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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K405
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number 1-10515
JMAR Technologies, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 68-0131180
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3956 Sorrento Valley Blvd., San Diego, CA 92121
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (858) 535-1706
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
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The aggregate market value of common stock held by non-affiliates of
the Registrant as of March 23, 2000 was approximately $328 million. The
aggregate market value was based on the closing price on March 23, 2000 for the
common stock as quoted on the NASDAQ National Market System. Excludes the common
stock held by executive officers, directors and stockholders whose ownership
exceeds 5% of the common stock outstanding at March 23, 2000. Exclusion of such
shares should not be construed to indicate that any such person possesses the
power, direct or indirect, to direct or cause the direction of the management or
policies of the Registrant or that such person is controlled by or under common
control with the Registrant.
Number of shares outstanding of common stock: Common Stock, $.01 Par
Value - 21,918,735 shares as of March 23, 2000.
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PART I
ITEM 1. BUSINESS
GENERAL
Founded in 1987, San Diego, California based JMAR Technologies, Inc.
(formerly JMAR Industries, Inc.) (the "Company" or "JMAR") is a semiconductor
industry-focused company. JMAR provides a full range of measurement and
inspection systems for high-precision, sub-micron manufacturing applications and
is a leading developer of proprietary advanced laser and X-ray light sources for
high-value microelectronics manufacturing and metrology applications. It has
also adapted some of its key semiconductor manufacturing technology to the
biochip manufacturing industry. In addition, JMAR is a provider of custom and
standard high performance semiconductors for the broad electronics market.
JMAR's two business segments, both located in Southern California, are as
follows:
MICROELECTRONICS EQUIPMENT - This segment includes the operations of JMAR
Precision Systems, Inc. ("JPSI") and JMAR Research, Inc. ("JRI"). The Company
manufactures state-of-the-art precision measurement, motion control and
light-based manufacturing systems for the microelectronics industry, including
high-performance laser-light based precision systems for repairing defective
semiconductors and fabricating advanced biomedical products; and conceives and
creates leading-edge microelectronics manufacturing systems based on the
Company's patented X-ray and other advanced light sources for higher-performance
semiconductor manufacturing and inspection.
SEMICONDUCTOR PRODUCTS AND PROCESSES - JMAR Semiconductor, Inc. ("JSI") is a
"fabless" supplier of semiconductors using advanced software design tools and
established semiconductor manufacturing facilities (foundries) throughout the
world, focusing on the development and delivery of high performance custom and
standard microcircuits for the telecommunications, commercial and military
marketplaces with emphasis on broadband telecommunications applications. JSI
also provides high value technology services related to semiconductor
fabrication and production processes.
BUSINESS SUMMARY
MICROELECTRONICS EQUIPMENT:
PRECISION SYSTEMS
The Microelectronics Equipment segment includes the following products
which are manufactured and sold by JPSI:
MEASUREMENT AND INSPECTION ("M&I") SYSTEMS - During 1999, JMAR's non-
contact video and laser-based Measurement and Inspection Systems product line
accounted for approximately 19 percent of the Company's revenues. JMAR's
measurement and inspection systems are sold primarily to manufacturers of
semiconductors, biochips and computer disk drives. This product line utilizes
state-of-the-art machine vision and laser position sensors integrated with
programmable optics and lighting control, precision X-Y-Z motion control and
other computer controlled functions to check variations in geometries in
microelectronics components. Proprietary algorithms are written by JPSI for edge
sensing, height sensing and point locating and fed into mathematical formulas
to determine straightness of lines, dimensional data, height measurements,
angles and radii of curvature of microelectronic devices.
JPSI manufactures and markets a range of non-contact, high-resolution
video/laser measurement systems, including its compact Mirage(TM) tabletop model
that complements the larger JMAR series 3000 and 4000 systems, all of which are
targeted at the microelectronics industry. The extremely versatile Mirage(TM) is
used by the Company's customers for a variety of applications including incoming
and outgoing inspection, off-line process control of manufacturing equipment,
process verification and many laboratory functions. Accordingly, it has become a
key and proven pillar of the Company's Measurement and Inspection product line.
JPSI's standard Series 3000 contains larger size X-Y stages that allow
measurement and inspection of parts having dimensions exceeding the capability
of the Mirage(TM) while
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the even larger Series 4000 system combines video and laser height probes to
provide high accuracy measurements in all three dimensions (X-Y-Z).
Lumina, the newest member of the Company's M&I Systems family, was
initially offered in late 1998 and first displayed at the Semicon West trade
show in San Jose, California in mid-1999. It is ideal for performing the
critical sub-micron measurements needed to manufacture flat panel displays,
microelectronics "artwork", precision etched parts, and a broad range of other
microelectronic and micro-medical devices. Using JMAR's high performance motion
control subsystems and precision optics, the Lumina(TM) produces highly accurate
measurements of large complex parts at industry-leading throughput speeds.
POSITIONING AND MOTION CONTROL. During 1999, the Positioning and Motion
Control product line accounted for approximately 6 percent of the Company's
revenues. JMAR manufactures a wide range of precision positioning stages and
motion control devices for the microelectronics industry. These stages, which
are the fundamental building blocks of many microelectronic manufacturing
systems, are often integrated into higher value custom measurement and
microelectronic processing products and systems manufactured by both JMAR as
well as its turnkey OEM system customers.
LITHOGRAPHY SYSTEMS FOR BIO-MEDICAL APPLICATIONS. During 1999, this
product line accounted for approximately 13 percent of the Company's revenues.
JMAR provides lithography alignment systems for manufacturing DNA biochips used
by the biomedical and other industries for acquiring, analyzing and managing
genetic information to improve the diagnosis, monitoring and treatment of
diseases and for the identification of other substances. The adaptation to the
biochip market of JMAR's precision positioning, alignment and lithography
technologies is a natural spin-off from the Company's current semiconductor
equipment product lines.
LASER REPAIR SYSTEMS. The Precision Systems division also manufactures
and sells laser microelectronics repair systems. During 1999, this product line
accounted for approximately 3 percent of the Company's revenues. JMAR's laser
repair systems utilize state-of-the-art lasers for microelectronics
manufacturing and repair. There is a growing need for higher precision
instruments to probe, inspect and repair semiconductor assemblies such as
Multi-Chip Modules ("MCM"). The Company's optical inspection stations are used
to locate open and short circuits while its Laser Processing Stations are
designed to meet today's demanding requirements for repair of MCM and other
microelectronic circuits.
Current laser repair system models use excimer lasers to repair short
circuits by removing excess material. This type of laser is capable of
delivering a broad combination of power levels, material removal, spot sizes and
energy uniformity.
CUSTOM PRODUCTS. In addition to its standard products, JPSI designs,
engineers and manufactures customized systems based on its motion control,
measurement and/or laser system capabilities to meet specified requirements of
customers. Frequently, the design of a particular custom product may lead to
additional sales of that product to the customer.
RESEARCH AND DEVELOPMENT
JMAR's contract and company-funded R&D programs, performed by JRI, have
created a broad world-class technology base that provides the foundation for an
array of important new commercial product lines and business areas. These
programs include:
CONTRACT RESEARCH AND DEVELOPMENT. The Company performs profitable
research and development contract work at JRI for third party customers,
including the U.S. government. The goals of these efforts are to develop
commercially significant products based on the Company's proprietary laser and
advanced optical technology.
ADVANCED LITHOGRAPHY SOURCES FOR SEMICONDUCTOR MANUFACTURING.
Lithography is one of the most critical steps in the production of
semiconductors. It is a photographic process which uses precision
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light sources to copy intricate computer-generated electronic circuit designs
onto semiconductor chips. A typical lithography system consists of an
illumination source integrated into an apparatus known as a "stepper" or an
"aligner". The combined system is installed in the semiconductor fabrication
line.
