<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 September 30, 1999
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
(858) 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 2, 1999).
Common Stock, $.01 par value: 18,044,640 shares
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<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE #
------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 1998 and
September 30, 1999 2
Consolidated Statements of Operations - Three months ended
September 30, 1999 and 1998 and nine months ended September
30, 1999 and 1998 3
Consolidated Statements of Cash Flows - Nine months ended
September 30, 1999 and 1998 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
PART II. OTHER INFORMATION
Item 1. N/A
Item 2. Changes in Securities 14
Item 3. N/A
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. N/A
Item 6. Reports on Form 8-K 14
</TABLE>
1
<PAGE> 3
PART I - FINANCIAL INFORMATION
JMAR TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
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<TABLE>
<CAPTION>
ASSETS September 30, 1999 December 31, 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents ............................................ $ 3,540,929 $ 3,848,183
Accounts receivable, net ............................................. 5,086,975 7,766,961
Notes and other receivable ........................................... 49,025 66,682
Inventories .......................................................... 6,599,851 5,848,936
Prepaid expenses and other ........................................... 924,780 828,664
------------ ------------
Total current assets ............................................. 16,201,560 18,359,426
Receivable from officer .................................................. 87,011 83,212
Property and equipment, net .............................................. 2,854,874 2,710,699
Other assets, net ........................................................ 1,361,816 1,245,987
Goodwill, net ............................................................ 425,499 475,509
------------ ------------
TOTAL ASSETS ..................................................... $ 20,930,760 $ 22,874,833
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ..................................................... $ 1,995,993 $ 4,728,068
Accrued liabilities .................................................. 697,357 570,945
Accrued payroll and related costs .................................... 1,034,524 1,153,304
Line of credit ....................................................... 4,545,000 2,100,000
Notes payable and capital lease obligations .......................... 235,500 593,975
------------ ------------
Total current liabilities ........................................ 8,508,374 9,146,292
------------ ------------
Notes payable and capital lease obligations, net of current portion ...... 589,155 475,362
------------ ------------
Stockholders' equity:
Preferred stock, $.01 par value;
5,000,000 shares authorized; none issued and outstanding
as of September 30, 1999 and December 31, 1998 ..................... -- --
Common stock, $.01 par value; 40,000,000 shares authorized; Issued and
outstanding 18,043,496 as of September 30, 1999 and
18,080,853 shares as of December 31, 1998 .......................... 180,435 180,809
Additional-paid in capital ........................................... 36,470,582 36,593,901
Accumulated deficit .................................................. (24,817,786) (23,521,531)
------------ ------------
Total stockholders' equity ....................................... 11,833,231 13,253,179
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ....................... $ 20,930,760 $ 22,874,833
============ ============
</TABLE>
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2
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JMAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
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<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1999 Sept. 30, 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales ................................. $ 4,677,464 $ 5,799,458 $ 18,141,946 $ 16,162,974
Costs of sales ........................ 3,067,231 3,446,797 12,900,413 9,902,330
------------ ------------ ------------ ------------
Gross profit ...................... 1,610,233 2,352,661 5,241,533 6,260,644
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and
administrative ...................... 1,633,779 1,565,580 5,306,691 4,380,632
Research, development and engineering 508,699 462,694 1,290,191 1,225,253
------------ ------------ ------------ ------------
Total operating expenses ............ 2,142,478 2,028,274 6,596,882 5,605,885
------------ ------------ ------------ ------------
Income (loss) from operations ......... (532,245) 324,387 (1,355,349) 654,759
Gain on sale of subsidiary stock ...... 161,000 -- 161,000 --
Interest and other income
(expense), net ........................ 4,460 22,609 78,308 102,442
Interest expense ...................... (72,112) (45,059) (180,214) (138,060)
------------ ------------ ------------ ------------
Net income (loss) ..................... $ (438,897) $ 301,937 $ (1,296,255) $ 619,141
============ ============ ============ ============
Basic and diluted net income (loss)
per share ............................. $ (.02) $ .02 $ (.07) $ .03
============ ============ ============ ============
Shares used in computation of net
income (loss) per share:
Basic ............................... 18,043,336 18,151,077 18,044,558 18,051,621
============ ============ ============ ============
Diluted ............................. 18,043,336 19,061,366 18,044,558 19,182,268
