Here is today's 10q...no press release yet...make up your own mind here (I already have)...filings on Edgar:
NDC AUTOMATION INC (AGVS)
Quarterly Report (SEC form 10QSB)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the financial statements (including the notes thereto)
presented elsewhere herein.
OVERVIEW
The Company derives virtually all of its revenues from the sale of hardware, software and engineering services in connection
with projects incorporating its Automated Guided Vehicle (AGV) control technology. In prior years the Company's net
revenues from AGV systems, vehicles and technology were derived primarily from sales to customers serving two industries
textiles and newspaper publishing. Net revenues since 1995 however have been derived from other industries, e.g. automotive,
CD manufacturing, food, paper. The Company's results of operations can be expected to continue to depend substantially upon
the capital expenditure levels in those industries and in other industries that it may enter. During 1996 and for the first three
quarters of 1997, the Company refocused its sales efforts to existing original equipment manufacturers (OEMs) and system
integrators in the AGV systems industry. Such OEMs and system integrators have historically sold products to end users to
whom the Company occasionally had direct sales. The Company reduced its sales effort to such end users to avoid competing
with its intended OEM customers. In September of 1997, however, the Company began to again pursue AGV system sales
directly to end users in selected market niches to supplement revenues obtained from sales to OEMs and system integrators.
Due to the long sales cycle involved, uncertainties in timing of projects, and the large dollar amount a typical project usually
bears to the Company's historical and current quarterly and annual net revenues, the Company has experienced, and may be
expected to continue to experience, substantial fluctuations in its quarterly and annual results of operations.
The Company sells its products and services primarily in two ways. Vehicles, technology and other products and services may
be sold in a "project" that becomes an integrated AGV system. The primary business is to sell hardware, software and services
as standard items, with less involvement by the Company in overall system design. The Company generally would recognize
lower net revenue but would realize a higher gross profit margin percentage in selling standard items, in each case compared to
the sale of a project, due to the inclusion in project sales of other vendors' products and services with margins generally lower
than the Company's own products and services. Between any given accounting periods, the levels of and mixture of standard
item sales and project sales can cause considerable variance in net revenues, gross profit, gross profit margin, operating income
and net income.
Revenues from standard item sales are recognized upon shipment, while revenues from project sales are recognized under the
"percentage of completion" method. Under this method, with respect to any particular customer contract, revenues are
recognized as costs are incurred relative to each major component of the project. Although the percentage of completion
method will ordinarily smooth out over time the net revenue and profitability effects of large projects, such method nevertheless
subjects the Company's results of operations to substantial fluctuations dependent upon the progress of work on project
components. Such components can differ markedly from one another in amount and in gross profit margin.
Project contracts are billed upon attainment of certain "milestones." The Company grants payment terms of 30 to 90 days to its
customers. It typically receives a cash advance ranging from 10% to 20% of the total contract amount. Bills are thereafter
delivered as milestones are reached. Upon delivery of the project, the customer typically reserves a "retainage" of 10% to 20%
pending system acceptance.
Notwithstanding the receipt by the Company of cash advances and periodic payments upon reaching project milestones, the
Company requires external financing for its costs and estimated earnings in excess of billings on uncompleted contracts,
inventories, receivable and other assets.
The Company's backlog consists of all amounts contracted to be paid by customers but not yet recognized as net revenues by
the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS
================================================================================
STRATEGY DIVERSIFICATION: The Company has decided to pursue a strategy diversification that is explained in note 5
of the financial statement. Positive results from this diversification in terms of new business and increased bookings and backlog
have been noted, and the Company intends to continue this strategy actively. However, there can be no assurance that these
approaches will continue to be successful.
HARCON AGREEMENT AND NEW ORDERS: On January 27, 1999 the Company signed an agreement with Harcon
Engineering, Inc. ("Harcon") of Roseville, Michigan with the objective of jointly pursuing material handling systems projects,
primarily in the automotive industry. The Company received in January 1999 an order from Harcon for the design phase of a
major laser guided AGV system to be installed at a new DaimlerChrysler facility in the Detroit area. The design phase order
together with manufacturing orders received in May of 1999 related to the project have increased the Company's backlog at
May 31, 1999 to the highest level since November 1995. The recent orders confirm management's efforts to increase revenues
and minimize losses.