Semiconductors are the engines that drive the technology industry.
Whereas the economics of most industries are driven by consumption or
deterioration, the economics of the semiconductor industry are driven by
continuous innovation to satisfy demanding performance goals. That requires
continuing advances in the ability of the industry to produce ever-smaller
circuit feature sizes which make it possible to produce more compact, higher
density, faster-operating circuits. The Company believes next-generation
lithography (NGL) systems, employing shorter wavelength illumination sources,
will be required to make the smaller circuit feature sizes needed to meet the
future needs of the rapidly growing microelectronics industry. JMAR is one of
the leading developers of compact high-intensity next generation X-ray
lithography sources.
The total size of the lithography market is substantial. The
semiconductor industry purchases between 1,500 to 2,000 new lithography systems
per year at prices ranging from approximately $700,000 to $7 million, depending
upon the circuit feature sizes and other factors. Historically, as circuit
feature sizes have become smaller the prices of the lithography systems have
increased rapidly.
In X-ray lithography, the illumination is provided by an X-ray source.
JMAR's point source X-ray lithography ("XRL") technology utilizes the Company's
patented Britelight(TM) high-power, picosecond-class, diode-pumped solid state
laser technology to generate the X-rays required to print microscopic circuits
finer than the 0.18 micron (one micron is about one-one hundredth of the
thickness of a human hair) feature sizes of today's state-of-the-art optical
lithography processes. As the semiconductor industry moves toward squeezing more
and more circuits onto each chip, uncertainty exists as to whether current
optical lithography technology will remain either feasible or economically
viable. Major issues include the need for new light sources that can efficiently
deliver the shorter wave lengths required, and the availability and cost of
appropriate optical materials.
Extensive process development work at several leading centers around
the world has demonstrated the viability of X-ray lithography using large
immobile X-ray sources known as "synchrotrons". The Company believes that most
of the industry considers these sources to be overly cumbersome, too expensive
and extremely inflexible for anything other than scientific feasibility and
proof-of-principle demonstrations.
JMAR's XRL program, aimed at providing an acceptable alternative to the
synchrotron for semiconductor manufacturing applications, is developing a
proprietary compact point source that, when completed, is expected to be
economically competitive with and no larger than conventional optical
lithography sources. The Company believes that once these much smaller and more
cost effective X-ray lithography systems become commercially available, they
will be well received. Semiconductor industry sources have made it clear that
for the industry to stay on schedule to support future market needs, the
upcoming 0.13 micron technology must be available to enter production by 2002,
followed by 0.10 micron and 0.07 micron technology at two-to-three year
intervals thereafter. JMAR believes its X-ray lithography source technology will
be a leading candidate to fulfill these demanding semiconductor industry
requirements. See "Market-Advanced Lithography" below and "Factors That May
Affect Future Results" in the Management's Discussion and Analysis.
In January 1994, after working on company funds and relatively small
government funded X-ray lithography R&D contracts, JMAR received a $6.9 million
multi-year contract to develop its laser-plasma Picosecond X-ray Source ("PXS")
for use in a point source X-ray stepper system. In July, 1998, JMAR received an
additional $13 million multi-year contract to continue this development and to
construct an X-ray lithography point source demonstration system capable of
supporting production rates of up to twenty-four 300mm diameter semiconductor
wafers per hour. The Company anticipates additional contract funding during 2000
to continue this program. These contracts were issued by the U.S. Army Research
Laboratory and are sponsored by the Defense Advanced Research Projects Agency
(DARPA) of the Department of Defense. The revenues from the government contracts
for advanced lithography constituted 25 percent of the Company's 1999 sales.
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During the course of this work on its X-ray lithography R&D contracts,
JMAR has achieved a major X-ray production performance milestone which it
believes constitutes an important breakthrough. In qualification testing early
in 1999, individual Britelight(TM) modules were producing approximately 3 watts
of 1-nanometer synchrotron-like X-rays on a steady state basis. The Company
believes this X-ray production achievement is substantially greater than that of
any other laser plasma X-ray source anywhere in the world. It represents a
significant advance in the Company's drive to develop a compact, lower-cost
alternative to the large, costly synchrotrons for advanced semiconductor
lithography and other applications.
JMAR's patented picosecond X-ray source ("PXS") is only a few cubic
feet in size, consisting of several individual modules each powered by the
Company's new Britelight(TM) laser. These modules produce a rapid train of very
short and powerful light pulses having intensities of many hundreds of trillions
of watts per square centimeter that are focused into a microwave-oven-size
chamber to produce X-rays. Recently, the Company demonstrated the feasibility of
superimposing simultaneous laser beams from multiple Britelight modules within
spot sizes of a few microns and time scales of a few trillionths of a second. By
so doing, JMAR has taken an important step in scaling its PXS technology to the
higher power outputs that the Company believes are needed for many currently
identified commercial semiconductor process development and production
applications.
HIGH PERFORMANCE "SOFT" X-RAY SOURCES. The Company believes that the
very small, less than ten microns in diameter, X-ray source spot size
generated by the PXS also opens the door for JMAR to produce additional
major-market commercial X-ray systems for a range of processing applications
such as semiconductor wafer inspection for failure analysis, fault
detection, metrology of lithography and in-line defect or contamination
detection. Rather than using multiple PXS modules as in the lithography and
other higher power applications, these X-ray tools are expected to utilize a
single PXS module for high resolution X-ray imaging, X-ray fluorescence and
X-ray photoelectron spectroscopy.
SEMICONDUCTOR PRODUCTS AND PROCESSES:
During 1999, the Semiconductor Products and Processes segment
conducted by JMAR Semiconductor, Inc. ("JSI") accounted for approximately 34
percent of the Company's revenues. In 1999, JSI entered into several strategic
relationships including design center and wafer supply agreements with Intersil
(formerly Harris Semiconductor, Inc.), a technology support and supply agreement
with Cadence Design Systems, Inc. and an expansion of a technology licensing
agreement with Philips Semiconductors. This segment consists of two "core"
product lines plus a rapidly evolving product line focused on the introduction
of a series of high-value proprietary standard semiconductor products
specifically targeted at the rapidly growing multi-billion dollar broadband
telecommunications market.
In 1999, JSI continued its Technology Services work under contracts
awarded in 1998 from TRW Inc. and General Dynamics Information Systems. Under
these ongoing programs, JSI uses its unique industry experience and existing
relationships to define and/or acquire the technologies needed to support their
customers' mission. New long-term programs were captured for the placement,
implementation and maintenance of the new state-of-the-art technologies. In a
unique arrangement, JSI maintains access to use these facilities to support its
commercial design and wafer fabrication needs.
This segment is comprised of the following three areas:
CUSTOM APPLICATION SPECIFIC INTEGRATED CIRCUITS ("ASIC'S"). Provides
fully packaged custom complementary metal-oxide semiconductor ("CMOS") gate
arrays, standard cells, and mixed signal circuits that are designed to meet
customer's specific needs. In 1999, JSI shipped finished products to an array of
customers, including KOFAX, Plexus Inc., Applied Microsystems, and Aydin
Corporation, among others. JSI's capabilities in this area were bolstered
dramatically with the signing of several sourcing and support agreements
involving state-of-the-art foundry technologies and libraries. This area is also
responsible for the continuing development of the Company's proprietary
Universal Logic Device (ULD), with origins in a contract awarded to JSI by TRW
Space and Electronics Group in 1998. The Company expects its ULD's to become a
standard product offering in the year 2000.
