<PAGE> 1
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
(Amendment No. )
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, For Use of the Commission Only (as permitted by Rule
14a-6(e)(2) )
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material pursuant to Rule 14a-11(c) or Rule 14a-12
JMAR Industries, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
[x] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction
applies:......................................................
2) Aggregate number of securities to which transaction
applies:......................................................
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 1/:...............
4) Proposed maximum aggregate value of
transaction:..................................................
5) Total fee paid:..........................................
[ ] Fee paid previously with preliminary materials.
[ ] 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:...................................................
1/ Set forth the amount on which the filing fee is calculated and state how
it was determined.
<PAGE> 2
JMAR INDUSTRIES, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD FRIDAY, JULY 18, 1997
TO THE SHAREHOLDERS:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of JMAR
Industries, Inc. ("JMAR" or the "Company") will be held on Friday, July 18, 1997
at 10:00 a.m., Pacific Daylight Time at the Morgan Run Resort & Club, 5690
Cancha De Golf, Rancho Santa Fe, California for the following purposes:
(1) To elect six directors to serve for the ensuing year or until
their successors are elected.
(2) To transact such other business as may properly come before
the meeting or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy Statement
accompanying this Notice.
Only shareholders of record at the close of business on June 6, 1997, are
entitled to receive notice of and to vote at the meeting.
All shareholders are cordially invited to attend the meeting in person. However,
to assure your representation at the meeting, you are urged to mark, sign, date
and return the enclosed proxy card as promptly as possible in the
postage-prepaid envelope enclosed for that purpose. Any shareholder attending
the meeting may vote in person even if he or she returned a proxy.
Sincerely,
/S/ John S. Martinez
John S. Martinez, Ph.D.
Chairman of the Board and
Chief Executive Officer
San Diego, California
June 16, 1997
IMPORTANT: WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE REQUESTED TO
COMPLETE AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE ENVELOPE PROVIDED.
<PAGE> 3
PROXY STATEMENT
The enclosed Proxy is solicited on behalf of the Board of Directors of JMAR
Industries, Inc. ("JMAR" or the "Company"), for use at the Annual Meeting of
Shareholders to be held Friday, July 18, 1997 at 10:00 a.m. PDT, or at any
adjournment thereof, for the purposes set forth herein and in the accompanying
Notice of Annual Meeting of Shareholders. The Annual Meeting will be held at the
Morgan Run Resort & Club, 5690 Cancha De Golf, Rancho Santa Fe, California.
There is included as an Appendix to this Proxy Statement complete financial
statements of the Company together with the report of the Company's independent
auditors thereon. The Appendix also contains the Management Discussion and
Analysis, together with certain additional financial and related information
regarding the Company. A Summary Annual Report of the Company for the fiscal
year ended December 31, 1996 ("fiscal 1996") is being mailed to shareholders
concurrently with the mailing of this Notice of Annual Meeting and Proxy
Statement. The Summary Annual Report contains, among other things, summary
financial information regarding the Company and a discussion of developments in
the Company's business during fiscal 1996.
The principal executive offices of the Company are located at 3956 Sorrento
Valley Boulevard, San Diego, California 92121. The Company's telephone number is
(619) 535-1706.
These proxy solicitation materials were mailed on or about June 16, 1997 to all
shareholders entitled to vote at the meeting.
INFORMATION CONCERNING SOLICITATION AND VOTING
REVOCABILITY OF PROXIES
Any proxy given pursuant to the solicitation may be revoked by the person giving
it at any time before its use by delivering to the Secretary of the Company a
written notice of revocation or a duly executed proxy bearing a later date or by
attending the meeting and voting in person.
VOTING AND SOLICITATION
On all matters, each share has one vote.
The cost of soliciting proxies will be borne by the Company. In addition, the
Company may reimburse brokerage firms and other persons representing beneficial
owners of shares for their expenses in forwarding solicitation material to such
beneficial owners. Proxies may be solicited by certain of the Company's
directors, officers and regular employees, without additional compensation,
personally or by telephone or telegram.
RECORD DATE
Shareholders of record at the close of business on June 6, 1997 (the "Record
Date") are entitled to receive notice of and to vote at the meeting and any
adjournment or adjournments thereof. As of June 6, 1997, 16,877,169 shares of
the Company's Common Stock, $.01 par value ("Common Stock"), were issued and
outstanding.
1
<PAGE> 4
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
As of June 6, 1997, the following person was known by the Company to be the
beneficial owner of more than 5 percent of the Company's Common Stock. A person
is deemed to be the beneficial owner of securities, whether or not he has any
economic interest therein, if he directly or indirectly has (or shares with
others) voting or investment power with respect to the securities or has the
right to acquire such beneficial ownership within sixty days.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES PERCENT OF TOTAL
BENEFICIALLY OWNED
<S> <C> <C>
John S. Martinez 1,560,693 (1) 8.94%
3956 Sorrento Valley Blvd.
San Diego, CA 92121
</TABLE>
(1) Includes: (a) 372,965 shares owned of record by the John S. Martinez
Separate Property Trust, of which Dr. Martinez as trustee, has sole voting and
investment power; (b) 587,728 shares of Common Stock which are issuable upon
exercise of currently exercisable warrants and stock options; and (c) 600,000
shares of Common Stock subject to a voting agreement pursuant to which Dr.
Martinez has sole voting power (but no investment power or economic interest)
until the earlier of October 6, 2003 or until the transfer of the shares
according to the terms of the voting agreement (the "Voting Agreement").
100,000 shares were released from the Voting Agreement in 1996 and are no longer
included in the shares beneficially owned by Dr. Martinez. Dr. Martinez also
holds sole voting power pursuant to the Voting Agreement over 160,000 shares of
Common Stock which are issuable upon conversion of $600,000 of notes. Pursuant
to the terms thereof, since these notes are not convertible within 60 days of
the date of this Proxy Statement, Dr. Martinez is not considered to have
"beneficial ownership" of said 160,000 shares.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the beneficial ownership of Common Stock of the
Company as of June 6, 1997 by each nominee for director, the "Named Officers"
(as defined in "Executive Compensation" on page 9 below) and by all director
nominees and executive officers as a group. Except as otherwise noted, the
following stockholders have sole voting and investment power with respect to the
shares. Information with respect to beneficial ownership is based on information
furnished to the Company by each stockholder included in the table.
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES PERCENT OF TOTAL
BENEFICIALLY OWNED
<S> <C> <C>
John S. Martinez, Ph.D. (1) 1,560,693 8.94%
Robert S. Hash (2) 294,802 1.74%
Marvin W. Sepe (3) 179,602 1.05%
Dennis E. Valentine (4) 107,519 (8)
James H. Banister, Jr. (5) 48,463 (8)
Vernon H. Blackman, Ph.D. (6) 22,534 (8)
Barry Ressler (6) 18,336 (8)
C. Neil Beer, Ph.D. (6) 11,916 (8)
All director nominees and executive officers as
a group (10 persons) (7) 2,314,512 12.92%
</TABLE>
2
<PAGE> 5
- --------------------
(1) See footnote 1 to preceding table.
(2) Includes: (a) 45,980 shares which are issuable upon exercise of currently
exercisable warrants and; (b) 9,588 shares which are issuable upon exercise
of currently exercisable warrants owned of record by Mr. Hash's wife. Mr.
Hash resigned as President of Pacific Precision Laboratories effective June
13, 1997.
(3) Includes 177,401 shares which are issuable upon exercise of currently
exercisable stock options and warrants.
(4) Includes 105,514 shares which are issuable upon exercise of currently
exercisable stock options and warrants.
(5) Includes 40,063 shares which are issuable upon exercise of currently
exercisable stock options and warrants.
(6) All shares are issuable upon exercise of currently exercisable stock
options and warrants.
(7) Includes 1,039,060 shares which are issuable upon exercise of currently
exercisable stock options and warrants.
(8) Less than one percent.
3
<PAGE> 6
ELECTION OF DIRECTORS
NOMINEES
A board of six directors is to be elected at the Annual Meeting. Unless
otherwise instructed, the proxy holders will vote the proxies received by them
for the Company's six nominees named below, all of whom are presently directors
of the Company. While the Company has no reason to believe that any of the
nominees will be unable to serve as a director, if such an event should occur,
the shares will be voted for such substitute nominee or nominees as may be
designated by the Board of Directors. Otherwise, the proxy holders will vote the
proxies only for the nominees named below. The term of office of each person
elected as director will continue until the next Annual Meeting of Shareholders
or until his successor has been elected and qualified.
<TABLE>
<CAPTION>
NAME OF NOMINEE AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
<S> <C> <C> <C>
John S. Martinez, Ph.D 67 Chairman of the Board, Chief Executive 1987
Officer and President of the Company
James H. Banister, Jr 66 President, Chief Executive Officer and 1989
Director of Kinetic Ceramics, Inc.
C. Neil Beer, Ph.D 62 President of SECON 1988
Vernon H. Blackman, Ph.D 67 Chairman of the Board and Chief Executive 1991
Officer of Esscor
Barry Ressler 56 Chief Executive Officer and Chairman of the 1994
Board of Triton Thalassic Technologies, Inc.
Marvin W. Sepe 41 President of California ASIC, Inc. 1996
</TABLE>
JOHN S. MARTINEZ, PH.D., became Chairman of the Board, President, Chief
Executive Officer and a Director of the Company at its inception. Prior to
co-founding the Company in October, 1987, he was President of HLX Laser, Inc.,
an excimer laser development company and President of Jamar Enterprises, a
management and investment consultant to high-technology companies. From 1976 to
1984, Dr. Martinez was President and Chief Executive Officer of Physics
International Company ("PI"), a high-technology research, development and
manufacturing company specializing in high-intensity energy technology and X-ray
generation equipment. During that period, PI's annual sales grew from
approximately $9,000,000 to over $42,000,000 and profits grew at a compounded
annual rate in excess of 32%. From 1961 to 1976, he held a number of management
positions at TRW, Inc. He formed that company's High Energy Laser program in
1970 and managed it until he left the company in 1976. Dr. Martinez, a Ford
Foundation and Atomic Energy Commission Fellowship holder, earned his Ph.D. in
Engineering Science from the University of California (Berkeley) in 1962, his
Bachelor's degree from Rensselaer Polytechnic Institute (Troy, NY) in 1951 and
is a graduate of the Oak Ridge School of Reactor Technology. He served on active
duty in the U.S. Marine Corps during the Korean War and was discharged as a
Captain in 1954. He is the holder or co-holder of six patents.
JAMES H. BANISTER, JR., has been a director since December, 1989 and was a
consultant of the Company from September, 1989 until March 31, 1994. He was the
Company's Chief Financial Officer, Chief Administrative Officer and Treasurer
through March, 1991. Since October, 1993 Mr. Banister has been President, Chief
Executive Officer and a Director of Kinetic Ceramics, Inc. From August, 1987 to
June, 1988 he was President and CEO of MSI, a subsidiary of Olin Corporation
supplying Signal Intelligence and electronic warfare equipment and services.
When that company was sold by Olin, Mr. Banister retired to
4
<PAGE> 7
manage his personal investments. Mr. Banister was with Physics International
Company (which became a subsidiary of Olin Corp. in 1985), from June, 1964 to
August, 1987, successively holding the positions of Contracts Manager, Director
of Marketing and Contract Relations, Vice President and Director of
Administration and Senior Vice President responsible for finance and
administration. From 1953 to 1964, Mr. Banister was with Stanford Research
Institute, now SRI International, holding the position of Manager of Contract
Administration. Mr. Banister received a Bachelor of Science degree in Business
and Engineering administration from MIT and has taken graduate courses in law at
Golden Gate College. He has been an officer and director of several subsidiaries
of Physics International Company.
C. NEIL BEER, PH.D., has been a director since July, 1988 and was an employee of
the Company from May, 1991 until November, 1992 and a consultant to the Company
from April, 1993 to September, 1993. Dr. Beer currently is the President of
SECON, a software engineering company primarily supporting the national
intelligence community. Prior to that, he was the Vice President, Advanced
Programs, OAO Corporation and, prior to that, was the Colorado Space Advocate,
responsible for the growth of Colorado's space industry. From September, 1986 to
October, 1989 he was President of Thermo Technologies Corporation which develops
advanced lasers, optics, signal processing, and energy conversion hardware.
Previously he was Deputy for Strategic Defense, Military Applications, at
Livermore National Laboratory. During his career with the U.S. Air Force, Dr.
Beer achieved the rank of Major General and was deputy Chief of Staff, plans and
programs, for the Air Force Space Command. Earlier, while assigned to the office
of the Secretary of Defense, he worked with the White House staff on policy and
support requirements. Dr. Beer was associate professor of mathematics at the Air
Force Academy and a combat pilot in Southeast Asia. Dr. Beer graduated magna cum
laude, with a B.S. degree in engineering from the University of Oklahoma, and
received his doctorate in Operations Research in 1972 from that same University.
Dr. Beer has published a number of papers on mathematical programming, with
emphasis on optimization techniques, and on our national military strategy. Dr.
Beer is recipient of the NSIA Medal for Outstanding Achievement in Space.
VERNON H. BLACKMAN, PH.D., has been a director of the Company since July, 1991
and was a consultant of the Company from December, 1991 through March 31, 1994.
Dr. Blackman has served as Chairman of the Board and Chief Executive Officer of
Esscor, a training and simulation service company to the utility industry, since
December, 1991. Dr. Blackman also served as Chairman of the Board, President and
Chief Executive Officer of JAYCOR from 1989 until March, 1991. JAYCOR is a high
technology company which supplies R&D services to various agencies of the U.S.
Government; primarily the Department of Defense. Prior to joining JAYCOR, Dr.
Blackman acted as a venture investor for his own account and helped to fund the
early stage development of several companies. Dr. Blackman currently serves on
the Board of Directors of Digivision, a privately-held company which provides
products to the medical industry. Dr. Blackman has also served on the Boards of
Directors of several other public companies, including Newport Pharmaceuticals
International, Inc. (1967-1974); Maxwell Laboratories, Inc. (1966-1974); Topaz,
Inc. (1979-1983) at which time Topaz was acquired by Square D Corporation; and
Optical Radiation Corporation (1970-1995). From 1974 to 1982, Dr. Blackman
served as President, CEO and Chairman of the Board of S-Cubed, a high technology
company which provided services and products to agencies of the U.S. Government.
