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, 1998
( ) 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 registrant as specified in its charter)
California 95-3267788
(State or other jurisdiction of incorporation or organization) (IRS Employer
Identification No.)
1958 Kellogg Ave., Carlsbad, California 92008
(Address of principal executive offices) (Zip Code)
(760) 431-4999
(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
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. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 18, 1998, based on the average of the highest and lowest
prices of such stock on that date was $10,238,861. The number of shares of
common stock of Photomatrix, Inc. outstanding as of June 18, 1998, was
9,931,000.
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 the competitive position of the Company's products, 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
Overview
Photomatrix, Inc. (the "Company," or "Photomatrix,") is a value added
engineering, design and manufacturing company specializing in document scanning,
digital video imaging and related technology. On June 5, 1998, the shareholders
of Photomatrix approved a merger ("Merger") with I-PAC Manufacturing, Inc.
("I-PAC"). Effective as of June 5, 1998, Photomatrix is comprised of I-PAC and
Photomatrix Imaging Corporation ("PMX").
I-PAC is a value added contract manufacturer, specializing in the
manufacture of electrical and mechanical assemblies. PMX develops, manufactures,
sells and services high-performance document and aperture-card scanners for
legal, financial, government and commercial enterprises.
PMX 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
four years, PMX 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 has steadily declined, while scanner product and services
revenue has increased.
Corporate History
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 the Company is currently in the process of
winding down and closing this operation. The financial position and results of
operations of Xscribe Legal Systems, Inc. and Lexia Systems, Inc. have been
shown in the consolidated financial statements of the Company as discontinued
operations. In May, 1998, the Company consolidated and relocated its United
States continuing operations to 1958 Kellogg Avenue, Carlsbad, California. The
Company's phone number is (760) 431-4999.
Principal Products
In fiscal year 1998, 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.
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Document Scanners
PMX 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 Photomatrix 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 newly introduced Vision Series 9600, a high-speed (up to 200
dual-sided pages per minute at 200 dots per inch [dpi] resolution), rugged,
single or dual-sided, 200 to 400 dpi, automatic feeding document scanning
system. The Vision Series 9600 includes the scanner, a Pentium PC, high
resolution display, a video interface card, Windows NT application software and
Vision Image Capture Software ("VICS"), which operates in Microsoft Windows NT.
VICS controls the scanning and PC hardware, displays images and manages the work
flow of the image capture process (including indexing, scanning and formatting)
and its customizable work flow features enable users to use VICS as the
front-end of a larger document management software system. Because the Series
9600 scanner, computer and VICS were designed to work as one tightly integrated
system, this configuration is the most efficient of the Photomatrix products.
The Vision Series 9600 replaces the Company's earlier generation Series 6000
scanners.
PMX has primarily sold the Vision Series 5000 ("Series 5000"), a
duplex, high resolution, 5000 element scanner which captures double-sided
documents at speeds in excess of 150 dual sided pages per minute. These machines
differ from the Vision Series 9600 and Vision Series 6000, in that the Series
5000 is not bundled with the Photomatrix image processing board, compression
board, or VICS. Instead, the Series 5000 is plug compatible with interface
(processing and compression) boards from Kofax, Xionics and Seaport Imaging.
Because of this compatibility, PMX sold a higher volume of the Series 5000
scanners. During the fourth quarter of fiscal 1998, the Company began selling
the next generation of plug-compatible document scanners, the Series 9000, which
features improved ergonomics of the top document stacker output bin, SCSI (Small
Computer Systems Interface) capabilities and increased speeds up to 200
dual-sided pages per minute.
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 wide range of
automation, throughput speed and image enhancement features. PMX sells aperture
card scanners primarily to corporate in-house and third party service bureaus
which scan microfilmed engineering drawings for the end users of those drawings.
PMX 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 nine ( 9) years of experience with the Company.
The Company views maintenance contracts and related revenue as a
significant revenue opportunity and profit center in fiscal year 1999.
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Competition
Document Scanners. PMX competes in the high-end of the industry with
Kodak, 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 a 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 Vision Series 5000 and 9000
scanners, sell for higher prices than the Photomatrix scanners.
In the document scanner market, PMX believes that its Vision Series
5000, 9000 and 9600 compare favorably with their product counterparts at BancTec
and Kodak. PMX believes that its primary competitive advantage in this segment
of the market is the price -performance relationship of its products, including
their relative speed, image quality, reliability and rugged build. PMX maintains
the leading price-performance ratios in its market segment and retains this
status by continually improving on speed and throughput and also pricing below
BancTec's and Kodak's products. All of its primary competitors, however, have
substantially greater resources than PMX for marketing and distribution and for
purchasing and maintaining market share. PMX's ability to increase 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. However, there is no assurance that the Company will not
experience intense price competition or that it will be able to maintain a
competitive position in this market.
PMX has entered into an original equipment manufacturer ("OEM")
contract with Bell & Howell to supply Series 5000 and 9000 scanners under the
Bell & Howell label. PMX scanners operate at speeds higher than scanners
manufactured by Bell & Howell, and the Company's OEM relationship with Bell &
Howell represents a strategic corporate partnering that should be beneficial to
both parties. Management does not currently view Bell & Howell as a competitor
in the high-end market assuming PMX continually improves the features and speed
of Photomatrix scanners such that they are perpetually superior to Bell &
Howell's product offering and Bell & Howell adequately markets and sells
Photomatrix scanners in large volumes. Management believes PMX has the
engineering talent and resources to stay ahead of Bell & Howell technologically,
thereby fostering an OEM relationship. In December, 1997, PMX entered into an
addendum to its OEM agreement with Bell & Howell, whereby Bell & Howell became
an exclusive agent, with certain specifically identified exceptions, to sell
Photomatrix peripheral document scanners to distributors and value added
resellers ("VARs") in the United States and Canada. As a part of this agreement,
PMX received a commitment from Bell & Howell to purchase a minimum quantity of
Vision Series 5000 document scanners, valued at $1.5 million, over a period of
seven months, beginning in December, 1997. Bell & Howell purchased $924,000
under this commitment agreement during the period from December, 1997 through
May, 1998. In June, 1998, this commitment agreement was modified, whereby Bell &
Howell agreed to purchase a minimum quantity of Vision Series 9000 scanners,
valued at approximately $600,000, over a period of nine months beginning in
July, 1998. There is no assurance that the existing OEM agreement with Bell &
Howell will continue to be beneficial to both parties.
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 significant 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 and 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 the storage and retrieval of these
documents.
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PMX 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. PMX's primary competitors in the aperture card scanning market
are Wicks & Wilson, a United Kingdom company, Microbox, a German company, and
SunRise Imaging, a US based company. PMX is not able to estimate the size of
this market but believes that it is currently limited due to the cost of
converting engineering back files of aperture cards and the related systems into
electronic storage and retrieval systems. PMX's products are high-end products
and are priced higher than other currently marketed products. In the Company's
opinion, its aperture card scanner product exceeds the quality and duty cycle
statistics of the products of any of its competitors.
Marketing and Distribution
PMX markets Series 9600 image capture systems to service bureaus and
end -users through its direct sales force. In contrast, PMX markets its Series
5000 and 9000 document scanners via indirect distribution channels, primarily as
a consequence of its OEM agreement with Bell & Howell and to VAR's service
bureaus and end-users. In April 1997, PMX entered into a distribution agreement
with IBM. Under the agreement, which contains no minimum requirements, IBM is
granted the right to sell Photomatrix document scanners. To date there have been
no significant sales under the IBM agreement.
PMX 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, PMX maintains close working relationships with
major systems integrators and VARs. PMX relies heavily on the sales efforts of
systems integrators and VARs to generate sales of aperture card scanners. PMX
also sells aperture card scanning systems through its direct sales force to
service bureaus which provide scanning services to engineering drawing end
users.
PMX 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 PMX field service employees who are located
throughout the United States and in England. PMX also performs repair services
for, and supplies replacement parts to, Kodak (which previously sold PMX
products under a private label agreement).
Raw Materials and Manufacturing
PMX manufactures its aperture card scanners and document scanners at
its manufacturing facilities in Carlsbad, California. PMX'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. PMX manufactures some of its own boards; however,
many of its printed circuit boards ("PCBs") have been manufactured by outside
vendors. In anticipation of the Merger, PMX recently began utilizing I-PAC as
its principal PCB vendor. Now that the Merger has occurred, the Company expects
to realize additional cost savings as a result of I-PAC's expertise in PCB
manufacturing and wiring and assembly.
PMX's products incorporate electronic, imaging and mechanical
components purchased from various vendors. The electronic components, including
computer chips, are generally available from multiple sources. PMX currently
uses Fairchild, Kodak and Sony CCDs (Charged Coupled Devices) in the PMX cameras
in its aperture card and document scanning products. However, other commercially
available CCD cameras could be substituted if necessary. PMX copies, labels and
packages its software products.
PMX's products contain numerous mechanical components that are machined
specially for PMX's products. PMX relies upon several vendors for 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 PMX could experience a supply disruption if
any of these vendors failed to meet its supply obligations.
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PMX 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 and NT, Novell NetWare and other commercially available
software.
Intellectual Property Rights and Licenses
PMX relies upon copyright and trade secret laws to protect its software
and firmware used in its aperture card scanner and document scanner products.
PMX has registered design documents for its document scanner and certain of its
product maintenance manuals, operations manuals and parts catalogues under
federal copyright law.
PMX 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, PMX 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. PMX offers with its
scanners a SCSI developers' tool kit for developing a Photomatrix scanner
driver.
PMX also purchases and resells as part of the Series 9600 document
scanner a board manufactured by Kodak Image Products that enables the scanning
of bar codes and bundles its Series 9600 document scanner with Microsoft NT
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.
Significant Customers
One customer (Bell & Howell) accounted for 17 percent of the Company's
total revenue for fiscal year 1997 and two customers Bell & Howell and Kodak,
accounted for 26 and 13 percent, respectively, of its revenue for fiscal year
1998. No other customer accounted for more than 10 percent of the Company's
total revenue during fiscal years 1998 or 1997. (See "Additional Risk Factors")
Backlog
PMX generally does not have a material order backlog at any time
because PMX normally fills orders within the delivery schedules requested by
customers (generally within 30 days).
Government Sales
The Company has had no government sales.
Research and Development
During the last three fiscal years, the Company expended $1,098,000
(fiscal year 1998), $969,000 (fiscal year 1997), and $1,018,000 (fiscal year
1996) on company-sponsored research and development projects, including projects
performed by consultants for the Company and capitalized software development
costs. Management expects that research and development expenditures (including
capitalized software development costs) will total approximately $1 million for
the coming year.
The Company works closely with its customers to develop enhancements
and new products in response to customer needs. In fiscal years 1998 and 1997,
the Company has been engaged in the development of competitive enhancements to
the Photomatrix line of scanners, including a faster scanner, a "smart"
automatic
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document feeder, a top loading stacker, and the next generation of both the
Series 5000 and 6000 document scanners and a new aperture card scanner line.
There is no assurance that the Company will successfully complete current or
planned development projects or that it 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 that is developed.
Environmental Laws
Compliance with federal, state and local laws enacted for the
protection of the environment has not had a material effect upon the Company's
capital expenditures, 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 such laws because of the nature of its products and
manufacturing operations.
Employees
At May 31, 1998 (before the merger with I-PAC), the Company had 47
full-time and one part-time employee, excluding three employees associated with
the 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 18.5% of its revenue for the year
ended March 31, 1998, and 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.
Property
Subsequent to March 31, 1998, the Company relocated its corporate
headquarters to the I-PAC facility in Carlsbad, California. The Company leases a
facility located in San Diego, California, consisting of approximately 23,400
square feet, which previously housed the Company's corporate offices and its
manufacturing, sales and administrative functions. The lease expires in
September 2002. The Company has entered into an assignment of this lease,
effective June 15, 1998. Management anticipates that related costs of lease
assignment and the write-off of leasehold improvements will be less than
$50,000.
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 consists of
5,100 square feet, and the lease expires in June 2000. The London facility
consists of 2,400 square feet, and the lease expires in May 2013.
The Company also leases 880 square feet in Herndon, Virginia for the
Lexia operation (which operation has been discontinued). This lease expires in
November 1998.
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)). Both Bernhart v. Xscribe and Galfin
v. Xscribe have now been or are in the process of being dismissed. Xscribe has
tendered the Hagipadelis v. Xscribe claim to its insurance carriers, St. Paul
Fire ("St. Paul") and Marine Insurance and Federal Insurance Company
("Federal"). 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 this remaining case is without
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merit 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.
Acquired Operations
I-PAC is a value added 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. I-PAC specializes in providing value added electronic
manufacturing services in connection with the manufacture of surface mount and
hybrid printed circuit boards used in high value industrial and commercial
products which require an exceptionally high level of quality control, a
critical emphasis on delivery schedules, and intensive customer support.
All of I-PAC's printed circuit boards are designed by the customer and
manufactured to its specifications. Using computer controlled manufacturing and
test machinery and equipment, I-PAC provides manufacturing services employing
surface mount technology ("SMT") and pin-through-hole ("PTH") interconnection
technologies. I-PAC offers a wide range of manufacturing and management
services, either on a turnkey or consignment basis, including material
procurement and control, manufacturing and test engineering support, and quality
assurance. I-PAC's strategy is to develop long-term manufacturing relationships
with established and emerging original equipment manufacturers ("OEMs").
Corporate History
I-PAC was organized under the laws of the State of California in 1990.
In January 1997, I-PAC purchased the facility it had been leasing, a 40,000
square foot, two story concrete building located in Carlsbad, California.
Subsequent to March 31, 1998, the Company relocated its corporate headquarters
and manufacturing operations into this facility.
In February 1997, I-PAC acquired I-PAC Express Assembly, Inc. ("I-PAC
Express"). I-PAC Express 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. I-PAC Express supports
prototyping requirements for new electronic products during their design phase,
allowing those products to then migrate to the main I-PAC facility when
production quantities are required. I-PAC intends to open additional I-PAC
Express locations in Southern California.
I-PAC's facilities are located at 1958 Kellogg Avenue, Carlsbad,
California 92009. Its phone number is (760) 438-1529.
Contract Electronics Manufacturing Industry
Overview
The contract electronics manufacturing industry provides the program
management, technical and administrative support, and manufacturing expertise
required to take a product from the early design and prototype stages through
volume production and distribution. Over the past two decades electronic systems
have become smaller, lighter and more reliable, while demands for performance at
lower costs have increased. The use of a contract manufacturer allows an OEM to
avoid large capital investments in plant, equipment and staff and to concentrate
instead on the areas of its greatest strength: innovation, design and marketing.
OEMs use contract manufacturers to:
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Reduce Production Costs. Contract manufacturers generally are
able to manufacture specialized products at a lower cost than OEMs
because of efficiencies associated with specialization and higher
production volumes.
Accelerate Time to Market. Rapid technological advances and
shorter product life cycles require OEMs to reduce the time required to
bring a product to market. Delays in bringing a product to market can
result in obsolescence of the product before or shortly after it
becomes available. By providing an established infrastructure and
manufacturing expertise, contract manufacturers can help OEMs shorten
their product introduction cycles.
Access Advanced Manufacturing Capabilities. As electronic
products have become smaller and more technologically advanced,
manufacturing processes have become more automated and complex, making
it more difficult for OEMs to maintain the manufacturing expertise
required to remain competitive. Using contract manufacturers affords
OEMs access to advanced manufacturing technology and processes.
Improve Manufacturing Quality. Because of their focus on their
specialized area of expertise, contract manufacturers generally can
provide services of higher quality than OEMs can provide in-house.
Focus Resources. In the rapidly changing, increasingly
competitive electronics industry, most OEMs must focus their attention
and resources properly. The use of contract manufacturers enables OEMs
to focus on their core competencies.
Reduce Investment. As the electronics industry has become more
technologically advanced, manufacturing requirements have resulted in
increased investments in inventory, equipment, labor and
infrastructure. Contract manufacturers enable OEMs to achieve high
technological capabilities at a lower capital investment level than
required for internal manufacturing.
Improve Inventory Management and Purchasing Power. The
experience of contract manufacturers in inventory procurement and
management can reduce OEM production and inventory costs.
Industry Size
According to the Institute for Interconnecting and Packaging
Electronics Circuits ("IPC"), the U.S. market for contract electronics
manufacturing services was approximately $36 billion in 1996 and was growing at
an annual rate of approximately 25%. The domestic contract electronics
manufacturing market includes passive components ($15 billion), actual assembly
($13 billion), PCBs ($7.2 billion) and flexible circuits ($0.7 billion).
Printed Circuit Boards
PCBs are the basic platform used in virtually all advanced electronic
equipment to direct, sequence and control electronic signals between
semiconductor devices (such as microprocessors, memory chips and logic devices)
and passive components (such as resistors and capacitors). PCBs consist of one
or more layers of circuitry laminated into rigid insulating material composed of
fiberglass epoxy. Multi-layer PCBs provide a three dimensional system with
electronic signals traveling along horizontal planes of multiple layers of
circuitry patterns as well as along the vertical plane through plated holes or
vias.
SMT is an assembly process which allows the placement of a large number
of components in a dense array directly on both sides of a PCB. SMT is a recent
advance over the more mature PTH technology, which
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permits electronic components to be attached to only one side of a PCB by
inserting the component into holes drilled through the board. The SMT process
allows OEMs to use advanced circuitry, while at the same time permitting the
placement of a greater number of components on a PCB without having to increase
the size of the board. By allowing increasingly complex circuits to be packaged
with the components in closer proximity to each other, SMT enhances circuit
processing speed and board and system performance.
Lead times for PCBs generally fall into two categories, "quick turn"
and "standard." Quick turn lead times range from one to 15 days for prototype
and preproduction quantities. Standard lead times typically run from six to
twelve weeks and are generally associated with larger volumes.
According to the IPC, the U.S. market for PCBs was estimated at
approximately $7.2 billion in 1996, an increase of 10% from 1995. Also according
to the IPC, Multi-layer PCBs, the fastest growing segment (14% growth from 1995
to 1996) accounted for approximately 74% of all PCBs shipped in 1996. Despite
its large size, the PCB market is fragmented. In 1996, only eight of
approximately 700 independent PCB manufacturers had annual sales in excess of
$100 million.
System and Subsystem Assembly
According to the IPC, the United States value added contract
manufacturing market was approximately $13 billion in 1996 and is growing at a
rate of approximately 20% per year. I-PAC believes that OEMs are increasingly
relying upon independent contract manufacturers for the manufacture of complex
electronic interconnect products rather than on in-house production.
Business Strategy
In response to these industry trends, I-PAC has positioned itself as a
specialist in the manufacture of complex, multi-layer PCBs, wire and cable
harnesses, molded cables, and complete system and subsystem assemblies including
value added electronic manufacturing services. I-PAC's strategy is to emphasize
its experience with surface mount and hybrid printed circuit boards used in high
value industrial and commercial products which require an exceptionally high
level of quality, a critical emphasis on delivery schedules, and intensive
customer support. Further, its strategy includes the following elements:
Establish and Maintain Long-term Relationships. One of I-PAC's
primary objectives is to pursue opportunities whereby it becomes an
integral part of an OEM's manufacturing operations. In this regard,
I-PAC strives to work closely with its customers in all phases of
design and production in an attempt to establish itself as the sole or
primary source for its customers' specialized manufacturing
requirements. I-PAC believes that this effort to develop close,
reliable, long-term relationships builds customer loyalty that is
difficult for competitors to overcome. I-PAC specifically targets
turnkey manufacturing opportunities because such business offers
increased profit margin, greater control over all variables of the
manufacturing process and greater reliance upon I-PAC by the OEM
associated with the turnkey operation.
Target and Maintain Balance Among Selected OEM Industries and
Customers. I-PAC markets its services to industries and customers that
have strict quality control standards for their products and that have
service intensive manufacturing requirements. I-PAC focuses on complex
assemblies in low and medium volumes for commercial and industrial
customers. I- PAC has not been, and does not intend to become, a
manufacturer of high volume PCB assemblies for personal computers or
other consumer related products, which typically have relatively low
margins. I-PAC instead focuses on a variety of industries that produce
products that generally have longer life cycles, higher engineering
content, higher customer margins, more stable demand and less price
pressure.
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Provide Comprehensive and Reliable Manufacturing Services.
