<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1998
Commission File Number 1-10515
JMAR TECHNOLOGIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 68-0131180
------------------------------ ----------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
3956 Sorrento Valley Blvd.
San Diego, CA 92121
(619) 535-1706
-----------------------------------------------------------
(Address, including zip code and telephone number including
area code of registrant's principal executive office)
Indicate by check mark whether the registrant 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, and has been subject to the filing requirements for at
least the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date (November 4, 1998)
Common Stock, $.01 par value: 17,988,121 shares
================================================================================
<PAGE> 2
JMAR TECHNOLOGIES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE #
------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 1997 and 2
September 30, 1998
Consolidated Statements of Income - Three months ended 3
September 30, 1998 and 1997 and nine months ended September
30, 1998 and 1997
Consolidated Statements of Cash Flows - Nine months ended 4
September 30, 1998 and 1997
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition 7
and Results of Operations
PART II. OTHER INFORMATION
Item 1. N/A
Item 2. Changes in Securities 10
Item 3. N/A
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. N/A
Item 6. Exhibits and Reports on Form 8-K 10
</TABLE>
1
<PAGE> 3
JMAR TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
================================================================================
<TABLE>
<CAPTION>
ASSETS Sept. 30, 1998 Dec. 31, 1997
-------------- -------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents ............................................. $ 3,639,945 $ 3,644,117
Accounts receivable, net .............................................. 6,118,401 4,308,777
Notes and other receivable ............................................ 101,762 111,285
Inventories ........................................................... 4,497,679 4,685,883
Prepaid expenses and other ............................................ 1,095,645 757,896
------------ ------------
Total current assets .............................................. 15,453,432 13,507,958
Receivable from officer ................................................... 81,966 78,378
Property and equipment, net ............................................... 2,718,477 2,500,404
Other assets, net ......................................................... 1,200,586 794,073
Goodwill, net ............................................................. 362,174 388,065
------------ ------------
TOTAL ASSETS ...................................................... $ 19,816,635 $ 17,268,878
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ...................................................... $ 1,085,924 $ 1,175,717
Accrued liabilities ................................................... 584,056 546,615
Accrued payroll and related costs ..................................... 769,247 1,228,853
Working capital line of credit ........................................ 3,000,000 475,000
Notes payable and capital lease obligations ........................... 509,423 447,246
------------ ------------
Total current liabilities ......................................... 5,948,650 3,873,431
------------ ------------
Notes payable and capital lease obligations, net of current
portion ................................................................. 570,613 907,235
------------ ------------
Stockholders' equity:
Preferred stock, $.01 par value;
5,000,000 shares authorized; None issued and outstanding
as of September 30, 1998 and December 31, 1997 .................. -- --
Common stock, $.01 par value; 40,000,000 shares authorized;
Issued and outstanding 18,156,709 shares as of September 30, 1998 and
17,890,952 shares as of December 31, 1997 ....................... 181,566 178,910
Additional-paid in capital ............................................ 36,775,037 36,587,674
Accumulated deficit ................................................... (23,659,231) (24,278,372)
------------ ------------
Total stockholders' equity ........................................ 13,297,372 12,488,212
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........................ $ 19,816,635 $ 17,268,878
============ ============
</TABLE>
================================================================================
2
<PAGE> 4
JMAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 AND NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------------- ---------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales .................................. $ 5,799,458 $ 5,583,611 $ 16,162,974 $ 16,397,718
Costs of sales ......................... 3,446,797 3,294,495 9,902,330 9,852,212
------------ ------------ ------------ ------------
Gross profit ....................... 2,352,661 2,289,116 6,260,644 6,545,506
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and
administrative ..................... 1,565,580 1,582,770 4,380,632 4,631,299
Research, development and
engineering ........................ 462,694 445,283 1,225,253 1,325,796
------------ ------------ ------------ ------------
Total operating expenses ............. 2,028,274 2,028,053 5,605,885 5,957,095
------------ ------------ ------------ ------------
Income from operations ................. 324,387 261,063 654,759 588,411
Interest and other income (expense), net 22,609 19,456 102,442 78,475
Interest expense ....................... (45,059) (45,466) (138,060) (145,354)
------------ ------------ ------------ ------------
Income before income taxes ............. 301,937 235,053 619,141 521,532
Income tax benefit ..................... -- 65,000 -- 165,000
------------ ------------ ------------ ------------
Net income ............................. $ 301,937 $ 300,053 $ 619,141 $ 686,532