US POSTAL SERVICE: The Company successfully installed an AGV pilot system for the US Postal Service ("USPS") during
the second quarter of 1999. The system was tested by an independent consulting firm with the goal to identify a technology or
technologies that the USPS could use to automate a portion of its operations. The Company was awarded the order in
competition with many other AGVS supplier. Based on Company contacts with USPS, it appears USPS's automation needs
will increase significantly over the next five year period. Due to the successful installation of the pilot project, the Company is
hopeful that it has positioned itself to receive directly or indirectly sales opportunities from
USPS.
ENTERTAINMENT INDUSTRY AND POWERWAY PRODUCTS: The Company received during the second quarter an
order of approximately $130,000 for its Powerway products from a major entertainment customer. The order is extremely
important to the Company because it is the first significant order for the Powerway product line. The Powerway line was
introduced as part of the Company's strategy to expand it distribution revenues and profitability. This same major entertainment
customer has ordered a pilot project involving the Company's AGV technology outside North America . The Company does
not generate revenues from projects outside its territory (such sales per the MLA are handled by Netzler and Dahlgren or their
licenses) but these projects may provide significant opportunities for the Company should similar projects be pursued in North
America.
RISK ASSOCIATED WITH YEAR 2000: The Company, in its day to day operations, relies upon various computer software
and hardware that may be adversely affected by a change in the millennium, from 1999 to 2000. In general, information
systems experts have predicted that a wide variety of problems, from system failures to data entry and transfer errors, will result
from the turn of the century. Repeated system failures, data entry and transfer errors and similar computer problems would
result in a material adverse effect on the Company and its operations. However, the Company has examined most of its
computer hardware and software and, based on such examination, does not reasonably anticipate any significant internal
problems as a result of the change in millennium.
The Company has assessed its accounting, network, communication and other material systems for Y2K compliance. The
investigation has revealed that these systems are not Y2K compliant, but such software or hardware can be purchased or
upgraded to comply. The present time frame to upgrade the accounting system is scheduled for the end of July 1999 and
completion of testing by the end of August 1999. Hardware systems are to be upgraded or purchased and tested also by the
end of August 1999. Costs associated with the Company's Y2K compliance are estimated to be approximately $20,000 for
software upgrades and approximately $70,000 for hardware. The Company expects to lease such upgrades and purchases for
approximately $3,000 a month, which is in line with management's operating and maintenance budgets.
MANAGEMENT'S DISCUSSION AND ANALYSIS
================================================================================
The Company may, however, be adversely affected by external systems problems, problems over which the Company has
minimal control. In order to minimize its risks, the Company is assessing critical third parties that supply material or services to
the Company. Such investigations include direct contacts with such vendors and reviewing information supplied by such
vendors through Internet sites or direct mailings. To date the critical vendors are addressing their Y2K issues and are at
different phases in their plans. To date none have communicated that they will have significant problems due to the change in the
millennium. The Company expects such work related to Y2K to continue with its critical vendors until such vendors issue
statements of full Y2K compliance.
It is difficult to provide a description of a worst case Y2K scenario. There are so many things that are beyond the Company's
control such as local and foreign government operations as well as transportation and delivery services. The Company has to
assume that there will not be an extended total break down of common business operations in the USA and Europe; if this
would occur, the Company would not be in a position to operate as a going concern. In analyzing the Company's current
operations, the worst case scenario would most likely be that the equipment and software it plans to purchase fails to solve its
Y2K issues. In such a situation the Company would be forced to a manual system of operation which could be implemented in
a relatively short period due to the present size of the Company.
The Company's present contingency plan should a worst case scenario event occur includes but is not limited to: a) Employee
awareness and training for modified operations; b) Hard copy print outs and software backups of all information; c) Continued
relations with a qualified Y2K specialist; d) Increased inventory of certain critical components to meet potential demands from
our customer service department; and e) Active information to and support of the Company's existing customer base with
regard to Y2K issues.