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TECHNOLOGY SERVICES. During 1999, the Technology Services product line
accounted for approximately 33 percent of the Company's revenues. The Company
provides technology development and high value technology services to other
semiconductor producers in the aerospace and defense industries. This area of
the business provided the majority of revenues for JSI in 1999. Largely based on
a contract originally awarded to JSI by General Dynamics Information Systems in
1998, this area continues to expand and grow, with scope changes and new awards
of $2.4 million to JSI in 1999. Work under this contract includes the
development, construction and operation of a new semiconductor wafer fabrication
facility at McClellan AFB in Sacramento for the Defense Microelectronics
Activity. This facility was completed in 1999 with facility qualification and
process development continuing into the year 2000. The backlog for the
Technology Services area remains strong, with new awards and task increases
expected to continue.
TELECOM PRODUCTS. This is an emerging growth area for JSI. It is
focusing on the introduction of a series of proprietary standard semiconductor
products used in communications systems, including computer networks, to
increase the rate of transfer of data, voice and video traffic. This area is
specifically targeted at the rapidly growing Local Area Network (LAN) and Wide
Area Network (WAN) sectors of the telecommunications market. In 1999, JSI made
substantial progress toward transitioning the thrust of its business to high
margin, proprietary standard products for the telecommunications sector
including Internet applications. The extensive semiconductor design,
manufacturing and engineering capabilities originally established by JSI to
support its Custom ASIC product area also play a key role in enabling JSI to
develop and produce state of the art semiconductors for this booming segment of
the telecommunications market.
MARKET
The Company's technology base has applications in several market areas:
MICROELECTRONICS EQUIPMENT
MEASUREMENT AND INSPECTION SYSTEMS. In this market, the Company
concentrates on providing manufacturing equipment for the microelectronics
industry, including applicable sectors of the semiconductor, biotech and
computer disk drive industries. The Company believes that the total annual sales
for all companies in the niches within this market in which it currently
competes is about $100 million.
R&D efforts in 2000 are expected to provide new products and systems
into the market that the Company believes will answer the needs of key customers
in its primary markets. The Company further believes that its R&D efforts will
produce new products that are expected to substantially broaden the markets in
which its measurement and inspection product line currently competes. See
"Factors That May Affect Future Results" in the Management's Discussion and
Analysis.
The Company provides equipment needed to improve manufacturing process
yields in environments where precision sub-micron accuracy and repeatability for
parts measurement or inspection are required and contact between the measurement
device and the products could result in damage or contamination. The Company
uses non-contact technologies such as optical/video with image analysis and
laser distance probes. By combining its expertise in non-contact technologies
with strong systems integration skills, JMAR believes it is able to provide the
solutions required by these targeted market segments. The Company also believes
that the trend toward small and more intricate electronic devices will continue
to increase the demand for non-contact technologies, parts handling and full
integration for a turnkey solution in which it specializes.
LITHOGRAPHY SYSTEMS FOR BIO-MEDICAL APPLICATIONS. The Company provides
micro-positioning lithography alignment systems and micro-array positioning
subsystems for the biochip industry. These systems enable the fabrication of
biomedical products for a range of material identification applications as well
as for improving the diagnosis, monitoring and treatment of many diseases. DNA
biochips manufactured by the Company's customers are also being used for
managing genetic information that can contribute to the study of the human aging
process and the Human Genome.
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According to the October 25, 1999 Business Week magazine, surveys by
brokerage houses and market-research firms indicated an immediate market for
biochips of about $1 billion, with the potential to expand rapidly in the next
decade. The Company believes its systems can find use in a number of
applications by a variety of companies in the biochip and biomedical industries
and is pursuing these opportunities.
POSITIONING AND MOTION CONTROL SUBSYSTEMS. Positioning components
manufactured and sold by the Company include air bearing, cross-roller bearing
and linear motor positioning stages and motion controllers with positioning
accuracies ranging from 0.05 microns to 10 microns, motorized x-y tables,
z-elevators, linear and rotary stages, and complete motion control solutions.
These products are incorporated into the Company's measurement, inspection and
other manufacturing system products and are also sold to major semiconductor
equipment OEM's for sophisticated surface analysis and inspection equipment, and
to manufacturers of biochip micro-array systems. The Company believes that the
total annual sales in the niches within this market in which it currently
competes is somewhat less than $100 million.
ADVANCED LITHOGRAPHY. Semiconductor manufacturers purchase lithography
tools from established stepper suppliers. The principal suppliers of steppers
for high volume semiconductor production are Nikon, Canon, ASML, Silicon Valley
Group Lithography (SVGL) and Ultratech Systems.
The Company understands that Canon and SVGL have developed prototype
X-ray lithography steppers, with Canon expected to release its XRA-1000 X-ray
stepper as a production tool in early 2000. In addition, Suss Advanced
Lithography (SAL), a privately-owned company headquartered in Vermont, was
established several years ago to focus on the X-ray lithography ("XRL") market.
According to SAL, as of the end of 1999, a total of 16 X-ray steppers have been
sold worldwide for X-ray lithography process development primarily for use with
synchrotron X-ray sources. So far, most of those X-ray steppers have been
provided by SAL.
JMAR believes that it is the leading developer of X-ray lithography
"point sources". The Company further believes that once its X-ray outputs attain
levels adequate for commercially viable chip production rates, its PXS X-ray
systems will provide the semiconductor industry with a lower cost, much more
compact and flexible alternative to synchrotron facilities for X-ray lithography
process development and production.
The semiconductor industry is currently transitioning its highest
performance fab lines to the initial production of circuitry having feature
sizes as small as 0.18 microns (critical dimension). The Company understands
that, with the exception of Suss Advanced Lithography, the primary focus of
stepper manufacturers for the near-term will continue to be on the
marketing of optical lithography steppers. The "International Technology Roadmap
for Semiconductors ("ITRS")" 1999 Edition, sponsored by the Semiconductor
Industry Association, projects that 0.13 micron generation lithography will also
use optical technology. The "next generation lithography" (NGL) technologies
competing to succeed optical lithography processes are XRL, extreme ultraviolet
(EUV), electron beam and ion projection technology. Each of these NGL
technologies has its major semiconductor manufacturer proponents. X-ray
lithography process development has been conducted over more than a decade, by
several other organizations, including IBM and several large Japanese
semiconductor companies, using synchrotron X-ray sources. The Company and other
proponents of XRL believe that as a result of this effort, XRL is the most
advanced and mature technology for the 0.13 micron generation and beyond.
Each of the NGL technologies has technical issues which need to be
addressed. In addition, the extension of optical lithography technologies to
smaller feature sizes has its own limitations to resolve. The principal
roadblocks to the adoption of XRL often cited by critics are the high cost and
time required to modify current factory designs to accommodate synchrotron X-ray
sources and the difficulties in manufacturing lithography masks having feature
sizes of 0.10 micron features sizes and below. The principal roadblocks often
cited by critics for the extension of deep UV lithography technology to 0.13
micron feature sizes is the availability of the required optical components and
the projected higher costs of the masks and stepper systems.
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JMAR's PXS point source X-ray technology seeks to provide the
semiconductor industry with a practical alternative to the synchrotrons for
X-ray lithography. Recent results demonstrated in the field of "X-ray
de-magnification" by Dr. Yuli Vladimirsky (an eminent X-ray lithography expert
who joined JMAR's research staff in November 1999) and a team of other leading
lithography scientists indicates that it may be possible to produce circuit
feature sizes having dimensional scales as small as one-sixth of the sizes of
the features of the X-ray masks. Such a capability could greatly mitigate
concerns about the viability of X-ray mask technology for printing sub- 0.10
micron circuit features.
