SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant [ x ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
Photomatrix, Inc.
(Name of Registrant as Specified In its Charter)
Photomatrix, Inc.
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1) or 14a-6(j)(2).
[ ] $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
[ x ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11. ($1,425) (previously paid)
1) Title of each class of securities to which transaction applies:
Common Stock
2) Aggregate number of securities to which transaction applies:
9,500,000
3) Per unit price of other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:1
$.75 per share based on the last trade price of a
share of Photomatrix Common Stock on the
NASDAQ SmallCap Market on March 24, 1998
4) Proposed maximum aggregate value of transaction:
$7,125,000
1 Set forth the amount on which the filing fee is calculated and state how it
was determined.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid: $______
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
<PAGE>
Photomatrix, Inc.
1958 Kellogg Avenue
Carlsbad, California 92009
May 11, 1998
Dear Shareholder:
We are pleased to enclose your Notice of Special Meeting of
Shareholders and Proxy Statement for the Special Meeting of Shareholders of
Photomatrix, Inc., a California corporation (the "Company" or "Photomatrix"), to
be held on June 5, 1998 at 1:00 p.m. at the Company's corporate headquarters
located at 1958 Kellogg Avenue, Carlsbad, California 92009.
At the Special Meeting, you will be asked to approve and adopt an
Agreement and Plan of Merger and Reorganization (the "Merger Agreement")
providing for the merger (the "Merger") of Photomatrix's wholly-owned
subsidiary, Photomatrix Acquisition Inc., a California corporation ("PAI"), and
I-PAC Manufacturing, Inc., a California corporation ("I-PAC"), pursuant to
which, among other things, I-PAC will become a wholly-owned subsidiary of
Photomatrix. You will also be asked to approve three alternative amendments to
the Articles of Incorporation giving the Board of Directors the authorization
and discretion, if necessary, to effect any one of (i) a 2 for 1, (ii) a 3 for
1, or (iii) a 4 for 1 reverse stock split whereby either two, three, or four
outstanding shares of Photomatrix Common Stock will be combined and converted
into one share of Photomatrix Common Stock; to adopt the Photomatrix 1998 Stock
Option Plan whereby 1,500,000 (pre-reverse stock split) shares of Photomatrix
Common Stock will be reserved for issuance to officers, directors and employees
under incentive stock options or non-qualified stock options to be granted by
the Compensation Committee of the Board of Directors; to elect six directors of
the Company; and to ratify the selection of KPMG Peat Marwick LLP as the
Company's independent auditors.
As a result of the Merger, the 8,500 outstanding shares of I-PAC Common
Stock will be exchanged for and represent the right to receive 4,848,000 shares
(adjusted proportionately in the event of the exercise of dissenters' rights) of
Photomatrix Common Stock and possibly additional shares of Photomatrix Common
Stock in the event that I-PAC achieves certain performance milestones during a
twelve month period commencing on July 1, 1998 or outstanding options to
purchase Photomatrix Common Stock are exercised. Your shares of Common Stock
will not be changed in the Merger.
The Merger will result in a combination of I-PAC's electronics contract
manufacturing business with the Company's existing operations. The Company's
Board of Directors believes the merger is in the best interests of the Company
and its shareholders, in that the combined enterprise should have substantial
opportunities for growth and should benefit from economies of scale, thereby
increasing the amount and stability of the Company's net cash flow from
operations. The Board recommends that you vote FOR adoption of the Merger
Agreement, as well as the additional proposals described above and in the Proxy
Statement which accompanies this letter.
I encourage you to read this Proxy Statement in its entirety.
Very truly yours,
/s/ Roy L. Gayhart
--------------------------------------------
Roy L. Gayhart, Chief Financial Officer
<PAGE>
Photomatrix, Inc.
1958 Kellogg Avenue
Carlsbad, California 92009
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 5, 1998
To the Shareholders of PHOTOMATRIX, INC.:
Notice is hereby given that the Special Meeting of Shareholders of
Photomatrix, Inc., a California corporation (the "Company" or "Photomatrix"),
will be held on June 5, 1998, at 1:00 p.m., local time, at the principal office
of the Company 1958 Kellogg Avenue, Carlsbad, California 92009, for the
following purposes:
1. To approve a proposed merger with I-PAC Manufacturing, Inc.
2. To approve three alternative amendments to the Articles of
Incorporation giving the Board of Directors the authorization and
discretion to effect, if necessary, any one of (i) a 2 for 1, (ii) a 3
for 1, or (iii) a 4 for 1 reverse stock split whereby either two,
three, or four outstanding shares of Photomatrix Common Stock will be
combined and converted into one share of Photomatrix Common Stock.
3. To elect six directors of the Company.
4. To adopt the Photomatrix 1998 Stock Option Plan whereby 1,500,000
(pre-reverse stock split) shares of Photomatrix Common Stock will be
reserved for issuance to officers, directors and employees of the
Company under incentive stock options or non-qualified stock options to
be granted by the Compensation Committee of the Board of Directors.
5. To ratify the appointment by the Company's Board of Directors of KPMG
Peat Marwick LLP as the independent auditors of the Company for the
1998 fiscal year.
6. To transact such other business as may properly come before the meeting
or any adjournment thereof.
Only shareholders of record at the close of business on April 17, 1998,
are entitled to receive notice of and to vote at the meeting and any adjournment
thereof.
All shareholders are cordially invited to attend the meeting in person.
Regardless of whether you plan to attend the meeting, please sign, date, and
promptly return the enclosed proxy in the accompanying envelope. Shareholders
attending the meeting may vote in person even if they have returned a proxy.
By Order of the Board of Directors
Roy L. Gayhart
Secretary
Carlsbad, California
May 11, 1998
<PAGE>
PHOTOMATRIX, INC.
1958 Kellogg Avenue
Carlsbad, California 92009
(619) 625-4400
----------------------
PROXY STATEMENT FOR SPECIAL MEETING OF SHAREHOLDERS
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The Board of Directors of Photomatrix, Inc. a California corporation
("Photomatrix" or the "Company"), the executive offices of which are located at
1958 Kellogg Avenue, Carlsbad, California 92009 (telephone: (619) 625-4400),
hereby solicits your proxy in the form enclosed for use at the Special Meeting
of Shareholders to be held on June 5, 1998, and any adjournment or postponement
thereof (the "Meeting" or the "Special Meeting"). This Proxy Statement is being
furnished to the shareholders of Photomatrix in connection with such
solicitation.
At the Meeting, shareholders will be asked to approve a proposal to
approve and adopt an Agreement and Plan of Merger and Reorganization (the
"Merger Agreement") providing for the merger (the "Merger") of Photomatrix's
wholly-owned subsidiary, Photomatrix Acquisition, Inc. ("PAI"), a California
corporation, with and into I-PAC Manufacturing, Inc., a California corporation
("I-PAC"), pursuant to which, among other things, I-PAC will become a
wholly-owned subsidiary of Photomatrix and the 8,500 outstanding shares of I-PAC
Common Stock will be converted into and represent the right to receive 4,848,000
shares (adjusted proportionately in the event of the exercise of dissenters'
rights) of Photomatrix Common Stock and possibly additional shares of
Photomatrix Common Stock if I-PAC achieves certain performance milestones during
a twelve month period commencing July 1, 1998 or outstanding options to purchase
Photomatrix Common Stock are exercised. See " Proposal 1 - The Merger" and the
documents referred to therein.
Shareholders will also be asked to approve three alternative amendments
to the Company's Articles of Incorporation giving the Board of Directors the
authorization and discretion to effect, if necessary, any one of (i) a 2 for 1,
(ii) a 3 for 1, or (iii) a 4 for 1 reverse stock split whereby either two,
three, or four outstanding shares of Photomatrix Common Stock will be combined
and converted into one share of Photomatrix Common Stock; to adopt the
Photomatrix 1998 Stock Option Plan whereby 1,500,000 (pre-reverse stock split)
shares of Photomatrix Common Stock will be reserved for issuance to officers,
directors and employees of the Company under incentive stock options or
non-qualified stock options to be granted by the Compensation Committee of the
Board of Directors; to elect six directors of the Company; and to ratify the
selection of KPMG Peat Marwick LLP as the Company's independent auditors for
fiscal 1998.
April 17, 1998 has been fixed by the Board of Directors as the record
date for the determination of shareholders entitled to notice of the Meeting.
Only shareholders of record on that date will be entitled to vote at the
Meeting. This Proxy Statement and the enclosed form of proxy are first being
sent to shareholders on or about May 15, 1998.
A copy of the Merger Agreement is attached to this Proxy Statement as
Appendix A and is incorporated herein by this reference.
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Certain statements in this Proxy Statement are forward-looking and are
identified by the use of forward-looking words or phrases such as "should,"
"intended," "will be positioned," "expects," "is expected," "are expected,"
"anticipates," "anticipated," and "believes." These forward-looking statements
are based on the Company's current expectations. Because forward-looking
statements involve risks and uncertainties, the Company's actual results could
differ materially from those envisioned in the forward-looking statements. In
addition to factors discussed under "PROPOSAL 1 - THE MERGER" and elsewhere in
this Proxy Statement, among the factors that could cause results to differ
materially from current expectations are: (1) general economic and competitive
conditions in the markets where the Company and I-PAC offer products and
services, (2) changes in the availability or costs of capital, (3) fluctuations
in demand for certain of the Company's or I-PAC's products or services, and (4)
competitive pressure from other products or services.
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VOTING AND PROXIES
Date, Time and Place of the Meeting
The Special Meeting of Shareholders of Photomatrix will be held on June
, 1998 at 1:00 p.m., local time, at 1958 Kellogg Avenue, Carlsbad, California
92009. The independent accountants for Photomatrix, KPMG Peat Marwick LLP, are
expected to be present at the Meeting, will have an opportunity to make a
statement if they desire to do so, and are expected to be able to respond to
appropriate questions.
Record Date, Shareholders Entitled to Vote, Quorum
The record date (the "Record Date") for the Meeting has been fixed by
the Board as of the close of business on April 17, 1998. Only shareholders of
record on the Record Date will be entitled to notice of the meeting and any
adjournment or postponement thereof, and only shareholders of record on the
Record Date will be entitled to vote at the Meeting and any adjournment or
postponement thereof. Each share of Common Stock is entitled to one vote on each
matter to be voted on, provided that California law requires that directors be
elected by cumulative voting, with each share having a number of votes equal to
the number of directorships to be filled, if a proper request for cumulative
voting is received from a shareholder prior to the voting.
As of the Record Date, there were 5,083,017 shares of Common Stock
outstanding and entitled to vote. The presence, either in person or by properly
executed proxy, of the holders of a majority of the shares of Common Stock
outstanding and entitled to vote is necessary to constitute a quorum at the
Meeting.
Proxies and Vote Required
All proxies in the enclosed form that are properly executed and
returned will be voted at the Meeting, or any adjournment or postponement
thereof, in accordance with any specifications thereon; or, if no specifications
are made, such proxies will be voted FOR approval of the Merger Agreement, FOR
authorization of a reverse stock split, FOR the nominees proposed by the Board
of Directors, FOR the adoption of the 1998 Photomatrix Stock Option Plan and FOR
the ratification of the selection of auditors. The execution of a proxy will not
affect a shareholder's right to attend the Meeting and vote in person. A proxy
may be revoked by a shareholder who attends the Meeting and gives oral notice of
his or her intention to vote in person; attendance at the meeting will not, by
itself, revoke a proxy. In addition, a shareholder may revoke a proxy at any
time before it is voted by executing a subsequent proxy or by delivering a
written notice to the Secretary of Photomatrix stating that the proxy is
revoked.
Votes cast by proxy or in person will be tabulated by the Inspector of
Elections (the "Inspector") with the assistance of the Company's transfer agent.
The Inspector will also determine whether a quorum is present. In general, the
affirmative vote of a majority of shares present in person or by proxy at a duly
held meeting at which a quorum is present is required under California law for
approval of proposals presented to shareholders. However, California law also
provides that approval of the Merger and the amendment of the Company's Articles
of Incorporation to effect a reverse stock split will each require the
affirmative vote of a majority of the outstanding shares of the Common Stock of
the Company and that, in the election of directors, the candidates receiving the
highest number of affirmative votes of the shares entitled to vote for them, up
to the number of directors to be elected by such shares, are elected. The
Inspector will treat abstentions as shares that are present and entitled to vote
for purposes of determining the presence of a quorum but will not treat
abstentions as votes in favor of approving any matter submitted to shareholders
for a vote. If a broker indicates on the enclosed proxy that it does not have
discretionary authority as to certain shares to vote on a particular matter,
those shares will not be considered present with regard to that matter. The
Company believes that the tabulation procedures to be followed by the Inspector
are consistent with the requirements of California law concerning the voting of
shares and determination of a quorum.
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Solicitation of Proxies
The expenses of printing and mailing this Proxy Statement will be borne
solely by Photomatrix and are estimated to be approximately $10,000. In addition
to the use of the mails, proxies may be solicited by directors and officers and
regular employees of Photomatrix, without additional remuneration, by personal
interviews, telephone, telegraph or otherwise. Photomatrix may also retain
American Stock Transfer & Trust Company to assist it in soliciting proxies.
Photomatrix may also request brokerage firms, nominees, custodians and
fiduciaries to forward proxy materials to beneficial owners of shares of Common
Stock and will provide reimbursement for their reasonable expenses incurred in
doing so.
PROPOSAL 1 -- THE MERGER
General
The following description of the principal terms of the Merger is
subject to and qualified in its entirety by reference to the terms of the Merger
Agreement, a copy of which is included as Appendix A to this Proxy Statement and
is incorporated herein by this reference. Consummation of the Merger is subject
to the condition, among others, that the Merger Agreement be approved by the
shareholders of Photomatrix.
Upon consummation of the Merger, each outstanding share of Common Stock
held by any I-PAC shareholder will be converted into and represent the right to
receive 570.35294 shares (adjusted proportionately in the event of the exercise
of dissenters' rights) of Photomatrix Common Stock (the "Conversion Amount"),
for a total of 4,848,000 shares of Photomatrix Common Stock. Thereafter, I-PAC
will be operated as a wholly-owned subsidiary of Photomatrix. In addition, I-PAC
shareholders will receive up to 3,744,902 additional shares of Photomatrix
Common Stock if I-PAC achieves certain performance milestones during the twelve
month period commencing July 1, 1998 (see Additional Earn-out Shares, pages 10
through 13) as well as an additional 907,333 shares on a share for share basis
if all outstanding options to purchase Photomatrix Common Stock are exercised.
The foregoing numbers of shares are subject to adjustment in the event that a
reverse stock split, as described herein, is effected. Photomatrix Common Stock
is currently listed on the NASDAQ SmallCap Market. I-PAC is a privately-held
company with four shareholders, and its stock is not and has never been listed
on any stock exchange.
Photomatrix, Inc. Photomatrix, through its subsidiary Photomatrix
Imaging Corporation, develops, manufactures, sells and services high-speed,
high-performance document and aperture card scanners and related services.
Photomatrix's principal executive office is located at 1958 Kellogg Avenue,
Carlsbad, California 92009, and its telephone number is (619) 625-4400. See
"Business of Photomatrix."
I-PAC Manufacturing, Inc. I-PAC is a value added contract manufacturer
of electrical and mechanical assemblies, including complex, multi-layer printed
circuit board assemblies, wire and cable harnesses, molded cables, and complete
system and sub-system assemblies. I-PAC's primary area of specialization is
providing electronic manufacturing services ("EMS") comprised of value added EMS
as well as contract manufacturing. I-PAC's principal executive office is located
at 1958 Kellogg Ave., Carlsbad, California 92009, and its telephone number is
(760) 438-1529. See "Business of I-PAC."
Photomatrix Acquisition, Inc. PAI is a wholly-owned subsidiary of
Photomatrix and has been formed solely for the purpose of facilitating the
Merger Agreement. PAI has no existing business. Its address and telephone number
are the same as those of Photomatrix.
Background of the Merger
In 1996, Photomatrix initiated a search for merger or acquisition
candidates that would (i) expand Photomatrix's manufacturing capability, (2)
provide Photomatrix with a more stable and diversified revenue base, and (3)
enhance Photomatrix' opportunities for growth in the near term. During 1996 and
1997, officers of I-PAC and Photomatrix met at
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various times to discuss the possibility of a merger between Photomatrix and
I-PAC. These discussions were very preliminary, however, as I-PAC had on-going
concerns regarding the ability of Photomatrix to improve its margins so as to
operate on at least a cash neutral basis.
During the period from February 1997 through December 1997, Photomatrix
had discussions regarding possible acquisitions and mergers with seven different
companies, including I-PAC. Photomatrix proposed one non-binding letter of
intent, which was rejected, to one of the companies. Photomatrix also received
proposed non-binding letters of intent from two other companies which placed
values on Photomatrix significantly below the value that was considered
acceptable by its management and Board of Directors. Photomatrix rejected both
offers.
In September 1997, I-PAC and Photomatrix began to explore in more
detail a merger of the two companies with a view to creating a combined entity
that could more aggressively compete in the high-end document and aperture card
scanner market, provide a more stable and diversified revenue base, and more
easily access the working capital needed to expand the combined business. In
these discussions and after visiting the I-PAC offices, management of
Photomatrix came to believe that a merger with I-PAC, with its strong management
team and superior manufacturing expertise, presented a good opportunity for
rapid revenue growth for the combined entity and increased shareholder value.
At the outset of the negotiations between Photomatrix and I-PAC, both
parties agreed that the acquisition would be structured as an exchange of stock.
The negotiations primarily focused on establishing a value for each of the
companies. Photomatrix, which had previously rejected non-binding offers placing
its value in the range of $3-4.5 million, initially took a position that placed
a $9 million valuation on Photomatrix. I-PAC initially took a position that
placed a $15 million valuation on I-PAC and presented Photomatrix with
preliminary due diligence materials, including unaudited historical financial
data, and projected financial data. The projected financial data indicated that
I-PAC would report $7 million in revenues and approximately $850,000 in income
for the year ended December 31, 1997 (including revenues of $2.8 million in the
fourth quarter) and $14 million in revenues and $3.5 million in income for 1998.
In addition, I-PAC possessed cerain licenses to sell proprietary digital video
transmission software, as well as start-up quick-turn printed circuit board
prototype contract manufacturer, that was of interest to Photomatrix.
Photomatrix prepared various post-transaction analyses considering the
historical results and short-term projections of the two companies, as well as
the synergies and redundant cost savings contributed by each company.
Eventually, the two companies came to an agreement that assigned a
post-transaction value for the proforma combined company of approximately $20
million, based on discounting the projections, estimating the redundant cost
savings ans applying average industry multiples. Further, the companies agreed
on a post-transaction value for Photomatrix of $7.7 million (or $1.29 per share
of common stock on a fully-diluted basis) and $12.3 million for I-PAC (or 9.5
million shares of Photomatrix common stock on a fully-diluted basis). The I-PAC
valuation was subject to, among other things, the completion of due diligence.
In addition, the parties agreed that all related party debt on I-PAC's books
would be converted to equity, that Suren Dutia would resign as Chairman of the
Board and Chief Executive Officer of Photomatrix and remain as its President,
that Patrick Moore (a principal shareholder of I-PAC) would be appointed Chief
Executive Officer of Photomatrix, that William Grivas (also a principal
shareholder of I-PAC) would be appointed Chairman of the Board of Photomatrix,
that the post-transaction Photomatrix Board would be comprised of its existing
four Board members, Mr. Grivas, James Hill (a principal shareholder of I-PAC),
and one additional member to be agreed upon by the Board at a future date and
that Photomatrix must maintain its listing on the NASDAQ SmallCap Market as a
condition of the Merger.
<PAGE>
On October 10, 1997, the Board of Directors of Photomatrix approved the
proposed merger in principle and authorized management to complete negotiations
of a transaction between the parties. A non-binding letter of intent was signed
by I-PAC and Photomatrix on October 29, 1997. Subsequent to signing the
non-binding letter of intent with I-PAC, Photomatrix received another proposed
non-binding letter of intent assigning a value of $7.2 million (or $1.20 per
share) for Photomatrix from one of the two companies whose offers it has
previously rejected. Photomatrix rejected the offer. During the negotiation of
the letter of intent, the due diligence investigation of the affairs of I-PAC
and the drafting of the Merger Agreement, management of Photomatrix consulted
with its professional and financial advisors. As a result of the due diligence
investigation, Photomatrix determined that the original terms of the letter of
intent should be modified. Specifically, events occurring during I-PAC's fourth
quarter, including the impact of the Asian crisis upon certain of I-PAC's
customers and the sales of one of I-PAC's major customers, contributed to
uncertainty and a related decrease in revenues. Photomatrix revised its 1998
projections for I-PAC to $6 million in revenues and approximately $400,000 in
income. Additional negotiations resulted in the proposed transaction which is
described in this Proxy Statement. Most significant to these negotiations was
the adjustment of valuation of I-PAC from $12.3 million to $6.3 million, with
the introduction of an accretive earn-out formula (see Additional Earn-out
Shares, pages 10 through 13), whereby I-PAC could increase its valuation during
a defined performance period ("earn-out period") by attaining certain minimum
revenue and gross profit levels. Essentially, if I-PAC achieves the maximum
earn-out milestone and all currently outstanding Photomatrix stock options and
warrants are exercised, the shareholders of I-PAC will receive the 9.5 million
shares of Photomatrix common stock agreed to in the original letter of intent.
There is no assurance that I-PAC will be able to achieve any of the milestones
under the earn-out formula. The parties executed the Merger Agreement on March
16, 1998.
Interests of Ceratin Persons in the Transaction
Mr. Patrick W. Moore, the President and a significant shareholder of
I-PAC, is a member of the Board of Directors of Photomatrix and has served as
such since January of 1991. Photomatrix and I-PAC have not previously had any
business relationship. After the Merger, I-PAC will be operated as a
wholly-owned subsidiary of Photomatrix. Following the Merger,
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Mr. Moore will continue to serve as a Director of Photomatrix and Mr. William L.
Grivas and Mr. James P. Hill, who are also principal shareholders of I-PAC, will
be elected to the Board. Upon the effective date of the Merger, Mr. Moore, Mr.
Grivas and Mr. Hill will receive 1,598,239, 1,598,239, and 1,549,334 shares,
respectively, of Photomatrix Common Stock. Depending upon the results of I-PAC's
operations during the earn-out period and the number of outstanding Photomatrix
options which are exercised, Mr. Moore, Mr. Grivas and Mr. Hill could receive up
to an additional 1,533,623, 1,533,623, and 1,486,695 shares, respectively, of
Photomatrix Common Stock as a consequence of the Merger.
Recommendation of the Board - Business Reasons for Merger
The Board of Directors of Photomatrix (the "Board") recommends approval
of the Merger as being in the best interests of all of the shareholders of
Photomatrix. The recommendation of the Board is the product of the business
judgment of its members, exercised in light of their fiduciary duty to all
shareholders. The material factors considered by the Board in reaching this
decision are set forth below. The Board did not consider other factors,
including potentially negative factors, in making its determination to recommend
approval of the Merger.
1. Management and the Board believe the acquisition of I-PAC will
result in significant improvements in operating results as a consequence of the
elimination of redundant facilities and services and efficiencies arising from
I-PAC's superior manufacturing experience and processes and the anticipated
increased production volume and capabilities of the combined companies.
2. Management and the Board believe the acquisition of I-PAC will
provide Photomatrix with a more stable, diversified, and profitable revenue
base. Photomatrix markets and sells high-end capital equipment, and accordingly
its sales are subject to significant volatility resulting from economic
conditions and changes. Management and the Board believe that the
diversification resulting from the acquisition of I-PAC will stabilize
Photomatrix's cash flow. Additionally, the business of I-PAC generates higher
operating margins than that of Photomatrix, which, as the business of I-PAC is
expanded into new markets, should improve the overall profitability of the
combined companies.
3. Management and the Board believe the structure of the Merger and a
recent decline in the market price of shares of Photomatrix Common Stock enhance
the desirability of the Merger from the perspective of the shareholders of
Photomatrix. Although the Board did not obtain a formal independent valuation of
I-PAC, Photomatrix and I-PAC agreed to use a post-transaction value of $1.29 per
share of Photomatrix Common Stock in determining the number of shares of
Photomatrix Common Stock that the shareholders of I-PAC will receive in the
Merger. This results in a valuation of $6,254,000. The number of shares to be
issued to the I-PAC shareholders will not vary with the market price of
Photomatrix Common Stock. The closing bid price of a share of Photomatrix Common
Stock at the time the parties signed the Letter of Intent was $0.40625. As of
May 4, 1998, the closing bid price of a share of Photomatrix Common Stock was
$1.0625. Fixing the number of shares of Photomatrix Common Stock to be issued in
the Merger has had the effect of preventing dilution to the Photomatrix
shareholders as a consequence of subsequent reductions in the market price of
Photomatrix Common Stock. If the market price for Photomatrix Common Stock stays
below $1.29 per share through the closing of the Merger, Photomatrix will
acquire I-PAC for an effective purchase price less than that originally
negotiated.
4. Management and the Board believe that the added manufacturing
experience of I-PAC will provide the Company with opportunities to provide
contract manufacturing services to the imaging industry.
5. I-PAC is a licensee of proprietary video transmission software
technology that has on-going development potential and possible application in a
number of markets. I-PAC expects that it will address these markets, which
include commercial and residential security telemedicine, video
teleconferencing, video editing and other related areas, after the Merger.
Additionally, I-PAC is currently negotiating with the licensor to manufacture
products based on this technology for the licensor of the technology. While
there can be no assurance that these efforts will be successful, Management and
the Photomatrix Board believe that the range of opportunities to expand the
business of I-PAC reflect favorably on its overall growth potential.
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6. Management and the Board believe that the growth prospects of I-PAC
are strong due to its existing customer base, its growth strategy and the growth
prospects of the contract manufacturing industry.
7. Although the Company has not identified any additional acquisition
candidate, management and the Board believe the Merger will enhance the ability
of the Company to grow through acquisition. Specifically, the Company believes
the combined entity will be attractive to privately-held technology product
companies where all of the manufacturing requirements can be met by I-PAC at
significant cost reductions and economies of scale and where the owner of the
company are interested in the liquidity offered by a publicly traded stock.
8. The Board has obtained the opinion of Fredericks, Shields & Co. as
to the fairness of the Merger, from a financial point of view, to the
shareholders of Photomatrix.
9. As a result of the merger, the Chairman of the Board and Chief
Executive Officer will be major shareholders of the Company deriving a
significant portion of their compensation from their efforts to increase the
value of the Company. Management and the Board believe that this motivation will
reflect favorably on the growth potential of Photomatrix.
In view of the wide variety of factors considered in connection with
the evaluation of the Merger, the Board did not find it practicable to, and did
not, quantify or otherwise assign relative weights to the specific factors
considered in reaching its decision. However, of primary importance to the Board
was its knowledge of the business and prospects of I-PAC.
The Board of Directors unanimously recommends that the shareholders
vote FOR approval and adoption of the Merger Agreement. Shareholders should note
that Patrick W. Moore has a conflict of interest in recommending this
transaction, in that he is the President and a significant shareholder of I-PAC.
See "The Merger -- Conflict of Interest of Patrick Moore."
IF HOLDERS OF MORE THAN TEN PERCENT OF THE OUTSTANDING SHARES OF
PHOTOMATRIX COMMON STOCK DO NOT VOTE IN FAVOR OF THE MERGER AND EXERCISE THEIR
DISSENTERS' RIGHTS, IT IS LIKELY THAT THE COMPANY'S BOARD OF DIRECTORS WILL
DECIDE TO TERMINATE THE MERGER. If the holders of more than ten percent of the
outstanding shares of Photomatrix Common Stock exercise dissenters' rights, the
Company would be required to expend in excess of $200,000 in cash to purchase
the dissenters' shares following the close of the Merger. The Board of Directors
would probably decide that to make such a large cash outlay to complete the
transaction would not be in the best interests of Photomatrix. In that event,
although the Merger would not be consummated, Photomatrix would nevertheless pay
approximately $150,000 in Merger expenses without obtaining the benefits
thereof. See "The Merger -- Conditions and Terms of the Merger."
Opinion of Fredericks, Shields & Co., LLC
The following description of the opinion of Fredericks, Shields & Co.
("FSC") contains forward-looking information. Without limiting the generality of
the foregoing, the projections and forecasts furnished to FSC were prepared by
the respective managements of Photomatrix and I-PAC. Photomatrix does not
publicly disclose internal management projections of the type provided to FSC in
connection with its analyses of the Merger, and such projections were not
prepared with a view toward public disclosure. These projections were based on
numerous variables and assumptions that are inherently uncertain and may be
beyond the control of Management, including, without limitation, factors related
to general economic and competitive conditions and prevailing interest rates.
Accordingly, actual results could vary significantly from those set forth in the
opinion.
Photomatrix retained FSC to act as its financial advisor and, in
connection with the Merger, to render an opinion to the Photomatrix Board as to
whether the merger consideration to be paid to the shareholders of I-PAC is
fair, from a financial point of view, to the shareholders of Photomatrix. On
March 16, 1998, FSC rendered its written opinion to the Photomatrix Board that,
as of such date and based upon and subject to certain considerations and
assumptions, the merger consideration to be paid to the shareholders of I-PAC as
specified in the Merger Agreement was fair, from a financial point
7
<PAGE>
of view, to the shareholders of Photomatrix. References herein to the "FSC
Opinion" or similar references refer to the written opinion of FSC dated March
16, 1998. The full text of the FSC Opinion, which sets forth the assumptions
made, matters considered and scope and limitations of the review undertaken and
procedures followed by FSC in rendering its opinion, is attached to this Proxy
Statement as Appendix B hereto and is incorporated herein by this reference. The
following description of the FSC Opinion is qualified in its entirety by
reference to the full text of the opinion. Photomatrix shareholders are urged to
read carefully the opinion of FSC in its entirety. No limitations were imposed
by Photomatrix on FSC with respect to the investigations made or procedures
followed in rendering its opinion.
In conducting its analysis and arriving at its opinion, FSC reviewed
and analyzed, among other things: (i) the Merger Agreement and the specific
terms of the Merger; (ii) unaudited financial summaries of I-PAC for the years
ended December 31, 1994 and December 31, 1995 and audited financial statements
of I-PAC for the year ended December 31, 1996 and 1997; (iii) certain financial
and operating information regarding the business, operations and prospects of
I-PAC, including forecasts and projections, provided to FSC by the management of
I-PAC; (iv) audited financial statements of Photomatrix for the years ending
March 31, 1995 through March 31, 1997, and unaudited quarterly financial
statements of Photomatrix for the periods ending June 30, 1997, September 30,
1997, and December 31, 1997; (v) certain financial and operating information
regarding the business, operations and prospects of Photomatrix, including
forecasts and projections, provided to FSC by the management of Photomatrix;
(vi) a comparison of the historical and projected financial results and
financial condition of I-PAC with those of other companies and businesses that
FSC deemed relevant; and (vii) a comparison of the financial terms of the Merger
with the financial terms of certain other recent transactions that FSC deemed
relevant. In addition, in arriving at its opinion, FSC also held discussions
with the management of each of I-PAC and Photomatrix as well as concerning their
businesses, operations, assets, financial conditions and prospects, as well as
the prospects of Photomatrix after the Merger has been consummated. FSC also
undertook such other studies, analyses and investigations as it deemed
appropriate.
In arriving at its opinion, although FSC visited certain properties and
facilities of Photomatrix and I-PAC, FSC did not make, obtain or assume any
responsibility for any independent evaluation or appraisal of such properties
and facilities or of the assets and liabilities (contingent or otherwise) of
Photomatrix or I-PAC. FSC assumed and relied upon the accuracy and completeness
of the financial and other information supplied to or otherwise used by it in
arriving at its opinion and did not attempt to verify independently, or
undertake any obligation to verify, such information. FSC further relied upon
the assurances of the managements of I-PAC and Photomatrix that they were not
aware of any facts that would make such information inaccurate or misleading. In
addition, FSC assumed that the forecasts and projections provided to FSC
represented the best currently available estimates and judgment of I-PAC's and
Photomatrix's managements as to the future financial condition and results of
operations of I-PAC and Photomatrix, respectively, and assumed that such
forecasts and projections had been reasonably prepared based on such currently
available estimates and judgments. FSC assumed no responsibility for and
expressed no view as to such forecasts and projections or the assumptions on
which they were based. FSC further assumed, with the consent of Photomatrix,
that the Merger will qualify as a tax-free reorganization within the meaning of
Section 368(a) of the Internal Revenue Code, as amended, and that, for
accounting purposes, the Merger will be accounted for as a purchase. FSC also
assumed that the Merger described in the Merger Agreement would be consummated
on the terms set forth therein, without waiver of any such terms.
FSC also took into account its assessment of general economic, market
and financial conditions and its experience in similar transactions, as well as
its experience in securities valuation in general. FSC noted that its opinion
was necessarily based upon conditions as they currently existed and could be
evaluated on the date of its opinion.
FSC did not express any view as to what the value of Photomatrix's
Common Stock will be when issued to I-PAC shareholders pursuant to the Merger,
or the price at which Photomatrix's Common Stock will trade prior to or
subsequent to the closing of the Merger. FSC's opinion is for the benefit and
use of the Photomatrix Board in its consideration of the Merger. The opinion
does not constitute a recommendation of the Merger over any alternative
transactions that may be available to Photomatrix and does not address the
underlying business decision of the Photomatrix Board to proceed with or effect
the Merger. Furthermore, the opinion does not constitute a recommendation by FSC
to any shareholder to vote in favor of the Merger.
8
<PAGE>
The following is a brief summary of the financial analyses used by FSC
in rendering its opinion. Such summary does not purport to be a complete
description of all of the analyses performed by, or all the factors considered
by, FSC in connection with its opinion.
Analysis of Selected Publicly Traded Companies - Using publicly
available information, FSC compared certain financial information and operating
statistics of I-PAC with similar financial information and operating statistics
of Altron Incorporated, Benchmark Electronics, Inc., Continental Circuits Corp.,
IEC Electronics Corp., Merix Corporation, Plexus Corp., Praegitzer Industries,
Inc., and Sigmatron International, Inc. (collectively to be referred to herein
as the "I-PAC Comparables"). Such information and operating statistics included,
among other things, certain historical profitability margins, certain historical
and projected growth rates, market values of equity, total market capitalization
values and implied multiples of historical and estimated revenues, earnings
before interest, taxes, depreciation and amortization ("EBITDA") and earnings
per share. Among other things, this analysis indicated that the implied
multiples of the I-PAC Comparables were as follows: a) total market
capitalization as a multiple of trailing twelve months revenues ranged from 0.24
x to 1.42x, with a median of 0.77x and an average of 0.80x (applying these
multiples to estimated I-PAC results would indicate a range from approximately
$1.3 million to $7.7 million, with a median of approximately $4.2 million and an
average of approximately $4.4 million); b) total market capitalization as a
multiple of trailing twelve months EBITDA ranged from 2.99x to 9.68x, with a
median of 7.66x and an average of 7.16x (applying these multiples to estimated
I-PAC results would indicate a range from approximately $3.0 million to $9.9
million, with a median of approximately $7.8 million and an average of
approximately $7.3 million); c) total market capitalization as a multiple of
estimated calender 1997 earnings per share ranged from 8.89x to 27.13x, with a
median of 17.94x and an average of 18.05x (applying these multiples to estimated
I-PAC results would indicate a range from approximately $3.2 million to $9.8
million, with a median of approximately $6.5 million and an average of
approximately $6.5 million); and d) total market capitalization as a multiple of
estimated 1998 earnings per share ranged from 7.63x to 18.01x, with a median of
15.48x and an average of 14.02x (applying these multiples to estimated I-PAC
results would indicate a range from approximately $3.1 million to $7.4 million,
with a median of approximately $6.3 million and an average of approximately $5.7
million). All implied financial multiples were based on closing market prices on
February 23, 1998.
Analysis of Selected Acquisitions - FSC reviewed 20 selected merger and
acquisition transaction deemed relevant by FSC. FSC began the selection process
by compiling a list of publicly traded manufacturers of electronic products. It
then analyzed the list to determine which companies derived a significant
portion of their revenues from manufacturing such products for third parties on
a contract basis (and could be considered "contract electronics manufacturers,"
and similar in that regard to I-PAC). The remaining publicly traded companies
were analyzed with regard to the types of products they manufactured, revenue
size, and operating characteristics. FSC then chose companies, that in its
judgment, were most analogous to I-PAC.
Among other things, FSC analyzed the purchase price, estimated trailing
twelve month revenues, and the estimated trailing twelve month earnings based on
certain public information for each of the selected acquisitions. This analysis
indicated that the implied financial multiples of the selected acquisitions were
as follows: a) total purchase price as a multiple of the trailing twelve months
revenues ranged from 0.23x to 1.80x, with a median of 0.49x and an average of
0.68x (applying these multiples to estimated I-PAC results would indicate a
range from approximately $1.3 million to $9.8 million, with a median of
approximately $2.7 million and an average of approximately $3.7 million); and b)
total purchase price as a multiple of the trailing twelve months earnings ranged
from 8.48x to 73.28x, with a median of 16.45x and an average of 28.66x (applying
these multiples to estimated I-PAC results would indicate a range from
approximately $3.1 million to $26.4 million, with a median of approximately $5.9
million and an average of approximately $10.3 million).
Pro Forma Merger Analysis - FSC analyzed certain pro forma financial
effects resulting from the Merger, including the impact of the Merger on
Photomatrix' projected earnings per share for calendar year 1998. Based on the
estimates of the respective managements of I-PAC and Photomatrix and the
exchange ratio, and assuming that the Merger will be treated as a purchase for
accounting purposes, the results of the proforma merger analysis suggested that,
without consideration of any potential operating synergies that may result from
the Merger, the Merger will be accretive to Photomatrix's earnings per share in
calendar year 1998. For the purposes of this analysis FSC used the following
estimates for calendar year 1998: estimated Photomatrix revenues of
approximately $9.5 million, estimated Photomatrix earnings of approximately
9
<PAGE>
$0.11 million ($.01 per share), estimated I-PAC revenues of approximately $6.0
million, and estimated I-PAC earnings of approximately $0.41 million ($.04 per
share). The actual results achieved by the combined company could vary from
projected results, and the variations could be material.
FSC believes that its analyses must be considered in the aggregate, and
that selecting portions of its analyses or the factors considered by it without
considering all factors and analyses considered by FSC could create a misleading
view of the processes underlying its opinion. The preparation of a fairness
opinion is a complex process and is not necessarily susceptible to partial
analysis or summary description. In arriving at its opinion, FSC did not
attribute any particular weight to any open analysis or factor considered by it,
but rather made qualitative judgments as to the significance and relevance of
each analysis and factor. In its analyses, FSC made numerous implicit
assumptions about industry and general economic conditions and other matters,
many of which are beyond the control of Photomatrix or I-PAC. Any estimates
contained therein are not necessarily indicative of future results or actual
values, which may be significantly more or less favorable than such estimates.
Estimates of values of companies do not purport to be appraisals or necessarily
reflect the prices at which companies may actually be sold. Because such
estimates are inherently subject to uncertainty, none of Photomatrix, I-PAC, FSC
or any other person assumes responsibility for their accuracy.
FSC is an investment banking firm engaged in, among other things, the
valuation of businesses and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes.
In connection with selecting an expert for the purposes of rendering a
fairness opinion, the Company received the names of three local investment
banking firms from its legal counsel. All three firms were contacted and
interviewed. The Company solicited and received proposals from each of the three
firms, and selected the firm of Fredericks, Shields & Co. Pursuant to the terms
of an engagement letter, Photomatrix has agreed to pay FSC an aggregate of
$30,000 for services provided to Photomatrix in connection with the Merger, of
which the total represents the fee for rendering its opinion. Photomatrix also
has agreed to reimburse FSC for its out-of-pocket expenses, including reasonable
fees and expenses for its legal counsel, and to indemnify FSC and certain
related parties against certain liabilities, including liabilities under the
federal securities laws, arising out of or in connection with the services
rendered by FSC under its engagement letter. The terms of the fee arrangement
with FSC were negotiated at arm's length between Photomatrix's management and
FSC.
Conditions and Terms of the Merger
The following is a brief summary of the principal terms of the Merger
Agreement and is subject to and qualified in its entirety by reference to the
Merger Agreement, a copy of which is included as Appendix A to this Proxy
Statement.
Photomatrix' shareholders should review the Merger Agreement in its entirety.
Consummation of the Merger. Upon consummation of the Merger, the
outstanding shares of I-PAC Common Stock will be exchanged for 4,848,000 shares
(adjusted proportionately in the event of the exercise of dissenters' rights) of
Photomatrix Common Stock, and thereafter I-PAC will be operated as a
wholly-owned subsidiary of Photomatrix.
Additional Earn-out Shares. In addition to the shares to be issued to
the I-PAC shareholders upon consummation of the Merger, additional shares may be
issued to the I-PAC shareholders if I-PAC meets certain performance criteria
during the 12-month period commencing July 1, 1998 or Photomatrix issues shares
of its Common Stock upon exercise of any of the 907,333 options and warrants to
purchase shares of Photomatrix Common Stock which were outstanding as of March
16, 1998, the date of the Merger Agreement. In the first case, additional shares
of Photomatrix Common Stock would be issued to the I-PAC shareholders in
accordance with the following table, which sets forth the number of additional
Photomatrix shares to be issued at various levels of financial performance by
I-PAC during the 12 month period commencing July 1, 1998 and the various levels
of performance which I-PAC would need to achieve in order to earn the additional
shares. In the second case, the shareholders of I-PAC would receive additional
shares of common stock on a share-for-share basis as, when, and if Photomatrix
issues shares of its common stock upon the exercise of options and warrants
outstanding as of the date of the Merger Agreement.
10
<PAGE>
<TABLE>
Additional
hotomatrix
Shares Alternative 1 Alternative 2
<S> <C> <C> <C>
934,834 Gross Revenues (as defined by the Merger Gross Revenues (as defined by the
Agreement) between $7,000,000 and Merger Agreement)of more than
$7,500,000 and a Gross Profit Margin (as $8,000,000 and Gross Profit (as
defined by the Merger Agreement) of at defined by the Merger Agreement) of
least 31.7% more than $2,275,000
1,403,234 Gross Revenues between $7,500,001 and Gross Revenues of more than
$8,000,000 and Gross Profit Margin of at $8,000,000 and Gross Profit of more
least 31.5% than $2,430,000
1,871,633 Gross Revenues between $8,000,001 and Gross Revenues of more than
$8,500,000 and Gross Profit Margin of at $8,500,000 and Gross Profit of more
least 31.3% than $2,580,000
2,338,101 Gross Revenues between $8,500,001 and Gross Revenues of more than
$9,000,000 and a Gross Profit Margin of $8,000,000 and Gross Profit of more
at least 31.2% than $2,730,000
2,804,803 Gross Revenues between $9,000,001 and Gross Revenues of more than
$9,500,000 and a Gross Profit Margin of $8,000,000 and Gross Profit of more
at least 31.1% than $2,890,000
3,274,970 Gross Revenues between $9,500,001 and Gross Revenues of more than
$10,000,000 and a Gross Profit Margin of $8,000,000 and Gross Profit of more
at least 31.0% than $3,040,000
3,744,902 Gross Revenues of more than $10,000,001 Gross Revenues of more than
and a Gross Profit Margin of at least $8,000,000 and Gross Profit of more
30.9% than $3,190,000
</TABLE>
In the event that I-PAC satisfies the performance criteria set forth
above and the I-PAC shareholders therefore receive additional shares of
Photomatrix Common Stock, Management of Photomatrix expects that the effects of
the earnout will be increasingly accretive to the earnings per share of the
combined entities as the performance of I-PAC results in the issuance of more
shares to the I-PAC shareholders. The following tables demonstrate the effect of
the earnout at the minimum and maximum levels of performance by I-PAC for
purposes of the earnout formula. The sole purpose of this data is to disclose
the accretive effect of the earnout formula on earnings per share. It is not
intended to be, and should not be interpreted as, a projection of the financial
results of either I-PAC or Photomatrix during the earnout period, and there can
be no assurance that the stated results, or any other results, will be achieved.
In addition, such information has not been examined or compiled by the
independent auditors of either I-PAC or Photomatrix.
The first table sets forth the potential unaudited combined results of
Photomatrix at the lowest level of I-PAC performance which results in the
issuance of earnout shares. With regard to Photomatrix' anticipated results, the
following chart assumes no significant change from the results of the past two
years, other than operating cost reductions either already implemented and in
place and redundant cost reductions (such as facilities related costs and
duplicate operational costs) which should be effected by the Merger.
(000's omitted, except for earnings per share)
11
<PAGE>
<TABLE>
Redundant Projected
I-PAC Photomatrix Cost Savings Combined
(unaudited) (unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue $ 7,000 $ 9,000 $ 16,000
Gross Profit -$ $ 2,219 $ 3,303 $ 257(3) $ 5,779
-% 31.7% 36.7%
Selling, G&A $ (1,202)(1) $(2,759) $ 314(4) $ (3,647)
Interest Expense $ (279)(2) $ (24) -- $ (303)
R&D -- $ (800) $ 36(5) $ (764)
------------ ----------- ----------- ------------
Operating Profit (Loss) $ 738 $ (280) $ 607 $ 1,065
Tax Provision $ (277)(6)
------------
Net Income $ 788
Outstanding Shares:
No options exercised(7) 10,885
All options exercised(8) 12,679
Earnings Per Share:
No options exercised $.07
All options exercised $.06
</TABLE>
The following table sets forth the anticipated combined results of
Photomatrix at the highest level of I-PAC performance identified in the earn-out
formula. With regard to Photomatrix' anticipated results, the following chart
assumes no significant change from the results of the past two years, other than
operating cost reductions either already implemented and in place and redundant
cost reductions (such as facilities related costs and duplicate operational
costs) which should be effected by the Merger.
(000's omitted, except for earnings per share)
<TABLE>
Redundant Projected
I-PAC Photomatrix Cost Savings Combined
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue $ 8,000 $ 9,000 $ 17,000
Gross Profit -$ $ 3,190 $ 3,303 $ 257(3) $ 6,750
-% 39.88% 36.7%
Selling, G&A $(1,374)(1) $(2,759) $ 259(4) $ (3,874)
Interest Expense $ (295)(2) $ (24) $ (319)
R&D -- $ (800) $ 36(5) $ (764)
----------- ---------- ---------- ----------
Operating Profit (Loss) $ 1,521 $ (280) $ 626 $ 1,793
Tax Provision (6) $ (587)(6)
-----------
Net Income $ 1,206
============
Outstanding Shares:
No options exercised (7) 13,676
All options exercised (8) 15,490
Earnings Per Share:
No options exercised $ .09
All options exercised $ .08
</TABLE>
12
<PAGE>
(1) I-PAC Selling, G&A costs, as shown, are assumed to be entirely
variable, representing 17.17% of revenues, the same percentage
experienced by I-PAC for the year ended December 31, 1997. Management
does not believe that such costs are completely variable in nature, but
instead are comprised of both fixed and variable costs.
(2) I-PAC Interest Expense, as shown, is comprised of two components:
mortgage related interest expense, which is fixed at approximately
$170,000 per year, and all other interest expense, which is estimated
at 1.56% of revenues, the same percentage experienced by I-PAC for the
year ended December 31, 1997.
(3) Redundant cost savings in Gross Profit are based on facilities costs
totaling $192,000, related to the current Photomatrix location in San
Diego, as well as redundant operating personnel costs, totaling
$65,000, which will be eliminated as result of consolidating the
Photomatrix operations into the existing I-PAC facility.
(4) Redundant cost savings anticipated in Selling, G&A are based on
facilities costs, totaling $122,000, related to the current Photomatrix
location in San Diego, as well as redundant operating personnel costs,
totaling $170,000, which will be eliminated as a result of
consolidating the Photomatrix operations into the existing I-PAC
facility, together with related party costs incurred by I-PAC, totaling
$115,000, which, based on agreements between the parties, will be
eliminated after the close of the Merger. These amounts are offset by
an increase in goodwill amortization of $93,000 per year for lowest
level performance milestone and $148,000 per year for the highest level
of performance milestone (See Note 9).
(5) Redundant cost savings anticipated in R&D are based on facilities
costs, totaling $36,000, related to the current Photomatrix location in
San Diego, which will be eliminated as a result of consolidating the
Photomatrix operations into the existing I-PAC facility.
(6) The anticipated tax provision reflects an estimated 40% tax rate less
approximately $400,000 of annual NOL benefit.
(7) Outstanding shares with no options exercised are comprised of (1) the
exiting 5,083,017 Photomatrix common shares outstanding, (2) the
4,848,000 shares to be exchanged for I-PAC shares at the Effective Time
and (3) the additional shares issuable to I-PAC shareholders as a
result of the achievement of performance milestones.
(8) Outstanding shares with all options exercised are comprised of (1) the
existing 5,083,017 Photomatrix common shares outstanding, (2) the
4,848,000 shares to be exchanged for I-PAC shares at the Effective
Time, (3) the additional shares issuable to I-PAC shareholders as a
result of the achievement of performance milestones, (4) 907,333 common
shares issued as a result of the exercise of currently outstanding
Photomatrix stock options and warrants and (5) 907,333 shares issuable
to I-PAC shareholders under the terms of the Merger Agreement in the
event that the outstanding Photomatrix options are exercised. Although
the issuance of additional shares to the I-PAC shareholders upon the
exercise of outstanding options would be dilutive to earnings per
share, it would not be dilutive to the value ascribed to the
Photomatrix shares in the Merger, in that the exchange ratio was
determined on a fully-diluted basis.
(9) Additional goodwill would be recognized as a result of the issuance of
additional shares. Such goodwill would be calculated at the fair value
of stock issued at the time of award. This table assumes a $0.40 per
share value with goodwill amortized over a 20-year period. The table
further assumes that only the 4,848,000 shares constituting the basic
merger consideration and the Earn-Out Shares are issued.
Board and Officer Appointment. The Merger Agreement requires
Photomatrix to appoint Mr. William L. Grivas and Mr. James P. Hill, both major
shareholders of I-PAC, to the Photomatrix Board of Directors. Following the
Merger, Photomatrix anticipates the Board of Directors of Photomatrix will have
seven authorized positions and that the members of Board will be Mr. Hill and
Mr. Grivas, as well as the current members of the Board: Patrick W. Moore (a
major shareholder and the President of I-PAC), Suren G. Dutia, Ira H. Sharp, and
John F. Staley, with one position to be filled in the future. The Merger
Agreement also provides that, effective as of the closing of the Merger, Suren
G. Dutia will resign as the Chairman and Chief Executive Officer of Photomatrix
and retain the title of President of Photomatrix, William L. Grivas will be
appointed the Chairman of the Board of Photomatrix, and Patrick W. Moore will be
appointed the Chief Executive Officer of Photomatrix.
Conversion of Related Party Debt. The Merger Agreement requires that
all but $25,000 of the approximately $448,000 owed by I-PAC to its shareholders
and their affiliates be converted to equity in I-PAC prior to the Effective
Time.
13
<PAGE>
Effective Time of the Merger. If approved by the shareholders, the
Merger will become effective when the Agreement of Merger and certain related
documents are filed in the office of the Secretary of State of the State of
California (the "Effective Time"), which is anticipated to be approximately 30
days after the Meeting, subject to the fulfillment or waiver of all conditions
to the Merger.
Conditions of Merger and Termination. The respective obligations of
each party to effect the Merger are subject to the satisfaction of various
conditions, including: a) the absence of any material adverse change in the
assets, liabilities, personnel, financial conditions or prospects of the
respective companies, b) the approval of the Merger by the respective Boards of
Directors and shareholders of the Company and I-PAC, c) the receipt of all
necessary or appropriate consents, waivers and approvals of third parties, d)
the absence of a significant number of dissenting shareholders, and e) the
continued listing of the Common Stock of Photomatrix on the NASDAQ SmallCap
Market.
The Merger Agreement may be terminated and the Merger abandoned (i) by
the mutual consent of Photomatrix and I-PAC, (ii) by either Photomatrix or I-PAC
if there has been a material breach of any provision of the Merger Agreement by
the other party which is not cured within 5 days after the breaching party has
been notified thereof, (iii) by either Photomatrix or I-PAC if the conditions to
their respective obligations to complete the Merger have not been completed by
June 30, 1998, (iv) by either of Photomatrix or I-PAC if the Merger has not
occurred on or before June 30, 1998, or (v) by Photomatrix if it accepts a
superior unsolicited takeover proposal and pays I-PAC a $250,000 termination
fee.
Exclusive Dealing. The Merger Agreement provides that neither company
shall, directly or indirectly, (i) solicit, initiate, or encourage, or take any
other action designed or reasonably likely to facilitate, any inquiries or the
making of any proposal which constitutes, or may reasonably be expected to lead
to, a takeover proposal of that company or (ii) participate in any discussions
or negotiations regarding any such proposal, provided that, if the Board of
Directors of Photomatrix determines in good faith, after consultation with
outside counsel, that it is necessary to do so in order to comply with its
fiduciary duties to Photomatrix's shareholders under applicable laws,
Photomatrix may, in response to a takeover proposal concerning Photomatrix which
was not solicited by Photomatrix, (i) furnish information with respect to
Photomatrix to the company making the proposal and (ii) participate in
negotiations regarding such takeover proposal.
Regulatory Requirements. There are no federal or state regulatory
requirements which must be complied with or approvals which must be obtained in
connection with the effectiveness of the Merger Agreement.
Conflict of Interest of Patrick W. Moore
Mr. Moore is a Director of Photomatrix. He is also the President of
I-PAC. Upon consummation of the Merger, Mr. Moore will be entitled to receive
1,598,239 shares of Photomatrix Common Stock in exchange for 2802.2 shares of
I-PAC Common Stock owned by him and may receive up to an additional 1,533,623
shares of Photomatrix Common Stock if the financial performance of I-PAC during
the 12 months commencing July 1, 1998 meets certain milestones and/or if
outstanding options or warrants to acquire Photomatrix Common Stock are
exercised. In all discussions concerning the proposed merger, Mr. Moore has
acted solely on behalf of I-PAC and has abstained from participating as a
director of Photomatrix.
Federal Income Tax Consequences
The following summary is a general discussion of certain expected
federal income tax consequences of the Merger to Photomatrix and does not deal
with any aspect of state, local or foreign tax laws. The Merger is intended to
constitute a tax-free reorganization within the meaning of Sections 368(a)(1)(A)
and 368(a)(2)(E) of the Internal Revenue Code of 1986 (the "Code"). Neither
Photomatrix nor I-PAC has sought or will seek a ruling from the Internal Revenue
Service concerning the federal income tax consequences of the Merger. If the
Merger does constitute a reorganization within the meaning of Sections
368(a)(1)(A) and 368(a)(2)(E) of the Code, it will not result in the recognition
of income by Photomatrix or I-PAC. In such case, I-PAC's tax basis in its assets
and liabilities would not be affected by the Merger.
14
<PAGE>
Accounting Treatment of the Merger
The Merger will be accounted for as a purchase of I-PAC by the Company
for accounting and financial reporting purposes. Under the purchase method of
accounting, upon the closing of the Merger, I-PAC's results of operations will
be combined with those of the Company, and I-PAC's assets and liabilities will
be recorded on the Company's books at their respective fair values at the
Effective Time. A determination of the fair value of I-PAC's assets and
liabilities will be made in order to allocate the purchase price 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 the exercise of Photomatrix outstanding options and warrants will be
treated in accordance with APB 16, in that any additional shares will be treated
as additional costs of the acquired enterprise and amortized accordingly over
the benefit period. The expected excess of the value of the consideration over
the fair value of I-PAC's net assets will be amortized through charges to
earnings over an anticipated period of twenty-years following the Effective
Time. See "Unaudited Pro Forma Combined Financial Statements."
Management Following Merger
The Directors of the Company immediately prior to the Effective Time
will continue to serve as Directors of the Company and will be joined by Mr.
Grivas, who will also assume the responsibilities of Chairman of the Board, and
Mr. Hill. See Proposal 3 - Election of Directors
The executive officers of the Company will be as follows:
William L. Grivas, age 43, Chairman of the Board.
Patrick W. Moore, age 50, Chief Executive Officer.
Suren G. Dutia, age 55, President
Roy L. Gayhart, age 47, Chief Financial Officer
Strategy After Merger
Immediately following the Merger, the Company plans to complete the
consolidation of its Photomatrix operation with the I-PAC operation in the
facility owned by I-PAC in Carlsbad, California. Management anticipates that
this move will result in cost reductions as a result of assigning the lease of,
or sub-leasing, its facility in San Diego, as well as streamlining its
operations by utilizing the existing manufacturing resources of I-PAC. The
Company anticipates that the cost savings will arise in such areas as the
elimination of redundant functions, production efficiencies, interest expense
reductions, purchasing efficiencies and the reduction of related party expenses.
Management intends to implement an aggressive cost reduction program immediately
following the Merger.
Following the Merger, the Company plans to attempt to establish and
maintain profitability, while aggressively pursuing growth opportunities. This
growth strategy will be targeted upon new acquisitions as well as expansion of
its core customer base.
I-PAC will strive to expand its customer base in the low to medium
volume, high-end commercial and industrial markets through its ongoing sales
efforts. In addition, it will pursue the acquisition of additional contract
manufacturing operations and the expansion of its I-PAC Express operations.
I-PAC Express specializes in quick-turn prototype manufacturing and assembly.
I-PAC Express is intended to be a growth and profit growth center for I-PAC, as
well as an additional marketing tool through which I-PAC may identify and secure
new, full-scale production customers. The ability to migrate a customer's
product from the prototype to the production stage is an important value added
service that I-PAC seeks to provide. I-PAC will also seek to support growth in
its contract manufacturing business by increasing its value added services to
customers by enhancing its engineering and test support functions. Management
believes that the engineering
15
<PAGE>
and R&D resources of Photomatrix can improve I-PAC's ability to provide such
services. Management further believes the Merger will create new opportunities
to provide contract manufacturing services to the imaging industry.
In addition to growth of its contract manufacturing operations, the
Company will pursue the acquisition of technology product companies which, like
Photomatrix, may have their manufacturing requirements met by I-PAC's existing
manufacturing capabilities. This strategy allows the technology company to focus
on engineering and marketing, with I-PAC's achievement of manufacturing
efficiencies improving operating margins. It is anticipated that any such
acquisitions may occur first in the technology and product fields of image and
document capture and digital video capture, storage and transmission.
I-PAC also possesses certain licenses for the development, manufacture
and sale of proprietary video capture, storage and transmission software
technology that has ongoing development potential and application in a wide
range of existing and new markets, including video surveillance, telemedicine,
video editing, video teleconferencing and various video broadcast applications.
These video compression and storage technologies may enhance Photomatrix's own
product capabilities, as well as enabling new product applications to be
developed by the Company in the fields identified.
Dissenters' Rights
Each holder of Photomatrix Common Stock on the Record Date may, by
complying with Chapter 13 of the General Corporation Law of the State of
California, require Photomatrix to purchase for cash at their fair market value
the shares of Photomatrix Common Stock owned by such shareholder which are
dissenting shares. Fair market value for this purpose is determined as of the
day before the first announcement of the terms of the Merger, excluding any
appreciation or depreciation which may occur as a consequence of the Merger. The
terms of the Merger were first announced on October 28, 1997, and the closing
bid price of Common Stock on that date was $0.40625.
Photomatrix is required to mail to each shareholder not voting in favor
of the Merger a notice of the approval of the Merger by the holders of Common
Stock within 10 days of the date of such approval, accompanied by certain
information, including a statement of the price determined by Photomatrix to
represent the fair market value of any dissenting shares and a summary of the
procedure to be followed to exercise dissenters' rights. The statement of price
will constitute an offer by Photomatrix to purchase, at the price stated, any
dissenting shares. The notice will also advise such shareholders that, within 30
days after the date on which notice of approval of the Merger is mailed by
Photomatrix, each such shareholder electing to exercise dissenting shareholder
rights must submit to Photomatrix at its principal office or at the office of
any transfer agent thereof a demand letter and such shareholder's certificates
representing any shares of Common Stock which the shareholder demands that
Photomatrix purchase. Such demand letter is required to state (i) the number of
shares of Common Stock held of record by the shareholder which the shareholder
demands that Photomatrix purchase and (ii) what the shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
Merger. Such statement of fair market value will constitute an offer by the
shareholder to sell the shares at such price.
If Photomatrix and a dissenting holder of Common Stock agree that the
holder's shares are dissenting shares and agree upon the price of the shares,
payment of the agreed price, with interest, shall be made within 30 days after
the amount thereof has been agreed to or within 30 days after any statutory or
contractual conditions to the Merger have been satisfied, whichever is later. If
Photomatrix denies that a holder's shares are dissenting shares, or Photomatrix
and the holder fail to agree upon the fair market value of the shares, then such
holder, within six months after the date on which notice of the approval of the
Merger is mailed to the holder, but not thereafter, may file a complaint in the
Superior Court of the proper county in California seeking a finding as to
whether the holder's shares are dissenting shares or the fair market value of
the shares, or both, or may intervene in any similar action. In such proceeding,
the holder will be entitled to judgment against Photomatrix in the amount of the
fair market value of any dissenting shares, as determined, with interest from
the date of judgment. The costs of the action, including reasonable compensation
to the appraisers, shall be assessed as the court considers equitable, but, if
the appraisal exceeds the price offered by Photomatrix, then Photomatrix shall
pay costs as provided by California law.
16
<PAGE>
Photomatrix may terminate the Merger in the event that holders
representing in excess of ten percent of the outstanding shares of Photomatrix
Common Stock do not vote in favor of the Merger and exercise their dissenter's
rights. IT IS LIKELY THAT, IF HOLDERS OF MORE THAN TEN PERCENT OF THE
OUTSTANDING SHARES OF PHOTOMATRIX COMMON STOCK DO NOT VOTE IN FAVOR OF THE
MERGER AND EXERCISE THEIR DISSENTERS' RIGHTS, PHOTOMATRIX'S BOARD OF DIRECTORS
WILL DECIDE TO TERMINATE THE MERGER. If dissenters hold in excess of ten percent
of the outstanding shares of Photomatrix Common Stock, the Company would be
required to expend in excess of $200,000 in cash to purchase the dissenters'
shares following the close of the Merger. The Board of Directors would probably
decide that such a large cash outlay to complete the transaction would not be in
the best interests of Photomatrix. In the event the Board decides not to
complete the Merger, Photomatrix will nevertheless pay approximately $150,000 in
Merger expenses without receiving the benefits of the Merger.
UNAUDITED PROFORMA COMBINED FINANCIAL STATEMENTS
The Unaudited Pro Forma Combined Financial Information set forth below
is based on the historical financial statements of Photomatrix and I-PAC after
giving effect to the purchase method of accounting and other adjustments
relating to the proposed combination for the periods ended and as of the dates
indicated. The historical financial statements of I-PAC for the year ended
December 31, 1996 and the nine months ended September 30, 1997 have been
combined with the historical financial statements of Photomatrix for the year
ended March 31, 1997 and the nine months ended December 31, 1997 respectively.
The Unaudited Pro Forma Combined Balance Sheet gives effect to the proposed
combination as of December 31, 1997. The Unaudited Pro Forma Combined Statements
of Operations are presented to give effect to the proposed combination as if
each had been consummated on April 1, 1996 for the fiscal year ended March 31,
1997 and the nine months ended December 31, 1997.
The Unaudited Pro Forma Combined Financial Information set forth below
reflects pro forma adjustments that are based upon available information and
certain assumptions that the Company believes are reasonable. In preparing the
Unaudited Pro Forma Combined Financial Information, the Company believes it has
utilized reasonable methods to conform the basis of the presentation. The
Unaudited Pro Forma Combined Financial Information is intended for informational
purposes only and is not necessarily indicative of the future financial position
or results of operations of the Company had the proposed combination described
above occurred on the indicated dates or been in effect for the period
presented.
The Unaudited Pro Forma Combined Financial Information should be read
in conjunction with, and is qualified in its entirety by, the historical
consolidated financial statements of Photomatrix and I-PAC including in each
case, the related notes thereto, included elsewhere, or incorporated by
reference herein, and with other financial information pertaining to the Company
including "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this proxy statement.
17
<PAGE>
PHOTOMATRIX, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR FISCAL YEAR ENDED MARCH 31, 1997
<TABLE>
Historical
` -------------------
The Company
Pro Forma Pro Forma
Photomatrix I-PAC Adjustments(5) Combined(3)
----------- ----- -------------- -----------
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents $1,165,000 $17,000 -- $1,182,000
Accounts receivable, net 1,086,000 551,000 -- 1,637,000
Inventories, net 2,915,000 1,063,000 -- 3,978,000
Prepaid expenses and other 159,000 46,000 -- 205,000
Current portion of notes receivable -- 17,000 -- 17,000
Total Current Assets 5,325,000 1,694,000 -- 7,019,000
Notes Receivable, Long Term -- 33,000 -- 33,000
Property and Equipment, Net 912,000 2,507,000 -- 3,419,000
Intangibles and Other Assets, 1,395,000 -- 1,477,000 2,872,000
Other Assets 151,000 72,000 -- 223,000
$7,783,000 $4,306,000 $1,477,000 $13,566,000
Current Liabilities:
Accounts payable $516,000 $575,000 -- $1,091,000
Accrued and other liabilities 634,000 105,000 -- 739,000
Customer deposits 451,000 -- -- 451,000
Current portion of long-term debt 162,000 667,000 -- 829,000
Net liabilities of discontinued 1,238,000 -- -- 1,238,000
operations
Total Current Liabilities 3,001,000 1,347,000 -- 4,348,000
Notes Payable to Related Party 252,000 448,000 ($423,000)(6) 277,000
Other Non-Current Liabilities 101,000 2,472,000 -- 2,573,000
Contingent Liabilities -- -- -- --
Total Liabilities 3,354,000 4,267,000 (423,000) 7,198,000
Shareholders' Equity
Preferred Stock -- -- -- --
Common Stock (1) 19,351,000 8,000 1,931,000 21,290,000
Retained Earnings (Deficit) (15,063,000) 31,000 (31,000)(5) (15,063,000)
Other 141,000 -- -- 141,000
4,429,000 39,000 1,900,000 6,368,000
Total Shareholders' Equity $7,783,000 $4,306,000 $1,477,000 $13,566,000
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
consolidated financial statements.
18
<PAGE>
PHOTOMATRIX, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR FISCAL YEAR ENDED MARCH 31, 1997
<TABLE>
Historical
-------------------------
The Company
Pro Forma Pro Forma
Photomatrix I-PAC Adjustments Combined(3)
--------------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $8,694,000 $5,189,000 -- $13,883,000
Cost of Revenues 6,400,000 4,160,000 -- 10,560,000
Gross Profit 2,294,000 1,029,000 -- 3,323,000
Operating Expenses:
Selling, general and administrative 3,311,000 929,000 74,000(4) 4,314,000
Research and development 807,000 -- -- 807,000
Facility consolidation and relocation 520,000 -- -- 520,000
Total Operating Expenses 4,638,000 929,000 74,000 5,641,000
Operating Income (Loss)(7) (2,344,000) 100,000 (74,000) (2,318,000)
Other Income (Expense), Net 158,000 (84,000) 49,000(6) 123,000
Income (Loss) From Continuing Operations
Before Income taxes (2,186,000) 16,000 (25,000) (2,195,000)
Provision for Income Taxes 104,000 1,000 -- 105,000
Income (Loss) from Continuing Operations ($2,290,000) $15,000 ($25,000) ($2,300,000)
Income(Loss) from Continuing Operation per ($0.44) $ 1.80 ($0.23)
Common Share, Basic and Diluted(1)(3)
Number of Shares Used in Computation(1) 5,083,000 8,500 9,931,000
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
consolidated financial statements.
19
<PAGE>
PHOTOMATRIX, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
<TABLE>
Historical
--------------------------
The Company
Pro Forma Pro Forma
Photomatrix I-PAC Adjustments Combined(3)
------------ --------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues $6,076,000 $4,472,000 -- $10,548,000
Cost of Revenues 3,968,000 3,097,000 -- 7,065,000
Gross Profit 2,108,000 1,375,000 -- 3,483,000
Operating Expenses:
Selling, general and administrative 2,376,000 679,000 55,000(4) 3,110,000
Research and development 580,000 -- -- 580,000
Write Off Capitalized Software 366,000 -- -- 366,000
Total Operating Expenses 3,322,000 679,000 55,000 4,056,000
Operating Income (Loss)(7) (1,214,000) 696,000 (55,000) (573,000)
Other Income (Expense), Net 87,000 (88,000) 37,000 36,000
Income (Loss) From Continuing Operations
Before Income Taxes (1,127,000) 608,000 18,000 (537,000)
Provision for Income Taxes(8) -- 6,000 243,000 249,000
Income (Loss) from Continuing Operations ($1,127,000) $602,000 $261,000) ($786,000)
Loss from Continuing Operation per
Common Share, Basic and Diluted(1)(2) ($0.22) $ 70.82 ($0.08)
Number of Shares Used in Computation(1) 5,083,000 8,500 9,931,000
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
consolidated financial statements.
20
<PAGE>
1) Under the Merger Agreement, Photomatrix will issue to the stockholders
of I-PAC 4,848,000 shares of Photomatrix common stock at the Effective
Time of the Merger. After the end of a twelve month period ending June
30, 1999, up to 3,744,902 additional shares may be issued to I-PAC
shareholders based upon the achievement of certain performance
milestones. The effect of the earn-out on earnings per share is
accretive, as shown at Additional Earn-out Shares, pages 10-13. In
addition, I-PAC shareholders will also be issued one additional share
for each currently outstanding stock option or warrant that is
exercised. As of March 16, 1998, there were 907,333 options and
warrants to acquire Photomatrix common stock outstanding. If all such
options and warrants are exercised, I-PAC shareholders will receive an
additional 907,333 shares, resulting in an additional 1,814,666 shares
being issued. The Unaudited Pro Forma Combined Balance Sheets reflects
the issuance of 4,848,000 shares only. The market value of a share is
assumed to be $0.40, the price of the stock prior to the announcement
of the Merger.
2) Loss per share basic and diluted for the period and year presented are
based on weighted-average number of shares outstanding during the year.
In accordance with Statement of Financial Accounting Standards No. 128
(Earnings Per Share), potential dilutive securities were excluded from
the calculation as their effect is antidilutive.
3) The Unaudited Pro Forma Combined Balance Sheet as of December 31, 1997,
reflects both company's balance sheets as of that date. The Unaudited
Pro Forma Combined Statement of Operations for the nine month period
ended December 31, 1997 reflects Photomatrix's results of operations
for the nine months then ended and I-PAC's results of operations for
the nine months ended September 30, 1997. The Unaudited Pro Forma
Combined Statement of Operations for the year ended March 31, 1997
reflects Photomatrix's results of operations for the year then ended
and I-PAC's results of operations for the year ended December 31, 1996.
4) The Unaudited Pro Forma Combined Statement of Operations for the nine
months ended December 31, 1997 and the year ended March 31, 1997,
assumes the Merger occurred as of April 1, 1996 and the resulting
goodwill of $1,477,000 was amortized beginning April 1, 1996 using a
twenty year amortization period. The Unaudited Proforma Combined
Statement of Operations also assumes that the fair value of assets
acquired and liabilities assumed in the Merger is the same as their
historical cost basis, in that substantially all such assets and
liabilities are current and therefore approximate fair market value,
except for I-PAC's land and building. I-PAC's land and building were
acquired during the year ended December 31, 1997, and the Company
currently believes that historical cost approximates their fair market
value.
CALCULATION OF GOODWILL:
Price paid for stock $1,939,000
Fair value of net assets purchased (39,000)
Conversion of I-PAC related party debt to Equity (423,000)
Goodwill recognized $1,477,000
CALCULATION OF AMORTIZATION:
Years to amortize Goodwill 20
Monthly amortization amount $6,154
Amortization expenses for:
12 months ended March 31, 1997 $74,000
9 months ended December 31, 1997 $55,000
5) The Pro Forma Adjustments include adjustments to eliminate I-PAC common
stock and retained earnings.
6) The Unaudited Pro Forma Combined Balance Sheet reflects the conversion
from long term debt to equity of $423,000 of related party debt,
together with the elimination of the related interest expense.
21
<PAGE>
7) The Unaudited Pro Forma Combined Statement of Operations does not
reflect cost savings which have already been implemented at Photomatrix
or are anticipated as a result of eliminating redundant functions and
costs, as follows:
<TABLE>
Description Manufacturing Selling G&A R&D
----------- ------------- ----------- ---
<S> <C> <C> <C>
Cost reduction already implemented (a) $ 100,000 $ 300,000 -
Elimination of Photomatrix facilities costs (b) $ 192,000 $ 122,000 $36,000
Elimination of redundant functions (c) $ 65,000 $ 170,000 -
Reduction of related party expenses (d) - $ 115,000 -
$ 357,000 $ 707,000 $36,000
</TABLE>
a) In January, 1998, Photomatrix made certain cost reductions
as a result of reducing manpower and other expenses in its
manufacturing, sales and administration areas.
b) Under terms of the Merger, Photomatrix operations will be
moved to I-PAC's Carlsbad facility and its current facility will be
sub-leased or assigned.
c) Reflects the elimination of redundant functions and
positions between the companies.
d) The parties have agreed that all future related party
transactions will be subject to review and approval of the audit
committee, and further that certain related party expenses will be
eliminated.
8) Calculated as if I-PAC were a C corporation using an effective tax rate
of 40%
22
<PAGE>
BUSINESS OF PHOTOMATRIX
Overview
Photomatrix, Inc. (the "Company," or "Photomatrix," through its
subsidiary, Photomatrix Imaging Corporation, develops, manufactures, sells and
services high-performance document and aperture-card scanners for legal,
financial, government and commercial enterprises.
Photomatrix now operates in the electronic imaging segment of the
Information and Image Management Industry as a supplier of quality, high-value
electronic image-processing hardware and software products and services. During
the past four years, Photomatrix has evolved from being a computer output
microfilm ("COM") duplicator manufacturer with primarily one major customer to a
document scanner manufacturer with many customers. Over the past four years,
revenue from COM products and services has steadily declined, while scanner
product and services revenue has increased.
Corporate History
Photomatrix was incorporated in California in 1978 under the name
Xscribe Corporation. On July 31, 1996, the Company sold substantially all the
assets and the business of its wholly owned subsidiary, Xscribe Legal Systems,
Inc. In October, 1996, the Company changed its name from Xscribe Corporation to
Photomatrix, Inc. In December, 1996, the Board of Directors of the Company
approved a plan to discontinue the operations of another wholly owned
subsidiary, Lexia Systems, Inc., and is currently in the process of winding down
and closing this operation. The financial position and results of operations of
Xscribe Legal Systems and Lexia Systems, Inc. have been shown in the financial
statements of the Company as discontinued operations. The Company recently
relocated its operations to I-PAC's facility at 1958 Kellogg Avenue, Carlsbad,
California 92009. The Company's phone number is (619) 625-4400.
Principal Products
In fiscal year 1998, the Company has derived its consolidated revenue
primarily from sales and service of its Photomatrix document scanners and
aperture card scanners, as more fully described below. Additionally, a portion
of the Company's consolidated revenue was obtained by servicing its discontinued
COM product line.
Document Scanners
Photomatrix offers a line of medium and high-speed paper document
scanners that serve as input devices for image management systems used in office
automation and service bureau environments. All Photomatrix scanners are
constructed for rugged, high volume use, offering higher duty cycles and
reliability than most competitive models.
The complete image capture system among the Photomatrix document
scanner line is the newly introduced Vision Series 9600, a high-speed (up to 200
dual-sided pages per minute at 200 dots per inch [dpi] resolution), rugged,
single or dual-sided, 200 to 400 dpi, automatic-feeding document scanning
system. Vision Series 9600 includes the scanner, a Pentium PC, high-resolution
display, a video interface card, Windows NT application software and Vision
Image Capture Software ("VICS"), which operates in Microsoft Windows NT. VICS
controls the scanning and PC hardware, displays images and manages the workflow
of the image capture process (including indexing, scanning and formatting) and
its customizable workflow features enable users to use VICS as the front-end of
a larger document management software system. Because the Series 9600 scanner,
computer and VICS were designed to work as one tightly-integrated system, this
configuration offers the best efficiency among Photomatrix products. The Series
9600 replaces the Company's earlier generation Series 6000 scanners.
Photomatrix has primarily sold the Vision Series 5000 ("Series 5000"),
a duplex, high-resolution, 5000-element CCD scanner which captures double-sided
documents at speeds in excess of 150 dual sided pages per minute. These rugged,
high-duty-cycle machines differ from the Vision Series 9600 and Vision Series
6000 in that the Series 5000 is not bundled with the Photomatrix image
processing board, compression board, or VICS. Instead, the Series 5000 is plug
compatible with industry-leading interface (processing and compression) boards
from Kofax, Xionics and Seaport Imaging. Because
23
<PAGE>
of this compatibility, Photomatrix sells a higher volume of the Series 5000
scanners. During the fourth quarter of fiscal 1998, the Company will begin
selling the next generation of plug-compatible document scanners, the Series
9000, which features improved ergonomics of the top document stacker output bin,
SCSI capabilities and increased speeds up to 200 dual sided pages per minute.
Aperture Card Scanners
Photomatrix aperture card scanners are used to scan microfilm images of
engineering drawings for storage in a digital format. In addition to crisper
images, the digital format permits users to electronically store, retrieve,
distribute and print engineering documents in a local or enterprise wide
environment. Photomatrix aperture card scanners offer a wide range of
automation, throughput speed and image enhancement features. Photomatrix sells
aperture card scanners primarily to corporate in-house and third-party service
bureaus who scan microfilmed engineering drawings for the end users of those
drawings. Photomatrix also sells a limited number of aperture card scanners
under subcontracts to provide electronic-imaging systems to the Department of
Defense.
Maintenance Services
The Company provides 24-hour service for its installed base through
field engineers in 10 major cities throughout the United States ("US") and in
England. The Company also has relationships with various third party maintenance
organizations, including a nationwide relationship with IBM, to maintain
document scanners, and Kodak, to provide COM duplicator spare parts. Photomatrix
field engineers average 9 years of experience with the Company. Using a
sophisticated system for parts distribution and inventory control, the service
operation offers installation, on-going maintenance and field technical support
for existing and new products.
The Company views maintenance contracts and related revenue as a
significant revenue opportunity and profit center in fiscal year 1999.
Competition
Document Scanners. Photomatrix document scanners utilize a flatbed
vacuum transport technology. Furthermore, Photomatrix competes in the high end
of the industry with Kodak, Bell and Howell, and BancTec where speed, throughput
and duty cycle are important product features. Competition in this segment is
based upon price, image quality, paper handling capabilities, throughput speeds,
ease of use, reliability and quality and speed of maintenance services. Kodak
has utilized its strengths of name recognition, reputation, distribution
channels, good performance, service capabilities, and strong financial capital
base to become the market share leader in this segment. However, Kodak 500 and
900 model scanners, which are comparable to the Company's Vision Series 5000 and
9000 scanners, sell for more than the Photomatrix scanners.
In the document scanner market, the Photomatrix Vision Series 5000,
9000 and 9600 compete favorably against their product counterparts at BancTec
and Kodak. Photomatrix believes that its primary competitive advantage in this
segment of the market is its price-performance relationship, including its
relative speed, image quality, reliability and rugged build. Photomatrix
maintains the leading price-performance ratios in its market segment and retains
this status via not only continually improving on speed and throughput but also
pricing below BancTec's and Kodak's products. All of its primary competitors,
however, have substantially greater resources than Photomatrix for marketing and
distribution and for purchasing and maintaining market share. Photomatrix's
likelihood of increasing its market share may be reduced should Kodak
significantly reduce its prices. Although management expects some general
downward pressure on price in the next two to three years, management does not
expect intense price competition in the foreseeable future. There is no
assurance that the Company will not experience intense price competition or that
it will be able to maintain a competitive position in this market.
Photomatrix has entered into an original equipment manufacturer ("OEM")
contract with Bell & Howell to supply Series 5000 scanners under the Bell &
Howell label. Photomatrix scanners operate at speeds higher than scanners
manufactured by Bell & Howell, and the Company's OEM relationship with Bell &
Howell represents a strategic corporate partnering that is beneficial to both
parties. Management does not view Bell & Howell as a competitor in the high-end
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market assuming Photomatrix continually improves the features and speed of
Photomatrix scanners such that they are perpetually superior to Bell & Howell's
product offering and Bell & Howell adequately markets and sells Photomatrix
scanners in large volumes. Management believes Photomatrix has the engineering
talent and resources to succeed at technologically staying ahead of Bell &
Howell thereby, fostering a long-term OEM relationship. In December, 1997,
Photomatrix entered into an addendum to its OEM agreement with Bell & Howell,
whereby Bell & Howell became an exclusive agent, with certain specifically
identified exceptions, to sell Photomatrix peripheral document scanners to
distributors and value-added resellers ("VARs") in the United States and Canada.
As a part of this agreement, Photomatrix received a binding commitment from Bell
& Howell to purchase a minimum quantity of Vision Series 5000 document scanners,
valued at $1.5 million, over a period of seven months, beginning in December,
1997.
Aperture Card Scanners. The market for scanning engineering drawings is
large and growing steadily. According to industry studies, in the US alone, it
is estimated that more than 40,000 companies each have more than 100,000
engineering drawings, with a total estimated value of more than $1.5 trillion.
Companies are dedicating large resources to and establishing significant budgets
for the conversion, storage, distribution and retrieval of these engineering
drawings. Problems with document and revision control, document distribution,
deterioration and loss of documents are pervasive. Aperture cards, which contain
microfilm images of these drawings, have been widely used since World War II to
improve the storage and security of these documents. The need to electronically
manage this data has become critical, as the volume of paper documents continues
to increase, and companies are increasingly seeking methods to increase the
efficiency of storage and retrieval of these documents.