============ ============ ============ ============
Basic and diluted net income per share . $ .02 $ .02 $ .03 $ .04
============ ============ ============ ============
Weighted average shares outstanding:
Basic .............................. 18,151,077 16,991,260 18,051,621 16,947,171
============ ============ ============ ============
Diluted ............................ 19,061,366 19,344,309 19,182,268 18,652,345
============ ============ ============ ============
</TABLE>
================================================================================
3
<PAGE> 5
JMAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
Nine Months Ended
----------------------------------
Sept. 30, 1998 Sept. 30, 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................ $ 619,141 $ 686,532
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation and amortization ............................. 568,986 725,200
Services received in exchange for common stock or warrants 19,616 607
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable ..................................... (1,809,624) (165,200)
Inventories ............................................. 188,204 (699,517)
Prepaid expenses and other .............................. (337,749) (402,623)
Other assets ............................................ (517,698) (407,194)
Increase (decrease) in:
Customer deposits ....................................... 8,800 (724,325)
Accounts payable and accrued liabilities ................ (520,758) 179,753
----------- -----------
Net cash used in operating activities ..................... (1,781,082) (806,767)
----------- -----------
Cash flows from investing activities:
Capital expenditures ...................................... (572,596) (589,072)
Increase in notes receivable .............................. (3,588) (306,500)
Payments received on notes and other receivable ........... 9,523 894,594
Patent costs .............................................. (34,657) (21,099)
----------- -----------
Net cash used in investing activities ................. (601,318) (22,077)
----------- -----------
Cash flows from financing activities:
Net borrowings (payments) under short-term debt agreements 2,525,000 (169,280)
Net payments of notes payable ............................. (280,071) (86,443)
Net proceeds from the exercise of options and warrants and
repurchases of stock ................................... 133,299 667,544
----------- -----------
Net cash provided by financing activities ............. 2,378,228 411,821
----------- -----------
Net decrease in cash and cash equivalents ..................... (4,172) (417,023)
Cash and cash equivalents, beginning of period ................ 3,644,117 2,629,286
----------- -----------
Cash and cash equivalents, end of period ...................... $ 3,639,945 $ 2,212,263
=========== ===========
</TABLE>
================================================================================
4
<PAGE> 6
JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of JMAR Technologies, Inc. (formerly JMAR Industries, Inc.) (the "Company") and
its subsidiaries. All significant intercompany balances and transactions have
been eliminated in consolidation.
The accompanying consolidated financial statements have been prepared by
the Company and are unaudited except for the balance sheet as of December 31,
1997. The financial statements have been prepared in accordance with generally
accepted accounting principles, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
accompanying consolidated financial statements include all adjustments of a
normal recurring nature which are necessary for a fair presentation of the
results for the interim periods presented. Certain information and footnote
disclosures normally included in financial statements have been condensed or
omitted pursuant to such rules and regulations. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Although the Company believes that the disclosures are adequate to
make the information presented not misleading, it is suggested that these
consolidated financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's Form 10-K for the
year ended December 31, 1997. The results of operations for the three and nine
months ended September 30, 1998 are not necessarily indicative of the results to
be expected for the full year.
(2) INVENTORIES
Inventories are carried at the lower of cost on the first-in, first-out
basis or market and are comprised of materials, direct labor and applicable
manufacturing overhead. At September 30, 1998 and December 31, 1997, inventories
consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Raw materials, components and sub-assemblies ... $2,411,745 $3,673,414
Work-in-process ................................ 1,497,386 680,883
Finished goods ................................. 588,548 331,586
---------- ----------
$4,497,679 $4,685,883
========== ==========
</TABLE>
(3) PROPERTY AND EQUIPMENT
As of September 30, 1998 and December 31, 1997, property and equipment
consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Equipment and machinery ............ $ 4,928,585 $ 4,505,804
Furniture and fixtures ............. 537,222 407,722
Leasehold improvements ............. 106,208 85,892
----------- -----------
5,572,015 4,999,418
Less-accumulated depreciation ...... (2,853,538) (2,499,014)
----------- -----------
$ 2,718,477 $ 2,500,404
=========== ===========
</TABLE>
5
<PAGE> 7
JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(4) EARNINGS PER SHARE
In 1997, the Company adopted FASB Statement No. 128 ("SFAS No. 128"),
Earnings per Share, effective December 15, 1997. There was no change to
previously reported earnings per share as a result of the adoption of this new
Financial Accounting Standard.
(5) NEW ACCOUNTING PRONOUNCEMENTS
In 1998, the Company adopted FASB Statement No. 130 ("SFAS 130"),
Reporting Comprehensive Income. SFAS 130 requires the reporting of additional
financial information. At September 30, 1998, there was no difference in the
Company's Net Income and Comprehensive Income.
