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 September 30, 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 small business issuer as specified in its charter)
California 95-3267788
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1958 Kellogg Avenue, Carlsbad, California 92008
(Address of principal executive offices) (Zip Code)
(760) 431-4999
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
- -------------------------------------------------------------------------------
At September 30, 1998, 9,931,000 shares of the Common Stock of Photomatrix, Inc.
were outstanding.
- -------------------------------------------------------------------------------
Transitional Small Business Disclosure Format.
Yes No X
<PAGE>
INDEX
PHOTOMATRIX, INC.
Page
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Consolidated balance sheets as of September 30, 1998
unaudited) and March 31, 1998 2
Unaudited consolidated statements of operations for the three
months and six months ended September 30, 1998 and September
30, 1997 3
Unaudited consolidated statements of cash flows for the six
months ended September 30, 1998 and September 30, 1997 4
Unaudited notes to consolidated financial statements 5
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9
PART II - OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
ITEM 5: OTHER INFORMATION 14
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 15
<PAGE>
PHOTOMATRIX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 AND MARCH 31, 1998
<TABLE>
September 30, 1998
(Unaudited) March 31, 1998
------------------------ --------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $251,000 $1,342,000
Accounts receivable, net of allowance
of $165,000 and $142,000 2,207,000 1,625,000
Inventories 3,159,000 2,171,000
Prepaid expenses and other 241,000 98,000
---------------------- --------------------
Total current assets 5,858,000 5,236,000
Property and equipment, net 3,948,000 547,000
Intangible assets, net 2,336,000 1,287,000
Other assets 78,000 125,000
Advances to officers 8,000 --
----------------------- --------------------
$12,228,000 $7,195,000
======================= ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,446,000 $502,000
Accrued liabilities and other 542,000 746,000
Customer deposits 255,000 409,000
Line of credit 842,000 --
Current maturities of notes payable 374,000 162,000
Net current liabilities of discontinued operation 898,000 1,113,000
-------------------- --------------------
Total current liabilities 4,357,000 2,932,000
Notes payable to related parties, long term 123,000 213,000
Long term debt and other 2,399,000 26,000
Commitments and contingencies
Shareholders' equity:
Preferred Stock, no par value; 3,173,000 shares
authorized, no shares issued and outstanding -- --
Common stock, no par value; 30 million shares
authorized, 9,931,000 and 5,083,000 shares
issued and outstanding, respectively 21,290,000 19,351,000
Additional paid-in capital 30,000 --
Accumulated deficit (16,129,000) (15,480,000)
Accumulated other comprehensive income 158,000 153,000
----------------------- --------------------
Total shareholders' equity 5,349,000 4,024,000
----------------------- --------------------
$12,228,000 $7,195,000
======================= ====================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
2
<PAGE>
PHOTOMATRIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
<TABLE>
Three Months Ended Six Months Ended
September 30, September 30,
1998 1997 1998 1997
-------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
REVENUES $3,071,000 $2,288,000 $4,363,000 $4,559,000
COST OF REVENUES 1,896,000 1,448,000 2,838,000 2,966,000
-------------- ---------------- --------------- ---------------
GROSS PROFIT 1,175,000 840,000 1,525,000 1,593,000
-------------- ---------------- --------------- ---------------
OPERATING EXPENSES
Selling, general and administrative 936,000 741,000 1,751,000 1,666,000
Research and development 161,000 173,000 376,000 354,000
Facility consolidation and relocation (42,000) -- 181,000 --
--------------- ---------------- --------------- ---------------
TOTAL OPERATING EXPENSES 1,055,000 914,000 2,308,000 2,020,000
OPERATING INCOME (LOSS) 120,000 (74,000) (783,000) (427,000)
--------------- ---------------- --------------- ---------------
OTHER INCOME (EXPENSE), NET (66,000) 89,000 (117,000) 97,000
--------------- ---------------- --------------- ---------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS 54,000 15,000 (900,000) (330,000)
INCOME FROM DISCONTINUED
OPERATIONS 251,000 -- 251,000 --
-------------- ---------------- --------------- ---------------
NET INCOME (LOSS) $ 305,000 $ 15,000 $ (649,000) $ (330,000)
============== ================ =============== ===============
BASIC EPS:
CONTINUING OPERATIONS $ 0.01 $ -- $ (0.11) $ (0.06)
-------------- ---------------- --------------- ---------------
DISCONTINUED OPERATIONS $ 0.02 $ -- $ 0.03 $ --
-------------- ---------------- --------------- ---------------
NET INCOME (LOSS) $ 0.03 $ -- $ (0.08) $ (0.06)
-------------- ---------------- --------------- ---------------
Weighted average number of common and
common stock equivalent shares outstanding 9,931,000 5,083,000 8,209,000 5,083,000
-------------- ---------------- --------------- ---------------
DILUTED EPS:
CONTINUING OPERATIONS $ 0.01 $ -- $ (0.11) $ (0.06)
--------------- ---------------- --------------- ---------------
DISCONTINUED OPERATIONS $ 0.02 $ -- $ 0.03 $ --
-------------- ---------------- --------------- ---------------
NET INCOME (LOSS) $ 0.03 $ -- $ (0.08) $ (0.06)
-------------- ---------------- --------------- ---------------
$ --
---------------
Weighted average number of common and
common stock equivalent shares outstanding 10,659,000 5,083,000 8,209,000 5,083,000
-------------- ---------------- --------------- ---------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
PHOTOMATRIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
<TABLE>
1998 1997
--------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATIONS
Net loss from continuing operations: $(900,000) $(330,000)
Adjustments:
Depreciation and amortization 395,000 473,000
Loss on disposal of property and equipment 13,000 --
Stock options granted to third party 30,000 --
Changes in assets and liabilities, excluding effects of
acquisition:
Accounts receivable 356,000 143,000
Inventories -- (237,000)
Prepaid expenses and other (56,000) (35,000)
Accounts payable 39,000 (93,000)
Accrued liabilities and other (445,000) 128,000
Customer deposits (154,000) (274,000)
--------------- --------------
Cash used in continuing operations (722,000) (255,000)
Cash provided by discontinued operations 36,000 628,000
--------------- --------------
Cash provided by (used in) operations (686,000) 403,000
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of acquisition, net of cash received 35,000 --
Capital expenditures (528,000) --
Proceeds from disposal of capital assets 20,000 23,000
Decrease in other assets 34,000 --
--------------- --------------
Cash provided by (used in) investing activities (439,000) 23,000
--------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit, net of repayments 159,000 --
Repayments on notes payable (22,000) --
Increase (decrease) in long term debt and other (108,000) 49,000
--------------- --------------
Cash provided by financing activities 29,000 49,000
--------------- --------------
EFFECTS OF EXCHANGE RATES ON CASH 5,000 (13,000)
--------------- --------------
NET INCREASE (DECREASE) TO CASH AND CASH
EQUIVALENTS (1,091,000) 462,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,342,000 812,000
--------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 251,000 $ 1,274,000
=============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
PHOTOMATRIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1998 AND MARCH 31, 1998 AND
FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
1. GENERAL
Basis of Presentation
The accompanying unaudited consolidated financial statements reflect the
accounts of Photomatrix, Inc. (the "Company"), together with its subsidiaries.
On June 5, 1998 the shareholders of the Company approved the merger ("Merger")
between the Company. and I-PAC Manufacturing, Inc. ("I-PAC"). The Company
issued 4,848,000 shares of Photomatrix common stock to shareholders of I-PAC
in exchange for the 8,500 outstanding shares of the common stock of the
privately-held company. This transaction resulted in an increase in the number
of outstanding shares of Photomatrix common stock from 5,083,000 to 9,931,000.
All significant intercompany transactions and balances have been eliminated.
Certain information and disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting
principles ("GAAP") have been condensed or omitted pursuant to GAAP, 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, 1998. The results for the
interim periods presented are not necessarily indicative of results to be
expected for a full year.
Certain prior year amounts have been reclassified to conform to the
current-year presentation.
2. CREDIT FACILITIES
As of September 30, 1998, the Company was obligated under a series of notes
payable totaling $3,738,000. This debt included a new $2,100,000 credit
facility with its bank that included a $1,500,000 line of credit and a
$600,000 term loan which matures in September, 2002. The aggregate outstanding
balance under these loans as of September 30, 1998 was $1,316,000. The Company
used some of the proceeds from the term loan to acquire additional
state-of-the-art equipment which will significantly broaden its surface mount
technology ("SMT") printed circuit board manufacturing capacity.
The new line of credit accrues interest on outstanding borrowings at the
bank's prime rate plus 1 % per annum. The Company's previous line of credit
accrued interest at prime plus 2%. All other terms of the new line of credit,
except for various covenants, essentially remained the same. Under the terms
of the new agreement, total borrowings under the line of credit will be
limited to the lesser of $1,500,000 or 75% of eligible accounts receivable (as
defined under the agreement). The Company is required to continue to (1)
maintain a minimum tangible net worth of $2,600,000 as of September 30, 1998,
$3,200,000 as of December 31, 1998, and $3,500,000 thereafter (2) maintain a
ratio of total liabilities to tangible net worth of not greater than 2.75 to
1.0, and (3) maintain a minimum debt service coverage of no less than 1.25 to
1.0. The new line of credit expires in July, 1999.
The Company has issued two notes in the aggregate amount of $2,038,000, which
are collateralized by trust deeds of the Company's real property located in
Carlsbad, California. The repayment of these notes is guaranteed by certain
major shareholders of the Company and the Small Business Administration. These
notes are payable in aggregate monthly installments of approximately $19,000,
including interest ranging from 7.5 to 9.5%.
5
<PAGE>
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'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 September 30, 1998
and March 31, 1998.
Photomatrix shut down the operations of Lexia on September 30, 1998.
Approximately $110,000 of reserves for discontinued operating losses were not
required, contributing to income from discontinued operations for the quarter.
In addition, Lexia has entered into a settlement with Fujitsu Computers Ltd.
("Fujitsu") regarding its disagreements over outstanding claims. Lexia had
carried on its books accounts payable claims by Fujitsu in the amount of
$341,000. Lexia has disputed these liabilities. Lexia has agreed to pay
Fujitsu $200,000 over an eight month period as payment in full of all
outstanding claims against Lexia, resulting in an additional $141,000 of
income from discontinued operations for the quarter. Lexia also carries on its
books accounts payable and unpaid rent claims by ICL, a sister company of
Fujitsu, in the amount of $457,000. Lexia disputes any liability with respect
to ICL in light of its own offsetting claims and defenses. There is no
assurance that Lexia will be successful in prevailing in its position with
regard to outstanding claims previously made by ICL.
4. BASIC AND DILUTED LOSS PER SHARE
In December 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards ('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
9,931,000 and 5,083,000, in the second quarters of fiscal years 1999 and 1998,
respectively, and 8,209,000 and 5,083,000, in the six month periods ended
September 30, 1998 and 1997, respectively. Diluted EPS reflects the potential
dilution attributable to securities that could share in the earnings of the
Company, similar to fully diluted EPS. Incremental shares from assumed
conversions of options and warrants representing approximately 728,000 shares
were used in computations of diluted earnings per share for the three months
ended September 30, 1998. For the three month period ended September 30, 1998,
outstanding options for the purchase of approximately 28,000 shares were not
used in computations of diluted earnings per share because they were priced
above market value as of September 30, 1998. For the six months ended
September 30, 1998, options and warrants to purchase approximately 1,286,000
shares were not used in computations of diluted earnings per share because
their effect was anti-dilutive. The adoption of SFAS No. 128 did not have a
material effect on the Company's net income/loss per common share.
5. ACQUISITION OF I-PAC MANUFACTURING, INC.
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 of Photomatrix Common
Stock and possibly an additional 4,652,000 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.
