<PAGE> 1
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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 March 31, 1998
Commission File Number 1-10515
JMAR INDUSTRIES, 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 practical date (May 7, 1998).
Common Stock, $.01 par value: 18,076,019 shares
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JMAR INDUSTRIES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE #
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 1997 and
March 31, 1998 2
Consolidated Statements of Operations - Three months ended
March 31, 1998 and 1997 3
Consolidated Statements of Cash Flows - Three months ended
March 31, 1998 and 1997 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II. OTHER INFORMATION
Item 1. N/A
Item 2. Changes in Securities 9
Item 3. N/A
Item 4. N/A
Item 5. N/A
Item 6. Reports on Form 8-K 9
</TABLE>
1
<PAGE> 3
JMAR INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
ASSETS (Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents ............................................ $ 3,555,789 $ 3,644,117
Accounts receivable, net ............................................. 4,660,972 4,308,777
Notes and other receivable ........................................... 110,100 111,285
Inventories .......................................................... 5,295,224 4,685,883
Prepaid expenses and other ........................................... 918,307 757,896
------------ ------------
Total current assets ............................................ 14,540,392 13,507,958
Receivable from officer .................................................... 79,543 78,378
Property and equipment, net ................................................ 2,652,217 2,500,404
Other assets, net .......................................................... 904,016 794,073
Goodwill, net .............................................................. 366,400 388,065
------------ ------------
TOTAL ASSETS .................................................... $ 18,542,568 $ 17,268,878
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ..................................................... $ 1,306,136 $ 1,175,717
Accrued liabilities .................................................. 480,064 540,933
Accrued payroll and related costs .................................... 1,010,885 1,228,853
Customer deposits .................................................... 5,682 5,682
Convertible notes payable ............................................ -- 20,000
Working capital line of credit ....................................... 1,925,000 475,000
Notes payable and capital lease obligations .......................... 444,065 427,246
------------ ------------
Total current liabilities ....................................... 5,171,832 3,873,431
------------ ------------
Notes payable and capital lease obligations, net of current portion ........ 819,992 907,235
------------ ------------
Stockholders' equity:
Preferred stock, $.01 par value;
5,000,000 shares authorized; none issued and outstanding
as of March 31, 1998 and December 31, 1997 ....................... -- --
Common stock, $.01 par value; 40,000,000 shares authorized; Issued and
outstanding 17,973,006 shares as of March 31, 1998 and
17,890,952 shares as of December 31, 1997 ........................ 179,730 178,910
Additional-paid in capital ........................................... 36,631,303 36,587,674
Accumulated deficit .................................................. (24,260,289) (24,278,372)
------------ ------------
Total stockholders' equity ..................................... 12,550,744 12,488,212
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ...................... $ 18,542,568 $ 17,268,878
============ ============
</TABLE>
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JMAR INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 31, March 31,
1998 1997
------------ ------------
<S> <C> <C>
Sales ..................................... $ 4,300,079 $ 5,245,501
Costs of sales ............................ 2,637,263 3,216,994
------------ ------------
Gross profit ........................ 1,662,816 2,028,507
------------ ------------
Operating expenses:
Selling, general and
administrative ........................ 1,309,738 1,461,093
Research, development and
engineering ........................... 332,801 444,165
------------ ------------
Total operating expenses ................ 1,642,539 1,905,258
------------ ------------
Income from operations .................... 20,277 123,249
Interest and other income (expense), net .. 38,091 32,798
Interest expense .......................... (40,285) (55,030)
------------ ------------
Net income ................................ $ 18,083 $ 101,017
============ ============
Basic and diluted net income per share .... $ .00 $ .01
============ ============
Weighted average shares outstanding:
Basic ................................... 17,952,279 16,793,025
------------ ------------
Diluted ................................. 19,337,011 18,187,109
------------ ------------
</TABLE>
3
<PAGE> 5
JMAR INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income ...................................................... $ 18,083 $ 101,017
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation and amortization ................................... 183,615 249,360
Service received in exchange for common stock or warrants ....... 18,412 --
Change in assets and liabilities net of effects from acquisition:
(Increase) decrease in:
Accounts receivable ........................................... (352,195) 230,643
Inventories ................................................... (609,341) 216,994
Prepaid expenses and other .................................... (160,411) (150,450)