In February, 1998, the Financial Accounting Standards Board (FASB)
issued SFAS No. 132, "Employers' Disclosures About Pensions and Other
Postretirement Benefits". SFAS No. 132 revises and standardizes employers'
disclosures about pension and other postretirement benefits, but it does not
change the measurement or recognition of those benefits. SFAS No. 132 is
effective for fiscal years beginning after December 15, 1997. SFAS No. 132
further requires restatement of disclosures for earlier periods provided for
comparative purposes. Management believes that the adoption of SFAS No. 132 will
not have any impact on the Company's consolidated financial statements or
disclosures thereto.
In March, 1998, the Accounting Standards Executive Committee (AcSEC)
issued AICPA Statement of Position (SOP) 98-1, "Accounting for costs of computer
software developed or obtained for internal use". This statement provides
guidance on accounting for the costs of computer software developed or obtained
for internal use and identifies characteristics of internal-use software and
provides assistance in determining when computer software is for internal use.
SOP 98-1 is effective for fiscal years beginning after December 15, 1998, with
earlier application permitted. The Company believes that the adoption of SOP
98-1 will have no significant impact on the Company's consolidated financial
statements, results of operations, or related disclosures thereto.
The Company will be required to adopt the FASB's Statement of Financial
Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 superseded FASB Statement No. 14,
Financial Reporting for Segments of a Business Enterprise. SFAS 131 established
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. SFAS 131 also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The adoption
of SFAS 131 will not affect the results of operations or financial position, but
may affect the disclosure of the segment information that will be disclosed in
the Annual Report on Form 10-K for the year ended December 31, 1998.
In April, 1998, AcSEC issued SOP 98-5, "Reporting on the costs of
start-up activities". This statement provides guidance on financial reporting of
start-up costs and organization costs and requires that such costs of start-up
activities be expensed as incurred. SOP 98-5 is effective for fiscal years
beginning after December 15, 1998, with earlier application permitted. The
Company believes that the adoption of SOP 98-5 will have no significant impact
on the Company's consolidated financial statements, results of operations, or
related disclosures thereto.
6
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 2.
RESULTS OF CONSOLIDATED OPERATIONS
Operating income, income before taxes and net income for the three month
period ending September 30, 1998 were $324,387, $301,937 and $301,937,
respectively, compared with $261,063, $235,053 and $300,053, respectively, for
the quarter ended September 30, 1997. Therefore, operating income and income
before tax increased 24 percent and 28 percent, respectively. Although net
income was approximately the same for the two periods, net income for the
quarter ended September 30, 1997 including a tax benefit of $65,000 compared
with no benefit recorded for the quarter ended September 30, 1998. Revenues for
the three month period ended September 30, 1998 were $5,799,458 compared with
$5,583,611 for the three month period ended September 30, 1997.
Operating income, income before taxes and net income for the nine months
ended September 30, 1998 were $654,759, $619,141 and $619,141, respectively,
compared to $588,411, $521,532 and $686,532, respectively, for the nine months
ended September 30, 1997. Included in the net income for the nine months ended
September 30, 1997 is a tax benefit of $165,000 compared with no benefit
recorded in the net income for the nine months ended September 30, 1998.
Revenues for the nine months ended September 30, 1998 and 1997 were $16,162,974
and $16,397,718, respectively.
The increase in revenues of $215,847 for the three months ended
September 30, 1998 compared to the three months ended September 30, 1997 is due
to the increase in revenue generated by the Company's continuing X-ray
lithography source development program funded by the Defense Advanced Research
Projects Agency (DARPA) and the Company's integrated circuit technology and
fabrication program funded by contracts from two major U.S. aerospace
corporations. These increases were partially offset by a decline in revenues of
the Company's precision instruments and systems due to marketplace
uncertainties, including Asian economic problems, and a significant downturn in
the worldwide semiconductor industry.
The decrease in revenues of $234,744 for the nine months ended September
30, 1998 compared to 1997, is primarily attributable to the decline in sales of
the Company's precision instrument products primarily due to reduced demand by
the computer disk drive industry offset in part by increases in the Company's
semiconductor-related business primarily in X-ray lithography and semiconductor
design and process development. The Company's ability to forecast orders for its
precision instrument products continues to be somewhat limited due to continuing
marketplace uncertainties. However, because of a substantial recent increase in
orders for its semiconductor products and services, the Company believes that
its consolidated sales revenue for both the fourth quarter and the full year
could be greater than they were for the same periods of 1997.
Gross margins for the nine months ended September 30, 1998 and 1997 were
38.7% and 39.9%, respectively, and for the three months ended September 30, 1998
and 1997 were 40.6% and 41.0%, respectively. The lower gross margins for 1998
are primarily due to competitive pricing pressures on certain products, higher
engineering costs related to the customization of certain products for new
applications and increases in semiconductor-related business at JMAR
Semiconductor and JMAR Research. These decreases were offset in part by lower
material costs due to higher volume purchases of inventory related to certain
product orders and cost reductions in the manufacturing process. The Company
expects continued competitive pressures on certain products. In addition, to the
extent that the Company's semiconductor-related business at JMAR Semiconductor
and JMAR Research continues to represent a higher percentage of the Company's
total revenues, the Company's margins may be lower in the future.
