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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________.
Commission file number 0-16055
PHOTOMATRIX, INC.
(Exact name of small business issuer as specified in its charter)
California 95-3267788
- -------------------------------------------------------------------------------
11065 Sorrento Valley Court, San Diego, California 92121
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(Address of principal executive offices) (Zip Code)
(619) 625-4400
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(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
----- -----
At December 31, 1997, 5,083,000 shares of Common Stock of the Issuer were
outstanding.
Transitional Small Business Disclosure Format.
Yes No X
----- -----
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INDEX
PHOTOMATRIX, INC.
Page
PART I. FINANCIAL INFORMATION ----
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ITEM 1. FINANCIAL STATEMENTS
Consolidated balance sheets 1
Unaudited consolidated statements of operations 2
Unaudited consolidated statements of cash flows 3
Notes to consolidated financial statements 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 7
PART II. OTHER INFORMATION
- ----------------------------
ITEM 5. OTHER INFORMATION 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 12
SIGNATURES 13
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PART I: FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
PHOTOMATRIX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1997
(Unaudited) March 31, 1997
----------------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,165,000 $ 812,000
Accounts receivable, net 1,086,000 1,602,000
Inventories, net 2,915,000 2,520,000
Prepaid expenses and other 159,000 149,000
------------ ------------
TOTAL CURRENT ASSETS 5,325,000 5,083,000
PROPERTY AND EQUIPMENT, NET 912,000 1,346,000
INTANGIBLES AND OTHER ASSETS, NET 1,395,000 2,053,000
OTHER ASSETS 151,000 83,000
------------ ------------
$ 7,783,000 $ 8,565,000
------------ ------------
------------ ------------
CURRENT LIABILITIES:
Accounts payable $ 516,000 $ 844,000
Accrued and other liabilities 634,000 590,000
Customer deposits 451,000 613,000
Line of credit (See Note 2, Part I, Item 1) - -
Current portion of notes payable 162,000 152,000
Net liabilities of discontinued operations (See Note
3, Part I, Item 1) 1,238,000 452,000
------------ ------------
TOTAL CURRENT LIABILITIES 3,001,000 2,651,000
NOTES PAYABLE TO RELATED PARTIES 252,000 375,000
OTHER NON-CURRENT LIABILITIES 101,000 40,000
CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY:
Preferred stock, 3,173,000 shares authorized - -
Common stock, no par value: 30 million shares
authorized, 5,083,000 shares issued and
outstanding 19,351,000 19,351,000
Accumulated deficit (15,063,000) (13,998,000)
Other 141,000 146,000
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 4,429,000 5,499,000
------------ ------------
$ 7,783,000 $ 8,565,000
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
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PHOTOMATRIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------- ---------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES $ 1,518,000 $ 2,451,000 $ 6,076,000 $ 6,871,000
COST OF REVENUES 1,003,000 1,785,000 3,968,000 5,107,000
------------ ------------ ------------ ------------
GROSS PROFIT 515,000 666,000 2,108,000 1,764,000
OPERATING EXPENSES:
Selling, general and administrative 711,000 904,000 2,376,000 2,685,000
Research and development 226,000 199,000 580,000 562,000
Write-off of Capitalized Software
(See Note 4, Part I, Item 1) 366,000 - 366,000 -
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 1,303,000 1,103,000 3,322,000 3,247,000
------------ ------------ ------------ ------------
OPERATING LOSS (788,000) (437,000) (1,214,000) (1,483,000)
OTHER INCOME (EXPENSE), NET (10,000) 241,000 87,000 193,000
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (798,000) (196,000) (1,127,000) (1,290,000)
LOSS FROM DISCONTINUED OPERATIONS - (3,000) - (246,000)
GAIN ON SALE OF DISCONTINUED OPERATION - - - 184,000
------------ ------------ ------------ ------------
NET LOSS $ (798,000) $ (199,000) $ (1,127,000) $ (1,352,000)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
LOSS PER COMMON SHARE:
