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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-16055
PHOTOMATRIX, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3267788
- - --------------------------------------------------------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
11065 SORRENTO VALLEY COURT, SAN DIEGO, CALIFORNIA 92121
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(Address of principal executive offices) (Zip Code)
(619) 625-4400
- - --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: Common Stock
Indicate by check mark whether the registrant (1) 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 (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statement incorporated hereby by reference in Part III of this Form 10-KSB or
any amendment to this Form 10-KSB.
[ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 18, 1997, based on the average of the highest and lowest
prices of such stock on that date was $2,382,700. The number of shares of
common stock of Photomatrix, Inc. outstanding as of June 18, 1997, was
5,083,000.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
THIS ANNUAL REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THESE STATEMENTS INCLUDE, WITHOUT LIMITATION, STATEMENTS RELATING
TO THE COMPANY'S PLANS AND OBJECTIVES FOR FUTURE OPERATIONS, ASSUMPTIONS AND
STATEMENTS RELATING TO THE COMPANY'S FUTURE ECONOMIC PERFORMANCE, MANAGEMENT'S
OPINIONS ABOUT COMPETITIVE POSITION OF THE COMPANY'S PRODUCTS AND THE ABILITY OF
THE COMPANY TO COMPETE SUCCESSFULLY AND OTHER NON-HISTORICAL INFORMATION. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, WITHOUT
LIMITATION, THOSE RISKS DISCUSSED IN ITEM 7 UNDER THE HEADING "ADDITIONAL RISK
FACTORS" AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS ANNUAL REPORT.
ITEM 1. BUSINESS
Photomatrix, Inc. (the "Company," "PMX" or "Photomatrix," formerly
Xscribe Corporation), through its subsidiary, Photomatrix Imaging
Corporation, develops, manufactures, sells and services high-performance
document and aperture-card scanners for legal, financial, government and
commercial enterprises. Photomatrix was incorporated in California in 1978
under the name Xscribe Corporation. On July 31, 1996, the Company sold
substantially all the assets and the business of its wholly owned subsidiary,
Xscribe Legal Systems, Inc. In October, 1996, the Company changed its name
from Xscribe Corporation to Photomatrix, Inc. In December, 1996, the Board of
Directors of the Company approved a plan to discontinue the operations of
another wholly owned subsidiary, Lexia Systems, Inc., and is currently in
process of selling this operation. The financial position and results of
operations of Xscribe Legal Systems and Lexia Systems, Inc. have been
restated in the financial statements of the Company as discontinued
operations. In March, 1997, the Company consolidated and relocated its United
States continuing operations to 11065 Sorrento Valley Court, San Diego. The
Company's phone number is (619) 625-4400.
Photomatrix now operates in the electronic imaging segment of the Information
and Image Management Industry as a supplier of quality, high-value electronic
image-processing hardware and software products and services. During the
past three years, Photomatrix has evolved from being a computer output
microfilm ("COM") duplicator manufacturer with primarily one major customer
to a document scanner manufacturer with many customers. Over the past four
years, revenue from COM products and services have steadily declined, while
scanner product and services revenue has increased, as shown on the following
schedule ($000 omitted):
FY 1994 FY 1995 FY 1996 FY 1997
---------------------------------------
SCANNER PRODUCTS & SERVICES $2,410 $5,747 $6,821 $7,226
COM PRODUCTS & SERVICES 7,332 3,965 2,271 1,468
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TOTAL REVENUE $9,742 $9,712 $9,092 $8,694
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PRINCIPAL PRODUCTS
In fiscal year 1997, the Company derived its consolidated revenue primarily
from sales and service of its Photomatrix document scanners and aperture card
scanners, as more fully described below. Additionally, a portion of the
Company's consolidated revenue was obtained by servicing its discontinued COM
product line.
DOCUMENT SCANNERS
Photomatrix offers a line of medium and high-speed paper document scanners that
serve as input devices for image management systems used in office automation
and service bureau environments. All PMX scanners are constructed for rugged,
high volume use, offering higher duty cycles and reliability than most
competitive models.
The complete image capture system among the Photomatrix document scanner line
is the Series 6000, a high-speed (4,200 dual-sided pages per hour at 200 dots
per inch [dpi] resolution), rugged, single or dual-sided, 200 to 400 dpi,
automatic-feeding document scanning system. Series 6000 includes the
scanner, a Pentium PC, high-resolution display, Windows 3.1 application
software and two circuit boards (using 32-bit EISA bus technology) that
enhance the scanner's speed and performance. One board processes (or cleans
up) the scanned images and the other board compresses the images for storage.
Photomatrix Image Capture Software ("PICS"), which operates in Microsoft
Windows and supports Novell Netware, controls the scanning and PC hardware,
displays images and manages the workflow of the image capture process
(including indexing, scanning and formatting). PICS supports Windows'
Dynamic Link Libraries, allowing the user to develop custom applications to
use with Series 6000. Because the Series 6000 scanner, boards and PICS were
designed to work as one tightly-integrated system, this configuration offers
the best efficiency among Photomatrix scanners.
Photomatrix primarily sells the Viper Series 5000 ("Series 5000"), a simplex
or duplex, high-resolution, 5000-element CCD scanner which captures
double-sided documents at speeds in excess of 9,000 dual sided pages per
hour. These rugged, high-duty-cycle machines differ from the Series 6000 in
that the Series 5000 is not bundled with the Photomatrix image processing
board, compression board, or PICS. Instead, Series 5000 is plug compatible
with industry-leading interface (processing and compression) boards from
Kofax, Xionics, Seaport Imaging, and Image Machines. Because of this
compatibility, Photomatrix sells a higher volume of the Series 5000 scanners.
APERTURE CARD SCANNERS
Photomatrix aperture card scanners are used to scan microfilm images of
engineering drawings for storage in a digital format. In addition to crisper
images, the digital format permits users to electronically store, retrieve,
distribute and print engineering documents in a local or enterprise wide
environment. Photomatrix aperture card scanners offer a
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wide range of automation, throughput speed and image enhancement features.
Photomatrix sells aperture card scanners primarily direct to corporate
in-house and third-party service bureaus who scan microfilmed engineering
drawings for the end users of those drawings. Photomatrix also sells a
limited number of aperture card scanners under subcontracts to provide
electronic-imaging systems to the Department of Defense.
MAINTENANCE SERVICES
The Company provides 24-hour service for its installed base through field
engineers in 10 major cities throughout the United States ("US") and in
England. The Company also has relationships with various third party
maintenance organizations, including a nationwide relationship with IBM, to
maintain document scanners, and Kodak, to provide COM duplicator spare parts.
PMX field engineers average 9 years of experience with the Company. Using a
sophisticated system for parts distribution and inventory control, the
service operation offers installation, on-going maintenance and field
technical support for existing and new products.
Total maintenance revenue for FY 1996 was $1.1 million, with a ratio of
scanner maintenance revenue to COM duplicator revenue of approximately 60:40.
In FY 1997, total maintenance revenue has maintained at a flat annualized run
rate of $1.1 million, but the relative percentage of maintenance revenue has
migrated towards scanners, where a 70:30 ratio of service from scanners to
COM duplicators now prevails.
The Company views maintenance contracts and related revenue as a significant
revenue opportunity in FY 1998 and FY 1999 and views maintenance contracts as
an important profit center.
COMPETITION
APERTURE CARD SCANNERS. The market for scanning engineering drawings is large
and growing steadily. According to industry studies, in the US alone, it is
estimated that more than 40,000 companies each have more than 100,000
engineering drawings, with a total estimated value of more than $1.5
trillion. Companies are dedicating large resources to and establishing
significant budgets for the conversion, storage, distribution and retrieval
of these engineering drawings. Problems with document and revision control,
document distribution, deterioration and loss of documents are pervasive.
Aperture cards, which contain microfilm images of these drawings, have been
widely used since World War II to improve the storage and security of these
documents. The need to electronically manage this data has become critical,
as the volume of paper documents continues to increase, and companies are
increasingly seeking methods to increase the efficiency of storage and
retrieval of these documents.
Photomatrix developed much of its technology and related application of
aperture card scanners in the mid 1980's when it introduced its aperture card
scanner product. Photomatrix's competitors in the aperture card scanning
market are Wicks & Wilson, a
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United Kingdom company, and Vidar Systems Corporation, a subsidiary of
Sweden's Yggdrasil. Photomatrix is not able to estimate the size of this
market, but believes that it is currently limited due to the cost constraints
of converting engineering backfiles of aperture cards and the related systems
into electronic storage and retrieval systems. Photomatrix is the only
approved aperture card vendor for the United States Department of Defense
Engineering Data Management Information and Control System ("EDMIC") contract
awarded to PRC in 1989 and the EDMIC's program currently is a significant
source of demand for this product. The principal competitive advantages of
the Photomatrix aperture card scanners are its image enhancement features,
high speed accurate conversion features and reliability. Photomatrix's
products are higher-end products and are priced higher than other currently
marketed products. In the Company's opinion, its aperture card scanner
product offering exceeds the quality and duty-cycle statistics of any of its
competitors.
DOCUMENT SCANNERS. The document scanning industry can be segmented into the
following five market segments:
- - - Sheetfed scanners
- - - Drum scanners
- - - Flatbed scanners
- - - Handheld scanners
- - - Recognition and imaging editing software
Photomatrix document scanners utilize a flatbed vacuum transport technology.
Furthermore, Photomatrix competes in the high end of the industry with Kodak,
Fujitsu, Bell and Howell, and BancTec where speed, throughput and duty cycle
are important product features. Competition in this segment is based upon
price, image quality, paper handling capabilities, throughput speeds, ease of
use, reliability and quality and speed of maintenance services. Kodak has
utilized its strengths of name recognition, reputation, distribution
channels, good performance, service capabilities, and strong financial
capital base to become the market share leader in this segment. However,
Kodak 500 and 900 model scanners, which are comparable to the Company's Viper
Series 5000 of scanners, sell for more than the Photomatrix scanners.
Competitors in the high-end document scanner market differentiate their
respective products primarily based on name recognition, quality,
distribution channels, and price. Management believes the products of all
three competitors in this marketplace operate comparably with
industry-standard boards and interfaces such that interoperability is no
longer a significant product differentiator. Photomatrix believes that its
primary competitive advantages in this segment of the market are its
price-performance relationship, including its relative speed, image quality,
reliability and rugged build. All of its primary competitors, however, have
substantially greater resources than Photomatrix for marketing and
distribution and for purchasing and maintaining market share. There is no
assurance that Photomatrix will be able to maintain a competitive position in
this market.
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In the document scanner market, the Photomatrix Series 5000 and 6000 compete
favorably against their product counterparts at BancTec and Kodak.
Photomatrix maintains the leading price-performance ratios in its market
segment and retains this status via not only continually improving on speed
and throughput but also pricing below BancTec's and Kodak's products. PMX's
likelihood of increasing its market share may be reduced should Kodak
significantly reduce its prices. Although management expects some general
downward pressure on price in the next two to three years, management does
not expect intense price competition in the foreseeable future. There is no
assurance that the Company will not experience intense price competition.
During fiscal year 1997, Photomatrix entered into an OEM contract with Bell
& Howell to supply Series 5000 scanners under the Bell & Howell label. PMX
scanners operate at speeds higher than Bell & Howell's, and the Company's OEM
relationship with Bell & Howell represents a strategic corporate partnering
that is beneficial to both parties. Management does not view Bell & Howell
as a competitor in the high-end market assuming PMX continually improves the
features and speed of PMX scanners such that they are perpetually superior to
Bell & Howell's product offering and Bell & Howell adequately markets and
sells PMX scanners in large volumes. Management believes PMX has the
engineering talent and resources to succeed at technologically staying ahead
of Bell & Howell and, thereby, fostering a long-term OEM relationship.
MARKETING AND DISTRIBUTION
PMX markets Series 6000 image capture systems to service bureaus and
high-volume end users via its direct sales force. In contrast, PMX markets
its Series 5000 document scanners via indirect distribution channels,
including via original equipment manufacturing (OEM) agreements, system
integrators, distributors, and value added remarketers. PMX has two separate
exclusive OEM agreements, one with Bell & Howell Limited under which Bell &
Howell Limited resells those scanners in Europe, Africa, the Indian
sub-continent and the Middle East, and the other with Bell & Howell (in the
United States) under which Bell & Howell resells those scanners in the United
States and Canada. The international agreement and the domestic agreement
contain no minimum requirements. Generally, both Bell & Howell agreements
preclude PMX from selling document scanners to dealers or distributors who
represent Bell & Howell scanners. In April, 1997, Photomatrix entered into a
distribution agreement with IBM. Under the agreement, which also contains no
minimum requirements, IBM is granted the right to sell Photomatrix document
scanners.
Photomatrix distributes its aperture card scanning products primarily to
systems integrators and VARs who package the Photomatrix scanners with other
software and hardware products for sale to end users. Because Photomatrix
aperture card scanners are peripheral products which must be integrated with
other products for end users, Photomatrix maintains close working
relationships with major systems integrators and VARs. Photomatrix relies
heavily on the sales efforts of its systems integrators and VARs
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to generate sales of aperture card scanners. Within this integrator and VAR
distribution channel, Photomatrix sells its aperture card scanners under
subcontracts to PRC, Inc. ("PRC") under a contract to provide electronic
imaging systems to the Department of Defense. PRC is not obligated to order
any minimum quantities and the timing and amount of the orders are not
predictable. Photomatrix also sells, through its direct sales force, aperture
card scanning systems to service bureaus which provide scanning services to
engineering drawing end users.
Photomatrix generally provides a 90-day warranty on its products and offers,
for sale, annual maintenance contracts thereafter. The warranty and
maintenance work is typically provided through Photomatrix field service
employees who are located throughout the United States. Photomatrix also
performs repair services for and supplies replacement parts to Eastman Kodak
Company (which previously sold Photomatrix product under a private-label
agreement).
RAW MATERIALS AND MANUFACTURING
For the year ended March 31, 1997, Photomatrix manufactured its aperture card
scanners and document scanners at its manufacturing facilities in Culver
City, California. Subsequent to year-end, the manufacturing operations have
been consolidated into a new facility in San Diego, California. This move
will result in closer day-to-day supervision by the Company's management,
since it represents the first time that operations personnel and upper
management of the Company have been located in the same building. In
addition, the Company has initially experienced raw material cost reductions
as result of changing from Los Angeles to San Diego vendors. The raw material
cost reductions have been offset by labor inefficiencies related to
significant assembly personnel turnover incurred in connection with the move.
Photomatrix's operations consist of procurement, kit packaging, assembly of
circuit boards, wiring and assembly and quality control testing of all parts,
components, subassemblies and final assemblies of all products. Photomatrix
manufactures its own boards, including 32 bit, EISA-bus technology image
processing and compression boards used in its Series 6000 scanning products.
Photomatrix's products incorporate electronic, imaging and mechanical
components purchased from various vendors. The electronic components,
including the computer chips, are generally available from multiple sources.
Photomatrix currently uses Fairchild, Kodak and Sony CCDs in the Photomatrix
cameras in its aperture card and document scanning products. However, other
commercially available CCD cameras could be substituted if necessary.
Photomatrix copies, labels and packages its software products.
Photomatrix's products contain numerous mechanical components that are
machined specially for Photomatrix's products. Photomatrix relies upon
several specific vendors as the sole source of its custom-machined parts.
Although many vendors can provide this machine work, tools and molds needed
for this process are in the possession of (and in some cases, owned by) its
machine-shop vendors, and Photomatrix could experience
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supply disruption if one of these vendors failed to meet its supply
obligations.
Photomatrix also bundles its aperture card scanners and document scanners
with commercially available personal computers, work stations,
high-resolution monitors, optical disk drives and other compatible
peripherals and with Microsoft Windows, Novell NetWare and other commercially
available software.
INTELLECTUAL PROPERTY RIGHTS AND LICENSES
Photomatrix relies upon copyright and trade secret laws to protect its
software and firmware used in its aperture card scanner and document scanner
products. Photomatrix has registered under Federal law design documents for
its document scanner and certain of its product maintenance manuals,
operations manuals and parts catalogues.
Photomatrix holds a perpetual nonexclusive license to use, manufacture, and
distribute aperture card scanners, microfiche scanners, single and double
sided document scanners that scan documents no greater than 12 inches in
width and 24 inches in length and multiformat scanners provided that the
manufacturer's net invoice price is not less than $7,000 for document
scanners and $10,000 for all scanners that use certain imaging technology of
Scan-Graphics, Inc., subject to United States Patent No. 4,972,273.
Photomatrix is obligated to pay Scan-Graphics a royalty of 5-1/2 % of
Photomatrix's net sales price for all aperture card scanners manufactured,
sold and delivered by Photomatrix until December 31, 1998. Photomatrix is
not obligated to pay any royalties with respect to document scanners, whole
fiche scanners, roll film scanners and/or multiformat scanners even if the
scanners use the patented technology or any derivative of such technology.
If Photomatrix discontinues its manufacturing of aperture card scanners, then
it is obligated to negotiate with Scan-Graphics to sell Scan-Graphics a
nonexclusive right to manufacture and sell the aperture card scanners.
Photomatrix is a party to a nonexclusive reseller agreement with Image
Machines Corporation for a Windows driver for Photomatrix's aperture card
scanners and for viewing and editing software. Under the reseller agreement,
Photomatrix purchases the software for resale on a per copy basis. The Image
Machines software is not bundled with aperture card scanners sold through PRC
or Intergraph who have developed their own software for use with the
scanners. Photomatrix offers with its scanners a SCSI developers' tool kit
for developing a Photomatrix scanner driver.
Photomatrix also purchases and resells as part of the Series 6000 document
scanner a board manufactured by Seaport Imaging that enables the scanning of
bar codes.
Photomatrix holds a nonexclusive license which expires in March, 1998 from
Educational Testing for an algorithm used for gray scaling images in Series
6000 document scanner and pays a $20 per unit royalty on sales of its
dual-sided scanners.
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Photomatrix holds a non-exclusive, perpetual, paid-up license to use and
sublicense its Vision QC software to end-users, and Photomatrix owns the
trademark Vision QC. The software and its source code are owned by Eureka
Software Solutions, Inc., and Eureka and NightRider, a service bureau, have
the right to sublicense the software to third parties.
Photomatrix bundles its Series 6000 document scanner with Microsoft DOS and
Windows which it purchases on a per copy basis.
SEASONAL BUSINESS
The second and third quarters of the Company's fiscal year have typically
shown higher revenue volumes than its first and fourth quarters.
DISCONTINUED OPERATIONS
The following represents a brief history on the discontinued operations of
Photomatrix, Inc.:
SALE OF XSCRIBE LEGAL SYSTEM, INC. In July, 1996, the Company sold its
computer-aided transcription business and related assets to its primary
competitor for $2.2 million. The Company retained certain liabilities.
LEXIA SYSTEMS, INC. In October, 1993, the Company acquired the North
American Sales Division of International Computers Limited, Inc. ("ICL"), a
developer of groupware (office automation) software and manufacturer of
Unix-based hardware, and formed Lexia Systems, Inc. ("Lexia"). Lexia and ICL
entered into a strategic alliance whereby Lexia was to distribute ICL's
groupware products in the US and support the domestic install base of ICL
customers. However, the business partnering efforts between the Company and
ICL / Fujitsu have proved to be ineffective primarily because of a difficult
working relationship between ICL, Fujitsu and Lexia, combined with the fact
that Lexia did not own the software or the proprietary rights and was not
able to control the marketing or product management of ICL products.
Consequently, in December, 1996, the Board of Directors of the Company
approved a plan to discontinue Lexia Systems, Inc. before the end of the
Company's second quarter in fiscal 1998. The Company is currently in process
of selling this operation. There is no assurance that the Company will be
able to consummate this sale. Further, in June, 1997, the Company had
accounts payable and unpaid rent due ICL and related entities in the amount
of $725,000. The Company is disputing the value received related to certain
of these liabilities and is attempting to settle with ICL at a discount.
There is no assurance that the Company will be successful in resolving these
disputed amounts.
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SIGNIFICANT CUSTOMERS
One customer (Bell & Howell) accounted for 17 percent of the Company's total
revenue for fiscal year 1997. No other customer accounted for more than 10
percent of the Company's total revenue during fiscal years 1996 or 1995. (See
"Additional Risk Factors")
BACKLOG
The Company generally does not have a material order backlog at any
time because the Company normally fills orders within the delivery schedules
requested by customers (generally within 30 days).
GOVERNMENT SALES
The Company has a subcontract to PRC's contract with the Department of
Defense (see "Competition"). Photomatrix is not guaranteed any orders under
the subcontract which provides that PRC will issue purchase orders for
products when the purchase orders are fully funded. Purchase orders are
subject to termination if the government terminates the prime contract 25
days prior to the delivery date for the product.
RESEARCH AND DEVELOPMENT
During the last three fiscal years, the Company expended $915,000 (fiscal
year 1997), $786,000 (fiscal year 1996), and $765,000 (fiscal year 1995) on
company-sponsored research and development projects, including projects
performed by consultants for the Company and including capitalized software
development costs.
The Company is currently engaged in the development of competitive
enhancements to the Photomatrix line of scanners, including a faster scanner,
a "smart" automatic document feeder, a top loading stacker, and the next
generation of both the Series 6000 document scanner and aperture card scanner
line. There is no assurance that the Company will successfully complete
current or planned development projects or will do so within the time
parameters and budgets established by the Company, and there is no assurance
that a market will develop for any product successfully developed.
The Company works closely with its customers in an attempt to develop
enhancements and new products in response to customer needs.
The Company's management expects that research and development expenditures
(including capitalized software development costs) will total about $1
million for the coming year.
ENVIRONMENTAL LAWS
Compliance with Federal, state and local laws enacted for the protection of the
environment have not had a material effect upon the Company's capital
expenditures,
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earnings or competitive position to date. The Company does not anticipate
that it will have to incur any material expenses in the future in order to
comply with Federal, state or local laws because of the nature of its
products and manufacturing operations.
EMPLOYEES
At June 1, 1997, the Company had 61 full-time and 3 part-time employees,
excluding nine employees associated with its discontinued Lexia operation,
none of whom are subject to a collective bargaining agreement. The Company
considers its relationship with its employees to be good.
FOREIGN AND DOMESTIC OPERATIONS
The Company derived approximately 21.8% of its revenue for the year ended
March 31, 1997, from foreign sales made by Photomatrix, Ltd., a wholly owed
subsidiary located in the United Kingdom.
ITEM 2. PROPERTY
The Company leases its corporate headquarters located in San Diego,
California. The Company first occupied this facility in March, 1997. This
facility consists of approximately 23,400 square feet which houses the
Company's corporate offices and PMX's manufacturing, sales and administrative
functions. The lease expires in September, 2002.
The Company also leases facilities in Chandler, Arizona and London, England.
These facilities house the Photomatrix product development and Photomatrix
European operations, respectively. The Chandler facility lease consists of
5,100 square feet, which expired subsequent to March 31, 1997 in June, 1997.
Subsequently, this lease was extended to June, 2000. The London facility
consists of 2,400 square feet and the lease expires in May, 2013.
As of March 31, 1997, the Company leased a 49,000 square foot facility in
Culver City (of which 15,000 square feet had been subleased to third-party
tenants), and the lease expired in May, 1997. In March, 1997, the Company
consolidated its corporate offices with its PMX manufacturing, sales and
administrative functions into a single facility in San Diego, California.
The Company also subleases 6,000 square feet in Reston, Virginia for its
Lexia operations (which operation has been discontinued by the Company, as
more fully described in Note 2 of the Consolidated Financial Statements
presented elsewhere herein) from ICL, which sublease expires in August, 1997.
The Company believes that its facilities are sufficient to accommodate its
current needs and does not anticipate leasing additional space during the
current fiscal year.
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ITEM 3. LEGAL PROCEEDINGS
The Company has been a defendant in three product liability cases pending in
the United States District Court, Eastern District of New York (BERNHART V.
XSCRIBE ET AL. (92 Civ. 3931), GALFIN V. XSCRIBE (92 Civ. 2582), and
HAGIPADELIS V. XSCRIBE (95 Civ. 1977)). Xscribe has tendered these claims to
its insurance carriers, St. Paul Fire and Marine Insurance, and Federal
Insurance Company, and St. Paul has assumed the Company's defense without
reservation of right and Federal has agreed to share defense costs, subject
to a reservation of rights. The insurance carriers have prevailed in all
judgements rendered to date. It may take several years before this litigation
is ultimately resolved. The Company believes that there is no merit to any
of the three pending cases and further believes that if any liability results
from these claims, the liability (excluding punitive damages, if any) will be
covered by its insurance policies. However, depending upon the outcome of
these cases, the Company may be served in the future with additional claims
or be subject to liability in excess of insurance policy limits.
The Company is not aware of any other legal proceedings to which it is a
party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Photomatrix, Inc. is traded in NASDAQ Stock Market Small Cap Tier under the
symbol PHRX. On June 18, 1997, there were 5,083,000 shares outstanding and
there were approximately 1,000 shareholders of record. Following is information
regarding Photomatrix, Inc. common stock market prices:
<TABLE>
<CAPTION>
Fiscal Year 1997 Fiscal Year 1996 Fiscal Year 1995
----------------- ----------------- -----------------
Fiscal Quarter Ended Low Bid High Bid Low Bid High Bid Low Bid High Bid
- - -------------------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
June 30 - 1st 11/16 1-7/16 7/8 1-1/2 3-9/16 4-19/32
September 30 - 2nd 17/32 1-1/16 13/16 1-1/2 2-1/4 3-15/16
December 31 - 3rd 3/8 13/16 3/4 1-1/16 1-13/16 2-11/16
March 31 - 4th 3/8 15/16 9/16 1-3/64 1-1/4 2-5/16
</TABLE>
The Company has not paid a cash dividend on its common stock and it is not
anticipated that the Company will pay any dividends in the foreseeable future
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following selected financial data is derived from audited financial
statements as of the years ended March 31, 1997, 1996, 1995, 1994 and 1993
(000's have been omitted). Certain reclassifications have been made to prior
year amounts to be consistent with current year classifications. Discontinued
operations were reclassified for all periods presented and the remaining
operations consist of Photomatrix Imaging Corp.and Photomatrix, Ltd., which
were acquired in fiscal 1994. The data set forth below should be read in
conjunction with the financial statements and the related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," both appearing elsewhere herein.
<TABLE>
<CAPTION>
For the years ended March 31,
------------------------------------------------------
1997 1996 1995 1994 1993 (1)
-------- -------- ------- -------- ----------
OPERATING DATA
<S> <C> <C> <C> <C> <C>
Revenue $ 8,694 $ 9,092 $ 9,712 $ 9,742 -
Gross profit percent 26.3% 32.3% 31.5% 34.8% -
Loss from
continuing operations $ (2,290) $ (1,368) $ (791) $ (194) -
Net income (loss) $ (2,407) $ (1,704) $ (133) $ 1,222 $ 662
Loss per share
from continuing operations $ (0.44) $ (0.24) $ (0.13) $ (.04) -
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
For the years ended March 31,
------------------------------------------------------
1997 1996 1995 1994 1993 (1)
-------- -------- ------- -------- ----------
OPERATING DATA
<S> <C> <C> <C> <C> <C>
Net income (loss) per share $ (0.46) $ (0.30) $ (0.02) $ 0.23 $ 0.07
Dividends per share $ - $ - $ - $ - $ -
1997 1996 1995 1994 1993
-------- -------- ------- -------- -------
BALANCE SHEET DATA
Working capital $ 2,432 $ 5,624 $ 6,991 $ 7,617 $ 1,965
Current ratio 1.92 2.96 4.10 5.35 (1)
Total assets $ 8,565 $ 12,581 $ 13,202 $ 12,844 $ 3,909
Total long-term debt and
obligations $ 415 $ 1,148 $ 699 $ 827 $ -
</TABLE>
(1) Continuing operations of the Company were acquired during fiscal 1994.
All years presented have been restated to reflect discontinued operations.
Accordingly, fiscal 1993 consists only of discontinued operations.
Management's discussion and analysis of financial condition and results of
operations should be read in conjunction with the selected financial data and
consolidated financial statements and notes thereto included elsewhere therein.
RESULTS OF OPERATIONS
Following is a comparative discussion by fiscal year of the results of
continuing operations for the last three fiscal years ended March 31, 1997. The
Company believes that inflation has not had a material effect on its operations
to date.
FISCAL YEAR 1997 ENDED MARCH 31, 1997 COMPARED TO FISCAL YEAR 1996 ENDED MARCH
31, 1996
Consolidated revenue for the year ended March 31, 1997 decreased by $398,000
(4.4 %) to $8,694,000 from $9,092,000 for the year ended March 31, 1996. This
decrease was due to a 35.4 % ($803,000) expected decrease in COM duplicator
revenue and offset by a 5.9 % ($405,000) increase in scanner product and service
revenue.
Consolidated gross margins for the year ended March 31, 1997 decreased
$639,000 (21.8 %) to $2,294,000 from $2,933,000 and gross margin as a percent
of sales decreased from 32.3 % to 26.4 % in the year ended March 31, 1997 due
to significant price concessions made by the Company in connection with the
establishment of its new OEM relationship with a major document scanner
customer, as well as certain cost inefficiencies caused by the relocation of
its manufacturing operations from Culver City to San Diego, including an
inventory obsolescence write-off of approximately $127,000. Management
believes that it has taken appropriate actions which will enable the Company
to realize gross
13
<PAGE>
margins similar to those in fiscal years 1996, 1995 and 1994. There is no
assurance that these margin improvements will be achieved.
Selling, general and administrative ("SG&A") expenses decreased $281,000 (7.8 %)
from $3,592,000 in the prior year to $3,311,000 in the current year. The net
decrease is primarily attributable to cost reductions made both in the sales and
marketing as well as the general and administrative areas of the Company. As a
percent of sales, SG&A decreased from 39.5 % in the prior year to 38.1 % in the
current year, primarily due to the cost reduction efforts implemented during the
current year.
Product development expenses increased $322,000 (66.4 %) from $485,000 in the
year ended March 31, 1996 to $807,000 in the year ended March 31, 1997.
Product development expenditures that were capitalized because they related
to technologically feasible projects were $108,000 in the current year
compared to $301,000 in the prior year. Total development spending increased
$129,000 from $786,000 in the prior year to $915,000 in the current year
primarily because of increased scanner development activity at Photomatrix,
including the development of new models which feature increased speed (150
and 200 page per minute duplex models), as well as new options such as a
"smart" automatic document feeder, a top-loading stacker and an NT version
of the Company's PICS software.
During the current fiscal year, the Company relocated and consolidated its
operations to San Diego. The cost incurred in connection with this activity
totaled $520,000, and has been shown as a separate line item.
Interest expense decreased $136,000 from $228,000 in the prior year to $92,000
in the current year. This decrease was due to decreased borrowings under the
Company's credit facility in the current year. Other income increased $239,000,
from $11,000 in 1996 to $250,000 in 1997 as a result of non-recurring payment
from a major customer under a minimum quantity purchase contract.
The Company's provisions for income taxes were $104,000 and $7,000 in the years
ended March 31, 1997 and 1996, respectively. These amounts are substantially
different from provisions calculated using the statutory rates because of the
Company's inability to recognize the effects of net operating losses and related
carry-forwards. The current year provision reflects an increase in the Company's
valuation allowance relating to the deferred tax asset.
The decreases in revenue and gross margin, and the increased product development
and relocation expenses, offset slightly by the reduction in SG&A costs and
interest expense and the increase in other income, resulted in a loss from
continuing operations of $2,290,000 ($0.44 per share) for the year ended March
31, 1997. This compares to the loss from continuing operations of $1,368,000
($0.24 per share) for the year ended March 31, 1996.
14
<PAGE>
During the current year, the Company sold its court reporting business (Xscribe
Legal Systems, Inc.) and discontinued Lexia Systems, Inc., as more fully
described in Note 2 of the Consolidated Financial Statements contained elsewhere
herein. Including the loss from discontinued operations of $336,000 in the
prior year and $251,000 in the current year, less gain of $134,000 from the sale
of Xscribe Legal Systems, the net loss increased from $1,704,000 ($0.30 per
share) in the year ended March 31, 1996 to $2,407,000 ($0.46 per share) in the
year ended March 31, 1997.
FISCAL YEAR 1996 ENDED MARCH 31, 1996 COMPARED TO FISCAL YEAR 1995 ENDED MARCH
31, 1995
Consolidated revenue for the year ended March 31, 1996 decreased $620,000 (6.4%)
to $9,092,000 in the year ended March 31, 1996 from $9,712,000 in the year ended
March 31, 1995. This decrease was due to a 42.7% ($1,694,000) expected decrease
in COM duplicator revenue, somewhat offset by an 18.7% ($1,074,000) increase in
scanner product and service revenue.
Consolidated gross margins for the year ended March 31, 1996 decreased
$124,000 (4.1%) to $2,933,000 in the year ended March 31, 1996 from
$3,057,000 in the year ended March 31, 1995. Gross margin as a percent of
sales remained relatively constant at about 32%.
