<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------------
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
Filed by the Registrant [ X ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
JMAR TECHNOLOGIES, INC.
(Name of Registrant as Specified in its Charter)
_____________________________________________
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(4) and 0-11.
1. Title of each class of securities to which transaction applies:
2. Aggregate number of securities to which transaction applies:
3. Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined):
4. Proposed maximum aggregate value of transaction:
5. Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1. Amount Previously Paid:
2. Form, Schedule or Registration Statement No.:
3. Filing Party:
4. Date Filed:
<PAGE> 2
[JMAR TECHNOLOGIES, INC. LOGO]
June 29, 1999
Dear Shareholder:
It is my pleasure to invite you to the JMAR Technologies, Inc. 1999 Annual
Meeting of Shareholders.
We will hold the meeting on Thursday, August 12, 1999 at 10:00 a.m. at the
Hilton La Jolla Torrey Pines Hotel, 10950 North Torrey Pines Road, La Jolla,
California (formerly the Sheraton Torrey Pines Hotel). After the close of the
formal portion of the meeting we will review the major developments of 1998,
answer your questions and discuss our future prospects. We will also have some
product demonstrations and a number of our key employees available to meet with
you. For those who plan to attend the meeting, we would also like to invite you
on an afternoon tour of JMAR's Research facility for demonstrations conducted by
JMAR's laser and X-ray Teams. A separate invitation with additional information
is enclosed.
This booklet includes the Notice of Annual Meeting and the Proxy Statement. The
Proxy Statement describes the business that we will conduct at the meeting and
provides additional information about JMAR's management.
Your vote is important. Whether or not you plan to attend the meeting, please
complete, date, sign and return the enclosed proxy card promptly. If you attend
the meeting and prefer to vote in person, you may do so.
We look forward to seeing you at the meeting.
Sincerely,
/s/ John S. Martinez
John S. Martinez, Ph.D.
Chairman of the Board
and Chief Executive Officer
<PAGE> 3
JMAR TECHNOLOGIES, INC.
NOTICE OF 1999 ANNUAL MEETING OF SHAREHOLDERS
DATE: THURSDAY, AUGUST 12, 1999
TIME: 10:00 A.M.
PLACE: HILTON LA JOLLA TORREY PINES HOTEL
10950 NORTH TORREY PINES ROAD
LA JOLLA, CALIFORNIA
DEAR SHAREHOLDERS:
At our 1999 Annual Meeting, we will ask you to:
(1) Elect five (5) directors to serve for the next year or until
their successors are elected;
(2) Consider and approve the Company's 1999 Stock Option Plan; and
(3) Transact any other business that may properly be presented at
the Annual Meeting.
These items of business are more fully described in the Proxy Statement
accompanying this Notice.
If you were a shareholder of record at the close of business on June 29, 1999,
you are entitled to vote at the Annual Meeting.
You are cordially invited to attend the meeting in person. However, to assure
your representation at the meeting, we urge you to mark, sign, date and return
the enclosed proxy card as promptly as possible in the enclosed postage-prepaid
envelope. If you do attend the meeting, you may then withdraw your proxy and
vote in person.
Sincerely,
/s/ Dennis E. Valentine
Dennis E. Valentine
Corporate Secretary
and Chief Financial Officer
San Diego, California
June 29, 1999
IMPORTANT: WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE
REQUESTED TO COMPLETE AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE
ENVELOPE PROVIDED.
<PAGE> 4
PROXY STATEMENT FOR JMAR TECHNOLOGIES, INC.
1999 ANNUAL MEETING OF SHAREHOLDERS
INFORMATION ABOUT THE ANNUAL MEETING AND VOTING
WHY DID YOU SEND ME THIS PROXY STATEMENT?
We sent you this Proxy Statement and the enclosed proxy card because our Board
of Directors is soliciting your proxy to vote at the 1999 Annual Meeting of
Shareholders. This Proxy Statement summarizes the information you need to know
to cast an informed vote at the Annual Meeting. However, you do not need to
attend the Annual Meeting to vote your shares. Instead, you may simply complete,
sign and return the enclosed proxy card.
Along with this Proxy Statement, we are also sending you the JMAR Technologies,
Inc. ("JMAR" or "Company") 1998 Summary Annual Report and Financial Information
Appendix which includes our complete financial statements, together with the
report of the Company's Independent Auditors, the "Management Discussion and
Analysis" and other related information.
WHO IS ENTITLED TO VOTE?
We will begin sending this Proxy Statement, the attached Notice of Annual
Meeting and the enclosed proxy card on or about July 7, 1999 to all shareholders
entitled to vote. Shareholders who owned JMAR Common Stock at the close of
business on June 29, 1999 are entitled to vote. On this record date, there were
18,029,281 shares of JMAR Common Stock outstanding. JMAR Common Stock is our
only class of outstanding capital stock.
WHAT CONSTITUTES A QUORUM?
A majority of our shareholders entitled to vote at the meeting must be present,
in person or by proxy, in order to constitute a quorum. We can only conduct the
business of the meeting if a quorum has been established. In order to conduct
the meeting and to vote to elect the directors, proxies marked as abstentions
and broker non-votes will be considered present at the meeting. As discussed
below, however, in determining the number of shares present for voting on the
proposal to approve the 1999 Stock Option Plan, proxies marked as abstentions
will be counted as present at the meeting, while broker non-votes will not be
counted as present at the meeting for that proposal.
HOW MANY VOTES DO I HAVE?
Each share of JMAR Common Stock that you owned at the close of business on June
29, 1999 entitles you to one vote. The proxy card indicates the number of votes
that you have.
HOW DO I VOTE BY PROXY?
Whether or not you plan to attend the Annual Meeting, we urge you to complete,
sign and date the enclosed proxy card and to return it promptly in the envelope
provided. Returning the proxy card will not affect your right to attend the
Annual Meeting and vote.
If you properly fill in your proxy card and send it to us in time to vote, your
"proxy" (one of the individuals named on your proxy card) will vote your shares
as you have directed. If you sign the proxy card but do not make specific
choices, your proxy will vote your shares as recommended by the Board of
Directors as follows:
- "FOR" the election of all five nominees for director
- "FOR" approval of the Company's 1999 Stock Option Plan
If any other matter is presented, your proxy will vote in accordance with the
recommendation of the Board of Directors, or, if no recommendation is given, in
accordance with his or her best judgment. At the time this
1
<PAGE> 5
Proxy Statement went to press, we knew of no matters which needed to be acted on
at the Annual Meeting, other than those discussed in this Proxy Statement.
If you hold your shares of JMAR Common Stock in "street name" (that is, through
a broker, bank or other nominee) and you fail to instruct your broker, bank or
nominee as to how to vote such shares of common stock, your broker, bank or
nominee may, in its discretion, vote your shares "FOR" the election of the
nominees for director set forth herein, and "FOR" approval of the Company's 1999
Stock Option Plan.
MAY I CHANGE MY VOTE AFTER I RETURN MY PROXY?
Yes. If you are a "record holder" of the shares (i.e., your shares are not held
in "street name") and you have returned the enclosed proxy card, you may change
your vote at any time before the vote is conducted at the Annual Meeting. You
may change your vote in any one of three ways:
- You may request another proxy card from JMAR's Corporate
Secretary, complete it and mail it to JMAR's Corporate
Secretary.
- You may notify JMAR's Corporate Secretary by mail before the
Annual Meeting that you have revoked your proxy.
- You may attend the Annual Meeting and vote in person.
HOW DO YOU VOTE IN PERSON?
If you are a record holder of the shares and you plan to attend the Annual
Meeting and vote in person, we will give you a ballot form when you arrive. Your
voting in person at the Annual Meeting will take precedence over any prior
proxies you have given. However, if your shares are held in "street name" (i.e.,
in the name of your broker, bank or other nominee), you must obtain a legal
proxy from the broker, bank or other nominee and bring it to the Annual Meeting
in order to cast your vote in person.
WHAT VOTE IS REQUIRED TO APPROVE EACH PROPOSAL?
PROPOSAL 1:
Elect Five Directors The five nominees for director who receive
the most votes will be elected. So, if a
quorum exists and you do not vote for a
particular nominee, or you indicate
"WITHHOLD AUTHORITY" to vote for a
particular nominee on your proxy card,
your vote will not count either "for" or
"against" the nominee. Our Certificate of
Incorporation does not permit cumulative
voting.
PROPOSAL 2:
Approve 1999 Stock Option Plan The affirmative vote of a majority of the
votes present at the Annual Meeting on
this proposal is required to approve the
Company's 1999 Stock Option Plan. For this
purpose, if you "ABSTAIN" from voting,
your vote will be counted as present at
the meeting and will have the effect of an
"AGAINST" vote. Broker non-votes, however,
are not counted in determining the total
number of shares present at the meeting
and have no effect on the outcome of this
proposal.
WHO PAYS THE COST OF SOLICITING THESE PROXIES?
JMAR will pay all the costs of soliciting these proxies. In addition to mailing
proxy soliciting material, our directors, officers and employees also may
solicit proxies in person, by telephone or by other electronic means of
communication for which they will receive no compensation. We will ask banks,
brokers and other institutions, nominees and fiduciaries to forward the proxy
materials to their principals and to obtain authority to execute proxies. We
will reimburse them for their reasonable expenses.
2
<PAGE> 6
INFORMATION ABOUT JMAR STOCK OWNERSHIP
OWNERSHIP OF 5% OR MORE OF JMAR COMMON STOCK
As of June 29, 1999, one individual and one entity were known by the Company to
be the beneficial owner of more than 5 percent of the Company's Common Stock. A
person is deemed to be the beneficial owner of JMAR Common Stock, whether or not
that person has any economic interest therein, if the person directly or
indirectly has (or shares with others) voting or investment power with respect
to the JMAR shares or has the right to acquire beneficial ownership of JMAR
shares within sixty days.
<TABLE>
<CAPTION>
==========================================================================================
NAME AND ADDRESS NUMBER OF SHARES PERCENT OF TOTAL
BENEFICIALLY OWNED
==========================================================================================
<S> <C> <C>
John S. Martinez
3956 Sorrento Valley Blvd. 1,609,114(1) 8.60%
San Diego, CA 92121
- ------------------------------------------------------------------------------------------
Kernco Trust SA
2 rue Jargonnant 950,000(2) 5.20%
CH-1211 Geneva
Switzerland
==========================================================================================
</TABLE>
(1) Includes: (a) 402,965 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) 679,349 shares of Common Stock which are issuable upon
exercise of currently exercisable warrants and stock options; and (c) 526,800
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").
(2) Includes 250,000 shares which are issuable upon exercise of currently
exercisable warrants.
OWNERSHIP OF JMAR COMMON STOCK BY MANAGEMENT
The following table shows the beneficial ownership of Common Stock of the
Company as of June 29, 1999 by each nominee for director, the "Named Officers"
(as defined in "Executive Compensation" on page 12 below) and by all director
nominees and executive officers as a group. The Company has also provided the
beneficial ownership for certain other executive officers who are not "Named
Officers". Except as otherwise noted, the following stockholders have sole
voting and investment power with respect to the shares. Information with respect
to beneficial ownership is based on information furnished to the Company by each
stockholder included in the table.
3
<PAGE> 7
<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) 1,609,114 8.60%
Marvin W. Sepe(2) 264,027 1.44%
Dennis E. Valentine(3) 156,885 (12)
Richard M. Foster(4) 87,313 (12)
Leonid Yoffe(5) 69,434 (12)
James H. Banister, Jr.(6) 61,686 (12)
Vernon H. Blackman(7) 54,224 (12)
John P. Ricardi(8) 43,097 (12)
Barry Ressler(9) 31,479 (12)
C. Neil Beer(10) 23,790 (12)
All executive officers and
directors as a group (12
persons)(11) 2,417,721 12.49%
</TABLE>
(1) See footnote (1) to preceding table.
(2) Includes 260,153 shares which are issuable upon exercise of currently
exercisable stock options and warrants.
(3) Includes 130,080 shares which are issuable upon exercise of currently
exercisable stock options and warrants.
(4) Includes 36,666 shares which are issuable upon exercise of currently
exercisable stock options.
(5) Includes 36,052 shares which are issuable upon exercise of currently
exercisable stock options and warrants.
(6) Includes 51,730 shares which are issuable upon exercise of currently
exercisable stock options and warrants.
(7) Includes 37,668 shares which are issuable upon exercise of currently
exercisable stock options and warrants.
(8) Includes 39,356 shares which are issuable upon exercise of currently
exercisable stock options.
(9) Includes 23,333 shares which are issuable upon exercise of currently
exercisable stock options.
(10) Includes 20,833 shares which are issuable upon exercise of currently
exercisable stock options.
(11) Includes 1,331,887 shares which are issuable upon exercise of currently
exercisable stock options and warrants.
(12) Less than one percent.
4
<PAGE> 8
ELECTION OF DIRECTORS
NOMINEES
We are asking the shareholders to elect a board of five directors at the Annual
Meeting. Unless otherwise instructed, the proxy holders will vote the proxies
received by them for the Company's five nominees named below, all of whom are
presently directors of the Company. While the Company has no reason to believe
that any of the nominees will be unable to serve as a director, if such an event
should occur, the shares will be voted for such substitute nominee or nominees
as may be designated by the Board of Directors. The term of office of each
person elected as director will continue until the next Annual Meeting of
Shareholders or until his successor has been elected and qualified.
<TABLE>
<CAPTION>
===================================================================================================
NAME OF NOMINEE AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
===================================================================================================
<S> <C> <C> <C>
John S. Martinez, Ph.D. 69 Chairman of the Board and Chief 1987
Executive Officer of the Company
- ---------------------------------------------------------------------------------------------------
James H. Banister, Jr. 69 President, Chief Executive Officer 1989
and Director of Kinetic Ceramics, Inc.
- ---------------------------------------------------------------------------------------------------
C. Neil Beer, Ph.D. 64 President of SECON 1988
- ---------------------------------------------------------------------------------------------------
Vernon H. Blackman, Ph.D. 69 Consultant 1991
- ---------------------------------------------------------------------------------------------------
Barry Ressler 58 Chief Executive Officer and Chairman 1994
of the Board of Triton Thalassic
Technologies, Inc.
- ---------------------------------------------------------------------------------------------------
</TABLE>
JOHN S. MARTINEZ, PH.D., became Chairman of the Board, President, Chief
Executive Officer and a Director of the Company at its inception. He
relinquished the title of President in November, 1998 at the time of the hiring
of E. Fred Schiele. 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, Dr. Martinez held a
number of management positions at TRW, Inc. He formed that company's High Energy
Laser program in 1970 and managed it until he left the company in 1976. Dr.
Martinez, a Ford Foundation and Atomic Energy Commission Fellowship holder,
earned his Ph.D. in Engineering Science from the University of California
(Berkeley) in 1962, his Bachelor's degree from Rensselaer Polytechnic Institute
(Troy, NY) in 1951 and is a graduate of the Oak Ridge School of Reactor
Technology. He served on active duty in the U.S. Marine Corps during the Korean
War and was discharged as a Captain in 1954. He is the holder or co-holder of
six patents. Dr. Martinez is the father of Joseph G. Martinez, Vice President,
General Counsel of the Company.