In 1959, Dr. Blackman co-founded MHD Research which was acquired by Hercules
Corporation in 1964. Dr. Blackman received a BA in Physics from Colgate
University in 1951 and a Ph.D. in Physics from Princeton University in 1955,
subsequent to which he served on the faculty as a research associate for 2
years.
BARRY RESSLER, has been a director of the Company since January, 1994. Mr.
Ressler is the Chief Executive Officer and Chairman of the Board of Triton
Thalassic Technologies, Inc. ("T3I"), a marine technology company specializing
in antifouling, water portability and industrial fluid contaminant technologies
and products. Mr. Ressler is also the President of Star Associates, Inc., a
company engaged in the basic research and development of particle accelerators
and free electron lasers for industrial and medical applications. From 1983 to
December, 1993 he served as Chief Executive Officer and Chairman of the Board
and a director of Thermo Voltek, a subsidiary of Thermo Electron. From 1963
until his appointment as CEO and Chairman, he served on various capacities at
Thermo Voltek. Mr. Ressler is a member of the Biotechnology Center External
Advisory Board of the University of Connecticut, advising the University on the
expansion of biotechnology research initiatives to foster University Industry
collaborative activities. Mr. Ressler graduated from the Pratt Institute with a
B.S. in Engineering Science.
5
<PAGE> 8
MARVIN W. SEPE, has been a director of the Company since July, 1996. Mr. Sepe
joined California ASIC in July 1996 as Executive Vice President and General
Manager and was elected President of that division in May 1997. For the prior 15
years he was with TRW Components International Inc., a wholly owned subsidiary
of TRW Inc., where he served as Director of Business Development for this
division of TRW, which grew from $16,000,000 in sales to nearly $40,000,000
under his strategic direction. Previously, Mr. Sepe held other management
positions within TRW including Marketing, Programs and Engineering. Prior to
joining TRW, Mr. Sepe was responsible for the development and oversight of
multiple semiconductor manufacturing operations both in the U.S. and
internationally. Mr. Sepe held the position of Manager of Worldwide Assembly
Operations for Silicon General Inc. (1980-1981) with manufacturing operations
throughout Southeast Asia, as well as the U.S. He served in the same role at
Silicon Systems Inc. (1977-1980), a fast growing start-up operation for custom
semiconductors and previously held various management responsibilities at Hi-Rel
Laboratories (1974-1977), a well respected evaluation laboratory. Mr. Sepe
attended Don Bosco Technical Institute, California Polytechnic State University
SLO, and holds a Masters Degree in Business Administration from Pepperdine
University. Mr. Sepe has published a number of papers and taught numerous
workshops on the economics and use of semiconductors in space applications.
BOARD MEETINGS AND COMMITTEES; OTHER MATTERS
The Board of Directors of the Company held a total of six meetings during the
fiscal year ended December 31, 1996. All directors attended at least 75 percent
of the meetings of the Board of Directors held during the time each director was
a member of the Board of Directors.
The Company has an audit committee consisting of two board members. Vernon H.
Blackman is Chairman of the Audit Committee and James H. Banister, Jr. is the
other member. The Audit Committee is empowered to recommend to the Board of
Directors a firm of certified public accountants to conduct audits of the
accounts and affairs of the Company, to review accounting objectives and
procedures of the Company and the findings and reports of the independent
certified public accountants, and to make such reports and recommendations to
the Board of Directors as it deems appropriate. The Audit Committee held one
meeting during the fiscal year ended December 31, 1996. Both members of the
Committee attended the meeting. The Company has no standing nominating or
compensation committees.
QUORUM REQUIREMENT AND VOTE REQUIRED FOR ELECTION
A majority of the outstanding shares will constitute a quorum at the meeting.
Directors are elected by a plurality of the votes. If more than six persons are
in nomination the six nominees receiving the most votes will be elected as
directors. Once a quorum is established, abstentions or other non-votes will not
have any legal effect on the election of directors.
6
<PAGE> 9
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
John S. Martinez, Ph.D. 67 Chief Executive Officer, Chairman of the
Board and President
Dennis E. Valentine 41 Vice President Finance, Chief Financial
Officer, Chief Administrative Officer and
Secretary
Leonid Yoffe 50 President, Pacific Precision Laboratories
(PPL)
Richard M. Foster 64 President, JMAR Technology Co. (JTC)
Marvin W. Sepe 41 President, California ASIC (Cal ASIC)
John P. Ricardi 44 Vice President for Corporate Development
and Senior Vice President for Sales and
Marketing of PPL
</TABLE>
Officers of the Company are elected annually by the Board of Directors and hold
office until their successors are duly elected and qualified.
The background and experience of Dr. Martinez and Mr. Sepe is set forth above in
"Election of Directors-Nominees".
DENNIS E. VALENTINE, has been the Vice President-Finance of the Company since
August, 1990, Chief Financial Officer and Chief Administrative Officer since
March, 1991 and Secretary since January, 1992. Prior to joining the Company, Mr.
Valentine had over ten years of financial and management experience with Arthur
Andersen LLP. His experience at Arthur Andersen LLP included extensive work with
public companies and consultation regarding mergers and acquisitions. He was the
manager in-charge of the local office merger and acquisition program and was on
the Board of Advisors of the Orange County Venture Forum. Mr. Valentine received
a Bachelor of Science degree in Business from the University of Southern
California in 1978. He is a member of the American Institute of Certified Public
Accountants and the California Society of Certified Public Accountants.
LEONID YOFFE, was elected President of PPL effective June 13, 1997. He had
previously served as President of PPL from February, 1994 through July, 1994.
From July, 1994 through June, 1997, Mr. Yoffe served as Executive Vice
President, Chief Operating Officer and Chief Financial Officer of PPL. Mr. Yoffe
has been with PPL since December, 1988 and has played a major role in organizing
all the traditional departments making up the classical manufacturing, material
planning and control, procurement, inventory and cost control. Prior to 1988 he
served as Manufacturing Manager for International Remote Imaging Systems, Inc.,
a publicly-held capital equipment manufacturer in the Biomedical field. Mr.
Yoffe has over 20 years of continuing experience in the management of
manufacturing operations and held various managerial positions in the high
technology capital equipment industry. Mr. Yoffe holds a B.S. degree in
Industrial Engineering and M.B.A. in Economics and Manufacturing Administration
from the State University of St. Petersburg in Russia.
RICHARD M. FOSTER, has been the President and a director of JTC since January,
1994. From 1984 to 1990, he was Corporate Vice President and Director of
Marketing at Physics International Co. From 1968 to 1984, he was with TRW
Defense and Electronics and was Marketing Director for a number of product lines
including communication satellite systems, high energy lasers, power and
propulsion and the Physical Research Center. Mr. Foster also spent three years
in Washington D.C. as a TRW Senior Representative. He was a principal engineer
at Ford Aeronutronic in Newport Beach from 1960 to 1968 and an Air Force
7
<PAGE> 10
Captain at Edwards AFB Rocket Propulsion Laboratory from 1957 to 1960. Mr.
Foster graduated cum laude with a B.S. and M.S. in Engineering from Stanford
University in 1957.
JOHN P. RICARDI, joined the Company in February, 1997. Mr. Ricardi is the
Company's Vice President for Corporate Development and Senior Vice President for
Sales and Marketing of PPL. He brings more than 20 years of related industry
experience to the Company, having served in numerous management positions with
various responsibilities for product development, national and international
sales and marketing and engineering operations. Most recently, he was Vice
President, General Manager of the Imaging Systems Division of Datron/Transco,
Inc. and Vice President, Marketing for Datron/Transco Inc. a subsidiary of
Datron Systems, Inc. His background also includes eight years with North
American Phillips Corporation as corporate Director of Marketing of its Airpax
subsidiary and seven years with Texas Instruments Inc. He holds both a bachelor
and a master of science degree in electrical engineering from Northeastern
University in Boston.
8
<PAGE> 11
EXECUTIVE COMPENSATION AND TRANSACTIONS WITH MANAGEMENT AND OTHERS
EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation for
services in all capacities to the Company during each of the last three fiscal
years of the Company's Chief Executive Officer and two other executive officers
of the Company who were serving as executive officers at the end of such fiscal
years (collectively, the "Named Officers"). No other executive officer received
more than $100,000 in annual salary and bonuses during 1996.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term Compensation
Annual Compensation (1) Awards (2)
----------------------- ------------------------
Name and Salary Bonus Securities Underlying
Principal Position Year ($) ($)(3) Options and Warrants (#)
- ------------------ ---- ------ ------ ------------------------
<S> <C> <C> <C> <C>
John S. Martinez, 1996 170,184 83,369 384,622 (5)
Chief Executive 1995 150,000 15,552 55,000
Officer 1994 163,079 0 2,500
Robert S. Hash, 1996 150,350 38,785 150,000 (5)
President of PPL 1995 153,234 0 0
1994 150,000 0 160,000 (4)
Dennis E. 1996 98,065 33,347 67,595 (5)
Valentine, 1995 90,000 6,221 20,000
Chief Financial 1994 89,165 0 0
Officer
</TABLE>
- ---------------------------
(1) Excludes perquisites and other personal benefits, the aggregate annual
amount of which for each Named Officer was less than the lesser of $50,000
or 10% of the total salary and bonus reported.
(2) The Company did not grant any restricted stock or stock appreciation rights
or make any long term incentive plan payments during the fiscal years ended
December 31, 1996, 1995 and 1994.
(3) Includes bonus payments earned by the Named Officers in the year indicated
for services rendered in such year, but which were paid in the following
year.
(4) Includes 150,000 incentive warrants issued in 1994 to Mr. Hash pursuant to
the incentive program established in 1993 at the time PPL was acquired by
the Company.
(5) Includes 324,420, 150,000 and 42,393 options and warrants for Messrs.
Martinez, Hash and Valentine, respectively, which were granted and reported
in prior years, but which were amended on August 15, 1996 (together with
options and warrants held by all employees and directors with exercise
prices over $3.00) to reduce their respective exercise prices to $3.00 per
share, 20 percent over the trading price on NASDAQ on August 15, 1996.
9
<PAGE> 12
OPTION GRANTS IN THE LAST FISCAL YEAR
The following table sets forth each grant of stock options and warrants made
during the fiscal year ended December 31, 1996 to each of the Named Officers:
<TABLE>
<CAPTION>
SHARES UNDERLYING PERCENTAGE OF
OPTIONS GRANTED TOTAL OPTIONS
(SHARES) GRANTED TO EXERCISE PRICE
EMPLOYEES IN PER SHARE
NAME FISCAL YEAR EXPIRATION DATE (2)
- ------------------ ------------------ -------------- -------------- --------------------
<S> <C> <C> <C> <C>
John S. Martinez 50,000 (1)(3) 4.68 $1.09 January 15, 2006
5,000 (1)(4)(8) .47 $2.62 September 20, 2006
2,601 (1)(5) .24 $3.00 June 5, 2006
2,601 (1)(5)(8) .24 $2.62 September 23, 2006
325,420 30.38 $3.00 (7)
Robert S. Hash 150,000 (7) 14.05 $3.00 March 24, 2004
Dennis E. Valentine 20,000 (1)(6) 1.87 $1.09 January 15, 2006
2,601 (1)(5) .24 $3.00 June 5, 2006
2,601 (1)(5)(8) .24 $2.62 September 23, 2006
42,393 3.98 $3.00 (7)
</TABLE>
- ---------------------------
(1) Such options were all granted under the Company's 1991 Stock Option Plan.
The exercise price of shares covered by such stock options may not be less
than the fair market value of the Company's common stock at the date of
grant. The terms of each such option and the increments in which it is
exercisable are determined by the Board of Directors. The exercise price
and tax withholding obligations related to exercise may be paid by delivery
of already owned shares or by the offset of the underlying shares, subject
to certain conditions.
(2) Options also expire if not exercised within 60 days after termination of
optionee's employment or one year following death of optionee if not
exercised by optionee's personal representative or one year following
resignation as a director.
(3) These options are incentive stock options. 27,333 of these options are
currently exercisable and the balance become exercisable on January 15,
1998.
(4) These options are non-qualified stock options. These options become
exercisable and vest one-third each year commencing on the first year after
their grant.
(5) These options are incentive stock options. These options become exercisable
and vest one-third each year commencing on the first year after their
grant.
(6) These options are incentive stock options. 10,933 of these options are
currently exercisable and the balance become exercisable on January 15,
1998.
(7) These options and warrants were granted and reported in prior years but
were amended on August 15, 1996 (together with options and warrants held by
all employees and directors with exercise prices over $3.00) to reduce
their respective exercise prices to $3.00 per share, 20 percent over the
trading price on NASDAQ on August 15, 1996. The expiration dates of such
options and warrants remain unchanged and range from March 28, 2001 to
March 31, 2003 for Messrs. Martinez and Valentine.
(8) These options contain a Reload Option feature whereby if the optionee
exercises the option in whole or in part using shares of Common Stock owned
by the optionee for at least six months, the Company shall grant to the
optionee a Reload Option to purchase that number of shares equal to the
shares transferred to the Company in payment of the exercise price of the
option.
10
<PAGE> 13
AGGREGATED OPTION AND WARRANT EXERCISES IN LAST FISCAL YEAR AND YEAR END OPTION
VALUES
The following table sets forth for each of the Named Officers the shares
acquired and the dollar value realized upon exercise of stock options and
warrants, if any, during the fiscal year ended December 31, 1996, the number of
shares of common stock underlying options and warrants held at December 31, 1996
and the value of such options and warrants which are "in-the-money":
<TABLE>
<CAPTION>
SHARES UNDERLYING VALUE OF
UNEXERCISED UNEXERCISED
OPTIONS AND WARRANTS IN-THE-MONEY OPTIONS AND
SHARES AT DECEMBER 31, 1996 WARRANTS AT
ACQUIRED ON EXERCISABLE/ DECEMBER 31, 1996 (1)
NAME EXERCISE VALUE UNEXERCISABLE EXERCISABLE/
REALIZED UNEXERCISABLE
- -------------------------- ------------- ------------ ------------------------ ----------------------------
<S> <C> <C> <C> <C>
John S. Martinez 0 0 61,809/391,669 $61,772/$104,690
Robert S. Hash 0 0 0/150,000 --
Dennis E. Valentine 0 0 33,098/54,497 $21,845/$40,646
</TABLE>
- ---------------------------
(1) Options are "in-the-money" if the fair market value of the underlying
common stock exceeds the exercise price of the option or warrant at
December 31, 1996. The fair market value of a share of common stock at
December 31, 1996 was $2.375 per share as quoted on the NASDAQ Stock
Market at the close of trading.