CONTINUING OPERATIONS $ (0.16) $ (0.04) $ (0.22) $ (0.24)
DISCONTINUED OPERATION 0.00 0.00 0.00 (0.01)
------------ ------------ ------------ ------------
NET LOSS $ (0.16) $ (0.04) $ (0.22) $ (0.25)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average number of common shares
outstanding 5,083,000 5,050,000 5,083,000 5,383,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
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PHOTOMATRIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED DECEMBER, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
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<S> <C> <C>
Operations:
Loss from continuing operations $ (1,127,000) $ (1,290,000)
Adjustments:
Depreciation and amortization 688,000 716,000
Write-off of Capitalized Software 366,000 -
Change in assets and liabilities:
Accounts receivable 516,000 (28,000)
Inventories (395,000) 669,000
Prepaid expenses and other (10,000) (55,000)
Accounts payable (328,000) (586,000)
Accrued liabilities and other 44,000 334,000
Customer deposits (162,000) (107,000)
------------- -------------
Cash used in continuing operations (408,000) (347,000)
Cash provided by discontinued operations 848,000 447,000
Gain on sale of discontinued operations - (184,000)
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Cash provided (used in) by operations 440,000 (84,000)
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Investing activities:
Proceeds from sale of discontinued operation - 2,000,000
Capital (expenditures) retirements 38,000 (237,000)
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Cash provided by investing activities 38,000 1,763,000
------------- -------------
Financing activities:
Repayment of credit facility - (1,024,000)
Repayment of notes payable (113,000) (93,000)
Other Assets and Liabilities (7,000) -
------------- -------------
Cash used in financing activities (120,000) (1,117,000)
------------- -------------
Effects of exchange rates on cash (5,000) 123,000
------------- -------------
Increase in cash and cash equivalents 353,000 685,000
Cash and cash equivalents, beginning of year 812,000 255,000
------------- -------------
Cash and cash equivalents, end of year $ 1,165,000 $ 940,000
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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PHOTOMATRIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND MARCH 31, 1997 AND
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997 AND 1996
(UNAUDITED)
1. GENERAL
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements reflect
the accounts of Photomatrix, Inc. (the "Company"), together with its
subsidiaries. All significant intercompany transactions and balances have
been eliminated.
These unaudited consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to those
rules and regulations, although the Company believes that the disclosures
made are adequate to prevent the information from being misleading. These
unaudited consolidated financial statements reflect, in the opinion of
management, all adjustments (which include only normal recurring
adjustments) necessary to present the Company's results of operations and
financial position as of the dates and for the periods presented. These
unaudited consolidated financial statements should be read in conjunction
with the audited financial statements and related notes included in the
Company's Report on Form 10-KSB filed with the Securities and Exchange
Commission for the year ended March 31, 1997. The results for the interim
periods presented are not necessarily indicative of results to be expected
for a full year.
2. CREDIT LINE
The Company has an unused line of credit with a bank to borrow a total
of $750,000. This line of credit, which expires September 1998, accrues
interest on outstanding borrowings at prime plus 2 percent per annum. As
of December 31, 1997, the Company had no outstanding borrowings against
this line of credit.
3. DISCONTINUATION OF LEXIA SYSTEMS, INC.
In December, 1996 the Board of Directors approved a plan to
discontinue the operations of Lexia Systems, Inc. ("Lexia"). Lexia is
currently in the process of winding down its affairs and has notified its
customers that it will cease operations on or before September 30, 1998.
Lexia has not been able to resolve outstanding issues between it and ICL
and Fujitsu/ICL Computers.