I-PAC believes that its ability to attract and retain customers depends
on its ability to offer a broad range of specialized services. I-PAC
provides its customers with services ranging from prototype production
to the manufacture of PCB assemblies, material procurement and
management, post-production testing, and final product assembly. I-PAC
also strives to provide the highest level of reliability in connection
with these services and has an ongoing program of investing in
sophisticated machinery and equipment to enable it to achieve this
objective on a continuing basis. I-PAC's ability to provide electrical
mechanical assembly, wire and cable assembly and harnessing, molded
cable processing and other related services allows it to offer a
broader range of value added services to its customers than is
typically offered by a PCB assembly manufacturer.
Pursue Opportunities for Growth. Although it has not currently
identified any candidate for acquisition, I-PAC is committed to
pursuing opportunities to increase the scope of its operations through
acquisition. Its strategy is to attempt to acquire privately-held
technology product companies where the manufacturing requirements can
be met by I-PAC at significant cost reductions and economies of scale.
In addition, I-PAC intends to attempt to increase its contract
manufacturing business through growth of its customer base, vertical
and horizontal acquisition of other contract manufacturers and
expansion of its I-PAC Express operations to additional locations.
Maintain Flexibility. Many of I-PAC's customers are leaders in
their respective industries. As such, these customers often require
that their products be routinely reengineered. I-PAC has organized its
operations so that it can respond rapidly to design changes and provide
value added services where needed.
Services Provided by I-PAC
I-PAC manufactures over 200 different assemblies which are incorporated
in over 60 different products. I-PAC provides contract manufacturing services
primarily with regard to advanced industrial and commercial products in the
industrial controls, process control equipment, commercial broadcast, video and
instrumentation markets.
During the year ended December 31, 1997, I-PAC provided contract
services to more than 30 different customers, including ITT, Lockheed Martin,
Disney, Hughes JVC, Coyote Technologies, Sanyo, Schumacher, Standard
Communications, Triconex (a Siebe company) and Palomar Products. I-PAC's
services can be categorized as follows:
Prototype Manufacture. Through its wholly-owned subsidiary,
I-PAC Express, I-PAC offers quick turn, PCB prototype manufacturing
capabilities, incorporating SMT and hybrid technologies. I-PAC Express
supports new OEM products in their design phase and then attempts to
migrate these products to I-PAC's main manufacturing facility when
production quantities are required.
Product Manufacture. I-PAC manufactures electronic products
and assemblies for use in a variety of industries and applications. Its
manufacturing operations include product assembly, testing, and
assembly into final product housings. While I-PAC has automated various
aspects of many processes, the assembly of components into electronic
products is a labor intensive process generally requiring a high degree
of precision and dexterity, together with multiple quality control
steps prior to shipment. In addition to PCB assembly, I-PAC
manufactures various interconnect products, including molded cables.
10
<PAGE>
Product Testing. The increasingly complex design and assembly
techniques required for products manufactured by I-PAC, as well as the
reliability demanded by its customers, has required I-PAC to engage
extensive testing of its products. These tests include in-circuit
component measurement testing, manufacturing defect analysis, and
functional tests.
Value Added Services. I-PAC provides value added electronic
manufacturing services to enhance the quality and reduce the cost of
OEM products. I-PAC primarily solicits the manufacturer of high
engineering content OEM products and offers close working relationships
with its customers and flexibility to meet customer engineering needs.
Manufacturing and Supplies
The principal materials used by I-PAC in the manufacture of its
products are electronic components such as memory chips, microprocessing units,
integrated circuits, resistors, capacitors, transformers, switches, connectors,
wire and related items purchased as stock items from a variety of manufacturers
and distributors. While I-PAC purchases most of these materials from outside
sources, I-PAC is not dependent upon a single source of supply for any materials
essential to its business. I-PAC has generally been able to obtain adequate
supplies of such materials, and no shortage of such materials is currently
anticipated. However, notwithstanding the foregoing, there can be no assurance
that I-PAC will continue to be able to procure such components in the future
without material delay or other restrictions.
I-PAC believes that it is currently operating in accordance with ISO
9000 manufacturing quality control requirements, which specify standards,
processes, procedures and documentation to be implemented and maintained in all
applicable functions. I-PAC expects to receive formal certification for such
compliance by an outside third party in 1998.
Marketing
Senior management of I-PAC and a manufacturers' representative
organization owned by the shareholders of I-PAC are currently primarily
responsible for marketing I-PAC's services. The manufacturers' representative
organization receives variable commissions based on orders received by I-PAC. As
part of its marketing strategy, I-PAC attempts to work closely with its
customers in all phases of design and production in an attempt to establish
itself as the sole or primary source for its customers' specialized
manufacturing requirements. I-PAC believes that this effort to develop close,
reliable, long-term relationships builds customer loyalty that is difficult for
competitors to overcome. As a result, I-PAC is continually striving to develop
new negotiated business with existing customers. I-PAC also expects that I-PAC
Express will assist in marketing the services of I-PAC, in that customers of the
quick turn prototyping services of I-PAC Express may turn to I-PAC for
manufacturing services when production quantities of the products prototyped by
I-PAC Express are required.
Competition
The contract manufacturing industry is highly fragmented and is
characterized by intense competition. The contract manufacturing services
provided by I-PAC are available from many independent sources as well as the
in-house manufacturing capabilities of current and potential customers of I-PAC.
Many of I-PAC's competitors and potential competitors are significantly larger
and have significantly more capital, direct buying power and management
resources than I-PAC. Management believes that the principal competitive factors
in its targeted markets are flexible value added services, product quality and
reliability, flexibility and timeliness in responding to design and schedule
changes, reliability in meeting product delivery schedules, pricing and
geographical location. I-PAC believes that it competes favorably with respect to
these factors. However, I-PAC also expects that competition in its markets will
continue to be intense, and there can be no assurance that I-PAC will compete
successfully.
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<PAGE>
Licenses
I-PAC has acquired licenses for the manufacture, marketing and sale of
proprietary video capture, storage and transmission software technology that has
on-going development potential and possible application in a wide range of
existing and new markets. The ongoing development is not capital intensive, in
that the technology can be applied to products in different markets without
significant modification. Following the Merger, I-PAC plans to begin entering
new markets, possibly including telemedicine, video editing, video
teleconferencing, video surveillance and various broadcast markets.
In May, 1998, the Company and I-PAC entered into a letter of intent
with the licensor to jointly develop, manufacture and sell a series of products
which incorporate the licensor's proprietary video compression, storage and
transmission technology. Under terms of this new agreement, Photomatrix will
provide various mechanical, hardware and packaging engineering services to
finalize the design of three of the licensor's products: a Digital VCR, a video
monitoring product which will initially be used in automated teller machines,
and video controller to be used with the licensor's primary products. I-PAC will
also provide value engineering services for these products. In return, I-PAC
will be granted exclusive rights to manufacture all three products for the
licensor on a cost-plus basis. In addition, the licensor will enter into a
licensing agreement with Photomatrix granting Photomatrix the right to private
label and sell the Digital VCR and a new surveillance product which will utilize
the video controller. Photomatrix and the licensor also agreed to jointly
develop "Video Instruction of Demand" software, which in combination with the
Digital VCR product, will enable the transmission and reception of a wide range
of "video instruction" products over the Internet, as well as other transmission
mediums.
Seasonality
I-PAC has historically experienced its strongest sales volume in the
first and second quarters of each calendar year, but its business is not
considered seasonal. It is, however, subject to the business cycles that impact
its customers.
Backlog
As of March 8, 1998, I-PAC's backlog was approximately $500,000,
compared to $700,000 as of December 31, 1997. I-PAC defines backlog as hard copy
purchase orders for which I-PAC has firm delivery dates within the next twelve
months.
Employees
As of June 4, 1998, I-PAC had approximately 61 full time employees, of
which 4 were engaged in program management, 40 were engaged in manufacturing and
the remainder were engaged in management, engineering or administration, and 2
part time employees. None of its employees is represented by a labor union.
I-PAC believes its relations with its employees are good.
Property
I-PAC maintains its executive offices and manufacturing facilities in a
40,000 square foot, two story concrete building located at 1958 Kellogg Ave.,
Carlsbad, California. I-PAC owns these facilities.
I-PAC Express leases a 5,000 square foot facility located at 1415 East
McFadden Avenue, Santa Ana, California. The lease for this facility provides for
annual rent of $22,600 and expires in April 2000.
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Government Regulation
I-PAC's operations are subject to certain federal, state and local
regulatory requirements related to environmental, waste management, health and
safety matters. While there can be no assurance that material costs and
liabilities will not be incurred or that past or future operations will not
result in exposure to claims of injury by employees or the public, I-PAC
management believes that its business is operated in substantial compliance with
such regulations.
I-PAC periodically generates and temporarily handles limited amounts of
materials that are considered hazardous wastes under applicable law. The Company
contracts for the offsite disposal of these materials and has implemented a
waste management program to address related regulatory issues.
Legal Proceedings
There are no material pending legal proceedings to which I-PAC or any
of its subsidiaries is a party or of which any of their properties is the
subject. I-PAC is not aware of any such proceedings known to be contemplated by
governmental authorities.
Related Party Transactions
The former shareholders of I-PAC currently own interests in several
entities with which I-PAC does business. Evergreen Investments (Evergreen), a
company owned by Mr. Moore and Mr. Grivas, provides management and legal
services to I-PAC. I-PAC incurred expenses of approximately $205,500 and
$235,600 for services provided by Evergreen for the years ended December 31,
1997 and 1996, respectively. For the year ended December 31, 1997, I-PAC
purchased approximately $6,600 of merchandise from MGS Interconnect ("MGS"), a
company owned by Mr. Moore and Mr. Grivas. During 1996, I-PAC subcontracted out
$57,400 of sub-assembly and other production work to MGS. I-PAC also recorded
sales to MGS of approximately $47,900 and $88,100 for the years ended December
31, 1997 and 1996, respectively. During 1997 and 1996, I-PAC incurred expenses
of approximately $136,700 and $147,000, respectively, for commissions to MGM
Tech Rep ("MGM"), an outside sales representative firm owned primarily by the
three stockholders of I-PAC. I-PAC received approximately $4,600 of rental
income from MGM for the year ended December 31, 1997. I-PAC also incurred
expenses of approximately $28,400 and $39,900 for legal services provided by a
law firm in which Mr. Hill is a partner, for the years ended December 31, 1997
and 1996, respectively. In addition, I-PAC also incurred expenses of
approximately $27,500 and $39,700 for general business consulting services
provided by Mr. Hill for the years ended December 31, 1997 and 1996,
respectively. Following the Merger, any related party transactions will be
reviewed and approved by the Audit Committee of Photomatrix' Board of Directors.
Discontinued Operations
The following represents a brief history of the discontinued operations
of Photomatrix:
Sale of Xscribe Legal System, Inc. In July 1996, the Company sold
certain assets and liabilities related to its computer-aided transcription
business 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
Unixbased 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 United States and support the domestic installed base
of ICL customers. However, the business partnering efforts between the Company
and ICL and its sister company, Fujitsu ICL Computers Ltd. ("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
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applicable software or proprietary rights and was not able to control the
marketing or product management of ICL and Fujitsu products. Consequently, in
December, 1996, the Board of Directors of the Company approved a plan to
discontinue Lexia Systems, Inc. The Company is currently in the process of
winding down and closing this operation. Further, as of March 31, 1998 , Lexia
had recorded accounts payable and unpaid rent claims of ICL and Fujitsu in the
amount of approximately $786,000. Lexia disputes these liabilities. Lexia is
attempting to resolve these disputes through negotiations . There is no
assurance that Lexia will be successful in resolving these disputed amounts.
Item 4. Submission of Matters to a Vote of Security Holders
On June 5, 1998, a Special Meeting of Shareholders of Photomatrix,
Inc., was held and the following matters were approved:
1. The proposed merger with I-PAC Manufacturing, Inc.
2. The election of six directors of the Company.
3. The adoption of the Photomatrix 1998 Stock Option Plan whereby
1,500,000 shares of Photomatrix Common Stock were reserved for issuance
to officers, directors and employees of the Company under incentive
stock options or nonqualified stock options to be granted by the
Compensation Committee of the Board of Directors.
4. The ratification of the appointment by the Company's Board of Directors
of KPMG Peat Marwick LLP as the independent auditors of the Company for
the 1998 fiscal year.
PART II
MARKET PRICES OF PHOTOMATRIX COMMON STOCK
Photomatrix, Inc. is traded in the NASDAQ Stock Market Small Cap Tier under the
symbol PHRX. On May 31, 1998, there were 5,083,000 shares outstanding, and there
were approximately 3,000 shareholders of record. On June 11, 1998, and effective
as of June 5, 1998, an additional 4,848,000 shares were issued under the terms
of the Merger Agreement, resulting in 9,931,000 shares outstanding as of that
date. Following is information regarding Photomatrix, Inc. common stock market
prices:
<TABLE>
Fiscal Year 1998 Fiscal Year 1997 Fiscal Year 1996
----------------- ----------------- -----------------
Quarter Ended Low Bid High Bid Low Bid High Bid Low Bid High Bid
- ------------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
June 30 - 1st 5/16 5/8 11/16 1-7/16 7/8 1-1/2
September 30 - 2nd 9/32 9/16 17/32 1-1/16 13/16 1-1/2
December 31 - 3rd 1/4 29/32 3/8 13/16 3/4 1-1/16
March 31 - 4th 3/8 15/16 3/8 15/16 9/16 1-3/64
</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.
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<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PHOTOMATRIX SELECTED HISTORICAL FINANCIAL DATA
The following selected financial data is derived from financial statements as of
and for the years ended March 31, 1998, 1997, 1996, 1995 and 1994 (000's have
been omitted). Certain reclassifications have been made to prior year amounts to
be consistent with current year. 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 consolidated
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>
For the years ended March 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Revenue $8,595 $ 8,694 $ 9,092 $ 9,712 $ 9,742
Gross profit percent 31.5% 26.3% 32.3% 31.5% 34.8%
Loss from continuing
operations $(1,696) $ (2,290) $ (1,368) $ (791) $ (194)
Net income (loss) $(1,482) $ (2,407) $ (1,704) $ (133) $ 1,222
Loss per share
from continuing operations $(0.33) $ (0.44) $ (0.24) $ (0.13) $ (0.04)
Net income (loss) per share $(0.29) $ (0.46) $ (0.30) $ (0.02) $ 0.23
Dividends per share - - - - -
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
BALANCE SHEET DATA
Working capital $2,304 $ 2,432 $ 5,624 $ 6,991 $ 7,617
Current ratio 1.76 1.92 2.96 4.10 5.35
Total assets $7,303 $ 8,565 $ 12,581 $ 13,202 $ 12,844
Total long-term debt and $ 239 $ 415 $ 1,148 $ 699 $ 827
obligations
</TABLE>
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.
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<PAGE>
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, 1998. The
Company believes that inflation has not had a material effect on its operations
to date.
Fiscal year 1998 ended March 31, 1998 compared to fiscal year 1997 ended March
31, 1997
Consolidated revenue for the year ended March 31, 1998 decreased by
$99,000 (1.1%) to $8,595,000 from $8,694,000 for the year ended March 31, 1997.
This decrease was due to decreases in scanner revenue of $593,000 (10.8%) and
COM duplicator revenue of $185,000 (52.1%) offset by increases in spare parts
revenue of $488,000 (51.0%) and service revenue of $191,000 (9.8%). The Company
anticipates that scanner sales will decline significantly in the first quarter
of fiscal 1999, as a result of a modification of a purchase commitment from Bell
& Howell, but that on a consolidated basis, revenue will increase significantly
in fiscal 1999 as a result of the acquisition of I-PAC.
Consolidated gross margins for the year ended March 31, 1998 increased
$412,000 (18.0%) to $2,706,000 from $2,294,000. This excludes the effect of the
$366,000 write-off of capitalized software, as more fully discussed below. Gross
margin as a percent of sales increased 5.1% to 31.5% from 26.4% in the year
ended March 31, 1998. This increase was due to a more favorable product mix, as
well as the cost reductions gained as a result of production efficiencies
resulting from improved production methods, product modularization and the
consolidation of the San Diego, California and Culver City, California
operations in March, 1997. Management believes that costs may be reduced further
as a result of the merger with I-PAC as described elsewhere, although there is
no assurance that these additional cost reductions will be achieved. These
improvements were somewhat offset by the write-off of $165,000 of inventory and
an increase in the Company's reserve for obsolete inventory by $475,000 as a
result of new product introductions, together with a significant decrease in
sales of aperture card scanners.
Selling, general and administrative ("SG&A") expenses decreased
$113,000 to $3,198,000 from $3,311,000 in the prior year. As a percent of
revenue SG&A decreased 0.9% to 37.2% from 38.1% in the prior year. These
reductions are attributable primarily due to cost reduction efforts in both the
sales and marketing and the general and administrative areas of the Company
which were implemented during the current fiscal year.
Research and development expenses increased $188,000 (23.3%) to
$995,000 from $807,000 in the year ended March 31, 1997. Software development
expenditures that were capitalized because they related to technologically
feasible projects were $103,000 in the current year compared to $162,000 in the
prior year. Total development spending increased $129,000 to $1,098,000 from
$969,000 in the prior year primarily because of increased scanner development
activity, including the development of new models.
Fiscal year 1998 includes a write-off of capitalized software in the
amount of $366,000. Fiscal year 1997 includes a charge for facility
consolidation and relocation in the amount of $520,000. The Company has recently
relocated its operations into the I-PAC facility located in Carlsbad,
California. The costs related to this move approximate $81,000, including
$77,000 paid to I-PAC before consummation of the merger, and will be reflected
in the Company's consolidated statement of operations for the first quarter of
fiscal 1999.
Interest expense decreased $51,000 to $41,000 from $92,000 in the prior
year. This decrease was due to the elimination of borrowings under the Company's
credit facility during fiscal 1998. The Company anticipates that debt service
expenses will increase as a result of the Merger. Other income decreased $47,000
to $203,000 from $250,000 in 1997. This reduction is the result of a one-time
sale of an unused trademark in the amount of $100,000 in the current year
together with various other transactions which were non-recurring in nature,
compared
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<PAGE>
to a $250,000 non-recurring payment from a major customer under a minimum
quantity purchase contract during the prior year.
The Company's provisions for income taxes were $5,000 and $104,000 in
the years ended March 31, 1998 and 1997, respectively. These amounts are
substantially different from provisions calculated using the statutory rates
because of the Company's inability to recognize the effect of net operating
losses and related carry-forwards. The prior year's provision was significantly
greater than that of the current year as a result of an increase in the
Company's valuation allowance relating to deferred tax assets.
The increases in gross margin and decreases in SG&A expenses, interest
expense and income tax expense, offset slightly by the increase in product
development expenses and reduction in other income, resulted in a loss from
continuing operations of $1,696,000 ($0.33 per share) for the year ended March
31, 1998. This is an improvement of $594,000 (25.9%) over the loss from
continuing operations of $2,290,000 ($0.44 per share) for the year ended March
31, 1997.
During fiscal 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. The Company booked a net loss from discontinued operations in
fiscal 1997 of $117,000. This loss included accruals for indemnifications
related to the discontinued operations of Xscribe Legal Systems. During the
current year, the indemnification period lapsed and the Company determined that
the remaining accruals were no longer necessary. The accruals were reversed,
resulting in income from discontinued operations of $214,000 in the current
year. Including the income from discontinued operations, the net loss for the
year ended March 31, 1998 was $1,482,000 ($0.29 per share), an improvement of
$925,000 (38.4%) over the net loss for the year ended March 31, 1997 of
$2,407,000 ($0.46 per share).
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 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 writeoff of approximately $127,000.
Selling, general and administrative ("SG&A") expenses decreased
$281,000 (7.8 %) from $3,592,000 in 1996 to $3,311,000 in 1997. 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 1996 to 38.1% in 1997,
primarily due to the cost reduction efforts implemented during 1997.
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 $162,000 in 1997 compared to $533,000 in
1996. Total development spending decreased $49,000 from $1,018,000 in 1996 to
$969,000 in 1997 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.
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<PAGE>
During fiscal 1997, 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 1996 to $92,000 in
1997. This decrease was due to decreased borrowings under the Company's credit
facility in 1997. Other income increased $239,000, from $11,000 in 1996 to
$250,000 in 1997 as a result of nonrecurring 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 1997 provision reflects an increase in
the Company's valuation allowance relating to a 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.