DIRECTORS' FEES
Effective April 1, 1994, Directors who are not salaried employees of the Company
receive a retainer (the "Retainer") of $1,000 per quarter and $500 for their
attendance at each Board of Directors meeting and Committee meeting and are
reimbursed for their travel, lodging and food expense incurred when attending
such meetings.
In addition, the 1991 Stock Option Plan, as amended, provides that directors are
eligible to participate in the 1991 Stock Option Plan on the same basis as key
employees of the Company and grants of options will be made by the Board of
Directors on a case-by-case basis on such terms as the Board in its discretion
may provide. During the fiscal year ended December 31, 1996, a grant of options
to purchase 5,000 shares of Common Stock was received by those directors who had
served more than one year (Messrs. Martinez, Banister, Beer, Ressler and
Blackman) and a grant of options to purchase 10,000 shares of Common Stock was
received by Mr. Sepe in their capacities as directors.
COMPENSATION PURSUANT TO PLANS
The Company had no retirement or pension plans under which its executive
officers and directors benefitted in 1996.
INCENTIVE PLANS
In February, 1993, the Board of Directors of the Company approved the Management
Anti-Dilution Incentive Plan (the "Plan") for the Company's senior management.
The Plan was designed to provide senior management with an incentive to maximize
stockholder value. Pursuant to the Plan, the executive officers and directors of
the Company, together with Dr. Shields, JTC's Chief Scientist, were issued
warrants ("Incentive Warrants") to purchase an amount of Common Stock which, at
the time of issuance of the warrants, would bring each participant's percentage
ownership of Common Stock closer to the percentage such participant owned prior
to the completion of the Company's public offering in February, 1993. An
11
<PAGE> 14
aggregate of 455,230 Incentive Warrants were outstanding on December 31, 1996.
The Incentive Warrants expire sixty days following the termination of the
holder's employment with the Company if such Incentive Warrants are not then
exercisable. The Incentive Warrants terminate three years following the date
such warrants are first exercisable or, in any event, ten years from the date of
issuance. The Company has agreed that if it files a Registration Statement or a
post-effective amendment to a Registration Statement following the date on which
the Incentive Warrants are exercisable, the holders of the Incentive Warrants
shall have the opportunity to register or qualify the shares of Common Stock
underlying the Incentive Warrants for offering to the public at no cost to such
holders.
In connection with the acquisition of PPL by the Company in October, 1993, the
Company established an incentive plan for the key employees of PPL which
provides for the issuance of warrants (the "PPL Warrants") to purchase up to
450,000 shares of Common Stock. As of December 31, 1996, warrants to purchase up
to 200,000 shares of Common Stock have been granted to Mr. Hash and Mr. Yoffe.
The PPL Warrants have substantially the same terms as the Incentive Warrants.
Prior to August 15, 1996, both the Incentive Warrants and the PPL Warrants were
not exercisable until such time as the average of the closing high bid prices of
the Common Stock as reported on NASDAQ or NASDAQ-NMS, as the case may be, during
any consecutive 180 day period was equal to or greater than $8.50. Upon becoming
exercisable, the Incentive Warrants and PPL Warrants were then exercisable at a
per share exercise price of $5.10. On August 15, 1996, the Board of Directors
approved an amendment to the Incentive Warrants and the PPL Warrants to provide
that the warrants will not be exercisable until the earlier of (i) forty five
days after such time as the closing high bid price of the Common Stock for 20
consecutive trading days is greater than $6.38 (which is 150% of the offering
price of the Company's 1993 public offering); (ii) the exercise by the
warrantholders of at least 90 percent of the Company's warrants which currently
trade on the Nasdaq National Market System under the symbol JMARW; or (iii) nine
years and six months after the date of grant. Upon becoming exercisable, the
Incentive Warrants and PPL Warrants will be exercisable at a per share exercise
price of $3.00, which represents a price equal to 20 percent over the closing
price of the Company's shares as quoted on the NASDAQ-NMS on August 15, 1996.
The Board of Directors has determined that the foregoing repricings as well as
the repricing of the stock options described in footnote 5 to the Executive
Compensation Table provide an additional incentive to all of the holders of such
options and warrants and will enable the Company to retain such employees in the
future.
CERTAIN TRANSACTIONS WITH MANAGEMENT AND OTHERS
EMPLOYMENT AND CONSULTING AGREEMENTS
Pursuant to Dr. Martinez's employment agreement, the Company agreed to retain
him as Chief Executive Officer of the Company and to pay him an annual salary of
not less than $175,000 plus expenses and normal employee insurance benefits and
a $600 per month auto lease allowance. The term of the employment agreement
continues until December 31, 1999. If the employment agreement is terminated by
the Company without cause, Dr. Martinez would become entitled to receive as
severance pay an amount equal to the greater of 36 month's pay or the balance of
the compensation that would have been payable to Dr. Martinez under the
employment agreement.
On March 29, 1993, the Company loaned Dr. Martinez $59,000 with interest at 6%
per annum to assist Dr. Martinez in paying certain income taxes that he
personally incurred in connection with a transaction that he undertook in
support of the Company. The December 31, 1996 loan amount, including accrued
interest is $73,824. The loan is secured by 14,750 shares of Common Stock owned
by Dr. Martinez.
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
The Audit Committee of the Board of Directors has selected Arthur Andersen LLP,
independent public accountants, to audit the financial statements of the Company
for the fiscal year ending December 31, 1997. Representatives of Arthur Andersen
will be present at the meeting with an opportunity to make a
12
<PAGE> 15
statement if they desire to do so and such representatives will be available to
respond to appropriate questions from shareholders in attendance.
DEADLINE FOR RECEIPT OF SHAREHOLDER PROPOSALS
Proposals from shareholders which are intended to be presented by such
shareholders at the Company's next Annual Meeting of Shareholders must be
received by the Company no later than January 31, 1998 and otherwise be in
compliance with applicable laws and regulations in order that they may be
included in the proxy statement and form of proxy relating to that meeting.
OTHER BUSINESS
The Board of Directors does not intend to present any other business at the
meeting and knows of no other matters which will be presented at the meeting.
By Order of the Board of Directors
/s/ DENNIS E. VALENTINE
-----------------------------------
Dennis E. Valentine
Secretary
Dated: June 16, 1997
13
<PAGE> 16
JMAR INDUSTRIES, INC.
FISCAL YEAR 1996
FINANCIAL INFORMATION APPENDIX
[Image: Rainbow through cloudy sky]
PUTTING LIGHT TO WORK
<PAGE> 17
JMAR INDUSTRIES, INC.
INDEX TO APPENDIX
<TABLE>
<S> <C>
Business Summary....................................................... A-2
Securities Information................................................. A-7
Five-Year Selected Financial Data...................................... A-8
Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. A-9
Report of Arthur Andersen LLP, Independent Public Accountants.......... A-15
Consolidated Balance Sheets As of December 31, 1996 and 1995........... A-16
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994.................................... A-17
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1996, 1995 and 1994.............................. A-18
Consolidated Statements of Cash Flow for the Years Ended
December 31, 1996, 1995 and 1994.................................... A-19
Notes to Consolidated Financial Statements............................. A-20
</TABLE>
A-1
<PAGE> 18
JMAR INDUSTRIES, INC.
BUSINESS SUMMARY
GENERAL
Founded in 1987, JMAR Industries, Inc. (the "Company" or "JMAR"),
headquartered in San Diego, California, develops and manufactures a wide range
of precision measurement and manufacturing systems based on the application of
advanced precision light sources, including lasers. The Company also employs
lasers to manufacture specialty semiconductors and is actively engaged in the
development of X-ray lithography, an enabling technology for the development of
future generations of high-performance semiconductors. JMAR operates through
three divisions located in Southern California:
PACIFIC PRECISION LABORATORIES ("PPL"), the Company's equipment
manufacturing division is located in Chatsworth, California, northwest of Los
Angeles where JMAR's core product lines are produced. These currently include:
Test and Measurement Systems - non-contact systems to measure and inspect
microelectronics (primarily semiconductors and disk drives) parts for both
quality assurance and process control purposes; Motion Control and Positioning
Systems - to improve the precision of microelectronics manufacturing; and Laser
Processing Systems - which perform the highly precise welding, trimming and
cutting required by the microelectronics and medical implant industries.
CALIFORNIA ASIC ("CAL ASIC"), the Company's newly established
quick-turn semiconductor design and fabrication operation located south of Los
Angeles in Irvine.
JMAR TECHNOLOGY CO. ("JTC"), the Company's research and development
center in San Diego where JMAR technologists conceive the products of tomorrow
and refine them for commercial application. The Company conducts its work on
advanced X-ray and optical lithography, new medical products, ultra-precision
laser machining systems, and other leading-edge product technologies at this
location.
JMAR's business involves the utilization of specialized forms of light
energy such as lasers or precision regulated light sources. Those business
operations fall into two categories: Current Products and Emerging Products.
CURRENT PRODUCTS
CURRENT PRODUCTS are those which JMAR produces and sells today.
Manufactured by PPL, they include:
TEST AND MEASUREMENT EQUIPMENT - MEASUREMENT, INSPECTION AND ALIGNMENT.
During 1996, JMAR's non-contact video and laser-based Test and Measurement
Equipment product line accounted for 50 percent of the Company's revenues.
JMAR's test and measurement systems are sold primarily to manufacturers of
semiconductors and computer disk drives. This line utilizes state-of-the-art
machine vision and laser position sensors integrated with programmable optics
and lighting control, precision X-Y-Z motion control and other computer
controlled functions. Vision, laser and other sensors are used to check changes
in variations in geometries. Proprietary algorithms are then written by PPL for
edge sensing, height sensing and point taking and fed into mathematical formulas
to determine straightness of lines, dimensional data, height measurements,
angles and radii of curvature of microscopic devices.
In late 1995, JMAR introduced its new compact Mirage tabletop,
non-contact, high-resolution video/laser measurement system to complement the
larger series 3000 and 4000 systems all of which are targeted towards the
microelectronics industry. The Mirage can be used
A-2
<PAGE> 19
for a variety of applications including incoming and outgoing inspection,
off-line process control for equipment, process verification and many laboratory
functions. The Company's standard Series 3000 systems incorporate video-based
measurement and offer several different sizes of X-Y stages while the larger
Series 4000 combines video and laser height probes to provide high accuracy
X-Y-Z measurements.
LASER SYSTEMS. The Company manufactures laser processing systems,
precision laser hermetic sealing systems and laser machining and welding centers
which, collectively, contributed 17 percent of 1996 sales revenue.
Laser Processing Systems. JMAR's laser processing systems utilize
state-of-the-art lasers for microelectronics manufacturing and repair. As
semiconductor assemblies such as Multi-Chip Modules ("MCM") approach the
complexity, densities and small feature sizes of semiconductor devices of the
early 1970's, there is a growing need for higher precision instruments to probe,
inspect and repair them. The Company's optical inspection stations are used to
locate open and short circuits while our Laser Processing Stations are designed
to meet today's demanding requirements for MCM substrate repair. Pulsed and
continuous wave laser sources covering the optical spectral range from infrared
to deep ultraviolet are used singly or in combination to create flexible, cost
effective systems for engineering evaluation or production.
Current system models use either excimer lasers to repair MCM short
circuits by removing excess material or argon ion lasers to repair open circuits
by chemical vapor deposition("CVD"). The excimer tools are capable of delivering
a broad combination of power levels, material removal, spot sizes and energy
uniformity. Systems which incorporate JMAR's newly patented short pulse solid
state laser ("Britelight(TM)") technology are currently in the prototype
development phase and are expected to be available within the next year.
Precision Laser Hermetic Sealing Systems. JMAR's LSS-9000 high-powered
Nd:YAG laser hermetic sealing systems are used primarily by electronic and
medical equipment manufacturers for leak-tight sealing of medical implant and
electronic packages. These systems provide superior performance relative to
conventional electrical resistance welding methods for joining and sealing
low-resistance metals such as aluminum, titanium and copper alloys. The primary
users of laser-based hermetic sealing systems are manufacturers of aerospace
assemblies, electronic assemblies used in marine environments and manufacturers
of devices and assemblies designed to be implanted in the human body. The
Company has historically limited the market in which its precision laser welding
systems compete to the handling of objects that require manufacturing travel
distance of less than 3 feet in any direction, and which normally have a
relatively high value-added component.
Laser Machining and Welding Centers. JMAR also produces Laser Machining
and Welding Centers for targeted marketplaces in the microelectronics industry.
These products include high accuracy small component welding systems which
utilize vision controlled alignment and sub-micron position repeatability. The
Company also produces processing stations for welding of microelectronic
feed-throughs and medical implantables and systems for welding critical computer
disk drive components. JMAR's precision micro-positioning and vision processing
technologies are incorporated into its Laser Machining and Welding Centers to
provide customers with single source, full turnkey manufacturing systems which
often include laser beam delivery systems, parts handling and identification
readers.
POSITIONING AND MOTION CONTROL. During 1996, the Positioning and Motion
Control product line accounted for 22 percent of the Company's revenues. JMAR
manufactures a wide range of precision customized positioning stages and motion
control devices for the microelectronics industry, including a standard product
line of stages with full turnkey solution capabilities. These stages which are
the fundamental building blocks of many microelectronic measurement and
manufacturing systems, are often integrated into custom systems to meet specific
customer requirements. In addition, the Company provides positioning components
and
A-3
<PAGE> 20
systems for original equipment manufacturers ("OEM") as well as for its own
test and measurement equipment and laser processing products.
CUSTOM PRODUCTS. In addition to its standard products, JMAR's PPL
division designs, engineers and manufactures customized systems based on its
motion control, measurement and/or laser system capabilities to meet specified
requirements of customers. Frequently, the design of a particular custom product
may lead to additional sales of that product to the customer.