4
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4. WRITE-OFF OF CAPITALIZED SOFTWARE
In November 1997 the Company announced the introduction of its new,
state-of-the-art 32-bit Vision Image Capture Software ("VICS"), a true
32-bit, MS-Windows NT-based software specifically designed for the
Photomatrix Vision Series scanners. As a result of this introduction, the
Company does not expect any significant future sales of its Photomatrix
Image Capture Software ("PICS"). Accordingly, the Company has recorded a
one-time charge of $366,000 in the quarter ended December 31, 1997 to write
off all capitalized software costs related to earlier generations of
software which were previously capitalized.
5. PENDING MERGER AGREEMENT
On October 29, 1997, the Company announced that it had entered into a
non-binding letter of intent with I-PAC Manufacturing, Inc. ("I-PAC"), a
custom contract manufacturer of electrical and mechanical assemblies,
including complex, multi-layer printed circuit board assemblies; wire and
cable harnesses; molded cables; and complete system and subsystem
assemblies, whereby the companies had agreed to combine their respective
business operations through a merger. The companies have revised the terms
to the original letter of intent. The revised non-binding agreement calls
for the issuance of 4,848,000 shares of Photomatrix common stock to
shareholders of I-PAC in exchange for all of the outstanding stock of the
privately-held company. In addition, I-PAC shareholders will have the right
to receive up to 4,652,000 additional shares based upon the exercise of
Photomatrix options and attaining certain performance milestones for I-PAC
operations. The merger is subject to several conditions, including: a)
satisfactory completion of due diligence by each of the parties; b) the
absence of any material adverse change in assets, liabilities, personnel,
financial conditions or prospects of the respective companies; c)
compliance with all applicable statutory and regulatory requirements; d)
the approval of the transaction and the execution, delivery and performance
of the agreement by their respective Boards of Directors and shareholders;
e) the receipt of all necessary or appropriate consents, waivers and
approvals of third parties; f) qualification of the transaction as a tax
free exchange under Federal and California tax laws; g) the absence of a
significant number of dissenting shareholders and h) the negotiation and
execution of a merger agreement and other appropriate documentation. The
merger will initially result in increasing the number of outstanding shares
of Photomatrix common stock from 5,083,000 to 9,931,000, and could
eventually result in increasing that number to 15,490,000 shares if I-PAC's
performance milestones are achieved and all existing Photomatrix options
and warrants are converted to common stock. Photomatrix has previously
granted options and warrants to officers, directors, key employees and
various other parties to purchase 907,000 shares of its common stock, all
of which remain outstanding.
Under the terms of the merger agreement, the corporate headquarters of
Photomatrix will be relocated as soon as possible after the close of the
merger transaction to the I-PAC Manufacturing, Inc. facility located in
Carlsbad, California. In addition, William Grivas, currently Chief
Executive Officer of I-PAC Manufacturing, will assume the position of
Chairman of the Board of Directors of Photomatrix and Patrick Moore,
5
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currently President of I-PAC Manufacturing, will assume the position of
Chief Executive Officer of Photomatrix. Suren Dutia, currently President,
Chief Executive Officer and Chairman of the Board for Photomatrix, will
retain the position of President of Photomatrix. The composition of the
Photomatrix Board of Directors will change from four members to seven
members. The existing members of the Board will remain the same, and the
three additional positions will be filled by William Grivas, James Hill and
one additional person. The transaction will be treated as a purchase for
accounting purposes.
I-PAC specializes in surface mount and hybrid printed circuit boards
used in high value industrial products and commercial products which
require an exceptionally high level of quality, a critical emphasis on
delivery schedules, and intensive customer support. I-PAC's primary
customers include ITT, Lockheed Martin, Disney, Hughes JVC, Sattel
Communications, Sanyo, Schumacher, Triconex (a Siebe company) and Palomar
Products. For the year ended December 31, 1997, I-PAC reported revenues of
nearly $5.6 million. I-PAC Manufacturing, Inc. owns a 40,000 square foot,
two story concrete building located in a high end R&D industrial park in
Carlsbad, California, which houses its operations. It also has an
investment in a wholly owned subsidiary, I-PAC Express Assembly, Inc.