============ ============ ============ ============
</TABLE>
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3
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JMAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
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<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------
Sept. 30, 1999 Sept. 30, 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ..................................... $(1,296,255) $ 619,141
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization ......................... 736,078 568,986
Services received in exchange for common stock ........ 5,320 19,616
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable, net ............................ 2,679,986 (1,809,624)
Inventories ......................................... (750,915) 188,204
Prepaid expenses and other .......................... (96,116) (337,749)
Other assets ........................................ 217,363 (517,698)
Decrease in:
Accounts payable and accrued liabilities ............ (2,724,443) (511,958)
----------- -----------
Net cash used in operating activities ............. (1,228,982) (1,781,082)
----------- -----------
Cash flows from investing activities:
Capital expenditures .................................. (978,958) (572,596)
Payments received on notes and other receivables ...... -- 9,523
Increase in notes receivable .......................... (31,838) (3,588)
Patent costs .......................................... (112,889) (34,657)
----------- -----------
Net cash used in investing activities ............. (1,123,685) (601,318)
----------- -----------
Cash flows from financing activities:
Net borrowings under short-term debt agreements ....... 2,445,000 2,525,000
Net payments of notes payable ......................... (244,682) (280,071)
Repurchases of stock .................................. (154,905) (31,105)
Net proceeds from the exercise of options and warrants -- 164,404
----------- -----------
Net cash provided by financing activities ......... 2,045,413 2,378,228
----------- -----------
Net decrease in cash and cash equivalents ................. (307,254) (4,172)
Cash and cash equivalents, beginning of period ............ 3,848,183 3,644,117
----------- -----------
Cash and cash equivalents, end of period .................. $ 3,540,929 $ 3,639,945
=========== ===========
</TABLE>
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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. (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,
1998. 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, 1998. The results of operations for the three and nine
months ended September 30, 1999 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, 1999 and December 31, 1998, inventories
consisted of the following:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Raw materials, components and sub-assemblies $3,925,529 $3,127,225
Work-in-process ............................ 1,787,912 2,068,309
Finished goods ............................. 886,410 653,402
---------- ----------
$6,599,851 $5,848,936
========== ==========
</TABLE>
5
<PAGE> 7
JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(3) PROPERTY AND EQUIPMENT
At September 30, 1999 and December 31, 1998, property and equipment
consisted of the following:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Equipment and machinery ..... $ 4,922,702 $ 5,003,891
Furniture and fixtures ...... 1,314,981 609,659
Leasehold improvements ...... 130,062 106,462
----------- -----------
6,367,745 5,720,012
Less-accumulated depreciation (3,512,871) (3,009,313)
=========== ===========
$ 2,854,874 $ 2,710,699
=========== ===========
</TABLE>
(4) SEGMENT INFORMATION
In 1998, the Company adopted SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information, which required the Company to report
operating information by segment. In the Company's Form 10-K for the year ended
December 31, 1998, three segments were reported. These three segments were the
Precision Systems Segment, the Contract Research and Development Segment, and
the Semiconductor Products and Processes Segment.
During the quarter ended March 31, 1999, the Company combined the
Precision Systems and Contract Research and Development Segments to form the
Microelectronics Equipment Segment. The Company's two Segments offer varying
products and services which are affected by different economic conditions.
Further, the Segments reflect the manner in which the Company now views the
operating segments.
Microelectronics Equipment Segment: This segment includes the
manufacture, marketing and sale of the Company's measurement and inspection
systems, positioning and motion control systems and biotech processing systems.
This segment also includes the development of the Company's micro-technology
emerging products, including: next-generation x-ray lithography sources and
other non-lithography X-ray systems for inspecting tomorrow's high-performance
semiconductors; ultra-precision laser machining systems; and other leading-edge
products based on its patented laser technology.
Semiconductor Products and Processes Segment: Using advanced design and
engineering tools and established foundry relationships with semiconductor
producers, this "fabless" supplier of semiconductors focuses on the development
and delivery of high-performance customer microcircuits for a wide range of
commercial, medical and military electronics uses. This segment also provides
high value services related to the upgrade and enhancement of a CMOS integrated
circuit fabrication facility and related wafer processing technology for the
low-volume and prototype manufacture of electronic circuits used in operational
military systems.