CONTRACT RESEARCH AND DEVELOPMENT. The Company performs profitable
research and development contract work at JTC for third party customers,
including the U.S. government and a large medical equipment company. The goals
of these efforts are to develop commercially significant products based on the
Company's proprietary laser and advanced optical technology. During 1996
contract R&D contributed 11% of JMAR's revenues.
EMERGING PRODUCTS
JMAR's contract and company-funded R&D programs, collectively, have
created a broad world-class technology base that provides the foundation for an
array of important new commercial product lines and business areas which the
Company refers to as its "Emerging Products". JMAR's Emerging Products,
described in the following sections, include: Advanced microlithography for
semiconductor manufacturing, ultra-precision laser machining systems, the
pocket-laser Light Knife for blood sampling and small volume, quick-turn custom
semiconductor manufacturing.
ADVANCED LITHOGRAPHY FOR SEMICONDUCTOR MANUFACTURING. Lithography is
the most critical process in the manufacture of semiconductors. It is a
photographic-like process which transfers circuit designs onto the chips thereby
determining the size of circuit features and the density of circuits on a chip.
A typical lithography system consists of an illumination source integrated into
an apparatus known as a "stepper" or an "aligner". The combined system is
installed in the semiconductor fabrication line.
Semiconductors are the engines that drive the Technology Industry.
Whereas the economics of most industries are driven by consumption or
deterioration, the economics of the semiconductor industry are driven by
continuous innovation because semiconductors do not wear out. To continue to
grow, the semiconductor industry must develop ever more powerful computer chips
at a rapid pace. That requires continuing advances in the ability of the
Industry to produce ever-smaller circuit feature sizes which make it possible to
produce higher circuit densities. Advanced lithography systems, employing
shorter wavelength illumination sources, are required to make smaller feature
sizes. JMAR is one of the world's leading developers of compact high-intensity
short-wavelength lithography sources, including X-rays and novel deep
ultraviolet light sources.
The total size of the lithography market is substantial. The
semiconductor industry purchases between 1,500 to 2,000 new lithography systems
per year at prices ranging from approximately $700,000 to $7 million. As the
circuit feature sizes get smaller the prices of the lithography systems increase
rapidly. In X-ray lithography, the illumination is provided by the X-ray source.
From 1989 to 1991, the Company designed, patented and developed an optical
pulse-compression technique and integrated it with its ACEL excimer laser to
produce X-rays in the 10-14 angstrom regime where a substantial amount of
lithography process development has already taken place, worldwide. In February
1991, the Company successfully tested a laboratory version of its excimer
laser-driven plasma X-ray source, thereby achieving a major milestone in its
program. Also, in subsequent experiments with a U.S. government laboratory, the
Company demonstrated X-ray generation at 130 angstroms (commonly referred to as
the Extreme Ultraviolet or "EUV" regime) using a 50 nanosecond laser pulse
duration. Sources producing
A-4
<PAGE> 21
illumination in both the X-ray and EUV wavelength regimes are expected to find
applications in future generations of lithography.
In January, 1994, after working on smaller government funded X-ray
lithography R&D contracts in prior years, JMAR received a $3.6-million contract,
with an option exercisable by the U.S. government for an additional $3.3
million, (of which $585,000 was funded in late 1995 and $2.2 million in 1996),
to develop JMAR's laser-plasma Picosecond X-ray Source ("PXS") for use in an
X-ray stepper system. Additional DARPA funding is anticipated in 1997 to develop
a prototype PXS for an entry-level x-ray lithography system with a throughput of
5 to 10 wafers per hour. The revenues from this contract constitute 9% of the
Company's 1996 sales. The contract was issued by the U.S. Army Research
Laboratory and is sponsored by the Defense Advanced Research Projects Agency
(DARPA) of the Department of Defense. By the end of 1997, the Company expects
that the cumulative amount of U.S. government contract funding for its X-ray
lithography point source development program will total in excess of $9,000,000.
During the initial portion of its work under contract the Company made
considerable progress in the generation of high-repetition few picosecond (one
picosecond is equal to one trillionth of a second) excimer laser pulses which
proved advantageous for the generation of the required X-rays with a minimum of
contamination (one of the problems which has plagued attempts by other
competitors to produce practical X-ray sources has been the production of
unacceptable amounts of collateral debris that contaminates the lithography
process).
During the latter part of 1994, JMAR initiated an Independent Research
and Development (IR&D) program based on the use of leading-edge diode-pumped
solid state laser technology to produce rapid rates of high energy
few-picosecond pulses for a range of potential applications, including X-ray
lithography. That program progressed so rapidly that the Company, with the
concurrence of its customer, phased in its new solid state PXS system as its
primary commercial X-ray source candidate and assigned its excimer laser-based
PXS to the study of more basic X-ray generation phenomenological studies.
In July 1996 the U.S. government delivered to JMAR's San Diego facility
a government-owned X-ray Stepper which had formed the nucleus of a competitive
X-ray Lithography program at Bell Laboratories. That Stepper, developed over a
period of several years at an estimated cost of more than $25 million in both
government and other corporation funding, was intended, subject to the
availability of adequate government contract funding, to be integrated with
JMAR's solid state PXS to provide the foundation for an X-ray lithography
workstation to be made available to leading semiconductor makers for development
of next generation chip manufacturing processes. Since that delivery the Company
has been evaluating the alternatives available to it for expediting the
commercialization of its X-ray lithography sources. It is now also considering
other alternatives for the establishment of a point source X-ray lithography
demonstration work station, including recently developed commercial X-ray
steppers as well as the Bell Labs Stepper.
ULTRA-PRECISION LASER MACHINING SYSTEMS FOR INDUSTRIAL MANUFACTURERS.
JMAR has demonstrated an initial version of its Microlight 1000, a new
micromachining system that combines the Company's patented solid state
picosecond Britelight(TM) laser technology (developed by its JTC division) with
one of its proprietary material processing systems (developed at its PPL
division) to enable manufacturers to produce micro-sized products and perform a
wide range of micro-fabrication procedures.
The Company has determined that the light beams produced by its
high-power picosecond lasers interact in very unique ways with certain materials
of interest to the microelectronics industry. Based on the results of a detailed
market research study completed in early 1997 the Company believes that these
unique interactions will enable makers of precision microcomponents to perform
new, previously unavailable manufacturing operations. That study identified a
number of important markets and potential major customers for the Microlight
system
A-5
<PAGE> 22
technology. Accordingly, the Company is currently working with a number of
precision product manufacturers to evaluate the ability of this technology to
improve the product manufacturing processes or to fabricate products that have,
heretofore, been difficult or impossible to make using conventional equipment.
During the first half of 1997 JMAR plans to upgrade the current Microlight 1000
system and customize it to meet the specifications for the most promising
markets identified by the study.
POCKET SIZE LASER BLOOD SAMPLERS. Another project currently under
development draws upon the Company's expertise in diode-pumped solid state
lasers to develop a battery-powered, pocket-size laser device for drawing blood
for diagnostic analysis for a large medical equipment supplier. Intended to
protect health care practitioners from the potential danger of disease
transmission related to the handling of needles and other sharp-edged sampling
devices, the Company's Light Knife(TM) laser devices are now in the prototype
stage with delivery of initial units scheduled for mid-1997. The ultimate
commercial success of this product will depend upon a number of factors
including technical performance, cost to produce and the ability of the
Company's customer to obtain FDA approval to market the products as well as the
ability of that customer to ultimately generate adequate sales volume.
MANUFACTURE OF CUSTOMIZED SEMICONDUCTORS. In May, 1996, JMAR acquired
approximately 94 percent of the outstanding shares of California ASIC, a
low-volume manufacturer of application specific integrated circuits ("ASIC's"),
an important class of semiconductors. ASIC's are compact logic devices that can
process and integrate a series of functions within a single semiconductor chip.
Because of this, they are commonly used to enhance the performance of a broad
range of electronic devices, including computers, telephones, fax machines,
modems, televisions and medical products.
Upon completion of the acquisition, JMAR immediately suspended Cal
ASIC's operations and commenced to upgrade its engineering capabilities and
re-equip its semiconductor fab facility to enhance the Company's competitive
capabilities in the market for specialty semiconductors. Those upgrades were
completed and initial order processing commenced in the first quarter of 1997.
In the conventional ASIC design cycle, chip layout and photomask
production are the most time consuming steps. The Cal ASIC process circumvents
this bottleneck by merging state-of-the-art design tools with a revolutionary
laser lithography production process that eliminates the need for expensive and
long lead-time photomasks. Coupled with a unique base wafer concept and onsite
processing, this direct linking of design and fabrication is expected to enable
Cal ASIC to perform low volume chip development and production in a fraction of
the time, and at a fraction of the cost of conventional ASIC production methods.
The Company believes that Cal ASIC's unique ASIC development technology
will permit fast, affordable ASIC prototyping without complex processing or
unnecessary added steps. The core of the Cal ASIC approach is its customized
direct write laser lithography system. The direct write laser system translates
the ASIC design file into an interconnect metalization pattern which is
"written" directly onto pre-processed, generic base wafers manufactured by high
volume semiconductor foundries. This direct write method eliminates the need for
procuring hard tooled photomasks, thereby reducing non-recurring engineering
costs substantially.
Since the direct write laser allows the custom circuit pattern to be
"written" on each chip, Cal ASIC is expected to be able to vary the design from
chip to chip, allowing multiple designs to be fabricated on a single wafer. This
should allow shorter prototype delivery times, provide added flexibility for Cal
ASIC customers and further improve the economics of the process.
A-6
<PAGE> 23
SECURITIES INFORMATION
The Company's common stock and warrants are traded on the Nasdaq
National Market tier of the Nasdaq Stock Market ("NASDAQ-NMS") under the symbols
JMAR and JMARW, respectively. The 1996 and 1995 high and low transaction prices
for the common stock as reported by NASDAQ-NMS are set forth in the following
table.
COMMON STOCK PRICE
<TABLE>
<CAPTION>
HIGH LOW
------------- -------------
<S> <C> <C>
1995
First Quarter................... 7/8 7/16
Second Quarter.................. 1-11/32 1/2
Third Quarter................... 2- 3/32 1- 1/4
Fourth Quarter.................. 1-11/16 15/16
1996
First Quarter................... 1-15/32 15/16
Second Quarter.................. 4- 9/16 1- 1/8
Third Quarter................... 3- 5/8 1-15/16
Fourth Quarter.................. 3- 1/16 2- 3/32
</TABLE>
There were approximately 4,098 holders of JMAR's common stock and 638
holders of JMAR's publicly traded warrants as of February 25, 1997.
The Company has never paid cash dividends on its Common Stock. The
Company currently intends to retain earnings for use in the operation and
expansion of its business and therefore does not anticipate paying any cash
dividends in the foreseeable future. The payment of dividends in the future by
the Company on its Common Stock will be dependent on its earnings and financial
condition and such other factors considered relevant by the Company's Board of
Directors.
A-7
<PAGE> 24
JMAR INDUSTRIES, INC.
FIVE-YEAR SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
====================================================================================================================
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating revenues.............. (1)$ 5,241,596 (1)$ 9,148,925 (1)$10,821,025 $12,210,490 $16,331,090
Revenues excluding terminated
operations.................... (2)2,328,000 (2)3,620,925 (2)7,782,025 12,210,490 16,331,090
Gross profit.................... 1,534,237 2,233,515 4,034,613 4,879,420 6,692,136
Operating expenses excluding
restructuring charges......... 3,821,088 5,814,072 5,439,430 4,694,233 6,188,169
Restructuring charges........... - 5,112,000 (458,309) - -
Income (loss) from operations... (2,286,851) (8,692,557) (946,508) 185,187 503,967
Interest expense................ (649,839) (900,482) (570,094) (321,162) (288,372)
Interest and other income
(expense), net................ 280,327 245,271 390,594 212,240 388,974
Loss on equity and other
investments................... (464,876) - - - -
Income (loss) from continuing
operations before income taxes. (3)(3,121,239) (3)(9,347,768) (3)(1,126,008) 76,265 604,569
Income tax benefit.............. - - - - 175,000
Income (loss) from continuing
operations..................... (3,121,239) (9,347,768) (1,126,008) 76,265 779,569
Discontinued operations:
Loss from operations of
discontinued operations.... (1,802,363) (3,627,869) (2,999,242) - -
Loss on disposal of
discontinued operations.... - - (540,404) - -
Net income (loss)............... (4,923,602) (12,975,637) (4,665,654) 76,265 779,569
Per share data:
Income (loss) per common
share from continuing
operations................. (1.39) (1.57) (.11) .01 .05
Loss from discontinued
operations................. (.80) (.61) (.33) - -
Net income (loss) per share. (2.19) (2.18) (.44) .01 .05
Fully diluted shares used in
calculation of net income
(loss) per share.............. 2,252,008 5,958,413 10,596,661 14,133,258 16,906,584
</TABLE>
<TABLE>
<CAPTION>
======================================================================================================================
CONSOLIDATED BALANCE SHEET DATA
======================================================================================================================
<S> <C> <C> <C> <C> <C>
Working capital .................. $3,406,317 $1,423,318 $4,007,846 $4,655,087 $5,743,747
Total assets...................... 13,890,391 19,137,447 9,107,968 9,248,995 15,395,518
Short-term debt................... 1,056,393 4,928,447 914,590 1,526,929 2,317,861
Long-term debt.................... 4,489,419 3,189,664 2,165,417 1,536,273 667,310
Stockholders' equity.............. 4,415,327 3,709,032 3,849,822 5,085,202 9,368,905
======================================================================================================================
</TABLE>
(1) Excludes revenue from the discontinued Surgilase operations of
$5,277,406, $6,776,603 and $4,771,775 for 1994, 1993 and 1992,
respectively.
(2) Excludes revenue from Terminated Operations (See page A-9).
(3) Includes losses from Terminated Operations (See page A-9).
A-8
<PAGE> 25
JMAR INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company's product lines are subdivided into two categories: Current
Products and Emerging Products. Current Products are those produced and sold,
today, whereas the Emerging Product lines are developing businesses some of
which are supported by third party customer R&D contracts.