Other assets .................................................. (153,009) (63,122)
Decrease in:
Customer deposits ............................................. -- (727,937)
Accounts payable and accrued liabilities ...................... (148,418) (147,287)
----------- -----------
Net cash used in operating activities ........................... (1,203,264) (290,782)
----------- -----------
Cash flows from investing activities:
Capital expenditures ............................................ (267,052) (365,444)
Payments received on notes and other receivable ................. 1,185 887,338
Increase in notes receivable .................................... (1,165) (11,186)
Patent costs .................................................... (3,643) --
----------- -----------
Net cash provided by (used in) investing activities ....... (270,675) 510,708
----------- -----------
Cash flows from financing activities:
Net borrowings (payments) under short-term debt agreements ...... 1,450,000 (991,642)
Net payments of notes payable ................................... (90,424) (11,656)
Net proceeds from the exercise of options and warrants ......... 26,035 202,994
----------- -----------
Net cash provided by (used in) financing activities ........ 1,385,611 (800,304)
----------- -----------
Net decrease in cash and cash equivalents ............................. (88,328) (580,378)
Cash and cash equivalents, beginning of period ........................ 3,644,117 2,629,286
----------- -----------
Cash and cash equivalents, end of period .............................. $ 3,555,789 $ 2,048,908
=========== ===========
</TABLE>
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JMAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of 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 months
ended March 31, 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 March 31, 1998 and December 31, 1997, inventories
consisted of the following:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
Raw materials, components and sub-assemblies .. $2,876,193 $3,673,414
Work-in-process ............................... 1,985,895 680,883
Finished goods ................................ 433,136 331,586
---------- ----------
$5,295,224 $4,685,883
========== ==========
</TABLE>
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JMAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(3) PROPERTY AND EQUIPMENT
At March 31, 1998 and December 31, 1997, property and equipment
consisted of the following:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
Equipment and machinery ........ $ 4,717,952 $ 4,505,804
Furniture and fixtures ......... 458,300 407,722
Leasehold improvements ......... 90,219 85,892
----------- -----------
5,266,471 4,999,418
Less-accumulated depreciation .. (2,614,254) (2,499,014)
----------- -----------
$ 2,652,217 $ 2,500,404
=========== ===========
</TABLE>
(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) ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT
In 1998, the Company adopted FASB Statement No. 130 ("SFAS 130"),
Reporting Comprehensive Income. SFAS 130 requires the reporting of additional
financial information. At March 31, 1998, there was no difference in the
Company's Net Income and Comprehensive Income.
6
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 2.
Results of Consolidated Operations
In 1997, as a result of an extensive in-depth evaluation, the Company
reorganized its California ASIC ("Cal ASIC") division. JMAR's Operating and Net
Income for the three months ended March 31, 1998, $20,277 and $18,083,
respectively, compared to $123,249 and $101,017 for the three months ended March
31, 1998, respectively, include operating and net losses of $51,121 and $63,155,
respectively, generated from Cal ASIC in 1998 compared to Cal ASIC's operating
and net losses of $254,448 and $260,501, respectively, for the three months
ended March 31, 1997 prior to Cal ASIC's reorganization.
Revenues for the three months ended March 31, 1998 and 1997 were
$4,300,079 and $5,245,501, respectively. The decrease of $945,422 for the three
months ended March 31, 1998 compared to the three months ended March 31, 1997 is
primarily attributable to a temporary decline in sales of its precision
instrument products to the disk drive industry of approximately $2,074,000 due
to a sharp drop in orders during the three-month period that began in
mid-November 1997, when many of the Company's U.S. customers appeared to have
delayed capital equipment spending primarily because of uncertainty caused by
the economic turmoil in Asia. This decrease, compounded somewhat by fluctuations
in market share between disk drive manufacturers, was partially offset by (i) an
increase in the Company's sales of its precision equipment to companies in the
semiconductor industry of approximately $544,000; (ii) an increase in revenues
generated by the Company's X-ray lithography source development program funded
by Defense Advanced Research Projects Agency (DARPA) of approximately $250,000;
and (iii) an increase in revenues of its Cal ASIC custom semiconductor division
of approximately $115,000. As a result of an increase in orders starting in
February, 1998 the Company anticipates that sales revenues will increase in the
second and third quarters. Certain of the Company's revenues are from a limited
number of customers including IBM, Intel and Seagate. As a result, the timing of
receipt and shipment of orders for those customers could have a material impact
on quarterly results.
Selling, general and administrative ("SG&A") expenses for the three
months ended March 31, 1998 and 1997 were $1,309,738 and $1,461,093,
respectively. The decrease in SG&A expenses in 1998 is primarily due to a
decrease in SG&A expenses of approximately $133,000 related to Cal ASIC as a
result of its reorganization late in 1997.