FORWARD-LOOKING STATEMENTS: This report (including information included or incorporated by reference herein)
contains certain forward-looking statements with respect to the financial condition, results of operation, plans, objectives, future
performance and business of the Company.
These forward-looking statements involve certain risk and uncertainties. Factors that may cause actual results to differ
materially from those contemplated by such forward-looking statements include, among others, the following possibilities:
a) Revenues from end user systems sales, new OEMs and new niches may be lower than expected or delayed. b) New
product lines from Thrige, Netzler & Dahlgren (Teach-in), Powerway may not be well received in the North American
industrial truck market or AGV market, thereby restricting growth opportunities for the Company. c) The Company's existing
bank relationships may not be extended which would cause the Company to default on its current obligations. d) The Company
might be unable to raise the additional working capital needed, directly or through a business combination, to finance the current
business strategy which may have a serious impact on the Company's ability to sell its current and future products, as well as
satisfy existing banking relationships. e) General economic or business conditions, either nationally or in the markets in which the
Company is doing business, may be less favorable than expected resulting in, among other things, a deterioration of market
share or reduced demand for its products.
RESULTS OF OPERATIONS
The table below shows (a) the relationship of income and expense items relative to net revenues, and (b) the change between
the comparable prior period and current period, for the three-month and six-month periods ended May 31, 1999 and 1998,
respectively. This table should be read in the context of the Company's condensed statements of income presented elsewhere
herein:
Percentage of Change
Period to Period
Percentage of Net Revenues Increase(Decrease)
---------------------------------- ------------------------------------------------------ ----------------------------
Three
Months Six Months
Three Months Six Months Ended May Ended
Ended Ended 31, May 31,
May 31, May 31, May 31, May 31, 1998 to 1998 to
1999 1998 1999 1998 1999 1999
% % % % % %
---------------------------------- ---------- ------------- ------------- ------------- ------------- -------------
Net Revenues 100.0 100.0 100.0 100.0 36.9 31.5
Cost of Goods Sold 53.5 60.2 57.1 59.3 21.7 26.6
---------------------------------- ---------- ------------- ------------- ------------- ------------- -------------
Gross Profit 46.5 39.8 42.9 40.7 59.9 38.6
---------------------------------- ---------- ------------- ------------- ------------- ------------- -------------
Operating expenses:
Selling 14.0 21.4 16.8 21.7 (10.2) 1.9
General and administrative 25.7 33.9 26.6 34.4 3.9 1.8
---------------------------------- ---------- ------------- ------------- ------------- ------------- -------------
39.7 55.3 43.4 56.1 (1.5) 1.8
---------------------------------- ---------- ------------- ------------- ------------- ------------- -------------
Operating income (loss) 6.8 (15.5) (0.5) (15.4) * 95.7
Net interest expense: (5.1) (8.9) (5.8) (8.8) (22.5) (13.8)
---------------------------------- ---------- ------------- ------------- ------------- ------------- -------------
Income (loss) before income taxes 1.7 (24.4) (6.3) (24.2) * (65.8)
Federal and state income taxes
(benefit) - - - - - -
================================== ========== ============= ============= ============= ============= =============
Net Income (loss) 1.7 (24.4) (6.3) (24.2) * (65.8)
================================== ========== ============= ============= ============= ============= =============
* Because the data changes from negative to positive, or from positive to negative, the percentage of change is not meaningful.
QUARTER ENDED MAY 31, 1999 COMPARED TO THE QUARTER ENDED MAY 31, 1998
Net revenues increased by $330,562 or 36.9% from $895,302 in the earlier period to $1,225,864 in the latter period. The
increase is primarily due to the increased distribution product sales which include approximately $130,000 of Powerway
products and the Company's refocus on providing system solutions to its customer thereby increasing such revenues compared
to the prior year. The Company received orders in excess of $3,000,000 during the current quarter primarily from the
automotive industry. Such orders provide a good backlog and revenue recognizing opportunities for the coming quarters.