Selling, general and administrative expenses increased $336,000 (10.3%) from
$3,256,000 in the year ended March 31, 1995 to $3,592,000 in the year ended
March 31, 1996. The net increase includes a $426,000 increase at Photomatrix to
develop its sales and marketing channels for scanners offset by $90,000 of cost
reductions at the corporate headquarters. As a percent of sales, SG&A increased
from 33.5% in the year ended March 31, 1995 to 39.6% in the year ended March 31,
1996, primarily due to the decreased revenue in the fiscal year ended March 31,
1996.
Product development expenses increased $56,000 (13.1%) from $429,000 in the year
ended March 31, 1995 to $485,000 in the year ended March 31, 1996. Product
development expenditures that were capitalized because they related to
technologically feasible projects were $301,000 in the year ended March 31, 1996
compared to $336,000 in the year ended March 31, 1995. Total development
spending increased $94,000 from $692,000 in the year ended March 31, 1995 to
$786,000 in the year ended March 31, 1996 primarily because of increased scanner
development activity at Photomatrix.
Other income (expense), which consists primarily of interest expense, increased
$76,000 from $141,000 in the year ended March 31, 1995 to $217,000 in the year
ended March 31, 1996. This increase was due to increased borrowings under the
Company's credit facility, primarily used to finance increased inventory levels.
The Company's provisions for income taxes were $7,000 and $22,000 in the years
ended
15
<PAGE>
March 31, 1996 and 1995, respectively. These amounts are substantially
different from provisions calculated using the statutory rates because of the
Company's inability to recognize the effects of net operating losses and
related carry-forwards, net of valuation allowances.
The decreases in revenue and gross margin, and the increased product development
and interest expenses, and SG&A costs, resulted in a loss from continuing
operations of $1,368,000 ($0.24 per share) for the year ended March 31, 1996.
This compares to a loss from continuing operations of $791,000 ($0.13 per share)
for the year ended March 31, 1995.
In the year ended March 31, 1997, the Company sold its court reporting business
(Xscribe Legal Systems, Inc.) and discontinued Lexia Systems, Inc., as more
fully described in Note 2 of the Consolidated Financial Statements contained
elsewhere herein. Including the income (loss) from discontinued operations of
$658,000 and ($336,000) in the years ending March 31, 1995 and 1996,
respectively, the net loss increased from ($133,000) ($0.02 per share) in the
year ended March 31, 1995 to ($1,704,000) ($0.30 per share) in the year ended
March 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Following is a discussion of Photomatrix's recent and future sources of and
demands on liquidity as well as an analysis of liquidity levels.
RECENT AND FUTURE SOURCES OF AND DEMANDS ON LIQUIDITY AND CAPITAL RESOURCES
During fiscal year 1997, the Company's primary sources of liquidity were cash
from discontinued operations of $1,382,000, proceeds of $2,000,000 from the sale
of Xscribe Legal Systems, reductions in the Company's inventory of $573,000 and
accounts receivable of $302,000, and an increase in accrued liabilities of
$264,000. Primary uses of cash in the year ended March 31, 1997 were to repay
the line of credit and notes payable with the bank and related parties
($967,000), reduce accounts payable and customer deposits ($524,000) and capital
expenditures and capitalized software ($429,000). In the year ended March 31,
1997, the Company's cash balance increased $557,000 from $255,000 to $812,000.
The Company has a line of credit with a bank, which was amended subsequent to
year-end to borrow a total of $750,000 which was unused at March 31, 1997. This
line of credit accrues interest on outstanding borrowings at prime plus 2-1/2%
per annum. During the year, the Company paid off a term loan with the same
bank in the amount of $854,000. Outstanding borrowings under this combined
credit facility are collateralized by all of the Company's assets.
As of March 31, 1996, the Company was in violation of certain financial
covenants required by the combined credit facility. In June 1996, the Company
renegotiated the
16
<PAGE>
facility to cure these defaults. In April, 1997, the Company amended and
renewed the line of credit. Total borrowings under the line of credit are
now limited to the lesser of $750,000 or 70% of eligible accounts receivable
(as defined). The Company is now required to 1) maintain a minimum tangible
net worth of $3,050,000 from March 31, 1997 through April 29, 1997, and
$2,800,000 at April 30, 1997 and thereafter, 2) maintain a ratio of total
liabilities to tangible net worth of not greater than 1.1 to 1.0 at March 31,
1997 and thereafter, 3) maintain working capital of $2,000,000 from March 31,
1997 through April 29, 1997, and $1,750,000 at April 30, 1997 and thereafter,
and 4) maintain a current ratio of 1.7 to 1.0 at March 31, 1997 and
thereafter. The new line of credit expires in August, 1997. The Company is in
process of extending the line of credit with the bank. The is no assurance
that the line of credit will be extended.
The Company is obligated under a series of unsecured notes payable to a related
party totaling $527,000 as of March 31, 1997. These notes bear interest at a
rate of 8% per annum and mature in May, 2000. Interest and principal payments
totaling approximately $16,000 are due monthly. In April, 1997, the Company
stopped making payments on these notes.
The Company has accounts payable and unpaid rent due ICL and related entities in
the amount of $725,000. The Company is disputing the value received related to
certain of these liabilities and is attempting to settle with ICL at a discount.
There is no assurance that the Company will be successful in resolving these
disputed amounts.
The Company's assured sources of future short-term liquidity as of March 31,
1997 are its cash balance of $812,000 and the unused portion of its line of
credit of $750,000. Availability under the line of credit can be further
limited based on the balance of eligible accounts receivables as described
above.
The Company is currently obligated to pay approximately $ 20,000 per month in
lease payments. Aside from these commitments, the Company has not made any
material capital commitments.
In March, 1997, the Financial Accounting Standards Board issued SFAS 128,
EARNINGS PER SHARE, which is effective for fiscal years ending after December
15, 1997. SFAS 128 requires the presentation of "basic" earnings per share
which excludes the dilutive effect of all common stock equivalents.
Presentation of "diluted" earnings per share, which reflects the dilutive
effects of all common stock equivalents, will also be required. The diluted
presentation is similar to the current presentation of fully diluted earnings
per share, but uses the average market price of stock during the period. The
Company is currently evaluating the impact of the implementation of SFAS 128.
The Company is concentrating on increasing its sales and improving its gross
margins. If it is successful, then it should have sufficient liquidity to fund
its operations during the next twelve months. In addition, the Company is
continuing discussions with various candidates in an attempt to explore the
possibility of a synergistic merger or strategic combination.
17
<PAGE>
There is no assurance that the Company will be successful in these efforts.
ADDITIONAL RISK FACTORS
Photomatrix's business is subject to the following risks and uncertainties in
addition to those described above.
ABILITY TO SUCCESSFULLY MARKET DOCUMENT SCANNERS
The Company's growth strategy is dependent upon its ability to market
successfully its document scanners. In this regard, Photomatrix is currently
focusing on expanding its indirect distribution channels through OEM
arrangements, such as the OEM agreement with Bell & Howell, and through
resellers. At this time, the indirect distribution channels are not well
developed and there is no assurance that these channels will lead to increased
sales. There is no assurance that Photomatrix's marketing efforts will be
successful. Competitors of Photomatrix have substantially greater resources and
may be able to compete more effectively on technology, price or product
features. Photomatrix is also constrained by limits on its marketing budget and
ability to create brand recognition. Further, Photomatrix's products are
relatively high-priced durable goods and economic conditions that adversely
affect the market for durable goods could have an adverse effect on
Photomatrix's orders.
COMPETITIVE ENVIRONMENT
The Company competes primarily in the high-end of the imaging marketplace. The
Company believes the critical success factors within this market segment include
engineering quality, price reasonableness, distribution channels, production
volume, name recognition, and access to a strong financial-capital base. The
Company expects the majority of its future revenue to come from the sale of its
line of high-performance document scanners. The Company's primary competitors
in the high-performance document-scanner marketplace include Kodak and BancTec,
both of which have access to a substantially greater financial-capital base than
the Company. In addition, the Company estimates that Kodak has the leading
market share in this market segment, and Kodak has substantially broader name
recognition and greater sales and marketing resources than the Company. There
can be no assurance that Photomatrix, Inc. will be able to overcome competitive
forces and reactions in order to increase revenue necessary to return to
profitability.
The Company's ability to increase its revenue is partially dependent upon
successfully using existing OEM relationships and upon expanding its indirect
channels of distribution. The Company's ability to expand these distribution
channels is in part dependent upon its marketing and research and development
expenditures. The Company's liquidity constraints may adversely impact these
expenditures.
Further, Bell & Howell, with whom the Company has an OEM relationship to sell
the
18
<PAGE>
Company's document scanners, has recently introduced a document scanner with
speed and features approaching the lower end of many of the scanners sold by
the Company via this OEM channel. Although the Company believes it will be
able to enhance its scanner technology to stay ahead of some of its
competitors' products, there can be no assurance that Bell & Howell or
another competitor will not introduce products into the Company's future
market niche that will be of equal or superior performance.
REQUIRED REVENUE INCREASES
In order to reduce operating losses, by March 31, 1997, management has
reduced operating costs on a consolidated basis by an aggregate of
approximately $800,000 annually (including continuing and discontinued
operations). The majority of the $800,000 cost reductions have been realized
through headcount reductions and the consolidation of the operations and
employees at the Photomatrix facility in Culver City, California and
corporate headquarters in San Diego, California into a single facility
located in San Diego, California. At current revenue levels, these cost
reductions will not, in and of themselves, return the Company to
profitability. The Company is focused on building indirect channels of
distribution and increasing its revenue in order to return the Company to
profitable operations.
Management projects sales revenue from its scanner product lines will need to
increase and related gross margins will need to improve in the next fiscal
year (i.e., the year ending March 31, 1998) relative to the current year in
order for the Company to return to profitability. Management believes that
margin improvements can be attained through improvements in customer and
product mix, a general price increase that was effective April, 1997,
together with cost reduction programs related to product modularity, improved
material procurement methods and improvements in labor efficiency. There can
be no assurance the Company's scanner product lines will meet or surpass
sales and gross margins levels of the prior year.
RETAINING AVAILABILITY OF LINE OF CREDIT
The Company has not yet achieved a critical-mass level of revenue to reach a
financial break-even point. Assuming that the Company's sales forecasts can
be achieved and the line of credit is renewed in August, 1997, cash flow
forecasts suggest that the Company's existing line of credit will be adequate
to finance the Company's growth in the year ending March 31, 1998 ("FY
1998"). However, there can be no assurance that the Company will be
successful in either increasing revenue volumes during FY 1998 to reach
break-even levels of sales or in generating sufficient cash flow therefrom to
satisfy cash and working capital requirements during this turn-around time
period. Furthermore, as discussed below, if the Company cannot increase
revenue levels sufficiently to return to profitability, the Company could be
default on its bank covenants in the near future and possibly lose its line
of credit.
19
<PAGE>
LEXIA SYSTEMS, INC.
Relative to the discontinuation of Lexia Systems, Inc. ("Lexia"), the Company
has identified a potential buyer of Lexia. ICL must consent to such a
strategic transaction to assign the relevant licensing agreements with ICL to
new management. Due to the protracted nature of the negotiations and the
disagreements, there is no assurance that the Company and ICL will settle
their current disagreements.
The Company has accounts payable and unpaid rent due ICL and related entities
in the amount of $725,000. The Company is disputing the value received
related to certain of these liabilities and is attempting to settle with ICL
at a discount. There is no assurance that the Company will be successful in
resolving these disputed amounts. Further, there is no assurance that
existing Lexia customers will not assert claims against the Company or that
such action would be successful.
RELOCATION OF CULVER CITY OPERATION TO SAN DIEGO
In March, 1997, the Company completed its relocation of the Culver City
facility to San Diego. Although management attempted to retain all assembly,
test and other employees involved in the manufacturing operations of the
Company, most of the current employees in the Culver City facility did not
relocate to San Diego. The Company did, however, hire certain replacement
employees to train along side former Photomatrix operations personnel prior
to the relocation. Following the relocation, it is possible that
inefficiencies associated with the manufacturing learning curve could
negatively impact the Company's gross margin.
RETENTION OF KEY EMPLOYEES
The Company is highly dependent upon the principal members of its management,
engineering and field service staff and key individuals in all areas of the
Company. The Company has implemented certain programs, including the
re-pricing of outstanding stock options (see Note 11 to the Consolidated
Financial Statements), which it believes will help in retaining these key
employees. There can be no assurance that the Company will be able to retain
all key personnel or attract new qualified personnel on acceptable terms.
20
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedule filed herewith are set forth in the Index
to Consolidated Financial Statements and the Index to Consolidated Financial
Statement Schedule and are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
21
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
Mr. SUREN G. DUTIA, has been a Director and has served as the President and
Chief Executive Officer of the Company since January 1989. He was elected to
be the Chairman of the Board of the Company in September 1990. He also
serves as the chief executive officer of each of the Company's subsidiaries.
Prior to January 1989, Mr. Dutia was associated from 1981 to December 1988
with Dynatech Corporation, a diversified high-technology company
headquartered in Burlington, Massachusetts. From 1986 to 1988, Mr. Dutia was
a Division Manager and Vice President. Mr. Dutia was responsible for several
subsidiaries, including one operating subsidiary for which he acted as
President. He directed turn-around/divestiture activities for Dynatech and
handled investor relations. Mr. Dutia is 55 years of age.
Mr. PATRICK W. MOORE, has been a Director of the Company since January 1991.
Mr. Moore, who currently serves as the President of IPAC Manufacturing, Inc.,
located in Carlsbad, California, has significant business experience in both
the private and public sectors. Mr. Moore also serves as a Director on the
Boards of IPAC Express Assembly, Inc., MGS Interconnect, Inc., MGM Techrep,
Inc., Evergreen Investments, Inc., Universal Cable Products, Inc. and
CCS-West, LLC. Mr. Moore has served on the National Commission on Employment
Policy, committees of the National Academy of Science, and as the national
president of various trade organizations based in Washington, D.C. From 1981
to 1986, Mr. Moore served as President of the San Diego Private Industry
Council and as Executive Director of the San Diego Regional Employment and
Training Consortium. Mr. Moore is 48 years of age.
Mr. IRA H. SHARP, has been a Director of the Company since January 1990. Mr.
Sharp has been the owner, Chief Executive Officer and General Counsel of
Alderson Reporting Company, Inc., a court-reporting and litigation-support
services firm in Washington, D.C. since 1984. Mr. Sharp also served in the
same capacities for Alderson from 1977 until 1983. During the period of his
absence from Alderson, Mr. Sharp was a lawyer in private practice. Mr. Sharp
is 54 years of age.
Mr. JOHN F. STALEY, has been a Director of the Company since January 1989.
From 1972 to the present, Mr. Staley has been a partner in Staley, Jobson and
Wetherell, a law firm Mr. Staley founded, located in Pleasanton, California.
Mr. Staley was also the founder and a director of Lab Sales of California and
P.M. America, which were corporations involved in the manufacturing, sale and
distribution of blood-analyzing machines and which were sold to Dynatech
Corporation in 1982. From 1982 to the present, Mr. Staley has been a
co-founder of the Bank of Livermore, California. Mr. Staley is 53 years of
age.
22
<PAGE>
EXECUTIVE OFFICERS
Set forth below is certain information about the executive officers of
Photomatrix and its subsidiaries as of June 1, 1997.
MR. SUREN G. DUTIA has served as the President and Chief Executive Officer of
the Company since January 1989.
MR. ROY L. GAYHART joined Photomatrix as Chief Financial Officer and
Secretary on April 18, 1997. From 1994 to 1997, Mr. Gayhart was President of
Sutherland-Gayhart, Inc., a private investment company which specialized in
small start-up and bridge financing investments. From 1992 to 1994 he served
as Chief Financial Officer, and later Vice President of International
Operations for Lottery Enterprises, Inc. Mr. Gayhart has also served as
Chief Financial Officer and Chief Operating Officer for the Shorebreak
Division of South Carolina Tees, Inc. (from 1991 to 1992), Jacks Incorporated
(from 1988 to 1991) and Nu-Ear Electronics, Inc. (from 1984 to 1988). Mr.
Gayhart is a CPA and was an audit manager with Arthur Andersen LLP. Mr.
Gayhart is 47 years of age.
MR. CHARLES H. FRADY has served as Controller and Treasurer since January,
1997. Mr. Frady joined Photomatrix in 1995 as Division Controller. From 1993
to 1995, he served as Senior Cost Accountant for Eaton Leonard Corporation.
From 1990 to 1993, Mr. Frady was Accounting Manager for PacOrd, Inc. From
1987 to 1990, he was Controller for Bell Industries, Inc. Mr. Frady is 55
years of age.
Set forth below is certain information about significant employees of the
Company as of June 1, 1997.
MR. DEL GLOVER joined Photomatrix in February 1996 as Vice President of Sales
and Marketing. For the eight years prior to that, Mr. Glover was Director,
Peripheral Products Division of Ricoh Corporation.
MR. WILLIAM SHEPPARD joined Photomatrix in July 1985 as Vice President of
Engineering. Prior to that, Mr. Sheppard served in various engineering
management positions with Planning Research Corporation, the U.S. Naval Ocean
Systems Center and as president of Saguaro Systems Corporation, a consulting
firm.
MR. ROGER BURTON joined Photomatrix in 1986 as the Managing Director of
Photomatrix, Ltd., its wholly owned United Kingdom-based subsidiary. Prior to
joining Photomatrix, Mr. Burton was Co-Director of Rosstech Designs, Ltd.,
specializing in electro-mechanical design consulting and prototype
manufacturing.
23
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table shows, for the most recent three fiscal years, the cash
compensation paid by the Company, as well as all other compensation paid or
accrued for those years to the Chief Executive Officer as of March 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term
Name and Fiscal ---------------------------- Compensation Stock
Principal Position Year Salary Bonus Other(1) Option Shares
- - ------------------ ------ ------ ----- -------- --------------------
<S> <C> <C> <C> <C> <C>
Suren G. Dutia 1997 $154,400 $30,000 $15,000 --
President and Chief 1996 $165,000 -- $13,900 191,667
Executive Officer 1995 $163,300 $10,000 $15,200 100,000
</TABLE>
(1) Includes Company matching contributions to the Photomatrix Savings and
Investment Plan ($4,800, $4,400, and $4,300) and supplemental life and
medical premiums ($10,200, $9,500, and $10,900) for 1997, 1996 and 1995,
respectively.
Employment Agreements. Mr. Dutia is employed under an employment agreement
that expires in June 1998. The Cash Compensation, Savings and Investment
Plan, Supplemental Life Insurance and Medical Premium plans provided to Mr.
Dutia, as described above, were provided in accordance with that employment
contract. If Mr. Dutia's employment is terminated by the Company without
cause, then he will be entitled to receive his base salary and health
insurance benefits for the remainder of the term.
Officers Severance Policy. In 1988, the Company's Board of Directors adopted
an Officers Severance Policy that was modified in November 1990 and February
1997. Under the policy, Mr. Dutia is to receive twelve weeks' compensation
upon termination, in addition to amounts due him under his employment
contract, and Mr. Gayhart and Mr. Frady are to receive eight weeks'
compensation upon termination of employment by the Company.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of June 18, 1997, Lorne House Trust was the only shareholder known by the
Company to be the beneficial owner of more than five percent of its
outstanding Common Stock. As of that date, Lorne House Trust was the
beneficial owner of 1,054,002 shares, representing 20.74 percent of the
Company's outstanding stock. These shares are
24
<PAGE>
beneficially owned by Lorne House Trust as trustee of the Bulldog trust and
the Pitkin trust, irrevocable trusts established by Sam Wyly and Charles J.
Wyly, Jr., respectively. The record holders are Tensas, Ltd. and Roaring
Creek, Ltd., which are corporations wholly owned by such trusts. Sam Wyly
and Charles J. Wyly, Jr. disclaim beneficial ownership of these shares.
25
<PAGE>
The following table sets forth certain information regarding the ownership of
Photomatrix common stock by Directors and Executive Officers:
Percent of Shares of
Shares of Common Stock Common Stock
Name of Beneficial Beneficially Owned Outstanding
Owner or Group as of June 10, 1997(1) as of June 10, 1997(1)
- - -------------- ---------------------- ----------------------
Suren G. Dutia
President, CEO and
Chairman of the Board(2) 278,033 5.46%
Patrick W. Moore, Director 41,667 *
Roy Gayhart
Chief Financial Officer,
Secretary 0 *
Charles H. Frady
Controller, Treasurer 1,667 *
Ira H. Sharp, Director 43,333 *
John F. Staley, Director 75,333 1.48%
All directors and executive
officers as a group(2) 440,033 8.35%
(1) Includes and reflects the ownership by the named director or officer of
shares of Common Stock subject to options exercisable within 60 days of June 18,
1997.
(2) Includes options to purchase 100,000 shares.
* less than 1%
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the acquisition of Photomatrix, Photomatrix restructured
outstanding indebtedness to members and affiliates of the Wyly family into
non-negotiable seven-year term notes bearing interest at the rate of eight
percent per annum. The total principal amount of the notes payable to members
of the Wyly family and their affiliates as of March 31, 1997 is $527,000.
26
<PAGE>
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULE AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS, SCHEDULE AND EXHIBITS
The following consolidated financial statements are filed herewith:
Consolidated Balance Sheets as of March 31, 1997 and 1996
Consolidated Statements of Operations for the years ended March 31, 1997,
1996 and 1995
Consolidated Statements of Shareholders' Equity for the years ended March
31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended March 31, 1997,
1996 and 1995.
Notes to Consolidated Financial Statements
The schedule filed herewith is set forth in the Index to Financial Statement
Schedule. Other financial statement schedules, for which provision is made
in the applicable accounting regulations of the Securities and Exchange
Commission, are not required under the related instructions and, therefore,
have been omitted.
REPORTS ON FORM 8-K.
The Company filed no reports on Form 8-K during the quarter ended March
31, 1997.
27
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and
Shareholders of Photomatrix, Inc.
We have audited the accompanying consolidated balance sheets of Photomatrix,
Inc. and subsidiaries as of March 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for each of the years in the three-year period ended March 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Photomatrix, Inc.and subsidiaries as of March 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended March 31, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
San Diego, California
May 29, 1997, except for Note 11, as to
which the date is June 6, 1997
28
<PAGE>
PHOTOMATRIX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 812,000 $ 255,000
Accounts receivable, net of allowance
of $111,000 and $76,000, respectively 1,602,000 1,904,000
Inventories 2,520,000 3,093,000
Prepaid expenses and other 149,000 156,000
Net assets of discontinued operation (Note 2) -- 3,084,000
---------- -----------
Total current assets 5,083,000 8,492,000
---------- -----------
Property and equipment, at cost 1,986,000 2,310,000
Less accumulated depreciation and amortization (640,000) (831,000)
---------- -----------
Net property and equipment 1,346,000 1,479,000
---------- -----------
Intangible assets, net of accumulated
amortization of $1,512,000 and $970,000
(Note 1) 2,053,000 2,433,000
Other assets 83,000 177,000
----------- -----------
$ 8,565,000 $12,581,000
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 844,000 $ 1,145,000
Accrued liabilities and other (Note 8) 590,000 326,000
Customer deposits (Note 8) 613,000 836,000
Line of credit (Note 6) -- 170,000
Current maturities of term note (Note 6) -- 250,000
Current maturities of notes payable to
related parties (Note 5) 152,000 141,000
Net liabilities of discontinued operation
(Note 2) 452,000 --
----------- -----------
Total current liabilities 2,651,000 2,868,000
Notes payable to related parties (Note 5) 375,000 527,000
Other non-current liabilities (Note 6) 40,000 621,000
Commitments and contingencies (Note 10)
Shareholders' equity (Note 4):
Preferred stock, 3,173,000 shares
authorized - -
Common stock, no par value; 30 million
shares authorized, 5,083,000 and 5,715,000
issued and outstanding 19,351,000 20,093,000
Accumulated deficit (13,998,000) (11,591,000)
Cumulative translation adjustment 146,000 63,000
----------- -----------
Total shareholders' equity 5,499,000 8,565,000
----------- -----------
$ 8,565,000 $12,581,000
----------- -----------
----------- -----------
The accompanying notes are an integral part of these consolidated balance sheets.
</TABLE>
29
<PAGE>
PHOTOMATRIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -----------
<S> <C> <C> <C>
Revenue:
Equipment and software $ 6,730,000 $ 6,979,000 $ 8,132,000
Services 1,964,000 2,113,000 1,580,000
------------ ------------ ------------
Total revenue 8,694,000 9,092,000 9,712,000
------------ ------------ ------------
Cost of revenue:
Equipment and software 5,180,000 4,881,000 5,417,000
Services 1,220,000 1,278,000 1,238,000
------------ ------------ ------------
Total cost of revenue 6,400,000 6,159,000 6,655,000
------------ ------------ ------------
Gross profit 2,294,000 2,933,000 3,057,000
------------ ------------ ------------
Operating costs and expenses:
Selling, general and administrative 3,311,000 3,592,000 3,256,000
Research and development 807,000 485,000 429,000
Facility consolidation and relocation 520,000 - -
------------ ------------ ------------
Total operating costs and expenses 4,638,000 4,077,000 3,685,000
------------ ------------ ------------
Operating loss (2,344,000) (1,144,000) (628,000)
------------ ------------ ------------
Other income (expense), net:
Interest expense (Notes 5 and 6) (92,000) (228,000) (122,000)
Other, net 250,000 11,000 (19,000)
------------ ------------ ------------
Net other income (expense) 158,000 (217,000) (141,000)
------------ ------------ ------------
Loss from continuing operations
before income taxes (2,186,000) (1,361,000) (769,000)
Provision for income taxes (Note 7) 104,000 7,000 22,000
------------ ------------ ------------
Loss from continuing operations (2,290,000) (1,368,000) (791,000)
------------ ------------ ------------
Income (loss) from discontinued operations (Note 2) (251,000) (336,000) 658,000
Gain on sale of discontinued operation (Note 2) 134,000 - -
------------ ------------ ------------
Net Loss $ (2,407,000) $ (1,704,000) $ (133,000)
------------ ------------ ------------
------------ ------------ ------------
Net income (loss) per share:
Continuing operations $ (0.44) $ (0.24) $ (0.13)
------------ ------------ ------------
------------ ------------ ------------
Discontinued operations $ (0.02) $ (0.06) $ 0.11
------------ ------------ ------------
------------ ------------ ------------
Net loss $ (0.46) $ (0.30) $ (0.02)
------------ ------------ ------------
------------ ------------ ------------
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
30
<PAGE>
PHOTOMATRIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Common Stock Cumulative
---------------------- Accumulated Translation
Shares Amount Deficit Adjustment Total
--------- ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1994 5,683,000 $20,080,000 $(9,754,000) $(58,000) $10,268,000
Exercise of warrants and options
(Note 4) 36,000 46,000 46,000
Other 6,000 62,000 68,000
Net loss (133,000) (133,000)
--------- ----------- ------------ ---------- -----------
Balance, March 31, 1995 5,719,000 20,132,000 (9,887,000) 4,000 10,249,000
Other (4,000) (39,000) 59,000 20,000
Net loss (1,704,000) (1,704,000)
--------- ----------- ------------ ---------- -----------
Balance, March 31, 1996 5,715,000 20,093,000 (11,591,000) 63,000 8,565,000
Common stock cancelled to settle
disagreements with ICL (Note 2) (666,000) (748,000) (748,000)
Exercise of options (Note 4) 34,000 6,000 6,000
Other 83,000 83,000
Net loss (2,407,000) (2,407,000)
--------- ----------- ------------ ---------- -----------
Balance, March 31, 1997 5,083,000 $19,351,000 $(13,998,000) $ 146,000 $ 5,499,000
--------- ----------- ------------ ---------- -----------
--------- ----------- ------------ ---------- -----------
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
31
<PAGE>
PHOTOMATRIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -----------
<S> <C> <C> <C>
Operations:
Loss from continuing operations $ (2,290,000) $ (1,368,000) $ (791,000)
Adjustments:
Depreciation and amortization 903,000 809,000 693,000
Loss on disposal of tangible assets 27,000 - -
Changes in assets and liabilities:
Accounts receivable 302,000 179,000 (617,000)
Inventories 573,000 (848,000) 87,000
Prepaid expenses and other 7,000 58,000 (92,000)
Accounts payable (301,000) 412,000 (24,000)
Accrued liabilities and other 264,000 (96,000) (79,000)
Customer deposits (223,000) 343,000 -
------------- ------------- -----------
Cash used in continuing operations (738,000) (511,000) (823,000)
Cash provided by discontinued operations 508,000 971,000 940,000
------------- ------------- -----------
Cash provided (used in) by operations (230,000) 460,000 117,000
------------- ------------- -----------
Investing activities:
Proceeds from sale of discontinued operation 2,000,000 - -
Purchase of property and equipment (267,000) (276,000) (693,000)
Product development additions (162,000) (533,000) (384,000)
Decrease (increase) in other assets 94,000 (78,000) 5,000
------------- ------------- -----------
Cash provided by (used in) investing activities 1,665,000 (887,000) (1,072,000)
------------- ------------- -----------
Financing activities:
Issuance of common stock 6,000 26,000 52,000
(Repayment of) proceeds from credit facility, net (Note 6) (826,000) 524,000 500,000
Repayment of notes payable to related parties (Note 5) (141,000) (108,000) -
Other - (8,000) (20,000)
------------- ------------- -----------
Cash provided by (used in) financing activities (961,000) 434,000 532,000
------------- ------------- -----------
Effects of exchange rates on cash 83,000 59,000 62,000
------------- ------------- -----------
Increase (decrease) in cash and cash equivalents 557,000 66,000 (361,000)
Cash and cash equivalents, beginning of year 255,000 189,000 550,000
------------- ------------- -----------
Cash and cash equivalents, end of year $ 812,000 $ 255,000 $ 189,000
------------- ------------- -----------
------------- ------------- -----------
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
32
<PAGE>
PHOTOMATRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of
Photomatrix, Inc. and its wholly-owned subsidiaries (the consolidated entity
referred to as the "Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation.
BUSINESS
The Company primarily develops, manufactures, sells and services
high-performance document and aperture card scanners to legal, financial,
government and commercial enterprises.
CASH EQUIVALENTS
Cash equivalents include all highly liquid investments with an original
maturity of three months or less.
INTANGIBLE ASSETS (INCLUDING SOFTWARE DEVELOPMENT COSTS)
Intangible assets are comprised of software development costs and costs
in excess of net assets acquired (goodwill).
Software development costs incurred to establish technological feasibility
are expensed when incurred. Subsequent costs are capitalized and amortized
beginning when the related product is available for general release to
customers. The amortization recorded for such products each year equals the
greater of (i) the amount computed using the ratio that current revenue bear
to total current and anticipated revenue, or (ii) the amount computed using
the straight-line method over the remaining useful life of the product not
to exceed a total life of five years. Unamortized computer software costs,
included in intangible assets, were $647,000 and $816,000 as of March 31,
1997 and 1996, respectively. Amortization expense for capitalized software
costs was $279,000, $139,000 and $55,000 for fiscal years 1997, 1996 and 1995,
respectively.
The goodwill, amounting to $936,000 as of March 31, 1997, is related to the
acquired Photomatrix technology and is being amortized over a period of ten
years.
Management periodically assesses the realizability of all intangible assets,
and records impairment allowances when appropriate. For the year ended
March 31, 1997, the Company recorded such an impairment allowance of
$81,000 related to a discontinued product line. No other such allowances
were recorded in the years ended March 31, 1996 and 1995.
FOREIGN CURRENCY TRANSLATION
The accounts of the Company's foreign subsidiary are measured using local
currency as the functional currency; assets and liabilities are translated
into U.S. dollars at period-end exchange rates, and income and expense
accounts are translated at average monthly exchange rates. Net exchange
gains or losses resulting from such translation are excluded from operations
and accumulated in a separate component of shareholders' equity ("cumulative
translation adjustment"). Gains and losses from foreign currency
33
<PAGE>
transactions are not significant and are included in selling, general and
administrative expenses in the consolidated statements of operations.
INVENTORIES
Inventories include material, labor and overhead valued at the lower of cost
(first-in, first-out) or market, and consist of the following as of March 31,
1997 and 1996:
1997 1996
------------ ------------
Raw materials $ 1,715,000 $ 2,109,000
Work in process 375,000 535,000
Finished goods 430,000 449,000
------------ ------------
$ 2,520,000 $ 3,093,000
------------ ------------
------------ ------------
REVENUE RECOGNITION
Equipment and software sale revenue are recognized upon transfer of the risk
of ownership to the customer which typically occurs upon shipment from either
the Company's or its agent's distribution location. The Company has no
significant obligations related to software sales subsequent to delivery and
subsequent to management's assessment that the collectibility of the related
receivable is probable. Service revenue is recognized over the related
contract period for maintenance contracts, or as the services are rendered.
PROPERTY AND EQUIPMENT
Substantially all property and equipment is demonstration equipment,
manufacturing equipment and personal computers used in the Company's
assembly, product development, sales and administrative activities. These
items are stated at cost. Depreciation is provided over
the estimated useful lives, typically three to five years, using the
straight-line method.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF,
on April 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured
by comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount of fair
value less costs to sell. Adoption of this Statement did not have a material
impact on the Company's financial position, results of operations, or
liquidity.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences
34
<PAGE>
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are computed using
enacted tax rates expected to apply to taxable income in the years in which
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities from a change in tax rates is recognized
in income in the period that includes the enactment date.
NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share has been computed based on the weighted
average number of common shares and common equivalent shares (the dilutive
effect of stock options and warrants) outstanding during the year. The
weighted average number of common shares and common equivalent shares used in
computing income (loss) per share is 5,219,000, 5,742,000, and 5,959,000 in
fiscal years 1997, 1996 and 1995, respectively. Primary and fully diluted
income (loss) per share are the same for all periods presented.
STOCK OPTIONS
Prior to April 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. As such, compensation expense would be recorded on the date
of grant only if the current market price of the underlying stock exceeded
the exercise price. On April 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation", which permits entities to
recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also
allows entities to continue to apply the provisions of APB Opinion No. 25 and
provide pro forma net loss and pro forma loss per share disclosures for
employee stock option grants made in fiscal 1996 and future years as if the
fair-value based method defined in SFAS No. 123 had been applied. The Company
has elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.
SIGNIFICANT CUSTOMERS
One customer (Bell & Howell) accounted for 17 percent of the Company's total
revenue for fiscal year 1997. No other customer accounted for more than 10
percent of the Company's total revenue during the years presented.
PRODUCT WARRANTY COSTS
The Company provides product warranties and software support services to
customers as part of its standard sales agreement. The warranties cover the
service costs associated with hardware and software defects and range in term
from 90 days to one year from date of sale.
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid approximates the amount expensed for the year ended March 31,
1997. However, in the year ended March 31, 1997, income tax expense of
$104,000 exceeds income tax payments of $5,000 due to the increase in the
valuation allowance related to the deferred tax asset during the year. Refer
to Note 7 below for a detailed discussion of income taxes.
35
<PAGE>
Interest and income taxes paid approximate the amounts expensed in the years
ended March 31, 1996 and 1995.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments," requires that the fair values be disclosed
for the Company's financial instruments. The carrying amount of cash and
cash equivalents, accounts receivable, accounts payable, accrued liabilities
and other, and customer deposits approximate their fair values because of the
short-term nature of these instruments. The carrying amounts reported for
the line of credit, notes payable to related parties, and other non-current
liabilities approximate fair value because the underlying instruments bear
interest at rates that are comparable to rates available to the Company for
similar debt instruments.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenue and expenses during the
reporting period to prepare these consolidated financial statements in
conformity with generally accepted accounting principles. Actual results
could differ from those estimates.
RECLASSIFICATIONS
Certain prior-year amounts have been reclassified to conform to the
current-year presentation.
2. DIVESTITURE AND DISCONTINUATION
XSCRIBE LEGAL SYSTEMS, INC.
As more fully described in the Company's Form 8-K dated July 31, 1996 (filed
August 13, 1996), on July 31, 1996, the Company sold substantially all of the
assets and the business of its wholly owned subsidiary, Xscribe Legal
Systems, Inc. ("Legal Systems"), to Stenograph Corporation ("Stenograph") in
exchange for $2 million cash paid at closing, a $180,000 note delivered at
closing, and the assumption by Stenograph of substantially all of the current
liabilities ($844,000) of Legal Systems (excluding certain contingent
liabilities). The contingent liabilities retained by the Company consist
primarily of all income, property, sales and employment tax contingencies of
Legal Systems, if any, and all products liability contingencies of Legal
Systems for product sold prior to July 31, 1996. The Company also agreed to
indemnify Stenograph, subject to certain limitations, upon the occurrence of
certain events and with respect to retained contingent liabilities.
The Company recognized a gain on the sale of Legal Systems of $134,000. The
discontinued business accounted for 33% and 35% of the Company's revenue for
the
36
<PAGE>
years ended March 31, 1996 and 1995, respectively. Current- and prior-period
balances have been reclassified to segregate Legal Systems as a discontinued
operation.
LEXIA SYSTEMS, INC.
In December 1996, the Board of Directors of the Company approved a plan to
discontinue the operations of Lexia Systems, Inc. ("Lexia"). In recent
periods, Lexia's operating results have turned from profits to losses, and
management believes these operational reverses to be permanent in nature.
The Company is currently negotiating to sell this operation. Lexia's
operational results have been reclassified as a discontinued operation for
the respective years presented herein. Lexia's balance sheets have similarly
been reclassified as net assets (liabilities) of discontinued operations as
of March 31, 1997 and 1996, respectively.
Previously, the Company had certain disagreements with the seller of the
assets and operations which comprised Lexia. Under the terms of a settlement
reached in August, 1996, the relinquished certain rights, including its
exclusive reselling rights, in exchange for cancellation of 666,000 shares
of the Company's common stock previously owned by the seller.
OTHER DISCONTINUED OPERATIONS
In fiscal year 1994, the Company discontinued its microfilming service
bureau, and in fiscal year 1996, the Company discontinued its imaging service
bureau. The accompanying consolidated financial statements reflect this
business as discontinued operations. Revenue from this discontinued business
was $51,000, and $177,000 in fiscal years 1996 and 1995, respectively.
Net liabilities of discontinued operations as of March 31, 1997 totaled
$3,084,000 and was primarily comprised of accounts receivable, inventories,
property and equipment, accounts payable, accrued liabilities and customer
deposits.
3. SEGMENT INFORMATION
Photomatrix operates predominantly in a single industry as a manufacturer of
document and aperture card scanners. The Company's operations are located
primarily in the United States and the United Kingdom. Geographical segment
information follows for 1997, 1996, and 1995:
37
<PAGE>
<TABLE>
<CAPTION>
GEOGRAPHIC AREAS 1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
REVENUE:
United States:
Domestic and export customers $ 6,797,000 $ 6,917,000 $ 7,960,000
Inter-area 923,000 1,399,000 646,000
------------ ------------ -----------
Total United States 7,720,000 8,316,000 8,606,000
Foreign 1,897,000 2,175,000 1,752,000
Eliminations (923,000) (1,399,000) (646,000)
------------ ------------ -----------
Total $ 8,694,000 $ 9,092,000 $ 9,712,000
------------ ------------ -----------
------------ ------------ -----------
OPERATING INCOME (LOSS):
United States $ (2,006,000) $ (978,000) $ (860,000)
Foreign (348,000) (97,000) 232,000
Eliminations 10,000 (69,000) --
------------ ------------ -----------
Total $ (2,344,000) $ (1,144,000) $ (628,000)
------------ ------------ -----------
------------ ------------ -----------
IDENTIFIABLE ASSETS:
United States $ 7,189,000 $ 10,619,000 $ 12,147,000
Foreign 1,366,000 2,031,000 1,075,000
Eliminations 10,000 (69,000) (20,000)
------------ ------------ -----------
Total $ 8,565,000 $ 12,581,000 $ 13,202,000
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
4. SHAREHOLDERS' EQUITY
The Company has two existing common stock option plans under which an
aggregate of 699,999 shares of the Company's common stock may be issued
through qualified incentive stock options or non-qualified stock options.
The Company has a third plan which expired in fiscal 1994 with approximately
100,000 options still outstanding. Under the terms of the existing plans,
incentive stock options are granted at an exercise price which is not less
than 100 percent of the fair market value of the Company's common stock at
the date of grant; non-qualified options are granted at not less than 85
percent of the fair value at the date of grant. Options are exercisable
within the period and in the increments as determined by the Company's Board
of Directors or plan administration committee appointed by the Board of
Directors.
At March 31, 1997, there were 21,835 additional shares available for grant
under the Plans. The per share weighted-average fair value of stock options
granted during 1997 and 1996 was $0.62 and $0.63 respectively, on the date of
grant using the Black Scholes option-pricing model with the following
weighted-average assumptions: 1997 - expected dividend yield 0.0%,
volatility of 75.8%, risk-free interest rate of 6.0%, and an expected life of
5 years; 1996 - expected dividend yield 0.0%, volatility of 75.8%, risk-free
interest rate of 6.0%, and an expected life of 5 years.
The Company applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, no compensation cost has been recognized for its stock options
in the financial statements. Had the Company determined compensation cost
based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net loss would have been increased to the pro forma
amounts indicated below:
38
<PAGE>
1997 1996
----------- -----------
Net loss, as reported $(2,407,000) $(1,704,000)
Pro forma $(2,578,000) $(1,771,000)
Loss per share, as reported $(0.46) $(0.30)
Pro forma loss per share $(0.49) $(0.31)
Pro forma net loss reflects only options granted in 1997 and 1996. Therefore,
the full impact of calculating compensation cost for stock options under SFAS
No. 123 is not reflected in the pro forma net loss amounts presented above
because compensation cost is reflected over the options' vesting period of 2-3
years and compensation cost for options granted prior to April 1, 1995 is not
considered.
Additional information with respect to the options under the plans follows (See
Note 11):
Shares Price per share Total
-------- --------------- ----------
Options outstanding, March 31, 1994 551,500 $0.18 - $3.94 $ 840,400
Options granted 339,000 $1.69 - $4.13 1,000,100
Options exercised (30,833) $0.38 - $2.16 (44,000)
Options canceled (142,800) $2.16 - $4.12 (507,900)
-------- --------------- ---------
Options outstanding, March 31, 1995 716,867 $0.18 - $4.13 $1,288,600
Options granted 760,665 $ .69 - $1.25 633,812
Options exercised -- -- --
Options canceled (649,034) $0.88 - $4.13 (1,260,465)
-------- --------------- ----------
Options outstanding, March 31, 1996 828,498 $0.18 - $3.56 $ 661,947
Options granted 195,000 $0.44 - $0.94 105,000
Options exercised (33,333) $0.18 (6,000)
Options canceled (242,833) $0.38 - $3.56 (227,839)
-------- --------------- ----------
Options outstanding, March 31, 1997 747,332 $0.18 - $1.25 $ 533,108
-------- --------------- ----------
-------- --------------- ----------
Options exercisable, March 31, 1997 356,166 $0.18 - $1.25 $ 237,869
-------- --------------- ----------
-------- --------------- ----------
In June 1995, the Company canceled employee stock options to acquire 41,667
shares at an exercise price of $4.13 per share and granted new replacement
options to acquire 41,667 shares at an exercise price of $1.69 per share. In
November 1995, the Company canceled stock options to acquire 628,999 shares
(including options to acquire 85,000 shares held outside the Plans described
above) at exercise prices ranging from $1.31 to $2.91 per share and granted
new replacement options to acquire 628,999 shares at an exercise price of
$0.88 per share.
In addition to the options described above, the Company had outstanding
warrants and other options to acquire common shares as follows:
Shares Exercise Price Expiration
------ -------------- --------------
33,333 $0.42 December, 2003
75,000 $1.00 August, 2000
Subsequent to March 31, 1997, the Company canceled the warrant to purchase
75,000 shares at an exercise price of $1.00 per share (listed above) and
re-issued a separate warrant to purchase 75,000 shares at an exercise price
of $0.44 per share with an expiration date of April, 2002.
The Company is authorized to issue 3,173,275 shares of its preferred stock.
No preferred
39
<PAGE>
shares were outstanding in the three years ended March 31, 1997.
5. RELATED PARTY TRANSACTIONS
In connection with the acquisition of Photomatrix in the year ended March 31,
1994, $777,000 of amounts due to affiliates of Photomatrix's then-majority
shareholders (presently shareholders of the Company) were converted into
seven year notes payable which mature in April 2000. These notes bear
interest at a rate of 8% per annum. Interest-only payments were due monthly
during the first two years. Interest and principal are due in equal monthly
installments (beginning in May 1995) for years three through seven. Interest
expense related to these notes was $48,000, $59,000 and $62,000 in the years
ended March 31, 1997, 1996 and 1995, respectively. As of March 31, 1997
$527,000 was outstanding under these notes.
6. LINE OF CREDIT
The Company has a line of credit with a bank to borrow a total of $750,000 of
which zero was outstanding at March 31, 1997. This line of credit accrues
interest on outstanding borrowings at prime plus 2-1/2% per annum. Total
borrowings under the line of credit are limited to the lesser of $750,000 or
70% of eligible accounts receivable (as defined). Total borrowings are
limited to $750,000 as of March 31, 1997. The Company is required to 1)
maintain a minimum tangible net worth of $3,050,000 through April 29, 1997,
and a minimum tangible net worth of $2,800,000 thereafter, 2) maintain a
ratio of total liabilities to tangible net worth of not greater than 1.1 to
1.0, 3) maintain working capital of $2,000,000 through April 29, 1997 and
$1,750,000 thereafter, and 4) maintain a current ratio of 1.7 to 1.0. The
line of credit expires in August 1997 and is subject to a 1% non-utilization
fee charged on the average daily unused portion of the line, payable
quarterly in arrears. Outstanding borrowings under this line of credit are
collateralized by all of the Company's assets.
Line of credit activity for 1997, 1996 and 1995 was as follows:
1997 1996 1995
-------- ---------- --------
Interest expense $ 7,000 $ 46,000 $ 49,000
Average interest rate 7.4% 8.5% 9.1%
Average month-end balance outstanding $ 99,000 $ 536,000 $520,000
Maximum month-end balance outstanding $460,000 $1,170,000 $940,000
As part of the credit facility which the Company maintained during a portion
of the years ended March 31, 1997 and 1996, the Company also had a term loan
with outstanding balances of zero and $854,000 as of March 31, 1997 and 1996,
respectively. Interest on this term loan accrued at a rate of prime plus
1-1/2% per annum. Interest expense on the term note during the years ended
March 31, 1997, 1996 and 1995 was $23,000, $61,000 and zero, respectively.
7. INCOME TAXES
The components of loss before income taxes are as follows:
40
<PAGE>
1997 1996 1995
----------- ------------ ----------
U.S. continuing operations $(1,820,000) $ (1,258,000) $ (812,000)
U.S. discontinued operations (117,000) (336,000) 658,000
Foreign (366,000) (103,000) 43,000
----------- ------------ ----------
$(2,303,000) $ (1,697,000) $ (111,000)
----------- ------------ ----------
----------- ------------ ----------
The provision for taxes consists of the following for fiscal years 1997, 1996
and 1995:
1997 1996 1995
----------- ------------ ----------
Current:
Federal $ -- $ -- $ 6,000
State 1,000 7,000 16,000
Foreign -- -- --
----------- ------------ ----------
1,000 7,000 22,000
Deferred 103,000 -- --
----------- ------------ ----------
$ 104,000 $ 7,000 $ 22,000
----------- ------------ ----------
----------- ------------ ----------
A reconciliation from the Federal income tax provision computed at the
statutory rate to the actual provision for taxes on loss from continuing
operations for fiscal years 1997, 1996 and 1995 is as follows:
1997 1996 1995
----------- ------------ ----------
Tax at statutory Federal tax rate $ (744,000) $ (463,000) $ (261,000)
State income taxes (net of
Federal benefit) -- 5,000 10,000
Federal impact on continuing
operations from change in
valuation allowance 848,000 465,000 223,000
Other -- -- 50,000
----------- ------------ ----------
$ 104,000 $ 7,000 $ 22,000
----------- ------------ ----------
----------- ------------ ----------
Deferred tax assets and liabilities result from differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities. The significant components of the deferred income tax assets
and deferred income tax liabilities as of March 31, 1997 and 1996 are as
follows:
41
<PAGE>
1997 1996
------------ ------------
Deferred tax assets:
Tax operating loss carryforward $ 4,624,000 $ 3,944,000
Inventory and other reserves 256,000 559,000
Tax basis of intangible assets
greater than book basis 193,000 174,000
Other 145,000 211,000
------------ ------------
5,218,000 4,888,000
Less valuation allowance (4,488,000) (3,793,000)
------------ ------------
730,000 1,095,000
------------ ------------
Deferred tax liabilities:
Book basis of intangible assets
greater than tax basis (461,000) (537,000)
Software capitalization (239,000) (414,000)
Other (30,000) (41,000)
------------ ------------
(730,000) (992,000)
------------ ------------
Net deferred tax asset (included
in other assets) $ -- $ 103,000
------------ ------------
------------ ------------
The Company has recorded net tax assets in an amount approximately equal to net
tax liabilities because management believes that these items will offset in
future periods, considering statutory carryforward periods and limitations.
Subject to future reassessment of future income potential, the Company has fully
reserved for all deferred tax assets in excess of deferred tax liabilities.
As of March 31, 1997, the Company has available for Federal income tax purposes
a net operating loss ("NOL") carryforward of approximately $13,600,000 which can
offset future consolidated taxable income and which begins to expire in fiscal
year 2000. The utilization of about $7,900,000 of this NOL is subject to an
annual limitation of about $800,000. The remainder of $5,700,000 is currently
available.
8. ACCRUED LIABILITIES AND CUSTOMER DEPOSITS
Accrued liabilities and other consist of the following as of March 31, 1997 and
1996:
1997 1996
------------ ------------
Compensation and related items $ 210,000 $ 235,000
Other 380,000 91,000
------------ ------------
$ 590,000 $ 326,000
------------ ------------
------------ ------------
In November 1995, the Company settled certain disagreements with Eastman
Kodak whereby Kodak discontinued its purchases of Photomatrix COM duplicators
and guaranteed certain future annual levels of spare-parts purchases. In
each calendar year 1996 and 1995, Kodak did not meet its annual obligations
and, as a result, made a one-time payment to the Company in fiscal year 1997
of $250,000, which has been classified as other income in these consolidated
financial statements. In December 1996 and 1995,
42
<PAGE>
Kodak advanced to the Company $500,000 and $608,000, respectively (the entire
respective calendar-year shortfall) as a prepayment against future
spare-parts purchases. Of the total prepayments made in the years ended
March 31, 1997 and 1996, $273,000 and $309,000 remained as of March 31, 1997
and 1996, respectively, and are included in customer deposits in the
accompanying consolidated balance sheets.
9. EMPLOYEE BENEFIT PLANS
The Company maintains defined contribution savings and investment plans for
the benefit of all full-time employees. The Company's expense related to the
plans was $39,000, $54,000 and $28,000 in 1997, 1996 and 1995, respectively.
The Company has no significant post-employment or post-retirement obligations
that would require accrual under SFAS 106 or 112.
10. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company's operations are conducted in facilities which are occupied under
operating leases. The leases require payment of taxes, maintenance expenses
and insurance. Rental expense (net of rents under sublease of $187,000,
$150,000 and $93,000 in 1997, 1996 and 1995, respectively) incurred under
operating leases (including leases which have expired) was $246,000, $232,000
and $208,000, in 1997, 1996 and 1995, respectively.
Future minimum lease commitments (net of minimum rents receivable under
sublease of $25,000 in 1998 ) as of March 31, 1997, are as follows:
1998 $ 245,000
1999 281,000
2000 288,000
2001 295,000
2002 288,000
2003 and thereafter 571,000
-----------
$ 1,968,000
-----------
-----------
LEGAL PROCEEDINGS
The Company has been a defendant in three product liability cases pending in
the United States District Court, Eastern District of New York (BERNHART V.
XSCRIBE ET AL. (92 Civ. 3931), GALFIN V. XSCRIBE (92 Civ. 2582), and
HAGIPADELIS V. XSCRIBE (95 Civ. 1977)). Xscribe has tendered these claims to
its insurance carriers, St. Paul Fire and Marine Insurance, and Federal
Insurance Company, and St. Paul has assumed the Company's defense without
reservation of right and Federal has agreed to share defense costs, subject
to a reservation of rights. The insurance carriers have prevailed in all
judgements rendered to date. It may take several years before this litigation
is ultimately resolved. The Company believes that there is no merit to any
of the three pending cases and further believes that if any liability results
from these claims, the liability (excluding punitive
43
<PAGE>
damages, if any) will be covered by its insurance policies. However,
depending upon the outcome of these cases, the Company may be served in the
future with additional claims or be subject to liability in excess of
insurance policy limits.
The Company is not aware of any other legal proceedings to which it is a party.
11. SUBSEQUENT EVENT
On June 6, 1997, the Company's Board of Directors voted to adjust the
exercise price of all outstanding stock options of all current directors and
employees under its two stock option plans to $0.53 per share (equal to the
fair market value on the date of grant).
44
<PAGE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Fiscal Quarters Ended
----------------------------------------------
June September December March Total
-------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
FISCAL 1997
Revenues $ 1,700 $ 2,720 $ 2,451 $ 1,823 $ 8,694
Gross profit 457 641 666 530 2,294
Loss from continuing operations (658) (436) (196) (1,000) (2,290)
Net loss (738) (415) (199) (1,055) (2,407)
Loss from continuing
operations per share (0.12) (0.09) (0.04) (0.20) (0.44)
Net loss per share (0.13) (0.08) (0.04) (0.21) (0.46)
Average shares outstanding 5,716 5,050 5,050 5,061 5,219
FISCAL 1996
Revenues $ 1,884 $ 2,368 $ 2,744 $ 2,096 $ 9,092
Gross profit 571 879 1,168 315 2,933
Income (loss) from continuing
operations (429) (256) 95 (778) (1,368)
Net loss (447) (189) (88) (980) (1,704)
Income (loss) from continuing
operations per share (0.08) (0.05) 0.02 (0.14) (0.24)
Net loss per share (0.08) (0.03) (0.02) (0.17) (0.30)
Average shares outstanding 5,754 5,750 5,742 5,724 5,742
Note: The loss from continuing operations and the net loss for the quarter
ended March, 1997, includes approximately $520,000 in costs related to the
Company's move and consolidation of operations to its new facility in San Diego.
</TABLE>
45
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
The following consolidated schedule of Photomatrix, Inc. and its
subsidiaries is submitted herewith.
Page
Schedule II - Valuation and Qualifying Accounts . . . . . . . . . . . 47
46
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
PHOTOMATRIX, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance, Balance,
Beginning End
Description of Year Expense Acquired Write-Off of Year
- - -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FISCAL YEAR 1997
----------------------------
Allowance for Uncollectible
Accounts Receivable $ 76 $ 46 $ - $ 11 $ 111
----------------------------------------------------
----------------------------------------------------
Inventory Excess and
Obsolescence Reserve $ 592 $ 130 $ - $ 572 $ 150
----------------------------------------------------
----------------------------------------------------
Warranty Reserve $ 35 $ 16 $ - $ - $ 51
----------------------------------------------------
----------------------------------------------------
FISCAL YEAR 1996
----------------------------
Allowance for Uncollectible
Accounts Receivable $ 61 $ 75 $ - $ 60 $ 76
----------------------------------------------------
----------------------------------------------------
Inventory Excess and
Obsolescence Reserve $ 368 $ 179 $ - $ (45) $ 592
----------------------------------------------------
----------------------------------------------------
Warranty Reserve $ 35 $ 15 $ - $ 15 $ 35
----------------------------------------------------
----------------------------------------------------
FISCAL YEAR 1995
----------------------------
Allowance for Uncollectible
Accounts Receivable $ 3 $ 30 $ 30 $ 2 $ 61
----------------------------------------------------
----------------------------------------------------
Inventory Excess and
Obsolescence Reserve $ 405 $ 89 $ - $ 126 $ 368
----------------------------------------------------
----------------------------------------------------
Warranty Reserve $ 35 $ - $ - $ - $ 35
----------------------------------------------------
----------------------------------------------------
</TABLE>
See accompanying independent auditors' report.
47
<PAGE>
EXHIBIT INDEX
The exhibits listed under Item 14(c) are filed as part of this Annual
Report on Form 10-KSB.
Executive Compensation Plans and Arrangements:
10.8 1992 Xscribe Stock Option Plan and sample agreement (ix)
10.11 Executive Employment Agreement between the Company and
Suren G. Dutia dated December 20, 1988. (ix)
10.24 Description of executive bonus arrangements and executive
severance plan. (ix)
10.25 1994 Xscribe Stock Option Plan and sample agreements. (ix)
(b) Reports on Form 8-K
No reports on Form 8-K were filed by Photomatrix during the
fiscal quarter ended March 31, 1997.
(c) Exhibits
3.1 Amended and Restated Articles of Incorporation
3.3 Bylaws
10.2 Settlement Agreement dated January 11, 1993 between (iv)
Photomatrix Corporation and Scan-Graphics, Inc.
10.4 Lease Agreement between Photomatrix and EVB Limited (iv)
Partnership-I dated December 17, 1987
10.5 Lease Agreement between Photomatrix Limited and Bermer (iv)
Limited dated May 31, 1989
10.6 Promissory Notes dated April 30, 1993 in the aggregate (iv)
principal amount of $776,607 payable to the following
members of the Wyly family and affiliates: Sam Wyly,
Charles Wyly, Jr., Evan Wyly, Donald Miller, First Dallas
International, Ltd., and Premier Partners
10.7 Subcontract dated March 31, 1991 between PRC, Inc. and (iv)
Photomatrix
10.8 1992 Xscribe Stock Option Plan and Sample Agreement (iv)
10.11 Executive Employment Agreement between the Company and (i)
Suren G. Dutia dated December 20, 1988
10.24 Description of executive bonus arrangements and executive (iv)
severance plan
10.25 1994 Xscribe Stock Option Plan and Sample Agreements (vii)
10.30 Security and Loan Agreement between Imperial Bank and (ix)
Xscribe Corporation dated June 17, 1996 and related
documents.
10.31 OEM Purchase Agreement for Photomatrix Scanners dated (ix)
February 8, 1996 between Bell & Howell Limited and
Photomatrix Corporation. (Non-public information has
been filed with the Securities and Exchange Commission)
10.32 OEM Purchase Agreement for Photomatrix Scanners dated (ix)
June 12, 1996 between Bell & Howell Operating Company and
Photomatrix Corporation. (Non-public information has
been filed with the Securities and Exchange Commission)
48
<PAGE>
10.33 Facilities Lease Agreement between Photomatrix and Manufacturers
Life dated November 7, 1996
10.34 Amendment No. 1 to Security and Loan Agreement with Imperial Bank,
together with continuing guarantee and warrant agreements.
21.1 Subsidiaries of the registrant as of March 31, 1997:
- Photomatrix Imaging, Inc., Nevada
- Lexia Systems, Inc., California
- Xscribe Imaging, Inc., California
- Xscribe Legal Systems, Inc., California
23.2 Independent Auditors' Consent from KPMG Peat Marwick LLP
dated June 30, 1997
24.1 Power of Attorney (see signature pages)
(i) Incorporated by reference to exhibits filed with the
Company's Combined Annual Report to Shareholders and Annual Report on Form 10-K
for the fiscal year ended March 31, 1991, filed with the Securities and
Exchange Commission on June 26, 1991.
(ii) Incorporated by reference to exhibits filed with the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1992,
filed with the Securities and Exchange Commission on June 26, 1992.
(iii) Incorporated by reference to exhibits filed with
the Company's Post Effective Amendment No. 2 to its Registration Statement on
Form S-2 (No. 33-43036) filed with the Securities and Exchange Commission on
June 14, 1993.
(iv) Incorporated by reference to exhibits filed with the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1993,
filed with the Securities and Exchange Commission on June 29, 1993.
(v) Incorporated by reference to exhibits filed with the
Company's Current Report on Form 8-K dated October 25, 1993, filed with the
Securities and Exchange Commission on November 5, 1993.
(vi) Incorporated by reference to exhibits filed with the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1994,
filed with the Securities and Exchange Commission on June 29, 1994.
(vii) Incorporated by reference to exhibits filed with Company's
Registration Statement on Form S-8 (No. _______) with the Securities and
Exchange Commission on August 18, 1995.
(viii) Incorporated by reference to exhibits filed with the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1995,
filed with the Securities and Exchange Commission on June 29, 1995.
(ix) Incorporated by reference to exhibits filed with the
Company's Annual Report on Form 10-K for the fiscal year ended March 31,
1996, filed with the Securities and Exchange Commission on June 25, 1996.
(d) Schedule
Schedule II Valuation and Qualifying Accounts
49
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on June 30, 1997.
PHOTOMATRIX, INC.
by /s/
---------------------------------
Suren G. Dutia, President, Chief
Executive Officer and Chairman
of the Board
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Suren G. Dutia and Roy L. Gayhart, jointly and
severally, his attorney-in-fact, each with the power of substitution, for him
in any and all capacities, to sign any amendment to the Report on Form 10-KSB
and file the same with the exhibits thereto and any other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or a
substitute or substitutes, may do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated.
SIGNATURE CAPACITY DATE
- - --------- -------- ----
/s/ June 30, 1997
- - -------------------
Suren G. Dutia President, Chief Executive Officer
and Chairman of the Board
/s/ June 30, 1997
- - -------------------
Roy L. Gayhart Chief Financial Officer
/s/ June 30, 1997
- - -------------------
Charles H. Frady Principal Accounting Officer
/s/ June 30, 1997
- - -------------------
Patrick W. Moore Director
/s/ June 30, 1997
- - -------------------
Ira H. Sharp Director
/s/ June 30, 1997
- - -------------------
John F. Staley Director
50
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
The Board of Directors of Photomatrix, Inc.:
Under date May 29, 1997, except for Note 11, as to which the date is June 6,
1997, we reported on the consolidated balance sheets of Photomatrix, Inc.and
subsidiaries as of March 31, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
years in the three-year period ended March 31, 1997. In connection with our
audits of the aforementioned consolidated financial statements, we also audited
the related consolidated financial statement schedule in the Form 10-KSB. This
consolidated financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this consolidated
financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
San Diego, California
May 29, 1997
51
<PAGE>
BOARD OF DIRECTORS
Suren G. Dutia (3) Ira H. Sharp (1) (2) (3)
President, Chief Executive Officer Owner, Chief Executive Office and
and Chairman of the Board General Counsel of Alderson
Reporting
John F. Staley (1) (2) (3) Patrick Moore (1) (2) (3)
Partner in Staley, Jobson and President of IPAC Manufacturing,
Wetherell Inc.
(1) Audit Committee Member
(2) Compensation Committee Member
(3) Nominating Committee Member
EXECUTIVE OFFICERS
Suren G. Dutia Roy L. Gayhart
President, Chief Executive Officer Chief Financial Officer Secretary
and Chairman of the Board
HEADQUARTERS
Photomatrix, Inc.
11065 Sorrento Valley Court
San Diego, California 92121
(619)625-4400
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
750 B Street
San Diego, California 92101
TRANSFER AGENT AND REGISTRAR
American Stock Transfer and Trust Company
40 Wall Street
New York, New York 10005
TRADEMARKS
Windows and Windows NT (Microsoft), Netware (Novell), TeamWARE (ICL) and
Pentium (Intel) are registered trademarks of the indicated companies.
<PAGE>
GUARANTY
XSCRIBE CORPORATION, A CALIFORNIA CORPORATION, (herein called the
"Guarantor"), whose address is 6285 NANCY RIDGE DRIVE, SAN DIEGO, CA
92121-2245, as a material inducement to and in consideration of THE
MANUFACTURERS LIFE INSURANCE COMPANY entering into a written lease with
PHOTOMATRIX CORPORATION dated NOVEMBER 7, 1996, pursuant to which Lessor
leased to Lessee, and Lessee 1eased from Lessor, premises located at 11065
SORRENTO VALLEY COURT, in the City of San Diego, County of San Diego,
California, (attached to this guaranty, and made a part of it),
unconditionally guarantees and promises to and for the benefit of Lessor that
Lessee shall perform the provisions of the lease that Lessee is to perform.
If Guarantor is more than one person, Guarantor's obligations are joint and
several and are independent of Lessee's obligations. A separate action may be
brought or prosecuted against any Guarantor whether the action is brought or
prosecuted against any other Guarantor or Lessee, or all, or whether any
other Guarantor or Lessee, or all, are joined in the action.
Guarantor waives the benefit of any statute of limitations affecting
Guarantor's liability under the guaranty.
The provisions of the lease may be changed by agreement between Lessor and
Lessee at any time, or by course of conduct, without notice to Guarantor.
This guaranty shall guarantee the performance of the lease as changed.
Assignment of the lease (as permitted by the lease) shall not affect this
guaranty.
This guaranty shall not be affected by Lessor's failure or delay to enforce
any of its rights.
If Lessee defaults under the lease, Lessor can proceed immediately against
Guarantor or Lessee, or both, or Lessor can enforce against Guarantor or
Lessee, or both, any rights that it has under the lease, or pursuant to
applicable laws. If the lease terminates and Lessor has any rights it can
enforce against Lessee after termination, Lessor can enforce those rights
against Guarantor without giving previous notice to Lessee or Guarantor, or
without making any demand on either of them.
Guarantor waives the right to require Lessor to (1) proceed against Lessee;
(2) proceed against or exhaust any security that Lessor holds from Lessee; or
(3) pursue any other remedy in Lessor's power. Guarantor waives any defense
by reason of any disability from any cause by Lessee, and waives any other
defense based on the termination of Lessee's liability from any cause. Until
all Lessee's obligations to Lessor have been discharged in full, Guarantor
has no right of subrogation against Lessee. Guarantor waives its right to
enforce any remedies that Lessor now has, or later may have, against Lessee.
Guarantor waives any right to participate in any presentments, demands for
performance, notices of non-performance, protests, notices of protest,
notices of dishonor, and notices of acceptance of this guaranty, and waives
all notices of the existence, creation, or incurring of new or additional
obligations.