Selling, general and administrative ("SG&A") expenses for the three
months ended September 30, 1998 and 1997 were $1,565,580 and $1,582,770,
respectively, and were $4,380,632 and $4,631,299 for the nine months ending
September 30, 1998 and 1997, respectively. The decrease in SG&A expenses for the
nine months ended September 30, 1998 compared to the nine months ended September
30, 1997 is primarily due to a decrease in SG&A expenses of approximately
$447,000 related to the reorganization of JMAR Semiconductor (formerly
California ASIC) at the end of 1997 partially offset by higher payroll costs and
higher investor relations costs.
7
<PAGE> 9
The Company's research, development and engineering program (RD&E)
consists of two types: Customer-Funded RD&E (U.S. government and other
companies) and Company-Funded RD&E. Both types of RD&E are expensed when
incurred. Customer-Funded RD&E costs incurred, included in "Costs of Sales"
expenses, totaled $709,413 and $324,759 for the three months ended September 30,
1998 and 1997, respectively, and $1,558,776 and $903,344 for the nine month
periods ended September 30, 1998 and 1997, respectively. Company-Funded RD&E
costs are shown in "Operating Expenses" and totaled $462,694 and $445,283 for
the three months ended September 30, 1998 and 1997, respectively, and $1,225,253
and $1,325,796 for the nine month periods ended September 30, 1998 and 1997,
respectively. Therefore, total RD&E expenses for the three month periods were
$1,172,107 and $770,042 for 1998 and 1997, respectively, and $2,784,029 and
$2,229,140 for the nine month periods in 1998 and 1997, respectively. The
increase in the Customer-Funded RD&E is primarily related to an increase in the
X-ray lithography program funding provided by DARPA.
CONSOLIDATED LIQUIDITY AND FINANCIAL CONDITION
Cash and cash equivalents at September 30, 1998 and December 31, 1997
were $3,639,945 and $3,644,117, respectively. The decrease in cash and cash
equivalents for the nine months ended September 30, 1998 was $4,172 as compared
to a decrease of $417,023 for the nine months ended September 30, 1997. The
decrease in cash for the nine months ended September 30, 1998 resulted primarily
from cash used in operations of $1,781,082, mainly to fund the growth in the
Company's accounts receivable balance, capital expenditures of $572,596 and net
payments of notes payable of $280,071 offset in part by net short term bank
credit line borrowings of $2,525,000 and net proceeds from the exercise of
options and warrants and repurchases of stock of $133,299. A significant portion
of the receivable growth was driven by the timing of billings and related cash
collections on certain long-term contracts. Cash from net income plus non-cash
operating items for the nine months ended September 30, 1998 was $1,207,743.
JMAR's operations will continue to require the use of working capital.
The working capital of the Company is generally funded through its working
capital line with Comerica Bank (the "Bank") and through third party contracts.
In 1998, the Bank increased the Company's credit availability from $3.5 million
to $6.0 million (the "Line"). The new banking arrangement provides a revolving
line of credit to JMAR for up to $5 million bearing interest at the Bank's prime
rate, plus an additional $1 million five-year term credit line at the Bank's
prime rate for financing equipment purchases and construction of prototype
product demonstration systems such as the Company's new Britelight lasers. This
is in addition to an existing $729,000 equipment financing loan previously made
by the Bank. As of October 31, 1998, JMAR's availability pursuant to the Line
was approximately $5,950,000. The Line contains several covenants relating to,
among other matters, the maintenance of certain minimum income levels and
financial ratios, which if not met by the Company could impact the availability
of advances pursuant to the Line. The Company is in compliance with all
covenants. Management believes that the Company has existing resources to
adequately fund operations and working capital requirements at least through
September 30, 1999 based on the current level of operations and business
conditions.
In September, 1998, the Board of Directors authorized the repurchase,
from time-to-time of up to $2,000,000 of its own shares of common stock in the
open market, or in negotiated transactions, when they are available at prices
the Company considers attractive. As of November 4, 1998, the Company had
repurchased approximately 200,000 shares pursuant to this repurchase program.
At December 31, 1997, the Company had in excess of $25 million of
Federal net operating loss carryforwards, subject to certain annual limitations.
To the extent the Company has taxable income in the future, these carryforwards
will be used by the Company to reduce its cash outlay for taxes.
YEAR 2000 ISSUE
The "Year 2000 Issue" is the result of computer systems not being able
to distinguish the year 2000 from the year 1900. This issue affects virtually
every business, including the Company's, and can affect both the Company's
internal information systems, the equipment and components it buys from others
and the products it sells.