Photomatrix developed much of its technology and related application of
aperture card scanners in the mid 1980's when it introduced its aperture card
scanner product. Photomatrix's primary competitors in the aperture card scanning
market are Wicks & Wilson, a United Kingdom company, Microbox , a German company
and SunRise Imaging, a US-based company. Photomatrix is not able to estimate the
size of this market, but believes that it is currently limited due to the cost
constraints of converting engineering backfiles of aperture cards and the
related systems into electronic storage and retrieval systems. Photomatrix's
products are higher-end products and are priced higher than other currently
marketed products. In the Company's opinion, its aperture card scanner product
offering exceeds the quality and duty-cycle statistics of any of its
competitors.
Marketing and Distribution
Photomatrix markets Series 9600 image capture systems to service
bureaus and high-volume end users through its direct sales force. In contrast,
Photomatrix markets its Series 5000 and 9000 document scanners via indirect
distribution channels, primarily as a consequence of the OEM agreement with Bell
& Howell. In April 1997, Photomatrix entered into a distribution agreement with
IBM. Under the agreement, which contains no minimum requirements, IBM is granted
the right to sell Photomatrix document scanners. To date there have been no
significant sales under the IBM agreement.
Photomatrix distributes its aperture card scanning products primarily
to systems integrators and VARs who package the Photomatrix scanners with other
software and hardware products for sale to end users. Because Photomatrix
aperture card scanners are peripheral products which must be integrated with
other products for end users, Photomatrix maintains close working relationships
with major systems integrators and VARs. Photomatrix relies heavily on the sales
efforts of its systems integrators and VARs to generate sales of aperture card
scanners. Photomatrix also sells, through its direct sales force, aperture card
scanning systems to service bureaus which provide scanning services to
engineering drawing end users.
Photomatrix generally provides a 90-day warranty on its products and
offers, for sale, annual maintenance contracts thereafter. The warranty and
maintenance work is typically provided through Photomatrix field service
employees who are located throughout the United States. Photomatrix also
performs repair services for and supplies replacement parts to Kodak (which
previously sold Photomatrix products under a private-label agreement).
Raw Materials and Manufacturing
Photomatrix manufactures its aperture card scanners and document
scanners at its manufacturing facilities in San Diego, California. Photomatrix's
operations consist of procurement, kit packaging, assembly of circuit boards,
wiring and assembly and quality control testing of all parts, components,
subassemblies and final assemblies of all products.
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Photomatrix manufactures some of its own boards, however much of the printed
circuit board ("PCB") manufacture is performed by outside vendors. In
anticipation of the Merger, Photomatrix recently began utilizing I-PAC as its
PCB vendor. The Company expects to realize significant cost savings after the
Effective Time as a result of this change, together with the utilization of
I-PAC's wiring and assembly expertise.
Photomatrix's products incorporate electronic, imaging and mechanical
components purchased from various vendors. The electronic components, including
the computer chips, are generally available from multiple sources. Photomatrix
currently uses Fairchild, Kodak and Sony CCDs in the Photomatrix cameras in its
aperture card and document scanning products. However, other commercially
available CCD cameras could be substituted if necessary. Photomatrix copies,
labels and packages its software products.
Photomatrix's products contain numerous mechanical components that are
machined specially for Photomatrix's products. Photomatrix relies upon several
specific vendors as the sole source of its custom-machined parts. Although many
vendors can provide this machine work, tools and molds needed for this process
are in the possession of (and in some cases, owned by) its machine-shop vendors,
and Photomatrix could experience supply disruption if one of these vendors
failed to meet its supply obligations.
Photomatrix also bundles its aperture card scanners and document
scanners with commercially available personal computers, work stations,
high-resolution monitors, optical disk drives and other compatible peripherals
and with Microsoft Windows and NT, Novell NetWare and other commercially
available software.
Intellectual Property Rights and Licenses
Photomatrix relies upon copyright and trade secret laws to protect its
software and firmware used in its aperture card scanner and document scanner
products. Photomatrix has registered under Federal law design documents for its
document scanner and certain of its product maintenance manuals, operations
manuals and parts catalogues.
Photomatrix holds a perpetual nonexclusive license to use, manufacture,
and distribute aperture card scanners, microfiche scanners, single and double
sided document scanners that scan documents no greater than 12 inches in width
and 24 inches in length and multiformat scanners, provided that the
manufacturer's net invoice price is not less than $7,000 for document scanners
and $10,000 for all scanners, that use certain imaging technology of
Scan-Graphics, Inc., subject to United States Patent No. 4,972,273. Photomatrix
is obligated to pay Scan-Graphics a royalty of 5-1/2 % of Photomatrix's net
sales price for all aperture card scanners manufactured, sold and delivered by
Photomatrix until December 31, 1998. Photomatrix is not obligated to pay any
royalties with respect to document scanners, whole fiche scanners, roll film
scanners and/or multiformat scanners even if the scanners use the patented
technology or any derivative of such technology. If Photomatrix discontinues its
manufacturing of aperture card scanners, then it is obligated to negotiate with
Scan-Graphics to sell Scan-Graphics a nonexclusive right to manufacture and sell
the aperture card scanners.
Photomatrix is a party to a nonexclusive reseller agreement with Image
Machines Corporation for a Windows driver for Photomatrix's aperture card
scanners and for viewing and editing software. Under the reseller agreement,
Photomatrix purchases the software for resale on a per copy basis. The Image
Machines software is not bundled with aperture card scanners sold through PRC or
Intergraph who have developed their own software for use with the scanners.
Photomatrix offers with its scanners a SCSI developers' tool kit for developing
a Photomatrix scanner driver.
Photomatrix also purchases and resells as part of the Series 9600
document scanner a board manufactured by Kodak Image Products that enables the
scanning of bar codes and bundles its Series 9600 document scanner with
Microsoft NT which it purchases on a per copy basis.
Seasonal Business
The second and third quarters of the Company's fiscal year have
typically shown higher revenue volumes than its first and fourth quarters.
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Discontinued Operations
The following represents a brief history of the discontinued operations
of Photomatrix:
Sale of Xscribe Legal System, Inc. In July 1996, the Company sold
certain assets and liabilities related to its computer-aided transcription
business to its primary competitor for $2.2 million. The Company retained
certain liabilities.
Lexia Systems, Inc. In October 1993, the Company acquired the North
American Sales Division of International Computers Limited, Inc. ("ICL"), a
developer of groupware (office automation) software and manufacturer of
Unix-based hardware, and formed Lexia Systems, Inc. ("Lexia"). Lexia and ICL
entered into a strategic alliance whereby Lexia was to distribute ICL's
groupware products in the United States and support the domestic installed base
of ICL customers. However, the business partnering efforts between the Company
and ICL and its sister company, Fujitsu ICL Computers Ltd. ("Fujitsu") have
proved to be ineffective primarily because of a difficult working relationship
between ICL, Fujitsu and Lexia, combined with the fact that Lexia did not own
the applicable software or proprietary rights and was not able to control the
marketing or product management of ICL and Fujitsu products. Consequently, in
December, 1996, the Board of Directors of the Company approved a plan to
discontinue Lexia Systems, Inc. before the end of the Company's fiscal year
1998. The Company is currently in process of winding down and closing this
operation. Further, in December 1997, the Company had recorded accounts payable
and unpaid rent due ICL and Fujitsu in the amount of approximately $786,000. The
Company is disputing the value received related to certain of these liabilities
and has been attempting to settle with ICL and Fujitsu at a discount. There is
no assurance that the Company will be successful in resolving these disputed
amounts.
Significant Customers
One customer (Bell & Howell) accounted for 17 percent of the Company's
total revenue for fiscal year 1997 and 23 percent of its revenue for the nine
months ended December 31, 1997. No other customer accounted for more than 10
percent of the Company's total revenue during fiscal years 1997 or 1996. (See
"Additional Risk Factors")
Backlog
The Company generally does not have a material order backlog at any
time because the Company normally fills orders within the delivery schedules
requested by customers (generally within 30 days).
Government Sales
The Company has had no government sales.
Research and Development
During the last three fiscal years, the Company expended $969,000
(fiscal year 1997), $1,018,000 (fiscal year 1996), and $813,000 (fiscal year
1995) on company-sponsored research and development projects, including projects
performed by consultants for the Company and capitalized software development
costs. Management expects that research and development expenditures (including
capitalized software development costs) will total approximately $1 million for
the coming year.
The Company works closely with its customers in an attempt to develop
enhancements and new products in response to customer needs. In fiscal years
1998 and 1997, the Company has been engaged in the development of competitive
enhancements to the Photomatrix line of scanners, including a faster scanner, a
"smart" automatic document feeder, a top loading stacker, and the next
generation of both the Series 6000 document scanner and aperture card scanner
line. There is no assurance that the Company will successfully complete current
or planned development projects or will do so within the time parameters and
budgets established by the Company, and there is no assurance that a market will
develop for any product successfully developed.
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Environmental Laws
Compliance with federal, state and local laws enacted for the
protection of the environment have not had a material effect upon the Company's
capital expenditures, earnings or competitive position to date. The Company does
not anticipate that it will have to incur any material expenses in the future in
order to comply with such laws because of the nature of its products and
manufacturing operations.
Employees
At March 6, 1998, the Company had 51 full-time and three part-time
employees, excluding three employees associated with the discontinued Lexia
operation, none of whom are subject to a collective bargaining agreement. The
Company considers its relationship with its employees to be good.
Foreign and Domestic Operations
The Company derived approximately 21.8% of its revenue for the year
ended March 31, 1997, and approximately 20.4% of its revenue for the nine months
ended December 31, 1997, from foreign sales made by Photomatrix, Ltd., a wholly
owed subsidiary located in the United Kingdom.
Property
The Company leases its corporate headquarters located in San Diego,
California. The Company first occupied this facility in March 1997, and it
consists of approximately 23,400 square feet, which houses the Company's
corporate offices and its manufacturing, sales and administrative functions. The
lease expires in September 2002. The Company is in the process of relocating its
corporate headquarters to the I-PAC facility in Carlsbad, California. The
Company entered into a letter of intent to assign its facilities on terms at
least as favorable as its existing lease terms. Management anticipates that the
writeoff of leasehold improvements will be nominal.
The Company also leases facilities in Chandler, Arizona and London,
England. These facilities house the Photomatrix product development and
Photomatrix European operations, respectively. The Chandler facility consists of
5,100 square feet, and the lease expires in June 2000. The London facility
consists of 2,400 square feet, and the lease expires in May 2013.
The Company also leases 880 square feet in Herndon, Virginia for its
Lexia operations (which operation has been discontinued). This lease expires in
November 1998.
Legal Proceedings
The Company has been a defendant in three product liability cases
pending in the United States District Court, Eastern District of New York
(Bernhart v. Xscribe et al. (92 Civ. 3931), Galfin v. Xscribe (92 Civ. 2582),
and Hagipadelis v. Xscribe (95 Civ. 1977)). Both Bernhart v. Xscribe and Galfin
v. Xscribe have now been or are in the process of being dismissed. Xscribe has
tendered the Hagipadelis v. Xscribe claim to its insurance carriers, St. Paul
Fire ("St. Paul") and Marine Insurance and Federal Insurance Company
("Federal"). St. Paul has assumed the Company's defense without reservation of
right, and Federal has agreed to share defense costs, subject to a reservation
of rights. The insurance carriers have prevailed in all judgements rendered to
date. It may take several years before this litigation is ultimately resolved.
The Company believes that this remaining case is without merit and further
believes that if any liability results from these claims, the liability
(excluding punitive damages, if any) will be covered by its insurance policies.
The Company is not aware of any other legal proceedings to which it is
a party.
Year 2000 Contingencies
The Company recognizes the need to ensure that its operations will not
be adversely impacted by Year 2000 software and hardware failures. The Company
is addressing the risk and believes it will resolve any such risks in a timely
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manner. The currently estimated costs associated with these changes are not
material in any year and are not material to the Company's financial position.
However, the Company could be adversely impacted if its suppliers and customers
do not make the necessary changes to their own systems and products successfully
and in a timely manner.
PHOTOMATRIX SELECTED HISTORICAL FINANCIAL DATA
The following selected financial data are derived from unaudited
financial statements for the nine month periods ended December 31, 1997 and 1996
and audited financial statements for the years ended March 31, 1997, 1996, 1995
and 1994. Certain reclassifications have been made to prior year amounts to be
consistent with current year. Discontinued operations were reclassified for all
periods presented, and the remaining operations consist of Photomatrix Imaging
Corp. and Photomatrix, Ltd., which were acquired in fiscal 1994. The historical
financial data for the nine month periods ended December 31, 1997 and 1996 have
not been audited and were derived from the accounting records of the Company. In
the opinion of management, the historical financial data of the Company as of
and for the nine month periods ended December 31, 1997 and 1996 include all
adjusting entries (consisting only of normal recurring adjustments) necessary to
present fairly the information set forth therein. The historical financial data
are not necessarily indicative of the results of operations for any future
period. Furthermore, the results of operations for the nine month period ended
December 31, 1997 should not be regarded as indicative of the results that may
be expected for the full year. The data set forth below should be read in
conjunction with the financial statements and the related notes thereto set
forth in the Company's Annual Report on Form 10-KSB for the year ended March 31,
1997, which is incorporated herein by reference and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," appearing elsewhere
herein.
(000's omitted, except for net income (loss) per share)
<TABLE>
Nine Months
ended December 31,
(unaudited) For the years ended March 31,
1997 1996 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA
Revenue $6,076 $6,871 $8,694 $9,092 $9,712 $9,742
Gross profit percent 34.7% 25.7% 26.3% 32.3% 31.5% 34.8%
Loss from continuing operations $(1.127) $(1,290) $(2,290) $(1,368) $ (791) $ (194)
Net income (loss) $(1,127) $(1,352) $(2,407) $(1,704) $ (133) $1,222
Loss per share from continuing $(0.22) $(0.24) $(0.44) $(0.24) $(0.13) $(0.04)
operations, basic and diluted
Net income (loss) per share, basic and $(0.22) $(0.25) $(0.46) $(0.30) $(0.02) $0.23
diluted
Dividends per share -- -- -- -- -- --
As of December 31, As of March 31,
BALANCE SHEET DATA 1997 1996 1997 1996 1995 1994
Working capital $2,324 $3,313 $2,432 $5,624 $6,991 $7,617
Current ratio 1.77 2.50 1.92 2.96 4.10 5.35
Total assets $7,783 $9,244 $8,565 $12,581 $13,202 $12,844
Total long-term debt and obligations $353 $450 $415 $1,148 $699 $827
</TABLE>
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PHOTOMATRIX 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 selected financial data and
consolidated financial statements and notes thereto incorporated by reference
herein.
Results of Operations
Following is a comparative discussion by period of the results of
continuing operations for the last three fiscal years ended March 31, 1997, and
the nine month periods ended December 31, 1997 and 1996. The Company believes
that inflation has not had a material effect on its operations to date.
Fiscal year 1997 ended March 31, 1997 compared to fiscal year 1996
ended March 31, 1996
Consolidated revenue for the year ended March 31, 1997 decreased by
$398,000 (4.4 %) to $8,694,000 from $9,092,000 for the year ended March 31,
1996. This decrease was due to a 35.4 % ($803,000) expected decrease in COM
duplicator revenue offset by a 5.9 % ($405,000) increase in scanner product and
service revenue.
Consolidated gross margins for the year ended March 31, 1997 decreased
$639,000 (21.8 %) to $2,294,000 from $2,933,000 and gross margin as a percent of
sales decreased from 32.3 % to 26.4 % in the year ended March 31, 1997 due to
significant price concessions made by the Company in connection with the
establishment of its new OEM relationship with a major document scanner
customer, as well as certain cost inefficiencies caused by the relocation of its
manufacturing operations from Culver City to San Diego, including an inventory
obsolescence write-off of approximately $127,000. Management believes that it
has taken appropriate actions which will enable the Company to realize gross
margins similar to those in fiscal years 1996, 1995 and 1994. There is no
assurance that these margin improvements will be achieved.
Selling, general and administrative ("SG&A") expenses decreased
$281,000 (7.8 %) from $3,592,000 in the prior year to $3,311,000 in the current
year. The net decrease is primarily attributable to cost reductions made both in
the sales and marketing as well as the general and administrative areas of the
Company. As a percent of sales, SG&A decreased from 39.5 % in the prior year to
38.1 % in the current year, primarily due to the cost reduction efforts
implemented during the current year.
Product development expenses increased $322,000 (66.4 %) from $485,000
in the year ended March 31, 1996 to $807,000 in the year ended March 31, 1997.
Product development expenditures that were capitalized because they related to
technologically feasible projects were $108,000 in the current year compared to
$301,000 in the prior year. Total development spending increased $129,000 from
$786,000 in the prior year to $915,000 in the current year primarily because of
increased scanner development activity at Photomatrix, including the development
of new models which feature increased speed (150 and 200 page per minute duplex
models), as well as new options such as a "smart" automatic document feeder, a
top-loading stacker and an NT version of the Company's PICS software.
During the current fiscal year, the Company relocated and consolidated
its operations to San Diego. The cost incurred in connection with this activity
totaled $520,000, and has been shown as a separate line item.
Interest expense decreased $136,000 from $228,000 in the prior year to
$92,000 in the current year. This decrease was due to decreased borrowings under
the Company's credit facility in the current year. Other income increased
$239,000, from $11,000 in 1996 to $250,000 in 1997 as a result of non-recurring
payment from a major customer under a minimum quantity purchase contract.
The Company's provisions for income taxes were $104,000 and $7,000 in
the years ended March 31, 1997 and 1996, respectively. These amounts are
substantially different from provisions calculated using the statutory rates
because of the Company's inability to recognize the effects of net operating
losses and related carry-forwards. The current year provision reflects an
increase in the Company's valuation allowance relating to the deferred tax
asset.
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The decreases in revenue and gross margin, and the increased product
development and relocation expenses, offset slightly by the reduction in SG&A
costs and interest expense and the increase in other income, resulted in a loss
from continuing operations of $2,290,000 ($0.44 per share) for the year ended
March 31, 1997. This compares to the loss from continuing operations of
$1,368,000 ($0.24 per share) for the year ended March 31, 1996.
During the current year, the Company sold its court reporting business
(Xscribe Legal Systems, Inc.) and discontinued Lexia Systems, Inc., as more
fully described in Note 2 of the Consolidated Financial Statements contained
elsewhere herein. Including the loss from discontinued operations of $336,000 in
the prior year and $251,000 in the current year, less gain of $134,000 from the
sale of Xscribe Legal Systems, the net loss increased from $1,704,000 ($0.30 per
share) in the year ended March 31, 1996 to $2,407,000 ($0.46 per share) in the
year ended March 31, 1997.
Fiscal year 1996 ended March 31, 1996 compared to fiscal year 1995
ended March 31, 1995
Consolidated revenue for the year ended March 31, 1996 decreased
$620,000 (6.4%) to $9,092,000 in the year ended March 31, 1996 from $9,712,000
in the year ended March 31, 1995. This decrease was due to a 42.7% ($1,694,000)
expected decrease in COM duplicator revenue, somewhat offset by an 18.7%
($1,074,000) increase in scanner product and service revenue.
Consolidated gross margins for the year ended March 31, 1996 decreased
$124,000 (4.1%) to $2,933,000 in the year ended March 31, 1996 from $3,057,000
in the year ended March 31, 1995. Gross margin as a percent of sales remained
relatively constant at about 32%.
Selling, general and administrative expenses increased $336,000 (10.3%)
from $3,256,000 in the year ended March 31, 1995 to $3,592,000 in the year ended
March 31, 1996. The net increase includes a $426,000 increase at Photomatrix to
develop its sales and marketing channels for scanners offset by $90,000 of cost
reductions at the corporate headquarters. As a percent of sales, SG&A increased
from 33.5% in the year ended March 31, 1995 to 39.6% in the year ended March 31,
1996, primarily due to the decreased revenue in the fiscal year ended March 31,
1996.
Product development expenses increased $56,000 (13.1%) from $429,000 in
the year ended March 31, 1995 to $485,000 in the year ended March 31, 1996.
Product development expenditures that were capitalized because they related to
technologically feasible projects were $301,000 in the year ended March 31, 1996
compared to $336,000 in the year ended March 31, 1995. Total development
spending increased $94,000 from $692,000 in the year ended March 31, 1995 to
$786,000 in the year ended March 31, 1996 primarily because of increased scanner
development activity at Photomatrix.
Other income (expense), which consists primarily of interest expense,
increased $76,000 from $141,000 in the year ended March 31, 1995 to $217,000 in
the year ended March 31, 1996. This increase was due to increased borrowings
under the Company's credit facility, primarily used to finance increased
inventory levels.
The Company's provisions for income taxes were $7,000 and $22,000 in
the years ended March 31, 1996 and 1995, respectively. These amounts are
substantially different from provisions calculated using the statutory rates
because of the Company's inability to recognize the effects of net operating
losses and related carry-forwards, net of valuation allowances.
The decreases in revenue and gross margin, and the increased product
development and interest expenses, and SG&A costs, resulted in a loss from
continuing operations of $1,368,000 ($0.24 per share) for the year ended March
31, 1996. This compares to a loss from continuing operations of $791,000 ($0.13
per share) for the year ended March 31, 1995.
In the year ended March 31, 1997, the Company sold its court reporting
business (Xscribe Legal Systems, Inc.) and discontinued Lexia Systems, Inc., as
more fully described in Note 2 of the Consolidated Financial Statements
contained elsewhere herein. Including the income (loss) from discontinued
operations of $658,000 and ($336,000) in the years ending March 31, 1995 and
1996, respectively, the net loss increased from ($133,000) ($0.02 per share) in
the year ended March 31, 1995 to ($1,704,000) ($0.30 per share) in the year
ended March 31, 1996.
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Nine months ended December 31, 1997 compared to the nine months ended
December 31, 1996
For the nine months ended December 31, 1997, consolidated revenues
decreased $795,000 or 11.6% to $6,076,000 from $6,871,000 for the nine months
ended December 31, 1996, primarily as a consequence of poor results in the third
quarter. Equipment and software revenue decreased $947,000 or 17.5% to
$4,463,000 from $5,410,000 for the nine months ended December 31, 1996. Service
revenue increased $152,000 or 10.4% to $1,613,000 from $1,461,000 for the prior
nine months ended December 31, 1996.
For the nine months ended December 31, 1997, consolidated gross margin
increased $344,000 or 19.5% to $2,108,000 from $1,764,000 for the nine months
ended December 31, 1996. As a percent of revenues gross margin increased 35.0%
to 34.7% from 25.7%. Equipment and software gross margin increased 23.9% to
28.5% from 23.0%, this improvement resulting from the effects of both a
continuing favorable product mix and a reduction in costs associated with
production efficiencies. Service gross margin increased 45.9% to 51.8% from
35.5%, resulting primarily from decreases in service costs, principally labor
and labor-related costs and taxes.
For the nine months ended December 31, 1997, selling, general and
administrative expenses ("SG&A") decreased $309,000 or 11.5% to $2,376,000 from
$2,685,000 for the nine months ended December 31, 1996. As a percent of revenue,
SG&A, remained constant at 39.1%. The Company is further reducing costs as a
result of the lower level of sales in the third quarter, uncertainties in the
market segment in which Photomatrix sells its aperture card and document
scanners and the restructuring of its sales and marketing department as a result
of the new OEM arrangement with Bell & Howell. As a result of the actions taken,
the Company expects cost reductions to exceed $400,000 on an annual basis.
For the nine months ended December 31, 1997, research and development
expenses increased by $18,000 or 3.2% to $580,000 from $562,000 for the nine
months ended December 31, 1996. As a percentage of revenue, research and
development expenses increased 16.8% to 9.6% from 8.2%. Total product
development spending increased $28,000 to $664,000 from $636,000. Expenditures
for new product development that were considered to be technologically feasible,
and as such were capitalized, increased $10,000 to $84,000 from $74,000.
The Company recorded a write-off of certain capitalized software costs
during the quarter ended December 31, 1997 in the amount of $366,000.
Other income of $87,000 in the nine months ended December 31, 1997,
compares to other income of $193,000 in the nine months ended December 31, 1996,
a decrease of $106,000. This decrease primarily reflects the sale of a trademark
for $100,000 in the current period compared to a one-time settlement payment of
$250,000 from a major customer in the prior period.
There was no provision for income taxes booked in either the nine
months ended December 31, 1997 or the nine months ended December 31, 1996.
The net effect of the increases in gross margin and research and
development, decreases in SG&A and other income plus the write off of
capitalized software resulted in a net loss from continuing operations for the
nine months ended December 31, 1997 of $1,127,000 or $(0.22) per share. This
compares to a net loss from continuing operations of $1,290,000 or $(0.24) per
share for the nine months ended December 31, 1996. There was no income from
discontinued operations in the current period compared to a loss of $62,000 or
$(0.01) per share in the nine months ended December 31, 1996. The net loss in
the current period of $1,127,000 or $(0.22) per share compares to a loss of
$1,352,000 or $(0.25) in the prior nine month period.
Recent and Future Sources of and Demands on
Liquidity and Capital Resources
For the nine months ended December 31, 1997, the Company's loss before
taxes, depreciation and amortization and the write-off of certain capitalized
software costs was $73,000. During this period the Company's primary sources of
liquidity were a reduction of accounts receivable ($516,000), an increase in
accrued and other liabilities ($44,000), retirement of capital assets ($38,000),
cash flows provided by discontinued operations ($848,000), and cash reserves.
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<PAGE>
During the same period the primary uses of cash were to increase inventories
($395,000), increase prepaid expenses ($10,000), reduce accounts payable
($328,000), reduce customer deposits ($162,000), reduce notes payable ($113,000)
and reduce other assets and liabilities ($7,000). As a result of these sources
and uses of liquidity during the nine months ended December 31, 1997 the
Company's cash balance increased $353,000 or 43.5%, from $812,000 to $1,165,000.
The Company has a $750,000 line of credit with its bank. This line of
credit accrues interest on outstanding borrowings at the bank's prime rate plus
2% per annum. Under the terms of the line of credit agreement, total borrowings
are limited to the lesser of $750,000 or 70% of eligible accounts receivable (as
defined under the agreement). The Company is required to (1) maintain a minimum
tangible net worth of $2,800,000, (2) maintain a ratio of total liabilities to
tangible net worth of not greater than 1.1 to 1.0, (3) maintain working capital
of $1,750,000 and (4) maintain a current ratio of 1.7 to 1.0. The line of credit
expires in September 1998. As of December 31, 1997, the Company had no
outstanding borrowings against this line of credit and was in compliance with
all of its requirements.
As of December 31, 1997, the Company was obligated under a series of
notes payable totaling $414,000. These notes bear interest at a rate of 8% per
annum and mature in April 2000. Interest and principal payments totaling $16,000
are due monthly. As of December 31, 1997, all payments under these obligations
were current.
The Company's assured sources of future short-term liquidity are its
cash balance of $1,165,000 as of December 31, 1997 and the full amount of its
line of credit of $750,000.
The Company currently is obligated to pay approximately $20,000 per
month in lease payments. Aside from these commitments, the Company has not made
any material capital commitments.
The Company is continuing to concentrate on increasing sales and
improving gross margins. If it is successful in this regard, it should have
sufficient liquidity to fund its operations during the next twelve months. In
the event that the proposed Merger is accomplished, although no assurance can be
given, the Company expects the effect on liquidity to be positive, and therefore
no additional capital will be required to fund operations.
In March 1997 the Financial Accounting Standards Board issued SFAS 128,
EARNINGS PER SHARE, effective for periods ending after December 15, 1997. SFAS
128 requires the presentation of "basic" earnings per share, which excludes the
dilutive effect of all common stock equivalents. Presentation of "diluted"
earnings per share, which reflects the dilutive effects of all common stock
equivalents, is required. The diluted presentation is similar to the current
presentation of fully diluted earnings per share, but uses the average market
price of the stock during the period. For the nine months ended December 31,
1997 and 1996 the Company had losses from continuing operations and thus only
basic earnings per share is presented, as the effect of common stock equivalents
is antidilutive to the calculation of diluted earnings per share.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
As of March 6, 1998, Aundir Trust Company Ltd., was the only
shareholder known by the Company to be the beneficial owner of more than five
percent of its outstanding Common Stock. As of that date, Andir Trust Company,
Ltd. was the beneficial owner of 1,054,002 shares, representing 20.74 percent of
the Company's outstanding stock. These shares are beneficially owned by Andir
Trust Company, Ltd. as trustee of the Bulldog Trust and the Pitkin Trust,
irrevocable trusts established by Sam Wyly and Charles J. Wyly, Jr.,
respectively. The record holders are Tensas, Ltd. and Roaring Creek, Ltd., which
are corporations wholly- owned by such trusts. Sam Wyly and Charles J. Wyly, Jr.
disclaim beneficial ownership of these shares. The address of Aundir Trust
Company is Castle Town, Isle of Man, British Isles.
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DESCRIPTION OF SECURITIES
General
Photomatrix is authorized to issue 30,000,000 shares of Common Stock
and 3,173,000 shares of Preferred Stock. After the closing of the Merger,
9,931,000 shares of Common Stock will be issued and outstanding (assuming no
exercise of outstanding options and warrants and no exercise of dissenters'
rights, and before issuing any Earn-Out Shares). No shares of Preferred Stock
are outstanding or will be outstanding after the closing of the Merger.
California Law and Certain Charter and Bylaw Provisions
The Bylaws provide that the number of directors of Photomatrix shall
consists of not less than three nor more than seven with the exact number to be
determined by a vote of a majority of the shareholders or the Board. The Board
has currently fixed the number at seven. Any vacancies on the Board may be
filled for the unexpired portion of the term by a majority vote of the remaining
directors.
Common Stock
Photomatrix is authorized to issue 30,000,000 shares of Common Stock of
which 5,083,017 shares are currently outstanding. Each share of Common Stock
entitles the holder thereof to one vote on all matters submitted to a vote of
the shareholders, except that the holders have cumulative voting rights for the
election of directors. The holders of Common Stock do not have preemptive rights
or rights to convert their Common Stock into other securities. Holders of Common
Stock are entitled to receive ratably such dividends as may be declared by the
Board of Directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of Photomatrix, holders of the Common
Stock have the right to a ratable portion of the assets remaining after payment
of liabilities. All shares of Common Stock outstanding and to be outstanding
upon completion of this offering are and will be fully paid and non-assessable.
Warrants
In addition to options issued under its Employee Stock Option Plans,
Photomatrix has issued outstanding warrants, expiring in August, 2002, to
acquire 75,000 of the Company's common shares at an exercise price of $0.44 per
share. The Company has also issued other options, expiring in December, 2003, to
acquire 33,333 of its common shares at an exercise price of $0.42 per share.
MARKET PRICES OF PHOTOMATRIX COMMON STOCK
Photomatrix, Inc. is traded on the NASDAQ Small Cap Market under the
symbol PHRX. On March 6, 1998, there were 5,083,017 shares outstanding and there
were approximately 1,000 shareholders of record. Following is information
regarding Photomatrix, Inc. Common Stock market prices:
<TABLE>
Fiscal Year 1998 Fiscal Year 1997 Fiscal Year 1996
Fiscal Quarter ended Low Bid High Bid Low Bid High Bid Low Bid High Bid
<S> <C> <C> <C> <C> <C> <C>
June 30 5/16 5/8 11/16 1-7/16 7/8 1-1/2
September 30 9/32 9/16 17/32 1-1/16 13/16 1-1/2
December 31 1/4 29/32 3/8 13/16 3/4 1-1/16
March 31 13/32 5/8 3/8 15/16 9/16 1-3/64
</TABLE>
The Company has not paid a cash dividend on its common stock, and it is
not anticipated that the Company will pay any dividends in the foreseeable
future.
34
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BUSINESS OF I-PAC
General Business and Overview
I-PAC is a value added custom contract manufacturer of electrical and
mechanical assemblies, including complex, multi-layer printed circuit board
assemblies, wire and cable harnesses, molded cables, and complete system and
subsystem assemblies. I-PAC specializes in providing value added electronic
manufacturing services in connection with the manufacture of surface mount and
hybrid printed circuit boards used in high value industrial and commercial
products which require an exceptionally high level of quality control, a
critical emphasis on delivery schedules, and intensive customer support.
All of I-PAC's printed circuit boards are designed by the customer and
manufactured to its specifications. Using computer controlled manufacturing and
test machinery and equipment, I-PAC provides manufacturing services employing
surface mount technology ("SMT") and pin-through-hole ("PTH") interconnection
technologies. I-PAC offers a wide range of manufacturing and management
services, either on a turnkey or consignment basis, including material
procurement and control, manufacturing and test engineering support, and quality
assurance. I-PAC's strategy is to develop long-term manufacturing relationships
with established and emerging original equipment manufacturers ("OEMs").
Corporate History
I-PAC was organized under the laws of the State of California in 1990.
In January 1997, I-PAC purchased the facility it had been leasing, a 40,000
square foot, two story concrete building located in Carlsbad, California.
In February 1997, I-PAC acquired I-PAC Express Assembly, Inc. ("I-PAC
Express"). I-PAC Express is a custom contract manufacturer specializing in quick
turn printed circuit board prototypes incorporating surface mount and hybrid
technologies. It is located in Santa Ana, California. I-PAC Express supports
prototyping requirements for new electronic products during their design phase,
allowing those products to then migrate to the main I-PAC facility when
production quantities are required. I-PAC intends to open additional I-PAC
Express locations in Southern California.
I-PAC's facilities are located at 1958 Kellogg Avenue, Carlsbad,
California 92009. Its phone number is (760) 438-1529.
Contract Electronics Manufacturing Industry
Overview
The contract electronics manufacturing industry provides the program
management, technical and administrative support, and manufacturing expertise
required to take a product from the early design and prototype stages through
volume production and distribution. Over the past two decades electronic systems
have become smaller, lighter and more reliable, while demands for performance at
lower costs have increased. The use of a contract manufacturer allows an OEM to
avoid large capital investments in plant, equipment and staff and to concentrate
instead on the areas of its greatest strength:
innovation, design and marketing.
OEMs use contract manufacturers to:
Reduce Production Costs. Contract manufacturers generally are
able to manufacture specialized products at a lower cost than OEMs
because of efficiencies associated with specialization and higher
production volumes.
Accelerate Time to Market. Rapid technological advances and
shorter product life cycles require OEMs to reduce the time required to
bring a product to market. Delays in bringing a product to market can
result in obsolescence of the product before or shortly after it
becomes available. By providing an established infrastructure and
manufacturing expertise, contract manufacturers can help OEMs shorten
their product introduction cycles.
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Access Advanced Manufacturing Capabilities. As electronic
products have become smaller and more technologically advanced,
manufacturing processes have become more automated and complex, making
it more difficult for OEMs to maintain the manufacturing expertise
required to remain competitive. Using contract manufacturers affords
OEMs access to advanced manufacturing technology and processes.
Improve Manufacturing Quality. Because of their focus on their
specialized area of expertise, contract manufacturers generally can
provide services of higher quality than OEMs can provide in-house.
Focus Resources. In the rapidly changing, increasingly
competitive electronics industry, most OEMs must focus their attention
and resources properly. The use of contract manufacturers enables OEMs
to focus on their core competencies.
Reduce Investment. As the electronics industry has become more
technologically advanced, manufacturing requirements have resulted in
increased investments in inventory, equipment, labor and
infrastructure. Contract manufacturers enable OEMs to achieve high
technological capabilities at a lower capital investment level than
required for internal manufacturing.
Improve Inventory Management and Purchasing Power. The
experience of contract manufacturers in inventory procurement and
management can reduce OEM production and inventory costs.
Industry Size
According to the Institute for Interconnecting and Packaging
Electronics Circuits ("IPC"), the U.S. market for contract electronics
manufacturing services was approximately $36 billion in 1996 and was growing at
an annual rate of approximately 25%. The domestic contract electronics
manufacturing market includes passive components ($15 billion), actual assembly
($13 billion), PCBs ($7.2 billion) and flexible circuits ($0.7 billion).
Printed Circuit Boards
PCBs are the basic platform used in virtually all advanced electronic
equipment to direct, sequence and control electronic signals between
semiconductor devices (such as microprocessors, memory chips and logic devices)
and passive components (such as resistors and capacitors). PCBs consist of one
or more layers of circuitry laminated into rigid insulating material composed of
fiberglass epoxy. Multilayer PCBs provide a three dimensional system with
electronic signals traveling along horizontal planes of multiple layers of
circuitry patterns as well as along the vertical plane through plated holes or
vias.
SMT is an assembly process which allows the placement of a large number
of components in a dense array directly on both sides of a PCB. SMT is a recent
advance over the more mature PTH technology, which permits electronic components
to be attached to only one side of a PCB by inserting the component into holes
drilled through the board. The SMT process allows OEMs to use advanced
circuitry, while at the same time permitting the placement of a greater number
of components on a PCB without having to increase the size of the board. By
allowing increasingly complex circuits to be packaged with the components in
closer proximity to each other, SMT enhances circuit processing speed and board
and system performance.
Lead times for PCBs generally fall into two categories, "quick-turn"
and "standard." Quick-turn lead times range from one to 15 days for prototype
and pre-production quantities. Standard lead times typically run from six to
twelve weeks and are generally associated with larger volumes.
According to the IPC, the U.S. market for PCBs was estimated at
approximately $7.2 billion in 1996, an increase of 10% from 1995. Also according
to the IPC, Multilayer PCBs, the fastest growing segment (14% growth from 1995
to 1996) accounted for approximately 74% of all PCBs shipped in 1996. Despite
its large size, the PCB market is fragmented. In 1996, only eight of
approximately 700 independent PCB manufacturers had annual sales in excess of
$100 million.
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<PAGE>
System and Sub-System Assembly
According to the IPC, the United States value-added contract
manufacturing market was approximately $13 billion in 1996 and is growing at a
rate of approximately 20% per year. I-PAC believes that OEMs are increasingly
relying upon independent contract manufacturers for the manufacture of complex
electronic interconnect products rather than on in-house production.
Business Strategy
In response to these industry trends, I-PAC has positioned itself as a
specialist in the manufacture of complex, multi-layer PCBs, wire and cable
harnesses, molded cables, and complete system and subsystem assemblies including
value added electronic manufacturing services. I-PAC's strategy is to emphasize
its experience with surface mount and hybrid printed circuit boards used in high
value industrial and commercial products which require an exceptionally high
level of quality, a critical emphasis on delivery schedules, and intensive
customer support. Further, its strategy includes the following elements:
Establish and Maintain Long-Term Relationships. One of I-PAC's
primary objectives is to pursue opportunities whereby it becomes an
integral part of an OEM's manufacturing operations. In this regard,
I-PAC strives to work closely with its customers in all phases of
design and production in an attempt to establish itself as the sole or
primary source for its customers' specialized manufacturing
requirements. I-PAC believes that this effort to develop close,
reliable, long-term relationships builds customer loyalty that is
difficult for competitors to overcome. I-PAC specifically targets
turnkey manufacturing opportunities because such business offers
increased profit margin, greater control over all variables of the
manufacturing process and greater reliance upon I-PAC by the OEM
associated with the turnkey operation.
Target and Maintain Balance Among Selected OEM Industries and
Customers. I-PAC markets its services to industries and customers that
have strict quality control standards for their products and that have
service-intensive manufacturing requirements. I-PAC focuses on complex
assemblies in low and medium volumes for commercial and industrial
customers. I-PAC has not been, and does not intend to become, a
manufacturer of high volume PCB assemblies for personal computers or
other consumer-related products, which typically have relatively low
margins. I-PAC instead focuses on a variety of industries that produce
products that generally have longer life cycles, higher engineering
content, higher customer margins, more stable demand and less price
pressure.
Provide Comprehensive and Reliable Manufacturing Services.
I-PAC believes that its ability to attract and retain customers depends
on its ability to offer a broad range of specialized services. I-PAC
provides its customers with services ranging from prototype production
to the manufacture of PCB assemblies, material procurement and
management, post-production testing, and final product assembly. I-PAC
also strives to provide the highest level of reliability in connection
with these services and has an ongoing program of investing in
sophisticated machinery and equipment to enable it to achieve this
objective on a continuing basis. I-PAC's ability to provide
electrical-mechanical assembly, wire and cable assembly and harnessing,
molded cable processing and other related services allows it to offer a
broader range of value added services to its customers than is
typically offered by a PCB assembly manufacturer.
Pursue Opportunities for Growth. Although it has not currently
identified any candidate for acquisition, I-PAC is committed to
pursuing opportunities to increase the scope of its operations through
acquisition. Its strategy is to attempt to acquire privately-held
technology product companies where the manufacturing requirements can
be met by I-PAC at significant cost reductions and economies of scale.
In addition, I-PAC intends to attempt to increase its contract
manufacturing business through growth of its customer base, acquisition
of other contract manufacturers and expansion of its I-PAC Express
operations to additional locations.
37
<PAGE>
Maintain Flexibility. Many of I-PAC's customers are leaders in
their respective industries. As such, these customers often require
that their products be routinely reengineered. I-PAC has organized its
operations so that it can respond rapidly to design changes and provide
value added services where needed.
Services Provided by I-PAC
I-PAC manufactures over 200 different assemblies which are incorporated
in over 60 different products. I-PAC provides contract manufacturing services
primarily with regard to advanced industrial and commercial products in the
industrial controls, process control equipment, commercial broadcast, video and
instrumentation markets.
During the year ended December 31, 1997, I-PAC provided contract
services to more than 30 different customers, including ITT, Lockheed Martin,
Disney, Hughes JVC, Coyote Technologies, Sanyo, Schumacher, Standard
Communications, Triconex (a Siebe company) and Palomar Products. I-PAC's
services can be categorized as follows:
Prototype Manufacture. Through its wholly-owned subsidiary,
I-PAC Express, I-PAC offers quick-turn, PCB prototype manufacturing
capabilities, incorporating SMT and hybrid technologies. I-PAC Express
supports new OEM products in their design phase and then migrates these
products to I-PAC's main manufacturing facility when production
quantities are required.
Product Manufacture. I-PAC manufactures electronic products
and assemblies for use in a variety of industries and applications. Its
manufacturing operations include product assembly, testing, and
assembly into final product housings. While I-PAC has automated various
aspects of many processes, the assembly of components into electronic
products is a labor intensive process generally requiring a high degree
of precision and dexterity, together with multiple quality control
steps prior to shipment. In addition to PCB assembly, I-PAC
manufactures various interconnect products, including molded cables.
Product Testing. The increasingly complex design and assembly
techniques of products manufactured by I-PAC, as well as the
reliability demanded by its customers, has required I-PAC to engage
extensive testing of its products. These tests include in-circuit
component measurement testing, manufacturing defect analysis, and
functional tests.
Value Added Services. I-PAC provides value added electronic
manufacturing services to enhance the quality and reduce the cost of
OEM products. I-PAC primarily solicits high engineering content OEM
products and offers close working relationships with its customers and
flexibility to meet customer engineering needs.
Manufacturing and Supplies
The principal materials used by I-PAC in the manufacture of its
products are electronic components such as memory chips, microprocessing units,
integrated circuits, resistors, capacitors, transformers, switches, connectors,
wire and related items purchased as stock items from a variety of manufacturers
and distributors. While I-PAC purchases most of these materials from outside
sources, I-PAC is not dependent upon a single source of supply for any materials
essential to its business. I-PAC has generally been able to obtain adequate
supplies of such materials, and no shortage of such materials is currently
anticipated. However, notwithstanding the foregoing, there can be no assurance
that I-PAC will continue to be able to procure such components in the future
without material delay or other restrictions.
I-PAC believes that it is currently operating in accordance with ISO
9000 manufacturing quality control requirements, which specify standards,
processes, procedures and documentation to be implemented and maintained in all
applicable functions. I-PAC expects to receive formal certification for such
compliance by an outside third party in 1998.
38
<PAGE>
Marketing
Senior management of I-PAC and a manufacturers' representative
organization owned by the shareholders of I-PAC are currently primarily
responsible for marketing I-PAC's services. The manufacturers' representative
organization receives variable commissions based on orders received by I-PAC. As
part of its marketing strategy, I-PAC attempts to work closely with its
customers in all phases of design and production in an attempt to establish
itself as the sole or primary source for its customers' specialized
manufacturing requirements. I-PAC believes that this effort to develop close,
reliable, long-term relationships builds customer loyalty that is difficult for
competitors to overcome. As a result, I-PAC is continually striving to develop
new negotiated business with existing customers. I-PAC also expects that I-PAC
Express will assist in marketing the services of I-PAC, in that customers of the
quick turn prototyping services of I-PAC Express may turn to I-PAC for
manufacturing services when production quantities of the products prototyped by
I-PAC Express are required.
Competition
The contract manufacturing industry is highly fragmented and is
characterized by intense competition. The contract manufacturing services
provided by I-PAC are available from many independent sources as well as the
in-house manufacturing capabilities of current and potential customers of I-PAC.
Many of I-PAC's competitors and potential competitors are significantly larger
and have significantly more capital, direct buying power and management
resources than I-PAC. Management believes that the principal competitive factors
in its targeted markets are flexible value added services, product quality and
reliability, flexibility and timeliness in responding to design and schedule
changes, reliability in meeting product delivery schedules, pricing and
geographical location. I-PAC believes that it competes favorably with respect to
these factors. However, I-PAC also expects that competition in its markets will
continue to be intense, and there can be no assurance that I-PAC will compete
successfully.
Licenses
I-PAC has acquired licenses for the manufacture, marketing and sale of
proprietary video capture, storage and transmission software technology that has
on-going development potential and possible application in a wide range of
existing and new markets. The ongoing development is not capital intensive, in
that the technology can be applied to products in different markets without
significant modification. Following the Merger, I-PAC plans to begin entering
new markets, possibly including telemedicine, video editing, video
teleconferencing, video surveillance and various broadcast markets.
Seasonality
I-PAC has historically experienced its strongest sales volume in the
first and second quarters of each calendar year, but its business is not
considered seasonal. It is, however, subject to the business cycles that impact
its customers.
Backlog
As of December 31, 1997, I-PAC's backlog was $700,000, compared to
$1,500,000 as of December 31, 1996. I-PAC defines backlog as hard copy purchase
orders for which I-PAC has firm delivery dates within the next twelve months.
Employees
As of December 31, 1997, I-PAC had approximately 70 full-time
employees, of which 4 were engaged in program management, 48 were engaged in
manufacturing and the remainder were engaged in management, engineering or
administration, and 2 part-time employees. None of its employees is represented
by a labor union. I-PAC believes its relations with its employees are
satisfactory.
Property
I-PAC maintains its executive offices and manufacturing facilities in a
40,000 square foot, two story concrete building located at 1958 Kellogg Ave.,
Carlsbad, California. I-PAC owns these facilities.
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<PAGE>
I-PAC Express leases a 5,000 square foot facility located at 1415 East
McFadden Avenue, Santa Ana, California. The lease for this facility provides for
annual rent of $22,600 and expires in April 2000.
Government Regulation
I-PAC's operations are subject to certain federal, state and local
regulatory requirements related to environmental, waste management, health and
safety matters. While there can be no assurance that material costs and
liabilities will not be incurred or that past or future operations will not
result in exposure to claims of injury by employees or the public, I-PAC
management believes that its business is operated in substantial compliance with
such regulations.
I-PAC periodically generates and temporarily handles limited amounts of
materials that are considered hazardous wastes under applicable law. The Company
contracts for the off-site disposal of these materials and has implemented a
waste management program to address related regulatory issues.
Legal Proceedings
There are no material pending legal proceedings to which I-PAC or any
of its subsidiaries is a party or of which any of their properties is the
subject. I-PAC is not aware of any such proceedings known to be contemplated by
governmental authorities.
Related Party Transactions
The shareholders of I-PAC currently own interests in several entities
with which I-PAC does business. Evergreen Investments (Evergreen), a company
owned by Mr. Moore and Mr. Grivas, provides management and legal services to
I-PAC. I-PAC incurred expenses of approximately $205,500 and $235,600 for
services provided by Evergreen for the years ended December 31, 1997 and 1996,
respectively. For the year ended December 31, 1997, I-PAC purchased
approximately $6,600 of merchandise from MGS Interconnect ("MGS"), a company
owned by Mr. Moore and Mr. Grivas. During 1996, I-PAC subcontracted out $57,400
of sub-assembly and other production work to MGS. I-PAC also recorded sales to
MGS of approximately $47,900 and $88,100 for the years ended December 31, 1997
and 1996, respectively. During 1997 and 1996, I-PAC incurred expenses of
approximately $136,700 and $147,000, respectively, for commissions to MGM Tech
Rep ("MGM"), an outside sales representative firm owned primarily by the three
stockholders of I-PAC. I-PAC received approximately $4,600 of rental income from
MGM for the year ended December 31, 1997. I-PAC also incurred expenses of
approximately $28,400 and $39,900 for legal services provided by a law firm in
which Mr. Hill is a partner, for the years ended December 31, 1997 and 1996,
respectively. In addition, I-PAC also incurred expenses of approximately $27,500
and $39,700 for general business consulting services provided by Mr. Hill for
the years ended December 31, 1997 and 1996, respectively. Following the Merger,
any related party transactions will be reviewed and approved by the Audit
Committee of Photomatrix' Board of Directors.
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I-PAC SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth certain selected consolidated financial
data for I-PAC and should be read in conjunction with the consolidated financial
statements of I-PAC and the notes thereto included elsewhere in this Proxy
Statement.
(000's omitted, except per share data).
For the Year Ended
December 3,
1997 1996
Income Statement Data
Net Revenues $5,442 $ 5,189
Gross Profit % 29.8% 19.8%
Earnings Before Taxes from Continuing Operations $ 442 $ 16
Taxes $ 6 $ 1
Earnings from Continuing $ 436 $ 15
Operations
Earnings Per Share from $51.35 $ 1.80
Continuing Operations
Net Earnings (Loss) Per Share $51.35 $(32.64)
As of December 31,
1997 1996
Balance Sheet Data
Net Working Capital $ 347 $ 75
Total Assets $ 4,306 $ 1,872
Long-Term Debt $ 2,920 $ 784
Shareholders' Equity (Deficit) $ 39 $ (397)
I-PAC MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
I-PAC Management's discussion and analysis of financial condition and
results of operations should be read in conjunction with the selected financial
data and consolidated financial statements and notes that are to be included
elsewhere herein.
Results of Operations
The following is a comparative discussion by period of the results of
I-PAC continuing operations for the last two fiscal years ended December 31,
1997. I-PAC believes that inflation has not had a material effect on its
operations to date.
For the year ended December 31, 1997, revenues increased $253,000 or
4.9% to $5,442,000 from $5,189,000 for the year ended December 31, 1996. The
increase was primarily related to revenues of I-PAC Express Assembly, a
wholly-owned subsidiary acquired in February 1997. This revenue growth was less
than projected due to the influence of the downturn in the Asian marketplace
upon several of I-PAC's customers and sale of one of I-PAC's customers.
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For the year ended December 31, 1997, consolidated gross margin
increased $592,000 or 57.5% to $1,621,000 from $1,029,000 for the year ended
December 31, 1996. As a percent of revenue, gross margin increased 50.2%, to
29.8% from 19.8% due primarily to I-PAC focusing its sales efforts on customers
with higher engineering content and complexity in their products resulting in
higher value-added margins. This marketplace, primarily high-end commercial and
industrial products, places a premium on quality and on-time delivery, with such
product requirements.
For the year ended December 31, 1997, selling, general and
administrative expenses ("SG&A") increased $119,000 or 12.8% to $1,048,000 from
$929,000 for the year ended December 31, 1996. As a percent of revenue, SG&A
increased 7.6% to 19.3% from 17.9% due primarily to the acquisition of I-PAC
Express Assembly. Acquired by I-PAC in February of 1997, this start-up
subsidiary required substantial administrative and sales support to accelerate
its business potential and to install I-PAC's manufacturing systems and
protocols.
For the year ended December 31, 1997, interest and other expenses
increased $46,000 or 54.8% to $130,000 from $84,000 for the year ended December
31, 1996. This increase was the result of an increase in other income of
$158,000 offset by an increase in interest expense of $204,000. The increase in
other income was due to the sublease of a portion of I-PAC's newly acquired
facility coupled with settlements of vendor disputes in I-PAC's favor. The
increase in interest expense was due primarily to mortgage interest payments
resulting from I-PAC's purchase of a 40,000 square foot facility in Carlsbad,
California in January of 1997. This facility houses I-PAC Manufacturing.
The net effect of the increase in gross margin offset by the increases
in SG&A, other expenses and provision for income tax resulted in income from
continuing operations for the year ended December 31, 1997 of $436,000, compared
to income from continuing operations for the year ended December 31, 1996 of
$15,000.
For the year ended December 31, 1997, I-PAC realized neither a loss
from discontinued operations nor a loss on the disposal of discontinued
operations. These were improvements over the loss from discontinued operations
in the amount of $179,000 and the loss from the disposal of discontinued
operations in the amount of $113,000 for the year ended December 31, 1996. This
improvement resulted from the sale of I-PAC's interest in a subsidiary, CCS-West
and its phase out of its CATV service and repair business.
Recent And Future Sources of and Demands on
Liquidity And Capital Resources
For the year ended December 31, 1997, I-PAC's net income before
depreciation and gain on the disposition of property and equipment was $545,000.
During the same period, its primary sources of liquidity were a reduction in
inventories ($27,000), an increase in accrued compensation and payroll taxes
($11,000), proceeds from the sale of property and equipment ($4,000), proceeds
from borrowings ($326,000) and cash reserves. During the same period, the
primary uses of liquidity were an increase in accounts receivable ($166,000), an
increase in prepaid expenses ($19,000), an increase in other assets ($25,000), a
decrease in accounts payable and accrued expenses ($257,000), a decrease in
accrued costs of discontinued operations ($113,000), purchase of property and
equipment ($242,000), and repayments against notes ($90,000). As a result of
these sources and uses of liquidity, I-PAC's cash balance increased $1,000 or
6.3%, from $16,000 to $17,000.
As of December 31, 1997, I-PAC was obligated under a series of notes
payable totaling $3,586,000. These notes include a revolving line of credit
which has a total lending limit of $700,000 and note with a bank in the amount
of $75,000. The line and the note require I-PAC to maintain certain financial
covenants and include as collateral the assets of I-PAC and is secured by
continuing guarantees executed by its stockholders. Interest is payable at prime
plus 1.5%. The outstanding balance on this line and note as of December 31, 1997
was $598,000. This loan and note expire on June 30, 1998.
I-PAC has issued two notes in the aggregate amount of $2,061,000, which
have as collateral trust deeds against I-PAC's property in Carlsbad, California.
The repayment of these notes is guaranteed by certain stockholders of I-PAC
and/or the Small Business Administration.
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<PAGE>
The Company has issued a number of equipment notes in the aggregate
amount of $253,000 with interest rates varying between 10% and 26.6% and with
the final payments due between February of 2000 and March of 2005. Equipment is
the collateral for these notes.
I-PAC also has a number of notes payable to related parties in the
amount of $448,000 with interest at prime plus 2% and guaranteed by
stockholders. Under the Merger Agreement all but approximately $25,000 of
related party debt will be converted to equity prior to the close.
The Company also has a non-interest bearing liability in the amount of
$227,000, the proceeds of which were used primarily for the purchase of
manufacturing equipment. The repayment of this liability can be made solely from
a withholding of 40% of the non-material component of any sales made by I-PAC to
the note holder through April of 1998. As of February 28, 1998 there have been
no orders received by the Company from the note holder. Any unpaid balance on
the due date will be canceled and the security interest released.
The Company's sources of future short-term liquidity are the remaining
balance on its line of credit in the amount of $177,000 and its cash balance of
$17,000.
The Company is continuing to concentrate on increasing sales and
improving gross margins. If it is successful, it should have sufficient
liquidity to fund its operations during the next twelve months.
PROPOSAL 2 -- AUTHORIZATION OF POSSIBLE REVERSE STOCK SPLIT
On August 22, 1997, the Securities and Exchange Commission approved new
listing standards for companies listed on The NASDAQ Stock Market. These new
requirements became effective on February 23, 1998. As of March 6, 1998,
Photomatrix was in compliance with all of the new requirements, except for the
minimum bid price of its Common Stock. Under the new SmallCap Market listing
maintenance requirements, the minimum bid price of the Company's Common Stock
must be at least $1.00 per share. As of March 6, 1998, the Company's highest bid
price over the previous thirty days was $0.59375 per share.
NASDAQ has advised Photomatrix that it has ninety days to cure this
deficiency (the "Cure Period") or be de-listed from the NASDAQ SmallCap Stock
Market. The deficiency will be cured as a result of the Company's Common Stock
meeting the minimum bid requirement for 10 consecutive trading days during the
Cure Period. Notwithstanding the fact that the Company believes that the Merger
provides investors with new data which supports a stock price in excess of $1.00
per share, it is possible that the market will not reflect such a valuation and
that a reverse stock split will be necessary to increase the likelihood that the
Common Stock of the Company will trade at a price higher than $1.00 per share
and that the Company will therefore be in compliance with the new NASDAQ rules
and thereby avoid de-listing.
The Board of Directors of the Company has recommended that the
shareholders approve three alternative amendments to the Articles of
Incorporation of the Company in the form of Exhibits C-1, C-2 and C-3 attached
hereto (the "Amendments") that would enable the Board of Directors to authorize,
if necessary, either a 2 for 1, 3 for 1 or 4 for 1 reverse stock split (the
"Alternatives"). The Board's sole criteria in determining whether to effect any
of these Alternatives will be the minimum bid price of Photomatrix Common Stock
during the Cure Period. There can be no assurance that the reverse stock split
will accomplish the objectives stated herein.
The Board of Directors recommends approval of the alternative
Amendments, with the Board being given the discretion to choose which one, if
any, of these three proposals are adopted, primarily because the Board of
Directors will be able to assess at a time more proximate to the possible
implementation date which of the three proposals is most likely to accomplish
the Company's objectives of increasing the minimum bid price of its Common Stock
to more than $1.00 per share, taking into account the then current market price
of the Common Stock, trading volumes, market conditions, the possible reaction
of the market to a reverse stock split and other factors.
At its regular meeting on February 12, 1998, the Board of Directors
unanimously approved submitting the Amendments to the shareholders for approval.
Under California law, a reverse stock split can only be effected by amending the
Articles of Incorporation. The shareholders must approve an amendment to the
Articles of Incorporation in order for the
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<PAGE>
amendment to become effective, and the shareholders must approve each of the
Amendments in order to give the Board of Directors discretion to adopt any of
the three Amendments.
An Amendment to the Articles of Incorporation to Effect a 2 for 1
Reverse Stock Split
As of February 12, 1998, 5,083,017 shares of Common Stock were issued
and outstanding. If the 2 for 1 reverse stock split is effected, every two
outstanding shares of Common Stock will be combined and converted automatically
into one new share of the Common Stock. In lieu of issuing fractional shares,
the Company will pay in cash the fair value of the fractional shares as defined
below. No shareholder of record as of March 31, 1998, held fewer than two shares
of Common Stock, so the Company does not expect that the reverse stock split
will result in a material change in the number of shareholders. Each
shareholder's percentage ownership of Common Stock will not be altered, except
for the effect of the elimination of fractional shares. The Company estimates
that it will cost less than $3,000 to pay for fractional shares. The number of
authorized shares will not be changed by the Amendment.
An Amendment to the Articles of Incorporation to Effect a 3 for 1
Reverse Stock Split
As of February 12, 1998, 5,083,017 shares of Common Stock were issued
and outstanding. If the 3 for 1 reverse stock split is effected, every three
outstanding shares of Common Stock will be combined and converted automatically
into one new share of the Common Stock. In lieu of issuing fractional shares,
the Company will pay in cash the fair value of the fractional shares as defined
below. No shareholder of record as of March 31, 1998, held fewer than three
shares of Common Stock, so the Company does not expect that the reverse stock
split will result in a material change in the number of shareholders. Each
shareholder's percentage ownership of Common Stock will not be altered, except
for the effect of the elimination of fractional shares. The Company estimates
that it will cost less than $3,000 to pay for fractional shares. The number of
authorized shares will not be changed by the Amendment.
An Amendment to the Articles of Incorporation to Effect a 4 for 1
Reverse Stock Split
As of February 12, 1998, 5,083,017 shares of Common Stock were issued
and outstanding. If the 4 for 1 reverse stock split is effected, every four
outstanding shares of Common Stock will be combined and converted automatically
into one new share of the Common Stock. In lieu of issuing fractional shares,
the Company will pay in cash the fair value of the fractional shares as defined
below. No shareholder of record as of March 31, 1998, held fewer than four
shares of Common Stock, so the Company does not expect that the reverse stock
split will result in a material change in the number of shareholders. Each
shareholder's percentage ownership of Common Stock will not be altered, except
for the effect of the elimination of fractional shares. The Company estimates
that it will cost less than $3,000 to pay for fractional shares. The number of
authorized shares will not be changed by the Amendment.
Determination of Fair Value for Fractional Shares for and Mechanics of
Reverse Stock Split
The fair value of the Shares will be determined by the mean between the
bid and asked price for the Common Stock as quoted by the NASDAQ System as of
the close of trading on the date the Amendment is filed unless the Board
determines that the mean is not a reflection of the fair value of the fractional
shares as required by California law and determines that another value such as
the bid or the ask, or the last traded price, is the fair value of such shares.
Shareholders, automatically without filing a claim, will receive cash
payment for the fractional shares as soon as practicable after the Amendment is
filed and the value of such shares is determined. Shareholders will not be
required to exchange their existing stock certificates for new stock
certificates, but shareholders desiring to do so may surrender existing stock
certificates to the Company's transfer agent. The reverse stock split will not
affect the voting or other rights of the Common Stock.
Tax Consequences of Reverse Stock Split
Shareholders will not incur federal or state income tax liability as a
result of the reverse stock split, except that shareholders who receive cash
from the sale of fractional shares may realize a taxable gain or loss to the
extent the cash exceeds or is less than their basis in the fractional shares
sold.
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Principal Reasons for Each of the Proposed Amendments
On August 22, 1997, the Securities and Exchange Commission approved new
listing standards for companies listed on The NASDAQ Stock Market. These new
requirements became effective on February 23, 1998. The new financial
requirements for continued listing on the NASDAQ SmallCap Market include minimum
requirements for (a) net tangible assets, market capitalization or net income,
(b) public float, (c) market value of public float, (d) bid price, (e) market
makers, (f) the number of round lot shareholders, and (g) corporate governance.
As of March 6, 1998, Photomatrix was in compliance with all the new
requirements, except for minimum bid price.
The Board has recommended each of the 2 for 1, 3 for 1 and 4 for 1
reverse stock splits because the Board believes that, if a reverse stock split
is enacted, it should result in the minimum bid price per share of Photomatrix
Common Stock being increased to at least $1.00 per share. Alternative proposals
are presented to the shareholders because the Board will require flexibility to
assess the then current trading price of the Company's Common Stock, trading
volumes, possible market reaction to a reverse stock split and other factors at
the time the reverse stock split is to be enacted so that it can select the
reverse stock split that the Board believes is most likely to achieve its
desired objective while minimizing the potential disadvantages of a reverse
stock split.
Possible Disadvantages
If any of the three proposed reverse stock splits is enacted, there is
no assurance that the reverse stock split will achieve the intended objective or
that the minimum bid price of the Common Stock will not decline in post reverse
stock split trading. The market price of stock is determined by a number of
factors, some of which may be adversely affected by a reverse stock split.
The reverse stock split may result in a shareholder owning an odd lot
of Common Stock. Shareholders may incur higher transactional costs to trade an
odd lot of Common Stock than the shareholder would incur to trade a round lot.
Shareholders should consult with their brokers concerning such transactional
costs. Generally, an odd lot is fewer than 100 shares and a round lot is 100
shares. The Company does not sponsor and does not presently intend to sponsor
any program for trading odd lots of the Common Stock or for the Company
purchasing odd lots.
Vote Required for each of the Three Amendments to Effect the 2 for 1, 3 for 1
and 4 for 1 Reverse Stock Split
Approval of the Amendments requires the affirmative vote of the holders
of a majority of the outstanding shares of the Company's Common Stock. The Board
of Directors can only effect an Amendment approved by the shareholders. A vote
against the Amendments will have no impact on the rights of the shareholders in
the event the Amendments are approved by the shareholders and by the Board of
Directors. Shareholders are not entitled to "dissenters' rights" or any other
similar rights under California law if they oppose a reverse stock split and the
Amendments.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE
FOR THE AMENDMENT TO THE ARTICLES OF INCORPORATION
PROPOSAL 3 -- ELECTION OF DIRECTORS
The Bylaws of the Company provide that the Company's Board of Directors
is to consist of from four to seven members and currently authorize a Board
consisting of four members. It is the intention of the Board that, if the Merger
is approved by the shareholders and closes, then the Bylaws will be amended to
provide for a Board of seven members.
The Board has proposed that six directors be elected at the Special
Meeting, four to serve from the date of their election and two to serve from the
date the Board is expanded following the Merger and, in either case, to hold
office until the next Annual Meeting of Shareholders and until their respective
successors are elected and qualified.
Should any of the nominees decline or be unable to serve as a director,
the persons authorized in the proxy to vote on your behalf will vote with full
discretion in accordance with their best judgment. The Company knows of no
reason why
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any nominee listed below would not be available for election, or, if elected,
would not be willing or able to serve. If additional persons are nominated for
election as directors, the proxy holders intend to vote all proxies received by
them according to cumulative voting rules to assure the election of as many of
the nominees listed below as possible. In such event, the specific nominees for
whom votes are cumulated will be determined by the proxy holders.
Nominees to Hold Office from the Date of the Meeting
Mr. PATRICK W. MOORE has been a Director of the Company since January
1991. Mr. Moore, has been the President of I-PAC since 1990. He has significant
business experience in both the private and public sectors. Mr. Moore has served
on the National Commission on Employment Policy, committees of the National
Academy of Sciences, and as the national president of various trade
organizations based in Washington, D.C. From 1981 to 1986 Mr. Moore served as
President of the San Diego Private Industry Council and as Executive Director of
the San Diego Regional Employment and Training Consortium. Mr. Moore is 50 years
of age.
Mr. SUREN G. DUTIA has been a Director and has served as the President
and Chief Executive Officer of the Company since January 1989. He was elected to
be the Chairman of the Board of the Company in September 1990. He also serves as
the Chief Executive Officer of each of Photomatrix's subsidiaries. Prior to
January 1989, Mr. Dutia was associated from 1981 to December 1988 with Dynatech
Corporation, a diversified high-technology company headquartered in Burlington,
Massachusetts. From 1986 to 1988, Mr. Dutia was a Division Manager and Vice
President. Mr. Dutia was responsible for several subsidiaries, including one
operating subsidiary for which he acted as President. He directed
turn-around/divestiture activities for Dynatech and handled investor relations.
Mr. Dutia is 55 years of age.
Mr. IRA H. SHARP has been a Director of the Company since January 1990.
Mr. Sharp has been the owner, Chief Executive Officer and General Counsel of
Alderson Reporting Company, Inc., a court-reporting and litigation-support
services firm in Washington, D.C. since 1984. Mr. Sharp also served in the same
capacities for Alderson from 1977 until 1983. During the period of his absence
from Alderson, Mr. Sharp was a lawyer in private practice. Mr. Sharp is 54 years
of age.
Mr. JOHN F. STALEY has been a Director of the Company since January
1989. From 1972 to the present, Mr. Staley has been a partner in Staley, Jobson
and Wetherell, a law firm Mr. Staley founded, located in Pleasanton, California.
Mr. Staley was also the founder and a director of Lab Sales of California and
P.M. America, which were corporations involved in the manufacturing, sale and
distribution of blood-analyzing machines and which were sold to Dynatech
Corporation in 1982. From 1982 to the present, Mr. Staley has been a co-founder
of the Bank of Livermore, California. Mr. Staley is 53 years of age.
Nominees to Take Office Upon the Merger and Expansion of the Board
Mr. WILLIAM L. GRIVAS, has served as the Chief Executive Officer of
I-PAC since 1990. Prior to that time, Mr. Grivas was the sole owner of Southwest
General Industries (SGI), a $25 million per year contract manufacturer which he
founded in the 1970's. After selling SGI to SCI Manufacturing, Inc., a Fortune
500 firm and the world's largest contract manufacturer, Mr. Grivas joined with
Mr. Moore and Mr. Hill to found I-PAC in 1990. Mr. Grivas served in the Marine
Corps as a Drill Instructor and a special weapons expert, with extensive
training in electronic and radar technologies.
Mr. Grivas is 43 years of age.
Mr. JAMES P. HILL is, and for at least the last five years has been, a
partner specializing in bankruptcy law, commercial law, and civil litigation in
the San Diego law firm of Sullivan, Hill, Lewin, Rez, Engel & LaBazzo. Mr. Hill
was a Director of the San Diego Bankruptcy Forum from 1991 through 1994 and the
Chairman of the Commercial Law Section of the San Diego County Bar Association
from 1985 through 1987. Mr. Hill is 45 years of age.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE
FOR THE NOMINEES LISTED ABOVE.
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COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS
During fiscal year 1997, there were eight meetings of the Board of
Directors. All of the Company's Directors attended at least 75 percent of all
meetings of the Board of Directors and other committees of the Board on which
such directors served during fiscal year 1997.
The standing committees of the Board of Directors of the Company are
the Compensation Committee, the Nominating Committee, and the Audit Committee.
The principal duties of the Compensation Committee are to determine and
review all compensation of Directors, officers, and employees of the Company, to
administer and manage the Company's incentive compensation plans, to determine
grants of stock options under Company plans, and to report to the Board of
Directors of the Company. Current members of the Compensation Committee are
Messrs. Moore, Sharp and Staley. The Compensation Committee met four times
during fiscal year 1997.
The Nominating Committee's principal duties are to nominate persons to
serve on the Board of Directors of the Company and to report to the Board. The
members of the Nominating Committee are Messrs. Dutia, Sharp and Staley. The
Nominating Committee does not solicit or consider nominations from shareholders.
The Nominating Committee met once during fiscal year 1997.
The principal duties of the Audit Committee are to advise and assist
the Board of Directors in evaluating the performance of the Company's
independent auditors, including the scope and adequacy of the auditor's
examination, and to review with the auditors the accuracy and completeness of
the Company's financial statements and procedures. The members of the Audit
Committee are Messrs. Moore, Sharp and Staley, none of whom are officers or
employees of the Company. The Audit Committee met once during fiscal year 1997.
DIRECTOR COMPENSATION
Directors who are also officers or employees of the Company or its
subsidiaries receive no additional compensation for their services as directors.
In fiscal year 1997, Directors who are not employees of the Company were paid an
annual fee of $4,000 plus $250 for each Board or Committee meeting attended. In
addition, Directors are reimbursed for reasonable travel expenses incurred in
attending meetings.
In July 1997 the Compensation Committee offered, and each outside Board
member accepted, the opportunity to cancel certain options previously granted
and to replace those options with a new option covering a like number of shares
at a lower exercise price. The new exercise price is $0.37 per share (which
equaled the market price on the date of grant) and the exercise prices of the
canceled options were $0.88 per share. The new options vest 50% one year after
the date of grant and 100% after two years. 396,667 options, (166,667 for Mr.
Dutia, 73,333 for Mr. Moore, 76,667 for Mr. Sharp, and 80,000 for Mr. Staley)
were repriced. The Compensation Committee took this action because the Company
wished to provide appropriate incentives in order to retain these valuable Board
members.
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STOCK OWNERSHIP BY DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the
ownership of Photomatrix common stock by Directors and Executive Officers:
<TABLE>
Shares of Common Stock Percent of Shares of
Beneficially Owned Common Stock Outstanding
Name of Beneficial Owner or Group as of February 12, 1998(1) as of February 12, 1998(1)
<S> <C> <C>
Suren G. Dutia, President, CEO and 144,833(2) 2.85%
Chairman of the Board
Patrick W. Moore, Director 5,000 *
Roy L. Gayhart, Chief Financial 20,000 *
Officer, Secretary
Ira H. Sharp, Director 5,000 *
John F. Staley, Director 25,333 *
All directors and executive officers as a 200,166 3.94%
group(2)
</TABLE>
(1) Includes and reflects the ownership by the named director or officer of
shares of Common Stock subject to options exercisable within 60 days of
March 26, 1998.
(2) Includes options to purchase 100,000 shares.
* Less than 1%
EXECUTIVE COMPENSATION
Summary of Cash and Certain Other Compensation
The following table shows, for the most recent three fiscal years, the
cash compensation paid by the Company, as well as all other compensation paid or
accrued for those years, to the Chief Executive Officer as of March 31, 1997. No
other executive officer of the Company earned annual salary and bonus in excess
of $100,000 during fiscal 1997.
Summary Compensation Table
<TABLE>
Long-Term
Compensation
Name and Fiscal Annual Compensation Stock
Principal Position Year Salary Bonus Other(1) Option Shares
<S> <C> <C> <C> <C> <C>
Suren G. Dutia, 1997 $154,400 $30,000 $15,000 --
President and Chief 1996 $165,000 -- $13,900 191,667
Executive Officer 1995 $163,300 $10,000 $15,200 100,000
</TABLE>
(1) Includes Company matching contributions to the Photomatrix Savings and
Investment Plan ($4,800, $4,400, and $4,300, for 1997, 1996 and 1995,
respectively) and medical premiums ($10,200, $9,500, and $10,900 for
1997, 1996 and 1995, respectively).
Employment Agreements. Mr. Dutia and Mr. Roy Gayhart, Chief Financial
Officer and Secretary of the Company, are employed under employment agreements
that expire on July 31, 1999 and April 30, 1999, respectively. If
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either Mr. Dutia's or Mr. Gayhart's employment is terminated by the Company
without cause, then each will be entitled to receive his base salary and health
insurance benefits for the remainder of the term of his agreement.
Officers Severance Policy. In 1988, the Company's Board of Directors
adopted an Officers Severance Policy that was modified in November 1990 and
February 1997. Under the policy, Mr. Dutia is to receive twelve weeks'
compensation upon termination of employment by the Company in addition to any
amounts payable for the remaining term of his employment agreement. Mr. Gayhart
is to receive eight weeks' compensation upon the termination of his employment
by the Company in addition to any amounts payable for the remaining term of his
employment agreement. Mr. Charles Frady, Controller and Assistant Treasurer, is
to receive eight weeks' compensation upon termination of employment by the
Company.
Stock Option Grants
There were no options granted to officers in fiscal 1997.
Aggregated Stock Option Exercises and Fiscal Year-End Stock Option Value Table
The following table sets forth certain information regarding the number
and value of specified unexercised options held by the Chief Executive Officer
and the Company's other executive officer as of March 31, 1997:
Value of Unexercised
In-the-Money
Number of Unexercised Options(1) Options(2)
Name Exercisable Unexercisable Exercisable Unexercisable
Suren G. Dutia 100,000 166,667 $59,870 $0
(1) No options were exercised in fiscal year 1997.
(2) The value is calculated as the total market value of stock subject to
the options on July 18, 1996 ($.37 per share), less the total of the
option exercise prices.
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Ten Year Option Repricing Table
In July 1997 the Compensation Committee offered to reprice a portion of
the option shares previously granted to Mr. Dutia which had an original exercise
price in excess of the market value of the Company's common stock at that time.
This offer was made in conjunction with identical offers to most employees. The
following table sets forth the specified information concerning all options
repriced for all executive officers of the Company for the period August 1987
(initial public offering) through July 1997.
<TABLE>
Length of
Number of Original
Shares Market Price Option Term
Underlying of Stock at Exercise Price Remaining at
Options Time of at Time of New Exercise Date of
Name Date Repriced Repricing Repricing Price Repricing
<S> <C> <C> <C> <C> <C>
S. Dutia, CEO November 1990 200,000 $0.18 $3.75 $0.18 8 years
S. Dutia, CEO June 1995 25,000 $1.25 $4.13 $1.69 9 years
S. Dutia, CEO November 1995 166,667 $0.88 $1.31- $0.88 6-9 years
$2.91
S. Dutia, CEO July 1997 166,667 $0.37 $ 0.88 $ 0.37 4-7 years
B. Myers, CFO November 1995 100,000 $0.18 $1.50- $0.18 8 years
$3.48
B. Myers, CFO June 1995 16,667 $1.25 $4.13 $1.69 9 years
B. Myers, CFO November 1995 116,667 $0.88 $1.31- $0.88 6-9 years
$2.91
</TABLE>
$2.91
Report on Stock Option Repricing
In connection with the July 1997 option repricing, the Compensation
Committee issued the following report:
While the Committee believes that the Company's Stock Option Plans have
been instrumental in attracting and retaining quality executive officers,
employees and Directors, the incentive feature of such program may become lost
when options are granted at fair market value and subsequently the market price
of the Company's common stock falls substantially below the exercise price of
stock options granted under such program. In 1997, the market price for the
Company's common stock fell substantially. As a result of the drop in market
price of the common stock, the optionees have exercise prices substantially
higher than the current market value, and therefore hold options which are out
of the money. After careful consideration of the relevant factors, including (1)
the decline in the market price of the common stock, (2) the reasons for the
decline in the market price of the common stock, (3) the large percentage of the
Company's employees and Directors holding out of the money options, and (4) the
importance of equity incentive to the Company's overall compensation program for
executive officers and employees at all levels and Directors, the Committee
approved the cancellation of the existing options and the reissue of said
options pursuant to the Company's Stock Option Plans.
COMPENSATION COMMITTEE
Ira H. Sharp
Patrick Moore
John F. Staley
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors, officers and persons who own more than ten percent of the
Company's common stock, to file reports of ownership and changes in ownership of
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securities with the Securities and Exchange Commission and to furnish to the
Company copies of all Section 16(a) forms they file. Based solely on its review
of copies of such forms received by it, or written representations from
reporting persons that no Forms 5 were required for those persons, the Company
believes that during fiscal year 1997, all filings required by its directors,
officers and greater than 10 percent beneficial owners were timely filed.
PROPOSAL 4 -- ADOPTION OF PHOTOMATRIX 1998 STOCK OPTION PLAN
The Board of Directors has unanimously adopted, subject to shareholder
approval, the Photomatrix, Inc. 1998 Stock Option Plan ("1998 Plan") that
authorizes the grant of incentive and nonqualified stock options covering an
aggregate of 1,500,000 (pre-reverse stock split) shares of Common Stock to
officers, directors and employees of the Company and its subsidiaries. The
affirmative vote of a majority of the outstanding shares is required to approve
the 1998 Plan. As of March 6, 1998, the market value of the 1,500,000 shares of
Common Stock reserved for issuance under options to be awarded under the 1998
Plan was approximately $703,125.
The following summary describes the principal features of the 1998
Plan. This summary is qualified in its entirety by reference to the specific
provisions of the 1998 Plan, the full text of which is enclosed herewith as
Appendix C. Additional copies of the Plan document are available to shareholders
upon request to the Company.
Purposes of the Plan
The purposes of the 1998 Plan are to encourage stock ownership by
officers, directors and employees of the Company and its subsidiaries, to
provide an incentive for such recipients of options to improve the profits of
the Company and its subsidiaries, and to assist the Company and its subsidiaries
in attracting, retaining and motivating the recipients of options by providing
them with an opportunity to participate in the Company's growth through stock
ownership. The Board of Directors of the Company approved the 1998 Plan, in
part, because there are an insufficient number of shares reserved for future
option grants under the 1994 and 1992 Plans, given the Company's anticipated
acquisition of I-PAC and the consequent expansion in the number of employees of
the Company and its subsidiaries. Further, under terms of the Merger, Messrs.
Grivas and Moore are entitled to receive options to purchase common stock with
the equivalent valuation of $75,000 annually (calculated by the product of the
number of shares of Common Stock underlying the option times 120 percent of the
fair value of the stock), with the option price set at 20% above the fair market
value (trading price) of the common stock at the time of grant.
Available Options
The 1998 Plan authorizes the grant of incentive and nonqualified stock
options covering an aggregate of 1,500,000 (pre-reverse stock split) shares of
Common Stock (subject to adjustment in the event of stock dividends, stock
splits and certain other corporate events). If the proposed 2 for 1 reverse
stock split is approved and effected, 750,000 shares of Common Stock shall be
reserved for issuance under the 1998 Plan. If the proposed 3 for 1 reverse stock
split is approved and effected, 500,000 shares of Common Stock will be reserved
for issuance under the 1998 Plan. If the proposed 4 for 1 reverse stock split is
approved and effected, 375,000 shares of Common Stock will be reserved for
issuance under the 1998 Plan.
Term of the Plan
The 1998 Plan was effective, subject to shareholder approval, upon
approval by the Board of Directors and will continue in effect until ten years
following the date it was approved by the Board. The Board of Directors may
suspend or terminate the Plan, but not outstanding options, at any time.
Eligible Persons
Any employee, officer or director of the Company and its subsidiary
corporations is eligible to participate in the 1998 Plan and be granted
incentive stock options or nonqualified options. As of March 6, 1998, 124 people
were eligible to participate in the 1998 Plan.
51
<PAGE>
Plan Administration
The Compensation Committee of the Board of Directors ("Committee") or,
in the absence of such a committee, the Board of Directors, shall administer the
1998 Plan. The Committee has the authority to (i) determine who receives stock
options, (ii) determine when options are granted, (iii) determine, not
inconsistent with the 1998 Plan, the terms and conditions of the options,
including when the options become exercisable or vested, (iv) determine whether
employees receive incentive or nonqualified options, and (v) interpret the
provision of the 1998 Plan and the options granted under the 1998 Plan.
Because members of the Compensation Committee are eligible to
participate in the 1998 Plan, the members have an interest in the approval of
the 1998 Plan and in the administration of the 1998 Plan.