If Lessor disposes of its interest in the lease, "Lessor", as used in this
guaranty, shall mean Lessor's successors.
If Lessor is required to enforce Guarantor's obligations by legal
proceedings, Guarantor shall pay to Lessor all costs incurred, including
without limitations, reasonable attorneys' fees.
Guarantor's obligations under this guaranty shall be binding on Guarantor's
successors.
XSCRIBE CORPORATION
a California Corporation
By: /s/ Suren G. Dutia Dated: 11 - 15 -, 1996
------------------------------- --------- ----
Suren G. Dutia, President & CEO
<PAGE>
STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE - GROSS
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
[LOGO]
1. Basic Provisions ("Basic Provisions").
1.1 PARTIES: This Lease ("Lease"), dated for reference purposes
only, November 7, 1996 is made by and between THE MANUFACTURERS LIFE
INSURANCE COMPANY ("Lessor"), and PHOTOMATRIX CORPORATION ("Lessee"),
(collectively the "Parties," or individually a "Party").
1.2(a) PREMISES: That certain portion of the Building, including all
improvements therein or to be provided by Lessor under the terms of this
Lease, commonly known by the street address of 11065 SORRENTO VALLEY COURT,
located in the City of San Diego County of SAN DIEGO, State of CALIFORNIA,
with zip code 92121, as outlined on Exhibit A attached hereto ("Premises").
The "Building" is that certain building containing the Premises and generally
described as (describe briefly the nature of the Building): APPROXIMATELY
23,400 SQUARE FEET RENTABLE (SFR) IN THE TORREY PINES BUSINESS PARK. In
addition to Lessee's rights to use and occupy the Premises as hereinafter
specified, Lessee shall have non-exclusive rights to the Common Areas (as
defined in Paragraph 2.7 below) as hereinafter specified, but shall not have
any rights to the roof, exterior walls or utility raceways of the Building or
to any other buildings in the Industrial Center. The Premises, the Building,
the Common Areas, the land upon which they are located, along with all other
buildings and improvements thereon, are herein collectively referred to as
the *Industrial Center." (Also see Paragraph 2.)
1.2(b) PARKING: SEE PARAGRAPH 52 unreserved vehicle parking spaces
("Unreserved Parking Spaces"); and NO reserved vehicle parking spaces ("Reserved
Parking Spaces"). (Also see Paragraph 2.6.)
1.3 TERM: FIVE years and SIX months ("Original Term") commencing
MARCH l, 1997 ("Commencement Date") and ending AUGUST 31, 2002 ("Expiration
Date"). (Also see Paragraph 3.)
1.4 EARLY POSSESSION: SEE PARAGRAPH 53 ("Early Possession Date").
(Also see Paragraphs 3.2 and 3.3.)
1.5 BASE RENT: $17,380.00 per month ("Base Rent"), payable on the
FIRST (1ST) day of each month commending MARCH 1, 1997. (Also see Paragraph 4.)
[X] If this box la checked, this Lease provides for the Base Rent to be
adjusted per Addendum 54, attached hereto.
1.6(a) BASE RENT PAID UPON EXECUTION: $17,380.00 as Base Rent for the
period 3/1/97 THROUGH 3/31/97.
1.6(b) LESSEE'S SHARE OF COMMON AREA OPERATING EXPENSES: 12.3 percent
(12.3 %) ("Lessee's Share") as determined by
[ ] prorata square footage of the Premises as compared to the total square
footage of the Building or [X] other criteria as described in Addendum 50.
1.7 SECURITY DEPOSIT: $ 19,360.00 ("Security Deposit"). (Also see
Paragraph 5.)
1.8 PERMITTED USE: A GENERAL OFFICE/ASSEMBLY/LIGHT MANUFACTURING
SPACE COMPATIBLE WITH THE CC&R'S AND UNDERLYING ZONING FOR THE PREMISES THAT
DOES NOT CONFLICT WITH ANY EXISTING OR FUTURE NON-COMPETITIVE USES IN THE
PARK. ("Permitted Use") (Also see Paragraph 6.)
1.9 INSURING PARTY. Lessor is the "Insuring Party." (Also see Paragraph
8.)
1.10(a) REAL ESTATE BROKERS. The following real estate broker(s)
(collectively, the "Brokers") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes):
[ ] NOT APPLICABLE represents Lessor exclusively ("Lessor's Broker")
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[ ] NOT APPLICABLE represents Lessee exclusively ("Lessee's Broker") or
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[ ] NOT APPLICABLE represents both Lessor and Lessee ("Dual Agency. (Also
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see Paragraph 15.)
1.10(b) Payment to Brokers. Upon the execution of this Lease by both
Parties, Lessor shall pay to said Broker(s) jointly, or in such separate shares
as they may mutually designate in writing, a fee as set forth in a separate
written agreement between Lessor and said Broker(s) (or in the event there Is no
separate written agreement between Lessor and said Broker(s), the sum of $ 0.00)
for brokerage services rendered by said Broker(s) in connection with this
transaction.
1.11 GUARANTOR. The obligations of the Lessee under this Lease are to be
guaranteed by XSCRIBE CORPORATION, A CALIFORNIA CORPORATION, 6285 NANCY RIDGE
DRIVE SAN DIEGO, CA 92121-2245 ("Guarantor"). (Also see Paragraph 37.)
1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 49 through 59, and Exhibits through D, all of which
constitute a part of this Lease.
2. PREMISES, PARKING AND COMMON AREAS.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of square footage set forth in this Lease, or
that may have been used in calculating rental and/or Common Area Operating
Expenses, is an approximation which Lessor and Lessee agree Is reasonable and
the rental and Lessee's Share (as defined in Paragraph 1.6(b)) based thereon is
not subject to revision whether or not the actual square footage is more or
less.
2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean and
free of debris on the Commencement Date and warrants to Lessee that the existing
plumbing, electrical systems, fire sprinkler system, lighting, air conditioning
and heating systems and loading doors, if any, in the Premises, other than those
constructed by Lessee, shall be in good operating condition on the Commencement
Date. If a non-compliance with said warranty exists as of the Commencement Date,
Lessor shall, except as otherwise provided in this Lease, promptly after receipt
of written notice from Lessee setting forth with specificity the nature and
extent of such non-compliance, rectify same at Lessor's expense. If Lessee does
not give Lessor written notice of a non-compliance with this warranty within
thirty (30) days after the Commencement Date, correction of that non-compliance
shall be the obligation of Lessee at Lessee's sole cost and expense.
2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor
warrants that any improvements (other than those constructed by Lessee or at
Lessee's direction) on or in the Premises which have been constructed or
installed by Lessor or with Lessor's consent or at Lessor's direction shall
comply with all applicable covenants or restrictions of record and applicable
building codes, regulations and ordinances In effect on the Commencement Date.
Lessor further warrants to Lessee that Lessor has no knowledge of any claim
having been made by any governmental agency that a violation or violations of
applicable building codes, regulations, or ordinances exist with regard to the
Premises as of the Commencement Date. Said warranties shall not apply to any
Alterations or Utility Installations (defined in Paragraph 7.3(a)) made or to be
made by Lessee. If the Premises do not comply with said warranties, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee given within six (6) months following the
Commencement Date and setting forth with specificity the nature and extent of
such non-compliance, take such action, at Lessor's expense, as may be reasonable
or appropriate to rectify the non-compliance. Lessor makes no warranty that the
Permitted Use in Paragraph 1.8 is permitted for the Premises under Applicable
Laws (as defined In Paragraph 2.4).
2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it has
been advised by the Broker(s) to satisfy itself with respect to the condition of
the Premises (including but not limited to the electrical and fire sprinkler
systems, security, environmental aspects, and compliance with the Americans with
Disabilities Act and applicable zoning, municipal, county, state and federal
laws, ordinances and regulations and any covenants or restrictions of record
(collectively, "APPLICABLE LAWS") and the present and future suitability of the
Premises for Lessee's intended use; (b) that Lessee has made such investigation
as it deems necessary with reference to such matters, Is satisfied with
reference thereto, and assumes all responsibility therefore as the same relate
to Lessee's occupancy of the Premises and/or the terms of this Lease; and (c)
that neither Lessor, nor any of Lessor's agents, has made any oral or written
representations or warranties with respect to said matters other than as set
forth in this Lease.
2.5 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor In
this Paragraph 2 shall be of no force or effect if immediately prior to the date
set forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In
such event, Lessee shall, at Lessee's sole cost and expense, correct any non-
compliance of the Premises with said warranties.
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2.6 VEHICLE PARKING. Lessee shall be entitled to use the number of
Unreserved Parking Spaces and Reserved Parking Spaces specified in Paragraph
1.2(b) on those portions of the Common Areas designated from time to time by
Lessor for parking. Lessee shall not use more parking spaces than said number.
Said parking spaces shall be used for parking by vehicles no larger than full-
size passenger automobiles or pick-up trucks, herein called "PERMITTED SIZE
VEHICLES." Vehicles other than Permitted Size Vehicles shall be parked and
loaded or unloaded as directed by Lessor in the Rules and Regulations (as
defined in Paragraph 40) Issued by Lessor. (Also see Paragraph 2.9.)
(a) Lessee shall not permit or allow any vehicles that belong to or
are controlled by Lessee or Lessee's employees, suppliers, shippers, customers,
contractors or Invitees to be loaded, unloaded, or parked in areas other than
those designated by Lessor for such activities.
(b) If Lessee permits or allows any of the prohibited activities
described in this Paragraph 2.6, then Lessor shall have the right, without
notice, in addition to such other rights and remedies that it may have, to
remove or tow away the vehicle involved and charge the cost to Lessee, which
cost shall be immediately payable upon demand by Lessor.
(c) Lessor shall at the Commencement Date of this Lease, provide
the parking facilities required by Applicable Law.
2.7 COMMON AREAS - DEFINITION. The term "COMMON AREAS" is defined as
all areas and facilities outside the Premises and within the exterior boundary
line of the Industrial Center and interior utility raceways within the Premises
that are provided and designated by the Lessor from time to time for the general
non-exclusive use of Lessor, Lessee and other lessees of the Industrial Center
and their respective employees, suppliers, shippers, customers, contractors and
invitees, including parking areas, loading and unloading areas, trash areas,
roadways, sidewalks, walkways, parkways, driveways and landscaped areas.
2.8 COMMON AREAS - LESSEE'S RIGHTS. Lessor hereby grants to Lessee, for
the benefit of Lessee and its employees, suppliers, shippers, contractors,
customers and invitees, during the term of this Lease, the non-exclusive right
to use, in common with others entitled to such use, the Common areas as they
exist from time to time, subject to any rights, powers, and privileges reserved
by Lessor under the terms hereof or under the terms of any rules and regulations
or restrictions governing the use of the Industrial Center. Under no
circumstances shall the right herein granted to use the Common Areas be deemed
to include the right to store any property, temporarily or permanently, in the
Common Areas. Any such storage shall be permitted only by the prior written
consent of Lessor or Lessor's designated agent, which consent may be revoked at
any time. In the event that any unauthorized storage shall occur then Lessor
shall have the right, without notice, in addition to such other rights and
remedies that it may have, to remove the property and charge the cost to Lessee,
which cost shall be immediately payable upon demand by Lessor.
2.9 COMMON AREAS - RULES AND REGULATIONS. Lessor or such other
person(s) as Lessor may appoint shall have the exclusive control and
management of the Common Areas and shall have the right, from time to time, to
establish, modify, amend and enforce reasonable Rules and Regulations with
respect thereto In accordance with Paragraph 40. Lessee agrees to abide by and
conform to all such Rules and Regulations, and to cause its employees,
suppliers, shippers, customers, contractors and invitees to so abide and
conform. Lessor shall not be responsible to Lessee for the non-compliance with
said rules and regulations by other lessees of the Industrial Center.
2.10 COMMON AREAS - CHANGES. Lessor shall have the right, in Lessor's
sole discretion, from time to time:
(a) To make changes to the Common Areas, including, without
limitation, changes in the location, size, shape and number of driveways,
entrances, parking spaces, parking areas, loading and unloading areas, ingress,
egress, direction of traffic, landscaped areas, walkways and utility raceways;
(b) To close temporarily any of the Common Areas for maintenance
purposes so long as reasonable access to the Premises remains available;
(c) To designate other land outside the boundaries of the
Industrial Center to be a part of the Common Areas;
(d) To add additional buildings and improvements to the Common
Areas;
(e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Industrial Center, or any portion
thereof; and
(f) To do and perform such other acts and make such other changes
in, to or with respect to the Common Areas and Industrial Center as Lessor may,
in the exercise of sound business judgment, deem to be appropriate.
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3.
3.2 EARLY POSSESSION. If an Early Possession Date is specified in
Paragraph 1.4 and if Lessee totally or partially occupies the Premises after the
Early Possession Date but prior to the Commencement Date, the obligation to pay
Base Rent shall be abated for the period of such early occupancy. All other
terms of this Lease, however, (including but not limited to the obligations to
pay Lessee's Share of Common Area Operating Expenses and to carry the Insurance
required by Paragraph 8) shall be in effect during such period. Any such early
possession shall not affect nor advance the Expiration Date of the Original
Term.
3.3 DELAY IN POSSESSION. If for any reason Lessor cannot deliver
possession of the Premises to Lessee by the Early Possession Date, if one is
specified in Paragraph 1.4, or if no Early Possession Date is specified, by the
Commencement Date, Lessor shall not be subject to any liability therefor, nor
shall such failure affect the validity of this Lease, or the obligations of
Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not,
except as otherwise provided herein, be obligated to pay rent or perform any
other obligation of Lessee under the terms of this Lease until Lessor delivers
possession of the Premises to Lessee. If possession of the Premises is not
delivered to Lessee within sixty (60) days after the Commencement Date, Lessee
may, at its option, by notice in writing to Lessor within ten (10) days after
the end of said sixty (60) day period, cancel this Lease, in which event the
parties shall be discharged from all obligations hereunder; provided further,
however, that if such written notice of Lessee is not received by Lessor within
said ten (10) day period, Lessee's right to cancel this Lease hereunder shall
terminate and be of no further force or effect. Except as may be otherwise
provided, and regardless of when the Original Term actually commences, if
possession is not tendered to Lessee when required by this Lease and Lessee does
not terminate this Lease, as aforesaid, the period free of the obligation to pay
Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the
date of delivery of possession and continue for a period equal to the period
during which the Lessee would have otherwise enjoyed under the terms hereof, but
minus any days of delay caused by the acts, changes or omissions of Lessee.
4. RENT.
4.1 BASE RENT. Lessee shall pay Base Rent and other rent or charges, as
the same may be adjusted from time to time, to Lessor in lawful money of the
United States, without offset or deduction, on or before the day on which it is
due under the terms of this Lease. Base Rent and all other rent and charges for
any period during the term hereof which is for less than one full month shall be
prorated based upon the actual number of days of the month involved. Payment of
Base Rent and other charges shall be made to Lesser at its address stated herein
or to such other persons or at such other addresses as Lessor may from time to
time designate in writing to Lessee.
4.2 COMMON AREA OPERATING EXPENSES. Lessee shall pay to Lessor during
the term hereof, in addition to the Base Rent, Lessee's Share (as specified in
Paragraph 1.6(b)) of increases only on all Common Area Operating Expenses, above
base year 1997 (96/97 Tax Base Year) as hereinafter defined, during each
calendar year of the term of this Lease, in accordance with the following
provisions:
(a) "COMMON AREA OPERATING EXPENSES" are defined, for purposes of
this Lease, as all costs incurred by Lessor relating to the ownership and
operation of the Industrial Center, including, but not limited to, the
following:
(i) The operation, repair and maintenance, in neat, clean, good
order and condition, of the following:
(aa) The Common Areas, including parking areas, loading and
unloading areas, trash areas, roadways, sidewalks, walkways, parkways,
driveways, landscaped areas, striping, bumpers, irrigation systems,
Common Area lighting facilities, fences and gates, elevators and roof.
(bb) Exterior signs and any tenant directories.
(cc) Fire detection and sprinkler systems.
(ii) The cost of water, gas, electricity and telephone to
service the Common Areas.
(iii) Trash disposal, property management and security services
and the costs of any environmental Inspections.
(iv) Reserves set aside for maintenance and repair of Common
Areas.
(v) Any increase above the Base Real Property Taxes (as defined
in Paragraph 10.2(b)) for the Building and the Common Areas.
(vi) Any "Insurance Cost Increase" (as defined in Paragraph
8.1).
(vii) The cost of insurance carried by Lessor with respect to
the Common Areas.
(viii) Any deductible portion of an insured loss concerning the
Building or the Common areas.
(ix) Any other services to be provided by Lessor that are stated
elsewhere in this Lease to be a Common Area Operating Expense.
(b)
(c) The inclusion of the improvements, facilities and services set
forth in Subparagraph 4.2(a) shall not be deemed to impose an obligation upon
Lessor to either have said improvements or facilities or to provide those
services unless the Industrial Center already has the same, Lessor already
provides the services, or Lessor has agreed elsewhere in this Lease to provide
the same or some of them.
(d) Lessee's Share of Common Area Operating Expenses shall be
payable by Lessee within ten (10) days after a reasonably detailed statement of
actual expenses is presented to Lessee by Lessor. At Lessor's option, however,
an amount may be estimated by Lessor from time to time of Lessee's Share of
annual Common Area Operating Expenses and the same shall be payable monthly or
quarterly, as Lessor shall designate, during each 12-month period of the Lease
term, on the same day as the Base Rent is due hereunder. Lessor shall deliver to
Lessee within sixty (60) days after the expiration of each calendar year a
reasonably detailed statement showing Lessee's Share of the actual Common Area
Operating Expenses incurred during the preceding year. If Lessee's payments
under this Paragraph 4.2(d) during said preceding year exceed Lessee's Share as
indicated on said statement, Lessor shall be credited the amount of such
overpayment against Lessee's Share of Common Area Operating Expenses next
becoming due. If Lessee's payments under this Paragraph 4.2(d) during said
preceding year were less than Lessee's Share as indicated on said statement,
Lessee shall pay to Lessor the amount of the deficiency within ten (10) days
after delivery by Lessor to Lessee of said statement.
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5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon Lessee's execution
hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's
faithful performance of Lessee's obligations under this Lease. If Lessee fails
to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults
under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain
all or any portion of said Security Deposit for the payment of any amount due
Lessor or to reimburse or compensate Lessor for any liability, cost, expense,
loss or damage (including attorneys' fees) which Lessor may suffer or incur by
reason thereof. If Lessor uses or applies all or any portion of said Security
Deposit, Lessee shall within ten (10) days after written request therefore
deposit monies with Lessor sufficient to restore said Security Deposit to the
full amount required by this Lease. Any time the Base Rent increases during the
term of this Lease, Lessee shall, upon written request from Lessor, deposit
additional monies with Lessor as an addition to the Security Deposit so that the
total amount of the Security Deposit shall at all times bear the same proportion
to the then current Base Rent as the initial Security Deposit bears to the
initial Base Rent set forth in Paragraph 1.5. Lessor shall not be required to
keep all or any part of the Security Deposit separate from its general accounts.
Lessor shall, at the expiration or earlier termination of the term hereof and
after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option,
to the last assignee, if any, of Lessee's interest herein), that portion of the
Security Deposit not used or applied by Lessor. Unless otherwise expressly
agreed in writing by Lessor, no part of the Security Deposit shall be considered
to be held in trust, to bear interest or other increment for its use, or to be
prepayment for any monies to be paid by Lessee under this Lease.
6. USE.
6.1 PERMITTED USE.
(a) Lessee shall use and occupy the Premises only for the Permitted
Use set forth in Paragraph 1.8, or any other legal use which is reasonably
comparable thereto, and for no other purpose. Lessee shall not use or permit the
use of the Premises in a manner that is unlawful, creates waste or a nuisance,
or that disturbs owners and/or occupants of, or causes damage to the Premises or
neighboring premises or properties.
(b) Lessor hereby agrees to not unreasonably withhold or delay its
consent to any written request by Lessee, Lessee's assignees or subtenants, and
by prospective assignees and subtenants of Lessee, its assignees and subtenants,
for a modification of said Permitted Use, so long as the same will not impair
the structural integrity of the improvements on the Premises or in the Building
or the mechanical or electrical systems therein, does not conflict with uses by
other lessees, is not significantly more burdensome to the Premises or the
Building and the improvements thereon, and is otherwise permissible pursuant to
this Paragraph 6. If Lessor elects to withhold such consent, Lessor shall within
five (5) business days after such request give a written notification of same,
which notice shall include an explanation of Lessor's reasonable objections to
the change in use.
6.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE"
as used in this Lease shall mean any product, substance, chemical, material or
waste whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public health, safety or welfare, the
environment, or the Premises; (ii) regulated or monitored by any governmental
authority; or (iii) a basis for potential liability of Lessor to any
governmental agency or third party under any applicable statute or common law
theory. Hazardous Substance shall include, but not be limited to, hydrocarbons,
petroleum, gasoline, crude oil or any products or by-products thereof. Lessee
shall not engage in any activity in or about the Premises which constitutes a
Reportable Use (as hereinafter defined) of Hazardous Substances without the
express prior written consent of Lessor and compliance in a timely manner (at
Lessee's sole cost and expense) with all Applicable Requirements (as defined in
Paragraph 6.3). "REPORTABLE USE" shall mean (i) the installation or use of any
above or below ground storage tank, (ii) the generation, possession, storage,
use, transportation, or disposal of a Hazardous Substance that requires a permit
from, or with respect to which a report, notice, registration or business plan
is required to be filed with, any governmental authority, and (iii) the presence
in, on or about the Premises of a Hazardous Substance with respect to which any
Applicable Laws require that a notice be given to persons entering or occupying
the Premises or neighboring properties. Notwithstanding the foregoing, Lessee
may, without Lessor's prior consent, but upon notice to Lessor and in compliance
with all Applicable Requirements, use any ordinary and customary materials
reasonably required to be used by Lessee in the normal course of the Permitted
Use, so long as such use is not a Reportable Use and does not expose the
Premises or neighboring properties to any meaningful risk of contamination or
damage or expose Lessor to any liability therefor. In addition, Lessor may (but
without any obligation to do so) condition its consent to any Reportable Use of
any Hazardous Substance by Lessee upon Lessee's giving Lessor such additional
assurances as Lessor, in its reasonable discretion, deems necessary to protect
itself, the public, the Premises and the environment against damage,
contamination or injury and/or liability therefor, including but not limited to
the installation (and, at Lessor's option, removal on or before Lease expiration
or earlier termination) of reasonably necessary protective modifications to the
Premises (such as concrete encasements) and/or the deposit of an additional
Security Deposit under Paragraph 5 hereof.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause
to believe, that a Hazardous Substance has come to be located in, on, under or
about the Premises or the Building, other than as previously consented to by
Lessor, Lessee shall immediately give Lessor written notice thereof, together
with a copy of any statement, report, notice, registration, application, permit,
business plan, license, claim, action, or proceeding given to, or received from,
any governmental authority or private party concerning the presence, spill,
release, discharge of, or exposure to, such Hazardous Substance including but
not limited to all such documents as may be involved in any Reportable Use
involving the Premises. Lessee shall not cause or permit any Hazardous Substance
to be spilled or released in, on, under or about the Premises (including,
without limitation, through the plumbing or sanitary sewer system).
(c) INDEMNIFICATION. Lessee shall indemnify, protect, defend and
hold Lessor, its agents, employees, lenders and ground lessor, if any, and the
Premises, harmless from and against any and all damages, liabilities, judgments,
costs, claims, liens, expenses, penalties, loss of permits and attorneys' and
consultants' fees arising out of or involving any Hazardous Substance brought
onto the Premises by or for Lessee or by anyone under Lessee's control.
Lessee's obligations under this Paragraph 6.2(c) shall include, but not be
limited to, the effects of any contamination or injury to person, property or
the environment created or suffered by Lessee, and the cost of investigation
(including consultants' and attorneys' fees and testing), removal, remediation,
restoration and/or abatement thereof, or of any contamination therein involved,
and shall survive the expiration or earlier termination of this Lease. No
termination, cancellation or release agreement entered into by Lessor and Lessee
shall release Lessee from its obligations under this Lease with respect to
Hazardous Substances, unless specifically so agreed by Lessor in writing at the
time of such agreement.
6.3 LESSEE'S COMPLIANCE WITH REQUIREMENTS. Lessee shall, at Lessee's
sole cost and expense, fully, diligently and in a timely manner, comply with all
"Applicable Requirements," which term is used in this Lease to mean all laws,
rules, regulations, ordinances, directives, covenants, easements and
restrictions of record, permits, the requirements of any applicable fire
insurance underwriter or rating bureau, and the recommendations of Lessor's
engineers and/or consultants, relating in any manner to the Premises (including
but not limited to matters pertaining to (i) industrial hygiene, (ii)
environmental conditions on, in, under or about the Premises, including soil and
groundwater conditions, and (iii) the use, generation, manufacture, production,
installation, maintenance, removal, transportation, storage, spill, or release
of any Hazardous Substance), now in effect or which may hereafter come into
effect. Lessee shall, within five (5) days after receipt of Lessor's written
request, provide Lessor with copies of all documents and information, including
but not limited to permits, registrations, manifests, applications, reports and
certificates, evidencing Lessee's compliance with any Applicable Requirements
specified by Lessor, and shall immediately upon receipt, notify Lessor in
writing (with copies of any documents involved) of any threatened or actual
claim, notice, citation, warning, complaint or report pertaining to or involving
failure by Lessee or the Premises to comply with any Applicable Requirements.
6.4 INSPECTION; COMPLIANCE WITH LAW. Lessor, Lessor's agents,
employees, contractors and designated representatives, and the holders of any
mortgages, deeds of trust or ground leases on the Premises ("LENDERS") shall
have the right to enter the Premises at any time in the case of an emergency,
and otherwise at reasonable times, for the purpose of inspecting the condition
of the Premises and for verifying compliance by Lessee with this Lease and all
Applicable Requirements (as defined in Paragraph 6.3), and Lessor shall be
entitled to employ experts and/or consultants in connection therewith to advise
Lessor with respect to Lessee's activities, including but not limited to
Lessee's installation, operation, use, monitoring, maintenance, or removal of
any Hazardous Substance on or from the Premises. The costs and expenses of any
such inspections shall be paid by the party requesting same, unless a Default or
Breach of this Lease by Lessee or a violation of Applicable Requirements or a
contamination, caused or materially contributed to by Lessee, is found to exist
or to be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent violation
or contamination. In such case, Lessee shall upon request reimburse Lessor or
Lessor's Lender, as the case may be, for the costs and expenses of such
inspections.
7. MAINTENANCE, REPAIRS, UTILITY INSTALLATIONS, TRADE FIXTURES AND
ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) Subject to the provisions of Paragraphs 2.2 (Condition), 2.3
(Compliance with Covenants, Restrictions and Building Code), 7.2 (Lessor's
Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at
Lessee's sole cost and expense and at all times, keep the Premises and every
part thereof in good order, condition and repair (whether or not such portion of
the Premises requiring repair, or the means of repairing the same, are
reasonably or readily accessible to Lessee, and whether or not the need for such
repairs occurs as a result of Lessee's use, any prior use, the elements or the
age of such portion of the Premises), including, without limiting the generality
of the foregoing, all equipment or facilities specifically serving the Premises,
such as plumbing, heating, air conditioning, ventilating, electrical, lighting
facilities, boilers, fired or unfired pressure vessels, fire hose connections if
within the Premises, fixtures, interior walls, interior surfaces of exterior
walls, ceilings, floors, windows, doors, plate glass, and skylights, but
excluding any items which are the responsibility of Lessor pursuant to Paragraph
7.2 below. Lessee, in keeping the Premises in good order, condition and repair,
shall exercise and perform good maintenance practices. Lessee's obligations
shall include restorations, replacements or renewals when necessary to keep the
Premises and all improvements thereon or a part thereof in good order, condition
and state of repair.
(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain a contract, with copies to Lessor, in customary form and substance for
and with a contractor specializing and experienced in the inspection,
maintenance and service of the heating, air conditioning and ventilation system
for the Premises. However, Lessor reserves the right, upon notice to Lessee, to
procure and maintain the contract for the heating, air conditioning and
ventilating systems, and if Lessor so elects, Lessee shall reimburse Lessor,
upon demand, for the cost thereof.
(c) If Lessee fails to perform Lessee's obligations under this
Paragraph 7.1, Lessor may enter upon the Premises after ten (10) days prior
written notice to Lessee (except in the case of an emergency, in which case no
notice shall be required), perform such obligations on Lessee's behalf, and put
the Premises in good order, condition and repair, in accordance with Paragraph
13.2 below.
7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code),
4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9
(Damage or Destruction) and 14 (Condemnation), Lessor, subject to reimbursement
pursuant to Paragraph 4.2, shall keep in good order, condition and repair the
foundations, exterior walls, structural condition of interior bearing walls,
exterior roof, fire sprinkler and/or standpipe and hose (if located in the
Common Areas) or other automatic fire extinguishing system including fire alarm
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and/or smoke detection systems and equipment, fire hydrants, parking lots,
walkways, parkways, driveways, landscaping, fences, signs and utility systems
serving the Common Areas and all parts thereof, as well as providing the
services for which there is a Common Area Operating Expense pursuant to
Paragraph 4.2. Lessor shall not be obligated to paint the exterior or interior
surfaces of exterior walls nor shall Lessor be obligated to maintain, repair or
replace windows, doors or plate glass of the Premises. Lessee expressly waives
the benefit of any statute now or hereafter in effect which would otherwise
afford Lessee the right to make repairs at Lessor's expense or to terminate this
Lease because of Lessor's failure to keep the Building, Industrial Center or
Common Areas in good order, condition and repair.
7.3 UTILITY INSTALLATIONS, TRADE FIXTURES, ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS"
is used in this Lease to refer to all air lines, power panels, electrical
distribution, security, fire protection systems, communications systems,
lighting fixtures, heating, ventilating and air conditioning equipment,
plumbing, and fencing in, on or about the Premises. The term "TRADE FIXTURES"
shall mean Lessee's machinery and equipment which can be removed without doing
material damage to the Premises. The term "ALTERATIONS" shall mean any
modification of the improvements on the Premises which are provided by Lessor
under the terms of this Lease, other than Utility Installations or Trade
Fixtures. "LESSEE-OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as
Alterations and/or Utility Installations made by Lessee that are not yet owned
by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make nor cause to be
made any Alterations or Utility Installations in, on, under or about the
Premises without Lessor's prior written consent. Lessee may, however, make non-
structural Utility Installations to the interior of the Premises (excluding the
roof) without Lessor's consent but upon notice to Lessor, so long as they are
not visible from the outside of the Premises, do not involve puncturing,
relocating or removing the roof or any existing walls, or changing or
interfering with the fire sprinkler or fire detection systems and the cumulative
cost thereof during the term of this Lease as extended does not exceed
$2,500.00.
(b) CONSENT. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with detailed plans. All consents given by
Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent,
shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits
required by governmental authorities; (ii) the furnishing of copies of such
permits together with a copy of the plans and specifications for the Alteration
or Utility Installation to Lessor prior to commencement of the work thereon; and
(iii) the compliance by Lessee with all conditions of said permits in a prompt
and expeditious manner. Any Alterations or Utility Installations by Lessee
during the term of this Lease shall be done in a good and workmanlike manner,
with good and sufficient materials, and be in compliance with all Applicable
Requirements. Lessee shall promptly upon completion thereof furnish Lessor with
as-built plans and specifications therefor. Lessor may, (but without obligation
to do so) condition its consent to any requested Alteration or Utility
Installation that costs $2,500.00 or more upon Lessee's providing Lessor with a
lien and completion bond in an amount equal to one and one-half times the
estimated cost of such Alteration or Utility Installation.
(c) LIEN PROTECTION. Lessee shall pay when due all claims for labor
or materials furnished or alleged to have been furnished to or for Lessee at or
for use on the Premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than ten (10) days' notice prior to the commencement of any
work in, on, or about the Premises, and Lessor shall have the right to post
notices of non-responsibility in or on the Premises as provided by law. If
Lessee shall, in good faith, contest the validity of any such lien, claim or
demand, then Lessee shall, at its sole expense, defend and protect itself,
Lessor and the Premises against the same and shall pay and satisfy any such
adverse judgment that may be rendered thereon before the enforcement thereof
against the Lessor or the Premises. If Lessor shall require, Lessee shall
furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one
and one-half times the amount of such contested lien claim or demand,
indemnifying Lessor against liability for the same, as required by law for the
holding of the Premises free from the effect of such lien or claim. In addition,
Lessor may require Lessee to pay Lessor's attorneys' fees and costs in
participating in such action if Lessor shall decide it is to its best interest
to do so.
7.4 OWNERSHIP, REMOVAL, SURRENDER, AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require their removal
and to cause Lessee to become the owner thereof as hereinafter provided in this
Paragraph 7.4, all Alterations and Utility Installations made to the Premises by
Lessee shall be the property of and owned by Lessee, but considered a part of
the Premises. Lessor may, at any time and at its option, elect in writing to
Lessee to be the owner of all or any specified part of the Lessee-Owned
Alterations and Utility Installations. Unless otherwise instructed per
Subparagraph 7.4(b) hereof, all Lessee-Owned Alterations and Utility
Installations shall, at the expiration or earlier termination of this Lease,
become the property of Lessor and remain upon the Premises and be surrendered
with the Premises by Lessee.
