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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K405
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number 1-10515
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JMAR Industries, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 68-0131180
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3956 Sorrento Valley Blvd., San Diego, CA 92121
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (619) 535-1706
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Unit (Common Stock and Warrant) Boston Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value; Warrant
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
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The aggregate market value of the common stock held by non-affiliates
of the Registrant as of March 3, 1997 was approximately $43,064,208. The
aggregate market value was based on the closing price on March 3, 1997 for the
common stock as quoted on the NASDAQ National Market System.
Number of shares outstanding of common stock: Common Stock, $.01 Par
Value - 16,860,269 shares as of March 3, 1997.
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PART I
ITEM 1. BUSINESS
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, micromachining,
and other leading-edge product technologies at this location.
BUSINESS SUMMARY
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.
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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 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% 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 before the end of 1997.
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
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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 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, laser micromachining 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
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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 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 approximately
$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.
MICROMACHINING 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. The Company believes that these
unique interactions will enable makers of precision microcomponents to perform
new, previously unavailable manufacturing
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operations. JMAR has contracted for a detailed market research study and is
currently working with a number of micromanufacturers to evaluate the ability of
its Microlight system technology to improve the manufacture of current products
or to fabricate those that are 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 specification 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 the second quarter of 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 Cal 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. At yearend, Cal ASIC
had started accepting customer orders and was in the process of completing its
facility upgrade.
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 the direct write
laser 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 cutting non-recurring engineering cost to an absolute
minimum.
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.
MARKET
The Company's technology base has applications in several market areas:
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LASER PROCESSING SYSTEMS
The worldwide market for laser based material processing equipment is
generally viewed as being divided into two major application categories. The
first category is the cutting or joining of parts having large sections or
geometries that are over three feet in length (one meter). In general,
manufacturers of high power CO2 and Yag lasers dominate this market. The Company
chooses to compete in the second application category which involves the
manufacture of systems to handle objects that require a manufacturing travel
distance of less than 3 feet (one meter) in any direction, and which normally
have a high value added component. Such applications for the microelectronics
industry require small part handling systems, vision-aided alignment, use of
sub-micron positioning and laser pointing. Examples of applications of such
systems include spot welding of flexures used in the disk drive industry,
surgical tools and medical implants. Examples of small microelectronic parts
that require sub-micron positioning and alignment are the repair of multi-chip
modules (both open and short repair) and the repair or process of high density
interconnects.
The Company believes that the laser based hermetic sealing market will
increase due to the growth in the market for implantable medical devices, as
well as the continued trend toward miniaturization and weight reduction in
avionics and space based telecommunications systems. The lower weight of
aluminum, titanium and similar lightweight metals has resulted in increased use
of such low electrical resistance metals which require laser based welding and
sealing systems. The Company expects to continue to participate in the continued
growth of this market.
The selling cycle of the above products is relatively lengthy and runs
between three months and one year. This cycle corresponds with the customers'
capital budgets. The normal marketing process starts with a preliminary
feasibility study funded by either the Company or by the customer, followed by
process qualification, the obtaining of budgetary information, final contract
negotiations, manufacturing and sale.
TEST, MEASUREMENT AND POSITIONING SYSTEMS
In this market, the Company concentrates on providing products for the
electronics industry, medical industry, aerospace and defense industries. The
mass storage industry (hard disk drives, tape backup systems and CD-ROM),
microelectronics, semiconductor and printed circuit board segments of such
industries constitute the targeted marketing focus of the Company. The Company
believes that the total sales in this market is in excess of $700 million.
The specific market segments of the electronics manufacturing industry
targeted by the Company have common measurement problems which are ideally
solved through non-contact technologies, such as spectrophotometry, laser
interferometry and laser distant probes. By combining its expertise in
non-contact technologies with strong systems integration skills, JMAR believes
it is able to provide the solutions required by these targeted market segments.
The Company also believes that the continued trend toward small and more
intricate electronic devices will continue to increase the demand for
non-contact technologies, parts handling and full integration for a turnkey
solution in which it specializes.
SPECIALTY SEMICONDUCTORS
The Cal ASIC specialty semiconductor business is focused on the
currently underserved low-volume and prototype gate array segments of the
rapidly expanding $17 billion worldwide market for ASIC's. Gate arrays, which
constitute about 40% of the entire ASIC market, are a series of customizable
semiconductor building blocks for a variety of critical digital computer
components.
The low-volume gate array market, which the Company believes is
currently growing at a rate of approximately 15% per year, is estimated to be
more than $500 million. That demand
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comes mainly from two sources. The first are the numerous chip developers or
product manufacturers who never need more than a few thousand chips of a given
design due to the limited number of products they build at any one time. This is
a very viable market due to the inability of large semiconductor factories,
which are set up for high-volume production, to handle short-run orders in a
cost-effective manner. Since they cannot do so, potential customers must look to
smaller fabricators like Cal ASIC.
The second source of demand for gate arrays comes from manufacturers
that initially require only a limited number of gate array chips for prototypes
of new or upgraded products - such as computers, cellular telephones or fax
machines - but who may ultimately require very large quantities of them. These
customers need a fabricator with the ability to rapidly produce small quantities
of gate arrays that also can accommodate the many refinements to the product
that these manufacturers often make during the prototyping process. JMAR's
market research indicates that many of these customers would prefer to do
business with a fabricator that can eliminate the variations in performance that
frequently occur when a chip moves from a custom-designed prototype
manufacturing process to mass production.
MICROMACHINING
The Company believes that a large potential market demand exists for
high performance systems which manufacture a broad range of ever-smaller
microdevices from materials which cannot be machined by currently available
fabrication tools. In December 1996 the Company contracted with an established
high technology market research firm to evaluate the current and expected
markets for its new laser-based micromachining systems including various
alternative configurations of its Microlight systems using JMAR's patented
Britelight lasers. The final results from this study are expected before the end
of March 1997.
ADVANCED LITHOGRAPHY
Semiconductor device manufacturers purchase lithography tools from
established stepper suppliers. The principal suppliers of steppers for high
volume semiconductor production are Nikon, Canon, ASML, Silicon Valley Group
Lithography (SVGL) and Ultratech Systems.
The Company understands that Canon and SVGL have X-ray lithography
stepper development and prototype programs underway. However, the primary
business focus of these companies is on the current multi-billion dollar optical
lithography stepper market. On the other hand, Suss Advanced Lithography (SAL),
a privately-owned venture headquartered in Vermont, was established several
years ago to focus on the X-ray lithography ("XRL") market. According to SAL, as
of the end of 1996 a total of 17 X-ray steppers have been sold, worldwide, for
X-ray lithography process development. SAL has informed JMAR that 16 of those
steppers were manufactured and sold by SAL. It is the Company's understanding
that those X-ray steppers were designed to interface with various synchrotron
X-ray source facilities currently being utilized, worldwide, for X-ray
lithography process development.
JMAR believes that it is currently the world's leading developer of
"point source" X-ray lithography systems. The Company further believes that
point source XRL systems, once their X-ray outputs reach levels adequate for
commercially viable chip production rates, will provide the semiconductor
industry with a lower cost, much more compact and flexible alternative to
synchrotron facilities for X-ray lithography process development and production.
One of the principal goals of the Company's 1997 XRL source development
program is the demonstration of the ability of the Company's patented
Britelight(TM) laser systems to generate commercially viable rates of X-rays
before the end of 1997.
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The Company understands that the semiconductor industry is currently
transitioning its highest performance fab lines to the initial production of
circuitry, having feature sizes as small as 0.25 microns (i.e., the "critical
dimension"). The Company also understands that, with the exception of SAL, the
primary focus of the stepper manufacturers for the next few years will continue
to be on the marketing of optical lithography steppers.
In approximately three years, full scale commercial production is
expected to transition to critical dimensions of 0.18 microns, followed by 0.13
microns about three years later. For each generation of chip technology,
full-scale commercial production operations are usually preceded by one to two
years of "pilot plant" operations by each semiconductor manufacturer. The pilot
operations, in turn, are preceded by a few years of laboratory process
development. According to Sematech, a non-profit semiconductor industry
technology evaluator, there are several candidate source technologies for the
0.18 micron generation and beyond. These include: extensions of current deep UV
excimer lasers, solid state lasers, synchrotron and point X-ray sources, extreme
UV, electron-beam and ion beams. Each of these technical approaches has its
proponents and detractors throughout the industry. Periodically, each cites the
strengths and weaknesses of the various techniques.
The Company believes that, as a result of the X-ray lithography process
development conducted during the past decade, or more, by other organizations
using synchrotron X-ray sources, XRL is closer to commercial reality for the
0.18 micron generation and beyond than any of the other above-listed
alternatives with the possible exception of deep UV technology. The principal
roadblocks often cited by critics of XRL are: the size, cost and complexity,
radiation hazards and lack of availability of a commercially financed X-ray mask
supplier. The principal roadblocks often cited by critics for the extension of
deep UV to the 0.18 micron is the lack of demonstrated optical component
technology and the projected higher costs of the new stepper systems.
The Company's XRL program is focused on the development of its PXS as a
commercially-viable X-ray source alternative to the synchrotron. Unlike
synchrotrons, the PXS source is not a hazardous radiation source. Furthermore,
commercial PXS source stepper systems for XRL are expected to cost less and be
of comparable, or smaller, size than projected DUV stepper systems for the 0.18
micron generation and beyond.
Up to now, all X-ray masks have been fabricated in R&D or prototype
Mask Shops and, consequently, because of the low volumes have been quite
expensive. The Company believes that once XRL is adopted as a production
process, the projected mask production rates will justify the initial investment
required to establish commercial mask fabrication operations.
The major technical milestone in the Company's PXS development program
is the continued scale-up in its Britelight laser technology to enable it to
generate commercially viable X-ray source outputs. JMAR's XRL contract with
DARPA, if fully funded on a timely basis, is intended to achieve that goal in
1997.
For further information on the alternative technologies listed above,
the reader is advised to consult the publicly-available literature on this
subject.
At the present time, the market for point source x-ray lithography
systems is believed to be limited to the sale of a few systems per year to
support the 0.18 micron process development programs of the major semiconductor
manufacturers and government supported research laboratories. That market is
expected to expand as the new 0.18 micron technology moves into the pilot plant
phase at leading manufacturers and then onto full scale production. Pursuant to
the Technology Roadmap prepared by the Semiconductor Industry Association (SIA),
the subsequent generation 0.13 micron technology will start moving into its
pilot phase as the 0.18 micron processes move into production. Many
semiconductor analysts believe that optical lithography has reached its feasible
resolution limit, and that commencing in the latter part of this
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decade x-ray sources - both large facilitized synchrotrons and point sources
such as JMAR's PXS - will start making major inroads into this very large
market. The selling price for such point sources is expected to be approximately
two million dollars.
LIGHT KNIFE PRODUCTS
JMAR has a light knife blood sampler product development agreement with
a large medical products manufacturer and currently expects its products to be
marketed by that customer. That customer has informed JMAR that the current
market for disposable blood collection devices is approximately $150 million per
year. JMAR's Light Knife blood collection system aims to compete for a
significant portion of that market. JMAR further believes that this market could
increase once healthcare practitioners become aware of the convenience and
safety advantages of Light Knife relative to current sharp edged products.
MANUFACTURING
Due to the complex nature of the capital equipment that the Company
manufactures, JMAR purchases a substantial amount of components from outside
vendors for integration into its final systems. Purchased items include: major
electronics components, computers, optics, television cameras and motors, as
well as mechanical components designed by PPL, such as machine parts, sheet
metal enclosures, raw aluminum castings and other fabricated parts. The Company
has not encountered difficulties procuring these items and does not rely on
exclusive sole source suppliers. Should any of these parts become unavailable
from existing suppliers, the Company believes that alternative suppliers are
readily available for most of the critical components. However, the use of
alternative vendors and suppliers may have an adverse effect upon manufacturing
schedules and procedures and could affect delivery and increase costs. Assembly
and testing, as well as customer acceptance, are performed within the Company's
facilities.
PPL has installed and integrated an internal information system which
includes a management information system that supports a fully integrated
material requirements planning system, which is run on PPL's internal local area
network. This system enables PPL to control its material requirements planning
and its production planning as well as all production.
To accommodate customer expectations, and due to the complexity of the
equipment that the Company manufactures, delivery times after receipt of an
order typically range from 30 to 90 days for standard products and from 90 days
to one year for customized and special products.
Cal ASIC has a manufacturing and sales agreement with an established
semiconductor manufacturer to share CMOS gate array design and manufacturing
resources. This agreement, along with its minifab facility and unique
proprietary technologies, will allow JMAR to provide electronic product
designers and prototypers with a unique, affordable, quick-response source of
small volumes of CMOS gate arrays that the Company believes will perform the
same as those produced by high-volume methods. It is JMAR's goal to utilize the
existing capabilities of its other divisions in advanced lithography, electronic
manufacturing process control and laser system motion control to assist Cal ASIC
to expand its production rates and the range of product offerings as market
opportunities arise.
RESEARCH AND DEVELOPMENT
The Company has made substantial investments in the development of
specialized software used to control the operations of its hermetic laser
welding systems. A major effort in excimer laser delivery optics has produced a
leading edge excimer delete (e.g., ablative material removal) tool for
semiconductor system repair applications. In addition, the Company conducts a
continuing program to expand its accessories and the motion control capabilities
of its
11
<PAGE> 12
positioning equipment. Company-funded expenditures for research, development and
engineering were $1,304,119, $881,800, $995,520, $853,828 and $609,841 for the
years ended December 31, 1996, 1995, 1994, 1993 and 1992, respectively. Total
expenditures for RD&E including funding provided by third party contracts from
the U.S. government and other companies were $2,441,184, $2,118,550, $2,292,635,
$1,419,851 and $1,046,040 for the years ended December 31, 1996, 1995, 1994,
1993 and 1992, respectively.
JMAR's JTC division is performing R&D contract work funded by the
Defense Advanced Research Projects Agency (DARPA) of the Department of Defense
and other customers. Its work for DARPA relates to: (1) X-ray lithography source
development, and 2) other advanced military system technology. During the past
five years, JTC has been awarded several contracts from the government relating
to the development of advanced manufacturing and military system prototypes
utilizing the Company's leading edge laser technology base. JMAR's PPL division
is responsible for the subsequent engineering and manufacturing of commercial
products based on these prototypes. Government funding of these dual use
technologies, however, is very vulnerable to changes in the political
atmosphere. For this reason, the Company is aggressively pursuing strategic
alliances with commercial microelectronics manufacturers as additional sources
of development funding.
Some of the more significant research and development projects the
Company has worked on in 1996 include (i) continued development of a miniature
laser lancet system for needleless extraction of blood from the body; (ii)
continued development of an x-ray lithography source and novel advanced optical
lithography sources for advanced semiconductor manufacturing; (iii) continued
development of a fully integrated tabletop system used in the microelectronics
industry for non-contact high precision measurement of electronic component
dimensions; (iv) continued development of a disk inspection system for failure
analysis for the disk drive industry; (v) continued development of a standard
platform for laser machining and welding applications; and (vi) continued
development of the Microlight 1000 micromachining demonstration center.
DISTRIBUTION
PPL sells its products on a worldwide basis. Prior to 1996, export
sales of PPL averaged in excess of 14% of total revenues, however, during 1996
export sales increased to in excess of 20% of total revenues. The increase in
export sales of PPL is due to the shipment to Europe of a large LSS 9000 welding
system (earlier LSS 9000 shipments to that same customer were installed in their
U.S. facilities).
PPL utilizes a combination of direct regional sales personnel and sales
representatives to market its products in the United States. Foreign sales are
handled through independent distributors and representatives located in Europe
and the Pacific Rim countries. The distributors normally purchase equipment for
their own account and resell it to the end user in compliance with local law and
customs. They are appointed as exclusive distributors or representatives for
either a geographic area or a targeted product line and are responsible for
service support, training and installation to local customers.
COMPETITION
PPL's principal competition for complete laser based hermetic sealing
systems in the United States is from companies which are principally laser
suppliers. The principal European competitor is based in Sweden. The competition
in laser based light industrial material processing systems is from both the
laser suppliers and smaller system integrators. There are a number of domestic
and international laser system manufacturers. Typically these manufacturers
either manufacture lasers or integrate systems (such as welding or marking) for
targeted marketplaces. The Company has positioned itself to be a high-end
integrator of leading edge, full turnkey laser processing systems incorporating
state-of-the-art Nd:YAG, argon-ion, or excimer
12
<PAGE> 13
lasers, as well as precision positioning, vision systems, remote parts handling
and full environmental control for the microelectronics industries. These
systems are primarily used for micromachining and short circuit and open circuit
repair of microelectronics components/systems.
The Company believes that it is recognized as a leader in precision
motion control X-Y staging, components and systems. There are three major
domestic competitors. These competitors carry a much broader line, have much
larger distribution channels, and have a large stock of off-the-shelf inventory.
In addition, there are approximately five smaller competitors specializing in
narrower niches. Rather than compete in the generalized motion control and
positioning product marketplace, the Company has established itself as an
integrater of X-Y positioning and motion control systems and platforms for
several substantial OEM customers.
The Company believes that it is recognized as a leader in test and
measurement systems utilizing vision and laser based depth probes. There are
approximately five domestic and three foreign competitors within JMAR's
marketplace. The majority of the competition supplies standard off-the-shelf
test and measurement systems for the microelectronics industry including the
mass storage industry. PPL's strengths against its competition is its ability to
integrate its positioning and motion control products with its standard test and
measurement systems to provide a turnkey system solution for manufacturing,
process control and quality control requirements. The Company's vision and laser
based systems are targeted for high-end applications requiring high resolution,
sub-micron edge detection, positioning and measurement accuracy. This enables
the Company to set itself apart from the mainline competition, which chooses to
compete in the lower resolution marketplace.
In the area of specialty semiconductors, the Company's Cal ASIC
division faces competition from a small number of gate array producers using
traditional semiconductor manufacturing techniques with the attendant processing
times and costs. Currently customers needing only small volumes of custom
integrated circuits have few choices. They must either use expensive field
programmable gate arrays, or pay high costs to a major producer for limited
production, or develop their application using discrete components. Cal ASIC
provides another alternative through the use of a unique direct write
lithography approach that eliminates photomask generation and allows much faster
prototyping and cost effective small volume production. Additionally, Cal ASIC's
direct write lithography approach will permit multiple designs to be written on
the same wafer, giving customers the ability to do multiple iterations of their
designs at one time. While one competitor does use a laser in their prototype
offerings, it is an ablative approach which the Company believes produces parts
unsuitable for production or even long term evaluation.
Four main competitors, all located in the western part of the U.S.,
have emerged in the niche that Cal ASIC serves. All four competitors offer
submicron technologies. Three possess full wafer foundries. Cal ASIC currently
uses 1.0 micron CMOS technology to serve its customers. Submicron geometry is a
perceived benefit for the competitors. However, the Company believes that the
great majority of customers in this market niche do not require submicron
technology, and that the Cal ASIC offering is suitable for a majority of the
market.
The Company believes that it has established itself as the leading
developer of laser-plasma x-ray lithography point source systems. Although other
x-ray point source technologies are under development, the Company also believes
that upon achievement of commercially viable outputs laser-plasma point sources
of the type under development at JMAR may have the best long-term potential for
meeting commercial x-ray lithography requirements. The Company believes that its
diode pumped solid state laser-driven Pico Second X-ray Source (PXS), when
fitted with X-ray collimator devices developed by other DARPA contractors, will
be capable of generating x-rays of sufficient intensity to demonstrate
sub-quarter micron feature sizes at commercial production rates. JMAR's PXS
system has a significant competitive advantage over
13
<PAGE> 14
alternative technologies because of certain unique technical features which the
Company believes will allow it to be readily integrated into semiconductor
fabrication processes.
PATENTS AND PROPRIETARY TECHNOLOGY
JMAR owns a substantial body of proprietary software used in the
operation of its systems and believes that this software provides it with a
unique competitive advantage compared with its competitors in the laser systems
and measurement systems business.
On July 18, 1995, JMAR was issued a patent for a "Low Cost, High
Brightness Solid State Laser" covering its solid state laser (i.e.,
"Britelight(TM)") and PXS technology.
The Company holds numerous patents relating to lasers, their
applications and associated systems and one non-laser patent. The Company's
policy is to apply for a patent on each of its significant inventions not only
to preserve its proprietary rights but also to protect against reverse
engineering by others and to avoid being "locked out" of the use of its own
technology by other patents. The Company does not place its principal reliance
on patent protection; rather, it seeks to maintain a competitive advantage
through an aggressive R&D program, protection of non-patented proprietary data,
maintenance of its advanced laser-optics expertise, superior product performance
and active marketing of its products. However, it is recognized that lasers and
x-ray lithography are the subject of very substantial R&D activity by many very
competent companies and that other approaches may be developed and patented,
making the field very competitive.
The Company's use of its laser technology is subject to the basic laser
patents owned and licensed by the Patlex Corporation ("Patlex"). Patlex holds
title to several of the basic laser and laser application patents originally
owned by Gordon Gould. Its position with respect to these patents has been
confirmed by the courts within recent years and most laser companies have signed
royalty agreements with Patlex since that time.
The lasers sold by the Company are currently subject to royalties under
Patlex U.S. Patent No. 4,704,583. The Company holds all necessary licenses with
Patlex. The Company has been advised by two of its customers (the "Customers")
that Jerome Lemelson ("Lemelson"), a private inventor, has notified them that
its Customers may be infringing on one or more technology use and process
patents in the areas of Image Analysis and Manufacturing Apparatus which are
held by Lemelson and are incorporated into products manufactured by the Company
and other equipment manufacturers. These Customers have been asked by Lemelson
to license the use of the technology covered in these patents. The Company has
not determined whether or not it infringes on any of the Lemelson patents, nor
has any claim been made on the Company by any party.
DEVELOPMENT AND PRODUCTION STRATEGY FOR X-RAY LITHOGRAPHY
JMAR's x-ray lithography source development strategy is based on
developing a modular x-ray source system which can be readily integrated with
any vertical-stage x-ray stepper, such as the current development-stage x-ray
steppers from Silicon Valley Group Lithography (SVGL), Canon, and Suss Advanced
Lithography (SAL). JMAR's commercialization plan for its x-ray source technology
is based on:
1) JTC's understanding of the market requirements for advanced
lithography; its x-ray source technology; and its experience with prototype
design and interface integration requirements of available steppers,
2) PPL's capability in engineering, product manufacturing,
assembly, test, and integration of precision manufacturing equipment for the
microelectronics industry,
14
<PAGE> 15
3) The use of established commercialized system components (combined in
a unique, patented manner) which makes possible the use of existing U.S.
industrial infrastructure to supply and service the principal components of the
PXS systems.
