<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________.
Commission file number 0-16055
PHOTOMATRIX, INC.
(Exact name of small business issuer as specified in its charter)
California 95-3267788
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
11065 Sorrento Valley Court, San Diego, California 92121
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(619) 625-4400
- --------------------------------------------------------------------------------
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for 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
-------- -------
At September 30, 1997, 5,083,000 shares of Common Stock of the Issuer were
outstanding.
Transitional Small Business Disclosure Format.
Yes No X
-------- ---------
<PAGE>
INDEX
PHOTOMATRIX, INC.
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Consolidated balance sheets as of September 30, 1997
(unaudited) and March 31, 1997 1
Unaudited consolidated statements of operations for the three
months ended September 30, 1997 and September 30, 1996 2
Unaudited consolidated statements of operations for the six
months ended September 30, 1997 and September 30, 1996 3
Unaudited consolidated statements of cash flows for the six
months ended September 30, 1997 and September 30,1996 4
Notes to consolidated financial statements 5
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 7
PART II - OTHER INFORMATION
ITEM 5: OTHER INFORMATION 11
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 12
SIGNATURES 13
<PAGE>
PHOTOMATRIX, INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1997 AND MARCH 31, 1997
<TABLE>
<CAPTION>
September 30, 1997
Unaudited March 31, 1997
--------------------- ------------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 1,274,000 $ 812,000
Accounts receivable, net 1,459,000 1,602,000
Inventories, net 2,757,000 2,520,000
Prepaid expenses and other 184,000 149,000
---------------- ------------------
TOTAL CURRENT ASSETS 5,674,000 5,083,000
PROPERTY AND EQUIPMENT, NET 1,035,000 1,346,000
INTANGIBLES AND OTHER ASSETS, NET 1,863,000 2,053,000
OTHER ASSETS 78,000 83,000
---------------- ------------------
$ 8,650,000 $ 8,565,000
---------------- ------------------
---------------- ------------------
CURRENT LIABILITIES:
Accounts payable $ 751,000 $ 844,000
Accrued liabilities and other 718,000 590,000
Customer deposits 339,000 613,000
Line of credit (Note 3) - -
Current portion of notes payable 152,000 152,000
Net liabilities of discontinued operations (Note 5) 1,080,000 452,000
---------------- ------------------
TOTAL CURRENT LIABILITIES 3,040,000 2,651,000
NOTES PAYABLE TO RELATED PARTIES 375,000 375,000
OTHER NON-CURRENT LIABILITIES 84,000 40,000
CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY:
Preferred stock, 3,173,000 shares authorized - -
Common stock, no par value: 30 million shares
authorized, 5,083,000 shares issued and outstanding 19,351,000 19,351,000
Accumulated deficit (14,328,000) (13,998,000)
Other 128,000 146,000
---------------- ------------------
TOTAL SHAREHOLDERS' EQUITY 5,151,000 5,499,000
---------------- ------------------
$ 8,650,000 $ 8,565,000
---------------- ------------------
---------------- ------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
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PHOTOMATRIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
<S> <C> <C>
REVENUES $ 2,288,000 $ 2,720,000
COST OF REVENUES 1,448,000 2,079,000
---------------- ----------------
GROSS PROFIT 840,000 641,000
---------------- ----------------
OPERATING EXPENSES:
Selling, general and administrative 741,000 890,000
Research and development 173,000 181,000
---------------- ----------------
TOTAL OPERATING EXPENSES 914,000 1,071,000
---------------- ----------------
OPERATING LOSS (74,000) (430,000)
OTHER INCOME (EXPENSE), NET 89,000 (6,000)
---------------- ----------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 15,000 (436,000)
PROVISION FOR INCOME TAXES - -
---------------- ----------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 15,000 (436,000)
LOSS FROM DISCONTINUED OPERATIONS - (163,000)
GAIN ON SALE OF DISCONTINUED OPERATION - 184,000