The Merger was accounted for as a purchase of I-PAC by the Company for
accounting and financial reporting purposes. Under the purchase method of
accounting, upon closing of the Merger, I-PAC's results of operations were
combined with those of the Company, and I-PAC's assets and liabilities were
recorded on the Company's books at their respective fair values. The purchase
price, amounting to $2,191,000, was comprised of the value of the stock plus
acquisition costs and was allocated among the assets acquired and the
liabilities assumed. The issuance of additional shares awarded to I-PAC
shareholders under the earn-out formula and/or in connection with
6
<PAGE>
the exercise of Photomatrix outstanding options and warrants will be treated
in accordance with generally accepted accounting principles, in that any
additional shares will be treated as additional costs of the acquired
enterprise and amortized accordingly over the benefit period. The $1,179,000
excess of the purchase price over the fair value of I-PAC's net assets will be
amortized over a twenty year period.
If the I-PAC transaction had been consummated at the beginning of fiscal year
1997, the Company's consolidated revenues, net income (loss) and net income
(loss) per share for the quarter and six months ended September 30, 1998 and
1997 would have been:
<TABLE>
Quarter Ended September 30, Six Months Ended September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues $3,071,000 $3,396,000 $ 4,900,000 $ 7,111,000
Net Income (Loss) $ 305,000 $ 99,000 $ (918,000) $ (169,000)
Basic and Diluted EPS $ 0.03 $ 0.01 $ ( 0.09) $ ( 0.02)
</TABLE>
6. COMPREHENSIVE INCOME
As of April 1, 1998, the Company adopted SFAS No. 130 "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components. SFAS No. 130 requires the cumulative
translation adjustment to be included as a component of comprehensive income
(loss) in addition to net income (loss) for the period. During the three
months ended September 30, 1998 and 1997 total comprehensive income totaled
$316,000 and $2,000, respectively, and during the six months ended September
30, 1998 and 1997, total comprehensive loss totaled $644,000 and $348,000,
respectively.
7. ACQUISITION OF MGM TECHREP, INC.
On July 1, 1998, the Company acquired the assets and business of MGM Techrep,
Inc. ("MGM"). MGM, a private entity that is primarily owned by the officers
and former owners of I-PAC, is a manufacturer's sales representative firm
headquartered in Santa Ana, California. Established in 1994, MGM has been the
primary sales rep firm in the Southern California area for I-PAC
Manufacturing, Inc. ("I-PAC"). MGM also represents approximately 15 other
companies engaged in the manufacture and distribution of a wide range of
industrial products used in the manufacture and sale of electronic and related
products.
The Photomatrix acquisition included all contracts with MGM's principals, its
customer list, all physical assets, and the MGM trade name. MGM retained
existing liabilities and released its sales personnel to Photomatrix, and
MGM's shareholders executed non-compete agreements with respect to the sales
rep business. The purchase price of the transaction will be determined
primarily on an earn-out basis by a declining percentage (75% in the first
year, 50% in the second year and 25% in the final year following the closing
date) of the commissions earned over a three-year period by MGM on sales
involving its existing principals and customers as of the time of purchase by
Photomatrix. During the three months ended September 30, 1998, the Company
recorded approximately $43,000 of goodwill related to these earn-out accruals.
No payments will be due to MGM for principals or customer accounts added after
the closing date. In addition, I-PAC forgave approximately $18,000 of amounts
due from MGM as of the closing date.
Consistent with the provisions of the Photomatrix-I-PAC merger agreement, this
related party transaction was reviewed and approved by the outside directors
on the Audit Committee of the Photomatrix Board of Directors.
7
<PAGE>
8. EMPLOYEE STOCK PURCHASE PLAN
On June 5, 1998 the Board of Directors authorized the Photomatrix Employee
Stock Purchase Plan and authorized the purchase of up to $250,000 of
Photomatrix common stock for the plan on the open market. The purpose of the
Purchase Plan is to serve as an incentive to and to encourage stock ownership
by eligible employees of the Company so that they may acquire or increase
their proprietary interest in the success of the Company and to encourage them
to remain in the service of the Company.
All full-time employees of the Company who have been in the continuous
employment of the Company for more than six months are eligible to participate
in the Purchase Plan, provided that no employee may be granted the right to
purchase stock under the Purchase Plan if, immediately after the right to
purchase such stock is granted, such employee owns stock possessing 5% or more
of the total combined voting power or value of all classes of the Company's
stock. The option price will be determined by the Company, provided that it
will be equal to or greater than 85% of the fair value of the Company's common
stock on the date the option is granted. Each participating employee may elect
to contribute to the Purchase Plan up to the lesser of $8,000 or 10% of his or
her base compensation during each calendar year.
A total of 750,000 shares of stock are available for purchase under the
Purchase Plan, subject to adjustment for various changes in the capitalization
of the Company.
9. EXPIRATION OF DEBT
During the quarter ended September 30, 1998, the Company recorded the
cancellation of a $227,000 long term liability due a lender/customer. This
long term liability was previously assumed by the Company in connection with
the acquisition of I-PAC. Under terms of the agreement, the liability was only
to be repaid if sales were to be made to the lender prior to September 5, 1998
at a rate of 40% of the non-material component of any such sales. As of
September 5, 1998, the $227,000 liability expired and all underlying security
interest was released under terms of the agreement. The Company has recorded
the expiration of the note as a reduction to goodwill related to the purchase
of I-PAC.
10. RELATED PARTY TRANSACTIONS
During the quarter ended September 30, 1998 the Company paid approximately
$111,000 to Evergreen Investments, a company owned by William L. Grivas,
Photomatrix Chairman and major shareholder, and Patrick W. Moore, Photomatrix
Chief Executive Officer and major shareholder. Of this amount, approximately
$43,000 was for S Corp distributions intended to cover personal tax
liabilities of the former I-PAC shareholders for calendar year 1997,
approximately $34,000 was for pre-merger management fees, and another $34,000
was for pre-acquisition commission payments due MGM TechRep. In addition, the
Company paid approximately $26,000 to Sullivan, Hill, Lewin, Rez, Engle and
LaBazzo, a law firm in which James P. Hill, a director and major shareholder,
is a partner. The Company also received approximately $1,000 from Keystone
Gaming, a company in which Patrick Moore has a minority interest. At September
30, 1998, the Company had accrued approximately $33,000 in amounts due to
former shareholders of I-PAC for S Corp distributions intended to cover
personal tax liabilities for calendar year 1997, approximately $33,000 in
legal fees due to Sullivan, Hill, Lewin, Rez, Engle and LaBazzo and advances
totaling approximately $8,000 due from William Grivas and Patrick Moore.
As mentioned in Note 2, certain shareholders of the Company have guaranteed
approximately $2,015,000 of the Company's debt at September 30, 1998. In
addition, the Company has guaranteed approximately $117,000 of debt of the
same shareholders.
Claudia Fullerton, who is the wife of Patrick Moore, is employed by the
Company as its Director of Administration at an annual salary of $54,000.
William Grivas, Jr., who is the son of William Grivas, is
8
<PAGE>
employed by the Company as an account representative at an annual salary of
$30,000.
All related party transactions are reviewed and approved by the Audit
Committee of the Board of Directors.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and unaudited notes to consolidated financial statements included
elsewhere herein.
Three months ended September 30, 1998 compared to the three months ended
September 30, 1997
On June 5, 1998, the Company acquired I-PAC and on July 1, 1998, the Company
acquired MGM. Both acquisitions were treated as purchases for accounting and
financial reporting purposes. Under the purchase method of accounting, the
results of operations of the acquired companies are combined with those of the
Company at the date of acquisition. Accordingly, the three month period ended
September 30, 1998, represents the first full quarter reflecting the combined
operations of the Company, I-PAC and MGM.
Consolidated revenues for the quarter ended September 30, 1998 increased
$783,000 or 34.2% to $3,071,000 from $2,288,000 for the quarter ended
September 30, 1997. The increase is primarily attributable to the inclusion of
three months of Electronic Manufacturing Services ("EMS") revenues of both
I-PAC and MGM. Imaging Products revenues in the quarter ended September 30,
1998 decreased by approximately $350,000 due to approximately $100,000
decrease in foreign document scanner sales and $250,00 decrease in duplicator
repair and spare parts sales.
Consolidated gross margin for the quarter ended September 30, 1998 increased
$335,000 or 69.1% to $1,175,000 from $840,000 for the quarter ended September
30, 1997. This increase is also primarily attributable to the inclusion of
three months of EMS gross profit of I-PAC. Likewise, gross margin as a percent
of revenues increased 1.6% to 38.3% from 36.7% for the quarter ended September
30, 1997. The increase was primarily attributable to the cost savings
anticipated with the merger, together with the Imaging Products sales of the
new 9600 document scanner systems, which carry increased margins over our
previous product offerings.
Selling, general and administrative expenses ("SG&A") for the quarter ended
September 30, 1998 included three months of expenses of both I-PAC and MGM and
as a result, increased $195,000 or 26.3% to $936,000 from $741,000 for the
quarter ended September 30, 1997. As a percent of revenues, SG&A for the
quarter ended September 30, 1998 decreased to 30.5% from 32.4% for the quarter
ended September 30, 1997. Offsetting the increase in costs resulting from the
inclusion of three months of costs from I-PAC and MGM were reductions in costs
due to the elimination of duplicated functions.
Research and development expenses for the quarter ended September 30, 1998
decreased $12,000 or 6.9% to $161,000 from $173,000 for the quarter ended
September 30, 1997. As a percent of revenues, research and development costs
decreased to 5.2% in the current quarter from 7.6% for the quarter ended
September 30, 1997. No expenditures were capitalized during the quarter ended
September 30, 1998 due to continuing emphasis upon scanner development,
including the development of a new mid-range scanner. During the quarter ended
September 30, 1997 product development spending was $189,000, and $16,000 of
expenditures were capitalized because they related to technologically feasible
software development projects. The overall reduction in product development
spending was primarily the result of reductions in materials and rework.
9
<PAGE>
Approximately $42,000 of the $223,000 reserves for moving and facility
relocation costs recorded in the quarter ended June 30, 1998 were not
required, resulting in a credit of $42,000 in facility relocation costs in the
quarter ended September 30, 1998.
Other expense was $66,000 for the quarter ended September 30, 1998, compared
to income of $89,000 for the quarter ended September 30, 1997. The current
quarter net expense is primarily comprised of interest expense related to
I-PAC mortgages and the line of credit, compared to income of $100,000 from
the sale of an unused trademark during the quarter ended September 30, 1997.
Interest expense increased $68,000, which reflects the addition of the
interest on the mortgage for the Carlsbad facility for three months, as well
as increased borrowings related to the line of credit.
There was no provision for income taxes booked in the three months ended
September 30, 1998, the same as in the three months ended September 30, 1997,
because of the effects of net operating loss carry forwards.
Photomatrix shut down the operations of its subsidiary Lexia Systems, Inc.
("Lexia") on September 30, 1998. Approximately $110,000 of reserves for
discontinued operating losses were not required, contributing to income from
discontinued operations for the quarter. In addition, Lexia has entered into a
settlement with Fujitsu Computers Ltd. ("Fujitsu") regarding its disagreements
over outstanding claims. Lexia had carried on its books accounts payable
claims by Fujitsu in the amount of approximately $341,000. Lexia had disputed
these liabilities. Lexia has agreed to pay Fujitsu $200,000 over an eight
month period as payment in full of all outstanding claims against Lexia,
resulting in an additional $141,000 income from discontinued operations for
the quarter. Lexia also carries on its books accounts payable and unpaid rent
claims by ICL, a sister company of Fujitsu, in the amount of $445,000. Lexia
disputes that any liability exists with respect to ICL in light of its own
offsetting claims and defenses. There is no assurance that Lexia will be
successful in prevailing in its position with regard to outstanding claims
previously made by ICL.