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
5
<PAGE> 9
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 of 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 and Chief Executive Officer of Thermo
Technologies Corporation which develops advanced lasers, optics, signal
processing, and energy conversion hardware. Previously he was Deputy for
Strategic Defense, Military Applications, at Livermore National Laboratory.
During his career with the U.S. Air Force, Dr. Beer achieved the rank of Major
General and was deputy Chief of Staff, plans and programs, for the Air Force
Space Command. Earlier, while assigned to the office of the Secretary of
Defense, he worked with the White House staff on policy and support
requirements. Dr. Beer was associate professor of mathematics at the Air Force
Academy and a combat pilot in Southeast Asia. Dr. Beer graduated magna cum
laude, with a B.S. degree in engineering from the University of Oklahoma, and
received his doctorate in Operations Research in 1972 from that same University.
Dr. Beer 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 from time to time has been a consultant of the Company since December, 1991.
Dr. Blackman served as Chairman of the Board and Chief Executive Officer of
Esscor, a training and simulation service company to the utility industry, from
December, 1991 to July, 1997. He continues to serve on the Board of Directors of
Esscor. 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 has also served on
the Boards of Directors of several other public companies, including Newport
Pharmaceuticals International, Inc. (1967-1974); Maxwell Laboratories, Inc.
(1966-1974); Topaz, Inc. (1979-1983) at which time Topaz was acquired by Square
D Corporation; and Optical Radiation Corporation (1970-1995). From 1974 to 1982,
Dr. Blackman served as President, CEO and Chairman of the Board of S-Cubed, a
high technology company which provided services and products to agencies of the
U.S. Government. In 1959, Dr. Blackman co-founded MHD Research which was
acquired by Hercules Corporation in 1964. Dr. Blackman received a BA in Physics
from Colgate University in 1951 and a Ph.D. in Physics from Princeton University
in 1955, subsequent to which he served on the faculty as a research associate
for 2 years.
BARRY RESSLER, has been a director of the Company since January, 1994. Mr.
Ressler is the Chief Executive Officer and Chairman of the Board of Triton
Thalassic Technologies, Inc. (T3I), a company engaged in the non-chemical
treatment and control of microorganism contaminated fluids for the automotive,
food packaging, pharmaceutical, paper, aquaculture and commercial shipping
industries. Mr. Ressler is also the President of STAR Associates, Inc., a
company engaged in the consultation, strategic planning and project funding of
early stage industrial process and therapeutic/diagnostic technologies. From
1983 to December, 1993 he served as Chief Executive Officer and Chairman of the
Board of Universal Voltronics Corporation (UVC), a public company that developed
high voltage products for defense, medical and industrial applications. In
March, 1990, UVC became a public subsidiary of Thermo Electron Corp. From 1963
until his appointment as CEO and Chairman, he served in various capacities at
UVC. 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 and Industry
collaborative activities. Mr. Ressler is also a member of the Nauticos Corp.
Sciences Business and Technology Advisory Board. Nauticos Corp. has developed
advanced side scan sonar, ROV and research protocols used in the discovery of
historic and contemporary sunken vessels. He is also a member of the Board of
Directors of CLI LTD in Sheffield UK, a company engaged in the controlled
lifting of heavy subsea objects (sunken submarines, historic wrecks and general
salvage and the emplacement of offshore pipelines and construction materials).
Mr. Ressler graduated from the Pratt Institute with a B.S. in Engineering
Science.
BOARD MEETINGS AND COMMITTEES; OTHER MATTERS
The Board of Directors of the Company held a total of eight meetings during the
fiscal year ended December 31, 1998. Each director attended at least 75 percent
of the total number of Board meetings plus
6
<PAGE> 10
meetings of the committees of the Board on which that particular director
served. Only one director, John S. Martinez, is an employee of the Company.
The Company's Audit Committee is the only standing Committee of the Board. The
Audit Committee annually recommends to the Board of Directors a firm of
certified public accountants to conduct audits of the accounts and affairs of
the Company. The Audit Committee also reviews accounting objectives and
procedures of the Company and the findings and reports of the independent
certified public accountants, and makes such reports and recommendations to the
Board of Directors as it deems appropriate. The Audit Committee held one meeting
during the fiscal year ended December 31, 1998.
During fiscal year 1998, the entire Board of Directors acted as the Compensation
Committee. Meeting as the Compensation Committee, the Board of Directors
considered executive compensation matters at eight meetings during the fiscal
year ended December 31, 1998. The Compensation Committee is empowered to make
decisions relating to the overall compensation arrangements for the Company's
executive officers and to any compensation plans in which officers and directors
of the Company are eligible to participate. The Company has no separately
designated nominating committee.
VOTE REQUIRED FOR ELECTION OF DIRECTORS
Directors are elected by a plurality of the votes. If more than five persons are
in nomination, the five nominees receiving the most votes will be elected as
directors. Once a quorum is established, abstentions or other non-votes will not
have any legal effect on the election of directors.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT YOU VOTE "FOR" ELECTION OF
ALL FIVE NOMINEES FOR DIRECTOR.
PROPOSAL TO
APPROVE THE COMPANY'S 1999 STOCK OPTION PLAN
In order to reach several important technical and corporate milestones over the
past 18 months, the Company successfully recruited and hired a team of
world-class technologists, highly experienced managers and other experts. The
grant of stock options in connection with the hiring of these key new employees,
together with the customary awards to existing employees, has resulted in the
grant of substantially all of the remaining options under the Company's current
1991 Stock Option Plan.
The Board of Directors of the Company believes that one of the keys to the
Company's future success will be its ability to continue to develop and
introduce into the market new high performance technologies and products. In
order to do this, the Company will need to continue to recruit and hire talented
employees. The Board of Directors believes that the Company's ability to grant
employee stock options plays a critical role in the ability of the Company to
attract and retain these key employees by affording them an opportunity to
acquire a proprietary interest in the Company. The Board also believes that the
grant of stock options to its current employees encourages greater stock
ownership which serves to further align the interests of the Company's employees
with the interests of the Company's shareholders.
In furtherance of these goals, the Board of Directors has adopted, subject to
shareholder approval, the JMAR Technologies, Inc. 1999 Stock Option Plan (the
"1999 Plan") which authorizes the granting of options to purchase a maximum of
900,000 shares of the Company's Common Stock to employees, directors and
consultants (including those who are also officers and directors) of the Company
and its subsidiaries. The principal terms of the 1999 Plan (which are
substantially similar to the existing 1991 Stock Option Plan) are summarized
below, but shareholders are urged to read the full text of the 1999 Plan which
is attached as Exhibit A to this Proxy Statement.
As of the date of this Proxy Statement, no options have been granted from the
1999 Plan.
TERMS AND CONDITIONS OF THE 1999 PLAN
Approximately one hundred twenty five (125) persons currently are employees of
the Company and subsidiaries and are eligible to be granted options under the
1999 Plan.
7
<PAGE> 11
During the ten year term of the 1999 Plan (expiring April 16, 2009), the 1999
Plan authorizes the granting of stock options to employees, directors and
consultants to purchase an aggregate of 900,000 shares of the Company's Common
Stock. Options under the 1999 Plan may be granted to employees of the Company
and subsidiaries, as Incentive Stock Options designed to qualify under Section
422A of the Internal Revenue Code of 1986, as amended, or as Non-Qualified Stock
Options. Options granted to directors and consultants shall be Non-Qualified
Stock Options.
The 1999 Plan will be administered by the Board of Directors (the "Board") which
has the discretion, subject to the terms of the 1999 Plan, to prescribe, amend
and rescind rules and regulations pertaining to the 1999 Plan and the
administration thereof.
The exercise price of options granted under the 1999 Plan is determined by the
Board but, in the case of Incentive Stock Options, shall not be less than the
fair market value per share of Common Stock on the date of grant.
Under the terms of the 1999 Plan, Incentive Stock Options expire no more than
ten years from the date of grant and Non-Qualified Stock Options expire not more
than eleven years from the date of grant. Each option granted under the 1999
Plan becomes exercisable and vests in such increments and at such times as the
Board shall specify. Shares covered by the unexercised portion of any terminated
or expired option may again be the subject of further option grants under the
1999 Plan.
Upon any exercise of an option granted under the 1999 Plan, the purchase price
of the shares purchased upon such exercise shall be paid in full (i) in cash,
(ii) by delivery to the Company of shares of its Common Stock valued at their
fair market value or (iii) by a combination of cash and stock. The fair market
value of shares of the Company's Common Stock delivered in full or partial
payment of the exercise price of an Option will be determined by the Board as of
the date of exercise in the same manner by which the fair market value of shares
of the Company's Common Stock is determined on the date of grant of an option.
The Company will receive no consideration upon the grant of any option under the
1999 Plan. Upon the exercise of an option, cash proceeds received by the Company
will constitute general funds of the Company which may be used for general
corporate purposes.
Options which are not exercisable on the date of termination of the employment,
directorship or consultant relationship of an employee, director or consultant
or which are not exercisable on the date of their death, shall expire on that
date. Options which are exercisable on the date of an employee's termination
will expire unless exercised within 60 days after termination of his or her
employment, except that upon an employee's death, options which are exercisable
on the date of an employee's death may be exercised within one year following
his or her demise by the personal representative of his or her estate. Options
which are exercisable and are held by a consultant or director will expire
unless exercised within one year following termination or resignation as a
consultant or director or within one year following their death.
Options granted under the 1999 Plan are not transferable except by will or the
laws of descent and distribution.
In the event of any change by reason of recapitalization, reclassification,
stock split-up, combination of shares, stock dividend, or like capital
adjustment, the 1999 Plan provides that the Board of Directors shall make
appropriate adjustments in the aggregate number and kind of shares available for
option grants under the 1999 Plan or subject to outstanding options thereunder
and also make appropriate adjustments in the per share exercise price of
outstanding options.
In the event of the merger, consolidation or other reorganization of the
Company, or in the event of any dissolution or liquidation of the Company, the
1999 Plan provides that the Board of Directors shall elect either to (i)
appropriately adjust the number, kind and exercise price of shares subject to
all outstanding options thereunder and shares which may become subject to
options granted thereafter, or (ii) terminate the 1999 Plan and any options
theretofore granted thereunder, subject to the right of optionees under the 1999
Plan to exercise, in whole or in part (including the portions of options which
may not otherwise have been exercisable due to any insufficient passage of
time), their options during a period of not less than thirty days following
notification by the Company of the event causing such termination.
The 1999 Plan may be amended, suspended or terminated by the Board of Directors
of the Company at any time, except that no amendment, suspension or termination
may affect, without his consent, any right or
8
<PAGE> 12
obligation of an optionee under an option previously granted to him.
Furthermore, in order to retain the ability to grant "Incentive Stock Options"
and to qualify for certain exemptions under Section 16 of the Securities
Exchange Act of 1934, no amendment may be made to the 1999 Plan without
shareholder approval which (i) increases the number of shares subject to the
1999 Plan (except pursuant to adjustments of the types described above), (ii)
changes the provisions of the Plan relating to the expiration dates of options,
(iii) changes the provisions of the Plan relating to the establishment of the
option price (except pursuant to adjustments of the types described above), or
(iv) changes the expiration date of the 1999 Plan. No options may be granted
under the 1999 Plan after its termination on April 16, 2009.
As with the 1991 Plan, the 1999 Plan has a "Reload Option" feature which
provides that when an optionholder elects to exercise his or her option by
delivering previously owned shares of common stock valued at the current market
price, a new option (a "Reload Option") will be granted to the holder to
purchase at the current market price a number of shares equal to the number of
shares which were delivered to exercise the original option. For example, if an
optionholder holds an option to purchase 1,000 shares for $2.00 and he delivers
as payment for the exercise price 500 shares which have a market value of $2,000
at the time of exercise (i.e., when the market value is $4.00 per share), then
the optionholder will receive the 1,000 option shares from the exercise of the
original option, plus a new option for 500 shares with an exercise price equal
to the current market price (i.e., in the example, an exercise price of $4.00
per share). In addition, if an optionee exercises an option with cash, the
Company will grant the optionee a new option to purchase at the current market
price a number of shares equal to the amount of cash paid divided by the market
value of the Common Stock on the date of exercise.
FEDERAL INCOME TAX CONSEQUENCES
INCENTIVE STOCK OPTIONS. No federal income tax consequences to the optionee
result from the grant of an Incentive Stock Option, and generally the exercise
of an Incentive Stock Option will not result in the recognition of income by an
optionee. If an optionee satisfies certain holding period requirements for
shares acquired upon the exercise of an Incentive Stock Option, the full amount
of his gain upon the sale of such shares (measured by the difference between the
amount of his proceeds of sale less the exercise price) will normally be treated
as long term capital gain. The Company will not be entitled to any deduction
under such circumstances.
NON-QUALIFIED OPTIONS. No federal income tax consequences to the optionee result
from the grant of a Non-Qualified Stock Option. Generally, an optionee will
recognize ordinary income upon exercise of a Non-Qualified Stock Option in an
amount equal to the difference between the fair market value on the date of
exercise of the shares acquired upon exercise of the option and the aggregate
exercise price of such shares. The Company will be entitled to an income tax
deduction equal to the amount of ordinary income recognized by an optionee as a
result of the exercise of a Non-Qualified Stock Option.
The preceding discussion under the heading, "Federal Income Tax Consequences" is
based on federal tax laws and regulations in effect on the date of this Proxy
Statement and does not purport to be a complete description of the federal
income tax aspects of the 1999 Plan.
QUORUM REQUIREMENT AND VOTE REQUIRED FOR APPROVAL
Approval by the shareholders of the Company's 1999 Stock Option Plan will
require the affirmative vote of a majority of the shares of Common Stock present
at the meeting. Abstentions are counted in determining the number of shares
present at the meeting, whereas broker non-votes are not counted in determining
the total number of shares present.
THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS A VOTE "FOR"
APPROVAL OF THE COMPANY'S 1999 STOCK OPTION PLAN.
9
<PAGE> 13
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
===============================================================================================
NAME AGE POSITION
===============================================================================================
<S> <C> <C>
John S. Martinez, Ph.D. 69 Chief Executive Officer and Chairman of the
Board
- -----------------------------------------------------------------------------------------------
E. Fred Schiele 47 President, Chief Operating Officer and Acting
President of JMAR Precision Systems
- -----------------------------------------------------------------------------------------------
Dennis E. Valentine 43 Vice President Finance, Chief Financial
Officer, Chief Administrative Officer and
Secretary
- -----------------------------------------------------------------------------------------------
Joseph G. Martinez 41 Vice President and General Counsel
- -----------------------------------------------------------------------------------------------
Richard M. Foster 66 President, JMAR Research
- -----------------------------------------------------------------------------------------------
Marvin W. Sepe 43 President, JMAR Semiconductor
- -----------------------------------------------------------------------------------------------
</TABLE>
Officers of the Company are elected annually by the Board of Directors and hold
office until their successors are duly elected and qualified.
The background and experience of Dr. Martinez is set forth above in "Election of
Directors-Nominees".
E. FRED SCHIELE, joined JMAR in November, 1998 as President and Chief Operating
Officer. In March, 1999, Mr. Schiele was also appointed Acting President of JMAR
Precision Systems. Before joining JMAR, Mr. Schiele served for two years as Vice
President and General Manager of the Semiconductor Systems Group at ADE
Corporation. There he was responsible for the manufacture and marketing of more
than $100 million annually in high-speed metrology equipment for the
semiconductor industry. Previously he was Group Vice President, Laser Systems,
for Electro Scientific Industries, a leading manufacturer of laser systems for
microelectronic repair, trimming and micromachining. Mr. Schiele received his
B.S. in Physics in 1973 and an MBA in Management and Finance from the University
of Wisconsin in 1980.