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 $417,348 and $216,973 for the three months ended March 31,
1998 and 1997, respectively. Company-Funded RD&E costs are shown in "Operating
Expenses" and totaled $332,801 and $444,165, respectively. Hence, total RD&E
expenses for the three month periods were $750,149 and $661,138 for 1998 and
1997, respectively. The increase in the Customer Funded RD&E is primarily
related to increases in the X-ray lithography program funded by DARPA resulting
in lower expenses in the Company-Funded RD&E due to the Company's allocation of
its available resources.
Interest expense was $40,285 and $55,030 for the three months ended
March 31, 1998 and 1997, respectively. The decrease in interest expense in 1998
versus 1997 is due to the conversion of $470,000 of convertible notes into JMAR
common stock in August 1997.
CONSOLIDATED LIQUIDITY AND FINANCIAL CONDITION
Cash and cash equivalents at March 31, 1998 and December 31, 1997 were
$3,555,789 and $3,644,117, respectively. The decrease in cash and cash
equivalents for the three months ended March 31, 1998 was $88,328 as compared to
a decrease of $580,378 for the three months ended March 31,
7
<PAGE> 9
1997. The decrease in cash for the three months ended March 31, 1998 resulted
primarily from cash used in operations of $1,203,264, capital expenditures of
$267,052 and net payments of notes payable of $90,424 offset in part by net
short term debt borrowings of $1,450,000 and proceeds from the exercise of stock
options and warrants of $26,035. The cash used in operations was primarily used
to finance inventory purchases and accounts receivable. Cash from net income
plus non-cash operating items for the three months ended March 31, 1998 was
$220,110.
JMAR operations will continue to require the use of working capital. The
working capital of PPL is generally funded through its $3,500,000 working
capital line (the "Line") with a bank (the "Bank"). The operations of JTC are
currently funded through third party contracts. As of March 31, 1998 PPL's
availability pursuant to the Line was approximately $3,365,000 of which
approximately $1,925,000 was borrowed at that time by PPL. 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 through the end of 1998 based on the current level of operations
and business conditions.
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.
"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 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 markets and customers, delays or
cancellations in orders, fluctuations in margins, timing of specific orders,
customer reorganizations, demand fluctuations, timely development, introduction
and acceptance of new products, 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, laser blood sampler,
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, cessation of operations
at one or more of its division facilities due to acts of nature 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.
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JMAR INDUSTRIES, INC.
PART II. OTHER INFORMATION
Item 2. Changes in Securities
Pursuant to the Board Member Compensation Program adopted by the Company
in August, 1997, the Company issued a total of 344 shares of Common
Stock to its outside directors as compensation for services as directors
in February, 1998. This transaction was exempt under Section 4(2) of the
Securities Act of 1933.
In March, 1998, the Company issued 10,000 shares of Common Stock to
Vernon H. Blackman, a director of the Company, for services rendered in
a transaction exempt under Section 4(2) of the Securities Act of 1933.
During the quarter ended March 31, 1998, the Company agreed to issue
32,319 shares and an option for 16,160 shares of Common Stock to Baytree
Associates, Inc. in connection with a private placement done in
November, 1997. This transaction was exempt under Regulation D of the
Securities Act of 1933.
Item 6. Reports on Form 8-K
(b) Reports on Form 8-K
The Company filed a Report on Form 8-K on March 2, 1998, containing the
press release which announced that the Company had extended the
expiration date of its warrants which currently trade on the NASDAQ
National Market System through April 20, 1998.
9
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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 INDUSTRIES, INC.
May 11, 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
10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,555,789
<SECURITIES> 0
<RECEIVABLES> 4,676,519
<ALLOWANCES> 15,547
<INVENTORY> 5,295,224
<CURRENT-ASSETS> 14,540,392
<PP&E> 5,266,471
<DEPRECIATION> 2,614,254
<TOTAL-ASSETS> 18,542,568
<CURRENT-LIABILITIES> 5,171,832
<BONDS> 819,992
0
0
<COMMON> 179,730
<OTHER-SE> 12,371,014
<TOTAL-LIABILITY-AND-EQUITY> 18,542,568
<SALES> 4,300,079
<TOTAL-REVENUES> 4,300,079
<CGS> 2,637,263
<TOTAL-COSTS> 2,637,263
<OTHER-EXPENSES> 1,642,539
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,285
<INCOME-PRETAX> 18,083
<INCOME-TAX> 0
<INCOME-CONTINUING> 18,083
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,083
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