8
<PAGE> 10
In early 1998, the Company formed a task force to assess the nature,
extent and cost of remediation of any Year 2000 compliance issues confronting
the Company and its suppliers. This project encompasses a review of the
Company's internal systems and products as well as its suppliers' compliance.
This assessment has been substantially completed at the Company's Precision
Systems division and is underway in its Research and Semiconductor divisions. As
a result of its assessment process, the Company has identified certain
corrective actions which may be required. Some of these actions have already
been taken and others remain to be completed. Based upon its understanding of
the corrective actions which may be required, the Company expects to complete
all required actions by mid-1999.
In connection with its assessment of the Year 2000 issues, the Company
has sent out letters to its customers advising them of the Year 2000 issue and
providing them with a testing procedure to diagnose any potential problems which
may arise with Year 2000 issues. The Company has also sent questionnaires to its
key suppliers requesting information regarding their own Year 2000 compliance
efforts, as well as requesting confirmation that the components and services
provided by those suppliers are Year 2000 compliant.
Based upon its initial assessment, the Company believes that Year 2000
issues at its facilities should not have a material impact on the Company's
financial or operating performance. Although the Company believes that it is
justified in relying upon the information it has obtained from its key
suppliers, the Company has not obtained and does not intend to obtain
independent confirmation of its suppliers' Year 2000 compliance and, therefore,
no assurances can be given that the companies upon which the Company relies will
timely resolve their own Year 2000 compliance issues.
The costs to implement the Company's Year 2000 plan are primarily the
time devoted by personnel to assess the Year 2000 issues, to communicate with
suppliers and customers and to formulate and implement any necessary changes. It
is the Company's policy to expense such costs as incurred. To date, the
financial impact to the Company of assessing and implementing the changes
required to address the Year 2000 issue has not been material to the Company's
business, operations, financial condition, liquidity and capital resources.
Based upon the Company's current assessment, the Company does not expect the
Year 2000 issue to have a material impact on its business, operations, financial
condition, liquidity and capital resources in the future.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Certain statements contained in this Management's Discussion and
Analysis of Financial Condition and Results of Operations which are not related
to historical results, including statements regarding the Company's plans to
address the Year 2000 issues, its estimated costs of remediation and testing,
the impact of the failure to reach compliance and its timetable for the
implementation of its Year 2000 plans, are forward-looking statements that
necessarily are based on certain assumptions and are subject to certain risks
and uncertainties that could cause actual future performance and results to
differ materially from those stated or implied in the forward-looking
statements. These risks and uncertainties include concentration of sales to
certain markets and customers, delays in shipments or cancellations of orders,
failure of expected orders to materialize, fluctuations in margins, timing of
future orders, customer reorganizations, failure of advanced technology to
perform as predicted, uncertainties associated with the timing of the funding of
government contracts, fluctuations in demand, delays in development,
introduction and acceptance of new products, changing business and economic
conditions in various geographic regions, technical obsolescence of existing
products, technical problems in the development or modification of current
products or manufacturing processes, the impact of competitive products and
pricing, shifts in demand for the Company's products, the degree of success of
technology transfer (e.g., advanced lithography sources, micromachining, etc.)
to commercial products, availability of working capital to support growth,
continued government funding of advanced lithography, successful integration of
acquisitions, other competitive factors, temporary cessation of operations at
one or more of its division facilities due to natural events such as floods,
earthquakes and fires, and other risks detailed in the Company's Form 10-K for
the year ended December 31, 1997 and in the Company's other filings with the
Securities and Exchange Commission.
9
<PAGE> 11
JMAR TECHNOLOGIES, INC.
PART II. OTHER INFORMATION
Item 2. Changes in Securities
(c)(i) Pursuant to the Board Member Compensation Program adopted by the
Company in August, 1997, the Company issued a total of 412 shares
of Common Stock to its outside directors as compensation for
services as directors in August, 1998. These transactions were
exempt under Section 4(2) of the Securities Act of 1933.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders held on August 6, 1998,
the following matter was voted on:
(a) The following directors were elected: John S. Martinez
(14,290,389 affirmative votes and 129,433 votes withheld); James
H. Banister, Jr. and C. Neil Beer (14,292,231 affirmative votes
and 127,593 votes withheld); Vernon H. Blackman (14,289,971
affirmative votes and 129,853 votes withheld); and Barry Ressler
(14,291,611 affirmative votes and 128,213 votes withheld).
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibit listed below is filed as part of this Report.
Exhibit 10.1 Employment Agreement between JMAR Technologies, Inc.
and Joseph G. Martinez, dated April 16, 1998.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the three months
ended September 30, 1998.
10
<PAGE> 12
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JMAR TECHNOLOGIES, INC.