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.
JOSEPH G. MARTINEZ, joined the Company in June, 1998 as Vice President and
General Counsel. From 1986 to 1998, Mr. Martinez was employed by Parker,
Milliken, Clark, O'Hara & Samuelian, P.C., a Los Angeles-based law firm which
had served as the Company's outside general corporate counsel since its
inception in 1987. From 1993 to 1998, Mr. Martinez was a shareholder of Parker,
Milliken and was the principal attorney responsible for representing the
Company. From 1984 to 1986, Mr. Martinez was employed by another law firm in Los
Angeles. During his tenure at Parker, Milliken, Mr. Martinez specialized in
corporate, securities and general business law. Mr. Martinez received a Juris
Doctor degree from the University of California, Davis and a Master of Business
Administration from U.C. Berkeley (with an emphasis in Finance and Accounting)
in a Joint Degree Program with both degrees awarded in 1984. He
10
<PAGE> 14
received his B.A. in Genetics from U.C. Berkeley in 1980. Mr. Martinez has been
a member of the California State Bar since 1984. Mr. Martinez is the son of Dr.
John S. Martinez, the Company's Chairman and Chief Executive Officer.
RICHARD M. FOSTER, has been the President and a director of JMAR Research 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.
MARVIN W. SEPE, joined JMAR Semiconductor in July, 1996 as Executive Vice
President and General Manager and was elected President of that division in May,
1997. Mr. Sepe was a director of the Company from July, 1996 to December, 1997.
For the prior 15 years he was with TRW Components International Inc., a wholly
owned subsidiary of TRW Inc., where he served as Director of Business
Development for this division of TRW, which grew from $16,000,000 in sales to
nearly $40,000,000 under his strategic direction. Previously, Mr. Sepe held
other management positions within TRW including Marketing, Programs and
Engineering. Prior to joining TRW, Mr. Sepe was responsible for the development
and oversight of multiple semiconductor manufacturing operations both in the
U.S. and internationally. Mr. Sepe held the position of Manager of Worldwide
Assembly Operations for Silicon General Inc. (1980-1981) with manufacturing
operations throughout Southeast Asia, as well as the U.S. He served in the same
role at Silicon Systems Inc. (1977-1980), a fast growing start-up operation for
custom semiconductors and previously held various management responsibilities at
Hi-Rel Laboratories (1974-1977), a well respected evaluation laboratory. Mr.
Sepe attended Don Bosco Technical Institute, California Polytechnic State
University SLO, and holds a Masters Degree in Business Administration from
Pepperdine University. Mr. Sepe has published a number of papers and taught
numerous workshops on the economics and use of semiconductors in space
applications.
11
<PAGE> 15
EXECUTIVE COMPENSATION AND TRANSACTIONS WITH MANAGEMENT AND OTHERS
EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation for
services in all capacities to the Company during each of the last three fiscal
years of the Company's Chief Executive Officer and the four other most highly
compensated individuals serving as executive officers as of the latest fiscal
year end whose compensation (salary and bonus) exceeded $100,000 (collectively,
the "Named Officers").
<TABLE>
<CAPTION>
Summary Compensation Table
========================================================================================================
Long-Term Compensation
Annual Compensation(1) Awards(2)
-------------------------------------------------------------
Name and Principal Year Salary Bonus Securities Underlying
Position ($) ($)(3) Options and Warrants (#)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John S. Martinez, 1998 200,592 84,074 77,960
Chief Executive 1997 187,112 175,000 125,000
Officer 1996 170,184 83,369 384,622(4)
- --------------------------------------------------------------------------------------------------------
Dennis E. Valentine, 1998 110,000 36,032 29,797
Chief Financial 1997 106,919 60,000 55,000
Officer 1996 98,065 33,347 67,595(4)
- --------------------------------------------------------------------------------------------------------
John P. Ricardi, 1998 145,331 0 0
Senior Vice President 1997 147,699(5) 25,000 60,000
for Sales and
Marketing of JMAR
Precision Systems(7)
- --------------------------------------------------------------------------------------------------------
Leonid Yoffe, Senior 1998 150,576 0 0
Vice President of 1997 146,905 65,000 0
Operations of JMAR 1996 111,908 27,703 70,000(4)
Precision Systems(8)
- --------------------------------------------------------------------------------------------------------
Marvin W. Sepe 1998 125,000 11,414 0
President of JMAR 1997 125,000 0 5,000
Semiconductor 1996 52,083(6) 0 129,554(4)
- --------------------------------------------------------------------------------------------------------
</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, 1998, 1997 and 1996.
(3) Includes bonus payments under the Management Incentive Bonus Plan earned
by the Named Officers in the year indicated for services rendered in
such year, but which were paid in the following year. See "Incentive
Plans" on page 18 below for the terms of the Management Incentive Bonus
Plan.
12
<PAGE> 16
(4) Includes 324,420, 50,000, 109,149 and 42,393 options and warrants for
Dr. Martinez and Messrs. Yoffe, Sepe and Valentine, respectively, which
were granted and reported in prior years, but which (together with
options and warrants issued to other employees of the Company) 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.
(5) Compensation is for eleven months. Includes $22,000 commissions on
sales.
(6) Compensation is for six months.
(7) Mr. Ricardi served as Vice President for Corporate Development of JMAR
until April, 1999.
(8) Mr. Yoffe served as President of JMAR Precision Systems, Inc. until
March, 1999.
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, 1998 to each of the Named Officers.
Pursuant to Securities and Exchange Commission rules, the table also shows the
value of the options at the end of the terms if the stock price were to
appreciate annually by 5% and 10%, respectively. The assumed values may not
reflect actual value at the times indicated.
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
SHARES OPTIONS POTENTIAL REALIZABLE
NAME UNDERLYING GRANTED TO VALUE AT ASSUMED
OPTIONS EMPLOYEES EXERCISE ANNUAL RATES OF STOCK
GRANTED IN FISCAL PRICE PER EXPIRATION PRICE APPRECIATION
(SHARES)(1)(6) YEAR SHARE DATE(2) FOR OPTION TERM
- ----------------------------------------------------------------------------------------------------------
5% 10%
-------- --------
<S> <C> <C> <C> <C> <C> <C>
John S. Martinez 63,000(3) 13.77 $2.91 February 6,2008 $115,295 $292,181
9,960(7) 2.18 $2.84 April 6,2008 17,789 45,081
5,000(4) 1.09 $2.44 August 7,2009 7,673 19,444
Dennis E. Valentine 27,000(5) 5.90 $2.91 February 6,2008 $ 49,412 $125,220
2,797(7) .61 $2.91 April 20,2008 5,119 12,972
John P. Ricardi 3,097(7) .68 $2.91 April 23,2008 $ 5,668 $ 14,363
Leo Yoffe 7,088(7) 1.55 $2.91 April 23,2008 $ 12,972 $ 32,873
Marvin W. Sepe 0 0 N/A N/A N/A N/A
</TABLE>
- ----------
(1) Such options were all granted under the Company's 1991 Stock Option
Plan. The exercise price of the stock options reported above was equal
to the fair market value of the Company's common stock at the date of
grant. The other terms of each such option 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 which are unvested at the time of termination of optionee's
employment expire at that time. Vested 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. Vested options issued to directors expire one
year following resignation as a director.
(3) These options are incentive stock options. 6,300 of these options are
currently exercisable and 6,300 become exercisable on February 6 of each
year thereafter through 2008.
(4) These options are non-qualified stock options granted to Dr. Martinez
for his service as a director. They become exercisable and vest
one-third each year commencing on the first year after their grant.
(5) These options are incentive stock options. 2,700 of these options are
currently exercisable and 2,700 become exercisable on February 6 of each
year thereafter through 2008.
13
<PAGE> 17
(6) These options contain a "Reload Option" feature which provides that 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 new option to purchase that number of
shares equal to the shares transferred to the Company in payment of the
exercise price of the option. In addition, if the optionee exercises the
option in whole or in part with cash, the Company shall grant to the
optionee a new option to purchase that number of shares equal to the
amount of cash paid divided by the market value of the Common Stock on
the date of exercise. In both cases, these "Reload Options" will have an
exercise price equal to the market price on the date of grant of the
Reload Option and are not exercisable until one year following the date
of grant.
(7) These options are Reload Options.
AGGREGATED OPTION AND WARRANT EXERCISES IN LAST FISCAL YEAR AND YEAR END OPTION
VALUES
The following table sets forth for each of the Named Officers the shares
acquired and the value realized on each exercise of stock options, if any, by
said officers during the fiscal year ended December 31, 1998 and the number of
shares of common stock underlying options and warrants outstanding at December
31, 1998 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
WARRANTS AT AND WARRANTS AT
SHARES DECEMBER 31, 1998 DECEMBER 31, 1998(1)
ACQUIRED ----------------- --------------------
NAME ON VALUE EXERCISABLE/ EXERCISABLE/
EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John S. Martinez 30,000 $56,988 148,603/477,835 $101,946/$0
Dennis E. Valentine 15,300 36,338 65,085/92,007 $28,107/$0
John P. Ricardi 3,741 1,871 16,259/43,097 $0/$0
Leonid Yoffe 20,000 37,525 0/57,088 $0/$0
Marvin W. Sepe 0 0 79,701/39,853 $0/$0
</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, 1998. The fair market value of a share of common stock at
December 31, 1998 was $2.13 per share as quoted on the NASDAQ Stock
Market at the close of trading.
COMPARATIVE STOCK PERFORMANCE
Set forth below are line graphs which compare the percentage change in the
cumulative total stockholder return on the Company's Common Stock from December
31, 1993 through December 31, 1998 with the percentage change in the cumulative
total return over the same period of the (i) Russell 2000 Index and (ii) Russell
3000 Electronics: Semi-Conductors/Components Industry Index. This graph assumes
an initial investment of $100 on December 31, 1993 in each of the Company's
Common Stock, the Russell 2000 Index and the Russell 3000 Electronics:
Semi-Conductors/Components Industry Index and that all dividends, if any, were
reinvested.
14
<PAGE> 18
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURNS
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
JMAR Technologies, Inc. $100 $ 25 $ 50 $112 $119 $100
- ---------------------------------------------------------------------------------------------------
Russell 2000 Index $100 $ 98 $126 $147 $180 $175
- ---------------------------------------------------------------------------------------------------
Semi-Conductors/Components $100 $109 $189 $306 $328 $518
- ---------------------------------------------------------------------------------------------------
</TABLE>
At the end of 1993 the Company concluded that its efficiency of operations and
its future profitability would be substantially improved by consolidating and
restructuring its manufacturing equipment group operations. Pursuant to the plan
of consolidation, substantially completed prior to the end of 1994, the Company
sold several operations and assets. The Company feels that its stock performance
since that time is a better reflection of its recent performance. Accordingly,
set forth below are line graphs which compare the percentage change in the
cumulative total stockholder return on the Company's Common Stock from December
31, 1994 through December 31, 1998 with the percentage change in the cumulative
total return over the same period of the (i) Russell 2000 Index and (ii) Russell
3000 Electronics: Semi-Conductors/Components Industry Index. This graph assumes
an initial investment of $100 on December 31, 1994 in each of the Company's
Common Stock; the Russell 2000 Index and the Russell 3000 Electronics:
Semi-Conductors/Components Industry Index and that all dividends, if any, were
reinvested.
15
<PAGE> 19
COMPARISON OF FOUR-YEAR CUMULATIVE TOTAL RETURNS
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
JMAR Technologies, Inc. $100 $200 $447 $476 $400
- ----------------------------------------------------------------------------------------
Russell 2000 Index $100 $128 $150 $183 $178
- ----------------------------------------------------------------------------------------
Semi-Conductors/ $100 $173 $280 $301 $475
Components
- ----------------------------------------------------------------------------------------
</TABLE>
REPORT OF THE COMPENSATION COMMITTEE
Set forth below is a report of the Compensation Committee with respect to the
Company's compensation policies during fiscal 1998 as they affect the Company's
Chief Executive Officer and the Company's other executive officers.
Compensation Policies for Executive Officers. The Company's compensation
policies for its executive officers are designed to provide compensation levels
that are competitive with those of other similar companies and thereby to enable
the Company to attract and retain qualified executives. More specifically, the
Company's compensation policies aim, through a combination of base salary,
annual bonus and equity-based compensation, to motivate officers to assist the
Company in meeting its annual and long-range business objectives and thereby to
enhance stockholder value. The cumulative effect of the Company's compensation
policies for executive officers is to tie such compensation closely to the
Company's performance.
Annual Cash Compensation. The Committee believes that the annual cash
compensation paid to executives should be commensurate with both the executive's
and the Company's performance. For this reason, the Company's executive cash
compensation consists of base compensation (salary) and variable incentive
compensation (annual bonus).
Base salaries for executive officers are established considering a
number of factors, including the Company's profitability; the executive's
individual performance and measurable contribution to the Company's success; and
pay levels of similar positions with comparable companies in the industry. The
Committee supports the Company's compensation philosophy of moderation for
elements such as base salary and benefits. Base salary decisions are made as
part of the Company's annual review process.
16
<PAGE> 20
Generally, base salaries are maintained at approximately the 50th percentile of
salaries paid by similar size, high technology companies.
Under the Management Incentive Bonus Plan ("MIBP"), an executive's
annual performance bonus award generally depends on two performance factors: the
overall financial performance of the Company and the performance of the business
unit for which the executive is accountable, along with the executive's
individual performance. The performance objectives of the Company and the
business unit are derived from the Company's Board-approved annual business
plan, which includes specific financial performance targets relating to revenue
and profits for the fiscal year. The Company has been profitable for the past
four consecutive years. Accordingly, MIBP bonuses were paid for fiscal years
1995, 1996, 1997 and 1998 (see page 12 above). Because the Company's net and
operating profits were lower in 1998 than in 1997, the bonus awards to the CEO
and the other Named Officers were correspondingly lower in 1998 than in 1997.
Equity Based Incentive Compensation. The Compensation Committee believes
that by providing executive officers with an equity interest in the Company
those officers are provided with additional incentives to work to maximize
stockholder value over the long term. The Company has four stock option or
warrant plans: the 1999 Stock Option Plan (if approved by the shareholders), the
1991 Stock Option Plan, the Management Anti-Dilution Plan, and the Precision
Systems Incentive Plan. Pursuant to the Plans, the CEO and other executive
officers (as well as other key employees) may be periodically granted stock
options at the then fair market value of the Company's Common Stock. In
addition, the CEO and executive officers are awarded stock options with vesting
schedules based upon the goals established under the MIBP. In 1998, stock
options were granted to executive officers under the 1991 Stock Option Plan (see
page 13 above).
CEO Compensation. Dr. Martinez has been Chief Executive Officer since he
co-founded the Company in 1987. Pursuant to his employment agreement, the
Company agreed to pay Dr. Martinez an annual salary of not less than $175,000.
In fiscal year 1998, Dr. Martinez's base salary was $192,500. Dr. Martinez's
participation in the above stated plans includes incentives to maximize Company
profitability and share price on an annual basis. In addition, through his
equity ownership, Dr. Martinez shares with other stockholders of the Company a
significant stake in the long-range success of the Company's business.