During 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 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.
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 1998, the Company's primary sources of liquidity
were from discontinued operations ($875,000), reductions to inventory ($349,000)
and prepaid expenses ($51,000), an increase in accrued liabilities ($264,000),
retirements of property and equipment ($420,000), and the effects of exchange
rates on cash ($7,000). Primary uses of liquidity in the year ended March 31,
1998 were a loss from continuing operations net of noncash charges ($448,000),
increases to accounts receivable ($131,000), other assets ($42,000), reduction
to long term liabilities ($14,000), accounts payable ($342,000), customer
deposits ($204,000), capitalized software additions ($103,000), and repayments
of notes payable to related parties ($152,000). In the year ended March 31,
1998, the Company's cash increased $530,000 from $812,000 to $1,342,000.
In September, 1997, the Company amended and renewed a line of credit
with a bank which allows for borrowings under the line of credit limited to the
lesser of $750,000 or 70% of eligible accounts receivable (as defined). The line
of credit accrues interest on all outstanding borrowings at the rate of prime
plus 2% per annum. The Company is now required to 1) maintain a minimum tangible
net worth of $2,800,000, 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
$1,750,000, and 4) maintain a current ratio of at least 1.7 to 1.0. Outstanding
borrowings are collateralized by all of the Company's assets. The line of credit
expires in September, 1998. As of March 31, 1998, there was no outstanding
balance on the line of credit and the Company was not in compliance with certain
loan covenants. The Company's bank
18
<PAGE>
has waived compliance with these requirements. The Company is currently in the
process of negotiating a $1.5 million line of credit with its bank.
The Company is obligated under a series of unsecured notes payable to a
related party totaling $375,000 as of March 31, 1998. These notes bear interest
at a rate of 8% per annum and mature in April 2000. Interest and principal
payments totaling approximately $16,000 are due monthly. All payments were
current as of March 31, 1998.
The Company's discontinued operation, Lexia, has recorded accounts
payable and unpaid rent claims of ICL and related entities in the amount of
$786,000. Lexia disputes these liabilities. Lexia is attempting to resolve these
disputes through negotiations. While the Company believes ICL claims against
Lexia will be settled with ICL at a discount, there is no assurance that Lexia
will be successful in resolving these disputed amounts.
The Company's assured sources of future short-term liquidity as of
March 31, 1998 are its cash and cash equivalents of $1,342,000 and the unused
portion of its line of credit of $750,000. Availability under the line of credit
can be further limited based upon the balance of eligible accounts receivable as
described above.
The Company is currently obligated as a guarantor under an assignment
agreement of a lease in the amount of approximately $20,000 per month through
September, 2002. In June 1998, the Company entered into a commitment to purchase
$400,000 of equipment for its manufacturing operation. Aside from these
commitments, the Company has not made any material capital commitments.
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. Management believes that the
Company has sufficient liquidity to fund the costs associated with the recent
Merger and relocation and consolidation of its operations into the I-PAC
facility, as well as the operations of the combined company. In addition,
management intends to structure any future acquisitions in a manner that will be
neutral or positive to its liquidity and accretive to its future earnings per
share.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS 130,
REPORTING COMPREHENSIVE INCOME. This Statement established standards for
reporting and display of comprehensive income and its components (revenue,
expenses, gains and losses) in a full set of general-purpose financial
statements. This Statement shall be effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. This statement, requiring
additional informational disclosures, is effective for the Company's fiscal year
ending March 31, 1999.
In June 1997, the Financial Accounting Standards Board issued SFAS 131,
DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. This
accounting statement established standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that enterprises report selected information about
operating segments in interim financial reports issued to shareholders. This
accounting statement shall be effective for fiscal years beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years in to be restated. At this time, the Company does not believe
that this accounting statement will have a significant impact on the financial
position or results of operations for the year ending March 31, 1999.
Statement of Position 97-2 Software Revenue Recognition, (SOP 97-2)
issued by the Accounting Standards Executive Committee, is effective for fiscal
years beginning after December 15, 1997. Earlier application is permitted. SOP
97-2 provides guidance on when revenue should be recognized and in what amounts
for licensing, selling, leasing, or other wise marketing computer software. The
Company does not expect adoption of SOP 97-2 to have a material effect, if any,
on its financial position or results of operations.
19
<PAGE>
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 has been dependent upon its ability to
market successfully its document scanners. In this regard, Photomatrix is
currently focusing on utilizing I-PAC's manufacturing expertise to create new
OEM arrangements, whereby the Company will provide value-added engineering and
manufacturing services to other scanner manufacturers. 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,
PMX'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 PMX's orders. The Company believes that its acquisition of I-PAC
significantly reduces its dependence on its ability to successfully market its
document scanners.
Competitive Environment
In the past, the Company has competed 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'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 will be able to overcome competitive forces
and reactions in order to increase revenue in an amount necessary to return to
profitability.
The Company's ability to increase its revenue is partially dependent
upon successfully developing additional OEM relationships and upon expanding its
indirect and direct sales. The Company's ability to improve its sales is in part
dependent upon its marketing and research and development expenditures. The
Company's liquidity constraints may limit these expenditures.
Further, Bell & Howell, with whom the Company has an OEM relationship
to sell the Company's document scanners, has recently introduced a document
scanner with speed and features overlapping the lower end of many of the
scanners sold by the Company via this OEM channel. Although the Company believes
it has been 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. During the period from July, 1997
through June, 1998, Bell & Howell sales of Photomatrix scanners have
significantly declined.
I-PAC also operates in a highly competitive industry and faces
competition from a number of domestic and foreign electronic manufacturing
services companies, some with financial and manufacturing resources greater than
the Company's. The Company also faces competition in the form of current and
prospective customers that have the capabilities to develop and manufacture
products internally. In order to maintain a viable alternative, the Company must
continue to enhance its total engineering and manufacturing technologies.
20
<PAGE>
Required Revenue Increases
In order to reduce operating losses, management has reduced operating
costs over the past eighteen months on a consolidated basis by an aggregate of
approximately $1,200,000 annually (including continuing and discontinued
operations). The majority of these cost reductions have been realized through
headcount reductions and the consolidation of the operations and employees at
the former Photomatrix facility in Culver City, California and the corporate
headquarters in San Diego, California into a single facility. At current revenue
levels, these cost reductions will not, in and of themselves, return the Company
to profitability. Therefore, the Company is focused on increasing its revenue
through the pursuit of OEM opportunities in the scanner industry in order to
return the Company to profitable operations. Management believes that the
acquisition of I-PAC enhances the likelihood that the Company will return to
profitability. There is no assurance, however, that the Company will be
profitable.
Lexia Systems, Inc.
Relative to the discontinuation of Lexia Systems, Inc. ("Lexia"), and
to the protracted nature of the negotiations and the disagreements with ICL and
Fujitsu, there is no assurance that Lexia and ICL/Fujitsu will settle their
current disagreements.
Lexia carries on its books accounts payable and unpaid rent claims of
ICL and related entities in the amount of $786,000. Lexia disputes these
liabilities. Lexia is attempting to resolve these disputes through negotiations.
While the Company believes the ICL claims against Lexia will be settled at a
discount, there is no assurance that Lexia will be successful in this regard.
Further, there is no assurance that existing Lexia customers will not assert
claims against Lexia and that such actions would not be defended successfully.
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 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.
Continued Listing on Nasdaq Small Cap Market
On August 22, 1997, the Securities and Exchange Commission approved new
listing standards for companies listed on The NASDAQ Stock Market. These new
requirements became effective on February 23, 1998. On February 27, 1998, NASDAQ
notified the Company that it was not in compliance with the new requirement
regarding the minimum bid price of its Common Stock. Under the new Small Cap
Market listing maintenance requirements, the minimum bid price of the Company's
Common Stock must be at least $1.00 per share. On May 18, 1998, NASDAQ notified
the Company that it was in compliance with this same minimum bid price
requirement. Notwithstanding the fact that the Company believes that the Merger
provides investors with new data which supports a stock price in excess of $1.00
per share, it is possible that the market will not reflect such a valuation over
a prolonged period and that a reverse stock split may be necessary in the future
to increase the likelihood that the Common Stock of the Company will trade at a
price higher than $1.00 per share and that the Company will therefore be in
compliance with the new NASDAQ rules and thereby avoid delisting. There is no
assurance that the Company will avoid delisting.
Retaining Availability of Line of Credit
The Company has not yet achieved a critical-mass level of revenue
sufficient to reach a financial break-even point. The Company is currently
negotiating with its bank for a new line of credit subsequent to the acquisition
of I-PAC. Assuming that the Company is successful in obtaining the new line of
credit, cash flow forecasts suggest that the Company's line of credit will be
adequate to finance the Company's growth in
21
<PAGE>
the year ending March 31, 1999. However, there can be no assurance that the
Company will be successful in negotiating the new line. Furthermore, as
discussed above, if the Company cannot increase revenue levels sufficiently to
return to profitability, the Company could be in default of its bank covenants
in the near future and possibly lose its line of credit.
Year 2000 Contingencies
The Company recognizes the need to ensure that its operations will not
be adversely impacted by Year 2000 software and hardware failures. The Company
is addressing Year 2000 risks and believes it will resolve any such risks in a
timely manner. The currently estimated costs associated with these changes are
not material in any year and are not material to the Company's financial
position. However, the Company could be adversely impacted if its suppliers and
customers do not make the necessary changes to their own systems and products
successfully and in a timely manner.
Customer Concentration
Many companies in the electronic manufacturing services industry,
including the Company, have a high percentage of their revenues concentrated in
a small customer base. The greatest risk facing these companies is possible
weakening of a major customer or a slow-down in the industry. It may take
several quarters to replace significant customers.
Internal Growth
Start-up costs and the management of labor and equipment efficiencies
for new manufacturing services programs and new customers can have the effect of
reducing the Company's gross margins. Due to these and other factors, gross
margins can be negatively impacted early on in the life cycle of new programs.
In addition, labor efficiency and equipment utilization rates ultimately
achieved and maintained by the Company for new and current programs impact the
Company's gross margins.
Acquisition Strategy
Geographical expansion and growth by acquisition can have an effect on
the Company's operation. The successful operation of an acquired business will
require communication and cooperation among key managers, along with the
transition of customer relationships. There can be no assurance the Company will
successfully manage the integration of new locations or acquired operations and
may experience certain inefficiencies which could negatively impact the results
of operations. Additionally, no assurance can be given that any past or future
acquisition by the Company will enhance the Company's business.
Other factors that could adversely affect forward-looking statements
include the Company's ability to maintain and expand its customer base, gross
margin pressures, the effect of start-up costs related to new facilities, the
overall economic conditions affecting the electronics industry, and other
factors and risks detailed herein and in the Company's other Securities and
Exchange Commission filings.
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.
22
<PAGE>
PART III
Item 9. Directors and Executive Officers of the Registrant
Directors
Mr. WILLIAM L. GRIVAS assumed the duties of Chairman of the Board effective as
of June 5, 1998. He has served as the Chief Executive Officer of I-PAC since
1990. Prior to that time, Mr. Grivas was the sole owner of Southwest General
Industries (SGI), a $25 million per year contract manufacturer which he founded
in the 1970's. After selling SGI to SCI Manufacturing, Inc., Mr. Grivas joined
with Mr. Moore and Mr. Hill to found I-PAC in 1990. Mr. Grivas also serves as a
Director on the Boards of I-PAC Express Assembly, Inc., MGS Interconnect, Inc.,
MGM Techrep, Inc., Evergreen Investments, Inc., Universal Cable Products, Inc.
and Vantage Manufacturing Services, Inc. Mr. Grivas served in the Marine Corps
as a Drill Instructor and a special weapons expert, with extensive training in
electronic and radar technologies. Mr. Grivas is 43 years of age.
Mr. PATRICK W. MOORE assumed the duties of Chief Executive Officer of the
Company effective as of June 5, 1998. Mr. Moore has been a Director of the
Company since January 1991. Mr. Moore, who has served as the President of I-PAC
since 1990, has significant business experience in both the private and public
sectors. Mr. Moore also serves as a Director on the Boards of I-PAC Express
Assembly, Inc., MGS Interconnect, Inc., MGM Techrep, Inc., Evergreen
Investments, Inc., Universal Cable Products, Inc. and Keystone Gaming, Inc. 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 50 years
of age.
Mr. SUREN G. DUTIA has been a Director of the Company and has served as the
President and Chief Executive Officer of the Company from January 1989 through
June 5, 1998. He was elected to be the Chairman of the Board of the Company in
September 1990. Effective June 5, 1998, Mr. Dutia resigned as Chief Executive
Officer and Chairman of the Board and retained his position as President of the
Company. 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. 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 55 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 manufacture, sale and
distribution of blood-analyzing machines and which were sold to Dynatech
Corporation in 1982. In 1982, Mr. Staley co-founded the Bank of Livermore,
California. Mr. Staley is 54 years of age.
Mr. JAMES P. HILL became a director of the Company effective as of June 5, 1998.
For the last five years Mr. Hill has been, a partner specializing in bankruptcy
law, commercial law and civil litigation in the San Diego law firm of Sullivan,
Hill, Lewin, Rez, Engel & LaBazzo. Mr. Hill was a Director of the San Diego
Bankruptcy Forum from 1991 through 1994 and the Chairman of the Commercial Law
Section of the San Diego County Bar
23
<PAGE>
Association from 1985 through 1987. Mr. Hill also serves as a director on the
Board of MGM Techrep, Inc. Mr. Hill is 45 years of age.
Executive Officers
Set forth below is information about certain executive officers of Photomatrix
and its subsidiaries effective as of June 5, 1998.
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 previously was an
audit manager with Arthur Andersen LLP. Mr. Gayhart is 48 years of age.
Mr. Charles H. Frady has served as Controller and Assistant Treasurer of the
Company 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 56 years of age.
Set forth below is certain information about significant employees of the
Company as of June 5, 1998.
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 the Director of
the 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 and 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.
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 of the Company. No other
current officer of the Company earned more than $100,000 in any of the years
identified.
<TABLE>
Summary Compensation Table
Annual Compensation Long Term Compensation Awards
Name and
principal position Year Salary Bonus Other(1) Securities Underlying
Options/SARs (#)
<S> <C> <C> <C> <C> <C>
Suren G. Dutia 1998 $140,000 - $11,200 -
President and Chief 1997 $154,400 $30,000 $15,000 -
Executive Officer 1996 $165,000 - $13,900 191,667
</TABLE>
24
<PAGE>
(1) Includes Company matching contributions to the Photomatrix Savings and
Investment Plan ($4,900, $4,800, and $4,400) and supplemental life and medical
premiums ($7,400, $10,200, and $9,500) for 1998, 1997 and 1996, respectively.
Employment Agreements. Mr. Dutia and Mr. Gayhart are employed under employment
agreements that expire on July 31, 1999 and April 30, 1999, respectively. If
either Mr. Dutia's or Mr. Gayhart's employment is terminated by the Company
without cause, then he will be entitled to receive his base salary, stock option
vesting 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 of employment by the Company, in addition to amounts due him under
his employment contract, Mr. Gayhart is to receive eight (8) weeks' compensation
upon termination, in addition to amounts payable for the remaining term of his
employment agreement, and Mr. Frady is to receive eight weeks' compensation upon
termination of employment by the Company.
Stock Option Grants
There were no options granted to the named executive officer in fiscal
1998.
Aggregated Stock Option Exercises and Fiscal Year-End Stock Option Value Table
The following table sets forth certain information regarding the number
and value of specified unexercised options held by the Chief Executive Officer
as of March 31, 1998:
<TABLE>
Value of Unexercised In-the-Money
Number of Unexercised Options(1) Options(2)
---------------------------------- ---------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ------------------ -------------- ----------------- ---------------- --------------
<S> <C> <C> <C> <C>
Suren G. Dutia 100,000 166,667 $72,000 $0
</TABLE>
(1) No options were exercised in fiscal year 1998.
(2) The value is calculated as the total market value of stock subject to
the options on June 18, 1998 ($1.03 per share), less the total of the
option exercise prices.
25
<PAGE>
Ten Year Option Repricing Table
In July 1997 the Compensation Committee offered to reprice a portion of
the option shares previously granted to Mr. Dutia which had an original exercise
price in excess of the market value of the Company's common stock at that time.
This offer was made in conjunction with identical offers to most employees. The
following table sets forth the specified information concerning all options
repriced for all executive officers of the Company for the period August 1987
(initial public offering) through June 1998.
<TABLE>
Length of
Number of Original
Shares Market Price Option Term
Underlying of Stock at Exercise Price Remaining at
Options Time of at Time of New Exercise Date of
Name Date Repriced Repricing Repricing Price Repricing
- -------------- ---------------- ------------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
S. Dutia, CEO November 1990 200,000 $0.18 $3.75 $0.18 8 years
S. Dutia, CEO June 1995 25,000 $1.25 $4.13 $1.69 9 years
S. Dutia, CEO November 1995 166,667 $0.88 $1.31- $0.88 6-9 years
$2.91
S. Dutia, CEO July 1997 166,667 $0.37 $ 0.88 $ 0.37 4-7 years
B. Myers, November 1995 100,000 $0.18 $1.50- $0.18 8 years
Former CFO $3.48
B. Myers, June 1995 16,667 $1.25 $4.13 $1.69 9 years
Former CFO
B. Myers, November 1995 116,667 $0.88 $1.31- $0.88 6-9 years
Former CFO $2.91
</TABLE>
Report on Stock Option Repricing
In connection with the July 1997 option repricing, the Compensation
Committee issued the following report:
While the Committee believes that the Company's Stock Option Plans have
been instrumental in attracting and retaining quality executive officers,
employees and Directors, the incentive feature of such programs may become lost
when options are granted at fair market value and subsequently the market price
of the Company's common stock falls substantially below the exercise price of
stock options granted under such programs. In 1997, the market price for the
Company's common stock fell substantially. As a result of the drop in market
price of the common stock, the optionees have exercise prices substantially
higher than the current market value, and therefore hold options which are out
of the money. After careful consideration of the relevant factors, including (1)
the decline in the market price of the common stock, (2) the reasons for the
decline in the market price of the common stock, (3) the large percentage of the
Company's employees and Directors holding out of the money options, and (4) the
importance of equity incentive to the Company's overall compensation program for
executive officers and employees at all levels and Directors, the Committee
approved the cancellation of the existing options and the reissue of said
options pursuant to the Company's Stock Option Plans.
COMPENSATION COMMITTEE
Ira H. Sharp
Patrick W. Moore
John F. Staley
26
<PAGE>
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
As of June 11, 1998, Aundir Trust Company Ltd., was the only
shareholder (other than certain of its executive officers) known by the Company
to be the beneficial owner of more than five percent of its outstanding Common
Stock. As of that date, Aundir Trust Company, Ltd. was the beneficial owner of
1,054,002 shares, representing approximately 10.6 percent of the Company's
outstanding stock. These shares are beneficially owned by Aundir Trust Company,
Ltd. 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. The address of Aundir Trust Company is Castle Town,
Isle of Man, British Isles.
The following table sets forth certain information regarding the ownership of
Photomatrix common stock by Directors and Executive Officers of the Company:
<TABLE>
Percent of Shares of
Shares of Common Stock Common Stock
Name of Beneficial Beneficially Owned Outstanding
Owner or Group as of June 11, 1998(1) as of June 11, 1998(1)
<S> <C> <C>
William L. Grivas, Chairman of the Board 1,609,057 16.20%
Patrick W. Moore, CEO and Director 1,599,227 16.10%
Suren G. Dutia, President and Director 291,033 2.80%
Roy L. Gayhart 20,000 *
Chief Financial Officer and Secretary
Charles H. Frady 5,000 *
Controller, Treasurer
James P. Hill, Director 1,579,176(2) 15.90%
Ira H. Sharp, Director 43,333 *
John F. Staley, Director 100,033 *
All directors and executive officers as a 5,246,859 52.83%
group
</TABLE>
(1) Includes and reflects the ownership by the named director or officer of
shares of Common Stock issuable pursuant to options exercisable within 60 days
of June 11, 1998.
(2) Includes 168,824 shares owed by Loma Services Corporation, of which Mr. Hill
is a principal shareholder, and 1,410,352 shares owned by Mr. Hill as Trustee of
the Hill Family Trust.