6
<PAGE> 8
JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
Segment information for the nine and three months ended September 30,
1999 and 1998 was as follows:
<TABLE>
<CAPTION>
SEMICONDUCTOR
MICROELECTRONICS PRODUCTS AND
EQUIPMENT PROCESSES
SEGMENT SEGMENT CORPORATE TOTAL
------- ------- --------- -----
<S> <C> <C> <C> <C>
Nine Months Ended Sept. 30, 1999:
Revenues $ 11,193,194 $ 6,948,752 $ -- $ 18,141,946
Operating income (loss) (1,642,783) 287,434 -- (1,355,349)
Total assets 13,851,830 4,078,397 3,000,533 20,930,760
Three Months Ended Sept. 30, 1999:
Revenues $ 3,308,632 $ 1,368,832 $ -- $ 4,677,464
Operating income (loss) (595,924) 63,679 -- (532,245)
Nine Months Ended Sept. 30, 1998:
Revenues $ 15,513,235 $ 649,739 $ -- $ 16,162,974
Operating income (loss) 800,178 (145,419) -- 654,759
Total assets 15,847,573 2,291,659 1,677,403 19,816,635
Three Months Ended Sept. 30, 1998:
Revenues $ 5,506,644 $ 292,814 $ -- $ 5,799,458
Operating income (loss) 342,042 (17,655) -- 324,387
</TABLE>
In the table above, Corporate assets are principally cash, deferred income taxes
and other assets.
(5) SHAREHOLDER RIGHTS PLAN
In February 1999, the Company adopted a Shareholder Rights Plan, and
subsequently declared a dividend of one Preferred Share Purchase Right for each
outstanding share of JMAR common stock held by shareholders of record at the
close of business on March 5, 1999. The Rights and Rights Plan expire on
February 12, 2009.
Each Right will entitle shareholders to buy one one-thousandth
(1/1000th) of a share of JMAR's Series A Junior Participating Preferred Stock at
an exercise price of $25.00. Initially, the Rights will not be exercisable and
will be attached to and trade together with shares of JMAR common stock. Subject
to limited exceptions, the Rights will become exercisable 10 days after a person
or group announces that it has acquired 15 percent or more of JMAR's common
stock or announces commencement of a tender or exchange offer for 15 percent or
more of JMAR's common stock.
Once exercisable, each Right not owned by the acquiring person or group
will entitle its holder to purchase that number of shares of JMAR's common stock
having a market value of twice the Right's current exercise price. In addition,
if JMAR is acquired in a merger or other business combination transaction, the
acquiring entity must assume the obligations under the Rights and the Rights
will become exercisable to acquire common stock of the acquiring entity at a 50
percent discount.
7
<PAGE> 9
JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
JMAR's Board may redeem the Rights for $.0001 per Right at any time on
or before the tenth day following acquisition by a person or group of 15 percent
or more of JMAR's common stock. In addition, at any time after an event
triggering exercisability of the Rights and prior to the acquisition by the
acquiring person of 50 percent or more of JMAR's common stock, the Board of
Directors of JMAR may also exchange each Right for one share of common stock of
JMAR.
(6) LINE OF CREDIT
The Company's $5,000,000 working capital line (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's
net loss in the third quarter is not in compliance with the minimum income
levels of these covenants. Based on the Company's income levels in 1999, the
Bank could, among other actions, change the terms of the Line or call for
immediate repayment of all of the outstanding borrowings under the Line
($2,370,000 at November 2, 1999). See "Consolidated Liquidity and Financial
Condition" at page 11.
8
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 2.
The Company operates in two segments as follows: Microelectronics
Equipment Segment and Semiconductor Products and Processes Segment. Note 4 to
the Consolidated Financial Statements discusses recent changes in the way the
Company is reporting its operating segments.
RESULTS OF CONSOLIDATED OPERATIONS
Net income (loss) for the three months ended September 30, 1999 and 1998
was $(438,897) and $301,937, respectively. During the same periods, revenues
decreased to $4,677,464 for the three months ended September 30, 1999 from
$5,799,458 for the three months ended September 30, 1998.
The decline in revenues for the three month period was chiefly
attributable to a decline in 1999 shipments of the Company's precision
instrument products related to a decline in orders for the Company's products
from the computer disk drive industry offset in part by continued sustained
growth in the Semiconductor Products and Processes Segment and by the continuing
growth of the Company's lithography equipment sales to the biochip industry.
For the nine months ended September 30, 1999, revenues were $18,141,946,
an increase of 12%, compared with $16,162,974 for the nine month period ended
September 30, 1998. The Company expects revenues to increase in the fourth
quarter of 1999 as compared to the third quarter of 1999. It also expects, but
cannot give assurance that, revenues for the 1999 year will exceed those for
1998. Net income (loss) for the nine months ended September 30, 1999 and 1998
was $(1,296,255) and $619,141, respectively.