Option Terms
The Committee may award either incentive stock options or nonqualified
options to eligible employees. Currently, the Company has a net operating loss
carry forward for federal income tax purposes so the Committee is likely to
award incentive stock options to employees.
The exercise price of a stock option may not be less than 100% of the
fair market value per share on the date of grant. The 1998 Plan defines fair
market value as the mean between the bid and asked price of the Common Stock as
quoted on NASDAQ. The exercise price is payable in full at the time of exercise,
in cash or, in the discretion of the Committee, by the delivery of outstanding
shares of Common Stock already owned by the option holder or by sale of the
shares subject to the option.
The Committee also determines the schedule pursuant to which options
become exercisable. Except with respect to options granted to officers or
directors of the Company, options granted to eligible participants must become
exercisable or vest at a rate of at least 20% per year during the five years
following the grant. Continuous service during the vesting period is the only
condition to vesting. In the event of a dissolution or liquidation of the
Company or a reorganization, merger or consolidation of the Company, if the
Company is not the surviving company, unvested options will automatically become
exercisable. The Committee can also accelerate the vesting of the options in the
case of certain similar events.
Options granted under the 1998 Plan may expire no later than 10 years
from the date of the grant. If an employee terminates his employment for any
reason other than death or permanent disability or a director ends his service
on the Board for any reason other than death of permanent disability, his vested
options expire within three months of the termination. In the case of death or
permanent disability, the vested options expire within six months of employment
termination or cessation of service on the Board. Any unvested options expire as
of termination of employment or cessation of service on the Board for any
reason.
Options granted under the 1998 Plan are not transferable or alienable
in any manner, whether voluntarily or involuntarily, other than by will or the
laws of descent and distribution, and may be exercised during the lifetime of
the holder only by the holder.
Amendments to the 1998 Plan
The Board may amend, suspend, alter or terminate the 1998 Plan at any
time; provided, however, that any amendment of the 1998 Plan that requires
shareholder approval, such as any increase in the number of shares available for
issuance under the Plan (except pursuant to provisions of the Plan relating to
adjustments upon the occurrence of certain events such as stock splits) or that
materially changes the class of persons who are eligible to receive incentive
stock options, shall be subject to the approval of a majority of the Company's
shareholders.
Federal Income Tax Consequences
The following discussion is only intended as a general summary of the
federal income tax consequences of the grant and exercise of incentive and
nonqualified stock options under the 1998 Plan. This discussion is based upon
the present
52
<PAGE>
Internal Revenue Code of 1986, as amended ("Code"), and the regulations
promulgated thereunder, all of which are subject to change or interpretation by
Congress, the Treasury Department and the courts. Participants in the 1998 Plan
may also be responsible for other federal state and local income and other taxes
and should consult with their own personal tax advisor before engaging in any
transaction with respect to options.
The tax consequences of a stock option to the option holder and to the
Company differ depending on whether the option is an incentive stock option as
defined in Section 422 of the Code or a nonqualified option. The Company
generally will be allowed a deduction for compensation expense upon the exercise
of a nonqualified option subject to certain reporting requirements and the
provisions of Section 162(m) of the Code. The compensation must also constitute
an ordinary and necessary business expense. The deduction is equal to the
compensation income realized by the option holder. In contrast, unless the
holder of an incentive stock option makes a "disqualifying disposition" of such
shares, the Company is not allowed a deduction with respect to the exercise or
grant of an incentive stock option.
Incentive Stock Options. Certain options granted under the 1998 Plan
may be intended to be "incentive stock options" as defined in Section 422 of the
Code. In general, holders of incentive stock options are not taxed at the time
of the grant of the option or at the time of the exercise of the option unless
the option holder disposes of the stock acquired upon the exercise of the option
within two years from the date of the option grant or one year from the exercise
date of the option ("disqualifying disposition"). However, the option holder may
incur liability for alternative minimum tax upon the exercise of the option
because the excess of the fair market value of stock at exercise over the
exercise price is an item of adjustment to income. Upon the option holder's sale
of stock acquired upon the exercise of the option which is not a disqualifying
disposition, the excess of the amount realized on the sale over the exercise
price will be taxed to the holder as long-term capital gain or loss. Subject to
certain exceptions, capital gain attributable to stock held more than 18 months
will be taxed to individuals at 20% and 28% if held at least one year but less
than 18 months.
If an option holder makes a disqualifying disposition, the portion of
the gain equal to the fair market value of the stock as of the date the option
was exercised (or, if lower, the proceeds of the sale) and the option exercise
price will be taxed to the holder as ordinary compensation income in the year of
the disposition and the Company will receive a deduction in the same amount
subject to certain reporting requirements and the provisions of Section 162(m)
of the Code. Any gain in excess of the ordinary income will be taxed as short or
long-term capital gain depending upon the holding period.
If the Committee permits the exercise of options with shares of Common
Stock, the tax consequences will be the same except as described below.
Pursuant to Section 424 of the Code and proposed Treasury Regulations,
the use of Common Stock that was previously acquired pursuant to an option plan
to pay the exercise price for an option under the 1998 Plan will be treated as a
taxable disposition of the old shares if the holding period requirements under
Section 422 of the Code applicable to the old shares have not been satisfied at
the time of the exchange. As a result, an option holder could receive
compensation income equal to the excess of the fair market value on the date of
exercise of the old shares over the exercise price of the new shares. However,
the option holder would not realize capital gain on any appreciation since the
date of acquisition of the old shares. The option holder's basis in the new
shares acquired would be the option holder's basis in the old shares plus any
compensation income realized upon the exchange of the old shares.
Nonqualified Options. Any options granted under the 1998 Plan that are
not "incentive stock options" as defined in Section 422 of the Code are
"nonqualified" or nonstatutory options. In general, the grant of a nonqualified
option does not result in the imposition of any federal income tax on the option
holder, regardless of whether the exercise price is higher or lower than fair
market value at the time of the grant. The exercise of a nonqualified option
causes the option holder to realize compensation income, taxable as ordinary
income, equal to the excess of the fair market value at the time of exercise
over the exercise price paid for the shares. This income is not an item of tax
preference for alternative minimum tax purposes. The option holder generally is
taxed on the income in the year of exercise. As a condition to exercising an
option under the 1998 Plan, the option holder must make an arrangement with the
Company with respect to the withholding of any federal, state or local taxes or
foreign taxes required to be withheld with respect to the exercise of the
options.
53
<PAGE>
Upon the option holder's sale of stock acquired upon the option
exercise, the option holder will be taxed, as long or short-term capital gain or
loss, on the difference between the exercise price plus the compensation income
realized by the option holder and the amount realized on the sale.
Vote Required
Adoption of the 1998 Plan requires the affirmative vote of the holders
of a majority of the outstanding shares of the Company's Common Stock.
THE BOARD OF DIRECTORS RECOMMENDS THAT
YOU VOTE FOR THE ADOPTION OF THE 1998 PLAN.
PROPOSAL 5 -- RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
Photomatrix's Board of Directors, upon recommendation of the Audit
Committee, has selected the firm of KPMG Peat Marwick LLP as Photomatrix's
independent auditors for the fiscal year 1998. This nationally known firm has
served as the Company's independent auditors since 1991 and has no direct or
indirect financial interest in the Company.
Although not legally required to do so, the Board is submitting the
selection of KPMG Peat Marwick LLP for ratification by the shareholders at the
Annual Meeting. In the absence of instructions to the contrary, the shares
represented by the proxy delivered to the Board of Directors will be voted in
favor of ratification of this appointment.
A representative of KPMG Peat Marwick LLP is expected to be present at
the Annual Meeting and will be available to respond to appropriate questions and
to make such statements as he or she may desire.
THE BOARD OF DIRECTORS RECOMMENDS THAT
YOU VOTE FOR THE RATIFICATION OF THE APPOINTMENT
OF THE INDEPENDENT AUDITORS.
EXHIBITS
Attached hereto as Exhibits 1 and 2, respectively, are the following
documents:
Photomatrix's Annual Report on Form 10-KSB for the year
ended March 31, 1997, filed on June 30, 1997; and
Photomatrix's Quarterly Report on Form 10-QSB for the nine
month period December 31, 1997.
54
<PAGE>
FINANCIAL STATEMENTS
The audited consolidated balance sheets of I-PAC as of December 31,
1997 and December 31, 1996, and the statements of operations and retained
earnings and cash flows for the years then ended are part of this Proxy
Statement commencing on page F-1. The audited consolidated balance sheets of
Photomatrix as of March 31, 1997 and March 31, 1996, and the consolidated
statements of operations, shareholders' equity, and cash flows for the years
ended March 31, 1997, 1996, and 1995, are set forth in the Report of Photomatrix
on Form 10-KSB for the year ended March 31, 1997, included in the Photomatrix
Annual Report, a copy of which is enclosed in this Proxy Statement. The
unaudited consolidated balance sheet of Photomatrix as of December 31, 1997, and
the consolidated statements of operations for the three and nine month periods
then ended, are set forth in the Report of Photomatrix on Form 10-QSB for the
quarterly period ended December 31, 1997, a copy of which is enclosed with this
Proxy Statement. The foregoing audited and unaudited financial statements of
Photomatrix are incorporated herein by this reference.
SHAREHOLDER PROPOSALS
Proposals of shareholders submitted pursuant to Rule 14a-8 of the Securities and
Exchange Commission for the proxy statement for the Annual Meeting of
Shareholders to be held in September 1998 must be received by the Company at its
principal executive offices not later than July 1, 1998. Such proposals should
be submitted in writing to the Secretary of the Company, Photomatrix Inc., 1958
Kellogg Avenue, Carlsbad, California 92009, who will submit them to the Board of
Directors for its consideration.
OTHER BUSINESS
Photomatrix knows of no other business to be submitted to the meeting.
If any other business properly comes before the meeting or any adjournment
thereof, the persons named as proxy holders on the enclosed proxy card intend to
vote the shares represented in accordance with their best judgment in the
interest of the Company.
ROY L GAYHART
Secretary
May 11, 1998
Carlsbad, California
55
<PAGE>
I-PAC MANUFACTURING, INC.
Financial Statements
Years Ended December 31, 1997 and 1996
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
I-PAC Manufacturing, Inc.
San Diego, California
We have audited the accompanying balance sheets of I-PAC Manufacturing,
Inc. as of December 31, 1997 and 1996, and the related statements of operations
and retained earnings, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of I-PAC Manufacturing,
Inc. as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ LEVITZ, ZACKS & CICERIC
January 31, 1998
San Diego, California
F-2
<PAGE>
I-PAC MANUFACTURING, INC.
Balance Sheets
December 31, 1997 and 1996
<TABLE>
ASSETS
1997 1996
<S> <C> <C>
Current Assets:
Cash $ 17,151 $ 15,616
Receivables 551,473 385,865
Inventories 1,062,692 1,131,332
Prepaid expenses 45,972 27,105
Current portion of notes receivable 16,667 -0-
Total current assets 1,693,955 1,559,918
Notes receivable, less current portion 33,333 -0-
Property and equipment, net 2,506,834 277,944
Other assets 71,587 34,083
Total assets $4,305,709 $1,871,945
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 597,669 $ 421,450
Accounts payable and accrued expenses 574,944 832,135
Accrued compensation and payroll taxes 105,258 94,691
Current portion of long-term debt 69,083 23,402
Accrued cost-discontinued operations -0- 113,394
Total current liabilities 1,346,954 1,485,072
Long-term debt, less current portion 2,245,074 230,389
Notes payable to related party 267,366 146,606
Notes payable to stockholders 180,457 180,457
Other long-term liability 226,790 226,790
Total liabilities 4,266,641 2,269,314
Stockholders' Equity:
Common stock - no par value; 1,000,000
shares authorized;
8,500 shares issued and outstanding 8,500 8,500
Retained earnings (deficit) 30,568 (405,869)
Total stockholders' equity (deficit) 39,068 (397,369)
Total liabilities and stockholders' equity $ 4,305,709 $ 1,871,945
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
I-PAC MANUFACTURING, INC.
Statements of Operations and Retained Earnings
Years Ended December 31, 1997 and 1996
<TABLE>
1997 1996
<S> <C> <C>
Sales, net $ 5,441,786 $ 5,188,948
Cost of sales 3,821,249 4,160,025
Gross profit 1,620,537 1,028,923
Selling, general and administrative expenses 1,048,321 928,737
Income from operations 572,216 100,186
Other income (expense):
Other income and expense, net 173,684 16,195
Interest expense (303,863) (100,271)
Income from continuing operating before
provision for income taxes 442,037 16,110
Provision for income taxes 5,600 800
Income from continuing operations 436,437 15,310
Discontinued operations (Note 3):
Loss from discontinued operations (less applicable
income taxes of $-0-) -0- (179,348)
Loss on disposal of discontinued operations during
phase-out period (less applicable income taxes of $-0-) -0- (113,394)
Net income (loss) 436,437 (277,432)
Retained deficit, beginning of year (405,869) (128,437)
Retained earnings (deficit), end of year $ 30,568 $ (405,869)
Earnings per share, basic and diluted:
Income from continuing operations $ 51.35 $ 1.80
Loss from discontinued operations -0- (21.10)
Loss on disposal of discontinued operations -0- (13.34)
Net income (loss) per share, basic and diluted $ 51.35 $ (32.64)
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
I-PAC MANUFACTURING, INC.
Statements of Cash Flows
Years Ended December 31, 1997 and 1996
<TABLE>
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 5,282,995 $ 5,681,214
Cash paid to suppliers and employees (5,033,634) (5,915,884)
Interest paid (303,863) (100,271)
Income taxes paid (800) (7,233)
Other income (expense), net 58,503 (13,805)
Net cash provided by (used in) operating activities 3,201 (355,979)
Cash flows from investing activities:
Purchase of property and equipment (242,262) (51,659)
Proceeds from sale of property and equipment 4,022 -0-
Net cash used in investing activities (238,240) (51,659)
Cash flows from financing activities:
Net borrowings on notes payable 176,219 421,450
Principal payments under long-term debt (60,405) (18,959)
Borrowing from related party 150,000 -0-
Principal payments under related party debt (29,240) -0-
Net cash provided by financing activities 236,574 402,491
Net increase (decrease) in cash 1,535 (5,147)
Cash, beginning of year 15,616 20,763
Cash, end of year $ 17,151 $ 15,616
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
I-PAC MANUFACTURING, INC.
Statements of Cash Flows
(Continued)
Years Ended December 31, 1997 and 1996
Increase (Decrease) in Cash
<TABLE>
1997 1996
<S> <C> <C>
Reconciliation of net income (loss) to net cash provided by
(used in) operating activities:
Net income (loss) $ 436,437 $ (277,432)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 110,826 77,423
Gain on disposition of property and equipment (1,787) -0-
(Increase) decrease in:
Receivables (165,608) 154,723
Inventories 27,143 (366,654)
Prepaid expenses (18,867) (14,859)
Other assets (24,925) (32,779)
Increase (decrease) in:
Accounts payable and accrued expenses (257,191) 25,035
Accrued compensation and payroll taxes 10,567 (34,830)
Accrued cost-discontinued operations (113,394) 113,394
Net cash provided by (used in) operating activities $ 3,201 $ (355,979)
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
In 1996, the Company acquired $76,263 of assets under capital leases.
In 1997, the Company:
Sold inventory and equipment for a note receivable of $50,000.
Incurred long-term debt of $2,111,230 to finance the purchase
of real property.
Incurred long-term debt of $9,541 to finance the purchase of a vehicle.
See accompanying notes to financial statements.
F-6
<PAGE>
I-PAC MANUFACTURING, INC.
Notes to Financial Statements
Years Ended December 31, 1997 and 1996
Note 1. THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES
I-PAC Manufacturing, Inc. (the Company) manufactures custom electronic
and electrical mechanical assemblies, including Printed Circuit Board
(PCB) assemblies, electrical interconnect products and subassemblies in
Carlsbad, California. Its customers, primarily located in the United
States, are major OEM's (original equipment manufacture), to which it
also provides valued-added engineering services. The Company generated
approximately 68% of its 1997 sales from four customers. These four
customers accounted for 24%, 17%, 16% and 11%, respectively, of 1997
sales revenue and approximately $390,000 of receivables at December 31,
1997. The Company grants unsecured credit to its customers.
Principles of Consolidation
The financial statements for 1997 include the accounts of the Company
and its wholly owned subsidiary, Express Assembly Corp. (Express)
purchased as of February 17, 1997 (Note 2). All significant
intercompany accounts and transactions have been eliminated upon
consolidation.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Inventory
Inventory is stated primarily at the lower of average cost or market.
Property and Equipment
Property and equipment, including renewals and betterments, are
recorded at cost and are depreciated using straight-line and
accelerated methods over estimated useful lives of 5 to 40 years.
Repairs and maintenance are charged to expense as incurred.
F-7
<PAGE>
I-PAC MANUFACTURING, INC.
Notes to Financial Statements
(Continued)
Years Ended December 31, 1997 and 1996
Note 1. THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES
(continued)
Revenue Recognition
Sales revenue and corresponding expense, cost of sales, are recognized
when the product is shipped to the customer.
Income Taxes
The stockholders have elected to have the Company taxed as a subchapter
S corporation under Section 1362 of the Internal Revenue Code which
provides that, in lieu of federal corporate income taxes, the
stockholders will recognize the Company's taxable revenue and
deductible expenses on their tax return. For California state purposes
a corporate tax is imposed on S corporations at the rate of 1.5% of
taxable income with a minimum of $800.
Note 2. ACQUISITION
On February 17, 1997, the Company acquired Express in a business
combination accounted for as a purchase. Express is primarily engaged
in quick turn prototype assembly and low volume value added
manufacturing. The results of operations of Express are included in the
accompanying financial statements since the date of acquisition. The
total cost of the acquisition was $31,119 which exceeded the fair value
of the net assets of Express by $14,671. The excess is being amortized
on the straight- line method over five years.
Note 3. DISCONTINUED OPERATIONS
At December 31, 1996, the Company's management approved a plan to sell
its 50% interest in Cable Converter Services - West LLC to the other
50% owner and discontinue its related operations of servicing and
repairing cable television equipment. The operations for servicing and
repairing cable television equipment are classified as discontinued
operations in the financial statements.
F-8
<PAGE>
I-PAC MANUFACTURING, INC.
Notes to Financial Statements
(Continued)
Years Ended December 31, 1997 and 1996
Revenues received from discontinued operations were $35,534 and
$347,130 for the years ended December 31, 1997 and 1996, respectively.
The Company has recorded a loss from discontinued operations of
$113,394 for estimated operations through February 28, 1997, the date
of sale. The Company sold related equipment and inventory at net book
value and recorded a note receivable of $50,000, due February 28, 2000.
The note receivable is
Note 3. DISCONTINUED OPERATIONS (continued)
expected to be satisfied by payments and/or credits allowed in
connection with certain future purchases by the Company from the
debtor. In addition, the Company has a purchase commitment of $60,000
expiring February 28, 1999.
Note 4. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
1997 1996
Receivable
Trade receivables $ 589,244 $ 430,452
Less allowance for doubtful accounts (37,771) (44,587)
$ 551,473 $ 385,865
Inventories
Raw materials $ 1,001,983 $ 983,125
Work-in-process 175,709 301,207
1,177,692 1,284,332
Less reserve for obsolescence (115,000) (153,000)
$ 1,062,692 $ 1,131,332
F-9
<PAGE>
I-PAC MANUFACTURING, INC.
Notes to Financial Statements
(Continued)
Years Ended December 31, 1997 and 1996
Note 4. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS (continued)
1997 1996
Property and equipment, net
Land $ 338,110 $ -0-
Building 1,908,453 -0-
Machinery and equipment 444,273 506,734
Equipment 76,263 76,264
Vehicles 18,610 11,408
Building improvements 26,765 21,069
2,812,474 615,475
Less accumulated depreciation and
amortization (305,640) (337,531)
$ 2,506,834 $ 277,944
Other income and expense, net
Rental income $ 112,860 $ -0-
Other income and expense, net 60,824 16,195
$ 173,684 $ 16,195
Rental income is primarily from a month-to-month lease of a portion of
the Company's facilities for $7,500 per month.
The Company incurred rent expense of $33,000 and $183,700 for the years
ended December 31, 1997 and 1996, respectively.
F-10
<PAGE>
I-PAC MANUFACTURING, INC.
Notes to Financial Statements
(Continued)
Years Ended December 31, 1997 and 1996
Note 5. NOTES PAYABLE
1997 1996
At December 31, 1997, the Company has a
business loan agreement with a bank
expiring in June 30, 1998, which provides
for a revolving line of credit with a
maximum indebtedness of $700,000.
Interest is payable monthly at prime
plus 1.5% (effective rate of 10% at
December 31, 1997). The Company is
required to maintain certain financial
covenants. The borrowing is collatera-
lized by the assets of the Company and
secured by continuing guarantees executed
by its stockholders. $ 522,669 $ -0-
At December 31, 1997, the Company has a
note payable to a bank for $75,000;
interest payable monthly at prime plus
1.5% (effective rate of 10% at December
31, 1997); due on demand or on June 30,
1998. This note is cross-collateralized
with the revolving line of credit business
loan payable to bank. 75,000 -0-
At December 31, 1996, the Company had a
business loan agreement with a bank which
expired in January 1997. It provided for
a revolving line of credit with a maximum
indebtedness of $425,000. Interest was
payable monthly at prime plus 1.5%. -0- 421,450
$ 597,669 $ 421,450
F-11
<PAGE>
I-PAC MANUFACTURING, INC.
Notes to Financial Statements
(Continued)
Years Ended December 31, 1997 and 1996
Note 6. LONG-TERM DEBT
<TABLE>
1997 1996
<S> <C> <C>
Note payable to bank in monthly installments of
$12,909 including interest at prime plus 1%,
subject to change every five years (effective
rate of 9.25% at 12/31/97); through January 2022;
collateralized by a first trust deed on the
Company's land and building. The Company is
required to maintain certain financial covenants.
The note is guaranteed by certain stockholders.
Certain notes payable to related parties (Note 7)
have been subordinated to this note. $1,477,406 $ -0-
Note payable to finance company in monthly
installments of $5,604 including interest at
7.569% and fees of $793; through March 2017;
collateralized by a second trust deed on the
Company's land and building; guaranteed by the
Small Business Administration; guaranteed by
stockholders. 583,897 -0-
Note payable to bank in monthly installments
of $2,812 including interest at the prime
plus 2.5%, (effective rate of 11% at
December 31, 1997) through March 2005;
collateralized by equipment. 167,898 181,829
Note payable to company in monthly installments
of $1,071 including interest at 18.20%;
through May 2001; collateralized by
equipment. 31,971 38,827
Note payable to company in monthly installments
of $996 including interest at 26.6%;
through June 2001; collateralized by
equipment. 28,340 31,193
</TABLE>
F-12
<PAGE>
Note 6. LONG-TERM DEBT (continued)
<TABLE>
1997 1996
<S> <C> <C>
Note payable to an individual in monthly
installments of $694 plus interest at 10%;
through January 2000. Guaranteed by a
stockholder. 17,361 -0-
Note payable to bank in monthly installments
of $327 including interest 14.25%; through
February 2000; collateralized by a vehicle. 7,284 -0-
Other -0- 1,942
2,314,157 253,791
Less current portion 69,083 23,402
$2,245,074 $ 230,389
</TABLE>
Principal payments on long-term debt for years ending December 31 are
due as follows:
Notes Payable Related Parties
Related
Long-term Party Stockholders
Total Debt (Note 7) (Note 7)
1998 $ 69,083 $ 69,083 $ -0- $ -0-
1999 212,125 81,889 130,236
2000 78,106 78,106
2001 73,726 73,726
2002 68,395 68,395
Thereafter 2,260,545 1,942,958 137,130 180,457
$2,761,980 $2,314,157 $ 267,366 $ 180,457
F-13
<PAGE>
Note 7. NOTES PAYABLE TO RELATED PARTIES
<TABLE>
1997 1996
<S> <C> <C>
Notes Payable to Company Related by Ownership
Notes payable to company; interest at prime
plus 2% payable monthly; due on demand;
collateralized by a security agreement,
stock pledge agreements and guarantees by
stockholders; subordinated to bank loan
(Note 6); classified as long-term due to
subordination to note payable to bank. $ 137,130 $ 146,606
Note payable to company; in monthly installments
of $3,242 through January 1998 and $129,293.37
due February 21, 1998, including interest at
prime plus 2%; subsequent to December 31, 1997,
the payment date was extended to July 31, 1999;
collateralized by a security agreement and
guaranteed by stockholders 130,236 -0-
$ 267,366 $ 146,606
Notes Payable to Stockholders
Prime plus 2% (effective rate of 10.5% at
December 31, 1997) payable monthly; due on
demand; subordinated to bank loan (Note 6);
classified as long-term due to subordination
to note payable to bank. $ 180,457 $ 180,457
</TABLE>
Interest expense on notes payable to related parties was $37,885 and
$34,658 for the years ended December 31, 1997 and 1996, respectively.
Under the terms on the nonbinding letter of intent to merge (Note 11),
all notes payable to related parties will be converted into equity upon
completion of the merger.
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<PAGE>
Note 8. OTHER LONG-TERM LIABILITY
Liability of $226,790 due to a company; non-interest bearing; due April
1998; collateralized by equipment; subordinated to bank loan; to be
repaid at a rate of 40% of the non-material component of any sales made
to the lender. No sales orders have been received from the lender as of
January 31, 1998. Any unpaid balance on the due date will be canceled
and the security interest released. In the opinion of management no
sales orders are anticipated through the due date of this liability.
Note 9. RELATED PARTY TRANSACTIONS
Evergreen Investments (Evergreen), a company owned by two officers and
primary stockholders of the Company, provides management and legal
services to the Company. The Company incurred expenses of approximately
$205,500 and $235,600 for services provided by Evergreen for the years
ended December 31, 1997 and 1996, respectively. During this period, the
two officers and primary stockholders did not receive a salary or
employee benefits directly from the Company. As of December 31, 1997
and 1996, approximately $49,000 and $5,900, respectively, due to
Evergreen was included in accounts payable. Under terms of the
nonbinding letter of intent (Note 11), these officers will become
officers of Photomatrix, Inc. and each will receive compensation as set
by the Board of Directors with an initial annual salary of $125,000. In
connection with this employment, subsequent to the close of the merger,
Evergreen will no longer provide management services to the Company.
For the year ended December 31, 1997, the Company purchased
approximately $6,600 of merchandise from MGS Interconnect (MGS), a
company owned by two primary stockholders of the Company. During 1996,
the Company subcontracted out $57,400 of sub-assembly and other
production work to MGS. The Company also recorded sales to
F-15
<PAGE>
I-PAC MANUFACTURING, INC.
Notes to Financial Statements
(Continued)
Years Ended December 31, 1997 and 1996
MGS of approximately $47,900 and $88,100 for the years ended December
31, 1997 and 1996, respectively.
Included in receivables at December 31, 1997 and 1996 are $41,373 and
$74,181, respectively, of accounts receivable due from related parties.
Note 9. RELATED PARTY TRANSACTIONS (continued)
During 1997 and 1996, the Company incurred expenses of approximately
$136,700 and $147,100, respectively, for commissions to MGM Tech Rep
(MGM), an outside sales representative firm owned primarily by the
three stockholders of the Company. In addition, at December 31, 1997,
prepaid expenses include approximately $42,200 of commissions advanced
to MGM. The Company received approximately $4,600 of rental income from
MGM for the year ended December 31, 1997.
The Company also incurred expenses of approximately $28,400 and $39,900
for legal services provided by a law firm in which a primary
stockholder and officer of the Company is a partner, for the years
ended December 31, 1997 and 1996, respectively. In addition, the
Company also incurred expenses of approximately $27,500 and $39,700 for
general business consulting services provided by this officer for the
years ended December 31, 1997 and 1996, respectively. During this
period, this officer did not receive a salary or employee benefits
directly from the Company.
Note 10. INCOME TAXES
The components of the provision for income taxes are as follows:
1997 1996
State S corporation franchise tax $ 5,600 $ 800
Deferred income tax -0- -0-
$ 5,600 $ 800
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<PAGE>
I-PAC MANUFACTURING, INC.
Notes to Financial Statements
(Continued)
Years Ended December 31, 1997 and 1996
Note 11. CONTINGENCIES
During October 1997, the Company executed a nonbinding letter of intent
to merge with a publicly traded company (Photomatrix, Inc.). Under the
terms of the nonbinding letter of intent if either party terminates the
merger negotiations without the written consent of the other, the party
causing the termination will pay the other party $100,000.
Note 12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments are as
follows:
1997 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
Assets:
Cash $ 17,151 $ 17,151 $ 15,616 $ 15,616
Note receivable including
current portion 50,000 50,000
Liabilities:
Notes payable 597,669 597,669 421,450 421,450
Long-term debt including
current portion 2,314,157 2,355,993 253,791 253,791
Notes payable to related
party 267,366 267,366 146,606 146,606
Notes payable to stock-
holder 180,457 180,457 180,457 180,457
Other long-term liability 226,790 -0- 226,790 226,790
The fair value of the note receivable is not determinable because a
quoted market price is not available and the cost of obtaining an
independent valuation is excessive.
F-17
<PAGE>
I-PAC MANUFACTURING, INC.
Notes to Financial Statements
(Continued)
Years Ended December 31, 1997 and 1996
The fair value of long-term debt, including current portion, is
estimated using interest rates currently available for long-term debt
with similar terms and remaining maturities. The fair value of notes
payable, notes payable to related party and notes payable to
stockholders approximates carrying value given the variable interest
rates provided in the notes.
The fair value of the other long-term liability is estimated based on
the expected cancellation in April 1998.
It is not practicable to estimate the fair value of guarantees on
behalf of the Company (Notes 5 and 6), however, the Company does not
expect to require payments on its behalf with respect to these
guarantees.
F-18
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
entered into as of March 16, 1998, by and among PHOTOMATRIX, INC., a California
corporation ("Photomatrix"); Photomatrix's wholly-owned subsidiary, PHOTOMATRIX
ACQUISITION, INC., a California corporation ("Merger Corp."); and I-PAC
MANUFACTURING, INC., a California corporation ("I-PAC").
W I T N E S S E T H:
WHEREAS, I-PAC is engaged in the business of custom contract
manufacturing of electrical and electrical mechanical products (the "I-PAC
Business").
WHEREAS, Photomatrix is engaged in the business of manufacturing and
selling high performance document scanners and aperture card scanners (the
"Photomatrix Business") and desires to acquire I-PAC through a tax-free merger
of Merger Corp. into I-PAC pursuant to Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code").
WHEREAS, the parties intend that this Agreement constitute a "plan of
reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(c) of the
Income Tax Regulations.
NOW, THEREFORE, in consideration of the recitals and of their
respective covenants, representations, warranties and agreements herein
contained, and intending to be legally bound hereby, the parties hereto agree as
follows:
ARTICLE I
CERTAIN DEFINITIONS
"Closing" has the meaning set forth in Section 2.2 below.
"Closing Date" has the meaning set forth in Section 2.2 below.
"I-PAC Share" means a share of the voting common stock of I-PAC.
"Photomatrix Share" means a share of the common voting stock of
Photomatrix.
"Effective Time" means 12:01 a.m. on the date as of which the Merger of
Merger Corp. with and into I-PAC, is effective which, for purposes of this
Agreement, is intended to be, and may be used interchangeably with, the Closing
Date.
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<PAGE>
"Knowledge" and the phrase "to the best knowledge" mean actual
knowledge, information and belief following such reasonable investigation and
review as a reasonably prudent corporation would conduct or commission in light
of the prevailing facts and circumstances.
"Merger" means the merger of Merger Corp. with and into I-PAC.
"Surviving Corporation" or "I-PAC" means I-PAC.
"Tax" means any federal, state, local and foreign income, gross
receipts, capital stock, profits, franchise, sales, stamp, occupation,
employment, unemployment, disability, withholding security, worker's
compensation, use, occupancy, transfer, value added, exercise, property (whether
real, personal or mixed) and other taxes and assessments (including interests
and penalties).
ARTICLE II
THE MERGER AND RELATED TRANSACTIONS
2.1 The Merger. Subject to the terms and conditions of this
Agreement, Merger Corp. will merge with and into I-PAC at the Effective Time.
I-PAC shall be the corporation surviving the Merger (the "Surviving
Corporation"). The terms of the Merger will be as set forth herein and in the
Merger Agreement in the form attached hereto as Exhibit 1.
2.2 The Closing. A Closing of the Merger and related transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of Luce, Forward, Hamilton & Scripps LLP, 600 West Broadway, Suite 2600, San
Diego, California 92101, on or about June 8, 1998 or such other time and place
as is mutually agreeable to the parties and following the satisfaction or waiver
of all other conditions to the obligations of the parties to consummate the
Merger and related transactions contemplated hereby (the "Closing Date").
2.3 Actions at the Closing. At the Closing, (i) I-PAC will deliver
to Photomatrix the various certificates, instruments, and documents referred to
in Article VI below; (ii) Photomatrix and Merger Corp. will deliver to I-PAC the
various certificates, instruments and documents referred to in Article VII
below; and (iii) Merger Corp. and Photomatrix will file the Merger Agreement,
together with the Officers' Certificates required pursuant to Section 1103 of
the California Corporations Code (the "CCC"), with the Secretary of State of the
State of California (the "Secretary of State") in the form of Exhibit 2 hereto.
2.4 Effect of Merger.
2.4.1 General. The Merger shall become effective at the time the
Agreement of Merger is filed with the Secretary of State or at such later time
as may be stated in the Agreement of Merger. The Merger shall have the effect
set forth in Section 1107 of the CCC. The Surviving Corporation may, at any time
after the Effective Time, take any action (including executing and
A-2
<PAGE>
delivering any document) in the name and on behalf of such entity or the entity
with which it merged in order to carry out and effectuate the transactions
contemplated by this Agreement.
2.4.2 Conversion of I-PAC Shares. At the Effective Time, each I-PAC
Share then issued and outstanding shall, by virtue of the Merger and without any
action on the part of the holder thereof, be converted into and represent the
right to receive 570.3529411 (adjusted proportionately to reflect any stock
split, reverse stock split or recapitalization of Photomatrix or any exercise of
dissenters' rights on or prior to the Closing Date) Photomatrix Shares
(collectively, the "Merger Consideration") and each share of Merger Corp. common
stock shall, by virtue of the Merger and without any action on the part of the
holder thereof, be converted into and represent the right to receive one I-PAC
Share. The Merger Consideration will be proportionately adjusted in the event of
any stock split or combination of the outstanding Photomatrix Shares or the
I-PAC Shares occurring, or any stock dividend payable to holders of Photomatrix
Shares or I-PAC Shares the record date of which is, prior to the Effective Time.
2.5 Exchange of I-PAC Shares.
2.5.1 At the Closing, Photomatrix shall make available for exchange
or conversion for the benefit of the holders of I-PAC Shares such number of
Photomatrix Shares as shall be issuable and such amount of cash as may be
payable in lieu of fractional Photomatrix Shares as Merger Consideration in
connection with the Merger.
2.5.2 Prior to the Closing, Photomatrix shall deliver to each
holder of record (other than Photomatrix, I-PAC or any wholly-owned subsidiary
of either of them) ("I-PAC Shareholder") of a certificate or certificates which
immediately prior to the Effective Time represents outstanding I-PAC Shares (the
"Certificates") a shareholder's representation and transmittal letter, in a form
attached hereto as Exhibit 3 ("Shareholder's Representation and Transmittal
Letter").
2.5.3 Upon surrender of the Certificates for cancellation to
Photomatrix, together with the Shareholder's Representation and Transmittal
Letters, duly executed, all to occur at the Closing, Photomatrix shall deliver
to the holders of each such Certificate that number of Photomatrix Shares equal
to (i) the number of I-PAC Shares represented by such Certificate times
570.3529411 plus any cash payable in lieu of fractional shares otherwise
issuable to the holders of each such Certificate.
2.5.4 In the event of a transfer of ownership of I-PAC Shares which
is not registered in the transfer records of I-PAC, it shall be a condition to
the issuance of Photomatrix Shares that each Certificate so surrendered shall be
properly endorsed or be otherwise in proper form for transfer and that such
transferee shall (a) pay to Photomatrix any transfer or other taxes required or
(b) establish to the satisfaction of Photomatrix that such tax has been paid or
is not payable. All Photomatrix Shares and cash in lieu of fractional shares
issued and paid upon the surrender for exchange of I-PAC Shares in accordance
with this Agreement shall be deemed to have been issued in full satisfaction of
all rights pertaining to such I-PAC Shares.
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<PAGE>
2.5.5 No certificates or scrip representing fractional Photomatrix
Shares shall be issued upon the surrender for exchange of Certificates; no
dividend or distribution of Photomatrix shall relate to any fractional share;
and such fractional share interests shall not entitle the owner thereof to vote
or otherwise exercise any rights as a shareholder of Photomatrix. In lieu of any
fractional share, Photomatrix shall pay to each holder of I-PAC Shares who
otherwise would be entitled to receive a fractional Photomatrix Share an amount
of cash (without interest) determined by multiplying (a) the average bid price
of a share of Photomatrix Common Stock during the ten (10) trading days
immediately preceding the Closing Date by (b) the fraction of a share to which
such holder would otherwise be entitled.
2.5.6 In the event any Certificate shall have been lost, stolen or
destroyed, Photomatrix shall issue in exchange for such lost, stolen or
destroyed Certificate, upon the making of an affidavit of that fact by the
holder thereof, such Photomatrix Shares and cash in lieu of fractional shares,
if any, as may be required pursuant hereto; provided, however, that Photomatrix
may, in its discretion and as a condition precedent to the issuance thereof,
require the owner of such lost, stolen or destroyed Certificate to deliver a
bond in such reasonable sum as it may direct as indemnity against any claim that
may be made against Photomatrix, Merger Corp., I-PAC, or any other party with
respect to the Certificate alleged to have been lost, stolen or destroyed.
2.6 Appointment to Photomatrix Board of Directors. Effective at the
Closing, the directors of Photomatrix shall be Suren G. Dutia, Ira H. Sharp,
John F. Staley, William L. Grivas, Patrick W. Moore and James P. Hill. The
authorized number of directors shall be seven, and there shall be one vacancy on
the Board.
2.7 Appointment of Photomatrix Officers. Effective at the Closing, and
subject and pursuant to Section 312(b) of the California General Corporation
Law, Suren Dutia shall resign as the Chairman and Chief Executive Officer of
Photomatrix and retain the title of President of Photomatrix, William L. Grivas
shall be appointed the Chairman of the Board of Photomatrix, Patrick W. Moore
shall be appointed the Chief Executive Officer of Photomatrix, and Roy L.
Gayhart shall serve as the Chief Financial Officer and Secretary of Photomatrix.
The Bylaws of Photomatrix will be amended in a manner in conformance with
existing employment agreements and acceptable to I- PAC to accommodate the
foregoing offices.
2.8 Possible Issuance of Additional Shares. In addition to the
Photomatrix Shares to be issued pursuant to Sections 2.4.2, 2.5.1, and 2.5.3 of
this Agreement, within ninety (90) days following the completion of the Earnout
Period, as that term is defined below, Photomatrix shall deliver to the I-PAC
Shareholders, allocated among them in proportion to their ownership of I-PAC
Shares as of the Closing Date, additional Photomatrix Shares determined in
accordance with the following schedule:
A-4
<PAGE>
Additional
Photomatrix
Shares Alternative 1 Alternative 2
934,834 Gross Revenues between Gross Revenues of more than
$7,000,000 and $7,500,000 and a $8,000,000 and Gross Profit of
Gross Profit Margin of at least more than $2,275,000
31.7%
1,403,234 Gross Revenues between Gross Revenues of more than
$7,500,001 and $8,000,000 and $8,000,000 and Gross Profit of
Gross Profit Margin of at least more than $2,430,000
31.5%
1,871,633 Gross Revenues between Gross Revenues of more than
$8,000,001 and $8,500,000 and $8,500,000 and Gross Profit of
Gross Profit Margin of at least more than $2,580,000
31.3%
2,338,101 Gross Revenues between Gross Revenues of more than
$8,500,001 and $9,000,000 and a $8,000,000 and Gross Profit of
Gross Profit Margin of at least more than $2,730,000
31.2%
2,804,803 Gross Revenues between Gross Revenues of more than
$9,000,001 and $9,500,000 and a $8,000,000 and Gross Profit of
Gross Profit Margin of at least more than $2,890,000
31.1%
3,274,970 Gross Revenues between Gross Revenues of more than
$9,500,0001 and $10,000,000 and $8,000,000 and Gross Profit of
a Gross Profit Margin of at more than $3,040,000
least31.0%
3,744,902 Gross Revenues of more than Gross Revenues of more than
$10,000,000 and a Gross Profit $8,000,000 and Gross Profit of
Margin of at least 30.9% more than $3,190,000
No additional Photomatrix Shares shall be issued if I-PAC generates Gross
Revenues of less than $7,000,000 during the Earnout Period. In no event shall
Photomatrix be required to issue more than 3,744,902 additional Photomatrix
Shares pursuant to this Section 2.8, provided that the foregoing numbers of
shares shall be adjusted to reflect any stock split, reverse stock split, or
recapitalization of Photomatrix. For purposes of this Section 2.8, (i) the
Earnout Period shall be the twelve months commencing with July 1, 1998, (ii)
I-PAC Gross Revenues, Gross Profit, and Gross Profit Margin shall be determined
as set forth in Exhibit 4 to this Agreement, and (iii) such determination shall
be
A-5
<PAGE>
based in part on a physical inventory of I-PAC as of the beginning and the end
of the Earnout Period. The determination of I-PAC Gross Revenues, Gross Profit,
and Gross Profit Margin during the Earnout Period shall be made initially by the
Audit Committee of the Photomatrix Board of Directors. If the Audit Committee
and the I-PAC Shareholders are unable to agree on the amount of I-PAC Gross
Revenues, Gross Profit, and Gross Profit Margin during the Earnout Period, the
matter shall be referred to the independent auditors of Photomatrix, whose
conclusion shall be final and binding on the parties.
2.9 Issuance of Additional Shares upon the Exercise of Outstanding
Options and Warrants. Options and warrants to purchase 907,333 shares of
Photomatrix Common Stock are outstanding as of the date of this Agreement, and
additional options may be issued prior to the Closing Date (collectively, the
"Outstanding Options"). If after the date of this Agreement Outstanding Options
are exercised, then an equivalent number of additional Photomatrix Shares shall
be issued to the I-PAC Shareholders, allocated among them in proportion to their
ownership of I- PAC Shares as of the Closing Date. Such issuances of additional
Photomatrix Shares shall occur on the Closing Date as to issuances of option
shares which occur on or before the Closing and concurrently with any issuances
of option shares which occur after the Closing Date until all of the Outstanding
Options have been exercised, have expired, or have been canceled.
ARTICLE III
REPRESENTATIONS, WARRANTIES AND COVENANTS
OF I-PAC AND THE SHAREHOLDERS
Representations of I-PAC . Except as set forth in the I-PAC Disclosure
Memorandum to be prepared, delivered and have the legal effect as provided in
Section 6.4 hereof, I-PAC represents and warrants to Photomatrix and Merger
Corp. and agrees as follows:
3.1 Existence; Good Standing; Corporate Authority and Authorization.
3.1.1 I-PAC. I-PAC is a corporation duly organized, validly
existing and in good standing under the laws of the State of California. I-PAC
is qualified to do business and is in good standing in all other jurisdictions
in which the character or location of the properties owned or leased by it or
the nature of the business conducted by it makes such qualification necessary
and where the failure to so qualify would have a material adverse effect upon
I-PAC. Set forth in the I-PAC Disclosure Memorandum, is a list of each
jurisdiction in which I-PAC is qualified to do business as a foreign
corporation. I-PAC has full corporate power to own its property and to carry on
its business as now being conducted. I-PAC has full corporate power and
authority to enter into and perform its obligations under this Agreement and
under each other instrument and document executed and delivered by I-PAC
pursuant hereto or in connection herewith and to take all actions required of it
to consummate the Merger.
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<PAGE>
3.1.2 Subsidiaries. The I-PAC Disclosure Memorandum sets forth the
following information regarding each subsidiary of I-PAC ("I-PAC Subsidiary"
and, hereinafter "I- PAC" shall refer to both I-PAC and any I-PAC Subsidiaries):
(i) the name of the corporation; (ii) the state of incorporation; (iii)
authorized capitalization; and (iv) issued and outstanding capital stock and
other securities (including debt securities). Each I-PAC Subsidiary is duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation or other organization and has full corporate
power and authority to own, lease or otherwise hold its assets and properties
and to carry on its business as it is now conducted. Each I-PAC Subsidiary is
duly qualified or licensed to do business and is in good standing as a foreign
corporation or other business entity in all of the jurisdictions in which such
I-PAC Subsidiary owns or leases any real property or conducts any business, so
as to require such qualification or licensing, except for instances where the
failure to so qualify would not have material adverse effect on the business or
financial condition of such I-PAC Subsidiary. All of the outstanding shares of
capital stock or other voting interests of each I-PAC Subsidiary are validly
issued and outstanding, fully paid and nonassessable and owned by I-PAC or
another I-PAC Subsidiary free of any claims, liens, charges or encumbrances of
any nature whatsoever. Except as reflected in the I-PAC Balance Sheet, no I-PAC
Subsidiary has issued a promissory note or any other evidence of indebtedness or
otherwise incurred indebtedness.
3.2 No Legal Bar; Conflicts; Enforceability. Neither the execution and
delivery of this Agreement, or any other instrument or document executed and
delivered by I-PAC pursuant hereto or in connection herewith, nor the
consummation of the transactions contemplated hereby or thereby (i) violates or
conflicts with any provision of the articles of incorporation or by-laws of
I-PAC or any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge or other restriction or requirement of any
government, governmental agency or court to which I-PAC is subject, (ii) creates
in any party a right of acceleration, termination, modification or cancellation
under any I-PAC Material Contract (as defined in Section 3.12 below) or any
other instrument by which any of the properties or assets of I-PAC may be
subject, bound or affected, or (iii) requires any notice or constitutes a breach
or default under any I-PAC Material Contract. Except for the filing of
appropriate certificates to effect the Merger, no authorization, consent or
approval of any public body or authority is necessary for the validity or
enforceability of the transactions contemplated by this Agreement. All necessary
approvals of the parties under any I-PAC Material Contract or of any other
person required to permit I-PAC to perform its obligations in connection with
consummation of the transactions contemplated in this Agreement have been
obtained by I-PAC or will be obtained by I-PAC on or before the Closing Date.
I-PAC is not a party to any contract or subject to any legal restriction or
requirement that would prevent or restrict complete fulfillment of all of the
terms and conditions of this Agreement. I-PAC has taken all necessary corporate
actions to authorize and approve the execution, delivery and performance of this
Agreement and the Merger (other than obtaining the approval of the I-PAC
Shareholders). This Agreement constitutes a legal, valid and binding obligation
of I-PAC, enforceable against I-PAC in accordance with its terms.
3.3 Capital Stock and Exclusive Dealing. I-PAC (not including the I-PAC
Subsidiaries) has an authorized capitalization consisting of one million
(1,000,000) shares of voting common stock, of which eight thousand five hundred
(8,500) shares are issued and are outstanding.
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All such outstanding shares have been duly authorized, are validly issued, and
are fully paid and nonassessable. There are no other shares of stock of I-PAC
issued and outstanding. There are no outstanding options, warrants, rights,
preemptive rights, calls, commitments, conversion rights, rights of exchange,
plans or other agreements of any character providing for the purchase, issuance
or sale of any shares of the capital stock of I-PAC, except as contemplated by
this Agreement. None of the outstanding I-PAC Shares have been issued in
violation of any preemptive right or agreement, commitment or obligation binding
on I-PAC or any of the I-PAC Shareholders or any applicable securities laws.
3.4 Restrictive Documents. I-PAC is not subject to, or a party to, any
charter, bylaw, mortgage, lien, lease, license, permit, agreement, contract, or
instrument, or any law, rule, ordinance, regulation, order, judgment or decree,
or any other restriction or requirement of any kind or character, which
materially adversely affects I-PAC or which would prevent the consummation of
the transactions contemplated by this Agreement or the continued operation of
I-PAC after the date hereof or the Closing Date on substantially the same basis
as it has heretofore been operated or which would restrict its ability to
acquire any property or conduct business in any area.
3.5 Financial Statements and No Material Changes. I-PAC has heretofore
furnished Photomatrix with the consolidated balance sheets of I-PAC as of
December 31, 1996 and 1997 and the related consolidated statements of income,
shareholders' equity and changes in financial position for the years ended
December 31, 1996 and 1997. The balance sheets of I-PAC as of the dates
mentioned above are hereinafter collectively referred to as the "I-PAC Balance
Sheets" and are in the form attached hereto as Exhibit 5. All such financial
statements and all other financial statements of I-PAC, including the footnotes
thereto, except as indicated therein, have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods indicated. The I-PAC Balance Sheets fairly present the financial
condition of I-PAC at the dates thereof, and the related statements of income,
shareholders' equity and changes in financial position fairly present the
results of the operations of I-PAC and the changes in its financial position for
the periods indicated. Since December 31, 1997 (the "Balance Sheet Date") there
has been no material adverse change in the assets, liabilities, business,
financial condition, or results of operations of I- PAC, whether as a result of
any legislative or regulatory change, revocation of any license or rights to do
business, litigation, administrative action, fire, explosion, accident,
casualty, labor trouble, flood, drought, riot, storm, condemnation or act of God
or otherwise and no fact or condition exists or is contemplated by I-PAC or, to
the best knowledge of I-PAC, threatened which might cause such a change in the
future.
3.6 Absence of Undisclosed Liabilities. Except as set forth in the
I-PAC Balance Sheets, I-PAC does not have any outstanding claims against it,
liabilities or indebtedness, contingent or otherwise, other than (i) liabilities
not of a character or amount required to be shown, accrued or escrowed against
on the I-PAC Balance Sheets under generally accepted accounting principles and
(ii) liabilities incurred subsequent to the Balance Sheet Date in the ordinary
course of business, consistent with past practices. I-PAC does not know and has
no reason to know of any basis for the assertion against I-PAC of any material
claim, charge, or other liability of any nature not fully
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reflected or reserved against in the I-PAC Balance Sheets or expressly disclosed
in this Agreement, including the I-PAC Disclosure Memorandum. The adjusted tax
basis and the fair market value of the assets of I-PAC exceed the liabilities of
I-PAC as of the date hereof and will exceed the liabilities of I-PAC as of the
Closing Date.
3.7 No Changes Prior to Closing Date. Since January 1, 1998, I-PAC has
not: (i) incurred any liability or obligation of any nature (whether accrued,
absolute, contingent or otherwise), except in the ordinary course of business,
(ii) permitted any assets to be subjected to any mortgage, pledge, lien,
security interest, encumbrance, restriction or charge of any kind, except in the
ordinary course of business, (iii) sold, transferred or otherwise disposed of
any assets, except in the ordinary course of business, (iv) made any capital
expenditure or commitment therefor, except in the ordinary course of business,
(v) declared or paid any dividend or made any distribution on any shares of
capital stock or redeemed, purchased or otherwise acquired any shares of capital
stock or any option, warrant or other right to purchase or acquire any such
shares, (vi) made any bonus payments or profit sharing distributions or payments
of any kind, (vii) increased its indebtedness for borrowed money, except current
borrowings from banks in the ordinary course of business, or made any loan to
any employee, director, shareholder or other person or entity, (viii) written
off as uncollectible any notes or accounts receivable, except write-offs in the
ordinary course of business charged to applicable reserves, none of which
individually or in the aggregate exceeds $25,000, (ix) granted any increase in
the rate of wages, salaries, bonuses or other remuneration to any executive
employee or, except in the ordinary course of business, to any other employee,
(x) cancelled or waived any claims or rights of substantial value, (xi) made any
change in any method of business accounting (other than revocation of its S
Corporation status and a change of its fiscal year end to March 31) or entered
into any transaction, except in the usual and ordinary manner and in the
ordinary course of business, (xii) changed the ownership of its shares of stock
or its capital structures (whether by the issuance, redemption or transfer of
shares) in contemplation of effecting the Merger, (xiii) retired, purchased,
redeemed or reacquired any shares of common stock, (xiv) paid any management
fees, rent, compensation or other fees or expenses to any I-PAC Shareholder or
any of their affiliates in an amount inconsistent with past practices, or (xv)
agreed, whether or not in writing, to do any of the foregoing.
3.8 Books and Records. The minute books of I-PAC, as made available to
Photomatrix and its representatives, contain accurate records of all official
meetings of and official corporate actions or written consents by the
shareholders and Board of Directors of I-PAC. The records, systems, controls,
data or information recorded, stored, maintained, operated or otherwise wholly
or partly dependent upon or held by any means (including any electronic,
mechanical or photographic process, whether computerized or not and including
all means of access thereto and therefrom) of I- PAC are under the exclusive
ownership and direct control of I-PAC.
3.9 Title to Properties; Encumbrances. Except for properties and assets
reflected in the Balance Sheets or acquired since the Balance Sheet Date which
have been sold or otherwise disposed of in the ordinary course of business,
I-PAC has good, valid and merchantable title to (a) all its properties and
assets (personal, tangible and intangible), and (b) all the properties and
assets
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purchased since the Balance Sheet Date; in each case, each such property is
subject to no encumbrance, lien, charge or other restriction of any kind or
character, except for liens for current taxes, assessments or governmental
charges or levies on property not yet due and not delinquent and liens
consisting of zoning or planning restrictions, easements and other restrictions
or limitations on the use of real property or irregularities in title thereto
which are set forth in the I-PAC Disclosure Memorandum and which do not
materially detract from the value of, or impair the use of, or otherwise impair
the marketability or title of such property.
3.10 Real Property and Leases. The I-PAC Disclosure Memorandum contains
an accurate and complete list of all real property which is used in the business
operations of I-PAC and/or owned in whole or in part by I-PAC and includes the
name of the record title holder thereof and a list of all indebtedness secured
by a lien, mortgage or deed of trust thereon. I-PAC has good and marketable
title in fee simple to all the real property specified as owned by it in the
I-PAC Disclosure Memorandum (or required to be set forth in the I-PAC Disclosure
Memorandum), free and clear of all encumbrances, liens, charges or other
restrictions of any kind or character, except for those of the nature referred
to in the I-PAC Disclosure Memorandum. All of the buildings, structures and
appurtenances situated on the real property listed in the I-PAC Disclosure
Memorandum (or required to be set forth in the I-PAC Disclosure Memorandum) are
in good operating condition and in a state of good maintenance and repair, are
adequate and suitable for the purposes for which they are presently being used
and have adequate rights of ingress and egress for operation of the business
being operated on such property. None of such buildings, structures or
appurtenances (or any equipment therein), nor the operation or maintenance
thereof, violate any restrictive covenant or any provision of any federal, state
or local law, ordinance, rule or regulation, or encroaches on any property owned
by others. Except as set forth in the I-PAC Disclosure Memorandum, no
condemnation proceeding is pending or threatened which would preclude or impair
the use of any such property by I-PAC for the purposes for which it is currently
used.
The I-PAC Disclosure Memorandum contains an accurate and complete list
and description (including the location of an executed copy thereof) of the
terms of all leases to which I-PAC is a party as lessee. Each lease set forth in
the I-PAC Disclosure Memorandum (or required to be set forth in the I-PAC
Disclosure Memorandum) is in full force and effect; all rents and additional
rents due to date on each such lease have been paid; in each case, the lessee
has been in peaceable possession since the commencement of the original term of
such lease and is not in default thereunder and no waiver, indulgence or
postponement of the lessee's obligations thereunder has been granted by the
lessor; and there exists no event of default or event, occurrence, condition or
act (including the Merger) which, with the giving of notice, the lapse of time
or the happening of any further event or condition, would become a default under
such lease (other than payments not yet due which would become a default if not
paid when due). I-PAC has not knowingly violated or been given notice of
violation of any of the terms or conditions under any such lease, and to the
best knowledge of I-PAC all of the covenants to be performed by any other party
under all such leases have been fully performed.
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3.11 Fixed Assets. The I-PAC Disclosure Memorandum sets forth a list
and location of I-PAC's material items of machinery, equipment, furniture,
fixtures, tools, signs, and other items of tangible personal property (excluding
inventory) which are owned by I-PAC and used in or useful or pertain to I-PAC's
business or the operation thereof, whether or not reflected on the books of, or
in the possession of, I-PAC and whether or not presently in use (collectively,
the "Fixed Assets"). For purposes of this Section 3.11 only, "material" shall
mean any item having a value of at least $1,000.
3.12 Material Contracts. The I-PAC Disclosure Memorandum contains a
list of all Contracts (as defined below) of the following types to which I-PAC
is a party as of the date of this Agreement: (a) each contract of employment of
any officer, employee or consultant or with any labor union or association and
any bonus, deferred compensation, pension, profit sharing, stock option,
employee stock purchase, retirement or other employee benefit plan; (b) each
agreement, indenture or other instrument which contains restrictions with
respect to the payment of dividends or any other distribution in respect of its
capital stock; (c) each contract or series of related contracts involving
payments either individually or in the aggregate in excess of $20,000 in or
pursuant to which any person who is or was an officer, director, stockholder or
employee of I-PAC has a material interest; (d) each contract relating to the
borrowing or lending of money or the guarantee of any obligations for borrowed
money or otherwise, excluding endorsements made for purposes of collection in
the ordinary course of business; (e) each contract continuing for a period of
more than one year from its date and involving payments in excess of $20,000 in
any year or $40,000 in the aggregate; (f) each contract for charitable
contributions in excess of $1,000; (g) each contract for the sale and/or
installation of any equipment where the purchase price for such equipment is not
less than $15,000, and each contract for equipment maintenance involving total
payments of not less than $25,000, including each contract for the sale and/or
installation of any equipment where such sale and/or installation has been
completed, but as to which I-PAC has any continuing obligation, contingent or
otherwise; (h) each contract for capital expenditures or for the purchase of
materials, supplies, equipment or services involving payments in excess of
$20,000; (i) each license or royalty agreement (other than standard software
manufacturer's licenses included in packaged software); (j) each distribution,
dealer, reseller, manufacturer's representative, sales agency or franchise
agreement; (k) each contract relating to advertising, promotion or public
relations not terminable without penalty by I-PAC on 30 days or less notice; (l)
each contract with any government agency or instrumentality; (m) each management
service, consulting or any other similar type of contract; (n) each option to
purchase any of I-PAC's assets, properties or rights; (o) each agreement under
which price discounts have been granted to customers other than in the ordinary
course of business; (p) each contract with respect to the discharge or removal
of effluent, hazardous wastes or pollutants of any nature; (q) each contract
containing covenants not to compete in any business or geographical area or not
to use or disclose any information in the possession of I-PAC; (r) all contracts
for the leasing or rental of real or personal property; (s) any agreement
imposing liability for consequential damages, penalties for late payment or
non-performance or containing a liquidated damages provision; and (t) any
contract not made in the ordinary course of business. "Contract" shall mean any
contract, lease, commitment, sales order, purchase order, agreement, indenture,
mortgage, franchise, note, bond, lien, instrument, plan, permit or license.
I-PAC has delivered to Photomatrix true and correct copies of each Contract
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required to be listed in the I-PAC Disclosure Memorandum under this Section 3.12
and a written description of each material oral arrangement so listed
(collectively, the "I-PAC Material Contracts"). As of the date of this
Agreement, all I-PAC Material Contracts are, and as of the Effective Time will
be, valid, enforceable in accordance with their terms and in full force and
effect, and, to the knowledge of I-PAC, I-PAC is not, and as of the Effective
Time I-PAC will not be, in default thereunder. As of the date of this Agreement,
I-PAC has not received notice that any party to any I-PAC Material Contract
intends to cancel or terminate such contract.
3.13 Litigation. There is no action, suit or proceeding at law or in
equity by any person or entity, or any arbitration or any administrative or
other proceeding by or before, or, to the best knowledge of I-PAC, any
investigation by, any governmental or other instrumentality or agency, pending,
or to the best knowledge of I-PAC, threatened, against or affecting I-PAC or any
of its properties or rights which could materially and adversely affect the
right or ability of I-PAC to carry on its business as now conducted, or which
could materially and adversely affect the financial condition or properties of
I-PAC. I-PAC does not know of any valid basis for any such action, suit,
arbitration, proceeding or investigation. I-PAC is not subject to any judgment,
order or decree entered in any lawsuit or proceeding which may have an adverse
effect on any of its operations, business practices, or properties or on its
ability to acquire any property or conduct business in any area.
3.14 Taxes. I-PAC has filed, will file or has caused to be filed,
within the times and within the manner prescribed by law, all Tax returns and
all other Tax reports and declarations which are required to be filed by, or
with respect to, I-PAC. Such returns, reports and declarations accurately
reflect I-PAC's liability for Taxes for the periods covered thereby. The Taxes
payable by, or due from, I-PAC have been fully paid or adequately disclosed and
fully provided for in its books and financial statements. No examination, audit
or inquiry of any Tax return of I-PAC is currently in progress, and I-PAC has
not received notice of intent to commence any inquiry, audit or examination of
any such Tax return from any taxing authority. There are no outstanding
agreements or waivers extending the statutory period of limitations applicable
to any Tax return of I-PAC. The properties of I-PAC are not encumbered by Tax
liens, other than liens for Taxes not yet delinquent. The State of California
has audited certain of I-PAC's sales tax returns, and no additional funds are
due with respect to such returns. I-PAC has not received or been threatened with
a claim for assessment, proposed assessment, or collection of any Tax, nor does
I-PAC have any knowledge as to a possible basis for any such claim. I-PAC has
not granted any powers of attorney or other authorizations to any persons to
represent I-PAC with respect to any Tax. I-PAC has not been included in any
unitized, affiliated, combined or other consolidated Tax returns, reports or
declarations, and I-PAC is not and has not been a party to any Tax-sharing
agreement or similar arrangement regulating the allocation of Taxes and payments
between itself and any person or entity. No consent, agreement or other
undertaking has been filed by I-PAC to have the provisions of Section 341(f) of
the Code apply. I-PAC has not agreed to make, nor is it required to make, any
adjustment under Section 481(a) of the Code by reason of a change in accounting
method or otherwise. I-PAC has disclosed on its federal income tax returns all
positions taken therein that could
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give rise to a substantial understatement of federal income Tax within the
meaning of Code Section 6662.
3.15 Permits. Set forth in the I-PAC Disclosure Memorandum is a
complete and accurate list of all material permits, licenses, approvals,
franchises, notices, and other authorizations issued by governmental entities or
other regulatory authorities, federal, state or local (collectively the
"Permits") held by I-PAC. The Permits are all the permits required for the
conduct of the I-PAC Business. Each Permit is in full force and effect; I-PAC
has not engaged in any activity which would cause or permit revocation or
suspension of any such Permit; and no action or proceeding looking to or
contemplating the revocation or suspension of any such Permit is pending or, to
I-PAC's knowledge, threatened. There are no existing defaults or events of
default or events or states of fact which with notice or the lapse of time or
both would constitute a default by I-PAC under any such Permit. I-PAC has no
knowledge of any default or claimed or purported or alleged default or state of
facts which with notice or the lapse of time or both would constitute a default
on the part of any other party in the performance of any obligation to be
performed or paid by any other party under any Permit. The consummation of the
transactions contemplated hereby will in no way affect the continuation,
validity or effectiveness of the Permits. Neither I-PAC nor its facility nor any
of its assets is required to be specially licensed by, nor is it subject to
specific regulation of, any governmental or regulatory body by reason of the
conduct of the business of I-PAC.
3.16 Insurance. The I-PAC Disclosure Memorandum contains a complete and
accurate list of insurance policies which I-PAC maintains with respect to its
business, properties or employees. All such policies are in full force and
effect, and there currently exists no right of termination with regard to any
such policy as a result of any default on the part of I-PAC. Such policies, with
respect to their amounts and types of coverage, are believed by I-PAC to be
adequate to insure against material risks to which I-PAC and its property and
assets are normally exposed in the operation of its business. Since the Balance
Sheet Date, there has not been any material adverse change in I-PAC's
relationship with its insurers or in the premiums payable pursuant to such
policies.
3.17 Product Warranty. Each product manufactured, sold, leased,
licensed or delivered by I-PAC conforms with all applicable contractual
commitments and express and implied warranties. I-PAC has no liability and, to
the best knowledge of I-PAC, there is no basis for any present or future action,
suit, proceeding, hearing, investigation, charge, complaint, claim, or demand
which may give rise to any liability for replacement or repair thereof or other
damages in connection therewith, subject only to any reserve for product
warranty claims set forth in the I-PAC Balance Sheets. No product manufactured,
sold, leased, or delivered by I-PAC is subject to any guaranty, warranty, or
other indemnity beyond the applicable standard terms and conditions of sale or
lease, all of which are reproduced and described in detail in the I-PAC
Disclosure Memorandum. Copies of the standard terms and conditions of sale or
lease for I-PAC, containing applicable guaranty, warranty, and indemnity
provisions, have been provided to Photomatrix by I-PAC.
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3.18 Intellectual Property.
3.18.1 All domestic and foreign patents, patent applications,
copyrighted works, copyright applications and registrations, trade secrets,
trademarks, service marks, inventions, manufacturing and design processes,
hardware designs, programming processes, software and other information, and
know-how (if any) that are used by, owned by or licensed to I-PAC (collectively,
the "I-PAC Intellectual Property") are listed in the I-PAC Disclosure Memorandum
which indicates, with respect to each such item, the nature of I-PAC's interest
therein and the expiration date thereof or the date on which I-PAC's interest
therein terminates. Registered copyrights, patents, trademarks and service marks
that are owned by or licensed to I-PAC have been duly registered in, filed in or
issued by, as the case may be, the United States Patent and Trademark Office,
the United States Register of Copyrights or the corresponding offices of other
countries identified in the I-PAC Disclosure Memorandum, and have been properly
maintained and renewed in accordance with all applicable provisions of law and
administrative regulations in the United States and each such country. The I-PAC
Intellectual Property is the only intellectual property used in or otherwise
necessary to operate the I-PAC Business as it is currently conducted.
3.18.2 Use of the I-PAC Intellectual Property and any other
intellectual property used by I-PAC in its business does not require the consent
of any other person, and the same are freely transferable (except as otherwise
provided by law) and are owned exclusively by I-PAC, free and clear of any
attachments, liens, encumbrances or adverse claims; and, to the best knowledge
of I-PAC, neither its present nor contemplated activities or products infringe,
misappropriate, dilute, impair or constitute unfair competition with respect to
any patent, trade name, trademark, service mark, copyright, trade secret or
other proprietary rights of others.
3.18.3 No other person has an interest in or right or license to
use, or the right to license others to use the I-PAC Intellectual Property.
There are no claims or demands of any other person pertaining thereto, and no
proceedings have been instituted, are pending or, to the best knowledge of
I-PAC, threatened that challenge the rights of I-PAC in respect thereof, and
I-PAC does not know of any fact that could be the basis of any such claim. I-PAC
is not aware of any infringement of any of the I-PAC Intellectual Property by
others, nor is any of the I-PAC Intellectual Property subject to any outstanding
order, decree, judgment, stipulation, settlement, lien, charge, encumbrance or
attachment. No claim or demand has been made and no proceeding has been filed
or, to the best knowledge of I-PAC, is threatened to be filed charging I-PAC
with infringement of any patent, trade name, trademark, service mark, copyright
or trade secret, and I-PAC does not know of any facts which could be the basis
of any such claims. There are no royalties, honoraria, fees or other payments
payable by I-PAC to any person with respect to any of the I-PAC Intellectual
Property.
3.18.4 There are no payments that are required to be made by I-PAC
for the use of the I-PAC Intellectual Property. I-PAC is not using or in any way
making any unlawful or wrongful use of any confidential information or
intellectual property of any third party, including without limitation any
former employer of any present or past employee of I-PAC or of any of I- PAC's
predecessors. I-PAC is not a party to any non-competition or confidentiality
agreement related to the business of I-PAC with any party other than
Photomatrix.
3.19 Compliance With Laws. I-PAC is in compliance with all applicable
laws, regulations, orders, judgments and decrees of each and every jurisdiction
in which it is doing business, including applicable federal laws and
regulations, the violation of which would have a material adverse effect on its
operations.
3.20 Inventory. The inventory as reflected on the I-PAC Balance Sheets
or acquired thereafter has been acquired and maintained in the ordinary course
of business, is of good and merchantable quality, consists substantially of a
quality, quantity, and condition usable, leasable or saleable in the ordinary
course of business within a period of one (1) year from the Closing Date, and is
not subject to any write down or write off for obsolescence or otherwise under
generally accepted accounting principles. The I-PAC Balance Sheets contain
adequate reserves for obsolete or slow moving inventory. I-PAC is not under any
liability or obligation with respect to the return of inventory in the
possession of any third party.
3.21 Accounts Receivable. The accounts receivable of I-PAC as reflected
in the I-PAC Balance Sheets are, to the extent uncollected on the date of this
Agreement, valid and existing and fully collectible through the use of ordinary
collection procedures (net of reserves set forth in such financial statements,
which reserves were adequate and in an amount consistent with I-PAC's historical
accounting policies), represent monies due for goods sold and delivered or
services rendered, and are subject to no refunds, discounts, rebates or other
adjustments (except discounts for prompt payment given in the ordinary course of
business) and to no defenses, rights of setoff, assignments, restrictions,
encumbrances or conditions enforceable by third parties. I-PAC has never
factored any of its accounts receivable.
3.22 Employment Relations. I-PAC is (i) in compliance with all federal,
state or other applicable laws respecting employment and employment practices,
terms and conditions of employment, wages and hours, equal employment
opportunity, nondiscrimination, occupational safety and health, and the payment
of social security and similar taxes and, to the best knowledge of I-PAC, has
not and is not engaged in any unfair labor practice; (ii) no unfair or unlawful
labor practice complaint against I-PAC is pending before the National Labor
Relations Board or any other governmental agency or commission; (iii) there is
no labor strike, dispute, slowdown or stoppage actually pending or, to the best
knowledge of I-PAC, threatened against or involving I-PAC; (iv) no
representation question exists respecting the employees of I-PAC; (v) no
grievance which might have a material adverse effect on the condition of I-PAC
or the conduct of its business exists, no arbitration proceeding arising out of
or under any collective bargaining agreement is pending, and no claim therefor
has been asserted; (vi) no collective bargaining agreement is currently being
negotiated by I-PAC; (vii) I-PAC has not experienced any material labor
difficulty; and (viii) no "plant closing" or "mass layoff" within the meaning of
the Worker Adjustment and Retraining Notification Act has occurred with respect
to I-PAC. There has not been, and, to the best knowledge of I-PAC, there will
not be, any change in relations with employees of I-PAC as a result of the
transactions contemplated
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by this Agreement. There exist no employment, consulting, severance or
indemnification agreements between I-PAC and any director, officer, employee or
agent of I-PAC or any other agreement that would give any person or entity the
right to receive any payment from I-PAC as a result of the Merger. There exists
no contract or arrangement which would limit in any way I-PAC's right to
discharge any employee of I-PAC following the Closing or which would entitle any
such discharged employee to receive compensation from I-PAC on account of such
discharge.
3.23 Employee Benefit Plans.
3.23.1 List of Plans. Set forth in the I-PAC Disclosure Memorandum
is an accurate and complete list of all employee benefit plans ("I-PAC Employee
Benefit Plans") within the meaning of Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), whether or not any such I-PAC
Employee Benefit Plans are otherwise exempt from the provisions of ERISA,
established, maintained or contributed to by I-PAC (including, for this purpose
all employers (whether or not incorporated) which by reason of common control
are treated together with I-PAC as a single employer within the meaning of
Section 414 of the Code).
3.23.2 Status of Plans. I-PAC does not maintain or contribute to
any I-PAC Employee Benefit Plan subject to ERISA which is not in substantial
compliance with ERISA, or which has incurred any accumulated funding deficiency
within the meaning of Section 412 or 418B of ERISA, or which has applied for or
obtained a waiver from the Internal Revenue Service of any minimum funding
requirement under Section 412 of the Code. I-PAC has not incurred any liability
to the Pension Benefit Guaranty Corporation ("PBGC") in connection with any
I-PAC Employee Benefit Plan or ceased operations at any facility or withdrawn
from any such Plan in a manner which could subject it to liability under Section
4062(f), 4063 or 4064 of ERISA. I-PAC does not know of any facts or
circumstances which might give rise to any liability to the PBGC under Title IV
of ERISA or which could reasonably be anticipated to result in any claims being
made against I-PAC or Photomatrix by the PBGC. I-PAC has not incurred any
withdrawal liability (including any contingent or secondary withdrawal
liability) within the meaning of Sections 4201 and 4202 of ERISA, to any
Employee Benefit Plan which is a multi-employer Plan (as defined in Section 4001
of ERISA), and no event has occurred, and there exists no condition or set of
circumstances, which presents a material risk of the occurrence of any
withdrawal from or the partition, termination, reorganization or insolvency of
any multi-employer Plan which could result in any liability on the part of I-PAC
to a multi-employer Plan.
3.23.3 Contributions. Full payment has been made of all amounts
which I-PAC is required, under applicable law or under any I-PAC Employee
Benefit Plan or any agreement relating to any I-PAC Employee Benefit Plan to
which I-PAC is a party, to have paid as contributions thereto for or with
respect to the most recent fiscal year of such I-PAC Employee Benefit Plan ended
prior to the date hereof. I-PAC has made adequate provisions for reserves to
meet contributions that have not been made because they are not yet due under
the terms of any I-PAC Employee Benefit Plan or related agreements . All
payments and contributions to any such Employment Benefit Plan have been finally
determined and paid for the period ended December 31, 1997. No contributions
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have been made to any I-PAC Employee Benefit Plan for the period subsequent to
December 31, 1997.
3.23.4 Tax Qualification. To the best knowledge of I-PAC, each
I-PAC Employee Benefit Plan intended to be qualified under Section 401(a) of the
Internal Revenue Code has been determined to be so qualified by the Internal
Revenue Service and nothing has occurred since the date of the last such
determination which resulted or is likely to result in the revocation of such
determination.
3.23.5 Transactions. No reportable event (as defined in Section
4043 of ERISA) has occurred with respect to any I-PAC Employee Benefit Plan, and
I-PAC has not engaged in any transaction with respect to any I-PAC Employee
Benefit Plan which would subject it to a tax, penalty or liability for
prohibited transactions under ERISA or the Code, nor have any of its directors,
officers or employees, to the extent they or any of them are fiduciaries with
respect to such plans, materially breached any of their responsibilities or
obligations imposed upon fiduciaries under Title I of ERISA or which would
result in any claim being made under or by or on behalf of any such plans by any
party with standing to make such claim.
3.23.6 Other Plans. I-PAC does not presently maintain any employee
benefit plans or any other pension, welfare or retirement benefit plans other
than those listed in the I-PAC Disclosure Memorandum.
3.23.7 Documents. I-PAC and the Shareholders have delivered or
caused to be delivered to Photomatrix and its counsel true and complete copies
of (i) all I-PAC Employee Benefit Plans as in effect on the date of this
Agreement, together with all amendments thereto which will become effective at a
later date, as well as the latest Internal Revenue Service determination letter
obtained with respect to any such I-PAC Employee Benefit Plan qualified under
Section 401 or 501 of the Code and (ii) Form 5500 with respect to each such Plan
for each of the last two fiscal years, and will provide when completed Form 5500
for the most recently completed fiscal year for each I- PAC Employee Benefit
Plan required to file such form.
3.24 Environmental Laws and Regulations. The I-PAC Disclosure
Memorandum sets forth all information relating to the following items: (a) the
nature and, if material, quantities of any hazardous substances (as defined
below) generated, transported or disposed of by I-PAC during the past five years
(other than raw material awaiting manufacturing, work-in process or finished
goods or through the sale of products in the ordinary course of business),
together with a description of the location of each such activity, and (b) a
summary of the nature and, if material, quantities of any hazardous substances
that have been disposed of or found at any site or facility owned or operated
presently or at any previous time by I-PAC (other than raw material awaiting
manufacturing, work-in-process or finished goods or through the sale of products
in the ordinary course of business). I-PAC's existing and prior uses of all real
property leased or owned by I-PAC complies and has at all times during their
occupancy complied with, and I-PAC is not in violation of, and has not violated,
in connection with the ownership, lease, occupancy, use, maintenance, or
operation of such property
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or the conduct of its business, any applicable federal, state, county or local
statutes, laws, regulations, rules, ordinances, codes, licenses or permits
relating in any way to the protection of the environment, including, without
limitation, the Clean Air Act, the Federal Water Pollution Control Act of 1972,
the Resource Conservation and Recovery Act of 1976 ("RCRA"), the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), the
Toxic Substances Control Act, any analogous state laws, and any amendments or
extensions of the foregoing and the regulations promulgated thereunder
(collectively, the "Environmental Laws"). I-PAC has not received any notice of
any work, repairs, construction or capital expenditures required by the
Environmental Laws with respect to any of its properties or its businesses. None
of I-PAC's leased or owned properties is contaminated by or contains any
hazardous substance. No claim, action, suit or proceeding is pending or, to
I-PAC's knowledge, threatened against I-PAC, before any court or other
governmental authority or arbitration tribunal, relating to hazardous
substances, pollution or the environment, and there is no outstanding judgment,
order, writ, injunction, decree or award against or affecting I-PAC or its
assets with respect to the same. There has never been, and there is not
presently occurring, any release of any hazardous substance on or from any of
I-PAC's leased or owned properties, I-PAC has not received any notice from any
government agency or private or public entity advising I-PAC that it is
responsible for response costs with respect to a release, a threatened release
or clean up of chemicals produced by, or resulting from, any business,
commercial, or industrial activities, operations, or processes, including, but
not limited to, hazardous substances, and I-PAC has not received any information
requests under CERCLA from any government agency. There are no facts or
circumstances which I-PAC reasonably expect could form the basis for the
assertion of any Claim (as defined below) against I-PAC relating to
environmental matters including, but not limited to, any Claim arising from past
or present environmental practices asserted under the Environmental Laws, which
I-PAC believes might have a material adverse effect on the business, results of
operations, financial condition or prospects of I-PAC taken as a whole.
As used herein, "hazardous substances(s)" include any pollutants,
contaminants, dangerous substances, toxic substances, solid waste, hazardous
wastes, hazardous materials, or hazardous substances as defined in or pursuant
to RCRA or CERCLA, or any other federal, state or local environmental law,
ordinance, rule or regulation, except that, for purposes of this Agreement,
"petroleum" (including crude oil or any fraction thereof) shall be deemed a
"hazardous substance." "Release" and "disposal" shall have the same meanings as
defined in CERCLA and RCRA. "Claim" shall mean any and all claims, demands,
causes of actions, suits, proceedings, administrative proceedings, losses,
judgments, attorneys' fees, and any other expenses incurred, assessed or
sustained by or against I-PAC.
3.25 Interests in Clients, Suppliers, Etc. Neither I-PAC nor any
officer or director of I-PAC owns or possesses, directly or indirectly, any
financial or proprietary interest in, or is a director, officer or employee of,
any corporation, limited liability company, partnership, association, trust,
joint venture or other business entity which is engaged in the same or similar
business as I-PAC, or is a competitor or potential competitor of I-PAC.
Ownership of securities of a company whose securities are registered under the
Securities Exchange Act of 1934, not in excess of 5% of any class of such
securities, shall not be deemed to be a financial interest for purposes of this
Section 3.25.
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3.26 Customers, Distributors and Sales Representatives. The I-PAC
Disclosure Memorandum sets forth the names and addresses of all customers to
which, and sales representatives and distributors through which, I-PAC has sold
or distributed in excess of $250,000 of its products or services during either
of the last two fiscal years of I-PAC. During such period and through the date
hereof, no such customer, distributor or sales representative has canceled or
otherwise terminated its relationship with I-PAC or decreased materially its
usage or purchase of the products or services of I-PAC, except for changes in
customer relationships that have occurred in the ordinary course of business the
aggregate value of which has not exceeded $1,250,000. To the knowledge of I-PAC,
no such customer, sales representative or distributor has any plan or intention
to terminate, cancel or otherwise modify its relationship with I-PAC in a manner
that would be adverse to I-PAC.
3.27 Bank Accounts, Powers of Attorney and Compensation of Employees.
The I- PAC Disclosure Memorandum contains an accurate and complete list showing
(a) the name and address of each bank in which I-PAC has an account or safe
deposit box, the number of any such account or any such box, the names of all
persons authorized to draw thereon or to have access thereto and the current
balances maintained in all such accounts, (b) the names of all persons, if any,
holding powers of attorney from I-PAC and a summary statement of the terms
thereof, and (c) the names of all persons whose compensation from I-PAC for the
last fiscal year of I-PAC exceed an annualized rate of Fifty Thousand and No/100
Dollars ($50,000.00), together with a statement of the full amount paid or
payable to each such person for services rendered during such fiscal year.
3.28 Disclosure. The representations, warranties and covenants made by
I-PAC in this Agreement, the financial statements referred to in Section 3.5
above (including the footnotes thereto), and any attached schedule, exhibit or
certificate delivered in accordance with the terms hereof, taken as a whole, do
not contain any untrue statement of a material fact, or omit any statement of a
material fact necessary in order to make the statements contained herein or
therein not misleading. There is no fact known to I-PAC which materially and
adversely affects the businesses, prospects or financial condition of I-PAC, its
properties or assets, which has not been disclosed and set forth in this
Agreement.
3.29 Broker's or Finder's Fees. No agent, broker, person or firm acting
on behalf of I-PAC is, or will be, entitled to any commission or broker's or
finder's fees from any of the parties hereto, or from any person controlling,
controlled by or under common control with any of the parties hereto, in
connection with any of the transactions contemplated herein.