I-PAC Express Assembly, Inc. is a custom contract manufacturer
specializing in quick turn printed circuit board prototypes incorporating
surface mount and hybrid technologies. It is located in Santa Ana,
California, in the heart of the Orange County high technology community.
I-PAC Express is situated to support prototyping requirements for new
products during their design phase, allowing those products to then
seamlessly migrate to the main facility when production build quantities
are required.
THERE IS NO ASSURANCE THAT THIS COMBINATION WILL BE CONSUMMATED.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS 10-QSB CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THESE STATEMENTS INCLUDE, WITHOUT LIMITATION,
STATEMENTS RELATING TO THE COMPANY'S PLANS AND OBJECTIVES FOR FUTURE
OPERATIONS, INCLUDING INCREASING SALES AND IMPROVING MARGINS,
ASSUMPTIONS AND STATEMENTS RELATING TO THE COMPANY'S FUTURE ECONOMIC
PERFORMANCE AND OTHER NON-HISTORICAL INFORMATION. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE,
WITHOUT LIMITATION, THOSE RISKS DISCUSSED IN ITEM 7 UNDER THE HEADING
"ADDITIONAL RISK FACTORS" AS WELL AS OTHER FACTORS AS DISCUSSED IN THE
COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED MARCH
31, 1997.
Management's discussion and analysis of financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and notes to consolidated financial statements included elsewhere
herein.
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THE
THREE MONTHS ENDED DECEMBER 31, 1996
For the quarter ended December 31, 1997, consolidated revenues decreased
$933,000 or 38.1% to $1,518,000 from $2,451,000 for the quarter ended December
31, 1996. This was due to a 47.6% ($952,000) decrease in equipment and
software revenues offset by a 4.2% ($19,000) increase in service revenues. This
reduction in equipment and software revenues was primarily due to extended
customer purchasing decisions and a significant reduction in orders from a major
OEM customer of Photomatrix. The Company has also not yet received anticipated
orders from a potentially significant new distributor. During December 1997,
the Company received a binding commitment from Bell & Howell for purchasing
Vision Series 5000 document scanners to be delivered over a seven-month period
beginning in December 1997. The purchase commitment, which exceeds $1.5 million,
is part of an agreement between Photomatrix and the Bell & Howell, whereby Bell
& Howell becomes the exclusive agent, with certain specifically identified
exceptions, to sell Photomatrix peripheral document scanners to distributors and
value-added resellers in the United States and Canada. In return for the
purchase commitment, Photomatrix agreed to restrict its direct sales activities
to the service bureau markets and not compete with Bell & Howell in the indirect
distribution channels. In addition, Photomatrix also retains rights to continue
selling its document scanners to international distributors as well as certain
domestic distributors and end users under existing distribution agreements.
Eight of the scanners were delivered in December 1997.
For the quarter ended December 31, 1997, consolidated gross margin
decreased $151,000 or 22.7% to $515,000 from $666,000 for the quarter ended
December 31, 1996. However, gross margin as a percent of revenues increased
24.6% to 33.9% from 27.2%. This increase was due to a 19.1% increase in
equipment and software margins coupled with a 36.6% increase in service margins.
The equipment and software gross margin improvement resulted from the effects of
both a continuing favorable product mix and a reduction in costs associated with
production
7
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efficiencies. The service gross margin improvement resulted from a 15.6%
decrease in service costs, primarily labor, tax and labor-related costs
coupled with a 21.0% increase in charges to customers for labor and materials
not covered by maintenance contracts.
For the quarter ended December 31, 1997, selling, general and
administrative expenses ("SG&A") decreased $193,000 or 21.4% to $711,000 from
$904,000 for the quarter ended December 31, 1996. As a percent of revenue
SG&A increased 26.8% to 46.8% from 36.9%. This increase is a reflection of
reduced revenues as actual SG&A costs continue to be held below previous year
amounts, primarily in the area of labor and labor-related costs and taxes.