Gross margins for the nine months ended September 30, 1999 and 1998 were
28.9% and 38.7%, respectively, but improved in the third quarter to 34.4% and
40.6% for the three months ended September 30, 1999 and 1998, respectively. The
gross margins have increased since the beginning of 1999 primarily due to an
increase in sales price on certain products, manufacturing efficiencies and a
lower portion of outside costs incurred in the Semiconductor Products and
Processes Segment. Despite generating approximately $2 million less in revenues
in the third quarter of 1999 as compared to the first quarter of 1999, gross
profit was approximately $1.6 million for each quarter. The Company's rapidly
expanding Semiconductor Products and Processes Segment conducted by JSI is in
the process of evolving from a lower profit margin developmental business to a
commercial business focused on the integrated circut replacement part and
telecommunication products markets. JMAR believes that as this evolution
progresses a greater proportion of JMAR's sales will be generated by higher
profit margin commercial products. Therefore, to the extent that the Company's
commercial semiconductor products begin to generate a higher percentage of the
Company's revenues, the Company's gross margins should continue to improve.
The Company's profits in 1999 were also impacted by JMAR's continuing
investments to accelerate the time-to-market for several new high-performance
products for the microelectronics marketplace. Included are increases in payroll
costs with the addition of several senior technical specialists and managers to
direct and help speed the Company's new precision instrument, laser and X-ray
product development programs. As discussed below, the Company's product
development expenditures, including that portion of customer-funded efforts
directly attributable to the commercialization of JMAR's proprietary
technologies, were 25.2% of revenues in the first nine months of 1999.
Selling, general and administrative ("SG&A") expenses for the three
months ended September 30, 1999 and 1998 were $1,633,779 and $1,565,580,
respectively, and were $5,306,691 and $4,380,632 for the nine months ended
September 30, 1999 and 1998, respectively. The increase in SG&A expenses in 1999
is primarily due to higher payroll costs related to the addition of senior
technical and management staff in the latter half of 1998. However, SG&A
expenses for the third quarter of 1999 have decreased compared to the first two
quarters of 1999, primarily due to a different mix of labor (i.e., more product
development labor and direct labor) and lower spending overall.
9
<PAGE> 11
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",
totaled $906,241 and $709,413 for the three months ended September 30, 1999 and
1998, respectively, and $3,288,374 and $1,558,776 for the nine month periods
ended September 30, 1999 and 1998, respectively. The increase in Customer-Funded
RD&E expenditures for 1999 is related to an increase of $873,709 in the X-ray
lithography program funding provided by the Defense Advanced Research Projects
Agency, most of which is directed toward commercialization of JMAR's X-ray
lithography source technology and $719,328 related to the Company's contract for
the development of a unique microcircuit architecture and devices for the
replacement of obsolete integrated circuits. Company-Funded RD&E costs are shown
in "Operating Expenses" and totaled $508,699 and $462,694 for the three months
ended September 30, 1999 and 1998, respectively, and $1,290,191 and $1,225,253
for the nine months ended September 30, 1999 and 1998, respectively. Hence,
total RD&E expenditures for the three month periods were $1,414,940 and
$1,172,107 for 1999 and 1998, respectively, and $4,578,565 and $2,784,029 for
the nine month periods in 1999 and 1998, respectively. Therefore, RD&E
expenditures as a percentage of sales were 25.2% and 17.2% for the nine months
ended September 30, 1999 and 1998, respectively, and 30.3% and 20.2% for the
three months ended September 30, 1999 and 1998, respectively. The increase in
RD&E expenditures is primarily related to the continued development of PXS point
X-ray sources for lithography for the semiconductor industry and other metrology
applications, the development of a unique microcircuit architecture and devices
for the replacement of obsolete integrated circuits and for a new family of
telecommunications semiconductor products, the continued development of
commercial systems based on JMAR's laser technology, the development of new
software for the Company's test and measurement systems and the engineering
development of higher performance test and measurement inspection systems for
the disk drive and semiconductor industries.
The gain on sale of subsidiary stock of $161,000 is for the sale of a
portion of JMAR Semiconductor, Inc. ("JSI") to related parties, primarily
employees and directors of JSI.
Interest expense is higher in 1999 due to increased borrowings under the
Company's working capital line with Comerica Bank.