---------------- ----------------
NET INCOME (LOSS) $ 15,000 $ (415,000)
---------------- ----------------
---------------- ----------------
EARNINGS (LOSS) PER COMMON SHARE:
CONTINUING OPERATIONS $ - $ (0.09)
DISCONTINUED OPERATION - 0.01
---------------- ----------------
NET LOSS $ - $ (0.08)
---------------- ----------------
---------------- ----------------
Weighted average number of common and common stock
equivalent shares outstanding 5,083,000 5,050,000
---------------- ----------------
---------------- ----------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
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PHOTOMATRIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
<S> <C> <C>
REVENUES $ 4,559,000 $ 4,420,000
COST OF REVENUES 2,966,000 3,322,000
---------------- ----------------
GROSS PROFIT 1,593,000 1,098,000
---------------- ----------------
OPERATING EXPENSES:
Selling, general and administrative 1,666,000 1,781,000
Research and development 354,000 363,000
---------------- ----------------
TOTAL OPERATING EXPENSES 2,020,000 2,144,000
---------------- ----------------
OPERATING LOSS (427,000) (1,046,000)
OTHER INCOME (EXPENSE), NET 97,000 (48,000)
---------------- ----------------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (330,000) (1,094,000)
PROVISION FOR INCOME TAXES - -
---------------- ----------------
LOSS FROM CONTINUING OPERATIONS (330,000) (1,094,000)
LOSS FROM DISCONTINUED OPERATIONS - (243,000)
GAIN ON SALE OF DISCONTINUED OPERATION - 184,000
---------------- ----------------
NET LOSS $ (330,000) $ (1,153,000)
---------------- ----------------
---------------- ----------------
EARNINGS (LOSS) PER COMMON SHARE:
CONTINUING OPERATIONS $ (0.06) $ (0.20)
DISCONTINUED OPERATIONS - (0.01)
---------------- ----------------
NET LOSS $ (0.06) $ (0.21)
---------------- ----------------
---------------- ----------------
Weighted average number of common and common stock
equivalent shares outstanding 5,083,000 5,383,000
---------------- ----------------
---------------- ----------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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PHOTOMATRIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATIONS:
Loss from continuing operations $ (330,000) $ (1,094,000)
Adjustments:
Depreciation and amortization 473,000 514,000
Change in assets and liabilities:
Accounts receivable 143,000 (264,000)
Inventories (237,000) 343,000
Prepaid expenses and other (35,000) (56,000)
Accounts payable (93,000) (490,000)
Accrued liabilities and other 128,000 67,000
Customer deposits (274,000) (282,000)
---------------- ----------------
Net cash flow used by continuing operations (225,000) (1,262,000)
Net operating cash flows provided by discontinued operations 628,000 326,000
---------------- ----------------
NET CASH PROVIDED BY OPERATIONS 403,000 (936,000)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of discontinued operation - 2,000,000
Capital (expenditures) retirements 23,000 (213,000)
---------------- ----------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 23,000 1,787,000
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of credit facility - (576,000)
Repayment of notes payable - (51,000)
Other Assets 49,000 (82,000)
---------------- ----------------
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES 49,000 (709,000)
---------------- ----------------
EFFECTS OF EXCHANGE RATES ON CASH (13,000) 21,000
---------------- ----------------
NET INCREASE TO CASH 462,000 163,000
CASH - BEGINNING OF PERIOD 812,000 255,000
---------------- ----------------
CASH - END OF PERIOD $ 1,274,000 $ 418,000
---------------- ----------------
---------------- ----------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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PHOTOMATRIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1997 AND MARCH 31, 1997 AND
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
1. GENERAL
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements
reflect the accounts of Photomatrix, Inc. (the "Company"), together
with its subsidiaries. All significant intercompany transactions and
balances have been eliminated.