* less than 1%
27
<PAGE>
Item 12. Certain Relationships and Related Transactions
In connection with the acquisition of PMX, 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, 1998 was $375,000.
Claudia Fullerton, who is the wife of Patrick W. Moore, is employed by the
Company as its Director of Administration at an annual salary of $47,900.
During the quarter ended June 30, 1998, the Company entered into an agreement
with I-PAC, whereby I-PAC provided manufacturing and administrative services to
the Company prior to the consummation of the merger. In addition, under this
agreement, the Company agreed to pay I-PAC rent for use of I-PAC facilities. The
total amount paid to I-PAC during this period was $116,000.
28
<PAGE>
PART IV
Item 13. Exhibits, Financial Statements, Schedule and Reports on Form 8-K
a. Financial Statements, Schedule and Exhibits
The following consolidated financial statements are filed herewith:
Consolidated Balance Sheets as of March 31, 1998 and 1997
Consolidated Statements of Operations for the years ended March 31, 1998,
1997 and 1996 Consolidated Statements of Shareholders' Equity for the years
ended March 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows
for the years ended March 31, 1998, 1997 and 1996. 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.
b. Reports on Form 8-K.
The Company filed no reports on Form 8-K during the quarter ended March 31,
1998.
c. Exhibits
The exhibits listed under Item 13(c) are filed as part of this Annual Report on
Form 10-KSB.
3.1 Amended and Restated Articles of Incorporation (ix)
3.3 Bylaws (ix)
3.3.1 Amendment to Bylaws dated June 5, 1998
10.2 Settlement Agreement dated January 11, 1993 between
Photomatrix Corporation and Scan-Graphics, Inc. (iv)
10.4 Lease Agreement between Photomatrix and EVB
Limited Partnership-I dated December 17, 1987 (iv)
10.5 Lease Agreement between Photomatrix Limited and
Bermer Limited dated May 31, 1989 (iv)
10.6 Promissory Notes dated April 30, 1993 in the aggregate
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 (iv)
10.7 Subcontract dated March 31, 1991 between PRC, Inc.
and Photomatrix (iv)
10.8 1992 Xscribe Stock Option Plan and Sample Agreement (iv)
10.11 Executive Employment Agreement between the Company and
Suren G. Dutia dated December 20, 1988 (i)
29
<PAGE>
10.11.1 Amendment to Executive Employment Agreement between the Company
and Suren G. Dutia
10.24 Description of executive bonus arrangements and executive s
everance plan (iv)
10.25 1994 Xscribe Stock Option Plan and Sample Agreements (vii)
10.30 Security and Loan Agreement between Imperial Bank and
Xscribe Corporation dated June 17, 1996 and related
documents (x)
10.30.1 Amendment No. 1 to Security and Loan Agreement with
Imperial Bank
10.30.2 Amendment No. 2 to Security and Loan Agreement with
Imperial Bank
10.30.3 Amendment No. 3 to Security and Loan Agreement with
Imperial Bank
10.31 OEM Purchase Agreement for Photomatrix Scanners dated
February 8, 1996 between Bell & Howell Limited and
Photomatrix Corporation (Non-public information has
been filed with the Securities and Exchange Commission) (ix)
10.32 OEM Purchase Agreement for Photomatrix Scanners dated
June 12, 1996 between Bell & Howell Operating Company
and Photomatrix Corporation (Non-public information has
been filed with the Securities and Exchange Commission) (ix)
10.33 Facilities Lease Agreement between Photomatrix and
Manufacturers Life dated November 7, 1996 (x)
10.33.1 Consent by Lessor to Assignment of Facilities Lease
Agreement
10.35 Agreement with Bell & Howell dated December 29, 1997
10.35.1 Addendum Business Agreement with Bell & Howell dated
January 5, 1998
10.36 Agreement and Plan of Reorganization and Merger, dated
as of March 16, 1998, by and among Photomatrix,
Inc., Photomatrix Acquisition Corp., and I-PAC
Manufacturing, Inc. (xi)
10.37 Executive Employment Agreement, dated as of June 5,
1998, between the Company and Patrick W. Moore
10.38 Executive Employment Agreement dated as of June 5,
1998, between the Company and William L. Grivas
10.39 1998 Photomatrix, Inc. Stock Option Plan and
Sample Agreements (xi)
21.1 Subsidiaries of the registrant as of March 31, 1998:
- 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
24.1 Power of Attorney (see signature pages)
(d) Schedule
Schedule II Valuation and Qualifying Accounts
27 Financial Data Schedule
30
<PAGE>
- ---------
(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 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.
(x) Incorporated by reference to exhibits filed with the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 1997, filed with
the Securities and Exchange Commission on June 30, 1997.
(xi) Incorporated by reference to exhibits to definitive proxy
materials filed on Schedule 14A on May 13, 1998.
31
<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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 1998, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
San Diego, California
May 29, 1998
F-1
<PAGE>
PHOTOMATRIX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND 1997
<TABLE>
ASSETS 1998 1997
--------------------- ------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $1,342,000 $812,000
Accounts receivable, net of allowance
of $142,000 and $111,000 1,733,000 1,602,000
Inventories 2,171,000 2,520,000
Prepaid expenses and other 98,000 149,000
--------------------- -----------------
Total current assets 5,344,000 5,083,000
--------------------- -----------------
Property and equipment, at cost 1,174,000 1,986,000
Less accumulated depreciation and amortization (627,000) (640,000)
---------------------- -----------------
Net property and equipment 547,000 1,346,000
---------------------- -----------------
Intangible assets, net of accumulated amortization of
$1,437,000 and $1,512,000 (Note 1) 1,287,000 2,053,000
Other assets 125,000 83,000
--------------------- ------------------
$7,303,000 $8,565,000
==================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $502,000 $844,000
Accrued liabilities and other (Note 8) 854,000 590,000
Customer deposits (Note 8) 409,000 613,000
Current maturities of notes payable to related parties
(Note 5) 162,000 152,000
Net current liabilities of discontinued operation (Note 2) 1,113,000 452,000
-------------------- ------------------
Total current liabilities 3,040,000 2,651,000
-------------------- ------------------
Notes payable to related parties, less current portion (Note 5) 213,000 375,000
Other non-current liabilities 26,000 40,000
Commitments and contingencies (Note 10)
Shareholders' equity (Note 4):
Preferred Stock, no par value; 3,173,000 shares authorized,
no shares issued and outstanding -- --
Common stock, no par value; 30 million shares
authorized, 5,083,000 shares issued and
outstanding 19,351,000 19,351,000
Accumulated deficit (15,480,000) (13,998,000)
Cumulative translation adjustment 153,000 146,000
--------------------
Total shareholders' equity 4,024,000 5,499,000
-------------------- -----------------
$7,303,000 $8,565,000
==================== =================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-2
<PAGE>
PHOTOMATRIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<TABLE>
1998 1997 1996
-------------- ------------- ------------
<S> <C> <C> <C>
Revenues:
Equipment and software $6,464,000 $6,730,000 $6,979,000
Services 2,131,000 1,964,000 2,113,000
-------------- ------------- ------------
Total revenues 8,595,000 8,694,000 9,092,000
-------------- ------------- ------------
Cost of revenues:
Equipment and software 4,746,000 5,180,000 4,881,000
Services 1,143,000 1,220,000 1,278,000
-------------- ------------ ------------
Total cost of revenues 5,889,000 6,400,000 6,159,000
-------------- ------------ ------------
Gross profit 2,706,000 2,294,000 2,933,000
-------------- ------------ ------------
Operating costs and expenses:
Selling, general and administrative 3,198,000 3,311,000 3,592,000
Research and development 995,000 807,000 485,000
Write off capitalized software 366,000 - -
Facility consolidation and relocation - 520,000 -
-------------- ------------ ------------
Total operating costs and expenses 4,559,000 4,638,000 4,077,000
-------------- ------------ ------------
Operating loss (1,853,000) (2,344,000) (1,144,000)
-------------- ------------- -----------
Other income (expense), net:
Interest expense (Notes 5 and 6) (41,000) (92,000) (228,000)
Other, net 203,000 250,000 11,000
--------------- ------------- -----------
Net other income (expense) 162,000 158,000 (217,000)
--------------- ------------- -----------
Loss from continuing operations before
taxes (1,691,000) (2,186,000) (1,361,000)
Provision for income taxes (Note 7) 5,000 104,000 7,000
--------------- ------------- -----------
Loss from continuing operations (1,696,000) (2,290,000) (1,368,000)
Income (loss) from discontinued operations
(Note 2) 214,000 (251,000) (336,000)
Gain on sale of discontinued operation
(Note 2) - 134,000 -
---------------- ------------- -----------
Net loss $(1,482,000) $2,407,000) $(1,704,000)
================ ============= ============
Basic and diluted net income (loss) per share:
Continuing operations
Discontinued operations $(0.33) $(0.44) $(0.24)
================= ============= ===========
Net loss $0.04 $(0.02) $(0.06)
================= ============= ===========
$(0.29) $(0.46) $(0.30)
================= ============= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE>
PHOTOMATRIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<TABLE>
Common Stock Cumulative
--------------------------------- Accumulated Translation
Shares Amount Deficit Adjustment Total
--------------- ----------------- ------------------ --------------- --------------
<S> <C> <C> <C> <C> <C>
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
Other -- -- -- 7,000 7,000
Net loss -- -- (1,482,000) -(1,482,000)
------------- -------------- --------------- -------------- --------------
Balance, March 31, 1998 5,083,000 $19,351,000 $(15,480,000) $ 153,000 $ 4,024,000
============= ============ ============= ============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE>
PHOTOMATRIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<TABLE>
Cash flows from operating activities: 1998 1997 1996
--------------- ----------------- ----------------
<S> <C> <C> <C>
Loss from continuing operations: $(1,696,000) $(2,290,000) $ (1,368,000)
Adjustments:
Depreciation and amortization 878,000 903,000 809,000
Write off capitalized software 366,000 - -
Loss on disposal of property and equipment 4,000 27,000 -
Changes in assets and liabilities:
Accounts receivable (131,000) 302,000 179,000
Inventories 349,000 573,000 (848,000)
Prepaid expenses and other 51,000 7,000 58,000
Accounts payable (342,000) (301,000) 412,000
Accrued liabilities and other 264,000 264,000 (96,000)
Customer deposits (204,000) (223,000) 343,000
--------------- ---------------- --------------
Cash used in continuing operations (461,000) (738,000) (511,000)
Cash provided by discontinued operations 875,000 508,000 971,000
---------------- ----------------- --------------
Cash provided by (used in) operations 414,000 (230,000) 460,000
---------------- ---------------- --------------
Cash flows from investing activities:
Proceeds from sale of discontinued operation - 2,000,000 -
Sale (purchase) of property and equipment 420,000 (267,000) (276,000)
Capitalized software (additions) and retirements (103,000) (162,000) (533,000)
Decrease (increase) in other assets (42,000) 94,000 (78,000)
---------------- ---------------- ---------------
Cash provided by (used in) investing activities 275,000 1,665,000 (887,000)
---------------- ---------------- ---------------
Cash flows from financing activities:
Issuance of common stock - 6,000 26,000
(Repayment of) proceeds from credit facility, net (Note 6) - (826,000) 524,000
Repayment of notes payable to related parties (Note 5) (152,000) (141,000) (108,000)
Other (14,000) - (8,000)
---------------- ---------------- --------------
Cash provided by (used in) financing activities (166,000) (961,000) 434,000
---------------- ---------------- --------------
Effects of exchange rates on cash 7,000 83,000 59,000
---------------- ---------------- --------------
Increase in cash and cash equivalents 530,000 557,000 66,000
Cash and cash equivalents, beginning of year 812,000 255,000 189,000
---------------- ----------------- --------------
Cash and cash equivalents, end of year $ 1,342,000 $ 812,000 $ 255,000
============== ================ ==============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE>
PHOTOMATRIX, INC. AND SUBSIDIARIES
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 (Include 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 software development 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 $154,000 and $647,000 as of March 31,
1998 and 1997, respectively. Amortization expense for capitalized software costs
were $273,000, $261,000, $279,000, $139,000 for fiscal years 1998, 1997, and
1996, respectively.
The goodwill, net of accumulated amortization of $1,103,000 and $830,000,
amounting to $1,133,000 and $1,406,000 as of March 31, 1998 and 1997,
respectively, is related to the acquired Photomatrix technology and is being
amortized over a period of 10 years.
The Company evaluates the recoverability of its capitalized software development
costs by comparing the unamortized software development costs to the estimated
net realizable value on a product by product basis. Any excess of the carrying
amount over the net realizable value of capitalized software development costs
is written off. In the year ended March 31, 1998, the Company recorded a
write-off of capitalized software of $366,000 related to a discontinued product
line.
F-6
<PAGE>
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 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 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 costs
(first-in, first-out) or market, and consist of the following as of March 31,
1998 and 1997:
1998 1997
---- ----
Raw materials $1,705,000 $1,715,000
Work in process 247,000 375,000
Finished goods 219,000 430,000
-------- --------
$2,171,000 $2,520,000
========== ==========
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,
effective 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 or 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 between the financial statement carrying
F-7
<PAGE>
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.
Basic and Diluted Income (Loss) Per Share
In December 1997, the Company adopted the provisions of SFAS No. 128, "Earnings
per Share." SFAS No. 128 supersedes APB No. 15 and replaces "primary" and "fully
diluted" earnings per share ("EPS") under Accounting Principles Board ("APB")
Opinion No. 15 with "basic" and "diluted" EPS. Unlike primary EPS, basic EPS
excludes the dilutive effects of options, warrants and other convertible
securities. The weighted average number of common shares outstanding used in
computing basic EPS was 5,083,000, 5,219,000 and 5,742,000 in fiscal years 1998,
1997 and 1996, respectively. Diluted EPS reflects the potential dilution of
securities that could share in the earnings of the Company, similar to fully
diluted EPS. Options and warrants representing approximately 886,000, 855,000
and 933,000 shares were excluded from the computations of net loss per common
share for the years ended March 31, 1998, 1997 and 1996, respectively, as their
effect is antidilutive. The adoption of SFAS No. 128 did not have a material
effect on the Company's net loss per common share.
Stock Options
Prior to April 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of 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
Two customers (Bell & Howell and Kodak) accounted for 26% and 13%, respectively,
of the Company's total revenue for fiscal year 1998. One customer (Bell &
Howell) accounted for 17% of the Company's total revenue for fiscal 1997. One
customer (Bell & Howell) accounted for 12% of the outstanding accounts
receivable at March 31, 1998. No other customer accounted for more than 10% of
the Company's total revenue or accounts receivable 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. The Company accrues for warranty
costs at the time of sale.
Supplemental Cash Flow Information
Interest and income taxes paid approximate the amounts expensed in the years
ended March 31, 1998 and 1996. Interest paid approximates the amount expensed
for the year ended March 31, 1997. However, in the
F-8
<PAGE>
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 assets. Refer to Note 7 below for a detailed discussion of income
taxes.
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 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.
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 recognized a gain on the sale of Legal Systems of $134,000 and also
recorded a net loss from discontinued operations in fiscal 1997 of $117,000.
This loss included accruals for indemnifications related to the discontinued
operations of Legal Systems. During the current year, the indemnification period
lapsed and the Company determined that the remaining accruals were no longer
necessary. The accruals were reversed, resulting in income from discontinued
operations of $214,000 in the current year. The discontinued business accounted
for 33% of the Company's revenue for the year ended March 31, 1996. Current and
prior period balances have been reclassified to present 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"). The Company is
currently in the process of winding down and closing this operation. Lexia's
operational results have been reclassified as discontinued operations for the
respective years presented herein. Lexia's balance sheets have similarly been
reclassified as net current liabilities of discontinued operations as of March
31, 1998 and 1997, respectively.
F-9
<PAGE>
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 Company 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. Currently, Lexia carries
on its books accounts payable and unpaid rent claims of ICL and related entities
in the amount of $786,000. Lexia disputes these liabilities. Lexia is attempting
to resolve these disputes through negotiations. There is no assurance that Lexia
will be able to resolve this matter.
Other Discontinued Operations
In fiscal year 1996, the Company discontinued its imaging service bureau. The
accompanying consolidated financial statements reflect this business as a
discontinued operations. Revenue from this discontinued business was $51,000 in
fiscal year 1996.
Net current liabilities of all discontinued operations as of March 31, 1998 and
1997 totaled $1,113,000 and $452,000, respectively, and was primarily comprised
of accounts receivable, 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 in the
United States and the United Kingdom. Geographical segment information follows
for 1998, 1997 and 1996.
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenue:
United States $ 6,999,000 $ 6,797,000 $ 6,917,000
Inter-area Domestic and export customers 796,000 923,000 1,399,000
-------- -------- ----------
Total United States 7,795,000 7,720,000 8,316,000
Foreign 1,596,000 1,897,000 2,175,000
Eliminations (796,000) (923,000) (1,399,000)
---------- ---------- ------------
Total $ 8,595,00 $ 8,694,000 $ 9,092,000
=========== =========== ===========
Operating income (loss):
United States $(1,603,000) $(2,006,000) $ (978,000)
Foreign 24,000 (348,000) (97,000)
Eliminations (274,000) 10,000 (69,000)
---------- ------- ---------
Total $(1,853,000) $(2,344,000) $(1,144,000)
============ ============ ============
Identifiable assets:
United States $ 6,475,000 $ 7,189,000 $10,619,000
Foreign 958,000 1,366,000 2,031,000
Eliminations (130,000) 10,000 (69,000)
---------- ------- ---------
Total $ 7,303,000 $ 8,565,000 $12,581,000
=========== =========== ===========
</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% of the fair market
value of the Company's common stock at the date of
F-10
<PAGE>
grant; non-qualified options are granted at not less than 85% 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. In conjunction
with the merger discussed in note 11, the Board of Directors has unanimously
adopted and the Company's shareholder approved a fourth plan, the Photomatrix,
Inc. 1998 Stock option Plan, that authorizes the grant of incentive and
non-qualified stock options covering an aggregate of 1,500,000 shares of Common
Stock to officers, directors and employees of the Company and its subsidiaries.
At March 31, 1998, there were 21,667 additional shares available for grant under
the Plans. The per share weighted-average fair value of stock options granted
during 1998, 1997 and 1996 was $0.33, $0.62 and $0.63, respectively, on the date
of grant using the Black Scholes option-pricing model with the following
weighted-average assumptions: 1998 - expected dividend yield 0.0%, volatility of
88.2%, risk-free interest rate of 6.0%, and an expected life of 10 years; 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 applied APB Opinion No. 25 in accounting for its Plans and,
accordingly, no compensation cost has been recognized for its stock options in
the consolidated 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:
1998 1997 1996
---- ---- ----
Net loss, as reported $(1,482,000) $(2,407,000) $(1,704,000)
Pro forma $(1,566,000) $(2,578,000) $(1,771,000)
Loss per share, as reported $(0.29) $(0.46) $(0.30)
Pro forma loss per share $(0.31) $(0.49) $(0.31)
Pro forma net loss reflects only options granted in 1998, 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:
Range of Exercise
Shares Price
------- ------------------
Options outstanding, March 31, 1995 716,867 $0.18 - $4.13
Options granted 760,665 $0.69 - $1.25
Options exercised - -
Options canceled (649,034) $0.88 - $4.13
--------- -------------
Options outstanding, March 31, 1996 828,498 $0.18 - $3.56
Options granted 195,000 $0 .44 - $0.94
Options exercised (33,333) $0.18
Options canceled (242,833) $0.38 - $3.56
--------- -------------
Options outstanding March 31, 1997 747,332 $0.18 - $1.25
Options granted 683,331 $0.35 - $0.38
Options exercised - -
Options canceled (652,330) $0.44 - $1.25
------- -------------
Options outstanding, March 31, 1998 778,333 $0.18 - $0.47
======= =============
Options exercisable, March 31, 1998 100,000 $0.18 - $ 0.47
======= ==============
F-11
<PAGE>
As of March 31, 1998, the Company has 778,333 options outstanding with a
weighted average exercise price of $0.37 per share and a weighted average
remaining contractual life of 8.7 years.
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 July, 1997, the Company canceled stock options to acquire 579,331
shares at exercise prices ranging from $0.44 to $1.25 per share and granted new
replacement options to acquire 579,331 shares at an exercise price of $0.38 per
share, its then fair market value.