CUSTOMERS
For fiscal years 1996, 1995 and 1994, the United States Government
accounted for 9%, 15% and 18%, respectively, of total sales. Foreign sales
accounted for 21%, 15% and 31% of the Company's revenues in 1996, 1995 and 1994.
In 1996, three customers each accounted for in excess of 10% of JMAR's revenues:
IBM (29.5%), Medtronic (12.1%) and Therma-Wave (10.7%). In 1995, four customers
each accounted for in excess of 10% of JMAR's revenues: Therma-Wave (16.4%), IBM
(15.8%), Seagate Technology (11.3%) and Magnecomp (11.0%). In 1994, two
customers accounted for 13.3% and 10.2% of the Company's revenues. Both of them
were purchasers of Flying Height Testing products which were discontinued during
that year.
EMPLOYEES
Currently, the Company has approximately 110 full-time employees. The
Company is not subject to any collective bargaining agreements and believes that
it maintains excellent relations with its employees.
INDUSTRY SEGMENT INFORMATION
Prior to the sale of Surgilase, Inc. in December, 1994, the Company
operated in two industry segments for financial reporting purposes as follows:
the Medical Equipment Group and the Manufacturing Equipment Group. Financial
information relating to the Company's export sales for the three years ended
December 31, 1996 is incorporated by reference from Note 14 of Notes to
Consolidated Financial Statements.
ITEM 2. PROPERTIES
The Company has a total of approximately 44,000 square feet of
laboratory, office, manufacturing and storage space under lease, including 9,280
square feet located in the Torrey Pines Business Park in the Sorrento Valley
region of San Diego, 15 miles north of San Diego International Airport. The
Sorrento Valley space is used for JTC's technology development activities,
including x-ray lithography and government contract businesses and for the
Company's corporate headquarters. That lease, which expires in August, 1997, is
at a current monthly rental of $5,661.
In 1996 PPL added approximately 3,500 square feet of industrial space
to its existing 25,000 square feet. The new space was required to expand the
internal machining capability and to consolidate large inventory and storage
requirements. This enabled the main manufacturing plant of approximately 25,000
square feet to increase its production capability. In addition, the Company
maintains sales offices in San Jose, California and Dallas, Texas. In 1996 the
size of the Texas office was doubled to accommodate additional pieces of
demonstration equipment. PPL's manufacturing, office and storage facilities are
located 25 miles north of Los Angeles International Airport and have a monthly
rental of $16,173.
Cal ASIC currently leases 6,596 square feet of manufacturing, office
and storage space south of Los Angeles in Irvine, California at a monthly rental
of $4,500 which expires in April, 1997. Cal ASIC is currently evaluating its
space needs for 1997 and beyond and is currently discussing a lease extension
with its landlord.
The Company believes that its physical properties are adequate for its
current needs.
15
<PAGE> 16
ITEM 3. LEGAL PROCEEDING
In July, 1995, a lawsuit was filed against Benchmark Industries, Inc.
("Benchmark") (a subsidiary of the Company which no longer has any assets or
operations) and Raytheon Company by two individuals in the U.S. District Court
for New Hampshire for an incident which occurred prior to the Company's
acquisition of Benchmark in September, 1992. The lawsuit alleged duty to warn,
strict product liability, negligence and ultrahazardous activity and loss of
consortium. The plaintiff sought general and compensatory damages in the amount
of $3,000,000. Benchmark has submitted the lawsuit to its insurance carrier and
believes that coverage is available for this lawsuit. Benchmark's insurance
company is currently paying the cost of defense of this lawsuit. It is the
Company's understanding that the plaintiff is no longer pursuing the lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS
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.
<TABLE>
<CAPTION>
COMMON STOCK PRICE
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.
In October, 1996, the Company issued to an individual for facilitating
the closing of a transaction a warrant exercisable for 10,000 shares of Common
Stock at an exercise price of $2.25 per share. The warrant was issued to a
sophisticated investor in a transaction which was exempt under Section 4(2) of
the 1933 Act.
16
<PAGE> 17
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data that follows has been
extracted from the Company's Consolidated Financial Statements, which have been
audited by Arthur Andersen LLP, independent public accountants. It should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and Notes thereto, which are included elsewhere in this report.
The amounts for 1994, 1993 and 1992 have been adjusted from that
previously reported to reflect the operations of Surgilase as discontinued
operations as a result of its sale on December 9, 1994 but continue to contain
the results of several other business activities which the Company also
terminated in 1994. The financial data for 1993 includes the operations of PPL
since October, 1993. The financial data for 1992 includes the operations of
Benchmark since September, 1992. The balance sheet information includes the
accounts of Surgilase at December 31, 1993 and 1992, the accounts of Benchmark
at December 31, 1994, 1993 and 1992 and the accounts of PPL at December 31,
1996, 1995, 1994 and 1993. The financial data below includes the operations of
Texcel through December 31, 1993.
17
<PAGE> 18
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
====================================================================================================================
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating revenues.............. (1)$ 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 - DECEMBER 31,
====================================================================================================================
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<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 19).
(3) Includes losses from Terminated Operations (See page 19).
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<PAGE> 19
ITEM 7. 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.
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
19
<PAGE> 20
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 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
20
<PAGE> 21
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.
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
21
<PAGE> 22
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 Form 10-K 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 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
22
<PAGE> 23
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 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.
23
<PAGE> 24
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements prepared in accordance with Regulation S-X are
set forth beginning on page 27 hereof.
24
<PAGE> 25
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.........................................................26
Consolidated Balance Sheets as of December 31, 1996 and 1995.....................................27
Consolidated Statements of Operations for the Years Ended December 31, 1996,
1995 and 1994....................................................................................28
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
1996, 1995 and 1994..............................................................................29
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996,
1995 and 1994....................................................................................30
Notes to Consolidated Financial Statements.......................................................31
</TABLE>
25
<PAGE> 26
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 and the
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and schedule 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.
Our audits were made for the purpose of forming an opinion on the
basic consolidated financial statements taken as a whole. The schedule listed in
Item 14 is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic consolidated financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic consolidated financial statements
taken as a whole.
/s/ Arthur Andersen LLP
-----------------------
ARTHUR ANDERSEN LLP
San Diego, California
February 24, 1997
26
<PAGE> 27
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> <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.
27
<PAGE> 28
JMAR INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
=======================================================================================================================
Year ended December 31,
-----------------------
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.
28
<PAGE> 29
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> <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
acquisition 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 financial statements are an integral part of these
consolidated statements.
29
<PAGE> 30
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
============= ============= =============
</TABLE>
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).
The accompanying notes to financial statements are an integral part of these
consolidated statements.
30
<PAGE> 31
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.
31
<PAGE> 32
JMAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
32
<PAGE> 33
JMAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 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.
33
<PAGE> 34
JMAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<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>
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:
34
<PAGE> 35
JMAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<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:
<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:
35
<PAGE> 36
JMAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<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 -
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
36
<PAGE> 37
JMAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
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>
37
<PAGE> 38
JMAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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:
DEFERRED TAX ASSETS:
<TABLE>
<CAPTION>
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>
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>
38
<PAGE> 39
JMAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
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:
39
<PAGE> 40
JMAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <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 Ex Shares Wtd Avg Ex Shares Wtd Avg Ex
Price Price 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>
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
40
<PAGE> 41
JMAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
41
<PAGE> 42
JMAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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>
42
<PAGE> 43
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
John S. Martinez, Ph.D. 66 Chief Executive Officer, President, Chairman of the
Board and Director
Robert S. Hash 46 President of PPL
Dennis E. Valentine 40 Vice President Finance, Chief Financial Officer, Chief
Administrative Officer and Secretary
Richard M. Foster 63 President of JTC
Edwin Barrowcliff 59 President and Chief Executive Officer of Cal ASIC
James H. Banister, Jr. 66 Director
C. Neil Beer, Ph.D. 61 Director
Vernon H. Blackman, Ph.D. 67 Director
Barry Ressler 56 Director
Marvin W. Sepe 41 Executive Vice President and General Manager of Cal ASIC
and Director
John P. Ricardi 44 Vice President for Corporate Development and Senior Vice
President for Sales and Marketing of PPL
</TABLE>
The directors of the Company are elected by the shareholders to hold office
until the next annual meeting of stockholders and until their respective
successors have been elected and qualified. Officers of the Company are elected
annually by the Board of Directors and hold office until their successors are
duly elected and qualified.
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,
43
<PAGE> 44
earned his Ph.D. in Engineering Science from the University of California
(Berkeley) in 1962, his Bachelor's degree from Rensselaer Polytechnic Institute
(Troy, N.Y.) 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.
ROBERT S. HASH, was elected President, Chief Operating Officer and a
director of the Company in February, 1994. At that time he resigned as President
of PPL. Mr. Hash resigned as President, Chief Operating Officer and director of
the Company in July, 1994 and resumed the duties of President of PPL. Mr. Hash
had been the President and a director of PPL since co-founding the company in
1985. From 1977 to 1985, Mr. Hash was employed by McBain Instruments, where he
served as Special Products Manager, General Manager of Commercial Products, and
Vice President of Engineering. At McBain Instruments, Mr. Hash developed and
marketed precision opto-electronic systems, the sales of which were responsible
for the increase in revenues of that company from $500,000 in 1977 to more than
$13 million in 1984. At the time of the acquisition of McBain Instruments by
Warner-Lambert in 1983, Mr. Hash was serving as a Division Vice President.
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.
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 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.
EDWIN BARROWCLIFF, is the President, Chief Executive Officer and a director
of California ASIC. Mr. Barrowcliff was a co-founder and served as President of
California ASIC since its inception in April, 1992. From 1989 to 1992 he was
Vice President and General Manager of Lasarray Corporation, Inc. where he was
responsible for technology development and demonstration of the company's
turn-key minifabrication facility for producing application specific integrated
circuits (ASICs) utilizing proprietary laser-based lithography methodology. He
served as Vice President of Operations from 1986 to 1989 at Holt Integrated
Circuits, Inc. where his responsibilities included establishing a wafer
fabrication facility suitable for producing the company's product line of
medical implantable custom integrated circuits. From 1979 to 1988 Mr.
Barrowcliff was employed by Commodore Semiconductor Systems, Inc., a division of
Commodore Computers, Inc. As project manager he was responsible for establishing
a high volume wafer fabrication facility for producing I/C parts for use in the
company's line of computers. As Vice President and General Manager of the
state-of-the-art facility he increased the staff to 400 persons and increased
production levels to in-excess of 3 million parts per month. Mr. Barrowcliff has
held a number of Engineering and Management positions at several
44
<PAGE> 45
semiconductor companies including Union Carbide, Motorola, Litton and Rockwell
International since receiving his Bachelor's degree in Physics from San Jose
University in 1966.
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 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 Defense 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 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.
45
<PAGE> 46
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.
MARVIN W. SEPE, has been a director of the Company since July, 1996.
Mr. Sepe is the Executive Vice President and General Manager of California ASIC.
Mr. Sepe comes to the Company after a 15 year tenure with TRW Components
International Inc., a wholly owned subsidiary of TRW Inc., focused on technical
services and technology transfer for the international spacecraft industry. With
strengths in international business and strategic management, Mr. Sepe was
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 Director positions within the company including
Marketing, Programs and Engineering. Mr. Sepe was a key member of a team of TRW
executives tasked with evaluating TRW technology developments and determining
the suitability of those developments for business spin-offs. 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 contract manufacturing operations throughout
Southeast Asia, as well as the U.S. This producer of linear semiconductors
produced over 1.5 million devices per month through its worldwide operations.
Mr. Sepe came to Silicon General after performing the same role for Silicon
Systems Inc. (1977-1980), a fast growing start-up operation for custom
semiconductors. His experience with semiconductors also includes management
responsibilities with 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.
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 a master of
science degree in electrical engineering from Northeastern University in Boston.
46
<PAGE> 47
ITEM 11. 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 (collectively, the "Named Officers"). No other executive
officer received more than $100,000 in annual salary and bonuses during 1996.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term Compensation
Annual Compensation (1) Awards (2)
--------------------------------------------------------------------
Name and Year Salary Bonus Securities Underlying
Principal Position ($) ($)(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 to reduce their
respective exercise prices to $3.00 per share, 20 percent over the trading
price on NASDAQ on August 15, 1996.
47
<PAGE> 48
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>
PERCENTAGE OF
TOTAL OPTIONS
SHARES UNDERLYING GRANTED TO
OPTIONS GRANTED EMPLOYEES IN EXERCISE PRICE
NAME (SHARES) FISCAL YEAR PER SHARE 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)(4) .24 $3.00 June 5, 2006
2,601 (1)(4)(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)(4) .24 $3.00 June 5, 2006
2,601 (1)(4)(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 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.
(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.
48
<PAGE> 49
AGGREGATE OPTION 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 value realized on each exercise of stock options, if
any, awarded to said officers as additional compensation during the fiscal year
ended December 31, 1996 and the number of shares of common stock underlying
options and warrants outstanding 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 IN-THE-MONEY OPTIONS AND
WARRANTS AT WARRANTS AT
SHARES DECEMBER 31, 1996 DECEMBER 31, 1996 (1)
ACQUIRED ----------------- ---------------------
ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John S. Martinez 0 0 61,809/391,669 $61,772/$104,690
Robert S. Hash 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.
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.
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 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
49
<PAGE> 50
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 Leonid
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.
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 capacity as directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 3, 1997, certain
information regarding the beneficial ownership of the Company's Common Stock by
(1) each person or entity known to the Company to be the beneficial owner of
more than five percent of the Company's Common Stock, (2) each director of the
Company, (3) each of the Named Officers, and (4) all directors and executive
officers of the Company as a group. In all cases, unless otherwise indicated,
the named person has sole voting power and sole investment power over the
securities.
50
<PAGE> 51
<TABLE>
<CAPTION>
NUMBER OF SHARES OF PERCENTAGE OF
COMMON STOCK OUTSTANDING COMMON STOCK
BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED
---------------- ------------------ ------------------
<S> <C> <C>
John S. Martinez (1) 1,558,992 8.94%
Robert S. Hash (2) 294,802 1.74%
Marvin W. Sepe (3) 146,269 (8)
Dennis E. Valentine (4) 106,652 (8)
James H. Banister, Jr. (5) 47,629 (8)
Vernon H. Blackman (6) 20,833 (8)
Barry Ressler (6) 18,336 (8)
C. Neil Beer (6) 11,082 (8)
All executive officers and directors
as a group (10 persons)
(7) 3,042,720 16.81%
</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) 586,027 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) 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 Form 10-K, Dr. Martinez is not considered to have "beneficial
ownership" of said 160,000 shares.
(2) Includes: (a) 239,234 shares received by Mr. Hash in connection with the
acquisition of PPL by the Company; (b) 45,980 shares which are issuable
upon exercise of currently exercisable warrants and; (c) 9,588 shares
which are issuable upon exercise of currently exercisable warrants owned
of record by Mr. Hash's wife.
(3) Includes 144,068 shares which are issuable upon exercise of currently
exercisable warrants.
(4) Includes 104,647 shares which are issuable upon exercise of currently
exercisable stock options and warrants.
(5) Includes 39,229 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 1,242,163 shares which are issuable upon exercise of currently
exercisable stock options and warrants.
(8) Less than one percent.
51
<PAGE> 52
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
1. Financial Statements. A list of financial statements is contained in
"Index to Consolidated Financial Statements" on page 25 hereof.
2. Financial Statement Schedules. The following financial statement
schedule of JMAR Industries, Inc., for the years ended December 31,
1996, 1995 and 1994 is filed as part of this Report and should be read
in conjunction with the Consolidated Financial Statements of JMAR
Industries, Inc.
Schedule
II. Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the Consolidated Financial Statements or Notes thereto.
3. Exhibits. The Exhibits listed on the accompanying index to Exhibits
are filed as part of this Report.
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS:
The Company's 1988 Stock Option Plan (Exhibit 10(l) to Registration
Statement 33-32446).
The Company's 1991 Stock Option Plan, with amendments (Exhibits A to
Proxy Statements for 1991, 1992, 1993, 1995 and 1996 Annual Meetings of
Shareholders).
Management Anti-Dilution Incentive Plan, as amended (Exhibit 10.12 to
this Form 10-K).
Amended and Restated Employment Agreement between the Company and John
S. Martinez, dated May 1, 1996 (Exhibit 10.3 to this Form 10-K).
Management Incentive Plan Agreement for Pacific Precision Laboratories,
Inc., as amended (Exhibit 10.24 to this Form 10-K).
(b) Reports on Form 8-K.
There were no reports filed on Form 8-K during the three months ended
December 31, 1996.
52
<PAGE> 53
JMAR INDUSTRIES, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 1996
INDEX TO EXHIBITS
3.1 (1)(3) Articles of Incorporation and amendments thereto.
3.2(10) Amendments to Articles of Incorporation, filed on July 9, 1992,
December 11, 1992, January 11, 1993 and February 1, 1993.
3.3 (1) Bylaws and amendments thereto.
3.4 (13) Amendment to Certificate of Incorporation, filed on August 23,
1994.
4.1 (4) Form of Common Stock Certificate.
4.2 (4) Form of Warrant Certificate for Warrants sold in February, 1993.
9.1 (13) Voting Trust Agreement, dated October 6, 1993 between John S.
Martinez and Cato Portfolio, A.G.
10.1 Employment Agreement between California ASIC, Inc. and Marvin W.
Sepe, dated July 1, 1996.
10.2 Employment Agreement between California ASIC, Inc. and Edwin
Barrowcliff, dated May 23, 1996.
10.3 Amended and Restated Employment Agreement between the Company and
John S. Martinez, dated May 1, 1996.
10.4 (1) The Company's 1988 Stock Option Plan.
10.5 (1) Form of Invention and Secrecy Agreement.
10.6 (3) Form of Warrant, with attached Piggyback Registration Rights
provisions, issued in April, 1991 to John S. Martinez, James H.
Banister, Jr., C. Neil Beer, Jay Borker, Scott Love, A. Lee
Morsell, Vernon H. Blackman, Susan Miller-French, Lester Levy and
Ali M. M. Mojdehi.
10.7 (2) (8) (9) (12) (14) The Company's 1991 Stock Option Plan, as amended.
10.8 (5) Underwriters' Warrants, dated February 24, 1993, issued to
Commonwealth Associates ("Commonwealth") and Lew Lieberbaum &
Co., Inc. ("Lieberbaum").
10.9 (5) Warrant Agreement, dated February 16, 1993, among the
Company, Commonwealth, Lieberbaum and American Securities
Transfer, Incorporated.
10.10 (5) Underwriting Agreement, dated February 16, 1993, among the
Company, Commonwealth Associates and Lieberbaum.
10.11 Building Lease, dated August 21, 1996, between The Manufacturers
Life Insurance Company and the Company.
10.12 Management Anti-Dilution Incentive Plan, as amended.
53
<PAGE> 54
<TABLE>
<CAPTION>
EXHIBIT NO.
DESCRIPTION
- ------------ -----------------------------
<S> <C>
10.13 (6) Form of 8.25% Senior Subordinated Convertible Promissory Note dated October 6, 1993 issued to Cato Portfolio A.G.
10.14 Employment Agreement between Pacific Precision Laboratories, Inc. and John P. Ricardi, dated February 3, 1997.
10.15 (7) Revolving Credit Loan Agreement, dated October 6, 1993, by and among PPL and Comerica Bank - California;
Security Agreement between PPL and Comerica; Guaranty executed by the Company.
10.16 (10) Warrants for the purchase of an aggregate of 180,000 shares of Common Stock, issued to H.I.G. Securities,
Ltd., Brentwood Financial, Ltd., Tesoma Overseas, Inc., Llewellyn Capital Management Ltd. and Sparta Capital, Ltd.
10.17 (10) Form of 1994 Warrant, between the Company and Baytree Associates, Inc. for the placement of the shares in 10.16.
10.18 (13) Form of Warrant, with attached Piggyback Registration Rights provisions issued to John S. Martinez, Vernon H.
Blackman, Robert S. Hash, Larry M. Levy, Dennis E. Valentine, Barry Ressler, Leonid Yoffe and Carole Hash issued
in connection with the Company's August, 1994 Loan Program.
10.19 (11) Subscription Agreement by and between the Company and Atlantic American Holding Company Limited dated March 31, 1995.
10.20(15) Agreement of Purchase and Sale of Assets dated as of May 23, 1996,
by and among the Company, Nancy Schwalbe, Edwin Barrowcliff and
California ASIC Technical Services, Inc.
10.21 (16) Master Lease Agreement and related documents dated as of September 10, 1996 between Leasing Technologies
International, Inc., the Company and California ASIC Technical Services, Inc.
10.22 (16) Installment Note dated September 1, 1996 between Comerica Bank-California and Pacific Precision Laboratories, Inc.
10.23 Escrow Agreement and Agreement of Settlement and General Release
by and among the Company; Atlantic American Holding Company
Limited; Parker, Milliken, Clark, O'Hara & Samuelian; and Sankary
& Sankary.
10.24 Management Incentive Plan Agreement for Pacific Precision Laboratories, Inc., as amended.
22.1 Subsidiaries of the Company include JMAR Technology Co. (a California corporation), Pacific Precision
Laboratories, Inc. (a California corporation) and California ASIC, Inc. (a Nevada corporation).
23 Consent of Independent Public Accountants.
</TABLE>
- ------------------------------------
54
<PAGE> 55
<TABLE>
<S> <C>
(1) Incorporated by reference to the exhibit filed with the Company's
Registration Statement on Form S-1 (No. 33-32446) filed on December 5,
1989 and amended on January 30, 1990, March 30, 1990 and April 23, 1990,
which Registration Statement became effective May 11, 1990.
(2) Incorporated by reference to the exhibit filed with the Company's Proxy Statement for the 1991 Annual Meeting of
Shareholders.
(3) Incorporated by reference to the exhibit filed with the Company's Form 10-K for the year ended December 31, 1991.
(4) Incorporated by reference to the exhibit filed with the Company's Registration Statement on Form S-1 (No. 33-47390) filed
on April 22, 1992 and amended November 23, 1992, January 11, 1993, January
27, 1993, February 9, 1993, February 11, 1993, February 12, 1993 and
declared effective on February 16, 1993.
(5) Incorporated by reference to the exhibit filed with the Company's Form 10-K for the year ended December 31, 1992.
(6) Incorporated by reference to the exhibit filed with the Company's Form 10-Q for the quarter ended September 30, 1993.