3.30 Certain Conditions for Accounting and Tax Treatment. There is no
plan or intention on the part of the I-PAC Shareholders to sell, exchange, or
otherwise dispose of a number of Photomatrix Shares received in the transaction
that would reduce the I-PAC Shareholders' ownership of Photomatrix Common Stock
to a number of shares having a value, as of the Closing Date, of less than fifty
percent (50%) of the value of all of the formerly outstanding Shares of I-PAC as
of the Closing Date. For purposes of this representation, I-PAC Shares exchanged
for cash or
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other property, surrendered by dissenters or exchanged for cash in lieu of
fractional shares of Photomatrix stock will be treated as outstanding I-PAC
Shares on the Closing Date. Moreover, I-PAC Shares and Photomatrix Shares held
by I-PAC Shareholders and otherwise sold, redeemed, or disposed of prior or
subsequent to the transaction will be considered in making this representation.
Following the Closing Date, I-PAC will hold at least ninety percent (90%) of the
fair market value of its net assets and at least seventy percent (70%) of the
fair market value of its gross assets held immediately prior to the Closing
Date. For purposes of this representation, amounts paid by I-PAC to dissenters,
amounts paid by I-PAC to shareholders who receive cash or other property,
amounts used by I-PAC to pay reorganization expenses, and all redemptions and
distributions (except for regular normal dividends) made by I-PAC will be
included as assets of I-PAC immediately prior to the Closing Date. I-PAC has no
plan or intention to issue additional shares of its stock that would result in
Photomatrix losing control of I-PAC within the meaning of section 368(c)(1) of
the Code. I-PAC and the I-PAC Shareholders will pay their respective expenses,
if any, incurred in connection with the transaction. In the transaction, I-PAC
Shares representing control of I-PAC, as defined in Section 368(c)(1) of the
Code, will be exchanged solely for Photomatrix Shares. For purposes of this
representation, I-PAC Shares exchanged for cash or other property originating
with Photomatrix will be treated as outstanding I-PAC Shares on the Closing
Date. On the Closing Date, I-PAC will not have outstanding any warrants,
options, convertible securities, or any other type of right pursuant to which
any person could acquire stock in I-PAC, that, if exercised or converted, would
affect Photomatrix's acquisition or retention of control of I-PAC as defined in
Section 368(c)(1) of the Code. I-PAC is not an investment company as defined in
section 368(a)(2)(f)(iii) and (iv) of the Code.
3.31 Cooperation. From and after the date of this Agreement, I-PAC and
its officers, directors, accountants, attorneys, agents and other
representatives will cooperate fully with Photomatrix (i) in the preparation of
all statements and reports contemplated by this Agreement and required pursuant
to the registration and other requirements provided in the 1933 Act and the 1934
Act, and (ii) to facilitate the consummation of the transactions provided for
herein, all in accordance with federal and state regulatory requirements.
ARTICLE IV
REPRESENTATIONS, WARRANTIES AND COVENANTS
OF PHOTOMATRIX AND THE SHAREHOLDERS
Representations of Photomatrix . Except as set forth in the Photomatrix
Disclosure Memorandum to be prepared, delivered and have the legal effect as
provided in Section 7.5 hereof, Photomatrix represents and warrants to I-PAC and
Merger Corp. and agrees as follows:
4.1 Existence; Good Standing; Corporate Authority and Authorization.
4.1.1 Photomatrix. Photomatrix is a corporation duly organized,
validly existing and in good standing under the laws of the State of California.
Photomatrix is qualified to do
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business and is in good standing in all other jurisdictions in which the
character or location of the properties owned or leased by it or the nature of
the business conducted by it makes such qualification necessary and where the
failure to so qualify would have a material adverse effect upon Photomatrix. Set
forth in the Photomatrix Disclosure Memorandum, is a list of each jurisdiction
in which Photomatrix is qualified to do business as a foreign corporation.
Photomatrix has full corporate power to own its property and to carry on its
business as now being conducted. Photomatrix has full corporate power and
authority to enter into and perform its obligations under this Agreement and
under each other instrument and document executed and delivered by Photomatrix
pursuant hereto or in connection herewith and to take all actions required of it
to consummate the Merger.
4.1.2 Subsidiaries. The Photomatrix Disclosure Memorandum sets
forth the following information regarding each subsidiary of Photomatrix
("Photomatrix Subsidiary" and, hereinafter "Photomatrix" shall refer to both
Photomatrix and any Photomatrix Subsidiaries): (i) the name of the corporation;
(ii) the state of incorporation; (iii) authorized capitalization; and (iv)
issued and outstanding capital stock and other securities (including debt
securities). Each Photomatrix Subsidiary is duly organized, validly existing and
in good standing under the laws of the jurisdiction of its incorporation or
other organization and has full corporate power and authority to own, lease or
otherwise hold its assets and properties and to carry on its business as it is
now conducted. Each Photomatrix Subsidiary is duly qualified or licensed to do
business and is in good standing as a foreign corporation or other business
entity in all of the jurisdictions in which such Photomatrix Subsidiary owns or
leases any real property or conducts any business, so as to require such
qualification or licensing, except for instances where the failure to so qualify
would not have a material adverse effect on the business or financial condition
of such Photomatrix Subsidiary. All of the outstanding shares of capital stock
or other voting interests of each Photomatrix Subsidiary are validly issued and
outstanding, fully paid and nonassessable and owned by Photomatrix or another
Subsidiary free of any claims, liens, charges or encumbrances of any nature
whatsoever. No Photomatrix Subsidiary has issued a promissory note or any other
evidence of indebtedness or otherwise incurred indebtedness, except for
indebtedness reflected in the Photomatrix Balance Sheets (as hereinafter
defined).
4.2 No Legal Bar; Conflicts; Enforceability. Neither the execution and
delivery of this Agreement, or any other instrument or document executed and
delivered by Photomatrix pursuant hereto or in connection herewith, nor the
consummation of the transactions contemplated hereby or thereby (i) violates or
conflicts with any provision of the articles of incorporation or by-laws of
Photomatrix or any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge or other restriction of any government,
governmental agency or court to which Photomatrix is subject, (ii) creates in
any party a right of acceleration, termination, modification or cancellation,
under any Photomatrix Material Contract (as defined in Section 4.12 below) or
any other instrument by which any of the properties or assets of Photomatrix may
be subject, bound or affected, or (iii) requires any notice or constitutes a
breach or default under any Photomatrix Material Contract. Except for the filing
of appropriate certificates to effect the Merger, no authorization, consent or
approval of any public body or authority is necessary for the validity or
enforceability of
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the transactions contemplated by this Agreement. All necessary approvals of the
parties under any Photomatrix Material Contracts or any other person required to
permit Photomatrix to perform its obligations in connection with the
consummation of the transactions contemplated in this Agreement have been, or
the best efforts of Photomatrix will be expended by Photomatrix so that such
approvals will be, obtained by Photomatrix on or before the Closing Date.
Photomatrix is not a party to any contract or subject to any other legal
restriction that would prevent or restrict complete fulfillment of all of the
terms and conditions of this Agreement or compliance with any of its obligations
under it. Photomatrix has taken all necessary corporate actions to authorize and
approve the execution, delivery and performance of this Agreement and the Merger
(other than obtaining the approval of the Photomatrix Shareholders). This
Agreement constitutes a legal, valid and binding obligation of Photomatrix,
enforceable against Photomatrix in accordance with its terms.
4.3 Capital Stock and Exclusive Dealing. Photomatrix (not including the
Photomatrix Subsidiaries) has an authorized capitalization consisting of
30,000,000 shares of voting common stock, of which 5,083,017 shares are issued
and outstanding, and 3,173,000 shares of preferred stock, none of which are
outstanding. All such outstanding common shares have been duly authorized, are
validly issued, and are fully paid and nonassessable. There are no other shares
of stock of Photomatrix issued and outstanding. There are no outstanding
options, warrants, rights, preemptive rights, calls, commitments, conversion
rights, rights of exchange, plans or other agreements of any character providing
for the purchase, issuance or sale of any shares of the capital stock of
Photomatrix, except as contemplated by this Agreement and except for 907,333
currently outstanding options and warrants (the "Photomatrix Options") to
purchase shares of Photomatrix Common Stock. None of the outstanding Photomatrix
Shares have been issued in violation of any preemptive right or agreement,
commitment or obligation binding on Photomatrix or any of the Photomatrix
Shareholders or any applicable securities laws.
4.4 Restrictive Documents. Photomatrix is not subject to, or a party
to, any charter, bylaw, mortgage, lien, lease, license, permit, agreement,
contract, or instrument, or any law, rule, ordinance, regulation, order,
judgment or decree, or any other restriction or requirement of any kind or
character, which materially adversely affects Photomatrix or which would prevent
the consummation of the transactions contemplated by this Agreement or the
continued operation of Photomatrix after the date hereof or the Closing Date on
substantially the same basis as it has heretofore been operated or which would
restrict its ability to acquire any property or conduct business in any area.
4.5 Financial Statements and No Material Changes. Photomatrix has
heretofore furnished I-PAC with the consolidated balance sheets of Photomatrix
as of March 31, 1996 and 1997 and December 31, 1997 and the related consolidated
statements of income, shareholders' equity and changes in financial position for
the years ended March 31, 1996 and 1997 and the nine (9) month period ended
December 31, 1997. The balance sheets of Photomatrix as of the dates mentioned
above are hereinafter collectively referred to as the "Photomatrix Balance
Sheets" and are in the form attached hereto as Exhibit 6. All such financial
statements and all other financial statements of Photomatrix, including the
footnotes thereto, except as indicated therein, have been prepared in
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accordance with generally accepted accounting principles consistently applied
throughout the periods indicated, provided that interim financial statements are
subject to year-end adjustments and the omission of footnotes included in
audited financial statements. The Photomatrix Balance Sheets fairly present the
financial condition of Photomatrix at the dates thereof, and the related
statements of income, shareholders' equity and changes in financial position
fairly present the results of the operations of Photomatrix and the changes in
the financial position for the periods indicated. Since the Balance Sheet Date,
there has been no material adverse change in the assets, liabilities, business,
financial condition, or results of operations of Photomatrix, whether as a
result of any legislative or regulatory change, revocation of any license or
rights to do business, litigation, administrative action, fire, explosion,
accident, casualty, labor trouble, flood, drought, riot, storm, condemnation or
act of God or otherwise and no fact or condition exists or is contemplated by
Photomatrix or, to the best knowledge of Photomatrix, threatened which might
cause such a change in the future.
4.6 Absence of Undisclosed Liabilities. Except as set forth in the
Photomatrix Balance Sheets, Photomatrix does not have any outstanding claims
against it, liabilities or indebtedness, contingent or otherwise, other than (i)
liabilities not of a character or amount required to be shown, accrued or
escrowed against on the Photomatrix Balance Sheets under generally accepted
accounting principles and (ii) liabilities incurred subsequent to the Balance
Sheet Date in the ordinary course of business, consistent with past practices.
Photomatrix does not know and has no reason to know of any basis for the
assertion against Photomatrix of any material claim, charge, or other liability
of any nature not fully reflected or reserved against in the Photomatrix Balance
Sheets or expressly disclosed in this Agreement, including the Photomatrix
Disclosure Memorandum. The adjusted tax basis and the fair market value of the
assets of Photomatrix exceed the liabilities of Photomatrix as of the date
hereof and will exceed the liabilities of Photomatrix as of the Closing Date.
4.7 No Changes Prior to Closing Date. Since January 1, 1998,
Photomatrix has not: (i) incurred any liability or obligation of any nature
(whether accrued, absolute, contingent or otherwise), except in the ordinary
course of business, (ii) permitted any assets to be subjected to any mortgage,
pledge, lien, security interest, encumbrance, restriction or charge of any kind,
except in the ordinary course of business, (iii) sold, transferred or otherwise
disposed of any assets, except in the ordinary course of business, (iv) made any
capital expenditure or commitment therefor, except in the ordinary course of
business, (v) declared or paid any dividend or made any distribution on any
shares of capital stock, or redeemed, purchased or otherwise acquired any shares
of capital stock or any option, warrant or other right to purchase or acquire
any such shares, (vi) made any bonus payments or profit sharing distributions or
payments of any kind, (vii) increased its indebtedness for borrowed money,
except current borrowings from banks in the ordinary course of business, or made
any loan to any employee, director, shareholder or other person or entity,
(viii) written off as uncollectible any notes or accounts receivable, except
write-offs in the ordinary course of business charged to applicable reserves,
none of which individually or in the aggregate exceeds $25,000, (ix) granted any
increase in the rate of wages, salaries, bonuses or other remuneration to any
executive employee or, except in the ordinary course of business, to any other
employee, (x) cancelled or waived any claims or rights of substantial value,
(xi) made any change in any method of business accounting or entered into any
transaction, except in the usual and ordinary manner and in the ordinary course
of business,
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(xii) changed the ownership of its shares of stock or its capital structures
(whether by the issuance, redemption or transfer of shares) in contemplation of
effecting the Merger, (xiii) retired, purchased, redeemed or reacquired any
shares of common stock, (xiv) paid any management fees, rent, compensation or
other fees or expenses to any Photomatrix Shareholder or any of their affiliates
in an amount inconsistent with past practices, or (xv) agreed, whether or not in
writing, to do any of the foregoing.
4.8 Books and Records. The minute books of Photomatrix, as made
available to I-PAC and its representatives, contain accurate records of all
official meetings of and official corporate actions or written consents by the
shareholders and Board of Directors of Photomatrix. The records, systems,
controls, data or information recorded, stored, maintained, operated or
otherwise wholly or partly dependent upon or held by any means (including any
electronic, mechanical or photographic process, whether computerized or not and
including all means of access thereto and therefrom) of Photomatrix are under
the exclusive ownership and direct control of Photomatrix.
4.9 Title to Properties; Encumbrances. Except for properties and assets
reflected in the Balance Sheets or acquired since the Balance Sheet Date which
have been sold or otherwise disposed of in the ordinary course of business,
Photomatrix has good, valid and merchantable title to (a) all its properties and
assets (personal, tangible and intangible), and (b) all the properties and
assets purchased since the Balance Sheet Date; in each case, each such property
is subject to no encumbrance, lien, charge or other restriction of any kind or
character, except for liens for current taxes, assessments or governmental
charges or levies on property not yet due and not delinquent and liens
consisting of zoning or planning restrictions, easements and other restrictions
or limitations on the use of real property or irregularities in title thereto
which are set forth in the Photomatrix Disclosure Memorandum and which do not
materially detract from the value of, or impair the use of, or otherwise impair
the marketability or title of such property.
4.10 Real Property and Leases. The Photomatrix Disclosure Memorandum
contains an accurate and complete list of all real property which is used in the
business operations of Photomatrix and/or owned in whole or in part by
Photomatrix and includes the name of the record title holder thereof and a list
of all indebtedness secured by a lien, mortgage or deed of trust thereon.
Photomatrix has good and marketable title in fee simple to all the real property
specified as owned by it in the Photomatrix Disclosure Memorandum (or required
to be set forth in the Photomatrix Disclosure Memorandum), free and clear of all
encumbrances, liens, charges or other restrictions of any kind or character,
except for those of the nature referred to in the Photomatrix Disclosure
Memorandum. All of the buildings, structures and appurtenances situated on the
real property listed in the Photomatrix Disclosure Memorandum (or required to be
set forth in the Photomatrix Disclosure Memorandum) are in good operating
condition and in a state of good maintenance and repair, are adequate and
suitable for the purposes for which they are presently being used and have
adequate rights of ingress and egress for operation of the business being
operated on such property. None of such buildings, structures or appurtenances
(or any equipment therein), nor the operation or maintenance thereof, violate
any restrictive covenant or any provision of any federal, state or local law,
ordinance, rule or regulation, or encroaches on any property owned by others.
Except as set
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forth in the Photomatrix Disclosure Memorandum, no condemnation proceeding is
pending or threatened which would preclude or impair the use of any such
property by Photomatrix for the purposes for which it is currently used.
The Photomatrix Disclosure Memorandum contains an accurate and complete
list and description (including the location of an executed copy thereof) of the
terms of all leases to which Photomatrix is a party as lessee. Each lease set
forth in the Photomatrix Disclosure Memorandum (or required to be set forth in
the Photomatrix Disclosure Memorandum) is in full force and effect; all rents
and additional rents due to date on each such lease have been paid; in each
case, the lessee has been in peaceable possession since the commencement of the
original term of such lease and is not in default thereunder and no waiver,
indulgence or postponement of the lessee's obligations thereunder has been
granted by the lessor; and there exists no event of default or event,
occurrence, condition or act (including the Merger) which, with the giving of
notice, the lapse of time or the happening of any further event or condition,
would become a default under such lease (other than payments not yet due which
would become a default if not paid when due). Photomatrix has not knowingly
violated or been given notice of violation of any of the terms or conditions
under any such lease, and to the best knowledge of Photomatrix all of the
covenants to be performed by any other party under all such leases have been
fully performed.
4.11 Fixed Assets. The Photomatrix Disclosure Memorandum sets forth a
list and location of Photomatrix's material items of machinery, equipment,
furniture, fixtures, tools, signs, and other items of tangible personal property
(excluding inventory) which are owned by Photomatrix and used in or useful or
pertain to Photomatrix's business or the operation thereof, whether or not
reflected on the books of, or in the possession of, Photomatrix and whether or
not presently in use (collectively, the "Fixed Assets"). For purposes of this
Section 4.11 only, "material" shall mean any item having a value of at least
$1,000.
4.12 Material Contracts. The Photomatrix Disclosure Memorandum contains
a list of all Contracts (as defined below) of the following types to which
Photomatrix is a party as of the date of this Agreement a party: (a) each
contract of employment of any officer, employee or consultant or with any labor
union or association and any bonus, deferred compensation, pension, profit
sharing, stock option, employee stock purchase, retirement or other employee
benefit plan; (b) each agreement, indenture or other instrument which contains
restrictions with respect to the payment of dividends or any other distribution
in respect of its capital stock; (c) each contract or series of related
contracts involving payments either individually or in the aggregate in excess
of $20,000 in or pursuant to which any person who is or was an officer,
director, stockholder or employee of Photomatrix has a material interest; (d)
each contract relating to the borrowing or lending of money or the guarantee of
any obligations for borrowed money or otherwise, excluding endorsements made for
purposes of collection in the ordinary course of business; (e) each contract
continuing for a period of more than one year from its date and involving
payments in excess of $20,000 in any year or $40,000 in the aggregate; (f) each
contract for charitable contributions in excess of $1,000; (g) each contract for
the sale and/or installation of any equipment where the purchase price for such
equipment is not less than $15,000, and each contract for equipment
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maintenance involving total payments of not less than $25,000, including each
contract for the sale and/or installation of any equipment where such sale
and/or installation has been completed, but as to which Photomatrix has any
continuing obligation, contingent or otherwise; (h) each contract for capital
expenditures or for the purchase of materials, supplies, equipment or services
involving payments in excess of $20,000; (i) each license or royalty agreement
(other than standard software manufacturer's licenses included in packaged
software); (j) each distribution, dealer, reseller, manufacturer's
representative, sales agency or franchise agreement; (k) each contract relating
to advertising, promotion or public relations not terminable without penalty by
Photomatrix on 30 days or less notice; (l) each contract with any government
agency or instrumentality; (m) each management service, consulting or any other
similar type of contract; (n) each option to purchase any of Photomatrix's
assets, properties or rights; (o) each agreement under which price discounts
have been granted to customers other than in the ordinary course of business;
(p) each contract with respect to the discharge or removal of effluent,
hazardous wastes or pollutants of any nature; (q) each contract containing
covenants not to compete in any business or geographical area or not to use or
disclose any information in the possession of Photomatrix; (r) all contracts for
the leasing or rental of real or personal property; (s) any agreement imposing
liability for consequential damages, penalties for late payment or
non-performance or containing a liquidated damages provision; and (t) any
contract not made in the ordinary course of business. Photomatrix has delivered
to I-PAC true and correct copies of each Contract required to be listed in the
Photomatrix Disclosure Memorandum under this Section 4.12 and a written
description of each material oral arrangement so listed (collectively, the
"Photomatrix Material Contracts"). As of the date of this Agreement, all
Photomatrix Material Contracts are, and as of the Effective Time will be, valid,
enforceable in accordance with their terms and in full force and effect, and, to
the knowledge of Photomatrix, Photomatrix is not, and as of the Effective Time
Photomatrix will not be, in default thereunder. As of the date of this
Agreement, Photomatrix has not received notice that any party to any Photomatrix
Material Contract intends to cancel or terminate such contract.
4.13 Litigation. There is no action, suit or proceeding at law or in
equity by any person or entity, or any arbitration or any administrative or
other proceeding by or before, or, to the best knowledge of Photomatrix, any
investigation by, any governmental or other instrumentality or agency, pending,
or to the best knowledge of Photomatrix, threatened, against or affecting
Photomatrix or any of its properties or rights which could materially and
adversely affect the right or ability of Photomatrix to carry on its business as
now conducted, or which could materially and adversely affect the financial
condition or properties of Photomatrix. Photomatrix does not know of any valid
basis for any such action, suit, arbitration, proceeding or investigation.
Photomatrix is not subject to any judgment, order or decree entered in any
lawsuit or proceeding which may have an adverse effect on any of its operations,
business practices, or properties or on its ability to acquire any property or
conduct business in any area.
4.14 Taxes. Photomatrix has filed, will file or has caused to be filed,
within the times and within the manner prescribed by law, all Tax returns and
all other Tax reports and declarations which are required to be filed by, or
with respect to, Photomatrix. Such returns, reports and declarations accurately
reflect Photomatrix's liability for Taxes for the periods covered thereby. The
Taxes
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payable by, or due from, Photomatrix have been fully paid or adequately
disclosed and fully provided for in its books and financial statements. No
examination, audit or inquiry of any Tax return of Photomatrix is currently in
progress, and Photomatrix has not received notice of intent to commence any
inquiry, audit or examination of any such Tax return from any taxing authority.
There are no outstanding agreements or waivers extending the statutory period of
limitations applicable to any Tax return of Photomatrix. The properties of
Photomatrix are not encumbered by Tax liens, other than liens for Taxes not yet
delinquent. The State of California has audited all of Photomatrix's sales tax
returns, and no additional funds are due with respect to such returns.
Photomatrix has not received or been threatened with a claim for assessment,
proposed assessment, or collection of any Tax, nor does Photomatrix have any
knowledge as to a possible basis for any such claim. Photomatrix has not granted
any powers of attorney or other authorizations to any persons to represent
Photomatrix with respect to any Tax. Photomatrix has not been included in any
unitized, affiliated, combined or other consolidated Tax returns, reports or
declarations, and Photomatrix is not and has not been a party to any Tax-sharing
agreement or similar arrangement regulating the allocation of Taxes and payments
between itself and any person or entity. No consent, agreement or other
undertaking has been filed by Photomatrix to have the provisions of Section
341(f) of the Code apply. Photomatrix has not agreed to make, nor is it required
to make, any adjustment under Section 481(a) of the Code by reason of a change
in accounting method or otherwise. Photomatrix has disclosed on its federal
income Tax Returns all positions taken therein that could give rise to a
substantial understatement of federal income Tax within the meaning of Code
Section 6662.
4.15 Permits. Set forth in the Photomatrix Disclosure Memorandum is a
complete and accurate list of all Permits held by Photomatrix. The Permits are
all the permits required for the conduct of the Photomatrix Business. Each
Permit is in full force and effect; Photomatrix has not engaged in any activity
which would cause or permit revocation or suspension of any such Permit; and no
action or proceeding looking to or contemplating the revocation or suspension of
any such Permit is pending or, to Photomatrix's knowledge, threatened. There are
no existing defaults or events of default or events or states of fact which with
notice or the lapse of time or both would constitute a default by Photomatrix
under any such Permit. Photomatrix has no knowledge of any default or claimed or
purported or alleged default or state of facts which with notice or the lapse of
time or both would constitute a default on the part of any other party in the
performance of any obligation to be performed or paid by any other party under
any Permit. The consummation of the transactions contemplated hereby will in no
way affect the continuation, validity or effectiveness of the Permits. Neither
Photomatrix nor its facility nor any of its assets is required to be specially
licensed by, nor is it subject to specific regulation of, any governmental or
regulatory body by reason of the conduct of the business of Photomatrix.
4.16 Insurance. The Photomatrix Disclosure Memorandum contains a
complete and accurate list of insurance policies which Photomatrix maintains
with respect to its business, properties or employees. All such policies are in
full force and effect, and there currently exists no right of termination with
regard to any such policy as a result of any default on the part of Photomatrix.
Such policies, with respect to their amounts and types of coverage, are believed
by Photomatrix to be adequate to insure against material risks to which
Photomatrix and its property and assets are
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normally exposed in the operation of its business. Since the Balance Sheet Date,
there has not been any material adverse change in Photomatrix's relationship
with its insurers or in the premiums payable pursuant to such policies.
4.17 Product Warranty. Each product manufactured, sold, leased,
licensed or delivered by Photomatrix conforms with all applicable contractual
commitments and all express and implied warranties. Photomatrix has no liability
and, to the best knowledge of Photomatrix, there is no basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand which may give rise to any liability for replacement or repair
thereof or other damages in connection therewith, subject only to any reserve
for product warranty claims set forth in the Photomatrix Balance Sheets. No
product manufactured, sold, leased, or delivered by Photomatrix is subject to
any guaranty, warranty, or other indemnity beyond the applicable standard terms
and conditions of sale or lease, all of which are reproduced and described in
detail in the Photomatrix Disclosure Memorandum. Copies of the standard terms
and conditions of sale or lease for Photomatrix, containing applicable guaranty,
warranty, and indemnity provisions, have been provided to I-PAC by Photomatrix.
4.18 Intellectual Property.
4.18.1 All domestic and foreign patents, patent applications,
copyrighted works, copyright applications and registrations, trade secrets,
trademarks, service marks, inventions, manufacturing and design processes,
hardware designs, programming processes, software and other information, and
know-how (if any) that are used by, owned by or licensed to Photomatrix
(collectively, the "Photomatrix Intellectual Property") are listed in the
Photomatrix Disclosure Memorandum which indicates, with respect to each such
item, the nature of Photomatrix's interest therein and the expiration date
thereof or the date on which Photomatrix's interest therein terminates.
Registered copyrights, patents, trademarks and service marks that are owned by
or licensed to Photomatrix have been duly registered in, filed in or issued by,
as the case may be, the United States Patent and Trademark Office, the United
States Register of Copyrights or the corresponding offices of other countries
identified in the Photomatrix Disclosure Memorandum, and have been properly
maintained and renewed in accordance with all applicable provisions of law and
administrative regulations in the United States and each such country. The
Intellectual Property is the only intellectual property used in or otherwise
necessary to operate the Photomatrix Business as it is currently conducted.
4.18.2 Use of the Photomatrix Intellectual Property and any other
intellectual property used by Photomatrix in its business does not require the
consent of any other person, and the same are freely transferable (except as
otherwise provided by law) and are owned exclusively by Photomatrix, free and
clear of any attachments, liens, encumbrances or adverse claims; and, to the
best knowledge of Photomatrix, neither its present nor contemplated activities
or products infringe, misappropriate, dilute, impair or constitute unfair
competition with respect to any patent, trade name, trademark, service mark,
copyright, trade secret or other proprietary rights of others.
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4.18.3 No other person has an interest in or right or license to
use, or the right to license others to use the Photomatrix Intellectual
Property. There are no claims or demands of any other person pertaining thereto,
and no proceedings have been instituted, are pending or, to the best knowledge
of Photomatrix, threatened that challenge the rights of Photomatrix in respect
thereof, and Photomatrix does not know of any fact that could be the basis of
any such claim. Photomatrix is not aware of any infringement of any of the
Photomatrix Intellectual Property by others, nor is any of the Photomatrix
Intellectual Property subject to any outstanding order, decree, judgment,
stipulation, settlement, lien, charge, encumbrance or attachment. No claim or
demand has been made and no proceeding has been filed or, to the best knowledge
of Photomatrix, is threatened to be filed charging Photomatrix with infringement
of any patent, trade name, trademark, service mark, copyright or trade secret,
and Photomatrix does not know of any facts which could be the basis of any such
claims. There are no royalties, honoraria, fees or other payments payable by
Photomatrix to any person with respect to any of the Photomatrix Intellectual
Property.
4.18.4 There are no payments that are required to be made by
Photomatrix for the use of the Photomatrix Intellectual Property. Photomatrix is
not using or in any way making any unlawful or wrongful use of any confidential
information or intellectual property of any third party, including without
limitation any former employer of any present or past employee of Photomatrix or
of any of Photomatrix's predecessors. Photomatrix is not a party to any
non-competition or confidentiality agreement related to the business of
Photomatrix with any party other than I-PAC.
4.19 Compliance With Laws. Photomatrix is in compliance with all
applicable laws, regulations, orders, judgments and decrees of each and every
jurisdiction in which it is doing business, including applicable federal laws
and regulations, the violation of which would have a material adverse effect on
its operations.
4.20 Inventory. The inventory as reflected on the Photomatrix Balance
Sheets or acquired thereafter has been acquired and maintained in the ordinary
course of business, is of good and merchantable quality, consists substantially
of a quality, quantity, and condition usable, leasable or saleable in the
ordinary course of business within a period of one (1) year from the Closing
Date, and is not subject to any write down or write off for obsolescence or
otherwise under generally accepted accounting principles. The Photomatrix
Balance Sheets contain adequate reserves for slow moving or obsolete inventory.
Photomatrix is not under any liability or obligation with respect to the return
of inventory in the possession of any third party.
4.21 Accounts Receivable. The accounts receivable of Photomatrix as
reflected in the Photomatrix Balance Sheets are, to the extent uncollected on
the date of this Agreement, valid and existing and fully collectible through the
use of ordinary collection procedures (net of reserves set forth in such
financial statements as at such dates, which reserves were adequate and in an
amount consistent with Photomatrix's historical accounting policies), represent
monies due for goods sold and delivered or services rendered, and are subject to
no refunds, discounts, rebates or other adjustments (except discounts for prompt
payment given in the ordinary course of business) and to no defenses,
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rights of setoff, assignments, restrictions, encumbrances or conditions
enforceable by third parties. Photomatrix has never factored any of its accounts
receivable.
4.22 Employment Relations. Photomatrix is (i) in compliance with all
federal, state or other applicable laws respecting employment and employment
practices, terms and conditions of employment, wages and hours, equal employment
opportunity, nondiscrimination, occupational safety and health, and the payment
of social security and similar taxes and, to the best knowledge of Photomatrix,
has not and is not engaged in any unfair labor practice; (ii) no unfair or
unlawful labor practice complaint against Photomatrix is pending before the
National Labor Relations Board or any other governmental agency or commission;
(iii) there is no labor strike, dispute, slowdown or stoppage actually pending
or, to the best knowledge of Photomatrix, threatened against or involving
Photomatrix; (iv) no representation question exists respecting the employees of
Photomatrix; (v) no grievance which might have a material adverse effect on the
condition of Photomatrix or the conduct of its business exists, no arbitration
proceeding arising out of or under any collective bargaining agreement is
pending, and no claim therefor has been asserted; (vi) no collective bargaining
agreement is currently being negotiated by Photomatrix; (vii) Photomatrix has
not experienced any material labor difficulty; and (viii) no "plant closing" or
"mass layoff" within the meaning of the Worker Adjustment and Retraining
Notification Act has occurred with respect to Photomatrix. There has not been,
and, to the best knowledge of Photomatrix, there will not be, any change in
relations with employees of Photomatrix as a result of the transactions
contemplated by this Agreement. There exist no employment, consulting, severance
or indemnification agreements between Photomatrix and any director, officer,
employee or agent of Photomatrix or any other agreement that would give any
person or entity the right to receive any payment from Photomatrix as a result
of the Merger. There exists no contract or arrangement which would limit in any
way Photomatrix's right to discharge any employee of Photomatrix following the
Closing or which would entitle any such discharged employee to receive
compensation from Photomatrix on account of such discharge.
4.23 Employee Benefit Plans.
4.23.1 List of Plans. Set forth in the Photomatrix Disclosure
Memorandum is an accurate and complete list of all employee benefit plans
("Photomatrix Employee Benefit Plans") within the meaning of Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), whether
or not any such Photomatrix Employee Benefit Plans are otherwise exempt from the
provisions of ERISA, established, maintained or contributed to by Photomatrix
(including, for this purpose all employers (whether or not incorporated) which
by reason of common control are treated together with Photomatrix as a single
employer within the meaning of Section 414 of the Code).
4.23.2 Status of Plans. Photomatrix does not maintain or contribute
to any Photomatrix Employee Benefit Plan subject to ERISA which is not in
substantial compliance with ERISA, or which has incurred any accumulated funding
deficiency within the meaning of Section 412 or 418B of ERISA, or which has
applied for or obtained a waiver from the Internal Revenue Service of any
minimum funding requirement under Section 412 of the Code. Photomatrix has not
incurred
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any liability to the Pension Benefit Guaranty Corporation ("PBGC") in connection
with any Photomatrix Employee Benefit Plan or ceased operations at any facility
or withdrawn from any such Plan in a manner which could subject it to liability
under Section 4062(f), 4063 or 4064 of ERISA. Photomatrix does not know of any
facts or circumstances which might give rise to any liability to the PBGC under
Title IV of ERISA or which could reasonably be anticipated to result in any
claims being made against Photomatrix or I-PAC by the PBGC. Photomatrix has not
incurred any withdrawal liability (including any contingent or secondary
withdrawal liability) within the meaning of Sections 4201 and 4202 of ERISA, to
any Photomatrix Employee Benefit Plan which is a multi-employer Plan (as defined
in Section 4001 of ERISA), and no event has occurred, and there exists no
condition or set of circumstances, which presents a material risk of the
occurrence of any withdrawal from or the partition, termination, reorganization
or insolvency of any multi-employer Plan which could result in any liability on
the part of Photomatrix to a multi-employer Plan.
4.23.3 Contributions. Full payment has been made of all amounts
which Photomatrix is required, under applicable law or under any Photomatrix
Employee Benefit Plan or any agreement relating to any Photomatrix Employee
Benefit Plan to which Photomatrix is a party, to have paid as contributions
thereto for or with respect to the most recent fiscal year of such Photomatrix
Employee Benefit Plan ended prior to the date hereof. Photomatrix has made
adequate provisions for reserves to meet contributions that have not been made
because they are not yet due under the terms of any Photomatrix Employee Benefit
Plan or related agreements . All payments and contributions to any such
Photomatrix Employment Benefit Plan have been finally determined and paid for
the period ended December 31, 1997. No contributions have been made to any
Photomatrix Employee Benefit Plan for the period subsequent to December 31,
1997.
4.23.4 Tax Qualification. To the best knowledge of Photomatrix,
each Photomatrix Employee Benefit Plan intended to be qualified under Section
401(a) of the Internal Revenue Code has been determined to be so qualified by
the Internal Revenue Service and nothing has occurred since the date of the last
such determination which resulted or is likely to result in the revocation of
such determination.
4.23.5 Transactions. No reportable event (as defined in Section
4043 of ERISA) has occurred with respect to any Photomatrix Employee Benefit
Plan, and Photomatrix has not engaged in any transaction with respect to any
Photomatrix Employee Benefit Plan which would subject it to a tax, penalty or
liability for prohibited transactions under ERISA or the Code, nor have any of
its directors, officers or employees, to the extent they or any of them are
fiduciaries with respect to such plans, materially breached any of their
responsibilities or obligations imposed upon fiduciaries under Title I of ERISA
or which would result in any claim being made under or by or on behalf of any
such plans by any party with standing to make such claim.
4.23.6 Other Plans. Photomatrix does not presently maintain any
employee benefit plans or any other pension, welfare or retirement benefit plans
other than those listed in the Photomatrix Disclosure Memorandum.
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4.23.7 Documents. Photomatrix and the Shareholders have delivered
or caused to be delivered to I-PAC and its counsel true and complete copies of
(i) all Photomatrix Employee Benefit Plans as in effect on the date of this
Agreement, together with all amendments thereto which will become effective at a
later date, as well as the latest Internal Revenue Service determination letter
obtained with respect to any such Photomatrix Employee Benefit Plan qualified
under Section 401 or 501 of the Code and (ii) Form 5500 with respect to each
such Plan for each of the last two fiscal years, and will provide when completed
Form 5500 for the most recently completed fiscal year for each Photomatrix
Employee Benefit Plan required to file such form.
4.24 Environmental Laws and Regulations. The Photomatrix Disclosure
Memorandum sets forth all information relating to the following items: (a) the
nature and, if material, quantities of any hazardous substances (as defined
below) generated, transported or disposed of by Photomatrix during the past five
years (other than raw material awaiting manufacturing, work-in process or
finished goods or through the sale of products in the ordinary course of
business), together with a description of the location of each such activity,
and (b) a summary of the nature and, if material, quantities of any hazardous
substances that have been disposed of or found at any site or facility owned or
operated presently or at any previous time by Photomatrix (other than raw
material awaiting manufacturing, work-in-process or finished goods or through
the sale of products in the ordinary course of business). Photomatrix's existing
and prior uses of all real property leased or owned by Photomatrix complies and
has at all times during their occupancy complied with, and Photomatrix is not in
violation of, and has not violated, in connection with the ownership, lease,
occupancy, use, maintenance, or operation of such property or the conduct of its
business, any Environmental Laws. Photomatrix has not received any notice of any
work, repairs, construction or capital expenditures required by the
Environmental Laws with respect to any of its properties or its businesses. None
of Photomatrix's leased or owned properties is contaminated by or contains any
hazardous substance. No claim, action, suit or proceeding is pending or, to
Photomatrix's knowledge, threatened against Photomatrix, before any court or
other governmental authority or arbitration tribunal, relating to hazardous
substances, pollution or the environment, and there is no outstanding judgment,
order, writ, injunction, decree or award against or affecting Photomatrix or its
assets with respect to the same. There has never been, and there is not
presently occurring, any release of any hazardous substance on or from any of
Photomatrix's leased or owned properties, Photomatrix has not received any
notice from any government agency or private or public entity advising
Photomatrix that it is responsible for response costs with respect to a release,
a threatened release or clean up of chemicals produced by, or resulting from,
any business, commercial, or industrial activities, operations, or processes,
including, but not limited to, hazardous substances, and Photomatrix has not
received any information requests under CERCLA from any government agency. There
are no facts or circumstances which Photomatrix reasonably expect could form the
basis for the assertion of any Claim (as defined below) against Photomatrix
relating to environmental matters including, but not limited to, any Claim
arising from past or present environmental practices asserted under the
Environmental Laws, which Photomatrix believes might have a material adverse
effect on the business, results of operations, financial condition or prospects
of Photomatrix taken as a whole.
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As used herein, "hazardous substances(s)" include any pollutants,
contaminants, dangerous substances, toxic substances, solid waste, hazardous
wastes, hazardous materials, or hazardous substances as defined in or pursuant
to RCRA or CERCLA, or any other federal, state or local environmental law,
ordinance, rule or regulation, except that, for purposes of this Agreement,
"petroleum" (including crude oil or any fraction thereof) shall be deemed a
"hazardous substance." "Release" and "disposal" shall have the same meanings as
defined in CERCLA and RCRA. "Claim" shall mean any and all claims, demands,
causes of actions, suits, proceedings, administrative proceedings, losses,
judgments, attorneys' fees, and any other expenses incurred, assessed or
sustained by or against Photomatrix.
4.25 Interests in Clients, Suppliers, Etc. Neither Photomatrix nor any
officer or director of Photomatrix owns or possesses, directly or indirectly,
any financial or proprietary interest in, or is a director, officer or employee
of, any corporation, limited liability company, partnership, association, trust,
joint venture or other business entity which is engaged in the same or similar
business as Photomatrix, or is a competitor or potential competitor of
Photomatrix. Ownership of securities of a company whose securities are
registered under the Securities Exchange Act of 1934, not in excess of 5% of any
class of such securities, shall not be deemed to be a financial interest for
purposes of this Section 4.25.
4.26 Customers, Distributors and Sales Representatives. The Photomatrix
Disclosure Memorandum sets forth the names and addresses of all customers to
which, and representatives and distributors through which, Photomatrix has sold
or distributed in excess of $250,000 of its products or services during either
of the last two fiscal years of Photomatrix. During such period and through the
date hereof, no such customer, distributor or sales representative has canceled
or otherwise terminated its relationship with Photomatrix or decreased
materially its usage or purchase of the products or services of Photomatrix,
except for changes in customer relationships that have occurred in the ordinary
course of business the aggregate value of which has not exceeded $1,250,000. To
the knowledge of Photomatrix, no such customer, sales representative or
distributor has any plan or intention to terminate, cancel or otherwise modify
its relationship with Photomatrix in a manner that would be adverse to
Photomatrix.
4.27 Bank Accounts, Powers of Attorney and Compensation of Employees.
The Photomatrix Disclosure Memorandum contains an accurate and complete list
showing (a) the name and address of each bank in which Photomatrix has an
account or safe deposit box, the number of any such account or any such box, the
names of all persons authorized to draw thereon or to have access thereto and
the current balances maintained in all such accounts, (b) the names of all
persons, if any, holding powers of attorney from Photomatrix and a summary
statement of the terms thereof, and (c) the names of all persons whose
compensation from Photomatrix for the last fiscal year of Photomatrix exceed an
annualized rate of Fifty Thousand and No/100 Dollars ($50,000.00), together with
a statement of the full amount paid or payable to each such person for services
rendered during such fiscal year.
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4.28 Disclosure. The representations, warranties and covenants made by
Photomatrix in this Agreement, the financial statements referred to in Section
4.5 above (including the footnotes thereto), and any attached schedule, exhibit
or certificate delivered in accordance with the terms hereof, taken as a whole,
do not contain any untrue statement of a material fact, or omit any statement of
a material fact necessary in order to make the statements contained herein or
therein not misleading. There is no fact known to Photomatrix which materially
and adversely affects the businesses, prospects or financial condition of
Photomatrix, its properties or assets, which has not been disclosed and set
forth in this Agreement.
4.29 Broker's or Finder's Fees. No agent, broker, person or firm acting
on behalf of Photomatrix is, or will be, entitled to any commission or broker's
or finder's fees from any of the parties hereto, or from any person controlling,
controlled by or under common control with any of the parties hereto, in
connection with any of the transactions contemplated herein.
4.30 Certain Conditions for Accounting and Tax Treatment. Prior to the
Closing Date, Photomatrix will be in control of Merger Corp. within the meaning
of Section 368(c)(1) of the Code. Photomatrix has no plan or intention to
reacquire any Photomatrix Shares issued in the transaction. Photomatrix has no
plan or intention to liquidate I-PAC; to merge I-PAC with or into another
corporation; to sell or otherwise dispose of the stock of I-PAC; or to cause
I-PAC to sell or otherwise dispose of any of its assets, except for dispositions
made in the ordinary course of business. Merger Corp. will have no liabilities
assumed by I-PAC, and will not transfer to I-PAC any assets subject to
liabilities, in the transaction. Following the Closing Date, I-PAC will continue
its historic business or use a significant portion of its historic business
assets in a business. Photomatrix and Merger Corp. will pay their respective
expenses, if any, incurred in connection with the transaction. In the
transaction, I-PAC Shares representing control of I-PAC, as defined in Section
368(c)(1) of the Code, will be exchanged solely for Photomatrix Shares. For
purposes of this representation, I- PAC Shares exchanged for cash or other
property originating with Photomatrix will be treated as outstanding I-PAC
Shares on the Closing Date. Photomatrix does not own, nor has it owned during
the past five years, any I-PAC Shares. Photomatrix and Merger Corp. are not
investment companies as defined in Section 368(a)(2)(F)(iii) and (iv) of the
Internal Revenue Code.
4.31 Cooperation. From and after the date of this Agreement,
Photomatrix and its officers, directors, accountants, attorneys, agents and
other representatives will cooperate fully with I-PAC (i) in the preparation of
all statements and reports contemplated by this Agreement and required pursuant
to the registration and other requirements provided in the 1933 Act and the 1934
Act, and (ii) to facilitate the consummation of the transactions provided for
herein, all in accordance with federal and state regulatory requirements.
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ARTICLE V
CONDUCT OF BUSINESS
5.1 Conduct of Business of I-PAC. I-PAC represents, warrants and agrees
that, during the period from the date hereof to the Closing Date, I-PAC shall
conduct its business operations according to the ordinary and usual course of
business and use its best effort to preserve intact its business organization,
keep available the services of its officers and employees, and maintain
satisfactory relationships with its customers, vendors, licensors, suppliers,
distributors, clients and others having business relationships with I-PAC.
Notwithstanding such agreements, pending the Closing Date and except as may be
first approved by Photomatrix or as is otherwise permitted or required by this
Agreement, I-PAC and the I-PAC Shareholders will cause (a) I-PAC's articles of
incorporation and by-laws to be maintained in their form as of the date of this
Agreement, (b) the compensation payable to each of William L. Grivas and Patrick
W. Moore to not exceed $10,417 per month (exclusive of distributions permitted
by paragraph (f)), and the compensation payable or to become payable by I-PAC,
in the aggregate, to any person being paid Fifty Thousand and No/100 Dollars
($50,000.00) per year or more on the Balance Sheet Date to be maintained at no
more than its existing levels as of such date, (c) I-PAC to refrain from making
any bonus (cash, stock or otherwise), pension, retirement or insurance payment
(other than regularly scheduled payments in the ordinary course consistent with
past practice) or arrangement to or with any such persons except those that may
have been approved by Photomatrix or those that are subject to and in accordance
with the provisions of this Agreement, (d) I-PAC to refrain from entering into
any contract, commitment or purchase, except contracts or purchases in the
ordinary course of business or involving a commitment by either party to such
contract or purchase of less than $10,000 in the aggregate, (e) I-PAC to refrain
from making any change affecting any of their bank, safe deposit or power of
attorney arrangements, (f) I-PAC to refrain from granting dividends or making
distributions to I-PAC Shareholders (other than a distribution or compensation
which does not exceed the amount of federal and state income tax payable by the
I-PAC Shareholders on income allocated to them by I-PAC during 1997), (g) I-PAC
to refrain from engaging in related party transactions without the prior written
consent of Photomatrix, provided that prior to the Closing Date I-PAC may
continue to pay interest which accrues on related party debt, management fees
payable to Evergreen Investments (which management fees shall be in lieu of the
compensation allowable under paragraph (b) and which shall be in conformance
with bank covenants of I-PAC as of the Closing Date), a retainer fee in
conformance with past practice to the law firm of Sullivan, Hill, Lewin, Rez,
Engel & LaBazzo, sales commissions to MGM TechRep in conformance with past
practice, and fees to Evergreen Investments and/or MedTech Industries for the
assignment or sublicense of the ASL License, which fees shall not exceed the
license fee paid by those entities to ASL in accordance with the ASL License
Agreement, (h) I-PAC to refrain from incurring any additional debt, other than
trade debt incurred in the ordinary course of business and debt incurred
pursuant to standard working capital lines of credit, and (i) I-PAC to refrain
from revising its historical payment practices regarding current liabilities.
During the period from the Balance Sheet Date to the Closing Date, I-PAC shall
confer on a regular and frequent basis with one or more designated
representatives of Photomatrix to report material operational matters and to
report the general status of ongoing business operations
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of I-PAC. I-PAC shall notify Photomatrix of any unexpected emergency or other
change in the normal course of its business or in the operation of its
properties and of any governmental complaints, investigations or hearings (or
communications indicating that the same may be contemplated), or adjudicatory
proceedings (including lawsuits, arbitrations or mediations), involving I-PAC,
and to keep Photomatrix fully informed of such events and permit its
representatives prompt access to all materials prepared in connection therewith.
Notwithstanding the foregoing, prior to the Closing Date, and without increasing
the total number of outstanding shares of I-PAC capital stock, (i) I-PAC shall
convert to equity in I-PAC all existing loans and other indebtedness for
borrowed money (which shall not include expense reimbursements and accrued
compensation) owed by I-PAC to one or more of the I-PAC Shareholders or their
affiliates (other than loans not exceeding $25,000 in the aggregate, which loans
may be repaid in cash) and (ii) through transfers, issuances and redemptions of
I-PAC stock or other means, the I-PAC Shareholders and their affiliates may
adjust their respective ownership interests in I-PAC and one or more additional
persons may become I-PAC Shareholders.
5.2 Conduct of Business of Photomatrix. Photomatrix represents,
warrants and agrees that during the period from the date hereof to the Closing
Date, Photomatrix conduct its business operations according to the ordinary and
usual course of business and use its best effort to preserve intact its business
organization, keep available the services of its officers and employees, and
maintain satisfactory relationships with its customers, vendors, licensors,
suppliers, distributors, clients and others having business relationships with
Photomatrix. Notwithstanding such agreements, pending the Closing Date and
except as may be first approved by I-PAC or as is otherwise permitted or
required by this Agreement, Photomatrix and the Photomatrix Shareholders will
cause (a) Photomatrix's articles of incorporation and by-laws to be maintained
in their form as of the date of this Agreement, (b) the compensation payable or
to become payable by Photomatrix, in the aggregate, to any person being paid
Fifty Thousand and No/100 Dollars ($50,000.00) per year or more on the Balance
Sheet Date to be maintained at no more than their existing levels as of such
date, (c) Photomatrix to refrain from making any bonus (cash, stock or
otherwise), pension, retirement or insurance payment (other than regularly
scheduled payments in the ordinary course consistent with past practice) or
arrangement to or with any such persons in excess of $2,500 to any one
individual or $100,000 in the aggregate, except those that may have been
approved by I-PAC or those that are subject to and in accordance with the
provisions of this Agreement, (d) Photomatrix to refrain from entering into any
contract, commitment or purchase, including contracts of employment, except
contracts or purchases in the ordinary course of business or involving a
commitment by either party to such contract or purchase of less than $10,000 in
the aggregate, (e) Photomatrix to refrain from making any change affecting any
of their bank, safe deposit or power of attorney arrangements, and (f)
Photomatrix to refrain from granting dividends or making distributions to
Photomatrix Shareholders, (g) Photomatrix to refrain from engaging in related
party transactions without the prior written consent of I-PAC, (h) Photomatrix
to refrain from incurring any additional debt other than pursuant to standard
working capital lines of credit; (i) Photomatrix to refrain from revising its
historical payment practices of its current liabilities; and (j) Photomatrix to
refrain from issuing shares of its capital stock or other equity securities
other than pursuant to the exercise of Outstanding Options. During the period
from the Balance Sheet Date to the Closing Date, Photomatrix shall cause
Photomatrix to, confer on a regular and frequent basis with one or more
designated
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representatives of I-PAC to report material operational matters and to report
the general status of ongoing business operations of Photomatrix. Photomatrix
shall notify I-PAC of any unexpected emergency or other change in the normal
course of its business or in the operation of its properties and of any
governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated), adjudicatory proceedings
(including lawsuits, arbitrations or mediations), involving Photomatrix, and to
keep I-PAC fully informed of such events and permit its representatives prompt
access to all materials prepared in connection therewith.
5.3 I-PAC No Solicitation.
5.3.1 I-PAC shall, and shall direct and use reasonable efforts to
cause its officers, directors, employees, representatives and agents to,
immediately cease any discussions or negotiations with any parties that may be
ongoing with respect to an I-PAC Takeover Proposal (as hereinafter defined).
I-PAC shall not, nor shall it permit any of its subsidiaries to, nor shall it
authorize or permit any of its officers, directors or employees or any
investment banker, financial advisor, attorney, accountant or other
representative retained by it or any of its subsidiaries to, directly or
indirectly, (i) solicit, initiate or encourage (including by way of furnishing
information), or take any other action designed or reasonably likely to
facilitate, any inquiries or the making of any proposal which constitutes, or
may reasonably be expected to lead to, any I-PAC Takeover Proposal or (ii)
participate in any discussions or negotiations regarding any I-PAC Takeover
Proposal. For purposes of this Agreement, an "I-PAC Takeover Proposal" means any
inquiry, proposal or offer from any person relating to any direct or indirect
acquisition or purchase of 50% or more of the assets of I-PAC and its
subsidiaries or 50% or more of any class of equity securities of I-PAC or any of
its subsidiaries, any tender offer or exchange offer that if consummated would
result in any person beneficially owning 50% or more of any class of equity
securities of I-PAC or any of its subsidiaries, any merger, consolidation, share
exchange, business combination, recapitalization, liquidation, dissolution or
similar transaction involving I-PAC or any of its subsidiaries, other than the
transactions contemplated by this Agreement, or any other transaction the
consummation of which could reasonably be expected to impede, interfere with,
prevent or materially delay the Merger or which would reasonably be expected to
dilute materially the benefits to Photomatrix the transactions contemplated by
this Agreement.
5.3.2 Neither the Board of Directors of I-PAC nor any committee
thereof shall (i) withdraw or modify, or propose publicly to withdraw or modify,
in a manner adverse to I-PAC, the approval or recommendation by such Board of
Directors or such committee of the Merger, (ii) approve or recommend, or propose
publicly to approve or recommend, any I-PAC Takeover Proposal or (iii) cause
I-PAC to enter into any letter of intent, agreement in principle, acquisition
agreement or other similar agreement related to any I-PAC Takeover Proposal.
5.4 Photomatrix No Solicitation.
5.4.1 Photomatrix shall, and shall direct and use reasonable
efforts to cause its officers, directors, employees, representatives and agents
to, immediately cease any discussions or
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negotiations with any parties that may be ongoing with respect to a Photomatrix
Takeover Proposal (as hereinafter defined). Photomatrix shall not authorize or
permit any of its officers, directors or employees or any investment banker,
financial advisor, attorney, accountant or other representative retained by it
to, directly or indirectly, (i) solicit, initiate or encourage (including by way
of furnishing information), or take any other action designed or reasonably
likely to facilitate, any inquiries or the making of any proposal which
constitutes, or may reasonably be expected to lead to, any Photomatrix Takeover
Proposal or (ii) participate in any discussions or negotiations regarding any
Photomatrix Takeover Proposal; provided, however, that if, at any time prior to
the Effective Time, the Board of Directors of Photomatrix determines in good
faith, after consultation with outside counsel, that it is necessary to do so in
order to comply with its fiduciary duties to Photomatrix's shareholders under
applicable laws, Photomatrix may, in response to a Photomatrix Takeover Proposal
which was not solicited subsequent to the date hereof, and subject to compliance
with Section 5.4.3, (i) furnish information with respect to Photomatrix to any
person pursuant to a customary confidentiality agreement (as determined by
Photomatrix after consultation with its outside counsel) and (ii) participate in
negotiations regarding such Photomatrix Takeover Proposal. For purposes of this
Agreement, a "Photomatrix Takeover Proposal" means any inquiry, proposal or
offer from any person relating to any direct or indirect acquisition or purchase
of 50% or more of the assets of Photomatrix or more of any class of equity
securities of Photomatrix, any tender offer or exchange offer that if
consummated would result in any person beneficially owning 50% or more of any
class of equity securities of Photomatrix, any merger, consolidation, share
exchange, business combination, recapitalization, liquidation, dissolution or
similar transaction involving Photomatrix, other than the transactions
contemplated by this Agreement, or any other transaction the consummation of
which could reasonably be expected to impede, interfere with, prevent or
materially delay the Merger or which would reasonably be expected to dilute
materially the benefits to I-PAC of the transactions contemplated by this
Agreement.
5.4.2 Except as set forth in this Section 5.4, neither the Board of
Directors of Photomatrix nor any committee thereof shall (i) withdraw or modify,
or propose publicly to withdraw or modify, in a manner adverse to I-PAC, the
approval or recommendation by such Board of Directors or such committee of the
Merger, (ii) approve or recommend, or propose publicly to approve or recommend,
any Photomatrix Takeover Proposal or (iii) cause Photomatrix to enter into any
letter of intent, agreement in principle, acquisition agreement or other similar
agreement (each, a "Photomatrix Acquisition Agreement") related to any
Photomatrix Takeover Proposal. Notwithstanding the foregoing, in the event that
prior to the Effective Time the Board of Directors of Photomatrix determines in
good faith, after consultation with outside counsel, that it is necessary to do
so in order to comply with its fiduciary duties to Photomatrix's shareholders
under applicable laws, the Board of Directors of Photomatrix may (subject to
this and the following sentences) (x) withdraw or modify its approval or
recommendation of the Merger or (y) approve or recommend a Photomatrix Superior
Proposal (as defined below) or terminate this Agreement (and concurrently with
or after such termination, if it so chooses, cause Photomatrix to enter into any
Photomatrix Acquisition Agreement with respect to any Photomatrix Superior
Proposal), but in each of the cases set forth in this clause (y), only at a time
that is after the tenth business day following I-PAC's receipt of written notice
advising I-PAC that the Board of Directors of Photomatrix has received a
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Photomatrix Superior Proposal, specifying the material terms and conditions of
such Photomatrix Superior Proposal and identifying the person making such
Photomatrix Superior Proposal. For purposes of this Agreement, a "Photomatrix
Superior Proposal" means any bona fide proposal made by a third party to
acquire, directly or indirectly, for consideration consisting of cash and/or
securities, more than 50% of the combined voting power of the shares of
Photomatrix Capital Stock then outstanding or all or substantially all the
assets of Photomatrix and otherwise on terms which the Board of Directors of
Photomatrix determines in its good faith judgment (based on the advice of an
outside financial advisor) to be materially more favorable to Photomatrix's
shareholders than the Merger and for which financing, to the extent required, is
then committed or which, in the good faith judgment of the Board of Directors of
Photomatrix, is reasonably capable of being financed by such third party.
5.4.3 In addition to the obligations of Photomatrix set forth in
paragraphs 5.4.1 and 5.4.2 of this Section 5.4, Photomatrix shall immediately
advise I-PAC orally and in writing of any request for information or of any
Photomatrix Takeover Proposal, the material terms and conditions of such request
or Photomatrix Takeover Proposal and the identity of the person making such
request or Photomatrix Takeover Proposal. Photomatrix will keep I-PAC fully
informed of the status and details (including amendments or proposed amendments)
of any such request or Photomatrix Takeover Proposal.
5.4.4 Nothing contained in this Section 5.4 shall prohibit
Photomatrix from taking and disclosing to its shareholders a position
contemplated by Rule 14e-2(a) promulgated under the Exchange Act or from making
any disclosure to Photomatrix's shareholders if, in the good faith judgment of
the Board of Directors of Photomatrix, after consultation with outside counsel,
failure so to disclose would be inconsistent with its fiduciary duties to
Photomatrix's shareholders under applicable laws; provided, however, neither
Photomatrix nor its Board of Directors nor any committee thereof shall, except
as permitted by Section 5.4.2, withdraw or modify, or propose publicly to
withdraw or modify, its position with respect to the Merger or approve or
recommend, or propose publicly to approve or recommend, a Photomatrix Takeover
Proposal.
5.5 No Stock Transactions. I-PAC shall (i) obtain an undertaking from
each shareholder of I-PAC, which shall identify Photomatrix as a third party
beneficiary of such undertaking, to the effect that, between the date of this
Agreement and the Effective Time, there are no sales or purchases of shares of
Photomatrix Common Stock by or at the direction of any such shareholder and (ii)
exercise its best efforts to ensure that no person or entity which has received
material non-public information concerning Photomatrix from any officer,
director, employee, shareholder or affiliate of I-PAC purchases or sells shares
of Photomatrix common stock while in the possession of such information.
5.6 Review.
5.6.1 Review of I-PAC. Prior to the Closing Date, Photomatrix may
directly and through its representatives make such investigation of the assets
and business of I-PAC (including,
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without limitation, investigation of its title to property and the condition of
its property and equipment, and the confirmation of its cash, inventories,
accounts receivable and liabilities) as Photomatrix deems necessary or
advisable. Photomatrix and its representatives shall have, at reasonable times
after the date of execution hereof, full access to the premises and to all the
books and records of I-PAC, and I-PAC shall cause to be furnished to Photomatrix
such financial and operating data and other information with respect to the
business and properties of I-PAC as Photomatrix shall from time to time
reasonably request.
5.6.2 Review of Photomatrix. Prior to the Closing Date, I-PAC may
directly and through its representatives make such investigation of the assets
and business of Photomatrix (including, without limitation, investigation of its
title to property and the condition of its property and equipment, and the
confirmation of its cash, inventories, accounts receivable and liabilities) as
I-PAC deems necessary or advisable. I-PAC and its representatives shall have, at
reasonable times after the date of execution hereof, full access to the premises
and to all the books and records of Photomatrix, and Photomatrix shall cause to
be furnished to I-PAC such financial and operating data and other information
with respect to the business and properties of Photomatrix as I-PAC shall from
time to time reasonably request.
5.7 Best Efforts. Subject to the terms and conditions herein provided,
each of I-PAC and Photomatrix shall cooperate and use their respective best
efforts to take, or cause to be taken, all appropriate action, and to make, or
cause to be made, all filings necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Agreement, including, without limitation, their respective
best efforts to obtain, prior to the Closing Date, all licenses, permits,
consents, approvals, authorizations, qualifications and orders of governmental
authorities and parties to contracts with I-PAC and Photomatrix as are necessary
for consummation of the transactions contemplated by this Agreement and to
fulfill the conditions to the Merger and to rectify any event or circumstance
which could impede consummation of the transactions contemplated by this
Agreement; provided, however, that no loan agreement or contract shall be
required to be amended or modified so as to be more burdensome to I-PAC or
Photomatrix, as appropriate, in order to obtain any such consent, approval or
authorization without first obtaining the written approval of Photomatrix.
5.8 Fulfillment of Agreement. Each party hereto shall deliver or cause
to be delivered on the Closing Date, and thereafter at such other times and
places as shall be reasonably agreed upon, such additional instruments as any
other party hereto may reasonably request for the purpose of consummating and
carrying out this Agreement and its terms, conditions and requirements.
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ARTICLE VI
CONDITIONS TO OBLIGATIONS OF PHOTOMATRIX
Conditions to Obligations of Photomatrix. The obligations of
Photomatrix and Merger Corp. to consummate the Merger and other transactions
described herein on the Closing Date are subject to satisfaction of the
following conditions.
6.1 Opinion of I-PAC's Counsel: Certificate of I-PAC . I-PAC shall have
furnished Photomatrix with a favorable opinion, dated the Closing Date, of
Sullivan, Hill, Lewin, Rez, Engel & LaBazzo and Certificates of I-PAC in form
and substance reasonably satisfactory to Photomatrix and its counsel.
6.2 Good Standing and Tax Certificates. I-PAC shall have delivered to
Photomatrix (a) copies of I-PAC's articles of incorporation, including all
amendments thereto, certified by the Secretary of State or other appropriate
official of the State of California, (b) certificates from the Secretary of
State or other appropriate official of the State of California to the effect
that I-PAC is in good standing or existing in such jurisdiction and listing all
charter documents of I-PAC on file, (c) a certificate from the Secretary of
State or other appropriate official in each state in which I-PAC is qualified to
do business to the effect that I-PAC is in good standing in such state and (d)
certificates as to the tax status of I-PAC in the State of California and each
state in which I-PAC is qualified to do business.
6.3 No Material Adverse Change. Since the I-PAC Balance Sheet Date
there shall have been no material adverse change in the assets or liabilities,
the business or financial condition, the results of operations, or prospects of
I-PAC, whether as a result of any legislative or regulatory change, revocation
of any license or rights to do business, fire, explosion, accident, casualty,
labor trouble, flood, drought, riot, storm, condemnation or act of God or
otherwise, other than any such change caused by the effect of transactions
contemplated by this Agreement, and I-PAC shall have delivered to Photomatrix a
certificate, dated the Closing Date, to such effect.
6.4 Truth of Representations and Warranties. The representations and
warranties of I-PAC contained in this Agreement or in any Exhibit or the I-PAC
Disclosure Memorandum, each of which shall be an integral part of this Agreement
and incorporated herein by this reference, shall be true and correct in all
material respects as of the date of this Agreement and as of the Closing Date
(as though made on and as of the Closing Date) except (i) to the extent such
representations and warranties are by their express provisions made as of a
specified date and (ii) for the effect of transactions contemplated by this
Agreement, and I-PAC shall have delivered to Photomatrix on the Closing Date a
certificate, dated the Closing Date, to such effect.
6.5 Performance of Agreements. Each and all of the agreements of I-PAC
to be performed on or before the Closing Date pursuant to the terms hereof shall
have been duly performed
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in all material respects, and I-PAC shall have delivered to Photomatrix a
certificate, dated the Closing Date, to such effect.
6.6 Proceedings. All proceedings to be taken in connection with the
transactions contemplated by this Agreement, and all documents incident thereto,
shall be reasonably satisfactory in form and substance to Photomatrix and its
counsel.
6.7 No Litigation Threatened. No action or proceeding shall have been
instituted or, to the best knowledge of I-PAC, shall have been threatened before
a court or other government body or by any public authority to restrain or
prohibit any of the transactions contemplated hereby. I-PAC shall have delivered
to Photomatrix a certificate, dated the Closing Date, to such effect.
6.8 Governmental Approvals. All governmental and other consents and
approvals, if any, necessary to permit the consummation of the transactions
contemplated by this Agreement shall have been received by I-PAC and
Photomatrix.
6.9 Employment Agreements. Patrick W. Moore and William L. Grivas shall
have entered into employment agreements with Photomatrix, and Suren G. Dutia
shall have entered into a First Amendment to Executive EmploymentAgreement, in
the forms attached hereto as Exhibits 7, 8, and 9, respectively ("Employment
Agreements").
6.10 NonCompetition Agreement. Patrick W. Moore and William L. Grivas
shall have entered into noncompetition agreements with Photomatrix in the forms
attached hereto as Exhibits 10 and 11, respectively ("NonCompetition
Agreements").
6.11 Registration Rights Agreements. The shareholders of I-PAC shall
have entered into Registration Rights Agreements with Photomatrix in the form
attached hereto as Exhibit 12 ("Registration Rights Agreement").
6.12 I-PAC Shareholder's Representation and Transmittal Letters. Each
of the I- PAC Shareholders shall have entered into and delivered a Shareholder's
Representation and Transmittal Letter to Photomatrix.
6.13 ASL License Agreement. Certain license agreements with Alpha
Systems Lab, Inc. ("ASL") are currently owned by MedTech Industries ("MedTech")
and Evergreen Investments ("Evergreen"), related parties of I-PAC. MedTech's
license agreement provides for the right to use ASL's technology in the medical
services industry. Evergreen's license grants sales and marketing rights for the
ASL technology. Both agreements are subject to thirty day cancellation by ASL.
These licenses and any other licenses owned by any I-PAC related parties shall
be transferred to I-PAC prior to the close.
6.14 Photomatrix Shareholder and Board of Director Approval. The
members of the Board of Directors of Photomatrix and the Photomatrix
Shareholders shall have approved the
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Merger. Holders of no more than ten percent (10%) of the outstanding shares of
Photomatrix Common Stock shall have exercised dissenter's rights as provided
under Chapter 13 of the CCC.
6.15 I-PAC Shareholder Approval. The I-PAC Shareholders shall have
approved the Merger and the Agreement in accordance with Chapter 12 of the CCC.
6.16 Fairness Opinion. Photomatrix shall have received a fairness
opinion from Frederick, Shields & Company certifying that Photomatrix is paying
a fair price for I-PAC.
6.17 S Corp. Status and Fiscal Year-End. I-PAC shall have revoked its S
Corp. election effective as of January 1, 1998, and shall have changed its
fiscal year-end to March 31.
ARTICLE VII
CONDITIONS TO I-PAC'S OBLIGATIONS
Conditions to I-PAC's Obligations. The obligations of I-PAC to
consummate the Merger and other transactions described herein on the Closing
Date are subject to satisfaction of the following conditions.
7.1 Opinion of Counsel for Photomatrix. Photomatrix shall have
furnished the I-PAC Shareholders with a favorable opinion, dated the Closing
Date, of Luce, Forward, Hamilton & Scripps LLP and Certificates of Photomatrix
in form and substance reasonably satisfactory to I-PAC and its counsel.
7.2 Good Standing Certificate. Photomatrix shall have delivered to
I-PAC (a) copies of the articles of incorporation, including all amendments
thereto, certified by the Secretary of State or other appropriate official of
the State of California, of Photomatrix and Merger Corp. (b) certificates from
the Secretary of State or other appropriate official of the State of California
to the effect that Photomatrix and Merger Corp. are in good standing or existing
in such jurisdiction and listing all charter documents of Photomatrix and Merger
Corp on file, (c) a certificate from the Secretary of State or other appropriate
official in each state in which Photomatrix or Merger Corp. is qualified to do
business to the effect that such corporation is in good standing in such state
and (d) certificates as to the tax status of each of Photomatrix and Merger
Corp. in the State of California and each state in which such corporation is
qualified to do business.
7.3 No Material Adverse Change. Since the Photomatrix Balance Sheet
Date there shall have been no material adverse change in the assets or
liabilities, the business or financial condition, the results of operations, or
prospects of Photomatrix, whether as a result of any legislative or regulatory
change, revocation of any license or rights to do business, fire, explosion,
accident, casualty, labor trouble, flood, drought, riot, storm, condemnation or
act of God or otherwise, other
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than any such change caused by the effect of transactions contemplated by this
Agreement, and Photomatrix shall have delivered to I-PAC a certificate, dated
the Closing Date, to such effect.
7.4 Tax Certificate of Merger Corp. Prior to or simultaneous with the
Closing, Merger Corp. shall file or cause to be filed a certificate of
satisfaction of the Franchise Tax Board evidencing the fact that all taxes
imposed by said Franchise Tax Board have been paid or secured.
7.5 Truth of Representations and Warranties. The representations and
warranties of Photomatrix contained in this Agreement or in any Exhibit or the
Photomatrix Disclosure Memorandum, each of which shall be an integral part of
this Agreement and incorporated herein by this reference, shall be true and
correct in all material respects as of the date of this Agreement and as of the
Closing Date (as though made on and as of the Closing Date) except (i) to the
extent such representations and warranties are by their express provisions made
as of a specified date and (ii) for the effect of transactions contemplated by
this Agreement, and Photomatrix shall have delivered to I-PAC on the Closing
Date a certificate, dated the Closing Date, to such effect.
7.6 Performance of Agreements. Each and all of the agreements of
Photomatrix and Merger Corp. to be performed on or before the Closing Date
pursuant to the terms hereof shall have been duly performed in all material
respects, and Photomatrix shall have delivered to the Shareholders a
certificate, dated the Closing Date, to such effect.
7.7 No Litigation Threatened. No action or proceeding shall have been
instituted or, to the best knowledge of Photomatrix, shall have been threatened
before a court or other government body or by any public authority to restrain
or prohibit any of the transactions contemplated hereby. Photomatrix shall have
delivered to I-PAC a certificate, dated the Closing Date, to such effect.
7.8 Governmental Approvals. All governmental and other consents and
approvals, if any, necessary to permit the consummation of the transactions
contemplated by this Agreement shall have been received by Photomatrix and
I-PAC.
7.9 Employment Agreements. Photomatrix shall have entered into the
Employment Agreements.
7.10 NonCompetition Agreements. Photomatrix shall have entered into the
NonCompetition Agreements.
7.11 Registration Rights Agreements. Photomatrix shall have entered
into the Registration Rights Agreements.
7.12 Photomatrix Shareholder and Board of Director Approval. The
members of the Board of Directors of Photomatrix and the Photomatrix
Shareholders shall have approved the Merger. Holders of no more than ten percent
(10%) of the outstanding shares of Photomatrix Common Stock shall have exercised
dissenter's rights as provided under Chapter 13 of the CCC.
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7.13 Market for Photomatrix Stock. The Common Stock of Photomatrix
shall not be delisted from, and such stock shall not be suspended from trading
on, the NASDAQ Small Cap Market.
ARTICLE VIII
SURVIVAL OF REPRESENTATIONS AND
WARRANTIES; INDEMNITY
8.1 I-PAC Bound. This Article is intended to provide recourse by
Photomatrix following consummation of the Merger in the event of any breach by
I-PAC of the representations, warranties, covenants and agreements of I-PAC
contained in this Agreement.
8.2 Survival of Representations, Warranties and Indemnities. The
representations, warranties and indemnities of the parties hereto included or
provided herein, or in the Disclosure Memoranda or any exhibit or certificate or
other document delivered pursuant hereto, shall survive the Closing Date for a
period of six months.
8.3 Scope of Indemnification, Liabilities and Obligations. The
liabilities and obligations of I-PAC and the I-PAC Shareholders hereunder shall
be limited to the Photomatrix Shares received in the Merger and shall be limited
as to claims asserted pursuant to a Notice of Claim made by an Indemnitee
(defined below) on or prior to the date that is two years after the Closing
Date; provided, however, that the Indemnitee (defined below) shall not be
indemnified and held harmless hereunder from Losses (defined below) unless and
until Losses (defined below) exceed in the aggregate $100,000, in which event
the Indemnitee shall be indemnified and held harmless hereunder in full for the
entire aggregate amount of all Losses.
8.4 Representations, Warranties, Covenants and Agreements. The parties
hereto agree that all representations, warranties, covenants and agreements made
in this Agreement or in any exhibit, document, instrument or certificate
delivered pursuant hereto shall be deemed to have been made at and as of the
date of the Agreement and at and as of the Closing Date. The parties hereto also
agree that, notwithstanding any right of any party under the Agreement to
investigate fully the affairs of the other parties hereto, and notwithstanding
any knowledge of facts determined or determinable by any party pursuant to such
an investigation, each party has the right to rely fully upon the
representations, warranties, covenants and agreements of the other parties
contained in this Agreement and upon the accuracy of the Disclosure Memoranda
and any document, instrument, exhibit or certificate given or delivered pursuant
to this Agreement.
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8.5 Indemnification.
8.5.1 Subject to and to the extent provided in Section 8.3 hereof,
the I-PAC Shareholders shall indemnify defend and hold harmless Photomatrix,
Surviving Corporation, their directors and officers and each person, if any, who
is affiliate of or controls Photomatrix as of the date hereof within the meaning
of the Securities Act of 1933, as amended, (collectively, the "Indemnitee")
against, and to hold the Indemnitee harmless from, any and all damages, losses,
claims, liabilities, charges, suits, penalties, costs and expenses, including
court costs, attorneys' fees and expenses and other costs of collection
(collectively "Loss" or "Losses"), which the Indemnitee may sustain, or to which
the Indemnitee may be subjected, arising out of or attributable to any
misrepresentation or breach of warranty by I-PAC in, or any breach or default by
I-PAC of or under any of the covenants, agreements or other provisions of, the
Agreement, including the I-PAC Disclosure Memorandum, or any documents,
instruments, exhibits or certificates delivered by or on behalf of I-PAC
pursuant to the Agreement.
8.6 Notice and Resolution of Claims -- Opportunity to Defend.
8.6.1 If at any time an Indemnitee shall claim indemnification from
the I-PAC Shareholders for any Loss or, in the reasonable judgment of
Indemnitee, for what, in the future, may result in Loss due to the filing, at or
before the time of such claim, of an action, claim or suit with an arbitrator,
mediator, court or other governmental entity ("Anticipated Loss"), then
Indemnitee shall send written notice of the same (a "Notice of Claim") to James
P. Hill ("the I-PAC Shareholder Representative"). A Notice of Claim shall
specify the basis for such claim and shall be supported by relevant information
and documentation with respect thereto and the total amount claimed.
8.6.2 If the I-PAC Shareholder Representative shall object to such
action, proceeding or claim, they shall give written notice of such objection (a
"Notice of Objection") to the Indemnitee within 30 days after receipt by the
I-PAC Shareholder Representative of the Notice of Claim sent to the I-PAC
Shareholder Representative. If the I-PAC Shareholder Representative does not
give a Notice of Objection within 30 days of such receipt, or shall have agreed
to pay such claim in whole or in part within such 30-day period, the I-PAC
Shareholders shall thereupon be liable for the payment of such claim. Within ten
days of any such agreement to pay, the I-PAC Shareholders shall pay Photomatrix
the amount of the Loss.
8.6.3 In the event that the I-PAC Shareholder Representative shall
have timely given a Notice of Objection in whole or in part to any Notice of
Claim, during the 30-day period following the date that the I-PAC Shareholder
Representative mailed the Notice of Objection to the Indemnitee, the I-PAC
Shareholder Representative and the Indemnitee shall privately attempt to resolve
or compromise the claim. If the parties resolve or compromise the claim within
such 30-day period, the I-PAC Shareholders within ten days shall satisfy the
claim, if required.
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8.6.4 If an indemnification claim has been made for an Anticipated
Loss, the parties may agree to postpone resolution until the time when the
incurrence of such Anticipated Loss shall have occurred or passed.
8.6.5 If the I-PAC Shareholders and the Indemnitee shall have
failed to resolve or compromise or agree to postpone resolution of the claim
within the period of 30 days from the date the I-PAC Shareholder Representative
shall have mailed the Notice of Objection, then the claim shall be settled by
arbitration in California, as determined by the three arbitrators referred to in
Section 8.6.5.1 below, in accordance with the rules of the American Arbitration
Association and the procedures set forth below.
8.6.5.1 Each of (i) Photomatrix and (ii) the I-PAC Shareholder
Representative shall appoint one arbitrator, and the two arbitrators so
appointed shall then together appoint a third arbitrator ("neutral arbitrator")
from a list of persons supplied by the American Arbitration Association in San
Diego. If one party shall fail to appoint the arbitrator to be appointed by it
within 14 days of the end of the 60-day period provided for in Section 8.6.3
above, the arbitrator appointed by the other party shall select from a list of
persons supplied by the American Arbitration Association a person who shall
serve as the single neutral arbitrator for purposes of the arbitration. If each
party shall have appointed one arbitrator; but such designees cannot agree on
the person to act as the neutral arbitrator within a period of 14 days after the
appointment of the second arbitrator, then either party may apply to the
American Arbitration Association in San Diego which shall appoint a neutral
arbitrator. As used hereafter the term "arbitrator" shall include the singular
and the plural as applicable. The arbitrator shall conduct the arbitration with
all reasonable dispatch in accordance with the rules of the American Arbitration
Association, provided, however, that the parties to such arbitration shall take
such action and execute such instruments as shall be necessary to cause the
California Rules of Civil Procedure pertaining to pre-trial discovery to be
applicable in respect of such proceeding. The arbitrator shall render a written
award (the "Award") which shall be delivered to the Indemnitee and the I-PAC
Shareholder Representative. An Award hereunder may be used as a basis for the
entry of judgment in any jurisdiction. In the event the parties have submitted
an Anticipated Loss indemnification claim to arbitration under this Section
8.6.5.1, then the arbitrator may, in its sole discretion, postpone resolution of
the claim until the time which it has determined, in its sole discretion, to be
the time when such Anticipated Loss shall have occurred or passed has been
reached.
8.6.5.2 Prior to making the Award, the arbitrator shall direct
Photomatrix and the I-PAC Shareholder Representative to submit statements
describing any element of Loss or Anticipated Loss as to which indemnification
is claimed hereunder that is attributable to attorneys' fees, disbursements, and
any similar costs incident to such Loss or Anticipated Loss, supported by
affidavits showing that such costs actually have been or are likely to be
incurred, and all such attorneys' fees, disbursements and other costs shall be
apportioned as determined by the arbitrator. All fees of the arbitrator and
administrative expenses of the American Arbitration Association shall be treated
as costs for purposes of this Article. As a part of each Award made pursuant to
this Agreement, the arbitrator may allow interest thereon (other than on the
portion of
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the Award representing attorneys' fees, disbursements and costs) from the date
of the Loss or the date the Anticipated Loss becomes a Loss to the date of
payment at the rate of 10% per annum.
8.6.5.3 The Award shall be a conclusive determination of the
matter and shall be binding upon the Indemnitee and the I-PAC Shareholders, and
shall not be contested by any of them. In the event that the arbitrator shall
determine that the Indemnitee shall be entitled to any indemnification by reason
of its claim for attorneys' fees or interest as above provided (a "Profit Escrow
Fee Award"), an executed copy of the Fee Award setting forth the amount of the
indemnification shall be delivered to the Indemnitee and the I-PAC Shareholders.
When the time for filing an application for correction of the Fee Award or
filing a petition to vacate or correct the Fee Award has passed (or immediately
if such rights are waived by the parties before or after the Fee Award) then the
I-PAC Shareholders shall be liable for the payment of such claim. The Fee Award
shall be satisfied in the same manner as an undisputed claim in such amount
(including the arbitrator's fee) would be satisfied under Section 8.6.2 of this
Agreement.
8.6.5.4 If a matter claimed to be subject to indemnification
involves a third-party claim which has not yet been determined, the arbitrator
may in his discretion make a separate determination solely as to whether the
third-party claim is one for which indemnification may be had or may defer a
determination as to whether indemnification may be had pending the further
development of information as to the nature of the third-party claim. If the
arbitrator determines that the third-party claim is not subject to
indemnification, he shall set forth the basis of his decision in detail, which
decision shall be deemed to be an "Award" hereunder.
8.6.5.5 Promptly after the assertion by any third party of any
claim against the Indemnitee that, in the judgment of the Indemnitee may result
in the incurrence by the Indemnitee of Loss for which the Indemnitee would be
entitled to indemnification, the Indemnitee shall deliver to the I-PAC
Shareholder Representative a Notice of Anticipated Loss describing in reasonable
detail such claim and the I-PAC Shareholders may, at their option, assume the
defense of the Indemnitee against such claim (including the employment of
counsel, who shall be counsel satisfactory to the Indemnitee), and the payment
of expenses. The Indemnitee shall have the right to employ separate counsel in
any such action or claim and to participate in the defense or contest thereof,
but the fees and expenses of such counsel shall not be at the expense of the
I-PAC Shareholders unless (i) the I-PAC Shareholders shall have failed to assume
the defense of such claim, within a reasonable time after having been notified
by the Indemnitee of the existence of such claim as provided in the preceding
sentence, (ii) the employment of such counsel has been specifically authorized
by the I-PAC Shareholders or (iii) the named parties to any such action
(including any impleaded parties) include both the Indemnitee and one or more of
the I-PAC Shareholders and the Indemnitee shall have been advised in writing by
such counsel that there may be one or more legal defenses available to it which
are different from or additional to those available to the I-PAC Shareholders
(it being understood, however, that the I-PAC Shareholders shall not, in
connection with any one such action or separate but substantially similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the fees and expenses of more than
one separate firm of attorneys for the Indemnitee).