In January 1998, in response to the lower level of sales in the third
quarter, uncertainties in the market segment in which Photomatrix sells its
aperture card and document scanners and the restructuring of its sales and
marketing department as a result of the new OEM arrangement with Bell &
Howell, the Company took definitive actions to further reduce operating
expenses, including eliminating several positions. The Company expects these
cost reductions will exceed $400,000 on an annual basis.
For the quarter ended December 31, 1997, research and development
expenses increased by $27,000 or 13.6% to $226,000 from $199,000 for the
quarter ended December 31, 1996. As a percent of revenue research and
development expenses increased 84.0% to 14.9% from 8.1% for the quarter ended
December 31, 1996. Total spending increased $15,000 to $226,000 from
$211,000. During the quarter, with a greater emphasis being placed on
research, there was no capitalization of expenses for new product
development, a decrease of $12,000 from the prior quarter.
The company recorded a write off of certain capitalized software costs
during the quarter ended December 31, 1997 in the amount of $366,000.
In the current quarter, other expense consists of $10,000 of interest
expense. In the prior quarter, other income was comprised of $9,000 of
interest income, offset by a $250,000 one-time settlement payment from a
major customer to settle a shortfall of guaranteed purchase commitments for
spare parts shipments in calendar year 1996.
There was no provision for income taxes booked in either the quarter
ended December 31, 1997 or the quarter ended December 31, 1996, because of
the effects of net operating loss carry-forwards, net of related allowances.
The net effect of the decreases in gross margin and SG&A, increases in
product development expenses and other expenses plus the one-time write off
of certain capitalized costs resulted in a net loss from continuing
operations for the quarter ended December 31, 1997 of $798,000 or $(0.16) per
share. This compares to a loss from continuing operations of $196,000 or
$(0.04) per share for the quarter ended December 31, 1996. There was no
income from discontinued operations in the current quarter compared to a loss
of $3,000 in the quarter ended December 31, 1996. The net loss in the
current quarter of $798,000 or $(0.16) per share compares to a net loss of
$199,000 or $(0.04) per share in the prior quarter.
8
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NINE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THE
NINE MONTHS ENDED DECEMBER 31, 1996
For the nine months ended December 31, 1997, consolidated revenues
decreased $795,000 or 11.6% to $6,076,000 from $6,871,000 for the nine months
ended December 31, 1996, primarily as a consequence of the poor results shown
in the current quarter. Equipment and software revenue decreased $947,000 or
17.5% to $4,463,000 from $5,410,000 for the nine months ended December 31,
1996. Service revenue increased $152,000 or 10.4% to $1,613,000 from
$1,461,000 for the prior nine months ended December 31, 1996.
For the nine months ended December 31, 1997, consolidated gross margin
increased $344,000 or 19.5% to $2,108,000 from $1,764,000 for the nine months
ended December 31, 1996. As a percent of revenues gross margin increased
35.0%, to 34.7 % from 25.7%. Equipment and software gross margin increased
23.9% to 28.5% from 23.0%, this improvement resulting from the effects of
both a continuing favorable product mix and a reduction in costs associated
with production efficiencies. Service gross margin increased 45.9% to 51.8%
from 35.5%, resulting primarily from decreases in service costs, primarily
labor and labor-related costs and taxes.
For the nine months ended December 31, 1997, selling, general and
administrative expenses ("SG&A") decreased $309,000 or 11.5% to $2,376,000
from $2,685,000 for the nine months ended December 31, 1996. As a percent of
revenue, SG&A remained constant at 39.1%. As previously discussed, the
Company is further reducing costs as a result of the lower level of sales in
the third quarter, uncertainties in the market segment in which Photomatrix
sells its aperture card and document scanners and the restructuring of its
sales and marketing department as a result of the new OEM arrangement with
Bell & Howell. As a result of the actions taken the Company expects cost
reductions to exceed $400,000 on an annual basis.