The Company's XRL program is focused on the development of the PXS as a
commercially-viable X-ray source initially for low-volume production, process
development applications, and ultimately as an alternative to the synchrotron
for high volume production. Unlike synchrotrons, the PXS is not a hazardous
radiation source. Furthermore, commercial PXS source/stepper systems for XRL are
expected to cost less and be of comparable, or smaller, size than projected
optical DUV stepper systems for the 0.13 micron generation and beyond.
At the present time, the Company believes that the market for point
source X-ray lithography systems for the next few years is limited to the sale
of a few systems per year to support the 0.13 micron and below, process
development programs of the major semiconductor manufacturers and government
supported research laboratories. It is estimated that these systems will be
priced in the $8 million to $12 million range. That market is expected to expand
as the new 0.13 micron technology moves into the pilot plant phase at leading
semiconductor manufacturers and then onto full scale production. According to
the latest ITRS Roadmap, the 0.13 micron generation technology will start moving
into first year production in 2002. As sales volume increases, system costs
are expected to drop significantly.
SEMICONDUCTOR PRODUCTS AND PROCESSES
JSI currently designs and produces customized microcircuits commonly
referred to as ASIC's. These devices serve the non-captive portion of the ASIC
market, which was estimated to be in excess of $8.3 billion in 1999, and is
forecast to grow to over $14 billion and $23 billion by 2002 and 2004,
respectively.
JSI produces fully packaged custom CMOS gate arrays, standard cells,
and mixed signal circuits that are designed to meet specific customer needs. JSI
is currently offering designs and products using technologies from 0.25 micron
to 1.0 micron (transistor gate length) for digital and advanced analog designs.
The semiconductor market is rapidly changing from one that
traditionally has been driven by computers to one that is being driven by
telecom products. This implies that telecom-related companies and products will
drive semiconductor technology and will represent the largest growth opportunity
for JSI. In 1999, JSI initiated major steps to leverage its existing core
competencies and to position the Company as a leading, high-growth "fabless"
provider of high-speed semiconductor products and design services targeted at
the telecommunications marketplace.
Market researchers forecast that the telecommunications integrated
circuit market will be the driving force in semiconductor demand over the next
five years growing from $27.5 billion in 1999 to over $48.5 billion by 2004 with
its rapid growth driven by the strong worldwide demand to accelerate the
transmission of Internet, voice and video data to ever-faster rates. In 1999 JSI
began development on a series of products to address the needs of this market
and capitalize on this significant growth opportunity.
The Company has generated a road map of designs and product offerings
to accomplish its strategy for market penetration. Total revenue for
semiconductor Wide-Area Network (WAN) and Local-Area Network (LAN) chips is
projected to grow from approximately $2.3 billion to over $5.9 billion in 2002.
Strategically, JSI is focused on serving the WAN marketplace, however due to
longer developmental time required for these more sophisticated higher selling
price circuits, JSI has also tactically approached the LAN market first. Its
revenues from the commercial sales of telecom chip products are expected to
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commence in the third quarter of 2000. Furthermore, the current LAN product
development program will provide stepping-stones from which subsequent WAN
products are expected to emerge.
The Company's telecom semiconductor roadmap includes the introduction
of three new product offerings including (i) high-speed First-In, First-out
(FIFO) memories (200+ MHz), (ii) a unique proprietary Universal Logic Device
(ULD) and (iii) Application Specific Standard Products (ASSP) for the WAN and
LAN markets which will include network processor-class products.
FIRST-IN-FIRST-OUT MEMORY (FIFO)
The First-in-First-out (FIFO) memory market opportunity was estimated
at approximately $300 million in 1999 and is forecasted to grow to $510 million
by 2004 due to ever-increasing product performance demands. FIFO's are widely
used in the telecommunications industry as data handling chips that match data
rates in a data stream. JSI is introducing its unique high-speed FIFO standard
memory products to gain presence in the telecom marketplace. As of mid-March
2000, JSI had completed the basic circuit design for its first FIFO device
including architecture, RTL coding, simulation, preliminary synthesis and patent
reviews and is now proceeding to fabricate prototypes. The prototypes will then
be fully tested (characterized) and the product will be introduced to the
market. Full-scale production is projected to commence by the third quarter of
2000. JSI plans to broaden its FIFO family product offerings by introducing
additional new designs throughout 2000.
UNIVERSAL LOGIC DEVICE (ULD)
JSI's Universal Logic Device(TM) (ULD) is an easily programmed,
electronically erasable logic replacement device targeted for electronics
component distributors, quick-turn manufacturers, design development
laboratories and repair facilities. The primary benefit to customers is a
substantial reduction in parts inventory, purchasing costs, and manufacturing
delays. A prototype of the commercial version of the ULD has been completely
designed, masked and fabricated, and is now being fully tested (characterized)
to evaluate functionality and performance. The testing of the ULD device is
projected to be completed by the end of the first half of 2000, and introduced
to the market by the beginning of the third quarter of 2000.
APPLICATION SPECIFIC STANDARD PRODUCTS (ASSP)
JSI's advanced ASSP products are currently in the product development
stage. JSI is focused on producing high-speed switching class products with
leading-edge features demanded by the marketplace. Features will include
embedded network processing, programmability (both hardware and software),
encryption, high-speed and flexibility of use, all of which are expected to
continue the trends of these class of products to generate very attractive gross
profit margins. Upon completion of the architecture definition in the first
quarter of 2000, the devices will be designed, fabricated and fully tested with
market introduction planned for the second quarter of 2001. ASSP products are in
high demand and are drivers of product innovation. JSI has a solid understanding
of the development and production costs for these devices. The Company believes
that gross margins in excess of 60% are possible for these products.
MANUFACTURING
The Company believes that alternative suppliers are readily available
for most of the critical components that it requires to manufacture its
products. During 1998, the Company completed the expansion of its internal
machine shop capabilities at its Precision Systems manufacturing division to
enable it to fabricate many components previously purchased from outside
suppliers. With the completion of this expansion, JMAR has started to realize
improved costs, quality, and lead times that it believes will significantly
improve its overall competitiveness in the marketplace. Due to the complex
nature of the capital equipment that the Company manufactures at its Precision
Systems division, it purchases a substantial amount of "off-the-shelf"
components from outside vendors for integration into its final systems. These
items include computers, optics, television cameras and motors. The Company has
not encountered difficulties procuring these items and does not rely on
exclusive sole source suppliers.
10
<PAGE> 11
JMAR has installed and integrated an internal information system which
includes a management information system that supports a fully integrated
material requirements planning system that is run on an internal local area
network. This system, which enables the Company's Precision Systems division to
control its material requirements and production planning, as well as all phases
of production, was expanded last year to improve the Company's quality assurance
program. Those improvements contributed to JPSI's receipt of its ISO 9001
re-certification. Improvements were also made in JPSI's communication network to
speed responses to its customers.
Due to the complexity of the equipment that the Company's Precision
Systems division manufactures, delivery times after receipt of an order
typically range from 30 to 90 days for standard products and from 90 days to one
year for customized and special products.
JMAR's Semiconductor Products and Processes division is a "fab-less"
supplier of products based on its existing semiconductor design and engineering
capabilities. To enable this, it has established manufacturing supply
arrangements with multiple semiconductor manufacturers for semiconductor wafers,
technology, design, and manufacturing support. Accordingly, it no longer
utilizes its own wafer fabrication facility, with its attendant operating costs.
The Company believes its flexible manufacturing agreements with multiple sources
give JMAR Semiconductor the ability to offer a much broader variety of higher
performance products than could be economically produced in its own fabrication
facilities. Since JMAR Semiconductor is a fabless operation, its time schedule
for the development, manufacture and sale of its products is dependent on the
availability of capacity at outside foundries.