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<PAGE>
ARTICLE IX
TERMINATION
9.1 Termination Events. This Agreement may, by notice given prior to or
at the Closing, be terminated:
9.1.1 by either Photomatrix or I-PAC if a material Breach of any
provision of this Agreement has been committed by the other party and such
Breach has not been waived or cured within fifteen (15) days after the breaching
party has been notified thereof:
9.1.2 by Photomatrix if any of the conditions in Article VI have
not been satisfied as of June 30, 1998 or if satisfaction of such a condition is
or becomes impossible (other than through the failure of Photomatrix to comply
with its obligations under this Agreement) and Photomatrix has not waived such
condition on or before June 30, 1998; or
9.1.3 by I-PAC, if any of the conditions in Article VII not been
satisfied as of June 30, 1998 or if satisfaction of such a condition is or
becomes impossible (other than through the failure of I-PAC to comply with their
obligations under this Agreement) and I-PAC has not waived such condition on or
before June 30, 1998;
9.1.4 by mutual consent of Photomatrix and I-PAC; or
9.1.5 by either Photomatrix or I-PAC if the Closing has not
occurred (other than through the failure of any party seeking to terminate this
Agreement to comply fully with its obligations under this Agreement) on or
before June 30, 1998 or such later date as the parties may agree upon.
9.1.6 by Photomatrix pursuant to Section 5.4.2.
9.2 Effect of Termination. Each party's right of termination under
Section 9.1 is in addition to any other rights it may have under this Agreement
or otherwise, and the exercise of such right of termination will not be an
election of remedies. If this Agreement is terminated pursuant to Section 9.1,
all further obligations of the parties under this Agreement will terminate,
except as provided in this Section 9.2 and except that the obligations in
Sections 9.3, 10.1, 10.2, 10.3, 10.7 and 10.8 will survive; provided, however,
that if this Agreement is terminated by a party because of a breach of the
Agreement by the other party or because one or more of the conditions to the
terminating party's obligations under this Agreement is not satisfied as a
result of the other party's failure to comply with its obligations under this
Agreement, the terminating party's right to pursue all legal remedies will
survive such termination unimpaired. In the event that this Agreement is
terminated by Photomatrix pursuant to Section 9.1.6, then Photomatrix shall
promptly, but in no event later than five days after the date of such
termination, pay I-PAC a fee equal to $250,000 (the
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<PAGE>
"Termination Fee"), payable by wire transfer of same day funds. Photomatrix
acknowledges that the agreements contained in this Section 9.2 are an integral
part of the transactions contemplated by this Agreement and that, without these
agreements, I-PAC would not enter into this Agreement; accordingly, if
Photomatrix fails to promptly pay the amount due pursuant to this Section 9.2
and, in order to obtain such payment, I-PAC commences an arbitration which
results in a judgment against Photomatrix for the Termination Fee, Photomatrix
shall also pay to I-PAC its costs and expenses (including reasonable attorneys'
fees) in connection with such arbitration, together with interest on the amount
of the Termination Fee at the prime rate of Citibank N.A. in effect on the date
such payment was required to be made.
9.3 Return of Documents in Event of Termination. In the event of the
termination of this Agreement for any reason, Photomatrix and I-PAC will deliver
to the other party all documents, work papers and other material obtained from
it relating to the transactions contemplated hereby, whether so obtained before
or after execution hereof, and will take all practicable steps to have any
information so obtained kept confidential. Unless and until the transactions
contemplated hereby are consummated, the parties shall both hold confidential
all information and copies of documents and records obtained in the course of
such investigation or heretofore in connection with the transactions
contemplated hereby and shall not use or disclose such information, documents,
and records to any person, except as may be required by applicable law or stock
exchange rules and to its professional advisors.
ARTICLE X
MISCELLANEOUS
10.1 Professional Expenses. I-PAC and Photomatrix (on behalf of it and
Merger Corp.) shall each pay all of their own professional expenses relating to
negotiating, drafting and closing the transactions contemplated by this
Agreement, including, without limitation, the fees and expenses of their
respective counsel, financial advisers and accountants.
10.2 Governing Law. The interpretation and construction of this
Agreement and all matters relating hereto shall be governed by the laws of the
State of California.
10.3 Arbitration. For any and all controversies or claims (other than
those to be expressly resolved pursuant to Article VIII or Section 9.1) arising
out of, resulting from or in any way related to this Agreement or any
transactions provided for or contemplated herein, or the breach thereof, other
than a claim for injunctive relief, or a claim for specific performance prior to
the Closing Date, shall be settled by arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association ("the AAA")
in effect at the time demand for arbitration is made by any party hereto.
Notwithstanding any rule of the AAA to the contrary, any dispute submitted to
arbitration pursuant to the terms of this Section 10.3 shall be submitted to a
single arbitrator mutually appointed by the parties hereto. In the event that
the parties hereto cannot agree on a single arbitrator, then the dispute shall
be submitted to a panel of three arbitrators selected in accordance
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<PAGE>
with the rules of the AAA. Arbitration shall occur in San Diego, California, or
such other location as is unanimously agreed by the parties hereto. The award
made by all or a majority of the arbitrators shall be final and binding, and
judgment with respect thereto may be entered in any court of law having
competent jurisdiction. The prevailing party in any such arbitration shall be
entitled to recover from, and have paid by, the other party thereto all fees and
disbursements of such arbitration, as well as its reasonable attorneys' fees,
costs and expenses, including both pre and post award interest.
10.4 "Person" Defined. "Person" shall mean and include an individual, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization and a government or other department or agency thereof.
10.5 Gender. Unless the context otherwise requires a different meaning,
words of a masculine gender shall be deemed and construed to include correlative
words of the feminine and neuter genders, words importing the singular number
shall include the plural number, and vice versa, and the terms "hereof,"
"hereby," "hereto," "hereunder," "herein," and similar terms mean this
Agreement.
10.6 Captions. The Article and Section captions used herein are for
reference purposes only, and shall not in any way affect the meaning or
interpretation of this Agreement.
10.7 Publicity. Except as otherwise required by law, or as may be
mutually consented and agreed to, none of the parties hereto shall issue any
press release or make any other public statement, in each case relating to or in
connection with or arising out of this Agreement or the matters contained
herein, without obtaining the prior approval of both Photomatrix and I-PAC to
the contents and the manner of presentation and publication thereof, provided,
however, Photomatrix shall have the right to make a public announcement of the
execution of this Agreement and a disclosure of the basic terms and conditions
of this Agreement if advised to do so by its legal counsel in connection with
the reporting and disclosure obligations of Photomatrix under the federal
securities laws and/or the NASDAQ Bulletin Board.
10.8 Notices. Any notice or other communications required or permitted
hereunder shall be sufficiently given if delivered in person or sent by express
mail or by registered or certified mail, postage prepaid, or by facsimile
transmission, receipt confirmed, addressed as follows:
(i) If to Photomatrix, Merger Corp. or,
following the Merger, I-PAC:
Photomatrix, Inc.
11065 Sorrento Valley Court
San Diego, CA 92121
Facsimile: (619) 457-8016
Attention: Suren Dutia
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<PAGE>
With a copy to:
Otto E. Sorensen, Esquire
Luce, Forward, Hamilton & Scripps LLP
600 West Broadway, Suite 2600
San Diego, California 92101
(619) 236-1414
Facsimile: (619) 232-8311
(ii) If to I-PAC or, after Merger,
the I-PAC Shareholder :
I-PAC Manufacturing, Inc.
1958 Kellogg Ave.
Carlsbad, California 92009
Facsimile: (760) 438-5517
Attention: Patrick W. Moore
With a copy to:
Sullivan, Hill, Lewin, Rez, Engel & LaBazzo
550 West C Street, Suite 1500
San Diego, California 92101
Facsimile: (619) 231-4372
Attention: James P. Hill
or such other address as shall be furnished in writing by any such party, and
such notice or communication shall be deemed to have been given as of the date
so delivered, sent or mailed.
10.9 Parties in Interest. This Agreement may not be transferred,
assigned, pledged or hypothecated by any party hereto, other than by operation
of law. This Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective heirs, executors, administrators,
successors and assigns.
10.10 Counterparts. This Agreement may be executed in one or more
counterparts, all of which taken together shall constitute one instrument.
10.11 Entire Agreement. This Agreement, including the other documents
referred to herein which form a part hereof, contains the entire understanding
of the parties hereto with respect to the subject matter contained herein and
therein. This Agreement supersedes all prior agreements and understandings among
the parties with respect to such subject matter.
10.12 Amendments. This Agreement may not be changed orally, but only by
an agreement in writing signed by Photomatrix and I-PAC.
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<PAGE>
10.13 Severability. In case any provision in this Agreement shall be
held invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions hereof will not in any way be
affected or impaired thereby.
10.14 Third Party Beneficiaries. Each party hereto intends that this
Agreement shall not benefit or create any right or cause of action in or on
behalf of any person other than the parties hereto; provided, however, that
Sections 2.6 and 2.7 are intended for the benefit of the I-PAC Shareholders, the
I-PAC Shareholders and the Surviving Corporation Indemnified Parties,
respectively.
10.15 Rules of Construction. The normal rules of construction which
require the terms of an agreement to be construed most strictly against the
drafter of such agreement are hereby waived since each party has been
represented by counsel in the drafting and negotiation of this Agreement.
IN WITNESS WHEREOF, each of the parties herein below stated has
executed this Agreement as of the date and year first above written.
PHOTOMATRIX:
PHOTOMATRIX, INC., a California corporation
By:
President
By:
Secretary
MERGER CORP.:
PHOTOMATRIX ACQUISITION, INC.
By:
President
By:
Secretary
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<PAGE>
I-PAC:
I-PAC MANUFACTURING, INC., a California
corporation
By:
President
By:
Secretary
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<PAGE>
AGREEMENT AND PLAN OF MERGER
AND REORGANIZATION
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I CERTAIN DEFINITIONS...............................................1
ARTICLE II THE MERGER AND RELATED TRANSACTIONS...............................2
2.1 The Merger........................................................2
2.2 The Closing.......................................................2
2.3 Actions at the Closing............................................2
2.4 Effect of Merger..................................................2
2.4.1 General...................................................2
2.4.2 Conversion of I-PAC Shares................................3
2.5 Exchange of I-PAC Shares..........................................3
2.6 Appointment to Photomatrix Board of Directors.....................4
2.7 Appointment of Photomatrix Officers...............................4
2.8 Possible Issuance of Additional Shares............................4
2.9 Issuance of Additional Shares upon the Exercise of
Outstanding Options and Warrants..................................6
ARTICLE III REPRESENTATIONS, WARRANTIES AND COVENANTS
OF I-PAC AND THE SHAREHOLDERS.....................................6
3.1 Existence; Good Standing; Corporate Authority and Authorization...6
3.1.1 I-PAC.....................................................6
3.1.2 Subsidiaries..............................................7
3.2 No Legal Bar; Conflicts; Enforceability...........................7
3.3 Capital Stock and Exclusive Dealing...............................7
3.4 Restrictive Documents.............................................8
3.5 Financial Statements and No Material Changes......................8
3.6 Absence of Undisclosed Liabilities................................8
3.7 No Changes Prior to Closing Date..................................9
3.8 Books and Records.................................................9
3.9 Title to Properties; Encumbrances.................................9
3.10 Real Property and Leases.........................................10
3.11 Fixed Assets.....................................................11
3.12 Material Contracts...............................................11
3.13 Litigation.......................................................12
3.14 Taxes............................................................12
3.15 Permits..........................................................13
3.16 Insurance........................................................13
3.17 Product Warranty.................................................13
3.18 Intellectual Property............................................14
3.19 Compliance With Laws.............................................15
3.20 Inventory........................................................15
(i)
<PAGE>
Page
3.21 Accounts Receivable..............................................15
3.22 Employment Relations.............................................15
3.23 Employee Benefit Plans...........................................16
3.23.1 List of Plans...........................................16
3.23.2 Status of Plans.........................................16
3.23.3 Contributions...........................................16
3.23.4 Tax Qualification.......................................17
3.23.5 Transactions............................................17
3.23.6 Other Plans.............................................17
3.23.7 Documents...............................................17
3.24 Environmental Laws and Regulations...............................17
3.25 Interests in Clients, Suppliers, Etc.............................18
3.26 Customers, Distributors and Sales Representatives................19
3.27 Bank Accounts, Powers of Attorney and Compensation of Employees..19
3.28 Disclosure.......................................................19
3.29 Broker's or Finder's Fees........................................19
3.30 Certain Conditions for Accounting and Tax Treatment..............19
3.31 Cooperation......................................................20
ARTICLE IV REPRESENTATIONS, WARRANTIES AND COVENANTS
OF PHOTOMATRIX AND THE SHAREHOLDERS..............................20
4.1 Existence; Good Standing; Corporate Authority and Authorization..20
4.1.1 Photomatrix...............................................20
4.1.2 Subsidiaries..............................................21
4.2 No Legal Bar; Conflicts; Enforceability..........................21
4.3 Capital Stock and Exclusive Dealing..............................22
4.4 Restrictive Documents............................................22
4.5 Financial Statements and No Material Changes.....................22
4.6 Absence of Undisclosed Liabilities...............................23
4.7 No Changes Prior to Closing Date.................................23
4.8 Books and Records................................................24
4.9 Title to Properties; Encumbrances................................24
4.10 Real Property and Leases.........................................24
4.11 Fixed Assets.....................................................25
4.12 Material Contracts...............................................25
4.13 Litigation.......................................................26
4.14 Taxes............................................................26
4.15 Permits..........................................................27
4.16 Insurance........................................................27
4.17 Product Warranty.................................................28
4.18 Intellectual Property............................................28
4.19 Compliance With Laws.............................................29
(ii)
<PAGE>
Page
4.20 Inventory........................................................29
4.21 Accounts Receivable..............................................29
4.22 Employment Relations.............................................30
4.23 Employee Benefit Plans...........................................30
4.23.1 List of Plans............................................30
4.23.2 Status of Plans..........................................30
4.23.3 Contributions............................................31
4.23.4 Tax Qualification........................................31
4.23.5 Transactions.............................................31
4.23.6 Other Plans..............................................31
4.23.7 Documents................................................32
4.24 Environmental Laws and Regulations...............................32
4.25 Interests in Clients, Suppliers, Etc.............................33
4.26 Customers, Distributors and Sales Representatives................33
4.27 Bank Accounts, Powers of Attorney and Compensation of Employees..33
4.28 Disclosure.......................................................34
4.29 Broker's or Finder's Fees........................................34
4.30 Certain Conditions for Accounting and Tax Treatment..............34
4.31 Cooperation......................................................34
ARTICLE V CONDUCT OF BUSINESS..............................................35
5.1 Conduct of Business of I-PAC.....................................35
5.2 Conduct of Business of Photomatrix...............................36
5.3 I-PAC No Solicitation............................................37
5.4 Photomatrix No Solicitation......................................37
5.5 No Stock Transactions............................................39
5.6 Review...........................................................39
5.6.1 Review of I-PAC...........................................39
5.6.2 Review of Photomatrix.....................................40
5.7 Best Efforts.....................................................40
5.8 Fulfillment of Agreement.........................................40
ARTICLE VI CONDITIONS TO OBLIGATIONS OF PHOTOMATRIX.........................41
6.1 Opinion of I-PAC's Counsel: Certificate of I-PAC ...............41
6.2 Good Standing and Tax Certificates...............................41
6.3 No Material Adverse Change.......................................41
6.4 Truth of Representations and Warranties..........................41
6.5 Performance of Agreements........................................41
6.6 Proceedings......................................................42
6.7 No Litigation Threatened.........................................42
6.8 Governmental Approvals...........................................42
6.9 Employment Agreements............................................42
(iii)
<PAGE>
Page
6.10 NonCompetition Agreement.........................................42
6.11 Registration Rights Agreements...................................42
6.12 I-PAC Shareholder's Representation and Transmittal Letters.......42
6.13 ASL License Agreement............................................42
6.14 Photomatrix Shareholder and Board of Director Approval...........42
6.15 I-PAC Shareholder Approval.......................................43
6.16 Fairness Opinion.................................................43
6.17 S Corp. Status and Fiscal Year-End...............................43
ARTICLE VII CONDITIONS TO I-PAC'S OBLIGATIONS................................43
7.1 Opinion of Counsel for Photomatrix...............................43
7.2 Good Standing Certificate........................................43
7.3 No Material Adverse Change.......................................43
7.4 Tax Certificate of Merger Corp...................................44
7.5 Truth of Representations and Warranties..........................44
7.6 Performance of Agreements........................................44
7.7 No Litigation Threatened.........................................44
7.8 Governmental Approvals...........................................44
7.9 Employment Agreements............................................44
7.10 NonCompetition Agreements........................................44
7.11 Registration Rights Agreements...................................44
7.12 Photomatrix Shareholder and Board of Director Approval...........44
7.13 Market for Photomatrix Stock.....................................45
ARTICLE VIII SURVIVAL OF REPRESENTATIONS AND
WARRANTIES; INDEMNITY............................................45
8.1 I-PAC Bound......................................................45
8.2 Survival of Representations, Warranties and Indemnities..........45
8.3 Scope of Indemnification, Liabilities and Obligations............45
8.4 Representations, Warranties, Covenants and Agreements............45
8.5 Indemnification..................................................46
8.6 Notice and Resolution of Claims-- Opportunity to Defend..........46
ARTICLE IX TERMINATION......................................................49
9.1 Termination Events...............................................49
9.2 Effect of Termination............................................49
9.3 Return of Documents in Event of Termination......................50
ARTICLE X MISCELLANEOUS....................................................50
10.1 Professional Expenses............................................50
10.2 Governing Law....................................................50
10.3 Arbitration......................................................50
(iv)
<PAGE>
Page
10.4 "Person" Defined.................................................51
10.5 Gender...........................................................51
10.6 Captions.........................................................51
10.7 Publicity........................................................51
10.8 Notices..........................................................51
10.9 Parties in Interest..............................................52
10.10 Counterparts.....................................................52
10.11 Entire Agreement.................................................52
10.12 Amendments.......................................................52
10.13 Severability.....................................................53
10.14 Third Party Beneficiaries........................................53
10.15 Rules of Construction............................................53
Exhibits
Exhibit 1: Agreement of Merger
Exhibit 2: Officers' Certificates
Exhibit 3: Representation and Transmittal Letter
Exhibit 4: Determination of I-PAC Gross Revenues, Gross Profit,
and Gross Margin
Exhibit 5: I-PAC Balance Sheets
Exhibit 6: Photomatrix Balance Sheets
Exhibit 7: Moore Executive Employment Agreement
Exhibit 8: Grivas Executive Employment Agreement
Exhibit 9: Amendment No. 1 to Dutia Executive Employment Agreement
Exhibit 10: Moore Covenant Not to Compete
Exhibit 11: Grivas Covenant Not to Compete
Exhibit 12: Registration Rights Agreement
(v)
<PAGE>
APPENDIX B
March 16, 1998
Board of Directors
Photomatrix, Inc.
11065 Sorrento Valley Court
San Diego, CA 92121
Attn: Mr. Suren G. Dutia
Gentlemen:
Photomatrix, Inc. ("Photomatrix") retained Fredericks, Shields & Co., LLC
("FSC") to express our opinion, as to the fairness, from a financial point of
view, to the shareholders of Photomatrix of the consideration to be paid to
I-PAC Manufacturing, Inc. ("I-PAC") for all the outstanding shares of I-PAC. The
Agreement and Plan of Merger and Reorganization (the "Agreement") calls for
Photomatrix to issue 4,848,000 shares of its common stock at closing in exchange
for all of the outstanding shares of I-PAC, with the possible issuance of up to
3,744,677 additional Photomatrix common shares within ninety (90) days of the
completion of the Earnout Period, the exact number of shares to be determined in
accordance with the schedule contained in Section 2.8 "Possible Issuance of
Additional Shares" of the Agreement.
FSC, as an integral part of our business, is continually engaged in the
valuation of both privately held and publicly traded businesses and their
securities in connection with mergers and acquisitions, divestitures, equity and
debt capital formation, recapitalizations, and other objectives.
In conducting our investigation and arriving at our opinion, we have reviewed
the Agreement and have taken into account such accepted financial procedures and
considerations as we deemed relevant. We have reviewed audited financial
statements of Photomatrix for the periods ending March 31, 1995 through March
31, 1997, as well as unaudited quarterly financial statements of Photomatrix for
the periods ending June 30, 1997, September 30, 1997, and December 31, 1997;
unaudited financial statements of I-PAC for the periods ending December 31, 1994
and December 31, 1995, nine-month unaudited financial statements of I-PAC for
the period ending September 30, 1997, and audited financial statements of I-PAC
for the periods ending December 31, 1996 and December 31, 1997. We have reviewed
management projections for Photomatrix and I-PAC for the period ending December
1998. We have visited Photomatrix and I-PAC's facilities, met with management,
and discussed the current business and future prospects of Photomatrix and
I-PAC. We have analyzed financial information regarding comparable public
companies, and consideration paid in other merger and acquisition transactions
that we consider to be comparable. We reviewed material discussing the economic
outlook and the outlook for the contract electronic manufacturing industry, and
other material as we deemed appropriate.
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In rendering our opinion, we have assumed, without independent verification, the
accuracy and completeness of the financial and other information and
representations which have been provided to us by Photomatrix and I-PAC or which
are publicly available.
Based on our analysis of the factors deemed relevant, it is our opinion that the
issuance of 4,848,000 shares of Photomatrix common stock at closing in exchange
for all of the outstanding shares of I-PAC, with the possible issuance of up to
3,744,677 additional Photomatrix common shares within ninety (90) days of the
completion of the Earnout Period, is fair, from a financial point of view, to
the shareholders of Photomatrix.
Very truly yours,
FREDERICKS, SHIELDS & CO., LLC
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APPENDIX C
PHOTOMATRIX, INC.
1998 STOCK OPTION PLAN
1. PURPOSE. This Stock Option Plan (the "Plan") is intended to serve as
an incentive to, and to encourage stock ownership by, certain eligible
participants rendering services to PHOTOMATRIX, INC., a California corporation
(the "Corporation"), and certain affiliates as set forth below, so that they may
acquire or increase their proprietary interest in the Corporation.
2. ADMINISTRATION.
2.1 Committee. The Plan shall be administered by the Board of
Directors of the Corporation (the "Board of Directors") or a compensation
committee of two or more members appointed by the Board of Directors (the
"Committee") who are Non-Employee Directors as defined in Rule 16b-3 promulgated
under Section 16 of the Securities Exchange Act of 1934 and an outside director
as defined in Treasury Regulation ss. 1.162-27(e)(3). 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 the period of time
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 grant options under the Plan to eligible participants rendering
services to the Corporation or any "parent" or "subsidiary" of the Corporation
("Parent or Subsidiary"), as defined in Section 424 of the Internal Revenue Code
of 1986, as amended (the "Code"), at such times, under such terms and in such
amounts as it may decide. For purposes of this Plan and any Stock Option
Agreement (as defined below), the term "Corporation" shall include any Parent or
Subsidiary, if applicable. Subject to the express provisions of the Plan, the
Committee shall have complete authority to interpret the Plan, to prescribe,
amend and rescind the rules and regulations relating to the Plan, to determine
the details and provisions of any Stock Option Agreement, to accelerate any
options granted under the Plan and to make all other determinations necessary or
advisable for the administration of the Plan.
2.4 Type of Option. The Committee shall have full authority and
discretion to determine, and shall specify, whether the eligible individual will
be granted options intended to qualify as incentive options under Section 422 of
the Code ("Incentive Options") or options which are not
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intended to qualify under Section 422 of the Code ("Non-Qualified Options");
provided, however, that Incentive Options shall only be granted to employees of
the Corporation, or a Parent or Subsidiary thereof, and shall be subject to the
special limitations set forth herein attributable to Incentive Options.
2.5 Interpretation. The interpretation and construction by the
Committee of any provisions of the Plan or of any option granted under the Plan
shall be final and binding on all parties having an interest in this 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.
3. ELIGIBILITY.
3.1 General. All directors, officers and employees of the
Corporation, or any Parent or Subsidiary, relative to the Corporation's, or any
Parent's or Subsidiaries', management, operation or development shall be
eligible to receive options under the Plan. The selection of recipients of
options shall be within the sole and absolute discretion of the Committee. No
person shall be granted an Incentive Option under this Plan unless such person
is an employee of the Corporation, or a Parent or Subsidiary, on the date of
grant. No employee shall be granted more than 150,000 options in any one year
period.
3.2 Termination of Eligibility.
3.2.1 If an optionee ceases to be employed by the Corporation,
or its Parent or Subsidiary, or is no longer an officer or member of the Board
of Directors of the Corporation, or its Parent or Subsidiary for any reason
(other than for "cause," as hereinafter defined, or such optionee's death), any
option granted hereunder to such optionee shall expire three months after the
date the occurrence giving rise to such termination of eligibility (or 1 year in
the event an optionee is "disabled," as defined in Section 22(e)(3) of the Code)
or upon the date it expires by its terms, whichever is earlier. Any option that
has not vested in the optionee as of the date of such termination shall
immediately expire and shall be null and void. The Committee shall, in its sole
and absolute discretion, decide, utilizing the provisions set forth in Treasury
Regulations ss.1.421-7 (h), whether an authorized leave of absence or absence
for military or governmental service, or absence for any other reason, shall
constitute termination of eligibility for purposes of this Section.
3.2.2 If an optionee ceases to be employed by the Corporation,
or its Parent or Subsidiary, or is no longer an officer or member of the Board
of Directors of the Corporation, or its Parent or Subsidiary and such
termination is as a result of "cause," as hereinafter defined, then all options
granted hereunder to such optionee shall expire on the date of the occurrence
giving rise to such termination of eligibility or upon the date it expires by
its terms, whichever is earlier, and such optionee shall have no rights with
respect to any unexercised options. For purposes of this Plan, "cause" shall
mean an optionee's personal dishonesty, misconduct, breach of fiduciary duty,
incompetence, intentional failure to perform stated obligations, willful
violation of any law, rule,
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regulation or final cease and desist order, or any material breach of any
provision of this Plan, any Stock Option Agreement or any employment agreement.
3.3 Death of Optionee and Transfer of Option. In the event an
optionee shall die, an option may be exercised (subject to the condition that no
option shall be exercisable after its expiration and only to the extent that the
optionee's right to exercise such option had accrued at the time of the
optionee's death) at any time within six months after the optionee's death by
the executors or administrators of the optionee or by any person or persons who
shall have acquired the option directly from the optionee by bequest or
inheritance. Any option that has not vested in the optionee as of the date of
death or termination of employment, whichever is earlier, shall immediately
expire and shall be null and void. No option shall be transferable by the
optionee other than by will or the laws of intestate succession.
3.4 Limitation on Options. No person shall be granted any Incentive
Option to the extent that the aggregate fair market value of the Stock (as
defined below) to which such options are exercisable for the first time by the
optionee during any calendar year (under all plans of the Corporation as
determined under Section 422(d) of the Code) exceeds $100,000.
4. IDENTIFICATION OF STOCK. The Stock, as defined herein, subject to
the options shall be shares of the Corporation's authorized but unissued or
acquired or reacquired common stock (the "Stock"). The aggregate number of
shares subject to outstanding options shall not exceed 1,500,000 shares of Stock
(subject to adjustment as provided in Section 6). Notwithstanding the above, at
no time shall the total number of shares of Stock issuable upon exercise of all
outstanding options and the total number of shares of Stock provided for under
any stock bonus or similar plan of the Corporation exceed 30% as calculated in
accordance with the conditions and exclusions of ss.260.140.45 of Title 10,
California Code of Regulations, based on the shares of the issuer which are
outstanding at the time the calculation is made. If any option granted hereunder
shall expire or terminate for any reason without having been exercised in full,
the unpurchased shares subject thereto shall again be available for purposes of
this Plan.
5. TERMS AND CONDITIONS OF OPTIONS. Any option granted pursuant to the
Plan shall be evidenced by an agreement ("Stock Option Agreement") in such form
as the Committee shall from time to time determine, which agreement shall comply
with and be subject to the following terms and conditions:
5.1 Number of Shares. Each option shall state the number of shares
of Stock to which it pertains.
5.2 Option Exercise Price. Each option shall state the option
exercise price, which shall be determined by the Committee; provided, however,
that (i) the exercise price of any Incentive Option shall not be less than the
fair market value of the Stock, as determined by the Committee, on the date of
grant of such option, (ii) the exercise price of any option granted to a person
who owns more than 10% of the total combined voting power of all classes of the
Corporation's stock, as
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determined for purposes of Section 422 of the Code, shall not be less than 120%
of the fair market value of the Stock, as determined by the Committee, on the
date of grant of such option, and (iii) the exercise price of any Non-Qualified
Option shall not be less than 100% of the fair market value of the Stock, as
determined by the Committee, on the date of grant of such option.
5.3 Term of Option. The term of an option granted hereunder shall
be determined by the Committee at the time of grant, but shall not exceed ten
years from the date of the grant. The term of any Incentive Option granted to an
employee who owns more than 10% of the total combined voting power of all
classes of the Corporation's stock, as determined for purposes of Section 422 of
the Code, shall in no event exceed five years from the date of grant. All
options shall be subject to early termination as set forth in this Plan. In no
event shall any option be exercisable after the expiration of its term.
5.4 Method of Exercise. An option shall be exercised by written
notice to the Corporation by the optionee (or successor in the event of death).
Such written notice shall state the number of shares with respect to which the
option is being exercised and designate a time, during normal business hours of
the Corporation, for the delivery thereof ("Exercise Date"), which time shall be
at least 30 days after the giving of such notice unless an earlier date shall
have been mutually agreed upon. At the time specified in the written notice, the
Corporation shall deliver to the optionee at the principal office of the
Corporation, or such other appropriate place as may be determined by the
Committee, a certificate or certificates for such shares. Notwithstanding the
foregoing, the Corporation may postpone delivery of any certificate or
certificates after notice of exercise for such reasonable period as may be
required to comply with any applicable listing requirements of any securities
exchange. In the event an option shall be exercisable by any person other than
the optionee, the required notice under this Section shall be accompanied by
appropriate proof of the right of such person to exercise the option.
5.5 Medium and Time of Payment. The option exercise price shall be
payable in full on or before the option Exercise Date in any one of the
following alternative forms:
5.5.1 Full payment in cash or certified bank or cashier's
check;
5.5.2 Full payment in shares of Stock having a fair market
value on the Exercise Date in the amount equal to the option exercise price;
5.5.3 A combination of the consideration set forth in Sections
5.5.1 and 5.5.2 equal to the option exercise price; or
5.5.4 Any other method of payment complying with the
provisions of Section 422 of the Code with respect to Incentive Options,
including, but not limited to, the delivery by optionee of an irrevocable
direction to a securities broker approved by the Corporation to sell the Stock
and to deliver all or part of the sales proceeds to the Corporation in payment
of all or part of the exercise price and any withholding taxes, provided that
the terms of payment are established by
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the Committee at the time of grant and any other method of payment established
by the Committee with respect to Non-Qualified Options.
5.6 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:
5.6.1 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 determined by the Committee after taking into
account such factors as the Committee shall deem appropriate.
5.6.2 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.
5.6.3 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.
5.7 Right to Exercise. Except with respect to options granted to
officers or directors of the Corporation, options granted pursuant to this Plan
shall be exercisable or "vest" at the rate of at least 20% per year over the
5-year period beginning on the date the option is granted. Options granted to
officers and directors shall become exercisable or "vest," subject to reasonable
conditions, at any time during any period established by the Corporation.
5.8 Rights as a Shareholder. An optionee or successor shall have no
rights as a shareholder with respect to any Stock underlying any option until
the date of the issuance to such optionee of a certificate for such Stock. 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 6.
5.9 Modification, Extension and Renewal of Options. Subject to the
terms and conditions of the Plan, the Committee may modify, extend or renew
outstanding options granted
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under the Plan, or accept the surrender of outstanding options (to the extent
not exercised) and authorize the granting of new options in substitution
therefor.
5.10 Other Provisions. The Stock Option Agreements shall contain
such other provisions, including without limitation, restrictions or conditions
upon the exercise of options, as the Committee shall deem advisable.
6. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.
6.1 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,
including, but not limited to, a stock split, reverse stock split,
recapitalization, continuation or reclassification, 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. Any
fraction of a share subject to 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.
6.2 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 as determined by the
Committee ("Capital Transaction"), this Plan and each option issued under this
Plan, whether vested or unvested, shall terminate immediately prior to such
Capital Transaction; provided, however, that subject to terms approved by the
Committee, all optionees will have the right, during the 30 days prior to such
Capital Transaction, to exercise all vested options. Notwithstanding the
foregoing, in the event there is a Capital Transaction, all options granted
under this Plan shall vest 30 days prior to such Capital Transaction. The
Committee may, but shall not be obligated to, (i) accelerate the vesting of any
option or (ii) apply the foregoing provisions, including but not limited to,
termination of this Plan and any options granted pursuant to the Plan, in the
event there is a sale of 50% or more of the stock of the Corporation in any two
(2) year period or a transaction similar to a Captial Transaction.
6.3 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.
6.4 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.
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6.5 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 optionee, which notice
shall set forth the number of shares subject to the option and the exercise
price thereof resulting from such adjustment.
6.6 Limitation on Adjustments. Any adjustment, assumption or
substitution of an Incentive Option shall comply with Section 425 of the Code,
if applicable.
7. NONASSIGNABILITY. 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 intestate succession, and may be exercised during the lifetime of an optionee
only by such optionee. Any transfer by the optionee of any option granted under
this Plan in violation of this Section shall void such option and any Stock
Option Agreement entered into by the optionee and the Corporation regarding such
transferred option shall be void and have no further force or effect. No option
shall be pledged or hypothecated in any way, nor shall any option be subject to
execution, attachment or similar process.
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 optionee. 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. 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 within a period of ten (10) years from such date, or the date of
any required shareholder approval required under the Plan, if earlier.
Termination of the Plan shall not affect any option theretofore granted.
10. AMENDMENT OF THE PLAN. The Board of Directors of the Corporation
may, subject to any required shareholder approval, suspend, discontinue or
terminate the Plan, or revise or amend it in any respect whatsoever, including,
but not limited to, any changes required pursuant to any state securities rules
or regulations, with respect to any shares of Stock at that time not subject to
options.
11. APPLICATION OF FUNDS. The proceeds received by the Corporation from
the sale of Stock pursuant to options may be used for general corporate
purposes.
12. 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.
13. NO OBLIGATION TO EXERCISE OPTION. The granting of an option shall
not impose any obligation upon the optionee to exercise such option.
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14. 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 within 12 months from the
date of approval by the Board of Directors. In the event such shareholder vote
is not obtained, all options granted hereunder, whether vested or unvested,
shall be null and void. Further, any stock acquired pursuant to the exercise of
any options under this Agreement may not count for purposes of determining
whether shareholder approval has been obtained.
15. WITHHOLDING TAXES. Notwithstanding anything else to the contrary in
this Plan or any Stock Option Agreement, the exercise of any option shall be
conditioned upon payment by such optionee in cash, or other provisions
satisfactory to the Committee, of all local, state, federal or other withholding
taxes applicable, in the Committee's judgment, to the exercise or to later
disposition of shares acquired upon exercise of an option (including any
repurchase of an option or the Stock).
16. PARACHUTE PAYMENTS. Any outstanding option under the Plan may not
be accelerated to the extent any such acceleration of such option would, when
added to the present value of other payments in the nature of compensation which
becomes due and payable to the optionee would result in the payment to such
optionee of an excess parachute payment under Section 280G of the Code. The
existence of any such excess parachute payment shall be determined in the sole
and absolute discretion of the Committee.
17. 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 Stock 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 optionee
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 any applicable state securities law.
18. NOTICES. Any notice to be given under the terms of the Plan shall
be addressed to the Corporation in care of its Secretary at its principal
office, and any notice to be given to an
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optionee shall be addressed to such 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.
As adopted by the Board of Directors as of February , 1998.
PHOTOMATRIX, INC., a California corporation
By:
Roy L. Gayhart,
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Photomatrix, Inc.
For Special Meeting of Shareholders - June , 1998
The undersigned hereby appoints Suren Dutia and Roy Gayhart, and each
of them, proxies, each with full power of substitution, for and in the name of
the undersigned at the Special Meeting of Shareholders of Photomatrix, Inc. to
be held at 1958 Kellogg Avenue, Carlsbad, California 92009, on June 5, 1998 at
1:00 p.m. and at any and all postponement and adjournments thereof, to vote all
shares of Common Stock which the undersigned is entitled to vote, as specified
below.
PROPOSAL 1
|_| FOR the Merger |_| AGAINST the Merger |_| ABSTAIN
Agreement Agreement
PROPOSAL 2
|_| FOR the Authorization |_| AGAINST the |_| ABSTAIN
of a Reverse Stock Split Authorization of
a Reverse Split
PROPOSAL 3
|_| FOR the Election of |_| AGAINST the Election |_| ABSTAIN
Directors of Directors
PROPOSAL 4
|_| FOR the Adoption of |_| AGAINST the Adoption |_| ABSTAIN
1998 Stock Option Plan of 1998 Stock Option
Plan
PROPOSAL 5
|_| FOR the Appointment |_| AGAINST the |_| ABSTAIN
of Independent Auditors Appointment of
Independent Auditors
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
UNLESS OTHERWISE MARKED, THIS PROXY WILL BE VOTED FOR THE ABOVE PROPOSAL
(Please Sign and Date the Proxy on Reverse Side)
<PAGE>
DATED: _____________________, 1998
_________________________________________
(Signature)
_________________________________________
(Signature)
Sign exactly as name
appears hereon. Give your
full title if signing in
other than individual
capacity. All joint owners
should sign.
<PAGE>
Exhibit 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------- ----------------
Commission file number 0-16055
PHOTOMATRIX, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3267788
- - - --------------------------------------------------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
11065 SORRENTO VALLEY COURT, SAN DIEGO, CALIFORNIA 92121
- - - --------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(619) 625-4400
- - - --------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: Common Stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
------- --------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statement incorporated hereby by reference in Part III of this Form 10-KSB or
any amendment to this Form 10-KSB.
[ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 18, 1997, based on the average of the highest and lowest
prices of such stock on that date was $2,382,700. The number of shares of
common stock of Photomatrix, Inc. outstanding as of June 18, 1997, was
5,083,000.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
PART I
THIS ANNUAL REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THESE STATEMENTS INCLUDE, WITHOUT LIMITATION, STATEMENTS RELATING
TO THE COMPANY'S PLANS AND OBJECTIVES FOR FUTURE OPERATIONS, ASSUMPTIONS AND
STATEMENTS RELATING TO THE COMPANY'S FUTURE ECONOMIC PERFORMANCE, MANAGEMENT'S
OPINIONS ABOUT COMPETITIVE POSITION OF THE COMPANY'S PRODUCTS AND THE ABILITY OF
THE COMPANY TO COMPETE SUCCESSFULLY AND OTHER NON-HISTORICAL INFORMATION. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, WITHOUT
LIMITATION, THOSE RISKS DISCUSSED IN ITEM 7 UNDER THE HEADING "ADDITIONAL RISK
FACTORS" AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS ANNUAL REPORT.
ITEM 1. BUSINESS
Photomatrix, Inc. (the "Company," "PMX" or "Photomatrix," formerly
Xscribe Corporation), through its subsidiary, Photomatrix Imaging
Corporation, develops, manufactures, sells and services high-performance
document and aperture-card scanners for legal, financial, government and
commercial enterprises. Photomatrix was incorporated in California in 1978
under the name Xscribe Corporation. On July 31, 1996, the Company sold
substantially all the assets and the business of its wholly owned subsidiary,
Xscribe Legal Systems, Inc. In October, 1996, the Company changed its name
from Xscribe Corporation to Photomatrix, Inc. In December, 1996, the Board of
Directors of the Company approved a plan to discontinue the operations of
another wholly owned subsidiary, Lexia Systems, Inc., and is currently in
process of selling this operation. The financial position and results of
operations of Xscribe Legal Systems and Lexia Systems, Inc. have been
restated in the financial statements of the Company as discontinued
operations. In March, 1997, the Company consolidated and relocated its United
States continuing operations to 11065 Sorrento Valley Court, San Diego. The
Company's phone number is (619) 625-4400.
Photomatrix now operates in the electronic imaging segment of the Information
and Image Management Industry as a supplier of quality, high-value electronic
image-processing hardware and software products and services. During the
past three years, Photomatrix has evolved from being a computer output
microfilm ("COM") duplicator manufacturer with primarily one major customer
to a document scanner manufacturer with many customers. Over the past four
years, revenue from COM products and services have steadily declined, while
scanner product and services revenue has increased, as shown on the following
schedule ($000 omitted):
FY 1994 FY 1995 FY 1996 FY 1997
---------------------------------------
SCANNER PRODUCTS & SERVICES $2,410 $5,747 $6,821 $7,226
COM PRODUCTS & SERVICES 7,332 3,965 2,271 1,468
---------------------------------------
TOTAL REVENUE $9,742 $9,712 $9,092 $8,694
---------------------------------------
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PRINCIPAL PRODUCTS
In fiscal year 1997, the Company derived its consolidated revenue primarily
from sales and service of its Photomatrix document scanners and aperture card
scanners, as more fully described below. Additionally, a portion of the
Company's consolidated revenue was obtained by servicing its discontinued COM
product line.
DOCUMENT SCANNERS
Photomatrix offers a line of medium and high-speed paper document scanners that
serve as input devices for image management systems used in office automation
and service bureau environments. All PMX scanners are constructed for rugged,
high volume use, offering higher duty cycles and reliability than most
competitive models.
The complete image capture system among the Photomatrix document scanner line
is the Series 6000, a high-speed (4,200 dual-sided pages per hour at 200 dots
per inch [dpi] resolution), rugged, single or dual-sided, 200 to 400 dpi,
automatic-feeding document scanning system. Series 6000 includes the
scanner, a Pentium PC, high-resolution display, Windows 3.1 application
software and two circuit boards (using 32-bit EISA bus technology) that
enhance the scanner's speed and performance. One board processes (or cleans
up) the scanned images and the other board compresses the images for storage.
Photomatrix Image Capture Software ("PICS"), which operates in Microsoft
Windows and supports Novell Netware, controls the scanning and PC hardware,
displays images and manages the workflow of the image capture process
(including indexing, scanning and formatting). PICS supports Windows'
Dynamic Link Libraries, allowing the user to develop custom applications to
use with Series 6000. Because the Series 6000 scanner, boards and PICS were
designed to work as one tightly-integrated system, this configuration offers
the best efficiency among Photomatrix scanners.
Photomatrix primarily sells the Viper Series 5000 ("Series 5000"), a simplex
or duplex, high-resolution, 5000-element CCD scanner which captures
double-sided documents at speeds in excess of 9,000 dual sided pages per
hour. These rugged, high-duty-cycle machines differ from the Series 6000 in
that the Series 5000 is not bundled with the Photomatrix image processing
board, compression board, or PICS. Instead, Series 5000 is plug compatible
with industry-leading interface (processing and compression) boards from
Kofax, Xionics, Seaport Imaging, and Image Machines. Because of this
compatibility, Photomatrix sells a higher volume of the Series 5000 scanners.
APERTURE CARD SCANNERS
Photomatrix aperture card scanners are used to scan microfilm images of
engineering drawings for storage in a digital format. In addition to crisper
images, the digital format permits users to electronically store, retrieve,
distribute and print engineering documents in a local or enterprise wide
environment. Photomatrix aperture card scanners offer a
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wide range of automation, throughput speed and image enhancement features.
Photomatrix sells aperture card scanners primarily direct to corporate
in-house and third-party service bureaus who scan microfilmed engineering
drawings for the end users of those drawings. Photomatrix also sells a
limited number of aperture card scanners under subcontracts to provide
electronic-imaging systems to the Department of Defense.
MAINTENANCE SERVICES
The Company provides 24-hour service for its installed base through field
engineers in 10 major cities throughout the United States ("US") and in
England. The Company also has relationships with various third party
maintenance organizations, including a nationwide relationship with IBM, to
maintain document scanners, and Kodak, to provide COM duplicator spare parts.
PMX field engineers average 9 years of experience with the Company. Using a
sophisticated system for parts distribution and inventory control, the
service operation offers installation, on-going maintenance and field
technical support for existing and new products.
Total maintenance revenue for FY 1996 was $1.1 million, with a ratio of
scanner maintenance revenue to COM duplicator revenue of approximately 60:40.
In FY 1997, total maintenance revenue has maintained at a flat annualized run
rate of $1.1 million, but the relative percentage of maintenance revenue has
migrated towards scanners, where a 70:30 ratio of service from scanners to
COM duplicators now prevails.
The Company views maintenance contracts and related revenue as a significant
revenue opportunity in FY 1998 and FY 1999 and views maintenance contracts as
an important profit center.
COMPETITION
APERTURE CARD SCANNERS. The market for scanning engineering drawings is large
and growing steadily. According to industry studies, in the US alone, it is
estimated that more than 40,000 companies each have more than 100,000
engineering drawings, with a total estimated value of more than $1.5
trillion. Companies are dedicating large resources to and establishing
significant budgets for the conversion, storage, distribution and retrieval
of these engineering drawings. Problems with document and revision control,
document distribution, deterioration and loss of documents are pervasive.
Aperture cards, which contain microfilm images of these drawings, have been
widely used since World War II to improve the storage and security of these
documents. The need to electronically manage this data has become critical,
as the volume of paper documents continues to increase, and companies are
increasingly seeking methods to increase the efficiency of storage and
retrieval of these documents.
Photomatrix developed much of its technology and related application of
aperture card scanners in the mid 1980's when it introduced its aperture card
scanner product. Photomatrix's competitors in the aperture card scanning
market are Wicks & Wilson, a
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United Kingdom company, and Vidar Systems Corporation, a subsidiary of
Sweden's Yggdrasil. Photomatrix is not able to estimate the size of this
market, but believes that it is currently limited due to the cost constraints
of converting engineering backfiles of aperture cards and the related systems
into electronic storage and retrieval systems. Photomatrix is the only
approved aperture card vendor for the United States Department of Defense
Engineering Data Management Information and Control System ("EDMIC") contract
awarded to PRC in 1989 and the EDMIC's program currently is a significant
source of demand for this product. The principal competitive advantages of
the Photomatrix aperture card scanners are its image enhancement features,
high speed accurate conversion features and reliability. Photomatrix's
products are higher-end products and are priced higher than other currently
marketed products. In the Company's opinion, its aperture card scanner
product offering exceeds the quality and duty-cycle statistics of any of its
competitors.
DOCUMENT SCANNERS. The document scanning industry can be segmented into the
following five market segments:
- - - - Sheetfed scanners
- - - - Drum scanners
- - - - Flatbed scanners
- - - - Handheld scanners
- - - - Recognition and imaging editing software
Photomatrix document scanners utilize a flatbed vacuum transport technology.
Furthermore, Photomatrix competes in the high end of the industry with Kodak,
Fujitsu, Bell and Howell, and BancTec where speed, throughput and duty cycle
are important product features. Competition in this segment is based upon
price, image quality, paper handling capabilities, throughput speeds, ease of
use, reliability and quality and speed of maintenance services. Kodak has
utilized its strengths of name recognition, reputation, distribution
channels, good performance, service capabilities, and strong financial
capital base to become the market share leader in this segment. However,
Kodak 500 and 900 model scanners, which are comparable to the Company's Viper
Series 5000 of scanners, sell for more than the Photomatrix scanners.
Competitors in the high-end document scanner market differentiate their
respective products primarily based on name recognition, quality,
distribution channels, and price. Management believes the products of all
three competitors in this marketplace operate comparably with
industry-standard boards and interfaces such that interoperability is no
longer a significant product differentiator. Photomatrix believes that its
primary competitive advantages in this segment of the market are its
price-performance relationship, including its relative speed, image quality,
reliability and rugged build. All of its primary competitors, however, have
substantially greater resources than Photomatrix for marketing and
distribution and for purchasing and maintaining market share. There is no
assurance that Photomatrix will be able to maintain a competitive position in
this market.
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In the document scanner market, the Photomatrix Series 5000 and 6000 compete
favorably against their product counterparts at BancTec and Kodak.
Photomatrix maintains the leading price-performance ratios in its market
segment and retains this status via not only continually improving on speed
and throughput but also pricing below BancTec's and Kodak's products. PMX's
likelihood of increasing its market share may be reduced should Kodak
significantly reduce its prices. Although management expects some general
downward pressure on price in the next two to three years, management does
not expect intense price competition in the foreseeable future. There is no
assurance that the Company will not experience intense price competition.
During fiscal year 1997, Photomatrix entered into an OEM contract with Bell
& Howell to supply Series 5000 scanners under the Bell & Howell label. PMX
scanners operate at speeds higher than Bell & Howell's, and the Company's OEM
relationship with Bell & Howell represents a strategic corporate partnering
that is beneficial to both parties. Management does not view Bell & Howell
as a competitor in the high-end market assuming PMX continually improves the
features and speed of PMX scanners such that they are perpetually superior to
Bell & Howell's product offering and Bell & Howell adequately markets and
sells PMX scanners in large volumes. Management believes PMX has the
engineering talent and resources to succeed at technologically staying ahead
of Bell & Howell and, thereby, fostering a long-term OEM relationship.
MARKETING AND DISTRIBUTION
PMX markets Series 6000 image capture systems to service bureaus and
high-volume end users via its direct sales force. In contrast, PMX markets
its Series 5000 document scanners via indirect distribution channels,
including via original equipment manufacturing (OEM) agreements, system
integrators, distributors, and value added remarketers. PMX has two separate
exclusive OEM agreements, one with Bell & Howell Limited under which Bell &
Howell Limited resells those scanners in Europe, Africa, the Indian
sub-continent and the Middle East, and the other with Bell & Howell (in the
United States) under which Bell & Howell resells those scanners in the United
States and Canada. The international agreement and the domestic agreement
contain no minimum requirements. Generally, both Bell & Howell agreements
preclude PMX from selling document scanners to dealers or distributors who
represent Bell & Howell scanners. In April, 1997, Photomatrix entered into a
distribution agreement with IBM. Under the agreement, which also contains no
minimum requirements, IBM is granted the right to sell Photomatrix document
scanners.
Photomatrix distributes its aperture card scanning products primarily to
systems integrators and VARs who package the Photomatrix scanners with other
software and hardware products for sale to end users. Because Photomatrix
aperture card scanners are peripheral products which must be integrated with
other products for end users, Photomatrix maintains close working
relationships with major systems integrators and VARs. Photomatrix relies
heavily on the sales efforts of its systems integrators and VARs
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to generate sales of aperture card scanners. Within this integrator and VAR
distribution channel, Photomatrix sells its aperture card scanners under
subcontracts to PRC, Inc. ("PRC") under a contract to provide electronic
imaging systems to the Department of Defense. PRC is not obligated to order
any minimum quantities and the timing and amount of the orders are not
predictable. Photomatrix also sells, through its direct sales force, aperture
card scanning systems to service bureaus which provide scanning services to
engineering drawing end users.
Photomatrix generally provides a 90-day warranty on its products and offers,
for sale, annual maintenance contracts thereafter. The warranty and
maintenance work is typically provided through Photomatrix field service
employees who are located throughout the United States. Photomatrix also
performs repair services for and supplies replacement parts to Eastman Kodak
Company (which previously sold Photomatrix product under a private-label
agreement).
RAW MATERIALS AND MANUFACTURING
For the year ended March 31, 1997, Photomatrix manufactured its aperture card
scanners and document scanners at its manufacturing facilities in Culver
City, California. Subsequent to year-end, the manufacturing operations have
been consolidated into a new facility in San Diego, California. This move
will result in closer day-to-day supervision by the Company's management,
since it represents the first time that operations personnel and upper
management of the Company have been located in the same building. In
addition, the Company has initially experienced raw material cost reductions
as result of changing from Los Angeles to San Diego vendors. The raw material
cost reductions have been offset by labor inefficiencies related to
significant assembly personnel turnover incurred in connection with the move.
Photomatrix's operations consist of procurement, kit packaging, assembly of
circuit boards, wiring and assembly and quality control testing of all parts,
components, subassemblies and final assemblies of all products. Photomatrix
manufactures its own boards, including 32 bit, EISA-bus technology image
processing and compression boards used in its Series 6000 scanning products.
Photomatrix's products incorporate electronic, imaging and mechanical
components purchased from various vendors. The electronic components,
including the computer chips, are generally available from multiple sources.
Photomatrix currently uses Fairchild, Kodak and Sony CCDs in the Photomatrix
cameras in its aperture card and document scanning products. However, other
commercially available CCD cameras could be substituted if necessary.
Photomatrix copies, labels and packages its software products.
Photomatrix's products contain numerous mechanical components that are
machined specially for Photomatrix's products. Photomatrix relies upon
several specific vendors as the sole source of its custom-machined parts.
Although many vendors can provide this machine work, tools and molds needed
for this process are in the possession of (and in some cases, owned by) its
machine-shop vendors, and Photomatrix could experience
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supply disruption if one of these vendors failed to meet its supply
obligations.
Photomatrix also bundles its aperture card scanners and document scanners
with commercially available personal computers, work stations,
high-resolution monitors, optical disk drives and other compatible
peripherals and with Microsoft Windows, Novell NetWare and other commercially
available software.
INTELLECTUAL PROPERTY RIGHTS AND LICENSES
Photomatrix relies upon copyright and trade secret laws to protect its
software and firmware used in its aperture card scanner and document scanner
products. Photomatrix has registered under Federal law design documents for
its document scanner and certain of its product maintenance manuals,
operations manuals and parts catalogues.
Photomatrix holds a perpetual nonexclusive license to use, manufacture, and
distribute aperture card scanners, microfiche scanners, single and double
sided document scanners that scan documents no greater than 12 inches in
width and 24 inches in length and multiformat scanners provided that the
manufacturer's net invoice price is not less than $7,000 for document
scanners and $10,000 for all scanners that use certain imaging technology of
Scan-Graphics, Inc., subject to United States Patent No. 4,972,273.
Photomatrix is obligated to pay Scan-Graphics a royalty of 5-1/2 % of
Photomatrix's net sales price for all aperture card scanners manufactured,
sold and delivered by Photomatrix until December 31, 1998. Photomatrix is
not obligated to pay any royalties with respect to document scanners, whole
fiche scanners, roll film scanners and/or multiformat scanners even if the
scanners use the patented technology or any derivative of such technology.
If Photomatrix discontinues its manufacturing of aperture card scanners, then
it is obligated to negotiate with Scan-Graphics to sell Scan-Graphics a
nonexclusive right to manufacture and sell the aperture card scanners.
Photomatrix is a party to a nonexclusive reseller agreement with Image
Machines Corporation for a Windows driver for Photomatrix's aperture card
scanners and for viewing and editing software. Under the reseller agreement,
Photomatrix purchases the software for resale on a per copy basis. The Image
Machines software is not bundled with aperture card scanners sold through PRC
or Intergraph who have developed their own software for use with the
scanners. Photomatrix offers with its scanners a SCSI developers' tool kit
for developing a Photomatrix scanner driver.
Photomatrix also purchases and resells as part of the Series 6000 document
scanner a board manufactured by Seaport Imaging that enables the scanning of
bar codes.
Photomatrix holds a nonexclusive license which expires in March, 1998 from
Educational Testing for an algorithm used for gray scaling images in Series
6000 document scanner and pays a $20 per unit royalty on sales of its
dual-sided scanners.
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Photomatrix holds a non-exclusive, perpetual, paid-up license to use and
sublicense its Vision QC software to end-users, and Photomatrix owns the
trademark Vision QC. The software and its source code are owned by Eureka
Software Solutions, Inc., and Eureka and NightRider, a service bureau, have
the right to sublicense the software to third parties.
Photomatrix bundles its Series 6000 document scanner with Microsoft DOS and
Windows which it purchases on a per copy basis.
SEASONAL BUSINESS
The second and third quarters of the Company's fiscal year have typically
shown higher revenue volumes than its first and fourth quarters.
DISCONTINUED OPERATIONS
The following represents a brief history on the discontinued operations of
Photomatrix, Inc.:
SALE OF XSCRIBE LEGAL SYSTEM, INC. In July, 1996, the Company sold its
computer-aided transcription business and related assets to its primary
competitor for $2.2 million. The Company retained certain liabilities.
LEXIA SYSTEMS, INC. In October, 1993, the Company acquired the North
American Sales Division of International Computers Limited, Inc. ("ICL"), a
developer of groupware (office automation) software and manufacturer of
Unix-based hardware, and formed Lexia Systems, Inc. ("Lexia"). Lexia and ICL
entered into a strategic alliance whereby Lexia was to distribute ICL's
groupware products in the US and support the domestic install base of ICL
customers. However, the business partnering efforts between the Company and
ICL / Fujitsu have proved to be ineffective primarily because of a difficult
working relationship between ICL, Fujitsu and Lexia, combined with the fact
that Lexia did not own the software or the proprietary rights and was not
able to control the marketing or product management of ICL products.
Consequently, in December, 1996, the Board of Directors of the Company
approved a plan to discontinue Lexia Systems, Inc. before the end of the
Company's second quarter in fiscal 1998. The Company is currently in process
of selling this operation. There is no assurance that the Company will be
able to consummate this sale. Further, in June, 1997, the Company had
accounts payable and unpaid rent due ICL and related entities in the amount
of $725,000. The Company is disputing the value received related to certain
of these liabilities and is attempting to settle with ICL at a discount.
There is no assurance that the Company will be successful in resolving these
disputed amounts.
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SIGNIFICANT CUSTOMERS
One customer (Bell & Howell) accounted for 17 percent of the Company's total
revenue for fiscal year 1997. No other customer accounted for more than 10
percent of the Company's total revenue during fiscal years 1996 or 1995. (See
"Additional Risk Factors")
BACKLOG
The Company generally does not have a material order backlog at any
time because the Company normally fills orders within the delivery schedules
requested by customers (generally within 30 days).
GOVERNMENT SALES
The Company has a subcontract to PRC's contract with the Department of
Defense (see "Competition"). Photomatrix is not guaranteed any orders under
the subcontract which provides that PRC will issue purchase orders for
products when the purchase orders are fully funded. Purchase orders are
subject to termination if the government terminates the prime contract 25
days prior to the delivery date for the product.
RESEARCH AND DEVELOPMENT
During the last three fiscal years, the Company expended $915,000 (fiscal
year 1997), $786,000 (fiscal year 1996), and $765,000 (fiscal year 1995) on
company-sponsored research and development projects, including projects
performed by consultants for the Company and including capitalized software
development costs.
The Company is currently engaged in the development of competitive
enhancements to the Photomatrix line of scanners, including a faster scanner,
a "smart" automatic document feeder, a top loading stacker, and the next
generation of both the Series 6000 document scanner and aperture card scanner
line. There is no assurance that the Company will successfully complete
current or planned development projects or will do so within the time
parameters and budgets established by the Company, and there is no assurance
that a market will develop for any product successfully developed.
The Company works closely with its customers in an attempt to develop
enhancements and new products in response to customer needs.
The Company's management expects that research and development expenditures
(including capitalized software development costs) will total about $1
million for the coming year.
ENVIRONMENTAL LAWS
Compliance with Federal, state and local laws enacted for the protection of the
environment have not had a material effect upon the Company's capital
expenditures,
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earnings or competitive position to date. The Company does not anticipate
that it will have to incur any material expenses in the future in order to
comply with Federal, state or local laws because of the nature of its
products and manufacturing operations.
EMPLOYEES
At June 1, 1997, the Company had 61 full-time and 3 part-time employees,
excluding nine employees associated with its discontinued Lexia operation,
none of whom are subject to a collective bargaining agreement. The Company
considers its relationship with its employees to be good.
FOREIGN AND DOMESTIC OPERATIONS
The Company derived approximately 21.8% of its revenue for the year ended
March 31, 1997, from foreign sales made by Photomatrix, Ltd., a wholly owed
subsidiary located in the United Kingdom.
ITEM 2. PROPERTY
The Company leases its corporate headquarters located in San Diego,
California. The Company first occupied this facility in March, 1997. This
facility consists of approximately 23,400 square feet which houses the
Company's corporate offices and PMX's manufacturing, sales and administrative
functions. The lease expires in September, 2002.
The Company also leases facilities in Chandler, Arizona and London, England.
These facilities house the Photomatrix product development and Photomatrix
European operations, respectively. The Chandler facility lease consists of
5,100 square feet, which expired subsequent to March 31, 1997 in June, 1997.
Subsequently, this lease was extended to June, 2000. The London facility
consists of 2,400 square feet and the lease expires in May, 2013.
As of March 31, 1997, the Company leased a 49,000 square foot facility in
Culver City (of which 15,000 square feet had been subleased to third-party
tenants), and the lease expired in May, 1997. In March, 1997, the Company
consolidated its corporate offices with its PMX manufacturing, sales and
administrative functions into a single facility in San Diego, California.
The Company also subleases 6,000 square feet in Reston, Virginia for its
Lexia operations (which operation has been discontinued by the Company, as
more fully described in Note 2 of the Consolidated Financial Statements
presented elsewhere herein) from ICL, which sublease expires in August, 1997.
The Company believes that its facilities are sufficient to accommodate its
current needs and does not anticipate leasing additional space during the
current fiscal year.
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ITEM 3. LEGAL PROCEEDINGS
The Company has been a defendant in three product liability cases pending in
the United States District Court, Eastern District of New York (BERNHART V.
XSCRIBE ET AL. (92 Civ. 3931), GALFIN V. XSCRIBE (92 Civ. 2582), and
HAGIPADELIS V. XSCRIBE (95 Civ. 1977)). Xscribe has tendered these claims to
its insurance carriers, St. Paul Fire and Marine Insurance, and Federal
Insurance Company, and St. Paul has assumed the Company's defense without
reservation of right and Federal has agreed to share defense costs, subject
to a reservation of rights. The insurance carriers have prevailed in all
judgements rendered to date. It may take several years before this litigation
is ultimately resolved. The Company believes that there is no merit to any
of the three pending cases and further believes that if any liability results
from these claims, the liability (excluding punitive damages, if any) will be
covered by its insurance policies. However, depending upon the outcome of
these cases, the Company may be served in the future with additional claims
or be subject to liability in excess of insurance policy limits.
The Company is not aware of any other legal proceedings to which it is a
party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Photomatrix, Inc. is traded in NASDAQ Stock Market Small Cap Tier under the
symbol PHRX. On June 18, 1997, there were 5,083,000 shares outstanding and
there were approximately 1,000 shareholders of record. Following is information
regarding Photomatrix, Inc. common stock market prices:
<TABLE>
<CAPTION>
Fiscal Year 1997 Fiscal Year 1996 Fiscal Year 1995
----------------- ----------------- -----------------
Fiscal Quarter Ended Low Bid High Bid Low Bid High Bid Low Bid High Bid
- - - -------------------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
June 30 - 1st 11/16 1-7/16 7/8 1-1/2 3-9/16 4-19/32
September 30 - 2nd 17/32 1-1/16 13/16 1-1/2 2-1/4 3-15/16
December 31 - 3rd 3/8 13/16 3/4 1-1/16 1-13/16 2-11/16
March 31 - 4th 3/8 15/16 9/16 1-3/64 1-1/4 2-5/16
</TABLE>
The Company has not paid a cash dividend on its common stock and it is not
anticipated that the Company will pay any dividends in the foreseeable future
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following selected financial data is derived from audited financial
statements as of the years ended March 31, 1997, 1996, 1995, 1994 and 1993
(000's have been omitted). Certain reclassifications have been made to prior
year amounts to be consistent with current year classifications. Discontinued
operations were reclassified for all periods presented and the remaining
operations consist of Photomatrix Imaging Corp.and Photomatrix, Ltd., which
were acquired in fiscal 1994. The data set forth below should be read in
conjunction with the financial statements and the related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," both appearing elsewhere herein.
<TABLE>
<CAPTION>
For the years ended March 31,
------------------------------------------------------
1997 1996 1995 1994 1993 (1)
-------- -------- ------- -------- ----------
OPERATING DATA
<S> <C> <C> <C> <C> <C>
Revenue $ 8,694 $ 9,092 $ 9,712 $ 9,742 -
Gross profit percent 26.3% 32.3% 31.5% 34.8% -
Loss from
continuing operations $ (2,290) $ (1,368) $ (791) $ (194) -
Net income (loss) $ (2,407) $ (1,704) $ (133) $ 1,222 $ 662
Loss per share
from continuing operations $ (0.44) $ (0.24) $ (0.13) $ (.04) -
</TABLE>
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<TABLE>
<CAPTION>
For the years ended March 31,
------------------------------------------------------
1997 1996 1995 1994 1993 (1)
-------- -------- ------- -------- ----------
OPERATING DATA
<S> <C> <C> <C> <C> <C>
Net income (loss) per share $ (0.46) $ (0.30) $ (0.02) $ 0.23 $ 0.07
Dividends per share $ - $ - $ - $ - $ -
1997 1996 1995 1994 1993
-------- -------- ------- -------- -------
BALANCE SHEET DATA
Working capital $ 2,432 $ 5,624 $ 6,991 $ 7,617 $ 1,965
Current ratio 1.92 2.96 4.10 5.35 (1)
Total assets $ 8,565 $ 12,581 $ 13,202 $ 12,844 $ 3,909
Total long-term debt and
obligations $ 415 $ 1,148 $ 699 $ 827 $ -
</TABLE>
(1) Continuing operations of the Company were acquired during fiscal 1994.
All years presented have been restated to reflect discontinued operations.
Accordingly, fiscal 1993 consists only of discontinued operations.
Management's discussion and analysis of financial condition and results of
operations should be read in conjunction with the selected financial data and
consolidated financial statements and notes thereto included elsewhere therein.
RESULTS OF OPERATIONS
Following is a comparative discussion by fiscal year of the results of
continuing operations for the last three fiscal years ended March 31, 1997. The
Company believes that inflation has not had a material effect on its operations
to date.
FISCAL YEAR 1997 ENDED MARCH 31, 1997 COMPARED TO FISCAL YEAR 1996 ENDED MARCH
31, 1996
Consolidated revenue for the year ended March 31, 1997 decreased by $398,000
(4.4 %) to $8,694,000 from $9,092,000 for the year ended March 31, 1996. This
decrease was due to a 35.4 % ($803,000) expected decrease in COM duplicator
revenue and offset by a 5.9 % ($405,000) increase in scanner product and service
revenue.
Consolidated gross margins for the year ended March 31, 1997 decreased
$639,000 (21.8 %) to $2,294,000 from $2,933,000 and gross margin as a percent
of sales decreased from 32.3 % to 26.4 % in the year ended March 31, 1997 due
to significant price concessions made by the Company in connection with the
establishment of its new OEM relationship with a major document scanner
customer, as well as certain cost inefficiencies caused by the relocation of
its manufacturing operations from Culver City to San Diego, including an
inventory obsolescence write-off of approximately $127,000. Management
believes that it has taken appropriate actions which will enable the Company
to realize gross
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margins similar to those in fiscal years 1996, 1995 and 1994. There is no
assurance that these margin improvements will be achieved.
Selling, general and administrative ("SG&A") expenses decreased $281,000 (7.8 %)
from $3,592,000 in the prior year to $3,311,000 in the current year. The net
decrease is primarily attributable to cost reductions made both in the sales and
marketing as well as the general and administrative areas of the Company. As a
percent of sales, SG&A decreased from 39.5 % in the prior year to 38.1 % in the
current year, primarily due to the cost reduction efforts implemented during the
current year.
Product development expenses increased $322,000 (66.4 %) from $485,000 in the
year ended March 31, 1996 to $807,000 in the year ended March 31, 1997.
Product development expenditures that were capitalized because they related
to technologically feasible projects were $108,000 in the current year
compared to $301,000 in the prior year. Total development spending increased
$129,000 from $786,000 in the prior year to $915,000 in the current year
primarily because of increased scanner development activity at Photomatrix,
including the development of new models which feature increased speed (150
and 200 page per minute duplex models), as well as new options such as a
"smart" automatic document feeder, a top-loading stacker and an NT version
of the Company's PICS software.
During the current fiscal year, the Company relocated and consolidated its
operations to San Diego. The cost incurred in connection with this activity
totaled $520,000, and has been shown as a separate line item.
Interest expense decreased $136,000 from $228,000 in the prior year to $92,000
in the current year. This decrease was due to decreased borrowings under the
Company's credit facility in the current year. Other income increased $239,000,
from $11,000 in 1996 to $250,000 in 1997 as a result of non-recurring payment
from a major customer under a minimum quantity purchase contract.
The Company's provisions for income taxes were $104,000 and $7,000 in the years
ended March 31, 1997 and 1996, respectively. These amounts are substantially
different from provisions calculated using the statutory rates because of the
Company's inability to recognize the effects of net operating losses and related
carry-forwards. The current year provision reflects an increase in the Company's
valuation allowance relating to the deferred tax asset.
The decreases in revenue and gross margin, and the increased product development
and relocation expenses, offset slightly by the reduction in SG&A costs and
interest expense and the increase in other income, resulted in a loss from
continuing operations of $2,290,000 ($0.44 per share) for the year ended March
31, 1997. This compares to the loss from continuing operations of $1,368,000
($0.24 per share) for the year ended March 31, 1996.
14
<PAGE>
During the current year, the Company sold its court reporting business (Xscribe
Legal Systems, Inc.) and discontinued Lexia Systems, Inc., as more fully
described in Note 2 of the Consolidated Financial Statements contained elsewhere
herein. Including the loss from discontinued operations of $336,000 in the
prior year and $251,000 in the current year, less gain of $134,000 from the sale
of Xscribe Legal Systems, the net loss increased from $1,704,000 ($0.30 per
share) in the year ended March 31, 1996 to $2,407,000 ($0.46 per share) in the
year ended March 31, 1997.
FISCAL YEAR 1996 ENDED MARCH 31, 1996 COMPARED TO FISCAL YEAR 1995 ENDED MARCH
31, 1995
Consolidated revenue for the year ended March 31, 1996 decreased $620,000 (6.4%)
to $9,092,000 in the year ended March 31, 1996 from $9,712,000 in the year ended
March 31, 1995. This decrease was due to a 42.7% ($1,694,000) expected decrease
in COM duplicator revenue, somewhat offset by an 18.7% ($1,074,000) increase in
scanner product and service revenue.
Consolidated gross margins for the year ended March 31, 1996 decreased
$124,000 (4.1%) to $2,933,000 in the year ended March 31, 1996 from
$3,057,000 in the year ended March 31, 1995. Gross margin as a percent of
sales remained relatively constant at about 32%.
Selling, general and administrative expenses increased $336,000 (10.3%) from
$3,256,000 in the year ended March 31, 1995 to $3,592,000 in the year ended
March 31, 1996. The net increase includes a $426,000 increase at Photomatrix to
develop its sales and marketing channels for scanners offset by $90,000 of cost
reductions at the corporate headquarters. As a percent of sales, SG&A increased
from 33.5% in the year ended March 31, 1995 to 39.6% in the year ended March 31,
1996, primarily due to the decreased revenue in the fiscal year ended March 31,
1996.
Product development expenses increased $56,000 (13.1%) from $429,000 in the year
ended March 31, 1995 to $485,000 in the year ended March 31, 1996. Product
development expenditures that were capitalized because they related to
technologically feasible projects were $301,000 in the year ended March 31, 1996
compared to $336,000 in the year ended March 31, 1995. Total development
spending increased $94,000 from $692,000 in the year ended March 31, 1995 to
$786,000 in the year ended March 31, 1996 primarily because of increased scanner
development activity at Photomatrix.
Other income (expense), which consists primarily of interest expense, increased
$76,000 from $141,000 in the year ended March 31, 1995 to $217,000 in the year
ended March 31, 1996. This increase was due to increased borrowings under the
Company's credit facility, primarily used to finance increased inventory levels.
The Company's provisions for income taxes were $7,000 and $22,000 in the years
ended
15
<PAGE>
March 31, 1996 and 1995, respectively. These amounts are substantially
different from provisions calculated using the statutory rates because of the
Company's inability to recognize the effects of net operating losses and
related carry-forwards, net of valuation allowances.
The decreases in revenue and gross margin, and the increased product development
and interest expenses, and SG&A costs, resulted in a loss from continuing
operations of $1,368,000 ($0.24 per share) for the year ended March 31, 1996.
This compares to a loss from continuing operations of $791,000 ($0.13 per share)
for the year ended March 31, 1995.
In the year ended March 31, 1997, the Company sold its court reporting business
(Xscribe Legal Systems, Inc.) and discontinued Lexia Systems, Inc., as more
fully described in Note 2 of the Consolidated Financial Statements contained
elsewhere herein. Including the income (loss) from discontinued operations of
$658,000 and ($336,000) in the years ending March 31, 1995 and 1996,
respectively, the net loss increased from ($133,000) ($0.02 per share) in the
year ended March 31, 1995 to ($1,704,000) ($0.30 per share) in the year ended
March 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Following is a discussion of Photomatrix's recent and future sources of and
demands on liquidity as well as an analysis of liquidity levels.
RECENT AND FUTURE SOURCES OF AND DEMANDS ON LIQUIDITY AND CAPITAL RESOURCES
During fiscal year 1997, the Company's primary sources of liquidity were cash
from discontinued operations of $1,382,000, proceeds of $2,000,000 from the sale
of Xscribe Legal Systems, reductions in the Company's inventory of $573,000 and
accounts receivable of $302,000, and an increase in accrued liabilities of
$264,000. Primary uses of cash in the year ended March 31, 1997 were to repay
the line of credit and notes payable with the bank and related parties
($967,000), reduce accounts payable and customer deposits ($524,000) and capital
expenditures and capitalized software ($429,000). In the year ended March 31,
1997, the Company's cash balance increased $557,000 from $255,000 to $812,000.
The Company has a line of credit with a bank, which was amended subsequent to
year-end to borrow a total of $750,000 which was unused at March 31, 1997. This
line of credit accrues interest on outstanding borrowings at prime plus 2-1/2%
per annum. During the year, the Company paid off a term loan with the same
bank in the amount of $854,000. Outstanding borrowings under this combined
credit facility are collateralized by all of the Company's assets.
As of March 31, 1996, the Company was in violation of certain financial
covenants required by the combined credit facility. In June 1996, the Company
renegotiated the
16
<PAGE>
facility to cure these defaults. In April, 1997, the Company amended and
renewed the line of credit. Total borrowings under the line of credit are
now limited to the lesser of $750,000 or 70% of eligible accounts receivable
(as defined). The Company is now required to 1) maintain a minimum tangible
net worth of $3,050,000 from March 31, 1997 through April 29, 1997, and
$2,800,000 at April 30, 1997 and thereafter, 2) maintain a ratio of total
liabilities to tangible net worth of not greater than 1.1 to 1.0 at March 31,
1997 and thereafter, 3) maintain working capital of $2,000,000 from March 31,
1997 through April 29, 1997, and $1,750,000 at April 30, 1997 and thereafter,
and 4) maintain a current ratio of 1.7 to 1.0 at March 31, 1997 and
thereafter. The new line of credit expires in August, 1997. The Company is in
process of extending the line of credit with the bank. The is no assurance
that the line of credit will be extended.
The Company is obligated under a series of unsecured notes payable to a related
party totaling $527,000 as of March 31, 1997. These notes bear interest at a
rate of 8% per annum and mature in May, 2000. Interest and principal payments
totaling approximately $16,000 are due monthly. In April, 1997, the Company
stopped making payments on these notes.
The Company has accounts payable and unpaid rent due ICL and related entities in
the amount of $725,000. The Company is disputing the value received related to
certain of these liabilities and is attempting to settle with ICL at a discount.
There is no assurance that the Company will be successful in resolving these
disputed amounts.
The Company's assured sources of future short-term liquidity as of March 31,
1997 are its cash balance of $812,000 and the unused portion of its line of
credit of $750,000. Availability under the line of credit can be further
limited based on the balance of eligible accounts receivables as described
above.
The Company is currently obligated to pay approximately $ 20,000 per month in
lease payments. Aside from these commitments, the Company has not made any
material capital commitments.
In March, 1997, the Financial Accounting Standards Board issued SFAS 128,
EARNINGS PER SHARE, which is effective for fiscal years ending after December
15, 1997. SFAS 128 requires the presentation of "basic" earnings per share
which excludes the dilutive effect of all common stock equivalents.
Presentation of "diluted" earnings per share, which reflects the dilutive
effects of all common stock equivalents, will also be required. The diluted
presentation is similar to the current presentation of fully diluted earnings
per share, but uses the average market price of stock during the period. The
Company is currently evaluating the impact of the implementation of SFAS 128.
The Company is concentrating on increasing its sales and improving its gross
margins. If it is successful, then it should have sufficient liquidity to fund
its operations during the next twelve months. In addition, the Company is
continuing discussions with various candidates in an attempt to explore the
possibility of a synergistic merger or strategic combination.
17
<PAGE>
There is no assurance that the Company will be successful in these efforts.
ADDITIONAL RISK FACTORS
Photomatrix's business is subject to the following risks and uncertainties in
addition to those described above.
ABILITY TO SUCCESSFULLY MARKET DOCUMENT SCANNERS
The Company's growth strategy is dependent upon its ability to market
successfully its document scanners. In this regard, Photomatrix is currently
focusing on expanding its indirect distribution channels through OEM
arrangements, such as the OEM agreement with Bell & Howell, and through
resellers. At this time, the indirect distribution channels are not well
developed and there is no assurance that these channels will lead to increased
sales. There is no assurance that Photomatrix's marketing efforts will be
successful. Competitors of Photomatrix have substantially greater resources and
may be able to compete more effectively on technology, price or product
features. Photomatrix is also constrained by limits on its marketing budget and
ability to create brand recognition. Further, Photomatrix's products are
relatively high-priced durable goods and economic conditions that adversely
affect the market for durable goods could have an adverse effect on
Photomatrix's orders.
COMPETITIVE ENVIRONMENT
The Company competes primarily in the high-end of the imaging marketplace. The
Company believes the critical success factors within this market segment include
engineering quality, price reasonableness, distribution channels, production
volume, name recognition, and access to a strong financial-capital base. The
Company expects the majority of its future revenue to come from the sale of its
line of high-performance document scanners. The Company's primary competitors
in the high-performance document-scanner marketplace include Kodak and BancTec,
both of which have access to a substantially greater financial-capital base than
the Company. In addition, the Company estimates that Kodak has the leading
market share in this market segment, and Kodak has substantially broader name
recognition and greater sales and marketing resources than the Company. There
can be no assurance that Photomatrix, Inc. will be able to overcome competitive
forces and reactions in order to increase revenue necessary to return to
profitability.
The Company's ability to increase its revenue is partially dependent upon
successfully using existing OEM relationships and upon expanding its indirect
channels of distribution. The Company's ability to expand these distribution
channels is in part dependent upon its marketing and research and development
expenditures. The Company's liquidity constraints may adversely impact these
expenditures.
Further, Bell & Howell, with whom the Company has an OEM relationship to sell
the
18
<PAGE>
Company's document scanners, has recently introduced a document scanner with
speed and features approaching the lower end of many of the scanners sold by
the Company via this OEM channel. Although the Company believes it will be
able to enhance its scanner technology to stay ahead of some of its
competitors' products, there can be no assurance that Bell & Howell or
another competitor will not introduce products into the Company's future
market niche that will be of equal or superior performance.
REQUIRED REVENUE INCREASES
In order to reduce operating losses, by March 31, 1997, management has
reduced operating costs on a consolidated basis by an aggregate of
approximately $800,000 annually (including continuing and discontinued
operations). The majority of the $800,000 cost reductions have been realized
through headcount reductions and the consolidation of the operations and
employees at the Photomatrix facility in Culver City, California and
corporate headquarters in San Diego, California into a single facility
located in San Diego, California. At current revenue levels, these cost
reductions will not, in and of themselves, return the Company to
profitability. The Company is focused on building indirect channels of
distribution and increasing its revenue in order to return the Company to
profitable operations.
Management projects sales revenue from its scanner product lines will need to
increase and related gross margins will need to improve in the next fiscal
year (i.e., the year ending March 31, 1998) relative to the current year in
order for the Company to return to profitability. Management believes that
margin improvements can be attained through improvements in customer and
product mix, a general price increase that was effective April, 1997,
together with cost reduction programs related to product modularity, improved
material procurement methods and improvements in labor efficiency. There can
be no assurance the Company's scanner product lines will meet or surpass
sales and gross margins levels of the prior year.
RETAINING AVAILABILITY OF LINE OF CREDIT
The Company has not yet achieved a critical-mass level of revenue to reach a
financial break-even point. Assuming that the Company's sales forecasts can
be achieved and the line of credit is renewed in August, 1997, cash flow
forecasts suggest that the Company's existing line of credit will be adequate
to finance the Company's growth in the year ending March 31, 1998 ("FY
1998"). However, there can be no assurance that the Company will be
successful in either increasing revenue volumes during FY 1998 to reach
break-even levels of sales or in generating sufficient cash flow therefrom to
satisfy cash and working capital requirements during this turn-around time
period. Furthermore, as discussed below, if the Company cannot increase
revenue levels sufficiently to return to profitability, the Company could be
default on its bank covenants in the near future and possibly lose its line
of credit.