(7) Incorporated by reference to the exhibit filed with the Company's Form 8-K dated October 6, 1993.
(8) Incorporated by reference to the exhibit filed with the Company's Proxy Statement for the 1992 Annual Meeting of
Shareholders.
(9) Incorporated by reference to the exhibit filed with the Company's Proxy Statement for the 1993 Annual Meeting of
Shareholders.
(10) Incorporated by reference to the exhibit filed with the Company's Form 10-K for the year ended December 31, 1993.
(11) Incorporated by reference to the exhibit filed with the Company's Form 10-Q for the quarter ended March 31, 1995.
(12) Incorporated by reference to the exhibit filed with the Company's Proxy Statement for the 1995 Annual Meeting of
Shareholders.
(13) Incorporated by reference to the exhibit filed with the Company's Form 10-K for the year ended December 31, 1994.
(14) Incorporated by reference to the exhibit filed with the Company's Proxy Statement for the 1996 Annual Meeting of
Shareholders.
(15) Incorporated by reference to the exhibit filed with the Company's Form 8-K dated May 23, 1996.
(16) Incorporated by reference to the exhibit filed with the Company's Form 10-Q for the quarter ended September 30, 1996.
</TABLE>
55
<PAGE> 56
SIGNATURES
Pursuant to the requirement of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
JMAR INDUSTRIES, INC.
<TABLE>
<S> <C>
Date: March 14, 1997 By: /s/ John S. Martinez
-------------- ---------------------
John S. Martinez
Chairman of the Board and
Chief Executive Officer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ John S. Martinez Chairman of the March 14, 1997
- ----------------------------- Board, Chief --------------
John S. Martinez Executive Officer and
Director
/s/ Dennis E. Valentine Chief Financial March 14, 1997
- ----------------------------- Officer and Chief --------------
Dennis E. Valentine Accounting Officer
/s/ James H. Banister, Jr. Director March 12, 1997
- ----------------------------- --------------
James H. Banister, Jr.
/s/ C. Neil Beer Director March 12, 1997
- ----------------------------- --------------
C. Neil Beer
/s/ Vernon H. Blackman Director March 12, 1997
- ----------------------------- --------------
Vernon H. Blackman
/s/ Barry Ressler Director March 12, 1997
- ----------------------------- --------------
Barry Ressler
/s/ Marvin W. Sepe
- ----------------------------- Director March 14, 1997
Marvin W. Sepe --------------
</TABLE>
56
<PAGE> 57
SCHEDULE II
JMAR INDUSTRIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Additions
--------------------------
Balance at Charged to Balance at
Description Beginning Costs and End of
of Year Expenses Other Deductions Year
---------- --------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
For the year ended December 31, 1996:
Warranty reserve .................. $ 14,729 $ -- $ -- $ 71 $ 14,800
Reserve for inventory obsolescence 171,573 -- (52,597) -- 118,976
Allowance for doubtful accounts ... 18,250 -- -- (1,020) 17,230
---------- --------- ------------ --------- ----------
For the year ended December 31, 1995
Warranty reserve .................. $ 36,548 $ -- $ -- $ (21,819) $ 14,729
Reserve for inventory obsolescence 136,403 (4,900) 47,283 (7,213) 171,573
Allowance for doubtful accounts ... 57,000 -- (38,750) -- 18,250
---------- --------- ------------ --------- ----------
For the year ended December 31, 1994:
Warranty reserve .................. $ 82,273 $ 54,811 $ (26,923)(A) $ (73,613) $ 36,548
Reserve for inventory obsolescence 1,441,640 (64,755) (1,240,482)(B) -- 136,403
Allowance for doubtful accounts ... 66,595 117,000 (20,000)(A) (106,595) 57,000
---------- --------- ------------ --------- ----------
</TABLE>
(A) Existing reserves for Surgilase when sold.
(B) Includes disposal of inventory previously reserved and existing reserves
for Surgilase when sold.
<PAGE> 1
EXHIBIT 10.1
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is dated and effective as of July 1,
1996 by and between California ASIC Technical Services, Inc. a Nevada
corporation, (the "Company"), and Marvin W. Sepe (the "Employee").
WITNESSETH
WHEREAS, the Company desires to retain the services of Employee as Executive
Vice President/General Manager;
WHEREAS, Employee desires to provide his services to the Company, on the terms
and conditions set forth herein;
NOW THEREFORE, in consideration of the mutual promises herein contained, the
parties hereto hereby agree as follows:
1. EMPLOYMENT AND TERM
The Company hereby retains the Employee as Executive Vice President/General
Manager for a term commencing on the date hereof and continuing to and ending
two years thereafter, unless this Agreement is sooner terminated as set forth
herein.
2. POSITION AND DUTIES
Employee agrees to be available to serve as Executive Vice President/General
Manager of the Company, and the Company agrees to employ Employee as Executive
Vice President/General Manager of the Company and to retain him as an employee
for the term of this Agreement and all successive renewals hereof. In addition
to, or in lieu of, serving as Executive Vice President/General Manager, Employee
may also possess such other titles and serve in such other capacities as the
Company shall from time to time determine and shall render such services and
have such duties and responsibilities as may be assigned to him from time to
time by the Company consistent with such positions. Employee shall devote his
full time, attention, and energy to the business of the Company and agrees to
perform faithfully and diligently such duties and responsibilities as may be
assigned to him to the best of his ability.
3. COMPENSATION AND EXPENSES
3.1 For the services to be rendered by the Employee as the Executive Vice
President/General Manager, the Company shall pay to him a salary of no
less than $125,000 per annum, payable bi-weekly in accordance with the
regular payroll schedule of the Company.
1
<PAGE> 2
3.2 The Company shall pay or reimburse the Employee for all
reasonable expenses incurred by him on the business of the Company.
3.3 In addition to the salary set forth in Paragraph 3.1 the Employee shall
be eligible to participate in the profit sharing program for top
management defined in the "Purchase Agreement" between the Company and
JMAR Industries, Inc..
3.4 As an additional inducement to Employee, Employee shall be granted
incentive stock options to purchase: (i) 100,000 shares of Common Stock
of the Company; and (ii) 100,000 shares of Common Stock of JMAR. The
terms of said options shall be consistent with said options being
treated as "incentive stock options" under the Internal Revenue Code of
1986, as amended (the "Tax Code').
3.5 In addition to the grant of options pursuant to Section 3.4 above, CATS
and JMAR shall grant Employee additional incentive stock options as
follows: Contingent upon the Company reporting a Net Profit for the
fiscal period commencing at the date of Closing of the Purchase
Agreement and ended December 31, 1996, on the first day of the fourth
month beginning after the end of said year; Employee shall be granted
incentive stock options to purchase: (i) 25,000 shares of the Company's
Common Stock; and (ii) 25,000 shares of JMAR Common Stock. "Net Profit"
shall be defined as set forth in paragraph 2.1e of the Purchase
Agreement. The terms of said options shall be consistent with said
options being treated as "incentive stock options" under the Tax Code.
The grant of the JMAR Stock Option is conditional upon the approval of
the necessary amendments to JMAR's Employee Stock Option Plan at JMAR's
1996 Annual Shareholders Meeting.
4. INSURANCE PLANS
The Employee shall have the right to participate in all Group Insurance and
other Employee Benefit Plans now in effect or hereafter established by the
Company for the benefit of the class of employees for which he would be a member
for so long as any such Plan is maintained in effect for the benefit of such
class, with Employee's participation or share therein being determined by the
provisions and requirements of the respective Plan.
5. TERMINATION
5.1 This Agreement shall terminate upon the occurrence of any of the
following events: (a) the death of Employee; (b) the incapacity or
disability of Employee, which renders him unable to perform
substantially all of the services
2
<PAGE> 3
contemplated by this Agreement for a continuous period of sixty (60)
days; or (c) the mutual agreement of the parties of this Agreement.
5.2 This Agreement may be terminated by the Company prior to the date
specified in Section 1 hereof on the happening of one or more of the
following events: (a) the commission of any act of fraud, dishonesty,
or embezzlement by Employee; (b) the willful neglect by Employee in the
performance of the services contemplated by this Agreement in such
manner as to provide reasonable cause for terminating his services; or
(c) the breach by the Employee of any of the covenants or obligations
under this Agreement and such breach provides reasonable cause for the
Company to terminate this Agreement; provided that, in order to
terminate this Agreement pursuant to clauses (b) and (c) of this
Section 5.2, the Company shall have given (30) days written notice of
termination to the Employee, and the Employee shall have failed to
fully cure and correct said willful neglect or breach within the thirty
days immediately following such notice.
5.3 This Agreement may be terminated by the Employee prior to the date
specified in Section 1 hereof on thirty (30) days written notice of
termination to the Company if the Company breaches any of its covenants
or obligations under this Agreement and such breach provides reasonable
cause for the Employee to terminate this Agreement.
5.4 In addition to the circumstances under which this Agreement may be
terminated by the Company pursuant to Section 5.2, the Company may
terminate this Agreement at any time, without cause, upon thirty (30)
days written notice of termination to the Employee; provided, however
should the Company terminate this Agreement pursuant to this Section
5.4 prior to the date specified in Section 1 hereof (other than a
termination pursuant to the provisions of Section 5.2), then the
Employee shall become entitled to receive as severance pay an amount
equal to the balance of the compensation that would have been payable
to the Employee pursuant to Section 3.1 hereof during the remainder of
the term specified in Section 1 hereof (subject to earlier termination
on the happening of the event specified in clause (a) of Section 5.1),
payable at the rate and times as such compensation would have been
payable to the Employee had this Agreement not been terminated pursuant
to this Section 5.4. In addition to the payment of such severance pay,
the Company shall also continue in force and maintain all insurance
policies in which Employee participates during the remainder of the
term specified in Section 1 hereof.
5.5 Notwithstanding any termination of the Employee's services hereunder,
all of the covenants of the Employee contained in Sections 6 and 7
shall continue in full force and effect in accordance with their
respective terms.
3
<PAGE> 4
6. CONFIDENTIAL INFORMATION
Concurrently herewith, Employee shall enter into a form of Invention and Secrecy
Agreement substantially similar to the agreement executed by the other key
employees of JMAR or the Company. Paragraphs 6 and 7 of this Agreement are
intended to supplement and not limit or restrict the provisions of such
Invention and Secrecy Agreement. The Employee acknowledges that, in the course
of the performance of his services hereunder, he may become acquainted with
confidential information regarding JMAR or the Company (and companies affiliated
with or owned, operated, or supervised by JMAR or the Company) and their
business, operations, finances, personnel, accounts, customers, and suppliers.
This information may include information relating to persons, firms,
corporations, and other entities which are or become suppliers or customers of
JMAR or the Company (or a company affiliated with or owned, operated, or
supervised by JMAR or the Company). The Employee will not, either during the
term of this Agreement or thereafter, without the prior express written consent
of the Company, disclose or make any use of such confidential information except
as may be required in the course of the performance of his services hereunder.
6.1 The undertakings and obligations of the parties under this Agreement
shall not apply to any proprietary information which:
a. Is disclosed in a printed publication available to the
public, is described in a patent anywhere in the world, or is
otherwise in the public domain at the time of disclosure;
b. Is generally disclosed to third parties by the Company
without restriction on such third parties; or
c. Is approved for release by written authorization of the
Company.
7. PROTECTION OF PROPERTY
All records, files, manuals, lists of customers, blanks, forms, materials,
furnished to the Employee by the Company (or any company affiliated with or
owned, operated, or supervised by the Company), used on their behalf or
generated or obtained during the course of the performance of the Employee's
services hereunder, shall be and remain the property of the Company (or any
company affiliated with or owned, operated, or supervised by the Company, as the
case may be). The Employee shall be a holder thereof for the sole use and
benefit of the Company (or any company affiliated with or owned, operated, or
supervised by the Company, as the case may be) and shall safely keep and
preserve such property, except as consumed in the normal business operations of
the Company (or any company affiliated with or owned, operated, or supervised by
the Company, as the case may be). The Employee acknowledges that this property
is confidential and is not readily accessible to the Company's competitors. Upon
termination of this Agreement hereunder, the Employee shall immediately deliver
4
<PAGE> 5
to the Company, or its authorized representative, all such property, including
all copies, remaining in the Employee's possession or control.
8. INDEMNIFICATION
The Company will protect, defend, indemnify, and hold harmless Employee from and
against any and all demands, claims, recoveries, obligations, losses, damages,
and liabilities, and all related costs, expenses (including reasonable
attorney's fees), interest and penalties, except for those liabilities related
to the obligations assumed by the Employee pursuant to the Purchase Agreement,
which Employee shall incur or suffer which arise from, result from, or relate to
the performance of his services under this Agreement, unless a judgment or other
final adjudication adverse to the Employee shall establish that he committed
acts of active and deliberate dishonesty, which acts were material to the cause
of action so adjudicated.
9. ASSIGNMENT
Neither the rights nor obligations under this Agreement may be assigned,
transferred, pledged, or hypothecated by any party hereto, except that this
Agreement shall be binding upon and inure to the benefit of any successor of the
Company, whether by merger, purchase, or otherwise, and the Company may assign
this Agreement to any subsidiary or affiliate of the Company.
10. NOTICES
Any notice required or permitted to be given under this Agreement shall be
deemed to have been duly given if in writing and if personally delivered or sent
by registered or certified mail, return receipt requested, with postage prepaid.
If to the Company:
California ASIC Technical Services, Inc.
13845-B Alton Parkway
Irvine, California 92718
With a copy to:
JMAR Industries, Inc.
3956 Sorrento Valley Blvd., Suite D
San Diego, California 92121
ATTN: Dennis Valentine
5
<PAGE> 6
If to the Employee:
Marvin W. Sepe
24701 Woodhill Lane
Lake Forest, California 92630
Any party may change the address to which notices are to be sent by giving ten
(10) days written notice of such change of address to the other party in the
manner provided for giving notice. Notices will be considered delivered on the
day of personal delivery on the date of deposit in the United States mail in the
manner above provided for giving notice by mail.
11. WAIVER
The waiver by any party hereto of a breach of any of the provisions of this
Agreement by the other party shall not operate or be construed as a waiver of
any subsequent breach hereof by such party.
12. SEVERABILITY
If any one or more covenants, agreements, or provisions herein contained shall
be held or determined for any reason whatsoever to be invalid or unenforceable,
either in whole or in part, then such covenants, agreements, or provisions, or
portions thereof, shall be null and void and shall be deemed separable from the
remaining covenants, agreements, or provisions hereof and shall in no way affect
the validity of any of the other provisions hereof.
13. ATTORNEY'S FEES
The prevailing party in any litigation concerning the enforcement or
interpretation of this Agreement shall be entitled to recover reasonable costs
and attorney's fees.
14. CHOICE OF LAW
This Agreement shall be governed by and construed in accordance with the laws of
the State of California.
15. ENTIRE AGREEMENT
This Agreement contains the entire agreement of the parties with respect to the
transactions contemplated hereby, and no party shall be liable or bound except
as expressly provided herein.
6
<PAGE> 7
16. HEADINGS
The subject headings of the sections of this Agreement are included for the
purpose of convenience only and shall not affect the construction or
interpretation of any term or provision hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set
forth below.
California ASIC Technical Services, Inc:
<TABLE>
<S> <C> <C>
By: /s/ John S. Martinez Date: 7/1/96
---------------------------- ---------------------
John S. Martinez, Ph.D.
Chairman of the Board
"Company"
By: /s/ Marvin W. Sepe Date: 7/1/96
---------------------------- ----------------------
Marvin W. Sepe
</TABLE>
<PAGE> 1
3
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is dated and effective as of May 23,
1996 by and between California ASIC Technical Services, Inc. a Nevada
corporation, (the "Company"), and Edwin Barrowcliff (the "Employee").
WITNESSETH
WHEREAS, the Company desires to retain the services of Employee as President and
Chief Executive Officer ("CEO");
WHEREAS, Employee desires to provide his services to the Company, on the terms
and conditions set forth herein;
NOW THEREFORE, in consideration of the mutual promises herein contained, the
parties hereto hereby agree as follows:
1. EMPLOYMENT AND TERM
The Company hereby retains the Employee as President and CEO, for a term
commencing on the date hereof and continuing to and ending on December 31, 1998,
unless this Agreement is sooner terminated as set forth herein.
2. POSITION AND DUTIES
Employee agrees to be available to serve as President and CEO of the Company,
and the Company agrees to employ Employee as President and CEO of the Company
and to retain him as an employee for the term of this Agreement and all
successive renewals hereof. In addition to, or in lieu of, serving as President
and CEO, Employee may also possess such other titles and serve in such other
capacities as the Company shall from time to time determine and shall render
such services and have such duties and responsibilities as may be assigned to
him from time to time by the Company consistent with such positions. Employee
shall devote his full time, attention, and energy to the business of the Company
and agrees to perform faithfully and diligently such duties and responsibilities
as may be assigned to him to the best of his ability.
3. COMPENSATION AND EXPENSES
3.1 For the services to be rendered by the Employee as President and CEO,
the Company shall pay to him a salary of no less than $80,000 per
annum, payable bi-weekly in accordance with the regular payroll
schedule of the Company.
3.2 The Company shall pay or reimburse the Employee for all
reasonable expenses incurred by him on the business of the Company.
1
<PAGE> 2
3.3 In addition to the salary set forth in Paragraph 3.1 the Employee shall
be eligible to participate in the profit sharing program for top
management defined in the "Purchase Agreement" between the Company and
JMAR Industries, Inc.
4. INSURANCE PLANS
The Employee shall have the right to participate in all Group Insurance and
other Employee Benefit Plans now in effect or hereafter established by the
Company for the benefit of the class of employees for which he would be a member
for so long as any such Plan is maintained in effect for the benefit of such
class, with Employee's participation or share therein being determined by the
provisions and requirements of the respective Plan.
5. TERMINATION
5.1 This Agreement shall terminate upon the occurrence of any of the
following events: (a) the death of Employee; (b) the incapacity or
disability of Employee, which renders him unable to perform
substantially all of the services contemplated by this Agreement for a
continuous period of sixty (60) days; or (c) the mutual agreement of
the parties of this Agreement.
5.2 This Agreement may be terminated by the Company prior to the date
specified in Section 1 hereof on the happening of one or more of the
following events: (a) the commission of any act of fraud, dishonesty,
or embezzlement by Employee; (b) the willful neglect by Employee in the
performance of the services contemplated by this Agreement in such
manner as to provide reasonable cause for terminating his services; or
(c) the breach by the Employee of any of the covenants or obligations
under this Agreement and such breach provides reasonable cause for the
Company to terminate this Agreement; provided that, in order to
terminate this Agreement pursuant to clauses (b) and (c) of this
Section 5.2, the Company shall have given (30) days written notice of
termination to the Employee, and the Employee shall have failed to
fully cure and correct said willful neglect or breach within the thirty
days immediately following such notice.
5.3 This Agreement may be terminated by the Employee prior to the date
specified in Section 1 hereof on thirty (30) days written notice of
termination to the Company if the Company breaches any of its covenants
or obligations under this Agreement and such breach provides reasonable
cause for the Employee to terminate this Agreement.
5.4 In addition to the circumstances under which this Agreement may be
terminated by the Company pursuant to Section 5.2, the Company may
terminate this Agreement at any time, without cause, upon thirty (30)
days written notice of termination to the Employee; provided, however
should the Company terminate this Agreement pursuant to this Section
5.4 prior to the date specified in Section
2
<PAGE> 3
1 hereof (other than a termination pursuant to the provisions of
Section 5.2), then the Employee shall become entitled to receive as
severance pay an amount equal to the balance of the compensation that
would have been payable to the Employee pursuant to Section 3.1 hereof
during the remainder of the term specified in Section 1 hereof (subject
to earlier termination on the happening of the event specified in
clause (a) of Section 5.1), payable at the rate and times as such
compensation would have been payable to the Employee had this Agreement
not been terminated pursuant to this Section 5.4. In addition to the
payment of such severance pay, the Company shall also continue in force
and maintain all insurance policies in which Employee participates
during the remainder of the term specified in Section 1 hereof.
5.5 In the event of termination of this Agreement pursuant to Section 5.1
(c) or 5.3, the Employee agrees to assist the Company in an orderly
transition of his replacement, including the transfer of all knowledge
of the Employee regarding the CATS Gate Array Technology as defined in
the Gate Array Manufacturing and Sales Agreement dated as of May 17,
1996 by and between IMP Incorporated and the Company.
5.6 Notwithstanding any termination of the Employee's services hereunder,
all of the covenants of the Employee contained in Sections 6 and 7
shall continue in full force and effect in accordance with their
respective terms.
6. CONFIDENTIAL INFORMATION
Concurrently herewith, Employee shall enter into a form of Invention and Secrecy
Agreement substantially similar to the agreement executed by the other key
employees of JMAR or the Company. Paragraphs 6 and 7 of this Agreement are
intended to supplement and not limit or restrict the provisions of such
Invention and Secrecy Agreement. The Employee acknowledges that, in the course
of the performance of his services hereunder, he may become acquainted with
confidential information regarding JMAR or the Company (and companies affiliated
with or owned, operated, or supervised by JMAR or the Company) and their
business, operations, finances, personnel, accounts, customers, and suppliers.
This information may include information relating to persons, firms,
corporations, and other entities which are or become suppliers or customers of
JMAR or the Company (or a company affiliated with or owned, operated, or
supervised by JMAR or the Company). The Employee will not, either during the
term of this Agreement or thereafter, without the prior express written consent
of the Company, disclose or make any use of such confidential information except
as may be required in the course of the performance of his services hereunder.
6.1 The undertakings and obligations of the parties under this Agreement
shall not apply to any proprietary information which:
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<PAGE> 4
a. Is disclosed in a printed publication available to the
public, is described in a patent anywhere in the world, or is
otherwise in the public domain at the time of disclosure;
b. Is generally disclosed to third parties by the Company
without restriction on such third parties; or
c. Is approved for release by written authorization of the
Company.
7. PROTECTION OF PROPERTY
All records, files, manuals, lists of customers, blanks, forms, materials,
furnished to the Employee by the Company (or any company affiliated with or
owned, operated, or supervised by the Company), used on their behalf or
generated or obtained during the course of the performance of the Employee's
services hereunder, shall be and remain the property of the Company (or any
company affiliated with or owned, operated, or supervised by the Company, as the
case may be). The Employee shall be a holder thereof for the sole use and
benefit of the Company (or any company affiliated with or owned, operated, or
supervised by the Company, as the case may be) and shall safely keep and
preserve such property, except as consumed in the normal business operations of
the Company (or any company affiliated with or owned, operated, or supervised by
the Company, as the case may be). The Employee acknowledges that this property
is confidential and is not readily accessible to the Company's competitors. Upon
termination of this Agreement hereunder, the Employee shall immediately deliver
to the Company, or its authorized representative, all such property, including
all copies, remaining in the Employee's possession or control.