These unaudited consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and disclosures normally
included in annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to those rules and regulations, although the Company believes
that the disclosures made are adequate to prevent the information from
being misleading. These unaudited consolidated financial statements
reflect, in the opinion of management, all adjustments (which include
only normal recurring adjustments) necessary to present the Company's
results of operations and financial position as of the dates and for
the periods presented. These unaudited consolidated financial
statements should be read in conjunction with the audited financial
statements and related notes included in the Company's Report on Form
10-KSB filed with the Securities and Exchange Commission for the year
ended March 31, 1997. The results for the interim periods presented
are not necessarily indicative of results to be expected for a full
year.
2. PRIOR-YEAR RECLASSIFICATIONS
Consistent with current-year classifications certain
reclassifications have been made to prior-year amounts.
3. RENEWAL OF CREDIT LINE
The Company has an unused line of credit with a bank to borrow a
total of $750,000. This recently renewed line of credit, which expires
September, 1998, accrues interest on outstanding borrowings at prime
plus 2 percent per annum. As of September 30, 1997 the Company had no
outstanding borrowings against this line of credit.
4. REPRICING OF STOCK OPTIONS
On July 18, 1997 the Compensation Committee of the 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 its then current fair market value.
5. DISCONTINUATION OF LEXIA SYSTEMS, INC.
In December, 1996 the Board of Directors approved a plan to
discontinue the operations of Lexia Systems, Inc. ("Lexia"). Lexia
is currently in the process of winding down its affairs and has
notified its customers that it will cease operations on March 31,
1998. The Company has not been able to consummate a sale of Lexia
operations or resolve outstanding issues between Lexia and ICL and
Fujitsu/ICL Computers.
5
<PAGE>
6. SUBSEQUENT EVENT
On October 29, 1997 the Company entered into a non-binding
letter of intent with I-PAC Manufacturing, Inc. The companies have
agreed to combine their respective business operations through a merger
which will result in the issuance of 9,500,000 shares of Photomatrix
common stock to shareholders of I-PAC Manufacturing, Inc. in exchange
for all of the outstanding stock of the privately-held company. The
proposed merger will result in increasing the number of outstanding
shares of Photomatrix common stock from 5,083,000 to 14,583,000. In
addition, Photomatrix has also previously granted options and warrants
to officers, directors, key employees and various other parties to
purchase 907,000 shares of its common stock, which remain outstanding.
I-PAC Manufacturing is a custom contract manufacturer of
electrical and mechanical assemblies, including complex, multi-layer
printed circuit board assemblies; wire and cable harnesses; molded
cables; and complete system and subsystem assemblies. It specializes
in surface mount and hybrid printed circuit boards used in high value
industrial products and commercial products which require an
exceptionally high level of quality, a critical emphasis on delivery
schedules, and intensive customer support. I-PAC's primary customers
include ITT, Lockheed Martin, Disney, Hughes JVC, Sattel
Communications, Sanyo, Schumacher, Triconex (a Siebe company) and
Palomar Products. For the nine months ended September 30, 1997, I-PAC
Manufacturing, Inc. reported revenues of nearly $5 million, combined
with a strong backlog. I-PAC Manufacturing, Inc. owns a 40,000 square
foot, two story concrete building located in a high end R&D industrial
park in Carlsbad, California, which houses its operations. It also has
a wholly-owned subsidiary, I-PAC Express Assembly, Inc.
I-PAC Express Assembly, Inc. is a custom contract manufacturer
specializing in quick turn printed circuit board prototypes
incorporating surface mount and hybrid technologies. It is located in
Santa Ana, California, in the heart of the Orange County high tech
community.
I-PAC Express Assembly, Inc. supports prototyping requirements for new
products during their design phase, allowing those products to be
manufactured by I-PAC Manufacturing when production quantities are
required. Under the terms of the letter of intent, the corporate
headquarters of Photomatrix will be relocated as soon as possible after
the close of the merger transaction to the I-PAC Manufacturing, Inc.
facility located in Carlsbad. In addition, William Grivas, currently
Chief Executive Officer of I-PAC Manufacturing, will assume the
position of Chairman of the Board of Directors of Photomatrix and
Patrick Moore, currently President of I-PAC Manufacturing, will assume
the position of Chief Executive Officer of Photomatrix. Suren Dutia,
currently President, Chief Executive Officer and Chairman of the Board
for Photomatrix, will retain the position of President of Photomatrix.