19
<PAGE>
LEXIA SYSTEMS, INC.
Relative to the discontinuation of Lexia Systems, Inc. ("Lexia"), the Company
has identified a potential buyer of Lexia. ICL must consent to such a
strategic transaction to assign the relevant licensing agreements with ICL to
new management. Due to the protracted nature of the negotiations and the
disagreements, there is no assurance that the Company and ICL will settle
their current disagreements.
The Company has accounts payable and unpaid rent due ICL and related entities
in the amount of $725,000. The Company is disputing the value received
related to certain of these liabilities and is attempting to settle with ICL
at a discount. There is no assurance that the Company will be successful in
resolving these disputed amounts. Further, there is no assurance that
existing Lexia customers will not assert claims against the Company or that
such action would be successful.
RELOCATION OF CULVER CITY OPERATION TO SAN DIEGO
In March, 1997, the Company completed its relocation of the Culver City
facility to San Diego. Although management attempted to retain all assembly,
test and other employees involved in the manufacturing operations of the
Company, most of the current employees in the Culver City facility did not
relocate to San Diego. The Company did, however, hire certain replacement
employees to train along side former Photomatrix operations personnel prior
to the relocation. Following the relocation, it is possible that
inefficiencies associated with the manufacturing learning curve could
negatively impact the Company's gross margin.
RETENTION OF KEY EMPLOYEES
The Company is highly dependent upon the principal members of its management,
engineering and field service staff and key individuals in all areas of the
Company. The Company has implemented certain programs, including the
re-pricing of outstanding stock options (see Note 11 to the Consolidated
Financial Statements), which it believes will help in retaining these key
employees. There can be no assurance that the Company will be able to retain
all key personnel or attract new qualified personnel on acceptable terms.
20
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedule filed herewith are set forth in the Index
to Consolidated Financial Statements and the Index to Consolidated Financial
Statement Schedule and are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
21
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
Mr. SUREN G. DUTIA, has been a Director and has served as the President and
Chief Executive Officer of the Company since January 1989. He was elected to
be the Chairman of the Board of the Company in September 1990. He also
serves as the chief executive officer of each of the Company's subsidiaries.
Prior to January 1989, Mr. Dutia was associated from 1981 to December 1988
with Dynatech Corporation, a diversified high-technology company
headquartered in Burlington, Massachusetts. From 1986 to 1988, Mr. Dutia was
a Division Manager and Vice President. Mr. Dutia was responsible for several
subsidiaries, including one operating subsidiary for which he acted as
President. He directed turn-around/divestiture activities for Dynatech and
handled investor relations. Mr. Dutia is 55 years of age.
Mr. PATRICK W. MOORE, has been a Director of the Company since January 1991.
Mr. Moore, who currently serves as the President of IPAC Manufacturing, Inc.,
located in Carlsbad, California, has significant business experience in both
the private and public sectors. Mr. Moore also serves as a Director on the
Boards of IPAC Express Assembly, Inc., MGS Interconnect, Inc., MGM Techrep,
Inc., Evergreen Investments, Inc., Universal Cable Products, Inc. and
CCS-West, LLC. Mr. Moore has served on the National Commission on Employment
Policy, committees of the National Academy of Science, and as the national
president of various trade organizations based in Washington, D.C. From 1981
to 1986, Mr. Moore served as President of the San Diego Private Industry
Council and as Executive Director of the San Diego Regional Employment and
Training Consortium. Mr. Moore is 48 years of age.
Mr. IRA H. SHARP, has been a Director of the Company since January 1990. Mr.
Sharp has been the owner, Chief Executive Officer and General Counsel of
Alderson Reporting Company, Inc., a court-reporting and litigation-support
services firm in Washington, D.C. since 1984. Mr. Sharp also served in the
same capacities for Alderson from 1977 until 1983. During the period of his
absence from Alderson, Mr. Sharp was a lawyer in private practice. Mr. Sharp
is 54 years of age.
Mr. JOHN F. STALEY, has been a Director of the Company since January 1989.
From 1972 to the present, Mr. Staley has been a partner in Staley, Jobson and
Wetherell, a law firm Mr. Staley founded, located in Pleasanton, California.
Mr. Staley was also the founder and a director of Lab Sales of California and
P.M. America, which were corporations involved in the manufacturing, sale and
distribution of blood-analyzing machines and which were sold to Dynatech
Corporation in 1982. From 1982 to the present, Mr. Staley has been a
co-founder of the Bank of Livermore, California. Mr. Staley is 53 years of
age.
22
<PAGE>
EXECUTIVE OFFICERS
Set forth below is certain information about the executive officers of
Photomatrix and its subsidiaries as of June 1, 1997.
MR. SUREN G. DUTIA has served as the President and Chief Executive Officer of
the Company since January 1989.
MR. ROY L. GAYHART joined Photomatrix as Chief Financial Officer and
Secretary on April 18, 1997. From 1994 to 1997, Mr. Gayhart was President of
Sutherland-Gayhart, Inc., a private investment company which specialized in
small start-up and bridge financing investments. From 1992 to 1994 he served
as Chief Financial Officer, and later Vice President of International
Operations for Lottery Enterprises, Inc. Mr. Gayhart has also served as
Chief Financial Officer and Chief Operating Officer for the Shorebreak
Division of South Carolina Tees, Inc. (from 1991 to 1992), Jacks Incorporated
(from 1988 to 1991) and Nu-Ear Electronics, Inc. (from 1984 to 1988). Mr.
Gayhart is a CPA and was an audit manager with Arthur Andersen LLP. Mr.
Gayhart is 47 years of age.
MR. CHARLES H. FRADY has served as Controller and Treasurer since January,
1997. Mr. Frady joined Photomatrix in 1995 as Division Controller. From 1993
to 1995, he served as Senior Cost Accountant for Eaton Leonard Corporation.
From 1990 to 1993, Mr. Frady was Accounting Manager for PacOrd, Inc. From
1987 to 1990, he was Controller for Bell Industries, Inc. Mr. Frady is 55
years of age.
Set forth below is certain information about significant employees of the
Company as of June 1, 1997.
MR. DEL GLOVER joined Photomatrix in February 1996 as Vice President of Sales
and Marketing. For the eight years prior to that, Mr. Glover was Director,
Peripheral Products Division of Ricoh Corporation.
MR. WILLIAM SHEPPARD joined Photomatrix in July 1985 as Vice President of
Engineering. Prior to that, Mr. Sheppard served in various engineering
management positions with Planning Research Corporation, the U.S. Naval Ocean
Systems Center and as president of Saguaro Systems Corporation, a consulting
firm.
MR. ROGER BURTON joined Photomatrix in 1986 as the Managing Director of
Photomatrix, Ltd., its wholly owned United Kingdom-based subsidiary. Prior to
joining Photomatrix, Mr. Burton was Co-Director of Rosstech Designs, Ltd.,
specializing in electro-mechanical design consulting and prototype
manufacturing.
23
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table shows, for the most recent three fiscal years, the cash
compensation paid by the Company, as well as all other compensation paid or
accrued for those years to the Chief Executive Officer as of March 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term
Name and Fiscal ---------------------------- Compensation Stock
Principal Position Year Salary Bonus Other(1) Option Shares
- - - ------------------ ------ ------ ----- -------- --------------------
<S> <C> <C> <C> <C> <C>
Suren G. Dutia 1997 $154,400 $30,000 $15,000 --
President and Chief 1996 $165,000 -- $13,900 191,667
Executive Officer 1995 $163,300 $10,000 $15,200 100,000
</TABLE>
(1) Includes Company matching contributions to the Photomatrix Savings and
Investment Plan ($4,800, $4,400, and $4,300) and supplemental life and
medical premiums ($10,200, $9,500, and $10,900) for 1997, 1996 and 1995,
respectively.
Employment Agreements. Mr. Dutia is employed under an employment agreement
that expires in June 1998. The Cash Compensation, Savings and Investment
Plan, Supplemental Life Insurance and Medical Premium plans provided to Mr.
Dutia, as described above, were provided in accordance with that employment
contract. If Mr. Dutia's employment is terminated by the Company without
cause, then he will be entitled to receive his base salary and health
insurance benefits for the remainder of the term.
Officers Severance Policy. In 1988, the Company's Board of Directors adopted
an Officers Severance Policy that was modified in November 1990 and February
1997. Under the policy, Mr. Dutia is to receive twelve weeks' compensation
upon termination, in addition to amounts due him under his employment
contract, and Mr. Gayhart and Mr. Frady are to receive eight weeks'
compensation upon termination of employment by the Company.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of June 18, 1997, Lorne House Trust was the only shareholder known by the
Company to be the beneficial owner of more than five percent of its
outstanding Common Stock. As of that date, Lorne House Trust was the
beneficial owner of 1,054,002 shares, representing 20.74 percent of the
Company's outstanding stock. These shares are
24
<PAGE>
beneficially owned by Lorne House Trust as trustee of the Bulldog trust and
the Pitkin trust, irrevocable trusts established by Sam Wyly and Charles J.
Wyly, Jr., respectively. The record holders are Tensas, Ltd. and Roaring
Creek, Ltd., which are corporations wholly owned by such trusts. Sam Wyly
and Charles J. Wyly, Jr. disclaim beneficial ownership of these shares.
25
<PAGE>
The following table sets forth certain information regarding the ownership of
Photomatrix common stock by Directors and Executive Officers:
Percent of Shares of
Shares of Common Stock Common Stock
Name of Beneficial Beneficially Owned Outstanding
Owner or Group as of June 10, 1997(1) as of June 10, 1997(1)
- - - -------------- ---------------------- ----------------------
Suren G. Dutia
President, CEO and
Chairman of the Board(2) 278,033 5.46%
Patrick W. Moore, Director 41,667 *
Roy Gayhart
Chief Financial Officer,
Secretary 0 *
Charles H. Frady
Controller, Treasurer 1,667 *
Ira H. Sharp, Director 43,333 *
John F. Staley, Director 75,333 1.48%
All directors and executive
officers as a group(2) 440,033 8.35%
(1) Includes and reflects the ownership by the named director or officer of
shares of Common Stock subject to options exercisable within 60 days of June 18,
1997.
(2) Includes options to purchase 100,000 shares.
* less than 1%
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the acquisition of Photomatrix, Photomatrix restructured
outstanding indebtedness to members and affiliates of the Wyly family into
non-negotiable seven-year term notes bearing interest at the rate of eight
percent per annum. The total principal amount of the notes payable to members
of the Wyly family and their affiliates as of March 31, 1997 is $527,000.
26
<PAGE>
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULE AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS, SCHEDULE AND EXHIBITS
The following consolidated financial statements are filed herewith:
Consolidated Balance Sheets as of March 31, 1997 and 1996
Consolidated Statements of Operations for the years ended March 31, 1997,
1996 and 1995
Consolidated Statements of Shareholders' Equity for the years ended March
31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended March 31, 1997,
1996 and 1995.
Notes to Consolidated Financial Statements
The schedule filed herewith is set forth in the Index to Financial Statement
Schedule. Other financial statement schedules, for which provision is made
in the applicable accounting regulations of the Securities and Exchange
Commission, are not required under the related instructions and, therefore,
have been omitted.
REPORTS ON FORM 8-K.
The Company filed no reports on Form 8-K during the quarter ended March
31, 1997.
27
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and
Shareholders of Photomatrix, Inc.
We have audited the accompanying consolidated balance sheets of Photomatrix,
Inc. and subsidiaries as of March 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for each of the years in the three-year period ended March 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Photomatrix, Inc.and subsidiaries as of March 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended March 31, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
San Diego, California
May 29, 1997, except for Note 11, as to
which the date is June 6, 1997
28
<PAGE>
PHOTOMATRIX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 812,000 $ 255,000
Accounts receivable, net of allowance
of $111,000 and $76,000, respectively 1,602,000 1,904,000
Inventories 2,520,000 3,093,000
Prepaid expenses and other 149,000 156,000
Net assets of discontinued operation (Note 2) -- 3,084,000
---------- -----------
Total current assets 5,083,000 8,492,000
---------- -----------
Property and equipment, at cost 1,986,000 2,310,000
Less accumulated depreciation and amortization (640,000) (831,000)
---------- -----------
Net property and equipment 1,346,000 1,479,000
---------- -----------
Intangible assets, net of accumulated
amortization of $1,512,000 and $970,000
(Note 1) 2,053,000 2,433,000
Other assets 83,000 177,000
----------- -----------
$ 8,565,000 $12,581,000
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 844,000 $ 1,145,000
Accrued liabilities and other (Note 8) 590,000 326,000
Customer deposits (Note 8) 613,000 836,000
Line of credit (Note 6) -- 170,000
Current maturities of term note (Note 6) -- 250,000
Current maturities of notes payable to
related parties (Note 5) 152,000 141,000
Net liabilities of discontinued operation
(Note 2) 452,000 --
----------- -----------
Total current liabilities 2,651,000 2,868,000
Notes payable to related parties (Note 5) 375,000 527,000
Other non-current liabilities (Note 6) 40,000 621,000
Commitments and contingencies (Note 10)
Shareholders' equity (Note 4):
Preferred stock, 3,173,000 shares
authorized - -
Common stock, no par value; 30 million
shares authorized, 5,083,000 and 5,715,000
issued and outstanding 19,351,000 20,093,000
Accumulated deficit (13,998,000) (11,591,000)
Cumulative translation adjustment 146,000 63,000
----------- -----------
Total shareholders' equity 5,499,000 8,565,000
----------- -----------
$ 8,565,000 $12,581,000
----------- -----------
----------- -----------
The accompanying notes are an integral part of these consolidated balance sheets.
</TABLE>
29
<PAGE>
PHOTOMATRIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -----------
<S> <C> <C> <C>
Revenue:
Equipment and software $ 6,730,000 $ 6,979,000 $ 8,132,000
Services 1,964,000 2,113,000 1,580,000
------------ ------------ ------------
Total revenue 8,694,000 9,092,000 9,712,000
------------ ------------ ------------
Cost of revenue:
Equipment and software 5,180,000 4,881,000 5,417,000
Services 1,220,000 1,278,000 1,238,000
------------ ------------ ------------
Total cost of revenue 6,400,000 6,159,000 6,655,000
------------ ------------ ------------
Gross profit 2,294,000 2,933,000 3,057,000
------------ ------------ ------------
Operating costs and expenses:
Selling, general and administrative 3,311,000 3,592,000 3,256,000
Research and development 807,000 485,000 429,000
Facility consolidation and relocation 520,000 - -
------------ ------------ ------------
Total operating costs and expenses 4,638,000 4,077,000 3,685,000
------------ ------------ ------------
Operating loss (2,344,000) (1,144,000) (628,000)
------------ ------------ ------------
Other income (expense), net:
Interest expense (Notes 5 and 6) (92,000) (228,000) (122,000)
Other, net 250,000 11,000 (19,000)
------------ ------------ ------------
Net other income (expense) 158,000 (217,000) (141,000)
------------ ------------ ------------
Loss from continuing operations
before income taxes (2,186,000) (1,361,000) (769,000)
Provision for income taxes (Note 7) 104,000 7,000 22,000
------------ ------------ ------------
Loss from continuing operations (2,290,000) (1,368,000) (791,000)
------------ ------------ ------------
Income (loss) from discontinued operations (Note 2) (251,000) (336,000) 658,000
Gain on sale of discontinued operation (Note 2) 134,000 - -
------------ ------------ ------------
Net Loss $ (2,407,000) $ (1,704,000) $ (133,000)
------------ ------------ ------------
------------ ------------ ------------
Net income (loss) per share:
Continuing operations $ (0.44) $ (0.24) $ (0.13)
------------ ------------ ------------
------------ ------------ ------------
Discontinued operations $ (0.02) $ (0.06) $ 0.11
------------ ------------ ------------
------------ ------------ ------------
Net loss $ (0.46) $ (0.30) $ (0.02)
------------ ------------ ------------
------------ ------------ ------------
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
30
<PAGE>
PHOTOMATRIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Common Stock Cumulative
---------------------- Accumulated Translation
Shares Amount Deficit Adjustment Total
--------- ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1994 5,683,000 $20,080,000 $(9,754,000) $(58,000) $10,268,000
Exercise of warrants and options
(Note 4) 36,000 46,000 46,000
Other 6,000 62,000 68,000
Net loss (133,000) (133,000)
--------- ----------- ------------ ---------- -----------
Balance, March 31, 1995 5,719,000 20,132,000 (9,887,000) 4,000 10,249,000
Other (4,000) (39,000) 59,000 20,000
Net loss (1,704,000) (1,704,000)
--------- ----------- ------------ ---------- -----------
Balance, March 31, 1996 5,715,000 20,093,000 (11,591,000) 63,000 8,565,000
Common stock cancelled to settle
disagreements with ICL (Note 2) (666,000) (748,000) (748,000)
Exercise of options (Note 4) 34,000 6,000 6,000
Other 83,000 83,000
Net loss (2,407,000) (2,407,000)
--------- ----------- ------------ ---------- -----------
Balance, March 31, 1997 5,083,000 $19,351,000 $(13,998,000) $ 146,000 $ 5,499,000
--------- ----------- ------------ ---------- -----------
--------- ----------- ------------ ---------- -----------
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
31
<PAGE>
PHOTOMATRIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -----------
<S> <C> <C> <C>
Operations:
Loss from continuing operations $ (2,290,000) $ (1,368,000) $ (791,000)
Adjustments:
Depreciation and amortization 903,000 809,000 693,000
Loss on disposal of tangible assets 27,000 - -
Changes in assets and liabilities:
Accounts receivable 302,000 179,000 (617,000)
Inventories 573,000 (848,000) 87,000
Prepaid expenses and other 7,000 58,000 (92,000)
Accounts payable (301,000) 412,000 (24,000)
Accrued liabilities and other 264,000 (96,000) (79,000)
Customer deposits (223,000) 343,000 -
------------- ------------- -----------
Cash used in continuing operations (738,000) (511,000) (823,000)
Cash provided by discontinued operations 508,000 971,000 940,000
------------- ------------- -----------
Cash provided (used in) by operations (230,000) 460,000 117,000
------------- ------------- -----------
Investing activities:
Proceeds from sale of discontinued operation 2,000,000 - -
Purchase of property and equipment (267,000) (276,000) (693,000)
Product development additions (162,000) (533,000) (384,000)
Decrease (increase) in other assets 94,000 (78,000) 5,000
------------- ------------- -----------
Cash provided by (used in) investing activities 1,665,000 (887,000) (1,072,000)
------------- ------------- -----------
Financing activities:
Issuance of common stock 6,000 26,000 52,000
(Repayment of) proceeds from credit facility, net (Note 6) (826,000) 524,000 500,000
Repayment of notes payable to related parties (Note 5) (141,000) (108,000) -
Other - (8,000) (20,000)
------------- ------------- -----------
Cash provided by (used in) financing activities (961,000) 434,000 532,000
------------- ------------- -----------
Effects of exchange rates on cash 83,000 59,000 62,000
------------- ------------- -----------
Increase (decrease) in cash and cash equivalents 557,000 66,000 (361,000)
Cash and cash equivalents, beginning of year 255,000 189,000 550,000
------------- ------------- -----------
Cash and cash equivalents, end of year $ 812,000 $ 255,000 $ 189,000
------------- ------------- -----------
------------- ------------- -----------
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
32
<PAGE>
PHOTOMATRIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of
Photomatrix, Inc. and its wholly-owned subsidiaries (the consolidated entity
referred to as the "Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation.
BUSINESS
The Company primarily develops, manufactures, sells and services
high-performance document and aperture card scanners to legal, financial,
government and commercial enterprises.
CASH EQUIVALENTS
Cash equivalents include all highly liquid investments with an original
maturity of three months or less.
INTANGIBLE ASSETS (INCLUDING SOFTWARE DEVELOPMENT COSTS)
Intangible assets are comprised of software development costs and costs
in excess of net assets acquired (goodwill).
Software development costs incurred to establish technological feasibility
are expensed when incurred. Subsequent costs are capitalized and amortized
beginning when the related product is available for general release to
customers. The amortization recorded for such products each year equals the
greater of (i) the amount computed using the ratio that current revenue bear
to total current and anticipated revenue, or (ii) the amount computed using
the straight-line method over the remaining useful life of the product not
to exceed a total life of five years. Unamortized computer software costs,
included in intangible assets, were $647,000 and $816,000 as of March 31,
1997 and 1996, respectively. Amortization expense for capitalized software
costs was $279,000, $139,000 and $55,000 for fiscal years 1997, 1996 and 1995,
respectively.
The goodwill, amounting to $936,000 as of March 31, 1997, is related to the
acquired Photomatrix technology and is being amortized over a period of ten
years.
Management periodically assesses the realizability of all intangible assets,
and records impairment allowances when appropriate. For the year ended
March 31, 1997, the Company recorded such an impairment allowance of
$81,000 related to a discontinued product line. No other such allowances
were recorded in the years ended March 31, 1996 and 1995.
FOREIGN CURRENCY TRANSLATION
The accounts of the Company's foreign subsidiary are measured using local
currency as the functional currency; assets and liabilities are translated
into U.S. dollars at period-end exchange rates, and income and expense
accounts are translated at average monthly exchange rates. Net exchange
gains or losses resulting from such translation are excluded from operations
and accumulated in a separate component of shareholders' equity ("cumulative
translation adjustment"). Gains and losses from foreign currency
33
<PAGE>
transactions are not significant and are included in selling, general and
administrative expenses in the consolidated statements of operations.
INVENTORIES
Inventories include material, labor and overhead valued at the lower of cost
(first-in, first-out) or market, and consist of the following as of March 31,
1997 and 1996:
1997 1996
------------ ------------
Raw materials $ 1,715,000 $ 2,109,000
Work in process 375,000 535,000
Finished goods 430,000 449,000
------------ ------------
$ 2,520,000 $ 3,093,000
------------ ------------
------------ ------------
REVENUE RECOGNITION
Equipment and software sale revenue are recognized upon transfer of the risk
of ownership to the customer which typically occurs upon shipment from either
the Company's or its agent's distribution location. The Company has no
significant obligations related to software sales subsequent to delivery and
subsequent to management's assessment that the collectibility of the related
receivable is probable. Service revenue is recognized over the related
contract period for maintenance contracts, or as the services are rendered.
PROPERTY AND EQUIPMENT
Substantially all property and equipment is demonstration equipment,
manufacturing equipment and personal computers used in the Company's
assembly, product development, sales and administrative activities. These
items are stated at cost. Depreciation is provided over
the estimated useful lives, typically three to five years, using the
straight-line method.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF,
on April 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured
by comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount of fair
value less costs to sell. Adoption of this Statement did not have a material
impact on the Company's financial position, results of operations, or
liquidity.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences
34
<PAGE>
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are computed using
enacted tax rates expected to apply to taxable income in the years in which
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities from a change in tax rates is recognized
in income in the period that includes the enactment date.
NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share has been computed based on the weighted
average number of common shares and common equivalent shares (the dilutive
effect of stock options and warrants) outstanding during the year. The
weighted average number of common shares and common equivalent shares used in
computing income (loss) per share is 5,219,000, 5,742,000, and 5,959,000 in
fiscal years 1997, 1996 and 1995, respectively. Primary and fully diluted
income (loss) per share are the same for all periods presented.
STOCK OPTIONS
Prior to April 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. As such, compensation expense would be recorded on the date
of grant only if the current market price of the underlying stock exceeded
the exercise price. On April 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation", which permits entities to
recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also
allows entities to continue to apply the provisions of APB Opinion No. 25 and
provide pro forma net loss and pro forma loss per share disclosures for
employee stock option grants made in fiscal 1996 and future years as if the
fair-value based method defined in SFAS No. 123 had been applied. The Company
has elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.
SIGNIFICANT CUSTOMERS
One customer (Bell & Howell) accounted for 17 percent of the Company's total
revenue for fiscal year 1997. No other customer accounted for more than 10
percent of the Company's total revenue during the years presented.
PRODUCT WARRANTY COSTS
The Company provides product warranties and software support services to
customers as part of its standard sales agreement. The warranties cover the
service costs associated with hardware and software defects and range in term
from 90 days to one year from date of sale.
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid approximates the amount expensed for the year ended March 31,
1997. However, in the year ended March 31, 1997, income tax expense of
$104,000 exceeds income tax payments of $5,000 due to the increase in the
valuation allowance related to the deferred tax asset during the year. Refer
to Note 7 below for a detailed discussion of income taxes.
35
<PAGE>
Interest and income taxes paid approximate the amounts expensed in the years
ended March 31, 1996 and 1995.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments," requires that the fair values be disclosed
for the Company's financial instruments. The carrying amount of cash and
cash equivalents, accounts receivable, accounts payable, accrued liabilities
and other, and customer deposits approximate their fair values because of the
short-term nature of these instruments. The carrying amounts reported for
the line of credit, notes payable to related parties, and other non-current
liabilities approximate fair value because the underlying instruments bear
interest at rates that are comparable to rates available to the Company for
similar debt instruments.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenue and expenses during the
reporting period to prepare these consolidated financial statements in
conformity with generally accepted accounting principles. Actual results
could differ from those estimates.
RECLASSIFICATIONS
Certain prior-year amounts have been reclassified to conform to the
current-year presentation.
2. DIVESTITURE AND DISCONTINUATION
XSCRIBE LEGAL SYSTEMS, INC.
As more fully described in the Company's Form 8-K dated July 31, 1996 (filed
August 13, 1996), on July 31, 1996, the Company sold substantially all of the
assets and the business of its wholly owned subsidiary, Xscribe Legal
Systems, Inc. ("Legal Systems"), to Stenograph Corporation ("Stenograph") in
exchange for $2 million cash paid at closing, a $180,000 note delivered at
closing, and the assumption by Stenograph of substantially all of the current
liabilities ($844,000) of Legal Systems (excluding certain contingent
liabilities). The contingent liabilities retained by the Company consist
primarily of all income, property, sales and employment tax contingencies of
Legal Systems, if any, and all products liability contingencies of Legal
Systems for product sold prior to July 31, 1996. The Company also agreed to
indemnify Stenograph, subject to certain limitations, upon the occurrence of
certain events and with respect to retained contingent liabilities.
The Company recognized a gain on the sale of Legal Systems of $134,000. The
discontinued business accounted for 33% and 35% of the Company's revenue for
the
36
<PAGE>
years ended March 31, 1996 and 1995, respectively. Current- and prior-period
balances have been reclassified to segregate Legal Systems as a discontinued
operation.
LEXIA SYSTEMS, INC.
In December 1996, the Board of Directors of the Company approved a plan to
discontinue the operations of Lexia Systems, Inc. ("Lexia"). In recent
periods, Lexia's operating results have turned from profits to losses, and
management believes these operational reverses to be permanent in nature.
The Company is currently negotiating to sell this operation. Lexia's
operational results have been reclassified as a discontinued operation for
the respective years presented herein. Lexia's balance sheets have similarly
been reclassified as net assets (liabilities) of discontinued operations as
of March 31, 1997 and 1996, respectively.
Previously, the Company had certain disagreements with the seller of the
assets and operations which comprised Lexia. Under the terms of a settlement
reached in August, 1996, the relinquished certain rights, including its
exclusive reselling rights, in exchange for cancellation of 666,000 shares
of the Company's common stock previously owned by the seller.
OTHER DISCONTINUED OPERATIONS
In fiscal year 1994, the Company discontinued its microfilming service
bureau, and in fiscal year 1996, the Company discontinued its imaging service
bureau. The accompanying consolidated financial statements reflect this
business as discontinued operations. Revenue from this discontinued business
was $51,000, and $177,000 in fiscal years 1996 and 1995, respectively.
Net liabilities of discontinued operations as of March 31, 1997 totaled
$3,084,000 and was primarily comprised of accounts receivable, inventories,
property and equipment, accounts payable, accrued liabilities and customer
deposits.
3. SEGMENT INFORMATION
Photomatrix operates predominantly in a single industry as a manufacturer of
document and aperture card scanners. The Company's operations are located
primarily in the United States and the United Kingdom. Geographical segment
information follows for 1997, 1996, and 1995:
37
<PAGE>
<TABLE>
<CAPTION>
GEOGRAPHIC AREAS 1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
REVENUE:
United States:
Domestic and export customers $ 6,797,000 $ 6,917,000 $ 7,960,000
Inter-area 923,000 1,399,000 646,000
------------ ------------ -----------
Total United States 7,720,000 8,316,000 8,606,000
Foreign 1,897,000 2,175,000 1,752,000
Eliminations (923,000) (1,399,000) (646,000)
------------ ------------ -----------
Total $ 8,694,000 $ 9,092,000 $ 9,712,000
------------ ------------ -----------
------------ ------------ -----------
OPERATING INCOME (LOSS):
United States $ (2,006,000) $ (978,000) $ (860,000)
Foreign (348,000) (97,000) 232,000
Eliminations 10,000 (69,000) --
------------ ------------ -----------
Total $ (2,344,000) $ (1,144,000) $ (628,000)
------------ ------------ -----------
------------ ------------ -----------
IDENTIFIABLE ASSETS:
United States $ 7,189,000 $ 10,619,000 $ 12,147,000
Foreign 1,366,000 2,031,000 1,075,000
Eliminations 10,000 (69,000) (20,000)
------------ ------------ -----------
Total $ 8,565,000 $ 12,581,000 $ 13,202,000
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
4. SHAREHOLDERS' EQUITY
The Company has two existing common stock option plans under which an
aggregate of 699,999 shares of the Company's common stock may be issued
through qualified incentive stock options or non-qualified stock options.
The Company has a third plan which expired in fiscal 1994 with approximately
100,000 options still outstanding. Under the terms of the existing plans,
incentive stock options are granted at an exercise price which is not less
than 100 percent of the fair market value of the Company's common stock at
the date of grant; non-qualified options are granted at not less than 85
percent of the fair value at the date of grant. Options are exercisable
within the period and in the increments as determined by the Company's Board
of Directors or plan administration committee appointed by the Board of
Directors.
At March 31, 1997, there were 21,835 additional shares available for grant
under the Plans. The per share weighted-average fair value of stock options
granted during 1997 and 1996 was $0.62 and $0.63 respectively, on the date of
grant using the Black Scholes option-pricing model with the following
weighted-average assumptions: 1997 - expected dividend yield 0.0%,
volatility of 75.8%, risk-free interest rate of 6.0%, and an expected life of
5 years; 1996 - expected dividend yield 0.0%, volatility of 75.8%, risk-free
interest rate of 6.0%, and an expected life of 5 years.
The Company applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, no compensation cost has been recognized for its stock options
in the financial statements. Had the Company determined compensation cost
based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net loss would have been increased to the pro forma
amounts indicated below:
38
<PAGE>
1997 1996
----------- -----------
Net loss, as reported $(2,407,000) $(1,704,000)
Pro forma $(2,578,000) $(1,771,000)
Loss per share, as reported $(0.46) $(0.30)
Pro forma loss per share $(0.49) $(0.31)
Pro forma net loss reflects only options granted in 1997 and 1996. Therefore,
the full impact of calculating compensation cost for stock options under SFAS
No. 123 is not reflected in the pro forma net loss amounts presented above
because compensation cost is reflected over the options' vesting period of 2-3
years and compensation cost for options granted prior to April 1, 1995 is not
considered.
Additional information with respect to the options under the plans follows (See
Note 11):
Shares Price per share Total
-------- --------------- ----------
Options outstanding, March 31, 1994 551,500 $0.18 - $3.94 $ 840,400
Options granted 339,000 $1.69 - $4.13 1,000,100
Options exercised (30,833) $0.38 - $2.16 (44,000)
Options canceled (142,800) $2.16 - $4.12 (507,900)
-------- --------------- ---------
Options outstanding, March 31, 1995 716,867 $0.18 - $4.13 $1,288,600
Options granted 760,665 $ .69 - $1.25 633,812
Options exercised -- -- --
Options canceled (649,034) $0.88 - $4.13 (1,260,465)
-------- --------------- ----------
Options outstanding, March 31, 1996 828,498 $0.18 - $3.56 $ 661,947
Options granted 195,000 $0.44 - $0.94 105,000
Options exercised (33,333) $0.18 (6,000)
Options canceled (242,833) $0.38 - $3.56 (227,839)
-------- --------------- ----------
Options outstanding, March 31, 1997 747,332 $0.18 - $1.25 $ 533,108
-------- --------------- ----------
-------- --------------- ----------
Options exercisable, March 31, 1997 356,166 $0.18 - $1.25 $ 237,869
-------- --------------- ----------
-------- --------------- ----------
In June 1995, the Company canceled employee stock options to acquire 41,667
shares at an exercise price of $4.13 per share and granted new replacement
options to acquire 41,667 shares at an exercise price of $1.69 per share. In
November 1995, the Company canceled stock options to acquire 628,999 shares
(including options to acquire 85,000 shares held outside the Plans described
above) at exercise prices ranging from $1.31 to $2.91 per share and granted
new replacement options to acquire 628,999 shares at an exercise price of
$0.88 per share.
In addition to the options described above, the Company had outstanding
warrants and other options to acquire common shares as follows:
Shares Exercise Price Expiration
------ -------------- --------------
33,333 $0.42 December, 2003
75,000 $1.00 August, 2000
Subsequent to March 31, 1997, the Company canceled the warrant to purchase
75,000 shares at an exercise price of $1.00 per share (listed above) and
re-issued a separate warrant to purchase 75,000 shares at an exercise price
of $0.44 per share with an expiration date of April, 2002.
The Company is authorized to issue 3,173,275 shares of its preferred stock.
No preferred
39
<PAGE>
shares were outstanding in the three years ended March 31, 1997.
5. RELATED PARTY TRANSACTIONS
In connection with the acquisition of Photomatrix in the year ended March 31,
1994, $777,000 of amounts due to affiliates of Photomatrix's then-majority
shareholders (presently shareholders of the Company) were converted into
seven year notes payable which mature in April 2000. These notes bear
interest at a rate of 8% per annum. Interest-only payments were due monthly
during the first two years. Interest and principal are due in equal monthly
installments (beginning in May 1995) for years three through seven. Interest
expense related to these notes was $48,000, $59,000 and $62,000 in the years
ended March 31, 1997, 1996 and 1995, respectively. As of March 31, 1997
$527,000 was outstanding under these notes.
6. LINE OF CREDIT
The Company has a line of credit with a bank to borrow a total of $750,000 of
which zero was outstanding at March 31, 1997. This line of credit accrues
interest on outstanding borrowings at prime plus 2-1/2% per annum. Total
borrowings under the line of credit are limited to the lesser of $750,000 or
70% of eligible accounts receivable (as defined). Total borrowings are
limited to $750,000 as of March 31, 1997. The Company is required to 1)
maintain a minimum tangible net worth of $3,050,000 through April 29, 1997,
and a minimum tangible net worth of $2,800,000 thereafter, 2) maintain a
ratio of total liabilities to tangible net worth of not greater than 1.1 to
1.0, 3) maintain working capital of $2,000,000 through April 29, 1997 and
$1,750,000 thereafter, and 4) maintain a current ratio of 1.7 to 1.0. The
line of credit expires in August 1997 and is subject to a 1% non-utilization
fee charged on the average daily unused portion of the line, payable
quarterly in arrears. Outstanding borrowings under this line of credit are
collateralized by all of the Company's assets.
Line of credit activity for 1997, 1996 and 1995 was as follows:
1997 1996 1995
-------- ---------- --------
Interest expense $ 7,000 $ 46,000 $ 49,000
Average interest rate 7.4% 8.5% 9.1%
Average month-end balance outstanding $ 99,000 $ 536,000 $520,000
Maximum month-end balance outstanding $460,000 $1,170,000 $940,000
As part of the credit facility which the Company maintained during a portion
of the years ended March 31, 1997 and 1996, the Company also had a term loan
with outstanding balances of zero and $854,000 as of March 31, 1997 and 1996,
respectively. Interest on this term loan accrued at a rate of prime plus
1-1/2% per annum. Interest expense on the term note during the years ended
March 31, 1997, 1996 and 1995 was $23,000, $61,000 and zero, respectively.
7. INCOME TAXES
The components of loss before income taxes are as follows:
40
<PAGE>
1997 1996 1995
----------- ------------ ----------
U.S. continuing operations $(1,820,000) $ (1,258,000) $ (812,000)
U.S. discontinued operations (117,000) (336,000) 658,000
Foreign (366,000) (103,000) 43,000
----------- ------------ ----------
$(2,303,000) $ (1,697,000) $ (111,000)
----------- ------------ ----------
----------- ------------ ----------
The provision for taxes consists of the following for fiscal years 1997, 1996
and 1995:
1997 1996 1995
----------- ------------ ----------
Current:
Federal $ -- $ -- $ 6,000
State 1,000 7,000 16,000
Foreign -- -- --
----------- ------------ ----------
1,000 7,000 22,000
Deferred 103,000 -- --
----------- ------------ ----------
$ 104,000 $ 7,000 $ 22,000
----------- ------------ ----------
----------- ------------ ----------
A reconciliation from the Federal income tax provision computed at the
statutory rate to the actual provision for taxes on loss from continuing
operations for fiscal years 1997, 1996 and 1995 is as follows:
1997 1996 1995
----------- ------------ ----------
Tax at statutory Federal tax rate $ (744,000) $ (463,000) $ (261,000)
State income taxes (net of
Federal benefit) -- 5,000 10,000
Federal impact on continuing
operations from change in
valuation allowance 848,000 465,000 223,000
Other -- -- 50,000
----------- ------------ ----------
$ 104,000 $ 7,000 $ 22,000
----------- ------------ ----------
----------- ------------ ----------
Deferred tax assets and liabilities result from differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities. The significant components of the deferred income tax assets
and deferred income tax liabilities as of March 31, 1997 and 1996 are as
follows:
41
<PAGE>
1997 1996
------------ ------------
Deferred tax assets:
Tax operating loss carryforward $ 4,624,000 $ 3,944,000
Inventory and other reserves 256,000 559,000
Tax basis of intangible assets
greater than book basis 193,000 174,000
Other 145,000 211,000
------------ ------------
5,218,000 4,888,000
Less valuation allowance (4,488,000) (3,793,000)
------------ ------------
730,000 1,095,000
------------ ------------
Deferred tax liabilities:
Book basis of intangible assets
greater than tax basis (461,000) (537,000)
Software capitalization (239,000) (414,000)
Other (30,000) (41,000)
------------ ------------
(730,000) (992,000)
------------ ------------
Net deferred tax asset (included
in other assets) $ -- $ 103,000
------------ ------------
------------ ------------
The Company has recorded net tax assets in an amount approximately equal to net
tax liabilities because management believes that these items will offset in
future periods, considering statutory carryforward periods and limitations.
Subject to future reassessment of future income potential, the Company has fully
reserved for all deferred tax assets in excess of deferred tax liabilities.
As of March 31, 1997, the Company has available for Federal income tax purposes
a net operating loss ("NOL") carryforward of approximately $13,600,000 which can
offset future consolidated taxable income and which begins to expire in fiscal
year 2000. The utilization of about $7,900,000 of this NOL is subject to an
annual limitation of about $800,000. The remainder of $5,700,000 is currently
available.
8. ACCRUED LIABILITIES AND CUSTOMER DEPOSITS
Accrued liabilities and other consist of the following as of March 31, 1997 and
1996:
1997 1996
------------ ------------
Compensation and related items $ 210,000 $ 235,000
Other 380,000 91,000
------------ ------------
$ 590,000 $ 326,000
------------ ------------
------------ ------------
In November 1995, the Company settled certain disagreements with Eastman
Kodak whereby Kodak discontinued its purchases of Photomatrix COM duplicators
and guaranteed certain future annual levels of spare-parts purchases. In
each calendar year 1996 and 1995, Kodak did not meet its annual obligations
and, as a result, made a one-time payment to the Company in fiscal year 1997
of $250,000, which has been classified as other income in these consolidated
financial statements. In December 1996 and 1995,
42
<PAGE>
Kodak advanced to the Company $500,000 and $608,000, respectively (the entire
respective calendar-year shortfall) as a prepayment against future
spare-parts purchases. Of the total prepayments made in the years ended
March 31, 1997 and 1996, $273,000 and $309,000 remained as of March 31, 1997
and 1996, respectively, and are included in customer deposits in the
accompanying consolidated balance sheets.
9. EMPLOYEE BENEFIT PLANS
The Company maintains defined contribution savings and investment plans for
the benefit of all full-time employees. The Company's expense related to the
plans was $39,000, $54,000 and $28,000 in 1997, 1996 and 1995, respectively.
The Company has no significant post-employment or post-retirement obligations
that would require accrual under SFAS 106 or 112.
10. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company's operations are conducted in facilities which are occupied under
operating leases. The leases require payment of taxes, maintenance expenses
and insurance. Rental expense (net of rents under sublease of $187,000,
$150,000 and $93,000 in 1997, 1996 and 1995, respectively) incurred under
operating leases (including leases which have expired) was $246,000, $232,000
and $208,000, in 1997, 1996 and 1995, respectively.
Future minimum lease commitments (net of minimum rents receivable under
sublease of $25,000 in 1998 ) as of March 31, 1997, are as follows:
1998 $ 245,000
1999 281,000
2000 288,000
2001 295,000
2002 288,000
2003 and thereafter 571,000
-----------
$ 1,968,000
-----------
-----------
LEGAL PROCEEDINGS
The Company has been a defendant in three product liability cases pending in
the United States District Court, Eastern District of New York (BERNHART V.
XSCRIBE ET AL. (92 Civ. 3931), GALFIN V. XSCRIBE (92 Civ. 2582), and
HAGIPADELIS V. XSCRIBE (95 Civ. 1977)). Xscribe has tendered these claims to
its insurance carriers, St. Paul Fire and Marine Insurance, and Federal
Insurance Company, and St. Paul has assumed the Company's defense without
reservation of right and Federal has agreed to share defense costs, subject
to a reservation of rights. The insurance carriers have prevailed in all
judgements rendered to date. It may take several years before this litigation
is ultimately resolved. The Company believes that there is no merit to any
of the three pending cases and further believes that if any liability results
from these claims, the liability (excluding punitive
43
<PAGE>
damages, if any) will be covered by its insurance policies. However,
depending upon the outcome of these cases, the Company may be served in the
future with additional claims or be subject to liability in excess of
insurance policy limits.
The Company is not aware of any other legal proceedings to which it is a party.
11. SUBSEQUENT EVENT
On June 6, 1997, the Company's Board of Directors voted to adjust the
exercise price of all outstanding stock options of all current directors and
employees under its two stock option plans to $0.53 per share (equal to the
fair market value on the date of grant).
44
<PAGE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Fiscal Quarters Ended
----------------------------------------------
June September December March Total
-------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
FISCAL 1997
Revenues $ 1,700 $ 2,720 $ 2,451 $ 1,823 $ 8,694
Gross profit 457 641 666 530 2,294
Loss from continuing operations (658) (436) (196) (1,000) (2,290)
Net loss (738) (415) (199) (1,055) (2,407)
Loss from continuing
operations per share (0.12) (0.09) (0.04) (0.20) (0.44)
Net loss per share (0.13) (0.08) (0.04) (0.21) (0.46)
Average shares outstanding 5,716 5,050 5,050 5,061 5,219
FISCAL 1996
Revenues $ 1,884 $ 2,368 $ 2,744 $ 2,096 $ 9,092
Gross profit 571 879 1,168 315 2,933
Income (loss) from continuing
operations (429) (256) 95 (778) (1,368)
Net loss (447) (189) (88) (980) (1,704)
Income (loss) from continuing
operations per share (0.08) (0.05) 0.02 (0.14) (0.24)
Net loss per share (0.08) (0.03) (0.02) (0.17) (0.30)
Average shares outstanding 5,754 5,750 5,742 5,724 5,742
Note: The loss from continuing operations and the net loss for the quarter
ended March, 1997, includes approximately $520,000 in costs related to the
Company's move and consolidation of operations to its new facility in San Diego.
</TABLE>
45
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
The following consolidated schedule of Photomatrix, Inc. and its
subsidiaries is submitted herewith.
Page
Schedule II - Valuation and Qualifying Accounts . . . . . . . . . . . 47
46
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
PHOTOMATRIX, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance, Balance,
Beginning End
Description of Year Expense Acquired Write-Off of Year
- - - -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FISCAL YEAR 1997
----------------------------
Allowance for Uncollectible
Accounts Receivable $ 76 $ 46 $ - $ 11 $ 111
----------------------------------------------------
----------------------------------------------------
Inventory Excess and
Obsolescence Reserve $ 592 $ 130 $ - $ 572 $ 150
----------------------------------------------------
----------------------------------------------------
Warranty Reserve $ 35 $ 16 $ - $ - $ 51
----------------------------------------------------
----------------------------------------------------
FISCAL YEAR 1996
----------------------------
Allowance for Uncollectible
Accounts Receivable $ 61 $ 75 $ - $ 60 $ 76
----------------------------------------------------
----------------------------------------------------
Inventory Excess and
Obsolescence Reserve $ 368 $ 179 $ - $ (45) $ 592
----------------------------------------------------
----------------------------------------------------
Warranty Reserve $ 35 $ 15 $ - $ 15 $ 35
----------------------------------------------------
----------------------------------------------------
FISCAL YEAR 1995
----------------------------
Allowance for Uncollectible
Accounts Receivable $ 3 $ 30 $ 30 $ 2 $ 61
----------------------------------------------------
----------------------------------------------------
Inventory Excess and
Obsolescence Reserve $ 405 $ 89 $ - $ 126 $ 368
----------------------------------------------------
----------------------------------------------------
Warranty Reserve $ 35 $ - $ - $ - $ 35
----------------------------------------------------
----------------------------------------------------
</TABLE>
See accompanying independent auditors' report.
47
<PAGE>
EXHIBIT INDEX
The exhibits listed under Item 14(c) are filed as part of this Annual
Report on Form 10-KSB.
Executive Compensation Plans and Arrangements:
10.8 1992 Xscribe Stock Option Plan and sample agreement (ix)
10.11 Executive Employment Agreement between the Company and
Suren G. Dutia dated December 20, 1988. (ix)
10.24 Description of executive bonus arrangements and executive
severance plan. (ix)
10.25 1994 Xscribe Stock Option Plan and sample agreements. (ix)
(b) Reports on Form 8-K
No reports on Form 8-K were filed by Photomatrix during the
fiscal quarter ended March 31, 1997.
(c) Exhibits
3.1 Amended and Restated Articles of Incorporation
3.3 Bylaws
10.2 Settlement Agreement dated January 11, 1993 between (iv)
Photomatrix Corporation and Scan-Graphics, Inc.
10.4 Lease Agreement between Photomatrix and EVB Limited (iv)
Partnership-I dated December 17, 1987
10.5 Lease Agreement between Photomatrix Limited and Bermer (iv)
Limited dated May 31, 1989
10.6 Promissory Notes dated April 30, 1993 in the aggregate (iv)
principal amount of $776,607 payable to the following
members of the Wyly family and affiliates: Sam Wyly,
Charles Wyly, Jr., Evan Wyly, Donald Miller, First Dallas
International, Ltd., and Premier Partners
10.7 Subcontract dated March 31, 1991 between PRC, Inc. and (iv)
Photomatrix
10.8 1992 Xscribe Stock Option Plan and Sample Agreement (iv)
10.11 Executive Employment Agreement between the Company and (i)
Suren G. Dutia dated December 20, 1988
10.24 Description of executive bonus arrangements and executive (iv)
severance plan
10.25 1994 Xscribe Stock Option Plan and Sample Agreements (vii)
10.30 Security and Loan Agreement between Imperial Bank and (ix)
Xscribe Corporation dated June 17, 1996 and related
documents.
10.31 OEM Purchase Agreement for Photomatrix Scanners dated (ix)
February 8, 1996 between Bell & Howell Limited and
Photomatrix Corporation. (Non-public information has
been filed with the Securities and Exchange Commission)
10.32 OEM Purchase Agreement for Photomatrix Scanners dated (ix)
June 12, 1996 between Bell & Howell Operating Company and
Photomatrix Corporation. (Non-public information has
been filed with the Securities and Exchange Commission)
48
<PAGE>
10.33 Facilities Lease Agreement between Photomatrix and Manufacturers
Life dated November 7, 1996
10.34 Amendment No. 1 to Security and Loan Agreement with Imperial Bank,
together with continuing guarantee and warrant agreements.
21.1 Subsidiaries of the registrant as of March 31, 1997:
- Photomatrix Imaging, Inc., Nevada
- Lexia Systems, Inc., California
- Xscribe Imaging, Inc., California
- Xscribe Legal Systems, Inc., California
23.2 Independent Auditors' Consent from KPMG Peat Marwick LLP
dated June 30, 1997
24.1 Power of Attorney (see signature pages)
(i) Incorporated by reference to exhibits filed with the
Company's Combined Annual Report to Shareholders and Annual Report on Form 10-K
for the fiscal year ended March 31, 1991, filed with the Securities and
Exchange Commission on June 26, 1991.
(ii) Incorporated by reference to exhibits filed with the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1992,
filed with the Securities and Exchange Commission on June 26, 1992.
(iii) Incorporated by reference to exhibits filed with
the Company's Post Effective Amendment No. 2 to its Registration Statement on
Form S-2 (No. 33-43036) filed with the Securities and Exchange Commission on
June 14, 1993.
(iv) Incorporated by reference to exhibits filed with the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1993,
filed with the Securities and Exchange Commission on June 29, 1993.
(v) Incorporated by reference to exhibits filed with the
Company's Current Report on Form 8-K dated October 25, 1993, filed with the
Securities and Exchange Commission on November 5, 1993.
(vi) Incorporated by reference to exhibits filed with the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1994,
filed with the Securities and Exchange Commission on June 29, 1994.
(vii) Incorporated by reference to exhibits filed with Company's
Registration Statement on Form S-8 (No. _______) with the Securities and
Exchange Commission on August 18, 1995.
(viii) Incorporated by reference to exhibits filed with the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1995,
filed with the Securities and Exchange Commission on June 29, 1995.
(ix) Incorporated by reference to exhibits filed with the
Company's Annual Report on Form 10-K for the fiscal year ended March 31,
1996, filed with the Securities and Exchange Commission on June 25, 1996.
(d) Schedule
Schedule II Valuation and Qualifying Accounts
49
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized on June 30, 1997.
PHOTOMATRIX, INC.
by /s/
---------------------------------
Suren G. Dutia, President, Chief
Executive Officer and Chairman
of the Board
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Suren G. Dutia and Roy L. Gayhart, jointly and
severally, his attorney-in-fact, each with the power of substitution, for him
in any and all capacities, to sign any amendment to the Report on Form 10-KSB
and file the same with the exhibits thereto and any other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or a
substitute or substitutes, may do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated.
SIGNATURE CAPACITY DATE
- - - --------- -------- ----
/s/ June 30, 1997
- - - -------------------
Suren G. Dutia President, Chief Executive Officer
and Chairman of the Board
/s/ June 30, 1997
- - - -------------------
Roy L. Gayhart Chief Financial Officer
/s/ June 30, 1997
- - - -------------------
Charles H. Frady Principal Accounting Officer
/s/ June 30, 1997
- - - -------------------
Patrick W. Moore Director
/s/ June 30, 1997
- - - -------------------
Ira H. Sharp Director
/s/ June 30, 1997
- - - -------------------
John F. Staley Director
50
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
The Board of Directors of Photomatrix, Inc.:
Under date May 29, 1997, except for Note 11, as to which the date is June 6,
1997, we reported on the consolidated balance sheets of Photomatrix, Inc.and
subsidiaries as of March 31, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
years in the three-year period ended March 31, 1997. In connection with our
audits of the aforementioned consolidated financial statements, we also audited
the related consolidated financial statement schedule in the Form 10-KSB. This
consolidated financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this consolidated
financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
San Diego, California
May 29, 1997
51
<PAGE>
BOARD OF DIRECTORS
Suren G. Dutia (3) Ira H. Sharp (1) (2) (3)
President, Chief Executive Officer Owner, Chief Executive Office and
and Chairman of the Board General Counsel of Alderson
Reporting
John F. Staley (1) (2) (3) Patrick Moore (1) (2) (3)
Partner in Staley, Jobson and President of IPAC Manufacturing,
Wetherell Inc.
(1) Audit Committee Member
(2) Compensation Committee Member
(3) Nominating Committee Member
EXECUTIVE OFFICERS
Suren G. Dutia Roy L. Gayhart
President, Chief Executive Officer Chief Financial Officer Secretary
and Chairman of the Board
HEADQUARTERS
Photomatrix, Inc.
11065 Sorrento Valley Court
San Diego, California 92121
(619)625-4400
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
750 B Street
San Diego, California 92101
TRANSFER AGENT AND REGISTRAR
American Stock Transfer and Trust Company
40 Wall Street
New York, New York 10005
TRADEMARKS
Windows and Windows NT (Microsoft), Netware (Novell), TeamWARE (ICL) and
Pentium (Intel) are registered trademarks of the indicated companies.
EXHIBIT 10.30 GUARANTY
GUARANTY
XSCRIBE CORPORATION, A CALIFORNIA CORPORATION, (herein called the
"Guarantor"), whose address is 6285 NANCY RIDGE DRIVE, SAN DIEGO, CA
92121-2245, as a material inducement to and in consideration of THE
MANUFACTURERS LIFE INSURANCE COMPANY entering into a written lease with
PHOTOMATRIX CORPORATION dated NOVEMBER 7, 1996, pursuant to which Lessor
leased to Lessee, and Lessee 1eased from Lessor, premises located at 11065
SORRENTO VALLEY COURT, in the City of San Diego, County of San Diego,
California, (attached to this guaranty, and made a part of it),
unconditionally guarantees and promises to and for the benefit of Lessor that
Lessee shall perform the provisions of the lease that Lessee is to perform.
If Guarantor is more than one person, Guarantor's obligations are joint and
several and are independent of Lessee's obligations. A separate action may be
brought or prosecuted against any Guarantor whether the action is brought or
prosecuted against any other Guarantor or Lessee, or all, or whether any
other Guarantor or Lessee, or all, are joined in the action.
Guarantor waives the benefit of any statute of limitations affecting
Guarantor's liability under the guaranty.
The provisions of the lease may be changed by agreement between Lessor and
Lessee at any time, or by course of conduct, without notice to Guarantor.
This guaranty shall guarantee the performance of the lease as changed.
Assignment of the lease (as permitted by the lease) shall not affect this
guaranty.
This guaranty shall not be affected by Lessor's failure or delay to enforce
any of its rights.
If Lessee defaults under the lease, Lessor can proceed immediately against
Guarantor or Lessee, or both, or Lessor can enforce against Guarantor or
Lessee, or both, any rights that it has under the lease, or pursuant to
applicable laws. If the lease terminates and Lessor has any rights it can
enforce against Lessee after termination, Lessor can enforce those rights
against Guarantor without giving previous notice to Lessee or Guarantor, or
without making any demand on either of them.
Guarantor waives the right to require Lessor to (1) proceed against Lessee;
(2) proceed against or exhaust any security that Lessor holds from Lessee; or
(3) pursue any other remedy in Lessor's power. Guarantor waives any defense
by reason of any disability from any cause by Lessee, and waives any other
defense based on the termination of Lessee's liability from any cause. Until
all Lessee's obligations to Lessor have been discharged in full, Guarantor
has no right of subrogation against Lessee. Guarantor waives its right to
enforce any remedies that Lessor now has, or later may have, against Lessee.
Guarantor waives any right to participate in any presentments, demands for
performance, notices of non-performance, protests, notices of protest,
notices of dishonor, and notices of acceptance of this guaranty, and waives
all notices of the existence, creation, or incurring of new or additional
obligations.
If Lessor disposes of its interest in the lease, "Lessor", as used in this
guaranty, shall mean Lessor's successors.
If Lessor is required to enforce Guarantor's obligations by legal
proceedings, Guarantor shall pay to Lessor all costs incurred, including
without limitations, reasonable attorneys' fees.
Guarantor's obligations under this guaranty shall be binding on Guarantor's
successors.
XSCRIBE CORPORATION
a California Corporation
By: /s/ Suren G. Dutia Dated: 11 - 15 -, 1996
------------------------------- --------- ----
Suren G. Dutia, President & CEO
<PAGE>
STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE - GROSS
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
[LOGO]
1. Basic Provisions ("Basic Provisions").
1.1 PARTIES: This Lease ("Lease"), dated for reference purposes
only, November 7, 1996 is made by and between THE MANUFACTURERS LIFE
INSURANCE COMPANY ("Lessor"), and PHOTOMATRIX CORPORATION ("Lessee"),
(collectively the "Parties," or individually a "Party").
1.2(a) PREMISES: That certain portion of the Building, including all
improvements therein or to be provided by Lessor under the terms of this
Lease, commonly known by the street address of 11065 SORRENTO VALLEY COURT,
located in the City of San Diego County of SAN DIEGO, State of CALIFORNIA,
with zip code 92121, as outlined on Exhibit A attached hereto ("Premises").
The "Building" is that certain building containing the Premises and generally
described as (describe briefly the nature of the Building): APPROXIMATELY
23,400 SQUARE FEET RENTABLE (SFR) IN THE TORREY PINES BUSINESS PARK. In
addition to Lessee's rights to use and occupy the Premises as hereinafter
specified, Lessee shall have non-exclusive rights to the Common Areas (as
defined in Paragraph 2.7 below) as hereinafter specified, but shall not have
any rights to the roof, exterior walls or utility raceways of the Building or
to any other buildings in the Industrial Center. The Premises, the Building,
the Common Areas, the land upon which they are located, along with all other
buildings and improvements thereon, are herein collectively referred to as
the *Industrial Center." (Also see Paragraph 2.)
1.2(b) PARKING: SEE PARAGRAPH 52 unreserved vehicle parking spaces
("Unreserved Parking Spaces"); and NO reserved vehicle parking spaces ("Reserved
Parking Spaces"). (Also see Paragraph 2.6.)
1.3 TERM: FIVE years and SIX months ("Original Term") commencing
MARCH l, 1997 ("Commencement Date") and ending AUGUST 31, 2002 ("Expiration
Date"). (Also see Paragraph 3.)
1.4 EARLY POSSESSION: SEE PARAGRAPH 53 ("Early Possession Date").
(Also see Paragraphs 3.2 and 3.3.)
1.5 BASE RENT: $17,380.00 per month ("Base Rent"), payable on the
FIRST (1ST) day of each month commending MARCH 1, 1997. (Also see Paragraph 4.)
[X] If this box la checked, this Lease provides for the Base Rent to be
adjusted per Addendum 54, attached hereto.
1.6(a) BASE RENT PAID UPON EXECUTION: $17,380.00 as Base Rent for the
period 3/1/97 THROUGH 3/31/97.
1.6(b) LESSEE'S SHARE OF COMMON AREA OPERATING EXPENSES: 12.3 percent
(12.3 %) ("Lessee's Share") as determined by
[ ] prorata square footage of the Premises as compared to the total square
footage of the Building or [X] other criteria as described in Addendum 50.
1.7 SECURITY DEPOSIT: $ 19,360.00 ("Security Deposit"). (Also see
Paragraph 5.)
1.8 PERMITTED USE: A GENERAL OFFICE/ASSEMBLY/LIGHT MANUFACTURING
SPACE COMPATIBLE WITH THE CC&R'S AND UNDERLYING ZONING FOR THE PREMISES THAT
DOES NOT CONFLICT WITH ANY EXISTING OR FUTURE NON-COMPETITIVE USES IN THE
PARK. ("Permitted Use") (Also see Paragraph 6.)
1.9 INSURING PARTY. Lessor is the "Insuring Party." (Also see Paragraph
8.)
1.10(a) REAL ESTATE BROKERS. The following real estate broker(s)
(collectively, the "Brokers") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes):
[ ] NOT APPLICABLE represents Lessor exclusively ("Lessor's Broker")
--------------------
[ ] NOT APPLICABLE represents Lessee exclusively ("Lessee's Broker") or
--------------------
[ ] NOT APPLICABLE represents both Lessor and Lessee ("Dual Agency. (Also
-------------------
see Paragraph 15.)
1.10(b) Payment to Brokers. Upon the execution of this Lease by both
Parties, Lessor shall pay to said Broker(s) jointly, or in such separate shares
as they may mutually designate in writing, a fee as set forth in a separate
written agreement between Lessor and said Broker(s) (or in the event there Is no
separate written agreement between Lessor and said Broker(s), the sum of $ 0.00)
for brokerage services rendered by said Broker(s) in connection with this
transaction.
1.11 GUARANTOR. The obligations of the Lessee under this Lease are to be
guaranteed by XSCRIBE CORPORATION, A CALIFORNIA CORPORATION, 6285 NANCY RIDGE
DRIVE SAN DIEGO, CA 92121-2245 ("Guarantor"). (Also see Paragraph 37.)
1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 49 through 59, and Exhibits through D, all of which
constitute a part of this Lease.
2. PREMISES, PARKING AND COMMON AREAS.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of square footage set forth in this Lease, or
that may have been used in calculating rental and/or Common Area Operating
Expenses, is an approximation which Lessor and Lessee agree Is reasonable and
the rental and Lessee's Share (as defined in Paragraph 1.6(b)) based thereon is
not subject to revision whether or not the actual square footage is more or
less.
2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean and
free of debris on the Commencement Date and warrants to Lessee that the existing
plumbing, electrical systems, fire sprinkler system, lighting, air conditioning
and heating systems and loading doors, if any, in the Premises, other than those
constructed by Lessee, shall be in good operating condition on the Commencement
Date. If a non-compliance with said warranty exists as of the Commencement Date,
Lessor shall, except as otherwise provided in this Lease, promptly after receipt
of written notice from Lessee setting forth with specificity the nature and
extent of such non-compliance, rectify same at Lessor's expense. If Lessee does
not give Lessor written notice of a non-compliance with this warranty within
thirty (30) days after the Commencement Date, correction of that non-compliance
shall be the obligation of Lessee at Lessee's sole cost and expense.
2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor
warrants that any improvements (other than those constructed by Lessee or at
Lessee's direction) on or in the Premises which have been constructed or
installed by Lessor or with Lessor's consent or at Lessor's direction shall
comply with all applicable covenants or restrictions of record and applicable
building codes, regulations and ordinances In effect on the Commencement Date.
Lessor further warrants to Lessee that Lessor has no knowledge of any claim
having been made by any governmental agency that a violation or violations of
applicable building codes, regulations, or ordinances exist with regard to the
Premises as of the Commencement Date. Said warranties shall not apply to any
Alterations or Utility Installations (defined in Paragraph 7.3(a)) made or to be
made by Lessee. If the Premises do not comply with said warranties, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee given within six (6) months following the
Commencement Date and setting forth with specificity the nature and extent of
such non-compliance, take such action, at Lessor's expense, as may be reasonable
or appropriate to rectify the non-compliance. Lessor makes no warranty that the
Permitted Use in Paragraph 1.8 is permitted for the Premises under Applicable
Laws (as defined In Paragraph 2.4).
2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it has
been advised by the Broker(s) to satisfy itself with respect to the condition of
the Premises (including but not limited to the electrical and fire sprinkler
systems, security, environmental aspects, and compliance with the Americans with
Disabilities Act and applicable zoning, municipal, county, state and federal
laws, ordinances and regulations and any covenants or restrictions of record
(collectively, "APPLICABLE LAWS") and the present and future suitability of the
Premises for Lessee's intended use; (b) that Lessee has made such investigation
as it deems necessary with reference to such matters, Is satisfied with
reference thereto, and assumes all responsibility therefore as the same relate
to Lessee's occupancy of the Premises and/or the terms of this Lease; and (c)
that neither Lessor, nor any of Lessor's agents, has made any oral or written
representations or warranties with respect to said matters other than as set
forth in this Lease.
2.5 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor In
this Paragraph 2 shall be of no force or effect if immediately prior to the date
set forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In
such event, Lessee shall, at Lessee's sole cost and expense, correct any non-
compliance of the Premises with said warranties.
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2.6 VEHICLE PARKING. Lessee shall be entitled to use the number of
Unreserved Parking Spaces and Reserved Parking Spaces specified in Paragraph
1.2(b) on those portions of the Common Areas designated from time to time by
Lessor for parking. Lessee shall not use more parking spaces than said number.
Said parking spaces shall be used for parking by vehicles no larger than full-
size passenger automobiles or pick-up trucks, herein called "PERMITTED SIZE
VEHICLES." Vehicles other than Permitted Size Vehicles shall be parked and
loaded or unloaded as directed by Lessor in the Rules and Regulations (as
defined in Paragraph 40) Issued by Lessor. (Also see Paragraph 2.9.)
(a) Lessee shall not permit or allow any vehicles that belong to or
are controlled by Lessee or Lessee's employees, suppliers, shippers, customers,
contractors or Invitees to be loaded, unloaded, or parked in areas other than
those designated by Lessor for such activities.
(b) If Lessee permits or allows any of the prohibited activities
described in this Paragraph 2.6, then Lessor shall have the right, without
notice, in addition to such other rights and remedies that it may have, to
remove or tow away the vehicle involved and charge the cost to Lessee, which
cost shall be immediately payable upon demand by Lessor.
(c) Lessor shall at the Commencement Date of this Lease, provide
the parking facilities required by Applicable Law.
2.7 COMMON AREAS - DEFINITION. The term "COMMON AREAS" is defined as
all areas and facilities outside the Premises and within the exterior boundary
line of the Industrial Center and interior utility raceways within the Premises
that are provided and designated by the Lessor from time to time for the general
non-exclusive use of Lessor, Lessee and other lessees of the Industrial Center
and their respective employees, suppliers, shippers, customers, contractors and
invitees, including parking areas, loading and unloading areas, trash areas,
roadways, sidewalks, walkways, parkways, driveways and landscaped areas.
2.8 COMMON AREAS - LESSEE'S RIGHTS. Lessor hereby grants to Lessee, for
the benefit of Lessee and its employees, suppliers, shippers, contractors,
customers and invitees, during the term of this Lease, the non-exclusive right
to use, in common with others entitled to such use, the Common areas as they
exist from time to time, subject to any rights, powers, and privileges reserved
by Lessor under the terms hereof or under the terms of any rules and regulations
or restrictions governing the use of the Industrial Center. Under no
circumstances shall the right herein granted to use the Common Areas be deemed
to include the right to store any property, temporarily or permanently, in the
Common Areas. Any such storage shall be permitted only by the prior written
consent of Lessor or Lessor's designated agent, which consent may be revoked at
any time. In the event that any unauthorized storage shall occur then Lessor
shall have the right, without notice, in addition to such other rights and
remedies that it may have, to remove the property and charge the cost to Lessee,
which cost shall be immediately payable upon demand by Lessor.
2.9 COMMON AREAS - RULES AND REGULATIONS. Lessor or such other
person(s) as Lessor may appoint shall have the exclusive control and
management of the Common Areas and shall have the right, from time to time, to
establish, modify, amend and enforce reasonable Rules and Regulations with
respect thereto In accordance with Paragraph 40. Lessee agrees to abide by and
conform to all such Rules and Regulations, and to cause its employees,
suppliers, shippers, customers, contractors and invitees to so abide and
conform. Lessor shall not be responsible to Lessee for the non-compliance with
said rules and regulations by other lessees of the Industrial Center.
2.10 COMMON AREAS - CHANGES. Lessor shall have the right, in Lessor's
sole discretion, from time to time:
(a) To make changes to the Common Areas, including, without
limitation, changes in the location, size, shape and number of driveways,
entrances, parking spaces, parking areas, loading and unloading areas, ingress,
egress, direction of traffic, landscaped areas, walkways and utility raceways;
(b) To close temporarily any of the Common Areas for maintenance
purposes so long as reasonable access to the Premises remains available;
(c) To designate other land outside the boundaries of the
Industrial Center to be a part of the Common Areas;
(d) To add additional buildings and improvements to the Common
Areas;
(e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Industrial Center, or any portion
thereof; and
(f) To do and perform such other acts and make such other changes
in, to or with respect to the Common Areas and Industrial Center as Lessor may,
in the exercise of sound business judgment, deem to be appropriate.
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3.
3.2 EARLY POSSESSION. If an Early Possession Date is specified in
Paragraph 1.4 and if Lessee totally or partially occupies the Premises after the
Early Possession Date but prior to the Commencement Date, the obligation to pay
Base Rent shall be abated for the period of such early occupancy. All other
terms of this Lease, however, (including but not limited to the obligations to
pay Lessee's Share of Common Area Operating Expenses and to carry the Insurance
required by Paragraph 8) shall be in effect during such period. Any such early
possession shall not affect nor advance the Expiration Date of the Original
Term.
3.3 DELAY IN POSSESSION. If for any reason Lessor cannot deliver
possession of the Premises to Lessee by the Early Possession Date, if one is
specified in Paragraph 1.4, or if no Early Possession Date is specified, by the
Commencement Date, Lessor shall not be subject to any liability therefor, nor
shall such failure affect the validity of this Lease, or the obligations of
Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not,
except as otherwise provided herein, be obligated to pay rent or perform any
other obligation of Lessee under the terms of this Lease until Lessor delivers
possession of the Premises to Lessee. If possession of the Premises is not
delivered to Lessee within sixty (60) days after the Commencement Date, Lessee
may, at its option, by notice in writing to Lessor within ten (10) days after
the end of said sixty (60) day period, cancel this Lease, in which event the
parties shall be discharged from all obligations hereunder; provided further,
however, that if such written notice of Lessee is not received by Lessor within
said ten (10) day period, Lessee's right to cancel this Lease hereunder shall
terminate and be of no further force or effect. Except as may be otherwise
provided, and regardless of when the Original Term actually commences, if
possession is not tendered to Lessee when required by this Lease and Lessee does
not terminate this Lease, as aforesaid, the period free of the obligation to pay
Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the
date of delivery of possession and continue for a period equal to the period
during which the Lessee would have otherwise enjoyed under the terms hereof, but
minus any days of delay caused by the acts, changes or omissions of Lessee.
4. RENT.
4.1 BASE RENT. Lessee shall pay Base Rent and other rent or charges, as
the same may be adjusted from time to time, to Lessor in lawful money of the
United States, without offset or deduction, on or before the day on which it is
due under the terms of this Lease. Base Rent and all other rent and charges for
any period during the term hereof which is for less than one full month shall be
prorated based upon the actual number of days of the month involved. Payment of
Base Rent and other charges shall be made to Lesser at its address stated herein
or to such other persons or at such other addresses as Lessor may from time to
time designate in writing to Lessee.
4.2 COMMON AREA OPERATING EXPENSES. Lessee shall pay to Lessor during
the term hereof, in addition to the Base Rent, Lessee's Share (as specified in
Paragraph 1.6(b)) of increases only on all Common Area Operating Expenses, above
base year 1997 (96/97 Tax Base Year) as hereinafter defined, during each
calendar year of the term of this Lease, in accordance with the following
provisions:
(a) "COMMON AREA OPERATING EXPENSES" are defined, for purposes of
this Lease, as all costs incurred by Lessor relating to the ownership and
operation of the Industrial Center, including, but not limited to, the
following:
(i) The operation, repair and maintenance, in neat, clean, good
order and condition, of the following:
(aa) The Common Areas, including parking areas, loading and
unloading areas, trash areas, roadways, sidewalks, walkways, parkways,
driveways, landscaped areas, striping, bumpers, irrigation systems,
Common Area lighting facilities, fences and gates, elevators and roof.
(bb) Exterior signs and any tenant directories.
(cc) Fire detection and sprinkler systems.
(ii) The cost of water, gas, electricity and telephone to
service the Common Areas.
(iii) Trash disposal, property management and security services
and the costs of any environmental Inspections.
(iv) Reserves set aside for maintenance and repair of Common
Areas.
(v) Any increase above the Base Real Property Taxes (as defined
in Paragraph 10.2(b)) for the Building and the Common Areas.
(vi) Any "Insurance Cost Increase" (as defined in Paragraph
8.1).
(vii) The cost of insurance carried by Lessor with respect to
the Common Areas.
(viii) Any deductible portion of an insured loss concerning the
Building or the Common areas.
(ix) Any other services to be provided by Lessor that are stated
elsewhere in this Lease to be a Common Area Operating Expense.
(b)
(c) The inclusion of the improvements, facilities and services set
forth in Subparagraph 4.2(a) shall not be deemed to impose an obligation upon
Lessor to either have said improvements or facilities or to provide those
services unless the Industrial Center already has the same, Lessor already
provides the services, or Lessor has agreed elsewhere in this Lease to provide
the same or some of them.
(d) Lessee's Share of Common Area Operating Expenses shall be
payable by Lessee within ten (10) days after a reasonably detailed statement of
actual expenses is presented to Lessee by Lessor. At Lessor's option, however,
an amount may be estimated by Lessor from time to time of Lessee's Share of
annual Common Area Operating Expenses and the same shall be payable monthly or
quarterly, as Lessor shall designate, during each 12-month period of the Lease
term, on the same day as the Base Rent is due hereunder. Lessor shall deliver to
Lessee within sixty (60) days after the expiration of each calendar year a
reasonably detailed statement showing Lessee's Share of the actual Common Area
Operating Expenses incurred during the preceding year. If Lessee's payments
under this Paragraph 4.2(d) during said preceding year exceed Lessee's Share as
indicated on said statement, Lessor shall be credited the amount of such
overpayment against Lessee's Share of Common Area Operating Expenses next
becoming due. If Lessee's payments under this Paragraph 4.2(d) during said
preceding year were less than Lessee's Share as indicated on said statement,
Lessee shall pay to Lessor the amount of the deficiency within ten (10) days
after delivery by Lessor to Lessee of said statement.
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5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon Lessee's execution
hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's
faithful performance of Lessee's obligations under this Lease. If Lessee fails
to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults
under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain
all or any portion of said Security Deposit for the payment of any amount due
Lessor or to reimburse or compensate Lessor for any liability, cost, expense,
loss or damage (including attorneys' fees) which Lessor may suffer or incur by
reason thereof. If Lessor uses or applies all or any portion of said Security
Deposit, Lessee shall within ten (10) days after written request therefore
deposit monies with Lessor sufficient to restore said Security Deposit to the
full amount required by this Lease. Any time the Base Rent increases during the
term of this Lease, Lessee shall, upon written request from Lessor, deposit
additional monies with Lessor as an addition to the Security Deposit so that the
total amount of the Security Deposit shall at all times bear the same proportion
to the then current Base Rent as the initial Security Deposit bears to the
initial Base Rent set forth in Paragraph 1.5. Lessor shall not be required to
keep all or any part of the Security Deposit separate from its general accounts.
Lessor shall, at the expiration or earlier termination of the term hereof and
after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option,
to the last assignee, if any, of Lessee's interest herein), that portion of the
Security Deposit not used or applied by Lessor. Unless otherwise expressly
agreed in writing by Lessor, no part of the Security Deposit shall be considered
to be held in trust, to bear interest or other increment for its use, or to be
prepayment for any monies to be paid by Lessee under this Lease.
6. USE.
6.1 PERMITTED USE.
(a) Lessee shall use and occupy the Premises only for the Permitted
Use set forth in Paragraph 1.8, or any other legal use which is reasonably
comparable thereto, and for no other purpose. Lessee shall not use or permit the
use of the Premises in a manner that is unlawful, creates waste or a nuisance,
or that disturbs owners and/or occupants of, or causes damage to the Premises or
neighboring premises or properties.
(b) Lessor hereby agrees to not unreasonably withhold or delay its
consent to any written request by Lessee, Lessee's assignees or subtenants, and
by prospective assignees and subtenants of Lessee, its assignees and subtenants,
for a modification of said Permitted Use, so long as the same will not impair
the structural integrity of the improvements on the Premises or in the Building
or the mechanical or electrical systems therein, does not conflict with uses by
other lessees, is not significantly more burdensome to the Premises or the
Building and the improvements thereon, and is otherwise permissible pursuant to
this Paragraph 6. If Lessor elects to withhold such consent, Lessor shall within
five (5) business days after such request give a written notification of same,
which notice shall include an explanation of Lessor's reasonable objections to
the change in use.
6.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE"
as used in this Lease shall mean any product, substance, chemical, material or
waste whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public health, safety or welfare, the
environment, or the Premises; (ii) regulated or monitored by any governmental
authority; or (iii) a basis for potential liability of Lessor to any
governmental agency or third party under any applicable statute or common law
theory. Hazardous Substance shall include, but not be limited to, hydrocarbons,
petroleum, gasoline, crude oil or any products or by-products thereof. Lessee
shall not engage in any activity in or about the Premises which constitutes a
Reportable Use (as hereinafter defined) of Hazardous Substances without the
express prior written consent of Lessor and compliance in a timely manner (at
Lessee's sole cost and expense) with all Applicable Requirements (as defined in
Paragraph 6.3). "REPORTABLE USE" shall mean (i) the installation or use of any
above or below ground storage tank, (ii) the generation, possession, storage,
use, transportation, or disposal of a Hazardous Substance that requires a permit
from, or with respect to which a report, notice, registration or business plan
is required to be filed with, any governmental authority, and (iii) the presence
in, on or about the Premises of a Hazardous Substance with respect to which any
Applicable Laws require that a notice be given to persons entering or occupying
the Premises or neighboring properties. Notwithstanding the foregoing, Lessee
may, without Lessor's prior consent, but upon notice to Lessor and in compliance
with all Applicable Requirements, use any ordinary and customary materials
reasonably required to be used by Lessee in the normal course of the Permitted
Use, so long as such use is not a Reportable Use and does not expose the
Premises or neighboring properties to any meaningful risk of contamination or
damage or expose Lessor to any liability therefor. In addition, Lessor may (but
without any obligation to do so) condition its consent to any Reportable Use of
any Hazardous Substance by Lessee upon Lessee's giving Lessor such additional
assurances as Lessor, in its reasonable discretion, deems necessary to protect
itself, the public, the Premises and the environment against damage,
contamination or injury and/or liability therefor, including but not limited to
the installation (and, at Lessor's option, removal on or before Lease expiration
or earlier termination) of reasonably necessary protective modifications to the
Premises (such as concrete encasements) and/or the deposit of an additional
Security Deposit under Paragraph 5 hereof.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause
to believe, that a Hazardous Substance has come to be located in, on, under or
about the Premises or the Building, other than as previously consented to by
Lessor, Lessee shall immediately give Lessor written notice thereof, together
with a copy of any statement, report, notice, registration, application, permit,
business plan, license, claim, action, or proceeding given to, or received from,
any governmental authority or private party concerning the presence, spill,
release, discharge of, or exposure to, such Hazardous Substance including but
not limited to all such documents as may be involved in any Reportable Use
involving the Premises. Lessee shall not cause or permit any Hazardous Substance
to be spilled or released in, on, under or about the Premises (including,
without limitation, through the plumbing or sanitary sewer system).
(c) INDEMNIFICATION. Lessee shall indemnify, protect, defend and
hold Lessor, its agents, employees, lenders and ground lessor, if any, and the
Premises, harmless from and against any and all damages, liabilities, judgments,
costs, claims, liens, expenses, penalties, loss of permits and attorneys' and
consultants' fees arising out of or involving any Hazardous Substance brought
onto the Premises by or for Lessee or by anyone under Lessee's control.
Lessee's obligations under this Paragraph 6.2(c) shall include, but not be
limited to, the effects of any contamination or injury to person, property or
the environment created or suffered by Lessee, and the cost of investigation
(including consultants' and attorneys' fees and testing), removal, remediation,
restoration and/or abatement thereof, or of any contamination therein involved,
and shall survive the expiration or earlier termination of this Lease. No
termination, cancellation or release agreement entered into by Lessor and Lessee
shall release Lessee from its obligations under this Lease with respect to
Hazardous Substances, unless specifically so agreed by Lessor in writing at the
time of such agreement.
6.3 LESSEE'S COMPLIANCE WITH REQUIREMENTS. Lessee shall, at Lessee's
sole cost and expense, fully, diligently and in a timely manner, comply with all
"Applicable Requirements," which term is used in this Lease to mean all laws,
rules, regulations, ordinances, directives, covenants, easements and
restrictions of record, permits, the requirements of any applicable fire
insurance underwriter or rating bureau, and the recommendations of Lessor's
engineers and/or consultants, relating in any manner to the Premises (including
but not limited to matters pertaining to (i) industrial hygiene, (ii)
environmental conditions on, in, under or about the Premises, including soil and
groundwater conditions, and (iii) the use, generation, manufacture, production,
installation, maintenance, removal, transportation, storage, spill, or release
of any Hazardous Substance), now in effect or which may hereafter come into
effect. Lessee shall, within five (5) days after receipt of Lessor's written
request, provide Lessor with copies of all documents and information, including
but not limited to permits, registrations, manifests, applications, reports and
certificates, evidencing Lessee's compliance with any Applicable Requirements
specified by Lessor, and shall immediately upon receipt, notify Lessor in
writing (with copies of any documents involved) of any threatened or actual
claim, notice, citation, warning, complaint or report pertaining to or involving
failure by Lessee or the Premises to comply with any Applicable Requirements.
6.4 INSPECTION; COMPLIANCE WITH LAW. Lessor, Lessor's agents,
employees, contractors and designated representatives, and the holders of any
mortgages, deeds of trust or ground leases on the Premises ("LENDERS") shall
have the right to enter the Premises at any time in the case of an emergency,
and otherwise at reasonable times, for the purpose of inspecting the condition
of the Premises and for verifying compliance by Lessee with this Lease and all
Applicable Requirements (as defined in Paragraph 6.3), and Lessor shall be
entitled to employ experts and/or consultants in connection therewith to advise
Lessor with respect to Lessee's activities, including but not limited to
Lessee's installation, operation, use, monitoring, maintenance, or removal of
any Hazardous Substance on or from the Premises. The costs and expenses of any
such inspections shall be paid by the party requesting same, unless a Default or
Breach of this Lease by Lessee or a violation of Applicable Requirements or a
contamination, caused or materially contributed to by Lessee, is found to exist
or to be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent violation
or contamination. In such case, Lessee shall upon request reimburse Lessor or
Lessor's Lender, as the case may be, for the costs and expenses of such
inspections.