The net effect of the increases in gross margin and other income coupled with
the decrease in research and development expenses, together with the increases
in interest expense and selling, general and administrative expenses, resulted
in net income from continuing operations for the quarter ended September 30,
1998 of $54,000 or $0.01 per share. The addition of income from discontinued
operations of $251,000 or $0.02 per share resulted in net income of $305,000
or $0.03 per share. This compares to net income of $15,000 or $0.00 per share
for the quarter ended September 30, 1997.
Six months ended September 30, 1998 compared to the six months ended September
30, 1997
During the quarter ended June 30, 1998, the Company completed the move of its
operations into I-PAC's facility located in Carlsbad, California. As expected,
this move was disruptive and resulted in certain operating inefficiencies.
Consolidated revenues in the six months ended September 30, 1998 decreased
$196,000 or 4.3% to $4,363,000 from $4,559,000 in the six months ended
September 30, 1997. This decline was primarily attributable to disappointing
Imaging Product revenues of the first quarter. The increase in revenue
attributable to the newly acquired EMS operations was not enough to overcome
this reduction.
Consolidated gross margin in the six months ended September 30, 1998 decreased
$68,000 or 4.2% to $1,525,000 from $1,593,000 in the six months ended
September 30, 1997. The overall 35.0% gross margin during the six months just
ended was slightly higher than the 34.9% gross margin percentage for the same
period of the prior year. Favorable gross margins of the second quarter offset
lower margins due to the low volume transitional quarter of pre-merger
operations for the Company.
Selling, general and administrative expenses ("SG&A") in the six months ended
September 30, 1998 increased $85,000 or 5.1% to $1,751,000 from $1,666,000 in
the six months ended September 30, 1997. These increases were primarily the
result of the inclusion of four months of I-PAC expenses and three months of
MGM expenses, offset by the reduction of costs resulting from the elimination
of the duplication of functions as a result of the merger. As a percent of
revenue, SG&A in the six months ended September 30, 1998 increased to 40.1%
from
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36.5% in the six months ended September 30, 1997, primarily as a result of the
abnormally low revenues during the first quarter.
Research and development expenses in the six months ended September 30, 1998
increased by $22,000 or 6.2% to $376,000 from $354,000 in the six months ended
September 30, 1997. As a percentage of revenue, research and development
expenses increased slightly, 0.8 percentage points to 8.6% from 7.8% for the
six months ended September 30, 1997. No expenditures were capitalized during
the six months ended September 30, 1998 as an emphasis was placed upon scanner
development, including the development of a new mid-range scanner. During the
previous six months ended September 30, 1997 product development spending
totaled $438,000, and $84,000 of expenditures were capitalized because they
related to technologically feasible software development projects.
The Company incurred approximately $181,000 in facility consolidation and
relocation cost as a result of moving its Sorrento Valley Imaging Products
operations into the I-PAC owned facilities in Carlsbad, California.
Other expense was $117,000 in the six months ended September 30, 1998 compares
to income of $97,000 in the six months ended September 30, 1997. This change
reflects a $94,000 increase in interest expense in the current six months
compared to income of $100,000 on the sale of a trademark in the six months
that ended September 30, 1997.
There was no provision for income taxes booked in the six months ended
September 30, 1998, the same as in the six months ended September 30, 1997,
because of the effects of net operating loss carry forwards.
The net effect of the increases in SG&A and research and development costs and
decreases in gross margin and other income resulted in an increase in the loss
from continuing operations between years of $570,000, to $(900,000) in the six
months ended September 30, 1998, or $(0.11) per share, compared to $(330,000)
or $(0.06) per share in the six months ended September 30, 1997. There was
income from discontinued operations in the current six months ended September
30, 1998 of $251,000, or $0.03 per share, compared to no income or loss from
discontinued operations in the six months ended September 30, 1997. The
results were a net loss of $(649,000) or $(0.08) in the current six months
period compared to a loss of $(330,000) or $(0.06) in the prior six months
period.
Liquidity and Capital Resources
Recent and Future Sources of and Demands on Liquidity and Capital Resources
During the six months ended September 30, 1998, the Company's primary sources
of liquidity were from a reduction to accounts receivable ($356,000), increase
in accounts payable ($39,000), proceeds from the disposal of capital assets
($20,000), decrease in other assets ($34,000), proceeds from line of credit
net of repayments ($159,000), the effects of exchange rates on cash ($5,000),
reduction in cost of acquisition ($35,000) and cash provided by discontinued
operations ($36,000). During the same period the primary uses of liquidity
were a net loss net of noncash charges ($462,000), increase to prepaid
expenses and other assets ($56,000), reduction in accrued liabilities
($445,000), reduction in customer deposits ($154,000), capital asset
expenditures ($528,000), and repayments on notes payable and other obligations
($130,000). As a result of these sources and uses of liquidity during the six
months ended September 30, 1998 as described above, the Company's cash and
cash equivalents balance decreased $1,091,000 or 81.3%, to $251,000 from
$1,342,000.
In July, 1998 the Company entered into a new $2,100,000 credit facility with
its bank that includes a $1,500,000 line of credit and a $600,000 term loan.
The outstanding balances under these loans as of September 30, 1998 was
$1,316,000. The new line of credit will accrue interest on outstanding
borrowings at the bank's prime rate plus 1 % per annum. Under the terms of the
new agreement, total borrowings under the line of credit will be limited to
the lesser of $1,500,000 or 75% of eligible accounts receivable (as defined
under the agreement). The Company is required to (1) maintain a minimum
tangible net worth of $2,600,000 as of September 30, 1998, $3,200,000 as of
December 31, 1998, and $3,500,000 thereafter (2) maintain a ratio of total
liabilities to tangible net worth
11
<PAGE>
of not greater than 2.75 to 1.0, and (3) maintain a minimum debt service
coverage of no less than 1.25 to 1.0. The new line of credit expires in July,
1999. Based on September 30, 1998 financial data, the Company was in
compliance with all of these covenants.
The Company has issued two notes in the aggregate amount of $2,038,000, which
are collateralized by the trust deeds of the Company's real property located
in Carlsbad, California. The repayment of these notes is guaranteed by certain
major shareholders of the Company and the Small Business Administration. These
notes are payable in aggregate monthly installments of approximately $19,000,
including interest ranging from 7.5 to 9.5%.
The Company is obligated under a series of notes payable totaling $294,000 as
of September 30, 1998. 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 September 30, 1998 all payments were current.
The Company also has certain equipment notes in the aggregate amount of
$50,000 with interest rates varying between 11% and 26.6% with final payments
due between 2000 and 2005. These notes are collateralized by equipment.
During September 1998, The Company's wholly-owned subsidiary, Lexia Systems,
settled its outstanding dispute with Fujitsu. As a result, the Company reduced
its previously recorded liability of $340,000 to Fujitsu to $200,000 and will
begin making payments against this liability in November, 1998 with the final
payment due to Fujitsu in June, 1999. Lexia also has recorded liabilities
reflecting accounts payable and unpaid rent claims of ICL and related entities
in the amount of $457,000 at September 30, 1998. These liabilities are
classified under net liabilities of discontinued operations. Lexia disputes
any liability with respect to ICL in light of its own offsetting claims and
defenses. There is no assurance that Lexia will be successful in prevailing in
its position with regard to outstanding claims previously made by ICL.
The Company's sources of future short-term liquidity are its cash balance of
$251,000 as of September 30, 1998 and the $784,000 unused amount of its new
$2.1 million credit facility with its bank. Availability under the line of
credit can be further limited based upon the balance of eligible accounts
receivable as described above. As of September 30, 1998, the availability of
the line of credit was limited to $1,135,000, based upon eligible accounts
receivable as of that date.
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. The Company is also obligated to pay approximately $8,000 per
month on various other leases. Aside from these commitments, the Company has
not made any material commitments.
The Company is concentrating on increasing its sales and improving its gross
margins. Management believes that, as a result of its recent mergers with
I-PAC and MGM, combined with its relocation and consolidation of its
operations into the I-PAC facility, the Company will have sufficient cash from
operations and other resources (including the availability under the Company's
line of credit) to fund operations of the combined company for the next twelve
months.
Year 2000
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
in process of reviewing its information technology systems and non-information
technology systems with embedded technology applications, addressing Year 2000
risks, and believes it will resolve any such risks in a timely manner. In
addition, during the quarter ended December 31, 1998, the Company plans to
begin a process of contacting its critical business partners to reasonably
assure that they are adequately prepared. The Company has determined that its
products are fully Year 2000 compliant.
Although the Company has not yet completed its assessment of the scope of the
Year 2000 issues facing its systems and programs, in connection with the
recent merger it is currently developing plans to convert much of its in-house
software. Year 2000 issues will be considered in connection with this software
conversion project. In addition, the
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Company plans to evaluate every piece of equipment in its facilities.
Equipment that is non-compliant will be brought into compliance, replaced or
taken out of service.
The Company plans on developing contingency plans to address Year 2000 issues
that do arise. As part of its Year 2000 compliance program, the Company plans
to identify alternate vendor sources for vendors who do not respond to our
questionnaires or who appear to not be in compliance. Although no assurance
can be made, given the nature of its major customers, the Company does not
expect that it will encounter significant problems with respect to customer
compliance with Year 2000 issues.
The currently the Company does not have an estimate of costs associated with
these efforts, but does not believe them to be significant. However, the
Company could be adversely impacted if its suppliers or customers do not make
the necessary changes to their own systems and products successfully and in a
timely manner, or if regional infrastructure failures occur as a consequence
of Year 2000 problems.
The SEC's recent guidance for Year 2000 disclosure also calls on companies to
describe their most likely worst case Year 2000 scenario. The Company believes
that the most likely worst case scenario is that the Company will have to add
additional staff and/or reassign existing staff and/or acquire additional
equipment or software during the time period leading up to and immediately
following December 31, 1999, in order to address Year 2000 issues that
unexpectedly arise.
New Accounting Pronouncements
In September 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 is to be restated. At this time, the Company does not
believe that this accounting statement will have a significant impact on its
financial position or results of operations for the year ending March 31,
1999.
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
ACQUIRING OTHER BUSINESSES, 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 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, 1998.
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PART II: OTHER INFORMATION
Item 4.
Submission of Matters to a Vote of Security Holders
None
Item 5.
Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended
September 30, 1998.
b. Exhibits
10.44 Stock Option Agreement-Patrick W. Moore
10.45 Stock Option Agreement-William L. Grivas
10.46 Employee Stock Purchase Plan
10.47 MGM TechRep Asset Transfer Agreement
27 Financial Data Schedule
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Issuer
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
PHOTOMATRIX INC.
Date: November 3, 1998 by /s/ William L. Grivas
-------------------------------
William L. Grivas
Chairman of the Board
Date: November 3, 1998 by /s/ Patrick W. Moore
-------------------------------
Patrick W. Moore
Chief Executive Officer
Date: November 3, 1998 by /s/ Roy L. Gayhart
-------------------------------
Roy L. Gayhart
Chief Financial Officer
Date: November 3, 1998 by /s/ Charles H. Frady
-------------------------------
Charles H. Frady
Controller
15
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT ("Agreement") is made by and between
PHOTOMATRIX, INC., a California corporation, (the "Corporation"), and Patrick W.
Moore, a California corporation (the "Optionee").
NOW, THEREFORE, in consideration of the mutual benefit to be derived
herefrom, the Corporation and Optionee agree as follows:
1. Grant of Option. The Corporation hereby grants to Optionee the
right, privilege and option ("Option") to purchase 153,941 shares of its common
stock ("Stock") at $.4872 per share, in the manner and subject to the conditions
provided hereinafter.
2. Time of Exercise of Option. The Option is fully vested. Any exercise
may be with respect to any part or all of the shares then exercisable pursuant
to such Option, provided that the minimum number of shares exercisable at any
time shall not be less than 100 shares or the balance of shares for which the
Option is then exercisable. Such Option must be exercised within 10 years after
the date of the grant. In no event shall the Corporation be required to transfer
fractional shares to Optionee or those entitled to Optionee's rights herein.