In addition to the options described above, the Company had outstanding warrants
and other options to acquire common shares as of March 31, 1998 as follows:
Shares Exercise Price Expiration
33,333 $0.42 December, 2003
75,000 $0.44 April, 2002
Subsequent to March 31, 1998, the Company granted options to purchase 100,000
shares at an exercise price of $0.75 per share with an expiration date of April,
2001.
The Company is authorized to issue 3,173,000 shares of its preferred stock. No
preferred shares were outstanding as of March 31, 1998 and 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 $37,000, $48,000 and $59,000 in the years ended March 31,
1998, 1997 and 1996, respectively. As of March 31, 1998 and 1997, $375,000 and
$527,000, respectively, were 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, 1998. This line of credit accrues
interest on outstanding borrowings at prime plus 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). The Company is required to 1)
maintain a minimum tangible net worth of $2,800,000; 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 $1,750,000; and 4) maintain a current ratio of at
least 1.7 to 1.0. As of March 31, 1998, the Company was not in compliance with
certain of these covenants; however, the Company obtained a waiver of these
requirements. The line of credit expires in September 1998 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.
F-12
<PAGE>
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 as of March 31, 1998 and 1997. 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, 1998, 1997 and 1996 was $0,
$23,000 and $61,000, respectively.
7. INCOME TAXES
The components of loss before income taxes are as follows:
1998 1997 1996
---- ---- ----
LOSS BEFORE INCOME TAXES
U.S. continuing operations $(1,410,000) $(1,820,000) $ (1,258,000)
U.S. discontinued operations 214,000 (117,000) (336,000)
Foreign (281,000) (366,000) (103,000)
------------- ------------ --------------
$(1,477,000) $(2,303,000) $(1,697,000)
============ ============ ============
PROVISION FOR TAXES
Current:
Federal $ - $ - $ -
State 5,000 1,000 7,000
Foreign - - -
------------- ------------ -------------
$ 5,000 $ 1,000 $ 7,000
Deferred - 103,000 -
------------- ------------ --------------
$ 5,000 $ 104,000 $ 7,000
============= ============ ==============
RECONCILIATION STATUTORY TO EFFECTIVE RATES
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 year 1998, 1997 and 1996 is as follows:
Tax at statutory federal tax rate $ (575,000) $(744,000) $(463,000)
State income taxes (net of federal benefit) 4,000 - 5,000
Federal impact on continuing operations
from change in valuation allowance 576,000 848,000 465,000
---------- --------- ---------
$ 5,000 $ 104,000 $ 7,000
======== ========= =========
DEFERRED TAX ASSETS/LIABILITIES
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, 1998 and 1997 are as follows:
1998 1997
---- ----
Deferred tax assets:
Tax operating loss carryforward $4,998,000 $ 4,624,000
Inventory and other reserves 428,000 256,000
Tax basis of intangible assets greater
than book basis - 193,000
Other 61,000 145,000
----------- ------------
5,487,000 5,218,000
Less valuation allowance (5,029,000) (4,488,000)
----------- ------------
458,000 $ 730,000
----------- ------------
Deferred tax liabilities:
Book basis of intangible assets
greater than tax basis (458,000) $ (461,000)
Software capitalization - (239,000)
Other - ( 30,000)
----------- ------------
$ (458,000) $ (730,000)
----------- ------------
Net deferred tax asset $ - $ -
=========== ============
F-13
<PAGE>
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, 1998, the Company has available for federal income tax purposes
a net operating loss ("NOL") carryforward of approximately $14,700,000 which can
offset future consolidated taxable income and which begins to expire in fiscal
year 2000. The utilization of this NOL may be subject to an annual limitation
under Section 382 of the Internal Revenue Code.
8. ACCRUED LIABILITIES AND CUSTOMER DEPOSITS
Accrued liabilities and other consist of the following as of March 31, 1998 and
1997:
1998 1997
---- ----
Compensation and related items $ 309,000 $ 210,000
Other 545,000 380,000
-------- --------
$ 854,000 $ 590,000
========= =========
In December 1997 and 1996, Kodak advanced to the Company $250,000 and $500,000,
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, 1998 and 1997, $0 and $273,000 remained as of March 31, 1998 and
1997, respectively, and are included in customer deposits in the accompanying
consolidated balance sheets. In fiscal year 1997, the Company recognized
$250,000 for minimum annual guaranty purchase level requirements, which was
classified as other income in the consolidated statements of operations.
9. MPLOYEE 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 $55,000, $39,000 and $54,000 in 1998, 1997 and 1996, 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 $0, $187,000 and
$150,000 in 1998, 1997 and 1996, respectively) incurred under operating leases
(including leases which have expired) was $306,000, $246,000 and $232,000, in
1998, 1997 and 1996, respectively.
Future minimum lease commitments as of March 31, 1998, are as follows:
1999 $ 94,000
2000 96,000
2001 73,000
2002 52,000
2003 46,000
2004 and thereafter 464,000
---------
$825,000
F-14
<PAGE>
Subsequent to March 31, 1998, the Company moved its corporate headquarters,
assigned the lease of its former principal operating facility, and provided the
lessor with a guarantee of the lease through its expiration in September 2002.
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)). Both Bernhart v. Xscribe and Galfin v. Xscribe has now
been or are in the process of being dismissed. Xscribe has tendered the
Hagipadelis v. Xscribe claim to its insurance carriers, St. Paul Fire ("St.
Paul") and Marine Insurance and Federal Insurance Company ("Federal"). 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 judgments rendered to date. It may take several
years before this litigation is ultimately resolved. The Company believes that
this remaining case is without merit 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.
11. SUBSEQUENT EVENTS (Unaudited)
On March 16, 1998, the Company entered into an Agreement and Plan of Merger and
Reorganization with I-PAC Manufacturing, Inc. The Agreement was approved by the
shareholders of the Company on June 5, 1998, and the transaction closed on June
11, 1998. As a result of the Merger, the 8,500 outstanding shares of I-PAC
Common Stock were exchanged for 4,848,000 shares (adjusted proportionately in
the event of the exercise of dissenters' rights) of Photomatrix Common Stock and
possibly additional shares of Photomatrix Common Stock in the event that I-PAC
achieves certain performance milestones during a twelve month period commencing
on July 1, 1998 or outstanding options to purchase Photomatrix Common Stock are
exercised.
If the I-PAC transaction had been consummated at the beginning of fiscal year
1997, the Company's consolidated revenues, net loss and net loss per share would
have been:
1998 1997
---- ----
Revenues $ 14,037,000 $13,883,000
Net Loss $ (1,071,000) $(2,709,000)
Net Loss per share, basic and
diluted $ ( 0.11) $ (0.27)
On June 5, 1998 the Company's shareholders also approved the 1998 Photomatrix
Stock Option Plan, which authorizes the grant of incentive and non-qualified
stock options covering an aggregate of 1,500,000 shares of common stock to
officers, directors and employees of the Company and its subsidiaries.
F-15
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and
Shareholders of Photomatrix, Inc.
Under date of May 29, 1998, we reported on the consolidated balance sheets of
Photomatrix, Inc. and subsidiaries as of March 31, 1998 and 1997, 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, 1998, which
are included in the Form 10-KSB. 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, 1998
F-16
<PAGE>
PHOTOMATRIX, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
Balance Deductions Balance
Beginning and End
Description of Year Expense Acquired Write-Offs of Year
- -------------------------------------------------------------------------------------------------------------------
Fiscal Year 1998
- -------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for Uncollectible
Accounts Receivable $ 111,000 63,000 - 32,000 142,000
========= ======== ========= =========== ==========
Inventory Excess and
Obsolescence Reserve $ 150.000 629,000 - 154,000 625,000
========= ======= ========= =========== ==========
Warranty Reserve $ 51,000 157,000 - 148,000 60,000
======== ======= ========= =========== ==========
Fiscal Year 1997
- -------------------------------------
Allowance for Uncollectible
Accounts Receivable $ 76,000 46,000 - 11,000 111,000
======== ======== ========= ========== ==========
Inventory Excess and
Obsolescence Reserve $ 592,000 130,000 - 572,000 150,000
========= ======= ========= ========== ==========
Warranty Reserve $ 35,000 16,000 - - 51,000
======== ======= ========= ========== ==========
Fiscal Year 1996
- -------------------------------------
Allowance for Uncollectible
Accounts Receivable $ 61,000 75,000 - 60,000 76,000
======== ======== ========= ========== ==========
Inventory Excess and
Obsolescence Reserve $ 368,000 179,000 - (45,000) 592,000
========= ======= ========= ========== ==========
Warranty Reserve $ 35,000 15,000 - 15,000 35,000
======== ======== ========= ========== ==========
</TABLE>
F-17
CERTIFICATE OF AMENDMENT OF THE
BYLAWS OF PHOTOMATRIX, INC.
The undersigned, Roy L. Gayhart, duly acting and qualified Secretary of
Photomatrix, Inc., a California corporation (the "Corporation"), hereby
certifies that the following amendment to the Corporation's Bylaws was duly
adopted by the Corporation's Board of Directors effective on June 5, 1998:
ARTICLE V. OFFICERS. Section 5.1. OFFICERS. The officers of the
corporation shall be a chairman of the board, a chief executive
officer, a president, a secretary and a chief financial officer,
and one or more vice presidents.
A new Article 5.7 shall be added to the Bylaws as follows:
Section 5.7 CHIEF EXECUTIVE OFFICER. Subject to such supervisory
powers, if any, as may be given by the board of directors to the
chairman of the board, if there be such an officer, the chief
executive officer shall, subject to the control of the board of
directors, have general supervision, direction and control of the
business and the officers of the corporation. He shall preside at
all meetings of the shareholders and, in the absence of the
chairman of the board, or if there be none, at all meetings of
the board of directors. He shall have the general powers and
duties of management usually vested in the office of chief
executive officer of a corporation, and shall have such other
powers and duties as may be prescribed by the board of directors.
The previous Article 5.7 shall be renumbered 5.8 and shall read
in full as follows:
<PAGE>
Section 5.8 PRESIDENT. The President shall supervise subordinates
reporting to him in their performance of assigned functions in a
manner that assures the achievement of goals and objectives. The
President shall promote the reputation of the Corporation, and
shall provide support requested by Chairman, Chief Executive
Officer, the Board of Directors and its committees. In the
absence or disability of the Chief Executive Officer and the
Chairman of the Board, the President shall perform all the duties
of the Chief Executive Officer, and when so acting, shall have
all the powers of, and be subject to all the restrictions upon
the Chief Executive Officer. The President shall have such other
powers and perform such other duties as from time to time may be
prescribed for him by the board of directors.
The sections of the Bylaws previously mentioned in 5.8 through
5.11 shall be renumbered 5.9 through 5.12.
The foregoing statement are true and correct to the best of my knowledge,
and this Certificate is executed at San Diego, Califonria on the 5th day of
June, 1998.
/s/ Roy L. Gayhart
------------------------------------
Roy L. Gayhart, Secretary
FIRST AMENDMENT TO
EXECUTIVE EMPLOYMENT AGREEMENT
This First Amendment (the "Amendment") between Photomatrix, Inc., a
California corporation ("Photomatrix"), and Suren G. Dutia ("Mr. Dutia") is
effective as of June 5, 1998, with reference to the following facts:
A. Photomatrix was formerly known as Xscribe Corporation, a California
corporation;
B. Photomatrix and Mr. Dutia are parties to that certain Executive
Employment Agreement dated December 20, 1988 (the "Agreement"); and
C. Photomatrix and Mr. Dutia wish to amend and modify the Agreement.
NOW, THEREFORE, the parties hereby agree as follows:
1. Modification to Executive Employment Agreement: The Agreement is hereby
amended and modified as follows:
1.1. Paragraph 1. of the Agreement shall be deleted in its
entirety and replaced with the following:
"1. Position and Duties. Mr. Dutia shall be appointed the
President of Photomatrix and a member of its Board of Directors.
During the Term, Mr. Dutia shall have such responsibilities,
duties and authority as are reasonably accorded to and expected
of a president and as may from time to time be prescribed by or
pursuant to the Company's Bylaws."
1.2. The Term of the Agreement shall be extended until July
31, 1999.
1.3. The following sentence shall be added to the end of Section
4.b. of the Agreement:
A termination of employment without cause under this Agreement
shall not constitute a termination of employment for purposes of
any stock option plan or stock option agreement in which Mr.
Dutia is a participant or to which he is a party; and, therefore,
a termination of employment without cause under this Agreement
shall not affect in any way the vesting or exercisability of any
options which have been granted to Mr. Dutia, except that, upon a
termination of employment without cause, any options granted to
Mr. Dutia which have not vested shall immediately vest and become
fully exercisable and all of
1
<PAGE>
Mr. Dutia's options shall remain exercisable until ninety days
following the expiration of the stated term of this Agreement.
2. Other Provisions Unmodified. Except as expressly modified hereby,
the rights, obligations and terms of the Agreement shall remain unmodified and
in full force and effect. In the event of a conflict between the Amendment and
the Agreement, the Amendment shall be controlling.
3. Counterparts. This Amendment may be executed in several
counterparts, and all so executed shall constitute an agreement, binding on all
the parties hereto, notwithstanding that all of the parties are not signatory to
the original or the same counterpart.
IN WITNESS WHEREOF, this Amendment is effective as of the date first
set forth above.
PHOTOMATRIX, INC., a California
corporation
By:
Its:
Suren G. Dutia
2
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: The name of Borrower shall be changed from Xscribe
Corporation to Photomatrix, Inc. in the Agreement and any documents executed by
Borrower relating thereto.
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, Bank 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 deleted 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."
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."
1
<PAGE>
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 2.50% per 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 in such Prime Rate. A nonutilization 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.
PHOTOMATRIX, INC.
"Borrower"
By:
Title:
IMPERIAL BANK
"Bank"
By:
Title:
2
Amendment No. 2 to Security and Loan Agreement
and Addendum, Exhibit "A," Thereto
This Amendment No. 2 dated as of April 28, 1997 ("Amendment") amends that
certain Security and Loan Agreement dated June 17, 1996 by and between Imperial
Bank ("Bank") and Photomatrix, Inc. ("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. Section 5 of the Addendum is deleted in its entirety and the following
substituted therefor:
" As a condition precedent to Bank's obligation to make any advances to
Borrower, Borrower shall, among other things, cause a continuing
guarantee to be executed by Photomatrix Imaging, Inc., in the amount of
$750,000, such guarantees in form satisfactory to Bank."
2. Section 9.a. of the Addendum is deleted in its entirety and the following
substituted therefor:
" Up to $750,000 in direct advances."
3. 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.
PHOTOMATRIX, INC.
"Borrower"
By:
Title:
IMPERIAL BANK
"Bank"
By:
Title:
Third Amendment to Security and Loan Agreement
and Addendum, Exhibit "A," Thereto
This Third Amendment ("Amendment") amends that certain Security and Loan
Agreement dated June 17, 1996, by and between Imperial Bank ("Bank") and
Photomatrix Imaging Corporation ("Borrower") and the Addendum, Exhibit "A," (the
"Addendum") thereto, of even date (collectively herein, the Security and Loan
Agreement and the Addendum are referred to as the "Agreement"), as follows:
1. Wherever the name "Xscribe Corporation" appears in the Agreement it shall be
changed to "Photomatrix Imaging Corporation."
2. Section 1. of the Addendum is deleted in its entirety and the following is
substituted therefor:
"Any commitment of Bank, pursuant to the terms of the Security and Loan
Agreement, to make advances against Eligible Accounts shall expire on
September 29, 1998, subject to Bank's right to renew said commitment at
its sole discretion. Any renewal of the commitment shall not be binding
upon the Bank unless it is in writing and signed by an officer of the
Bank."
3. Section 5. of the Addendum is deleted in its entirety and the following is
substituted therefor:
"Guarantee. As a condition precedent to Bank's obligation to make any
advances to Borrower, Borrower shall, among other things: cause
guarantees to be executed by Photomatrix, Inc. (parent company) in the
amount of $750,000 in form and substance satisfactory to Bank."
4. Section 10.a. of the Addendum is deleted in its entirety and the following is
substituted therefor:
"The rate of interest applicable to the Line of Credit Loan Account
shall be two percent (2.00%) per year in excess of the rate of interest
which the Bank has announced as its prime lending rate ("Prime Rate")
which shall vary concurrently with any change in 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."
5. Except as provided above, the Agreement remains unchanged.
1
<PAGE>
6. This Amendment is effective as of September 30, 1997, and the parties hereby
confirm that the Agreement as amended in full force and effect.
PHOTOMATRIX, INC.
"Borrower"
By:
Title:
IMPERIAL BANK
"Bank"
By:
Title:
2
CONSENT BY LESSOR TO ASSIGNMENT
The Manufacturers Life Insurance Company (U.S.A.)(the
"Lessor"), is the lessor of premises described in Paragraph 1 of the lease dated
the 7th day of November, 1996 (the "Lease"), between the Lessor and Photomatrix
Corporation and subsequently Photomatrix Imaging Corporation, a Nevada
corporation, as successor in interest to Photomatrix Corporation (the "Lessee"),
a copy of which Lease is attached hereto as Schedule "A". The Lease contains a
restriction against assignment or subletting by the Lessee without the Lessor's
prior written consent thereto. The Lessor consents, subject to the following
conditions, to the assignment of all of the Lessee' s right, title and interest
in the Lease by the Lessee to Cryogen, Inc. a California corporation (the
"Assignee") dated in the 15th day of April, 1998 (the "Assignment"), a copy of
which Assignment is attached hereto as Schedule "B".
1. The Lessor's consent is expressly conditional upon the payment of the
Rent reserved by the Lease, and the performance and observance of the
covenants, conditions and agreements in the Lease and this consent in
no way affects or releases the Lessee from its obligations, liabilities
and responsibilities under the Lease. The Lessee confirms and
acknowledges that, notwithstanding the Assignment, that it, together
with the Assignee, will be jointly and severally liable under the Lease
for the fulfilment of all the Lessee's agreements, covenants and
obligations thereunder.
2. This consent is given without prejudice to the Lessor's rights under
the Lease, and is expressly limited to the Assignment to the Assignment
to the Assignee, and will not be deemed to be the consent to or
authorization for any further or other assignment or subletting or
parting with or sharing possession of all or any part of the Leased
Premises.
3. In granting its consent to the Assignment, the Lessor does not:
(a) make any representation or warranties with respect to the status
of the Lease, or
(b) acknowledge or approve of any of the terms of the Assignment.
Further, nothing contained in the Assignment or this consent will be
construed as modifying, waiving or affecting any of the provisions,
covenants and conditions or any of the Lessor's rights or remedies
under the Lease other than as specifically set forth herein.
4. In consideration of the Lessor's consent to the Assignment the Assignee
covenants with the Lessor:
(a) to assume, observe and perform, all of the Lessee's obligations and
liabilities under the Lease, and without limiting the generality of the
foregoing, to pay the Base Rent and Common Area Operating Expenses and other
rent or charges, reserved in the Lease and to fulfil all of the other covenants,
agreements and conditions of the Lessee under the Lease; and
(b) at the end of the current Fiscal Period, the Lessor will adjust the
items of Common Area Operating Expenses and other rent or charges payable by the
Lessee per Paragraph 4.2 (d) of the Lease and Assignee shall either pay to the
Lessor the deficiency or receive the credit of any overpayment from the Lessor
as if the Assignee had been the Lessee for the entire Term.
The Assignee further expressly acknowledges that is shall be bound by
the prohibition against subletting, assigning, mortgaging or
encumbering or permitting the occupation or use of all or part of the
Leased Premises by others without the prior written consent of the
Lessor, upon the terms and conditions as are set forth in Paragraph 12
of the Lease.
5. Notwithstanding any provisions of the Assignment or this consent to the
contrary, the Lessor, the Lessee and the Assignee amend the following
paragraphs of the Assignment and the Assignee agrees to and
acknowledges this amendments to the Assignment:
INITIAL
(07/97) ASSIGN CONSENT _______
<PAGE>
(a) Paragraphs A(ii) and A(iii) of the Assignment assign various
Leasehold Improvements to the Assignee. Notwithstanding, it is hereby agreed by
all Parties that all Leasehold Improvements deemed to be fixtures per the Lease
shall be the property of the Lessor upon the termination of the Lease at the
sole option of the Lessor.