8. INDEMNIFICATION
The Company will protect, defend, indemnify, and hold harmless Employee from and
against any and all demands, claims, recoveries, obligations, losses, damages,
and liabilities, and all related costs, expenses (including reasonable
attorney's fees), interest and penalties, except for those liabilities related
to the obligations assumed by the Employee pursuant to the Purchase Agreement,
which Employee shall incur or suffer which arise from, result from, or relate to
the performance of his services under this Agreement, unless a judgment or other
final adjudication adverse to the Employee shall establish that he committed
acts of active and deliberate dishonesty, which acts were material to the cause
of action so adjudicated.
9. ASSIGNMENT
Neither the rights nor obligations under this Agreement may be assigned,
transferred, pledged, or hypothecated by any party hereto, except that this
Agreement shall be binding upon and inure to the benefit of any successor of the
Company, whether by
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<PAGE> 5
merger, purchase, or otherwise, and the Company may assign this Agreement to any
subsidiary or affiliate of the Company.
10. NOTICES
Any notice required or permitted to be given under this Agreement shall be
deemed to have been duly given if in writing and if personally delivered or sent
by registered or certified mail, return receipt requested, with postage prepaid.
If to the Company:
California ASIC Technical Services, Inc.
13845-B Alton Parkway
Irvine, California 92718
With a copy to:
JMAR Industries, Inc.
3956 Sorrento Valley Blvd., Suite D
San Diego, California 92121
ATTN: Dennis Valentine
If to the Employee:
Edwin Barrowcliff
24701 Woodhill Lane
Lake Forest, California 92630
Any party may change the address to which notices are to be sent by giving ten
(10) days written notice of such change of address to the other party in the
manner provided for giving notice. Notices will be considered delivered on the
day of personal delivery on the date of deposit in the United States mail in the
manner above provided for giving notice by mail.
11. WAIVER
The waiver by any party hereto of a breach of any of the provisions of this
Agreement by the other party shall not operate or be construed as a waiver of
any subsequent breach hereof by such party.
12. SEVERABILITY
If any one or more covenants, agreements, or provisions herein contained shall
be held or determined for any reason whatsoever to be invalid or unenforceable,
either in whole or in part, then such covenants, agreements, or provisions, or
portions thereof, shall be
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<PAGE> 6
null and void and shall be deemed separable from the remaining covenants,
agreements, or provisions hereof and shall in no way affect the validity of any
of the other provisions hereof.
13. ATTORNEY'S FEES
The prevailing party in any litigation concerning the enforcement or
interpretation of this Agreement shall be entitled to recover reasonable costs
and attorney's fees.
14. CHOICE OF LAW
This Agreement shall be governed by and construed in accordance with the laws of
the State of California.
15. ENTIRE AGREEMENT
This Agreement contains the entire agreement of the parties with respect to the
transactions contemplated hereby, and no party shall be liable or bound except
as expressly provided herein.
16. HEADINGS
The subject headings of the sections of this Agreement are included for the
purpose of convenience only and shall not affect the construction or
interpretation of any term or provision hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set
forth below.
California ASIC Technical Services, Inc:
By: /s/ John S. Martinez Date: 5/23/96
----------------------------- --------------
John S. Martinez, Ph.D.
Chairman of the Board
"Company"
By: /s/ Edwin Barrowcliff Date: 5/23/96
----------------------------- --------------
Edwin Barrowcliff
6
<PAGE> 1
EXHIBIT 10.3
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT ("Agreement")
is dated and effective as of May 1, 1996, by and between JMAR Industries, Inc.,
a Delaware corporation (the "Company") and Dr. John S. Martinez (the
"Employee").
W I T N E S S E T H:
WHEREAS, the Company desires to continue to retain the
services of Dr. John S. Martinez as Chief Executive Officer; and
WHEREAS, Dr. Martinez desires to provide his services to the
Company, on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual promises herein
contained, the parties hereto hereby agree as follows:
1. Employment and Term. The Company hereby extends the
period of employment of the Employee as Chief Executive Officer of the Company,
for a term commencing on the date hereof and continuing to and ending on
December 31, 1999, unless this Agreement is sooner terminated as set forth
herein. This Agreement shall be automatically renewable thereafter for
successive one year terms unless either party shall deliver written notice to
the other party in accordance with Paragraph 10 hereof of its intention not to
so renew no later than 60 days
<PAGE> 2
prior to the end of the term of the Agreement then in effect. In the event the
Company delivers notice of its intention not to so renew, the delivery of such
notice shall be deemed a termination under Section 5.5 of this Agreement.
2. Position and Duties. Dr. Martinez agrees to be
available to serve as Chief Executive Officer of the Company, and the Company
agrees to elect Dr. Martinez as Chief Executive Officer of the Company and to
retain him as Chief Executive Officer for the term of this Agreement and all
successive renewals hereof. In addition to serving as Chief Executive Officer,
Dr. Martinez shall also possess such other titles and serve in such other
capacities as the Company shall from time to time determine and shall render
such services and have such duties and responsibilities as may be assigned to
him from time to time by the Company consistent with such positions. Dr.
Martinez shall devote such time, attention and energy to the business of the
Company as he in his sole discretion shall determine is necessary and agrees to
perform faithfully and diligently such duties and responsibilities as may be
assigned to him to the best of his ability. The Company acknowledges and
agrees that Dr. Martinez may serve as a consultant or in any other capacity for
any other business as Dr. Martinez in his sole discretion may determine.
2
<PAGE> 3
3. Compensation and Expenses.
3.1 For the services to be rendered by the Employee as Chief
Executive Officer, the Company shall pay to him a salary which is no less than
a rate of $175,000 per annum, payable biweekly, in accordance with the regular
payroll schedule of the Company. Said salary may be increased annually at the
discretion of the Board of Directors.
3.2 The Company shall continue to pay or reimburse the
Employee for all reasonable expenses incurred by him on the business of the
Company.
3.3 The Company will continue to provide the Employee with an
auto lease allowance of $600 per month.
4. Insurance Plans. The Employee shall have the right to
participate in all group insurance and other employee benefit plans now in
effect or hereafter established by the Company for the benefit of the class of
employees of which he would be a member for so long as any such plan is
maintained in effect for the benefit of such class, with Dr. Martinez's
participation or share therein being determined by the provisions and
requirements of the respective plan.
5. Termination.
5.1 This Agreement shall terminate upon the occurrence of
either of the following events: (a) the death of Dr. Martinez; (b) the
incapacity or disability of Dr. Martinez which
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<PAGE> 4
renders him unable to perform substantially all of the services contemplated by
this Agreement for a continuous period of ninety days; or (c) the mutual
agreement of the parties to this Agreement.
5.2 This Agreement may be terminated by the Company prior to
the date specified in Section 1 hereof on the happening of one or more of the
following events: (a) The commission of an act of fraud, dishonesty or
embezzlement by Dr. Martinez; (b) the willful neglect by Dr. Martinez in the
performance of the services contemplated by this Agreement in such manner as to
provide reasonable cause for terminating his services; or (c) the breach by the
Employee of any of the covenants or obligations under this Agreement and such
breach provides reasonable cause for the Company to terminate this Agreement;
provided that, in order to terminate this Agreement pursuant to clauses (b) and
(c) of this Section 5.2, the Company shall have given thirty days written
notice of termination to the Employee, and the Employee shall have failed to
fully cure or correct such willful neglect or breach within the thirty days
immediately following such notice.
5.3 This Agreement may be terminated by the Employee prior to
the date specified in Section 1 hereof on thirty days written notice of
termination to the Company if the Company breaches any of its covenants or
obligations under this Agreement
4
<PAGE> 5
and such breach provides reasonable cause for the Employee to terminate this
Agreement.
5.4 In addition to the circumstances under which this
Agreement may be terminated by the Employee pursuant to Section 5.3, the
Employee may terminate this Agreement at any time, without cause, upon thirty
days written notice of termination to the Company.
5.5 In addition to the circumstances under which this
Agreement may be terminated by the Company pursuant to Section 5.2, the Company
may terminate this Agreement at any time, without cause, upon thirty days
written notice of termination to the Employee; provided, however, should the
Company terminate this Agreement pursuant to this Section 5.5 prior to the date
specified in Section 1 hereof (as extended by any automatic renewals hereof)
(other than a termination pursuant to the provisions of Section 5.2), then the
Employee shall 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 the Employee pursuant to Section 3.1 hereof during the
remainder of the term specified in Section 1 hereof (subject to earlier
termination on the happening of the event specified in clause (a) of Section
5.1), payable at the rate and times as such compensation would have been
payable to the Employee had this Agreement not been terminated pursuant to
5
<PAGE> 6
this Section 5.5. Said severance pay period was established pursuant to a
Resolution of the Board of Directors on September 28, 1989 as partial
consideration for Dr. Martinez' assignment to the Corporation of the rights to
the "California Jamar, Inc." name. In addition to the payment of such
severance pay, the Company shall also continue in force and maintain all
insurance policies in which Dr. Martinez participates at the time of such
termination until the later of two years following such termination and
December 31, 1999.
5.6 Notwithstanding any termination of the Employee's
services hereunder, all of the covenants of the Employee contained in Sections
6 and 7 shall continue in full force and effect in accordance with their
respective terms.
6. Confidential Information. Dr. Martinez has previously
entered into an Invention and Secrecy Agreement which remains in full force and
effect in accordance with the terms thereof. Paragraphs 6 and 7 of this
Agreement are intended to supplement and not limit or restrict the provisions of
such Invention and Secrecy Agreement. The Employee acknowledges that, in the
course of the performance of his services hereunder, he may become acquainted
with confidential information regarding the Company (and companies affiliated
with or owned, operated or supervised by the Company) and their business,
operations, finances, personnel, accounts, customers and suppliers. This
6
<PAGE> 7
information may include information relating to persons, firms, corporations
and other entities which are or become suppliers or customers of the Company
(or a company affiliated with or owned, operated or supervised by the Company).
The Employee will not, either during the term of this Agreement or for a period
of one year thereafter, without the prior express written consent of the
Company, disclose or make any use of such confidential information except as
may be required in the course of the performance of his services hereunder.
7. Protection of Property. All records, files, manuals, lists
of customers, blanks, forms, materials, supplies, computer programs and other
materials furnished to the Employee by the Company (or any company affiliated
with or owned, operated or supervised by the Company), used on their behalf or
generated or obtained during the course of the performance of the Employee's
services hereunder, shall be and remain the property of the Company (or any
company affiliated with or owned, operated or supervised by the Company, as the
case
7
<PAGE> 8
may be). The Employee shall be a holder thereof for the sole use and benefit
of the Company (or any company affiliated with or owned, operated or supervised
by the Company, as the case may be), and shall safely keep and preserve such
property, except as consumed in the normal business operations of the Company
(or any company affiliated with or owned, operated or supervised by the
Company, as the case may be). The Employee acknowledges that this property is
confidential and is not readily accessible to the Company's competitors. Upon
termination of this Agreement hereunder, the Employee shall immediately deliver
to the Company, or its authorized representative, all such property, including
all copies, remaining in the Employee's possession or control.
8. Indemnification. The Company will protect, defend,
indemnify and hold harmless Dr. Martinez from and against any and all demands,
claims, recoveries, obligations, losses, damages and liabilities and all
related costs, expenses (including reasonable attorneys' fees), interest and
penalties which Dr. Martinez shall incur or suffer which arise from, result
from or relate to the performance of his services under this Agreement.
Furthermore, the Company agrees to use its best efforts to maintain in effect a
Directors' and Officers' Liability Insurance policy having coverage limits of
no less than $1,000,000 per incident.
9. Assignment. Neither the rights nor obligations under this
Agreement may be assigned, transferred, pledged or hypothecated by any party
hereto, except that this Agreement shall be binding upon and inure to the
benefit of any successor of the Company, whether by merger, purchase or
otherwise and the Company may assign this Agreement to any subsidiary or
affiliate of the Company.
8
<PAGE> 9
10. Notices. Any notice required or permitted to be
given under this Agreement shall be deemed to have been duly given if in
writing and if personally delivered or sent by registered or certified mail,
return receipt requested, with postage prepaid.
If to the Company:
JMAR Industries, Inc.
3956 Sorrento Valley Blvd.
San Diego, California 92121
Attention: President
If to the Employee:
Dr. John S. Martinez
P. O. Box 1030
Del Mar, California 92014
Any party may change the address to which notices are to be sent to it or him
by giving ten days written notice of such change of address to the other party
in the manner above provided for giving notice. Notices will be considered
delivered on the date of personal delivery or on the date of deposit in the
United States mail in the manner above provided for giving notice by mail.
11. Waiver. The waiver by any party hereto of a breach of any
of the provisions of this Agreement by the other party shall not operate or be
construed as a waiver of any subsequent breach hereof by such party.
12. Severability. If any one or more covenants, agreements or
provisions herein contained shall be held or
9
<PAGE> 10
determined for any reason whatsoever to be invalid or unenforceable, either in
whole or in part, then such covenants, agreements or provisions, or portion
thereof, shall be null and void and shall be deemed separable from the
remaining covenants, agreements or provisions hereof and shall in no way affect
the validity of any of the other provisions hereof.
13. Attorneys' Fees. The prevailing party in any
litigation concerning the enforcement or interpretation of this Agreement shall
be entitled to recover reasonable costs and attorneys' fees.
14. Choice of Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
15. Entire Agreement. This Agreement contains the entire
agreement of the parties with respect to the transactions contemplated hereby,
and no party shall be liable or bound except as expressly provided herein.
16. Headings. The subject headings of sections of this
Agreement are included for the purposes of convenience only
10
<PAGE> 11
and shall not affect the construction or interpretation of any term or
provision hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date set forth above.
JMAR INDUSTRIES, INC.
By:/s/ Dennis E. Valentine
-------------------------------------------
Dennis E. Valentine,
Chief Financial Officer
/s/ John S. Martinez
- -------------------------------------------
John S. Martinez, Ph.D, Employee
11
<PAGE> 1
EXHIBIT 10.11
STANDARD INDUSTRIAL LEASE -- GROSS
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
[LOGO]
1. PARTIES. This Lease, dated, for reference purposes only, August 21, 1996, is
made by and between THE MANUFACTURERS LIFE INSURANCE COMPANY (herein called
"Lessor") and JMAR TECHNOLOGY, CO. (herein called "Lessee").
2. PREMISES. Lessor hereby leases to Lessee and Lessee leases from Lessor for
the term, at the rental, and upon all of the conditions set forth herein, that
certain real property situated in the County of San Diego State of California,
commonly known as 3956 Sorrento Valley Boulevard, Suites C, D, E, F, San Diego,
CA 92121 and described as approximately 9,280 Square Feet Rentable (SFR) in the
Torrey Pines Business Park. Said real property including the land and all
improvements therein, is herein called "the Premises".
3. TERM.
3.1 TERM. The term of this Lease shall be for Twelve (12) Months
commencing on September 1, 1996 and ending on August 31, 1997 unless sooner
terminated pursuant to any provision hereof.
3.2 DELAY IN POSSESSION. Notwithstanding said commencement date, if for
any reason Lessor cannot deliver possession of the Premises to Lessee on said
date, Lessor shall not be subject to any liability therefor, nor shall such
failure affect the validity of this Lease or the obligations of Lessee hereunder
or extend the term hereof, but in such case, Lessee shall not be obligated to
pay rent until possession of the Premises is tendered to Lessee; provided,
however, that if Lessor shall not have delivered possession of the Premises
within sixty (60) days from said commencement date, Lessee may, at Lessee's
option, by notice in writing to Lessor within ten (10) days thereafter, cancel
this Lease, in which event the parties shall be discharged from all obligations
hereunder, provided further, however, that if such written notice of Lessee is
not received by Lessor within said ten (10) day period, Lessee's right to cancel
this Lease hereunder shall terminate and be of no further force or effect.
3.3 EARLY POSSESSION. If Lessee occupies the Premises prior to said
commencement date, such occupancy shall be subject to all provisions hereof,
such occupancy shall not advance the termination date, and Lessee shall pay rent
for such period at the initial monthly rates set forth below.
4. RENT. Lessee shall pay to Lessor as rent for the Premises, monthly payments
of $5,661.00, in advance, on the first day of each month of the term hereof.
Lessee shall pay Lessor on September 1, 1996, $ 5,661.00, as rent for
September 1, 1996 through September 30, 1996. Basic Rent for the term of the
Lease is $5,661.00 per month.
Rent for any period during the term hereof which is for less than one month
shall be a pro rata portion of the monthly installment. Rent shall be payable in
lawful money of the United States to Lessor at the address stated herein or to
such other persons or at such other places as Lessor may designate in writing.
5. SECURITY DEPOSIT. Lessee has on deposit with Lessor $5,661.00 as security for
Lessee's faithful performance of Lessee's obligations hereunder. If Lessee fails
to pay rent or other charges due hereunder, or otherwise defaults with respect
to any provision of this Lease, Lessor may use, apply or retain all or any
portion of said deposit for the payment of any rent or other charge in default
or for the payment of any other sum to which Lessor may become obligated by
reason of Lessee's default, or to compensate Lessor for any loss or damage which
Lessor may suffer thereby. If Lessor so uses or applies all or any portion of
said deposit, Lessee shall within ten (10) days after written demand therefor
deposit cash with Lessor in an amount sufficient to restore said deposit to the
full amount hereinabove stated and Lessee's failure to do so shall be a material
breach of this Lease. If the monthly rent shall, from time to time, increase
during the term of this Lease, Lessee shall thereupon deposit with Lessor
additional security deposit so that the amount of security deposit held by
Lessor shall at all times bear the same proportion to current rent as the
original security deposit bears to the original monthly rent set forth in
paragraph 4 hereof. Lessor shall not be required to keep said deposit separate
from its general accounts. If Lessee performs all of Lessee's obligations
hereunder, said deposit, or so much thereof as has not theretofore been applied
by Lessor, shall be returned, without payment of interest or other increment for
its use, to Lessee (or, at Lessor's option, to the last assignee, if any, of
Lessee's interest hereunder) at the expiration of the term hereof, and after
Lessee has vacated the Premises. No trust relationship is created herein between
Lessor and Lessee with respect to said Security Deposit.
6. USE.
6.1 USE. The Premises shall be used and occupied only for light
manufacturing, office, testing, warehouse, research or any other use which is
reasonably comparable and for no other purpose.
6.2 COMPLIANCE WITH LAW.
(a) Lessor warrants to Lessee that the Premises, in its state
existing on the date that the Lease term commences, but without regard to the
use for which Lessee will use the Premises, does not violate any covenants or
restrictions of record, or any applicable building code, regulation or ordinance
in effect on such Lease term commencement date. In the event it is determined
that this warranty has been violated, then it shall be the obligation of the
Lessor, after written notice from Lessee, to promptly, at Lessor's sole cost and
expense, rectify any such violation. In the event Lessee does not give to Lessor
written notice of the violation of this warranty within six months from the date
that the Lease term commences, the correction of same shall be the obligation of
the Lessee at Lessee's sole cost. The warranty contained in this paragraph
6.2(a) shall be of no force or effect if, prior to the date of this Lease,
Lessee was the owner or occupant of the Premises, and, in such event, Lessee
shall correct any such violation at Lessee's sole cost.
(b) Except as provided in paragraph 6.2(a), Lessee shall, at
Lessee's expense, comply promptly with all applicable statutes, ordinances,
rules, regulations, orders, covenants and restrictions of record, and
requirements in effect during the term or any part of the term hereof,
regulating the use by Lessee of the Premises. Lessee shall not use nor permit
the use of the Premises in any manner that will tend to create waste or a
nuisance or, if there shall be more than one tenant in the building containing
the Premises, shall tend to disturb such other tenants.
6.3 CONDITION OF PREMISES.
(a) Lessor shall deliver the Premises to Lessee clean and free
of debris on Lease commencement date (unless Lessee is already in possession)
and Lessor further warrants to Lessee that the plumbing, lighting, air
conditioning, heating, and loading doors in the Premises shall be in good
operating condition on the Lease commencement date. In the event that it is
determined that this warranty has been violated, then it shall be the obligation
of Lessor, after receipt of written notice from Lessee setting forth with
specificity the nature of the violation, to promptly, at Lessor's sole cost,
rectify such violation. Lessee's failure to give such written notice to Lessor
within thirty (30) days after the Lease commencement date shall cause the
conclusive presumption that Lessor has complied with all of Lessor's obligations
hereunder. The warranty contained in this paragraph 6.3(a) shall be of no force
or effect if prior to the date of this Lease, Lessee was the owner or occupant
of the Premises. (b) Except as otherwise provided in this Lease, Lessee hereby
accepts the Premises in their condition existing as of the Lease commencement
date or the date that Lessee takes possession of the Premises, whichever is
earlier, subject to all applicable zoning, municipal, county and state laws,
ordinances and regulations governing and regulating the use of the Premises, and
any covenants or restrictions of record, and accepts this Lease subject thereto
and to all matters disclosed thereby and by any exhibits attached hereto. Lessee
acknowledges that neither Lessor nor Lessor's agent has made any representation
or warranty as to the present or future suitability of the Premises for the
conduct of Lessee's business.
7. MAINTENANCE, REPAIRS AND ALTERATIONS.
7.1 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs 6,
7.2, and 9 and except for damage caused by any negligent or intentional act or
omission of Lessee, Lessee's agents, employees, or invitees in which event
Lessee shall repair the damage, Lessor, at Lessor's expense, shall keep in good
order, condition and repair the foundations, exterior walls and the exterior
roof of the Premises. Lessor shall not, however, be obligated to paint such
exterior, nor shall Lessor be required to maintain the interior surface of
exterior walls, windows, doors, or plate glass. Lessor shall have no obligation
to make repairs under this Paragraph 7.1 until a reasonable time after receipt
of written notice of the need for such repairs. Lessee expressly waives the
benefits of any statute now or hereafter in effect which would otherwise afford
Lessee the right to make repairs at Lessor's expense or to terminate this Lease
because of Lessor's failure to keep the Premises in good order, condition and
repair.
