Here is the management discussion part of the 10Q:
sec.yahoo.com
November 10, 1998
JMAR TECHNOLOGIES INC (JMAR)
Quarterly Report (SEC form 10-Q)
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.
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.
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
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.
JMAR TECHNOLOGIES, INC.
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