(b) REMOVAL. Unless otherwise agreed in writing, Lessor may require
that any or all Lessee-Owned Alterations or Utility Installations be removed by
the expiration or earlier termination of this Lease, notwithstanding that their
installation may have been consented to by Lessor. Lessor may require the
removal at any time of all or any part of any Alterations or Utility
Installations made without the required consent of Lessor. See Paragraph 57
(c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by
the end of the last day of the Lease term or any earlier termination date, clean
and free of debris and in good operating order, condition and state of repair,
ordinary wear and tear excepted. Ordinary wear and tear shall not include any
damage or deterioration that would have been prevented by good maintenance
practice or by Lessee performing all of its obligations under this Lease. Except
as otherwise agreed or specified herein, the Premises, as surrendered, shall
include the Alterations and Utility Installations. The obligation of Lessee
shall include the repair of any damage occasioned by the installation,
maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and
Lessee-Owned Alterations and Utility Installations, as well as the removal of
any storage tank installed by or for Lessee, and the removal, replacement, or
remediation of any soil, material or ground water contaminated by Lessee, all as
may then be required by Applicable Requirements and/or good practice. Lessee's
Trade Fixtures shall remain the property of Lessee and shall be removed by
Lessee subject to its obligation to repair and restore the Premises per this
Lease. See Paragraph 58
8. INSURANCE; INDEMNITY.
8.1 PAYMENT OF PREMIUM INCREASES.
(a) As used herein, the term "INSURANCE COST INCREASE" is defined
as any increase in the actual cost of the insurance applicable to the Building
and required to be carried by Lessor pursuant to Paragraphs 8.2(b), 8.3(a) and
8.3(b), ("REQUIRED INSURANCE"), over and above the Base Premium, as hereinafter
defined, calculated on an annual basis. "Insurance Cost Increase" shall include,
but not be limited to, requirements of the holder of a mortgage or deed of trust
covering the Premises, increased valuation of the Premises, and/or a general
premium rate increase. The term "Insurance Cost Increase" shall not, however,
include any premium increases resulting from the nature of the occupancy of any
other lessee of the Building. If the parties insert a dollar amount in Paragraph
1.9, such amount shall be considered the "BASE PREMIUM." If a dollar amount has
not been inserted in Paragraph 1.9 and if the Building has been previously
occupied during the twelve (12) month period immediately preceding the
Commencement Date, the "Base Premium" shall be the annual premium applicable to
such twelve (12) month period. If the Building was not fully occupied during
such twelve (12) month period, the "Base Premium" shall be the lowest annual
premium reasonably obtainable for the Required Insurance as of the Commencement
Date, assuming the most nominal use possible of the Building. In no event,
however, shall Lessee be responsible for any portion of the premium cost
attributable to liability insurance coverage in excess of $1,000,000 procured
under Paragraph 8.2(b).
(b) Lessee shall pay any Insurance Cost Increase to Lessor pursuant
to Paragraph 4.2. Premiums for policy periods commencing prior to, or extending
beyond, the term of this Lease shall be prorated to coincide with the
corresponding Commencement Date or Expiration Date.
8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force during
the term of this Lease a Commercial General Liability policy of insurance
protecting Lessee, Lessor and any Lender(s) whose names have been provided to
Lessee in writing (as additional Insureds) against claims for bodily injury,
personal injury and property damage based upon, involving or arising out of the
ownership, use, occupancy or maintenance of the Premises and all areas
appurtenant thereto. Such insurance shall be on an occurrence basis providing
single limit coverage in an amount not less than $1,000,000 per occurrence with
an "ADDITIONAL INSURED-MANAGERS OR LESSORS OF PREMISES" endorsement and contain
the "AMENDMENT OF THE POLLUTION EXCLUSION" endorsement for damage caused by
heat, smoke or fumes from a hostile fire. The policy shall not contain any
intra-insured exclusions as between insured persons or organizations, but shall
include coverage for liability assumed under this Lease as an "INSURED CONTRACT"
for the performance of Lessee's indemnity obligations under this Lease. The
limits of said insurance required by this Lease or as carried by Lessee shall
not, however, limit the liability of Lessee nor relieve Lessee of any obligation
hereunder. All insurance to be carried by Lessee shall be primary to and not
contributory with any similar insurance carried by Lessor, whose insurance shall
be considered excess insurance only.
(b) CARRIED BY LESSOR. Lessor shall also maintain liability
insurance described in Paragraph 8.2(a) above, in addition to and not in lieu
of, the insurance required to be maintained by Lessee. Lessee shall not be named
as an additional insured therein.
8.3 PROPERTY INSURANCE-BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. Lessor shall obtain and keep in
force during the term of this Lease a policy or policies in the name of Lessor,
with loss payable to Lessor and to any Lender(s), insuring against loss or
damage to the Premises. Such insurance shall be for full replacement cost, as
the same shall exist from time to time, or the amount required by any Lender(s),
but in no event more than the commercially reasonable and available insurable
value thereof if, by reason of the unique nature or age of the Improvements
involved, such latter amount is less than full replacement cost. Lessee-Owned
Alterations and Utility Installations, Trade Fixtures and Lessee's personal
property shall be insured by Lessee pursuant to Paragraph 8.4. If the coverage
is available and commercially appropriate, Lessor's policy or policies shall
insure against all risks of direct physical loss or damage (except the perils of
flood and/or earthquake unless required by a Lender or included in the Base
Premium), including coverage for any additional costs resulting from debris
removal and reasonable amounts of coverage for the enforcement of any ordinance
or law regulating the reconstruction or replacement of any undamaged sections of
the Building required to be demolished or removed by reason of the enforcement
of any building, zoning, safety or land use laws as the result of a covered
loss, but not including plate glass insurance. Said policy or policies shall
also contain an agreed valuation provision in lieu of any co-insurance clause,
waiver of subrogation, and inflation guard protection causing an increase in the
annual property insurance coverage amount by a factor of not less than the
adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers
for the city nearest to where the Premises are located.
(b) RENTAL VALUE. Lessor shall also obtain and keep in force during
the term of this Lease a policy or policies in the name of Lessor, with loss
payable to Lessor and any Lender(s), insuring the loss of the full rental and
other charges payable by all lessees of the Building to Lessor for one year
(including all Real Property Taxes, insurance costs, all Common Area Operating
Expenses and any scheduled rental increases). Said insurance may provide that in
the event the Lease is terminated by reason of an insured loss, the period of
indemnity for such coverage shall be extended beyond the date of the completion
of repairs or replacement of the Premises, to provide for one full year's loss
of rental revenues from the date of any such loss. Said insurance shall contain
an agreed valuation provision in lieu of any co-insurance clause, and the amount
of coverage shall be adjusted annually to reflect the projected rental income,
Real Property Taxes, insurance premium costs and other expenses, if any,
otherwise payable, for the next 12-month period. Common Area Operating Expenses
shall include any deductible amount in the event of such loss.
(c) ADJACENT PREMISES. Lessee shall pay for any increase in the
premiums for the property insurance of the Building and for the Common Areas or
other buildings in the Industrial Center if said increase is caused by Lessee's
acts, omissions, use or occupancy of the Premises.
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(d) LESSEE'S IMPROVEMENTS. Since Lessor is the Insuring Party,
Lessor shall not be required to insure Lessee-Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease.
8.4. LESSEE'S PROPERTY INSURANCE. Subject to the requirements of
Paragraph 8.5, Lessee at its cost shall either by separate policy or, at
Lessor's option, by endorsement to a policy already carried, maintain insurance
coverage on all of Lessee's personal property, Trade Fixtures and Lessee-Owned
Alterations and Utility Installations in, on, or about the Premises similar in
coverage to that carried by Lessor as the Insuring Party under Paragraph 8.3(a).
Such insurance shall be full replacement cost coverage with a deductible not to
exceed $2,500 per occurrence. The proceeds from any such insurance shall be
used by Lessee for the replacement of personal property and the restoration of
Trade Fixtures and Lessee-Owned Alterations and Utility Installations. Upon
request from Lessor, Lessee shall provide Lessor with written evidence that such
insurance is in force.
8.5 INSURANCE POLICIES. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises are
located, and maintaining during the policy term a "General Policyholders Rating"
of at least B+, V, or such other rating as may be required by a Lender, as set
forth in the most current issue of "Best's Insurance Guide." Lessee shall not do
or permit to be done anything which shall invalidate the insurance policies
referred to in this Paragraph 8. Lessee shall cause to be delivered to Lessor,
within seven (7) days after the earlier of the Early Possession Date or the
Commencement Date, certified copies of, or certificates evidencing the existence
and amounts of, the insurance required under Paragraph 8.2(a) and 8.4. No such
policy shall be cancelable or subject to modification except after thirty (30)
days' prior written notice to Lessor. Lessee shall at least thirty (30) days
prior to the expiration of such policies, furnish Lessor with evidence of
renewals or "insurance binders" evidencing renewal thereof, or Lessor may order
such insurance and charge the cost thereof to Lessee, which amount shall be
payable by Lessee to Lessor upon demand.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor each hereby release and relieve the other, and waive
their entire right to recover damages (whether in contract or in tort) against
the other, for loss or damage to their property arising out of or incident to
the perils required to be insured against under Paragraph 8. The effect of such
releases and waivers of the right to recover damages shall not be limited by the
amount of insurance carried or required, or by any deductibles applicable
thereto. Lessor and Lessee agree to have their respective insurance companies
issuing property damage insurance waive any right to subrogation that such
companies may have against Lessor or Lessee, as the case may be, so long as the
insurance is not invalidated thereby.
8.7 INDEMNITY. Except for Lessor's gross negligence and willful
misconduct and/or breach of express warranties, Lessee shall indemnify,
protect, defend and hold harmless the Premises, Lessor and its agents,
Lessor's master or ground Lessor, partners and Lenders, from and against any
and all claims, loss of rents and/or damages, costs, liens, judgments,
penalties, loss of permits, attorneys' and consultants' fees, expenses and/or
liabilities arising out of, involving, or in connection with, the occupancy
of the Premises by Lessee, the conduct of Lessee's business, any act,
omission or neglect of Lessee, its agents, contractors, employees or
invitees, and out of any Default or Breach by Lessee in the performance in a
timely manner of any obligation on Lessee's part to be performed under this
Lease. The foregoing shall include, but not be limited to, the defense or
pursuit of any claim or any action or proceeding involved therein, and
whether or not (in the case of claims made against Lessor) litigated and/or
reduced to judgment. In case any action or proceeding be brought against
Lessor by reason of any of the foregoing matters, Lessee upon notice from
Lessor shall defend the same at Lessee's expense by counsel reasonably
satisfactory to Lessor and Lessor shall cooperate with Lessee in such
defense. Lessor need not have first paid any such claim in order to be so
indemnified.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures, or from any other
cause, whether said injury or damage results from conditions arising upon the
Premises or upon other portions of the Building of which the Premises are a
part, from other sources or places, and regardless of whether the cause of such
damage or injury or the means of repairing the same is accessible or not. Lessor
shall not be liable for any damages arising from any act or neglect of any other
lessee of Lessor nor from the failure by Lessor to enforce the provisions of any
other lease in the Industrial Center. Notwithstanding Lessor's negligence or
breach of this Lease, Lessor shall under no circumstances be liable for injury
to Lessee's business or for any loss of income or profit therefrom.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to
the Premises, other than Lessee-Owned Alterations and Utility Installations, the
repair cost of which damage or destruction is less than fifty percent (50%) of
the then Replacement Cost (as defined in Paragraph 9.1(d)) of the Premises
(excluding Lessee-Owned Alterations and Utility Installations and Trade
Fixtures) immediately prior to such damage or destruction.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction
to the Premises, other than Lessee-Owned Alterations and Utility Installations,
the repair cost of which damage or destruction is fifty percent (50%) or more of
the then Replacement Cost of the Premises (excluding Lessee-Owned Alterations
and Utility Installations and Trade Fixtures) immediately prior to such damage
or destruction. In addition, damage or destruction to the Building, other than
Lessee-Owned Alterations and Utility Installations and Trade Fixtures of any
lessees of the Building, the cost of which damage or destruction is fifty
percent (50%) or more of the then Replacement Cost (excluding Lessee-Owned
Alterations and Utility Installations and Trade Fixtures of any lessees of the
Building) of the Building shall, at the option of Lessor, be deemed to be
Premises Total Destruction.
(c) "INSURED LOSS" shall mean damage or destruction to the
Premises, other than Lessee-Owned Alterations and Utility Installations and
Trade Fixtures, which was caused by an event required to be covered by the
insurance described in Paragraph 8.3(a) irrespective of any deductible amounts
or coverage limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the
Improvements owned by Lessor at the time of the occurrence to their condition
existing immediately prior thereto, including demolition, debris removal and
upgrading required by the operation of applicable building codes, ordinances or
laws, and without deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 PREMISES PARTIAL DAMAGE - INSURED LOSS. If Premises Partial
Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's
expense, repair such damage (but not Lessee's Trade Fixtures or Lessee-Owned
Alterations and Utility Installations) as soon as reasonably possible and
this Lease shall continue in full force and effect. In the event, however,
that there is a shortage of Insurance proceeds and such shortage is due to
the fact that, by reason of the unique nature of the improvements in the
Premises, full replacement cost insurance coverage was not commercially
reasonable and available, Lessor shall have no obligation to pay for the
shortage in insurance proceeds or to fully restore the unique aspects of the
Premises unless Lessee provides Lessor with the funds to cover same, or
adequate assurance thereof, within ten (10) days following receipt of written
notice of such shortage and request therefor. If Lessor receives said funds
or adequate assurance thereof within said ten (10) day period, Lessor shall
complete them as soon as reasonably possible and this Lease shall remain in
full force and effect. If Lessor does not receive such funds or assurance
within said period, Lessor may nevertheless elect by written notice to Lessee
within ten (10) days thereafter to make such restoration and repair as is
commercially reasonable with Lessor paying any shortage in proceeds, in which
case this Lease shall remain in full force and effect. If Lessor does not
receive such funds or assurance within and repair, then such ten (10) day
period, and if Lessor does not so elect to restore this Lease shall terminate
sixty (60) days following the occurrence of the damage destruction. Unless
otherwise agreed, Lessee shall in no event have any right to reimbursement
from Lessor for any funds contributed by Lessee to repair any such damage or
destruction. Premises Partial Damage due to flood or earthquake shall be
subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that
there may be some insurance coverage, but the net proceeds of any such
insurance shall be made available for the repairs if made by either Party.
9.3 PARTIAL DAMAGE - UNINSURED LOSS. If Premises Partial Damage that is
not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect), Lessor may at Lessor's
option, either (i) repair such damage as soon as reasonably possible at Lessor's
expense, in which event this Lease shall continue in full force and effect, or
(ii) give written notice to Lessee within thirty (30) days after receipt by
Lessor of knowledge of the occurrence of such damage of Lessor's desire to
terminate this Lease as of the date sixty (60) days following the date of such
notice. In the event Lessor elects to give such notice of Lessor's intention to
terminate this Lease, Lessee shall have the right within ten (10) days after the
receipt of such notice to give written notice to Lessor of Lessee's commitment
to pay for the repair of such damage totally at Lessee's expense and without
reimbursement from Lessor. Lessee shall provide Lessor with the required funds
or satisfactory assurance thereof within thirty (30) days following such
commitment from Lessee. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such repairs as soon as reasonably
possible after the required funds are available. If Lessee does not give such
notice and provide the funds or assurance thereof within the times specified
above, this Lease shall terminate as of the date specified in Lessor's notice
of termination.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an Insured Loss or was caused by a negligent or willful act of
Lessee. In the event, however, that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 9.7.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6)
months of the term of this Lease there is damage for which the cost to repair
exceeds one month's Base Rent, whether or not an Insured Loss, Lessor may, at
Lessor's option, terminate this Lease effective sixty (60) days following the
date of occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however, if Lessee at that time has an exercisable option to
extend this Lease or to purchase the Premises, then Lessee may preserve this
Lease by (a) exercising such option, and (b) providing Lessor with any shortage
in insurance proceeds (or adequate assurance thereof) needed to make the repairs
on or before the earlier of (i) the date which is ten (10) days after Lessee's
receipt of Lessor's written notice purporting to terminate this Lease, or (ii)
the day prior to the date upon which such option expires. If Lessee duly
exercises such option during such period and provides Lessor with funds (or
adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor
shall, at Lessor's expense repair such damage as soon as reasonably possible and
this Lease shall continue in full force and effect. If Lessee fails to exercise
such option and provide such funds or assurance during such period, then this
Lease shall terminate as of the date set forth in the first sentence of this
Paragraph 9.5.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of (i) Premises Partial Damage or (ii)
Hazardous Substance Condition for which Lessee is not legally responsible,
the Base Rent, Common Area Operating Expenses and other charges, if any,
payable by Lessee hereunder for the period during which such damage or
condition, its repair, remediation or restoration continues, shall be abated
in proportion to the degree to which Lessee's use of the Premises is
impaired, but not in excess of proceeds from insurance required to be carried
under Paragraph 8.3(b). Except for abatement of Base Rent, Common Area
Operating Expenses and other charges, if any, as aforesaid, all other
obligations of Lessee hereunder shall be performed by Lessee, and Lessee
shall have no claim against Lessor for any damage suffered by reason of any
such damage, destruction, repair, remediation or restoration.
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(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises within
ninety (90) days after such obligation shall accrue, Lessee may, at any time
prior to the commencement of such repair or restoration, give written notice to
Lessor and to any Lenders of which Lessee has actual notice of Lessee's election
to terminate this Lease on a date not less than sixty (60) days following the
giving of such notice. If Lessee gives such notice to Lessor and such Lenders
and such repair or restoration is not commenced within thirty (30) days after
receipt of such notice, this Lease shall terminate as of the date specified in
said notice. If Lessor or a Lender commences the repair or restoration of the
Premises within thirty (30) days after the receipt of such notice, this Lease
shall continue in full force and effect. "COMMENCE" as used in this Paragraph
9.6 shall mean either the unconditional authorization of the preparation of the
required plans, or the beginning of the actual work on the Premises, whichever
occurs first.
9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable
Requirements and this Lease shall continue in full force and effect, but subject
to Lessor's rights under Paragraph 6.2(c) and Paragraph 13), Lessor may at
Lessor's option either (i) investigate and remediate such Hazardous Substance
Condition, if required, as soon as reasonably possible at Lessor's expense, in
which event this Lease shall continue in full force and effect, or (ii) if the
estimated cost to investigate and remediate such condition exceeds twelve (12)
times the then monthly Base Rent or $100,000 whichever is greater, give written
notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of
the occurrence of such Hazardous Substance Condition of Lessor's desire to
terminate this Lease as of the date sixty (60) days following the date of such
notice. In the event Lessor elects to give such notice of Lessor's intention to
terminate this Lease, Lessee shall have the right within ten (10) days after the
receipt of such notice to give written notice to Lessor of Lessee's commitment
to pay for the excess costs of (a) investigation and remediation of such
Hazardous Substance Condition to the extent required by Applicable Requirements,
over (b) an amount equal to twelve (12) times the then monthly Base Rent or
$100,000, whichever is greater. Lessee shall provide Lessor with the funds
required of Lessee or satisfactory assurance thereof within thirty (30) days
following said commitment by Lessee. In such event this Lease shall continue in
full force and effect, and Lessor shall proceed to make such investigation and
remediation as soon as reasonably possible after the required funds are
available. If Lessee does not give such notice and provide the required funds
or assurance thereof within the time period specified above, this Lease shall
terminate as of the date specified in Lessor's notice of termination.
9.8 TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this Paragraph 9, Lessor shall return to Lessee any advance payment
made by Lessee to Lessor and so much of Lessee's Security Deposit as has not
been, or is not then required to be, used by Lessor under the terms of this
Lease.
9.9 WAIVER OF STATUTES. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
and the Building with respect to the termination of this Lease and hereby
waive the provisions of any present or future statute to the extent it is
inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1 PAYMENT OF TAXES. Lessor shall pay the Real Property Taxes, as
defined in Paragraph 10.2(a), applicable to the Industrial Center, and except as
otherwise provided in Paragraph 10.3, any increases in such amounts over the
Base Real Property Taxes shall be included in the calculation of Common Area
Operating Expenses in accordance with the provisions of Paragraph 4.2.
10.2 REAL PROPERTY TAX DEFINITIONS.
(a) As used herein, the term "REAL PROPERTY TAXES" shall include
any form of real estate tax or assessment, general, special, ordinary or
extraordinary, and any license fee, commercial rental tax, improvement bond or
bonds, levy or tax (other than inheritance, personal income or estate taxes)
imposed upon the Industrial Center by any authority having the direct or
indirect power to tax, including any city, state or federal government, or any
school, agricultural, sanitary, fire, street, drainage, or other improvement
district thereof, levied against any legal or equitable interest of Lessor in
the Industrial Center or any portion thereof, Lessor's right to rent or other
income therefrom, and/or Lessor's business of leasing the Premises. The term
"REAL PROPERTY TAXES" shall also include any tax, fee, levy, assessment or
charge, or any increase therein, imposed by reason of events occurring, or
changes in Applicable Law taking effect, during the term of this Lease,
including but not limited to a change in the ownership of the Industrial Center
or in the improvements thereon, the execution of this Lease, or any
modification, amendment or transfer thereof, and whether or not contemplated by
the Parties.
(b) As used herein, the term "BASE REAL PROPERTY TAXES" shall be
the amount of Real Property Taxes, which are assessed against the Premises,
Building or Common Areas in the calendar year during which the Lease is
executed. In calculating Real Property Taxes for any calendar year, the Real
Property Taxes for any real estate tax year shall be included in the calculation
of Real Property Taxes for such calendar year based upon the number of days
which such calendar year and tax year have in common.
10.3 ADDITIONAL IMPROVEMENTS. Common Area Operating Expenses shall not
include Real Property Taxes specified in the tax assessor's records and work
sheets as being caused by additional improvements placed upon the Industrial
Center by other lessees or by Lessor for the exclusive enjoyment of such other
lessees. Notwithstanding Paragraph 10.1 hereof, Lessee shall, however, pay to
Lessor at the time Common Area Operating Expenses are payable under Paragraph
4.2, the entirety of any increase in Real Property Taxes if assessed solely by
reason of Alterations, Trade Fixtures or Utility Installations placed upon the
Premises by Lessee or at Lessee's request.
10.4 JOINT ASSESSMENT. If the Building is not separately assessed, Real
Property Taxes for all of the land and improvements included within the tax
parcel assessed, such proportion to be determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other information as
may be reasonably available. Lessor's reasonable determination thereof, in good
faith, shall be conclusive.
10.5 LESSEE'S PROPERTY TAXES. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or stored within the Industrial Center. When
possible, Lessee shall cause its Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all other personal
property to be assessed and billed separately from the real property of Lessor.
If any of Lessee's said property shall be assessed with Lessor's real property,
Lessee shall pay Lessor the taxes attributable to Lessee's property within ten
(10) days after receipt of a written statement setting forth the taxes
applicable to Lessee's property.
11. UTILITIES. Lessee shall pay directly for all utilities and services
supplied to the Premises, including but not limited to electricity, telephone,
security, gas and cleaning of the Premises, together with any taxes thereon. If
any such utilities or services are not separately metered to the Premises or
separately billed to the Premises, Lessee shall pay to Lessor a reasonable
proportion to be determined by Lessor of all such charges jointly metered or
billed with other premises in the Building, in the manner and within the time
periods set forth in Paragraph 4.2(d).
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively, "assign") or
sublet all or any part of Lessee's interest in this Lease or in the Premises
without Lessor's prior written consent given under and subject to the terms of
Paragraph 36.
(b) A change in the control of Lessee shall constitute an
assignment requiring Lessor's consent. The transfer, on a cumulative basis, of
twenty-five percent (25%) or more of the voting control of Lessee shall
constitute a change in control for this purpose. See Paragraph 59 attached
herein.
(c) The involvement of Lessee or its assets in any transaction, or
series of transactions (by way of merger, sale, acquisition, financing,
refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal
assignment or hypothecation of this Lease or Lessee's assets occurs, which
results or will result in a reduction of the Net Worth of Lessee, as hereinafter
defined, by an amount equal to or greater than twenty-five percent (25%) of
such Net Worth of Lessee as it was represented to Lessor at the time of full
execution and delivery of this Lease or at the time of the most recent
assignment to which Lessor has consented, or as it exists immediately prior to
said transaction or transactions constituting such reduction, at whichever time
said Net Worth of Lessee was or is greater, shall be considered an assignment of
this Lease by Lessee to which Lessor may reasonably withhold its consent. "NET
WORTH OF LESSEE" for purposes of this Lease shall be the net worth of Lessee
(excluding any Guarantors) established under generally accepted accounting
principles consistently applied.
(d) An assignment or subletting of Lessee's interest in this Lease
without Lessor's specific prior written consent shall, at Lessor's option, be a
Default curable after notice per Paragraph 13.1, or a non-curable Breach without
the necessity of any notice and grace period. If Lessor elects to treat such
unconsented to assignment or subletting as a non-curable Breach, Lessor shall
have the right to either: (i) terminate this Lease, or (ii) upon thirty (30)
days' written notice ("LESSOR'S NOTICE"), increase the monthly Base Rent for the
Premises to the greater of the then fair market rental value of the Premises, as
reasonably determined by Lessor, or one hundred ten percent (110%) of the Base
Rent then in effect. Pending determination of the new fair market rental value,
if disputed by Lessee, Lessee shall pay the amount set forth in Lessor's Notice,
with any overpayment credited against the next installment(s) of Base Rent
coming due, and any underpayment for the period retroactively to the effective
date of the adjustment being due and payable immediately upon the determination
thereof. Further, in the event of such Breach and rental adjustment, (i) the
purchase price of any option to purchase the Premises held by Lessee shall be
subject to similar adjustment to the then fair market value as reasonably
determined by Lessor (without the Lease being considered an encumbrance or any
deduction for depreciation or obsolescence, and considering the Premises at its
highest and best use and in good condition) or one hundred ten percent (110%) of
the price previously in effect, (ii) any index-oriented rental or price
adjustment formulas contained in this Lease shall be adjusted to require that
the base index be determined with reference to the index applicable to the time
of such adjustment, and (iii) any fixed rental adjustments scheduled during the
remainder of the Lease term shall be increased in the same ratio as the new
rental bears to the Base Rent in effect immediately prior to the adjustment
specified in Lessor's Notice.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor
shall be limited to compensatory damages and/or injunctive relief.
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or subletting
shall not (i) be effective without the express written assumption by such
assignee or sublessee of the obligations of Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, nor (iii) alter the primary
liability of Lessee for the payment of Base Rent and other sums due Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval of
an assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of any rent for performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for the Default or Breach by
Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or to
any subsequent or successive assignment or subletting by the assignee or
sublessee. However, Lessor may consent to subsequent sublettings and assignments
of the sublease or any amendments or modifications thereto without notifying
Lessee or anyone else liable under this Lease or the sublease and without
obtaining their consent, and such action shall not relieve such persons from
liability under this Lease or the sublease.
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(d) In the event of any Default or Breach of Lessee's obligation
under this Lease, Lessor may proceed directly against Lessee, any Guarantors
or anyone else responsible for the performance of the Lessee's obligations
under this Lease, including any sublessee, without first exhausting Lessor's
remedies against any other person or entity responsible therefor to Lessor,
or any security held by Lessor.
(e) Each request for consent to an assignment or subletting shall
be in writing, accompanied by information relevant to Lessor's determination
as to the financial and operational responsibility and appropriateness of the
proposed assignee or sublessee, including but not limited to the intended use
and/or required modification of the Premises, if any, together with a
non-refundable deposit of $250 plus legal review not to exceed two (2)
billable hours or ten percent (10%) of the monthly Base Rent applicable to
the portion of the Premises which is the subject of the proposed assignment
or sublease, whichever is greater, as reasonable consideration for Lessor's
considering and processing the request for consent. Lessee agrees to provide
Lessor with such other or additional information and/or documentation as may
be reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such sublease, be
deemed, for the benefit of Lessor, to have assumed and agreed to conform and
comply with each and every term, covenant, condition and obligation herein to
be observed or performed by Lessee during the term of said assignment or
sublease, other than such obligations as are contrary to or inconsistent with
provisions of an assignment or sublease to which Lessor has specifically
consented in writing.
(g) The occurrence of a transaction described in Paragraph 12.2(c)
shall give Lessor the right (but not the obligation) to require that the
Security Deposit be increased by an amount equal to three (3) times the then
monthly Base Rent, and Lessor may make the actual receipt by Lessor of the
Security Deposit increase a condition to Lessor's consent to such
transaction.
(h) Lessor, as a condition to giving its consent to any assignment
or subletting, may require that the amount and adjustment schedule of the
rent payable under this Lease be adjusted to what is then the market value
and/or adjustment schedule for property similar to the Premises as then
constituted, as determined by Lessor.
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all
or any part of the Premises and shall be deemed included in all subleases
under this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease of all or a
portion of the Premises heretofore or hereafter made by Lessee, and Lessor
may collect such rent and income and apply same toward Lessee's obligations
under this Lease; provided, however, that until a Breach (as defined in
Paragraph 13.1) shall occur in the performance of Lessee's obligations under
this Lease, Lessee may, except as otherwise provided in this Lease, receive,
collect and enjoy the rents accruing under such sublease. Lessor shall not,
by reason of the foregoing provision or any other assignment of such sublease
to Lessor, nor by reason of the collection of the rents from a sublessee, be
deemed liable to the sublessee for any failure of Lessee to perform and
comply with any of Lessee's obligations to such sublessee under such
Sublease. Lessee hereby irrevocably authorizes and directs any such
sublessee, upon receipt of a written notice from Lessor stating that a Breach
exists in the performance of Lessee's obligations under this Lease, to pay to
Lessor the rents and other charges due and to become due under the sublease.
Sublessee shall rely upon any such statement and request from Lessor and
shall pay such rents and other charges to Lessor without any obligation or
right to inquire as to whether such Breach exists and notwithstanding any
notice from or claim from Lessee to the contrary. Lessee shall have no right
or claim against such sublessee, or, until the Breach has been cured, against
Lessor, for any such rents and other charges so paid by said sublessee to
Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any
obligation to do so, may require any sublessee to attorn to Lessor, in which
event Lessor shall undertake the obligations of the sublessor under such
sublease from the time of the exercise of said option to the expiration of
such sublease; provided, however, Lessor shall not be liable for any prepaid
rents or security deposit paid by such sublessee to such sublessor or for any
other prior defaults or breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor
under a sublease shall also require the consent of Lessor herein.
(d) No sublessee under a sublease approved by Lessor shall further
assign or sublet all or any part of the Premises without Lessor's prior
written consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach
by Lessee to the sublessee, who shall have the right to cure the Default of
Lessee within the grace period, if any, specified in such notice. The
sublessee shall have a right of reimbursement and offset from and against
Lessee for any such Defaults cured by the sublessee.
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default, and that Lessor may include the cost of such services and costs in
said notice as rent due and payable to cure said default. A "DEFAULT" by
Lessee is defined as a failure by Lessee to observe, comply with or perform
any of the terms, covenants, conditions or rules applicable to Lessee under
this Lease. A "BREACH" by Lessee is defined as the occurrence of anyone or
more of the following Defaults, and, where a grace period for cure after
notice is specified herein, the failure by Lessee to cure such Default prior
to the expiration of the applicable grace period, and shall entitle Lessor to
pursue the remedies set forth in Paragraphs 13.2 and/or 13.3:
(a) The vacating of the Premises without the intention to reoccupy
same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the
failure by Lessee to make any payment of Base Rent, Lessee's Share of Common
Area Operating Expenses, or any other monetary payment required to be made by
Lessee hereunder as and when due, the failure by Lessee to provide Lessor
with reasonable evidence of insurance or surety bond required under this
Lease, or the failure of Lessee to fulfill any obligation under this Lease
which endangers or threatens life or property, where such failure continues
for a period of three (3) days following written notice thereof by or on
behalf of Lessor to Lessee.