Cost of goods sold increased from $538,680 to $655,657 or 21.7% due primarily to higher net revenues in 1999. As a
percentage of net revenues, cost of goods sold decreased compared to 1998 due to a favorable foreign currency exchange rate
during the current quarter as well as a good mix of product sales versus project revenues . Gross profit increased by $213,585
or 59.9% from $356,622 to $570,207, while gross profit as a percentage of net revenues increased to 46.5% from 39.8% due
to the same factor.
Selling expenses decreased from $191,104 to $171,697 or 10.2 % primarily due to a major show related expenses being
realized in the first quarter of 1999 where such similar show expenses were incurred in the second quarter of 1998. General
and administrative expenses increased from $303,519 to $315,332, or 3.9% due primarily to increased training personnel cost
compared to the prior year. As a percentage of net revenues, general and administrative expenses decreased from 33.9% to
25.7%.
Primarily as a result of the foregoing, operating income increased by $221,179 from an operating loss of $138,001 in the earlier
period to an operating income of $83,178 in the latter period.
Net interest expense decreased from $80,108 to $62,079, a decrease of $18,029, lower borrowings compared to the prior
year were the primary reason for the decline. Such reductions are not expected to continue due to increase cash requirements
from the current backlog as well as accruing interest on delayed payments to Netzler & Dahlgren trade payables.
The Company did not recognize any tax benefits in 1999 domestically for its current loss as utilization of operating loss
carryforwards in the future are not assured.
Primarily due to higher revenues in 1999 as described above the Company incurred a net income of $21,099 in 1999
compared to a net loss of $218,109 in 1998.
BACKLOG. Backlog consists of all amounts contracted to be paid by customers but not yet recognized as net revenues by the
Company. At May 31, 1999, the Company had a backlog of approximately $2,770,000 compared to approximately
$1,020,000 one year earlier. The primary reason for the significant increase is the receipt of a major order from Harcon in May
1999 for a major installation at a DaimlerChrysler facility in Detroit. The backlog as of May 31, 1999 is the highest backlog
that the Company has had in several years and positions the Company to improve its results for the fiscal year ending 1999
compared to 1998.
SIX MONTHS ENDED MAY 31, 1999 COMPARED TO SIX MONTHS ENDED MAY 31, 1998
Net revenues increased by $516,696, or 31.5%, from $1,641,197 in the earlier period to $2,157,893 in the latter period. The
increase is primarily due to the increased distribution product sales which include approximately $130,000 of Powerway
products and the Company's refocus on providing system solutions to its customer thereby increasing such revenues compared
to the prior year.
Cost of goods sold increased from $972,585 to $1,231,538, or 26.6%, due primarily to the higher level of net revenues
recognized in 1999. As a percentage of net revenues, cost of goods sold decreased from 59.3% to 57.1%. Gross profit
increased by $257,743, or 38.6%, from $668,612 to $926,355, while gross profit as a percentage of net revenues increased
from 40.7% to 42.9%.
Selling expenses increased from $356,853 to $363,456, or 1.9% while the Company's revenues and bookings increased
significantly. General and administrative expenses remained fairly constant increasing from $563,935 to $573,811, or only
1.8%, compared to the prior year.
Primarily as a result of the foregoing, the operating loss for the period was $10,912 compared to an operating loss of $252,176
the prior year.
Net interest expense decreased from $144,704 to $124,765, an increase of 13.8 %.
The Company did not recognize any tax benefits in 1999 domestically for its current loss as utilization of operating loss
carryforwards in the future are not assured.
Primarily due to higher revenues in 1999 as described above, the Company reduced its a net loss by $261,203 or by 65.8%
from $396,880 in 1998 to $135,677 in 1999. Management remains optimistic about its current strategy due to recent bookings
and the present backlog.
LIQUIDITY AND CAPITAL RESOURCES
The Company experiences needs for external sources of financing to support its working capital, capital expenditures and
acquisition requirements when such requirements exceed its cash generated from operations in any particular fiscal period. The
amount and timing of external financing requirements depend significantly upon the nature, size, number and timing of projects
and contractual billing arrangements with customers relating to project milestones. The Company has relied upon bank financing
under a revolving working capital facility, as well as long-term debt and capital leases and proceeds of its public offerings, and
private offerings, to satisfy its external financing needs.