3. Method of Exercise. The Option shall be exercised by Optionee by the
delivery to the Corporation on a form approved by the Corporation of a
fully-executed Notice of Exercise, specifying the number of shares to be issued,
and enclosing a check in payment of the purchase price for the shares.
4. Restrictions on Exercise and Delivery. The exercise of this Option
shall be subject to the condition that, if at any time the Corporation shall
determine, in its sole and absolute discretion,
(a) the satisfaction of any withholding tax or other
withholding liabilities is necessary or desirable as
a condition of, or in connection with, such exercise
or the delivery or purchase of shares pursuant
thereto,
(b) the listing, registration, or qualification of any
shares deliverable upon such exercise is necessary,
under any state or federal law, as a condition of, or
in connection with, such exercise or the delivery or
purchase of shares pursuant thereto, or
(c) the consent or approval of any regulatory body is
necessary as a condition of, or in connection with,
such exercise or the delivery or purchase of shares
pursuant thereto,
then in any such event, such exercise shall not be effective unless such
withholding, listing, registration, qualification, consent or approval shall
have been effected or obtained free of any con ditions not acceptable to the
Corporation. Optionee shall execute such documents and take such other actions
as are required by the Corporation to enable it to effect or obtain such
withholding, listing, registration, qualification, consent or approval. Neither
the Corporation nor any officer or director thereof shall have any liability
with respect to the non-issuance or failure to sell shares as the result of any
suspensions of exercisability imposed pursuant to this Section.
5. Termination of Option. To the extent not previously exercised, this
Option shall terminate upon the first to occur of any of the following events:
(a) the dissolution or liquidation of the Corporation;
(b) The expiration of 10 years from the date of the grant of
the Option hereunder;
(c) the breach by Optionee of any provision of this Agreement.
6. Nonassignability. This Option may not be sold, pledged, assigned or
transferred in any manner other than by will or by the laws of intestate
succession, and may be exercised during the lifetime of Optionee only by
Optionee. Any transfer by Optionee of any part of this Option other than by will
or the laws of intestacy shall void such Option, and the Corporation shall have
no further obligation with respect to the Option. This Option shall not be
pledged or hypothecated in any way, nor shall the Option be subject to
execution, attachment or similar process.
7. Rights as Shareholder. Neither Optionee nor his executor,
administrator, heirs or legatees, shall be, or have any rights or privileges of
a shareholder of the Corporation in respect of shares issuable hereunder unless
and until certificates representing such shares shall have been issued in
Optionee's name.
8. Restrictive Legends. Each certificate evidencing the shares acquired
hereunder, including any certificate issued to any transferee thereof, shall be
imprinted with such legends appropriate by the Corporation as may be deemed.
9. No Right of Employment. Neither the grant nor exercise of this
option nor anything in this Agreement shall impose upon the Corporation or any
other corporation any obligation to employ or continue to employ Optionee. The
right of the Corporation and any other corporation to terminate Optionee shall
not be diminished or affected because this Option has been granted to Optionee.
10. Mandatory Arbitration. In the event of any dispute between the
Corporation and Optionee regarding this Agreement, the dispute and any issue as
to the arbitrability of such dispute, shall be settled to the exclusion of a
court of law, by arbitration in San Diego, California, by a panel of three
arbitrators (each party shall choose one arbitrator and the third shall be
chosen by the two arbitrators so selected) in accordance with the Commercial
Arbitration Rules of the American Arbitration Association then in effect. The
decision of a majority of the arbitrators shall be final and
1
<PAGE>
binding upon the parties. All costs of the arbitration and the fees of the
arbitrators shall be allocated between the parties as determined by a majority
of the arbitrators, it being the intention of the parties that the prevailing
party in such a proceeding be made whole with respect to its expenses.
11. Definitions. Capitalized terms shall have the meaning set forth
herein.
12. Notices. Any notice to be given under the terms of this Agreement
shall be addressed to the Corporation in care of its Secretary at its principal
office, and any notice to be given to Optionee shall be addressed to the
Optionee at the address maintained by the Corporation for such person or at such
other address as the Optionee may specify in writing to the Corporation.
13. Binding Effect. This Agreement shall be binding upon and inure to
the benefit of Optionee, his heirs and successors, and of the Corporation, its
successors and assigns.
14. Governing Law. This Agreement shall be governed by the laws of the
State of California.
15. Descriptive Headings. Titles to Sections are solely for information
purposes.
IN WITNESS WHEREOF, this Agreement is effective as of, and the date of
grant shall be_________________, 199_.
PHOTOMATRIX, INC., a California corporation
By:
Roy L. Gayhart, Chief Financial Officer
OPTIONEE
Patrick W. Moore
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT ("Agreement") is made by and between
PHOTOMATRIX, INC., a California corporation, (the "Corporation"), and William L.
Grivas, a California corporation (the "Optionee").
NOW, THEREFORE, in consideration of the mutual benefit to be derived
herefrom, the Corporation and Optionee agree as follows:
1. Grant of Option. The Corporation hereby grants to Optionee the
right, privilege and option ("Option") to purchase 153,941 shares of its common
stock ("Stock") at $.4872 per share, in the manner and subject to the conditions
provided hereinafter.
2. Time of Exercise of Option. The Option is fully vested. Any exercise
may be with respect to any part or all of the shares then exercisable pursuant
to such Option, provided that the minimum number of shares exercisable at any
time shall not be less than 100 shares or the balance of shares for which the
Option is then exercisable. Such Option must be exercised within 10 years after
the date of the grant. In no event shall the Corporation be required to transfer
fractional shares to Optionee or those entitled to Optionee's rights herein.
3. Method of Exercise. The Option shall be exercised by Optionee by the
delivery to the Corporation on a form approved by the Corporation of a
fully-executed Notice of Exercise, specifying the number of shares to be issued,
and enclosing a check in payment of the purchase price for the shares.
4. Restrictions on Exercise and Delivery. The exercise of this Option
shall be subject to the condition that, if at any time the Corporation shall
determine, in its sole and absolute discretion,
(a) the satisfaction of any withholding tax or other
withholding liabilities is necessary or desirable as
a condition of, or in connection with, such exercise
or the delivery or purchase of shares pursuant
thereto,
(b) the listing, registration, or qualification of any
shares deliverable upon such exercise is necessary,
under any state or federal law, as a condition of, or
in connection with, such exercise or the delivery or
purchase of shares pursuant thereto, or
(c) the consent or approval of any regulatory body is
necessary as a condition of, or in connection with,
such exercise or the delivery or purchase of shares
pursuant thereto,
then in any such event, such exercise shall not be effective unless such
withholding, listing, registration, qualification, consent or approval shall
have been effected or obtained free of any con ditions not acceptable to the
Corporation. Optionee shall execute such documents and take such other actions
as are required by the Corporation to enable it to effect or obtain such
withholding, listing, registration, qualification, consent or approval. Neither
the Corporation nor any officer or director thereof shall have any liability
with respect to the non-issuance or failure to sell shares as the result of any
suspensions of exercisability imposed pursuant to this Section.
5. Termination of Option. To the extent not previously exercised, this
Option shall terminate upon the first to occur of any of the following events:
(a) the dissolution or liquidation of the Corporation;
(b) The expiration of 10 years from the date of the grant of
the Option hereunder;
(c) the breach by Optionee of any provision of this Agreement.
6. Nonassignability. This Option may not be sold, pledged, assigned or
transferred in any manner other than by will or by the laws of intestate
succession, and may be exercised during the lifetime of Optionee only by
Optionee. Any transfer by Optionee of any part of this Option other than by will
or the laws of intestacy shall void such Option, and the Corporation shall have
no further obligation with respect to the Option. This Option shall not be
pledged or hypothecated in any way, nor shall the Option be subject to
execution, attachment or similar process.
7. Rights as Shareholder. Neither Optionee nor his executor,
administrator, heirs or legatees, shall be, or have any rights or privileges of
a shareholder of the Corporation in respect of shares issuable hereunder unless
and until certificates representing such shares shall have been issued in
Optionee's name.
8. Restrictive Legends. Each certificate evidencing the shares acquired
hereunder, including any certificate issued to any transferee thereof, shall be
imprinted with such legends appropriate by the Corporation as may be deemed.
9. No Right of Employment. Neither the grant nor exercise of this
option nor anything in this Agreement shall impose upon the Corporation or any
other corporation any obligation to employ or continue to employ Optionee. The
right of the Corporation and any other corporation to terminate Optionee shall
not be diminished or affected because this Option has been granted to Optionee.
10. Mandatory Arbitration. In the event of any dispute between the
Corporation and Optionee regarding this Agreement, the dispute and any issue as
to the arbitrability of such dispute, shall be settled to the exclusion of a
court of law, by arbitration in San Diego, California, by a panel of three
arbitrators (each party shall choose one arbitrator and the third shall be
chosen by the two arbitrators so selected) in accordance with the Commercial
Arbitration Rules of the American Arbitration Association then in effect. The
decision of a majority of the arbitrators shall be final and
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<PAGE>
binding upon the parties. All costs of the arbitration and the fees of the
arbitrators shall be allocated between the parties as determined by a majority
of the arbitrators, it being the intention of the parties that the prevailing
party in such a proceeding be made whole with respect to its expenses.
11. Definitions. Capitalized terms shall have the meaning set forth
herein.
12. Notices. Any notice to be given under the terms of this Agreement
shall be addressed to the Corporation in care of its Secretary at its principal
office, and any notice to be given to Optionee shall be addressed to the
Optionee at the address maintained by the Corporation for such person or at such
other address as the Optionee may specify in writing to the Corporation.
13. Binding Effect. This Agreement shall be binding upon and inure to
the benefit of Optionee, his heirs and successors, and of the Corporation, its
successors and assigns.
14. Governing Law. This Agreement shall be governed by the laws of the
State of California.
15. Descriptive Headings. Titles to Sections are solely for information
purposes.
IN WITNESS WHEREOF, this Agreement is effective as of, and the date of
grant shall be __________________, 199_.
PHOTOMATRIX, INC., a California corporation
By:
Roy L. Gayhart, Chief Financial Officer
OPTIONEE
William L. Grivas
PHOTOMATRIX, INC.
EMPLOYEE STOCK PURCHASE PLAN
1. Purpose. This Employee Stock Purchase Plan (the "Plan") is intended
to serve as an incentive to and to encourage stock ownership by certain eligible
employees of Photomatrix, Inc., a California corporation (the "Corporation"), so
that they may acquire or increase their proprietary interest in the success of
the Corporation, and to encourage them to remain in the service of the
Corporation. This Plan is intended to qualify as an employee stock purchase
plan, as defined in Section 423 of the Internal Revenue Code of 1986, as amended
(the "Code").
2. Administration.
2.1 Committee. The Plan shall be administered by the Board of
Directors or a committee of three members or others designated by the Board of
Directors of the Corporation (the "Committee"). The Committee shall select one
of its members as Chairman and shall appoint a Secretary, who need not be a
member of the Committee. The Committee shall hold meetings at such times and
places as it may determine and minutes of such meetings shall be recorded. Acts
by a majority of the Committee in a meeting at which a quorum is present and
acts approved in writing by a majority of the members of the Committee shall be
valid acts of the Committee.
2.2 Term. If the Board of Directors selects a Committee, the
members of the Committee shall serve on the Committee for a period of time as
determined by the Board of Directors and shall be subject to removal by the
Board of Directors at any time. The Board of Directors may terminate the
function of the Committee at any time and resume all powers and authority
previously delegated to the Committee.
2.3 Authority. The Committee shall have sole discretion and
authority to prescribe, amend and rescind the rules and regulations relating to
the Plan and to make all other determinations necessary and advisable for the
administration of the Plan.