(b) Paragraph E of the Assignment indicates that there are minor leaks
in the roof. The Lessee hereby agrees that there are no leaks in the roof and
the Assignee hereby accepts the Premises in "as is" condition. All matters
regarding repair now or in the future shall be addressed per the Lease.
(c) The Landlord's Estoppel, page 8 of the Assignment is hereby
deleted.
6. The Lessee and the Assignee represent and warrant that they have dealt
with no broker, finder, agent or other person in connection with the
Assignemnt other than The Irving Hughes Group (the "Broker") and they
agree to indemnify and hold the Lessor harmless from and against any
claims or causes of action for a commission or other form of
compensation arising from the Assignment of the Lease, whether advanced
by the Broker or any other person or entity. The provisions of this
paragraph will survive the termination of the Lease any renewal
thereof.
7. The Lessee and the Assignee agree that to the extent that the Lessor
holds any prepaid rent or security deposit under the Lease such prepaid
rent or security deposit has been assigned to the Assignee.
8. Any capitalised term not otherwise defined herein has the meaning
ascribed to such term in the Lease.
In witness whereof, the undersigned have executed this Consent
By Lessor to Assignment on this ____ day of May, 1998.
THE MANUFACTURERS LIFE INSURANCE
COMPANY (U.S.A.)
__________________________________
Witness (Lessor)
By Signature:___________________________
Name: Bruce R. Pearson
Title: Real Estate Director
I/We have the authority to bind the
corporation
PHOTOMATRIX IMAGING CORPORATION, Nevada
corporation
(Lessee)
___________________________________
Witness
By Signature:__________________________
Name:
Title:
I/We have the authority to bind the
corporation
INITIAL
(07/97) ASSIGN CONSENT _______
<PAGE>
CRYOGEN, INC., a California corporation
(Assignee)
_____________________________________
Witness
By Signature:___________________________
Name:
Title:
I/We have the authority to bind the
corporation
EXSCRIBE CORPORATION
(Lease Guarantor)
_____________________________________
Witness
By Signature:___________________________
Name:
Title:
I/We have the authority to bind the
corporation
INITIAL
(07/97) ASSIGN CONSENT _______
<PAGE>
LEASE ASSIGNMENT AND ASSUMPTION AGREEMENT
11065 SORRENTO VALLEY COURT, SAN DIEGO, CALIFORNIA
THIS LEASE ASSIGNMENT AND ASSUMPTION AGREEMENT ("Assignment"), is made
and entered into this 16th day of April, 1998 (the "Effective Date"), between
PHOTOMATRIX IMAGING CORPORATION, a Nevada corporation, having a mailing address
of 11065 Sorrento Valley Road, San Diego, California 92121, as successor in
interest to Photomatrix Corporation. (the "Assignor") and CRYOGEN, INC., a
California corporation having a mailing address of 6199 Cornerstone Court East
Suite 106, San Diego, CA 92121 (the "Assignee"). All terms used herein having
initial capital letters and not otherwise herein defined shall have the meanings
ascribed to such terms in the Lease (as defined below).
WITNESSETH:
A. Assignment. For good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Assignor hereby assigns, transfers
and conveys to Assignee all of the Assignor's right title and interest in and
to:
(i) that certain Standard Industrial/Commercial Multi-Tenant
Lease -- Gross, dated November 7, 1996 between TBE
MANUFACTURERS LIFE INSURANCE COMPANY (the "Landlord"), as
lessor, and Photomatrix Corporation ("Lessee") (Assignor
being the successor to Lessee), as lessee, relating to
certain premises located at 11065 Sorrento Valley Road, San
Diego, California 92121, as more particularly therein
described (the "Premises"), a copy of which is attached
hereto and incorporated herein as Exhibit A (the "Lease"),
as guaranteed by XSCRIBE --------- CORPORATION (the
"Guarantor") under that certain Guaranty dated November 15,
1996 (the "Guaranty"); and all advance rentals and other
advance payments made thereunder;
(ii) Assignor's leasehold interest in the Premises, including,
without limitation, any improvements and alterations to the
Premises ("Leasehold Improvements") which are not owned by
Assignor; and
(iii) Subject to the provisions of Paragraph Q herein, Assignor's
ownership interest in category 5 network cabling, if any,
vertical blinds and alarm system sensors of the Premises
("Assignor's Personal Property") which are owned by
Assignor.
Assignor hereby releases all claims to any prepayment or deposit held
by any person or entity relating to the Premises, the Leasehold Improvements
(except relating to the existing alarm/telephone system of the Premises) or
Assignor's Personal Property (including, without limitation, any utility
deposits, performance and/or completion bonds, and the like). All such sums
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<PAGE>
shall be held by such person or entity for the benefit of Assignee, subject to
the provisions of the applicable agreement requiring such prepayment or deposit.
B. Consideration for Release of Assignor's Interest in Security
Deposit. Upon the execution of this Assignment, Assignee shall pay to Assignor
the amount of Nineteen Thousand Three Hundred Sixty Dollars ($19,360.00), as
consideration for Assignor's release of its interest in the Security Deposit set
forth in the Lease to Assignee (the "Release Consideration").
C. Date of Assignment. Assignee hereby accepts the foregoing assignment
and hereby assumes primary liability for and agrees (i) with each of Assignor
and Landlord to perform all of Assignor's obligations under the Lease accruing
from and after June 8, 1998 (the "Assignment Date") and (ii) with Assignor to
perform all of Assignee's obligations under this Assignment accruing from and
after the Effective Date. Notwithstanding the Assignment Date, Assignor shall be
solely responsible for the payment of Rent until June 15, 1998, and the June
payment of Rent under the Lease shall be paid as follows: Assignor shall pay the
entire June payment of rent due under the Lease to Landlord on or before June 1,
1998, and shall concurrently deliver to Assignee a written request for the
amount of such payment attributable on a pro rata basis to the period June 16 -
June 30, 1998 ("Assignee Initial Rent Payment"); within five (5) days after
receiving such written request Assignee shall pay Assignor the Assignee Initial
Rent Payment. Commencing on July 1, 1998, and for the duration of the Lease
term, Assignee shall make all payments of rent accruing under the Lease directly
to Landlord.
D. Delay in Possession. Notwithstanding the Assignment Date set forth
above, if for any reason Assignor cannot deliver possession of the Premises to
the Assignee on said date for any reason other than a delay caused by Assignee
or a delay in the receipt of the Landlord's consent hereto, such "Assignor
Delay" shall not affect the validity of this Assignment, but in such case, the
Assignment Date shall be delayed, Assignee's obligations hereunder shall not
accrue, and Assignor's obligations under the Lease shall continue to accrue
until the earlier of the following events: (a) one (1) business day after
Assignor delivers written notice to Assignee that the Premises can be delivered
to Assignee 'm the physical condition required under this Assignment clean and
free of any assignees or occupants (other than Assignee) and any personal
property of Assignor and any prior assignee or occupant of the Premises (except
for Assignor's Personal Property); or (b) that date upon which Assignee occupies
the Premises for any Permitted Use other than construction of Assignee's initial
tenant improvements approved by Assignor and Landlord or pre-construction
activities associated therewith. Notwithstanding the foregoing, Assignor hereby
agrees to use its best efforts to vacate the majority of the Premises (with the
exception of those certain offices currently occupied by Assignor's accounting
and administrative staff) no later than May 8, 1998. The Assignor shall deliver
the entire Premises to Assignee within two (2) days following completion of the
FY 1997-98 audit of Assignor, but no later than June 8, 1998. If the Assignor is
unable to deliver the entire Premises to Assignee on or before June 8, 1998 in
the condition set forth herein solely because of any Assignor Delay, Assignor
will pay to Assignee, as liquidated damages (which Assignee and Assignor agree
fairly reflect Assignee's damages for delays in delivery of the Premises beyond
the anticipated Assignment Date), Two Thousand Dollars ($2,000.00) for each
calendar day that
2
<PAGE>
Assignor so delays in delivering the Premises to Assignee. If possession of the
Premises is not delivered to Assignee by June 15, 1998, Assignee may, at its
option, by notice in writing to Assignor (which shall be delivered no later than
June 25, 1998), cancel this Assignment, in which event the parties shall be
discharged from all obligations hereunder; and any funds paid by either party
shall be returned to such party, including commissions.
E. Condition of Premises.
1. Physical Condition. Assignor hereby represents and warrants
that to the best of Assignor's knowledge, the roof, mechanical systems, windows
and seals, structural components of the Premises, all electrical and plumbing
systems of the Premises, each portion of the Premises that Assignor is obligated
to repair and maintain under the Lease, and the Assignor's Personal Property are
all in good operating condition and repair and, are or will be in good working
condition on the Assignment Date; provided,.however, that the existence of
certain minor leaks in the Premises roof previously disclosed to Assignee shall
not constitute a breach of the foregoing warranty so long as Assignor continues
to diligently enforce its rights under the Lease to cause the Landlord to repair
such leaks. Additionally, Assignor shall deliver the Premises to Assignee in
good and broom-clean condition, with all lighting, mechanical and plumbing
systems, and building finishes in good working order and condition. The Premises
shall be delivered to Assignee in the foregoing condition on the date of
Assignor's delivery of each portion of the Premises between the Effective Date
and the Assignment Date. Notwithstanding the foregoing, Assignee's physical
inspection of the Premises to Assignee's satisfaction shall be a condition
subsequent to the effectiveness of this Assignment. Such inspection shall be
performed, if at all, prior to April 30, 1998. In the event that Assignee
determines from such physical inspection that the Premises are not satisfactory
for Assignee's use or occupancy based upon the physical condition of the
Premises only, Assignee shall notify Assignor of such determination in writing
no later than May 5, 1998, and this Assignment shall be deemed canceled as of
the date of such notice, in which event the parties shall be discharged from all
obligations hereunder and Assignor shall return the Security Deposit, if
previously delivered to Assignor, to Assignee. Failure by Assignee to deliver
such notice by said date shall be deemed Assignee's acceptance of the Premises
in its existing physical condition on the Assignment Date (with the exception of
any damages caused by Assignor's agents, employees or contractors occupying the
Premises between the Effective Date and the Assignment Date, which damages shall
be Assignor'!-, obligation to repair in a prompt and diligent manner).
2. Assignor's Representations and Warranties. As of the Effective
Date, Assignor represents and warrants that (a) Assignor is lawfully possessed
of the lessee's interest in and to the Lease, the Leasehold Improvements and the
Assignor's Personal Property; (b) Assignor has the right and authority to assign
its interest in the Lease and the Leasehold Improvements and to convey the
Assignor's Personal Property to Assignee; (c) the Lease attached hereto as
Exhibit A is complete, unmodified and in full force and effect; (d) the Premises
have not been previously assigned or subleased by Assignor- (e) Assignor is not
in default under the Lease and, to the best of Assignor's knowledge, Landlord is
not in default thereunder, and Assignor is not aware of any event or existing
condition which, with the giving of notice and/or the passage of time, would
constitute
3
<PAGE>
such a default; (f) Assignor's interest in the Lease, the Leasehold Improvements
(with the exception of the alarm/telephone system of the Premises, which is
controlled by Paragraph Q below) and the Assignor's Personal Property shall be
delivered to Assignee free and clear of all liens, encumbrances and creditor's
rights held by any party claiming by, through or under Assignor- and (g) to the
best of Assignor's knowledge, the Premises is free of any Hazardous Substances
(other than de minimis amounts in compliance with Applicable Laws and the Lease,
and associated with the operation and use of Premises, including, without
limitation, cleaning and maintenance activities).
F. Assignee's Indemnity. As between Assignor and Assignee, Assignee
shall be responsible for the performance of all obligations of the lessee under
the Lease accruing from and after the Assignment Date (except as specifically
set forth herein), for all liabilities arising from Assignee's use or occupancy
of the Premises to the extent arising from and after the Effective Date and for
all claims, costs, expenses and liabilities relating to Assignee's material
breach of any term, condition, covenant or agreement of the Lease to be
performed by Assignee from and after the Assignment Date, and Assignee agrees to
protect, defend, indemnify and hold harmless Assignor and Guarantor from any
claims, losses, costs or expenses (including reasonable counsel fees) suffered
or incurred by Assignor or Guarantor arising out of or resulting from any
failure by Assignee to perform any such obligations, including, without
limitations the Hazardous Substances obligations of the Lease arising from
Assignee's use of any such Hazardous Substances in the Premises. The foregoing
indemnification shall include indemnity against all costs, expenses and
liabilities reasonably incurred in connection with any such claim or proceeding
brought thereon, and the defense thereof, and shall survive the cancellation or
termination of this Assignment.
G. Assignor's Indemnity. As between Assignor and Assignee, Assignor
shall be responsible for the performance of all obligations of the lessee under
the Lease that accrue prior to the Effective Date, for all liabilities arising
from Assignor's or Lessee's use or occupancy of the Premises to the extent
arising prior to the Assignment Date and for all- claims, costs, expenses and
liabilities relating to Assignor's material breach of any term, condition,
covenant or agreement of the Lease to be performed by Assignor or Guarantor
prior to the Assignment Date, and Assignor agrees to pro@ defend, indemnify and
hold harmless Assignee from any claims, losses, costs or expenses (including
reasonable counsel fees) suffered or incurred by Assignee arising out of or
resulting from any failure by Assignor or Guarantor to perform. any such
obligations, including without limitations the Hazardous Substances obligations
of the Lease arising from Assignor's use of any such Hazardous Substances in the
Premises. The foregoing indemnification shall include indemnity against all
costs, expenses and liabilities reasonably incurred in connection with any such
claim or proceeding brought thereon, and the defense thereof, and shall survive
the cancellation or termination of this Assignment.
H. Confirmation of Landlord's Liability Requirements. As set forth in
Section 12.2 of the Lease, Assignor and Assignee hereby acknowledge and agree
that, notwithstanding the assignment and assumption hereby accomplished,
Assignor shall remain fully and primarily liable, which liability shall be joint
and several with that of Assignee, for the performance of all obligations
4
<PAGE>
of the lessee under the Lease accruing from and after the Effective Date and for
the remainder of the Original Term.
I. Landlord's Consent. This Assignment is conditioned upon Landlord's
written approval of this Assignment prior to the Assignment Date. If Landlord
does not consent to this Assignment prior to the Assignment Date, delivery of
possession of the Premises to Assignee shall be delayed in accordance with the
provisions of Paragraph D of this Assignment; provided, however, that such delay
shall not be considered an Assignor Delay so long as Assignor is diligently
attempting to enforce Assignor's rights under Section 12 of the Lease. If
Landlord refuses to consent to this Assignment then this Assignment shall be
deemed canceled as of the date of Landlord's notice of such refusal, in which
event the parties shall be discharged from all obligations hereunder and
Assignor shall return the Security Deposit, if previously delivered to Assignor,
to Assignee; provided, however, that if Landlord acts unreasonably in
withholding, delaying or conditioning such consent Assignor shall promptly
exercise commercially reasonable efforts to enforce Assignor's rights under
Section 12 of the Lease.
J. Signage. Assignor's cost, Assignor shall remove its signs from the
Premises and perform all repairs required to restore the Premises to the
condition required by the Lease as a result of such removal.
K. Notices. Assignor's and Assignee's address for all notices and
other communications under the Lease before the Assignment Date shall be their
respective addresses set forth in the first paragraph of this Assignment, and
after the Assignment Date shall be:
Assignor: 1958 Kellogg
Carlsbad, California 92008
Attn: Mr. Suren Dutia
with a copy to: Sullivan, Hill, Lewin, Rez, Engel & LaBazzo
550 West C Street, Suite 1500
San Diego, California 92101
Attn: John R- Engel, Esq.
Assignee: 11065 Sorrento Valley Road
San Diego, CA 92121
Attn: Mr. Michael Warford
with a copy to: Brobeck, Phleger & Harrison, LLP
550 West C Street, Suite 1300
San Diego, CA 92101
Attn: W. Scott Biel, Esq.
5
<PAGE>
L. Brokers. Assignor shall pay a commission to The Irving Hughes Group
(the "Broker") in the amount of Twenty Three Thousand Four Hundred Dollars
($23,400.00), fifty percent (50%) of which shall be due and payable to Broker
upon Landlord's consent to this Assignment following full execution hereof by
the parties, and fifty percent (50%) of which shall be due and payable to Broker
upon commencement of rent payments by Assignee directly to Landlord.
M. Attorneys' Fees. Should any party commence any legal action or
proceeding against another based on this Assignment, the prevailing party shall
be entitled to an award of reasonable attorneys' fees, in addition to any other
relief to which such party would be entitled.
N. Counterparts. This instrument may be executed in one or more
Counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same agreement after each party has executed such a
counterpart.
O. Governing Law. This instrument shall be construed and interpreted
in accordance with the laws of the State of California.
P. Binding Effect. The provisions hereof are binding upon and shall
inure to the benefit of the parties hereto and their respective successors and
assigns.
Q. PERSONAL PROPERTY CONVEYANCE
1. Use of Leasehold Improvements. Assignor and Assignee agree
that the following Assignor's Personal Property shall remain in the Premises
after the Assignment Date and shall be conveyed to the Assignee as its sole and
separate property in accordance with the terms and conditions of this Paragraph
Q to this Assignment: the Premises category 5 network cabling; all vertical
blinds of the Premises; and the Premises alarm system sensors.
2. Purchase of Personal Property. Effective upon the Assignment
Date and following the receipt of Landlord's consent hereto, Assignee agrees to
purchase and Assignor agrees to sell the Assignor's Personal Property. Assignee
agrees to pay Assignor the sum of Nine Thousand Seven Hundred Seventy-One and
14/100 Dollars ($9,771.14) ("Personal Property Purchase Price") for the
Assignor's Personal Property, which shall be payable upon the delivery of a Bill
of Sale executed by Assignor, in the form of Exhibit B attached hereto and
incorporated herein ("Bill of Sale"), conveying title to Assignee; provided,
however, that if the network cabling is not category 5, then the Personal
Property Purchase Price shall be reduced to Two Thousand Two Hundred Ninety-Six
and 63/100 Dollars. No commission shall be paid to any Broker or third party on
account of the Personal Property Purchase Price.
3. Alarm System Lease or Purchase. As part of the Lease
obligations of Assignee and Assignor pursuant to this Assignment, Assignor
agrees to lease or sell (as determined by Assignee, and as permitted by the
applicable vendor and Landlord) to Assignee, and Assignee
6
<PAGE>
agrees to lease or buy from Assignor, the Assignor's interest in the Premises
alarm system not conveyed to Assignee as part of the Assignor's Personal
Property (the "Alarm System"). If Assignee elects to lease the Alarm System,
Assignor shall be responsible for the repair and maintenance of said Alarm
System, and Assignee shall pay Assignor as rent for such Alarm System monthly
rent of Ninety Dollars ($90.00) each month for the remainder of the Lease Term.
If Assignee elects to purchase the Alarm System (and such purchase is permitted
by the applicable vendor(s) and Landlord), such purchase shall be on an "as-is"
basis, and Assignee shall pay Assignor a lump sum of Four Thousand Dollars
($4,000.00) as the purchase price for such Alarm System, which purchase price
shall be amortized over the remaining Term of the Lease following the date of
purchase to reflect the depreciation of the Alarm System.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Assignment to be duly executed as of the Effective Date.
"ASSIGNOR"
PHOTOMATRIX IMAGING
CORPORATION
By:__________________________________
Name:________________________________
Title:_______________________________
"ASSIGNEE"
CRYOGEN, INC.
By:__________________________________
Name:________________________________
Title:_______________________________
7
<PAGE>
LANDLORD'S ESTOPPEL
This Estoppel Certificate is made by the undersigned "Landlord" with
respect to that certain Standard Industrial/Commercial Multi-Tenant Lease --
Gross, dated November 7, 1996 (the "Lease"), between the Landlord, as lessor,
and Photomatrix Corporation ("Lessee")(Assignor being the successor to Lessee),
as lessee, relating to certain premises located at 11065 Sorrento Valley Road,
San Diego, California 92121, as more particularly therein described (the
"Premises"), as guaranteed by XSCRIBE CORPORATION (the "Guarantor") under that
certain Guaranty dated November 15, 1996 (the "Guaranty"). All terms used herein
having initial capital letters and not otherwise herein defined shall have the
meanings ascribed to such terms in the Lease.