Through these various compensation programs, the Board of Directors believes
that JMAR furthers its objectives of attracting, retaining and motivating the
best qualified executive officers and employees, and ultimately will serve to
increase JMAR's profitability and maximize shareholder value.
Compensation Committee:
John S. Martinez
James H. Banister, Jr.
C. Neil Beer
Vernon H. Blackman
Barry Ressler
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As noted above, during fiscal year 1998 executive compensation was set by the
Board of Directors acting as the Compensation Committee. The Compensation
Committee included Dr. Martinez, the Company's Chief Executive Officer; however,
the compensation of Dr. Martinez was set by the Compensation Committee members
without the participation by Dr. Martinez. Except for Dr. Martinez, each member
of the Compensation Committee is neither an officer nor an employee of the
Company.
DIRECTOR COMPENSATION
Directors who are not salaried employees of the Company receive a retainer (the
"Retainer") of $1,000 per quarter and $1,000 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 August, 1997,
the Company adopted the Director Compensation Plan. Pursuant to the Director
Compensation Plan, $500 of the Board meeting compensation will be paid in
Company stock.
17
<PAGE> 21
In addition, as has been the policy in past years, during the fiscal year ended
December 31, 1998 each of the directors were granted options to purchase 5,000
shares of Common Stock at the then market price for their services as directors.
COMPENSATION PURSUANT TO PLANS
The Company has no defined benefit pension or actuarial plans under which its
executive officers participate.
INCENTIVE PLANS
As discussed in the Report of the Compensation Committee above, in 1993, JMAR
established a Management Incentive Bonus Plan (the "MIBP") based on profits
generated and stock performance each year. The Company has been profitable for
the past four consecutive years. Accordingly, MIBP cash bonuses were paid and
options awarded in fiscal years 1995, 1996, 1997 and 1998 to those employees
deemed to have made the greatest contributions toward the Company's ability to
generate those profits.
In March 1998, the Board of Directors approved a resolution requiring that
starting with 1997, a substantial portion of each Management Incentive Bonus
earned by its senior officers be used by such officers to: 1) buy JMAR common
shares in the Public Market; and/or 2) exercise existing stock options or
warrants, including payment of income taxes (if any) resulting from such option
or warrant exercises. The long term goal is for each senior officer designated
in the Beneficial Ownership table in this Report to own JMAR shares having a
market value of a minimum of one times his annual salary. Once any such
designated employee achieves that goal they will no longer be required to
allocate a specific portion of their bonus to the purchase of additional JMAR
shares unless their share holdings fall below that level. The Company believes
that this policy will provide additional incentives to the Company's senior
officers to maximize the Company's profits and share price over the long term.
Pursuant to the MIBP Stock Ownership Requirement in 1998, Messrs. Yoffe,
Valentine and Ricardi purchased 20,000, 15,300 and 3,741 shares, respectively.
Dr. Martinez and Mr. Foster owned 372,965 and 50,647 shares, respectively, prior
to March, 1998. Notwithstanding the fact that Dr. Martinez and Mr. Foster
exceeded the required stock ownership goal, each used a portion of their cash
Management Incentive Bonus to purchase 30,000 and 2,000 shares, respectively, in
1998. In 1999, pursuant to the MIBP Stock Ownership Requirement, Messrs.
Valentine, Sepe and Joseph Martinez purchased 9,500, 1,673 and 1,500 shares,
respectively.
CERTAIN TRANSACTIONS WITH MANAGEMENT AND OTHERS
EMPLOYMENT AND CONSULTING AGREEMENTS
Pursuant to Dr. Martinez's employment agreement, the Company agreed to retain
him as Chief Executive Officer of the Company and to pay him an annual salary of
not less than $175,000 plus expenses and normal employee insurance benefits and
a $600 per month auto lease allowance. The term of the employment agreement
continues until December 31, 1999, but renews annually unless notice to the
contrary is given 60 days prior to the end of the term. If the employment
agreement is terminated by the Company without cause, Dr. Martinez would become
entitled to receive as severance pay an amount equal to the greater of 36
month's pay or the balance of the compensation that would have been payable to
Dr. Martinez under the employment agreement.
On March 29, 1993, the Company loaned Dr. Martinez $59,000 with interest at 6%
per annum to assist Dr. Martinez in paying certain income taxes that he
personally incurred in connection with a transaction that he undertook in
support of the Company. The December 31, 1998 loan amount, including accrued
interest is $83,212. The loan is secured by 14,750 shares of Common Stock owned
by Dr. Martinez.
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
The Audit Committee of the Board of Directors has selected Arthur Andersen LLP,
independent public accountants, to audit the financial statements of the Company
for the fiscal year ending December 31, 1999. Representatives of Arthur Andersen
will be present at the meeting with an opportunity to make a statement if they
desire to do so and such representatives will be available to respond to
appropriate questions from shareholders in attendance.
18
<PAGE> 22
DEADLINE FOR RECEIPT OF SHAREHOLDER PROPOSALS
Proposals from shareholders which are intended to be presented by such
shareholders at the Company's 2000 Annual Meeting of Shareholders must be
received by the Company no later than January 31, 2000 and otherwise be in
compliance with applicable laws and regulations in order that they may be
included in the proxy statement and form of proxy relating to that meeting.
OTHER BUSINESS
The Board of Directors does not intend to present any other business at the
meeting and knows of no other matters which will be presented at the meeting.
By Order of the Board of Directors
/s/ Dennis E. Valentine
Dennis E. Valentine
Secretary
Dated: June 29, 1999
19
<PAGE> 23
EXHIBIT A
JMAR TECHNOLOGIES, INC.
1999 STOCK OPTION PLAN
1. PURPOSE. The 1999 Stock Option Plan (the "Plan") is
intended to advance the interests of JMAR Technologies, Inc. (the "Company"),
its shareholders and its subsidiaries by encouraging and enabling selected key
employees (including officers and directors) and consultants upon whose
judgment, initiative and effort the Company is largely dependent for the
successful conduct of its business to acquire and retain a proprietary interest
in the Company by ownership of its stock. The Plan is also intended to encourage
ownership in the Company by its directors whose services are considered
essential to the Company's continued progress and thus to provide them with a
further incentive to continue to serve as directors of the Company. It is
intended that the Plan provide the flexibility for the issuance of options which
qualify as incentive stock options ("incentive stock options") within the
meaning of Section 422A of the Internal Revenue Code of 1986, as amended (the
"Code") and options which do not so qualify ("non-qualified stock options").
2. DEFINITIONS.
(a) "Agreement" means the agreement between the Company and
the Optionee under which an option is granted, and setting forth the terms and
conditions of the option and the Optionee's rights thereunder.
(b) "Board" means the Board of Directors of the Company.
(c) "Common Stock" means the Company's $0.01 par value
common stock.
(d) "Date of Grant" means the date on which an option under
the Plan is granted.
(e) "Option" means an option granted under the Plan.
(f) "Optionee" means a person to whom an option, which has
not expired, has been granted under the Plan.
(g) "Subsidiary" or "Subsidiaries" means a subsidiary
corporation or corporations of the Company as defined in Section 425 of the
Code.
(h) "Successor" means the legal representative of the estate
of the deceased Optionee or the person who acquires the right to exercise an
option by bequest or inheritance or by reason of the death of any Optionee.
3. ADMINISTRATION OF THE PLAN. The Plan shall be
administered by the Board. Subject to the provisions of the Plan, the Board
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 option, the individuals to whom and the
time or times at which options shall be
20
<PAGE> 24
granted and the nature of each option granted under the Plan, i.e., whether the
option will be an incentive stock option or a non-qualified stock option; (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 option 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 Board shall be conclusively binding for all purposes and
upon all persons.
4. COMMON STOCK SUBJECT TO OPTIONS. Unless amended in
accordance with the provisions of Paragraph 11, and subject to adjustment under
the provisions of Paragraph 7, the aggregate number of shares of the Company's
Common Stock which may be issued upon the exercise of options granted under the
Plan shall not exceed 900,000. The shares of Common Stock to be issued upon the
exercise of options may be authorized but unissued shares, shares issued and
reacquired by the Company or shares bought on the market for the purposes of the
Plan. In the event any option shall, for any reason, terminate or expire or be
surrendered without having been exercised in full, the shares subject to such
option but not purchased thereunder shall again be available for options to be
granted under the Plan.
5. PARTICIPANTS. Options may be granted under the Plan to
any person who, based upon the recommendations of management, the Board
determines is a key employee (including officers and directors) or consultant of
the Company or any Subsidiary.
6. TERMS AND CONDITIONS OF OPTIONS. Any option granted
under the Plan shall be evidenced by an Agreement executed by the Company and
the Optionee and shall contain such terms and be in such form as the Board may
from time to time approve, subject to the following terms, limitations and
conditions:
(a) Option Price. The option price per share with respect to
each option granted under the Plan shall be determined by the Board but in the
case of incentive stock options shall in no instance be less than 100% of the
fair market value of a share of the Common Stock on the Date of Grant. For the
purposes hereof, fair market value shall be defined as follows: (i) in case the
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, as the case may be), on the date
nearest preceding the Date of Grant or (ii) in case the 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 the Common Stock were traded on
such recognized securities exchange on the Date of Grant or, if the 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.
(b) Period of Option. Except for earlier termination as
provided in Subparagraphs (h) and (i) of this Paragraph 6, and in Subparagraph
(b) of Paragraph 7,
21
<PAGE> 25
the expiration date of options granted under the Plan shall be fixed by the
Board, but, notwithstanding any provision of the Plan to the contrary, with
respect to an incentive stock option, such expiration date shall not be more
than ten years from the Date of Grant and with respect to a non-qualified stock
option, such expiration date shall not be more than eleven years from the Date
of Grant.
(c) Vesting of Shareholder Rights. Neither an Optionee nor
any Successor shall have any of the rights of a shareholder of the Company until
the option with respect to the applicable shares shall have been duly exercised
and the certificate evidencing such shares delivered to such Optionee or any
Successor.
(d) Exercise of Option. Each option granted under the Plan
shall be exercisable in such amounts and at such respective dates prior to the
expiration of the option as provided in the Agreement.
(e) Payment of Option Price. Upon exercise of an option, the
Optionee or Successor shall pay the option price by delivering to the Company:
(i) cash or a check payable to the Company in an
amount equal to the option price;
(ii) a stock certificate or certificates, duly
endorsed for transfer to the Company, representing shares of Common Stock of the
Company owned by the Optionee or Successor which have a fair market value on the
date of exercise determined in accordance with Paragraphs 6(a)(i) and 6(a) (ii)
hereof by substituting "date of exercise" for the phrase "Date of Grant" each
time the latter appears therein. Shares of stock delivered to the Company in
payment of tax withholdings are allowed only to the extent that such delivery
does not result in a charge to the earnings of the Company.
(iii) cash or a check payable to the Company and a
stock certificate or certificates, duly endorsed for transfer to the Company,
representing shares of Common Stock of the Company owned by the Optionee or
Successor, which, when added to the amount of the cash or check, have a fair
market value on the date of exercise equal to the option price. For the purposes
hereof, fair market value shall be determined in accordance with Paragraph
6(e)(ii).
(f) Reload Options. Upon the exercise of an Option granted
under the Plan (the "Original Option"), the Company shall grant to the Optionee
on the date of such exercise an additional Option under the Plan with the terms
provided in this paragraph 6(f) (the "Reload Option").
(i) General Terms. The exercise price of the Reload
Option shall be the fair market value per share of Common Stock on the date of
exercise of the Original Option. The Reload Option shall not be exercisable
until one year after the date the Reload Option is granted and shall have such
other terms as the Board shall determine. Upon the exercise of a Reload Option
granted hereunder, the Optionee is entitled to receive a further Reload Option
in accordance with this paragraph 6(f).
22
<PAGE> 26
(ii) Exercises Using Stock. If the Original Option is
exercised by the payment in whole or in part of shares of Common Stock which
have been owned by Optionee for at least six months, then (i) the Reload Option
shall represent an option to purchase that number of shares of Common Stock
equal to the number of shares so transferred to the Company in payment of the
exercise price of the Original Option and (ii) the shares of Common Stock
covered by the Reload Option shall not reduce the number of shares of Common
Stock available for grant under the Plan pursuant to Paragraph 4. If within one
year of the exercise of the Original Option the Optionee sells any of the shares
of Common Stock received upon exercise of the Original Option, then an
equivalent number of Reload Option shares shall expire and be unexercisable.
(iii) Exercises Using Cash. If the Original Option is
exercised by the payment in whole or in part in cash, then the following
provisions shall apply: (i) the Reload Option shall be an option to purchase
that number of shares of Common Stock equal to the amount of cash so paid
divided by the fair market value per share of Common Stock on the date of
exercise of the Original Option, (ii) the shares of Common Stock covered by the
Reload Option shall reduce the number of shares of Common Stock available for
grant under the Plan pursuant to Paragraph 4, and (iii) if within one year of
the exercise of the Original Option the Optionee sells shares of Common Stock
received upon exercise of the Original Option and the number sold within such
one year period exceeds the number of shares covered by the Reload Option, then
a number of Reload Option shares equal to such excess number of shares shall
expire.
(g) Non-Transferability of Option. No option shall be
transferable or assignable by an Optionee, otherwise than by will or the laws of
descent and distribution and each option shall be exercisable during the
Optionee's lifetime only by the Optionee and thereafter only by his Successor in
accordance with the terms of this Plan. No option shall be pledged or
hypothecated in any way and no option shall be subject to execution, attachment
or similar process.
(h) Termination of Relationship. Upon termination of an
Optionee's employment with the Company and its Subsidiaries other than by reason
of the death of the Optionee, the option privileges of such Optionee shall be
limited to the shares which were immediately purchasable by him at the date of
such termination and such option privilege shall expire unless exercised by him
within sixty (60) days after the date of such termination. With regard to
options granted to consultants or to directors, upon termination of a
consultant's agreement with the Company and its Subsidiaries or of a director's
service as a director of the Company, as appropriate, whether by reason of the
death of the consultant or director or otherwise, the option privileges of such
consultant or director shall be limited to the shares which were immediately
purchasable by him or his successor, as the case may be, within one year after
such termination. The granting of an option to any person shall not alter in any
way the Company's or the Subsidiary's right to terminate such person's
employment or other relationship at any time for any reason, nor shall it confer
upon the Optionee any rights or privileges except as specifically provided for
in the Plan.
23
<PAGE> 27
(i) Death of Optionee. If an Optionee dies while serving as
an employee, officer, director or consultant, the option privileges of said
Optionee shall be limited to the shares which were immediately purchasable by
such Optionee at the date of death and such option privileges shall expire
unless exercised by said Optionee's Successor within one (1) year after the date
of death.
7. ADJUSTMENTS.
(a) In the event that the outstanding shares of Common Stock
of the Company are hereafter increased or decreased or changed into or exchanged
for a different number or kind of shares or other securities of the Company or
of another corporation, by reason of a recapitalization, reclassification, stock
split-up, combination of shares, dividend or other distribution payable in
capital stock, appropriate adjustment shall be made by the Board in the number,
kind and exercise price of shares for the purchase of which options have
theretofore been or may thereafter be granted under the Plan.