RESULTS OF SEGMENT OPERATIONS
Microelectronics Equipment Segment
Revenue for the three months ended September 30, 1999 as compared to the
three months ended September 30, 1998 for the Microelectronics Equipment Segment
decreased $2,198,012 from $5,506,644 to $3,308,632 or 39.9%. Revenue for the
nine month period in 1999 as compared to 1998 for this Segment decreased
$4,320,041 from $15,513,235 to $11,193,194 or 27.8%. This decrease primarily
reflects lower shipments of precision instruments to the disk drive industry,
worldwide. As a result, operating income of the Microelectronics Equipment
Segment for the three months ended September 30, 1999 as compared to the three
months ended September 30, 1998 was adversely affected as well, decreasing
$937,966 from income of $342,042 to a loss of $595,924. Operating income for the
nine month period in 1999 as compared to 1998 for this Segment decreased
$2,442,961 from income of $800,178 to a loss of $1,642,783. This decrease
reflects the decrease in revenues of the higher margin precision instruments as
well as an increase in product development expenditures.
Semiconductor Products and Processes Segment
Revenue for the three months ended September 30, 1999 as compared to the
three months ended September 30, 1998 for the Semiconductor Products and
Processes Segment increased $1,076,018 from $292,814 to $1,368,832, or 367.5%.
Revenue for the nine month period in 1999 as compared to 1998 for this Segment
increased $6,299,013 from $649,739 to $6,948,752. This growth reflects the
receipt in the last half of 1998 of two significant contracts from General
Dynamics Information Systems and TRW funded by the Defense Microelectronics
Activity. Because of the increase in revenues, operating income for the three
months ended September 30, 1999 as compared to the three months
10
<PAGE> 12
ended September 30, 1998 increased $81,334 from a loss of $17,655 to income of
$63,679. Operating income for the nine month period in 1999 as compared to 1998
for this Segment increased $432,853 from a loss of $145,419 to income of
$287,434.
CONSOLIDATED LIQUIDITY AND FINANCIAL CONDITION
Cash and cash equivalents at September 30, 1999 and December 31, 1998
were $3,540,929 and $3,848,183, respectively. The decrease in cash and cash
equivalents for the nine months ended September 30, 1999 was $307,254. That
decrease resulted primarily from cash used in operations of $1,228,982, capital
expenditures of $978,958, net payments of notes payable of $244,682, repurchases
of stock of $154,905, patent costs of $112,889 and an increase in notes
receivable of $31,838 offset in part by borrowings from the Company's working
capital bank line of $2,445,000.
JMAR's operations will continue to require the use of working capital.
The working capital of the Company has generally been funded through its
$5,000,000 working capital line (the "Line") with Comerica Bank (the "Bank") and
through third party contracts. 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's net loss in the third quarter is
not in compliance with the minimum income levels of these covenants. The Company
believes it will receive a waiver for this quarter's non-compliance. Based on
the Company's income levels in 1999, the Bank could, among other actions, change
the terms of the Line. In addition, the Bank could call for immediate repayment
of all of the outstanding borrowings under the Line ($2,370,000 at November 2,
1999), however, the Company believes this action is unlikely. The changes in the
terms could include an increase in the interest rate or restrictions or
limitations on the amount available under the Line. If the Bank adversely
changes the terms of the Line, the Company believes, but can give no assurance
that, it has available to it several potential sources of capital including
private or public offerings of equity in JMAR or one or more of its subsidiaries
to satisfy its liquidity needs at least through September 30, 2000.
In addition to its working capital needs, the Company may also require
additional outside financing for some of its emerging products in order to
expedite their commercialization including 1) the continued development of
commercial products based on JMAR's proprietary laser technology, including PXS
point-X-ray sources for semiconductor industry lithography and other metrology
applications; and 2) the development of a series of standard high performance
semiconductor products targeted at the telecommunications market. If the Company
decides to expedite the commercialization of its emerging products, the Company
believes it has available to it several potential sources of capital for these
purposes, including technology ventures with other companies and private or
public offerings of equity in JMAR or one or more of its subsidiaries.
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 and when the Company believes it is appropriate
to use its available cash to do so. As of November 2, 1999, the Company had
repurchased 252,900 shares pursuant to this repurchase program at a total cost
of approximately $496,000.
At December 31, 1998, the Company had in excess of $25 million of
Federal net operating loss carryforwards, subject to certain annual limitations,
which expire from 2004 through 2011. To the extent the Company has taxable
income in the future, these carryforwards may be used by the Company to reduce
its cash outlay for taxes.