RESEARCH AND DEVELOPMENT
Company-funded expenditures for research, development and engineering
were $2,105,294, $2,026,482, $1,699,010, $1,304,119 and $881,800 for the years
ended December 31, 1999, 1998, 1997, 1996 and 1995, respectively. Total
expenditures for RD&E including funding provided by third party contracts from
the U.S. government and other companies were $7,250,287, $5,863,796, $3,186,149,
$2,441,184 and $2,118,550 for the years ended December 31, 1999, 1998, 1997,
1996 and 1995, respectively.
JMAR Research is performing R&D contract work based on its advanced
solid state laser technology. This work, which has important potential
commercial applications, is funded by the Defense Advanced Research Projects
Agency (DARPA) of the Department of Defense and other customers. Government
funding for these dual-use technologies, however, is very vulnerable to changes
in the political atmosphere. For this reason, the Company is pursuing strategic
alliance discussions with commercial microelectronics manufacturers to enlist
their participation in the continuing development and commercialization of this
technology.
Some of the more significant research and development projects the
Company has worked on in 1999 include (i) the continued development of PXS point
X-ray sources for lithography for the semiconductor industry and other metrology
applications; (ii) the development of a unique microcircuit architecture and
devices for the replacement of obsolete integrated circuits; (iii) the
development of new software for the Company's test and measurement systems; and
(iv) the engineering development of higher performance test and measurement
inspection systems for the semiconductor, biochip and disk drive industries.
DISTRIBUTION
JMAR sells its products on a worldwide basis. It uses a combination of
direct regional sales personnel and sales representatives to market its products
in the United States. Foreign sales are handled through independent distributors
and representatives. The distributors normally purchase equipment for their own
account and resell it to the end user in compliance with local law and customs.
They are normally appointed as exclusive distributors or representatives for
either a geographic area or a targeted product line and are responsible for
service support, training and installation to local customers.
11
<PAGE> 12
In 1999, JPSI increased its service network to include additional direct
personnel to meet the demands of its customers.
COMPETITION
MICROELECTRONICS EQUIPMENT:
PRECISION SYSTEMS
JMAR is an established provider of precision motion control X-Y
staging, components and systems. There are three major domestic competitors.
These competitors carry a much broader line, have much larger distribution
channels, and have a large stock of off-the-shelf inventory. In addition, there
are approximately five smaller competitors specializing in narrower niches.
Rather than compete in the generalized motion control and positioning product
marketplace, the Company has established itself as an integrator of X-Y
positioning and motion control subsystems and platforms for several substantial
OEM customers. During the past 18 months, the Company received indications that
the market for its precision X-Y stages may be larger than originally estimated.
Accordingly, the Company expanded its internal machine shop capabilities at JPSI
to improve its competitiveness in price, quality and delivery time.
JMAR believes that it is a recognized leader in measurement and
inspection systems utilizing vision and laser based depth probes. There are
approximately five domestic and three foreign competitors within JMAR's
marketplace. The majority of JMAR's competitors in this area supply standard
off-the-shelf measurement and inspection systems for the microelectronics
industry. JMAR's strengths against its competition are its ability to integrate
its positioning and motion control products with its standard measurement and
inspection systems to provide turnkey system solutions for manufacturing,
process control and quality control requirements. The Company's vision and
laser-based systems are targeted for high-end applications requiring high
resolution, sub-micron edge detection, positioning and measurement accuracy.
This enables the Company to set itself apart from its primary competitors which
choose to compete in the lower resolution marketplace.
RESEARCH AND DEVELOPMENT
The Company believes that it has established itself as the world's
leading developer of laser-plasma X-ray lithography point source systems.
Although other X-ray point source technologies are under development, the
Company also believes that upon achievement of commercially viable outputs
laser-plasma point sources of the type under development at JMAR it may have the
best long-term potential for meeting commercial X-ray lithography requirements.
The Company believes that its patented diode pumped solid state laser-driven
Picosecond X-ray Source (PXS), when fitted with X-ray collimator devices
developed by other DARPA contractors, will be capable of generating X-rays of
sufficient intensity to demonstrate 0.13 micron and smaller feature sizes at
commercially-viable manufacturing rates. In addition, the Company believes that
its PXS system will have a significant competitive advantage over alternative
technologies because of certain unique technical features which should allow
it to be readily integrated into semiconductor fabrication processes.
SEMICONDUCTOR PRODUCTS AND PROCESSES:
In its custom ASIC product area, JMAR Semiconductor faces competition
from a number of microcircuit producers willing to serve lower volume
applications. While not limited in the volumes that it can supply, JMAR
Semiconductor chooses to target high value, lower volume customers who are not
served by the major producers. Using high performance software tools,
proprietary design routines, and flexible foundry and production arrangements,
JMAR Semiconductor believes it provides a cost effective solution to these low
volume customers.
In the area of technology services provided to the aerospace and
government markets, JSI has very few competitors. The success of JSI in this
area is due to the broad range of technologies it can address and its abilities
to reach across many major producers for technology and support. The programs
12
<PAGE> 13
that JSI performs are high-level engineering labor-intensive activities,
requiring in-depth knowledge and complete understanding of the technology being
addressed. This type of work is generally not addressed by the major producers
due to its high quality labor content and lack of direct production pay-off from
the use of such resources. Smaller firms do not have the mix of skills and
industry relationships that JSI has gathered. For example, in the competitive
bidding that JSI has undertaken, the competing companies were not as broad in
their technology offerings, nor flexible enough to go outside of their
established relationships.
In its recent entry into the Telecom Products area, JSI is implementing
the "enter late, exit late" approach of providing a second source for high-speed
FIFO memory devices with industry-leading performance. Lower performance FIFO
devices are currently produced by Integrated Device Technology, Inc. ("IDT") and
Cypress Semiconductor ("Cypress"), both of which are much larger than JMAR.
PATENTS AND PROPRIETARY TECHNOLOGY
During the past several years JMAR's patent protection efforts have
produced 11 issued patents containing 295 separate allowed claims covering
various types of laser plasma X-ray sources, high-brightness solid state lasers
and point-source lithography system technology. The Company has four additional,
multi-claim patents pending covering internal imaging of semiconductor device
(nanotomography), laser ablation of materials, and ultraviolet and extreme
ultraviolet (EUV) microlithography systems, each of which represents a major
opportunity for potential growth for JMAR. JMAR has also filed several
provisional patents covering improvements to its lasers, related lithography and
non-lithography applications as well as advancements in its precision motion
control products at JMAR Precision Systems. Furthermore, JMAR Semiconductor's
chip design activities have created a substantial body of valuable proprietary
technology that is also in the process of being patented.
The Company's policy is to apply for a patent on each of its
significant inventions not only to preserve its proprietary rights but also to
protect against reverse engineering by others and to avoid being "locked out" of
the use of its own technology by other patents. However, the Company does not
place its principal reliance on patent protection; rather, it seeks to maintain
a competitive advantage through an aggressive R&D program, protection of
non-patented proprietary data, maintenance of its advanced laser-optics
expertise, superior product performance and active marketing of its products.
However, it is recognized that lasers and X-ray lithography are the subject of
very substantial R&D activity by many very competent companies and that other
approaches may be developed and patented, making the field very competitive.
CUSTOMERS
For fiscal years 1999, 1998 and 1997, the United States Government
accounted for approximately 58%, 33% and 10%, respectively, of total sales. A
major portion of the Company's government contract sales involves research and
development aimed at producing commercially-viable products and technology.