The composition of the Photomatrix Board of Directors will change from
four members to seven members. The existing members of the Board will
remain the same, and the three additional positions will be filled by
William Grivas, James Hill, who is currently a director of I-PAC
Manufacturing and one additional person. It is anticipated that the
transaction will be treated as a pooling of interests for accounting
purposes.
The proposed merger is subject to several conditions, including
but not limited to the following: a) satisfactory completion of due
diligence by each of the parties , b) the absence of any material
adverse change in assets, liabilities, personnel, financial conditions
or prospects of the respective companies, c) compliance with all
applicable statutory and regulatory requirements, d) the approval of
the transaction and the execution, delivery and performance of the
transaction agreement by their respective Boards of Directors and
shareholders, e) the receipt of all necessary or appropriate consents,
waivers and approvals of third parties, f) qualification of this
transaction as a "pooling of interests" for accounting purposes, g)
qualification of this transaction as a tax-free exchange under Federal
and California tax laws, h) the absence of a significant number of
dissenting shareholders and i) the negotiation and execution of a
merger agreement and the appropriate documentation. There is no
assurance that the proposed merger will be consummated.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results
of operations should be read in conjunction with the consolidated financial
statements and notes to consolidated financial statements included elsewhere
herein.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1996
Consolidated revenues for the quarter ended September 30, 1997
decreased $432,000 or 15.9% to $2,288,000 from $2,720,000 in the quarter ended
September 30, 1996. This was due to a 21.1% ($466,000) decrease in equipment
and software revenues offset by a 6.7% ($34,000) increase in service revenues.
This reduction in equipment and software revenues resulted primarily from a
softening of the scanner market.
Consolidated gross margin for the quarter ended September 30, 1997
increased $199,000 or 31.1% to $840,000 from $641,000 in the quarter ended
September 30, 1996. Likewise, gross margin as a percent of revenues increased
13.1% to 36.7% from 23.6% in the quarter ended September 30, 1996. This
increase was due to an 11.6% increase in equipment and software margins coupled
with a 16.5% increase in service margins. The equipment and software gross
margin improvement resulted from the effects of both a favorable product mix and
a reduction in costs associated with production efficiencies. The service gross
margin improvement resulted from a 22.9% decrease in service costs, primarily
labor, tax and labor-related costs coupled with a 141.6% increase in charges to
customers for labor and materials not covered by maintenance contracts.
Selling, general and administrative expenses ("SG&A") for the quarter
ended September 30, 1997 decreased $149,000 or 16.7% to $741,000 from $890,000
in the quarter ended September 30, 1996. As a percent of revenue SG&A for the
quarter ended September 30, 1997 decreased 0.3% to 32.4% from 32.7% for the
quarter ended September 30, 1996. These reductions were achieved with the
consolidation of the Culver City and San Diego facilities into a new San Diego
facility which resulted in cost reductions in Sales and Marketing and
Administrative expenses, primarily attributable to reductions in wages and
salaries and the elimination of duplicate facility costs.
Research and development expenses for the quarter ended September 30,
1997 decreased by $8,000 or 4.4% to $173,000 from $181,000 in the quarter ended
September 30, 1996. As a percent of revenue research and development expenses
increased slightly, 0.9% to 7.6% from 6.7% for the quarter ended September 30,
1996. Total product development spending increased $12,000 to $218,000 from
$206,000 in the quarter ended September 30, 1996, due primarily to an increase
in new scanner product development activities. Expenditures that were
capitalized because they related to technologically feasible projects increased
$20,000 to $45,000 from $25,000 in the quarter ended September 30, 1996.
Other income of $89,000 for the quarter ended September 30, 1997
compares to an expense of $6,000 in the quarter ended September 30, 1996. This
improvement is primarily the result of the sale of a trademark for $100,000
during the quarter ended September 30, 1997.