YEAR 2000 ISSUES
The "Year 2000 Issue" is the result of computer systems, embedded
semiconductors and related items 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 a company's internal information systems, the
equipment and components it buys from others and the products it sells.
11
<PAGE> 13
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 thorough review of the
Company's internal systems and products as well as its suppliers' compliance.
This assessment has been completed with regard to the Company's internal
information systems and at all of the Company's three divisions. As a result of
its assessment process, the Company identified certain corrective actions. The
Company has completed the corrective actions required to be taken with regard to
its internal information systems and believes such systems are compliant. With
regard to its products, the Company has completed the corrective actions
required to be taken. The Company is continuing to assess and reassess its Year
2000 issues as it obtains additional information and test procedures from
semiconductor industry groups and other sources.
In connection with its assessment of the Year 2000 issues, the Company
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 in
equipment supplied to them by the Company. The Company 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. The Company is
continuing to follow-up with those suppliers who have not responded to its
surveys.
Based upon its ongoing assessment process, the Company believes that
Year 2000 issues related to its internal systems and its products 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 and confirmations it has obtained from its key suppliers, the
Company 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. The Company estimates
that its total cumulative labor costs incurred in connection with its Year 2000
assessment and remediation efforts from early 1998 through the beginning of the
Year 2000 will be approximately $75,000 and its other expenses over the same
period will be approximately $15,000. 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 Form 10-Q which are not related to
historical results, including statements regarding JMAR's future sales or profit
growth, competitive position or products, projects or processes currently under
development and the ability of the Company to successfully introduce those
products into the commercial marketplace or to apply those products, projects or
processes to alternative applications and 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, fluctuation 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
12
<PAGE> 14
processes, the impact of competitive products and pricing, shifts in demand for
the Company's products, the degree of success and market acceptance of
technology transfer (e.g., advanced laser systems, lithography and
non-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 and 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, 1998 and in the Company's other filings with the Securities and Exchange
Commission.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company's market risks pursuant to Item 3 are not material and
therefore are not required to be disclosed.
13
<PAGE> 15
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 1,144 shares of
Common Stock to its outside directors as compensation for services as
directors in August, 1999. These transactions were exempt under Section
4(2) of the Securities Act of 1933.
(ii) In June, 1999, the Company issued 5,000 shares of Common Stock to a
shareholder who exercised statutory dissenter's rights in connection
with the Company's acquisition of the remaining 6% of California ASIC,
Inc. (now called JMAR Semiconductor) it did not then own. The
transaction was exempt under Section 4(2) of the Securities Act of 1933.
(iii) In October, 1999, the Company issued 12,171 shares of Common Stock
to Steven Sarfati as required in the acquisition agreement as additional
purchase price for Continuum Engineering, Inc., in a transaction exempt
under Section 4(2) of the Securities Act of 1933.
(iv) In September, 1999, the Company issued to two employees warrants
exercisable into 30,000 shares of Common Stock at an exercise price of
$3.00 per share. The warrants were issued pursuant to the Management
Incentive Plan dated August 15, 1996 for JMAR Precision Systems, Inc.
(the "Incentive Warrants"). The Incentive Warrants were issued in a
transaction exempt under Section 4(2) of the Securities Act of 1933. The
Incentive Warrants become exercisable upon the earlier of (i) forty five
days after such time as the closing high bid price of the Company's
Common Stock for 20 consecutive trading days is greater than $6.38; or
(ii) the exercise of holders of at least 90 percent of the Company's
publicly traded Warrants; or (iii) nine years and six months after the
date of grant. The Warrants expire ten years after the date of grant.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders held on August 12, 1999,
the following matters were voted on:
(a) The following directors were elected: John S. Martinez
(15,672,580 affirmative votes and 457,333 votes withheld); James
H. Banister, Jr. (15,720,314 affirmative votes and 409,599 votes
withheld); C. Neil Beer (15,689,389 affirmative votes and
440,524 votes withheld); Vernon H. Blackman (15,721,514
affirmative votes and 408,399 votes withheld); and Barry Ressler
(15,697,689 affirmative votes and 432,224 votes withheld).
(b) A motion to approve the Company's 1999 Stock Option Plan was
passed with 14,521,884 affirmative votes, 1,416,482 negative
votes and 191,547 abstaining votes.
Item 6. Reports on Form 8-K
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the three months ended
September 30, 1999.
14
<PAGE> 16
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 2, 1999 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
15
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