7. MAINTENANCE, REPAIRS, UTILITY INSTALLATIONS, TRADE FIXTURES AND
ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) Subject to the provisions of Paragraphs 2.2 (Condition), 2.3
(Compliance with Covenants, Restrictions and Building Code), 7.2 (Lessor's
Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at
Lessee's sole cost and expense and at all times, keep the Premises and every
part thereof in good order, condition and repair (whether or not such portion of
the Premises requiring repair, or the means of repairing the same, are
reasonably or readily accessible to Lessee, and whether or not the need for such
repairs occurs as a result of Lessee's use, any prior use, the elements or the
age of such portion of the Premises), including, without limiting the generality
of the foregoing, all equipment or facilities specifically serving the Premises,
such as plumbing, heating, air conditioning, ventilating, electrical, lighting
facilities, boilers, fired or unfired pressure vessels, fire hose connections if
within the Premises, fixtures, interior walls, interior surfaces of exterior
walls, ceilings, floors, windows, doors, plate glass, and skylights, but
excluding any items which are the responsibility of Lessor pursuant to Paragraph
7.2 below. Lessee, in keeping the Premises in good order, condition and repair,
shall exercise and perform good maintenance practices. Lessee's obligations
shall include restorations, replacements or renewals when necessary to keep the
Premises and all improvements thereon or a part thereof in good order, condition
and state of repair.
(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain a contract, with copies to Lessor, in customary form and substance for
and with a contractor specializing and experienced in the inspection,
maintenance and service of the heating, air conditioning and ventilation system
for the Premises. However, Lessor reserves the right, upon notice to Lessee, to
procure and maintain the contract for the heating, air conditioning and
ventilating systems, and if Lessor so elects, Lessee shall reimburse Lessor,
upon demand, for the cost thereof.
(c) If Lessee fails to perform Lessee's obligations under this
Paragraph 7.1, Lessor may enter upon the Premises after ten (10) days prior
written notice to Lessee (except in the case of an emergency, in which case no
notice shall be required), perform such obligations on Lessee's behalf, and put
the Premises in good order, condition and repair, in accordance with Paragraph
13.2 below.
7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code),
4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9
(Damage or Destruction) and 14 (Condemnation), Lessor, subject to reimbursement
pursuant to Paragraph 4.2, shall keep in good order, condition and repair the
foundations, exterior walls, structural condition of interior bearing walls,
exterior roof, fire sprinkler and/or standpipe and hose (if located in the
Common Areas) or other automatic fire extinguishing system including fire alarm
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and/or smoke detection systems and equipment, fire hydrants, parking lots,
walkways, parkways, driveways, landscaping, fences, signs and utility systems
serving the Common Areas and all parts thereof, as well as providing the
services for which there is a Common Area Operating Expense pursuant to
Paragraph 4.2. Lessor shall not be obligated to paint the exterior or interior
surfaces of exterior walls nor shall Lessor be obligated to maintain, repair or
replace windows, doors or plate glass of the Premises. Lessee expressly waives
the benefit of any statute now or hereafter in effect which would otherwise
afford Lessee the right to make repairs at Lessor's expense or to terminate this
Lease because of Lessor's failure to keep the Building, Industrial Center or
Common Areas in good order, condition and repair.
7.3 UTILITY INSTALLATIONS, TRADE FIXTURES, ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS"
is used in this Lease to refer to all air lines, power panels, electrical
distribution, security, fire protection systems, communications systems,
lighting fixtures, heating, ventilating and air conditioning equipment,
plumbing, and fencing in, on or about the Premises. The term "TRADE FIXTURES"
shall mean Lessee's machinery and equipment which can be removed without doing
material damage to the Premises. The term "ALTERATIONS" shall mean any
modification of the improvements on the Premises which are provided by Lessor
under the terms of this Lease, other than Utility Installations or Trade
Fixtures. "LESSEE-OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as
Alterations and/or Utility Installations made by Lessee that are not yet owned
by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make nor cause to be
made any Alterations or Utility Installations in, on, under or about the
Premises without Lessor's prior written consent. Lessee may, however, make non-
structural Utility Installations to the interior of the Premises (excluding the
roof) without Lessor's consent but upon notice to Lessor, so long as they are
not visible from the outside of the Premises, do not involve puncturing,
relocating or removing the roof or any existing walls, or changing or
interfering with the fire sprinkler or fire detection systems and the cumulative
cost thereof during the term of this Lease as extended does not exceed
$2,500.00.
(b) CONSENT. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with detailed plans. All consents given by
Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent,
shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits
required by governmental authorities; (ii) the furnishing of copies of such
permits together with a copy of the plans and specifications for the Alteration
or Utility Installation to Lessor prior to commencement of the work thereon; and
(iii) the compliance by Lessee with all conditions of said permits in a prompt
and expeditious manner. Any Alterations or Utility Installations by Lessee
during the term of this Lease shall be done in a good and workmanlike manner,
with good and sufficient materials, and be in compliance with all Applicable
Requirements. Lessee shall promptly upon completion thereof furnish Lessor with
as-built plans and specifications therefor. Lessor may, (but without obligation
to do so) condition its consent to any requested Alteration or Utility
Installation that costs $2,500.00 or more upon Lessee's providing Lessor with a
lien and completion bond in an amount equal to one and one-half times the
estimated cost of such Alteration or Utility Installation.
(c) LIEN PROTECTION. Lessee shall pay when due all claims for labor
or materials furnished or alleged to have been furnished to or for Lessee at or
for use on the Premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than ten (10) days' notice prior to the commencement of any
work in, on, or about the Premises, and Lessor shall have the right to post
notices of non-responsibility in or on the Premises as provided by law. If
Lessee shall, in good faith, contest the validity of any such lien, claim or
demand, then Lessee shall, at its sole expense, defend and protect itself,
Lessor and the Premises against the same and shall pay and satisfy any such
adverse judgment that may be rendered thereon before the enforcement thereof
against the Lessor or the Premises. If Lessor shall require, Lessee shall
furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one
and one-half times the amount of such contested lien claim or demand,
indemnifying Lessor against liability for the same, as required by law for the
holding of the Premises free from the effect of such lien or claim. In addition,
Lessor may require Lessee to pay Lessor's attorneys' fees and costs in
participating in such action if Lessor shall decide it is to its best interest
to do so.
7.4 OWNERSHIP, REMOVAL, SURRENDER, AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require their removal
and to cause Lessee to become the owner thereof as hereinafter provided in this
Paragraph 7.4, all Alterations and Utility Installations made to the Premises by
Lessee shall be the property of and owned by Lessee, but considered a part of
the Premises. Lessor may, at any time and at its option, elect in writing to
Lessee to be the owner of all or any specified part of the Lessee-Owned
Alterations and Utility Installations. Unless otherwise instructed per
Subparagraph 7.4(b) hereof, all Lessee-Owned Alterations and Utility
Installations shall, at the expiration or earlier termination of this Lease,
become the property of Lessor and remain upon the Premises and be surrendered
with the Premises by Lessee.
(b) REMOVAL. Unless otherwise agreed in writing, Lessor may require
that any or all Lessee-Owned Alterations or Utility Installations be removed by
the expiration or earlier termination of this Lease, notwithstanding that their
installation may have been consented to by Lessor. Lessor may require the
removal at any time of all or any part of any Alterations or Utility
Installations made without the required consent of Lessor. See Paragraph 57
(c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by
the end of the last day of the Lease term or any earlier termination date, clean
and free of debris and in good operating order, condition and state of repair,
ordinary wear and tear excepted. Ordinary wear and tear shall not include any
damage or deterioration that would have been prevented by good maintenance
practice or by Lessee performing all of its obligations under this Lease. Except
as otherwise agreed or specified herein, the Premises, as surrendered, shall
include the Alterations and Utility Installations. The obligation of Lessee
shall include the repair of any damage occasioned by the installation,
maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and
Lessee-Owned Alterations and Utility Installations, as well as the removal of
any storage tank installed by or for Lessee, and the removal, replacement, or
remediation of any soil, material or ground water contaminated by Lessee, all as
may then be required by Applicable Requirements and/or good practice. Lessee's
Trade Fixtures shall remain the property of Lessee and shall be removed by
Lessee subject to its obligation to repair and restore the Premises per this
Lease. See Paragraph 58
8. INSURANCE; INDEMNITY.
8.1 PAYMENT OF PREMIUM INCREASES.
(a) As used herein, the term "INSURANCE COST INCREASE" is defined
as any increase in the actual cost of the insurance applicable to the Building
and required to be carried by Lessor pursuant to Paragraphs 8.2(b), 8.3(a) and
8.3(b), ("REQUIRED INSURANCE"), over and above the Base Premium, as hereinafter
defined, calculated on an annual basis. "Insurance Cost Increase" shall include,
but not be limited to, requirements of the holder of a mortgage or deed of trust
covering the Premises, increased valuation of the Premises, and/or a general
premium rate increase. The term "Insurance Cost Increase" shall not, however,
include any premium increases resulting from the nature of the occupancy of any
other lessee of the Building. If the parties insert a dollar amount in Paragraph
1.9, such amount shall be considered the "BASE PREMIUM." If a dollar amount has
not been inserted in Paragraph 1.9 and if the Building has been previously
occupied during the twelve (12) month period immediately preceding the
Commencement Date, the "Base Premium" shall be the annual premium applicable to
such twelve (12) month period. If the Building was not fully occupied during
such twelve (12) month period, the "Base Premium" shall be the lowest annual
premium reasonably obtainable for the Required Insurance as of the Commencement
Date, assuming the most nominal use possible of the Building. In no event,
however, shall Lessee be responsible for any portion of the premium cost
attributable to liability insurance coverage in excess of $1,000,000 procured
under Paragraph 8.2(b).
(b) Lessee shall pay any Insurance Cost Increase to Lessor pursuant
to Paragraph 4.2. Premiums for policy periods commencing prior to, or extending
beyond, the term of this Lease shall be prorated to coincide with the
corresponding Commencement Date or Expiration Date.
8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force during
the term of this Lease a Commercial General Liability policy of insurance
protecting Lessee, Lessor and any Lender(s) whose names have been provided to
Lessee in writing (as additional Insureds) against claims for bodily injury,
personal injury and property damage based upon, involving or arising out of the
ownership, use, occupancy or maintenance of the Premises and all areas
appurtenant thereto. Such insurance shall be on an occurrence basis providing
single limit coverage in an amount not less than $1,000,000 per occurrence with
an "ADDITIONAL INSURED-MANAGERS OR LESSORS OF PREMISES" endorsement and contain
the "AMENDMENT OF THE POLLUTION EXCLUSION" endorsement for damage caused by
heat, smoke or fumes from a hostile fire. The policy shall not contain any
intra-insured exclusions as between insured persons or organizations, but shall
include coverage for liability assumed under this Lease as an "INSURED CONTRACT"
for the performance of Lessee's indemnity obligations under this Lease. The
limits of said insurance required by this Lease or as carried by Lessee shall
not, however, limit the liability of Lessee nor relieve Lessee of any obligation
hereunder. All insurance to be carried by Lessee shall be primary to and not
contributory with any similar insurance carried by Lessor, whose insurance shall
be considered excess insurance only.
(b) CARRIED BY LESSOR. Lessor shall also maintain liability
insurance described in Paragraph 8.2(a) above, in addition to and not in lieu
of, the insurance required to be maintained by Lessee. Lessee shall not be named
as an additional insured therein.
8.3 PROPERTY INSURANCE-BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. Lessor shall obtain and keep in
force during the term of this Lease a policy or policies in the name of Lessor,
with loss payable to Lessor and to any Lender(s), insuring against loss or
damage to the Premises. Such insurance shall be for full replacement cost, as
the same shall exist from time to time, or the amount required by any Lender(s),
but in no event more than the commercially reasonable and available insurable
value thereof if, by reason of the unique nature or age of the Improvements
involved, such latter amount is less than full replacement cost. Lessee-Owned
Alterations and Utility Installations, Trade Fixtures and Lessee's personal
property shall be insured by Lessee pursuant to Paragraph 8.4. If the coverage
is available and commercially appropriate, Lessor's policy or policies shall
insure against all risks of direct physical loss or damage (except the perils of
flood and/or earthquake unless required by a Lender or included in the Base
Premium), including coverage for any additional costs resulting from debris
removal and reasonable amounts of coverage for the enforcement of any ordinance
or law regulating the reconstruction or replacement of any undamaged sections of
the Building required to be demolished or removed by reason of the enforcement
of any building, zoning, safety or land use laws as the result of a covered
loss, but not including plate glass insurance. Said policy or policies shall
also contain an agreed valuation provision in lieu of any co-insurance clause,
waiver of subrogation, and inflation guard protection causing an increase in the
annual property insurance coverage amount by a factor of not less than the
adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers
for the city nearest to where the Premises are located.
(b) RENTAL VALUE. Lessor shall also obtain and keep in force during
the term of this Lease a policy or policies in the name of Lessor, with loss
payable to Lessor and any Lender(s), insuring the loss of the full rental and
other charges payable by all lessees of the Building to Lessor for one year
(including all Real Property Taxes, insurance costs, all Common Area Operating
Expenses and any scheduled rental increases). Said insurance may provide that in
the event the Lease is terminated by reason of an insured loss, the period of
indemnity for such coverage shall be extended beyond the date of the completion
of repairs or replacement of the Premises, to provide for one full year's loss
of rental revenues from the date of any such loss. Said insurance shall contain
an agreed valuation provision in lieu of any co-insurance clause, and the amount
of coverage shall be adjusted annually to reflect the projected rental income,
Real Property Taxes, insurance premium costs and other expenses, if any,
otherwise payable, for the next 12-month period. Common Area Operating Expenses
shall include any deductible amount in the event of such loss.
(c) ADJACENT PREMISES. Lessee shall pay for any increase in the
premiums for the property insurance of the Building and for the Common Areas or
other buildings in the Industrial Center if said increase is caused by Lessee's
acts, omissions, use or occupancy of the Premises.
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(d) LESSEE'S IMPROVEMENTS. Since Lessor is the Insuring Party,
Lessor shall not be required to insure Lessee-Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease.
8.4. LESSEE'S PROPERTY INSURANCE. Subject to the requirements of
Paragraph 8.5, Lessee at its cost shall either by separate policy or, at
Lessor's option, by endorsement to a policy already carried, maintain insurance
coverage on all of Lessee's personal property, Trade Fixtures and Lessee-Owned
Alterations and Utility Installations in, on, or about the Premises similar in
coverage to that carried by Lessor as the Insuring Party under Paragraph 8.3(a).
Such insurance shall be full replacement cost coverage with a deductible not to
exceed $2,500 per occurrence. The proceeds from any such insurance shall be
used by Lessee for the replacement of personal property and the restoration of
Trade Fixtures and Lessee-Owned Alterations and Utility Installations. Upon
request from Lessor, Lessee shall provide Lessor with written evidence that such
insurance is in force.
8.5 INSURANCE POLICIES. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises are
located, and maintaining during the policy term a "General Policyholders Rating"
of at least B+, V, or such other rating as may be required by a Lender, as set
forth in the most current issue of "Best's Insurance Guide." Lessee shall not do
or permit to be done anything which shall invalidate the insurance policies
referred to in this Paragraph 8. Lessee shall cause to be delivered to Lessor,
within seven (7) days after the earlier of the Early Possession Date or the
Commencement Date, certified copies of, or certificates evidencing the existence
and amounts of, the insurance required under Paragraph 8.2(a) and 8.4. No such
policy shall be cancelable or subject to modification except after thirty (30)
days' prior written notice to Lessor. Lessee shall at least thirty (30) days
prior to the expiration of such policies, furnish Lessor with evidence of
renewals or "insurance binders" evidencing renewal thereof, or Lessor may order
such insurance and charge the cost thereof to Lessee, which amount shall be
payable by Lessee to Lessor upon demand.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor each hereby release and relieve the other, and waive
their entire right to recover damages (whether in contract or in tort) against
the other, for loss or damage to their property arising out of or incident to
the perils required to be insured against under Paragraph 8. The effect of such
releases and waivers of the right to recover damages shall not be limited by the
amount of insurance carried or required, or by any deductibles applicable
thereto. Lessor and Lessee agree to have their respective insurance companies
issuing property damage insurance waive any right to subrogation that such
companies may have against Lessor or Lessee, as the case may be, so long as the
insurance is not invalidated thereby.
8.7 INDEMNITY. Except for Lessor's gross negligence and willful
misconduct and/or breach of express warranties, Lessee shall indemnify,
protect, defend and hold harmless the Premises, Lessor and its agents,
Lessor's master or ground Lessor, partners and Lenders, from and against any
and all claims, loss of rents and/or damages, costs, liens, judgments,
penalties, loss of permits, attorneys' and consultants' fees, expenses and/or
liabilities arising out of, involving, or in connection with, the occupancy
of the Premises by Lessee, the conduct of Lessee's business, any act,
omission or neglect of Lessee, its agents, contractors, employees or
invitees, and out of any Default or Breach by Lessee in the performance in a
timely manner of any obligation on Lessee's part to be performed under this
Lease. The foregoing shall include, but not be limited to, the defense or
pursuit of any claim or any action or proceeding involved therein, and
whether or not (in the case of claims made against Lessor) litigated and/or
reduced to judgment. In case any action or proceeding be brought against
Lessor by reason of any of the foregoing matters, Lessee upon notice from
Lessor shall defend the same at Lessee's expense by counsel reasonably
satisfactory to Lessor and Lessor shall cooperate with Lessee in such
defense. Lessor need not have first paid any such claim in order to be so
indemnified.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures, or from any other
cause, whether said injury or damage results from conditions arising upon the
Premises or upon other portions of the Building of which the Premises are a
part, from other sources or places, and regardless of whether the cause of such
damage or injury or the means of repairing the same is accessible or not. Lessor
shall not be liable for any damages arising from any act or neglect of any other
lessee of Lessor nor from the failure by Lessor to enforce the provisions of any
other lease in the Industrial Center. Notwithstanding Lessor's negligence or
breach of this Lease, Lessor shall under no circumstances be liable for injury
to Lessee's business or for any loss of income or profit therefrom.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to
the Premises, other than Lessee-Owned Alterations and Utility Installations, the
repair cost of which damage or destruction is less than fifty percent (50%) of
the then Replacement Cost (as defined in Paragraph 9.1(d)) of the Premises
(excluding Lessee-Owned Alterations and Utility Installations and Trade
Fixtures) immediately prior to such damage or destruction.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction
to the Premises, other than Lessee-Owned Alterations and Utility Installations,
the repair cost of which damage or destruction is fifty percent (50%) or more of
the then Replacement Cost of the Premises (excluding Lessee-Owned Alterations
and Utility Installations and Trade Fixtures) immediately prior to such damage
or destruction. In addition, damage or destruction to the Building, other than
Lessee-Owned Alterations and Utility Installations and Trade Fixtures of any
lessees of the Building, the cost of which damage or destruction is fifty
percent (50%) or more of the then Replacement Cost (excluding Lessee-Owned
Alterations and Utility Installations and Trade Fixtures of any lessees of the
Building) of the Building shall, at the option of Lessor, be deemed to be
Premises Total Destruction.
(c) "INSURED LOSS" shall mean damage or destruction to the
Premises, other than Lessee-Owned Alterations and Utility Installations and
Trade Fixtures, which was caused by an event required to be covered by the
insurance described in Paragraph 8.3(a) irrespective of any deductible amounts
or coverage limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the
Improvements owned by Lessor at the time of the occurrence to their condition
existing immediately prior thereto, including demolition, debris removal and
upgrading required by the operation of applicable building codes, ordinances or
laws, and without deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 PREMISES PARTIAL DAMAGE - INSURED LOSS. If Premises Partial
Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's
expense, repair such damage (but not Lessee's Trade Fixtures or Lessee-Owned
Alterations and Utility Installations) as soon as reasonably possible and
this Lease shall continue in full force and effect. In the event, however,
that there is a shortage of Insurance proceeds and such shortage is due to
the fact that, by reason of the unique nature of the improvements in the
Premises, full replacement cost insurance coverage was not commercially
reasonable and available, Lessor shall have no obligation to pay for the
shortage in insurance proceeds or to fully restore the unique aspects of the
Premises unless Lessee provides Lessor with the funds to cover same, or
adequate assurance thereof, within ten (10) days following receipt of written
notice of such shortage and request therefor. If Lessor receives said funds
or adequate assurance thereof within said ten (10) day period, Lessor shall
complete them as soon as reasonably possible and this Lease shall remain in
full force and effect. If Lessor does not receive such funds or assurance
within said period, Lessor may nevertheless elect by written notice to Lessee
within ten (10) days thereafter to make such restoration and repair as is
commercially reasonable with Lessor paying any shortage in proceeds, in which
case this Lease shall remain in full force and effect. If Lessor does not
receive such funds or assurance within and repair, then such ten (10) day
period, and if Lessor does not so elect to restore this Lease shall terminate
sixty (60) days following the occurrence of the damage destruction. Unless
otherwise agreed, Lessee shall in no event have any right to reimbursement
from Lessor for any funds contributed by Lessee to repair any such damage or
destruction. Premises Partial Damage due to flood or earthquake shall be
subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that
there may be some insurance coverage, but the net proceeds of any such
insurance shall be made available for the repairs if made by either Party.
9.3 PARTIAL DAMAGE - UNINSURED LOSS. If Premises Partial Damage that is
not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect), Lessor may at Lessor's
option, either (i) repair such damage as soon as reasonably possible at Lessor's
expense, in which event this Lease shall continue in full force and effect, or
(ii) give written notice to Lessee within thirty (30) days after receipt by
Lessor of knowledge of the occurrence of such damage of Lessor's desire to
terminate this Lease as of the date sixty (60) days following the date of such
notice. In the event Lessor elects to give such notice of Lessor's intention to
terminate this Lease, Lessee shall have the right within ten (10) days after the
receipt of such notice to give written notice to Lessor of Lessee's commitment
to pay for the repair of such damage totally at Lessee's expense and without
reimbursement from Lessor. Lessee shall provide Lessor with the required funds
or satisfactory assurance thereof within thirty (30) days following such
commitment from Lessee. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such repairs as soon as reasonably
possible after the required funds are available. If Lessee does not give such
notice and provide the funds or assurance thereof within the times specified
above, this Lease shall terminate as of the date specified in Lessor's notice
of termination.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an Insured Loss or was caused by a negligent or willful act of
Lessee. In the event, however, that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 9.7.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6)
months of the term of this Lease there is damage for which the cost to repair
exceeds one month's Base Rent, whether or not an Insured Loss, Lessor may, at
Lessor's option, terminate this Lease effective sixty (60) days following the
date of occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however, if Lessee at that time has an exercisable option to
extend this Lease or to purchase the Premises, then Lessee may preserve this
Lease by (a) exercising such option, and (b) providing Lessor with any shortage
in insurance proceeds (or adequate assurance thereof) needed to make the repairs
on or before the earlier of (i) the date which is ten (10) days after Lessee's
receipt of Lessor's written notice purporting to terminate this Lease, or (ii)
the day prior to the date upon which such option expires. If Lessee duly
exercises such option during such period and provides Lessor with funds (or
adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor
shall, at Lessor's expense repair such damage as soon as reasonably possible and
this Lease shall continue in full force and effect. If Lessee fails to exercise
such option and provide such funds or assurance during such period, then this
Lease shall terminate as of the date set forth in the first sentence of this
Paragraph 9.5.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of (i) Premises Partial Damage or (ii)
Hazardous Substance Condition for which Lessee is not legally responsible,
the Base Rent, Common Area Operating Expenses and other charges, if any,
payable by Lessee hereunder for the period during which such damage or
condition, its repair, remediation or restoration continues, shall be abated
in proportion to the degree to which Lessee's use of the Premises is
impaired, but not in excess of proceeds from insurance required to be carried
under Paragraph 8.3(b). Except for abatement of Base Rent, Common Area
Operating Expenses and other charges, if any, as aforesaid, all other
obligations of Lessee hereunder shall be performed by Lessee, and Lessee
shall have no claim against Lessor for any damage suffered by reason of any
such damage, destruction, repair, remediation or restoration.
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(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises within
ninety (90) days after such obligation shall accrue, Lessee may, at any time
prior to the commencement of such repair or restoration, give written notice to
Lessor and to any Lenders of which Lessee has actual notice of Lessee's election
to terminate this Lease on a date not less than sixty (60) days following the
giving of such notice. If Lessee gives such notice to Lessor and such Lenders
and such repair or restoration is not commenced within thirty (30) days after
receipt of such notice, this Lease shall terminate as of the date specified in
said notice. If Lessor or a Lender commences the repair or restoration of the
Premises within thirty (30) days after the receipt of such notice, this Lease
shall continue in full force and effect. "COMMENCE" as used in this Paragraph
9.6 shall mean either the unconditional authorization of the preparation of the
required plans, or the beginning of the actual work on the Premises, whichever
occurs first.
9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable
Requirements and this Lease shall continue in full force and effect, but subject
to Lessor's rights under Paragraph 6.2(c) and Paragraph 13), Lessor may at
Lessor's option either (i) investigate and remediate such Hazardous Substance
Condition, if required, as soon as reasonably possible at Lessor's expense, in
which event this Lease shall continue in full force and effect, or (ii) if the
estimated cost to investigate and remediate such condition exceeds twelve (12)
times the then monthly Base Rent or $100,000 whichever is greater, give written
notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of
the occurrence of such Hazardous Substance Condition of Lessor's desire to
terminate this Lease as of the date sixty (60) days following the date of such
notice. In the event Lessor elects to give such notice of Lessor's intention to
terminate this Lease, Lessee shall have the right within ten (10) days after the
receipt of such notice to give written notice to Lessor of Lessee's commitment
to pay for the excess costs of (a) investigation and remediation of such
Hazardous Substance Condition to the extent required by Applicable Requirements,
over (b) an amount equal to twelve (12) times the then monthly Base Rent or
$100,000, whichever is greater. Lessee shall provide Lessor with the funds
required of Lessee or satisfactory assurance thereof within thirty (30) days
following said commitment by Lessee. In such event this Lease shall continue in
full force and effect, and Lessor shall proceed to make such investigation and
remediation as soon as reasonably possible after the required funds are
available. If Lessee does not give such notice and provide the required funds
or assurance thereof within the time period specified above, this Lease shall
terminate as of the date specified in Lessor's notice of termination.
9.8 TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this Paragraph 9, Lessor shall return to Lessee any advance payment
made by Lessee to Lessor and so much of Lessee's Security Deposit as has not
been, or is not then required to be, used by Lessor under the terms of this
Lease.
9.9 WAIVER OF STATUTES. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
and the Building with respect to the termination of this Lease and hereby
waive the provisions of any present or future statute to the extent it is
inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1 PAYMENT OF TAXES. Lessor shall pay the Real Property Taxes, as
defined in Paragraph 10.2(a), applicable to the Industrial Center, and except as
otherwise provided in Paragraph 10.3, any increases in such amounts over the
Base Real Property Taxes shall be included in the calculation of Common Area
Operating Expenses in accordance with the provisions of Paragraph 4.2.
10.2 REAL PROPERTY TAX DEFINITIONS.
(a) As used herein, the term "REAL PROPERTY TAXES" shall include
any form of real estate tax or assessment, general, special, ordinary or
extraordinary, and any license fee, commercial rental tax, improvement bond or
bonds, levy or tax (other than inheritance, personal income or estate taxes)
imposed upon the Industrial Center by any authority having the direct or
indirect power to tax, including any city, state or federal government, or any
school, agricultural, sanitary, fire, street, drainage, or other improvement
district thereof, levied against any legal or equitable interest of Lessor in
the Industrial Center or any portion thereof, Lessor's right to rent or other
income therefrom, and/or Lessor's business of leasing the Premises. The term
"REAL PROPERTY TAXES" shall also include any tax, fee, levy, assessment or
charge, or any increase therein, imposed by reason of events occurring, or
changes in Applicable Law taking effect, during the term of this Lease,
including but not limited to a change in the ownership of the Industrial Center
or in the improvements thereon, the execution of this Lease, or any
modification, amendment or transfer thereof, and whether or not contemplated by
the Parties.
(b) As used herein, the term "BASE REAL PROPERTY TAXES" shall be
the amount of Real Property Taxes, which are assessed against the Premises,
Building or Common Areas in the calendar year during which the Lease is
executed. In calculating Real Property Taxes for any calendar year, the Real
Property Taxes for any real estate tax year shall be included in the calculation
of Real Property Taxes for such calendar year based upon the number of days
which such calendar year and tax year have in common.
10.3 ADDITIONAL IMPROVEMENTS. Common Area Operating Expenses shall not
include Real Property Taxes specified in the tax assessor's records and work
sheets as being caused by additional improvements placed upon the Industrial
Center by other lessees or by Lessor for the exclusive enjoyment of such other
lessees. Notwithstanding Paragraph 10.1 hereof, Lessee shall, however, pay to
Lessor at the time Common Area Operating Expenses are payable under Paragraph
4.2, the entirety of any increase in Real Property Taxes if assessed solely by
reason of Alterations, Trade Fixtures or Utility Installations placed upon the
Premises by Lessee or at Lessee's request.
10.4 JOINT ASSESSMENT. If the Building is not separately assessed, Real
Property Taxes for all of the land and improvements included within the tax
parcel assessed, such proportion to be determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other information as
may be reasonably available. Lessor's reasonable determination thereof, in good
faith, shall be conclusive.
10.5 LESSEE'S PROPERTY TAXES. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or stored within the Industrial Center. When
possible, Lessee shall cause its Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all other personal
property to be assessed and billed separately from the real property of Lessor.
If any of Lessee's said property shall be assessed with Lessor's real property,
Lessee shall pay Lessor the taxes attributable to Lessee's property within ten
(10) days after receipt of a written statement setting forth the taxes
applicable to Lessee's property.
11. UTILITIES. Lessee shall pay directly for all utilities and services
supplied to the Premises, including but not limited to electricity, telephone,
security, gas and cleaning of the Premises, together with any taxes thereon. If
any such utilities or services are not separately metered to the Premises or
separately billed to the Premises, Lessee shall pay to Lessor a reasonable
proportion to be determined by Lessor of all such charges jointly metered or
billed with other premises in the Building, in the manner and within the time
periods set forth in Paragraph 4.2(d).
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively, "assign") or
sublet all or any part of Lessee's interest in this Lease or in the Premises
without Lessor's prior written consent given under and subject to the terms of
Paragraph 36.
(b) A change in the control of Lessee shall constitute an
assignment requiring Lessor's consent. The transfer, on a cumulative basis, of
twenty-five percent (25%) or more of the voting control of Lessee shall
constitute a change in control for this purpose. See Paragraph 59 attached
herein.
(c) The involvement of Lessee or its assets in any transaction, or
series of transactions (by way of merger, sale, acquisition, financing,
refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal
assignment or hypothecation of this Lease or Lessee's assets occurs, which
results or will result in a reduction of the Net Worth of Lessee, as hereinafter
defined, by an amount equal to or greater than twenty-five percent (25%) of
such Net Worth of Lessee as it was represented to Lessor at the time of full
execution and delivery of this Lease or at the time of the most recent
assignment to which Lessor has consented, or as it exists immediately prior to
said transaction or transactions constituting such reduction, at whichever time
said Net Worth of Lessee was or is greater, shall be considered an assignment of
this Lease by Lessee to which Lessor may reasonably withhold its consent. "NET
WORTH OF LESSEE" for purposes of this Lease shall be the net worth of Lessee
(excluding any Guarantors) established under generally accepted accounting
principles consistently applied.
(d) An assignment or subletting of Lessee's interest in this Lease
without Lessor's specific prior written consent shall, at Lessor's option, be a
Default curable after notice per Paragraph 13.1, or a non-curable Breach without
the necessity of any notice and grace period. If Lessor elects to treat such
unconsented to assignment or subletting as a non-curable Breach, Lessor shall
have the right to either: (i) terminate this Lease, or (ii) upon thirty (30)
days' written notice ("LESSOR'S NOTICE"), increase the monthly Base Rent for the
Premises to the greater of the then fair market rental value of the Premises, as
reasonably determined by Lessor, or one hundred ten percent (110%) of the Base
Rent then in effect. Pending determination of the new fair market rental value,
if disputed by Lessee, Lessee shall pay the amount set forth in Lessor's Notice,
with any overpayment credited against the next installment(s) of Base Rent
coming due, and any underpayment for the period retroactively to the effective
date of the adjustment being due and payable immediately upon the determination
thereof. Further, in the event of such Breach and rental adjustment, (i) the
purchase price of any option to purchase the Premises held by Lessee shall be
subject to similar adjustment to the then fair market value as reasonably
determined by Lessor (without the Lease being considered an encumbrance or any
deduction for depreciation or obsolescence, and considering the Premises at its
highest and best use and in good condition) or one hundred ten percent (110%) of
the price previously in effect, (ii) any index-oriented rental or price
adjustment formulas contained in this Lease shall be adjusted to require that
the base index be determined with reference to the index applicable to the time
of such adjustment, and (iii) any fixed rental adjustments scheduled during the
remainder of the Lease term shall be increased in the same ratio as the new
rental bears to the Base Rent in effect immediately prior to the adjustment
specified in Lessor's Notice.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor
shall be limited to compensatory damages and/or injunctive relief.
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or subletting
shall not (i) be effective without the express written assumption by such
assignee or sublessee of the obligations of Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, nor (iii) alter the primary
liability of Lessee for the payment of Base Rent and other sums due Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval of
an assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of any rent for performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for the Default or Breach by
Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or to
any subsequent or successive assignment or subletting by the assignee or
sublessee. However, Lessor may consent to subsequent sublettings and assignments
of the sublease or any amendments or modifications thereto without notifying
Lessee or anyone else liable under this Lease or the sublease and without
obtaining their consent, and such action shall not relieve such persons from
liability under this Lease or the sublease.
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(d) In the event of any Default or Breach of Lessee's obligation
under this Lease, Lessor may proceed directly against Lessee, any Guarantors
or anyone else responsible for the performance of the Lessee's obligations
under this Lease, including any sublessee, without first exhausting Lessor's
remedies against any other person or entity responsible therefor to Lessor,
or any security held by Lessor.
(e) Each request for consent to an assignment or subletting shall
be in writing, accompanied by information relevant to Lessor's determination
as to the financial and operational responsibility and appropriateness of the
proposed assignee or sublessee, including but not limited to the intended use
and/or required modification of the Premises, if any, together with a
non-refundable deposit of $250 plus legal review not to exceed two (2)
billable hours or ten percent (10%) of the monthly Base Rent applicable to
the portion of the Premises which is the subject of the proposed assignment
or sublease, whichever is greater, as reasonable consideration for Lessor's
considering and processing the request for consent. Lessee agrees to provide
Lessor with such other or additional information and/or documentation as may
be reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such sublease, be
deemed, for the benefit of Lessor, to have assumed and agreed to conform and
comply with each and every term, covenant, condition and obligation herein to
be observed or performed by Lessee during the term of said assignment or
sublease, other than such obligations as are contrary to or inconsistent with
provisions of an assignment or sublease to which Lessor has specifically
consented in writing.
(g) The occurrence of a transaction described in Paragraph 12.2(c)
shall give Lessor the right (but not the obligation) to require that the
Security Deposit be increased by an amount equal to three (3) times the then
monthly Base Rent, and Lessor may make the actual receipt by Lessor of the
Security Deposit increase a condition to Lessor's consent to such
transaction.
(h) Lessor, as a condition to giving its consent to any assignment
or subletting, may require that the amount and adjustment schedule of the
rent payable under this Lease be adjusted to what is then the market value
and/or adjustment schedule for property similar to the Premises as then
constituted, as determined by Lessor.
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all
or any part of the Premises and shall be deemed included in all subleases
under this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease of all or a
portion of the Premises heretofore or hereafter made by Lessee, and Lessor
may collect such rent and income and apply same toward Lessee's obligations
under this Lease; provided, however, that until a Breach (as defined in
Paragraph 13.1) shall occur in the performance of Lessee's obligations under
this Lease, Lessee may, except as otherwise provided in this Lease, receive,
collect and enjoy the rents accruing under such sublease. Lessor shall not,
by reason of the foregoing provision or any other assignment of such sublease
to Lessor, nor by reason of the collection of the rents from a sublessee, be
deemed liable to the sublessee for any failure of Lessee to perform and
comply with any of Lessee's obligations to such sublessee under such
Sublease. Lessee hereby irrevocably authorizes and directs any such
sublessee, upon receipt of a written notice from Lessor stating that a Breach
exists in the performance of Lessee's obligations under this Lease, to pay to
Lessor the rents and other charges due and to become due under the sublease.
Sublessee shall rely upon any such statement and request from Lessor and
shall pay such rents and other charges to Lessor without any obligation or
right to inquire as to whether such Breach exists and notwithstanding any
notice from or claim from Lessee to the contrary. Lessee shall have no right
or claim against such sublessee, or, until the Breach has been cured, against
Lessor, for any such rents and other charges so paid by said sublessee to
Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any
obligation to do so, may require any sublessee to attorn to Lessor, in which
event Lessor shall undertake the obligations of the sublessor under such
sublease from the time of the exercise of said option to the expiration of
such sublease; provided, however, Lessor shall not be liable for any prepaid
rents or security deposit paid by such sublessee to such sublessor or for any
other prior defaults or breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor
under a sublease shall also require the consent of Lessor herein.
(d) No sublessee under a sublease approved by Lessor shall further
assign or sublet all or any part of the Premises without Lessor's prior
written consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach
by Lessee to the sublessee, who shall have the right to cure the Default of
Lessee within the grace period, if any, specified in such notice. The
sublessee shall have a right of reimbursement and offset from and against
Lessee for any such Defaults cured by the sublessee.
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default, and that Lessor may include the cost of such services and costs in
said notice as rent due and payable to cure said default. A "DEFAULT" by
Lessee is defined as a failure by Lessee to observe, comply with or perform
any of the terms, covenants, conditions or rules applicable to Lessee under
this Lease. A "BREACH" by Lessee is defined as the occurrence of anyone or
more of the following Defaults, and, where a grace period for cure after
notice is specified herein, the failure by Lessee to cure such Default prior
to the expiration of the applicable grace period, and shall entitle Lessor to
pursue the remedies set forth in Paragraphs 13.2 and/or 13.3:
(a) The vacating of the Premises without the intention to reoccupy
same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the
failure by Lessee to make any payment of Base Rent, Lessee's Share of Common
Area Operating Expenses, or any other monetary payment required to be made by
Lessee hereunder as and when due, the failure by Lessee to provide Lessor
with reasonable evidence of insurance or surety bond required under this
Lease, or the failure of Lessee to fulfill any obligation under this Lease
which endangers or threatens life or property, where such failure continues
for a period of three (3) days following written notice thereof by or on
behalf of Lessor to Lessee.
(c) Except as expressly otherwise provided in this Lease, the
failure by Lessee to provide Lessor with reasonable written evidence (in duly
executed original form, if applicable) of (i) compliance with Applicable
Requirements per Paragraph 6.3, (ii) the inspection, maintenance and service
contracts required under Paragraph 7.1(b), (iii) the rescission of an
unauthorized assignment or subletting per Paragraph 12.1, (iv) a Tenancy
Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination
of this Lease per Paragraph 30, (vi) the guaranty of the performance of
Lessee's obligations under this Lease if required under Paragraphs 1.11 and
37, (vii) the execution of any document requested under Paragraph 42
(easements), or (viii) any other documentation or information which Lessor
may reasonably require of Lessee under the terms of this lease, where any
such failure continues for a period of ten (10) days following written notice
by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof
that are to be observed, complied with or performed by Lessee, other than
those described in Subparagraphs 13.1(a), (b) or (c), above, where such
Default continues for a period of thirty (30) days after written notice
thereof by or on behalf of Lessor to Lessee; provided, however, that if the
nature of Lessee's Default is such that more than thirty (30) days are
reasonably required for its cure, then it shall not be deemed to be a Breach
of this Lease by Lessee if Lessee commences such cure within said thirty (30)
day period and thereafter diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the making
by Lessee of any general arrangement or assignment for the benefit of
creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S. Code
Section 101 or any successor statute thereto (unless, in the case of a
petition filed against LESSEE, the same is dismissed within sixty (60) days);
(iii) the appointment of a trustee or receiver to take possession of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where possession is not restored to Lessee within
thirty (30) days; or (iv) the attachment, execution or other judicial seizure
of substantially all of Lessee's assets located at the Premises or of
Lessee's interest in this Lease, where such seizure is not discharged within
thirty (30) days; provided, however, in the event that any provision of this
Subparagraph 13.1(e) is contrary to any applicable law, such provision shall
be of no force or effect, and shall not affect the validity of the remaining
provisions.
(f) The discovery by Lessor that any financial statement of Lessee
or of any Guarantor, given to Lessor by Lessee or any guarantor, was
materially false.
(g) If the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a Guarantor, (ii) the termination of a
Guarantor's liability with respect to this Lease other than in accordance
with the terms of such guaranty, (iii) a Guarantor's becoming insolvent or
the subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the
guaranty, or (v) a Guarantor's breach of its guaranty obligation on an
anticipatory breach basis, and Lessee's failure, within sixty (60) days
following written notice by or on behalf of Lessor to Lessee of any such
event, to provide Lessor with written alternative assurances of security,
which, when coupled with the then existing resources of Lessee, equals or
exceeds the combined financial resources of Lessee and the Guarantors that
existed at the time of execution of this lease.
13.2 REMEDIES. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written
notice to Lessee (or in case of an emergency, without notice), Lessor may at
its option (but without obligation to do so), perform such duty or obligation
on Lessee's behalf, including but not limited to the obtaining of reasonably
required bonds, insurance policies, or governmental licenses, permits or
approvals. The costs and expenses of any such performance by Lessor shall be
due and payable by lessee to Lessor upon invoice therefor. If any check given
to Lessor by Lessee shall not be honored by the bank upon which it is drawn,
Lessor, at its own option, may require all future payments to be made under
this Lease by Lessee to be made only by cashier's check. In the event of a
Breach of this Lease by Lessee (as defined in Paragraph 13.1), with or
without further notice or demand, and without limiting Lessor in the exercise
of any right or remedy which Lessor may have by reason of such Breach, Lessor
may:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate
and Lessee shall immediately surrender possession of the Premises to Lessor.
In such event Lessor shall be entitled to recover from Lessee: (i) the worth
at the time of the award of the unpaid rent which had been earned at the time
of termination; (ii) the worth at the time of award of the amount by which
the unpaid rent which would have been earned after termination until the time
of award exceeds the amount of such rental loss that the Lessee proves could
have been reasonably avoided; (iii) the worth at the time of award of the
amount by which the unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor
for all the detriment proximately caused by the Lessee's failure to perform
its obligations under this Lease or which in the ordinary course of things
would be likely to result therefrom, including but not limited to the cost of
recovering possession of the Premises, expenses of reletting, including
necessary renovation and alteration of the Premises, reasonable attorneys'
fees, and that portion of any leasing commission paid by Lessor in connection
with this Lease applicable to the unexpired term of this Lease. The worth at
the time of award of the amount referred to in provision (iii) of the
immediately preceding sentence shall be computed by discounting such amount
at the discount rate of the Federal Reserve Bank of San Francisco or the
Federal Reserve Bank District in which the Premises are located at the time
of award plus one percent (196). Efforts by Lessor to mitigate damages caused
by Lessee's Default or Breach of this Lease shall not waive Lessor's right to
recover damages under this Paragraph 13.2. If termination of this Lease is
obtained
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through the provisional remedy of unlawful detainer, Lessor shall have the
right to recover in such proceeding the unpaid rent and damages as are
recoverable therein, or Lessor may reserve the right to recover all or any
part thereof in a) separate suit for such rent and/or damages. If a notice
and grace period required under Subparagraph 13.1(b), (c) or (d) was not
previously given, a notice to pay rent or quit, or to perform or quit, as the
case may be, given to Lessee under any statute authorizing the forfeiture of
leases for unlawful detainer shall also constitute the applicable notice for
grace period purposes required by Subparagraph 13.1(b),(c) or (d). In such
case, the applicable grace period under the unlawful detainer statue shall
run concurrently after the one such statutory notice, and the failure of
Lessee to cure the Default within the greater of the two (2) such grace
periods shall constitute both an unlawful detainer and a Breach of this Lease
entitling Lessor to the remedies provided for in this Lease and/or by said
statute.
(b) Continue the Lease and Lessee's right to possession in effect
(in California under California Civil Code Section 1951.4) after Lessee's
Breach and recover the rent as it becomes due, provided Lessee has the right
to sublet or assign, subject only to reasonable limitations. Lessor and
Lessee agree that the limitations on assignment and subletting in this Lease
are reasonable. Acts of maintenance or preservation, efforts to relet the
Premises, or the appointment of a receiver to protect the Lessor's interest
under this Lease, shall not constitute a termination of the Lessee's right to
possession.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located.
(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity provisions of this Lease as to matters
occurring or accruing during the term hereof or by reason of Lessee's
occupancy of the Premises.
13.3 INDUCEMENT RECAPTURE IN EVENT OF BREACH. Any agreement by Lessor
for free or abated rent or other charges applicable to the Premises, or for
the giving or paying by Lessor to or for Lessee of any cash or other bonus,
inducement or consideration for Lessee's entering into this Lease, all of
which concessions are hereinafter referred to as "INDUCEMENT PROVISIONS"
shall be deemed conditioned upon Lessee's full and faithful performance of
all of the terms, covenants and conditions of this Lease to be performed or
observed by Lessee during the term hereof as the same may be extended. Upon
the occurrence of a Breach (as defined in Paragraph 13.1) of this Lease by
Lessee, any such Inducement Provision shall automatically be deemed deleted
from this Lease and of no further force or effect, and any rent, other
charge, bonus, inducement or consideration theretofore abated, given or paid
by Lessor under such an Inducement Provision shall be immediately due and
payable by Lessee to Lessor, and recoverable by Lessor, as additional rent
due under this Lease, notwithstanding any subsequent cure of said Breach by
Lessee. The acceptance by Lessor of rent or the cure of the Breach which
initiated the operation of this Paragraph 13.3 shall not be deemed a waiver
by Lessor of the provisions of thiS Paragraph 13.3 unless specifically so
stated in writing by Lessor at the time of such acceptance.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee
to Lessor of rent and other sums due hereunder will cause Lessor to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed upon
Lessor by the terms of any ground Lease, mortgage or deed of trust covering
the Premises. Accordingly, if any installment of rent or other sum due from
Lessee shall not be received by Lessor or Lessor's designee within ten (10)
days after such amount shall be due, then, without any requirement for notice
to Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%)
of such overdue amount. The parties hereby agree that such late charge
represents a fair and reasonable estimate of the costs Lessor will incur by
reason of late payment by Lessee. Acceptance of such late charge by Lessor
shall in no event constitute a waiver of Lessee's Default or Breach with
respect to such overdue amount, nor prevent Lessor from exercising any of the
other rights and remedies granted hereunder. In the event that a late charge
is payable hereunder, whether or not collected, for three (3) consecutive
installments of Base Rent, then notwithstanding Paragraph 4.1 or any other
provision of this Lease to the contrary, Base Rent shall, at Lessor's option,
become due and payable quarterly in advance.
13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph 13.5, a
reasonable time shall in no event be less than thirty (30) days after receipt
by Lessor, and by any Lender(s) whose name and address shall have been
furnished to Lessee in writing for such purpose, of written notice specifying
wherein such obligation of Lessor has not been performed; provided, however,
that if the nature of Lessor's obligation is such that more than thirty (30)
days after such notice are reasonably required for its performance, then
Lessor shall not be in breach of this Lease if performance is commenced
within such thirty (30) day period and thereafter diligently pursued to
completion.
14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said
power (all of which are herein called "condemnation"), this Lease shall
terminate as to the part so taken as of the date the condemning authority
takes title or possession, whichever first occurs. If more than ten percent
(10%) of the floor area of the Premises, or more than twenty-five percent
(25%) of the portion of the Common Areas designated for Lessee's parking, is
taken by condemnation, Lessee may, at Lessee's option, to be exercised in
writing within ten (10) days after Lessor shall have given Lessee written
notice of such taking (or in the absence of such notice, within ten (10) days
after the condemning authority shall have taken possession) terminate this
Lease as of the date the condemning authority takes such possession. If
Lessee does not terminate this Lease in accordance with the foregoing, this
Lease shall remain in full force and effect as to the portion of the Premises
remaining, except that the Base Rent shall be reduced In the same proportion
as the rentable floor area of the Premises taken bears to the total rentable
floor area of the Premises. No reduction of Base Rent shall occur if the
condemnation does not apply to any portion of the Premises. Any award for the
taking of all or any part of the Premises under the power of eminent domain
or any payment made under threat of the exercise of such power shall be the
property of Lessor, whether such award shall be made as compensation for
diminution of value of the leasehold or for the taking of the fee, or as
severance damages; provided, however, that Lessee shall be entitled to any
compensation, separately awarded to Lessee for Lessee's relocation expenses
and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not
terminated by reason of such condemnation, Lessor shall to the extent of its
net severance damages received, over and above Lessee's Share of the legal
and other expenses incurred by Lessor in the condemnation matter, repair any
damage to the Premises caused by such condemnation authority. Lessee shall be
responsible for the payment of any amount in excess of such net severance
damages required to complete such repair.
16. TENANCY AND FINANCIAL STATEMENTS. 16.1 TENANCY STATEMENT. Each Party
(as "RESPONDING PARTY") shall within ten (10) days after written notice from
the other party (the "REQUESTING PARTY") execute, acknowledge and deliver to
the Requesting Party a statement in writing in A form similar to the then
most current "TENANCY STATEMENT" form published by the American Industrial
Real Estate Association, plus such additional information, confirmation
and/or statements as may be reasonably requested by the Requesting Party.
16.2 FINANCIAL STATEMENT. If Lessor desires to finance, refinance, or
sell the Premises or the Building, or any part thereof, Lessee and all
Guarantors shall deliver to any potential lender or purchaser designated by
Lessor such financial statements of Lessee and such Guarantors as may be
reasonably required by such lender or purchaser, including but not limited to
Lessee's financial statements for the past three (3) years. All such
financial statements shall be received by Lessor and such lender or purchaser
in confidence and shall be used only for the purposes herein set forth.
17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the
owner or owners at the time in question of the fee title to the Premises. In
the event of a transfer of Lessor's title or interest in the Premises or in
this Lease, Lessor shall deliver to the transferee or assignee (in cash or by
credit) any unused Security Deposit held by Lessor at the time of such
transfer or assignment. Except as provided in Paragraph 15.3, upon such
transfer or assignment and delivery of the Security Deposit, as aforesaid,
the prior Lessor shall be relieved of all liability with respect to the
obligations and/or covenants under this Lease thereafter to be performed by
the Lessor. Subject to the foregoing, the obligations and/or covenants in
this Lease to be performed by the Lessor shall be binding only upon the
Lessor as herein above defined.
18. SEVERABILITY. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within ten (10)
days following the date on which it was due, shall bear interest from the
date due at the prime rate charged by the largest state chartered bank in the
state in which the Premises are located plus four percent (4%) per annum, but
not exceeding the maximum rate allowed by law, in addition to the potential
late charge provided for in Paragraph 13.4.
20. TIME OF ESSENCE. Time is of the essence with respect to the performance
of all obligations to be performed or observed by the parties under this
Lease.
21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the
terms of this Lease are deemed to be rent.
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23. NOTICES.
23.1 NOTICE REQUIREMENTS. All notices required or permitted
by this Lease shall be in writing and may be delivered in person (by hand or
by messenger or courier service) or may be sent by regular, certified or
registered mail or U.S. Postal Service Express Mail, with postage prepaid, or
by facsimile transmission during normal business hours, and shall be deemed
sufficiently given if served in a manner specified in this Paragraph 23. The
addresses noted adjacent to a Party's signature on this Lease shall be that
Party's address for delivery or mailing of notice purposes. Either Party may
by written notice to the other specify a different address for notice
purposes, except that upon Lessee's taking possession of the Premises, the
Premises shall constitute Lessee's address for the purpose of mailing or
delivering notices to Lessee. A copy of all notices required or permitted to
be given to Lessor hereunder shall be concurrently transmitted to such party
or parties at such addresses as Lessor may from time to time hereafter
designate by written notice to Lessee.
23.2 DATE OF NOTICE. Any notice sent by registered or certified mail, return
receipt requested, shall be deemed given on the date of delivery shown on the
receipt card, or if no delivery date is shown, the postmark thereon. If sent by
regular mail, the notice shall be deemed given forty-eight (48) hours after the
same is addressed as required herein and mailed with postage prepaid. Notices
delivered by United States Express Mail or overnight courier that guarantees
next day delivery shall be deemed given twenty-four (24) hours after delivery of
the same to the United States Postal Service or courier. If any notice is
transmitted by facsimile transmission or similar means, the same shall be deemed
served or delivered upon telephone or facsimile confirmation of receipt of the
transmission thereof, provided a copy is also delivered via delivery or mail. If
notice is received on a Saturday or a Sunday or a legal holiday, it shall be
deemed received on the next business day.
24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant
or condition hereof by Lessee, shall be deemed a waiver of any other term,
covenant or condition hereof, or of any subsequent Default or Breach by Lessee
of the same or any other term, covenant or condition hereof. Lessor's consent
to, or approval of, any such act shall not be deemed to render unnecessary the
obtaining of Lessor's consent to, or approval of, any subsequent or similar act
by Lessee, or be construed as the basis of an estoppel to enforce the provision
or provisions of this Lease requiring such consent. Regardless of Lessor's
knowledge of a Default or Breach at the time of accepting rent, the acceptance
of rent by Lessor shall not be a waiver of any Default or Breach by Lessee of
any provision hereof. Any payment given Lessor by Lessee may be accepted by
Lessor on account of moneys or damages due Lessor, notwithstanding any
qualifying statements or conditions made by Lessee in connection therewith,
which such statements and/or conditions shall be of no force or effect
whatsoever unless specifically agreed to in writing by Lessor at or before the
time of deposit of such payment.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease. In the event that Lessee holds over in violation of this Paragraph
26 then the Base Rent payable from and after the time of the expiration or
earlier termination of this Lease shall be increased to two hundred percent
(200%) of the Base Rent applicable during the month immediately preceding such
expiration or earlier termination. Nothing contained herein shall be construed
as a consent by Lessor to any holding over by Lessee.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the Parties,
their personal representatives, successors and assigns and be governed by the
laws of the State in which the Premises are located. Any litigation between the
Parties hereto concerning this Lease shall be initiated in the county in which
the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or
other hypothecation or security device (collectively, "Security Device"), now
or hereafter placed by Lessor upon the real property of which the Premises
are a part, to any and all advances made on the security thereof, and to all
renewals, modifications, consolidations, replacements and extensions thereof.
Lessee agrees that the Lenders holding any such Security Device shall have no
duty, liability or obligation to perform any of the obligations of Lessor
under this Lease, but that in the event of Lessor's default with respect to
any such obligation, Lessee will give any Lender whose name and address have
been furnished Lessee in writing for such purpose notice of Lessor's default
pursuant to Paragraph 13.5. If any Lender shall elect to have this Lease
and/or any Option granted hereby superior to the lien of its Security Device
and shall give written notice thereof to Lessee, this Lease and such Options
shall be deemed prior to such Security Device, notwithstanding the relative
dates of the documentation or recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device,
and that in the event of such foreclosure, such new owner shall not: (i) be
liable for any act or omission of any prior lessor or with respect to events
occurring prior to acquisition of ownership, (ii) be subject to any offsets
or defenses which Lessee might have against any prior lessor, or (iii) be
bound by prepayment of more than one month's rent.
30.3 NON-DISTURBANCE. With respect to Security Devices entered into by
Lessor after the execution of this lease, Lessee's subordination of this
Lease shall be subject to receiving assurance (a "non-disturbance agreement")
from the Lender that Lessee's possession and this Lease, including any
options to extend the term hereof, will not be disturbed so long as Lessee is
not in Breach hereof and attorns to the record owner of the Premises.
30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall be
effective without the execution of any further documents; provided, however,
that upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any such
subordination or non-subordination, attornment and/or non-disturbance agreement
as is provided for herein.
31. ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding to
enforce the terms hereof or declare rights hereunder, the Prevailing Party (as
hereafter defined) in any such proceeding, action, or appeal thereon, shall be
entitled to reasonable attorneys' fees. Such fees may be awarded in the same
suit or recovered in a separate suit, whether or not such action or proceeding
is pursued to decision or judgment. The term "Prevailing Party" shall include,
without limitation, a Party or Broker who substantially obtains or defeats the
relief sought, as the case may be, whether by compromise, settlement, judgment,
or the abandonment by the other Party or Broker of its claim or defense. The
attorneys' fee award shall not be computed in accordance with any court fee
schedule, but shall be such as to fully reimburse all attorneys' fees reasonably
incurred. Lessor shall be entitled to attorneys' fees, costs and expenses
incurred in preparation and service of notices of Default and consultations in
connection therewith, whether or not a legal action is subsequently commenced in
connection with such Default or resulting Breach. Broker(s) shall be intended
third party beneficiaries of this Paragraph 31.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall
have the right to enter the Premises at any time, in the case of an emergency,
and otherwise at reasonable times for the purpose of showing the same to
prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises or to the Building, as Lessor
may reasonably deem necessary. Lessor may at any time place on or about the
Premises or Building any ordinary "For Sale" signs and Lessor may at any time
during the last one hundred eighty (180) days of the term hereof place on or
about the Premises any ordinary "For Lease" signs. All such activities of Lessor
shall be without abatement of rent or liability to Lessee.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. SIGNS. Lessee shall not place any sign upon the exterior of the Premises or
the Building, except that Lessee may, with Lessor's prior written consent,
install (but not on the roof) such signs as are reasonably required to advertise
Lessee's own business so long as such signs are in a location designated by
Lessor and comply with Applicable Requirements and the signage criteria
established for the Industrial Center by Lessor. The installation of any sign on
the Premises by or for Lessee shall be subject to the provisions of Paragraph
7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations).
Unless otherwise expressly agreed herein, Lessor reserves all rights to the use
of the roof of the Building, and the right to install advertising signs on the
Building, including the roof, which do not unreasonably interfere with the
conduct of Lessee's business; Lessor shall be entitled to all revenues from such
advertising signs.
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, Lessor shall, in the event of any such surrender,
termination or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election to the contrary by written notice to the holder
of any such lesser interest, shall constitute Lessor's election to have such
event constitute the termination of such interest.
36. CONSENTS.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided
herein, wherever in this Lease the consent of a Party is required to an act by
or for the other Party, such consent shall not be unreasonably withheld or
delayed. Lessor's actual reasonable costs and expenses (including but not
limited to architects', attorneys', engineers' and other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent pertaining to this Lease or the Premises, including but not
limited to consents to an assignment a subletting or the presence or use of a
Hazardous Substance, shall be paid by Lessee to Lessor upon receipt of an
invoice and supporting documentation therefor. In addition to the deposit
described In Paragraph 12.2(e), Lessor may, as a condition to considering any
such request by Lessee, require that Lessee deposit with Lessor an amount of
money (in addition to the Security Deposit held under Paragraph 5) reasonably
calculated by Lessor to represent the cost Lessor will incur in considering and
responding to Lessee's request. Any unused portion of said deposit shall be
refunded to Lessee without interest. Lessor's consent to any act, assignment of
this Lease or subletting of the Premises by Lessee shall not constitute an
acknowledgment that no Default or Breach by Lessee of this Lease exists, nor
shall such consent be deemed a waiver of any then existing Default or Breach,
except as may be otherwise specifically stated in writing by Lessor at the time
of such consent.
(b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by Lessee as being reasonable. The failure to specify herein any
particular condition to Lessor's consent shall not preclude the impositions by
Lessor at the time of consent of such further or other conditions as are then
reasonable with reference to the particular matter for which consent is being
given.
37. GUARANTOR.
37.1 FORM OF GUARANTY. If there are to be any Guarantors of this Lease per
Paragraph 1.11, the form of the guaranty to be executed by each such Guarantor
shall be in the form most recently published by the American Industrial Real
Estate Association, and each such Guarantor shall have the same obligations as
Lessee under this lease, including but not limited to the obligation to provide
the Tenancy Statement and information required in Paragraph 16.
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37.2 ADDITIONAL OBLIGATIONS OF GUARANTOR. It shall constitute a Default
of the Lessee under this Lease if any such Guarantor falls or refuses, upon
reasonable request by Lessor to give: (a) evidence of the due execution of
the guaranty called for by this Lease, including the authority of the
Guarantor (and of the party signing on Guarantor's behalf) to obligate such
Guarantor on said guaranty, and resolution of its board of directors
authorizing the making of such guaranty, together with a certificate of
incumbency showing the signatures of the persons authorized to sign on its
behalf, (b) current financial statements of Guarantor as may from time to
time be requested by Lessor, (c) a Tenancy Statement, or (d) written
confirmation that the guaranty is still in effect.
38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises and
the performance of all of the covenants, conditions and provisions on Lessee's
part to be observed and performed under this Lease, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease.
39. OPTIONS.
39.1 DEFINITION. As used in this Lease, the word "Option" has the following
meaning: (a) the right to extend the term of this Lease or to renew this Lease
or to extend or renew any lease that Lessee has on other property of Lessor; (b)
the right of first refusal to lease the Premises or the right of first offer to
lease the Premises or the right of first refusal to lease other property of
Lessor or the right of first offer to lease other property of Lessor; (c) the
right to purchase the Premises, or the right of first refusal to purchase the
Premises, or the right of first offer to purchase the Premises, or the right to
purchase other property of Lessor, or the right of first refusal to purchase
other property of Lessor, or the right of first offer to purchase other property
of Lessor.
39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee in
this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and
cannot be voluntarily or involuntarily assigned or exercised by any person or
entity other than said original Lessee while the original Lessee is in full and
actual possession of the Premises and without the intention of thereafter
assigning or subletting. The Options, if any, herein granted to Lessee are not
assignable, either as a part of an assignment of this Lease or separately or
apart therefrom, and no Option may be separated from this Lease in any manner,
by reservation or otherwise.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple Options to
extend or renew this Lease, a later option cannot be exercised unless the prior
Options to extend or renew this Lease have been validly exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option, notwithstanding
any provision in the grant of Option to the contrary: (i) during the period
commencing with the giving of any notice of Default under Paragraph 13.1 and
continuing until the noticed Default is cured, or (ii) during the period of time
any monetary obligation due Lessor from Lessee is unpaid (without regard to
whether notice thereof is given Lessee), or (iii) during the time Lessee is in
Breach of this Lease, or (iv) In the event that Lessor has given to Lessee three
(3) or more notices of separate Defaults under Paragraph 13.1 during the twelve
(12) month period immediately preceding the exercise of the Option, whether or
not the Defaults are cured.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because at the provisions of Paragraph 39.4(a)
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option. If, after such exercise and during the term of
this Lease, i) Lessee fails to pay to Lessor a monetary obligation of Lessee for
a period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to
Lessee three (3) or more notices of separate Defaults under Paragraph 13.1
during any twelve (12) month period, whether or not the Defaults are cured, or
(iii) if Lessee commits a Breach of this Lease.
40. RULES AND REGULATIONS. Lessee agrees that it will abide by, and keep and
observe all reasonable rules and regulations ("Rules and Regulations") which
Lessor may make from time to time for the management, safety, care, and
cleanliness of the grounds, the parking and unloading of vehicles and the
preservation of good order, as well as for the convenience of other occupants or
tenants of the Building and the Industrial Center and their invitees.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. RESERVATIONS. Lessor reserves the right, from time to time, to grant,
without the consent or joinder of Lessee, such easements, rights of way, utility
raceways, and dedications that Lessor deems necessary, and to cause the
recordation of parcel maps and restrictions, so long as such easements, rights
of way, utility raceways, dedications, maps and restrictions do not reasonably
interfere with the use of the Premises by Lessee. Lessee agrees to sign any
documents reasonably requested by Lessor to effectuate any such easement rights,
dedication, map or restrictions.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay under the provisions of this
Lease.
44. AUTHORITY. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
45. CONFLICT. Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provisions shall be controlled by the typewritten or
handwritten provisions.
46. OFFER. Preparation of this Lease by either Lessor or Lessee or Lessor's
agent or Lessee's agent and submission of same to Lessee or Lessor shall not be
deemed an offer to lease. This Lease is not intended to be binding until
executed and delivered by all Parties hereto.
47. AMENDMENTS. This Lease may be modified only in writing, signed by the
parties in interest at the time of the modification. The Parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an Institutional Insurance company or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the property
of which the Premises are a part.
48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such multiple parties shall be the joint and several
responsibility of all persons or entitles named herein as such Lessor or Lessee.
49. ENVIRONMENTAL COMPLIANCE is attached hereto and is made a part of this
Lease.
50. COMMON AREA OPERATING EXPENSES is attached hereto and is made a part of this
Lease.
51. REPAIRS is attached hereto and is made a part of this Lease
52. PARKING is attached hereto and is made a part of this Lease.
53. EARLY OCCUPANCY is attached hereto and is made a part of this Lease.
54. BASE RENT INCREASE SCHEDULE is attached hereto and is made a part of this
Lease.
55. FIRST OPTION TO RENEW is attached hereto and is made a part of this Lease.
56. SECOND OPTION TO RENEW is attached hereto and is made a part of this Lease.
57. ADDENDUM TO PARAGRAPH 7.4 (b) is attached hereto and is made a part of this
Lease.
58. ADDENDUM TO PARAGRAPH 7.4 (c) is attached hereto and is made a part of this
Lease.
59. ADDENDUM TO PARAGRAPH 12.1(b) is attached hereto and is made a part of this
Lease.
EXHIBITS "A" through "C" are attached hereto and are made a part of this
Lease.
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LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM
AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY
REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH
RESPECT TO THE PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR YOUR
ATTORNEY'S REVIEW AND APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED
TO EVALUATE THE CONDITION OF THE PROPERTY FOR THE POSSIBLE PRESENCE
OF ASBESTOS, UNDERGROUND STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO
REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL
REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKERS OR THEIR
CONTRACTORS, AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL
EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO
WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF
THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS
LEASE. IF THE SUBJECT PROPERTY IS IN A STATE OTHER THAN CALIFORNIA,
AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE
CONSULTED.
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
Executed at: San Diego, California Executed at:
------------------------ ---------------------------
on: November 15, 1996 on:
--------------------------------- ------------------------------------
By: LESSOR: By: LESSEE:
THE MANUFACTURERS LIFE INSURANCE PHOTOMATRIX CORPORATION
COMPANY
--------------------------------- ------------------------------------
By: /s/ Bruce R. Pearson By: /s/ Suren G. Dutia
--------------------------------- ------------------------------------
Name Printed: Bruce R. Pearson Name Printed: Suren G. Dutia
----------------------- --------------------------
Title: Real Estate Director Title: President and CEO
------------------------------ ---------------------------------
Address: 7510 Clairemont Mesa Blvd., Address: 6285 Nancy Ridge Drive
Suite 211
San Diego, CA 922111-1539 San Diego, CA 92121-2245
---------------------------- ----------------------------------------
Telephone: (619) 292-1667 Telephone: (619) 457-5091 x340
-------------------------- -----------------------------
Facsimile: (619) 292-0504 Facsimile: (619) 457-8016
-------------------------- -----------------------------
BROKER: BROKER:
Executed at: Executed at:
------------------------- --------------------------
on: on:
--------------------------------- ------------------------------------
By: By:
--------------------------------- ------------------------------------
Name Printed: Name Printed:
----------------------- --------------------------
Title: Title:
------------------------------ ---------------------------------
Address: Address:
---------------------------- ----------------------------------------
Telephone: ( ) Telephone: ( )
-------------------------- -----------------------------
Facsimile: ( ) Facsimile: ( )
-------------------------- -----------------------------
NOTE: These forms are often modified to meet changing requirements and needs of
the industry. Always write or call to make sure you are utilizing the most
current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 345 So.
Figueroa St., M-1, Los Angeles, CA 90071. (213) 687-8777.
[ CHECKED ]
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[ VERIFIED ]
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49. ENVIRONMENTAL COMPLIANCE
DEFINITIONS
"CONTAMINANT" means any solid, liquid, gas odor, heat, sound, vibration,
radiation or combination of any of them that may cause:
(i) impairment of the quality of the natural environment for any use that
can be made of it,
(ii) injury or damage to property or to plant or animal life,
(iii) harm or material discomfort to any person,
(iv) an adverse effect on the health of any person,
(v) impairment of the safety of any person,
(vi) any property or plant or animal life to be unfit for use by humans,
(vii) loss of enjoyment of normal use of property, or
(viii) interference with the normal conduct of business, and includes any
biological, chemical or physical agent which is regulated, prohibited,
restricted or controlled under any Environmental Laws.
"ENVIRONMENTAL LAWS" means the common law and all applicable federal, state,
local, municipal, governmental or quasi-governmental laws, by-laws, rules,
regulations, licenses, orders, guidelines, directives, permits, decisions or
requirements concerning occupational or public health and safety or the
environment and any order, injunction, judgment, declaration, notice or demand
issued thereunder.
LESSEE'S COVENANTS, REPRESENTATIONS AND WARRANTIES
l. USE AND OCCUPANCY
(a) The Lessee shall continuously, actively and diligently use and
occupy the Leased Premises only for A GENERAL OFFICE/ASSEMBLY/LIGHT
MANUFACTURING SPACE COMPATIBLE WITH THE CC&R'S AND UNDERLYING
ZONING FOR THE PREMISES THAT DOES NOT CONFLICT WITH ANY EXISTING OR
FUTURE NON-COMPETITIVE USES IN THE PARK and for no other purpose
without prior written consent from the Lessor.
(b) (i) the Lessee shall not permit or suffer the following to be present
at, on or under the Leased Premises:
(1) any Contaminant, including without limitation,
polychlorinated biphynels ("PCBs") or substances containing
PCBs or asbestos or materials containing asbestos;
(2) urea formaldehyde foam insulation; or
(3) underground or above-ground storage tanks or conduits;
unless it has received the prior written consent of the
Lessor which consent may be unreasonably withheld. Any of
the above-noted substances or items which the Lessor gives
written permission to suffer or permit at the Leased
Premises shall be maintained by the Lessee during the
Term, and removed by the Lessee at the expiry or earlier
termination of the Lease, in strict compliance with all
Environmental Laws, at the sole cost and expense of the
Lessee and the Lessee shall indemnify the Lessor from and
against all claims and costs resulting from the presence
of such substances or items at, on or under the Leased
Premises;
(ii) the Lessee hereby covenants, warrants and represents that it
currently conducts and maintains its business and operations,
and shall continue to conduct and maintain its business and
operations at the Leased Premises, so as to comply in all
respects with all present and future laws, regulations,
by-laws, licenses and ordinances including, without limitation,
all Environmental Laws (collectively, "Laws") and shall take
all appropriate actions so as to remain in compliance with
Laws, including obtaining all necessary licenses, permits,
consents and approvals required to operate the Leased Premises
and the business carried out on, at or from the Leased
Premises. The Lessee shall establish and maintain a system to
assure and monitor continued compliance with, and to prevent
the contravention of, Laws (including Environmental Laws),
which system shall include periodic reviews of the compliance
system;
(iii) the Lessee acknowledges that it has inspected the Leased
Premises and has performed tests and studies including, without
limitation, an environmental audit, so as to satisfy itself as
to the state of repair and condition of the Leased Premises and
agrees to accept the Leased Premises in an "as is" condition.
The Lessee acknowledges that its tests and inspections have
indicated that the Leased Premises currently comply with all
Laws (including Environmental Laws). The Lessor will not be
responsible or liable to the Lessee for the state of repair or
condition of the Leased Premises or the compliance or
non-compliance of the Leased Premises with Laws and the Lessee
shall be fully responsible and liable for same in accordance
with the terms of this Lease;
(iv) the Lessee shall notify the Lessor immediately and in
reasonable detail upon discovery of any Contaminant, or receipt
of any claim, notice or communication relating to any
Contaminant, affecting the Leased Premises or any property in
the vicinity of the Leased Premises or if the Lessee becomes
aware of any violation or potential violation by the Lessee of
any Environmental Laws or any warranty, covenant or
representation in this Section l and shall describe therein the
action which the Lessee intends to take with respect to such
matter. Forthwith upon receipt, the Lessee shall send copies to
the Lessor of all orders, approvals or licenses affecting the
Leased Premises and all correspondence with authorities having
jurisdiction or any other person with respect to any
Contaminant or Environmental Laws relating to the Leased
Premises or any property in the vicinity of the Leased
Premises, including, without limitation, results of
environmental tests and reports in the Lessee's possession;
(v) the Lessee covenants at its sole cost and expense to do such
work as is necessary to remedy or prevent the discharge, spill
or location of any Contaminant on, from or under the Leased
Premises or the breach by the Lessee of any Environmental Law
and to remove any Contaminant found at, on or under the Leased
Premises so as to comply with Environmental Laws (such work
being hereinafter referred to as the "Remedial Work"). Prior to
undertaking the Remedial Work, the Lessee shall, at its own
expense, prepare all necessary studies, plans and proposals
with respect to the Remedial Work and submit the same for
approval by the Lessor. The Lessee shall provide all completion
bonds and other security required by the Lessor or the
authorities having jurisdiction and shall carry out the work
required in accordance with such approved plans and in
compliance with all Environmental Laws and the Lessor's
reasonable requirements. The Lessee shall keep the Lessor fully
informed with respect to all aspects of the Remedial Work. The
Lessee further agrees that if the Lessor determines, acting
reasonably, that the Lessee is not diligently commencing or
completing the Remedial Work or that the Building, the Lands,
the Lessor or the Lessor's reputation could be placed in
jeopardy by the quality or method of performance of such
Remedial Work by the Lessee, the Lessor may itself undertake
the Remedial Work or any part thereof at the cost and expense
of the Lessee, which cost shall be paid by the Lessee within 30
days after receipt of an invoice on account thereof. The Lessor
shall be entitled to retain its own consultants to monitor all
aspects of the Remedial Work including the determination of
what Remedial Work is necessary and the Lessee will promptly
reimburse the Lessor for all costs thereof.
(vi) the Lessor or its agents may at any time and from time to time
on 24 hours' prior written notice to the Lessee, enter the
Leased Premises to inspect the Leased Premises and any records
reasonably considered to be relevant to confirm compliance by
the Lessee of all Laws and covenants hereunder or to identify
the existence, nature and extent of any Contaminant on the
Leased Premises and the Lessee's use, storage and disposal of
any Contaminant. The Lessee agrees to cooperate with the Lessor
and its agents in their performance of each such inspection. If
the Lessor, acting reasonably, determines following any such
inspection, that further testing or investigation is required
in order to monitor the Lessee's compliance with all Laws and
covenant's hereunder, the Lessor may required the Lessee, at
the Lessee's expense, to arrange for such testing or
investigation, or may arrange for such testing or investigation
itself, in which case the Lessor's costs of any such testing or
investigation shall be paid by the Lessee to the Lessor within
30 days after receipt of an invoice on account thereof. The
inspections contemplated by this Section 1(b)(vi) include,
without limitation, the right to undertake soil, ground water,
environmental or other tests, measurements or surveys in, on or
below the Leased Premises;
(vii) upon the expiration or earlier termination of this Lease, the
Lessee, at its sole cost and expense, shall obtain and deliver
to the Lessor a certificate from all relevant governmental
authorities to the effect that the Leased Premises are in full
compliance with all Environmental Laws or a written certificate
from an environmental consultant approved by the Lessor to the
same effect; and
(viii) the Lessee shall and does hereby indemnify and save harmless
the Lessor and its successors and assigns and the directors,
officers, employees and agents of the Lessor and its successors
and assigns (collectively the "Indemnitees") from and against
all losses, damages, expenses and costs (including legal costs
as between an attorney and his own client) whatsoever which may
bc suffered by any of the Indemnitees arising from or relating
to the use of the Leased Premises by the Lessee or any breach
by the Lessee of any warranty, covenant or representation in
this Section 1. This indemnity shall survive the expiration or
earlier termination of the Lease. The Lessor shall hold the
benefit of this indemnity in trust for those indemnified
persons who are not parties to this Lease.
Initial
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<PAGE>
ADDENDUM TO PARAGRAPH 49(i) 1(b)(v)
Notwithstanding the foregoing, Lessee will not be responsible for
contaminants disposed of on this property prior to the occupancy of the
Premises by Lessee. Lessee will be responsible for any contaminants disposed
of on this property by Lessee, Lessee's employees, agents, customers,
contractors, licensees, or invitees.
ADDENDUM TO PARAGRAPH 49(i) 1(b)(vii)
In the event said certification reveals that contaminants have been
disposed of on the Premises by Lessee, Lessee's employees, agents, customers,
contractors, licenses, or invitees, then Lessee shall reimburse Lessor for
the cost of the environmental certification and Lessee shall, at its sole
cost, perform all necessary remedial work per Paragraph 1(b)(v) above.
Initial
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<PAGE>
50. COMMON AREA OPERATING EXPENSES
Lessee's share of Common Area Operating Expenses as determined by prorata
square footage of the Premises as compared to the total square footage of the
Business Park, which is 190,256 s.f. It is hereby mutually agreed there shall
be no increases of the base rent or common area maintenance costs (CAM's)
during the initial twelve (12) month lease term. Thereafter any increases
over the base year may be passed through to Lessee at its pro rata share, but
in no event may the CAM's increase in excess of five percent (5%) (Taxes and
Insurance costs excepted) over the actual expenses in the previous year.
51. REPAIRS
In the case of air conditioning equipment, maintenance shall include
servicing of equipment at the least four times a year. Such service shall be
provided by a reputable maintenance service company acceptable to Lessor.
Evidence of a service contract shall be provided to Lessor. In the event
Lessee does not obtain such a service contract, Lessee, upon Lessor's
request, agrees to pay Lessor as additional Rent the cost of maintenance
contract for the air conditioning equipment. Said additional Rent shall be
paid monthly along with the Rent stipulated in Paragraph 4 of this lease. The
additional Rent may be adjusted annually to reflect any changes in the
prevailing cost of this service.
52. PARKING
All parking shall be free of charge throughout the lease term and any
lease renewals and/or expansions. Lessee agrees not to overburden the parking
facilities and agrees to cooperate with Lessor and other Lessees in the use
of parking facilities. Lessor reserves the right in its absolute discretion
to determine whether parking facilities are becoming crowded and, in such
event to allocate parking space among Lessee and other Lessees. Lessee shall
not permit business vehicles to be parked or stored in the parking lot that
are not in operable condition and Lessee understands that vehicles may not be
repaired in the parking lot. Lessee and/or employees of the Lessee further
understand that personal vehicles are not permitted to be stored in the
parking lot at any time. Lessee further understands that work conducted
outside the leased premises and/or in the parking lot is not permitted at
anytime.
53. EARLY OCCUPANCY
The Lessee may occupy the Premises early, (herein called "Early
Occupancy"). The Early Occupancy period shall commence upon the Lessor
obtaining a certificate of substantial completion for its work per Exhibit
"C", Improvements, attached hereto. It is a condition that the Lessee shall
comply with the insurance clause per Paragraph 8 of the Lease and shall
provide proof of such insurance to the Lessor prior to taking possession of
the Premises. The Early Occupancy period shall be free of Rent, however, the
Lessee shall transfer the electrical utility into its responsibility prior to
taking possession of the Premises.
54. BASE RENT INCREASE SCHEDULE
(a) The Monthly Rent for the Term of the Lease shall be paid per the
following schedule:
$17,380.00 Per Month - March, 1997 through February, 1998
$17,955.00 Per Month - March, 1998 through February, 1999
$18,550.00 Per Month - March, 1999 through February, 2000
$19,160.00 Per Month - March, 2000 through February, 2001
$19,800.00 Per Month - March, 2001 through February, 2002
$20,360.00 Per Month - March, 2002 through August, 2002
The Months of April, May, June, July, August, September, October and
November, 1997 shall be at one-half (1/2) Rent, which equals $8,690.00 per
month, to offset Lessee's moving expenses.
(b) If, during the first twelve months of the Term, the Lessee
pays the Lessor the unamortized portion of Fifty Thousand and No/100 Dollars
($50,000.00) as a reimbursement for a portion of the cost of the Tenant
Improvements, the Lessor hereby agrees to reduce the above Base Rent Increase
Schedule by One Thousand and No/100 Dollars ($1,000.00) per month throughout
the initial Term certain of the Lease commencing the first day of the month
from the date the reimbursement is paid by the Lessee.
<PAGE>
55. FIRST OPTION TO RENEW
(A) The Lessor covenants with the Lessee that if the Lessee duly and
regularly pays the Rent and any and all amounts required to be paid pursuant
to this Lease and performs each and every covenant, proviso and agreement on
the part of the Lessee to be paid, rendered, observed and performed herein,
the Lessor will at the expiration of the term on written notice by the Lessee
to the Lessor given by the Lessee not less than Six (6) Months prior to the
expiration of the Term, grant to the Lessee a Thirty (30) Month renewal of
Lease of the Leased premises (the "First Renewal Term" on the same general
terms and conditions as in the Lease then, at the commencement of the Renewal
Term, being used by the Lessor for the Building.