2.4 Interpretation. The interpretation and construction by the
Committee of any provisions of the Plan or of any option granted under it shall
be final and binding on all parties having an interest in the Plan or any option
granted hereunder. No member of the Committee shall be liable for any action or
determination made in good faith with respect to the Plan or any option granted
under the plan.
2.5 Agent. The Committee may employ such legal counsel,
consultants, brokers and agents as it may deem desirable for the administration
of the Plan and may rely upon any opinion received from any such counsel or
consultant and any computation received from any such consultant, broker or
agent. The Committee may, in its sole discretion, designate an agent ("Agent")
to administer the Plan, purchase and sell shares of common stock in accordance
with the Plan, keep records, send statements of account to employees and to
perform other duties relating to the Plan, as the Committee may request from
time to time.
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2.6 Purchase of Common Stock by the Plan. The Agent shall
either receive stock which has been purchased for the Plan by the Corporation on
the open market or purchase for the Plan shares of common stock on the open
market. In the former case, the Plan shall repay the Corporation the actual
purchase price of the common stock as options are exercised. In the latter case,
the Plan shall borrow the money necessary to acquire the shares from the
Corporation and shall repay the loan as options are exercised. Purchases of
common stock for the Plan shall be held in trust until such time as options held
by participating Eligible Employees (as defined in Section 3 herein) are
exercised pursuant to the terms of this Plan. Upon exercise of an option by an
Eligible Employee, the shares of common stock purchased shall be distributed
directly to Eligible Employee. Notwithstanding any other provision in this
Agreement, the total number of common stock authorized to be purchased and
allocated to Eligible Employees under the Plan shall not exceed 750,000 shares.
3. Eligibility.
3.1 General. All regular employees of the Corporation, or any
"parent" or "subsidiary" corporation of the Corporation, as defined in Section
424 of the Code ("Parent" or "Subsidiary") who (i) are working at least 20 hours
per week and (ii) have been in the continuous employment of the Corporation for
more than 6 months are eligible to participate (each, an "Eligible Employee").
All Eligible Employees who elect to participate in this Plan shall have the same
rights and privileges except as provided in Section 3.6. Notwithstanding the
above, employees of a Parent or Subsidiary shall only be Eligible Employees if
the Committee designates such corporation as a participant. For purposes of this
Plan, the term "Corporation" shall otherwise include any Parent or Subsidiary,
if applicable. Employees whose customary employment is for not more than five
months in any calendar year are excluded from this Plan.
3.2 Excluded Eligible Employees. Notwithstanding any other
provision in this Plan, no employee can be granted the right to purchase stock
under this Plan if such employee, (i) is customarily not employed by the
Corporation for more than five months a year; or (ii) immediately after the
right to purchase such stock is granted, owns stock possessing 5% or more of the
total combined voting power or value of all classes of the Corporation's stock.
For purposes of determining stock ownership, the rules of Section 424(d) of the
Code shall apply, and stock which the employee may purchase under outstanding
options, including rights to purchase stock under this Plan, shall be treated as
stock owned by the employee.
3.3 Participation. Eligible Employees who wish to participate
and purchase shares under this Plan shall execute a form to be furnished by the
Corporation, indicating that they authorize and instruct the Corporation to
deduct from their pay a specified percentage of their respective Base
Compensation (as defined below), to be applied toward the purchase of stock
pursuant to this Plan for each individual's account. All payroll deductions made
for a participant shall be credited to his account under the Plan. A participant
may not make any separate cash payment into such account. Subject to Section
3.6, each participant may designate any whole percentage of his or her base
salary or any fixed dollar amount per pay period to be contributed to the Plan
on his or her behalf; provided that any fixed dollar amount shall not exceed 10%
of such Eligible Employee's Base Compensation for each Quarter Period (as
defined in Section 3.5). Upon the participant's written request to the
Corporation, the amount of the payroll deduction will be
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changed as of the next Entry Date (as defined in Section 3.5) following such
request. Nonparticipating employees who are eligible or become eligible may
execute payroll deduction authorizations and become participants in the Plan as
of the Entry Date after which they first satisfy the eligibility requirements
set forth in Section 3.1. The election by the participant must be received prior
to the Entry Date. Payroll deductions will commence with pay checks issued not
later than the next pay period after the Entry Date following receipt of the
employee's signed payroll deduction authorization.
3.4 Grant of Option. Upon the Agent's purchase or receipt of
common stock pursuant to this Plan, the Corporation, if so determined in its
sole discretion, shall grant to participating Eligible Employees, subject to all
the terms and provisions of this Plan, the right to purchase the common stock.
The number of option shares a participating Eligible Employee is deemed to have
been granted and the option price of shares purchased shall be calculated in the
manner specified in Section 4.
3.5 Exercise of Option. Until the Plan is terminated, for
every quarter period ("Quarter Period"), beginning on the 1st day of January,
the 1st day of April, the 1st day of July and the 1st day of October in each
Plan year, and terminating on March 31 of such year for a period beginning
January 1, June 30 of such year for a period beginning April 1, September 30 of
such year for a period beginning July 1 and December 31 of such year for a
period beginning October 1, unless a participant gives written notice to the
Corporation, a participant's option to acquire stock with payroll deductions
will be deemed to have been exercised, to the extent of the cash available in
such account, automatically on the Termination Date of the applicable Quarter
Period for the purchase of the number of whole shares of stock which the
accumulated payroll deductions in his account at that time will purchase at the
applicable option price (but not in excess of the number of shares for which
options have been granted to the employee pursuant to Section 4.1), and any
excess in the participant's account at that time will be retained in the account
and be applied toward the following Quarter Period until such time as the
participant withdraws from the Plan or when the Plan is discontinued. No
fractional shares of common stock shall be issued under any circumstances. As
used in the Plan, "Entry Date" means the January 1, April 1, July 1, or October
1, as the case may be, on which the particular Quarter Period begins and
"Termination Date" means the March 31, June 30, September 30 or December 31, as
the case may be, on which the particular Quarter Period terminates. Common stock
purchased under the Plan shall be distributed directly to the participant.
3.6 Limitation on Participation. An Eligible Employee may not
elect to contribute to the Plan more than the lesser of $8,000 or 10% (these
standards are not mandatory and may be adjusted) of such Eligible Employee's
Base Compensation (as defined below) for the calendar year. "Base Compensation"
means the base compensation paid in cash to a participant by the Corporation,
including salaries and wages, but excluding bonuses, incentive compensation,
commissions, overtime pay, moving or relocation allowances, car allowances,
imputed income attributable to cars, taxable fringe benefits and similar items.
In addition, a participant may not elect to make such contributions to the Plan
which would permit stock with a fair market value exceeding $25,000 to be
purchased for his or her account in any calendar year under all plans of the
Corporation as determined under Section 423 of the Code. For this purpose, the
fair market value
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of the stock will be determined at the time that the participant is granted the
right to purchase stock. All share amounts set forth herein are subject to
adjustment as provided in Section 5.
3.7 Delivery of Stock. Certificates for whole shares of common
stock shall be issued to participants within sixty (60) days (or such shorter
period of time as the Committee, in its sole discretion, may determine)
following the purchase of shares of common stock by a participant. A fee fixed
by the Agent or transfer agent, as the case may be, may be charged to the
participant for the issuance of certificates of shares of common stock and for
the replacement of lost certificates. The Committee may adopt, amend or repeal
any guidelines for requirements necessary for the custody and delivery of the
common stock, including, without limitation, guidelines regarding the imposition
of reasonable fees in certain circumstances.
3.8 Discontinuing Payroll Deductions. If a participant wishes
to discontinue employee contributions entirely, he or she may do so by filing a
new enrollment form at any time. Payroll withholding shall cease as soon as
reasonably practicable after such form has been received by the Corporation.
Discontinuation of payroll deductions shall be treated as an election to
withdraw from the Plan and amounts standing to the Participant's credit prior to
his or her election to discontinue contributions shall be distributed to him or
her in accordance with Section 3.9.
3.9 Withdrawal or Termination. A participant may elect to
withdraw from the Plan by filing the prescribed form with the Corporation at any
time. If the participant withdraws from the Plan, the participant will be
returned all accumulated payroll deductions which have not been used to purchase
stock, without interest. A participant who discontinues contributions to the
Plan under Section 3.8, or withdraws from the Plan under this Section may again
become a participant, if he or she is then an Eligible Employee, by following
the procedure described in Section 3.4.
3.10 Payment of Interest. No interest will be paid or allowed
on any money paid into the Plan or credited to the account of any participant.
3.11 Termination. In the event of a participant's death or
termination of employment, the discontinuance of the Plan by the Corporation,
the election of the employee to withdraw from the Plan for any reason, or in the
event the employee is no longer an Eligible Employee, all of such participant's
accumulated payroll deductions contributed to the Plan during the applicable
Quarter Period in which such withdrawal or termination occurs will be
distributed, without interest, to his or her name or order, or in the event of
death, to the name of his or her legal representative, as promptly as
practicable and all options granted pursuant to this Plan shall terminate and be
null and void.
3.12 Limitation on Subscriptions. The total number of shares
of stock available for purchase under the Plan is 750,000 shares, subject to
adjustment as set forth in Section 5. In the event that the aggregate number of
shares that all participants are eligible to purchase on a Termination Date
based on the amount of payroll withholdings exceeds the maximum number of shares
remaining available for issuance under this Section, then the number of shares
to which each
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participant is entitled shall be determined by multiplying the number of shares
available for issuance by a fraction, the numerator of which is the number of
shares that such participant is able to purchase and the denominator of which is
the number of shares that all participants are able to purchase.
3.13 Expenses. All costs of maintaining records and executing
transfers will be borne by the Corporation.
3.14 Fair Market Value. The fair market value of a share of
stock on any relevant date shall be determined in accordance with the following
provisions:
3.14.1 If the stock at the time is neither listed nor
admitted to trading on any stock exchange nor traded in the over-the-counter
market, then the fair market value shall be the value of the stock as determined
by the Board of Directors in their last valuation of the Stock, after taking
into account such factors as the Board of Directors shall deem appropriate.
3.14.2 If the stock is not at the time listed or
admitted to trading on any stock exchange but is traded in the over-the-counter
market, the fair market value shall be the mean between the highest bid and
lowest asked prices (or, if such information is available, the closing selling
price) of one share of stock on the date in question in the over-the-counter
market, as such prices are reported by the National Association of Securities
Dealers through its NASDAQ system or any successor system. If there are no
reported bid and asked prices (or closing selling price) for the stock on the
date in question, then the mean between the highest bid price and lowest asked
price (or the closing selling price) on the last preceding date for which such
quotations exist shall be determinative of fair market value.
3.14.3 If the stock is at the time listed or admitted
to trading on any stock exchange, then the fair market value shall be the
closing selling price of one share of Stock on the date in question on the stock
exchange determined by the Committee to be the primary market for the stock, as
such price is officially quoted in the composite tape of transactions on such
exchange. If there is no reported sale of stock on such exchange on the date in
question, then the fair market value shall be the closing selling price on the
exchange on the last preceding date for which such quotation exists.
3.15 Fees and Commissions. Each participant shall be fully
responsible for (i) any brokerage fees and commissions charged for the sale of
common stock (but not brokerage fees and commissions charged upon the
acquisition of the stock; and (ii) any taxes owed by them as a result of
participation in the Plan.
3.16 Expiration of Time to Exercise Options. To the extent
options granted pursuant to Section 4 herein are not exercised within five years
from the date such options are granted, such options shall be deemed expired and
shall no longer be exercisable.
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3.17 Priority. Payments made through payroll withholding shall
be applied to the options granted to a participant in the order in which they
are received, i.e. the first options granted shall be the first options
exercised.