There was no provision for income taxes booked in either the quarter
ended September 30, 1997 or the quarter ended September 30, 1996, because of
the effects of net operating loss carryforwards.
The net effect of the increases in gross margin and other income,
together with the decreases in SG&A and product development expenses resulted
in net income from continuing operations for the quarter ended September 30,
1997 of $15,000 or $0.00 per share. This compares to a loss from continuing
operations of $436,000 or $(0.09) per share for the quarter ended September 30,
1996. There was no effect from discontinued operations in the current quarter
compared to income of $21,000 or $0.01 per share in the quarter
7
<PAGE>
ended September 30, 1996. Therefore, net income was $15,000 or $0.00 per share
in the current quarter compared to a net loss of $415,000 or $(0.08) per share
in the prior quarter.
SIX MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE SIX MONTHS ENDED SEPTEMBER
30, 1996
Consolidated revenues for the six months ended September 30, 1997
increased $139,000 or 3.1% to $4,559,000 from $4,420,000 in the six months ended
September 30, 1996. Both equipment and software revenue and service revenue
increased from the prior six month period, equipment and software revenue
showing a modest 0.1% ($5,000) increase and service revenue showing a 13.2%
increase.
Consolidated gross margin in the six months ended September 30, 1997
increased $495,000 or 45.1% to $1,593,00 from $1,098,000 in the six months ended
September 30, 1996. Gross margin as a percent of revenues also increased, 10.1%,
to 34.9% from 24.8% for the six months ended September 30, 1996. The equipment
and software gross margin improvement resulted from the effects of both a
favorable product mix and a reduction in costs associated with production
efficiencies. The service gross margin improvement resulted from a 17.3%
decrease in service costs, primarily labor, tax and labor-related costs coupled
with a 105.5% increase in charges to customers for labor and materials not
covered by maintenance contracts.
Selling, general and administrative expenses ("SG&A") in the six months
ended September 30, 1997 decreased $115,000 or 6.5% to $1,666,000 from
$1,781,000 in the six months ended September 30, 1996. As a percent of revenue,
SG&A in the six months ended September 30, 1997 decreased 3.8% to 36.5% from
40.3% in the six months ended September 30, 1996. As was the case with the
three months ended September 30, 1997, these reductions were achieved with the
consolidation of the Culver City and San Diego facilities into a new San Diego
facility which resulted in cost reductions in Sales and Marketing and
Administration expenses, primarily attributable to reductions in wages and
salaries and the elimination of duplicate facility costs.
Research and development expenses in the six months ended September 30,
1997 decreased by $9,000 or 2.5% to $354,000 from $363,000 in the six months
ended September 30, 1996. As a percentage of revenue, research and development
expenses decreased slightly, 0.4% to 7.8% from 8.2% for the six months ended
September 30, 1996. Total product development spending increased $11,000 to
$438,000 from $425,000 in the six months ended September 30, 1996, due primarily
to an increase in new scanner product development activities. Expenditures that
were capitalized because they related to technologically feasible projects
increased $22,000 to $84,000 from $62,000 in the six months ended September 30,
1996.
Other income of $97,000 in the six months ended September 30, 1997
compares to an expense of $48,000 in the six months ended September 30, 1996.
This improvement reflects a sale for $100,000 of a trademark in the current
quarter combined with a reduction in interest expense.
There was no provision for income taxes booked in the six months ended
September 30, 1997, the same as in the six months ended September 30, 1996,
because of the effects of net operating loss carryforwards.
The net effect of the increases in gross margin and other income and
the decreases in SG&A and product development expenses resulted in a reduction
in the loss from continuing operations between years of $764,000, or $(0.06) per
share compared to $(0.20) per share in the six months ended September 30, 1996.
There was no effect from discontinued operations in the current six months ended
September 30, 1997 compared to a loss of $59,000 in the six months ended
September 30, 1996. The results were a net loss of $330,000 or $(0.06) in the
current six month period compared to a loss of $1,153,000 or $(0.21) in the
prior six month period.