(b) In the event that the Company shall determine to merge,
consolidate or enter into any other reorganization with or into any other
corporation, or in the event of any dissolution or liquidation of the Company,
then in any such event, at the election of the Board, (i) appropriate adjustment
shall be made by the Board in the number, kind and exercise price of shares for
the purchase of which options have theretofore been and/or may thereafter be
granted under the Plan, or (ii) the Plan and any options theretofore granted
under the Plan shall terminate as of the date of such merger, consolidation,
reorganization, dissolution or liquidation, provided that written notice of such
event shall have been given to each Optionee not less than 30 days prior to the
date of such event. Upon any election by the Board pursuant to the provisions of
clause (ii) of this Subparagraph (b), each Optionee shall have the right during
the period commencing on the date the notice referred to in said clause (ii) is
given and concluding on the date of such merger, consolidation, reorganization,
dissolution or liquidation, as the case may be, to exercise such Optionee's
outstanding and unexercised stock options, including shares as to which such
options would not otherwise have been exercisable by reason of an insufficient
lapse of time.
(c) All adjustments and determinations under this Paragraph
7 shall be made by the Board, whose decisions as to what adjustments or
determinations shall be made, and the extent thereof, shall be final, binding
and conclusive.
8. DOLLAR LIMITATION ON INCENTIVE STOCK OPTIONS. The
aggregate fair market value (determined as of the Date of Grant) of the Common
Stock with respect to which Incentive Stock Options are exercisable for the
first time by an individual during any calendar year (under all Incentive Stock
Option plans of the Company and any parent or subsidiary) shall not exceed
$100,000, plus any "unused limit carryover," as defined in and as may be
available under Section 422A of the Code.
9. RESTRICTIONS ON ISSUING SHARES. The exercise of each
option shall be subject to the condition that if at any time the Company shall
determine in its discretion that (i) the satisfaction of withholding tax or
other withholding liabilities, or of (ii) the listing, registration or
qualification of any shares otherwise deliverable upon such exercise upon any
securities exchange or under any state or federal law, or (iii) the consent or
approval
24
<PAGE> 28
of any regulatory body, or (iv) the perfection of any exemption from any such
withholding, listing, registration, qualification, consent or approval is
necessary or desirable as a condition of, or in connection with, such exercise
or the issuance, delivery or purchase of shares thereunder, then in any such
event, such exercise shall not be effective unless such withholding, listing,
registration, qualification, consent, approval or exemption shall have been
effected, obtained or perfected free of any conditions not acceptable to the
Company.
10. USE OF PROCEEDS. The proceeds received by the Company
from the sale of its Common Stock pursuant to the exercise of options granted
under the Plan shall be added to the Company's general funds and used for
general corporate purposes.
11. AMENDMENT, SUSPENSION AND TERMINATION OF THE PLAN. The
Board may at any time suspend or terminate the Plan or may amend it from time to
time in such respects as the Board may deem advisable in order that the options
granted thereunder may conform to any changes in the law or in any other respect
which the Board may deem to be in the best interests of the Company; provided,
however, that without approval by the shareholders of the Company representing a
majority of the voting power, no such amendment shall (a) except pursuant to
Paragraph 7, increase the maximum number of shares for which options may be
granted under the Plan, (b) change the provisions of Subparagraph (a) of
Paragraph 6 relating to the establishment of the option price, (c) change the
provisions of Subparagraph (b) of Paragraph 6 relating to the expiration date of
each option or (d) change the provisions of the second sentence of this
Paragraph 11 relating to the term of this Plan. Unless the Plan shall
theretofore have been terminated by the Board, the Plan shall terminate ten (10)
years after the effective date of the Plan. No option may be granted during any
suspension or after termination of the Plan. Except as otherwise provided in the
Plan, no amendment, suspension or termination of the Plan shall, without an
Optionee's consent, alter or impair any of the rights or obligations under any
option theretofore granted to such Optionee under the Plan.
25
<PAGE> 29
JMAR TECHNOLOGIES, INC.
FISCAL YEAR 1998
FINANCIAL INFORMATION APPENDIX
HIGH PERFORMANCE TECHNOLOGIES AND PRODUCTS
FOR THE MICROTECHNOLOGY WORLD
[IMAGE: HEADLINES FROM PRESS COVERAGE SHINING THROUGH
JMAR'S X-RAY SOURCE CHAMBER SUPERIMPOSED ON SEMICONDUCTOR WAFER]
BRITELIGHT(TM) LASERS -- X-RAY SOURCES --
CUSTOM SEMICONDUCTORS -- PRECISION MEASUREMENT SYSTEMS
<PAGE> 30
JMAR TECHNOLOGIES, INC.
INDEX TO APPENDIX
<TABLE>
<S> <C>
Securities Information........................................... A-2
Five-Year Selected Financial Data................................ A-3
Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... A-4
Report of Arthur Andersen LLP, Independent Public Accountants.... A-11
Consolidated Balance Sheets as of December 31, 1998 and 1997..... A-12
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996.............................. A-13
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1998, 1997 and 1996........................ A-14
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996.............................. A-15
Notes to Consolidated Financial Statements....................... A-16
</TABLE>
A-1
<PAGE> 31
JMAR TECHNOLOGIES, INC.
SECURITIES INFORMATION
The Company's Common Stock and Common Stock Purchase Warrants are traded
on the Nasdaq National Market tier of the Nasdaq Stock Market ("NASDAQ-NMS")
under the symbols JMAR and JMARW, respectively. The 1998 and 1997 high and low
transaction prices for the common stock as reported by NASDAQ-NMS are set forth
in the following table.
COMMON STOCK PRICE
<TABLE>
<CAPTION>
HIGH LOW
-------- -------
<S> <C> <C>
1997
First Quarter.............................................. 2 29/32 2 3/16
Second Quarter............................................. 3 23/32 1 15/16
Third Quarter.............................................. 4 19/32 3 1/16
Fourth Quarter............................................. 4 31/32 2 1/2
1998
First Quarter.............................................. 3 1/2 2 7/16
Second Quarter............................................. 3 5/32 2 5/16
Third Quarter.............................................. 2 3/4 1 19/32
Fourth Quarter............................................. 3 5/32 1 15/16
</TABLE>
There were approximately 6,370 holders of JMAR's common stock and 351
holders of JMAR's publicly traded warrants as of March 12, 1999.
The Company has never paid cash dividends on its Common Stock. The
Company currently intends to retain earnings for use in the operation and
expansion of its business and therefore does not anticipate paying any cash
dividends in the foreseeable future. The payment of dividends in the future by
the Company on its Common Stock will be dependent on its earnings and financial
condition and such other factors considered relevant by the Company's Board of
Directors.
A-2
<PAGE> 32
JMAR TECHNOLOGIES, INC.
FIVE-YEAR SELECTED FINANCIAL DATA
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
================================================================================
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating revenues ............ $ 10,821,025(1) $ 12,210,490 $ 16,331,090 $ 21,461,627 $ 24,560,834
Revenues excluding terminated
operations .................. 7,782,025(2) 12,210,490 16,331,090 21,461,627 24,560,834
Gross profit .................. 4,034,613 4,879,420 6,692,136 8,830,316 9,187,891
Operating expenses excluding
restructuring charges ....... 5,439,430 4,694,233 6,188,169 7,303,374 8,279,582
Restructuring charges ......... (458,309) -- -- -- --
Income (loss) from operations . (946,508) 185,187 503,967 1,526,942 908,309
Interest expense .............. (570,094) (321,162) (288,372) (181,562) (181,227)
Interest and other income
(expense), net .............. 390,594 212,240 388,974 104,905 61,963
Income (loss) from continuing
operations before income taxes (1,126,008)(3) 76,265 604,569 1,450,285 789,045
Income tax (provision) benefit -- -- 175,000 345,000 (32,204)
Income (loss) from continuing
operations ................... (1,126,008) 76,265 779,569 1,795,285 756,841
Discontinued operations:
Loss from operations of
discontinued operations . (2,999,242) -- -- -- --
Loss on disposal of
discontinued operations (540,404) -- -- -- --
Net income (loss) ............. (4,665,654) 76,265 779,569 1,795,285 756,841
Basic per share data:
Income (loss) per common
share from continuing
operations ............... (.11) .01 .05 .11 .04
Loss from discontinued
operations ............... (.33) -- -- -- --
Net income (loss) per share (.44) .01 .05 .11 .04
Basic shares used in
computation of net income
(loss) per share ............ 10,596,661 13,525,886 15,582,579 17,065,860 18,046,860
</TABLE>
================================================================================
CONSOLIDATED BALANCE SHEET DATA - DECEMBER 31,
================================================================================
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Working capital ......... $ 4,007,846 $ 4,655,087 $ 5,743,747 $ 9,634,527 $ 9,213,134
Total assets ............ 9,107,968 9,248,995 15,395,518 17,268,878 22,874,833
Short-term debt ......... 914,590 1,526,929 2,317,861 922,246 2,693,975
Long-term debt .......... 2,165,417 1,536,273 667,310 907,235 475,362
Stockholders' equity .... 3,849,822 5,085,202 9,368,905 12,488,212 13,253,179
</TABLE>
- --------------
(1) Excludes revenue from the discontinued Surgilase operations of $5,277,406.
(2) Excludes revenue from Terminated Operations.
(3) Includes losses from Terminated Operations.
A-3
<PAGE> 33
JMAR TECHNOLOGIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company operates in three segments as follows: Precision Systems,
Contract Research and Development, and Semiconductor Products and Processes.
RESULTS OF CONSOLIDATED OPERATIONS
Net income for each of the fiscal years ended December 31, 1998, 1997
and 1996 was $756,841, $1,795,285 and $779,569, respectively, while operating
income for those same periods was $908,309, $1,526,942 and $503,967,
respectively. Revenues for 1998, 1997 and 1996 were $24,560,834, $21,461,627 and
$16,331,090, respectively. The net and operating income reported for 1997 and
1998 include a number of special income and asset writedown items which tend to
obscure direct comparison of the results of those two years. Therefore, Table 1
below was prepared to assist the reader in evaluating the Company's results for
1997 and 1998. It summarizes the Company's Consolidated Statements of Income for
those two years, itemizes the five applicable special items contained in the
reported results for those years and presents the results, excluding the special
items.
Included in net and operating incomes for 1998 are asset writedowns of
$150,000 and $100,000, respectively, while net income for 1997 contained a
one-time gain and a tax benefit totaling $934,969, or $0.05 per share. Income
from operations for 1997 contained a non-recurring gain of $589,969. Excluding
the impact of these special items, net income for 1998 was $906,841 or 5%
greater than the net income of $860,316 for 1997 and operating income for 1998
was $1,008,309 or 8% higher compared with the 1997 operating income of $936,973.
In addition to the impact of the special items, net and operating income
in 1998 were also affected by a number of factors - including rapid growth in
the Company's semiconductor-related Contract Research and Development, and
Semiconductor Products and Processes segments offset, in part, by a steep
decline in sales of the Company's higher-margin precision instruments for the
computer industry from its Precision Systems segment. The Company believes this
decline resulted primarily from the economic downturn in Asia. JMAR's
profitability was further impacted by the substantial investments the Company
made in research and development to fuel continued growth (see below).
A-4
<PAGE> 34
TABLE 1
SUMMARY
FINANCIAL DATA
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year Ending Quarter Ending
December 31 December 31
------------------------------ ------------------------------
Item 1998 1997 1998 1997
- ---- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales $24,560,834 $21,461,627 $ 8,397,860 $ 5,063,909
Gross Profit 9,187,891 8,830,316 2,927,247 2,284,810
Income from Operations 908,309(1) 1,526,942(3) 253,550(1) 938,531(3)
Net Income 756,841(2) 1,795,285(3)(4) 137,700(2) 1,108,753(3)(5)
Net Income per Share:
Basic $ .04 $ .11 $ .01 $ .06
Diluted $ .04 $ .10 $ .01 $ .06
</TABLE>
- --------------
Special Items
(1) After Asset Writedown of $100,000 (4) Includes $345,000 Tax Benefit
(2) After Asset Writedown of $150,000 (5) Includes $180,000 Tax Benefit
(3) Includes Non-Recurring Gain of $589,969
Excluding Special Items
<TABLE>
<CAPTION>
Year Ending Quarter Ending
December 31 December 31
-------------------------- --------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Income from Operations ($) 1,008,309 936,973 353,550 348,562
Net Income ($) 906,841 860,316 287,700 338,784
Net Income/Share (Diluted) $ 0.05 $ 0.05 $ 0.02 $ 0.02
</TABLE>
As a result of the receipt of approximately $26 million in orders during
the second half of 1998, sales in the fourth quarter of 1998 rose to $8,397,860,
a gain of 66% over the $5,063,909 reported in the fourth quarter of 1997 and
approximately 35% higher than the sales level in any other quarter in the
Company's history. The increase in revenues for the year ended December 31, 1998
over the year ended December 31, 1997 is primarily attributable to increases in
the Company's semiconductor-related business primarily in X-ray lithography in
the Contract Research and Development Segment and semiconductor design and
process development in the Semiconductor Products and Processes Segment offset,
in part, by a decline in sales of the Company's precision instrument products in
its Precision Systems Segment.
The increase in revenues for the year ended December 31, 1997 over the
year ended December 31, 1996 was primarily attributable to the heightened demand
for the Company's core disk drive inspection and measurement systems in its
Precision Systems Segment. Management believes this growth was the result of
expansion of the global market for high-performance hard disk drives in 1997,
particularly those incorporating advanced magneto-resistive (MR) head
technology. In 1997, demand also grew for the Company's Mirage family of
tabletop test and measurement systems as the microelectronics industry,
including makers of ion beam manufacturing equipment, discovered new ways to
utilize JMAR's products to improve their manufacturing yields. In addition, the
revenues generated by the Company's DARPA-funded X-ray lithography source
development program in its Contract Research and Development Segment increased
approximately 40% in 1997 over the prior year. These increases were offset in
part by the inclusion in 1996 of revenues related to the Company's laser
hermetic sealing systems in its Precision Systems Segment.
A-5
<PAGE> 35
Due to continued decreases in the revenues of the Company's Precision
Systems Segment, profits in the first quarter of 1999 will be less than revenues
and profits in the fourth quarter of 1998. The Company's ability to forecast
orders for its precision instrument products in its Precision Systems Segment
continues to be somewhat limited due to continuing marketplace uncertainties. In
addition, certain of the Company's revenues are from a limited number of
customers. As a result, the timing of receipt and shipment of orders for those
customers could have a material impact on quarterly results in 1999.
Gross margins for the fiscal years ended December 31, 1998, 1997 and
1996 were 37.4%, 41.1% and 41%, respectively. The lower gross margins for 1998
are primarily due to a steep decline in sales of the Company's higher margin
precision instruments for the computer industry, the build-up of expenses
associated with the rapid increase in the Company's semiconductor-related
business, competitive pricing pressures on certain products and higher
engineering costs related to the customization of certain products for new
applications. These decreases were offset in part by lower material costs due to
higher volume purchases of inventory related to certain product orders and cost
reductions in the manufacturing process. The Company continues to experience
competitive pressures on certain products, which may impact gross margins in the
future. In addition, to the extent that the Company's rapidly expanding
semiconductor-related business continues to represent a higher percentage of the
Company's revenues, the Company's margins are expected to be lower in the first
quarter of 1999 and could be lower for some time thereafter.