JMAR had formerly operated in two industry segments which for financial
reporting purposes are as follows: the Medical Equipment and Accessories Group
and the Manufacturing Equipment Group. In recent years, the Medical Equipment
Group consisted primarily of the operations of Surgilase. This operation was
sold in December, 1994 and is accounted for as discontinued operations. As a
result, and in accordance with standard accounting practice, the revenues from
Surgilase operations are excluded from the revenues shown herein for 1994, and
the amounts for all other items related to Surgilase have been adjusted to
reflect the operations of Surgilase as a discontinued operation. Pursuant to its
restructuring in 1994, the Company also sold several other operations and assets
(the "Terminated Operations") which, in accordance with standard accounting
practice, have not been classified as "discontinued operations". Therefore, the
revenues and results of operations from the Terminated Operations are required
to be included in the Operating Revenues reported in the statements of
operations for prior years. To compare the revenues generated by those assets
which remained after the disposition of the Terminated Operations with the
revenues generated by such assets prior to the disposition of the Terminated
Operations, however, the second line of the Consolidated Statements of
Operations Data on the previous page reflects the revenues of the Company
excluding the revenues from the Terminated Operations.
RESULTS OF CONSOLIDATED OPERATIONS
The Company achieved record performance in revenues, operating
profitability and net profitability during 1996. Operating income for 1996 and
1995 was $503,967 and $185,187, respectively, versus a loss of $946,508 for the
year ended December 31, 1994, while net income for those same periods was
$779,569 and $76,265, versus a loss of $4,665,654, respectively.
On May 23, 1996, the Company acquired approximately 94 percent of the
outstanding common stock of California ASIC ("Cal ASIC"). The Company has
accounted for the acquisition as a purchase effective June 1, 1996. JMAR's
Operating and Net Incomes for 1996, $503,967 and $779,569, respectively, include
operating and net losses of $448,040 and $460,028, respectively, generated from
Cal ASIC's startup operations. Accordingly, JMAR's operating income and net
income, excluding the startup loss from Cal ASIC, were $952,007 and $1,239,597,
respectively, for the year ended December 31, 1996. The Company's outlook for
fiscal year 1997 is positive for operations that existed prior to the
acquisition of Cal ASIC. However, the Company expects a continuing adverse
impact on profits in the near term from Cal ASIC, including a non-cash charge of
approximately $195,000 per year for goodwill. It is management's belief that Cal
ASIC will become profitable before the end of 1997.
At the end of 1993 the Company concluded that its efficiency of
operations and its future profitability would be significantly improved by
consolidating and restructuring its manufacturing equipment group operations.
Pursuant to the plan of consolidation, which was substantially completed prior
to the end of 1994, the Company sold two product lines and Texcel (with the
exception of certain Texcel laser material processing assets which were
transferred to PPL) and consolidated the remaining manufacturing equipment
operations into its PPL manufacturing division in Chatsworth, California. As
part of the consolidation plan, the Company also sold its Flying Height Testing
("FHT") equipment product line effective June 30, 1994.
A-9
<PAGE> 26
Revenues for each of the fiscal years ended December 31, 1996, 1995 and
1994 were $16,331,090, $12,210,490 and $10,821,025, respectively. Approximately
$3,039,000 in revenues from Terminated Operations were included in the revenues
for 1994. Therefore, the actual revenues for the fiscal years ended December 31,
1996, 1995 and 1994 from operations continued into 1995 were $16,331,090,
$12,210,490 and $7,782,025, respectively (approximately 45% compounded annual
growth rate compared with a compounded annual growth rate in excess of 62% for
the five year period 1992 to 1996). The increase in revenues for the year ended
December 31, 1996 over the year ended December 31, 1995 is primarily
attributable to the overall increased volume of orders in 1996 for Disk Head
Inspection Workstations and new products, primarily the Mirage tabletop video
measurement system. Inventories have increased from $2,585,575 at December 31,
1995 to $3,855,312 at December 31, 1996 primarily due to raw material and
component purchases to support the increased orders and higher levels of
production planned for 1997. The revenue increase for the year ended December
31, 1995 over the year ended December 31, 1994 of approximately $4,428,000 was
primarily attributable to increased sales from Manufacturing Equipment products
produced by the PPL manufacturing division of approximately $4,510,000.
Gross margins for the fiscal years ended December 31, 1996, 1995 and
1994 were 41%, 40% and 37.3%, respectively. The increase in gross profit margins
for the fiscal year ended December 31, 1996 versus the fiscal year ended
December 31, 1995 is primarily due to greater efficiencies in the manufacturing
process resulting from higher sales and production volume and the elimination of
a low margin product at PPL. Although the Company's margins have improved in
1996 as compared to 1995, it continues to experience competitive pressures on
certain products which may impact gross margins in the future. The lower gross
profit margins for the fiscal year ended December 31, 1994 versus the fiscal
year ended December 31, 1995 is primarily due to lower margin product lines of
Benchmark Industries, formerly a JMAR subsidiary which was eliminated as part of
the 1994 restructuring, and the re-location of the laser material processing
assets from the East Coast of the U.S. to Southern California. The Company took
action in 1994 to eliminate these lower margin products. The increased gross
margins for 1995 were partially offset by lower margins at PPL in 1995 versus
1994 due to increased outside vendor component purchases.
Selling, general and administrative ("SG&A") expenses for the fiscal
years ended December 31, 1996, 1995 and 1994, were $4,884,050, $3,812,433 and
$4,443,910, respectively. The increase in SG&A expenses in 1996 is due to (i)
SG&A expenses of $448,040 related to Cal ASIC in 1996 compared to none in 1995;
(ii) increased amortization with respect to the larger quantity of demonstration
equipment, primarily related to the Mirage, required to support expanded
marketing efforts; (iii) higher customer service costs that resulted from adding
to the customer service staff to support increased sales volume experienced in
1996; and (iv) higher payroll costs. The decrease in SG&A expenses in 1995 as
compared to 1994 was due to lower expenses resulting from restructuring and
consolidation of the manufacturing equipment group at PPL in Southern California
and other cost reductions.
The Company's research, development and engineering program (RD&E)
consists of two types: Customer-Funded RD&E (U.S. government and other
companies) and Company-Funded RD&E. Both types of RD&E are expensed when
incurred. Customer-Funded RD&E costs incurred, included in "Contract Costs of
Sales" expenses totaled $1,137,065, $1,236,750 and $1,297,115 for the fiscal
years ended December 31, 1996, 1995 and 1994, respectively. The decrease in
Customer-Funded RD&E for 1996 is primarily due to the delay in receipt of
additional contract funding from the U.S. government. Company-Funded RD&E costs
are shown in "Operating Expenses" and totaled $1,304,119, $881,800 and $995,520,
respectively. Hence, total RD&E expenses for those three years were $2,441,184,
$2,118,550 and $2,292,635, respectively.
Interest expense for the fiscal years ended December 31, 1996, 1995 and
1994, was $288,372, $321,162 and $570,094, respectively. The decrease in
interest expense in 1996
A-10
<PAGE> 27
versus 1995 is due to the conversion of $1,000,000 of convertible notes into
JMAR common stock in October 1996. The decrease in interest expense in 1995
versus 1994 is due to the payoff or conversion of approximately $2,500,000 of
convertible notes in February 1994, the payoff or conversion of approximately
$2,401,000 of Benchmark debt in 1994 and the conversion or payoff of $700,000 of
convertible notes in 1995. Included in interest expense for fiscal year 1994 is
amortization of certain Common Stock warrant premiums totaling $7,295, and loan
fees totaling $30,780, $51,525 and $75,382, for the fiscal years 1996, 1995 and
1994, respectively.
Interest and other income (expense) for 1996 includes a gain of
approximately $405,700 related to the settlement with Atlantic American Holding
Company Limited ("Atlantic") and early redemption of the preferred stock of
Atlantic that the Company held and includes a non-recurring charge of $80,000
recorded in the first quarter relating to an investment disposed of in a prior
year. Interest and other income (expense) for 1994 includes discounts obtained
by the Company against certain payables primarily related to Benchmark, a gain
on the sale of the FHT product line of PPL and a gain on the sale of stock in
another company and offset in part by a loss on the sale of assets of Benchmark.
During 1994 the Company decided not to sell the Metrology line of PPL.
Accordingly, the previously established restructuring reserves for that
potential sale were reversed in 1994. This reversal was offset by additional
restructuring costs associated with the disposition and consolidation of certain
assets of Benchmark.
During 1994, JMAR sold substantially all of the assets of Surgilase on
an installment sale basis for a price of approximately $6,700,000, the final
payment of which was received by the Company in June 1996. Discontinued
operations reflect a loss of $2,999,242 for the year ended December 31, 1994 and
a loss on disposal of discontinued operations of $540,404 in 1994.
Included in the Statement of Operations for the Company in 1996 is a
tax benefit of $175,000 related to the utilization by the Company of a portion
of its net operating loss carryforward.
CONSOLIDATED LIQUIDITY AND FINANCIAL CONDITION
Working capital as of December 31, 1996 was $5,743,747 compared to
$4,655,087 at December 31, 1995.
Cash and cash equivalents at December 31, 1996 and December 31, 1995
were $2,629,286 and $1,837,647, respectively. The increase (decrease) in cash
and cash equivalents for the fiscal years ended December 31, 1996, 1995 and 1994
was $791,639, $(107,731) and $1,387,358, respectively. Cash from net income plus
non-cash operating items improved from a provision of cash of $663,071 for the
year ended December 31, 1995 to a provision of cash of $1,447,741 for the year
ended December 31, 1996. The increase in cash for 1996 resulted from cash
provided by financing activities of $1,429,441 (net proceeds from the exercise
of warrants, borrowings from notes payable, and net proceeds from issuances of
common stock, less net payments of short-term debt) offset in part by cash used
in operations of $413,687 and cash used in investing activities of $224,115
(primarily capital expenditures, increase in other receivables, and acquisition
costs, less cash received from the collection of notes receivable, primarily
related to the sale of Surgilase). The cash used in operations was primarily
used to finance accounts receivable and inventory purchases offset in part by an
increase in accounts payable and accrued liabilities. Accounts receivable
increased primarily due to an increase in revenues for the twelve months ended
December 31, 1996. Accounts payable and accrued liabilities increased primarily
due to (i) an increase in inventory purchases to support planned production
increases; (ii) an increase in deposits and progress payments obtained in
connection with customer orders; and (iii) accounts payable and accruals of Cal
ASIC.
A-11
<PAGE> 28
The decrease in cash for 1995 resulted from cash used in operations of
$1,625,119 (primarily to finance inventory and accounts receivable and to
paydown accounts payable and accrued liabilities) offset in part by cash
provided by investment activities of $1,076,835 (primarily cash received from
the note receivable related to the sale of Surgilase less capital expenditures)
and cash provided by financing activities of $440,553 (primarily net borrowings
under short-term debt agreements less payments of notes payable). The increase
in cash for 1994 resulted from cash provided by investing activities of
$4,278,288 (primarily consisting of proceeds from the sale of assets and
Surgilase and payments received on notes receivable offset by capital
expenditures) and finance activities of $174,404 (primarily consisting of
proceeds from the issuance of common stock offset by payments of notes payable,
including convertible notes of $2,350,000) offset by cash used in operations of
$3,065,334.
JMAR operations will continue to require the use of working capital.
The working capital of PPL is generally funded through its working capital line
(the "Line") with a bank (the "Bank") plus customer advanced payments made at
the time of order placements. The operations of JTC are currently funded through
third party contracts. During 1995 and most of the first quarter of 1996,
advances pursuant to the Line were based on 80 percent of eligible accounts
receivable and 25 percent of eligible inventories (up to $1,000,000). The Bank
increased the Line from $1,500,000 in the second quarter of 1995 to $3,000,000
in March, 1996, allowed certain foreign receivables (up to $250,000) to be
eligible receivables and increased the percent of eligible inventories to 35
percent. As of December 31, 1996, PPL's capital availability pursuant to the
Line was approximately $2,774,000 of which approximately $1,444,000 was
borrowed. The Line contains several covenants relating to, among other matters,
the maintenance of certain minimum income levels and financial ratios, which if
not met could impact the availability of advances pursuant to the Line. In
addition, during the third quarter, the Bank loaned the Company $500,000 to be
used for equipment purchases by PPL. Concurrent with the closing of the
acquisition (the "Acquisition") of Cal ASIC, the Company loaned $400,000 to Cal
ASIC (in addition to $100,000 previously loaned) and agreed to loan an
additional $1,000,000 over an eighteen month period, of which $500,000 was
loaned in the quarter ended September 30, 1996, and to be used by Cal ASIC for
equipment purchases and working capital purposes. In addition, the Company
agreed to loan the two majority shareholders of Cal ASIC up to $250,000 secured
by the JMAR stock they received in the Acquisition. During September, 1996, the
Company entered into a $950,000 lease financing agreement with Leasing
Technologies International, Inc., the proceeds of which will be used to finance
Cal ASIC equipment and software financing requirements. Management believes that
the Company has existing resources to adequately fund operations and working
capital requirements as well as the Cal ASIC obligations for the next twelve
months based on the current level of operations and business conditions.
At December 31, 1996, the Company had in excess of $26 million of
Federal net operating loss carryforwards, subject to certain annual limitations.
To the extent the Company has taxable income in the future, these carryforwards
will be used by the Company to reduce its cash outlay for taxes.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain statements contained in this Appendix are forward looking
statements that involve a number of risks and uncertainties. In addition to the
factors discussed below, among the other factors that could cause actual results
to differ materially are the following: Concentration of sales to markets and
customers (see "Customers"), delays or cancellations in orders, fluctuations in
margins, timing of specific orders, customer reorganizations, demand
fluctuations, timely development, introduction and acceptance of new products,
technical obsolescence of existing products, technical problems in the
development or modification of current products, the impact of competitive
products and pricing, shifts in demand for the Company's products, the degree of
success of technology transfer (e.g., advanced lithography sources, laser blood
sampler, micromachining, etc.) to commercial products, availability of
A-12
<PAGE> 29
working capital to support growth, continued government funding of advanced
lithography, successful integration of acquisitions, and other competitive
factors.