8
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
RECENT AND FUTURE SOURCES OF AND DEMANDS ON LIQUIDITY AND CAPITAL RESOURCES
During the six months ended September 30, 1997, the Company's primary
sources of liquidity were a reduction of accounts receivable ($143,000), an
increase in accrued liabilities and other ($128,000), a reduction in other
assets ($49,000), cash flows provided by discontinued operation ($628,000), and
cash reserves. During the same period the primary uses of cash were to
increase inventories ($237,000), increase prepaid expenses ($35,000), reduce
accounts payable ($93,000), reduce customer deposits ($274,000), and for capital
expenditures ($23,000). As a result of these sources and uses of liquidity
during the six months ended September 30, 1997 as described above, the
Company's cash balance increased $462,000 or 56.8%, from $812,000 to $1,274,000.
During September, 1997 the Company renewed its $750,000 line of credit
with its bank. The new line of credit will accrue interest on outstanding
borrowings at the bank's prime rate plus 2% per annum. The Company's previous
line of credit accrued interest at prime plus 2-1/2%. All other terms of the
new line of credit, including various covenants, essentially remain the same.
As of September 30, 1997, the Company had no outstanding borrowings against this
line of credit.
Under the terms of the renewed agreement, total borrowings under the
line of credit will continue to be limited to the lesser of $750,000 or 70% of
eligible accounts receivable (as defined under the agreement). The Company is
required to continue to (1) maintain a minimum tangible net worth of $2,800,000,
(2) maintain a ratio of total liabilities to tangible new worth of not greater
than 1.1 to 1.0, (3) maintain working capital of $1,750,000 and (4) maintain a
current ratio of 1.7 to 1.0. The new line of credit expires in September, 1998.
The Company is obligated under a series of notes payable totaling
$527,000 as of September 30, 1997. These notes bear interest at a rate of 8%
per annum and mature in April 2000. Interest and principal payments totaling
$16,000 are due monthly. In April, 1997 the Company stopped making payments on
these notes. In October, 1997 the Company resumed payments and as of October 31
is current with all payments under these obligations.
The Company's assured sources of future short-term liquidity are its
cash balance of $1,274,000 as of September 30, 1997 and the full amount of its
line of credit of $750,000 as of September 30, 1997.
The Company currently is obligated to pay approximately $20,000 per
month in lease payments. Aside from these commitments, the Company has not made
any material capital commitments.
The Company is continuing to concentrate on increasing sales and
improving gross margins. If it is successful, then it should have sufficient
liquidity to fund its operations during the next twelve months. If it is
unsuccessful it may have to rely upon its line of credit and raise additional
capital to fund its operations. In the event that the proposed merger (Note 6)
is accomplished, although no assurance can be given, the Company expects the
effect on liquidity to be positive, therefore no additional capital will be
required to fund operations.
In March, 1997, the Financial Accounting Standards Board issued SFAS
128, EARNINGS PER SHARE, 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 the stock during the period. The Company is currently
evaluating the impact of implementation of SFAS 128.
9
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THIS 10-QSB 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 INCLUDING
INCREASING SALES AND IMPROVING MARGINS, ASSUMPTIONS AND STATEMENTS RELATING TO
THE COMPANY'S FUTURE ECONOMIC PERFORMANCE 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 OTHER FACTORS AS DISCUSSED IN THE COMPANY'S
ANNUAL REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED MARCH 31, 1997.
10
<PAGE>
PART II - OTHER INFORMATION
Item 5. OTHER INFORMATION
On October 29, 1997 the Company entered into a non-binding
letter of intent with I-PAC Manufacturing, Inc. The companies have
agreed to combine their respective business operations through a merger
which will result in the issuance of 9,500,000 shares of Photomatrix
common stock to shareholders of I-PAC Manufacturing, Inc. in exchange
for all of the outstanding stock of the privately-held company. The
proposed merger will result in increasing the number of outstanding
shares of Photomatrix common stock from 5,083,000 to 14,583,000. In
addition, Photomatrix has also previously granted options and warrants
to officers, directors, key employees and various other parties to
purchase 907,000 shares of its common stock, which remain outstanding.