7.2 LESSEE'S OBLIGATIONS.
(a) Subject to the provisions of Paragraph 6, 7.1 and 9, Lessee,
at Lessee's expense, shall keep in good order, condition and repair the Premises
and every part thereof (whether or not the damaged portion of the Premises or
the means of repairing the same are reasonably or readily accessible to Lessee)
including, without limiting the generality of the foregoing, all plumbing,
heating, air conditioning. (Lessee shall procure and
Initials: DEV
________
BRP
________
<PAGE> 2
maintain, at Lessee's expense, an air conditioning system maintenance contract)
ventilating, electrical and lighting facilities and equipment within the
Premises, fixtures, interior walls and interior surface of exterior walls,
ceilings, windows, doors, plate glass, and skylights, located within the
Premises.
(b) If Lessee fails to perform Lessee's obligations under this
Paragraph 7.2 or under any other paragraph of this Lease, Lessor may at Lessor's
option enter upon the Premises after 10 days' prior written notice to Lessee
(except in the case of emergency, in which case no notice shall be required),
perform such obligations on Lessee's behalf and put the Premises in good order,
condition and repair, and the cost thereof together with interest thereon at the
maximum rate then allowable by law shall be due and payable as additional rent
to Lessor together with Lessee's next rental installment.
(c) On the last day of the term hereof, or on any sooner
termination, Lessee shall surrender the Premises to Lessor in the same condition
as received, ordinary wear and tear excepted, clean and free of debris. Lessee
shall repair any damage to the Premises occasioned by the installation or
removal of its trade fixtures, furnishings and equipment. Notwithstanding
anything to the contrary otherwise stated in this Lease, Lessee shall leave the
air lines, power panels, electrical distribution systems, lighting fixtures,
space heaters, air conditioning, plumbing and fencing on the premises in good
operating condition.
7.3 ALTERATIONS AND ADDITIONS.
(a) Lessee shall not, without Lessor's prior written consent
make any alterations, improvements, additions, or Utility Installations in, on
or about the Premises, except for nonstructural alterations not exceeding
$2,500 in cumulative costs during the term of this Lease. In any event,
whether or not in excess of $2,500 in cumulative cost, Lessee shall make no
change or alteration to the exterior of the Premises nor the exterior of the
building(s) on the Premises without Lessor's prior written consent. As used in
this Paragraph 7.3 the term "Utility Installation" shall mean carpeting, window
coverings, air lines, power panels, electrical distribution systems, lighting
fixtures, space heaters, air conditioning, plumbing, and fencing. Lessor may
require that Lessee remove any or all of said alterations, improvements,
additions or Utility Installations at the expiration of the term, and restore
the Premises to their prior condition. Lessor may require Lessee to provide
Lessor, at Lessee's sole cost and expense, a lien and completion bond in an
amount equal to one and one-half times the estimated cost of such improvements,
to insure Lessor against any liability for mechanic's and materialmen's liens
and to insure completion of the work. Should Lessee make any alterations,
improvements, additions or Utility Installations without the prior approval of
Lessor, Lessor may require that Lessee remove any or all of the same.
(b) Any alterations, improvements, additions or Utility
Installations in, or about the Premises that Lessee shall desire to make and
which requires the consent of the Lessor shall be presented to Lessor in
written form, with proposed detailed plans. If Lessor shall give its consent,
the consent shall be deemed conditioned upon Lessee acquiring a permit to do so
from appropriate governmental agencies, the furnishing of a copy thereof to
Lessor prior to the commencement of the work and the compliance by Lessee of
all conditions of said permit in a prompt and expeditious manner.
(c) Lessee shall pay, when due, all claims for labor or
materials furnished or alleged to have been furnished to or for Lessee at or for
use in the Premises, which claims are or may be secured by any mechanics' or
materialmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than ten (10) days' notice prior to the commencement of any
work in the Premises, and Lessor shall have the right to post notices of
non-responsibility in or on the Premises as provided by law. If Lessee shall,
in good faith, contest the validity of any such lien, claim or demand, then
Lessee shall, at its sole expense defend itself and Lessor against the same and
shall pay and satisfy any such adverse judgment that may be rendered thereon
before the enforcement thereof against the Lessor or the Premises, upon the
condition that if Lessor shall require, Lessee shall furnish to Lessor a surety
bond satisfactory to Lessor in an amount equal to such contested lien claim or
demand indemnifying Lessor against liability for the same and holding the
Premises free from the effect of such lien or claim. In addition, Lessor may
require Lessee to pay Lessor's attorneys fees and costs in participating in such
action if Lessor shall decide it is to its best interest to do so.
(d) Unless Lessor requires their removal, as set forth in
Paragraph 7.3(a), all alterations, improvements, additions, and Utility
Installations (whether or not such Utility Installations constitute trade
fixtures of Lessee), which may be made on the Premises, shall become the
property of Lessor and remain upon and be surrendered with the Premises at the
expiration of the term. Notwithstanding the provisions of this Paragraph
7.3(d), Lessee's machinery and equipment, other than that which is affixed to
the Premises so that it cannot be removed without material damage to the
Premises, shall remain the property of Lessee and may be removed by Lessee
subject to the provisions of Paragraph 7.2(c).
8. INSURANCE; INDEMNITY.
8.1 LIABILITY INSURANCE - LESSEE. Lessee shall, at Lessee's
expense, obtain and keep in force during the term of this Lease a policy of
Combined Single Limit Bodily Injury and Property Damage Insurance insuring
Lessee and Lessor against any liability arising out of the use, occupancy or
maintenance of the Premises and all other areas appurtenant thereto. Such
insurance shall be in an amount not less than $1,000,000 per occurrence. The
policy shall insure performance by Lessee of the Indemnity provisions of this
Paragraph 8. The limits of said Insurance shall not, however, limit the
liability of Lessee hereunder.
8.2 LIABILITY INSURANCE - LESSOR. Lessor shall obtain and keep in
force during the term of this Lease a policy of Combined Single Limit Bodily
Injury and Property Damage Insurance insuring Lessor, but not Lessee, against
any liability arising out of the ownership, use, occupancy or maintenance of
the Premises and all areas appurtenant thereto in an amount not less than
$500,000 per occurrence.
8.3 PROPERTY INSURANCE. Lessor shall obtain and keep in force
during the term of this Lease a policy or policies of insurance covering loss or
damage to the Premises, but not Lessee's fixtures, equipment or tenant
improvements in an amount not to exceed the full replacement value thereof, as
the same may exist from time to time, providing protection against all perils
included within the classification of fire, extended coverage, vandalism,
malicious mischief, flood (in the event same is required by a lender having a
lien on the Premises), special extended perils ("all risk," as such term is used
in the insurance industry) but not plate glass insurance. In addition, the
Lessor shall obtain and keep in force, during the term of this Lease, a policy
of rental value insurance covering a period of one year, with loss payable to
Lessor, which shall also cover all real estate taxes and insurance costs for
said period.
8.4 PAYMENT OF PREMIUM INCREASE.
(a) Lessee shall pay to Lessor, during the term hereof, in
addition to the rent, the amount of any increase in premiums for the insurance
required under Paragraphs 8.2 and 8.3 over and above such premiums paid during
the Base Period, as hereinafter defined, whether such premium increase shall be
the result of the nature of Lessee's occupancy, any act or omission of Lessee,
requirements of the holder of a mortgage or deed of trust covering the Premises,
increased valuation of the Premises, or general rate increases. In the event
that the Premises have been occupied previously, the words "Base Period" shall
mean the last twelve months of the prior occupancy. In the event that the
Premises have never been previously occupied, the premiums during the "Base
Period" shall be deemed to be the lowest premiums reasonably obtainable for
said insurance assuming the most nominal use of the Premises. Provided
however, in lieu of the Base Period, the parties may insert a dollar amount at
the end of this sentence which figure shall be considered as the insurance
premium for the Base Period: $6,000.00. In no event, however, shall Lessee be
responsible for any portion of the premium cost attributable to liability
insurance coverage in excess of $1,000,000 procured under paragraph 8.2.
(b) Lessee shall pay any such premium increases to Lessor
within 30 days after receipt by Lessee of a copy of the premium statement or
other satisfactory evidence of the amount due. If the Insurance policies
maintained hereunder cover other improvements in addition to the Premises,
Lessor shall also deliver to Lessee a statement of the amount of such increase
attributable to the Premises and showing in reasonable detail, the manner in
which such amount was computed. If the term of this Lease shall not expire
concurrently with the expiration of the period covered by such Insurance,
Lessee's liability for premium increases shall be prorated on an annual basis.
(c) If the Premises are part of a larger building, then Lessee
shall not be responsible for paying any increase in the property insurance
premium caused by the acts or omissions of any other tenant of the building of
which the Premises are a part.
8.5 INSURANCE POLICIES. Insurance required hereunder shall be in
companies holding a "General Policyholders Rating" of at least B plus, or such
other rating as may be required by a lender having a lien on the Premises, as
set forth in the most current issue of "Best's Insurance Guide". Lessee shall
deliver to Lessor copies of policies of liability insurance required under
Paragraph 8.1 or certificates evidencing the existence and amounts of such
insurance. No such policy shall be cancellable or subject to reduction of
coverage or other modification except after thirty (30) days' prior written
notice to Lessor. Lessee shall, at least thirty (30) days prior to the
expiration of such policies, furnish Lessor with renewals or "binders" thereof,
or Lessor may order such Insurance and charge the cost thereof to Lessee, which
amount shall be payable by Lessee upon demand. Lessee shall not do or permit
to be done anything which shall invalidate the Insurance policies referred to
in Paragraph 8.3.
8.6 WAIVER OF SUBROGATION. Lessee and Lessor each hereby release
and relieve the other, and waive their entire right of recovery against the
other for loss or damage arising out of or incident to the perils insured
against under Paragraph 8.3, which perils occur in, on or about the Premises,
whether due to the negligence of Lessor or Lessee or their agents, employees,
contractors and/or invitees. Lessee and Lessor shall, upon obtaining the
policies of Insurance required hereunder, give notice to the Insurance carrier
or carriers that the foregoing mutual waiver of subrogation is contained in
this Lease.
8.7 INDEMNITY. Lessee shall indemnify and hold harmless Lessor
from and against any and all claims arising from Lessee's use of the Premises,
or from the conduct of Lessee's business or from any activity, work or things
done, permitted or suffered by Lessee in or about the Premises or elsewhere and
shall further indemnify and hold harmless Lessor from and against any and all
claims arising from any breach or default in the performance of any obligation
on Lessee's part to be performed under the terms of this Lease, or arising from
any negligence of the Lessee, or any of Lessee's agents, contractors, or
employees, and from and against all costs, attorney's fees, expenses and
liabilities incurred in the defense of any such claim or any action or
proceeding brought thereon; and in case any action or proceeding be brought
against Lessor by reason of any such claim, Lessee upon notice from Lessor
shall defend the same at Lessee's expense by counsel satisfactory to Lessor.
Lessee, as a material part of the consideration to Lessor, hereby assumes all
risk of damage to property or injury to persons, in, upon or about the
Premises arising from any cause and Lessee hereby waives all claims in respect
thereof against Lessor.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessee hereby agrees that
Lessor shall not be liable for injury to Lessee's business or any loss of
income therefrom or for damage to the goods, wares, merchandise or other
property of Lessee, Lessee's employees, invitees, customers, or any other
person in or about the Premises, nor shall Lessor be liable for injury to the
person of Lessee, Lessee's employees, agents or contractors, whether such
damage or injury is caused by results from fire, steam, electricity, gas, water
or rain, or from the breakage, leakage, obstruction or other defects of pipes,
sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures,
or from any other cause, whether the said damage or injury results from
conditions arising upon the Premises or upon other portions of the building of
which the Premiss are a part, or from other sources or places and regardless of
whether the cause of such damage or injury or the means of repairing the same
is inaccessible to Lessee. Lessor shall not be liable for any damages arising
from any act or neglect of any other tenant, if any, of the building in which
the Premises are located. Notwithstanding the above, the Lessor shall be
liable for any damage caused through the active negligence or willful
misconduct by itself, its agents, employees or contractors.
Initials: DEV
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9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "Premises Partial Damage" shall herein mean damage or
destruction to the Premises to the extent that the cost of repair is less than
50% of the fair market value of the Premises immediately prior to such damage or
destruction. "Premises Building Partial Damage" shall herein mean damage or
destruction to the building of which the Premises are a part to the extent that
the cost of repair is less than 50% of the fair market value of such building as
a whole immediately prior to such damage or destruction.
(b) "Premises Total Destruction" shall herein mean damage or
destruction to the Premises to the extent that the cost of repair is 50% or more
of the fair market value of the Premises immediately prior to such damage or
destruction. "Premises Building Total Destruction" shall herein mean damage or
destruction to the building of which the Premises are a part to the extent that
the cost of repair is 50% or more of the fair market value of such building as a
whole immediately prior to such damage or destruction.
(c) "Insured Loss" shall herein mean damage or destruction which
was caused by an event required to be covered by the insurance described in
paragraph 8.
9.2 PARTIAL DAMAGE - INSURED LOSS. Subject to the provisions of
paragraphs 9.4, 9.5 and 9.6, if at any time during the term of this Lease there
is damage which is an Insured Loss and which falls into the classification of
Premises Partial Damage or Premises Building Partial Damage, then Lessor shall,
at Lessor's sole cost, repair such damage, but not Lessee's fixtures, equipment
or tenant improvements, as soon as reasonably possible and this Lease shall
continue in full force and effect. * See Paragraph (51) - ADDENDUM TO PARAGRAPH
9.
9.3 PARTIAL DAMAGE - UNINSURED LOSS. Subject to the provisions of
Paragraphs 9.4, 9.5 and 9.6, if at any time during the term of this Lease there
is damage which is not an Insured Loss and which falls within the classification
of Premises Partial Damage or Premises Building Partial Damage, unless caused by
a negligent or willful act of Lessee (in which event Lessee shall make the
repairs at Lessee's expense), Lessor may at Lessor's option either (i) repair
such damage as soon as reasonably possible at Lessor's expense, in which event
this Lease shall continue in full force and effect, or (ii) give written notice
to Lessee within thirty (30) days after the date of the occurrence of such
damage of Lessor's intention to cancel and terminate this Lease, as of the date
of the occurrence of such damage. In the event Lessor elects to give such notice
of Lessor's intention to cancel and terminate this Lease, Lessee shall have the
right within ten (10) days after the receipt of such notice to give written
notice to Lessor of Lessee's intention to repair such damage at Lessee's
expense, without reimbursement from Lessor, in which event this Lease shall
continue in full force and effect, and Lessee shall proceed to make such repairs
as soon as reasonably possible. If Lessee does not give such notice within such
10-day period this Lease shall be cancelled and terminated as of the date of the
occurrence of such damage. *
9.4 TOTAL DESTRUCTION. If at any time during the term of this Lease
there is damage, whether or not an Insured Loss, (including destruction required
by any authorized public authority), which falls into the classification of
Premises Total Destruction or Premises Building Total Destruction, this Lease
shall automatically terminate as of the date of such total destruction.
9.5 DAMAGE NEAR END OF TERM.
(a) If at any time during the last six months of the term of
this Lease there is damage, whether or not an Insured Loss, which falls within
the classification of Premises Partial Damage, Lessor may at Lessor's option
cancel and terminate this Lease as of the date of occurrence of such damage by
giving written notice to Lessee of Lessor's election to do so within 30 days
after the date of occurrence of such damage.
(b) Notwithstanding paragraph 9.5(a), in the event that Lessee
has an option to extend or renew this Lease, and the time within which said
option may be exercised has not yet expired, Lessee shall exercise such option,
if it is to be exercised at all, no later than 20 days after the occurrence of
an Insured Loss falling within the classification of Premises Partial Damage
during the last six months of the term of this Lease. If Lessee duly exercises
such option during said 20 day period, Lessor shall, at Lessor's expense, repair
such damage as soon as reasonably possible and this Lease shall continue in full
force and effect. If Lessee fails to exercise such option during said 20 day
period, then Lessor may at Lessor's option terminate and cancel this Lease as of
the expiration of said 20 day period by giving written notice to Lessee of
Lessor's election to do so within 10 days after the expiration of said 20 day
period, notwithstanding any term or provision in the grant of option to the
contrary. *
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of damage described in paragraphs 9.2 or 9.3,
and Lessor or Lessee repairs or restores the Premises pursuant to the provisions
of this Paragraph 9, the rent payable hereunder for the period during which such
damage, repair or restoration continues shall be abated in proportion to the
degree to which Lessee's use of the Premises in impaired. Except for abatement
of rent, if any, Lessee shall have no claim against Lessor for any damage
suffered by reason of any such damage, destruction, repair or restoration.
(b) If Lessor shall be obligated to repair or restore the
Premises under the provisions of this Paragraph 9 and shall not commence such
repair or restoration within 90 days after such obligations shall accrue, Lessee
may at Lessee's option cancel and terminate this Lease by giving Lessor written
notice of Lessee's election to do so at any time prior to the commencement of
such repair or restoration. In such event this Lease shall terminate as of the
date of such notice.
9.7 TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this Paragraph 9, an equitable adjustment shall be made concerning
advance rent and any advance payments made by Lessee to Lessor. Lessor shall, in
addition, return to Lessee so much of Lessee's security deposit as has not
theretofore been applied by Lessor.
9.8 WAIVER. lessor and lessee waive the provisions of any statutes
which relate to termination of leases when leased property is destroyed and
agree that such event shall be governed by the terms of this Lease.
10. REAL PROPERTY TAXES.
See Paragraph (50) attached herein
10.1 PAYMENT of TAX INCREASE. Lessor shall pay the real property tax,
as defined in paragraph 10.3, applicable to the Premises; provided, however,
that lessee shall pay, in addition to rent, the amount, if any, by which real
property taxes applicable to the Premises increase over the fiscal real estate
tax year 19 19 . Such payment shall be made by Lessee within thirty (30)
days after receipt of Lessor's written statement setting forth the amount of
such increase and the computation thereof. If the term of this Lease shall not
expire concurrently with the expiration of the tax fiscal year, Lessee's
liability for increased taxes for the last partial lease year shall be prorated
on an annual basis.
10.2 ADDITIONAL IMPROVEMENTS. Notwithstanding paragraph 10.1 hereof,
Lessee shall pay to Lessor upon demand therefor the entirety of any increase in
real property tax if assessed solely by reason of additional improvements placed
upon the Premises by Lessee or at Lessee's request.
10.3 DEFINITION OF "REAL PROPERTY TAX". As used herein, the term
"real property tax" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed on the Premises by any authority having
the direct or indirect power to tax, including any city, state or federal
government, or any school, agricultural, sanitary, fire, street, drainage or
other improvement district thereof, as against any legal or equitable interest
of Lessor in the Premises or in the real property of which the Premises are a
part, as against Lessor's right to rent or other income therefrom, and as
against Lessor's business of leasing the Premises. The term "real property tax"
shall also include any tax, fee, levy, assessment or charge (i) in substitution
of, partially or totally, any tax, fee, levy, assessment or charge hereinabove
included within the definition of "real property tax," or (ii) the nature of
which was hereinbefore included within the definition of "real property tax," or
(iii) which is imposed for a service or right not charged prior to June 1, 1978,
or, if previously charged, has been increased since June 1, 1978, or (iv) which
is imposed as a result of a transfer, either partial or total, of Lessor's
interest in the Premises or which is added to a tax or charge hereinbefore
included within the definition of real property tax by reason of such transfer,
or (v) which is imposed by reason of this transaction, any modifications or
changes hereto, or any transfers hereof.
10.4 JOINT ASSESSMENT. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the real property taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be determined by Lessor from the respective valuations
assigned in the assessor's work sheets or such other information as may be
reasonably available. Lessor's reasonable determination thereof, in good faith,
shall be conclusive.
10.5 PERSONAL PROPERTY TAXES.
(a) Lessee shall pay prior to delinquency all taxes assessed
against and levied upon trade fixtures, furnishings, equipment and all other
personal property of Lessee contained in the Premises or elsewhere. When
possible, Lessee shall cause said trade fixtures, furnishings, equipment and all
other personal property to be assessed and billed separately from the real
property of Lessor.
(b) If any of Lessee's said personal property shall be assessed
with Lessor's real property, Lessee shall pay Lessor the taxes attributable to
Lessee within 10 days after receipt of a written statement setting forth the
taxes applicable to Lessee's property.
11. UTILITIES. Lessee shall pay for all gas, heat, light, power, telephone
and other utilities and services supplied to the premises, together with any
taxes thereon. If any such services are not separately metered to Lessee, Lessee
shall pay a reasonable proportion to be determined by Lessor of all charges
jointly metered with other premises.
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED. Lessee shall not voluntarily or by
operation of law assign, transfer, mortgage, sublet, or otherwise transfer or
encumber all or any part of Lessee's interest in this Lease or in the Premises,
without Lessor's prior written consent, which Lessor shall not unreasonably
withhold. Lessor shall respond to Lessee's request for consent hereunder in a
timely manner and any attempted assignment, transfer, mortgage, encumbrance or
subletting without such consent shall be void, and shall constitute a breach of
this Lease.
12.2 LESSEE AFFILIATE. Notwithstanding the provisions of paragraph
12.1 hereof, Lessee may assign or sublet the Premises, or any portion thereof,
without Lessor's consent, to any corporation which controls, is controlled by or
is under common control with Lessee, or to any corporation resulting from the
merger or consolidation with Lessee, or to any person or entity which acquires
all the assets of Lessee as a going concern of the business that is being
conducted on the Premises, provided that said assignee assumes, in full, the
obligations of Lessee under this Lease. Any such assignment shall not, in any
way, affect or limit the liability of Lessee under the terms of this Lease even
if after such assignment or subletting the terms of this Lease are materially
changed or altered without the consent of Lessee, the consent of whom shall not
be necessary.
12.3 NO RELEASE OF LESSEE. Regardless of Lessor's consent, no
subletting or assignment shall release Lessee of Lessee's obligation or alter
the primary liability of Lessee to pay the rent and to perform all other
obligations to be performed by Lessee hereunder. The acceptance of rent by
Lessor from any other person shall not be deemed to be a waiver by Lessor of any
provision hereof. Consent to one assignment or subletting shall not be deemed
consent to any subsequent assignment or subletting. In the event of default by
any assignee of Lessee or any successor of Lessee, in the performance of any of
the terms hereof, Lessor may proceed directly against Lessee without the
necessity of exhausting remedies against said assignee. Lessor may consent to
subsequent assignments or subletting of this Lease or amendments or
modifications to this Lease with assignees of Lessee, without notifying Lessee,
or any successor of Lessee, and without obtaining its or their consent thereto
and such action shall not relieve Lessee of liability under this Lease.
12.4 ATTORNEY'S FEES. In the event Lessee shall assign or sublet the
Premises or request the consent of Lessor to any assignment or subletting or if
Lessee shall request the consent of Lessor for any act Lessee proposes to do
then Lessee shall pay Lessor's reasonable attorneys fees incurred in connection
therewith, such attorneys fees not to exceed $350.00 for each such request.