4. Granting of Options.
4.1 Number of Option Shares. Upon purchase or receipt of
common stock by the Agent for the Plan which the Corporation determines it will
issue options that are subject to this Plan, the Company shall give written
notice to all participating Eligible Employees. Such employees shall have twenty
(20) days from delivery of notice to elect to participate in the purchase of
such shares by delivering to Agent written notice indicating such election.
Subject to the limitations contained herein, each employee making such election
shall be deemed to have a right to purchase a maximum number of shares of the
stock of the Company equal to an amount determined as follows: an amount equal
to (i) number of shares purchased or acquired by the Agent multiplied by (ii)
the employee's Base Compensation as specified in Section 3.6 divided by (iii)
the total Base Compensation of all employees electing to participate in the
purchase of shares pursuant to this Section 4.1. The market value of the
Company's stock shall be determined as provided in Section 3.14.
4.2 Option Price. The option exercise price of option granted
pursuant to this Plan shall be equal to or greater than 85% of the fair market
value on the date of grant as determined by the Company.
5. Adjustments upon Changes in Capitalization.
5.1 Subdivision or Consolidation. Subject to any required
action by shareholders of the Corporation, the number of shares of stock covered
by each outstanding option, and the exercise price thereof, shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of stock of the Corporation resulting from a subdivision or consolidation
of shares or the payment of a stock dividend (but only on the stock) or any
other increase or decrease in the number of such shares effected without receipt
of consideration by the Corporation including, but not limited to, a stock
split, reverse stock split, recapitalization, combination or reclassification.
Any fraction of a share subject to an option that would otherwise result from an
adjustment pursuant to this Section shall be rounded downward to the next full
number of shares without other compensation or consideration to the holder of
such option.
5.2 Capital Transactions. Upon a sale or exchange of all or
substantially all of the assets of the Corporation, a merger or consolidation in
which the Corporation is not the surviving corporation, a merger, reorganization
or consolidation in which the Corporation is the surviving corporation and
shareholders of the Corporation exchange their stock for securities or property,
a liquidation of the Corporation or similar transaction ("Capital Transaction"),
this Plan and each option to purchase stock issued under this Plan shall
terminate, unless such options are assumed by a successor corporation in the
Capital Transaction, on the date of such Capital Transaction; provided, however,
that unless the outstanding options are assumed by a successor corporation in
the Capital
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Transaction, all funds held in any participant's account shall be returned to
such participant as set forth in Section 3.9.
5.3 Adjustments. To the extent that the foregoing adjustments
relate to stock or securities of the Corporation, such adjustments shall be made
by the Committee, whose determination in that respect shall be final, binding
and conclusive.
5.4 Ability to Adjust. The grant of an option pursuant to the
Plan shall not affect in any way the right or power of the Corporation to make
adjustments, reclassifications, reorganizations or changes of its capital or
business structure or to merge, consolidate, dissolve, liquidate, sell or
transfer all or any part of its business or assets.
5.5 Notice of Adjustment. Whenever the Corporation shall take
any action resulting in any adjustment provided for in this Section, the
Corporation shall forthwith deliver notice of such action to each participant,
which notice shall set forth the number of shares subject to the option and the
exercise price thereof resulting from such adjustment.
5.6 Limitation on Adjustments. Any adjustment, assumption or
substitution shall not provide any participant with any additional benefit under
his or her option and shall comply with Section 425 of the Code, if applicable.
6. Transferability. Options granted under this Plan may not be sold,
pledged, assigned or transferred in any manner other than by will or by the laws
of descent and distribution, and may be exercised during the lifetime of a
participant only by such participant. Any transfer in violation of this
provision shall void such option. No option shall be pledged or hypothecated in
any way, nor shall any option be subject to execution, attachment or similar
process.
7. Rights as a Shareholder. A participant shall have no rights as a
shareholder with respect to any stock underlying any option until the date of
the issuance to such participant a certificate for such shares. No adjustment
shall be made for dividends (ordinary or extraordinary, whether in cash,
securities or other property) or distributions or other rights for which the
record date is prior to the date such stock certificate is issued, except as
provided in Section 5.
8. No Right of Employment. Neither the grant nor exercise of any option
nor anything in this Plan shall impose upon the Corporation or any other
corporation any obligation to employ or continue to employ any participant. The
right of the Corporation and any other corporation to terminate any employee
shall not be diminished or affected because an option has been granted to such
employee.
9. Amendment of the Plan. The Board of Directors of the Corporation
may, subject to any requested shareholder approval, suspend, discontinue or
terminate the Plan, or revise or amend it in any respect whatsoever.
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10. Term of Plan. This Plan is effective on the date the Plan is
adopted by the Board of Directors and options may be granted pursuant to the
Plan from time to time until June 30, 2008.
11. Approval of Board of Directors and Shareholders. The Plan shall not
take effect until approved by the Board of Directors of the Corporation. This
Plan shall be approved by a vote of the shareholders by June 30, 1999. In the
event such shareholder vote is not obtained, all options granted hereunder,
whether vested or un-vested, shall be rescinded and shall be null and void.
12. Application of Funds. The proceeds received by the Corporation from
the sale of stock pursuant to options may be used for general corporate
purposes.
13. Reservation of Shares. The Corporation, during the term of this
Plan, shall at all times reserve and keep available such number of shares of
stock as shall be sufficient to satisfy the requirements of the Plan.
14. No Obligation to Exercise Option. The granting of an option shall
not impose any obligation upon the participant to exercise such option.
15. Withholding Taxes. Notwithstanding anything else to the contrary in
the Plan, the exercise of any option shall be conditioned upon payment by such
participant in cash, or other provisions satisfactory to the Committee of all
local, state and federal withholding taxes applicable, in the Committee's
judgment, to the exercise or to later disposition of shares acquired upon
exercise of an option.
16. Securities Laws Compliance. Notwithstanding anything contained
herein, the Corporation shall not be obligated to grant any option under this
Plan or to sell, issue or effect any transfer of any share pursuant to this Plan
unless such grant, sale, issuance or transfer is at such time effectively (i)
registered or exempt from registration under the Act, and (ii) qualified or
exempt from qualification under the California Corporate Securities Law of 1968
and any other applicable state securities laws. As a condition to exercise of
any option, each participant shall make such representations as may be deemed
appropriate by counsel to the Corporation for the Corporation to use any
available exemption from registration under the Act or qualification under any
applicable state securities law. Any share certificates issued pursuant to this
Plan shall bear any applicable legends that may be desirable or necessary as
determined in the sole and absolute discretion of the Corporation.
17. Notices. Any notice to be given under the terms of this Plan shall
be addressed to the Corporation in care of its Secretary at its principal
office, and any notice to be given to participant shall be addressed to such
participant at the address maintained by the Corporation for such person or at
such other address as the participant may specify in writing to the Corporation.
All notices, requests, demands and other communications under this Plan shall be
in writing and shall be deemed to have been duly given on the date of delivery
if delivered personally to the party to whom notice is to be given, or on the
third (3rd) day after mailing if mailed to the party to whom notice is given, by
first class mail, registered or certified, postage prepaid, and properly
addressed. Either party may
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<PAGE>
change the address to which notices to such party are to be addressed by giving
the other party hereto written notice of such change in the manner herein set
forth.
18. Effect of Plan. The provisions of the Plan shall, in accordance
with its terms, be binding upon, and inure to the benefit of, all successors of
each employee participating in the Plan, including, without limitation, such
employee's estate and the executors, administrators or trustees thereof, heirs
and legatees, and any receiver, trustee in bankruptcy or representative of
creditors of such employee.
19. Arbitration. In the event of any dispute between the Corporation
and a participant regarding this Plan, the dispute and any issue as to the
arbitrability of such dispute, shall be settled to the exclusion of a court of
law, by arbitration in San Diego, California, by a panel of three arbitrators
(each party shall choose one arbitrator and the third shall be chosen by the two
arbitrators so selected) in accordance with the Commercial Arbitration Rules of
the American Arbitration Association then in effect. The decision of a majority
of the arbitrators shall be final and binding upon the parties. All costs of the
arbitration and the fees of the arbitrators shall be allocated between the
parties as determined by a majority of the arbitrators, it being the intention
of the parties that the prevailing party in such a proceeding be made whole with
respect to its expenses.
20. Governing Law. This Plan shall be governed by the laws of the State
of California.
21. Descriptive Headings. Titles to Sections are solely for information
purposes.
22. Information. All participants in the Plan shall be distributed
financial statements of the Corporation at least annually.
23. Rule 16(b). To the extent required, the Plan is intended to comply
with Rule 16(b)(3) of the Exchange Act as then in effect or any successor
provisions ("Rule 16(b)(3)") and the Committee shall interpret and administer
the provisions of the Plan in a manner consistent therewith. Any provisions
inconsistent with Rule 16(b)(3) shall be inoperative and shall not affect the
validity of the Plan. The Committee may establish and adopt written
administrative guidelines, designed to facilitate compliance with Section 16(b)
of the Exchange Act and Rule 16(b)(3), as it may deem necessary or proper for
the administration and operation of the Plan and the transaction of business
thereunder.
As adopted by the Board of Directors effective _________________.
PHOTOMATRIX, INC., a California corporation
By:
Its:
9
ASSET TRANSFER AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into this First day of
July, 1998 by and between Photomatrix, Inc. ("Purchaser"), a California
corporation, and MGM TechRep, Inc. ("Seller"), a California corporation.
B A C K G R O U N D
A. Seller wishes to divest itself of certain assets and its manufacturer's
rep business ("Business").
B. Purchaser wishes to acquire from Seller the Business and certain assets
from Seller.
A G R E E M E N T
In consideration of the premises and the mutual covenants contained herein
the parties hereto agree as follows:
SECTION 1.
PURCHASE AND SALE OF ASSETS
1.1 Sale of Assets. For the consideration hereinafter specified, and
subject to the provisions herein set forth, at the Closing (as defined in
Section 1.4 hereof), Seller shall sell, assign, convey, transfer, and deliver to
Purchaser, and the Purchaser shall purchase, accept, and acquire from Seller:
(a) the furniture, fixtures and office equipment, and other
tangible personal property listed on Schedule 1.1(a), in AS-IS WHERE-IS
CONDITION (the "Equipment");
(b) the existing principal contracts listed on Schedule 1.1(b)
including all outstanding quotes and pending orders pursuant thereto and upon
which commissions shall become payable (the "Contracts");
(c) the name "MGM TechRep" and all associated registrations,
listings, qualifications and good will associated therewith and all proprietary
information that Seller may possess regarding its principals and customers;
(d) the intangible property which includes the know how,
design rights, plans, specifications, drawings, quotes, and trade secrets,
substantially all of which Seller acquired from Purchaser and which are
presently used by Seller in the conduct of the Business.
1.2 Assumed Liabilities. At the Closing, and upon the sale and purchase
of the Assets, Purchaser shall assume and agree to pay or discharge when due the
liabilities, obligations, and contracts, listed on Schedule 1.2 hereof, and the
performance obligations of Seller pursuant to the contracts with principals to
the extent such liabilities, obligations, and performance are attributable to
periods occurring after the Closing Date, (collectively, such
<PAGE>
obligations are hereinafter referred to as the "Assumed Liabilities"). Except as
expressly provided in this Section 1.2, Purchaser does not and shall not assume
any liabilities or obligations of Seller whether known, unknown, fixed,
contingent, liquidated, unliquidated, disputed, or undisputed, and shall not be
obligated for any liability, cost, or expense or required to defend any suit or
claim arising out of any act, event, or transaction occurring prior to the
closing date or out of any condition existing prior to the Closing Date,
notwithstanding that the date on which the claim, demand, or obligation is
asserted is after the Closing Date. Purchaser shall be responsible for all its
actions initiated and conducted subsequent to the Closing Date and shall
indemnify Seller from any such obligations, claims, costs or liabilities that
arise from actions of the Purchaser subsequent to the Closing Date.