Selling, general and administrative ("SG&A") expenses for the fiscal
years ended December 31, 1998, 1997 and 1996, were $6,153,100, $6,194,333 and
$4,884,050, respectively. The increase in SG&A expenses in 1997 of $1,310,283
over 1996 is due to (i) higher sales and marketing costs related to the
Company's increased sales volume; and (ii) higher payroll costs.
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", totaled $3,837,314, $1,487,139 and $1,137,065 for the fiscal years ended
December 31, 1998, 1997 and 1996, respectively. The increase in Customer-Funded
RD&E expenditures for 1998 is primarily related to an increase in the X-ray
lithography program funding provided by DARPA, most of which is directed toward
commercialization of JMAR's X-ray lithography source technology. Company-Funded
RD&E costs are shown in "Operating Expenses" and totaled $2,026,482, $1,699,010
and $1,304,119, respectively. Hence, total RD&E expenses for those three years
were $5,863,796, $3,186,149 and $2,441,184, respectively. Capitalized software
costs of $451,185, $444,355 and $222,010 for the years ended December 31, 1998,
1997 and 1996 are not included in the above amounts. Including capitalized
software costs, RD&E expenditures as a percentage of sales were 25.7%, 16.9% and
16.3% for the years ended December 31, 1998, 1997 and 1996, respectively. The
increase in RD&E expenditures is primarily related to the engineering
development of a new generation of disk drive inspection systems, the
development of new software for the Company's test and measurement systems,
continued development of the Britelight laser system and the Microlight 1000
demonstration center and continued development of advanced lithography for
semiconductor manufacturing.
Included in 1998 is a writedown of $100,000 related to certain fixed
assets in the Semiconductor Products and Processes Segment. The non-recurring
item for 1997 includes a gain of approximately $2,839,000 from the settlement of
certain claims against the former principal shareholders of JMAR Semiconductor
offset in part by the writedown of certain assets primarily related to the
Semiconductor Products and Processes Segment in the amount of $1,594,000 and
costs incurred as a result of the reorganization of JMAR Semiconductor in the
amount of $655,031 resulting in a net gain of $589,969.
Interest expense for the fiscal years ended December 31, 1998, 1997 and
1996 was $181,227, $181,562 and $288,372, respectively. The decrease in interest
expense in 1997 versus 1996 is primarily due to the conversion of $1,000,000 and
$470,000 of convertible notes into JMAR common stock in October, 1996 and
August, 1997, respectively. Included in interest expense for fiscal years 1998,
1997 and 1996 are loan fees totaling $11,642, $10,369 and $30,780, respectively.
A-6
<PAGE> 36
Interest and other income (expense) for 1998 includes a writedown of
$50,000 of a note receivable from Santa Fe Laser Company. 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.
Included in the Statement of Income in 1997 and 1996 is a tax benefit of
$345,000 and $175,000, respectively, related to the utilization by the Company
of a portion of its net operating loss carryforward.
CONSOLIDATED LIQUIDITY AND FINANCIAL CONDITION
Cash and cash equivalents at December 31, 1998 and December 31, 1997
were $3,848,183 and $3,644,117, respectively. The increase in cash and cash
equivalents for the fiscal years ended December 31, 1998, 1997 and 1996 was
$204,066, $1,014,831 and $791,639, respectively. Cash from net income plus
non-cash operating items for the year ended December 31, 1998 was $1,690,771.
The increase in cash for 1998 resulted primarily from borrowings under
the Company's working capital bank line of $1,625,000 and proceeds from the
exercise of options and warrants of $163,684 offset in part by capital
expenditures of $803,498, payments of notes payable of $376,400, repurchases of
stock of $349,203 and cash used in operations of $40,580. Inventories have
increased from $4,685,883 at December 31, 1997 to $5,848,936 at December 31,
1998 primarily due to an increase in inventory costs related to a contract at
JMAR Semiconductor. These costs were billed to the customer subsequent to
December 31, 1998.
The increase in cash for 1997 resulted from proceeds from the issuance
of common stock of $3,215,253, payments received on notes receivables of
$897,857, proceeds from the exercise of options and warrants of $668,355 and net
borrowings of notes payable of $273,222 offset in part by cash used in
operations of $1,951,488, payment of short-term debt of $969,281, capital
expenditures of $763,697, increase in notes and other receivables of $307,939
and patent costs of $47,451. 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, 1997. Accounts payable and accrued liabilities increased primarily
due to an increase in inventory purchases to support planned production
increases.
JMAR's operations will continue to require the use of working capital.
The Company's working capital availability as of December 31 for each of the
five years ending with 1998 is summarized in the Consolidated Balance Sheet Data
on A-3. The working capital of the Company is generally funded through its
working capital line with Comerica Bank (the "Bank") and through third party
contracts. In 1998, the Bank increased the Company's credit availability from
$3.5 million to $6.0 million (the "Line"). The new banking arrangement provides
a revolving line of credit to JMAR for up to $5 million bearing interest at the
Bank's prime rate, plus an additional $1 million five-year term credit line at
the Bank's prime rate for financing equipment purchases and construction of
prototype products. This is in addition to an existing $666,658 equipment
financing loan previously made by the Bank. As of March 10, 1999, JMAR's
availability pursuant to the Line was $6,000,000. The Line contains several
covenants relating to, among other matters, the maintenance of certain minimum
income levels and financial ratios, which if not met by the Company could impact
the availability of advances pursuant to the Line. The Company is in compliance
with all covenants. Management believes that the Company has existing resources
to adequately fund operations and working capital requirements for the next
twelve months based on the current level of operations and business conditions.
In September, 1998, the Board of Directors authorized the repurchase,
from time-to-time, of up to $2,000,000 of its own shares of common stock in the
open market, or in negotiated transactions, when they are available at prices
the Company considers attractive. As of March 22, 1999, the Company had
repurchased 234,300 shares pursuant to this repurchase program at a total cost
of $446,833.
A-7
<PAGE> 37
At December 31, 1998, the Company had in excess of $25 million of
Federal net operating loss carryforwards, subject to certain annual limitations
which expire from 2004 through 2011. To the extent the Company has taxable
income in the future, these carryforwards may be used by the Company to reduce
its cash outlay for taxes.
YEAR 2000 ISSUE
The "Year 2000 Issue" is the result of computer systems, embedded
semiconductors and related items not being able to distinguish the year 2000
from the year 1900. This issue affects virtually every business, including the
Company's, and can affect both the Company's internal information systems, the
equipment and components it buys from others and the products it sells.
In early 1998, the Company formed a task force to assess the nature,
extent and cost of remediation of any Year 2000 compliance issues confronting
the Company and its suppliers. This project encompasses a review of the
Company's internal systems and products as well as its suppliers' compliance.
This assessment has been substantially completed with regard to the Company's
internal information systems and at all of the Company's three divisions. As a
result of its assessment process, the Company has identified certain corrective
actions which may be required. The Company has completed the corrective actions
required to be taken with regard to its internal information systems and
believes such systems are compliant. With regard to its products, the Company
has taken several corrective actions and others remain to be completed. Based
upon its understanding of the corrective actions which may be required, the
Company expects to complete all required actions by mid-1999.
In connection with its assessment of the Year 2000 issues, the Company
has sent out letters to its customers advising them of the Year 2000 issue and
providing them with a testing procedure to diagnose any potential problems in
equipment supplied to them by the Company. The Company has also sent
questionnaires to its key suppliers requesting information regarding their own
Year 2000 compliance efforts, as well as requesting confirmation that the
components and services provided by those suppliers are Year 2000 compliant.
Based upon its initial assessment, the Company believes that Year 2000
issues related to its internal systems and its products should not have a
material impact on the Company's financial or operating performance. Although
the Company believes that it is justified in relying upon the information and
confirmations it has obtained from its key suppliers, the Company does not
intend to obtain independent confirmation of its suppliers' Year 2000 compliance
and, therefore, no assurances can be given that the companies upon which the
Company relies will timely resolve their own Year 2000 compliance issues.
The costs to implement the Company's Year 2000 plan are primarily the
time devoted by personnel to assess the Year 2000 issues, to communicate with
suppliers and customers and to formulate and implement any necessary changes. It
is the Company's policy to expense such costs as incurred. To date, the
financial impact to the Company of assessing and implementing the changes
required to address the Year 2000 issue has not been material to the Company's
business, operations, financial condition, liquidity and capital resources.
Based upon the Company's current assessment, the Company does not expect the
Year 2000 issue to have a material impact on its business, operations, financial
condition, liquidity and capital resources in the future.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain statements contained in this Appendix which are not related to
historical results, including statements regarding JMAR's future sales or profit
growth, competitive position or products, projects or processes currently under
development and the ability of the Company to successfully introduce those
products into the commercial marketplace or to apply those products, projects or
processes to alternative applications and the Company's plans to address the
Year 2000 issues, its estimated costs of remediation and testing, the impact of
the failure to reach compliance and its timetable for the implementation of its
Year 2000 plans, are forward-looking statements that necessarily are based on
certain assumptions and are subject to certain risks and uncertainties that
could cause actual future
A-8
<PAGE> 38
performance and results to differ materially from those stated or implied in the
forward-looking statements. These risks and uncertainties include concentration
of sales to certain markets and customers, delays in shipments or cancellations
of orders, failure of expected orders to materialize, fluctuations in margins,
timing of future orders, customer reorganizations, failure of advanced
technology to perform as predicted, uncertainties associated with the timing of
the funding of government contracts, fluctuations in demand, delays in
development, introduction and acceptance of new products, changing business and
economic conditions in various geographic regions, technical obsolescence of
existing products, technical problems in the development or modification of
current products or manufacturing processes, 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, micromachining,
etc.) to commercial products, availability of working capital to support growth,
continued government funding of advanced lithography, successful integration of
acquisitions, other competitive factors and temporary cessation of operations at
one or more of its division facilities due to natural events such as floods,
earthquakes and fires.
JMAR's future operating results are also dependent on its ability to
develop, manufacture and market, in a timely manner, innovative products that
meet customers' needs and the continued growth of the semiconductor, computer
disk drive, general microelectronics 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.
Although the Company has made substantial progress in its PXS X-ray
source development program, the X-ray output levels achieved as of the end of
1998 were, in the Company's judgment, less than that required for commercially
viable X-ray lithography. 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 source 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 initial versions of its Britelight lasers
and its Microlight 1000, it has only recently introduced a low power version of
the Britelight(TM) into the commercial marketplace. Along with some of the risks
discussed in the preceding paragraph, the size of the potential market for that
product is not yet known and there is no assurance that the Britelight(TM) laser
will be accepted in the marketplace.
In addition, portions of the Company's manufacturing operations are
sometimes dependent on the ability of a targeted base of suppliers to provide
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 certain 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.
A-9
<PAGE> 39
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.
The Company denominates its foreign sales in U.S. dollars and the
Company does not believe that foreign currency fluctuations will have a material
adverse impact on its ability to compete with its domestic-based competitors.
Foreign currency fluctuations, however, could make the Company's products less
affordable in foreign markets and thus reduce the demand for such products. The
Company attempts to mitigate credit risk relative to sales to foreign customers
through its policy of generally requiring letters of credit.