Initials: DEV
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<PAGE> 4
13. DEFAULTS; REMEDIES.
13.1 DEFAULTS. The occurrence of any one or more of the following
events shall constitute a material default and breach of this Lease by Lessee:
(a) The vacating or abandonment of the Premises by Lessee.
(b) The failure by Lessee to make any payment of rent or any
other payment required to be made by Lessee hereunder, as and when due, where
such failure shall continue for a period of three days after written notice
thereof from Lessor to Lessee. In the event that Lessor serves Lessee with a
Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes
such Notice to Pay Rent or Quit shall also constitute the notice required by
this subparagraph.
(c) The failure by Lessee to observe or perform any of the
covenants, conditions or provisions of this Lease to be observed or performed
by Lessee, other than described in paragraph (b) above, where such failure
shall continue for a period of 30 days after written notice thereof from Lessor
to Lessee; provided, however, that if the nature of Lessee's default is such
that more than 30 days are reasonably required for its cure, then Lessee shall
not be deemed to be in default if Lessee commenced such cure within said 30-day
period and thereafter diligently prosecutes such cure to completion.
(d) (i) The making by Lessee of any general arrangement or
assignment for the benefit of creditors; (ii) Lessee becomes a "debtor" as
defined in 11 U.S.C. Section 101 or any successor statute thereto (unless, in
the case of a petition filed against Lessee, the same is dismissed within 60
days); (iii) the appointment of a trustee or receiver to take possession of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where possession is not restored to Lessee within 30
days; or (iv) the attachment, execution or other judicial seizure of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where such seizure is not discharged within 30 days.
Provided, however, in the event that any provision of this paragraph 13.1(d) is
contrary to any applicable law, such provision shall be of no force or effect.
(e) The discovery by Lessor that any financial statement given
to Lessor by Lessee, any assignee of Lessee, any subtenant of Lessee, any
successor in interest of Lessee or any guarantor of Lessee's obligation
hereunder, and any of them, was materially false.
13.2 REMEDIES. In the event of any such material default or breach
by Lessee, Lessor may at any time thereafter, with or without notice or demand
and without limiting Lessor in the exercise of any right or remedy which Lessor
may have by reason of such default or breach:
(a) Terminate Lessee's right to possession of the Premises by
any lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession of the Premises to Lessor. In such event
Lessor shall be entitled to recover from Lessee all damages incurred by Lessor
by reason of Lessee's default including, but not limited to, the cost of
recovering possession of the Premises; expenses of reletting, including
necessary renovation and alteration of the Premises, reasonable attorney's
fees, and any real estate commission actually paid; the worth at the time of
award by the court having jurisdiction thereof of the amount by which the
unpaid rent for the balance of the term after the time of such award exceeds
the amount of such rental loss for the same period that Lessee proves could be
reasonably avoided; that portion of the leasing commission paid by Lessor
pursuant to Paragraph 15 applicable to the unexpired term of this Lease.
(b) Maintain Lessee's right to possession in which case this
Lease shall continue in effect whether or not Lessee shall have abandoned the
Premises. In such event Lessor shall be entitled to enforce all of Lessor's
rights and remedies under this Lease, including the right to recover the rent as
it becomes due hereunder.
(c) Pursue any other remedy now or hereafter available to
Lessor under the laws or judicial decisions of the state wherein the Premises
are located. Unpaid installments of rent and other unpaid monetary obligations
of Lessee under the terms of this Lease shall bear interest from the date due
at the maximum rate then allowable by law.
13.3 DEFAULT BY LESSOR. Lessor shall not be in default unless
Lessor fails to perform obligations required of Lessor within a reasonable
time, but in no event later than thirty (30) days after written notice by
Lessee to Lessor and to the holder of any first mortgage or deed of trust
covering the Premises whose name and address shall have theretofore been
furnished to Lessee in writing, specifying wherein Lessor has failed to perform
such obligation; provided, however, that if the nature of Lessor's obligation is
such that more than thirty (30) days are required for performance then Lessor
shall not be in default if Lessor commences performance within such 30-day
period and thereafter diligently prosecutes the same to completion.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed on
Lessor by the terms of any mortgage or trust deed covering the Premises.
Accordingly, if any installment of rent or any other sum due from Lessee shall
not be received by Lessor or Lessor's designee within ten (10) days after such
amount shall be due, then, without any requirement for notice to Lessee, Lessee
shall pay to Lessor a late charge equal to 6% of such overdue amount. The
parties hereby agree that such late charge represents a fair and reasonable
estimate of the costs Lessor will incur by reason of late payment by Lessee.
Acceptance of such late charge by Lessor shall in no event constitute a waiver
of Lessee's default with respect to such overdue amount, nor prevent Lessor from
exercising any of the other rights and remedies granted hereunder. In the event
that a late charge is payable hereunder, whether or not collected, for three (3)
consecutive installments of rent, then rent shall automatically become due and
payable quarterly in advance, rather than monthly, notwithstanding paragraph 4
or any other provision of this Lease to the contrary.
13.5 IMPOUNDS. In the event that a late charge is payable hereunder,
whether or not collected, for three (3) installments of rent or any other
monetary obligation of Lessee under the terms of this Lease, Lessee shall pay to
Lessor, if Lessor shall so request, in addition to any other payments required
under this Lease, a monthly advance installment, payable at the same time as the
monthly rent, as estimated by Lessor, for real property tax and insurance
expenses on the Premies which are payable by Lessee under the terms of this
Lease. Such fund shall be established to insure payment when due, before
delinquency, of any or all such real property taxes and insurance premiums. If
the amounts paid to Lessor by Lessee under the provisions of this paragraph are
insufficient to discharge the obligations of Lessee to pay such real property
taxes and insurance premiums as the same become due, Lessee shall pay to Lessor,
upon Lessor's demand, such additional sums necessary to pay such obligations.
All moneys paid to Lessor under this paragraph may be intermingled with other
moneys of Lessor and shall not bear interest. In the event of a default in the
obligations of Lessee to perform under this Lease, then any balance remaining
from funds paid to Lessor under the provisions of this paragraph may, at the
option of Lessor, be applied to the payment of any monetary default of Lessee in
lieu of being applied to the payment of real property tax and insurance
premiums.
14. CONDEMNATION. If the Premises or any portion thereof are taken under
the power of eminent domain, or sold under the threat of the exercise of said
power (all of which are herein called "condemnation"), this Lease shall
terminate as to the part so taken as of the date the condemning authority takes
title or possession, whichever first occurs. If more than 10% of the floor area
of the building on the Premises, or more than 25% of the land area of the
Premises which is not occupied by any building, is taken by condemnation, Lessee
may, at Lessee's option, to be exercised in writing only within ten (10) days
after Lessor shall have given Lessee written notice of such taking (or in the
absence of such notice, within ten (10) days after the condemning authority
shall have taken possession) terminate this Lease as of the date the condemning
authority takes such possession. If Lessee does not terminate this Lease in
accordance with the foregoing, this Lease shall remain in full force and effect
as to the portion of the Premises remaining, except that the rent shall be
reduced in the proportion that the floor area of the building taken bears to the
total floor area of the building situated on the Premises. No reduction of rent
shall occur if the only area taken is that which does not have a building
located thereon. Any award for the taking of all or any part of the Premises
under the power of eminent domain or any payment made under threat of the
exercise of such power shall be the property of Lessor, whether such award shall
be made as compensation for diminution in value of the Leasehold or for the
taking of the fee, or as severance damages; provided, however, that Lessee shall
be entitled to any award for loss of or damage to Lessee's trade fixtures and
removable personal property. In the event that this Lease is not terminated by
reason of such condemnation, Lessor shall to the extent of severance damages
received by Lessor in connection with such condemnation, repair any damage to
the Premises caused by such condemnation except to the extent that Lessee has
been reimbursed therefor by the condemning authority. Lessee shall pay any
amount in excess of such severance damages required to complete such repair.
15. BROKER'S FEE.
16. ESTOPPEL CERTIFICATE.
(a) Lessee shall at any time upon not less than ten (10) days'
prior written notice from Lessor execute, acknowledge and deliver to Lessor a
statement in writing (i) certifying that this Lease is unmodified and in full
force and effect (or, if modified, stating the nature of such modification and
certifying that this Lease, as so modified, is in full force and effect) and the
date to which the rent and other charges are paid in advance, if any, and (ii)
acknowledging that there are not, to Lessee's knowledge, any uncured defaults
on the part of Lessor hereunder, or specifying such defaults if any are
claimed. Any such statement may be conclusively relied upon by any prospective
purchaser or encumbrancer of the Premises.
(b) At Lessor's option, Lessee's failure to deliver such statement
within such time shall be a material breach of this Lease or shall be
conclusive upon Lessee (i) that this Lease is in full force and effect, without
modification except as may be represented by Lessor, (ii) that there are no
uncured defaults in Lessor's performance, and (iii) that not more than one
month's rent has been paid in advance or such failure may be considered by
Lessor as a default by Lessee under this Lease.
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(c) If Lessor desires to finance, refinance, or sell the
Premises, or any part thereof, Lessee hereby agrees to deliver to any lender or
purchaser designated by Lessor such financial statements of Lessee as may be
reasonably required by such lender or purchaser. Such statements shall include
the past three years' financial statements of Lessee. All such financial
statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.
17. LESSOR'S LIABILITY. The term "Lessor" as used herein shall mean only
the owner or owners at the time in question of the fee title or a lessee's
interest in a ground lease of the Premises, and except as expressly provided in
Paragraph 15. In the event of any transfer of such title or interest, Lessor
herein named (and in case of any subsequent transfers then the grantor) shall
be relieved from and after the date of such transfer of all liability as
respects Lessor's obligations thereafter to be performed, provided that any
funds in the hands of Lessor or the then grantor at the time of such transfer,
in which Lessee has an interest, shall be delivered to the grantee. The
obligations contained in this Lease to be performed by Lessor shall, subject as
aforesaid, be binding on Lessor's successors and assigns, only during their
respective periods of ownership.
18. SEVERABILITY. The invalidity of any provision of this Lease as
determined by a court of competent jurisdiction shall in no way affect the
validity of any other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Except as expressly herein provided,
any amount due to Lessor not paid when due shall bear interest at the maximum
rate then allowable by law from the date due. Payment of such interest shall
not excuse or cure any default by Lessee under this Lease, provided, however,
that interest shall not be payable on late charges incurred by Lessee nor on
any amounts upon which late charges are paid by Lessee.
20. TIME OF ESSENCE. Time is of the essence.
21. ADDITIONAL RENT. Any monetary obligations of Lessee to Lessor under the
terms of this Lease shall be deemed to be rent.
22. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease contains all
agreements of the parties with respect to any matter mentioned herein. No prior
agreement or understanding pertaining to any such matter shall be effective.
This Lease may be modified in writing only, signed by the parties in interest
at the time of the modification. Except as otherwise stated in this Lease,
Lessee hereby acknowledges that neither the real estate broker listed in
Paragraph 15 hereof nor any cooperating broker on this transaction nor the
Lessor or any employees or agents of any of said persons has made any oral or
written warranties or representations to Lessee relative to the condition or
use by Lessee of said Premises and Lessee acknowledges that Lessee assumes all
responsibility regarding the Occupational Safety Health Act, the legal use and
adaptability of the Premises and the compliance thereof with all applicable
laws and regulations in effect during the term of this Lease except as
otherwise specifically stated in this Lease.
23. NOTICES. Any notice required or permitted to be given hereunder shall
be in writing and may be given by personal delivery or by certified mail, and
if given personally or by mail, shall be deemed sufficiently given if addressed
to Lessee or to Lessor at the address noted below the signature of the
respective parties, as the case may be. Either party may by notice to the other
specify a different address for notice purposes except that upon Lessee's
taking possession of the Premises, the Premises shall constitute Lessee's
address for notice purposes. A copy of all notices required or permitted to be
given to Lessor hereunder shall be concurrently transmitted to such party or
parties at such addresses as Lessor may from time to time hereafter designate
by notice to Lessee.
24. WAIVERS. No waiver by Lessor or any provision hereof shall be deemed a
waiver of any other provision hereof or of any subsequent breach by Lessee of
the same or any other provision. Lessor's consent to, or approval of any act,
shall not be deemed to render unnecessary the obtaining of Lessor's consent to
or approval of any subsequent act by Lessee. The acceptance of rent hereunder
by Lessor shall not be a waiver of any preceding breach by Lessee of any
provision hereof, other than the failure of Lessee to pay the particular rent
so accepted, regardless of Lessor's knowledge of such preceding breach at the
time of acceptance of such rent.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a "short form" memorandum of this
Lease for recording purposes.
26. HOLDING OVER. If Lessee, with Lessor's consent, remains in possession
of the Premises or any part thereof after the expiration of the term hereof,
such occupancy shall be a tenancy from month to month upon all the provisions
of this Lease pertaining to the obligations of Lessee, but all options and
rights of first refusal, if any, granted under the terms of this Lease shall be
deemed terminated and be of no further effect during said month to month
tenancy.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies
at law or in equity.
28. COVENANTS AND CONDITIONS. Each provision of this Lease performable by
Lessee shall be deemed both a covenant and a condition.
29. BINDING EFFECT; CHOICE OF LAW. Subject to any provisions hereof
restricting assignment or subletting by Lessee and subject to the provisions of
Paragraph 17, this Lease shall bind the parties, their personal
representatives, successors and assigns. This Lease shall be governed by the
laws of the State wherein the Premises are located.
30. SUBORDINATION.
(a) This Lease, at Lessor's option, shall be subordinate to any
ground lease, mortgage, deed of trust, or any other hypothecation or security
now or hereafter placed upon the real property of which the Premises are a part
and to any and all advances made on the security thereof and to all renewals,
modifications, consolidations, replacements and extensions thereof.
Notwithstanding such subordination, Lessee's right to quiet possession of the
Premises shall not be disturbed if Lessee is not in default and so long as
Lessee shall pay the rent and observe and perform all of the provisions of this
Lease, unless this Lease is otherwise terminated pursuant to its terms. If any
mortgagee, trustee or ground lessor shall elect to have this Lease prior to the
lien of its mortgage, deed of trust or ground lease, and shall give written
notice thereof to Lessee, this Lease shall be deemed prior to such mortgage,
deed of trust, or ground lease, whether this Lease is dated prior or subsequent
to the date of said mortgage, deed of trust or ground lease or the date of
recording thereof.
(b) Lessee agrees to execute any documents required to
effectuate an attornment, a subordination or to make this Lease prior to the
lien of any mortgage, deed of trust or ground lease, as the case may be.
Lessee's failure to execute such documents within 10 days after written demand
shall constitute a material default by Lessee hereunder, or, at Lessor's
option, Lessor shall execute such documents on behalf of Lessee as Lessee's
attorney-in-fact. Lessee does hereby make, constitute and irrevocably appoint
Lessor as Lessee's attorney-in-fact and in Lessee's name, place and stead, to
execute such documents in accordance with this paragraph 30(b).
31. ATTORNEY'S FEES. If either party or the broker named herein brings an
action to enforce the terms hereof or declare rights hereunder, the prevailing
party in any such action, on trial or appeal, shall be entitled to his
reasonable attorney's fees to be paid by the losing party as fixed by the
court. The provisions of this paragraph shall inure to the benefit of the
broker named herein who seeks to enforce a right hereunder.
32. LESSOR's ACCESS. Lessor and Lessor's agents shall have the right to
enter the Premises at reasonable times for the purpose of inspecting the same,
showing the same to prospective purchasers, lenders, or lessees, and making such
alterations, repairs, improvements or additions to the Premises or to the
building of which they are a part as Lessor may deem necessary or desirable.
Lessor may at any time place on or about the Premises any ordinary "For Sale"
signs and Lessor may at any time during the last 120 days of the term hereof
place on or about the Premises any ordinary "For Lease" signs, all without
rebate of rent or liability to Lessee.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first
having obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. SIGNS. Lessee shall not place any sign upon the Premises without
Lessor's prior written consent except that Lessee shall have the right, without
the prior permission of Lessor to place ordinary and usual for rent or sublet
signs thereon.
35. MERGER. The voluntary or other surrender of this Lease by Lessee, or a
mutual cancellation thereof, or a termination by Lessor, shall not work a
merger, and shall, at the option of Lessor, terminate all or any existing
subtenancies or may, at the option of Lessor, operate as an assignment to
Lessor of any or all such subtenancies.
36. CONSENTS. Except for paragraph 33 hereof, wherever in this Lease the
consent of one party is required to an act of the other party, such consent
shall not be unreasonably withheld.
37. GUARANTOR. In the event that there is a guarantor of this Lease, said
guarantor shall have the same obligations as Lessee under this Lease.
38. QUIET POSSESSION. Upon Lessee paying the rent for the Premises and
observing and performing all of the covenants, conditions and provisions on
Lessee's part to be observed and performed hereunder, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease. The individuals executing this Lease on behalf of
Lessor represent and warrant to Lessee that they are fully authorized and
legally capable of executing this Lease on behalf of Lessor and that such
execution is binding upon all parties holding an ownership interest in the
Premises.
39. OPTIONS.
39.1 DEFINITION. As used in this paragraph the word "Options" has the
following meaning: (1) the right or option to extend the term of this Lease or
to renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor; (2) the option or right of first refusal to lease the
Premises or the right of first offer to lease the Premises or the right of
first refusal to lease other property of Lessor or the right of first offer to
lease other property of Lessor; (3) the right or option to purchase the
Premises, or the right of first refusal to purchase the Premises, or the right
of first offer to purchase the Premises or the right or option to purchase
other property of Lessor, or the right of first refusal to purchase other
property of Lessor or the right of first offer to purchase other property of
Lessor.
39.2 OPTIONS PERSONAL. Each Option granted to Lessee in this Lease are
personal to Lessee and may not be exercised or be assigned, voluntarily or
involuntarily, by or to any person or entity other than Lessee, provided,
however, the Option may be exercised by or assigned to any
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Lessee Affiliate as defined in paragraph 12.2 of this Lease. The Options herein
granted to Lessee are not assignable separate and apart from this Lease.
39.3 Multiple Options. In the event that Lessee has any multiple
options to extend or renew this Lease a later option cannot be exercised unless
the prior option to extend or renew this Lease has been so exercised.
39.4 Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary, (i) during
the time commencing from the date Lessor gives to Lessee a notice of default
pursuant to paragraph 13.1(b) or 13.1(c) and continuing until the default
alleged in said notice of default is cured, or (ii) during the period of time
commencing on the day after a monetary obligation to Lessor is due from Lessee
and unpaid (without any necessity for notice thereof to Lessee) continuing until
the obligation is paid, or (iii) at any time after an event of default described
in paragraphs 13.1(a), 13.1(d), or 13.1(e) (without any necessity of Lessor to
give notice of such default to Lessee), or (iv) in the event that Lessor has
given to Lessee three or more notices of default under paragraph 13.1(b), where
a late charge becomes payable under paragraph 13.4 for each of such defaults, or
paragraph 13.1(c), whether or not the defaults are cured, during the 12 month
period prior to the time that Lessee intends to exercise the subject Option.
(b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee
for a period of 30 days after such obligation becomes due (without any necessity
of Lessor to give notice thereof to Lessee), or (ii) Lessee fails to commence to
cure a default specified in paragraph 13.1(c) within 30 days after the date that
Lessor gives notice to Lessee of such default and/or Lessee fails thereafter to
diligently prosecute said cure to completion, or (iii) Lessee commits a default
described in paragraph 13.1(a), 13.1(d) or 13.1(e) (without any necessity of
Lessor to give notice of such default to Lessee), or (iv) Lessor gives to Lessee
three or more notices of default under paragraph 13.1(b), where a late charge
becomes payable under paragraph 13.4 for each such default, or paragraph
13.1(c), whether or not the defaults are cured.
40. MULTIPLE TENANT BUILDING. In the event that the Premises are part of a
larger building or group of buildings then Lessee agrees that it will abide by,
keep and observe all reasonable rules and regulations which Lessor may make from
time to time for the management, safety, care, and cleanliness of the building
and grounds, the parking of vehicles and the preservation of good order therein
as well as for the convenience of other occupants and tenants of the building.
The violations of any such rules and regulations shall be deemed a material
breach of this Lease by Lessee.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligations whatsoever to provide same.
Lessee assumes all responsibility for the protection of Lessee, its agents and
invitees from acts of third parties.
42. EASEMENTS. Lessor reserves to itself the right, from time to time, to
grant such easements, rights and dedications that Lessor deems necessary or
desirable, and to cause the recordation of Parcel Maps and restrictions, so long
as such easements, rights, dedications, Maps and restrictions do not
unreasonably interfere with the use of the Premises by Lessee. Lessee shall sign
any of the aforementioned documents upon request of Lessor and failure to do so
shall constitute a material breach of this Lease.
43. PERFORMANCE UNDER PROTEST. if at any time a dispute shall arise as to
any amount or sum of money to be paid by one party to the other under the
provisions hereof, the party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such payment
shall not be regarded as a voluntary payment, and there shall survive the right
on the part of said party to institute suit for recovery of such sum. If it
shall be adjudged that there was no legal obligation on the part of said party
to pay such sum or any part thereof, said party shall be entitled to recover
such sum or so much thereof as it was not legally required to pay under the
provisions of this Lease.
44. AUTHORITY. If Lessee is a corporation, trust, or general or limited
partnership, each individual executing this Lease on behalf of such entity
represents and warrants that he or she is duly authorized to execute and deliver
this Lease on behalf of said entity. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after execution of this
Lease, deliver to Lessor evidence of such authority satisfactory to Lessor.
45. CONFLICT. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the typewritten
or handwritten provisions.
46. ADDENDUM. Attached hereto is an addendum containing paragraphs 47
through 52 which constitutes a part of this Lease.
47. ENVIRONMENTAL COMPLIANCE is attached hereto and is made a part of this
Lease.
48. REPAIRS is attached hereto and is made a part of this Lease.
49. PARKING is attached hereto and is made a part of this Lease.
50. ADDITIONAL COSTS is attached hereto and is made a part of this Lease.
51. ADDENDUM TO PARAGRAPH 9. - DAMAGE OR DESTRUCTION is attached hereto and
is made a part of this Lease.
52. EXHIBITS "A", "B" AND "C" are attached hereto and are made a part of
this Lease.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE SHOW THEIR INFORMED
AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS
LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND
EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR SUBMISSION TO
YOUR ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS
MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL
ESTATE BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY,
LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION
RELATING THERETO; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR
OWN LEGAL COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.