JMAR's future operating results are also dependent on its ability to
develop, manufacture and market, in a timely manner, innovative products that
meet customers' needs and the continued growth of the semiconductor, computer
disk drive and medical equipment industries. Inherent in this process are a
number of risks that the Company must successfully manage in order to achieve
favorable operating results. The process of developing new high technology
products is complex and uncertain and requires innovations that anticipate
customer needs and technological trends. After the products are developed, the
Company must quickly manufacture them in sufficient volumes at acceptable costs
to meet demand and establish the necessary sales and marketing capabilities to
assure adequate and timely sales volume.
In addition, portions of the Company's manufacturing operations are
sometimes dependent on the ability of a targeted base of suppliers to supply
core technology, sub-assemblies and common manufactured parts in time to meet
critical distribution and manufacturing schedules. From time-to-time the Company
could experience constrained supply of certain component parts due to a variety
of reasons, including strong demand in those product lines as well as strong
demand in the industry. Such constraints could adversely affect JMAR's operating
results until alternate sourcing is developed.
As is the case for a large number of California-based companies, a
significant portion of the Company's operations are located near major
earthquake faults. The ultimate impact on the Company, significant suppliers and
the general infrastructure is unknown, but operating results could be materially
affected in the event of a major earthquake. The Company is predominantly
self-insured for losses and interruptions caused by earthquakes.
The operations of the Company involve the use of substances regulated
under various federal, state and international laws governing the environment.
It is the Company's policy to apply strict standards for environmental
protection even if not subject to regulations imposed by local governments. The
liability for environmental remediation and related costs is accrued when it is
considered probable and the costs can be estimated. Environmental costs are
presently not material to JMAR's operations or financial position.
Although JMAR believes that it has the necessary product offerings and
resources for continuing success, future revenue and margin trends cannot be
reliably predicted and may cause the Company to adjust its operations. Factors
external to the Company can result in volatility of the Company's common stock
price. Because of the foregoing factors, recent trends should not be considered
reliable indicators of future stock prices or financial results.
During May, 1996, the Company acquired California ASIC a quick turn,
but as yet unprofitable, manufacturer of a special category of semiconductor
chips. The Company believes that Cal ASIC fits well with the Company's current
business activities and believes that the acquisition will improve the Company's
profitability and sales volume at some point in 1997. The initial expense of
integrating Cal ASIC into the Company and expanding its sales volume to
profitable levels has produced losses at Cal ASIC and may continue to produce
losses in the near term. Morever, despite plans for additional investment, there
are no guarantees that the operations of Cal ASIC will ever achieve
profitability. JMAR has performed what it believes is extensive due diligence on
the markets, the technologies and the management of Cal ASIC using both its
internal resources as well as several competent, independent outside consultancy
groups. On the basis of the information obtained, the Company is optimistic
regarding the potential future contribution of Cal ASIC to JMAR. However, there
are many possible factors which could negatively impact the achievement of these
expected future benefits, including: failure of the quick-turn gate array market
to materialize as rapidly as forecast, emergence of new competitors, possible
patent infringement claims, inability to attract and retain the additional
qualified employees required to manufacture and sell the Cal ASIC products and
services, failure
A-13
<PAGE> 30
of the manufacturing facilities to produce adequate quantities and quality of
products within the required time frame at profitable cost levels, deterioration
of the relationship between Cal ASIC and its base wafer suppliers, litigation
from prior creditors or shareholders of Cal ASIC, the ability of the Company to
raise the funds necessary to adequately finance the working capital needs and
equipment purchase needs of Cal ASIC as well as many of the risk factors set
forth above.
The ultimate commercial success of the Company's pocket size laser
blood samplers will depend on a number of factors including technical
performance, cost to produce and the ability of the Company's customer to obtain
FDA approval to market the products and the ability of that customer to
ultimately generate adequate sales volume.
The Company has not yet achieved commercially viable outputs in its
X-ray lithography program. In order to prove that its technology works and to
produce a completed product, the Company must complete the development and
integration of these highly technical and complicated systems into a
fully-integrated prototype. With any new technology, there is a risk that the
market may not appreciate the benefits of the product. In addition, the
Company's X-ray lithography system will compete against other developing
technologies. Development by others of new or improved products, processes or
technologies may make the Company's proposed product obsolete or less
competitive. Also, the development of sophisticated laser products is a lengthy
and capital intensive process and is subject to unforeseen risks, delays,
problems and costs.
Although JMAR has demonstrated an initial version of its Microlight
1000, it has not yet sold the proposed product. Along with some of the risks
discussed in the preceding paragraph, the size of the potential market for the
product is not yet known. In addition, the Company has not proven that its
proposed product will improve the manufacturing of customer's products or
fabricate those that are currently impossible to make using conventional
equipment.
A-14
<PAGE> 31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To JMAR Industries, Inc.:
We have audited the accompanying consolidated balance sheets of JMAR
Industries, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. 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 financial statements referred to above present
fairly, in all material respects, the financial position of JMAR Industries,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
San Diego, California
February 24, 1997
A-15
<PAGE> 32
JMAR INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND DECEMBER 31, 1995
<TABLE>
===========================================================================================================
<CAPTION>
ASSETS December 31,
------------------------
1996 1995
---------- ----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents (Note 2) ...................................... $2,629,286 $1,837,647
Accounts receivable, net (Note 5)........................................ 2,994,762 1,742,484
Notes and other receivable (Notes 11 and 13 )............................ 902,005 979,165
Inventories (Notes 2 and 4).............................................. 3,855,312 2,585,575
Prepaid expenses and other .............................................. 721,685 137,736
------------- ---- -------
Total current assets................................................ 11,103,050 7,282,607
Notes receivable (Note 13 )................................................... 54,667 129,502
Receivable from officers...................................................... 73,824 69,524
Property and equipment, net (Notes 2 and 6)................................... 2,704,460 571,622
Equity securities, at cost (Note 11) ......................................... - 621,000
Other assets, net (Note 2) .................................................. 347,627 290,208
Goodwill, net (Notes 2 and 3)................................................ 1,111,890 284,532
------------- ------------
TOTAL ASSETS......................................................... $15,395,518 $9,248,995
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable......................................................... $ 914,272 $ 455,715
Accrued liabilities...................................................... 535,885 215,768
Accrued payroll and related costs........................................ 849,072 423,845
Customer deposits ....................................................... 742,213 5,263
Convertible notes payable (Notes 8 and 11) .............................. 589,631 -
Notes payable and capital lease obligations (Notes 7 and 8).............. 1,728,230 1,526,929
------------- ------------
Total current liabilities........................................... 5,359,303 2,627,520
------------- ------------
Convertible notes payable (Notes 8 and 11).................................... - 1,536,273
------------- ------------
Notes payable and capital lease obligations, net of current portion
(Notes 7 and 8) .............................................................. 667,310 -
------------- ------------
Commitments and contingencies (Notes 3, 7 and 9)
Stockholders' equity (Notes 3, 8, 9, 11 and 12):
Preferred stock, $.01 par value; 5,000,000 shares authorized; none
issued and outstanding as of December 31, 1996 and December 31, 1995 .. - -
Common stock, $.01 par value; 40,000,000 shares authorized; Issued and
outstanding 16,760,269 shares as of December 31, 1996 and 14,228,585
shares as of December 31, 1995......................................... 167,603 142,286
Additional paid-in capital............................................... 35,274,959 31,796,142
Accumulated deficit...................................................... (26,073,657) (26,853,226)
------------ ------------
Total stockholders' equity................................ 9,368,905 5,085,202
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................... $15,395,518 $9,248,995
=========== ==========
===========================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
A-16
<PAGE> 33
JMAR INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
===========================================================================================================
Year ended December 31,
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Product sales.................................................. $14,585,585 $10,351,949 $ 8,501,017
Contract sales................................................. 1,745,505 1,858,541 2,320,008
----------- ----------- ------------
Total revenues (Note 14)............................. 16,331,090 12,210,490 10,821,025
Product costs of sales......................................... 8,501,889 6,094,320 5,311,386
Contract costs of sales........................................ 1,137,065 1,236,750 1,475,026
----------- ----------- ------------
Gross profit ........................................ 6,692,136 4,879,420 4,034,613
----------- ----------- ------------
Operating Expenses:
Selling, general and administrative....................... 4,884,050 3,812,433 4,443,910
Research, development and engineering..................... 1,304,119 881,800 995,520
Restructuring charges (Note 13)........................... - - (458,309)
----------- ----------- ------------
Total operating expenses............................. 6,188,169 4,694,233 4,981,121
----------- ----------- ------------
Income (loss) from operations.................................. 503,967 185,187 (946,508)
Interest and other income (expense), net....................... 388,974 212,240 390,594
Interest expense............................................... (288,372) (321,162) (570,094)
----------- ----------- ------------
Income (loss) from continuing operations before income taxes... 604,569 76,265 (1,126,008)
Income tax benefit (Note 10)................................... 175,000 - -
----------- ----------- ------------
Income (loss) from continuing operations....................... 779,569 76,265 (1,126,008)
Discontinued Operations (Note 13):
Loss from operations of discontinued operations.......... - - (2,999,242)
Loss on disposal of discontinued operations............... - - (540,404)
----------- ----------- ------------
Net income (loss).............................................. $ 779,569 $ 76,265 $ (4,665,654)
=========== =========== ============
Net income (loss) per common share and common equivalent share
(Note 2):
Primary and fully diluted:
Income (loss) per common share from continuing operations. $ .05 $ .01 $ (.11)
Loss per common share from discontinued operations........ - - (.33)
----------- ----------- ------------
Net income (loss) per common share ............................ $ .05 $ .01 $ (.44)
=========== =========== ============
Weighted average common and common equivalent shares outstanding:
Primary................................................... 16,755,753 14,133,258 10,596,661
=========== =========== ============
Fully diluted.............................................. 16,906,584 14,133,258 10,596,661
=========== =========== ============
===========================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
A-17
<PAGE> 34
JMAR INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
==================================================================================================================================
Additional Total
Common Stock Preferred Stock Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
---------- -------- ------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993........... 7,506,123 $75,062 - $ - $25,897,807 $(22,263,837) $ 3,709,032
Debt converted to equity (Note 11)... 58,160 581 - - 112,375 - 112,956
Issuance of common stock and
warrants (Note 11)................. 4,625,000 46,250 - - 4,704,230 - 4,750,480
Stock issued upon litigation
settlement......................... 25,000 250 - - 11,000 - 11,250
Stock issued related to acquisition
of Rose Technology................. 68,150 681 - - 24,677 - 25,358
Stock received in sale of Texcel..... (40,000) (400) - - (93,200) - (93,600)
Net loss............................. - - - - - (4,665,654) (4,665,654)
---------- -------- ----- ----- ----------- ------------ -----------
Balance, December 31, 1994........... 12,242,433 122,424 - - 30,656,889 (26,929,491) 3,849,822
Debt converted to equity (Note 11)... 700,000 7,000 - - 443,002 - 450,002
Issuance of common stock (Note 11)... 1,278,152 12,782 - - 688,075 - 700,857
Stock issued upon litigation
settlement......................... 8,000 80 - - 8,176 - 8,256
Net income........................... - - - - - 76,265 76,265
---------- -------- ----- ----- ----------- ------------ -----------
Balance, December 31, 1995........... 14,228,585 142,286 - - 31,796,142 (26,853,226) 5,085,202
Issuance of stock related to acqui-
sition of Cal ASIC (Note 3)........ 1,427,526 14,275 - - 1,707,270 - 1,721,545
Debt converted to equity (Note 11)... 440,000 4,400 - - 973,021 - 977,421
Stock issued upon exercise of
warrants (Note 11)................. 474,158 4,742 - - 644,426 - 649,168
Issuance of common stock (Note 11)... 190,000 1,900 - - 154,100 - 156,000
Net income........................... - - - - - 779,569 779,569
---------- -------- ----- ----- ----------- ------------ -----------
16,760,269 $167,603 - $ - $35,274,959 $(26,073,657) $ 9,368,905
==================================================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
A-18
<PAGE> 35
JMAR INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................... $ 779,569 $ 76,265 $(4,665,654)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization............................ 668,172 565,750 918,391
Services received in exchange for
common stock or warrants.............................. - 21,056 13,757
Restructuring charges.................................... - - (411,000)
Loss on sale and disposition of assets................... - - 608,671
Loss on disposal of discontinued operations.............. - - 540,404
Discount on payables..................................... - - (348,001)
Gain on sale of product line............................. - - (496,454)
Change in assets and liabilities net of
effects of acquisitions:
(Increase) decrease in:
Accounts receivable..................................... (1,252,278) (589,073) 2,360,360
Inventories............................................. (1,307,937) (464,635) (81,666)
Prepaid expenses and other.............................. (654,320) (31,760) 71,923
Other assets............................................ (132,172) (108,350) 63,338
Increase (decrease) in:
Accounts payable and accrued liabilities................ 1,485,279 (1,094,372) (3,245,776)
Discontinued operations-noncash charges and working
capital changes...................................... - - 1,606,373
----------- ----------- -----------
Net cash used in operating activities........................ (413,687) (1,625,119) (3,065,334)
----------- ----------- -----------
Cash flows from investing activities:
License and patent costs .................................... (12,905) (16,675) -
Capital expenditures......................................... (941,597) (251,502) (172,025)
Increase in notes and other receivables...................... (187,722) (7,147) (27,259)
Payments received on notes receivable........................ 1,004,502 1,339,661 240,283
Proceeds from sale of assets................................. - 12,498 2,770,341
Acquisition costs, net of cash acquired...................... (86,393) - 44,210
Proceeds from sale of discontinued operations................ - - 1,500,000
Cash used for discontinued operations........................ - - (77,262)
----------- ----------- -----------
Net cash provided by (used in) investing activities..... (224,115) 1,076,835 4,278,288
----------- ----------- -----------
Cash flows from financing activities:
Net borrowings (payments) under short-term debt agreements... (82,648) 734,866 (478,681)
Net borrowings (payments) of notes payable.................. 706,921 (313,860) (4,231,977)
Net proceeds from the issuance of common stock............... 156,000 19,547 4,750,479
Net proceeds from the exercise of warrants................... 649,168 - -
Cash provided by discontinued operations..................... - - 134,583
----------- ----------- -----------
Net cash provided by financing activities............... 1,429,441 440,553 174,404
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents.............. 791,639 (107,731) 1,387,358
Cash and cash equivalents, beginning of period.................... 1,837,647 1,945,378 558,020
----------- ----------- -----------
Cash and cash equivalents, end of period.......................... $ 2,629,286 $ 1,837,647 $ 1,945,378
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY: On May 23, 1996, the Company
acquired approximately 94 percent of the outstanding common stock of California
ASIC. As consideration for the acquisition, the Company issued an aggregate of
approximately 1,427,526 shares of its common stock (See Note 3).