The undersigned Landlord does hereby certify to Cryogen, Inc., a
California corporation ("Assignee"), that (1) the copy of the Lease attached
hereto as Exhibit A (the "Lease") is a true, full and correct copy of the Lease
and the Lease has not been modified or amended in any way; (2) the term of the
Lease shall expire on August 31, 2002, subject to the option rights contained
therein; (3) the Lease is in full force and effect, neither party is in default
thereunder, nor do any circumstances exist which, upon notice and/or expiration
of any applicable grace period, would constitute a default thereunder; (4) the
current monthly base rent payable under the Lease is $17,955.00 and payment of
such rent and all other amounts payable by Assignor under the Lease is current
through the month of April 1998; and (5) the Landlord shall not require any of
the leasehold improvements made in and to the Premises (excluding furnishings,
fixtures and equipment) made by or on behalf of the Assignor or Lessee as of the
date hereof to be altered or removed by the holder of the lessee's interest in
and to the Lease upon the expiration or earlier termination of the Lease.
Further, the undersigned Landlord does hereby represent and warrant that the
Landlord holds record title to the premises demised under the Lease and that the
Lease is subject to no underlying ground lease.
From and after the date of this Estoppel, if Landlord sends any notice,
demand or other communication relative to any claim of a default under the Lease
on the part of the holder from time to time of the lessee's interest in and to
the Lease, Landlord agrees to provide the same concurrently to the Assignee, at
the notice address of the Assignee set forth in the Lease, and to the Assignor,
at 1958 Kellogg, Carlsbad, California 92008; Attn: Mr. Suren Dutia.
Executed under seal as of this _____ day of ________________, 1998.
THE MANUFACTURERS LIFE INSURANCE
COMPANY
By:_____________________________
Title:__________________________
1
<PAGE>
EXHIBIT A
LEASE
[To Be Attached]
2
<PAGE>
Received 1-7-97
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 leased 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, whether any other Guarantor of 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 its 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 limitation,
reasonable attorneys' fees.
Guarantor's obligations under this guaranty shall be binding on Guarantor's
successors.
XSCRIBE CORPORATION
a California Corporation
By:_______________________________ Dated:_____________________
Suren G. Dutia, President & CEO
B&H-Photomatrix Business Agreement
December 29, 1997
This document defines the business relationship and conditions between Bell &
Howell and Photomatrix whereby Bell & Howell will become the exclusive agent,
excluding those listed below as exceptions, to sell Photomatrix peripheral
scanners to Distributors and Valued Added Resellers in the defined territory.
This agreement will become an addendum to the existing agreement between Bell &
Howell and Photomatrix. The following provides definitions, conditions and
quantity commitments under this agreement.
General Definitions
Territory
Worldwide for selling purpose and North America (USA
and Canada) relative to exclusive agent aspect
Product
All document scanner peripherals, including presently
available Vision Series 5104, 5120 and 5154, defined as
PS100, PS120 and PS150 by Bell & Howell. The 200 PPM
scanner (Model 9020) will be made available, subject
tot he conditions stated under Quantity Commitment. As
other Vision Series scanner peripherals become
available, such will be added to the list of products.
Sales Channel
Distribution is defined as those companies which buy
and resell to a Valued Added Reseller (VAR).
VAR is defined as those companies which buy from the
Distributor, adds some level of value and resells to
the end user.
Direct is defined as selling to the end user.
Market Segment
Service Bureau is an end user company whose primary
business is to provide scanning services to other
companies.
Time Period
This agreement will commence January 1, 1998 and be
in effect through June 30, 1998.
<PAGE>
Conditions
Photomatrix will:
Sell scanner peripherals and turnkey systems
to the Service Bureau market segment,
utilizing its Direct Sales organization.
Not sell scanner peripherals to any
Distributor, VAR or End User, with the
exception of the following:
Distributor: Amitech, ImageMax, IBM, IKON,
Bluebird
<PAGE>
VAR: Lockheed Martin/Grumman
End User: BlueCross/BlueShield of GA, Gigante and DScan are
end users in Mexico
Provide product service to Photomatrix Vision Services
customers only.
Provide service assistance to B&H upon request.
Bell & Howell will:
Provide all necessary product training to their Sales
organization and Distributors.
Sell scanner peripherals to any Distributor or VAR not listed
above as an exception.
Sell, through their Distributor/VAR network, to Service
Bureaus.
Be responsible for all promotions, collateral materials, sales
tools, advertising and products for evaluation.
Establish a service escalation plan to minimize downtime at
the end user.
Provide to Photomatrix a monthly report to reflect the
quantity of each scanner model sold each month and the month
ending inventory of each model.
Provide a six (6) month blanket purchase order and authorize
releases against such by issuing a purchase order with product
definition and ship to address.
Provide product service to its PS customers only.
Quantity Commitment
In consideration of the above, Bell & Howell will commit to purchase
the following quantities of document scanners during the time period
and under the method noted:
<PAGE>
Time Period Quantity Method
December 1997 8 Purchase Order to ship in December
January 1998 - June 1998 54 1997 Blanket Purchase Order with
individual PO to release for
shipment
Bell & Howell, IMPG Photomatrix Corporation
By:________________________________ By:________________________________
Bob Honn Dell D. Glover
Title: Product Marketing Manager Vice President, Marketing & Sales
Date: Date:
B&H-Photomatrix Business Agreement
Addendum
January 5, 1998
General Definitions
Time Period
This entire agreement will commence January 1, 1998 and be in
effect through December 31, 1998, however, the quantity
commitment is for the time period January 1, 1998 through June
30, 1998.
Quantity Commitment
For Time Period January 1998 - June 1998, under Method, replace with
the following:
Blanket Purchase Order with Individual PO to release a minimum
of 9 per month for shipment
Bell & Howell, IMPG Photomatrix Corporation
By: By:
__________________________________ ______________________________
Bob Honn Dell D. Glover
Title: Product Marketing Manager Vice President, Marketing & Sales
Date: Date:
EXECUTIVE EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made as of this 5th day of
June, 1998 by and between Photomatrix, Inc., a California corporation
("Photomatrix" or the "Company"), and Patrick W. Moore, an individual ("Mr.
Moore").
The parties agree as follows:
1. Position and Duties. Effective June 5, 1998, Mr. Moore shall be
appointed the Chief Executive Officer of Photomatrix and a member of its Board
of Directors. During the Term, Mr. Moore shall have such responsibilities,
duties and authority as are reasonably accorded to and expected of a chief
executive officer and as may from time to time be prescribed by or pursuant to
the Company's Bylaws.
2. Term of Employment. The term of Mr. Moore's employment (the "Term")
shall commence on the date set forth above and shall continue until June 5,
1999, unless further extended or sooner terminated as hereinafter provided.
3. Compensation and Benefits. During the Term, Photomatrix shall pay or
provide to Mr. Moore the following compensation and benefits:
a. Salary. Photomatrix shall pay to Mr. Moore a base salary
("Base Salary") of no less than $125,000 per year, payable bi-weekly.
b. Performance Review and Bonus. The Board of Directors shall
review Mr. Moore's performance as often as the Board of Directors deems
appropriate, but not less than once every twelve months. In connection with each
such annual review, the Board of Directors shall consider whether to award him
bonus compensation, in addition to the Base Salary, based on his performance
during the preceding year. Whether a bonus is awarded and the amount of any
bonus shall be in the sole discretion of the Board of Directors.
c. Stock Option. On the date of this Agreement, and on each
anniversary of such date for the remainder of the Term, Photomatrix shall grant
to Mr. Moore an option to acquire such number of shares of common stock of
Photomatrix equal to the quotient of $75,000 divided by 120% of the fair market
value of the stock on the date of the grant, except with regard to the first
grant as to which the exercise price will be 120% of the fair market value of
the stock on March 16, 1998 (the date of that certain Agreement and Plan of
Merger and Reorganization by and among the Company, Photomatrix Acquisition,
Inc., and I-PAC Manufacturing, Inc.).
(1) The exercise price per share shall be twenty percent
(20%) above the fair market value of the stock on the date of the grant.
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<PAGE>
(2) The option shall be exercisable as of the date of the
grant.
(3) The option shall have other terms and conditions the
same as those contained in agreements entered into pursuant to the Company's
1998 Stock Option Plan ("1998 Plan") and as are not inconsistent with the
foregoing provisions.
d. Automobile. An automobile allowance of $500 per month,
beginning with acquisition of the automobile, shall be provided to Mr. Moore.
Expenses related to the use of such automobile, whether or not in the course of
Company business, shall be the sole responsibility of Mr. Moore; provided,
however, a car phone shall be provided to Mr. Moore and he shall be reimbursed
upon substantiation in accordance with Photomatrix policy for variable costs
incurred in connection with use of the car phone on Company business.
e. Vacation and Sick Leave. Mr. Moore shall be entitled to
paid vacation and to all paid holidays and personal days afforded by the Company
from time to time to its executives generally.
f. Services Furnished. Photomatrix shall furnish Mr. Moore
with office space, stenographic assistance and such other facilities and
administrative support as shall be necessary and suitable to Mr. Moore's
position and adequate for the performance of his duties under this Agreement.
g. Other Benefits. Mr. Moore shall be entitled to participate
in all employee benefit plans and arrangements, (including the reimbursement of
expenses incurred in the course of carrying out duties as an executive or
employee) made available by the Company from time to time during the Term to the
Company's executives or employees generally, subject to and on a basis
consistent with the terms, conditions and overall administration of such plans
and arrangements.
h. Withholding. Photomatrix is authorized to withhold from any
compensation or other amounts as may be owed by Photomatrix to Mr. Moore from
time to time such amounts as Photomatrix is required by law so to withhold or
which at the time payment by Photomatrix is required Mr. Moore owes to
Photomatrix.
4. Termination. The Term shall cease only under the following
circumstances:
a. Death or Disability. The Term shall automatically terminate
upon the disability (unless otherwise agreed in writing by Photomatrix and Mr.
Moore) and upon the death of Mr. Moore. Disability shall mean a physical or
mental disability of Mr. Moore which is reasonably likely to continue for a
period of at least thirty days and which would prevent him from performing his
duties under this Agreement in all substantial respects during such period.
b. Termination By Photomatrix Without Cause. Photomatrix shall
be entitled to terminate Mr. Moore's employment under this Agreement without
cause; provided, however,
2
<PAGE>
Photomatrix shall continue to pay the Base Salary and health insurance costs to
Mr. Moore during the remainder of the Term. A termination of employment without
cause under this Agreement shall not constitute a termination of employment for
purposes of any stock option plan or stock option agreement in which Mr. Moore
is a participant or to which he is a party; and, therefore, a termination of
employment without cause under this Agreement shall not affect in any way the
vesting or exercisability of any options which have been granted to Mr. Moore,
except that, upon a termination of employment without cause, any options granted
to Mr. Moore which have not vested shall immediately vest and become fully
exercisable and all of Mr. Moore's options shall remain exercisable until ninety
days following the expiration of the stated term of this Agreement.
c. Termination By Photomatrix With Cause. Photomatrix shall be
entitled to terminate Mr. Moore's employment under this Agreement for cause, in
which case neither Base Salary nor other compensation or benefits shall be
payable to Mr. Moore after such termination. "Cause" means (i) gross negligence
in the performance or nonperformance of any material responsibilities to
Photomatrix; (ii) the commission of any material criminal act or fraud with
respect to the Company or which may affect adversely the reputation of the
Company; (iii) dishonesty; (iv) gross misconduct; (v) breach of the Agreement of
Confidentiality between Photomatrix and Mr. Moore in the form attached hereto as
Exhibit "A"; or (vi) violation of a material condition of employment by the
Company if such violation continues for ten days after notice by Photomatrix to
Mr. Moore specifying the violation. The fact Photomatrix may not terminate such
employment when it has cause shall not constitute waiver of Photomatrix's rights
to terminate Mr. Moore at a later time pursuant to this Agreement.
d. Termination By Mr. Moore. Mr. Moore shall be entitled to
terminate his employment under this Agreement at any time upon 30 days' prior
written notice to Photomatrix, in which event Photomatrix shall have no further
obligations under this Agreement.
5. Confidentiality, Exclusivity, and Prohibition Against Solicitation
of Employees. At the time this Agreement is signed, Mr. Moore also shall execute
an Agreement of Confidentiality in the form of Exhibit "A" and such other
documents and instruments as Photomatrix requires new executives and employees
generally to execute.
6. Miscellaneous.
a. Arbitration. Any dispute or controversy between the parties
hereto involving the construction or application of any terms, covenants or
conditions of this Agreement, or any claim arising out of or relating to this
Agreement, or any claim arising out of or relating to Mr. Moore's employment by
Photomatrix that is not resolved by the parties within ten (10) days of oral or
written notice of the claim or dispute by one party to the other shall be
settled by arbitration in San Diego, California in accordance with the rules of
the American Arbitration Association then in effect, and judgment upon the award
rendered by the arbitrators may be entered in any court having jurisdiction
thereof. Photomatrix and Mr. Moore agree that the arbitrators shall have no
authority to award punitive or exemplary damages. Any decision of the
arbitrators shall be final and binding upon the
3
<PAGE>
parties. Either party may request that the arbitrators submit written findings
of fact and conclusions of law.
b. Amendment. This agreement shall not be released,
discharged, changed or modified in any manner, except by an instrument signed by
the party or parties to be bound.
c. Controlling Law. This Agreement shall be controlled and
interpreted pursuant to California law (excluding choice or conflict of law
provisions).
d. Entire Agreement. This Agreement contains the entire
agreement and understanding between the parties as to the subject matter hereof,
and supersedes all contemporaneous agreements (whether written or oral) and
commitments in respect thereto.
e. Notices. Any notices required or permitted to be sent under
this Agreement shall be delivered by hand or mailed by United States registered
or certified mail, return receipt requested, and addressed as follows:
If to Photomatrix:
Photomatrix, Inc.
1958 Kellogg Avenue
Carlsbad, CA 92008
Attention: Suren G. Dutia
with a copy to:
Luce, Forward, Hamilton & Scripps LLP
600 W. Broadway, Suite 2600
San Diego, California 92101
Attention: Otto E. Sorensen
If to Mr. Moore:
Patrick W. Moore
1958 Kellogg Avenue
Carlsbad, CA 92008
Either party may change its address for receiving notices by giving notice to
the other party in the manner prescribed above.
f. Captions. The headings and captions to sections and paragraphs
of this Agreement are for convenience of reference only and shall not constitute
a part of the Agreement nor be used in its construction or interpretation.
4
<PAGE>
g. Severability. The provisions of this Agreement are
severable. Should any provision or application of this Agreement be held
invalid, the invalidity shall not affect other provisions or applications which
can be given effect without the invalid provision or application.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first set forth above.
PHOTOMATRIX, INC.,
a California corporation
By: Suren G. Dutia, President
Its: President
Patrick W. Moore
5
<PAGE>
EXHIBIT "A"
AGREEMENT Of CONFIDENTIALITY
This Agreement of Confidentiality ("Agreement") is made this 5th day of June,
1998, between Photomatrix, Inc. ("Photomatrix"), a California corporation, and
Patrick Moore ("Employee").
RECITALS OF FACT
A. Photomatrix, a California corporation in good standing, is engaged
in the business of manufacturing and selling high quality printers and scanners.
B. Employee is currently employed by Photomatrix.
C. Photomatrix and Employee desire that Employee's relationship with
Photomatrix be based upon the terms and conditions set forth in this Agreement.
D. Employee acknowledges the existence of a confidential relationship
between Employee and Photomatrix.
THE PARTIES AGREE AS FOLLOWS
In consideration of Employee's continued employment with Photomatrix:
1. Employee shall deal fairly and in good faith with Photomatrix.
2. Employee shall not at any time, whether during or subsequent to the
termination of his employment, unless in the loyal performance of his employment
responsibilities to Photomatrix or specifically consented to in writing by
Photomatrix, use, divulge, take, remove, convert, appropriate, reproduce, or
disclose, communicate or transfer to any person or entity, confidential
information or material concerning any matters affecting or relating to the
business of Photomatrix, including, without limitation: the names, buying
habits, needs or practices of any of its customers; Photomatrix's marketing
methods and related data; the prices at which Photomatrix sells, has sold,
offers or has offered, its products or services; Photomatrix's manufacturing and
sales costs; Photomatrix's products or services; Photomatrix's designs or
technology; Photomatrix's manufacturing process; Photomatrix's research or
development; documents, lists or other records used in Photomatrix's business;
or any other confidential information or material relating to the business of
Photomatrix, its manner of operation, or other confidential data of any nature.
The parties agree that as between them, the confidential information or material
described in this paragraph is
EXHIBIT "A"
p. 1
<PAGE>
important, material, and a confidential trade secret, which affects the
successful conduct of Photomatrix's business and its goodwill.
3. For the purposes of this Agreement, the terms "confidential
information," "material(s)" and "trade secret(s)" include, without limitation:
documents, documentation, data, papers, specifications, computer printouts,
designs, forms, lists, proposals, bids, orders, agreements, contracts,
correspondence, schedules, books, guidelines, manuals, diaries, calendars,
reports, notes, memoranda, minutes, computer software, computer hardware, codes,
computer programs, procedures, processes, discs, tapes, recordings, film,
photographs, negatives, slides, transparencies, components, subcomponents,
devices, inventory, parts, stock, models, partial or complete prototypes,
research, technology, equipment, tools, credit cards or identification cards,
identification or access numbers, keys, other physical objects, and copies,
reproductions, abridgements or summaries of any of the above.
4. All confidential information and material relating to the business
of Photomatrix, which Employee shall prepare, use, observe, possess, or control,
shall be and remain Photomatrix's sole property.
5. In the event Employee is terminated, resigns, or breaches this or
any other agreement with Photomatrix, Employee shall deliver promptly to
Photomatrix all confidential information or materials relating to Photomatrix's
business, and copies or summaries thereof, which are or have been in Employee's
possession or under his control.
6. During the term of his employment with Photomatrix, Employee shall
not own an interest in, operate, conduct, join, control, incorporate, form or
participate in, or be connected as an officer, employee, agent, independent
contractor, partner, shareholder, or principal of any business entity producing,
designing, providing, soliciting orders for, selling, distributing, or marketing
products, goods, equipment, and/or services which compete with Photomatrix's
products or services.
7. During the term of his employment with Photomatrix, Employee shall
not, directly or indirectly, for himself or for any other person or entity,
induce, influence or solicit any customer or prospective customer of Photomatrix
to: terminate its relationship with Photomatrix; modify its relationship with
Photomatrix to Photomatrix's detriment; or give its business to a competitor of
Photomatrix.
8. For two years following the termination of Employee's employment
with Photomatrix, Employee shall not (i) induce or solicit customers of
Photomatrix; or (ii) use or disclose Photomatrix's technological processes,
trade secrets or Confidential Information, including revealing, making judgments
on or otherwise using, any confidential information, material or trade secrets
of Photomatrix's business to which Employee had access by reason of Employee's
employment by Photomatrix or his confidential relationship with Photomatrix.
EXHIBIT "A"
p. 1
<PAGE>
9. Employee shall not, directly or indirectly, for himself/herself or
for any other person or entity, whether during or subsequent to the termination
of this Agreement, induce, influence or solicit any person who is an employee,
representative, independent contractor, officer, director or shareholder of
Photomatrix to terminate such relationship with Photomatrix or to modify such
relationship in a manner detrimental to Photomatrix.
10. All provisions of this Agreement are material. Any breach of this
Agreement is a material breach.
11. In the event of a breach of this Agreement, Photomatrix may, at its
option, terminate Employee's employment and/or exercise any right or remedy
provided by law or equity.
12. Photomatrix's waiver of any breach of any provision of this
Agreement shall not be deemed a waiver of any subsequent breach of this
Agreement.
13. If any provision of this Agreement is determined to be invalid or
unenforceable by an arbitrator or court of competent jurisdiction, then it shall
be severed from this Agreement and the remainder of this Agreement shall be
enforced without regard to the severed portion.
14. The covenants contained in this paragraph are separate covenants
covering their subject matter in each of the separate foreign country, or
political subdivision thereof, in which Photomatrix transacts business; if any
covenant shall be void, voidable or judicially unenforceable in any one or more
of such counties, states, foreign countries, or political subdivision thereof,
such covenant shall not be affected with respect to each other county, state and
foreign country or political subdivision thereof, each covenant with respect to
each county, state and foreign country, or political subdivision thereof, being
severable and independent.