November 9, 1998 By: /s/ John S. Martinez
------------------------------------
John S. Martinez, Chief Executive
Officer and Authorized Officer
By: /s/ Dennis E. Valentine
------------------------------------
Dennis E. Valentine, Chief
Accounting Officer
11
<PAGE> 13
EXHIBIT INDEX
Exhibit 10.1 - Employment Agreement between JMAR Technologies, Inc.
and Joseph G. Martinez, dated April 16, 1998.
Exhibit 27 - Financial Data Schedule
<PAGE> 1
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made by and between Joseph G.
Martinez ("Martinez") and JMAR Industries, Inc. ("JMAR").
1. Title. Martinez shall be employed as Vice President/General Counsel
of JMAR and shall report directly to the Chief Executive Officer of JMAR.
2. Salary. As compensation for employment with the Company, Martinez
will be paid $5,192.31 bi-weekly, which is equivalent to $135,000 per year.
3. Management Incentive Bonus Program. As a corporate officer, Martinez
will participate in JMAR's Management Incentive Bonus Program which pays cash
bonuses based on the Company's consolidated annual profitability. For 1998,
Martinez will be allocated a 15% participation share in the Corporate Office
pool (the "Pool"), pro-rated based on the percentage of the year that he is
employed by JMAR. (For example, if Martinez starts work at JMAR on May 1st, his
pro-rated share of the Pool would be 2/3 x 15% or 10%).
4. Auto Allowance. Martinez will receive $400 per month as an automobile
expense allowance.
5. Equity Participation. On his employment start date, Martinez will be
granted 50,000 Employee Stock Options, subject to the conditions of JMAR's
Employee Stock Option Plan ("Plan"), a copy of which is attached hereto. The
principal elements of that Plan include:
5.1 An option Exercise Price equal to the Closing price of JMAR stock as
quoted on the NASDAQ National Market System for the five trading day
average prior to the day that Martinez starts work.
5.2 One third of Martinez' Options will vest (i.e., become exercisable)
at the end of each successive twelve month period after Martinez' start
date.
5.3 If there is any contradiction between the summary of the elements of
the Plan as described in this Agreement, and the Plan itself, the terms
of the Plan shall govern and control.
6. Office Location. The Company believes that the greater the amount of
time that Martinez is able to spend in close proximity to the corporate staff,
the greater will be his impact on JMAR's operations. Nevertheless, to
accommodate Martinez' current and future living arrangements, the Company will
make available to Martinez temporary office space at its Orange County facility
(which currently houses the Company's California ASIC operations).
Administrative staff support will be supplied by corporate office personnel
located in San Diego.
7. Expense Reimbursements.
7.1 The Company will reimburse Martinez for all of the reasonable
out-of-pocket expenses that he incurs in the performance of his
employment with JMAR, excluding any costs associated with travel between
his Orange County office and San Diego.
7.2 The Company will reimburse Martinez for his professional expenses to
support his continuing status as a fully licensed attorney-at-law,
including Annual California State Bar dues, continuing education classes
and other educational seminars and events that are deemed to be in the
Company's best interests.
12
<PAGE> 2
7.3 The Company will also provide Martinez with an annual budget to
purchase necessary legal periodicals and other reference material and
computer software and hardware to enable him to access standard
professional information sources.
8. Relocation Expense. The Company will reimburse Martinez for
reasonable, actual expenses involved in moving his primary residence from its
present location to a location within a reasonable daily commute from JMAR's
corporate office pursuant to its standard Relocation Policy.
9. Home Sale Realtor Fee Reimbursement.
9.1 The Company will reimburse Martinez for 50% of any Realtors fees
incurred in connection with the sale of his current residence located in
Torrance, California providing the escrow on such sale is closed and the
fee is paid no later than August 31, 1998.
9.2 If Martinez sells his current home in Torrance and re-locates his
permanent residence to San Diego County prior to August 31, 1998, the
Company will reimburse him for 100% of the Realtor fees incurred in
connection with the sale of his Torrance home.
10. Employee Benefits. Martinez will be enrolled in JMAR's employee
medical, dental and life insurance programs and will be eligible for all of the
benefits described in the employee benefit section of the enclosed "Personnel
Handbook". JMAR reserves the right to modify, supplement or rescind any of its
insurance programs and benefits at any time, in its sole discretion. He will
accrue three weeks paid vacation per year and will also be eligible to
participate in JMAR's 401(k) Plan (see the copy of the attached Plan
Description).
11. First Year Of Employment. The following provisions shall govern the
term, duration, and termination of employment for the first year (365
consecutive days regardless of any leave of absence, vacation or sick days) of
Martinez employment:
11.1 During the first year of employment, this Agreement shall terminate
upon the occurrence of any of the following events: (a) the death of
Martinez; (b) the incapacity or disability of Martinez, which renders
him unable to perform substantially all of the services contemplated by
this Agreement for a continuous period of sixty (60) days; or (c) the
mutual agreement of Martinez and the Company.