A-10
<PAGE> 40
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To JMAR Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of JMAR
Technologies, Inc. (formerly JMAR Industries, Inc.) (a Delaware corporation) and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of JMAR Technologies,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
San Diego, California
March 2, 1999
A-11
<PAGE> 41
JMAR TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997
================================================================================
<TABLE>
<CAPTION>
ASSETS December 31,
------ --------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents ......................................................... $ 3,848,183 $ 3,644,117
Accounts receivable, net .......................................................... 7,766,961 4,308,777
Notes and other receivable ........................................................ 66,682 111,285
Inventories ....................................................................... 5,848,936 4,685,883
Prepaid expenses and other ........................................................ 828,664 757,896
------------ ------------
Total current assets ......................................................... 18,359,426 13,507,958
Receivable from officer ................................................................ 83,212 78,378
Property and equipment, net ............................................................ 2,710,699 2,500,404
Other assets, net ...................................................................... 1,245,987 794,073
Goodwill, net .......................................................................... 475,509 388,065
------------ ------------
TOTAL ASSETS .................................................................. $ 22,874,833 $ 17,268,878
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable .................................................................. $ 4,728,068 $ 1,175,717
Accrued liabilities ............................................................... 570,945 546,615
Accrued payroll and related costs ................................................. 1,153,304 1,228,853
Line of credit .................................................................... 2,100,000 475,000
Notes payable and capital lease obligations ....................................... 593,975 447,246
------------ ------------
Total current liabilities .................................................... 9,146,292 3,873,431
------------ ------------
Notes payable and capital lease obligations, net of current portion .................... 475,362 907,235
------------ ------------
Commitments and contingencies (Notes 7 and 9)
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued and
outstanding as of December 31, 1998 and December 31, 1997 ..................... - -
Common stock, $.01 par value; 40,000,000 shares authorized;
Issued and outstanding 18,080,853 shares as of December 31, 1998 and
17,890,952 shares as of December 31, 1997 ...................................... 180,809 178,910
Additional paid-in capital ........................................................ 36,593,901 36,587,674
Accumulated deficit ............................................................... (23,521,531) (24,278,372)
------------ ------------
Total stockholders' equity ................................................... 13,253,179 12,488,212
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .................................... $ 22,874,833 $ 17,268,878
============ ============
</TABLE>
================================================================================
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
A-12
<PAGE> 42
JMAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
================================================================================
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Product sales ........................................... $ 16,340,637 $ 19,228,621 $ 14,585,585
Contract sales .......................................... 8,220,197 2,233,006 1,745,505
------------ ------------ ------------
Total revenues ................................ 24,560,834 21,461,627 16,331,090
Product costs of sales .................................. 9,789,606 11,144,172 8,501,889
Contract costs of sales ................................. 5,583,337 1,487,139 1,137,065
------------ ------------ ------------
Gross profit .................................. 9,187,891 8,830,316 6,692,136
------------ ------------ ------------
Operating Expenses:
Selling, general and administrative ................ 6,153,100 6,194,333 4,884,050
Research, development and engineering .............. 2,026,482 1,699,010 1,304,119
Asset writedowns and non-recurring items ........... 100,000 (589,969) -
------------ ------------ ------------
Total operating expenses ...................... 8,279,582 7,303,374 6,188,169
------------ ------------ ------------
Income from operations .................................. 908,309 1,526,942 503,967
Interest and other income (expense), net ................ 61,963 104,905 388,974
Interest expense ........................................ (181,227) (181,562) (288,372)
------------ ------------ ------------
Income before income taxes .............................. 789,045 1,450,285 604,569
Income tax (provision) benefit .......................... (32,204) 345,000 175,000
------------ ------------ ------------
Net income .............................................. $ 756,841 $ 1,795,285 $ 779,569
============ ============ ============
Net income per share:
Basic .............................................. $ .04 $ .11 $ .05
============ ============ ============
Diluted ............................................ $ .04 $ .10 $ .05
============ ============ ============
Shares used in computation of net income per share:
Basic .............................................. 18,046,860 17,065,860 15,582,579
============ ============ ============
Diluted ............................................ 19,112,634 18,601,119 16,755,753
============ ============ ============
</TABLE>
================================================================================
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
A-13
<PAGE> 43
JMAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
================================================================================
<TABLE>
<CAPTION>
Common Stock Preferred Stock
Shares Amount Shares Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 ...... 14,228,585 $ 142,286 - $ -
Issuance of stock related to
acquisition of Cal ASIC ...... 1,427,526 14,275 - -
Debt converted to equity ........ 440,000 4,400 - -
Stock issued upon exercise of
warrants .................... 474,158 4,742 - -
Issuance of stock ............... 190,000 1,900 - -
Net income ...................... - - - -
------------ ------------ ------------ ------------
Balance, December 31, 1996 ...... 16,760,269 167,603 - -
Stock issued upon exercise of
warrants and options ......... 681,618 6,816 - -
Debt converted to equity ........ 156,634 1,566 - -
Issuance of stock ............... 1,008,252 10,083 - -
Retirement of stock related to
acquisition of Cal ASIC ...... (715,821) (7,158) - -
Net income ...................... - - - -
------------ ------------ ------------ ------------
Balance, December 31, 1997 ...... 17,890,952 178,910 - -
Stock issued upon exercise of
warrants and options ......... 213,812 2,138 - -
Issuance of stock for services .. 44,184 442 - -
Issuance of stock related to
acquisition of minority
interest of JSI .............. 24,045 240 - -
Repurchases of stock ............ (184,300) (1,843) - -
Issuance of stock related to
acquisition of Continuum
Engineering .................. 92,160 922 - -
Net income ...................... - - - -
------------ ------------ ------------ ------------
Balance, December 31, 1998 ...... 18,080,853 $ 180,809 - $ -
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Additional Total
Paid-in Accumulated Stockholders'
Capital Deficit Equity
------------ ------------ ------------
<S> <C> <C> <C>
Balance, December 31, 1995 ...... $ 31,796,142 $(26,853,226) $ 5,085,202
Issuance of stock related to
acquisition of Cal ASIC ...... 1,707,270 - 1,721,545
Debt converted to equity ........ 973,021 - 977,421
Stock issued upon exercise of
warrants .................... 644,426 - 649,168
Issuance of stock ............... 154,100 - 156,000
Net income ...................... - 779,569 779,569
------------ ------------ ------------
Balance, December 31, 1996 ...... 35,274,959 (26,073,657) 9,368,905
Stock issued upon exercise of
warrants and options ......... 661,539 - 668,355
Debt converted to equity ........ 467,622 - 469,188
Issuance of stock ............... 3,219,472 - 3,229,555
Retirement of stock related to
acquisition of Cal ASIC ...... (3,035,918) - (3,043,076)
Net income ...................... - 1,795,285 1,795,285
------------ ------------ ------------
Balance, December 31, 1997 ...... 36,587,674 (24,278,372) 12,488,212
Stock issued upon exercise of
warrants and options ......... 161,546 - 163,684
Issuance of stock for services .. 21,099 - 21,541
Issuance of stock related to
acquisition of minority
interest of JSI .............. 36,864 - 37,104
Repurchases of stock ............ (347,360) - (349,203)
Issuance of stock related to
acquisition of Continuum
Engineering .................. 134,078 - 135,000
Net income ...................... - 756,841 756,841
------------ ------------ ------------
Balance, December 31, 1998 ...... $ 36,593,901 $(23,521,531) $ 13,253,179
============ ============ ============
</TABLE>
================================================================================
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
A-14
<PAGE> 44
JMAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
================================================================================
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................................................ $ 756,841 $ 1,795,285 $ 779,569
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization ......................................... 812,724 700,644 668,172
Services received in exchange for
common stock or warrants ........................................... 21,541 9,864 -
Asset writedowns and non-recurring items .............................. 100,000 (589,969) -
Change in assets and liabilities net of
effects from acquisitions, asset writedowns and non-recurring items:
Increase in:
Accounts receivable, net ............................................. (3,409,102) (1,434,015) (1,252,278)
Inventories .......................................................... (1,133,215) (830,571) (1,307,937)
Prepaid expenses and other ........................................... (68,696) (556,109) (654,320)
Other assets ......................................................... (592,031) (699,349) (132,172)
Increase (decrease) in:
Customer deposits .................................................... 9,997 (724,325) 736,950
Accounts payable and accrued liabilities ............................. 3,461,361 377,057 748,329
----------- ----------- -----------
Net cash used in operating activities ..................................... (40,580) (1,951,488) (413,687)
----------- ----------- -----------
Cash flows from investing activities:
Patent costs .............................................................. (60,628) (47,451) (12,905)
Capital expenditures ...................................................... (803,498) (763,697) (941,597)
Increase in notes and other receivables ................................... (4,834) (307,939) (187,722)
Payments received on notes receivable ..................................... 13,422 897,857 1,004,502
Acquisition costs, net of cash acquired ................................... 37,103 - (86,393)
----------- ----------- -----------
Net cash used in investing activities ................................ (818,435) (221,230) (224,115)
----------- ----------- -----------
Cash flows from financing activities:
Net borrowings (payments) under short-term debt agreements ................ 1,625,000 (969,281) (82,648)
Net borrowings (payments) of notes payable ............................... (376,400) 273,222 706,921
Net proceeds from the issuance of common stock ............................ - 3,215,253 156,000
Repurchases of stock ...................................................... (349,203) - -
Net proceeds from the exercise of options and warrants ................... 163,684 668,355 649,168
----------- ----------- -----------
Net cash provided by financing
activities ......................................................... 1,063,081 3,187,549 1,429,441
----------- ----------- -----------
Net increase in cash and cash equivalents ...................................... 204,066 1,014,831 791,639
Cash and cash equivalents, beginning of
period ....................................................................... 3,644,117 2,629,286 1,837,647
----------- ----------- -----------
Cash and cash equivalents, end of period ....................................... $ 3,848,183 $ 3,644,117 $ 2,629,286
=========== =========== ===========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY: On May 23, 1996, the Company
acquired approximately 94 percent of the outstanding common stock of JMAR
Semiconductor (formerly California ASIC). As consideration for the acquisition,
the Company issued an aggregate of approximately 1,427,526 shares of its common
stock. On December 7, 1998, the Company acquired 100% of the outstanding common
stock of Continuum Engineering, Inc. As consideration for the acquisition, the
Company issued an aggregate of 92,160 shares of its common stock (See Note 3).
================================================================================
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
A-15
<PAGE> 45
JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE COMPANY
The accompanying consolidated financial statements include the
accounts of JMAR Technologies, Inc. (formerly JMAR Industries, Inc.) (the
"Company" or "JMAR") and its subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
The Company develops, manufactures and markets precision
measurement, yield enhancement and laser manufacturing systems, provides custom
semiconductor products for the microelectronics industry and is a leading
developer of advanced lithography sources for production of future higher
performance semiconductors.
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. 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.
d. 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.
e. 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 temporary differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases.
A-16
<PAGE> 46
JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
f. 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.
g. 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. During
1997 management determined that such an impairment had occurred relative to a
portion of its custom semiconductor business. Accordingly, the Company wrote-off
a portion of the goodwill associated with that business. Management believes
that there has been no impairment of goodwill as reflected in the Company's
consolidated financial statements as of December 31, 1998. Accumulated
amortization of goodwill was $561,312 and $474,651 at December 31, 1998 and
1997, respectively. Patent costs are amortized over ten years, and other assets,
including capitalized software, are amortized over not more than five years.
Accumulated amortization of other assets was $568,317 and $338,382 at December
31, 1998 and 1997, respectively.
h. 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.
i. 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.
A-17
<PAGE> 47
JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
j. Earnings Per Share
Effective December 15, 1997, the Company adopted Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), Earnings per Share. There
was no impact on previously reported earnings per share (see Note 13).
k. 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).
l. Reclassifications
Certain reclassifications have been made to the prior year financial
statements to conform with the 1998 presentation.
m. New Accounting Pronouncements
In 1998, the Company adopted FASB Statement No. 130 ("SFAS 130"),
Reporting Comprehensive Income. SFAS 130 requires the reporting of additional
financial information. For each of the three years ended December 31, 1998,
there was no difference in the Company's Net Income and Comprehensive Income.
In February, 1998, the Financial Accounting Standards Board (FASB)
issued SFAS No. 132, "Employers' Disclosures About Pensions and Other
Postretirement Benefits". SFAS No. 132 revises and standardizes employers'
disclosures about pension and other postretirement benefits, but it does not
change the measurement or recognition of those benefits. SFAS No. 132 is
effective for fiscal years beginning after December 15, 1997. SFAS No. 132
further requires restatement of disclosures for earlier periods provided for
comparative purposes. The adoption of SFAS No. 132 did not have any impact on
the Company's consolidated financial statements or disclosures thereto.
In March, 1998, the Accounting Standards Executive Committee (AcSEC)
issued AICPA Statement of Position (SOP) 98-1, "Accounting for costs of computer
software developed or obtained for internal use". This statement provides
guidance on accounting for the costs of computer software developed or obtained
for internal use and identifies characteristics of internal-use software and
provides assistance in determining when computer software is for internal use.
SOP 98-1 is effective for fiscal years beginning after December 15, 1998, with
earlier application permitted. The Company believes that the adoption of SOP
98-1 will have no significant impact on the Company's consolidated financial
statements, results of operations, or related disclosures thereto.
A-18
<PAGE> 48
JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company has adopted the FASB's Statement of Financial Accounting
Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and
Related Information." SFAS 131 superseded FASB Statement No. 14, Financial
Reporting for Segments of a Business Enterprise. SFAS 131 established standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. SFAS 131 also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The adoption of
SFAS 131 does not affect the results of operations or financial position, but
does affect the disclosure of the segment information that is disclosed in the
Notes to the Consolidated Financial Statements (see Note 14).
In April, 1998, AcSEC issued SOP 98-5, "Reporting on the costs of
start-up activities". This statement provides guidance on financial reporting of
start-up costs and organization costs and requires that such costs of start-up
activities be expensed as incurred. SOP 98-5 is effective for fiscal years
beginning after December 15, 1998, with earlier application permitted. The
Company believes that the adoption of SOP 98-5 will have no significant impact
on the Company's consolidated financial statements, results of operations, or
related disclosures thereto.
3. ACQUISITIONS
On May 23, 1996, the Company acquired (the "Acquisition")
approximately 94 percent of the outstanding common stock of California ASIC
Technical Services, Inc. ("Cal ASIC") (subsequently renamed JMAR Semiconductor).
JMAR Semiconductor is a "fab-less" supplier of semiconductors focusing on the
development and delivery of high performance custom microcircuits for a wide
range of commercial, medical and military electronics uses. 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 purchase price was
negotiated at arm's length. 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. Related
goodwill of $164,946 at December 31, 1998 is being amortized over five years.
In October, 1997, the Company received approximately 716,000 freely
tradable shares of Company common stock with a market value of approximately
$2,839,000 from the former principal shareholders of Cal ASIC as settlement (the
"Settlement") of certain claims under the terms of the original purchase
agreement. These shares were retired by the Company. JMAR's ownership position
in JMAR Semiconductor remained unchanged as a result of the Settlement. This
non-recurring gain of approximately $2,839,000 has been offset in part by the
writedown of certain assets primarily related to JMAR Semiconductor in the
amount of $1,594,000 and costs incurred as a result of the reorganization of
JMAR Semiconductor in the amount of $655,031 resulting in a net gain of
$589,969. In May, 1998, the Company acquired the remaining outstanding shares of
JMAR Semiconductor.
A-19
<PAGE> 49
JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
On December 7, 1998, the Company acquired 100 percent of the
outstanding common stock of Continuum Engineering, Inc. ("CEI"). As
consideration, the Company issued to the sole shareholder of CEI 92,160 shares
of its Common Stock. The purchase price was negotiated at arm's length and the
acquisition was accounted for as a purchase effective December 1, 1998. Included
in the Consolidated Balance Sheet at December 31, 1998 is goodwill of $150,000
related to this acquisition.
4. INVENTORIES
At December 31, 1998 and 1997, inventories consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Raw materials, components and sub-assemblies ..... $3,127,225 $3,673,414
Work-in-process .................................. 2,068,309 680,883
Finished goods ................................... 653,402 331,586
---------- ----------
$5,848,936 $4,685,883
========== ==========
</TABLE>
5. ACCOUNTS RECEIVABLE
At December 31, 1998 and 1997, accounts receivable consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Trade .................................. $ 2,762,563 $ 3,367,271
Trade - unbilled ....................... 245,013 367,875
U.S. Government - billed ............... 3,988,231 10,350
U.S. Government - unbilled ............. 814,524 598,828
----------- -----------
7,810,331 4,344,324
Less - Reserve for doubtful accounts ... (43,370) (35,547)
----------- -----------
$ 7,766,961 $ 4,308,777
=========== ===========
</TABLE>
All unbilled receivables at December 31, 1998 and 1997, 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, 1998 and 1997, property and equipment consisted of
the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Equipment and machinery ......... $ 5,003,891 $ 4,505,804
Furniture and fixtures .......... 609,659 407,722
Leasehold improvements .......... 106,462 85,892
----------- -----------
5,720,012 4,999,418
Less-Accumulated depreciation ... (3,009,313) (2,499,014)
----------- -----------
$ 2,710,699 $ 2,500,404
=========== ===========
</TABLE>
A-20
<PAGE> 50
JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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, 1998 are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
--------- ---------
<S> <C> <C>
1999 ............................ $ 130,179 $ 407,866
2000 ............................ 936 198,686
Thereafter ...................... - -
--------- ---------
131,115 $ 606,552
=========
Amount representing interest .... (5,543)
---------
125,572
Less: Current portion ........... (124,636)
---------
$ 936
=========
</TABLE>
During September, 1996, the Company entered into a $950,000 lease
financing agreement with Leasing Technologies International, Inc., the proceeds
of which have been used to finance JMAR Semiconductor equipment and software
financing requirements. The above amount for capital leases represents the
amount outstanding pursuant to that agreement at December 31, 1998.
Related rent expense was $380,748, $363,339 and $315,515 for the
years ended December 31, 1998, 1997 and 1996, 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.
The Company has entered into employment agreements with several of
its key employees.
8. NOTES PAYABLE
Notes payable as of December 31, 1998 and 1997, were as follows:
A-21
<PAGE> 51
JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Working capital line of credit in the amount of $5,000,000 with Comerica Bank -
California. Advances bear interest at prime rate. The line is renewable at the
Bank's option yearly on May 1st and interest on the line is payable monthly.
Advances are secured by all assets of the Company. The bank agreements contain
covenants, among other items, relating to income levels and financial ratios ...... $ 2,100,000 $ 475,000
Unsecured convertible promissory notes bearing interest at 8.25 percent ........... - 20,000
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 the Company .............................................. 218,741 343,745
Note payable with monthly interest payments only through April 1998. Commencing
May 1998, due in monthly principal installments of $10,417 plus interest at
prime plus .5% through May 2002, secured by all assets of the Company ............. 447,917 500,000
Notes payable due May 2000, interest at 12 percent, secured by
certain machinery and equipment ................................................... 187,462 187,462
Capital leases (see Note 7) ....................................................... 131,115 298,393
Other notes payable ............................................................... 84,102 4,881
----------- -----------
3,169,337 1,829,481
Less: Current portion ............................................................. (2,693,975) (922,246)
=========== ===========
$ 475,362 $ 907,235
=========== ===========
</TABLE>
During October 1993 the Company issued $2,500,000 of convertible
promissory notes (the "Notes") of which none remained outstanding at December
31, 1998. The Notes were initially convertible into shares of Common Stock of
the Company at $3.75 per share. In October 1996, 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 (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 Notes
converted the Notes into 440,000 shares. In July, 1997, 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 (80 percent) was lowered to $3.00 per share.