(c) Except as expressly otherwise provided in this Lease, the
failure by Lessee to provide Lessor with reasonable written evidence (in duly
executed original form, if applicable) of (i) compliance with Applicable
Requirements per Paragraph 6.3, (ii) the inspection, maintenance and service
contracts required under Paragraph 7.1(b), (iii) the rescission of an
unauthorized assignment or subletting per Paragraph 12.1, (iv) a Tenancy
Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination
of this Lease per Paragraph 30, (vi) the guaranty of the performance of
Lessee's obligations under this Lease if required under Paragraphs 1.11 and
37, (vii) the execution of any document requested under Paragraph 42
(easements), or (viii) any other documentation or information which Lessor
may reasonably require of Lessee under the terms of this lease, where any
such failure continues for a period of ten (10) days following written notice
by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof
that are to be observed, complied with or performed by Lessee, other than
those described in Subparagraphs 13.1(a), (b) or (c), above, where such
Default continues for a period of thirty (30) days after written notice
thereof by or on behalf of Lessor to Lessee; provided, however, that if the
nature of Lessee's Default is such that more than thirty (30) days are
reasonably required for its cure, then it shall not be deemed to be a Breach
of this Lease by Lessee if Lessee commences such cure within said thirty (30)
day period and thereafter diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the making
by Lessee of any general arrangement or assignment for the benefit of
creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S. Code
Section 101 or any successor statute thereto (unless, in the case of a
petition filed against LESSEE, the same is dismissed within sixty (60) days);
(iii) the appointment of a trustee or receiver to take possession of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where possession is not restored to Lessee within
thirty (30) days; or (iv) the attachment, execution or other judicial seizure
of substantially all of Lessee's assets located at the Premises or of
Lessee's interest in this Lease, where such seizure is not discharged within
thirty (30) days; provided, however, in the event that any provision of this
Subparagraph 13.1(e) is contrary to any applicable law, such provision shall
be of no force or effect, and shall not affect the validity of the remaining
provisions.
(f) The discovery by Lessor that any financial statement of Lessee
or of any Guarantor, given to Lessor by Lessee or any guarantor, was
materially false.
(g) If the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a Guarantor, (ii) the termination of a
Guarantor's liability with respect to this Lease other than in accordance
with the terms of such guaranty, (iii) a Guarantor's becoming insolvent or
the subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the
guaranty, or (v) a Guarantor's breach of its guaranty obligation on an
anticipatory breach basis, and Lessee's failure, within sixty (60) days
following written notice by or on behalf of Lessor to Lessee of any such
event, to provide Lessor with written alternative assurances of security,
which, when coupled with the then existing resources of Lessee, equals or
exceeds the combined financial resources of Lessee and the Guarantors that
existed at the time of execution of this lease.
13.2 REMEDIES. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written
notice to Lessee (or in case of an emergency, without notice), Lessor may at
its option (but without obligation to do so), perform such duty or obligation
on Lessee's behalf, including but not limited to the obtaining of reasonably
required bonds, insurance policies, or governmental licenses, permits or
approvals. The costs and expenses of any such performance by Lessor shall be
due and payable by lessee to Lessor upon invoice therefor. If any check given
to Lessor by Lessee shall not be honored by the bank upon which it is drawn,
Lessor, at its own option, may require all future payments to be made under
this Lease by Lessee to be made only by cashier's check. In the event of a
Breach of this Lease by Lessee (as defined in Paragraph 13.1), with or
without further notice or demand, and without limiting Lessor in the exercise
of any right or remedy which Lessor may have by reason of such Breach, Lessor
may:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate
and Lessee shall immediately surrender possession of the Premises to Lessor.
In such event Lessor shall be entitled to recover from Lessee: (i) the worth
at the time of the award of the unpaid rent which had been earned at the time
of termination; (ii) the worth at the time of award of the amount by which
the unpaid rent which would have been earned after termination until the time
of award exceeds the amount of such rental loss that the Lessee proves could
have been reasonably avoided; (iii) the worth at the time of award of the
amount by which the unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor
for all the detriment proximately caused by the Lessee's failure to perform
its obligations under this Lease or which in the ordinary course of things
would be likely to result therefrom, including but not limited to the cost of
recovering possession of the Premises, expenses of reletting, including
necessary renovation and alteration of the Premises, reasonable attorneys'
fees, and that portion of any leasing commission paid by Lessor in connection
with this Lease applicable to the unexpired term of this Lease. The worth at
the time of award of the amount referred to in provision (iii) of the
immediately preceding sentence shall be computed by discounting such amount
at the discount rate of the Federal Reserve Bank of San Francisco or the
Federal Reserve Bank District in which the Premises are located at the time
of award plus one percent (196). Efforts by Lessor to mitigate damages caused
by Lessee's Default or Breach of this Lease shall not waive Lessor's right to
recover damages under this Paragraph 13.2. If termination of this Lease is
obtained
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through the provisional remedy of unlawful detainer, Lessor shall have the
right to recover in such proceeding the unpaid rent and damages as are
recoverable therein, or Lessor may reserve the right to recover all or any
part thereof in a) separate suit for such rent and/or damages. If a notice
and grace period required under Subparagraph 13.1(b), (c) or (d) was not
previously given, a notice to pay rent or quit, or to perform or quit, as the
case may be, given to Lessee under any statute authorizing the forfeiture of
leases for unlawful detainer shall also constitute the applicable notice for
grace period purposes required by Subparagraph 13.1(b),(c) or (d). In such
case, the applicable grace period under the unlawful detainer statue shall
run concurrently after the one such statutory notice, and the failure of
Lessee to cure the Default within the greater of the two (2) such grace
periods shall constitute both an unlawful detainer and a Breach of this Lease
entitling Lessor to the remedies provided for in this Lease and/or by said
statute.
(b) Continue the Lease and Lessee's right to possession in effect
(in California under California Civil Code Section 1951.4) after Lessee's
Breach and recover the rent as it becomes due, provided Lessee has the right
to sublet or assign, subject only to reasonable limitations. Lessor and
Lessee agree that the limitations on assignment and subletting in this Lease
are reasonable. Acts of maintenance or preservation, efforts to relet the
Premises, or the appointment of a receiver to protect the Lessor's interest
under this Lease, shall not constitute a termination of the Lessee's right to
possession.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located.
(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity provisions of this Lease as to matters
occurring or accruing during the term hereof or by reason of Lessee's
occupancy of the Premises.
13.3 INDUCEMENT RECAPTURE IN EVENT OF BREACH. Any agreement by Lessor
for free or abated rent or other charges applicable to the Premises, or for
the giving or paying by Lessor to or for Lessee of any cash or other bonus,
inducement or consideration for Lessee's entering into this Lease, all of
which concessions are hereinafter referred to as "INDUCEMENT PROVISIONS"
shall be deemed conditioned upon Lessee's full and faithful performance of
all of the terms, covenants and conditions of this Lease to be performed or
observed by Lessee during the term hereof as the same may be extended. Upon
the occurrence of a Breach (as defined in Paragraph 13.1) of this Lease by
Lessee, any such Inducement Provision shall automatically be deemed deleted
from this Lease and of no further force or effect, and any rent, other
charge, bonus, inducement or consideration theretofore abated, given or paid
by Lessor under such an Inducement Provision shall be immediately due and
payable by Lessee to Lessor, and recoverable by Lessor, as additional rent
due under this Lease, notwithstanding any subsequent cure of said Breach by
Lessee. The acceptance by Lessor of rent or the cure of the Breach which
initiated the operation of this Paragraph 13.3 shall not be deemed a waiver
by Lessor of the provisions of thiS Paragraph 13.3 unless specifically so
stated in writing by Lessor at the time of such acceptance.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee
to Lessor of rent and other sums due hereunder will cause Lessor to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed upon
Lessor by the terms of any ground Lease, mortgage or deed of trust covering
the Premises. Accordingly, if any installment of rent or other sum due from
Lessee shall not be received by Lessor or Lessor's designee within ten (10)
days after such amount shall be due, then, without any requirement for notice
to Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%)
of such overdue amount. The parties hereby agree that such late charge
represents a fair and reasonable estimate of the costs Lessor will incur by
reason of late payment by Lessee. Acceptance of such late charge by Lessor
shall in no event constitute a waiver of Lessee's Default or Breach with
respect to such overdue amount, nor prevent Lessor from exercising any of the
other rights and remedies granted hereunder. In the event that a late charge
is payable hereunder, whether or not collected, for three (3) consecutive
installments of Base Rent, then notwithstanding Paragraph 4.1 or any other
provision of this Lease to the contrary, Base Rent shall, at Lessor's option,
become due and payable quarterly in advance.
13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph 13.5, a
reasonable time shall in no event be less than thirty (30) days after receipt
by Lessor, and by any Lender(s) whose name and address shall have been
furnished to Lessee in writing for such purpose, of written notice specifying
wherein such obligation of Lessor has not been performed; provided, however,
that if the nature of Lessor's obligation is such that more than thirty (30)
days after such notice are reasonably required for its performance, then
Lessor shall not be in breach of this Lease if performance is commenced
within such thirty (30) day period and thereafter diligently pursued to
completion.
14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said
power (all of which are herein called "condemnation"), this Lease shall
terminate as to the part so taken as of the date the condemning authority
takes title or possession, whichever first occurs. If more than ten percent
(10%) of the floor area of the Premises, or more than twenty-five percent
(25%) of the portion of the Common Areas designated for Lessee's parking, is
taken by condemnation, Lessee may, at Lessee's option, to be exercised in
writing within ten (10) days after Lessor shall have given Lessee written
notice of such taking (or in the absence of such notice, within ten (10) days
after the condemning authority shall have taken possession) terminate this
Lease as of the date the condemning authority takes such possession. If
Lessee does not terminate this Lease in accordance with the foregoing, this
Lease shall remain in full force and effect as to the portion of the Premises
remaining, except that the Base Rent shall be reduced In the same proportion
as the rentable floor area of the Premises taken bears to the total rentable
floor area of the Premises. No reduction of Base Rent shall occur if the
condemnation does not apply to any portion of the Premises. Any award for the
taking of all or any part of the Premises under the power of eminent domain
or any payment made under threat of the exercise of such power shall be the
property of Lessor, whether such award shall be made as compensation for
diminution of value of the leasehold or for the taking of the fee, or as
severance damages; provided, however, that Lessee shall be entitled to any
compensation, separately awarded to Lessee for Lessee's relocation expenses
and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not
terminated by reason of such condemnation, Lessor shall to the extent of its
net severance damages received, over and above Lessee's Share of the legal
and other expenses incurred by Lessor in the condemnation matter, repair any
damage to the Premises caused by such condemnation authority. Lessee shall be
responsible for the payment of any amount in excess of such net severance
damages required to complete such repair.
16. TENANCY AND FINANCIAL STATEMENTS. 16.1 TENANCY STATEMENT. Each Party
(as "RESPONDING PARTY") shall within ten (10) days after written notice from
the other party (the "REQUESTING PARTY") execute, acknowledge and deliver to
the Requesting Party a statement in writing in A form similar to the then
most current "TENANCY STATEMENT" form published by the American Industrial
Real Estate Association, plus such additional information, confirmation
and/or statements as may be reasonably requested by the Requesting Party.
16.2 FINANCIAL STATEMENT. If Lessor desires to finance, refinance, or
sell the Premises or the Building, or any part thereof, Lessee and all
Guarantors shall deliver to any potential lender or purchaser designated by
Lessor such financial statements of Lessee and such Guarantors as may be
reasonably required by such lender or purchaser, including but not limited to
Lessee's financial statements for the past three (3) years. All such
financial statements shall be received by Lessor and such lender or purchaser
in confidence and shall be used only for the purposes herein set forth.
17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the
owner or owners at the time in question of the fee title to the Premises. In
the event of a transfer of Lessor's title or interest in the Premises or in
this Lease, Lessor shall deliver to the transferee or assignee (in cash or by
credit) any unused Security Deposit held by Lessor at the time of such
transfer or assignment. Except as provided in Paragraph 15.3, upon such
transfer or assignment and delivery of the Security Deposit, as aforesaid,
the prior Lessor shall be relieved of all liability with respect to the
obligations and/or covenants under this Lease thereafter to be performed by
the Lessor. Subject to the foregoing, the obligations and/or covenants in
this Lease to be performed by the Lessor shall be binding only upon the
Lessor as herein above defined.
18. SEVERABILITY. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within ten (10)
days following the date on which it was due, shall bear interest from the
date due at the prime rate charged by the largest state chartered bank in the
state in which the Premises are located plus four percent (4%) per annum, but
not exceeding the maximum rate allowed by law, in addition to the potential
late charge provided for in Paragraph 13.4.
20. TIME OF ESSENCE. Time is of the essence with respect to the performance
of all obligations to be performed or observed by the parties under this
Lease.
21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the
terms of this Lease are deemed to be rent.
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23. NOTICES.
23.1 NOTICE REQUIREMENTS. All notices required or permitted
by this Lease shall be in writing and may be delivered in person (by hand or
by messenger or courier service) or may be sent by regular, certified or
registered mail or U.S. Postal Service Express Mail, with postage prepaid, or
by facsimile transmission during normal business hours, and shall be deemed
sufficiently given if served in a manner specified in this Paragraph 23. The
addresses noted adjacent to a Party's signature on this Lease shall be that
Party's address for delivery or mailing of notice purposes. Either Party may
by written notice to the other specify a different address for notice
purposes, except that upon Lessee's taking possession of the Premises, the
Premises shall constitute Lessee's address for the purpose of mailing or
delivering notices to Lessee. A copy of all notices required or permitted to
be given to Lessor hereunder shall be concurrently transmitted to such party
or parties at such addresses as Lessor may from time to time hereafter
designate by written notice to Lessee.
23.2 DATE OF NOTICE. Any notice sent by registered or certified mail, return
receipt requested, shall be deemed given on the date of delivery shown on the
receipt card, or if no delivery date is shown, the postmark thereon. If sent by
regular mail, the notice shall be deemed given forty-eight (48) hours after the
same is addressed as required herein and mailed with postage prepaid. Notices
delivered by United States Express Mail or overnight courier that guarantees
next day delivery shall be deemed given twenty-four (24) hours after delivery of
the same to the United States Postal Service or courier. If any notice is
transmitted by facsimile transmission or similar means, the same shall be deemed
served or delivered upon telephone or facsimile confirmation of receipt of the
transmission thereof, provided a copy is also delivered via delivery or mail. If
notice is received on a Saturday or a Sunday or a legal holiday, it shall be
deemed received on the next business day.
24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant
or condition hereof by Lessee, shall be deemed a waiver of any other term,
covenant or condition hereof, or of any subsequent Default or Breach by Lessee
of the same or any other term, covenant or condition hereof. Lessor's consent
to, or approval of, any such act shall not be deemed to render unnecessary the
obtaining of Lessor's consent to, or approval of, any subsequent or similar act
by Lessee, or be construed as the basis of an estoppel to enforce the provision
or provisions of this Lease requiring such consent. Regardless of Lessor's
knowledge of a Default or Breach at the time of accepting rent, the acceptance
of rent by Lessor shall not be a waiver of any Default or Breach by Lessee of
any provision hereof. Any payment given Lessor by Lessee may be accepted by
Lessor on account of moneys or damages due Lessor, notwithstanding any
qualifying statements or conditions made by Lessee in connection therewith,
which such statements and/or conditions shall be of no force or effect
whatsoever unless specifically agreed to in writing by Lessor at or before the
time of deposit of such payment.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease. In the event that Lessee holds over in violation of this Paragraph
26 then the Base Rent payable from and after the time of the expiration or
earlier termination of this Lease shall be increased to two hundred percent
(200%) of the Base Rent applicable during the month immediately preceding such
expiration or earlier termination. Nothing contained herein shall be construed
as a consent by Lessor to any holding over by Lessee.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the Parties,
their personal representatives, successors and assigns and be governed by the
laws of the State in which the Premises are located. Any litigation between the
Parties hereto concerning this Lease shall be initiated in the county in which
the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or
other hypothecation or security device (collectively, "Security Device"), now
or hereafter placed by Lessor upon the real property of which the Premises
are a part, to any and all advances made on the security thereof, and to all
renewals, modifications, consolidations, replacements and extensions thereof.
Lessee agrees that the Lenders holding any such Security Device shall have no
duty, liability or obligation to perform any of the obligations of Lessor
under this Lease, but that in the event of Lessor's default with respect to
any such obligation, Lessee will give any Lender whose name and address have
been furnished Lessee in writing for such purpose notice of Lessor's default
pursuant to Paragraph 13.5. If any Lender shall elect to have this Lease
and/or any Option granted hereby superior to the lien of its Security Device
and shall give written notice thereof to Lessee, this Lease and such Options
shall be deemed prior to such Security Device, notwithstanding the relative
dates of the documentation or recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device,
and that in the event of such foreclosure, such new owner shall not: (i) be
liable for any act or omission of any prior lessor or with respect to events
occurring prior to acquisition of ownership, (ii) be subject to any offsets
or defenses which Lessee might have against any prior lessor, or (iii) be
bound by prepayment of more than one month's rent.
30.3 NON-DISTURBANCE. With respect to Security Devices entered into by
Lessor after the execution of this lease, Lessee's subordination of this
Lease shall be subject to receiving assurance (a "non-disturbance agreement")
from the Lender that Lessee's possession and this Lease, including any
options to extend the term hereof, will not be disturbed so long as Lessee is
not in Breach hereof and attorns to the record owner of the Premises.
30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall be
effective without the execution of any further documents; provided, however,
that upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any such
subordination or non-subordination, attornment and/or non-disturbance agreement
as is provided for herein.
31. ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding to
enforce the terms hereof or declare rights hereunder, the Prevailing Party (as
hereafter defined) in any such proceeding, action, or appeal thereon, shall be
entitled to reasonable attorneys' fees. Such fees may be awarded in the same
suit or recovered in a separate suit, whether or not such action or proceeding
is pursued to decision or judgment. The term "Prevailing Party" shall include,
without limitation, a Party or Broker who substantially obtains or defeats the
relief sought, as the case may be, whether by compromise, settlement, judgment,
or the abandonment by the other Party or Broker of its claim or defense. The
attorneys' fee award shall not be computed in accordance with any court fee
schedule, but shall be such as to fully reimburse all attorneys' fees reasonably
incurred. Lessor shall be entitled to attorneys' fees, costs and expenses
incurred in preparation and service of notices of Default and consultations in
connection therewith, whether or not a legal action is subsequently commenced in
connection with such Default or resulting Breach. Broker(s) shall be intended
third party beneficiaries of this Paragraph 31.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall
have the right to enter the Premises at any time, in the case of an emergency,
and otherwise at reasonable times for the purpose of showing the same to
prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises or to the Building, as Lessor
may reasonably deem necessary. Lessor may at any time place on or about the
Premises or Building any ordinary "For Sale" signs and Lessor may at any time
during the last one hundred eighty (180) days of the term hereof place on or
about the Premises any ordinary "For Lease" signs. All such activities of Lessor
shall be without abatement of rent or liability to Lessee.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. SIGNS. Lessee shall not place any sign upon the exterior of the Premises or
the Building, except that Lessee may, with Lessor's prior written consent,
install (but not on the roof) such signs as are reasonably required to advertise
Lessee's own business so long as such signs are in a location designated by
Lessor and comply with Applicable Requirements and the signage criteria
established for the Industrial Center by Lessor. The installation of any sign on
the Premises by or for Lessee shall be subject to the provisions of Paragraph
7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations).
Unless otherwise expressly agreed herein, Lessor reserves all rights to the use
of the roof of the Building, and the right to install advertising signs on the
Building, including the roof, which do not unreasonably interfere with the
conduct of Lessee's business; Lessor shall be entitled to all revenues from such
advertising signs.
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, Lessor shall, in the event of any such surrender,
termination or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election to the contrary by written notice to the holder
of any such lesser interest, shall constitute Lessor's election to have such
event constitute the termination of such interest.
36. CONSENTS.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided
herein, wherever in this Lease the consent of a Party is required to an act by
or for the other Party, such consent shall not be unreasonably withheld or
delayed. Lessor's actual reasonable costs and expenses (including but not
limited to architects', attorneys', engineers' and other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent pertaining to this Lease or the Premises, including but not
limited to consents to an assignment a subletting or the presence or use of a
Hazardous Substance, shall be paid by Lessee to Lessor upon receipt of an
invoice and supporting documentation therefor. In addition to the deposit
described In Paragraph 12.2(e), Lessor may, as a condition to considering any
such request by Lessee, require that Lessee deposit with Lessor an amount of
money (in addition to the Security Deposit held under Paragraph 5) reasonably
calculated by Lessor to represent the cost Lessor will incur in considering and
responding to Lessee's request. Any unused portion of said deposit shall be
refunded to Lessee without interest. Lessor's consent to any act, assignment of
this Lease or subletting of the Premises by Lessee shall not constitute an
acknowledgment that no Default or Breach by Lessee of this Lease exists, nor
shall such consent be deemed a waiver of any then existing Default or Breach,
except as may be otherwise specifically stated in writing by Lessor at the time
of such consent.
(b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by Lessee as being reasonable. The failure to specify herein any
particular condition to Lessor's consent shall not preclude the impositions by
Lessor at the time of consent of such further or other conditions as are then
reasonable with reference to the particular matter for which consent is being
given.
37. GUARANTOR.
37.1 FORM OF GUARANTY. If there are to be any Guarantors of this Lease per
Paragraph 1.11, the form of the guaranty to be executed by each such Guarantor
shall be in the form most recently published by the American Industrial Real
Estate Association, and each such Guarantor shall have the same obligations as
Lessee under this lease, including but not limited to the obligation to provide
the Tenancy Statement and information required in Paragraph 16.
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37.2 ADDITIONAL OBLIGATIONS OF GUARANTOR. It shall constitute a Default
of the Lessee under this Lease if any such Guarantor falls or refuses, upon
reasonable request by Lessor to give: (a) evidence of the due execution of
the guaranty called for by this Lease, including the authority of the
Guarantor (and of the party signing on Guarantor's behalf) to obligate such
Guarantor on said guaranty, and resolution of its board of directors
authorizing the making of such guaranty, together with a certificate of
incumbency showing the signatures of the persons authorized to sign on its
behalf, (b) current financial statements of Guarantor as may from time to
time be requested by Lessor, (c) a Tenancy Statement, or (d) written
confirmation that the guaranty is still in effect.
38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises and
the performance of all of the covenants, conditions and provisions on Lessee's
part to be observed and performed under this Lease, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease.
39. OPTIONS.
39.1 DEFINITION. As used in this Lease, the word "Option" has the following
meaning: (a) the right to extend the term of this Lease or to renew this Lease
or to extend or renew any lease that Lessee has on other property of Lessor; (b)
the right of first refusal to lease the Premises or the right of first offer to
lease the Premises or the right of first refusal to lease other property of
Lessor or the right of first offer to lease other property of Lessor; (c) the
right to purchase the Premises, or the right of first refusal to purchase the
Premises, or the right of first offer to purchase the Premises, or the right to
purchase other property of Lessor, or the right of first refusal to purchase
other property of Lessor, or the right of first offer to purchase other property
of Lessor.
39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee in
this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and
cannot be voluntarily or involuntarily assigned or exercised by any person or
entity other than said original Lessee while the original Lessee is in full and
actual possession of the Premises and without the intention of thereafter
assigning or subletting. The Options, if any, herein granted to Lessee are not
assignable, either as a part of an assignment of this Lease or separately or
apart therefrom, and no Option may be separated from this Lease in any manner,
by reservation or otherwise.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple Options to
extend or renew this Lease, a later option cannot be exercised unless the prior
Options to extend or renew this Lease have been validly exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option, notwithstanding
any provision in the grant of Option to the contrary: (i) during the period
commencing with the giving of any notice of Default under Paragraph 13.1 and
continuing until the noticed Default is cured, or (ii) during the period of time
any monetary obligation due Lessor from Lessee is unpaid (without regard to
whether notice thereof is given Lessee), or (iii) during the time Lessee is in
Breach of this Lease, or (iv) In the event that Lessor has given to Lessee three
(3) or more notices of separate Defaults under Paragraph 13.1 during the twelve
(12) month period immediately preceding the exercise of the Option, whether or
not the Defaults are cured.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because at the provisions of Paragraph 39.4(a)
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option. If, after such exercise and during the term of
this Lease, i) Lessee fails to pay to Lessor a monetary obligation of Lessee for
a period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to
Lessee three (3) or more notices of separate Defaults under Paragraph 13.1
during any twelve (12) month period, whether or not the Defaults are cured, or
(iii) if Lessee commits a Breach of this Lease.
40. RULES AND REGULATIONS. Lessee agrees that it will abide by, and keep and
observe all reasonable rules and regulations ("Rules and Regulations") which
Lessor may make from time to time for the management, safety, care, and
cleanliness of the grounds, the parking and unloading of vehicles and the
preservation of good order, as well as for the convenience of other occupants or
tenants of the Building and the Industrial Center and their invitees.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. RESERVATIONS. Lessor reserves the right, from time to time, to grant,
without the consent or joinder of Lessee, such easements, rights of way, utility
raceways, and dedications that Lessor deems necessary, and to cause the
recordation of parcel maps and restrictions, so long as such easements, rights
of way, utility raceways, dedications, maps and restrictions do not reasonably
interfere with the use of the Premises by Lessee. Lessee agrees to sign any
documents reasonably requested by Lessor to effectuate any such easement rights,
dedication, map or restrictions.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay under the provisions of this
Lease.
44. AUTHORITY. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
45. CONFLICT. Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provisions shall be controlled by the typewritten or
handwritten provisions.
46. OFFER. Preparation of this Lease by either Lessor or Lessee or Lessor's
agent or Lessee's agent and submission of same to Lessee or Lessor shall not be
deemed an offer to lease. This Lease is not intended to be binding until
executed and delivered by all Parties hereto.
47. AMENDMENTS. This Lease may be modified only in writing, signed by the
parties in interest at the time of the modification. The Parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an Institutional Insurance company or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the property
of which the Premises are a part.
48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such multiple parties shall be the joint and several
responsibility of all persons or entitles named herein as such Lessor or Lessee.
49. ENVIRONMENTAL COMPLIANCE is attached hereto and is made a part of this
Lease.
50. COMMON AREA OPERATING EXPENSES is attached hereto and is made a part of this
Lease.
51. REPAIRS is attached hereto and is made a part of this Lease
52. PARKING is attached hereto and is made a part of this Lease.
53. EARLY OCCUPANCY is attached hereto and is made a part of this Lease.
54. BASE RENT INCREASE SCHEDULE is attached hereto and is made a part of this
Lease.
55. FIRST OPTION TO RENEW is attached hereto and is made a part of this Lease.
56. SECOND OPTION TO RENEW is attached hereto and is made a part of this Lease.
57. ADDENDUM TO PARAGRAPH 7.4 (b) is attached hereto and is made a part of this
Lease.
58. ADDENDUM TO PARAGRAPH 7.4 (c) is attached hereto and is made a part of this
Lease.
59. ADDENDUM TO PARAGRAPH 12.1(b) is attached hereto and is made a part of this
Lease.
EXHIBITS "A" through "C" are attached hereto and are made a part of this
Lease.
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LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM
AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY
REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH
RESPECT TO THE PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR YOUR
ATTORNEY'S REVIEW AND APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED
TO EVALUATE THE CONDITION OF THE PROPERTY FOR THE POSSIBLE PRESENCE
OF ASBESTOS, UNDERGROUND STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO
REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL
REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKERS OR THEIR
CONTRACTORS, AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL
EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO
WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF
THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS
LEASE. IF THE SUBJECT PROPERTY IS IN A STATE OTHER THAN CALIFORNIA,
AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE
CONSULTED.
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
Executed at: San Diego, California Executed at:
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on: November 15, 1996 on:
--------------------------------- ------------------------------------
By: LESSOR: By: LESSEE:
THE MANUFACTURERS LIFE INSURANCE PHOTOMATRIX CORPORATION
COMPANY
--------------------------------- ------------------------------------
By: /s/ Bruce R. Pearson By: /s/ Suren G. Dutia
--------------------------------- ------------------------------------
Name Printed: Bruce R. Pearson Name Printed: Suren G. Dutia
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Title: Real Estate Director Title: President and CEO
------------------------------ ---------------------------------
Address: 7510 Clairemont Mesa Blvd., Address: 6285 Nancy Ridge Drive
Suite 211
San Diego, CA 922111-1539 San Diego, CA 92121-2245
---------------------------- ----------------------------------------
Telephone: (619) 292-1667 Telephone: (619) 457-5091 x340
-------------------------- -----------------------------
Facsimile: (619) 292-0504 Facsimile: (619) 457-8016
-------------------------- -----------------------------
BROKER: BROKER:
Executed at: Executed at:
------------------------- --------------------------
on: on:
--------------------------------- ------------------------------------
By: By:
--------------------------------- ------------------------------------
Name Printed: Name Printed:
----------------------- --------------------------
Title: Title:
------------------------------ ---------------------------------
Address: Address:
---------------------------- ----------------------------------------
Telephone: ( ) Telephone: ( )
-------------------------- -----------------------------
Facsimile: ( ) Facsimile: ( )
-------------------------- -----------------------------
NOTE: These forms are often modified to meet changing requirements and needs of
the industry. Always write or call to make sure you are utilizing the most
current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 345 So.
Figueroa St., M-1, Los Angeles, CA 90071. (213) 687-8777.
[ CHECKED ]
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[ VERIFIED ]
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MULTI-TENANT - GROSS -11-
- - -C-American Industrial Real Estate Association 1993
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49. ENVIRONMENTAL COMPLIANCE
DEFINITIONS
"CONTAMINANT" means any solid, liquid, gas odor, heat, sound, vibration,
radiation or combination of any of them that may cause:
(i) impairment of the quality of the natural environment for any use that
can be made of it,
(ii) injury or damage to property or to plant or animal life,
(iii) harm or material discomfort to any person,
(iv) an adverse effect on the health of any person,
(v) impairment of the safety of any person,
(vi) any property or plant or animal life to be unfit for use by humans,
(vii) loss of enjoyment of normal use of property, or
(viii) interference with the normal conduct of business, and includes any
biological, chemical or physical agent which is regulated, prohibited,
restricted or controlled under any Environmental Laws.
"ENVIRONMENTAL LAWS" means the common law and all applicable federal, state,
local, municipal, governmental or quasi-governmental laws, by-laws, rules,
regulations, licenses, orders, guidelines, directives, permits, decisions or
requirements concerning occupational or public health and safety or the
environment and any order, injunction, judgment, declaration, notice or demand
issued thereunder.
LESSEE'S COVENANTS, REPRESENTATIONS AND WARRANTIES
l. USE AND OCCUPANCY
(a) The Lessee shall continuously, actively and diligently use and
occupy the Leased Premises only for A GENERAL OFFICE/ASSEMBLY/LIGHT
MANUFACTURING SPACE COMPATIBLE WITH THE CC&R'S AND UNDERLYING
ZONING FOR THE PREMISES THAT DOES NOT CONFLICT WITH ANY EXISTING OR
FUTURE NON-COMPETITIVE USES IN THE PARK and for no other purpose
without prior written consent from the Lessor.
(b) (i) the Lessee shall not permit or suffer the following to be present
at, on or under the Leased Premises:
(1) any Contaminant, including without limitation,
polychlorinated biphynels ("PCBs") or substances containing
PCBs or asbestos or materials containing asbestos;
(2) urea formaldehyde foam insulation; or
(3) underground or above-ground storage tanks or conduits;
unless it has received the prior written consent of the
Lessor which consent may be unreasonably withheld. Any of
the above-noted substances or items which the Lessor gives
written permission to suffer or permit at the Leased
Premises shall be maintained by the Lessee during the
Term, and removed by the Lessee at the expiry or earlier
termination of the Lease, in strict compliance with all
Environmental Laws, at the sole cost and expense of the
Lessee and the Lessee shall indemnify the Lessor from and
against all claims and costs resulting from the presence
of such substances or items at, on or under the Leased
Premises;
(ii) the Lessee hereby covenants, warrants and represents that it
currently conducts and maintains its business and operations,
and shall continue to conduct and maintain its business and
operations at the Leased Premises, so as to comply in all
respects with all present and future laws, regulations,
by-laws, licenses and ordinances including, without limitation,
all Environmental Laws (collectively, "Laws") and shall take
all appropriate actions so as to remain in compliance with
Laws, including obtaining all necessary licenses, permits,
consents and approvals required to operate the Leased Premises
and the business carried out on, at or from the Leased
Premises. The Lessee shall establish and maintain a system to
assure and monitor continued compliance with, and to prevent
the contravention of, Laws (including Environmental Laws),
which system shall include periodic reviews of the compliance
system;
(iii) the Lessee acknowledges that it has inspected the Leased
Premises and has performed tests and studies including, without
limitation, an environmental audit, so as to satisfy itself as
to the state of repair and condition of the Leased Premises and
agrees to accept the Leased Premises in an "as is" condition.