============================================================================================================
</TABLE>
The accompanying notes to financial statements are an integral part of these
consolidated statements.
A-19
<PAGE> 36
JMAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE COMPANY
The accompanying consolidated financial statements include the accounts
of JMAR Industries, Inc. (the "Company" or "JMAR") and its wholly owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.
The Company develops, manufactures and markets precision measurement
and manufacturing systems and specialty semiconductor and laser products for the
microelectronics and medical industries.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Cash and Cash Equivalents
The Company defines cash and equivalents to include cash on hand and
cash invested in short-term securities which have original maturities of less
than 90 days.
b. Fair Value of Financial Instruments
The carrying value of certain of the Company's financial instruments,
including accounts receivable, accounts payable and accrued expenses
approximates fair value due to their short maturities. Based on borrowing rates
currently available to the Company for loans with similar terms, the carrying
value of its notes payable, capital lease obligations and borrowings under the
Company's line of credit approximates fair value.
c. Inventories
Inventories are carried at the lower of cost on the first-in, first-out
basis or market and are comprised of materials, direct labor and applicable
manufacturing overhead.
d. Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standard No. 109 ("SFAS 109"). Under the asset and
liability method of SFAS 109, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
SFAS 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Valuation allowances are established for net deferred tax assets when it is
uncertain that such tax assets will be realized.
e. Property and Equipment
Property and equipment are recorded at cost. Depreciation and
amortization are provided over the assets' estimated useful life of three to ten
years using the straight-line method. Maintenance and repairs are expensed as
incurred. Costs capitalized for self constructed assets include direct material,
labor and applicable overhead.
A-20
<PAGE> 37
f. Goodwill and Other Assets
Goodwill is amortized by systematic charges to income over the periods
estimated to be benefited, generally five to ten years. The Company periodically
reevaluates the original assumptions and rationale utilized in the establishment
of the carrying value and estimated lives of these assets. Management believes
that there has been no impairment of goodwill as reflected in the Company's
consolidated financial statements as of December 31, 1996. Accumulated
amortization of goodwill was $244,599 and $94,204 at December 31, 1996 and 1995,
respectively. Patent costs are amortized over ten years, and other assets are
amortized over not more than five years. Accumulated amortization of other
assets was $184,340 and $89,619 at December 31, 1996 and 1995, respectively.
g. Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121 ("SFAS 121") "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of", which requires the adjustment of the carrying value of long-lived assets
and certain identifiable intangibles, if their value is determined to be
impaired. The Company adopted the provisions of this standard on January 1,
1996. The adoption of SFAS 121 had no material impact on the accompanying
financial statements.
h. Revenues
Product revenues are generally recognized when the product is shipped
and all risks of ownership have passed to the customer. Contract revenues are
recognized based on the percentage of completion method wherein income is
recognized pro-rata over the life of the contract based on the ratio of total
incurred costs to anticipated total costs of the contract. Actual costs could
differ from these estimated costs. Estimated losses are fully charged to
operations when identified.
i. Income (Loss) Per Share
Income (loss) per common and common equivalent share is based on the
weighted average number of shares of common stock outstanding and dilutive
common equivalent shares from stock options, warrants and convertible notes
using the treasury stock method. Common stock equivalents are not included in
the calculation of loss per share as their effect would be antidilutive.
j. Stock Options
Effective January 1, 1996, the Company adopted the disclosure only
requirement of Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
Accounting for Stock-Based Compensation. The adoption of SFAS 123 had no
material impact on the accompanying financial statements (see Note 12).
k. Reclassifications
Certain reclassifications have been made to the prior year financial
statements to conform with the 1996 presentation.
l. Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
A-21
<PAGE> 38
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
3. ACQUISITION OF CALIFORNIA ASIC, INC.
On May 23, 1996, the Company acquired (the "Acquisition") approximately
94 percent of the outstanding common stock of California ASIC Technical
Services, Inc., a Nevada corporation (subsequently renamed California ASIC ("Cal
ASIC")). The Acquisition involved a private tender offer to the shareholders of
Cal ASIC (the "Sellers"). As consideration for the Acquisition, the Company
issued to the Sellers an aggregate of 1,427,526 shares of its Common Stock. The
shares issued by the Company are unregistered, however, the Company agreed to
use its best efforts to register certain of the shares in the future. The
purchase price was negotiated at arm's length.
In addition, concurrent with the closing, the Company loaned $400,000
of its funds to Cal ASIC (in addition to $100,000 previously loaned) and agreed
to loan an additional $1,000,000 over an eighteen month period, of which
$500,000 was loaned in 1996, to be used by Cal ASIC for equipment purchases and
working capital purposes. In addition, the Company agreed to loan the two
majority shareholders of Cal ASIC up to $250,000, secured by the JMAR stock they
received in the Acquisition.
Cal ASIC is engaged in the design, fabrication, assembly and testing of
application specific integrated circuits for the electronics industry and will
be operated as a division of the Company.
The Company has accounted for the acquisition as a purchase effective
June 1, 1996. The allocation of the purchase price of Cal ASIC reflected in the
accompanying financial statements has been prepared based upon an independent
appraisal of certain of the acquired assets and using management's estimate of
fair value for the remaining net assets. The Company will continue to review its
allocation of the purchase price to the acquired assets and liabilities.
Goodwill related to this acquisition is being amortized over five years.
The following unaudited pro forma information gives effect to the
acquisition of Cal ASIC as if the acquisition occurred on January 1 of each
respective pro forma period. In connection with the acquisition, Cal ASIC
entered into agreements with several of its creditors which reduced the related
liabilities due those creditors by approximately $850,000. Such debt reductions
are not reflected in the statement of operations of the Company. The pro forma
loss from continuing operations excludes any impact from the debt settlements of
Cal ASIC directly attributable to the Acquisition. These statements do not
purport to be indicative of the results of operations which actually would have
occurred had the acquisition of Cal ASIC occurred on January 1 of each
respective period or which may be expected to occur in the future.
<TABLE>
<CAPTION>
For the Year Ended
December 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Total revenues................................... $16,343,000 $12,401,000
=========== ===========
Income (loss) from continuing operations......... $ 368,000 $ (304,000)
=========== ===========
Income (loss) per share.......................... $ .02 $ (.02)
=========== ===========
</TABLE>
A-22
<PAGE> 39
4. INVENTORIES
At December 31, 1996 and 1995, inventories consisted of the following:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Raw materials, components and sub-assemblies.......................... $2,695,803 $1,333,163
Work-in-process....................................................... 913,403 725,109
Finished goods........................................................ 246,106 527,303
-------------- --------------
$3,855,312 $2,585,575
============== ==============
</TABLE>
5. ACCOUNTS RECEIVABLE
At December 31, 1996 and 1995, accounts receivable consisted of the
following:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Trade.................................................................. $2,802,417 $1,496,433
U.S. Government - billed............................................... 38,130 94,466
U.S. Government - unbilled............................................. 171,445 169,835
-------------- --------------
3,011,992 1,760,734
Less - Reserve for doubtful accounts................................... (17,230) (18,250)
-------------- --------------
$2,994,762 $1,742,484
============== ==============
</TABLE>
All unbilled receivables at December 31, 1996 and 1995, are expected to
be billed and collected within one year. Payment to the Company, for performance
on certain U.S. Government contracts, is subject to progress payment audits by
the Defense Contract Audit Agency and are recorded at the amounts expected to be
realized.
6. PROPERTY AND EQUIPMENT
At December 31, 1996 and 1995, property and equipment consisted of the
following:
<TABLE>
<CAPTION>
1996 1995
--------------- --------------
<S> <C> <C>
Equipment and machinery................................................ $4,243,555 $1,815,406
Furniture and fixtures................................................. 313,909 253,211
Leasehold improvements................................................. 62,380 43,775
--------------- --------------
4,619,844 2,112,392
Less-Accumulated depreciation.......................................... (1,915,384) (1,540,770)
--------------- --------------
$2,704,460 $571,622
=============== ==============
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
The Company leases office facilities under operating leases and certain
equipment and software under capital leases. Minimum future rental payments as
of December 31, 1996 are as follows:
A-23
<PAGE> 40
<TABLE>
<CAPTION>
Capital Leases Operating Leases
-------------- ----------------
<S> <C> <C>
1997............................... $113,388 $292,378
1998............................... 113,388 192,169
1999............................... 61,938 127,263
2000............................... - -
2001............................... - -
---------------- -----------------
288,714 $611,810
=================
Amount representing interest....... (29,317)
----------------
259,397
Less: Current portion.............. (96,527)
----------------
$162,870
================
</TABLE>
During September, 1996, the Company entered into a $950,000 lease
financing agreement with Leasing Technologies International, Inc., the proceeds
of which will be used to finance Cal ASIC equipment and software financing
requirements. The above amount for capital leases represents the amount
outstanding pursuant to that agreement at December 31, 1996.
Related rent expense was $315,515, $260,672 and $327,741 for the years
ended December 31, 1996, 1995 and 1994, respectively.
In the ordinary course of business, the Company has been involved in
various legal proceedings and claims. Currently there are no significant legal
proceedings or claims which in the opinion of management would have a material
adverse effect on the Company's consolidated financial position or results of
operations.
8. NOTES PAYABLE
Notes payable as of December 31, 1996 and 1995, were as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Working capital line of credit in the amount of
$3,000,000 with Comerica Bank - California.
Advances are based on 80% of eligible accounts
receivable and 35% of eligible inventories up to
$1,000,000. Advances bear interest at prime plus
1.25%. Interest on the line is payable monthly;
principal is due in full on 30 day notice. Advances
are secured by all assets of PPL. The bank agreements
contain covenants, among other items, relating to
income levels and financial ratios....................... $1,444,281 $1,526,929
Unsecured convertible promissory notes in the amount
of $600,000 and $1,600,000 at December 31, 1996 and
1995, respectively, convertible into 160,000 shares of
common stock at December 31, 1996, bearing interest
at 8.25 percent, due October 1997, net of $10,369
of loan fees............................................. 589,631 1,536,273
Note payable due in monthly principal installments
of $10,417 plus interest through October 2000,
interest at prime plus 1.25%, secured by all assets
of PPL................................................... 468,749 -
Notes payable due in monthly principal and interest
installments of $6,306 through May 2000, interest
at 12 percent, secured by certain machinery
and equipment............................................ 218,234 -
</TABLE>
A-24
<PAGE> 41
<TABLE>
<S> <C> <C>
Capital leases (see Note 7).............................................. $259,397 $ -
Other notes payable...................................................... 4,879 -
-------------- --------------
2,985,171 3,063,202
Less: Current portion.................................................... (2,317,861) (1,526,929)
-------------- --------------
$667,310 $1,536,273
============== ==============
</TABLE>
During October 1993 the Company issued $2,500,000 of convertible
promissory notes of which $600,000 remain outstanding at December 31,1996. The
convertible notes bear interest at 8.25 percent and were initially convertible
into shares of Common Stock of the Company at $3.75 per share. In March 1995,
the Company entered into an agreement to amend the terms of the notes, whereby
the conversion price for a pro-rata share of the notes (8.7 percent) was lowered
to $.40 per share and the Company would repay, without penalty, one dollar of
remaining notes for every one dollar of notes converted pursuant to the amended
conversion terms. During 1995, $200,000 in notes were converted into 500,000
shares and the Company repaid another $200,000 of the notes. During the third
quarter of 1995, the Company entered into an agreement to further amend the
terms of the notes, whereby the conversion price for a pro-rata share of the
notes (15.8 percent) was lowered to the higher of $1.50 or the average of the
closing best bid price of the Company's Common Stock for the ten trading days
prior to the day the note holder elects to convert. Pursuant to these amended
terms, holders of $300,000 in convertible notes converted the notes. In October
1996, the Company entered into an agreement to further amend the terms of the
notes, whereby the conversion price for a pro-rata share of the notes (62.5
percent) was lowered to $2.27 per share, which was the fair market value of the
Company's Common Stock at the time of the amendment. Pursuant to these amended
terms, holders of $1,000,000 in convertible notes converted the notes into
440,000 shares (see Note 11). These transactions had no impact on the Company's
results of operations for any of the periods presented in the accompanying
financial statements, other than the corresponding reduction in interest
expense.
The weighted average interest rate on the loan with Comerica
Bank-California was 9.52% and 10.07% for 1996 and 1995, respectively. The
maximum amount outstanding was $1,632,666 and $1,526,929 and the average amount
outstanding was $1,055,497 and $869,737 during 1996 and 1995, respectively.
Interest paid for the years ended December 31, 1996, 1995 and 1994 was
$289,248, $254,648 and $491,820, respectively.
9. RELATED PARTY TRANSACTIONS
During 1996, the Company renewed the employment contract with its Chief
Executive Officer, Dr. John S. Martinez to provide for a yearly salary of not
less than $175,000 and extended the term thereof to December 31, 1999. In 1993,
the Company loaned Dr. Martinez $59,000 with interest at 6% per annum to assist
Dr. Martinez in paying certain income taxes that he personally incurred in
connection with a transaction that he undertook in support of the Company.
During 1994, the Company issued warrants to directors, officers and
employees to purchase 658,666 shares of common stock of the Company in
connection with bridge loans made to the Company. The warrants have exercise
prices per share ranging from $.36 to $.47.
A-25
<PAGE> 42
10. INCOME TAXES
For the year ended December 31, 1996, the Company has recorded a tax
benefit of $175,000 related to the estimated future utilization of net operating
loss carryforwards. No provision for federal and state income taxes has been
provided for the year ended December 31, 1995 due to the Company's carryforward
position. No provision for federal and state income taxes has been provided for
the year ended December 31, 1994 as a result of the losses incurred in that
period.