Foreign sales accounted for 11%, 32% and 42% of the Company's revenues in 1999,
1998 and 1997, respectively. In 1999, 1998 and 1997, IBM accounted for 10.3%,
29.6% and 38.6% of JMAR's revenues, respectively. Installations in IBM's foreign
facilities accounted for 6.0%, 19.9% and 19.4% of the Company's revenues in
1999, 1998 and 1997, respectively, and are included in the above foreign sales
numbers. In 1999, 13.4% of the Company's revenues were derived from sales of DNA
biochip lithographic alignment systems to Affymetrix, Inc. In December 1999, the
Company received a $1.8 million order from Affymetrix, all of which will be
shipped in 2000. For the current status of sales to this customer and industry
see "Results of Consolidated Operations" in the Management's Discussion and
Analysis.
EMPLOYEES
Currently, the Company has approximately 125 full-time employees. The
Company is not subject to any collective bargaining agreements and believes that
it maintains excellent relations with its employees.
13
<PAGE> 14
INFORMATION REGARDING INDUSTRY SEGMENTS, SIGNIFICANT CUSTOMERS AND EXPORT SALES
The Company operates in two segments as follows: Microelectronics
Equipment and Semiconductor Products and Processes. Financial information
relating to the Company's segments, significant customers and export sales for
the three years ended December 31, 1999 is incorporated by reference from Note
14 of Notes to Consolidated Financial Statements.
ITEM 2. PROPERTIES
The Company has a total of approximately 45,000 square feet of
laboratory, office, manufacturing and storage space under leases between the
Company's three subsidiaries and their respective landlords. Of these, JRI
leases 9,280 square feet located in the Torrey Pines Business Park in the
Sorrento Valley region of San Diego, 15 miles north of San Diego International
Airport. The Sorrento Valley space is used for JRI's expanding advanced light
technology development activities, including X-ray lithography and for the
Company's corporate headquarters. That lease expires on February 28, 2003. The
Company is currently negotiating the terms of a lease on a new facility to house
its corporate offices.
JPSI leases a total of 28,500 square feet of manufacturing, office and
storage space in two separate buildings located 25 miles north of Los Angeles
International Airport in Chatsworth, California, a suburb of Los Angeles. The
facility lease expires in August, 2002.
JMAR Semiconductor leases 6,596 square feet of office and storage space
in Irvine, California south of Los Angeles which expires in May, 2000. JMAR
Semiconductor is currently negotiating the terms of a lease on a larger
facility.
The Company believes that its physical properties are adequate for its
current needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to a financial services agreement with Sands
Brothers & Co. Inc., ("Sands") which provides for the provision of certain
financial services by Sands. Although the Company does not believe its
publicly traded Warrant exercise program was covered by this agreement, it
offered Sands the right to act as Warrant solicitation agent. When Sands failed
to perform as such more than one month after being asked, the Company retained
another investment banking firm to do so. In February 2000, Sands asserted that
it was entitled to up to 10% of the proceeds from the exercise of the Company's
publicly traded Warrants, which is twice the fee provided for in the Company's
original warrant solicitation agreement. In March 2000, the Company filed a
Declaratory Relief Action in the U.S. District Court in San Diego which seeks a
judicial interpretation that the financial services agreement with Sands does
not apply to the Company's Warrant exercise program. The Company believes any
claim to a fee by Sands is without merit and intends to vigorously contest any
such claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
The Company's Common Stock is traded on the Nasdaq National Market tier
of the Nasdaq Stock Market ("NASDAQ-NMS") under the symbol JMAR. On February 15,
2000, the Company called for redemption of its 2,449,749 Common Stock Purchase
Warrants which traded at that time on the Nasdaq National Market under the
symbol JMARW. Each Warrant was exercisable for one share of Common Stock at
$5.50 until March 20, 2000. After that time, the Warrants were no longer
exercisable, and holders had the right to receive only the redemption price of
$0.05 per Warrant. As of the redemption date, March 20, 2000, 2,442,444 Warrants
had been exercised and 7,305 Warrants were redeemed. The 1999 and 1998 high
and low transaction prices for the common stock as reported by NASDAQ-NMS are
set forth in the following table.
14
<PAGE> 15
COMMON STOCK PRICE
<TABLE>
<CAPTION>
HIGH LOW
---------- ---------
1998
<S> <C> <C>
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
1999
First Quarter................................ 2 3/8 1 13/16
Second Quarter............................... 2 17/32 1 7/8
Third Quarter................................ 2 1/32 1 1/2
Fourth Quarter............................... 4 9/16 1 1/2
</TABLE>
There are approximately 7,000 holders of JMAR's common stock.
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.
Pursuant to the Director Compensation Program adopted by the Company in
August, 1997, the Company issued a total of 1,144 shares of Common Stock in
October, 1999 and a total of 1,232 shares of Common Stock in December, 1999 to
its outside directors as compensation for services as a director. These
transactions were exempt under Section 4(2) of the Securities Act of 1933.
In October and December 1999, the Company issued to three employees
warrants exercisable into a total of 30,000 shares of Common Stock at an
exercise price of $3.00 per share. The warrants were issued pursuant to the
Management Incentive Plan (the "Plan")for JMAR Precision Systems, Inc.
(the "Incentive Warrants"). The Incentive Warrants were issued in a transaction
exempt under Section 4(2) of the Securities Act of 1933. The exercise prices of
the Warrants issued under this Plan are the higher of $3.00 or the market value
of one share of JMAR stock at the close of trading on the date of grant of the
Warrant.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data that follows has been
extracted from the Company's Consolidated Financial Statements, which have been
audited by Arthur Andersen LLP, independent public accountants. It should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and Notes thereto, which are included elsewhere in this report.
The Consolidated Statement of Operations for 1996 includes the
operations of JMAR Semiconductor since May, 1996. The balance sheet information
includes the accounts of JMAR Semiconductor as of December 31, 1999, 1998,1997
and 1996.
15
<PAGE> 16
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
--------------------------------------------------------------------------------
1995 1996 1997 1998 1999
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues ............................. $ 12,210,490 $ 16,331,090 $ 21,461,627 $ 24,560,834 $ 24,767,740
Gross profit ......................... 4,879,420 6,692,136 8,830,316 9,187,891 7,051,994
Operating expenses ................... 4,694,233 6,188,169 7,303,374 8,279,582 9,197,098
Income (loss) from operations ........ 185,187 503,967 1,526,942 908,309 (2,145,104)
Interest expense ..................... (321,162) (288,372) (181,562) (181,227) (240,928)
Interest and other income
(expense), net ..................... 212,240 388,974 104,905 61,963 137,038
Income (loss) before
income taxes ....................... 76,265 604,569 1,450,285 789,045 (2,248,994)
Income tax (provision) benefit ....... -- 175,000 345,000 (32,204) --
Net income (loss) .................... 76,265 779,569 1,795,285 756,841 (2,248,994)
Net income (loss) per basic share .... .01 .05 .11 .04 (.12)
Basic shares used in computation
of net income (loss) per share ..... 13,525,886 15,582,579 17,065,860 18,046,860 18,045,914
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET DATA - DECEMBER 31,
--------------------------------------------------------------------------------
1995 1996 1997 1998 1999
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Working capital ...................... $ 4,655,087 $ 5,743,747 $ 9,634,527 $ 9,213,134 $ 7,468,743
Total assets ......................... 9,248,995 15,395,518 17,268,878 22,874,833 20,673,768
Short-term debt ...................... 1,526,929 2,317,861 922,246 2,693,975 5,195,490
Long-term liabilities................. 1,536,273 667,310 907,235 475,362 642,913
Stockholders' equity ................. 5,085,202 9,368,905 12,488,212 13,253,179 10,909,461
</TABLE>
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<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company operates in two segments as follows: Microelectronics
Equipment and Semiconductor Products and Processes.