The parties hereto have executed this Lease at the place on the dates specified
immediately adjacent to their respective signatures.
Executed at San Diego, California THE MANUFACTURERS LIFE INSURANCE COMPANY
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on August 29/96 By /s/ BRUCE R. PEARSON
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Bruce R. Pearson, Real Estate Director
Address 7510 Clairemont Mesa Blvd., By
Suite 211 --------------------------------------
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San Diego, CA 92111-1539 "LESSOR" (Corporate seal)
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Executed at JMAR TECHNOLOGY CO.
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on By /s/ Dennis E. Valentine
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By Dennis E. Valentine, Treasurer
Address --------------------------------------
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--------------------------- "LESSEE" (Corporate seal)
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CHECKED
KAF
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VERIFIED
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EXHIBIT 10.12
MANAGEMENT ANTI-DILUTION INCENTIVE PLAN
PLAN FOR JMAR INDUSTRIES, INC.
AS AMENDED
This Management Anti-Dilution Incentive Plan ("Plan") replaces the
Management Anti-Dilution Incentive Plan (the "1993 Plan") for JMAR Industries,
Inc. ("JMAR" or the "Company"), established at the time of the 1993 public
offering of JMAR. The 1993 Plan made available for grant to the senior
management of JMAR (the "Grantees") warrants (the "Warrants") to purchase
806,637 shares of JMAR common stock, of which warrants to purchase 455,230
shares are outstanding as of August 15, 1996. The terms of the Plan shall be as
follows:
1. All Warrants become exercisable upon the earlier of (i) forty five days
after the closing high bid price of the Company's common stock as
reported on NASDAQ-NMS for 20 consecutive trading days is greater than
$6.38; (ii) the exercise by the warrant holders of at least 90 percent
of the Company's warrants which currently trade on the NASDAQ-NMS under
the symbol JMARW; or (iii) nine years and six months after the date of
grant.
2. Prior to the date at which the Warrants become exercisable, JMAR will
register the resale of the shares which underlie the Warrants.
3. Subject to the other provisions hereof, unexercised Warrants held by an
employee whose employment terminates with JMAR for reasons other than
death, will expire sixty days after the date of that employee's
termination. In the event that the Warrant holder dies while still
employed by JMAR the Warrants will remain exercisable by the heirs of
the deceased employee for a period of one year after his/her death.
4. The Warrants shall terminate three years following the date such
Warrants are first exercisable pursuant to Paragraph 1 or, in any
event, ten years after date of grant.
5. The Plan shall be administered by the Board of Directors of JMAR (the
"Committee"). The Committee shall consider the recommendations of
management, but shall have full and final authority in its discretion:
(i) to
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construe and interpret the Plan; (ii) to determine the terms and
provisions of the respective Agreements, which need not be identical,
including, but without limitation, terms covering the payment of the
exercise price; and (iii) to make all other determinations and take all
other actions deemed necessary or advisable for the proper
administration of the Plan. All such actions and determinations of the
Committee shall be conclusively binding for all purposes and upon all
persons.
JMAR INDUSTRIES, INC.
/s/ John S. Martinez
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John S. Martinez, Ph.D.
Chairman and Chief Executive Officer
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EXHIBIT 10.14
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made by and between John Ricardi
("Ricardi"), JMAR Industries, Inc. ("JMAR") and Pacific Precision Laboratories,
Inc. ("PPL") (collectively, PPL and JMAR shall be referred to as the
"Companies").
1. Titles. Ricardi shall be employed as Senior Vice President for Sales
and Marketing of PPL and shall report directly to the President of PPL. Ricardi
shall also be employed as Vice President for Corporate Development for JMAR,
reporting directly to the Chief Executive Officer of JMAR.
2. Salary. As compensation for employment with the Companies, Ricardi
will be paid $5,557.00 bi-weekly, which is equivalent to $145,002 per year.
3. Incentive Bonus Program.
3.1 Ricardi will receive a cash bonus payable at the end of 1997 equal to
1/2 of one percent of the amount of the increase of PPL's 1997 firm
shippable sales bookings in excess of PPL's 1996 actual shipped sales
bookings. Said bonus shall be payable in installments. The initial
installment shall be payable within fifteen (15) days after receipt, by
JMAR, of its 1997 audit report from Arthur Andersen & Co. Subsequent
quarterly installments shall be paid to Ricardi based on 1997 bookings
which are shipped in subsequent years.
3.2 Ricardi will receive a cash bonus equal to 1 percent of the sales
revenue generated in 1997 from the introduction of new JTC products into
the commercial marketplace (excluding sales from R&D and product
development contracts).
3.3 If Ricardi's starting date at JMAR and PPL is on or before February 3,
1997, Ricardi will also be allocated a 10 percent share of the PPL
Management Incentive Pool, the total size of which is based on PPL's 1997
profitability.
4. Auto Allowance. Ricardi will receive $500 per month as an automobile
allowance.
5. Equity Participation. On Ricardi's employment start date, Ricardi will
be granted 60,000 Employee Stock Options, subject to the conditions of JMAR's
Employee Stock Option Plan ("Plan"), a copy of which is attached hereto. The
principal elements of that Plan include:
<PAGE> 2
5.1 An option Exercise Price equal to the Closing price of JMAR stock
as quoted on the NASDAQ National Market System for the five trading day
average prior to the day that Ricardi starts work.
5.2 One third of Ricardi's Options will vest (i.e., become
exercisable) at the end of each successive twelve month period after
Ricardi's start date.
5.3 If there is any contradiction between the summary of the elements
of the Plan in Paragraph 7.1 and 7.2, and the Plan itself, the terms of
the Plan shall govern and control.
5.4 In addition, starting in 1998 (if the majority of Ricardi's
efforts and responsibilities will have transitioned from PPL to the
Corporate Office) Ricardi will become eligible to participate in the
JMAR Corporate Incentive Bonus plan which pays out cash bonuses based
on JMAR's consolidated profitability plus stock option awards based on
improvements in JMAR's stock price.
6. Relocation Expense. The Companies will reimburse Ricardi for
reasonable, actual expenses involved in moving his primary residence from its
present location to the San Diego area pursuant to its standard Relocation
Policy.
7. Company Credit Card. Ricardi will be issued a credit card for use in
charging company expenses incurred by Ricardi.
8. Employee Benefits. Ricardi will be enrolled in JMAR's employee
medical, dental and life insurance programs and will be eligible for all of the
benefits described in the employee benefit section of the enclosed "Personnel
Handbook". JMAR reserves the right to modify, supplement or rescind any of its
insurance programs and benefits at any time, in its sole discretion. The
standard vacation accrual plan will be modified for Ricardi such that the
initial yearly earning rate for vacation will be four weeks, instead of the
standard three weeks. Ricardi will also be eligible to participate in JMAR's
401(k) Plan (see the copy of the attached Plan Description).
9. First Year Of Employment. The following provisions shall govern the
term, duration, and termination of employment for the first year (365
consecutive days regardless of any leave of absence, vacation or sick days) of
Ricardi's employment:
9.1 During the first year of employment, this Agreement shall
terminate upon the occurrence of any of the following events: (a) the
death of Ricardi; (b) the incapacity or disability of Ricardi, which
renders him unable to perform substantially all of the services
contemplated by this Agreement for a continuous period of sixty (60)
days; or (c) the mutual agreement of Ricardi and either of the
Companies.
2
<PAGE> 3
9.2 This Agreement may be terminated by either of the Companies prior
to completion of the first year of employment on the happening of one
or more of the following events: (a) the commission of an act of fraud,
dishonesty, or embezzlement by Ricardi; (b) the willful neglect by
Ricardi in the performance of the services contemplated by this
Agreement in such manner as to provide reasonable cause for terminating
his services; or (c) the breach by Ricardi of any of the covenants or
obligations under this Agreement and such breach provides reasonable
cause for either of the Companies to terminate this Agreement; provided
that, in order to terminate this Agreement pursuant to clauses (b) and
(c) of this Paragraph 2.2, JMAR or PPL shall have given thirty (30)
days written notice of termination to Ricardi, and Ricardi shall have
failed to fully cure or correct such willful neglect or breach within
the thirty days immediately following such notice.
9.3 This Agreement may be terminated by Ricardi prior to the first
year on thirty (30) days written notice of termination to JMAR or PPL
if either JMAR or PPL breaches any of its covenants or obligations
under the Agreement and such breach provides reasonable cause for
Ricardi to terminate this Agreement.
9.4 In addition to the circumstances under which this Agreement may be
terminated by the Companies pursuant to Paragraph 2.2, the Companies
may terminate this Agreement at any time, without cause, upon thirty
(30) days written notice of termination to Ricardi; provided, however,
should the Companies terminate this Agreement pursuant to this
Paragraph 2.4 prior to the end of the first year of employment (other
than a termination pursuant to the provisions of Paragraph 2.2), then
Ricardi shall become entitled to receive as severance pay an amount
equal to the balance of the compensation that would have been payable
to Ricardi through the end of the first year of employment (subject to
earlier termination on the happening of the event specified in
Paragraph 2.2), payable at the rate and times as such compensation
would have been payable to Ricardi had this Agreement not been
terminated pursuant to this Paragraph 2.4. In addition to the payment
of such severance pay, all insurance policies in which Ricardi
participates shall continue through the end of what otherwise would
have been the first year of employment.
9.5 If employment is terminated under this Agreement for any reason by
any party hereto, then Ricardi's employment with both JMAR and PPL
shall terminate.
10. Employment After The First Year. If employment continues for more than
one year, the following provisions shall govern the term, duration, and
termination of employment:
10.1 If employment continues beyond the first year, employment will be
at-will and may be terminated at any time, for any reason, by either of
the Companies
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or Ricardi. If either of the Companies decide to terminate Ricardi, it
or they will provide thirty (30) days notice and Ricardi will receive
an additional sixty (60) days severance pay, unless the termination is
on the ground set forth in Paragraph 3.3(b) below, in which case
Ricardi will receive neither notice nor severance.
10.2 Ricardi and the Companies understand and agree that
Ricardi and the Companies have the right to terminate Ricardi's
employment at any time for any reason, with or without cause. Ricardi
and the Companies understand and agree that nothing in the Companies'
employee handbooks or the Companies' other policies is intended to be,
and nothing in them should be construed to be, a limitation on the
right to terminate the employment relationship at any time for any
reason.
10.3 Notwithstanding the notice provision in Paragraph 3.1 above, this
Agreement shall terminate immediately (without advance notice) on the
happening of one or more of the following events: (a) the death of John
Ricardi; or (b) the commission of an act of fraud, dishonesty, or
embezzlement by John Ricardi.
10.4 If employment is terminated under this Agreement for any reason
by any party hereto, then Ricardi's employment with both JMAR and PPL
shall terminate.
10.5 This Agreement contains the entire agreement between the parties
as to the term and duration of the employment. It supersedes any and
all other agreements, either oral or in writing between the parties
hereto with respect to Ricardi's term of employment and the termination
thereof. Each party to this Agreement acknowledges that no
representations, inducements, promises, or agreements, oral or
otherwise, have been made by any party, or anyone acting on behalf of
any party, which are not embodied herein, and acknowledges that no
other agreement, statement, or promise not contained in this Agreement
shall be valid or binding. This Agreement may not be modified or
amended by oral agreement, or course of conduct, but only by an
agreement in writing signed by John S. Martinez and Ricardi.
11. Confidential Information.
11.1 Concurrently herewith, Ricardi shall enter into an Invention and
Secrecy Agreement substantially similar to the agreement executed by
the other key employees of JMAR. This Agreement is intended to
supplement and not limit or restrict the provisions of such Invention
and Secrecy Agreement. Ricardi will acknowledge that, in the course of
the performance of Ricardi's services hereunder, Ricardi may become
acquainted with confidential information regarding JMAR (and companies
affiliated with or owned, operated, or supervised by JMAR) and their
business, operations, finances, personnel,
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accounts, customers, and suppliers. This information may include
information relating to persons, firms, corporations, and other
entities which are or become suppliers or customers of JMAR (or a
company affiliated with or owned, operated, or supervised by JMAR).
Ricardi agrees he will not, either during the term of this Agreement or
thereafter, without the prior express written consent of JMAR and PPL,
disclose or make any use of such confidential information except as may
be required in the course of the performance of Ricardi's services
hereunder.
11.2 The undertakings and obligations of the parties under this
Agreement shall not apply to any proprietary information which:
(a) Is disclosed in a printed publication available to the public,
is described in a patent anywhere in the world, or is otherwise in
the public domain at the time of disclosure;
(b) Is generally disclosed to third parties by the disclosing
party without restriction on such third parties; or
(c) Is approved for release by written authorization of the
disclosing party.
12. Protection Of Property. All records, files, manuals, list of
customers, blanks, forms, materials, furnished to Ricardi by the Companies (or
any company affiliated with or owned, operated, or supervised by the Companies),
used on their behalf or generated or obtained during the course of the
performance of Ricardi's services hereunder, shall be and remain the property of
the Companies (or any company affiliated with or owned, operated, or supervised
by the Companies, as the case may be). Ricardi shall be a holder thereof for the
sole use and benefit of the Companies (or any companies affiliated with or
owned, operated, or supervised by the Companies, as the case may be) and shall
safely keep and preserve such property, except as consumed in the normal
business operations of the Companies (or any company affiliated with or owned,
operated, or supervised by the Companies, as the case may be). Ricardi
acknowledges that this property is confidential and is not readily accessible to
the competitors of the Companies. Upon termination of this Agreement hereunder,
Ricardi shall immediately deliver to the Companies, or their authorized
representatives, all such property, including all copies, remaining in Ricardi's
possession or control.
13. Severability. If any provision in this Agreement is held by a court
of competent jurisdiction to be invalid, void or unenforceable, the remaining
provisions shall nevertheless continue in full force without being impaired or
invalidated in any way.
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14. Applicable Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of California.
15. Waiver. The failure of any party to insist on strict compliance
with any of the terms, covenants, or conditions of this Agreement by the other
party shall not be deemed a waiver of that term, covenant, or condition, nor
shall any waiver or relinquishment of any right or power at any one time or
times be deemed a waiver or relinquishment of that right or power for all or any
other times.
16. Arbitration. Except as otherwise required by law, any controversy
or claim arising out of or relating to this Agreement or the breach or
termination thereof, shall be settled by arbitration in San Diego County,
California in accordance with the rules of the American Arbitration Association,
and judgment upon the award rendered by the arbitrator(s) may be entered in any
court having jurisdiction thereof. The arbitrator(s) shall have no authority
whatsoever to make an award of punitive damages to either side. By agreeing to
arbitration under this paragraph, JMAR, PPL and Ricardi understand they are
agreeing to have any dispute relating to Ricardi's employment decided by a
neutral arbitrator and as to those disputes decided by the neutral arbitrator,
JMAR, PPL and Ricardi are giving up their right to a jury or court trial and
giving up their right, if any, to seek punitive damages against each other.
17. Effective Date. This Agreement shall become effective on the date
Ricardi begins employment with JMAR and PPL.
Date: 12/13/96 /s/ John S. Martinez
---------------------------- ------------------------------
John S. Martinez
Chairman of the Board
JMAR
Date: 12/12/96 /s/ Robert S. Hash
---------------------------- ------------------------------
Robert Hash
President
Pacific Precision Laboratories
Date: 12/22/96 /s/ John P. Ricardi
---------------------------- ------------------------------
John Ricardi
6
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EXHIBIT 10.23
ESCROW AGREEMENT AND AGREEMENT OF SETTLEMENT
AND GENERAL RELEASE
1. PARTIES: The parties to this Escrow Agreement and Agreement of Settlement
and General Release ("Agreement") are JMAR Industries, Inc. ("JMAR"), a Delaware
corporation; Atlantic American Holding Company Limited ("ATLANTIC"), a St. Kitts
and Nevis, West Indies corporation; Parker, Milliken, Clark, O'Hara & Samuelian,
P.C. ("Escrow Agent 1"); and Sankary & Sankary ("Escrow Agent 2").1/ Escrow
Agents 1 and 2 at times will be referred to collectively as "Escrow Agents".
2. RECITALS: This Agreement is made with reference to the following
facts:
2.1 In 1995, Atlantic purchased 1,000,000 shares of JMAR Common Stock
(the, "JMAR Stock") pursuant to the terms of an agreement between JMAR and
Atlantic dated March 31, 1995 (the, "March 31, 1995 Agreement") and as
consideration therefore issued and delivered to JMAR 4,000 shares of $250 par
value of Series A Cumulative Preferred Stock (the, "Preferred Stock") of
Atlantic.
2.2 Certain disputes and controversies have arisen between JMAR and
Atlantic, including, but not limited to, the claims, demands and cause or causes
of action set forth by the parties in a civil action pending in the United
States District Court for the Southern District of California, entitled JMAR
Industries, Inc. v. Atlantic American Holding Company Limited, Case No.
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1/ JMAR and ATLANTIC shall at times be referred to as the "parties." Any such
reference shall exclude the Escrow Agents.
<PAGE> 2
96-1506 J(RBB) (the, "Civil Action").
2.3 It is the intention of JMAR and Atlantic to settle and dispose
of, fully and completely, any and all claims, demands, and causes of action
which exist or may exist between them, known or unknown, from the beginning of
time to the date hereof, including, without limitation on the generality of the
foregoing, any and all claims, demands and cause or causes of action reflected
in the Civil Action described more fully at Section 2.2.
NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS:
3. DEPOSIT OF JMAR STOCK WITH ESCROW AGENT 2:
3.1 Atlantic currently is in possession of certificates, registered
in the name of Atlantic, representing an aggregate of 800,000 shares of the
JMAR Stock acquired under the March 31, 1995 Agreement. No later than the date
Atlantic executes this Agreement, Atlantic will deposit certificates, registered
in its name, representing 600,000 shares of the JMAR Stock with Escrow Agent 2.
Escrow Agent 2 shall hold and maintain the JMAR Stock until the purchase price
for the JMAR Stock has been received by Escrow Agent 1 as provided herein.
4. ATLANTIC'S DEPOSIT OF DOCUMENTATION WITH ESCROW AGENT 1:
4.1 No later than the date Atlantic executes this Agreement, Atlantic
will deliver to Escrow Agent 1 all documentation necessary to effect a transfer
of interest in the 600,000 shares of JMAR Stock deposited with Escrow Agent 2
pursuant to Section 3.1, all of which shall be in form and substance acceptable
to JMAR's transfer agent, including but not limited to: 1) a stock assignment
executed in blank by Atlantic; 2) a corporate resolution of Atlantic authorizing
the transfer of interest in the JMAR Stock provided for herein; and 3) signature
guaranties for all
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executed documents. As soon as Atlantic is provided with one or more
subscription agreements pertaining to the JMAR Stock, it will immediately
execute and deliver them to Escrow Agent 1. Signature guaranties also shall be
provided for all subscription agreements Atlantic delivers to Escrow Agent 1. If
no securities firms, banks or other institutions located in St. Kitts are
capable of providing signature guaranties acceptable to the transfer agent, then
Altantic shall execute the documents under alternative conditions satisfactory
to the transfer agent.
5. JMAR'S DEPOSIT OF THE ATLANTIC PREFERRED STOCK WITH ESCROW AGENT 1:
JMAR currently is in possession of 4,000 shares of Atlantic Preferred
Stock. No later than the date JMAR executes this Agreement, JMAR shall deposit
with Escrow Agent 1 the 4,000 shares of Atlantic Preferred Stock in its
possession, together with a stock assignment to effect the transfer of the
Atlantic Preferred Stock to Atlantic with the number of shares left blank.
Escrow Agent 1 shall hold and maintain the Atlantic Preferred Stock until JMAR
obtains a sufficient distribution of proceeds under the formula provided in
Section 7 to cover the par value of the Preferred Shares and dividends owed
thereon and fees and expenses as provided therein. If JMAR does not receive an
amount sufficient to cover the amounts owed to JMAR under Section 7, Escrow
Agent 1 shall redeem the maximum pro-rata number of Preferred Shares as can be
redeemed at $250.00 a share according to the amount of payment received by JMAR.
6. SALE OF THE JMAR STOCK
Once Atlantic has deposited the 600,000 shares of JMAR Stock with
Escrow Agent 2, JMAR shall attempt to locate a buyer or buyers to purchase the
JMAR Stock held by
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Escrow Holder 2. Once an offer to purchase the JMAR Stock is received from a
buyer, and the purchase price is not less than $1.99 per share, Atlantic shall
be deemed to have accepted such offer upon receipt of written notice thereof
from JMAR. If a buyer purchases the JMAR Stock for a price less than $1.99 per
share, then JMAR shall receive the amount specified in Section 7.1 minus 30% of
the difference between $1.99 per share and the purchase price per share
multiplied by the number of shares of JMAR Stock sold.
Upon receipt by Escrow Agent 1 of good funds representing payment for
the JMAR Stock, Escrow Agent 1 shall confirm this fact in writing to Escrow
Agent 2, and Escrow Agent 2 shall thereupon deliver to JMAR's transfer agent the
stock certificates representing the 600,000 shares of JMAR Stock deposited by
Atlantic with Escrow Agent 2, together with any documentation as the transfer
agent shall require, with a request that a new stock certificate or certificates
be issued in accordance with the purchaser's or purchasers' instructions and be
delivered to Escrow Agent 1.
Upon receipt by Escrow Agent 1 of the new stock certificate or
certificates in such form as are acceptable to the purchaser or purchasers,
Escrow Agent 1 shall distribute the proceeds from the sale of the JMAR Stock as
provided in Section 7 below and shall deliver the new stock certificate or
certificates to the purchaser or purchasers. Escrow Agent 1 also shall deliver
those Atlantic Preferred Shares and stock assignments, redeemed by the foregoing
distribution of proceeds, to Escrow Agent 2 who will convey them to Atlantic.
7. DISTRIBUTION OF PROCEEDS FROM THE SALE OF THE JMAR STOCK:
7.1 The proceeds from the sale of the JMAR Stock shall be distributed
as
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follows:
(A) JMAR shall receive :
(I) $1,000,000 representing the face value of the Atlantic
Preferred Shares issued to JMAR under the March 31, 1995 Agreement; (ii) unpaid
dividends on the Atlantic Preferred Shares due to JMAR amounting to $64,167 as
of December 1, 1996; and (iii) legal fees and expenses and other out-of-pocket
costs incurred by JMAR in connection with the Civil Action and this Agreement
amounting to $61,150. Atlantic shall receive a credit against the foregoing sums
in the amount of $209,705, being the net proceeds JMAR received from the
foreclosure sale of Atlantic's 200,000 shares of JMAR Stock which had been
pledged as security in a loan transaction involving Creative Sports. Therefore,
JMAR shall receive $915,612 from the proceeds of the sale of the JMAR Stock
pursuant to Section 6 hereof, provided this transaction is completed prior to
December 31, 1996.2/ If this transaction is not completed and Atlantic has
complied prior to December 31, 1996 with all requests for documents presented to
Atlantic by JMAR or the transfer agent prior to December 31, 1996, including but
not limited to requests for signed subscription agreements and all required
documents of the transfer agent, the Preferred Stock dividend of $5,833 due on
January 1, 1997 will be pro-rated on a daily basis until the completion of the
transaction.