11.2 This Agreement may be terminated by the Company prior to completion
of the first year of employment on the happening of one or more of the
following events: (a) the commission of an act of fraud, dishonesty, or
embezzlement by Martinez; (b) the willful neglect by Martinez in the
performance of the services contemplated by this Agreement in such
manner as to provide reasonable cause for terminating his services; or
(c) the breach by Martinez of any of the covenants or obligations under
this Agreement and such breach provides reasonable cause for the Company
to terminate this Agreement; provided that, in order to terminate this
Agreement pursuant to clauses (b) and (c) of this Paragraph 11.2, JMAR
shall have given thirty (30) days written notice of termination to
Martinez, and Martinez shall have failed to fully cure or correct such
willful neglect or breach within the thirty days immediately following
such notice.
11.3 This Agreement may be terminated by Martinez prior to the first
year on thirty (30) days written notice of termination to JMAR if JMAR
breaches any of its covenants or obligations under the Agreement and
such breach provides reasonable cause for Martinez to terminate this
Agreement.
11.4 In addition to the circumstances under which this Agreement may be
terminated by the Company pursuant to Paragraph 11.2, the Company may
terminate this Agreement at any time, without cause, upon thirty (30)
days written notice of termination to Martinez; provided, however,
13
<PAGE> 3
should the Company terminate this Agreement pursuant to this Paragraph
11.4 prior to the end of the first year of employment (other than a
termination pursuant to the provisions of Paragraph 11.2), then Martinez
shall become entitled to receive as severance pay an amount equal to the
balance of the compensation that would have been payable to him through
the end of the first year of employment (subject to earlier termination
on the happening of the event specified in Paragraph 11.2), payable at
the rate and times as such compensation would have been payable to
Martinez had this Agreement not been terminated pursuant to this
Paragraph. In addition to the payment of such severance pay, all
insurance policies in which Martinez participates shall continue through
the end of what otherwise would have been the first year of employment.
11.5 If employment is terminated under this Agreement for any reason by
any party hereto, then Martinez' employment with JMAR shall terminate.
12. Employment After The First Year. If employment continues for more
than one year, the following provisions shall govern the term, duration, and
termination of employment:
12.1 If employment continues beyond the first year, employment will be
at-will and may be terminated at any time, for any reason, by either
JMAR or Martinez. If the Company decides to terminate Martinez, it or
they will provide thirty (30) days notice and Martinez will receive an
additional sixty (60) days severance pay, unless the termination is on
the ground set forth in Paragraph 12.3(b) below, in which case Martinez
will receive neither notice nor severance.
12.2 Martinez and the Company understand and agree that Martinez and the
Company have the right to terminate Martinez' employment at any time for
any reason, with or without cause. Martinez and the Company understand
and agree that nothing in the Company's employee handbooks or its other
policies is intended to be, and nothing in them should be construed to
be, a limitation on the right to terminate the employment relationship
at any time for any reason.
12.3 Notwithstanding the notice provision in Paragraph 12.1 above, this
Agreement shall terminate immediately (without advance notice) on the
happening of one or more of the following events: (a) the death of
Martinez; or (b) the commission of an act of fraud, dishonesty, or
embezzlement by Martinez.
12.4 This Agreement contains the entire agreement between the parties as
to the term and duration of the employment. It supersedes any and all
other agreements, either oral or in writing between the parties hereto
with respect to Martinez' term of employment and the termination
thereof. Each party to this Agreement acknowledges that no
representations, inducements, promises, or agreements, oral or
otherwise, have been made by any party, or anyone acting on behalf of
any party, which are not embodied herein, and acknowledges that no other
agreement, statement, or promise not contained in this Agreement shall
be valid or binding. This Agreement may not be modified or amended by
oral agreement, or course of conduct, but only by an agreement in
writing signed by both the Chairman or the CEO of JMAR and by Martinez.
13. Confidential Information.
13.1 Concurrently herewith, Martinez shall enter into an Invention and
Secrecy Agreement substantially similar to the agreement executed by the
other key employees of JMAR. This Agreement is intended to supplement
and not limit or restrict the provisions of such Invention and Secrecy
Agreement. Martinez will acknowledge that, in the course of the
performance of Martinez' services hereunder, he may become acquainted
with confidential information regarding JMAR (and companies affiliated
with or owned, operated, or supervised by JMAR) and their business,
operations, finances, personnel, accounts, customers, and suppliers.