RESULTS OF CONSOLIDATED OPERATIONS
Net (loss) income for each of the fiscal years ended December 31, 1999,
1998 and 1997 was $(2,248,994), $756,841 and $1,795,285, respectively, while
operating (loss) income for those same periods was $(2,145,104), $908,309 and
$1,526,942, respectively. Revenues for 1999, 1998 and 1997 were $24,767,740,
$24,560,834 and $21,461,627, respectively. The net and operating (loss) income
reported for 1999 and 1998 include a number of special charges, gains and
asset writedown items that 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 those periods. It summarizes the Company's
Consolidated Statements of Operations for 1999 and 1998, itemizes the
applicable special items contained in the reported results for those years and
presents the results for those two years, excluding the special items.
Included in the net and operating loss for 1999 are inventory reserves
of $389,000 and employee termination accruals of $175,000. Included in the net
loss for 1999 is an asset writedown of $88,344. Included in net and operating
incomes for 1998 are asset writedowns of $150,000 and $100,000, respectively.
In addition to the impact of the special items, net and operating (loss)
income in 1999 and 1998 were also affected by a number of factors - including
rapid growth in the Company's semiconductor-related business in its
Semiconductor Products and Processes segment offset by a steep decline in sales
of the Company's higher-margin precision instruments for the computer industry
from its Microelectronics Equipment segment. JMAR's profitability was further
impacted by the substantial investments the Company made in research and
development to fuel future growth (see below).
17
<PAGE> 18
TABLE 1
SUMMARY
FINANCIAL DATA
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ending December 31 Quarter Ending December 31
---------------------------------- ----------------------------
Item 1999 1998 1999 1998
- ---- ------------ ----------- ----------- ----------
<S> <C> <C> <C> <C>
Net Sales $ 24,767,740 $24,560,834 $ 6,625,794 $8,397,860
Gross Profit 7,051,994 9,187,891 1,810,461 2,927,247
Income (Loss)
from Operations (2,145,104)(3) 908,309(1) (789,755)(3) 253,550(1)
Net Income (Loss) (2,248,994)(3)(4) 756,841(2) (952,739)(3)(4) 137,700(2)
Net Income (Loss)
Per Share:
Basic $ (.12) $ .04 $ (.05) $ .01
Diluted $ (.12) $ .04 $ (.05) $ .01
</TABLE>
SPECIAL ITEMS
(1) After Asset Writedown of $100,000
(2) After Asset Writedown of $150,000
(3) After Inventory Reserve of $389,000 and Employee Termination Accruals of
$175,000
(4) After Asset Writedown of $88,344
EXCLUDING SPECIAL ITEMS
<TABLE>
<CAPTION>
Year Ending December 31 Quarter Ending December 31
------------------------- ----------------------------
1999 1998 1999 1998
---------- --------- -------- -------
<S> <C> <C> <C> <C>
Income (Loss) from
Operations($) (1,581,104) 1,008,309 (225,755) 353,550
Net Income (Loss)($) (1,596,650) 906,841 (300,395) 287,700
Net Income (Loss)/Share
(Diluted) $ (0.09) $ 0.05 $ (0.02) $ 0.02
</TABLE>
The Company's revenues in 1999 were negatively impacted by a decline in
1999 shipments of the Company's precision instrument products related to the
continuing slump in demand triggered by the 1998 Far East economic slowdown
which led to a decline in orders for the Company's products from the computer
disk drive industry offset in part by continued sustained growth in the
Semiconductor Products and Processes Segment and by the growth in 1999 of the
Company's lithography equipment sales to the biochip industry.
The increase in revenues for the year ended December 31, 1998 over the
year ended December 31, 1997 is generally attributable to increases in the
Company's semiconductor-related business primarily in X-ray lithography in the
Microelectronics Equipment 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
Microelectronics Equipment Segment.
18
<PAGE> 19
The Company's ability to forecast orders for its precision instrument
products in its Microelectronics Equipment 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 2000.
During the past decade, JMAR has developed and manufactured a broad
range of high precision positioning and measurement systems to support the needs
of the semiconductor and computer disk drive industries to produce
high-performance micro-products. Several years ago, as the biotech industry
began to productize the fruits of its prior decades of research, JMAR initiated
a program to adapt certain of its precision manufacturing capabilities to
support the expected future needs of the biotech industry. Initially the focus
of that activity was on supplying the positioning technology required by DNA
biochip manufacturers, led by Affymetrix.
In recent years, a broader segment of the biotech industry began to
define their need to transition more of their operations from research to
precision manufacturing. In response, JMAR initiated an in house program to
explore the feasibility of adapting more of its established positioning,
alignment and metrology technology to serve the needs of that industry.
Accordingly, the Company has been investigating the requirements of many other
customers and potential customers in the biotechnology and biochip markets and
is aggressively marketing its products and technology to several companies in
those markets. JMAR believes that the biotech/biochip industry will continue to
be a positive contributor to the Company's growth in the future.
The biochip market place is rapidly evolving, with new manufacturing
technologies and new biochip manufacturers entering the market. As a result,
JMAR's current aligner systems may not be used in producing future generations
of biochips. To remain competitive, JMAR may be required to develop next
generation solutions for its current customers and for the new entrants to the
market. JMAR is working with the industry to participate in their future
development needs, but there can be no assurance that JMAR will continue to
receive significant orders of JMAR biochip aligner systems in the future or will
be able to develop successful next generation technologies in the biochip
market.
Gross margins for the fiscal years ended December 31, 1999, 1998 and
1997 were 28.5%, 37.4% and 41.1%, respectively. The lower gross margins for 1999
are primarily due to a continued 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 a reserve for
excess inventory of $389,000. The Company continues to experience competitive
pressures on certain products, which may impact gross margins in the future. The
Company's rapidly expanding Semiconductor Products and Processes Segment
conducted by JSI is in the process of evolving from a lower profit margin
development business to a commercial business focused on the integrated circuit
replacement part and telecommunication products markets. JMAR believes that, as
this evolution progresses, a greater proportion of JMAR's sales will be
generated by higher profit margin commercial semiconductor products. Therefore,
to the extent that the Company's commercial semiconductor products begin to
generate a higher percentage of the Company's revenues, the Company's gross
margins should improve. The Company also expects that as its patented,
laser-driven advanced light products enter the marketplace and gain acceptance,
they will also substantially improve its gross profit margins.
The Company's profits in 1999 were also impacted by JMAR's continuing
investments to accelerate the time-to-market for several new high-performance
products for the microelectronics marketplace. Included are increases in payroll
costs with the addition of several senior technical specialists and managers to
direct and help speed the Company's new precision instrument, laser and X-ray
product development programs. As discussed below, the Company's product
development expenditures, including that portion of customer-funded efforts
directly related to the commercialization of JMAR's proprietary technologies,
were 30% of revenues in 1999.
Selling, general and administrative ("SG&A") expenses for the fiscal
years ended December 31, 1999, 1998 and 1997 were $6,916,804, $6,153,100 and
$6,194,333, respectively. The increase in SG&A expenses in 1999 is primarily
due to higher payroll costs related to the addition of senior technical and
management staff.