Pursuant to these amended terms, holders of $470,000 in Notes converted the
Notes. These transactions had no impact on the Company's results of operations
for any of the periods presented in the accompanying financial statements, other
than the corresponding reduction in interest expense.
A-22
<PAGE> 52
JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The weighted average interest rate on the loan with Comerica
Bank-California was 8.6% and 9.25% for 1998 and 1997, respectively. The maximum
amount outstanding was $3,000,000 and $1,250,000 and the average amount
outstanding was $943,750 and $353,541 during 1998 and 1997, respectively.
Interest paid for the years ended December 31, 1998, 1997 and 1996
was $160,966, $162,488 and $289,248, 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.
10. INCOME TAXES
For the years ended December 31, 1997 and 1996, the Company has
recorded a tax benefit of $345,000 and $175,000, respectively, related to the
estimated future utilization of net operating loss carryforwards. The provision
for federal and state income taxes for the year ended December 31, 1998 is for
alternative minimum taxes. The Company paid taxes of $32,204 in 1998.
At December 31, 1998, the Company had Federal net operating loss
carryforwards as follows:
<TABLE>
<CAPTION>
EXPIRES
- -------
<S> <C>
2004................................................................... $ 1,184,000
2005................................................................... 2,840,000
2006................................................................... 961,000
2007................................................................... 4,546,000
2008................................................................... 6,932,000
2009................................................................... 6,860,000
2010................................................................... 2,265,000
2011................................................................... 585,000
===========
Total.................................................................. $26,173,000
===========
</TABLE>
The Company has approximately $1,496,000 of temporary differences
that will offset future taxable income subject to the change in ownership
limitations discussed below.
A-23
<PAGE> 53
JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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, 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 $5,349,000 of Company and acquired company loss
carryforwards. Approximately $20,824,000 of the 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, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
DEFERRED TAX ASSETS: 1998 1997
----------- -----------
<S> <C> <C>
Net operating loss carryforwards ........... $ 8,899,000 $ 8,652,000
Losses from equity and other investments ... 492,000 492,000
Other ...................................... 16,000 547,000
----------- -----------
Total gross deferred tax assets ..... 9,407,000 9,691,000
Less valuation reserve .............. (8,887,000) (9,171,000)
----------- -----------
Net deferred tax asset .............. $ 520,000 $ 520,000
=========== ===========
</TABLE>
The valuation reserve as of December 31, 1998 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 1998, 1997 and 1996 varied from
the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Statutory federal income tax rate ........ 34% 34% 34%
State income tax ......................... 6 6 6
Permanent differences .................... 2 1 2
Benefit recorded due to net operating loss
carryforward position .................. (38) (65) (71)
------ ------ ------
4% (24)% (29)%
====== ====== ======
</TABLE>
A-24
<PAGE> 54
JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. STOCKHOLDERS' EQUITY
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.
During the year ended December 31, 1997, the Company received net
proceeds of approximately $3,898,000 from the private placements of
approximately 1,008,000 shares of common stock and the exercise of warrants and
options into approximately 682,000 shares of common stock.
During the year ended December 31, 1998, the Company received net
proceeds of approximately $164,000 from the exercise of warrants and options
into approximately 214,000 shares of common stock.
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 JPSI employees (the "JPSI Plan").
The Company accounts for these plans under APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with FASB Statement No. 123 ("SFAS 123"), the
Company's net income and earnings per share would have been reduced to the
following pro forma amounts:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net Income: As Reported $756,841 $1,795,285 $779,569
Pro Forma 403,764 1,492,559 668,169
Basic EPS: As Reported .04 .11 .05
Pro Forma .02 .09 .04
Diluted EPS: As Reported .04 .10 .05
Pro Forma .02 .08 .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.
A-25
<PAGE> 55
JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company was authorized to 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 JPSI Plan. As of December 31,
1998, the Company has granted options for 110,782 shares under the 1988 Plan,
1,232,662 options under the 1991 Plan, 424,246 warrants under the Anti-Dilution
Plan, and 244,500 warrants under the JPSI Plan. In addition, 50,000
non-qualified options have been granted to an employee outside of the above
plans. 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
JPSI 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 total number of stock options or
warrants pursuant to all four of the above "plans" as of December 31, 1996, 1997
and 1998 and changes during the years then ended is presented in the table and
narrative below:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- -------------------------- --------------------------
Wtd Avg Wtd Avg Wtd Avg
Shares Ex Price Shares Ex Price Shares Ex Price
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beg. of year 1,589,752 $ 2.54 1,319,369 $ 2.69 993,518 $ 4.35
Granted 507,442 2.78 587,500 2.67 330,184 2.37
Exercised (95,214) 0.90 (70,764) 2.27 - -
Forfeited (95,000) 3.18 (246,353) 3.69 (4,333) 3.27
----------- ----------- -----------
Outstanding at end of year 1,906,980 2.66 1,589,752 2.54 1,319,369 2.69
----------- ----------- -----------
Exercisable at end of year 533,294 375,071 261,418
Weighted avg. fair value
of options or warrants
granted 2.78 2.51 1.61
</TABLE>
131,056 of the 1,906,980 options and warrants outstanding at
December 31, 1998 have exercise prices between $.53 and $1.09 with a weighted
average exercise price of $.89 and a weighted average remaining contractual life
of 6.6 years. All of these options and warrants are exercisable. 791,976 of the
options and warrants outstanding at December 31, 1998 have exercise prices
between $1.72 and $2.94 with a weighted average exercise price of $2.49 and a
weighted average remaining contractual life of 8.6 years. 217,186 of these
options and warrants are exercisable. 929,448 of the options and warrants at
December 31, 1998 have exercise prices of $3.00 with a weighted average exercise
price of $3.00 and a weighted average remaining contractual life of 5.8 years.
171,717 of these options and warrants are exercisable. 54,500 of the options and
warrants outstanding at December 31, 1998 have exercise prices between $3.13 and
$4.06 with a weighted average exercise price of $3.47 and a weighted average
remaining contractual life of 8.4 years. 13,335 of these options and warrants
are exercisable.
A-26
<PAGE> 56
JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 1996, 1997 and 1998: risk-free
interest rate of approximately 6 percent; expected dividend yields of 0 percent,
expected lives of 6 years, and expected volatility of 48 percent.
13. EARNINGS PER SHARE
In 1997, the Company adopted FASB Statement No. 128 ("SFAS No.
128"), Earnings per Share. Basic earnings per common share were computed by
dividing net income by the weighted average number of shares of common stock
outstanding during the year. Diluted earnings per common share for the years
ended December 31, 1998, 1997 and 1996 were computed by dividing net income by
the sum of the weighted average number of shares of common stock (18,046,860,
17,065,860 and 15,582,579 for 1998, 1997 and 1996, respectively) plus dilutive
employee stock options and warrants (130,260, 314,276 and 154,364 for 1998, 1997
and 1996, respectively) and other dilutive warrants and options (935,514,
1,220,983 and 1,018,810 for 1998, 1997 and 1996, respectively).
14. SEGMENT INFORMATION
In 1998, the Company adopted SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information, which changes the way the
Company reports information about its operating segments. The Company's three
reportable segments have separate management teams and infrastructures that
offer different products and services and are affected by different economic
conditions.
Precision Systems: This segment includes the manufacture, marketing
and sale of the Company's measurement and inspection systems, positioning and
motion control systems and laser processing systems.
Contract Research and Development: This segment includes the
development of the Company's micro-technology emerging products, including:
next-generation X-ray and other lithography sources for manufacturing and
inspecting tomorrow's high-performance semiconductors; ultra-precision laser
machining systems; and other leading-edge products based on its patented laser
technology.
Semiconductor Products and Processes: Using advanced tools and
established foundry relationships with semiconductor producers, this segment,
which consists of a "fab-less" supplier of semiconductors, focuses on the
development and delivery of high-performance custom microcircuits for a wide
range of commercial, medical and military electronics uses. This segment also
provides high value technology services related to semiconductor fabrication and
production.
The accounting policies of the reportable segments are the same as
those described in Note 2 of Notes to Consolidated Financial Statements. The
Company evaluates the performance of its operating segments primarily based on
revenues and operating income. Corporate costs are generally allocated to the
segments.
A-27
<PAGE> 57
JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Segment information for the years 1998, 1997 and 1996 was as
follows:
<TABLE>
<CAPTION>
Contract Semiconductor
Precision Research & Products &
Systems Development Processes Corporate Total
----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1998:
Revenues $16,001,541 $ 5,607,167 $ 2,952,126 $ - $24,560,834
Operating income 343,173 428,170 136,966 - 908,309
Intersegment cost
reimbursement 688,144 - - - 688,144
Total assets 10,311,692 3,281,280 4,895,127 4,386,734 22,874,833
Capital expenditures 471,609 192,620 113,492 25,777 803,498
Depreciation and
amortization 553,502 78,115 124,258 56,849 812,724
1997:
Revenues 18,950,828 2,233,006 277,793 - 21,461,627
Operating income
(loss) 1,482,128 106,727 (61,913) - 1,526,942
Total assets 10,058,498 1,352,936 1,924,309 3,933,135 17,268,878
Capital expenditures 458,534 58,023 234,681 12,459 763,697
Depreciation and
amortization 378,322 69,163 189,184 63,975 700,644
1996:
Revenues 14,585,585 1,745,505 - - 16,331,090
Operating income
(loss) 1,033,278 85,918 (615,229) - 503,967
Total assets 8,522,674 831,402 3,331,681 2,709,761 15,395,518
Capital expenditures 429,102 50,521 460,618 1,356 941,597
Depreciation and
amortization 257,352 118,006 201,186 91,628 668,172
</TABLE>
In the table above, Corporate includes income and expenses not
allocated to reportable segments. Corporate assets are principally cash,
deferred income taxes and other assets.
SIGNIFICANT CUSTOMERS
Sales to the United States Government aggregated $8,220,197,
$2,062,131 and $1,468,546 in 1998, 1997 and 1996, respectively. Within the
Precision Systems segment, sales to one customer totaled $7,279,778, $8,285,304
and $4,824,754 in 1998, 1997 and 1996, respectively. Also within the Precision
Systems segment, two other customers accounted for $1,982,040 and $1,748,724 of
the Company's revenues in 1996.
A-28
<PAGE> 58
JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
EXPORT SALES
The following table presents revenues by country based on where the
product was shipped to or where the services were provided.
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
United States $16,605,291 $12,523,252 $12,925,642
Mexico 4,723,499 3,619,195 430,000
Malaysia 1,801,438 1,830,602 786,931
Costa Rica 522,015 263,059 -
Hong Kong - 1,548,198 -
Switzerland - - 1,446,965
Others 908,591 1,677,321 741,552
----------- ----------- -----------
Total $24,560,834 $21,461,627 $16,331,090
=========== =========== ===========
</TABLE>
All assets of the Company are located in the United States.
A-29
<PAGE> 59
CORPORATE OFFICES
CORPORATE HEADQUARTERS
JMAR Technologies, Inc.
3956 Sorrento Valley Blvd.
San Diego, CA 92121
(858) 535-1706
JMAR PRECISION SYSTEMS, INC.
9207 Eton Avenue
Chatsworth, CA 91311
(818) 700-8977
JMAR SEMICONDUCTOR, INC.
13845 Alton Parkway
Irvine, CA 92618
(949) 581-9024
JMAR RESEARCH, INC.
3956 Sorrento Valley Blvd.
San Diego, CA 92121
(858) 535-1706
STOCK REGISTRAR & TRANSFER AGENT
American Securities Transfer, Inc.
938 Quail Street, Suite 101
Lakewood, CO 80215
(303) 234-5300
INDEPENDENT AUDITORS
Arthur Andersen LLP
701 B Street
San Diego, CA 92101
ANNUAL MEETING OF SHAREHOLDERS
Thursday, August 12, 1999, 10:00 a.m.
Hilton La Jolla Torrey Pines
10950 North Torrey Pines Road
La Jolla, CA 92037
(858) 558-1500
[JMAR LOGO]
JMAR TECHNOLOGIES, INC.
3956 Sorrento Valley Blvd.
San Diego, CA 92121
ph. (858) 535-1706
www.jmar.com
<PAGE> 60
PROXY PROXY
JMAR TECHNOLOGIES, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE 1999 ANNUAL MEETING OF SHAREHOLDERS
The undersigned shareholder of JMAR Technologies, Inc. hereby appoints Joseph G.
Martinez and Dennis E. Valentine and each of them, with full power of
substitution to each, proxies of the undersigned to represent the undersigned at
the 1999 Annual Meeting of the Shareholders of JMAR Technologies, Inc. to be
held on Thursday, August 12, 1999 at the Hilton La Jolla Torrey Pines Hotel,
10950 North Torrey Pines Road, La Jolla, California, at 10:00 a.m., local time,
and at any adjournment(s) thereof, with all powers, including voting rights,
which the undersigned would possess if personally present at said meeting on the
following:
<TABLE>
<S> <C>
(1) Election of five Directors of the Company to serve until the 2000 Annual
Meeting of Shareholders of JMAR Technologies, Inc. and until their respective
successors are duly elected and qualified.
[ ] FOR ALL NOMINEES LISTED BELOW [ ] WITHHOLD AUTHORITY to vote for all listed below
(except as marked to the contrary below)
John S. Martinez, James H. Banister, Jr., C. Neil Beer, Vernon H. Blackman, and Barry
Ressler.
(INSTRUCTIONS: To withhold authority for any individual nominee, write that nominee's name in
the space provided below.)
- --------------------------------------------------------------------------------------------------
(2) Approval of the Company's 1999 Stock Option Plan.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(3) In their discretion, upon all matters as may properly come before the
meeting or any adjournments thereof.
</TABLE>
<PAGE> 61
THIS PROXY WILL BE VOTED AS DIRECTED. UNLESS A CONTRARY DIRECTION IS INDICATED,
THIS PROXY WILL BE VOTED FOR ALL OF THE PROPOSALS AND NOMINEES FOR DIRECTOR
LISTED ON REVERSE SIDE.
The proxies (or, if only one, then that one proxy) or their substitutes acting
at the meeting may exercise all powers hereby conferred.
The undersigned hereby revokes any prior proxy and ratifies and confirms all the
above-named proxies or their substitutes, and each of them, shall lawfully do or
cause to be done by virtue hereof.
The undersigned acknowledges receipt of the Notice of the 1999 Annual Meeting of
Shareholders and accompanying Proxy Statement dated June 29, 1999.
Dated:__________________________, 1999
______________________________________
Signature
______________________________________
Signature if held jointly
IMPORTANT: In signing this Proxy, please
sign your name or names in the same way as
shown at left. When signing as a fiduciary,
please give your full title. If shares are
registered in the names of two or more
persons, each should sign.
IMPORTANT: PLEASE MARK, DATE, SIGN AND RETURN THIS PROXY PROMPTLY IN THE
ENCLOSED ENVELOPE WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