For the nine months ended December 31, 1997, research and development
expenses increased by $18,000 or 3.2% to $580,000 from $562,000 for the nine
months ended December 31, 1996. As a percentage of revenue, research and
development expenses increased 15.9 % to 9.5% from 8.2%. Total product
development spending increased $28,000 to $664,000 from $636,000.
Expenditures for new product development that were considered to be
technologically feasible, and as such were capitalized, increased $10,000 to
$84,000 from $74,000.
As previously discussed, the company recorded a write off of certain
capitalized software costs during the quarter ended December 31, 1997 in the
amount of $366,000.
Other income of $87,000 in the nine months ended December 31, 1997,
compares to income of $193,000 in the nine months ended December 31, 1996, a
decrease of $106,000. This decrease primarily reflects a sale of a trademark
for $100,000 in the current period compared to a one-time settlement payment
of $250,000 from a major customer in the prior period.
There was no provision for income taxes booked in the nine months ended
December 31, 1997, the same as in the nine months ended December 31, 1996,
because of the effects of net operating loss carry-forwards, net of related
allowances.
9
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The net effect of the increases in gross margin and research and
development, decreases in SG&A and other income plus the write off of
capitalized software resulted in a net loss from continuing operations for
the nine months ended December 31, 1997 of $1,127,000 or $(0.22) per share.
This compares to a net loss from continuing operations of $1,290,000 or
$(0.24) per share for the nine months ended December 31, 1996. There was no
income from discontinued operations in the current period compared to a loss
of $62,000 or $(0.01) per share in the nine months ended December 31, 1996.
The net loss in the current period of $1,127,000 or $(0.22) per share
compares to a loss of $1,352,000 or $(0.25) in the prior nine month period.
RECENT AND FUTURE SOURCES OF AND DEMANDS ON LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended December 31, 1997, the Company's loss before
taxes, depreciation and amortization and the one-time write off of certain
capitalized software costs was $73,000. During this period the Company's
primary sources of liquidity were a reduction of accounts receivable
($516,000), an increase in accrued and other liabilities ($44,000),
retirement of capital assets ($38,000), cash flows provided by discontinued
operation ($848,000), and cash reserves. During the same period the primary
uses of cash were to increase inventories ($395,000), increase prepaid
expenses ($10,000), reduce accounts payable ($328,000), reduce customer
deposits ($162,000), reduce notes payable ($113,000) and reduce other assets
and liabilities (7,000). As a result of these sources and uses of liquidity
during the nine months ended December 31, 1997 the Company's cash balance
increased $353,000 or 43.58%, from $812,000 to $1,165,000.
The Company has a $750,000 line of credit with its bank. This line of
credit accrues interest on outstanding borrowings at the bank's prime rate
plus 2% per annum. Under the terms of the line total borrowings are limited
to the lesser of $750,000 or 70% of eligible accounts receivable (as defined
under the agreement). 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 new worth of not greater than 1.1 to 1.0, (3) maintain working
capital of $1,750,000 and (4) maintain a current ratio of 1.7 to 1.0. The
line of credit expires in September, 1998. As of December 31, 1997, the
Company had no outstanding borrowings against this line of credit and is in
compliance with all requirements.
The Company is obligated under a series of notes payable totaling
$414,000 as of December 31, 1997. These notes bear interest at a rate of 8%
per annum and mature in April 2000. Interest and principal payments totaling
$16,000 are due monthly. As of December 31, all payments under these
obligations are current.
The Company's assured sources of future short-term liquidity are its
cash balance of $1,165,000 as of December 31, 1997 and the full amount of its
line of credit of $750,000.
The Company currently is obligated to pay approximately $20,000 per
month in lease payments. Aside from these commitments, the Company has not
made any material capital commitments.
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The Company is continuing to concentrate on increasing sales and improving
gross margins. If it is successful, it should have sufficient liquidity to fund
its operations during the next twelve months. In the event that the proposed
merger is accomplished, although no assurances can be given, the company expects
the effect on liquidity to be positive, and therefore no additional capital will
be required to fund operations.