1.3 Purchase Price, Payment. The purchase price of the Assets (the
"Purchase Price"), subject to the assumption of the Assumed Liabilities, shall
be pursuant to the schedule outlined in the attached Schedule 1.3.
1.4 Closing Effective Date. The Closing for the purchase and sale
contemplated by this Agreement (the "Closing") shall be July 1, 1998, (the
"Closing Date" or the "Effective Date").
1.5 Further Assurances. From time to time after the Closing, at the
request of either party hereto and without further consideration therefor, each
party shall execute and deliver such further instruments and take such other
action as the other party may reasonably require to effectuate the transation
contemplated by this Agreement.
SECTION 2
COVENANTS OF SELLER
2.1 Noncompetition by Seller.
(a) The following terms are used in this Section 2.1, with the
meanings thereafter ascribed:
(i) "Affiliate of Seller" shall mean any person or
entity controlling, controlled by, or under common control with Seller. As used
herein the term "control" as used in the preceding sentence means power by
virtue of familial relationship, contract, security ownership, position, or
otherwise to influence, direct, or cause the direction of the management and
affairs of a person or entity.
(ii) "Area" shall mean a 500-mile radius of the
Purchaser's premises at 1958 Kellogg Ave., Carlsbad, California.
(iii) "Business of the Seller" means the business of
manufacturers' sales representative.
(iv) "Competing Business" shall mean any business,
person or entity which is engaged in a business substantially the same as the
Business purchased by Purchaser.
(b) Seller covenants that, for a period of five (5) years from
and after the Closing Date, it will observe the following separate and
independent covenants:
<PAGE>
(i) Neither Seller, nor any Affiliate of Seller will,
without the prior written consent of Purchaser, within the Area, directly of
indirectly, on behalf of Seller or in the service of others, (i) become
financially interested in a Competing Business (other than as a holder of less
than five percent of the outstanding voting securities or any entity whose
voting securities are listed on a national securities exchange or quoted by the
National Association of Securities Dealers, Inc. automated quotation system),
or, (ii) engage in or be retained by any Competing Business.
(ii) Seller acknowledges and agrees that all
Confidential Information of Seller, and all physical embodiments thereof, are
confidential to, and from and after the Closing Date and shall be and remain the
sole and exclusive property of Purchaser. Seller agrees that Seller will not,
without the prior written consent of Purchaser, (i) disclose or make available
any Confidential Information of Purchaser to any person or entity (including any
Affiliate of Seller), or (ii) make o cause to be made, or permit, either on
behalf of Seller or on behalf of others, any use of Confidential Information of
Purchaser.
(iii) Seller shall not use as a trade name or conduct
Business under the names of "MGM" or "MGM TechRep".
(c) Seller acknowledges that Purchaser will engage in the
prior Business of the Seller throughout the Area; that the within and foregoing
covenants are made by Seller as an inducement to Purchaser to purchase the
Assets and to protect and preserve to Purchaser its interest in the Business of
the Seller including, particularly, the goodwill associated therewith; that each
of the above and foregoing covenants is reasonable and that irreparable loss and
injury would result should Selle breach any of the foregoing covenants.
(d) Each of the covenants hereinabove contained shall be
deemed separate, severable, and independent covenants, and in the event any
covenant shall be declared invalid by any court of competent jurisdiction, such
invalidity shall not in any manner affect or impair the validity or
enforceability of any other part or provision of such covenant or of any other
covenant contained herein.
(e) In addition to all other remedies provided at law or in
equity, Purchaser shall be entitled to both preliminary and permanent
injunctions against Seller to prevent a breach of contemplated or threatened
breach by Seller of any of the foregoing covenants; and the existence or any
claim, demand, cause of action, or action of Seller against Purchaser, whether
predicated upon this Agreement or otherwise, shall not constitute a defense to
the enforcement by Purchaser of any such covenants.
2.2 Seller's Agreement to Assist Purchaser. Seller shall furnish leads
and quote packages to Purchaser that it may receive or acquire subsequent to the
Closing Date that are part of or relate to the Business.
2.3 Financial Information. Within thirty (30) days of Seller's written
request, Purchaser shall furnish with true and correct copies of financial
records and reports showing earnings from commissions and receipts of commission
payments sufficient to substantiate the amounts due and paid to Seller per the
terms of Schedule 1.3, except that Purchaser shall have no obligation to furnish
such financial information after June 30, 2001.
<PAGE>
SECTION 3
REPRESENTATIONS AND WARRANTIES
OF THE SELLER
For the purpose of inducing Purchaser to enter into this Agreement and
consummate the transactions contemplated hereby, Seller represents and warrants
to Purchaser that:
3.1 Organization, Power and Authority of the Seller. Seller is a
corporation duly organized and legally existing in good standing under the laws
of the State of California and has full corporate power and authority and all
licenses and permits necessary to own or lease its properties and to carry on
its Business as it is now being conducted.
3.2 Ownership of the Assets. The Seller is the lawful record and
beneficial owner of the Assets and has valid marketable title thereto, free and
clear of all liens, pledges, and encumbrances.
3.3 Litigation Involving the Seller. There are no actions, suits,
claims, governmental investigations or arbitration proceedings (collectively
"Litigation") pending or to the best of Seller's knowledge, threatened against
or affecting the Assets, or the ability of Seller to perform its obligations
under this Agreement. There are no outstanding orders, decrees or stipulations
issued by any local, state, or federal judicial authority in any proceeding to
which the Seller is or was a party r which affect the A ssets, or the ability of
Seller to perform its obligations under this Agreement.
3.4 Compliance with Laws by the Seller. To the best of Seller's
knowledge, the Seller has operated the Business in compliance with all
applicable laws, regulations, permits, and orders.
3.5 Due Execution and Delivery; Valid and Binding Obligations; Absence
of Breach. This Agreement has been duly executed and delivered by the Seller and
is a valid and binding obligation of the Seller, enforceable in accordance with
its terms. The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action of the Seller. Neither the execution and
delivery of this Agreement not the consummation of the transactions contemplated
hereby will: (i) conflict with or violate any provision of the Articles of
Incorporation or Bylaws of the Seller, or of any law, ordinance or regulation or
any decree or order of any court of administrative or other governmental body
which is either applicable to, binding upon or enforceable against the Seller;
(ii) to the best of Seller's knowledge, result in any breach of, cancellation of
or default under any mortgage, contract, agreement, indenture, ot will, trust or
other instrument which is either binding upon or enforceable against the Seller
or the Assets; or (iii) violate any legally protected right of any individual or
entity or give to any individual or entity a right or claim against the
Purchaser or the Assets.
3.6 Intangible Property. Seller will deliver to Purchaser prior to
Closing all of the documents in Seller's possession evidencing the intangible
property. Seller owns all of the Intangible Property. As of the Closing, Seller
will have conveyed to Purchaser all of Seller's right, title, and interest in
and to all of the Intangible Property necessary to conduct the Business of
Purchaser as presently conducted by Seller free and clear of all liens, except
(i) claims of ownership by a licensor and any restrictions imposed by any
license agreement that, if enforced, would not interfere with the conduct of the
Business of Purchaser as presently conducted by Seller. Seller does not pay or
know of any claim or potential claim of any royalty to anyone under or in
connection with the use of any Intangible property in the Business.
<PAGE>
3.7 Contracts. Seller has delivered to Purchaser true and correct
copies of each contact or agreement in the possession of Seller. Seller has not
received notice from any principal that is has cancelled or terminated any of
these agreements. No principal has prepaid Seller for any commissions yet to be
earned.
3.8 Disclosure. All statements made herein are true and correct, and
the information provided and to be provided by Seller to Purchaser relating to
this Agreement does not and will not contain any statement which will, at the
time and in the light of the circumstances under which it is made, be false or
misleading with respect to any material fact, or omit to state any material fact
(which is known, or in the exercise of reasonable diligence by Seller should
have been known) necessary in or order to make any statement contained herein
not false or misleading in any material respect.
SECTION 4
REPRESENTATIONS AND WARRANTIES OF PURCHASER
For the purpose of inducing Seller to enter into this Agreement and to
consummate the transactions contemplated hereby, Purchaser represents and
warrants to Seller that:
4.1 Organization, Power and Authority of the Purchaser. Purchaser is a
corporation duly organized and legally existing in good standing under the laws
of the State of California and has full corporate power and authority and all
licenses and permits necessary to own or lease its properties and to carry on
its Business as it is now being conducted.
4.2 Litigation Involving the Purchaser There are not actions, suits,
claims, governmental investigations or arbitration proceedings (collectively
"Litigation") pending or to the best of Purchaser's knowledge, threatened
against or affecting the Purchaser and its ability to complete this transaction.
There are no outstanding orders, decrees or stipulations issued by any local,
state, or federal judicial authority in any proceeding to which the Purchaser is
or was a party which affect r Purchaser's abilit y to perform its obligations
under this Agreement.
4.3 Compliance with Laws by the Purchaser. To the best of Purchaser's
knowledge, the Purchaser is in compliance with all applicable laws, regulations,
permits, and orders.
4.4 Disclosure. All statements made herein are true and correct, and
the information provided and to be provided by Purchaser to Seller relating to
this Agreement does not and will not contain any statement which will, at the
time and in the light of the circumstances under which it is made, be false or
misleading with respect to any material fact, or omit to state any material face
(which is known, or in the exercise of reasonable diligence by Purchaser should
have been known) necessary in order to make any statement contained herein not
false or misleading in any material respect.
<PAGE>
SECTION 5
AGREEMENT BY SELLER TO INDEMNIFY
5.1 Seller's Indemnity Obligation.
(a) Seller agrees that Seller will indemnify and hold
Purchaser harmless in respect of the aggregate of all expenses, losses, costs,
deficiencies, liabilities and damages (including related counsel fees and
expenses) incurred or suffered by Purchaser (collectively the "Indemnifiable
Damages of Purchaser"), (i) as a result of breach of any warranty or
representation made by Seller pursuant to this Agreement or (ii) resulting from
any default in the performance of any covenant or agreement made by the Seller
pursuant to this Agreement. Seller shall not be required to indemnify Purchaser
until the aggregate amount of Indemnifiable Damages of Purchaser exceeds
$10,000.
(b) The obligation of Seller to indemnify Purchaser for
Indemnifiable Damages of Purchaser shall be subject to the condition that Seller
shall have received a written declaration of Purchaser requesting
indemnification, specifying the basis on which indemnification is sought, and
specifying the amount of the Indemnifiable Damages of Purchaser (an
"Indemnification Claim") within six (6) months after the Closing Date. Seller
shall not be liable for damages in excess of the actual damages suffered by
Purchaser as a result of the act or omission for which indemnification is
claimed, net of any insurance proceeds received by Seller or tax benefits
realized by Seller as a result of the Indemnifiable Damages of Purchaser.
Seller's maximum liability for indemnification hereunder shall not exceed the
Purchase Price.
(c) Purchaser's sole remedy for a breach of any representation
or warranty hereunder or Seller's default in the performance of any covenant or
agreement hereunder shall be indemnification. For purposes of providing a means
by which the Seller's obligation to indemnify the Purchaser may be satisfied,
the Seller agrees that Purchaser shall have the right to set off the amount of
Indemnifiable Damages of Purchaser against amounts owed to Seller.
(d) The Seller shall have a period of forty-five (45) days
from the date it receives an Indemnification Claim to give notice of its
intention to dispute each claim. If the Seller notifies the Purchaser in writing
within such 45-day period of its intention to dispute such Indemnification Claim
and if such dispute is not resolved within thirty (30) days after the date of
such notice given by the Seller, then such dispute shall be resolved by an
arbitrator mutually satisfactory to Purchaser and Seller. If Purchaser and
Seller are unable to agree on a single arbitrator within thirty (30) days of the
date of the first written notice suggesting an arbitrator, then the arbitrator
shall be selected by the mutual agreement of two persons, one designated by
Seller and one designated by Purchaser. Such arbitrator shall be appointed
within sixty (60) days after the expiration of the second above mentioned thirty
(30) day period. The arbitrator shall abide by the rules of the American
Arbitration Association and their decision shall be final and binding on all
parties.