I-PAC Manufacturing is a custom contract manufacturer of
electrical and mechanical assemblies, including complex, multi-layer
printed circuit board assemblies; wire and cable harnesses; molded
cables; and complete system and subsystem assemblies. It specializes
in surface mount and hybrid printed circuit boards used in high value
industrial products and commercial products which require an
exceptionally high level of quality, a critical emphasis on delivery
schedules, and intensive customer support. I-PAC's primary customers
include ITT, Lockheed Martin, Disney, Hughes JVC, Sattel
Communications, Sanyo, Schumacher, Triconex (a Siebe company) and
Palomar Products. For the nine months ended September 30, 1997, I-PAC
Manufacturing, Inc. reported revenues of nearly $5 million, combined
with a strong backlog. I-PAC Manufacturing, Inc. owns a 40,000 square
foot, two story concrete building located in a high end R&D industrial
park in Carlsbad, California, which houses its operations. It also has
an a wholly-owned subsidiary, I-PAC Express Assembly, Inc.
I-PAC Express Assembly, Inc. is a custom contract manufacturer
specializing in quick turn printed circuit board prototypes
incorporating surface mount and hybrid technologies. It is located in
Santa Ana, California, in the heart of the Orange County high tech
community. I-PAC Express Assembly, Inc. supports prototyping
requirements for new products during their design phase, allowing those
products to be manufactured by I-PAC Manufacturing when production
quantities are required. Under the terms of the letter of intent, the
corporate headquarters of Photomatrix will be relocated as soon as
possible after the close of the merger transaction to the I-PAC
Manufacturing, Inc. facility located in Carlsbad. In addition, William
Grivas, currently Chief Executive Officer of I-PAC Manufacturing, will
assume the position of Chairman of the Board of Directors of
Photomatrix and Patrick Moore, currently President of I-PAC
Manufacturing, will assume the position of Chief Executive Officer of
Photomatrix. Suren Dutia, currently President, Chief Executive
Officer and Chairman of the Board for Photomatrix, will retain the
position of President of Photomatrix. The composition of the
Photomatrix Board of Directors will change from four members to seven
members. The existing members of the Board will remain the same, and
the three additional positions will be filled by William Grivas, James
Hill, who is currently a director of I-PAC Manufacturing and one
additional person. It is anticipated that the transaction will be
treated as a pooling of interests for accounting purposes.
The proposed merger is subject to several conditions, including
but not limited to the following: a) satisfactory completion of due
diligence by each of the parties , b) the absence of any material
adverse change in assets, liabilities, personnel, financial conditions
or prospects of the respective companies, c) compliance with all
applicable statutory and regulatory requirements, d) the approval of
the transaction and the execution, delivery and performance of the
transaction agreement by their respective Boards of Directors and
shareholders, e) the receipt of all necessary or appropriate consents,
waivers and approvals of third parties, f) qualification of this
transaction as a "pooling of interests" for accounting purposes, g)
qualification of this transaction as a tax-free exchange under
11
<PAGE>
Federal and California tax laws, h) the absence of a significant number
of dissenting shareholders and i) the negotiation and execution of a
merger agreement and the appropriate documentation. There is no
assurance that the proposed merger will be consummated.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the quarter
ended September 30, 1997.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Issuer has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
PHOTOMATRIX INC.
Date: November 10, 1997 by /s/ Suren G. Dutia
--------------------------
Suren G. Dutia
President
Chief Executive Officer
Date: November 10, 1997 by /s/ Roy L. Gayhart
--------------------------
Roy L. Gayhart
Chief Financial Officer
Date: November 10, 1997 by /s/ Charles H. Frady
--------------------------
Charles H. Frady
Controller
Principal Accounting Officer
13
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