(B) The Rent for the First Option to Renew shall be paid according to the
following schedule:
$20,038.00 Per Month - September, 2002 through August, 2003
$20,739.00 Per Month - September, 2003 through August, 2004
$21,465.00 Per Month - September, 2004 through August, 2005
56. SECOND OPTION TO RENEW
(A) The Lessor covenants with the Lessee that if the Lessee duly and
regularly pays the Rent and any and all amounts required to be paid pursuant
to this Lease and performs each and every covenant, proviso and agreement on
the part of the Lessee to be paid, rendered, observed and performed herein,
the Lessor will at the expiration of the First Renewal Term on written notice
by the Lessee to the Lessor given by the Lessee not less than Six (6) Months
notice prior to the expiration of the term, grant to the Lessee a Thirty (30)
Month renewal of Lease of the Leased premises (the "Second Renewal Term") on
the same general terms and conditions as in the Lease then, at the
commencement of the Second Renewal Term, being used by the Lessor for the
Building.
(B) The Rent for the Second Option to Renew shall be paid according to the
following schedule:
$22,216.00 Per Month - September, 2005 through August, 2006
$22,994.00 Per Month - September, 2006 through August, 2007
$23,798.00 Per Month - September, 2007 through August, 2008
(C) Notwithstanding the above, in the event the Lessee does not exercise the
First Option to Renew, then this Second Option to Renew is null and void.
57. ADDENDUM TO PARAGRAPH 7.4(b)
Notwithstanding Paragraph 7.4 (b), the Lessor shall not require the
removal of any Lessee owned alterations that would be consistent with typical
alterations or improvements found in similarly zoned industrial properties
within the Sorrento Valley area as reasonably determined by the Lessor.
58. ADDENDUM TO PARAGRAPH 7.4(c)
Notwithstanding Paragraph 7.4 (c), the Lessee shall be permitted to remove
thefollowing items:
1. Security System
2. Fencing installed within the building
3. Racks and shelves
4. Battery-changing stations (2)
5. Compressor
6. Generator
7. Telephone switch
8. Reception counter
9. Employee lockers
10. Cabinets
11. Vending machines
12. First-aid cabinet
13. Drinking water system
Any area, in, on or about the Premises damaged or adversely affected by
said removal of items as reasonably determining by Lessor shall be repaired
by the Lessee at its sole cost.
<PAGE>
59. ADDENDUM TO PARAGRAPH 12.1(b)
Lessor's approval shall be conditioned, among other things, on Lessor's
receiving adequate assurances of future performance under this Lease,
including extension and/or options to renew, and any sublease or assignment.
In determining the adequacy of such assurances, Lessor may base its decision
on such factors as it deems appropriate, including but not limited to:
(i) that the source of rent and other consideration due under this Lease,
and, in the case of assignment, that the financial condition and
operating performance of the proposed assignee and its guarantors, if
any, shall be similar to the financial condition and operating
performance of Lessor and its guarantors, if any, as of the time
Lessee became the lessee under this Lease;
(ii) that any assumption or assignment of this Lease will not result in
increased cost or expense, or demand for the services and utilities
provided by Lessor pursuant to Section 4.2 hereunder and will not
disturb or be detrimental to other tenants of Lessor;
(iii)that assumption or assignment of such lease will not disrupt any tenant
mix or balance in the Project.
(iv) The assignment or sublease shall be on the same terms and conditions
set forth in the notice given to Lessor;
(v) No assignment or sublease shall be valid and no assignee or sublessee
shall take possession of the Premises or any part thereof until an
executed counterpart of such assignment or sublease has been delivered
to Lessor in a form satisfactory to Lessor;
(vi) No assignee or sublessee shall have a further right to assign or sublet
except on the terms herein contained.
EXHIBIT 10.34 AM. 1 TO AGMT.
AMENDMENT NO 1 TO SECURITY AND LOAN AGREEMENT
AND ADDENDUM, EXHIBIT "A," THERETO
This Amendment No. 1 dated as of March 31, 1997 ("Amendment") amends that
certain Security and Loan Agreement dated June 17, 1996 by and between Imperial
Bank ("Bank") and Xscribe Corporation ("Borrower") and the Addendum, Exhibit
"A," (the "Addendum") thereto, of even date as previously amended. (collectively
herein the Security and Loan Agreement and the Addendum are referred to as the
"Agreement") as follows:
1. The name of Borrower shall be changed from Xscribe Corporation to
Photomatrix, Inc. in the Agreement and any documents executed by Borrower
relating thereto.
2 The advance rate on the accounts receivable line of credit as reflected in
Section 1. of the Security and Loan Agreement is amended from 80.000% of
Eligible Accounts to 70.000% of Eligible Accounts.
3. Section 6 e. of the Addendum is deleted in its entirety and. the following
substituted therefor:
" Accounts with respect to international transactions unless insured by
an insurance company acceptable to Bank or covered by letters of credit
issued or confirmed by a bank acceptable to Bank. However. Banks may deem,
at its sole discretion, international accounts eligible on a. case by case
basis."
4. Section 7. of the Addendum is deleted in its entirety and the following
substituted therefor:
" All financial covenants and financial information referenced herein
shall be interpreted and prepared in accordance with generally accepted
accounting principles applied on a basis consistent with previous years.
Compliance with financial covenants shall be calculated and monitored on a
monthly basis."
5. Section 8.a. of the Addendum is delete in its entirety and the following
substituted therefor"
" Have and maintain a minimum tangible net worth (meaning the excess of
all assets, over its liabilities, less subordinated debt) of not less than
$3,050,000 from 3/31/97 through 4/29/97 and $2,800,000 at 4/30/97 and
thereafter."
1
<PAGE>
6. Section 8.b. of the Addendum is deleted in its entirety and the following
substituted therefor.
" Have and maintain a ratio of total liabilities to tangible net worth
of not greater than 1.10 to 1.00 at 3/31/97 and thereafter."
7. Section 8 c. of the Addendum is deleted in its entirety and the following
substituted therefor:
" Have and maintain working capital of $2,000,000 from 3/31/97 through
4/29/97 and $1,750,000 at 4/30/97 and thereafter. Working capital is
defined as current assets minus current liabilities."
8. Section 8.d. of the Addendum is deleted in its entirety and the following
substituted therefor:
" Have and maintain a current ratio of 1.70 to 1 00 at 3/31/97 and
thereafter. Current ratio is defined as current assets divided by current
liabilities."
9. Section 10.a of the Addendum is deleted in its entirety and the following
substituted therefor:
" The rate of interest applicable to the Line of Credit Loan Account
shall be 2.50% pa year in excess of the rate of interest which Bank has
announced as its prime lending rate ("Prime Rate") which shall vary
concurrently with any change m such Prime Rate. A non utilization fee of
one percent (1.00%) shall be charged on the average daily unused portion of
the line, payable quarterly in arrears."
10. In consideration of the Bank executing this Amendment, that Borrower agrees
that the strike price on the existing warrant for the purchase of 75,000 shares
of Photomatrix, Inc common stock is reset to the lesser of $.50 per share or
current market price. This reset is effective immediately and will be documented
in entirety with a modified warrant agreement, which Borrower agrees to execute.
11. Except as provided above, the Agreement remains unchanged and the parties
hereby confirm that the Agreement as herein amended is in full force and effect.
Signatures continued on next page.
2
<PAGE>
PHOTOMATRIX, INC.
"Borrow
By: /s/Suren G. Dutia
----------------------------------------
Title: President and Chief Executive Officer
-------------------------------------
IMPERIAL BANK
"Bank"
By: /s/
----------------------------------------
Title: /s/Vice President
-------------------------------------
3
<PAGE>
IMPERIAL BANK
Member FDIC
CONTINUING GUARANTEE
ORIGINATING OFFICE: San Diego Regional Office
Name of Office: San Diego Regional Office
Street Address: 701 B Street
City, State, Zip Code: San Diego, CA 92101
The undersigned (hereinafter referred to as "Guarantor") hereby requests and
authorizes IMPERIAL BANK (hereinafter referred to as the "Bank") to extend
credit to PHOTOMATRIX, INC.
a Corporation
(DESIGNATE TYPE OF ENTITY)
(hereinafter referred to as "Debtor"), and in consideration of the granting of
such credit by the Bank to Debtor, Guarantor agrees as follows:
1. The words "indebtedness" and "credit" are used herein in their most
comprehensive sense and include any and all advances, debts, obligations and
liabilities, including interest thereon, of Debtor heretofore, now or hereafter
made, incurred or created, with or without notice to Guarantor, whether
voluntary or involuntary and however arising, whether due or not due, absolute
or contingent, liquidated or unliquidated, determined or undetermined, whether
assumed by Debtor's successors, heirs or assigns by operation of law or
otherwise, and whether Debtor is liable individually or jointly with others, and
whether recovery upon any such indebtedness or credit is or hereafter becomes
barred by any statute of limitations or is or hereafter becomes otherwise
unenforceable.
2. Credit may be granted from time to time at the request of Debtor and
without further authorization from or notice to Guarantor, even though Debtor's
financial condition may have deteriorated since the date hereof. If Debtor is a
corporation or a partnership, the Bank need not inquire into the power of Debtor
or the authority of its officers, directors, partners or agents acting or
purporting to act in its behalf. Each credit heretofore or hereafter granted to
Debtor shall be considered to have been granted at the special instance and
request of Guarantor and in consideration of and in reliance upon this
guarantee.
3. Guarantor hereby unconditionally guarantees and promises to pay the Bank or
its order any and all indebtedness of Debtor to the Bank and to perform any and
all obligations of Debtor under the terms of any agreement or instrument
evidencing, securing or executed in connection with any such indebtedness
("Credit Documents"). The liability of Guarantor shall not at any time exceed
the sum of the amount set forth below, plus the interest thereon in accordance
with the Credit Documents and the costs, attorneys' fees and other expenses
provided for in Paragraph 15 hereof. If no amount is set forth below, the
liability of the Guarantor hereunder shall be unlimited. The Bank may permit
Debtor's indebtedness to exceed any maximum liability without impairing the
obligations of Guarantor hereunder. No payments made by or on behalf of
Guarantor to the Bank shall reduce any such maximum liability unless written
notice to that effect is received by the Bank at or prior to the time such
payment is made. If Guarantor has executed more than one guarantee of the
indebtedness of Debtor to the Bank, the guarantees shall be cumulative.
4. Either before or after revocation hereof and in such manner, upon such
terms and at such times as it considers best and with or without notice to
Guarantor, the Bank may alter, compromise, accelerate, extend or change the time
or manner for the payment of any indebtedness hereby guaranteed, increase or
reduce the rate of interest thereon, release or add any one or more guarantors
or endorsers, accept additional or substituted security therefor, or release or
subordinate any security therefor. No exercise or nonexercise by the Bank of any
right hereby given it, no dealing by the Bank with Debtor or any other person,
and no change, impairment or suspension of any right or remedy of the Bank shall
in any way affect any of the obligations of Guarantor hereunder or any security
furnished by Guarantor or give Guarantor any recourse against the Bank.
5. In addition to all liens upon and rights of offset given to the Bank by law
against any property of Debtor or of Guarantor, Guarantor hereby grants a
security interest in all property of Guarantor now or hereafter in the
possession of or on deposit with the Bank, whether held in a general or special
account or for safekeeping or otherwise. Each such security interest may be
exercised without demand upon or notice to Guarantor, shall continue in full
force unless specifically waived or released by the Bank in writing and shall
not be considered waived by any conduct of the Bank or by any failure of the
Bank to exercise any right of offset or to enforce any such security interest or
by any neglect or delay in so doing.
Page 1 of 4
<PAGE>
6. Guarantor waives and agrees not to assert or take advantage of (a) any right
to require the Bank to proceed against the Debtor or any other person, firm or
corporation or to proceed against or exhaust any security held by it at any time
or to pursue any other remedy in its power; (b) the defense of the statute of
limitations in any action hereunder or for the collection of any indebtedness or
the performance of any obligation guaranteed hereby; (c) any defense that may
arise by reason of the incapacity, lack of authority, death or disability of, or
revocation hereof by, any other or others or the failure of the Bank to file or
enforce a claim against the estate (either in administration, bankruptcy, or
other proceeding) of any other or others; (d) demand, protest and notice of any
kind including, without limiting the generality of the foregoing, notice of the
existence, creation or incurring of new or additional indebtedness or of any
action or non-action on the part of the Debtor, the Bank, any endorser, creditor
of Debtor or Guarantor under this or any other instrument, or any other person
whomsoever, in connection with any obligation or evidence of indebtedness hereby
guaranteed; (e) any defense based upon an election of remedies by the Bank,
including without limitation, an election to proceed by nonjudicial rather than
judicial foreclosure, which election destroys or otherwise impairs subrogation
rights of Guarantor or the right of Guarantor to proceed against Debtor for
reimbursement, or both, including, without limitation, the impairment of
subrogation rights arising by virtue of California Civil Code 580(b) and 580(d);
(f) any defense or right based upon the fair value deficiency protections and
provisions of California Civil Code 580(a) and California Civil Procedure Code
726; and (g) any defense or right based upon the acceptance by the Bank or an
affiliate of the Bank of a deed in lieu of foreclosure, without extinguishing
the indebtedness, even if such acceptance destroys, alters or otherwise impairs
subrogation rights of Guarantor or the right of Guarantor to proceed against
Debtor for reimbursement, or both.
7. Guarantor, by execution hereof, represents to the Bank that the
relationship between Guarantor and Debtor is such that Guarantor has access to
all relevant facts and information concerning the indebtedness and Debtor and
that the Bank can rely upon Guarantor having such access. Guarantor waives and
agrees not to assert any duty on the part of the Bank to disclose to Guarantor
any facts that the Bank may now or hereafter know about Debtor, regardless of
whether the Bank has reason to believe that any such facts materially increase
the risk beyond that which Guarantor intends to assume, or has reason to believe
that such facts are unknown to Guarantor, or has a reasonable opportunity to
communicate such facts to Guarantor. Guarantor is fully responsible for being
and keeping informed of the financial condition of Debtor and all circumstances
bearing on the risk of non-payment of the indebtedness guaranteed hereby.
8. Until all indebtedness of Debtor to the Bank has been paid in full, even
though such indebtedness is in excess of the liability of Guarantor, Guarantor
shall have no right of subrogation and waives any right to enforce any remedy
which the Bank now has or may hereafter have against Debtor and any benefit of
and any right to participate in any security now or hereafter held by the Bank.
9. Except as otherwise provided in this paragraph, all existing or future
indebtedness of Debtor to Guarantor and, if Debtor is a partnership, any right
to withdraw any capital of Guarantor invested in Debtor, is hereby subordinated
to all indebtedness hereby guaranteed and, without the prior written consent of
the Sank, shall not be paid or withdrawn in whole or in part nor will Guarantor
accept any payment of or on account of any such indebtedness or as a withdrawal
of capital while this guarantee is in effect. At the Bank's request, Debtor
shall pay to the Bank all or any part of subordinated indebtedness and any
capital which Guarantor is entitled to withdraw. Each payment by Debtor to
Guarantor in violation of this paragraph shall be received in trust for the Bank
and shall be paid to the Bank immediately on account of the indebtedness of
Debtor to the Bank. No such payment shall reduce or affect in any manner
Guarantor's liability under any of the provisions of this guarantee. Guarantor
reserves the right to receive from Debtor payment of any salary for personal
services at the same monthly rate as that at which Guarantor has been paid
during the preceding twelve months, it being expressly understood that such
amount shall not be subordinated to the indebtedness guaranteed hereby.
10. Guarantor will file all claims against Debtor in any bankruptcy or other
proceeding in which the filing of claims is required by law upon any
indebtedness of Debtor to Guarantor and shall concurrently assign to the Bank
all of the Guarantor's rights thereunder. If Guarantor does not file any such
claim, the Bank, as Guarantor's attorney-in-fact, is hereby authorized to do so
in Guarantor's name or, in the Bank's discretion, to assign the claim and to
cause proof of claim to be filed in the name of the Bank's nominee. In all such
cases, whether in administration, bankruptcy or otherwise, the person or persons
authorized to pay such claims shall pay to the Bank the full amount thereof and,
to the full extent necessary for the purpose, Guarantor hereby assigns to the
Bank all of the Guarantor's rights to any and all such payments or distributions
to which Guarantor would otherwise be entitled. If the amount so paid is greater
than the guaranteed indebtedness then outstanding, the Bank will pay the amount
of the excess to the person entitled thereto.
11. With or without notice to Guarantor, the Bank, in its sole discretion and
at any time and from time to time either before or after delivery of any notice
of revocation hereunder and in such manner and upon such terms as it considers
fit, may (a) apply any or all payments or recoveries from Debtor, from Guarantor
or from any other guarantor under this or any other instrument or realized from
any security, in such manner and order or priority as the Bank elects, to any
indebtedness of Debtor to the Bank, whether or not such indebtedness is
guaranteed hereby or is otherwise secured or is due at the time of such
application; and (b) refund to Debtor any payment received by the Bank upon any
indebtedness hereby guaranteed and payment of the amount refunded shall be fully
guaranteed hereby. Any recovery realized from any other guarantor under this or
any other instrument shall be first credited upon that portion of the
indebtedness of Debtor to the Bank which exceeds Guarantor's maximum liability,
if any, hereunder.
12. The amount of Guarantor's liability and all rights, powers and remedies of
the Bank hereunder and under the Credit Documents and any other agreement now or
at any time hereafter in force between the Bank and Guarantor shall be
cumulative and not alternative, and such rights, powers and remedies shall be in
addition to all rights, powers and remedies given to the Bank by law.
13. Guarantor's obligations hereunder are independent of the obligations of
Debtor and, in the event of any default hereunder, a separate action or actions
may be brought and prosecuted against Guarantor whether action is brought
against Debtor or whether Debtor is joined in any such action or actions. The
Bank may maintain successive actions for other defaults. The Bank's rights
hereunder shall not be exhausted by its exercise of any of its rights or
remedies or by any such action or by any number of successive actions until and
unless all indebtedness and obligations hereby guaranteed have been paid and
fully performed.
Page 2 of 4
<PAGE>
14. This is a continuing guarantee and Guarantor agrees that it shall remain
in full force until and unless Guarantor delivers to the Bank written notice
that it has been revoked as to credit granted subsequent to the effective time
of revocation as herein provided. delivery of such notice shall be effective by
personal service upon an officer of the Bank at the originating office of the
Bank designated on the first page hereof or by mailing such notice by certified
or registered mail, return receipt requested, postage prepaid and addressed to
the Sank at the originating office designated on the first page hereof.
Regardless of how notice of revocation is given, it shall not be effective until
twelve o'clock noon Pacific Standard or Daylight Savings Time, as the case may
be, on the next succeeding Bank business day following the day such notice is
delivered, but delivery of such notice shall not affect any of Guarantor's
obligations hereunder with respect to credit granted prior to the effective date
of such revocation, nor shall it affect any of the obligations of any other
guarantor for the credit granted to Debtor hereunder. If the originating office
of the Bank designated above is not in existence at the time notice of
revocation is desired to be given, then such notice may be given in the manner
above provided by delivering the same to IMPERIAL BANK OFFICE at 9920 South La
Cienega Boulevard, Inglewood, California, 90301.
15. Guarantor agrees to pay to the Bank without demand reasonable attorneys'
fees and all costs and other expenses which the Bank expends or incurs in
collecting or compromising any indebtedness of the Debtor, in protecting the
Bank's security under the Credit Documents or in enforcing this guarantee
against Guarantor or any other guarantor of any indebtedness hereby guaranteed
whether or not suit is filed, including, without limitation, attorney's fees,
costs and other such expenses incurred in any bankruptcy proceeding. Guarantor
warrants and represents that it is fully authorized by law to execute this
guarantee.
16. This guarantee shall benefit the Bank, its successors and assigns,
including the assignees of any indebtedness hereby guaranteed, and binds
Guarantor's successors and assigns. This guarantee is assignable by the Bank
with respect to all or any portion of the indebtedness and obligations
guaranteed hereunder, and, when so assigned, Guarantor shall be liable to the
assignees under this guarantee without in any manner affecting Guarantor's
liability hereunder with respect to any indebtedness or obligations retained by
the Bank. No delegation or assignment of this guarantee by any Guarantor shall
be of any force or effect or release Guarantor from any obligation hereunder.
17. No provision of this guarantee or right of the Bank hereunder can be
waived, nor can any Guarantor be released from his/her obligations hereunder,
except by a writing duly executed by an authorized officer of the Bank. Should
any one or more provisions of this guarantee be determined to be illegal or
unenforceable, all other provisions nevertheless shall be governed by and
construed in accordance with the laws of California, and Guarantor agrees to
submit to the jurisdiction of the Courts of California.
18. If more than one guarantor signs this guarantee, the obligation of all
such guarantors shall be joint and several. When the context and construction so
require, all words used in the singular shall be deemed to have been used in the
plural and the masculine shall include the feminine and neuter. Any married
person who signs this guarantee agrees that recourse may be had against separate
property for all obligations under this guarantee.
19. Except as provided in any other written agreement now or at any time
hereafter in force between the Bank and Guarantor this guarantee shall
constitute the entire agreement of Guarantor with the Bank with respect to the
subject matter hereof and no representation, understanding, promise or condition
concerning the subject matter hereof shall be binding upon the Bank unless
expressed herein. Any notice to Guarantor shall be considered to have been duly
given when delivered personally or forty-eight hours after being mailed, postage
prepaid, to the address(es) set forth below or to such other address(es) as
Guarantor may from time to time designate by giving notice in the same manner of
notice to the Bank set forth in Paragraph 14 hereof.
20. Each of the undersigned Guarantors hereby acknowledges the receipt of a true
copy of this guarantee.
21. / / This guarantee is secured by a deed of trust dated N/A , ,
to Imperial Bancorp, as Trustee.
22. / / I/We hereby amend the Trust Agreement to the extent necessary, if any,
to allow the Trust to guarantee the debt of any person(s).
23. Notwithstanding anything herein to the contrary , the maximum liability of
the guarantor shall not exceed its net worth under generally accepted
accounting principals from time to time.
GUARANTEE AMOUNT $ 750, 000. 00
Executed by or on behalf of Guarantor(s) on April 28 , 97
Signature of Guarantor(s)
PHOTOMATRIX IMAGING CORPORATION
BY /s/Suren G. Dutia
--------------------------------------------------------------
Suren Dutia, Pres/CEO/CHMN
--------------------------------------------------------------
--------------------------------------------------------------
--------------------------------------------------------------
Address
--------------------------------------------------------------
--------------------------------------------------------------
--------------------------------------------------------------
--------------------------------------------------------------
Page 3 of 4
<PAGE>
(COMPLETE IF GUARANTOR IS A CORPORATION)
RESOLUTION AUTHORIZING CONTINUING GUARANTEE,
ENDORSEMENT AND GUARANTEE OF NOTE OR NOTES
AND HYPOTHECATION OF ASSETS
PHOTOMATRIX, INC.
WHEREAS,
hereinafter referred to as "Debtor", has requested IMPERIAL BANK, hereinafter
referred to as "Bank", to grant credit to Debtor.
WHEREAS, the corporation hereinafter named expects to derive benefit from such
financial accommodation by Bank,
1. NOW, BE IT RESOLVED, that any 1 of the following named officers
--------------
(SPECIFY NUMBER)
Suren Dutia the President/CEO/CHMN
- - - --------------------------------------- -------------------------------
Roy L. Gayhart the CEO/Secretary
- - - --------------------------------------- -------------------------------
the
- - - --------------------------------------- -------------------------------
the
- - - --------------------------------------- -------------------------------
for and on behalf of PHOTOMATRIX IMAGING CORPORATION
(NAME OF CORPORATION)
be and they hereby are authorized and directed for and in the name of this
corporation and as its act and deed to do and perform any one or more of the
following:
A. Execute a continuing guarantee in favor of Bank for any and all assets
of this corporation.
B. Endorse and/or guarantee a note or notes in favor of Bank whereunder
Debtor is Maker and Bank is Payee including renewals and extensions thereof.
C. Grant to Bank a security interest in and to any and all assets of this
corporation: (1) as security for any obligation which this corporation may incur
under subparagraphs A and/or B above; or (2) as security for indebtedness of
Debtor to Bank to the extent of the value of the security interest so granted
without personal liability on the part of this corporation to Bank.
2. RESOLVED FURTHER, that Bank may rely on the authority conferred herein
until Bank receives notice in writing that the authority contained in this
resolution has been revoked or the authority of the persons or officers named
above has been revoked.
3. RESOLVED FURTHER, that the liability of this corporation to Bank hereunder
shall not exceed the total sum of
**SEVEN HUNDRED FIFTY THOUSAND DOLLARS AND ZERO CENTS** DOLLARS ($ 750,000.00).
4. RESOLVED FURTHER, that any guarantees or other documents in like amount and
terms as those stated above heretofore executed by said officers in the name of
this corporation are hereby ratified and approved, and the secretary or
assistant secretary is authorized and directed to attach copies of such
documents to the minutes of the corporation.
I, the undersigned Roy L. Gayhart , hereby certify that I am the
duly elected, qualified and acting secretary of the above
referenced corporation, duly organized and existing under the laws of the State
of California ; that the Board of Directors of said corporation duly
and regularly adopted the resolution of which the foregoing is a full, true and
correct copy.
I further certify that said resolution is now in full force and effect, that
it has not been revoked, suspended, or amended in any way, and that the specimen
signatures appearing below are the signatures of the officers authorized to sign
for this corporation by virtue of said resolution.
I further certify that shareholder consent IS NOT required in the
(IS OR IS NOT)
event of hypothecation of all or substantially all of the assets of said
corporation.
EXECUTED ON
AUTHORIZED SIGNATURES:
Signature: /s/Suren Dutia
------------------------------------------------------------
Suren Dutia
Signature: /s/Roy L. Gayhart
------------------------------------------------------------
Roy L.Gayhart
Signature:
------------------------------------------------------------
Signature:
------------------------------------------------------------
(SEAL)
Confirmed By:
/s/Suren Dutia
- - - ---------------------------------------------------------------------------
(PRESIDENT)
Suren Dutia
/s/Roy L. Gayhart
- - - ---------------------------------------------------------------------------
Roy L. Gayhart (SECRETARY)
Page 4 of 4
<PAGE>
THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT
OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
WARRANT TO PURCHASE STOCK
Company: PHOTOMATRIX, INC (formerly XSCRIBE CORPORATION), a California
corporation
Number of Shares: 75,000
Class of Stock: Common
Initial Exercise Price: $.50 or the market value on the date of execution
hereof, whichever is less, per share
Issue Date: April 9, 1997
Expiration Date: April 9, 2002 (subject to Article 4.1)
THIS WARRANT CERTIFIES THAT, in consideration of an extension of credit to
Corporation and for other good and valuable consideration, IMPERIAL BANCORP as
parent of IMPERIAL BANK, or transferee or assignee ("Holder") is entitled to
purchase the number of fully paid and nonassessable shares of the class of
securities (the "Shares") of PHOTOMATRIX, INC. (the "Company") at the initial
exercise price per Share (the "Warrant Price") all as set forth above and as
adjusted pursuant to Article 2 of this Warrant, subject to the provisions and
upon the terms and conditions set forth of this Warrant.
ARTICLE 1. EXERCISE
1.1 METHOD OF EXERCISE. Holder may exercise this Warrant by delivering
this Warrant and a duly executed Notice of Exercise in substantially the form
attached as Appendix 1 to the principal office of the Company. Unless Holder is
exercising the conversion right set forth in Section 1.2, Holder shall also
deliver to the Company payment for the aggregate Warrant Price for the Shares
being purchased.
1.2 CONVERSION RIGHT. In lieu of exercising this Warrant as specified in
Section 1.1, Holder may from time to time convert this Warrant, in whole or in
part, into a number of Shares determined by dividing (a) the aggregate fair
market value of the Shares minus the aggregate Warrant Price of such Shares by
(b) the fair market value of one Share. The fair market value of the Shares
shall be determined pursuant to Section 1.3.
1.3 FAIR MARKET VALUE. If the Shares are traded regularly in a public
market, the fair market value of the Shares shall be the closing price of the
Shares reported for the
<PAGE>
business day immediately before Holder delivers its Notice of Exercise to the
Company. If the Shares are not regularly traded in a public market, the Board of
Directors of the Company shall determine fair market value in its reasonable
good faith judgment. The foregoing notwithstanding, if Holder advises the Board
of Directors in writing that Holder disagrees with such determination, then the
Company and Holder shall promptly agree upon a reputable investment banking firm
to undertake such valuation. If the valuation of such investment banking firm is
greater than that determined by the Board of Directors, then all fees and
expenses of such investment banking firm shall be paid by the Company. In all
other circumstances, such fees and expenses shall be paid by Holder.
1.4 DELIVERY OF CERTIFICATE AND NEW WARRANT. Promptly after Holder
exercises or converts this Warrant, the Company shall deliver to Holder
certificates for the Shares acquired and, if this Warrant has not been fully
exercised or converted and has not expired, a new Warrant representing the
Shares not so acquired.
1.5 REPLACEMENT OF WARRANTS. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of mutilation, or surrender and cancellation of this Warrant,
the Company at its expense shall execute and deliver, in lieu of this Warrant, a
new warrant of like tenor.
1.6 REPURCHASE ON SALE, MERGER, OR CONSOLIDATION OF THE COMPANY.
1.6.1. "ACQUISITION". For the purpose of this Warrant, "Acquisition"
means any sale, license, or other disposition of all or substantially all of the
assets (including intellectual property) of the Company, or any reorganization,
consolidation, or merger of the Company where the holders of the Company's
securities before the transaction beneficially own less than 50% of the
outstanding voting securities of the surviving entity after the transaction.
1.6.2. ASSUMPTION OF WARRANT. If upon the closing of any Acquisition
the successor entity assumes the obligations of this Warrant, then this Warrant
shall be exercisable for the same securities, cash, and property as would be
payable for the Shares issuable upon exercise of the unexercised portion of this
Warrant as if such Shares were outstanding on the record date for the
Acquisition and subsequent closing. The Warrant Price shall be adjusted
accordingly. The Company shall use reasonable efforts to cause the surviving
corporation to assume the obligations of this Warrant.
1.6.3. NONASSUMPTION. If upon the closing of any Acquisition the
2
<PAGE>
successor entity does not assume the obligations of his Warrant and Holder has
not otherwise exercised this Warrant in full, then the unexercised portion of
this Warrant shall be deemed to have been automatically converted pursuant to
Section 1.2 and thereafter Holder shall participate in the acquisition on the
same terms as other holders of the same class of securities of the Company.
ARTICLE 2. ADJUSTMENTS TO THE SHARES.
2.1 STOCK DIVIDENDS, SPLITS, ETC. If the Company declares or pays a
dividend on its common stock payable in common stock, or other securities,
subdivides the outstanding common stock into a greater amount of common stock,
then upon exercise of this Warrant, for each Share acquired, Holder shall
receive, without cost to Holder, the total number and kind of securities to
which Holder would have been entitled had Holder owned the Shares of record as
of the date the dividend or subdivision occurred.
2.2 RECLASSIFICATION, EXCHANGE OR SUBSTITUTION. Upon any reclassification,
exchange, substitution, or other event that results in a change of the number
and/or class of the securities issuable upon exercise or conversion of this
Warrant, Holder shall be entitled to receive, upon exercise or conversion of
this Warrant, the number and kind of securities and property that Holder would
have received for the Shares if this Warrant had been exercised immediately
before such reclassification, exchange, substitution, or other event. The
Company or its successor shall promptly issue to Holder a new Warrant for such
new securities or other property. The new Warrant shall provide for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Article 2 including, without limitation, adjustments to the
Warrant Price and to the number of securities or property issuable upon exercise
of the new Warrant. The provisions of this Section 2.2 shall similarly apply to
successive reclassifications, exchanges, substitutions, or other events.
2.3 ADJUSTMENTS FOR COMBINATIONS, ETC. If the outstanding Shares are
combined or consolidated, by reclassification or otherwise, into a lesser number
of shares, the Warrant Price shall be proportionately increased.
2.4 ADJUSTMENTS FOR DILUTING ISSUANCES. The Warrant Price and the number
of Shares issuable upon exercise of this Warrant shall be subject to adjustment,
from time to time, in the manner set forth on Exhibit A, if attached, in the
event of Diluting Issuances (as defined on Exhibit A).
2.5 NO IMPAIRMENT. The Company shall not, by amendment of its Articles of
Incorporation or through a reorganization, transfer of assets, consolidation,
merger, dissolution, issue, or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed under this Warrant by the Company, but shall at all times
in good faith assist in carrying
3
<PAGE>
out all the provisions of this Article 2 and in taking all such action as may be
necessary or appropriate to protect Holder's rights under this Article against
impairment. If the Company takes any action affecting the Shares other than as
described above that adversely affects Holder's rights under this Warrant, the
Warrant Price shall be adjusted downward and the number of Shares issuable upon
exercise of this Warrant shall be adjusted upward in such a manner that the
aggregate Warrant Price of this Warrant is unchanged.
2.6 CERTIFICATE AS TO ADJUSTMENTS. Upon each adjustment of the Warrant
Price, the Company at its expense shall promptly compute such adjustment, and
furnish Holder with a certificate of its Chief Financial Officer setting forth
such adjustment and the facts upon which such adjustment is based. The Company
shall, upon written request, furnish Holder a certificate setting forth the
Warrant Price in effect upon the date thereof and the series of adjustments
leading to such Warrant Price.
ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY.
3.1 REPRESENTATIONS AND WARRANTIES. The Company hereby represents and
warrants to the Holder as follows:
(a) The initial Warrant Price referenced on the first page of this
Warrant is not greater than (i) the price per share at which the Shares were
last issued in an arms-length transaction in which at least $50,000 of the
Shares were sold and (ii) the fair market value of the Shares as of the date of
this Warrant.
(b) All Shares which may be issued upon the exercise of the purchase
right represented by this Warrant, and all securities, if any, issuable upon
conversion of the Shares, shall, upon issuance, be duly authorized, validly
issued, fully paid and nonassessable, and free of any liens and encumbrances
except for restrictions on transfer provided for herein or under applicable
federal and state securities laws.
3.2 NOTICE OF CERTAIN EVENTS. If the Company proposes at any time (a) to
declare any dividend or distribution upon its common stock, whether in cash,
property, stock, or other securities and whether or not a regular cash dividend;
(b) to offer for subscription pro rata to the holders of any class or series of
its stock any additional shares of stock of any class or series or other rights;
(c) to effect any reclassification or recapitalization of common stock; (d) to
merge or consolidate with or into any other corporation, or sell, lease,
license, or convey all or substantially all of its assets, or to liquidate,
dissolve or wind up; or (e) offer holders of registration rights the opportunity
to participate in an underwritten public offering of the company's securities
for cash, then, in connection with each such event, the Company shall give
Holder (a) at least 20 days prior written notice of the date on which a record
will be taken for such dividend, distribution, or subscription rights (and
specifying the date on which the holders of
4
<PAGE>
common stock will be entitled thereto) or for determining rights to vote, if
any, in respect of the matters referred to in (c) and (d) above; (2) in the case
of the matters referred to in (c) and (d) above at least 20 days prior written
notice of the date when the same will take place (and specifying the date on
which the holders of common stock will be entitled to exchange their common
stock for securities or other property deliverable upon the occurrence of such
event); and (3) in the case of the matter referred to in (e) above, the same
notice as is given to the holders of such registration rights.
3.3 INFORMATION RIGHTS. So long as the Holder holds this Warrant ad/or any
of the Shares, the Company shall deliver to the Holder (a) promptly after
mailing, copies of all communiques to the shareholders of the Company, (b)
within ninety (90) days after the end of each fiscal year of the Company, the
annual audited financial statements of the Company certified by independent
public accountants of recognized standing and (c) within forty-five (45) days
after the end of each of the first three quarters of each fiscal year, the
Company's quarterly, unaudited financial statements.
3.4 REGISTRATION UNDER SECURITIES ACT OF 1933, AS AMENDED. The Company
agrees that the Shares shall be subject to the registration rights set forth on
Exhibit C, if attached.
ARTICLE 4. MISCELLANEOUS.
4.1 TERM. This Warrant is exercisable, in whole or in part, at any time
and from time to time on or before the Expiration Date set forth above..
4.2 LEGENDS. This Warrant and the Shares shall be imprinted with a legend
in substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN
EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS
COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
4.3 COMPLIANCE WITH SECURITIES LAWS ON TRANSFER. This Warrant and the
Shares issuable upon exercise this Warrant may not be transferred or assigned in
whole or in part without compliance with applicable federal and state securities
laws by the transferor and the transferee (including, without limitation, the
delivery of investment representation letters and legal opinions reasonably
satisfactory to the Company). The Company shall not require Holder to provide an
opinion of counsel if the transfer is to an affiliate of Holder or if there is
no material question as to the
5
<PAGE>
availability of current information as referenced in Rule 144(c), Holder
represents that it has complied with Rule 144(d) and (e) in reasonable detail,
the selling broker represents that it has complied with Rule 144(f), and the
Company is provided with a copy of Holder's notice of proposed sale.
4.4 TRANSFER PROCEDURE. Subject to the provisions of Section 4.2, Holder
may transfer all or part of this Warrant or the Shares issuable upon exercise of
this Warrant by giving the Company notice of the portion of the Warrant being
transferred setting forth the name, address and taxpayer identification number
of the transferee and surrendering this Warrant to the Company for reissuance to
the transferee(s) (and Holder, if applicable). Unless the Company is filing
financial information with the SEC pursuant to the Securities Exchange Act of
1934, the Company shall have the right to refuse to transfer any portion of this
Warrant to any person who directly competes with the Company.
4.5 NOTICES. All notices and other communications from the Company to the
Holder, or vice versa, shall be deemed delivered and effective when given
personally or mailed by first-class registered or certified mail, postage
prepaid, at such address as may have been furnished to the Company or the
Holder, as the case may be, in writing by the Company or such Holder from time
to time.
4.6 WAIVER. This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought.
4.7 ATTORNEYS' FEES. In the event of any dispute between the parties
concerning the terms and provisions of this Warrant, the party prevailing in
such dispute shall be entitled to collect from the other party all costs
incurred in such dispute, including reasonable attorneys' fees.
4.8 GOVERNING LAW. This Warrant shall be governed by and construed in
accordance with the laws of the State of California, without giving effect to
its principles regarding conflicts of law.
PHOTOMATRIX, INC.
"COMPANY"
By /s/Suran G. Dutia
--------------------------------
Name SUREN G. DUTIA
------------------------------
(Print)
Title: Chairman, President
6
<PAGE>
By /s/Peter B. Harker
--------------------------------
Name PETER B. HARKER
------------------------------
(Print)
Title: Chief Financial Officer, Secretary,
7
<PAGE>
APPENDIX 1
NOTICE OF EXERCISE
1. The undersigned hereby elects to purchase shares of the
Common Stock of Photomatrix, Inc, pursuant to the terms of the attached Warrant,
and tenders herewith payment of the purchase price of such shares in full.
1. The undersigned hereby elects to convert the attached Warrant into
Shares/cash [strike one] in the manner specified in the Warrant. This conversion
is exercised with respect to of the Shares covered by the Warrant.
[Strike paragraph that does not apply.]
2. Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name as is specified below:
----------------------------------------
(Name)
----------------------------------------
----------------------------------------
(Address)
3. The undersigned represents it is acquiring the shares solely for its
own account and not as a nominee for any other party and not with a view toward
the resale or distribution thereof except in compliance with applicable
securities laws.
-----------------------------------
By
--------------------------------
(Signature)
- - - -----------------------
(Date)
8
<PAGE>
APPENDIX 2
NOTICE THAT WARRANT IS ABOUT TO EXPIRE
(Name of Holder)
(Address of Holder)
Attn: Chief Financial Officer
Dear
This is to advise you that the Warrant issued to you described below will
expire on _______ , 19__.
Issuer: Xscribe Corporation
Issue Date: APRIL 9, 1997
Class of Security Issuable: Common
Exercise Price Per Share:
Number of Shares Issuable:
Procedure for Exercise:
Please contact [name of contact person at (phone number)] with any
questions you may have concerning exercise of the Warrant. This is your only
notice of pending expiration.
PHOTOMATRIX, INC.
By
--------------------------------
Its
-------------------------------
9
<PAGE>
EXHIBIT A
REGISTRATION RIGHTS
The Shares shall be deemed "registrable securities" or otherwise entitled
to "piggy back" registration rights in accordance with the terms of any
agreement between the Company and any of its investors (the "Agreement")
The Company agrees that no amendments will be made to the Agreement which
would have an adverse impact on Holder's registration thereunder without the
consent of Holder.
If no Agreement exists, then the Company and the Holder shall enter into a
form of Registration Rights Agreement which shall be no less favorable than any
such agreement subsequently entered into between the Company and any investors
and in no event providing less than piggy back registration rights.
10
<PAGE>
OLD WARRANT AGREEMENT
THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT
OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
WARRANT TO PURCHASE STOCK
Company: XSCRIBE CORPORATlON, a California corporation
Number of Shares: 75,000
Class of Stock: Common
Initial Exercise Price: $1.00 per share
Issue Date: August 10 1995
Expiration Date: August 2000, (subject to Article 4.1)
THIS WARRANT CERTIFIES THAT, in consideration of an extension of credit to
Corporation and for other good and valuable consideration, IMPERIAL BANCORP
("Holder") is entitled to purchase the number of fully paid and nonassessable
shares of the class of securities (the "Shares") of Xscribe Corporation (the
"Company") at the initial exercise price per Share (the "Warrant Price") all as
set forth above and as adjusted pursuant to Article 2 of this Warrant, subject
to the provisions and upon the terms and conditions set forth of this Warrant.
ARTICLE 1. EXERCISE
1.1 METHOD OF EXERCISE. Holder may exercise this Warrant by delivering
this Warrant and a duly executed Notice of Exercise in substantially the form
attached as Appendix 1 to the principal office of the Company. Unless Holder is
exercising the conversion right set forth in Section 1.2, Holder shall also
deliver to the Company payment for the aggregate Warrant Price for the Shares
being purchased,.
1.2 CONVERSION RIGHT. In lieu of exercising this Warrant as specified in
Section 1.1, Holder may from time to time convert this Warrant, in whole or in
part, into a number of Shares determined by dividing (a) the aggregate fair
market value of the Shares minus the aggregate Warrant Price of such Shares by
(b) the fair market value of one Share. The fair market value of the Shares
shall be determined pursuant to Section 1.3.
1.3 FAIR MARKET VALUE. If the Shares are traded regularly in a public
market, the fair market value of the Shares shall be the closing price of the
Shares reported for the business day immediately before Holder delivers its
Notice of Exercise to the
<PAGE>
Company. If the Shares are not regularly traded in a public market, the Board of
Directors of the Company shall determine fair market value in its reasonable
good faith judgment. The foregoing notwithstanding, if Holder advises the Board
of Directors in writing that Holder disagrees with such determination, then the
Company and Holder shall promptly agree upon a reputable investment banking firm
to undertake such valuation. If the valuation of such investment banking firm is
greater than that determined by the Board of Directors, then all fees and
expenses of such investment banking firm shall be paid by the Company. In all
other circumstances, such fees and expenses shall be paid by Holder.
1.4 DELIVERY OF CERTIFICATE AND NEW WARRANT. Promptly after Holder
exercises or converts this Warrant, the Company shall deliver to Holder
certificates for the Shares acquired and, if this Warrant has not been fully
exercised or converted and has not expired, a new Warrant representing the
Shares not so acquired.
1.5 REPLACEMENT OF WARRANTS. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of mutilation, or surrender and cancellation of this Warrant,
the Company at its expense shall execute and deliver, in lieu of this Warrant, a
new warrant of like tenor.
1.6 REPURCHASE ON SALE, MERGER. OR CONSOLIDATION OF THE COMPANY.
1.6.1. "ACQUISITION". For the purpose of this Warrant, "Acquisition"
means any sale, license, or other disposition of all or substantially all of the
assets (including intellectual property) of the Company, or any reorganization,
consolidation, or merger of the Company where the holders of the Company's
securities before the transaction beneficially own less than 50% of the
outstanding voting securities of the surviving entity after the transaction.
1.6.2. ASSUMPTION OF WARRANT. If upon the closing of any Acquisition
the successor entity assumes the obligations of this Warrant, then this Warrant
shall be exercisable for the same securities, cash, and property as would be
payable for the Shares issuable upon exercise of the unexercised portion of this
Warrant as if such Shares were outstanding on the record date for the
Acquisition and subsequent closing. The Warrant Price shall be adjusted
accordingly. The Company shall use reasonable efforts to cause the surviving
corporation to assume the obligations of this Warrant.
1.6.3. NONASSUMPTION. If upon the closing of any Acquisition the
successor entity does not assume the obligations of his Warrant and Holder has
not otherwise exercised this Warrant in full, then the unexercised portion of
this Warrant shall be deemed to have been automatically converted pursuant to
Section 1.2 and thereafter Holder shall participate in the acquisition on the
same terms as other holders of the same class of securities of the Company.
<PAGE>
ARTICLE 2. ADJUSTMENTS TO THE SHARES.
2.1 STOCK DIVIDENDS, SPLITS, ETC. If the Company declares or pays a
dividend on its common stock payable in common stock, or other securities,
subdivides the outstanding common stock into a greater amount of common stock,
then upon exercise of this Warrant, for each Share acquired, Holder shall
receive, without cost to Holder, the total number and kind of securities to
which Holder would have been entitled had Holder owned the Shares of record as
of the date the dividend or subdivision occurred.
2.2 RECLASSIFICATION, EXCHANGE OR SUBSTITUTION. Upon any reclassification,
exchange, substitution, or other event that results in a change of the number
and/or class of the securities issuable upon exercise or conversion of this
Warrant, Holder shall be entitled to receive, upon exercise or conversion of
this Warrant, the number and kind of securities and property that Holder would
have received for the Shares if this Warrant had been exercised immediately
before such reclassification, exchange, substitution, or other event. The
Company or its successor shall promptly issue to Holder a new Warrant for such
new securities or other property. The new Warrant shall provide for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Article 2 including, without limitation, adjustments to the
Warrant Price and to the number of securities or property issuable upon exercise
of the new Warrant. The provisions of this Section 2.2 shall similarly apply to
successive reclassifications, exchanges, substitutions, or other events.
2.3 ADJUSTMENTS FOR COMBINATIONS, ETC. If the outstanding Shares are
combined or consolidated, by reclassification or otherwise, into a lesser number
of shares, the Warrant Price shall be proportionately increased.
2.4 NO IMPAIRMENT. The Company shall not, by amendment of its Articles of
Incorporation or through a reorganization, transfer of assets, consolidation,
merger, dissolution, issue, or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed under this Warrant by the Company, but shall at all times
in good faith assist in carrying out all the provisions of this Article 2 and in
taking all such action as may be necessary or appropriate to protect Holder's
rights under this Article against impairment. If the Company takes any action
affecting the Shares other than as described above that adversely affects
Holder's rights under this Warrant, the Warrant Price shall be adjusted downward
and the number of Shares issuable upon exercise of this Warrant shall be
adjusted upward in such a manner that the aggregate Warrant Price of this
Warrant is unchanged.
2.5 CERTIFICATE AS TO ADJUSTMENTS. Upon each adjustment of the Warrant
Price, the Company at its expense shall promptly compute such adjustment, and
furnish Holder with a certificate of its Chief Financial Officer setting forth
such adjustment and the facts upon which such adjustment is based. The Company
shall, upon written
<PAGE>
request, furnish Holder a certificate setting forth the Warrant Price in effect
upon the date thereof and the series of adjustments leading to such Warrant
Price.
ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY.
3.1 REPRESENTATIONS AND WARRANTIES. The Company hereby represents and
warrants to the Holder as follows:
(a) The initial Warrant Price referenced on the first page of this
Warrant is not greater than the fair market value of the Shares as of the date
of this Warrant.
(b) All Shares which may be issued upon the exercise of the purchase
right represented by this Warrant, and all securities, if any, issuable upon
conversion of the Shares, shall, upon issuance, be duly authorized, validly
issued, fully paid and nonassessable, and free of any liens and encumbrances
except for restrictions on transfer provided for herein or under applicable
federal and state securities laws.
3.2 NOTICE OF CERTAIN EVENTS. If the Company proposes at any time (a) to
declare any dividend or distribution upon its common stock, whether in cash,
property, stock, or other securities and whether or not a regular cash dividend;
(b) to offer for subscription pro rata to the holders of any class or series of
its stock any additional shares of stock of any class or series or other rights;
(c) to effect any reclassification or recapitalization of common stock; (d) to
merge or consolidate with or into any other corporation, or sell, lease,
license, or convey all or substantially all of its assets, or to liquidate,
dissolve or wind up; or (e) offer holders of registration rights the opportunity
to participate in an underwritten public offering of the company's securities
for cash, then, in connection with each such event, the Company shall give
Holder (a) at least 20 days prior written notice of the date on which a record
will be taken for such dividend, distribution, or subscription rights (and
specifying the date on which the holders of common stock will be entitled
thereto) or for determining rights to vote, if any, in respect of the matters
referred to in (c) and (d) above; (2) in the case of the matters referred to in
(c) and (d) above at least 20 days prior written notice of the date when the
same will take place (and specifying the date on which the holders of common
stock will be entitled to exchange their common stock for securities or other
property deliverable upon the occurrence of such event); and (3) in the case of
the matter referred to in (e) above, the same notice as is given to the holders
of such registration rights.
3.3 INFORMATION RIGHTS. So long as the Holder holds this Warrant an/or any
of the Shares, the Company shall deliver to the Holder (a) promptly after
mailing, copies of all communiques to the shareholders of the Company, (b)
within ninety (90) days after the end of each fiscal year of the Company, the
annual audited financial statements of the Company certified by independent
public accountants of recognized standing and (c) within forty-five (45) days
after the end of each of the first three quarters of each fiscal year, the
Company's quarterly, unaudited financial statements.
<PAGE>
3.4 REGISTRATION UNDER SECURITIES ACT OF 1933, AS AMENDED. The Company
agrees that the Shares shall be subject to the registration rights set forth on
Exhibit A attached.
ARTICLE 4. MISCELLANEOUS.
4.1 TERM. This Warrant is exercisable, in whole or in part, at any time
and from time to time on or before the Expiration Date set forth above.
4.2 LEGENDS. This Warrant and the Shares shall be imprinted with a legend
in substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN
EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS
COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
4.3 COMPLIANCE WITH SECURITIES LAWS ON TRANSFER. This Warrant and the
Shares issuable upon exercise this Warrant may not be transferred or assigned in
whole or in part without compliance with applicable federal and state securities
laws by the transferor and the transferee (including, without limitation, the
delivery of investment representation letters and legal opinions reasonably
satisfactory to the Company). The Company shall not require Holder to provide an
opinion of counsel if the transfer is to an affiliate of Holder or if there is
no material question as to the availability of current information as referenced
in Rule 144(c), Holder represents that it has complied with Rule 144(d) and (e)
in reasonable detail, the selling broker represents that it has complied with
Rule 144(f), and the Company is provided with a copy of Holder's notice of
proposed sale.
4.4 TRANSFER PROCEDURE. Subject to the provisions of Section 4.2, Holder
may transfer all or part of this Warrant or the Shares issuable upon exercise of
this Warrant by giving the Company notice of the portion of the Warrant being
transferred setting forth the name, address and taxpayer identification number
of the transferee and surrendering this Warrant to the Company for reissuance to
the transferee(s) (and Holder, if applicable).
4.5 NOTICES. All notices and other communications from the Company to the
Holder, or vice versa, shall be deemed delivered and effective when given
personally or mailed by first-class registered or certified mail, postage
prepaid, at such address as may have been furnished to the Company or the
Holder, as the case may be, in writing by the Company or such Holder from time
to time.
<PAGE>
4.6 WAIVER. This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought.
4.7 ATTORNEYS' FEES. In the event of any dispute between the parties
concerning the terms and provisions of this Warrant, the party prevailing in
such dispute shall be entitled to collect from the other party all costs
incurred in such dispute, including reasonable attorneys' fees.
4.8 GOVERNING LAW. This Warrant shall be governed by and construed in
accordance with the laws of the State of California, without giving effect to
its principles regarding conflicts of law.
XSCRIBE CORPORATION
"COMPANY"
By /s/ Suren G. Dutia
----------------------------
Name SUREN G. DUTIA
-------------------------
(Print)
Title: Chairman of the Board, President,
or Vice President
By /s/ Bruce C. Myers
----------------------------
Name BRUCE C. MYERS
-------------------------
(Print)
Title: Chief Financial Officer, Secretary,
Assistant Treasurer or Assistant
Secretary
<PAGE>
APPENDIX 1
NOTICE OF EXERCISE
1. The undersigned hereby elects to purchase shares of the
Common Stock of Xscribe Corporation pursuant to the terms of the attached
Warrant, and tenders herewith payment of the purchase price of such shares in
full.
1. The undersigned hereby elects to convert the attached Warrant into
Shares in the manner specified in the Warrant. This conversion is exercised with
respect to of the Shares covered by the Warrant.
[Strike paragraph that does not apply.]
2. Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name as is specified below:
------------------------------
(Name)
------------------------------
------------------------------
(Address)
3. The undersigned represents it is acquiring the shares solely for its
own account and not as a nominee for any other party and not with a view toward
the resale or distribution thereof except in compliance with applicable
securities laws.
IMPERIAL BANCORP
By
-----------------------------------
(Signature)
- - - -----------------
(Date)
<PAGE>
EXHIBIT A
REGISTRATION RIGHTS
The Shares shall be deemed "registrable securities" or otherwise entitled
to "piggy back" registration rights in accordance with the terms of any
agreement between the Company and any of its investors (the "Agreement").
The Company agrees that no amendments will be made to the Agreement which
would have an adverse impact on Holder's registration rights thereunder without
the consent of Holder.
If no Agreement continues to exist, then the Company and the Holder shall
enter into a form of Registration Rights Agreement which shall be no less
favorable than any such agreement subsequently entered into between the Company
and any investors and in no event providing less than piggy back registration
rights.
<PAGE>
IMPERIAL BANK
Executive Offices - Century Boulevard at the San Diego Freeway - P.O. Box 92991
- - - - Los Angeles, California 90009 - (310) 417-5600
July 12, 1996
Xscribe Corporation
6285 Nancy Ridge Drive
San Diego, CA 92121
Re: Warrant Dated August 10, 1995 For 75,000 Shares
At 1.00 Per Share
Gentlemen:
This letter will serve as Imperial Bank's notice that we will be transferring
the above referenced warrant to its parent, Imperial Bancorp. This transfer is
to the parent of the Bank, an Affiliate, and is for purposes of facilitating
compliance with banking laws, and not with a view to distribution of the warrant
or the underlying securities. Please acknowledge receipt of this notice, reissue
the enclosed warrant in the name of Imperial Bancorp and so reflect Imperial
Bancorp as the holder of the warrant on your record.
For purposes of the warrant, the only authorized representatives of Imperial
Bancorp who can exercise or otherwise deal with the warrant are any two of the
following:
George L. Graziadio
William L. Capps
Richard J. Casey
Robert M. Franko
J. Richard Barkley
Karen C. Abajian
Norman P. Creighton
Daniel R. Mathis
Robert S. Muehlenbeck
Eldon K. Lloyd
Richard M. Baker
If you have any questions concerning this matter, please contact the
undersigned.
Sincerely,
/s/ Karen C. Abajian
Karen C. Abajian
Senior Vice President & Controller
KCA/sd
enclosure
ACKNOWLEDGED: /s/ Suren G. Dutia
----------------------------
By: SUREN G. DUTIA
---------------------------
Title: CEO
---------------------------
Date: OCTOBER 7, 1996
---------------------------
EX 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors of Photomatrix, Inc.:
We consent to incorporation by reference in the registration statements
(No.'s 33-18896, 33-72122 and 33-61951) on Form S-8 of Photomatrix, Inc. of
our report dated May 29, 1997, except for Note 11, as to which the date is
June 6, 1997, relating to the consolidated balance sheets of Photomatrix,
Inc. and subsidiaries as of March 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for each of the years in the three-year period ended March 31, 1997, and the
related schedule, which reports appear in the March 31, 1997 Annual Report on
Form 10-KSB of Photomatrix, Inc. and subsidiaries.
KPMG Peat Marwick LLP
San Diego, California
June 30, 1997
<PAGE>
Exhibit 2
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________.
Commission file number 0-16055
PHOTOMATRIX, INC.
(Exact name of small business issuer as specified in its charter)
California 95-3267788
- -------------------------------------------------------------------------------
11065 Sorrento Valley Court, San Diego, California 92121
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(619) 625-4400
- -------------------------------------------------------------------------------
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
----- -----
At December 31, 1997, 5,083,000 shares of Common Stock of the Issuer were
outstanding.
Transitional Small Business Disclosure Format.
Yes No X
----- -----
<PAGE>
INDEX
PHOTOMATRIX, INC.
Page
PART I. FINANCIAL INFORMATION ----
- - ------------------------------
ITEM 1. FINANCIAL STATEMENTS
Consolidated balance sheets 1
Unaudited consolidated statements of operations 2
Unaudited consolidated statements of cash flows 3
Notes to consolidated financial statements 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 7
PART II. OTHER INFORMATION
- - ----------------------------
ITEM 5. OTHER INFORMATION 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 12
SIGNATURES 13
<PAGE>
PART I: FINANCIAL INFORMATION
- - ------------------------------
ITEM 1. FINANCIAL STATEMENTS
PHOTOMATRIX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1997
(Unaudited) March 31, 1997
----------------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,165,000 $ 812,000
Accounts receivable, net 1,086,000 1,602,000
Inventories, net 2,915,000 2,520,000
Prepaid expenses and other 159,000 149,000
------------ ------------
TOTAL CURRENT ASSETS 5,325,000 5,083,000
PROPERTY AND EQUIPMENT, NET 912,000 1,346,000
INTANGIBLES AND OTHER ASSETS, NET 1,395,000 2,053,000
OTHER ASSETS 151,000 83,000
------------ ------------
$ 7,783,000 $ 8,565,000
------------ ------------
------------ ------------
CURRENT LIABILITIES:
Accounts payable $ 516,000 $ 844,000
Accrued and other liabilities 634,000 590,000
Customer deposits 451,000 613,000
Line of credit (See Note 2, Part I, Item 1) - -
Current portion of notes payable 162,000 152,000
Net liabilities of discontinued operations (See Note
3, Part I, Item 1) 1,238,000 452,000
------------ ------------
TOTAL CURRENT LIABILITIES 3,001,000 2,651,000
NOTES PAYABLE TO RELATED PARTIES 252,000 375,000
OTHER NON-CURRENT LIABILITIES 101,000 40,000
CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY:
Preferred stock, 3,173,000 shares authorized - -
Common stock, no par value: 30 million shares
authorized, 5,083,000 shares issued and
outstanding 19,351,000 19,351,000
Accumulated deficit (15,063,000) (13,998,000)
Other 141,000 146,000
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 4,429,000 5,499,000
------------ ------------
$ 7,783,000 $ 8,565,000
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE>
PHOTOMATRIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------- ---------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES $ 1,518,000 $ 2,451,000 $ 6,076,000 $ 6,871,000
COST OF REVENUES 1,003,000 1,785,000 3,968,000 5,107,000
------------ ------------ ------------ ------------
GROSS PROFIT 515,000 666,000 2,108,000 1,764,000
OPERATING EXPENSES:
Selling, general and administrative 711,000 904,000 2,376,000 2,685,000
Research and development 226,000 199,000 580,000 562,000
Write-off of Capitalized Software
(See Note 4, Part I, Item 1) 366,000 - 366,000 -
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 1,303,000 1,103,000 3,322,000 3,247,000
------------ ------------ ------------ ------------
OPERATING LOSS (788,000) (437,000) (1,214,000) (1,483,000)
OTHER INCOME (EXPENSE), NET (10,000) 241,000 87,000 193,000
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (798,000) (196,000) (1,127,000) (1,290,000)
LOSS FROM DISCONTINUED OPERATIONS - (3,000) - (246,000)
GAIN ON SALE OF DISCONTINUED OPERATION - - - 184,000
------------ ------------ ------------ ------------
NET LOSS $ (798,000) $ (199,000) $ (1,127,000) $ (1,352,000)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
LOSS PER COMMON SHARE:
CONTINUING OPERATIONS $ (0.16) $ (0.04) $ (0.22) $ (0.24)
DISCONTINUED OPERATION 0.00 0.00 0.00 (0.01)
------------ ------------ ------------ ------------
NET LOSS $ (0.16) $ (0.04) $ (0.22) $ (0.25)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average number of common shares
outstanding 5,083,000 5,050,000 5,083,000 5,383,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
PHOTOMATRIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED DECEMBER, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Operations:
Loss from continuing operations $ (1,127,000) $ (1,290,000)
Adjustments:
Depreciation and amortization 688,000 716,000
Write-off of Capitalized Software 366,000 -
Change in assets and liabilities:
Accounts receivable 516,000 (28,000)
Inventories (395,000) 669,000
Prepaid expenses and other (10,000) (55,000)
Accounts payable (328,000) (586,000)
Accrued liabilities and other 44,000 334,000
Customer deposits (162,000) (107,000)
------------- -------------
Cash used in continuing operations (408,000) (347,000)
Cash provided by discontinued operations 848,000 447,000
Gain on sale of discontinued operations - (184,000)
------------- -------------
Cash provided (used in) by operations 440,000 (84,000)
------------- -------------
Investing activities:
Proceeds from sale of discontinued operation - 2,000,000
Capital (expenditures) retirements 38,000 (237,000)
------------- -------------
Cash provided by investing activities 38,000 1,763,000
------------- -------------
Financing activities:
Repayment of credit facility - (1,024,000)
Repayment of notes payable (113,000) (93,000)
Other Assets and Liabilities (7,000) -
------------- -------------
Cash used in financing activities (120,000) (1,117,000)
------------- -------------
Effects of exchange rates on cash (5,000) 123,000
------------- -------------
Increase in cash and cash equivalents 353,000 685,000
Cash and cash equivalents, beginning of year 812,000 255,000
------------- -------------
Cash and cash equivalents, end of year $ 1,165,000 $ 940,000
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
PHOTOMATRIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND MARCH 31, 1997 AND
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997 AND 1996
(UNAUDITED)
1. GENERAL
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements reflect
the accounts of Photomatrix, Inc. (the "Company"), together with its
subsidiaries. All significant intercompany transactions and balances have
been eliminated.
These unaudited consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to those
rules and regulations, although the Company believes that the disclosures
made are adequate to prevent the information from being misleading. These
unaudited consolidated financial statements reflect, in the opinion of
management, all adjustments (which include only normal recurring
adjustments) necessary to present the Company's results of operations and
financial position as of the dates and for the periods presented. These
unaudited consolidated financial statements should be read in conjunction
with the audited financial statements and related notes included in the
Company's Report on Form 10-KSB filed with the Securities and Exchange
Commission for the year ended March 31, 1997. The results for the interim
periods presented are not necessarily indicative of results to be expected
for a full year.
2. CREDIT LINE
The Company has an unused line of credit with a bank to borrow a total
of $750,000. This line of credit, which expires September 1998, accrues
interest on outstanding borrowings at prime plus 2 percent per annum. As
of December 31, 1997, the Company had no outstanding borrowings against
this line of credit.
3. DISCONTINUATION OF LEXIA SYSTEMS, INC.
In December, 1996 the Board of Directors approved a plan to
discontinue the operations of Lexia Systems, Inc. ("Lexia"). Lexia is
currently in the process of winding down its affairs and has notified its
customers that it will cease operations on or before September 30, 1998.
Lexia has not been able to resolve outstanding issues between it and ICL
and Fujitsu/ICL Computers.
4
<PAGE>
4. WRITE-OFF OF CAPITALIZED SOFTWARE
In November 1997 the Company announced the introduction of its new,
state-of-the-art 32-bit Vision Image Capture Software ("VICS"), a true
32-bit, MS-Windows NT-based software specifically designed for the
Photomatrix Vision Series scanners. As a result of this introduction, the
Company does not expect any significant future sales of its Photomatrix
Image Capture Software ("PICS"). Accordingly, the Company has recorded a
one-time charge of $366,000 in the quarter ended December 31, 1997 to write
off all capitalized software costs related to earlier generations of
software which were previously capitalized.
5. PENDING MERGER AGREEMENT
On October 29, 1997, the Company announced that it had entered into a
non-binding letter of intent with I-PAC Manufacturing, Inc. ("I-PAC"), a
custom contract manufacturer of electrical and mechanical assemblies,
including complex, multi-layer printed circuit board assemblies; wire and
cable harnesses; molded cables; and complete system and subsystem
assemblies, whereby the companies had agreed to combine their respective
business operations through a merger. The companies have revised the terms
to the original letter of intent. The revised non-binding agreement calls
for the issuance of 4,848,000 shares of Photomatrix common stock to
shareholders of I-PAC in exchange for all of the outstanding stock of the
privately-held company. In addition, I-PAC shareholders will have the right
to receive up to 4,652,000 additional shares based upon the exercise of
Photomatrix options and attaining certain performance milestones for I-PAC
operations. The merger is subject to several conditions, including: a)
satisfactory completion of due diligence by each of the parties; b) the
absence of any material adverse change in assets, liabilities, personnel,
financial conditions or prospects of the respective companies; c)
compliance with all applicable statutory and regulatory requirements; d)
the approval of the transaction and the execution, delivery and performance
of the agreement by their respective Boards of Directors and shareholders;
e) the receipt of all necessary or appropriate consents, waivers and
approvals of third parties; f) qualification of the transaction as a tax
free exchange under Federal and California tax laws; g) the absence of a
significant number of dissenting shareholders and h) the negotiation and
execution of a merger agreement and other appropriate documentation. The
merger will initially result in increasing the number of outstanding shares
of Photomatrix common stock from 5,083,000 to 9,931,000, and could
eventually result in increasing that number to 15,490,000 shares if I-PAC's
performance milestones are achieved and all existing Photomatrix options
and warrants are converted to common stock. Photomatrix has previously
granted options and warrants to officers, directors, key employees and
various other parties to purchase 907,000 shares of its common stock, all
of which remain outstanding.
Under the terms of the merger agreement, the corporate headquarters of
Photomatrix will be relocated as soon as possible after the close of the
merger transaction to the I-PAC Manufacturing, Inc. facility located in
Carlsbad, California. In addition, William Grivas, currently Chief
Executive Officer of I-PAC Manufacturing, will assume the position of
Chairman of the Board of Directors of Photomatrix and Patrick Moore,
5
<PAGE>
currently President of I-PAC Manufacturing, will assume the position of
Chief Executive Officer of Photomatrix. Suren Dutia, currently President,
Chief Executive Officer and Chairman of the Board for Photomatrix, will
retain the position of President of Photomatrix. The composition of the
Photomatrix Board of Directors will change from four members to seven
members. The existing members of the Board will remain the same, and the
three additional positions will be filled by William Grivas, James Hill and
one additional person. The transaction will be treated as a purchase for
accounting purposes.
I-PAC specializes in surface mount and hybrid printed circuit boards
used in high value industrial products and commercial products which
require an exceptionally high level of quality, a critical emphasis on
delivery schedules, and intensive customer support. I-PAC's primary
customers include ITT, Lockheed Martin, Disney, Hughes JVC, Sattel
Communications, Sanyo, Schumacher, Triconex (a Siebe company) and Palomar
Products. For the year ended December 31, 1997, I-PAC reported revenues of
nearly $5.6 million. I-PAC Manufacturing, Inc. owns a 40,000 square foot,
two story concrete building located in a high end R&D industrial park in
Carlsbad, California, which houses its operations. It also has an
investment in a wholly owned subsidiary, I-PAC Express Assembly, Inc.
I-PAC Express Assembly, Inc. is a custom contract manufacturer
specializing in quick turn printed circuit board prototypes incorporating
surface mount and hybrid technologies. It is located in Santa Ana,
California, in the heart of the Orange County high technology community.
I-PAC Express is situated to support prototyping requirements for new
products during their design phase, allowing those products to then
seamlessly migrate to the main facility when production build quantities
are required.
THERE IS NO ASSURANCE THAT THIS COMBINATION WILL BE CONSUMMATED.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS 10-QSB CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THESE STATEMENTS INCLUDE, WITHOUT LIMITATION,
STATEMENTS RELATING TO THE COMPANY'S PLANS AND OBJECTIVES FOR FUTURE
OPERATIONS, INCLUDING INCREASING SALES AND IMPROVING MARGINS,
ASSUMPTIONS AND STATEMENTS RELATING TO THE COMPANY'S FUTURE ECONOMIC
PERFORMANCE AND OTHER NON-HISTORICAL INFORMATION. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE,
WITHOUT LIMITATION, THOSE RISKS DISCUSSED IN ITEM 7 UNDER THE HEADING
"ADDITIONAL RISK FACTORS" AS WELL AS OTHER FACTORS AS DISCUSSED IN THE
COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED MARCH
31, 1997.
Management's discussion and analysis of financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and notes to consolidated financial statements included elsewhere
herein.
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THE
THREE MONTHS ENDED DECEMBER 31, 1996
For the quarter ended December 31, 1997, consolidated revenues decreased
$933,000 or 38.1% to $1,518,000 from $2,451,000 for the quarter ended December
31, 1996. This was due to a 47.6% ($952,000) decrease in equipment and
software revenues offset by a 4.2% ($19,000) increase in service revenues. This
reduction in equipment and software revenues was primarily due to extended
customer purchasing decisions and a significant reduction in orders from a major
OEM customer of Photomatrix. The Company has also not yet received anticipated
orders from a potentially significant new distributor. During December 1997,
the Company received a binding commitment from Bell & Howell for purchasing
Vision Series 5000 document scanners to be delivered over a seven-month period
beginning in December 1997. The purchase commitment, which exceeds $1.5 million,
is part of an agreement between Photomatrix and the Bell & Howell, whereby Bell
& Howell becomes the exclusive agent, with certain specifically identified
exceptions, to sell Photomatrix peripheral document scanners to distributors and
value-added resellers in the United States and Canada. In return for the
purchase commitment, Photomatrix agreed to restrict its direct sales activities
to the service bureau markets and not compete with Bell & Howell in the indirect
distribution channels. In addition, Photomatrix also retains rights to continue
selling its document scanners to international distributors as well as certain
domestic distributors and end users under existing distribution agreements.
Eight of the scanners were delivered in December 1997.
For the quarter ended December 31, 1997, consolidated gross margin
decreased $151,000 or 22.7% to $515,000 from $666,000 for the quarter ended
December 31, 1996. However, gross margin as a percent of revenues increased
24.6% to 33.9% from 27.2%. This increase was due to a 19.1% increase in
equipment and software margins coupled with a 36.6% increase in service margins.
The equipment and software gross margin improvement resulted from the effects of
both a continuing favorable product mix and a reduction in costs associated with
production
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efficiencies. The service gross margin improvement resulted from a 15.6%
decrease in service costs, primarily labor, tax and labor-related costs
coupled with a 21.0% increase in charges to customers for labor and materials
not covered by maintenance contracts.
For the quarter ended December 31, 1997, selling, general and
administrative expenses ("SG&A") decreased $193,000 or 21.4% to $711,000 from
$904,000 for the quarter ended December 31, 1996. As a percent of revenue
SG&A increased 26.8% to 46.8% from 36.9%. This increase is a reflection of
reduced revenues as actual SG&A costs continue to be held below previous year
amounts, primarily in the area of labor and labor-related costs and taxes.
In January 1998, in response to the lower level of sales in the third
quarter, uncertainties in the market segment in which Photomatrix sells its
aperture card and document scanners and the restructuring of its sales and
marketing department as a result of the new OEM arrangement with Bell &
Howell, the Company took definitive actions to further reduce operating
expenses, including eliminating several positions. The Company expects these
cost reductions will exceed $400,000 on an annual basis.
For the quarter ended December 31, 1997, research and development
expenses increased by $27,000 or 13.6% to $226,000 from $199,000 for the
quarter ended December 31, 1996. As a percent of revenue research and
development expenses increased 84.0% to 14.9% from 8.1% for the quarter ended
December 31, 1996. Total spending increased $15,000 to $226,000 from
$211,000. During the quarter, with a greater emphasis being placed on
research, there was no capitalization of expenses for new product
development, a decrease of $12,000 from the prior quarter.
The company recorded a write off of certain capitalized software costs
during the quarter ended December 31, 1997 in the amount of $366,000.
In the current quarter, other expense consists of $10,000 of interest
expense. In the prior quarter, other income was comprised of $9,000 of
interest income, offset by a $250,000 one-time settlement payment from a
major customer to settle a shortfall of guaranteed purchase commitments for
spare parts shipments in calendar year 1996.
There was no provision for income taxes booked in either the quarter
ended December 31, 1997 or the quarter ended December 31, 1996, because of
the effects of net operating loss carry-forwards, net of related allowances.
The net effect of the decreases in gross margin and SG&A, increases in
product development expenses and other expenses plus the one-time write off
of certain capitalized costs resulted in a net loss from continuing
operations for the quarter ended December 31, 1997 of $798,000 or $(0.16) per
share. This compares to a loss from continuing operations of $196,000 or
$(0.04) per share for the quarter ended December 31, 1996. There was no
income from discontinued operations in the current quarter compared to a loss
of $3,000 in the quarter ended December 31, 1996. The net loss in the
current quarter of $798,000 or $(0.16) per share compares to a net loss of
$199,000 or $(0.04) per share in the prior quarter.
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NINE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THE
NINE MONTHS ENDED DECEMBER 31, 1996
For the nine months ended December 31, 1997, consolidated revenues
decreased $795,000 or 11.6% to $6,076,000 from $6,871,000 for the nine months
ended December 31, 1996, primarily as a consequence of the poor results shown
in the current quarter. Equipment and software revenue decreased $947,000 or
17.5% to $4,463,000 from $5,410,000 for the nine months ended December 31,
1996. Service revenue increased $152,000 or 10.4% to $1,613,000 from
$1,461,000 for the prior nine months ended December 31, 1996.
For the nine months ended December 31, 1997, consolidated gross margin
increased $344,000 or 19.5% to $2,108,000 from $1,764,000 for the nine months
ended December 31, 1996. As a percent of revenues gross margin increased
35.0%, to 34.7 % from 25.7%. Equipment and software gross margin increased
23.9% to 28.5% from 23.0%, this improvement resulting from the effects of
both a continuing favorable product mix and a reduction in costs associated
with production efficiencies. Service gross margin increased 45.9% to 51.8%
from 35.5%, resulting primarily from decreases in service costs, primarily
labor and labor-related costs and taxes.
For the nine months ended December 31, 1997, selling, general and
administrative expenses ("SG&A") decreased $309,000 or 11.5% to $2,376,000
from $2,685,000 for the nine months ended December 31, 1996. As a percent of
revenue, SG&A remained constant at 39.1%. As previously discussed, the
Company is further reducing costs as a result of the lower level of sales in
the third quarter, uncertainties in the market segment in which Photomatrix
sells its aperture card and document scanners and the restructuring of its
sales and marketing department as a result of the new OEM arrangement with
Bell & Howell. As a result of the actions taken the Company expects cost
reductions to exceed $400,000 on an annual basis.
For the nine months ended December 31, 1997, research and development
expenses increased by $18,000 or 3.2% to $580,000 from $562,000 for the nine
months ended December 31, 1996. As a percentage of revenue, research and
development expenses increased 15.9 % to 9.5% from 8.2%. Total product
development spending increased $28,000 to $664,000 from $636,000.
Expenditures for new product development that were considered to be
technologically feasible, and as such were capitalized, increased $10,000 to
$84,000 from $74,000.
As previously discussed, the company recorded a write off of certain
capitalized software costs during the quarter ended December 31, 1997 in the
amount of $366,000.
Other income of $87,000 in the nine months ended December 31, 1997,
compares to income of $193,000 in the nine months ended December 31, 1996, a
decrease of $106,000. This decrease primarily reflects a sale of a trademark
for $100,000 in the current period compared to a one-time settlement payment
of $250,000 from a major customer in the prior period.
There was no provision for income taxes booked in the nine months ended
December 31, 1997, the same as in the nine months ended December 31, 1996,
because of the effects of net operating loss carry-forwards, net of related
allowances.
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The net effect of the increases in gross margin and research and
development, decreases in SG&A and other income plus the write off of
capitalized software resulted in a net loss from continuing operations for
the nine months ended December 31, 1997 of $1,127,000 or $(0.22) per share.
This compares to a net loss from continuing operations of $1,290,000 or
$(0.24) per share for the nine months ended December 31, 1996. There was no
income from discontinued operations in the current period compared to a loss
of $62,000 or $(0.01) per share in the nine months ended December 31, 1996.
The net loss in the current period of $1,127,000 or $(0.22) per share
compares to a loss of $1,352,000 or $(0.25) in the prior nine month period.
RECENT AND FUTURE SOURCES OF AND DEMANDS ON LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended December 31, 1997, the Company's loss before
taxes, depreciation and amortization and the one-time write off of certain
capitalized software costs was $73,000. During this period the Company's
primary sources of liquidity were a reduction of accounts receivable
($516,000), an increase in accrued and other liabilities ($44,000),
retirement of capital assets ($38,000), cash flows provided by discontinued
operation ($848,000), and cash reserves. During the same period the primary
uses of cash were to increase inventories ($395,000), increase prepaid
expenses ($10,000), reduce accounts payable ($328,000), reduce customer
deposits ($162,000), reduce notes payable ($113,000) and reduce other assets
and liabilities (7,000). As a result of these sources and uses of liquidity
during the nine months ended December 31, 1997 the Company's cash balance
increased $353,000 or 43.58%, from $812,000 to $1,165,000.
The Company has a $750,000 line of credit with its bank. This line of
credit accrues interest on outstanding borrowings at the bank's prime rate
plus 2% per annum. Under the terms of the line total borrowings are limited
to the lesser of $750,000 or 70% of eligible accounts receivable (as defined
under the agreement). The Company is required to (1) maintain a minimum
tangible net worth of $2,800,000, (2) maintain a ratio of total liabilities
to tangible new worth of not greater than 1.1 to 1.0, (3) maintain working
capital of $1,750,000 and (4) maintain a current ratio of 1.7 to 1.0. The
line of credit expires in September, 1998. As of December 31, 1997, the
Company had no outstanding borrowings against this line of credit and is in
compliance with all requirements.
The Company is obligated under a series of notes payable totaling
$414,000 as of December 31, 1997. These notes bear interest at a rate of 8%
per annum and mature in April 2000. Interest and principal payments totaling
$16,000 are due monthly. As of December 31, all payments under these
obligations are current.
The Company's assured sources of future short-term liquidity are its
cash balance of $1,165,000 as of December 31, 1997 and the full amount of its
line of credit of $750,000.
The Company currently is obligated to pay approximately $20,000 per
month in lease payments. Aside from these commitments, the Company has not
made any material capital commitments.
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The Company is continuing to concentrate on increasing sales and improving
gross margins. If it is successful, it should have sufficient liquidity to fund
its operations during the next twelve months. In the event that the proposed
merger is accomplished, although no assurances can be given, the company expects
the effect on liquidity to be positive, and therefore no additional capital will
be required to fund operations.
In March 1997 the Financial Accounting Standards Board issued SFAS 128,
EARNINGS PER SHARE, effective for periods ending after December 15, 1997. SFAS
128 requires the presentation of "basic" earnings per share, which excludes the
dilutive effect of all common stock equivalents. Presentation of "diluted"
earnings per share, which reflects the dilutive effects of all common stock
equivalents, is be required. The diluted presentation is similar to the current
presentation of fully diluted earnings per share, but uses the average market
price of the stock during the period. For the three and nine months ended
December 31, 1997 and 1996 the company had losses from continuing operations and
thus only basic earnings per share is presented as the effect of common stock
equivalents is antidilutive to the calculation of diluted earnings per share.
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PART II: OTHER INFORMATION
- - ---------------------------
ITEM 5. OTHER INFORMATION
On October 29, 1997, the Company announced that it had entered into a
non-binding letter of intent with I-PAC Manufacturing, Inc. ("I-PAC"), a custom
contract manufacturer of electrical and mechanical assemblies, including
complex, multi-layer printed circuit board assemblies; wire and cable harnesses;
molded cables; and complete system and subsystem assemblies, whereby the
companies had agreed to combine their respective business operations through a
merger. The companies have revised the terms to the original letter of intent.
The revised non-binding agreement calls for the issuance of 4,848,000 shares of
Photomatrix common stock to shareholders of I-PAC in exchange for all of the
outstanding stock of the privately-held company. In addition, I-PAC shareholders
will have the right to earn up to 4,652,000 additional shares, based upon
Photomatrix options exercised and attaining certain performance milestones for
I-PAC operations. The merger is subject to several conditions, including: a)
satisfactory completion of due diligence by each of the parties; b) the
absence of any material adverse change in assets, liabilities, personnel,
financial conditions or prospects of the respective companies; c) compliance
with all applicable statutory and regulatory requirements; d) the approval of
the transaction and the execution, delivery and performance of the agreement by
their respective Boards of Directors and shareholders; e) the receipt of all
necessary or appropriate consents, waivers and approvals of third parties; f)
qualification of the transaction as a tax free exchange under Federal and
California tax laws; g) the absence of a significant number of dissenting
shareholders and h) the negotiation and execution of a merger agreement and
other appropriate documentation. THERE IS NO ASSURANCE THAT THIS COMBINATION
WILL BE CONSUMMATED
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(A) EXHIBITS
Financial Data Sheet (filed only electronically with the SEC)
(B) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the quarter ended December
31, 1997.
Items 1, 2, 3 and 4 are not applicable and have been omitted.
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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: February 12, 1998 by /s/ Suren G. Dutia
------------------------------
Suren G. Dutia
President
Chief Executive Officer
Date: February 12, 1998 by /s/ Roy L. Gayhart
------------------------------
Roy L. Gayhart
Chief Financial Officer
Date: February 12, 1998 by /s/ Charles H. Frady
------------------------------
Charles H. Frady
Controller
Principal Accounting Officer
13