(B) JMAR is deemed to have received its funds upon payment of
good funds to Escrow Agent 1 pursuant to paragraph 6 herein and when Escrow
Agent 1 has received the newly issued certificates in the names of the
purchasers in such form as is acceptable to
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2/ The amount JMAR receives is subject to the offset specified in Section 6 in
the event the purchase price paid for the JMAR Stock is less than $1.99 per
share.
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<PAGE> 6
the purchaser or purchasers. Notwithstanding the foregoing, the transaction will
be deemed to be completed upon receipt of good funds by Escrow Agent 1 pursuant
to paragraph 6 and delivery to Escrow Agent 1 by Atlantic of 600,000 shares of
JMAR Stock properly endorsed by Atlantic, along with all necessary documents to
transfer ownership of the stock, as determined by the transfer agent.
(C) Atlantic shall receive any and all remaining proceeds
obtained through the sale of the JMAR Stock pursuant to Section 6 hereof after
JMAR is paid the sums specified in paragraph 7.1(a).
7.2 Concurrent with the distribution of the proceeds to Atlantic
under section 7.1(c), JMAR shall deliver to Atlantic (i) a release by JMAR of
any interest in, or claim to, the 200,000 shares of JMAR Stock issued to and
remaining in the possession of Atlantic and not delivered to Escrow Agent 1; and
(ii) the Atlantic Preferred Shares presently issued to JMAR, upon payment
evidenced by JMAR's receipt of the proceeds to be paid pursuant to the terms of
paragraph 7.1(a).
8. POWERS OF ESCROW AGENTS: The Escrow Agents undertake the duties and
obligations imposed by this Escrow Agreement upon the following terms and
conditions, all of which shall be binding on JMAR and Atlantic:
(A) In performing any duties under the Agreement, an Escrow
Agent shall not be liable to any party for damages, losses, or expenses, except
for gross negligence or willful misconduct on the part of the Escrow Agent.
Neither Escrow Agent shall incur any such liability for (1) any act or failure
to act made or omitted in good faith, or (2) any action taken or omitted in
reliance upon any instrument, including any written statement or affidavit
provided for in
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this Escrow Agreement that an Escrow Agent shall in good faith believe to be
genuine, nor will an Escrow Agent be liable or responsible for forgeries, fraud,
impersonations, nor determining the scope of any representative authority. In
addition, each Escrow Agent may consult with legal counsel in connection with
such Escrow Agent's duties under this Escrow Agreement and shall be fully
protected in any act taken, suffered, or permitted by him/her in good faith in
accordance with the advice of counsel. Neither Escrow Agent is responsible for
determining and verifying the authority of any person acting or purporting to
act on behalf of any party to this Escrow Agreement.
(B) In the event that the conditions of this Escrow Agreement
are not promptly fulfilled, or if an Escrow Agent renders any service not
provided for in this Escrow Agreement, or if the parties request a substantial
modification of its terms, or if any controversy arises, or if either Escrow
Agent is made a party to, or intervenes in, any litigation pertaining to this
escrow or its subject matter, such Escrow Agent shall be reasonably compensated
for such extraordinary services and reimbursed for all costs, attorney's fees
and expenses occasioned by such default, delay, controversy or litigation and
such Escrow Agent shall have the right to retain all documents and/or other
things of value at any time held by such Escrow Agent until such compensation,
fees, costs, and expenses are paid. The party or parties requesting such
additional services or modifications, or responsible for the default, delay,
controversy or litigation, shall pay these sums upon demand and such Escrow
Agent may deduct such sums from the funds to be distributed to such party or
parties hereunder.
(C) If any controversy arises between the parties to this
Agreement, or with any other party, concerning the escrow services provided
under this Agreement, its terms or conditions, neither Escrow Agent will be
required to determine the controversy or to take any action
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regarding it. The Escrow Agents may hold all documents and funds and may wait
for settlement of any such controversy by final appropriate legal proceedings or
other means as, in each Escrow Agent's discretion, such Escrow Agent may be
required, despite what may be set forth elsewhere in this Escrow Agreement. In
such event, neither Escrow Agent will be liable for interest or damage.
Furthermore, each Escrow Agent may at its option, file an action of interpleader
requiring the parties to answer and litigate any claims and rights among
themselves. Each Escrow Agent is authorized to deposit with the clerk of the
court all documents and funds held in escrow, except all costs, expenses,
charges and reasonable attorney fees incurred by such Escrow Agent due to the
interpleader action and which the parties jointly and severally agree to pay.
Upon initiating such action, such Escrow Agent shall be fully released and
discharged of and from all obligations and liability imposed by the terms of
this Escrow Agreement.
(D) JMAR and Atlantic and their respective successors and
assigns, jointly and severally, agree to indemnify and hold each Escrow Agent
harmless against any and all losses, claims, damages, liabilities and expenses,
including reasonable costs of investigation, attorney's fees and disbursements
that may be imposed on each Escrow Agent or incurred by each Escrow Agent in
connection with the performance of its duties under this Escrow Agreement,
unless such Escrow Agent's conduct was grossly negligent or willful.
(E) In the event of an actual conflict between either Escrow
Agent's representation of JMAR or Atlantic and its duties as Escrow Agent
hereunder, such Escrow Agent may resign immediately. Either Escrow Agent may
also resign at any time upon giving at least ten (10) days written notice to the
parties; provided, however, that no such resignations shall become
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effective until the appointment of a successor escrow agent which shall be
accomplished as follows: The parties shall use their best efforts to mutually
agree on a successor escrow agent within ten (10) days after receiving such
notice. If the parties fail to agree upon a successor escrow agent within such
time, such Escrow Agent shall have the right to appoint a successor escrow agent
authorized to do business in the State of California. The successor escrow agent
shall execute and deliver an instrument accepting such appointment and its
properties, rights, powers and duties of the predecessor escrow agent as if
originally named as escrow agent and the resigning Escrow Agent shall be
discharged from any further duties and liabilities under this Escrow Agreement.
9. DISMISSAL: Upon full performance of this Agreement, JMAR shall dismiss
the Civil Action described in Section 2.1 with prejudice, each party to bear its
own costs except as provided herein.
10. GENERAL RELEASES: In consideration of the mutual general releases
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which is acknowledged by each party, JMAR and ATLANTIC agree and
generally release each other as follows:
10.1 Except as to such rights or claims as may be created by this
Agreement and such Subscription Agreements as are executed by Atlantic, each
party hereby releases, remises and forever discharges each other party, and each
of its present and former agents, servants, officers, directors, employees,
shareholders, principals, predecessors, alter egos, partners, parents,
subsidiaries, attorneys, insurers, reinsurers, sureties, successors and assigns,
from any and all matters as described more fully at Section 2.2 above and any
claims, demands and cause or causes of action heretofore or hereafter arising
out of, connected with or incidental to the dealings between the parties
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prior to the effective date hereof, including, without limitation on the
generality of the foregoing, any and all claims, demands and cause or causes of
action reflected in the civil action described more fully at Section 2.1.
Notwithstanding the foregoing, Atlantic shall not be released from liability
arising out of, or related to, any breach by Atlantic of its representations and
warranties contained in Section 11 of this Agreement or any erroneous
representations and warranties contained therein.
10.2 THE UNDERSIGNED ALL ACKNOWLEDGE THAT THEY HAVE BEEN ADVISED BY
LEGAL COUNSEL, AND THAT THEY ARE FAMILIAR WITH AND SPECIFICALLY WAIVE THE
BENEFIT OF THE PROVISIONS OF SECTION 1542 OF THE CIVIL CODE OF THE STATE OF
CALIFORNIA, WHICH PROVIDES AS FOLLOWS:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR.
11. REPRESENTATIONS AND WARRANTIES:
11.1 Atlantic represents and warrants to, and agrees with, JMAR as
follows.
(A) Atlantic has full right, title and interest in the 600,000
shares of JMAR Stock, free and clear of any security interest, lien, charge,
encumbrance, option or any claim whatsoever.
(B) Atlantic and its directors, officers, employees, agents or
affiliates have complied with all federal or state securities statutes and
regulations in connection with
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Atlantic's ownership of the JMAR Stock.
(C) Neither the execution or delivery by Atlantic of this
Agreement nor the performance by Atlantic of the transactions contemplated
herein violate any provision of law applicable to Atlantic or conflict with or
result in a breach or termination of any provision of, or constitute a default,
or will result in the creation of any lien, charge or encumbrance upon any of
the property or assets of Atlantic pursuant to or under its certificate of
incorporation or By-laws, or any mortgage, deed of trust, indenture or other
agreement or instrument, or any other judgment, decree, statute, regulation or
any other restriction of any kind or character to which Atlantic may be bound
with or without the giving of notice, the passage of time or both, except with
respect to applicable laws affecting creditors rights.
11.2 Each of the parties to this Agreement represents and warrants to,
and agrees with, each other as follows:
(A) Each party has received independent legal advice from its
attorneys with respect to the advisability of making the settlement provided for
herein, with respect to the advisability of executing this Agreement, and with
respect to the meaning of California Civil Code Section 1542.
(B) No party (nor any officer, agent, partner, employee,
representative or attorney of or for any party), has made any statement or
representation to any other party regarding any fact relied upon in entering
into this Agreement, and each party does not rely upon any statement,
representation or promise of any other party (or any officer, agent, partner,
employee, representative or attorney of or for any other party), in executing
this Agreement, or in making the settlement provided for herein, except as
expressly stated in this Agreement.
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(C) Each party to this Agreement has made such investigation of
the facts pertaining to this settlement and this Agreement, and of all the
matters pertaining to it, as it deems necessary.
(D) Each party or responsible officer or partner thereof has
read this Agreement and understands the contents hereof. Each of the officers or
partners executing this Agreement on behalf of their respective corporations or
partnerships is empowered to do so and thereby binds such respective corporation
or partnership.
(E) Neither party has assigned, transferred, or granted, or
purported to assign, transfer, or grant, any of the claims, demands, and cause
or causes of action disposed of by this Agreement.
(F) Each term of this Agreement is contractual and not merely a
recital.
(G) Each party is aware that it may hereafter discover claims or
facts in addition to or different from those it now knows or believes to be true
with respect to the matters related herein. Nevertheless, it is the intention of
the parties to fully, finally and forever settle and release all such matters,
and all claims relating to them, which do now exist or may have existed between
them. In furtherance of such intention, the releases given herein shall be and
remain in effect as full and complete mutual releases of all such matters
notwithstanding the discovery or existence of any additional or different claims
or facts relating to them. Said releases shall not apply to Atlantic's breaches
of the representations and warranties made in Section 11 of this Agreement or to
any erroneous representations contained in said Section.
(H) The parties will execute all such further and additional
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documents as shall be reasonable, convenient, necessary or desirable to carry
out the provisions of this Agreement.
(I) It is within the contemplation of each of the parties to
this Agreement that each of them may have claims for relief or causes of action
for malicious prosecution or abuse of process or other claims in connection with
the filing of claims for relief, causes of action, counterclaims or
cross-complaints in the Civil Action described more fully at Section 2.1 and
matters undertaken in connection therewith. It is the intention of the parties
to this Agreement to release any and all such claims, to deny that any malicious
prosecution of actions or abuse of process has occurred, and to represent and
agree that the filing of all claims for relief, causes of action, counterclaims
or cross-complaints in the foregoing civil action, was done pursuant to advice
of legal counsel and upon probable cause.
12. INDEMNIFICATION: Atlantic agrees to indemnify, reimburse, and hold
harmless JMAR from and against all claims, damages, losses, liabilities,
demands, suits, judgments, causes of action, civil and criminal legal
proceedings, penalties, fines, and other sanctions, and any attorney's fees and
other reasonable costs and expenses, relating to or arising out of, Atlantic's
breach of, any representation, warranty, or covenant made by it in Section 11 of
this Agreement or any erroneous representations and warranties contained in
Section 11.
13. SETTLEMENT: This Agreement effects the settlement of claims which are
denied and contested, and nothing contained herein shall be construed as an
admission by any party of any liability of any kind to any other party. Each of
the parties denies any liability in connection with any claim and intends by
this Agreement solely to avoid litigation and buy its peace. The parties agree
to refrain from publicly disseminating this Agreement and the settlement terms
embodied herein
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to individuals or entities unaffiliated with their respective corporations,
unless required to do so: 1) by the Securities and Exchange Commission; 2) to
comply with a party's duties and/or obligations under applicable law; 3) to
fulfill disclosure obligations imposed by law; or 4) to provide retained
professionals such as attorneys and accountants with information necessary for
said professionals to perform their services. The parties additionally agree not
to make any adverse derogatory statements which are untrue concerning this
transaction or the other party in any report, press release, quarterly or annual
financial statement or report, and any response for information thereof.
14. MISCELLANEOUS:
14.1 This Agreement shall be deemed to have been executed and
delivered within the State of California, and the rights and obligations of the
parties hereto shall be construed and enforced in accordance with and governed
by, the laws of the State of California.
14.2 This Agreement and such Subscription Agreements as are executed
by the parties pursuant to this Agreement constitute the entire agreement
between the parties which supersedes all prior and contemporaneous oral and
written agreements and discussions. This Agreement may be amended only by an
agreement in writing.
14.3 This Agreement is binding upon and shall inure to the benefit of
the parties and each of their present and former agents, servants, officers,
directors, employees, shareholders, principals, predecessors, alter egos,
partners, parents, subsidiaries, attorneys, insurers, reinsurers, sureties,
heirs, executors, administrators, trustees, successors and assigns.
14.4 Each party has cooperated in the drafting and preparation of this
Agreement. Hence, in any construction to be made of this Agreement, the same
shall not be construed against any party.
-14-
<PAGE> 15
14.5 In the event of litigation or arbitration relating to this
Agreement, the prevailing party shall be entitled to recover reasonable
attorneys' fees and costs.
14.6 This Agreement may be executed in counterparts, and when each
party has signed and delivered at least one such counterpart, each counterpart
shall be deemed an original, and, when taken together with the other signed
counterparts, shall constitute one Agreement, which shall be binding upon and
effective as to all parties.
14.7 Each party shall pay for its own legal fees and other expenses
relating to the litigation referred to in Paragraph 2.1.
14.8 This Agreement shall be effective as of the date the last
counterpart is executed.
15. NOTICES: All notices, consents, requests, instructions, approvals, and
other communications hereunder shall be validly given, made or received if in
writing and delivered personally or sent by registered or certified mail,
postage prepaid, to:
(a) JMAR INDUSTRIES, INC.
3956 Sorrento Valley Blvd., Suite D
San Diego, CA 92121
Attn: Dennis Valentine,
Chief Financial Officer
Fax Number: (619) 535-1835
(b) ATLANTIC AMERICAN HOLDING COMPANY LIMITED
2902 Bienville Blvd., Suite 6
Ocean Springs, Mississippi 39564
Attn: Harvey Milam
Facsimile: 601/875-7761
(c) THE ESCROW AGENTS:
Parker, Milliken, Clark, O'Hara & Samuelian
333 South Hope Street, 27th Floor
-15-
<PAGE> 16
Los Angeles, CA 90071-1488
Attn: Joseph G. Martinez, Esq.
Fax Number: (213) 683-6669
SANKARY & SANKARY
4518 Vista De La Tierra
Del Mar, California 92014
Attn: Morris Sankary
Fax Number: (619) 481-1292
JMAR INDUSTRIES, INC.
DATED: December 24, 1996 /s/ Dennis E. Valentine
---------------------------------
By: Dennis E. Valentine
Its: Chief Financial Officer
ATLANTIC AMERICAN HOLDING COMPANY LIMITED
DATED: December 26, 1996 /s/ Earl A. L. Maynard
---------------------------------
By: Earl A L Maynard
Its: Chairman
PARKER, MILLIKEN, CLARK, O'HARA
& SAMUELIAN
DATED: December 30, 1996 /s/ Joseph G. Martinez
---------------------------------
By: Joseph G. Martinez
SANKARY & SANKARY
DATED: December 31, 1996 /s/ Morris Sankary
---------------------------------
By: Morris Sankary
<PAGE> 1
EXHIBIT 10.24
MANAGEMENT WARRANT INCENTIVE PLAN
FOR PACIFIC PRECISION LABORATORIES, INC.
AS AMENDED
This Management Warrant Incentive Plan ("Plan") for the key employees
of Pacific Precision Laboratories, Inc. ("PPL") replaces the Management Warrant
Incentive Plan (the "1993 Plan") for PPL dated as of October 6, 1993,
established at the time of the acquisition of PPL by JMAR Industries, Inc.
("JMAR"). The 1993 Plan made available for grant to the key PPL employees (the
"Grantees") warrants (the "Warrants") to purchase 450,000 shares of JMAR common
stock, of which warrants to purchase 200,000 shares have been granted as of
August 15, 1996. The terms of the Plan shall be as follows:
1. Subject to the stock price performance requirement set forth in item 2
below, one third of the Warrants held by each Grantee will become
exercisable one year after the date of grant, an additional one third will
become exercisable two years after the date of grant, and the remaining one
third will become exercisable three years after the date of grant.
2. Subject to the vesting requirements set forth above, all Warrants become
exercisable upon the earlier of (i) forty five days after the closing high
bid price of the Company's common stock as reported on NASDAQ-NMS for 20
consecutive trading days is greater than $6.38; (ii) the exercise by the
warrant holders of at least 90 percent of the Company's warrants which
currently trade on the NASDAQ-NMS under the symbol JMARW; or (iii) nine
years and six months after the date of grant.
3. Prior to the date at which the Warrants become exercisable, JMAR will
register the resale of the shares which underlie the Warrants.
4. Subject to the other provisions hereof, unexercised Warrants held by an
employee whose employment terminates with PPL or JMAR for reasons other
than death, will expire sixty days after the date of that employee's
termination, and those Warrants will be returned to the PPL pool for
reallocation to other PPL employees. In the event that the Warrant holder
dies while still employed by
1
<PAGE> 2
PPL or JMAR the Warrants will remain exercisable by the heirs of the
deceased employee for a period of one year after his/her death.
5. The Warrants shall terminate three years following the date such Warrants
are first exercisable pursuant to Paragraph 2 or, in any event, ten years
after date of grant.
6. The Plan shall be administered by a Committee (the "Committee") of the
Board of Directors of PPL (the "PPL Board"), the members of which shall be
appointed by the Chairman of the PPL Board from among the non-PPL employee
members of the PPL Board. The Committee shall consider the recommendations
of management, but shall have full and final authority in its discretion:
(i) to determine the number of shares and purchase price of Common Stock
covered by each Warrant, the individuals to whom and the time or times at
which Warrants shall be granted; (ii) to construe and interpret the Plan;
(iii) to determine the terms and provisions of the respective Agreements,
which need not be identical, including, but without limitation, terms
covering the payment of the exercise price; and (iv) to make all other
determinations and take all other actions deemed necessary or advisable for
the proper administration of the Plan. All such actions and determinations
of the Committee shall be conclusively binding for all purposes and upon
all persons.
7. The exercise price per share with respect to each Warrant granted under the
Plan shall be equal to the higher of (i) the fair market value of a share
of JMAR Common Stock on the date of grant or (ii) $3.00. For the purposes
hereof, fair market value shall be defined as follows: (i) in case the JMAR
Common Stock shall not then be listed and traded upon a recognized
securities exchange, upon the basis of the mean between the closing bid and
asked quotations for such stock (or the closing selling price for such
stock, if applicable) on the date of grant (as reported by a newspaper of
general circulation or a recognized stock quotation service) or, in the
event that there shall be no bid or asked quotations (or reported closing
selling price) on the date of grant, then upon the basis of the mean
between the closing bid and asked quotations (or the closing selling price,
2
<PAGE> 3
as the case may be), on the date nearest preceding the date of grant or
(ii) in case JMAR Common Stock shall then be listed and traded upon a
recognized securities exchange, upon the basis of the closing selling price
at which shares of JMAR Common Stock were traded on such recognized
securities exchange on the date of grant or, if JMAR Common Stock was not
traded on said date, upon the basis of the closing selling price on the
date nearest preceding the date of grant.
JMAR INDUSTRIES, INC. PACIFIC PRECISION
LABORATORIES, INC.
/s/ John S. Martinez /s/ Robert S. Hash
- ------------------------------------ ------------------------------------
John S. Martinez, Ph.D. Robert S. Hash
Chairman and Chief Executive Officer President and Director
/s/ John S. Martinez
------------------------------------
John S. Martinez
Chairman of the Board
/s/ Leo Yoffe
------------------------------------
Leo Yoffe
Director
/s/ Dennis E. Valentine
------------------------------------
Dennis E. Valentine
Director
/s/ Marvin W. Sepe
------------------------------------
Marvin W. Sepe
Director
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report included in this Form 10-K into the Company's
previously filed Registration Statements Files No. 33-66672, No. 33-66674, No.
33-47390, No. 33-96848, No. 333-10923 and No. 333-10925.
/s/ Arthur Andersen LLP
-------------------------
ARTHUR ANDERSEN LLP
San Diego, California
March 14, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,629,286
<SECURITIES> 0
<RECEIVABLES> 3,011,992
<ALLOWANCES> 17,230
<INVENTORY> 3,855,312
<CURRENT-ASSETS> 11,103,050
<PP&E> 4,619,844
<DEPRECIATION> 1,915,384
<TOTAL-ASSETS> 15,395,518
<CURRENT-LIABILITIES> 5,359,303
<BONDS> 667,310
0
0
<COMMON> 167,603
<OTHER-SE> 9,201,302
<TOTAL-LIABILITY-AND-EQUITY> 15,395,518
<SALES> 16,331,090
<TOTAL-REVENUES> 16,331,090
<CGS> 9,638,954
<TOTAL-COSTS> 9,638,954
<OTHER-EXPENSES> 6,188,169
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 288,372
<INCOME-PRETAX> 604,569
<INCOME-TAX> (175,000)
<INCOME-CONTINUING> 779,569
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 779,569
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