During the six months ended May 31, 1999 net cash provided from operating activities was $73,328. As of May 31, 1999 the
Company had been delaying payments of approximately $240,000 to Netzler & Dahlgren due to cash not being available
under the current line of credit. Had the funds been available and Netzler and Dahlgren been paid when due the Company
would have used approximately $165,000 of cash from operation activities.
The Company entered into an Inventory and Accounts Receivable Loan and Security Agreement ("Loan Agreement") on
February 28, 1997 with the National Bank of Canada and National Canada Business Corp. (herein collectively called the
"Lender"). The Loan Agreement was amended and restated on April 30, 1999 and allows the Company to borrow up to a
maximum of $1,250,000. Loans made under the new Loan Agreement are evidenced by a demand promissory Note. The
Loan Agreement allows the Company to borrow pursuant to a borrowing formula which is secured by Company's personal
property as collateral. The Company's outstanding loan amount at any one time shall not exceed the lesser of (a) U.S
$1,250,000 or (b) 80% of i) Qualified Accounts receivable (as defined in the Loan Agreement) that are non-project Qualified
Accounts and ii) Qualified Accounts that are project Qualified Accounts plus 50% of all eligible inventory (as defined in the
Loan Agreement) , but in no event shall (A) Inventory Value be in excess of $300,000 and (B) Inventory Value and Qualified
Accounts that are project Qualified Accounts be in excess of $450,000. The borrowed funds will bear interest at the Lender's
prime rate plus 2.75% per annum . The Loan Agreement is further secured by 1) an Inventory Repurchase Agreement and 2) a
$450,000 irrevocable Letter of Credit issued by a Swedish bank. Netzler & Dahlgren Co. AB (NDCab) is obligated to repay
the letter of credit bank any funds it disburses under the Letter of Credit. The Company is ultimately responsible to repay to
NDCab for any amounts it pays in reimbursing the letter of credit bank. The Repurchase Agreement guarantees that NDCab
will repurchase from the Company on certain conditions up to $300,000 worth of inventory, thereby providing funds to pay the
Lender should the Company default on its loan obligations.
The lender, at its discretion, may demand payment upon written notice to the Company. The maturity date has been extended
to October 31, 1999, or upon demand by the Bank. The extension was conditional upon Netzler & Dahlgren extending its
$450,000 irrevocable Letter of Credit to the Bank through November 1, 1999. To further secure Netzler & Dahlgren for
providing the Letter of Credit the Company entered into a Reimbursement Agreement under which the Company granted to
Netzler and Dahlgren a security interest in the Company's land and building; such collateral is a junior lien to the primary
mortgage lender's security interest.
During May 1999, the mortgage loan maturity date was extended for thirteen months from May 16, 1999 to June 16, 2000.
The interest rate on the note remained at 9.5%, and the combined principle and interest monthly payment of $13,912 was also
unchanged .
During the second quarter of 1999 the Company delayed payments of approximately $240,000 to its affiliate Netzler and
Dahlgren so not to exceed current borrowing maximums from the demand promissory note. Such past due payable are
accruing interest at 16% per annum. The Company continues to have difficulty obtaining adequate lines of credit to meet its
operating needs due to the poor results of the last two years and its low equity position. Bank relations have improved
especially since the new bookings received during the second quarter but the banks are still very cautious. This is evidenced by
short extensions of credits, increased interest rates and the continued requirement to have guarantees from Netzler and
Dahlgren. The Company has no assurances that such support will continue from Netzler and Dahlgren leaving the Company
very dependent under the present conditions.
The Company is exploring the possibility of raising additional equity capital, subordinated debt directly or possibly through a
business combination in order to improve its financial position, its independence and have the working capital to address
potential growth opportunities. There can be no assurance that the Company will be successful in raising the additional capital
or subordinated debt to improve its financial position. The Company's ability to continue as a going concern would be adversely
affected if financial support from Netzler & Dahlgren does not continue or equity and/or debt financing is not obtained in the
near future or if revenues do not increase to consistently provide earnings for the Company.
|