In March 1997 the Financial Accounting Standards Board issued SFAS 128,
EARNINGS PER SHARE, effective for periods ending after December 15, 1997. SFAS
128 requires the presentation of "basic" earnings per share, which excludes the
dilutive effect of all common stock equivalents. Presentation of "diluted"
earnings per share, which reflects the dilutive effects of all common stock
equivalents, is be required. The diluted presentation is similar to the current
presentation of fully diluted earnings per share, but uses the average market
price of the stock during the period. For the three and nine months ended
December 31, 1997 and 1996 the company had losses from continuing operations and
thus only basic earnings per share is presented as the effect of common stock
equivalents is antidilutive to the calculation of diluted earnings per share.
11
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PART II: OTHER INFORMATION
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ITEM 5. OTHER INFORMATION
On October 29, 1997, the Company announced that it had entered into a
non-binding letter of intent with I-PAC Manufacturing, Inc. ("I-PAC"), a custom
contract manufacturer of electrical and mechanical assemblies, including
complex, multi-layer printed circuit board assemblies; wire and cable harnesses;
molded cables; and complete system and subsystem assemblies, whereby the
companies had agreed to combine their respective business operations through a
merger. The companies have revised the terms to the original letter of intent.
The revised non-binding agreement calls for the issuance of 4,848,000 shares of
Photomatrix common stock to shareholders of I-PAC in exchange for all of the
outstanding stock of the privately-held company. In addition, I-PAC shareholders
will have the right to earn up to 4,652,000 additional shares, based upon
Photomatrix options exercised and attaining certain performance milestones for
I-PAC operations. The merger is subject to several conditions, including: a)
satisfactory completion of due diligence by each of the parties; b) the
absence of any material adverse change in assets, liabilities, personnel,
financial conditions or prospects of the respective companies; c) compliance
with all applicable statutory and regulatory requirements; d) the approval of
the transaction and the execution, delivery and performance of the agreement by
their respective Boards of Directors and shareholders; e) the receipt of all
necessary or appropriate consents, waivers and approvals of third parties; f)
qualification of the transaction as a tax free exchange under Federal and
California tax laws; g) the absence of a significant number of dissenting
shareholders and h) the negotiation and execution of a merger agreement and
other appropriate documentation. THERE IS NO ASSURANCE THAT THIS COMBINATION
WILL BE CONSUMMATED
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(A) EXHIBITS
Financial Data Sheet (filed only electronically with the SEC)
(B) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the quarter ended December
31, 1997.
Items 1, 2, 3 and 4 are not applicable and have been omitted.
12
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Issuer has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
PHOTOMATRIX INC.
Date: February 12, 1998 by /s/ Suren G. Dutia
------------------------------
Suren G. Dutia
President
Chief Executive Officer
Date: February 12, 1998 by /s/ Roy L. Gayhart
------------------------------
Roy L. Gayhart
Chief Financial Officer
Date: February 12, 1998 by /s/ Charles H. Frady
------------------------------
Charles H. Frady
Controller
Principal Accounting Officer
13
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<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,165,000
<SECURITIES> 0
<RECEIVABLES> 1,218,000
<ALLOWANCES> 132,000
<INVENTORY> 2,915,000
<CURRENT-ASSETS> 5,325,000
<PP&E> 1,755,000
<DEPRECIATION> 843,000
<TOTAL-ASSETS> 7,783,000
<CURRENT-LIABILITIES> 3,001,000
<BONDS> 0
0
0
<COMMON> 19,351,000
<OTHER-SE> 141,000
<TOTAL-LIABILITY-AND-EQUITY> 7,783,000
<SALES> 0
<TOTAL-REVENUES> 1,518,000
<CGS> 0
<TOTAL-COSTS> 1,003,000
<OTHER-EXPENSES> 1,303,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (798,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (798,000)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
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