<PAGE>
SECTION 6
AGREEMENT BY PURCHASER TO INDEMNIFY
6.1 Purchaser's Indemnity Obligation.
(a) Purchaser agrees that Purchaser will indemnify and hold
Seller harmless in respect of the aggregate of all expenses, losses, costs,
deficiencies, liabilities and damages (including related counsel fees and
expenses) incurred or suffered by Seller (collectively the "Indemnifiable
Damages of Seller") (i) as a result of breach of any warranty or representation
made by Purchaser pursuant to this Agreement; or (ii) resulting from any default
in the performance of any covenant or agreement made by the Purchaser pursuant
to this Agreement. Purchaser shall not be required to indemnify Seller until the
aggregate amount of Indemnifiable Damages of Seller exceeds $10,000.
(b) The obligation of Purchaser to indemnify Seller for
Indemnifiable Damages of Seller shall be subject to the condition that Purchaser
shall have received a written declaration of Seller requesting indemnification,
specifying the basis on which indemnification is sought, and specifying the
amount of the Indemnifiable Damages of Seller (an "Indemnification Claim")
within six (6) months after the Closing Date. Purchaser shall not be liable for
damages in excess of the actual damages suffered by Seller as a result of the
act or omission for which indemnification is claimed, net of any insurance
proceeds received by Purchaser or tax benefits realized by Purchaser as a result
of the Indemnifiable Damages of Seller.
(c) Seller's sole remedy for a breach of any representation or
warranty hereunder.
(d) The Purchaser shall have a period of forty-five (45) days
from the date it receives and Indemnification Claim to give notice of its
intention to dispute each claim. If the Purchaser notifies the Seller in writing
within such 45-day period of its intention to dispute such Indemnification Claim
and if such dispute is not resolved within thirty (30) days after the date of
such notice given by the Purchaser, then such dispute shall be resolved by an
arbitrator mutually satisfactory to Purchaser and Seller. If Purchaser and
Seller are unable to agree on a single arbitrator within thirty (30) days of the
date of the first written notice suggesting an arbitrator, then the arbitrator
shall be selected by the mutual agreement of two persons, one designated by
Seller and one designated by Purchaser. Such arbitrator shall be appointed
within sixty (60) days after the expiration of the second above mentioned thirty
(30) day period. The arbitrators shall abide by the rules of the American
Arbitration Association and their decision shall be final and finding on all
parties.
<PAGE>
SECTION 7
GENERAL PROVISIONS
7.1 Fees and expenses. Seller and Purchaser each shall pay the fees and
expenses incurred by them in connection with the transactions contemplated by
this Agreement.
7.2 Notices. All notices, request, demands, and other communications
hereunder shall be in writing and shall be delivered (i) in person or by
courier, (ii) mailed by first class registered or certified mail, or (iii)
delivered by facsimile transmission, as follows:
(a) If to Seller:
MGM TechRep, Inc.
P.O. Box 8697
Rancho Santa Fe, CA 92067
(b) If to Purchaser:
Photomatrix, Inc.
1958 Kellogg Ave.
Carlsbad, CA 92008
or to such other address as the parties hereto may designate in writing to the
other in accordance with this Section 7.2. Any party may change the address to
which notices are to be sent to it by giving written notice of such change of
address to the other parties in the manner above provided for giving notice. If
delivered personally, the date on which a notice, request, instruction or
document is delivered shall be the date on which such delivery is made and if
delivered by facsimile transmission or n mail as aforesaid, the date on which
such notice, request, instruction or document is received shall be the date of
delivery.
7.3 Assignment; Binding Effect. This Agreement shall not be assignable
by any of the parties hereto without the written consent of the other. This
Agreement shall be binding upon the parties hereto and their respective
successors, assigns, and transferees.
7.4 Headings. The section, subsection, and other headings in this
Agreement are inserted solely as a matter of convenience and for reference, and
are not a part of this Agreement.
7.5 Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one counterpart has been signed by each party and
delivered to the other party hereto.
7.6 Integration of Agreement. This Agreement supersedes all prior
agreements, oral and written, between the parties hereto with respect to the
subject matter hereof. Neither this Agreement, nor any provision hereof, may be
changed, waived, discharged, supplemented, or terminated orally, but only by an
agreement in writing signed by the party against which the enforcement of such
change, waiver, discharge, or termination is sought.
<PAGE>
7.7 Partial Invalidity. Whenever possible, each provision hereof shall
be interpreted in such manner as to be effective and valid under applicable law,
but in case any one or more of the provisions contained herein shall, for any
reason, be held to be invalid, illegal, or unenforceable in any respect, such
invalidity, illegality, or unenforceability shall not effect any other
provisions of this Agreement, and this Agreement shall be construed as if such
invalid, illegal, or unenforceable n provision or provisions had never been
contained herein unless the deletion of such provision or provisions would
result in such a material change as to cause completion of the transactions
contemplated hereby to be unreasonable.
7.8 Entire Agreement. This Agreement and the Exhibits and Schedules
attached hereto contain the entire agreement of the parties hereto with respect
to the subject matter hereof. Any reference herein to this Agreement shall be
deemed to include the Schedules and Exhibits attached hereto.
7.9 Governing Law. The validity, interpretation, construction, and
performance of this Agreement shall be controlled by and construed under the
laws of the State of California. In the event of any litigation arising out of
any dispute in connection with this Agreement, the parties hereby consent to the
jurisdiction of the California courts and the venue of San Diego County,
California.
7.10 Arbitration. Any dispute arising pursuant to this Agreement (but
not pursuant to the Security Agreement) other than with respect to breaches of
Sections 3.1 and 3.2 hereof shall be submitted for arbitration by an arbitrator
mutually satisfactory to Purchaser and Seller. If Purchaser and Seller are
unable to agree on a single arbitrator within thirty (30) days of the date of
the first written notice suggesting an arbitrator, then the arbitrator shall be
selected by the mutual agreement of two persons, one designated by Seller and
one designated by Purchaser. The arbitrators shall abide by the rules of the
American Arbitration Association and their decision shall be final and binding
on all parties.
<PAGE>
IN WITNESS WHEREOF, each party hereto has caused this Agreement to be
executed on its behalf by its duly authorized officers, all as of the day and
year first above written.
PURCHASER: Photomatrix, Inc.
By: _______________________________
Patrick W. Moore, CEO
SELLER: MGM TechRep, Inc.
By: ________________________________
Lee Forsythe, President
<PAGE>
Exhibits:
1.1(a) - Equipment
1.1(b) - Contracts
1.2 - Assumed Liabilities
1.3 - Purchase Price
<PAGE>
Exhibit 1.1(a)
MGM TECHREP EQUIPMENT LIST (7/1/98)
1- Oak executive desk and wall unit combination
1- Executive chair
1- Oak credenza
1- Oak bookshelf
1- File cabinet (Oak)
3- Matching chairs
1- Pentium computer NCC 486DX2
1- HP Deskjet 692C
1- Compudyne monitor
1- Axion monitor
1- Casio DL-220 printing calculator
1- Upright 5 panel file cabinet
2- 4 drawer file cabinets
1- Vision 21 computer
1- Trade show booth
1- 5-ft. table
<PAGE>
Exhibit 1.1(b)
Contracts With MGM Principals
I-PAC Manufacturing, Inc. (Contract Manufacturing)
I-PAC Express Assembly, Inc. (Contract Manufacturing)
Astron (Connectors)
Tyee Products (Resistors & Capacitors)
Machrone Manufacturing Corp. (EMI-Inductors)
Marina Pacific (Custom & Standard cables/fiber optics)
Tumbler (Power Cords)
Korean Circuits Company (PCB's)
Global Circuits (PCB's)
Tri-Star Engineered Products (PCB's)
Advanced Engineering & Molding (Plastic Injection Molding)
Techcraft (Custom Sheet Metal)
Autec Power Systems (Power Supplies) - Pending
Pacific Transformer (Transformers & Transducers)
Alliance Semi-conductor (memory) - Pending
<PAGE>
MGM COMMISSION RECEIPT CALCULATION
(copy of Check/Remittance attached)
Principal:_____________________ Date Received:_______________________
CHECK TOTAL PRE-JULY 1, 1998 INVOICES POST JULY 1,1998 INVOICES
$ $ $
x 100% x 75
$ $
SUMMARY
TOTAL RECEIVED:
AMOUNT DUE O-MGM:
PAID CHECK#__________________ DATE:___________________
<PAGE>
Exhibit 1.2
ASSUMED LIABILITIES
No liabilities incurred prior to July 1, 1998, are assumed by Purchaser except
as specified here below:
A. Liabilities for personnel employed by Seller on June 30, 1998
that Purchaser determined it would hire , effective July 1, 1998,
to conduct the Business, to include:
1. Unpaid but earned wages in arrearage.
2. Unpaid but earned leave benefits.
3. Unpaid but earned sales commissions.
4. Payroll tax liabilities associated with 1-3
above.
5. Employment agreement obligations for the post
July 1, 1998 period.
B. The personnel covered include :
1. Lee Forsythe
2. Jack Chalmers
3. Dean Terry
4. Monica Perez
<PAGE>
Exhibit 1.3
PURCHASE PRICE
The price to be paid by Purchaser to Seller for the Business shall all be
allocated to Goodwill, and shall be comprised of the following:
Purchaser shall compromise and forgive any and all sales commission
advances paid out to Seller by IPAC Manufacturing, Inc. and/or IPAC Express
Assembly, Inc. that remain outstanding as of June 30, 1998.
Purchaser shall compromise and forgive any and all Accounts Payable
owing by Seller to Purchaser, IPAC Manufacturing, Inc. or IPAC Express Assembly,
Inc. as of June 30, 1998.
Purchaser shall pay over to Seller an amount equal to :
100% of commission payments Purchaser receives the principals that
Seller has transferred to Purchaser [Exhibit 1.1 (b)] in this Agreement, that
were earned prior to July 1, 1998;
75% of commissions earned from the principals specified in Exhibit 1.1
(b) for the period of July 1, 1998, through June 30, 1999;
50% of the commissions earned from the principals specified in Exhibit
1.1 (b) for the period of July 1, 1999, through June 30, 2000;
35% of the commissions earned from the principals specified in Exhibit
1.1 (b) for the period of July 1, 2000, through June 30, 2001.
Payments due to Seller pursuant to A-C of this paragraph shall be paid
monthly, prior to the 15th of the month, for amounts due through the end of the
prior month.
Purchaser shall owe no amounts to Seller for principals that it secures
subsequent to July 1, 1998, that are not included on Exhibit 1.1 (b), or for
customers of those principals that were not a customer of one or more of those
principal accounts prior to July 1, 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,274,000
<SECURITIES> 0
<RECEIVABLES> 1,534,000
<ALLOWANCES> 75,000
<INVENTORY> 2,757,000
<CURRENT-ASSETS> 5,674,000
<PP&E> 1,822,000
<DEPRECIATION> 787,000
<TOTAL-ASSETS> 8,650,000
<CURRENT-LIABILITIES> 3,040,000
<BONDS> 0
0
0
<COMMON> 19,351,000
<OTHER-SE> 128,000
<TOTAL-LIABILITY-AND-EQUITY> 8,650,000
<SALES> 0
<TOTAL-REVENUES> 2,288,000
<CGS> 0
<TOTAL-COSTS> 1,448,000
<OTHER-EXPENSES> 914,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,000
<INCOME-PRETAX> 15,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 15,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>