At December 31, 1996, the Company had Federal net operating loss
carryforwards as follows:
<TABLE>
<CAPTION>
EXPIRES
- -------
<S> <C>
2002........................................................ $ 139,000
2003........................................................ 1,000
2004........................................................ 1,381,000
2005........................................................ 2,840,000
2006........................................................ 961,000
2007........................................................ 4,546,000
2008........................................................ 6,932,000
2009........................................................ 6,860,000
2010........................................................ 2,265,000
2011........................................................ 315,000
-----------------
Total....................................................... $26,240,000
=================
</TABLE>
The Company has approximately $1,192,000 of favorable temporary
differences that will offset future taxable income subject to the change in
ownership limitations discussed below.
Realization of future tax benefits from utilization of the net
operating loss carryforwards for income tax purposes is limited by the change in
ownership (as defined for Federal Income Tax Reporting Purposes) as a result of
the Company's initial public offering in May 1990. As a result of additional
financings in 1992 and 1993 as discussed in Note 11, additional ownership
changes have occurred which restrict the Company's ability to utilize its net
operating loss carryforwards and any "built in losses." In addition, the net
operating losses of acquired companies are also subject to separate change of
ownership limitations. Of the above net operating loss carryforwards, annual
limitations of approximately $813,000 apply to approximately $7,088,000 of
Company and acquired company loss carryforwards. Approximately $19,152,000 of
net operating loss carryforwards are not subject to annual limitations.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 and 1995 are presented below:
<TABLE>
<CAPTION>
DEFERRED TAX ASSETS: 1996 1995
---------------- -----------------
<S> <C> <C>
Net operating loss carryforwards................. $ 8,922,000 $ 8,372,000
Losses from equity and other investments......... 363,000 493,000
Other............................................ 42,000 192,000
---------------- -----------------
Total gross deferred tax assets......... 9,327,000 9,057,000
Less valuation reserve.................. (9,152,000) (9,057,000)
---------------- -----------------
Net deferred tax asset.................. $175,000 $ -
================ =================
</TABLE>
A-26
<PAGE> 43
The valuation reserve as of December 31, 1996 represents deferred tax
assets which management believes, based on the Company's history of operating
losses, may not be realized in future periods.
The effective income tax rate for 1996, 1995 and 1994 varied from the
statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Statutory federal income tax (benefit) rate................... 34% (34)% (34)%
State income tax.............................................. 6 (6) (6)
Permanent differences......................................... 2 16 8
Benefit (recorded) not recorded due to net operating loss
carryforward position......................................... (71) 24 32
------------ ------------ ------------
(29)% - -
============ ============ ============
</TABLE>
11. STOCKHOLDERS' EQUITY
During October, 1993, the Company issued $2,500,000 of convertible
promissory notes of which $600,000 remain outstanding at December 31, 1996.
During 1995, $200,000 in notes were converted into 500,000 shares and the
Company repaid another $200,000 of the notes. During the third quarter of 1995,
holders of $300,000 in convertible notes converted the notes into 200,000
shares. In October 1996, holders of $1,000,000 in convertible notes converted
the notes into 440,000 shares (see Note 8).
During 1995 and 1994, the Company received approximately $90,000 and
$4,750,000 from private placements of Common Stock.
During 1994, holders of $112,956 in debt of the Company agreed to
convert that debt into 58,160 shares of Common Stock of the Company.
During 1995, the Company issued 1,000,000 shares of Common Stock in
exchange for preferred stock (the "Preferred Stock") of Atlantic American
Holding Company Limited ("Atlantic"). The investment was recorded at a cost of
$621,000 at December 31, 1995. In December 1996, the Company and Atlantic
entered into an Escrow Agreement and Agreement of Settlement and General Release
whereby Atlantic agreed to (i) an early redemption of the remaining shares of
Preferred Stock held by the Company less that portion redeemed by the receipt of
$224,500 in November 1996; (ii) the payment of all accrued but unpaid dividends
under the Preferred Stock; and (iii) the reimbursement of certain legal fees and
out-of-pocket costs incurred by the Company in connection with a civil action
(the "Civil Action") filed by the Company against Atlantic. In return, JMAR
agreed to dismiss the Civil Action and in January, 1997, JMAR received
approximately $885,000 as a final settlement from Atlantic.
During the year ended December 31, 1996, the Company received net
proceeds of approximately $805,000 from the exercise of warrants into
approximately 474,000 shares of common stock and private placements of
approximately 190,000 shares of common stock.
In addition to the common stock, the Company has outstanding 2,705,882
warrants which trade on NASDAQ under the symbol JMARW and which entitle the
holder to purchase one share of JMAR common stock at a price of $4.68. The
warrants, which expire on February 15, 1998, are redeemable on 30 days notice at
the Company's option if the closing high bid price of JMAR's common stock
exceeds $6.38 for a period of 20 days.
A-27
<PAGE> 44
12. STOCK-BASED COMPENSATION PLANS
The Company has four stock option or warrant plans, the 1988 Stock
Option Plan (the "1988 Plan"), the 1991 Stock Option Plan (the "1991 Plan"), the
Management Anti-Dilution Plan (the "Anti-Dilution Plan"), and an incentive plan
which provides for the issuance of warrants to PPL employees (the "PPL Plan").
The Company accounts for these plans under APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with FASB Statement No. 123 ("SFAS 123"), the
Company's net income and earnings per share would have been reduced to the
following pro forma amounts:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Net Income: As Reported $76,265 $779,569
Pro Forma 68,337 668,169
Primary and Fully
Diluted EPS: As Reported .01 .05
Pro Forma .00 .04
</TABLE>
Because the SFAS 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that expected in future years.
The Company may grant options or warrants to its employees (including
directors) and consultants for up to 120,000 shares under the 1988 Plan,
1,480,000 shares under the 1991 Plan, 806,637 shares under the Anti-Dilution
Plan, and 450,000 shares under the PPL Plan. As of December 31, 1996, the
Company has granted options or warrants for 115,542 shares under the 1988 Plan,
577,220 shares under the 1991 Plan, 455,230 shares under the Anti-Dilution Plan,
and 200,000 shares under the PPL Plan. Under all Plans the option or warrant
exercise price is equal to or more than the stock's market price on date of
grant. In 1996, the Company repriced 737,340 options and warrants under the 1991
Plan, the Anti-Dilution Plan and PPL Plan and changed the initial vesting period
of 655,230 of such warrants to provide for vesting on the earliest of (i) forty
five days after such time as the closing high bid price of the Company's common
stock for 20 consecutive trading days is greater than $6.38; (ii) the exercise
by the warrantholders of at least 90 percent of the Company's warrants which
currently trade on the Nasdaq NMS; or (iii) nine years and six months after the
date of grant.
A summary of the status of the Company's four stock option or warrant
plans at December 31, 1995 and 1996 and changes during the years then ended is
presented in the table and narrative below:
<TABLE>
<CAPTION>
1994 1995 1996
------------------------- ---------------------------- -----------------------------
Shares Wtd Avg Shares Wtd Avg Shares Wtd Avg
Ex Price Ex Price Ex Price
------------ ----------- -------------- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beg. of
year 920,719 $5.07 1,054,983 $4.56 993,518 $4.35
Granted 267,500 4.25 107,000 .85 330,184 2.37
Exercised - - - - - -
Forfeited (133,236) 5.26 (168,465) 5.09 (4,333) 3.27
------------ -------------- ---------------
Outstanding at end of
year 1,054,983 4.56 993,518 4.35 1,319,369 2.69
------------ -------------- ---------------
Exercisable at end of
year 189,775 186,783 261,418
Weighted average fair
value of options or
warrants granted 1.60 .62 1.61
</TABLE>
A-28
<PAGE> 45
232,080 of the 1,319,369 options and warrants at December 31, 1996 have
exercise prices between $.53 and $1.09, with a weighted average exercise price
of $.82 and a weighted average remaining contractual life of 7.7 years. 96,213
of these options and warrants are exercisable. 161,376 of the options and
warrants outstanding at December 31, 1996 have exercise prices between $1.79 and
$2.94, with a weighted average exercise price of $2.43 and a weighted average
remaining contractual life of 8.5 years. 42,486 of these options and warrants
are exercisable. 895,304 of the options and warrants at December 31, 1996 have
exercise prices of $3.00, with a weighted average exercise price of $3.00 and a
weighted average remaining contractual life of 6.8 years. 92,110 of these
options and warrants are exercisable. 30,609 of the options and warrants
outstanding at December 31, 1996 have exercise prices of $9.00, with a weighted
average exercise price of $9.00 and a weighted average remaining contractual
life of less than one year. All of these options and warrants are exercisable.
The fair value of each option and warrant grant is estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 1995 and 1996: risk-free
interest rates of 7 percent; expected dividend yields of 0 percent, expected
lives of 6 years, and expected volatility ranging from 70 to 98 percent
(depending on the date of grant).
13. RESTRUCTURING CHARGES AND OTHER DISPOSITIONS
On December 9, 1994, the Company completed the sale of substantially
all of the assets of its unprofitable wholly-owned subsidiary Surgilase to
Sharplan Lasers, Inc. ("Sharplan"), a wholly-owned subsidiary of Laser
Industries Limited for a total price of approximately $6,700,000 which includes
the assumption by Sharplan of approximately $2,950,000 of liabilities and a
combination of notes and cash totaling approximately $3,750,000. Under the terms
of the transaction, the Company received $1,500,000 in cash at closing with the
balance of approximately $2,250,000 to be received in several installment
payments through June 30, 1996. Of this amount, $1,343,700 was received in 1995
and $904,889 was received in 1996.
The loss on disposition of Surgilase has been accounted for as
discontinued operations and prior years financial statements have been restated
to reflect the discontinuation of Surgilase. Revenues of Surgilase for 1994 were
$5,277,406.
During 1994, PPL sold its Flying Height Testing ("FHT") equipment
product line to a wholly-owned subsidiary of Cambrian Systems, Inc. The final
sale amount was $2,400,000 which resulted in a gain of approximately $496,000
which was reported in the statement of operations for 1994.
As part of the Company's decision to restructure and consolidate the
manufacturing equipment group, during 1994 the Company sold several product
lines and assets of its subsidiary, Benchmark Industries, Inc. ("Benchmark"),
completed most of the consolidation of the industrial laser product line of
Benchmark into PPL and sold its Texcel subsidiary. During 1994 the Company
decided not to sell the Metrology line of PPL. Accordingly, the restructuring
reserves previously established for that potential sale were reversed in 1994.
This reversal was offset by certain additional restructuring costs associated
with the disposition and consolidation of certain assets of Benchmark.
14. SIGNIFICANT CUSTOMERS AND EXPORT SALES
Government contracts generated 9%, 15% and 18% of the Company's
revenues in the years ended December 31, 1996, 1995 and 1994, respectively. In
1996, three other non-government customers accounted for 29.5%, 12.1% and 10.7%
of the Company's revenues. In 1995, four non-government customers accounted for
11.0%, 11.3%, 15.8% and 16.4% of the Company's revenues. In 1994, two
non-government customers accounted for 13.3% and 10.2% of the Company's
revenues.
A-29
<PAGE> 46
A summary of export sales by geographic area is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
------------- -------------- --------------
<S> <C> <C> <C>
Europe................ $1,544,390 $ 40,384 $ 15,518
Asia.................. $1,420,767 $ 1,684,083 $ 3,249,559
Other................. $ 440,291 $ 76,973 $ 86,484
</TABLE>
A-30
<PAGE> 47
JMAR INDUSTRIES, INC.
3956 Sorrento Valley Blvd.
San Diego, CA 92121
<PAGE> 48
PROXY PROXY
JMAR INDUSTRIES, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE 1997 ANNUAL MEETING OF SHAREHOLDERS
The undersigned shareholder of JMAR Industries, Inc. hereby appoints John S.
Martinez and Dennis E. Valentine and each of them, with full power of
substitution to each, proxies of the undersigned to represent the undersigned at
the 1997 Annual Meeting of the Shareholders of JMAR Industries, Inc. to be held
on Friday, July 18, 1997 at the Morgan Run Resort & Club, 5690 Cancha De Golf,
Rancho Santa Fe, California, at 10:00 a.m., local time, and at any
adjournment(s) thereof, with all powers, including voting rights, which the
undersigned would possess if personally present at said meeting on the
following:
(1) Election of six Directors of the Company to serve until the 1998 Annual
Meeting of Shareholders of JMAR Industries, Inc. and until their respective
successors are duly elected and qualified.
[ ] FOR ALL NOMINEES LISTED [ ] WITHHOLD AUTHORITY to vote for all
BELOW listed below
(except as marked to the contrary below)
John S. Martinez, James H. Banister, Jr., C. Neil Beer, Vernon H. Blackman,
Barry Ressler and Marvin W. Sepe.
(INSTRUCTIONS: To withhold authority for any individual nominee, write that
nominee's name in the space provided below.)
- ------------------------------------------------------------------------------
(2) In their discretion, upon all matters as may properly come before the
meeting or any adjournments thereof.
<PAGE> 49
THIS PROXY WILL BE VOTED AS DIRECTED. UNLESS A CONTRARY DIRECTION IS INDICATED,
THIS PROXY WILL BE VOTED FOR ALL OF THE PROPOSALS AND NOMINEES FOR DIRECTOR
LISTED ON REVERSE SIDE.
The proxies (or, if only one, then that one proxy) or their substitutes acting
at the meeting may exercise all powers hereby conferred.
The undersigned hereby revokes any prior proxy and ratifies and confirms all the
above-named proxies or their substitutes, and each of them, shall lawfully do or
cause to be done by virtue hereof.
The undersigned acknowledges receipt of the Notice of the 1997 Annual Meeting of
Shareholders and accompanying Proxy Statement dated June 16, 1997.
Dated:__________________________, 1997
------------------------------------
Signature
------------------------------------
Signature if held jointly
IMPORTANT: In signing this Proxy,
please sign your name or names in
the same way as shown at left. When
signing as a fiduciary, please give
your full title. If shares are
registered in the names of two or
more persons, each should sign.
IMPORTANT: PLEASE MARK, DATE, SIGN AND RETURN THIS PROXY PROMPTLY IN THE
ENCLOSED ENVELOPE WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