The Lessee acknowledges that its tests and inspections have
indicated that the Leased Premises currently comply with all
Laws (including Environmental Laws). The Lessor will not be
responsible or liable to the Lessee for the state of repair or
condition of the Leased Premises or the compliance or
non-compliance of the Leased Premises with Laws and the Lessee
shall be fully responsible and liable for same in accordance
with the terms of this Lease;
(iv) the Lessee shall notify the Lessor immediately and in
reasonable detail upon discovery of any Contaminant, or receipt
of any claim, notice or communication relating to any
Contaminant, affecting the Leased Premises or any property in
the vicinity of the Leased Premises or if the Lessee becomes
aware of any violation or potential violation by the Lessee of
any Environmental Laws or any warranty, covenant or
representation in this Section l and shall describe therein the
action which the Lessee intends to take with respect to such
matter. Forthwith upon receipt, the Lessee shall send copies to
the Lessor of all orders, approvals or licenses affecting the
Leased Premises and all correspondence with authorities having
jurisdiction or any other person with respect to any
Contaminant or Environmental Laws relating to the Leased
Premises or any property in the vicinity of the Leased
Premises, including, without limitation, results of
environmental tests and reports in the Lessee's possession;
(v) the Lessee covenants at its sole cost and expense to do such
work as is necessary to remedy or prevent the discharge, spill
or location of any Contaminant on, from or under the Leased
Premises or the breach by the Lessee of any Environmental Law
and to remove any Contaminant found at, on or under the Leased
Premises so as to comply with Environmental Laws (such work
being hereinafter referred to as the "Remedial Work"). Prior to
undertaking the Remedial Work, the Lessee shall, at its own
expense, prepare all necessary studies, plans and proposals
with respect to the Remedial Work and submit the same for
approval by the Lessor. The Lessee shall provide all completion
bonds and other security required by the Lessor or the
authorities having jurisdiction and shall carry out the work
required in accordance with such approved plans and in
compliance with all Environmental Laws and the Lessor's
reasonable requirements. The Lessee shall keep the Lessor fully
informed with respect to all aspects of the Remedial Work. The
Lessee further agrees that if the Lessor determines, acting
reasonably, that the Lessee is not diligently commencing or
completing the Remedial Work or that the Building, the Lands,
the Lessor or the Lessor's reputation could be placed in
jeopardy by the quality or method of performance of such
Remedial Work by the Lessee, the Lessor may itself undertake
the Remedial Work or any part thereof at the cost and expense
of the Lessee, which cost shall be paid by the Lessee within 30
days after receipt of an invoice on account thereof. The Lessor
shall be entitled to retain its own consultants to monitor all
aspects of the Remedial Work including the determination of
what Remedial Work is necessary and the Lessee will promptly
reimburse the Lessor for all costs thereof.
(vi) the Lessor or its agents may at any time and from time to time
on 24 hours' prior written notice to the Lessee, enter the
Leased Premises to inspect the Leased Premises and any records
reasonably considered to be relevant to confirm compliance by
the Lessee of all Laws and covenants hereunder or to identify
the existence, nature and extent of any Contaminant on the
Leased Premises and the Lessee's use, storage and disposal of
any Contaminant. The Lessee agrees to cooperate with the Lessor
and its agents in their performance of each such inspection. If
the Lessor, acting reasonably, determines following any such
inspection, that further testing or investigation is required
in order to monitor the Lessee's compliance with all Laws and
covenant's hereunder, the Lessor may required the Lessee, at
the Lessee's expense, to arrange for such testing or
investigation, or may arrange for such testing or investigation
itself, in which case the Lessor's costs of any such testing or
investigation shall be paid by the Lessee to the Lessor within
30 days after receipt of an invoice on account thereof. The
inspections contemplated by this Section 1(b)(vi) include,
without limitation, the right to undertake soil, ground water,
environmental or other tests, measurements or surveys in, on or
below the Leased Premises;
(vii) upon the expiration or earlier termination of this Lease, the
Lessee, at its sole cost and expense, shall obtain and deliver
to the Lessor a certificate from all relevant governmental
authorities to the effect that the Leased Premises are in full
compliance with all Environmental Laws or a written certificate
from an environmental consultant approved by the Lessor to the
same effect; and
(viii) the Lessee shall and does hereby indemnify and save harmless
the Lessor and its successors and assigns and the directors,
officers, employees and agents of the Lessor and its successors
and assigns (collectively the "Indemnitees") from and against
all losses, damages, expenses and costs (including legal costs
as between an attorney and his own client) whatsoever which may
bc suffered by any of the Indemnitees arising from or relating
to the use of the Leased Premises by the Lessee or any breach
by the Lessee of any warranty, covenant or representation in
this Section 1. This indemnity shall survive the expiration or
earlier termination of the Lease. The Lessor shall hold the
benefit of this indemnity in trust for those indemnified
persons who are not parties to this Lease.
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ADDENDUM TO PARAGRAPH 49(i) 1(b)(v)
Notwithstanding the foregoing, Lessee will not be responsible for
contaminants disposed of on this property prior to the occupancy of the
Premises by Lessee. Lessee will be responsible for any contaminants disposed
of on this property by Lessee, Lessee's employees, agents, customers,
contractors, licensees, or invitees.
ADDENDUM TO PARAGRAPH 49(i) 1(b)(vii)
In the event said certification reveals that contaminants have been
disposed of on the Premises by Lessee, Lessee's employees, agents, customers,
contractors, licenses, or invitees, then Lessee shall reimburse Lessor for
the cost of the environmental certification and Lessee shall, at its sole
cost, perform all necessary remedial work per Paragraph 1(b)(v) above.
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50. COMMON AREA OPERATING EXPENSES
Lessee's share of Common Area Operating Expenses as determined by prorata
square footage of the Premises as compared to the total square footage of the
Business Park, which is 190,256 s.f. It is hereby mutually agreed there shall
be no increases of the base rent or common area maintenance costs (CAM's)
during the initial twelve (12) month lease term. Thereafter any increases
over the base year may be passed through to Lessee at its pro rata share, but
in no event may the CAM's increase in excess of five percent (5%) (Taxes and
Insurance costs excepted) over the actual expenses in the previous year.
51. REPAIRS
In the case of air conditioning equipment, maintenance shall include
servicing of equipment at the least four times a year. Such service shall be
provided by a reputable maintenance service company acceptable to Lessor.
Evidence of a service contract shall be provided to Lessor. In the event
Lessee does not obtain such a service contract, Lessee, upon Lessor's
request, agrees to pay Lessor as additional Rent the cost of maintenance
contract for the air conditioning equipment. Said additional Rent shall be
paid monthly along with the Rent stipulated in Paragraph 4 of this lease. The
additional Rent may be adjusted annually to reflect any changes in the
prevailing cost of this service.
52. PARKING
All parking shall be free of charge throughout the lease term and any
lease renewals and/or expansions. Lessee agrees not to overburden the parking
facilities and agrees to cooperate with Lessor and other Lessees in the use
of parking facilities. Lessor reserves the right in its absolute discretion
to determine whether parking facilities are becoming crowded and, in such
event to allocate parking space among Lessee and other Lessees. Lessee shall
not permit business vehicles to be parked or stored in the parking lot that
are not in operable condition and Lessee understands that vehicles may not be
repaired in the parking lot. Lessee and/or employees of the Lessee further
understand that personal vehicles are not permitted to be stored in the
parking lot at any time. Lessee further understands that work conducted
outside the leased premises and/or in the parking lot is not permitted at
anytime.
53. EARLY OCCUPANCY
The Lessee may occupy the Premises early, (herein called "Early
Occupancy"). The Early Occupancy period shall commence upon the Lessor
obtaining a certificate of substantial completion for its work per Exhibit
"C", Improvements, attached hereto. It is a condition that the Lessee shall
comply with the insurance clause per Paragraph 8 of the Lease and shall
provide proof of such insurance to the Lessor prior to taking possession of
the Premises. The Early Occupancy period shall be free of Rent, however, the
Lessee shall transfer the electrical utility into its responsibility prior to
taking possession of the Premises.
54. BASE RENT INCREASE SCHEDULE
(a) The Monthly Rent for the Term of the Lease shall be paid per the
following schedule:
$17,380.00 Per Month - March, 1997 through February, 1998
$17,955.00 Per Month - March, 1998 through February, 1999
$18,550.00 Per Month - March, 1999 through February, 2000
$19,160.00 Per Month - March, 2000 through February, 2001
$19,800.00 Per Month - March, 2001 through February, 2002
$20,360.00 Per Month - March, 2002 through August, 2002
The Months of April, May, June, July, August, September, October and
November, 1997 shall be at one-half (1/2) Rent, which equals $8,690.00 per
month, to offset Lessee's moving expenses.
(b) If, during the first twelve months of the Term, the Lessee
pays the Lessor the unamortized portion of Fifty Thousand and No/100 Dollars
($50,000.00) as a reimbursement for a portion of the cost of the Tenant
Improvements, the Lessor hereby agrees to reduce the above Base Rent Increase
Schedule by One Thousand and No/100 Dollars ($1,000.00) per month throughout
the initial Term certain of the Lease commencing the first day of the month
from the date the reimbursement is paid by the Lessee.
<PAGE>
55. FIRST OPTION TO RENEW
(A) The Lessor covenants with the Lessee that if the Lessee duly and
regularly pays the Rent and any and all amounts required to be paid pursuant
to this Lease and performs each and every covenant, proviso and agreement on
the part of the Lessee to be paid, rendered, observed and performed herein,
the Lessor will at the expiration of the term on written notice by the Lessee
to the Lessor given by the Lessee not less than Six (6) Months prior to the
expiration of the Term, grant to the Lessee a Thirty (30) Month renewal of
Lease of the Leased premises (the "First Renewal Term" on the same general
terms and conditions as in the Lease then, at the commencement of the Renewal
Term, being used by the Lessor for the Building.
(B) The Rent for the First Option to Renew shall be paid according to the
following schedule:
$20,038.00 Per Month - September, 2002 through August, 2003
$20,739.00 Per Month - September, 2003 through August, 2004
$21,465.00 Per Month - September, 2004 through August, 2005
56. SECOND OPTION TO RENEW
(A) The Lessor covenants with the Lessee that if the Lessee duly and
regularly pays the Rent and any and all amounts required to be paid pursuant
to this Lease and performs each and every covenant, proviso and agreement on
the part of the Lessee to be paid, rendered, observed and performed herein,
the Lessor will at the expiration of the First Renewal Term on written notice
by the Lessee to the Lessor given by the Lessee not less than Six (6) Months
notice prior to the expiration of the term, grant to the Lessee a Thirty (30)
Month renewal of Lease of the Leased premises (the "Second Renewal Term") on
the same general terms and conditions as in the Lease then, at the
commencement of the Second Renewal Term, being used by the Lessor for the
Building.
(B) The Rent for the Second Option to Renew shall be paid according to the
following schedule:
$22,216.00 Per Month - September, 2005 through August, 2006
$22,994.00 Per Month - September, 2006 through August, 2007
$23,798.00 Per Month - September, 2007 through August, 2008
(C) Notwithstanding the above, in the event the Lessee does not exercise the
First Option to Renew, then this Second Option to Renew is null and void.
57. ADDENDUM TO PARAGRAPH 7.4(b)
Notwithstanding Paragraph 7.4 (b), the Lessor shall not require the
removal of any Lessee owned alterations that would be consistent with typical
alterations or improvements found in similarly zoned industrial properties
within the Sorrento Valley area as reasonably determined by the Lessor.
58. ADDENDUM TO PARAGRAPH 7.4(c)
Notwithstanding Paragraph 7.4 (c), the Lessee shall be permitted to remove
thefollowing items:
1. Security System
2. Fencing installed within the building
3. Racks and shelves
4. Battery-changing stations (2)
5. Compressor
6. Generator
7. Telephone switch
8. Reception counter
9. Employee lockers
10. Cabinets
11. Vending machines
12. First-aid cabinet
13. Drinking water system
Any area, in, on or about the Premises damaged or adversely affected by
said removal of items as reasonably determining by Lessor shall be repaired
by the Lessee at its sole cost.
<PAGE>
59. ADDENDUM TO PARAGRAPH 12.1(b)
Lessor's approval shall be conditioned, among other things, on Lessor's
receiving adequate assurances of future performance under this Lease,
including extension and/or options to renew, and any sublease or assignment.
In determining the adequacy of such assurances, Lessor may base its decision
on such factors as it deems appropriate, including but not limited to:
(i) that the source of rent and other consideration due under this Lease,
and, in the case of assignment, that the financial condition and
operating performance of the proposed assignee and its guarantors, if
any, shall be similar to the financial condition and operating
performance of Lessor and its guarantors, if any, as of the time
Lessee became the lessee under this Lease;
(ii) that any assumption or assignment of this Lease will not result in
increased cost or expense, or demand for the services and utilities
provided by Lessor pursuant to Section 4.2 hereunder and will not
disturb or be detrimental to other tenants of Lessor;
(iii)that assumption or assignment of such lease will not disrupt any tenant
mix or balance in the Project.
(iv) The assignment or sublease shall be on the same terms and conditions
set forth in the notice given to Lessor;
(v) No assignment or sublease shall be valid and no assignee or sublessee
shall take possession of the Premises or any part thereof until an
executed counterpart of such assignment or sublease has been delivered
to Lessor in a form satisfactory to Lessor;
(vi) No assignee or sublessee shall have a further right to assign or sublet
except on the terms herein contained.
<PAGE>
AMENDMENT NO 1 TO SECURITY AND LOAN AGREEMENT
AND ADDENDUM, EXHIBIT "A," THERETO
This Amendment No. 1 dated as of March 31, 1997 ("Amendment") amends that
certain Security and Loan Agreement dated June 17, 1996 by and between Imperial
Bank ("Bank") and Xscribe Corporation ("Borrower") and the Addendum, Exhibit
"A," (the "Addendum") thereto, of even date as previously amended. (collectively
herein the Security and Loan Agreement and the Addendum are referred to as the
"Agreement") as follows:
1. The name of Borrower shall be changed from Xscribe Corporation to
Photomatrix, Inc. in the Agreement and any documents executed by Borrower
relating thereto.
2 The advance rate on the accounts receivable line of credit as reflected in
Section 1. of the Security and Loan Agreement is amended from 80.000% of
Eligible Accounts to 70.000% of Eligible Accounts.
3. Section 6 e. of the Addendum is deleted in its entirety and. the following
substituted therefor:
" Accounts with respect to international transactions unless insured by
an insurance company acceptable to Bank or covered by letters of credit
issued or confirmed by a bank acceptable to Bank. However. Banks may deem,
at its sole discretion, international accounts eligible on a. case by case
basis."
4. Section 7. of the Addendum is deleted in its entirety and the following
substituted therefor:
" All financial covenants and financial information referenced herein
shall be interpreted and prepared in accordance with generally accepted
accounting principles applied on a basis consistent with previous years.
Compliance with financial covenants shall be calculated and monitored on a
monthly basis."
5. Section 8.a. of the Addendum is delete in its entirety and the following
substituted therefor"
" Have and maintain a minimum tangible net worth (meaning the excess of
all assets, over its liabilities, less subordinated debt) of not less than
$3,050,000 from 3/31/97 through 4/29/97 and $2,800,000 at 4/30/97 and
thereafter."
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6. Section 8.b. of the Addendum is deleted in its entirety and the following
substituted therefor.
" Have and maintain a ratio of total liabilities to tangible net worth
of not greater than 1.10 to 1.00 at 3/31/97 and thereafter."
7. Section 8 c. of the Addendum is deleted in its entirety and the following
substituted therefor:
" Have and maintain working capital of $2,000,000 from 3/31/97 through
4/29/97 and $1,750,000 at 4/30/97 and thereafter. Working capital is
defined as current assets minus current liabilities."
8. Section 8.d. of the Addendum is deleted in its entirety and the following
substituted therefor:
" Have and maintain a current ratio of 1.70 to 1 00 at 3/31/97 and
thereafter. Current ratio is defined as current assets divided by current
liabilities."
9. Section 10.a of the Addendum is deleted in its entirety and the following
substituted therefor:
" The rate of interest applicable to the Line of Credit Loan Account
shall be 2.50% pa year in excess of the rate of interest which Bank has
announced as its prime lending rate ("Prime Rate") which shall vary
concurrently with any change m such Prime Rate. A non utilization fee of
one percent (1.00%) shall be charged on the average daily unused portion of
the line, payable quarterly in arrears."
10. In consideration of the Bank executing this Amendment, that Borrower agrees
that the strike price on the existing warrant for the purchase of 75,000 shares
of Photomatrix, Inc common stock is reset to the lesser of $.50 per share or
current market price. This reset is effective immediately and will be documented
in entirety with a modified warrant agreement, which Borrower agrees to execute.
11. Except as provided above, the Agreement remains unchanged and the parties
hereby confirm that the Agreement as herein amended is in full force and effect.
Signatures continued on next page.
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PHOTOMATRIX, INC.
"Borrow
By: /s/Suren G. Dutia
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Title: President and Chief Executive Officer
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IMPERIAL BANK
"Bank"
By: /s/
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Title: /s/Vice President
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IMPERIAL BANK
Member FDIC
CONTINUING GUARANTEE
ORIGINATING OFFICE: San Diego Regional Office
Name of Office: San Diego Regional Office
Street Address: 701 B Street
City, State, Zip Code: San Diego, CA 92101
The undersigned (hereinafter referred to as "Guarantor") hereby requests and
authorizes IMPERIAL BANK (hereinafter referred to as the "Bank") to extend
credit to PHOTOMATRIX, INC.
a Corporation
(DESIGNATE TYPE OF ENTITY)
(hereinafter referred to as "Debtor"), and in consideration of the granting of
such credit by the Bank to Debtor, Guarantor agrees as follows:
1. The words "indebtedness" and "credit" are used herein in their most
comprehensive sense and include any and all advances, debts, obligations and
liabilities, including interest thereon, of Debtor heretofore, now or hereafter
made, incurred or created, with or without notice to Guarantor, whether
voluntary or involuntary and however arising, whether due or not due, absolute
or contingent, liquidated or unliquidated, determined or undetermined, whether
assumed by Debtor's successors, heirs or assigns by operation of law or
otherwise, and whether Debtor is liable individually or jointly with others, and
whether recovery upon any such indebtedness or credit is or hereafter becomes
barred by any statute of limitations or is or hereafter becomes otherwise
unenforceable.
2. Credit may be granted from time to time at the request of Debtor and
without further authorization from or notice to Guarantor, even though Debtor's
financial condition may have deteriorated since the date hereof. If Debtor is a
corporation or a partnership, the Bank need not inquire into the power of Debtor
or the authority of its officers, directors, partners or agents acting or
purporting to act in its behalf. Each credit heretofore or hereafter granted to
Debtor shall be considered to have been granted at the special instance and
request of Guarantor and in consideration of and in reliance upon this
guarantee.
3. Guarantor hereby unconditionally guarantees and promises to pay the Bank or
its order any and all indebtedness of Debtor to the Bank and to perform any and
all obligations of Debtor under the terms of any agreement or instrument
evidencing, securing or executed in connection with any such indebtedness
("Credit Documents"). The liability of Guarantor shall not at any time exceed
the sum of the amount set forth below, plus the interest thereon in accordance
with the Credit Documents and the costs, attorneys' fees and other expenses
provided for in Paragraph 15 hereof. If no amount is set forth below, the
liability of the Guarantor hereunder shall be unlimited. The Bank may permit
Debtor's indebtedness to exceed any maximum liability without impairing the
obligations of Guarantor hereunder. No payments made by or on behalf of
Guarantor to the Bank shall reduce any such maximum liability unless written
notice to that effect is received by the Bank at or prior to the time such
payment is made. If Guarantor has executed more than one guarantee of the
indebtedness of Debtor to the Bank, the guarantees shall be cumulative.
4. Either before or after revocation hereof and in such manner, upon such
terms and at such times as it considers best and with or without notice to
Guarantor, the Bank may alter, compromise, accelerate, extend or change the time
or manner for the payment of any indebtedness hereby guaranteed, increase or
reduce the rate of interest thereon, release or add any one or more guarantors
or endorsers, accept additional or substituted security therefor, or release or
subordinate any security therefor. No exercise or nonexercise by the Bank of any
right hereby given it, no dealing by the Bank with Debtor or any other person,
and no change, impairment or suspension of any right or remedy of the Bank shall
in any way affect any of the obligations of Guarantor hereunder or any security
furnished by Guarantor or give Guarantor any recourse against the Bank.
5. In addition to all liens upon and rights of offset given to the Bank by law
against any property of Debtor or of Guarantor, Guarantor hereby grants a
security interest in all property of Guarantor now or hereafter in the
possession of or on deposit with the Bank, whether held in a general or special
account or for safekeeping or otherwise. Each such security interest may be
exercised without demand upon or notice to Guarantor, shall continue in full
force unless specifically waived or released by the Bank in writing and shall
not be considered waived by any conduct of the Bank or by any failure of the
Bank to exercise any right of offset or to enforce any such security interest or
by any neglect or delay in so doing.
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6. Guarantor waives and agrees not to assert or take advantage of (a) any right
to require the Bank to proceed against the Debtor or any other person, firm or
corporation or to proceed against or exhaust any security held by it at any time
or to pursue any other remedy in its power; (b) the defense of the statute of
limitations in any action hereunder or for the collection of any indebtedness or
the performance of any obligation guaranteed hereby; (c) any defense that may
arise by reason of the incapacity, lack of authority, death or disability of, or
revocation hereof by, any other or others or the failure of the Bank to file or
enforce a claim against the estate (either in administration, bankruptcy, or
other proceeding) of any other or others; (d) demand, protest and notice of any
kind including, without limiting the generality of the foregoing, notice of the
existence, creation or incurring of new or additional indebtedness or of any
action or non-action on the part of the Debtor, the Bank, any endorser, creditor
of Debtor or Guarantor under this or any other instrument, or any other person
whomsoever, in connection with any obligation or evidence of indebtedness hereby
guaranteed; (e) any defense based upon an election of remedies by the Bank,
including without limitation, an election to proceed by nonjudicial rather than
judicial foreclosure, which election destroys or otherwise impairs subrogation
rights of Guarantor or the right of Guarantor to proceed against Debtor for
reimbursement, or both, including, without limitation, the impairment of
subrogation rights arising by virtue of California Civil Code 580(b) and 580(d);
(f) any defense or right based upon the fair value deficiency protections and
provisions of California Civil Code 580(a) and California Civil Procedure Code
726; and (g) any defense or right based upon the acceptance by the Bank or an
affiliate of the Bank of a deed in lieu of foreclosure, without extinguishing
the indebtedness, even if such acceptance destroys, alters or otherwise impairs
subrogation rights of Guarantor or the right of Guarantor to proceed against
Debtor for reimbursement, or both.
7. Guarantor, by execution hereof, represents to the Bank that the
relationship between Guarantor and Debtor is such that Guarantor has access to
all relevant facts and information concerning the indebtedness and Debtor and
that the Bank can rely upon Guarantor having such access. Guarantor waives and
agrees not to assert any duty on the part of the Bank to disclose to Guarantor
any facts that the Bank may now or hereafter know about Debtor, regardless of
whether the Bank has reason to believe that any such facts materially increase
the risk beyond that which Guarantor intends to assume, or has reason to believe
that such facts are unknown to Guarantor, or has a reasonable opportunity to
communicate such facts to Guarantor. Guarantor is fully responsible for being
and keeping informed of the financial condition of Debtor and all circumstances
bearing on the risk of non-payment of the indebtedness guaranteed hereby.
8. Until all indebtedness of Debtor to the Bank has been paid in full, even
though such indebtedness is in excess of the liability of Guarantor, Guarantor
shall have no right of subrogation and waives any right to enforce any remedy
which the Bank now has or may hereafter have against Debtor and any benefit of
and any right to participate in any security now or hereafter held by the Bank.
9. Except as otherwise provided in this paragraph, all existing or future
indebtedness of Debtor to Guarantor and, if Debtor is a partnership, any right
to withdraw any capital of Guarantor invested in Debtor, is hereby subordinated
to all indebtedness hereby guaranteed and, without the prior written consent of
the Sank, shall not be paid or withdrawn in whole or in part nor will Guarantor
accept any payment of or on account of any such indebtedness or as a withdrawal
of capital while this guarantee is in effect. At the Bank's request, Debtor
shall pay to the Bank all or any part of subordinated indebtedness and any
capital which Guarantor is entitled to withdraw. Each payment by Debtor to
Guarantor in violation of this paragraph shall be received in trust for the Bank
and shall be paid to the Bank immediately on account of the indebtedness of
Debtor to the Bank. No such payment shall reduce or affect in any manner
Guarantor's liability under any of the provisions of this guarantee. Guarantor
reserves the right to receive from Debtor payment of any salary for personal
services at the same monthly rate as that at which Guarantor has been paid
during the preceding twelve months, it being expressly understood that such
amount shall not be subordinated to the indebtedness guaranteed hereby.
10. Guarantor will file all claims against Debtor in any bankruptcy or other
proceeding in which the filing of claims is required by law upon any
indebtedness of Debtor to Guarantor and shall concurrently assign to the Bank
all of the Guarantor's rights thereunder. If Guarantor does not file any such
claim, the Bank, as Guarantor's attorney-in-fact, is hereby authorized to do so
in Guarantor's name or, in the Bank's discretion, to assign the claim and to
cause proof of claim to be filed in the name of the Bank's nominee. In all such
cases, whether in administration, bankruptcy or otherwise, the person or persons
authorized to pay such claims shall pay to the Bank the full amount thereof and,
to the full extent necessary for the purpose, Guarantor hereby assigns to the
Bank all of the Guarantor's rights to any and all such payments or distributions
to which Guarantor would otherwise be entitled. If the amount so paid is greater
than the guaranteed indebtedness then outstanding, the Bank will pay the amount
of the excess to the person entitled thereto.
11. With or without notice to Guarantor, the Bank, in its sole discretion and
at any time and from time to time either before or after delivery of any notice
of revocation hereunder and in such manner and upon such terms as it considers
fit, may (a) apply any or all payments or recoveries from Debtor, from Guarantor
or from any other guarantor under this or any other instrument or realized from
any security, in such manner and order or priority as the Bank elects, to any
indebtedness of Debtor to the Bank, whether or not such indebtedness is
guaranteed hereby or is otherwise secured or is due at the time of such
application; and (b) refund to Debtor any payment received by the Bank upon any
indebtedness hereby guaranteed and payment of the amount refunded shall be fully
guaranteed hereby. Any recovery realized from any other guarantor under this or
any other instrument shall be first credited upon that portion of the
indebtedness of Debtor to the Bank which exceeds Guarantor's maximum liability,
if any, hereunder.
12. The amount of Guarantor's liability and all rights, powers and remedies of
the Bank hereunder and under the Credit Documents and any other agreement now or
at any time hereafter in force between the Bank and Guarantor shall be
cumulative and not alternative, and such rights, powers and remedies shall be in
addition to all rights, powers and remedies given to the Bank by law.
13. Guarantor's obligations hereunder are independent of the obligations of
Debtor and, in the event of any default hereunder, a separate action or actions
may be brought and prosecuted against Guarantor whether action is brought
against Debtor or whether Debtor is joined in any such action or actions. The
Bank may maintain successive actions for other defaults. The Bank's rights
hereunder shall not be exhausted by its exercise of any of its rights or
remedies or by any such action or by any number of successive actions until and
unless all indebtedness and obligations hereby guaranteed have been paid and
fully performed.
Page 2 of 4
<PAGE>
14. This is a continuing guarantee and Guarantor agrees that it shall remain
in full force until and unless Guarantor delivers to the Bank written notice
that it has been revoked as to credit granted subsequent to the effective time
of revocation as herein provided. delivery of such notice shall be effective by
personal service upon an officer of the Bank at the originating office of the
Bank designated on the first page hereof or by mailing such notice by certified
or registered mail, return receipt requested, postage prepaid and addressed to
the Sank at the originating office designated on the first page hereof.
Regardless of how notice of revocation is given, it shall not be effective until
twelve o'clock noon Pacific Standard or Daylight Savings Time, as the case may
be, on the next succeeding Bank business day following the day such notice is
delivered, but delivery of such notice shall not affect any of Guarantor's
obligations hereunder with respect to credit granted prior to the effective date
of such revocation, nor shall it affect any of the obligations of any other
guarantor for the credit granted to Debtor hereunder. If the originating office
of the Bank designated above is not in existence at the time notice of
revocation is desired to be given, then such notice may be given in the manner
above provided by delivering the same to IMPERIAL BANK OFFICE at 9920 South La
Cienega Boulevard, Inglewood, California, 90301.
15. Guarantor agrees to pay to the Bank without demand reasonable attorneys'
fees and all costs and other expenses which the Bank expends or incurs in
collecting or compromising any indebtedness of the Debtor, in protecting the
Bank's security under the Credit Documents or in enforcing this guarantee
against Guarantor or any other guarantor of any indebtedness hereby guaranteed
whether or not suit is filed, including, without limitation, attorney's fees,
costs and other such expenses incurred in any bankruptcy proceeding. Guarantor
warrants and represents that it is fully authorized by law to execute this
guarantee.
16. This guarantee shall benefit the Bank, its successors and assigns,
including the assignees of any indebtedness hereby guaranteed, and binds
Guarantor's successors and assigns. This guarantee is assignable by the Bank
with respect to all or any portion of the indebtedness and obligations
guaranteed hereunder, and, when so assigned, Guarantor shall be liable to the
assignees under this guarantee without in any manner affecting Guarantor's
liability hereunder with respect to any indebtedness or obligations retained by
the Bank. No delegation or assignment of this guarantee by any Guarantor shall
be of any force or effect or release Guarantor from any obligation hereunder.
17. No provision of this guarantee or right of the Bank hereunder can be
waived, nor can any Guarantor be released from his/her obligations hereunder,
except by a writing duly executed by an authorized officer of the Bank. Should
any one or more provisions of this guarantee be determined to be illegal or
unenforceable, all other provisions nevertheless shall be governed by and
construed in accordance with the laws of California, and Guarantor agrees to
submit to the jurisdiction of the Courts of California.
18. If more than one guarantor signs this guarantee, the obligation of all
such guarantors shall be joint and several. When the context and construction so
require, all words used in the singular shall be deemed to have been used in the
plural and the masculine shall include the feminine and neuter. Any married
person who signs this guarantee agrees that recourse may be had against separate
property for all obligations under this guarantee.
19. Except as provided in any other written agreement now or at any time
hereafter in force between the Bank and Guarantor this guarantee shall
constitute the entire agreement of Guarantor with the Bank with respect to the
subject matter hereof and no representation, understanding, promise or condition
concerning the subject matter hereof shall be binding upon the Bank unless
expressed herein. Any notice to Guarantor shall be considered to have been duly
given when delivered personally or forty-eight hours after being mailed, postage
prepaid, to the address(es) set forth below or to such other address(es) as
Guarantor may from time to time designate by giving notice in the same manner of
notice to the Bank set forth in Paragraph 14 hereof.
20. Each of the undersigned Guarantors hereby acknowledges the receipt of a true
copy of this guarantee.
21. / / This guarantee is secured by a deed of trust dated N/A , ,
to Imperial Bancorp, as Trustee.
22. / / I/We hereby amend the Trust Agreement to the extent necessary, if any,
to allow the Trust to guarantee the debt of any person(s).
23. Notwithstanding anything herein to the contrary , the maximum liability of
the guarantor shall not exceed its net worth under generally accepted
accounting principals from time to time.
GUARANTEE AMOUNT $ 750, 000. 00
Executed by or on behalf of Guarantor(s) on April 28 , 97
Signature of Guarantor(s)
PHOTOMATRIX IMAGING CORPORATION
BY /s/Suren G. Dutia
--------------------------------------------------------------
Suren Dutia, Pres/CEO/CHMN
--------------------------------------------------------------
--------------------------------------------------------------
--------------------------------------------------------------
Address
--------------------------------------------------------------
--------------------------------------------------------------
--------------------------------------------------------------
--------------------------------------------------------------
Page 3 of 4
<PAGE>
(COMPLETE IF GUARANTOR IS A CORPORATION)
RESOLUTION AUTHORIZING CONTINUING GUARANTEE,
ENDORSEMENT AND GUARANTEE OF NOTE OR NOTES
AND HYPOTHECATION OF ASSETS
PHOTOMATRIX, INC.
WHEREAS,
hereinafter referred to as "Debtor", has requested IMPERIAL BANK, hereinafter
referred to as "Bank", to grant credit to Debtor.
WHEREAS, the corporation hereinafter named expects to derive benefit from such
financial accommodation by Bank,
1. NOW, BE IT RESOLVED, that any 1 of the following named officers
--------------
(SPECIFY NUMBER)
Suren Dutia the President/CEO/CHMN
- - --------------------------------------- -----------------------------------
Roy L. Gayhart the CEO/Secretary
- - --------------------------------------- -----------------------------------
the
- - --------------------------------------- -----------------------------------
the
- - --------------------------------------- -----------------------------------
for and on behalf of PHOTOMATRIX IMAGING CORPORATION
(NAME OF CORPORATION)
be and they hereby are authorized and directed for and in the name of this
corporation and as its act and deed to do and perform any one or more of the
following:
A. Execute a continuing guarantee in favor of Bank for any and all assets
of this corporation.
B. Endorse and/or guarantee a note or notes in favor of Bank whereunder
Debtor is Maker and Bank is Payee including renewals and extensions thereof.
C. Grant to Bank a security interest in and to any and all assets of this
corporation: (1) as security for any obligation which this corporation may incur
under subparagraphs A and/or B above; or (2) as security for indebtedness of
Debtor to Bank to the extent of the value of the security interest so granted
without personal liability on the part of this corporation to Bank.
2. RESOLVED FURTHER, that Bank may rely on the authority conferred herein
until Bank receives notice in writing that the authority contained in this
resolution has been revoked or the authority of the persons or officers named
above has been revoked.