15. This Agreement shall be governed by and construed in accordance
with the laws of the State of California. Any litigation arising out of the
subject matter of this Agreement shall be brought in San Diego, California.
16. This Agreement can only be amended by a writing signed by
Photomatrix and Employee.
17. Any dispute or controversy between the parties hereto involving the
construction or application of any terms, covenants or conditions of this
Agreement, or any claim arising out of or relating to this Agreement, that is
not resolved by the parties within ten (10) days of oral or written notice of
the claim or dispute by one party to the other shall be settled by arbitration
in San Diego, California in accordance with the rules of the American
Arbitration Association then in effect, and judgment upon the award rendered by
the arbitrators may be entered in any court having jurisdiction thereof.
Photomatrix and Mr. Moore agree that the arbitrators shall have no authority to
award punitive or exemplary damages. Any decision of the arbitrators shall be
final and binding upon the
EXHIBIT "A"
p. 1
<PAGE>
parties. Either party may request that the arbitrators submit written findings
of fact and conclusions of law.
18. If either party incurs attorneys' fees or costs in connection with
this Agreement or to enforce or interpret any provision of this Agreement, and
such party through negotiation, agreement, settlement, litigation, arbitration
or other agreement, settlement, litigation, arbitration or otherwise, prevails,
then such party is entitled to recover its attorneys' fees and costs from the
other party.
19. In this Agreement, words of the masculine gender shall be construed
to include the correlative words of the feminine and neuter genders. Unless the
context otherwise indicates, words importing the singular number shall include
the plural number and vice versa, and words importing persons shall include
corporations, partnerships, and associations as well as natural persons.
20. This Agreement constitutes the entire agreement of confidentiality
between Photomatrix and Employee and supersedes all negotiations, discussions
and any previous agreements of confidentiality between them.
Photomatrix, Inc.
__________________________ By: __________________________
Patrick W. Moore Suren G. Dutia, President
EXHIBIT "A"
p. 1
EXECUTIVE EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made as of this 5th day of
June, 1998 by and between Photomatrix, Inc., a California corporation
("Photomatrix" or the "Company"), and William L. Grivas, an individual ("Mr.
Grivas").
The parties agree as follows:
1. Position and Duties. Effective June 5, 1998, Mr. Grivas shall be
appointed the Chairman of Board of Directors of Photomatrix. During the Term,
Mr. Grivas shall have such responsibilities, duties and authority as are
reasonably accorded to and expected of a chairman of a board of directors and as
may from time to time be prescribed by or pursuant to the Company's Bylaws.
2. Term of Employment. The term of Mr. Grivas's employment (the "Term")
shall commence on the date set forth above and shall continue until June 5,
1999, unless further extended or sooner terminated as hereinafter provided.
3. Compensation and Benefits. During the Term, Photomatrix shall pay or
provide to Mr. Grivas the following compensation and benefits:
a. Salary. Photomatrix shall pay to Mr. Grivas a base salary
("Base Salary") of no less than $125,000 per year, payable bi-weekly.
b. Performance Review and Bonus. The Board of Directors shall
review Mr. Grivas's performance as often as the Board of Directors deems
appropriate, but not less than once every twelve months. In connection with each
such annual review, the Board of Directors shall consider whether to award him
bonus compensation, in addition to the Base Salary, based on his performance
during the preceding year. Whether a bonus is awarded and the amount of any
bonus shall be in the sole discretion of the Board of Directors.
c. Stock Option. On the date of this Agreement, and on each
anniversary of such date for the remainder of the Term, Photomatrix shall grant
to Mr. Grivas an option to acquire such number of shares of common stock of
Photomatrix equal to the quotient of $75,000 divided by 120% of the fair market
value of the stock on the date of the grant, except with regard to the first
grant as to which the exercise price will be 120% of the fair market value of
the stock on March 16, 1998 (the date of that certain Agreement and Plan of
Merger and Reorganization by and among the Company, Photomatrix Acquisition,
Inc., and I-PAC Manufacturing, Inc.).
(1) The exercise price per share shall be twenty percent
(20%) above the fair market value of the stock on the date of the grant.
1
<PAGE>
(2) The option shall be exercisable as of the date of the
grant.
(3) The option shall have other terms and conditions the
same as those contained in agreements entered into pursuant to the Company's
1998 Stock Option Plan ("1998 Plan") and as are not inconsistent with the
foregoing provisions.
d. Automobile. An automobile allowance of $500 per month,
beginning on the date of this Agreement, shall be provided to Mr. Grivas.
Expenses related to the use of such automobile, whether or not in the course of
Company business, shall be the sole responsibility of Mr. Grivas; provided,
however, a car phone shall be provided to Mr. Grivas and he shall be reimbursed
upon substantiation in accordance with Photomatrix policy for variable costs
incurred in connection with use of the car phone on Company business.
e. Vacation and Sick Leave. Mr. Grivas shall be entitled to paid
vacation and to all paid holidays and personal days afforded by the Company from
time to time to its executives generally.
f. Services Furnished. Photomatrix shall furnish Mr. Grivas with
office space, stenographic assistance and such other facilities and
administrative support as shall be necessary and suitable to Mr. Grivas's
position and adequate for the performance of his duties under this Agreement.
g. Other Benefits. Mr. Grivas shall be entitled to participate in
all employee benefit plans and arrangements, (including the reimbursement of
expenses incurred in the course of carrying out duties as an executive or
employee) made available by the Company from time to time during the Term to the
Company's executives or employees generally, subject to and on a basis
consistent with the terms, conditions and overall administration of such plans
and arrangements.
h. Withholding. Photomatrix is authorized to withhold from any
compensation or other amounts as may be owed by Photomatrix to Mr. Grivas from
time to time such amounts as Photomatrix is required by law so to withhold or
which at the time payment by Photomatrix is required Mr. Grivas owes to
Photomatrix.
4. Termination. The Term shall cease only under the following
circumstances:
a. Death or Disability. The Term shall automatically terminate
upon the disability (unless otherwise agreed in writing by Photomatrix and Mr.
Grivas) and upon the death of Mr. Grivas. Disability shall mean a physical or
mental disability of Mr. Grivas which is reasonably likely to continue for a
period of at least thirty days and which would prevent him from performing his
duties under this Agreement in all substantial respects during such period.
b. Termination By Photomatrix Without Cause. Photomatrix shall
be entitled to terminate Mr. Grivas's employment under this Agreement without
cause; provided, however,
2
<PAGE>
Photomatrix shall continue to pay the Base Salary and health insurance costs to
Mr. Grivas during the remainder of the Term. A termination of employment without
cause under this Agreement shall not constitute a termination of employment for
purposes of any stock option plan or stock option agreement in which Mr. Grivas
is a participant or to which he is a party; and, therefore, a termination of
employment without cause under this Agreement shall not affect in any way the
vesting or exercisability of any options which have been granted to Mr. Grivas,
except that, upon a termination of employment without cause, any options granted
to Mr. Grivas which have not vested shall immediately vest and become fully
exercisable and all of Mr. Grivas' options shall remain exercisable until ninety
days following the expiration of the stated term of this Agreement.
c. Termination By Photomatrix With Cause. Photomatrix shall be
entitled to terminate Mr. Grivas's employment under this Agreement for cause, in
which case neither Base Salary nor other compensation or benefits shall be
payable to Mr. Grivas after such termination. "Cause" means (i) gross negligence
in the performance or nonperformance of any material responsibilities to
Photomatrix; (ii) the commission of any material criminal act or fraud with
respect to the Company or which may affect adversely the reputation of the
Company; (iii) dishonesty; (iv) gross misconduct; (v) breach of the Agreement of
Confidentiality between Photomatrix and Mr. Grivas in the form attached hereto
as Exhibit "A"; or (vi) violation of a material condition of employment by the
Company if such violation continues for ten days after notice by Photomatrix to
Mr. Grivas specifying the violation. The fact Photomatrix may not terminate such
employment when it has cause shall not constitute waiver of Photomatrix's rights
to terminate Mr. Grivas at a later time pursuant to this Agreement.
d. Termination By Mr. Grivas. Mr. Grivas shall be entitled to
terminate his employment under this Agreement at any time upon 30 days' prior
written notice to Photomatrix, in which event Photomatrix shall have no further
obligations under this Agreement.
5. Confidentiality, Exclusivity, and Prohibition Against Solicitation
of Employees. At the time this Agreement is signed, Mr. Grivas also shall
execute an Agreement of Confidentiality in the form of Exhibit "A" and such
other documents and instruments as Photomatrix requires new executives and
employees generally to execute.
6. Miscellaneous.
a. Arbitration. Any dispute or controversy between the parties
hereto involving the construction or application of any terms, covenants or
conditions of this Agreement, or any claim arising out of or relating to this
Agreement, or any claim arising out of or relating to Mr. Grivas's employment by
Photomatrix that is not resolved by the parties within ten (10) days of oral or
written notice of the claim or dispute by one party to the other shall be
settled by arbitration in San Diego, California in accordance with the rules of
the American Arbitration Association then in effect, and judgment upon the award
rendered by the arbitrators may be entered in any court having jurisdiction
thereof. Photomatrix and Mr. Grivas agree that the arbitrators shall have no
authority to award punitive or exemplary damages. Any decision of the
arbitrators shall be final and binding upon the
3
<PAGE>
parties. Either party may request that the arbitrators submit written findings
of fact and conclusions of law.
b. Amendment. This agreement shall not be released,
discharged, changed or modified in any manner, except by an instrument signed by
the party or parties to be bound.
c. Controlling Law. This Agreement shall be controlled and
interpreted pursuant to California law (excluding choice or conflict of law
provisions).
d. Entire Agreement. This Agreement contains the entire
agreement and understanding between the parties as to the subject matter hereof,
and supersedes all contemporaneous agreements (whether written or oral) and
commitments in respect thereto.
e. Notices. Any notices required or permitted to be sent under
this Agreement shall be delivered by hand or mailed by United States registered
or certified mail, return receipt requested, and addressed as follows:
If to Photomatrix:
Photomatrix, Inc.
1958 Kellogg Avenue
Carlsbad, CA 92008
Attention: Suren G. Dutia
with a copy to:
Luce, Forward, Hamilton & Scripps LLP
600 W. Broadway, Suite 2600
San Diego, California 92101
Attention: Otto E. Sorensen
If to Mr. Grivas:
William L. Grivas
1958 Kellogg Avenue
Carlsbad, CA 92008
Either party may change its address for receiving notices by giving notice to
the other party in the manner prescribed above.
f. Captions. The headings and captions to sections and paragraphs
of this Agreement are for convenience of reference only and shall not constitute
a part of the Agreement nor be used in its construction or interpretation.
4
<PAGE>
g. Severability. The provisions of this Agreement are
severable. Should any provision or application of this Agreement be held
invalid, the invalidity shall not affect other provisions or applications which
can be given effect without the invalid provision or application.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first set forth above.
PHOTOMATRIX, INC.,
a California corporation
By:
Suren G. Dutia, President
William L. Grivas
5
<PAGE>
EXHIBIT "A"
AGREEMENT Of CONFIDENTIALITY
This Agreement of Confidentiality ("Agreement") is made this 5th
day of June, 1998, between Photomatrix, Inc. ("Photomatrix"), a California
corporation and William L. Grivas ("Employee").
RECITALS OF FACT
A. Photomatrix, a California corporation in good standing, is engaged
in the business of manufacturing and selling high quality printers and scanners.
B. Employee is currently employed by Photomatrix.
C. Photomatrix and Employee desire that Employee's relationship with
Photomatrix be based upon the terms and conditions set forth in this Agreement.
D. Employee acknowledges the existence of a confidential relationship
between Employee and Photomatrix.
THE PARTIES AGREE AS FOLLOWS
In consideration of Employee's continued employment with Photomatrix:
1. Employee shall deal fairly and in good faith with Photomatrix.
2. Employee shall not at any time, whether during or subsequent to the
termination of his employment, unless in the loyal performance of his employment
responsibilities to Photomatrix or specifically consented to in writing by
Photomatrix, use, divulge, take, remove, convert, appropriate, reproduce, or
disclose, communicate or transfer to any person or entity, confidential
information or material concerning any matters affecting or relating to the
business of Photomatrix, including, without limitation: the names, buying
habits, needs or practices of any of its customers; Photomatrix's marketing
methods and related data; the prices at which Photomatrix sells, has sold,
offers or has offered, its products or services; Photomatrix's manufacturing and
sales costs; Photomatrix's products or services; Photomatrix's designs or
technology; Photomatrix's manufacturing process; Photomatrix's research or
development; documents, lists or other records used in Photomatrix's business;
or any other confidential information or material relating to the business of
Photomatrix, its manner of operation, or other confidential data of any nature.
The parties agree that as between them, the confidential information or material
described in this paragraph is
EXHIBIT "A"
p. 1
<PAGE>
important, material, and a confidential trade secret, which affects the
successful conduct of Photomatrix's business and its goodwill.
3. For the purposes of this Agreement, the terms "confidential
information," "material(s)" and "trade secret(s)" include, without limitation:
documents, documentation, data, papers, specifications, computer printouts,
designs, forms, lists, proposals, bids, orders, agreements, contracts,
correspondence, schedules, books, guidelines, manuals, diaries, calendars,
reports, notes, memoranda, minutes, computer software, computer hardware, codes,
computer programs, procedures, processes, discs, tapes, recordings, film,
photographs, negatives, slides, transparencies, components, subcomponents,
devices, inventory, parts, stock, models, partial or complete prototypes,
research, technology, equipment, tools, credit cards or identification cards,
identification or access numbers, keys, other physical objects, and copies,
reproductions, abridgements or summaries of any of the above.
4. All confidential information and material relating to the business
of Photomatrix, which Employee shall prepare, use, observe, possess, or control,
shall be and remain Photomatrix's sole property.
5. In the event Employee is terminated, resigns, or breaches this or
any other agreement with Photomatrix, Employee shall deliver promptly to
Photomatrix all confidential information or materials relating to Photomatrix's
business, and copies or summaries thereof, which are or have been in Employee's
possession or under his control.
6. During the term of his employment with Photomatrix, Employee shall
not own an interest in, operate, conduct, join, control, incorporate, form or
participate in, or be connected as an officer, employee, agent, independent
contractor, partner, shareholder, or principal of any business entity producing,
designing, providing, soliciting orders for, selling, distributing, or marketing
products, goods, equipment, and/or services which compete with Photomatrix's
products or services.
7. During the term of his employment with Photomatrix, Employee shall
not, directly or indirectly, for himself or for any other person or entity,
induce, influence or solicit any customer or prospective customer of Photomatrix
to: terminate its relationship with Photomatrix; modify its relationship with
Photomatrix to Photomatrix's detriment; or give its business to a competitor of
Photomatrix.
8. For two years following the termination of Employee's employment
with Photomatrix, Employee shall not (i) induce or solicit customers of
Photomatrix; or (ii) use or disclose Photomatrix's technological processes,
trade secrets or Confidential Information, including revealing, making judgments
on or otherwise using, any confidential information, material or trade secrets
of Photomatrix's business to which Employee had access by reason of Employee's
employment by Photomatrix or his confidential relationship with Photomatrix.
EXHIBIT "A"
p. 1
<PAGE>
9. Employee shall not, directly or indirectly, for himself/herself or
for any other person or entity, whether during or subsequent to the termination
of this Agreement, induce, influence or solicit any person who is an employee,
representative, independent contractor, officer, director or shareholder of
Photomatrix to terminate such relationship with Photomatrix or to modify such
relationship in a manner detrimental to Photomatrix.
10. All provisions of this Agreement are material. Any breach of this
Agreement is a material breach.
11. In the event of a breach of this Agreement, Photomatrix may, at its
option, terminate Employee's employment and/or exercise any right or remedy
provided by law or equity.
12. Photomatrix's waiver of any breach of any provision of this
Agreement shall not be deemed a waiver of any subsequent breach of this
Agreement.
13. If any provision of this Agreement is determined to be invalid or
unenforceable by an arbitrator or court of competent jurisdiction, then it shall
be severed from this Agreement and the remainder of this Agreement shall be
enforced without regard to the severed portion.
14. The covenants contained in this paragraph are separate covenants
covering their subject matter in each of the separate foreign country, or
political subdivision thereof, in which Photomatrix transacts business; if any
covenant shall be void, voidable or judicially unenforceable in any one or more
of such counties, states, foreign countries, or political subdivision thereof,
such covenant shall not be affected with respect to each other county, state and
foreign country or political subdivision thereof, each covenant with respect to
each county, state and foreign country, or political subdivision thereof, being
severable and independent.
15. This Agreement shall be governed by and construed in accordance
with the laws of the State of California. Any litigation arising out of the
subject matter of this Agreement shall be brought in San Diego, California.
16. This Agreement can only be amended by a writing signed by
Photomatrix and Employee.
17. Any dispute or controversy between the parties hereto involving the
construction or application of any terms, covenants or conditions of this
Agreement, or any claim arising out of or relating to this Agreement, that is
not resolved by the parties within ten (10) days of oral or written notice of
the claim or dispute by one party to the other shall be settled by arbitration
in San Diego, California in accordance with the rules of the American
Arbitration Association then in effect, and judgment upon the award rendered by
the arbitrators may be entered in any court having jurisdiction thereof.
Photomatrix and Mr. Grivas agree that the arbitrators shall have no authority to
award punitive or exemplary damages. Any decision of the arbitrators shall be
final and binding upon the
EXHIBIT "A"
p. 1
<PAGE>
parties. Either party may request that the arbitrators submit written findings
of fact and conclusions of law.
18. If either party incurs attorneys' fees or costs in connection with
this Agreement or to enforce or interpret any provision of this Agreement, and
such party through negotiation, agreement, settlement, litigation, arbitration
or other agreement, settlement, litigation, arbitration or otherwise, prevails,
then such party is entitled to recover its attorneys' fees and costs from the
other party.
19. In this Agreement, words of the masculine gender shall be construed
to include the correlative words of the feminine and neuter genders. Unless the
context otherwise indicates, words importing the singular number shall include
the plural number and vice versa, and words importing persons shall include
corporations, partnerships, and associations as well as natural persons.
20. This Agreement constitutes the entire agreement of confidentiality
between Photomatrix and Employee and supersedes all negotiations, discussions
and any previous agreements of confidentiality between them.
Photomatrix, Inc.
__________________________ By: __________________________
William L. Givas Suren G. Dutia, President
EXHIBIT "A"
p. 1
Subsidiaries of Registrant:
Photomatrix Imaging, Inc., Nevada
Lexia Sysems, California
Xscribe Imaging, Inc., California
Xscribe Legal Sysems, Inc., California
The Board of Directors
Photomatrix, Inc:
We consent to the incorporation by reference in the registration statements
(Nos. 33-18896, 33-72122 and 33-61951) on Form S-8 of Photomatrix, Inc. and
subsidiaries of our reports dated May 29, 1998, relating to the consolidated
balance sheets of Photomatrix, Inc. and subsidiaries as of March 31, 1998 and
1997, 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, 1998, and the related schedule, which reports appear in the March 31,
1998 annual report on Form 10-KSB of Photomatrix, Inc.
KPMG Peat Marwick LLP
San Diego, California
June 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-1-1997
<PERIOD-END> MAR-31-1998
<CASH> 1,342,000
<SECURITIES> 0
<RECEIVABLES> 1,875,000
<ALLOWANCES> 142,000
<INVENTORY> 2,171,000
<CURRENT-ASSETS> 5,344,000
<PP&E> 1,174,000
<DEPRECIATION> 627,000
<TOTAL-ASSETS> 7,303,000
<CURRENT-LIABILITIES> 3,040,000
<BONDS> 0
0
0
<COMMON> 19,351,000
<OTHER-SE> 153,000
<TOTAL-LIABILITY-AND-EQUITY> 7,303,000
<SALES> 0
<TOTAL-REVENUES> 8,595,000
<CGS> 0
<TOTAL-COSTS> 5,889,000
<OTHER-EXPENSES> 4,559,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41,000
<INCOME-PRETAX> (1,691,000)
<INCOME-TAX> 5,000
<INCOME-CONTINUING> (1,696,000)
<DISCONTINUED> 214,000
<EXTRAORDINARY> 0
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