This information may include information relating to persons, firms,
corporations, and other entities which are or become
14
<PAGE> 4
suppliers or customers of JMAR (or a company affiliated with or owned,
operated, or supervised by JMAR). Martinez agrees he will not, either
during the term of this Agreement or thereafter, without the prior
express written consent of JMAR, disclose or make any use of such
confidential information except as may be required in the course of the
performance of Martinez' services hereunder.
13.2 The undertakings and obligations of the parties under this
Agreement shall not apply to any proprietary information which:
(a) Is disclosed in a printed publication available to the
public, is described in a patent anywhere in the world, or is
otherwise in the public domain at the time of disclosure;
(b) Is generally disclosed to third parties by the disclosing
party without restriction on such third parties; or
(c) Is approved for release by written authorization of the
disclosing party.
14. Protection Of Property. All records, files, manuals, list of
customers, blanks, forms, materials, furnished to Martinez by the Company (or
any company affiliated with or owned, operated, or supervised by the Company),
used on its behalf or generated or obtained during the course of the performance
of Martinez' services hereunder, shall be and remain the property of the Company
(or any company affiliated with or owned, operated, or supervised by the
Company, as the case may be). Martinez shall be a holder thereof for the sole
use and benefit of the Company (or any companies affiliated with or owned,
operated, or supervised by the Company, as the case may be) and shall safely
keep and preserve such property, except as consumed in the normal business
operations of the Company (or any company affiliated with or owned, operated, or
supervised by the Company, as the case may be). Martinez acknowledges that this
property is confidential and is not readily accessible to the competitors of the
Company. Upon termination of this Agreement hereunder, Martinez shall
immediately deliver to the Company, or its authorized representatives, all such
property, including all copies, remaining in Martinez' possession or control.
15. Severability. If any provision in this Agreement is held by a court
of competent jurisdiction to be invalid, void or unenforceable, the remaining
provisions shall nevertheless continue in full force without being impaired or
invalidated in any way.
16. Applicable Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
17. Waiver. The failure of any party to insist on strict compliance with
any of the terms, covenants, or conditions of this Agreement by the other party
shall not be deemed a waiver of that term, covenant, or condition, nor shall any
waiver or relinquishment of any right or power at any one time or times be
deemed a waiver or relinquishment of that right or power for all or any other
times.
18. Arbitration. Except as otherwise required by law, any controversy or
claim arising out of or relating to this Agreement or the breach or termination
thereof, shall be settled by arbitration in San Diego County, California in
accordance with the rules of the American Arbitration Association, and judgment
upon the award rendered by the arbitrator(s) may be entered in any court having
jurisdiction thereof. The arbitrator(s) shall have no authority whatsoever to
make an award of punitive damages to either side. By agreeing to arbitration
under this paragraph, JMAR and Martinez understand they are agreeing to have any
dispute relating to Martinez' employment decided by a neutral arbitrator and as
to those disputes decided by the neutral arbitrator, JMAR and Martinez are
giving up their right to a jury or court trial and giving up their right, if
any, to seek punitive damages against each other.
15
<PAGE> 5
19. Effective Date. This Agreement shall become effective on the date
Martinez begins employment with JMAR.
Date: 4/15/98 /s/ John S. Martinez
----------------- ------------------------------------
John S. Martinez
Chairman of the Board
JMAR
Date: 4/13/98 /s/ Barry Ressler
----------------- ------------------------------------
Barry Ressler
Date: 4/13/98 /s/ C. Neil Beer
----------------- ------------------------------------
Dr. C. Neil Beer
Date: 4/15/98 /s/ Vernon H. Blackman
----------------- ------------------------------------
Dr. Vernon H. Blackman
Date: 4/15/98 /s/ James H. Banister, Jr.
----------------- ------------------------------------
James H. Banister, Jr.
Date: April 16, 1998 Agreed To: /s/ Joseph G. Martinez
----------------- ------------------------------------
Joseph G. Martinez
16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,639,945
<SECURITIES> 0
<RECEIVABLES> 6,133,948
<ALLOWANCES> 15,547
<INVENTORY> 4,497,679
<CURRENT-ASSETS> 15,453,432
<PP&E> 5,572,015
<DEPRECIATION> 2,853,538
<TOTAL-ASSETS> 19,816,635
<CURRENT-LIABILITIES> 5,948,650
<BONDS> 570,613
0
0
<COMMON> 181,566
<OTHER-SE> 13,115,806
<TOTAL-LIABILITY-AND-EQUITY> 19,816,635
<SALES> 16,162,974
<TOTAL-REVENUES> 16,162,974
<CGS> 9,902,330
<TOTAL-COSTS> 9,902,330
<OTHER-EXPENSES> 5,605,885
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 138,060
<INCOME-PRETAX> 619,141
<INCOME-TAX> 0
<INCOME-CONTINUING> 619,141
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 619,141
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