3. RESOLVED FURTHER, that the liability of this corporation to Bank hereunder
shall not exceed the total sum of
**SEVEN HUNDRED FIFTY THOUSAND DOLLARS AND ZERO CENTS** DOLLARS ($ 750,000.00).
4. RESOLVED FURTHER, that any guarantees or other documents in like amount and
terms as those stated above heretofore executed by said officers in the name of
this corporation are hereby ratified and approved, and the secretary or
assistant secretary is authorized and directed to attach copies of such
documents to the minutes of the corporation.
I, the undersigned Roy L. Gayhart , hereby certify that I am the
duly elected, qualified and acting secretary of the above
referenced corporation, duly organized and existing under the laws of the State
of California ; that the Board of Directors of said corporation duly
and regularly adopted the resolution of which the foregoing is a full, true and
correct copy.
I further certify that said resolution is now in full force and effect, that
it has not been revoked, suspended, or amended in any way, and that the specimen
signatures appearing below are the signatures of the officers authorized to sign
for this corporation by virtue of said resolution.
I further certify that shareholder consent IS NOT required in the
(IS OR IS NOT)
event of hypothecation of all or substantially all of the assets of said
corporation.
EXECUTED ON
AUTHORIZED SIGNATURES:
Signature: /s/Suren Dutia
------------------------------------------------------------
Suren Dutia
Signature: /s/Roy L. Gayhart
------------------------------------------------------------
Roy L.Gayhart
Signature:
------------------------------------------------------------
Signature:
------------------------------------------------------------
(SEAL)
Confirmed By:
/s/Suren Dutia
- - -------------------------------------------------------------------------------
(PRESIDENT)
Suren Dutia
/s/Roy L. Gayhart
- - -------------------------------------------------------------------------------
Roy L. Gayhart (SECRETARY)
Page 4 of 4
<PAGE>
THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT
OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
WARRANT TO PURCHASE STOCK
Company: PHOTOMATRIX, INC (formerly XSCRIBE CORPORATION), a California
corporation
Number of Shares: 75,000
Class of Stock: Common
Initial Exercise Price: $.50 or the market value on the date of execution
hereof, whichever is less, per share
Issue Date: April 9, 1997
Expiration Date: April 9, 2002 (subject to Article 4.1)
THIS WARRANT CERTIFIES THAT, in consideration of an extension of credit to
Corporation and for other good and valuable consideration, IMPERIAL BANCORP as
parent of IMPERIAL BANK, or transferee or assignee ("Holder") is entitled to
purchase the number of fully paid and nonassessable shares of the class of
securities (the "Shares") of PHOTOMATRIX, INC. (the "Company") at the initial
exercise price per Share (the "Warrant Price") all as set forth above and as
adjusted pursuant to Article 2 of this Warrant, subject to the provisions and
upon the terms and conditions set forth of this Warrant.
ARTICLE 1. EXERCISE
1.1 METHOD OF EXERCISE. Holder may exercise this Warrant by delivering
this Warrant and a duly executed Notice of Exercise in substantially the form
attached as Appendix 1 to the principal office of the Company. Unless Holder is
exercising the conversion right set forth in Section 1.2, Holder shall also
deliver to the Company payment for the aggregate Warrant Price for the Shares
being purchased.
1.2 CONVERSION RIGHT. In lieu of exercising this Warrant as specified in
Section 1.1, Holder may from time to time convert this Warrant, in whole or in
part, into a number of Shares determined by dividing (a) the aggregate fair
market value of the Shares minus the aggregate Warrant Price of such Shares by
(b) the fair market value of one Share. The fair market value of the Shares
shall be determined pursuant to Section 1.3.
1.3 FAIR MARKET VALUE. If the Shares are traded regularly in a public
market, the fair market value of the Shares shall be the closing price of the
Shares reported for the
<PAGE>
business day immediately before Holder delivers its Notice of Exercise to the
Company. If the Shares are not regularly traded in a public market, the Board of
Directors of the Company shall determine fair market value in its reasonable
good faith judgment. The foregoing notwithstanding, if Holder advises the Board
of Directors in writing that Holder disagrees with such determination, then the
Company and Holder shall promptly agree upon a reputable investment banking firm
to undertake such valuation. If the valuation of such investment banking firm is
greater than that determined by the Board of Directors, then all fees and
expenses of such investment banking firm shall be paid by the Company. In all
other circumstances, such fees and expenses shall be paid by Holder.
1.4 DELIVERY OF CERTIFICATE AND NEW WARRANT. Promptly after Holder
exercises or converts this Warrant, the Company shall deliver to Holder
certificates for the Shares acquired and, if this Warrant has not been fully
exercised or converted and has not expired, a new Warrant representing the
Shares not so acquired.
1.5 REPLACEMENT OF WARRANTS. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of mutilation, or surrender and cancellation of this Warrant,
the Company at its expense shall execute and deliver, in lieu of this Warrant, a
new warrant of like tenor.
1.6 REPURCHASE ON SALE, MERGER, OR CONSOLIDATION OF THE COMPANY.
1.6.1. "ACQUISITION". For the purpose of this Warrant, "Acquisition"
means any sale, license, or other disposition of all or substantially all of the
assets (including intellectual property) of the Company, or any reorganization,
consolidation, or merger of the Company where the holders of the Company's
securities before the transaction beneficially own less than 50% of the
outstanding voting securities of the surviving entity after the transaction.
1.6.2. ASSUMPTION OF WARRANT. If upon the closing of any Acquisition
the successor entity assumes the obligations of this Warrant, then this Warrant
shall be exercisable for the same securities, cash, and property as would be
payable for the Shares issuable upon exercise of the unexercised portion of this
Warrant as if such Shares were outstanding on the record date for the
Acquisition and subsequent closing. The Warrant Price shall be adjusted
accordingly. The Company shall use reasonable efforts to cause the surviving
corporation to assume the obligations of this Warrant.
1.6.3. NONASSUMPTION. If upon the closing of any Acquisition the
2
<PAGE>
successor entity does not assume the obligations of his Warrant and Holder has
not otherwise exercised this Warrant in full, then the unexercised portion of
this Warrant shall be deemed to have been automatically converted pursuant to
Section 1.2 and thereafter Holder shall participate in the acquisition on the
same terms as other holders of the same class of securities of the Company.
ARTICLE 2. ADJUSTMENTS TO THE SHARES.
2.1 STOCK DIVIDENDS, SPLITS, ETC. If the Company declares or pays a
dividend on its common stock payable in common stock, or other securities,
subdivides the outstanding common stock into a greater amount of common stock,
then upon exercise of this Warrant, for each Share acquired, Holder shall
receive, without cost to Holder, the total number and kind of securities to
which Holder would have been entitled had Holder owned the Shares of record as
of the date the dividend or subdivision occurred.
2.2 RECLASSIFICATION, EXCHANGE OR SUBSTITUTION. Upon any reclassification,
exchange, substitution, or other event that results in a change of the number
and/or class of the securities issuable upon exercise or conversion of this
Warrant, Holder shall be entitled to receive, upon exercise or conversion of
this Warrant, the number and kind of securities and property that Holder would
have received for the Shares if this Warrant had been exercised immediately
before such reclassification, exchange, substitution, or other event. The
Company or its successor shall promptly issue to Holder a new Warrant for such
new securities or other property. The new Warrant shall provide for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Article 2 including, without limitation, adjustments to the
Warrant Price and to the number of securities or property issuable upon exercise
of the new Warrant. The provisions of this Section 2.2 shall similarly apply to
successive reclassifications, exchanges, substitutions, or other events.
2.3 ADJUSTMENTS FOR COMBINATIONS, ETC. If the outstanding Shares are
combined or consolidated, by reclassification or otherwise, into a lesser number
of shares, the Warrant Price shall be proportionately increased.
2.4 ADJUSTMENTS FOR DILUTING ISSUANCES. The Warrant Price and the number
of Shares issuable upon exercise of this Warrant shall be subject to adjustment,
from time to time, in the manner set forth on Exhibit A, if attached, in the
event of Diluting Issuances (as defined on Exhibit A).
2.5 NO IMPAIRMENT. The Company shall not, by amendment of its Articles of
Incorporation or through a reorganization, transfer of assets, consolidation,
merger, dissolution, issue, or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed under this Warrant by the Company, but shall at all times
in good faith assist in carrying
3
<PAGE>
out all the provisions of this Article 2 and in taking all such action as may be
necessary or appropriate to protect Holder's rights under this Article against
impairment. If the Company takes any action affecting the Shares other than as
described above that adversely affects Holder's rights under this Warrant, the
Warrant Price shall be adjusted downward and the number of Shares issuable upon
exercise of this Warrant shall be adjusted upward in such a manner that the
aggregate Warrant Price of this Warrant is unchanged.
2.6 CERTIFICATE AS TO ADJUSTMENTS. Upon each adjustment of the Warrant
Price, the Company at its expense shall promptly compute such adjustment, and
furnish Holder with a certificate of its Chief Financial Officer setting forth
such adjustment and the facts upon which such adjustment is based. The Company
shall, upon written request, furnish Holder a certificate setting forth the
Warrant Price in effect upon the date thereof and the series of adjustments
leading to such Warrant Price.
ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY.
3.1 REPRESENTATIONS AND WARRANTIES. The Company hereby represents and
warrants to the Holder as follows:
(a) The initial Warrant Price referenced on the first page of this
Warrant is not greater than (i) the price per share at which the Shares were
last issued in an arms-length transaction in which at least $50,000 of the
Shares were sold and (ii) the fair market value of the Shares as of the date of
this Warrant.
(b) All Shares which may be issued upon the exercise of the purchase
right represented by this Warrant, and all securities, if any, issuable upon
conversion of the Shares, shall, upon issuance, be duly authorized, validly
issued, fully paid and nonassessable, and free of any liens and encumbrances
except for restrictions on transfer provided for herein or under applicable
federal and state securities laws.
3.2 NOTICE OF CERTAIN EVENTS. If the Company proposes at any time (a) to
declare any dividend or distribution upon its common stock, whether in cash,
property, stock, or other securities and whether or not a regular cash dividend;
(b) to offer for subscription pro rata to the holders of any class or series of
its stock any additional shares of stock of any class or series or other rights;
(c) to effect any reclassification or recapitalization of common stock; (d) to
merge or consolidate with or into any other corporation, or sell, lease,
license, or convey all or substantially all of its assets, or to liquidate,
dissolve or wind up; or (e) offer holders of registration rights the opportunity
to participate in an underwritten public offering of the company's securities
for cash, then, in connection with each such event, the Company shall give
Holder (a) at least 20 days prior written notice of the date on which a record
will be taken for such dividend, distribution, or subscription rights (and
specifying the date on which the holders of
4
<PAGE>
common stock will be entitled thereto) or for determining rights to vote, if
any, in respect of the matters referred to in (c) and (d) above; (2) in the case
of the matters referred to in (c) and (d) above at least 20 days prior written
notice of the date when the same will take place (and specifying the date on
which the holders of common stock will be entitled to exchange their common
stock for securities or other property deliverable upon the occurrence of such
event); and (3) in the case of the matter referred to in (e) above, the same
notice as is given to the holders of such registration rights.
3.3 INFORMATION RIGHTS. So long as the Holder holds this Warrant ad/or any
of the Shares, the Company shall deliver to the Holder (a) promptly after
mailing, copies of all communiques to the shareholders of the Company, (b)
within ninety (90) days after the end of each fiscal year of the Company, the
annual audited financial statements of the Company certified by independent
public accountants of recognized standing and (c) within forty-five (45) days
after the end of each of the first three quarters of each fiscal year, the
Company's quarterly, unaudited financial statements.
3.4 REGISTRATION UNDER SECURITIES ACT OF 1933, AS AMENDED. The Company
agrees that the Shares shall be subject to the registration rights set forth on
Exhibit C, if attached.
ARTICLE 4. MISCELLANEOUS.
4.1 TERM. This Warrant is exercisable, in whole or in part, at any time
and from time to time on or before the Expiration Date set forth above..
4.2 LEGENDS. This Warrant and the Shares shall be imprinted with a legend
in substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN
EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS
COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
4.3 COMPLIANCE WITH SECURITIES LAWS ON TRANSFER. This Warrant and the
Shares issuable upon exercise this Warrant may not be transferred or assigned in
whole or in part without compliance with applicable federal and state securities
laws by the transferor and the transferee (including, without limitation, the
delivery of investment representation letters and legal opinions reasonably
satisfactory to the Company). The Company shall not require Holder to provide an
opinion of counsel if the transfer is to an affiliate of Holder or if there is
no material question as to the
5
<PAGE>
availability of current information as referenced in Rule 144(c), Holder
represents that it has complied with Rule 144(d) and (e) in reasonable detail,
the selling broker represents that it has complied with Rule 144(f), and the
Company is provided with a copy of Holder's notice of proposed sale.
4.4 TRANSFER PROCEDURE. Subject to the provisions of Section 4.2, Holder
may transfer all or part of this Warrant or the Shares issuable upon exercise of
this Warrant by giving the Company notice of the portion of the Warrant being
transferred setting forth the name, address and taxpayer identification number
of the transferee and surrendering this Warrant to the Company for reissuance to
the transferee(s) (and Holder, if applicable). Unless the Company is filing
financial information with the SEC pursuant to the Securities Exchange Act of
1934, the Company shall have the right to refuse to transfer any portion of this
Warrant to any person who directly competes with the Company.
4.5 NOTICES. All notices and other communications from the Company to the
Holder, or vice versa, shall be deemed delivered and effective when given
personally or mailed by first-class registered or certified mail, postage
prepaid, at such address as may have been furnished to the Company or the
Holder, as the case may be, in writing by the Company or such Holder from time
to time.
4.6 WAIVER. This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought.
4.7 ATTORNEYS' FEES. In the event of any dispute between the parties
concerning the terms and provisions of this Warrant, the party prevailing in
such dispute shall be entitled to collect from the other party all costs
incurred in such dispute, including reasonable attorneys' fees.
4.8 GOVERNING LAW. This Warrant shall be governed by and construed in
accordance with the laws of the State of California, without giving effect to
its principles regarding conflicts of law.
PHOTOMATRIX, INC.
"COMPANY"
By /s/Suran G. Dutia
--------------------------------
Name SUREN G. DUTIA
------------------------------
(Print)
Title: Chairman, President
6
<PAGE>
By /s/Peter B. Harker
--------------------------------
Name PETER B. HARKER
------------------------------
(Print)
Title: Chief Financial Officer, Secretary,
7
<PAGE>
APPENDIX 1
NOTICE OF EXERCISE
1. The undersigned hereby elects to purchase shares of the
Common Stock of Photomatrix, Inc, pursuant to the terms of the attached Warrant,
and tenders herewith payment of the purchase price of such shares in full.
1. The undersigned hereby elects to convert the attached Warrant into
Shares/cash [strike one] in the manner specified in the Warrant. This conversion
is exercised with respect to of the Shares covered by the Warrant.
[Strike paragraph that does not apply.]
2. Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name as is specified below:
----------------------------------------
(Name)
----------------------------------------
----------------------------------------
(Address)
3. The undersigned represents it is acquiring the shares solely for its
own account and not as a nominee for any other party and not with a view toward
the resale or distribution thereof except in compliance with applicable
securities laws.
-----------------------------------
By
--------------------------------
(Signature)
- - -----------------------
(Date)
8
<PAGE>
APPENDIX 2
NOTICE THAT WARRANT IS ABOUT TO EXPIRE
(Name of Holder)
(Address of Holder)
Attn: Chief Financial Officer
Dear
This is to advise you that the Warrant issued to you described below will
expire on _______ , 19__.
Issuer: Xscribe Corporation
Issue Date: APRIL 9, 1997
Class of Security Issuable: Common
Exercise Price Per Share:
Number of Shares Issuable:
Procedure for Exercise:
Please contact [name of contact person at (phone number)] with any
questions you may have concerning exercise of the Warrant. This is your only
notice of pending expiration.
PHOTOMATRIX, INC.
By
--------------------------------
Its
-------------------------------
9
<PAGE>
EXHIBIT A
REGISTRATION RIGHTS
The Shares shall be deemed "registrable securities" or otherwise entitled
to "piggy back" registration rights in accordance with the terms of any
agreement between the Company and any of its investors (the "Agreement")
The Company agrees that no amendments will be made to the Agreement which
would have an adverse impact on Holder's registration thereunder without the
consent of Holder.
If no Agreement exists, then the Company and the Holder shall enter into a
form of Registration Rights Agreement which shall be no less favorable than any
such agreement subsequently entered into between the Company and any investors
and in no event providing less than piggy back registration rights.
10
<PAGE>
OLD WARRANT AGREEMENT
THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT
OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
WARRANT TO PURCHASE STOCK
Company: XSCRIBE CORPORATlON, a California corporation
Number of Shares: 75,000
Class of Stock: Common
Initial Exercise Price: $1.00 per share
Issue Date: August 10 1995
Expiration Date: August 2000, (subject to Article 4.1)
THIS WARRANT CERTIFIES THAT, in consideration of an extension of credit to
Corporation and for other good and valuable consideration, IMPERIAL BANCORP
("Holder") is entitled to purchase the number of fully paid and nonassessable
shares of the class of securities (the "Shares") of Xscribe Corporation (the
"Company") at the initial exercise price per Share (the "Warrant Price") all as
set forth above and as adjusted pursuant to Article 2 of this Warrant, subject
to the provisions and upon the terms and conditions set forth of this Warrant.
ARTICLE 1. EXERCISE
1.1 METHOD OF EXERCISE. Holder may exercise this Warrant by delivering
this Warrant and a duly executed Notice of Exercise in substantially the form
attached as Appendix 1 to the principal office of the Company. Unless Holder is
exercising the conversion right set forth in Section 1.2, Holder shall also
deliver to the Company payment for the aggregate Warrant Price for the Shares
being purchased,.
1.2 CONVERSION RIGHT. In lieu of exercising this Warrant as specified in
Section 1.1, Holder may from time to time convert this Warrant, in whole or in
part, into a number of Shares determined by dividing (a) the aggregate fair
market value of the Shares minus the aggregate Warrant Price of such Shares by
(b) the fair market value of one Share. The fair market value of the Shares
shall be determined pursuant to Section 1.3.
1.3 FAIR MARKET VALUE. If the Shares are traded regularly in a public
market, the fair market value of the Shares shall be the closing price of the
Shares reported for the business day immediately before Holder delivers its
Notice of Exercise to the
<PAGE>
Company. If the Shares are not regularly traded in a public market, the Board of
Directors of the Company shall determine fair market value in its reasonable
good faith judgment. The foregoing notwithstanding, if Holder advises the Board
of Directors in writing that Holder disagrees with such determination, then the
Company and Holder shall promptly agree upon a reputable investment banking firm
to undertake such valuation. If the valuation of such investment banking firm is
greater than that determined by the Board of Directors, then all fees and
expenses of such investment banking firm shall be paid by the Company. In all
other circumstances, such fees and expenses shall be paid by Holder.
1.4 DELIVERY OF CERTIFICATE AND NEW WARRANT. Promptly after Holder
exercises or converts this Warrant, the Company shall deliver to Holder
certificates for the Shares acquired and, if this Warrant has not been fully
exercised or converted and has not expired, a new Warrant representing the
Shares not so acquired.
1.5 REPLACEMENT OF WARRANTS. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of mutilation, or surrender and cancellation of this Warrant,
the Company at its expense shall execute and deliver, in lieu of this Warrant, a
new warrant of like tenor.
1.6 REPURCHASE ON SALE, MERGER. OR CONSOLIDATION OF THE COMPANY.
1.6.1. "ACQUISITION". For the purpose of this Warrant, "Acquisition"
means any sale, license, or other disposition of all or substantially all of the
assets (including intellectual property) of the Company, or any reorganization,
consolidation, or merger of the Company where the holders of the Company's
securities before the transaction beneficially own less than 50% of the
outstanding voting securities of the surviving entity after the transaction.
1.6.2. ASSUMPTION OF WARRANT. If upon the closing of any Acquisition
the successor entity assumes the obligations of this Warrant, then this Warrant
shall be exercisable for the same securities, cash, and property as would be
payable for the Shares issuable upon exercise of the unexercised portion of this
Warrant as if such Shares were outstanding on the record date for the
Acquisition and subsequent closing. The Warrant Price shall be adjusted
accordingly. The Company shall use reasonable efforts to cause the surviving
corporation to assume the obligations of this Warrant.
1.6.3. NONASSUMPTION. If upon the closing of any Acquisition the
successor entity does not assume the obligations of his Warrant and Holder has
not otherwise exercised this Warrant in full, then the unexercised portion of
this Warrant shall be deemed to have been automatically converted pursuant to
Section 1.2 and thereafter Holder shall participate in the acquisition on the
same terms as other holders of the same class of securities of the Company.
<PAGE>
ARTICLE 2. ADJUSTMENTS TO THE SHARES.
2.1 STOCK DIVIDENDS, SPLITS, ETC. If the Company declares or pays a
dividend on its common stock payable in common stock, or other securities,
subdivides the outstanding common stock into a greater amount of common stock,
then upon exercise of this Warrant, for each Share acquired, Holder shall
receive, without cost to Holder, the total number and kind of securities to
which Holder would have been entitled had Holder owned the Shares of record as
of the date the dividend or subdivision occurred.
2.2 RECLASSIFICATION, EXCHANGE OR SUBSTITUTION. Upon any reclassification,
exchange, substitution, or other event that results in a change of the number
and/or class of the securities issuable upon exercise or conversion of this
Warrant, Holder shall be entitled to receive, upon exercise or conversion of
this Warrant, the number and kind of securities and property that Holder would
have received for the Shares if this Warrant had been exercised immediately
before such reclassification, exchange, substitution, or other event. The
Company or its successor shall promptly issue to Holder a new Warrant for such
new securities or other property. The new Warrant shall provide for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Article 2 including, without limitation, adjustments to the
Warrant Price and to the number of securities or property issuable upon exercise
of the new Warrant. The provisions of this Section 2.2 shall similarly apply to
successive reclassifications, exchanges, substitutions, or other events.
2.3 ADJUSTMENTS FOR COMBINATIONS, ETC. If the outstanding Shares are
combined or consolidated, by reclassification or otherwise, into a lesser number
of shares, the Warrant Price shall be proportionately increased.
2.4 NO IMPAIRMENT. The Company shall not, by amendment of its Articles of
Incorporation or through a reorganization, transfer of assets, consolidation,
merger, dissolution, issue, or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed under this Warrant by the Company, but shall at all times
in good faith assist in carrying out all the provisions of this Article 2 and in
taking all such action as may be necessary or appropriate to protect Holder's
rights under this Article against impairment. If the Company takes any action
affecting the Shares other than as described above that adversely affects
Holder's rights under this Warrant, the Warrant Price shall be adjusted downward
and the number of Shares issuable upon exercise of this Warrant shall be
adjusted upward in such a manner that the aggregate Warrant Price of this
Warrant is unchanged.
2.5 CERTIFICATE AS TO ADJUSTMENTS. Upon each adjustment of the Warrant
Price, the Company at its expense shall promptly compute such adjustment, and
furnish Holder with a certificate of its Chief Financial Officer setting forth
such adjustment and the facts upon which such adjustment is based. The Company
shall, upon written
<PAGE>
request, furnish Holder a certificate setting forth the Warrant Price in effect
upon the date thereof and the series of adjustments leading to such Warrant
Price.
ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY.
3.1 REPRESENTATIONS AND WARRANTIES. The Company hereby represents and
warrants to the Holder as follows:
(a) The initial Warrant Price referenced on the first page of this
Warrant is not greater than the fair market value of the Shares as of the date
of this Warrant.
(b) All Shares which may be issued upon the exercise of the purchase
right represented by this Warrant, and all securities, if any, issuable upon
conversion of the Shares, shall, upon issuance, be duly authorized, validly
issued, fully paid and nonassessable, and free of any liens and encumbrances
except for restrictions on transfer provided for herein or under applicable
federal and state securities laws.
3.2 NOTICE OF CERTAIN EVENTS. If the Company proposes at any time (a) to
declare any dividend or distribution upon its common stock, whether in cash,
property, stock, or other securities and whether or not a regular cash dividend;
(b) to offer for subscription pro rata to the holders of any class or series of
its stock any additional shares of stock of any class or series or other rights;
(c) to effect any reclassification or recapitalization of common stock; (d) to
merge or consolidate with or into any other corporation, or sell, lease,
license, or convey all or substantially all of its assets, or to liquidate,
dissolve or wind up; or (e) offer holders of registration rights the opportunity
to participate in an underwritten public offering of the company's securities
for cash, then, in connection with each such event, the Company shall give
Holder (a) at least 20 days prior written notice of the date on which a record
will be taken for such dividend, distribution, or subscription rights (and
specifying the date on which the holders of common stock will be entitled
thereto) or for determining rights to vote, if any, in respect of the matters
referred to in (c) and (d) above; (2) in the case of the matters referred to in
(c) and (d) above at least 20 days prior written notice of the date when the
same will take place (and specifying the date on which the holders of common
stock will be entitled to exchange their common stock for securities or other
property deliverable upon the occurrence of such event); and (3) in the case of
the matter referred to in (e) above, the same notice as is given to the holders
of such registration rights.
3.3 INFORMATION RIGHTS. So long as the Holder holds this Warrant an/or any
of the Shares, the Company shall deliver to the Holder (a) promptly after
mailing, copies of all communiques to the shareholders of the Company, (b)
within ninety (90) days after the end of each fiscal year of the Company, the
annual audited financial statements of the Company certified by independent
public accountants of recognized standing and (c) within forty-five (45) days
after the end of each of the first three quarters of each fiscal year, the
Company's quarterly, unaudited financial statements.
<PAGE>
3.4 REGISTRATION UNDER SECURITIES ACT OF 1933, AS AMENDED. The Company
agrees that the Shares shall be subject to the registration rights set forth on
Exhibit A attached.
ARTICLE 4. MISCELLANEOUS.
4.1 TERM. This Warrant is exercisable, in whole or in part, at any time
and from time to time on or before the Expiration Date set forth above.
4.2 LEGENDS. This Warrant and the Shares shall be imprinted with a legend
in substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN
EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS
COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
4.3 COMPLIANCE WITH SECURITIES LAWS ON TRANSFER. This Warrant and the
Shares issuable upon exercise this Warrant may not be transferred or assigned in
whole or in part without compliance with applicable federal and state securities
laws by the transferor and the transferee (including, without limitation, the
delivery of investment representation letters and legal opinions reasonably
satisfactory to the Company). The Company shall not require Holder to provide an
opinion of counsel if the transfer is to an affiliate of Holder or if there is
no material question as to the availability of current information as referenced
in Rule 144(c), Holder represents that it has complied with Rule 144(d) and (e)
in reasonable detail, the selling broker represents that it has complied with
Rule 144(f), and the Company is provided with a copy of Holder's notice of
proposed sale.
4.4 TRANSFER PROCEDURE. Subject to the provisions of Section 4.2, Holder
may transfer all or part of this Warrant or the Shares issuable upon exercise of
this Warrant by giving the Company notice of the portion of the Warrant being
transferred setting forth the name, address and taxpayer identification number
of the transferee and surrendering this Warrant to the Company for reissuance to
the transferee(s) (and Holder, if applicable).
4.5 NOTICES. All notices and other communications from the Company to the
Holder, or vice versa, shall be deemed delivered and effective when given
personally or mailed by first-class registered or certified mail, postage
prepaid, at such address as may have been furnished to the Company or the
Holder, as the case may be, in writing by the Company or such Holder from time
to time.
<PAGE>
4.6 WAIVER. This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought.
4.7 ATTORNEYS' FEES. In the event of any dispute between the parties
concerning the terms and provisions of this Warrant, the party prevailing in
such dispute shall be entitled to collect from the other party all costs
incurred in such dispute, including reasonable attorneys' fees.
4.8 GOVERNING LAW. This Warrant shall be governed by and construed in
accordance with the laws of the State of California, without giving effect to
its principles regarding conflicts of law.
XSCRIBE CORPORATION
"COMPANY"
By /s/ Suren G. Dutia
----------------------------
Name SUREN G. DUTIA
-------------------------
(Print)
Title: Chairman of the Board, President,
or Vice President
By /s/ Bruce C. Myers
----------------------------
Name BRUCE C. MYERS
-------------------------
(Print)
Title: Chief Financial Officer, Secretary,
Assistant Treasurer or Assistant
Secretary
<PAGE>
APPENDIX 1
NOTICE OF EXERCISE
1. The undersigned hereby elects to purchase shares of the
Common Stock of Xscribe Corporation pursuant to the terms of the attached
Warrant, and tenders herewith payment of the purchase price of such shares in
full.
1. The undersigned hereby elects to convert the attached Warrant into
Shares in the manner specified in the Warrant. This conversion is exercised with
respect to of the Shares covered by the Warrant.
[Strike paragraph that does not apply.]
2. Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name as is specified below:
------------------------------
(Name)
------------------------------
------------------------------
(Address)
3. The undersigned represents it is acquiring the shares solely for its
own account and not as a nominee for any other party and not with a view toward
the resale or distribution thereof except in compliance with applicable
securities laws.
IMPERIAL BANCORP
By
-----------------------------------
(Signature)
- - -----------------
(Date)
<PAGE>
EXHIBIT A
REGISTRATION RIGHTS
The Shares shall be deemed "registrable securities" or otherwise entitled
to "piggy back" registration rights in accordance with the terms of any
agreement between the Company and any of its investors (the "Agreement").
The Company agrees that no amendments will be made to the Agreement which
would have an adverse impact on Holder's registration rights thereunder without
the consent of Holder.
If no Agreement continues to exist, then the Company and the Holder shall
enter into a form of Registration Rights Agreement which shall be no less
favorable than any such agreement subsequently entered into between the Company
and any investors and in no event providing less than piggy back registration
rights.
<PAGE>
IMPERIAL BANK
Executive Offices - Century Boulevard at the San Diego Freeway - P.O. Box 92991
- - - Los Angeles, California 90009 - (310) 417-5600
July 12, 1996
Xscribe Corporation
6285 Nancy Ridge Drive
San Diego, CA 92121
Re: Warrant Dated August 10, 1995 For 75,000 Shares
At 1.00 Per Share
Gentlemen:
This letter will serve as Imperial Bank's notice that we will be transferring
the above referenced warrant to its parent, Imperial Bancorp. This transfer is
to the parent of the Bank, an Affiliate, and is for purposes of facilitating
compliance with banking laws, and not with a view to distribution of the warrant
or the underlying securities. Please acknowledge receipt of this notice, reissue
the enclosed warrant in the name of Imperial Bancorp and so reflect Imperial
Bancorp as the holder of the warrant on your record.
For purposes of the warrant, the only authorized representatives of Imperial
Bancorp who can exercise or otherwise deal with the warrant are any two of the
following:
George L. Graziadio
William L. Capps
Richard J. Casey
Robert M. Franko
J. Richard Barkley
Karen C. Abajian
Norman P. Creighton
Daniel R. Mathis
Robert S. Muehlenbeck
Eldon K. Lloyd
Richard M. Baker
If you have any questions concerning this matter, please contact the
undersigned.
Sincerely,
/s/ Karen C. Abajian
Karen C. Abajian
Senior Vice President & Controller
KCA/sd
enclosure
ACKNOWLEDGED: /s/ Suren G. Dutia
----------------------------
By: SUREN G. DUTIA
---------------------------
Title: CEO
---------------------------
Date: OCTOBER 7, 1996
---------------------------
<PAGE>
INDEPENDENT AUDITORS' CONSENT
The Board of Directors of Photomatrix, Inc.:
We consent to incorporation by reference in the registration statements
(No.'s 33-18896, 33-72122 and 33-61951) on Form S-8 of Photomatrix, Inc. of
our report dated May 29, 1997, except for Note 11, as to which the date is
June 6, 1997, relating to the consolidated balance sheets of Photomatrix,
Inc. and subsidiaries as of March 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for each of the years in the three-year period ended March 31, 1997, and the
related schedule, which reports appear in the March 31, 1997 Annual Report on
Form 10-KSB of Photomatrix, Inc. and subsidiaries.
KPMG Peat Marwick LLP
San Diego, California
June 30, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 812,000
<SECURITIES> 0
<RECEIVABLES> 1,602,000
<ALLOWANCES> 91,000
<INVENTORY> 2,520,000
<CURRENT-ASSETS> 5,083,000
<PP&E> 1,986,000
<DEPRECIATION> 640,000
<TOTAL-ASSETS> 8,565,000
<CURRENT-LIABILITIES> 2,651,000
<BONDS> 415,000
0
0
<COMMON> 19,351,000
<OTHER-SE> (13,852,000)
<TOTAL-LIABILITY-AND-EQUITY> 8,565,000
<SALES> 0
<TOTAL-REVENUES> 8,694,000
<CGS> 0
<TOTAL-COSTS> 6,400,000
<OTHER-EXPENSES> 4,638,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 92,000
<INCOME-PRETAX> (2,186,000)
<INCOME-TAX> 104,000
<INCOME-CONTINUING> (2,290,000)
<DISCONTINUED> (251,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,407,000)
<EPS-PRIMARY> (0.46)
<EPS-DILUTED> (0.46)
</TABLE>