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 $5,144,993, $3,837,314 and $1,487,139 for the fiscal years ended
December 31, 1999, 1998 and 1997, respectively. The increase in Customer-Funded
RD&E expenditures for 1999 is primarily related to an increase of $444,762 in
the X-ray lithography program funding provided by DARPA, most all of which is
directed toward development of JMAR's X-ray lithography source technology for
the commercial semiconductor market and $862,917 related to the Company's
contract for the development of a unique microcircuit architecture and devices
for the replacement of obsolete integrated circuits. The Company believes this
latter technology has applicability in both the government and the commercial
marketplaces. Company-Funded RD&E costs are shown in "Operating Expenses" and
totaled $2,105,294, $2,026,482 and $1,699,010, for the fiscal years ended
December 31, 1999, 1998 and 1997, respectively. Hence, total RD&E expenses for
those three years were $7,250,287, $5,863,796 and $3,186,149, respectively.
Capitalized software costs of $179,573, $451,185 and $444,355 for the years
ended December 31, 1999, 1998 and 1997 are not included in the above amounts.
Including capitalized software costs, RD&E expenditures as a percentage of sales
were 30.0%, 25.7% and 16.9% for the years ended December 31, 1999, 1998
and 1997, respectively. The increase in RD&E expenditures is primarily related
to the continued development of PXS point X-ray sources for lithography for the
semiconductor industry and other metrology applications, the development of a
unique microcircuit architecture and devices for the replacement of obsolete
integrated circuits, the development of new software for the Company's test and
measurement systems and the engineering development of higher performance test
and measurement inspection systems for the semiconductor, biochip and disk
drive industries.
19
<PAGE> 20
Included in 1999 is an accrual of $175,000 in termination costs for a
former employee. 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, 1999, 1998 and
1997 was $240,928, $181,227 and $181,562, respectively. The increase in 1999 is
related to increased borrowings pursuant to the Company's working capital line
of credit.
Interest and other income (expense) for 1999 includes a writedown of
$88,344 of a note receivable from an officer of the Company. Interest and other
income (expense) for 1998 includes a writedown of $50,000 of a note receivable
from the defunct Santa Fe Laser Company.
Included in the Statement of Operations in 1997 is a tax benefit of
$345,000 related to the utilization by the Company of a portion of its net
operating loss carryforward.
RESULTS OF SEGMENT OPERATIONS
Microelectronics Equipment Segment
Revenue for the year ended December 31, 1999 as compared to the year
ended December 31, 1998 for the Microelectronics Equipment Segment decreased
$5,143,726 from $21,608,708 to $16,464,982 or 24%. This decrease primarily
reflects lower shipments of precision instruments to the disk drive industry,
worldwide. As a result, operating income of the Microelectronics Equipment
Segment for the year ended December 31, 1999 as compared to the year ended
December 31, 1998 was adversely affected as well, decreasing $3,231,064 from
income of $771,343 to a loss of $2,459,721. This decrease reflects the decrease
in revenues of the higher margin precision instruments as well as an increase in
product development expenditures.
Semiconductor Products and Processes Segment
Revenue for the year ended December 31, 1999 as compared to the year
ended December 31, 1998 for the Semiconductor Products and Processes Segment
increased $5,350,632 from $2,952,126 to $8,302,758 or 181%. This growth reflects
the receipt in the last half of 1998 of two significant contracts from General
Dynamics Information Systems and TRW funded by the Defense Microelectronics
Activity. Because of the increase in revenues, operating income for the year
ended December 31, 1999 as compared to the year ended December 31, 1998
increased $177,651 from income of $136,966 to income of $314,617.
CONSOLIDATED LIQUIDITY AND FINANCIAL CONDITION
Cash and cash equivalents at December 31, 1999 and 1998 were $2,323,127
and $3,848,183, respectively. The (decrease) increase in cash and cash
equivalents for the fiscal years ended December 31, 1999, 1998 and 1997 was
$(1,525,056), $204,066 and $1,014,831, respectively. During the first quarter of
2000, the Company received a cash infusion of approximately $14.8 million from
the exercise of most all of its outstanding publicly and privately held warrants
and options (see below).
The decrease in cash for 1999 resulted primarily from cash used in
operations of $2,709,394, capital expenditures of $1,186,661, note payments of
$220,934, repurchases of stock of $134,639 and patent costs of $155,712 offset
in part by borrowings from the Company's working capital bank line of
$2,890,000.
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
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<PAGE> 21
of stock of $349,203 and cash used in operations of $40,580. Inventories
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.
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 1999 is summarized in the Consolidated Balance Sheet Data
on page 16. The working capital of the Company is generally funded through its
working capital line (the "Line") with Comerica Bank (the "Bank") and through
third-party contracts. Effective December 20, 1999, due to the Company's losses
in 1999, the Bank changed the Line from a $5 million unrestricted revolving
line of credit to a $5 million primarily formula-based line. Of that amount,
$750,000 is unrestricted with advances on the balance based on a formula of 80
percent of eligible accounts receivable, 35 percent of eligible inventories (up
to $2.5 million), 50 percent of unbilled revenue on a long-term contract and up
to $500,000 for certain foreign receivables. 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. Subsequent to December 31, 1999,
the Company received net proceeds of approximately $14.8 million from the
exercise of outstanding options and warrants, including its publicly traded
warrants. Of these funds, $4,990,000 were used to pay down the Line in its
entirety (however, the availability of the Line is still in effect). In
addition, these funds will be used to accelerate the Company's development of
high-value semiconductors for the rapidly growing Internet and Telecom markets
and to accelerate the development and commercialization of its other high value
proprietary products, as needed. Management believes that the Company has
adequate resources to 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 million 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 14, 2000, the Company had
repurchased 252,900 shares pursuant to this repurchase program at a total cost
of approximately $484,000.
At December 31, 1999, the Company had in excess of $27 million of
Federal net operating loss carryforwards subject to certain annual limitations,
which expire from 2004 through 2014. 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 EFFECT ON COMPUTER SYSTEMS
Although the date is now past January 1, 2000 and JMAR has not
experienced immediate adverse impact from the transition to the Year 2000, the
Company cannot provide assurances that it, its customers or its vendors have not
been affected in a manner that is not yet apparent. In addition, some computer
programs that were date-sensitive to the Year 2000 may not have been programmed
to process the Year 2000 as a leap year, and any negative consequential effects
may remain unknown. As a result, the Company will continue to monitor its Year
2000 compliance and the Year 2000 compliance of customers and vendors. Due to
the general uncertainty inherent in the Year 2000 problem, especially the
uncertainty regarding the Year 2000 compliance of customers and vendors, JMAR
is unable to determine at this time whether the Year 2000 problem will have a
material adverse effect on its business, results of operations and financial
condition.
To date JMAR has spent immaterial amounts to comply with accounting and
statutory requirements regarding the Year 2000. The Company believes that it
will spend minimal additional amounts for Year 2000 issues in the foreseeable
future. These assessments have not been independently verified.
RECENT ACCOUNTING PRONOUNCEMENT
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." This SAB summarizes the SEC's view in applying generally accepted
accounting principles to revenue recognition in financial statements. This SAB
will become effective as of the quarter ending June 30, 2000.
Management
21
<PAGE> 22
has not determined the impact of the SAB on the Company's consolidated financial
statements.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain statements contained in this Form 10-K, 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 are forward-looking statements that
necessarily are based on certain assumptions and are subject to certain risks
and uncertainties that could cause actual future 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, 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, biochip,
telecommunications, computer disk drive and general microelectronics 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
1999 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 and X-ray products is a lengthy and capital intensive
process and is subject to unforeseen risks, delays, problems and costs.
Along with some of the risks discussed in the preceding paragraph,
there is no assurance that the Company will market its Britelight(TM)
lasers as stand-alone products or that, if the Company should do so, they 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
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<PAGE> 23
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.
JMAR Semiconductor is a "fabless" supplier of products. Accordingly,
its time schedule for the development, manufacture and sale of its products is
dependent on the availability of capacity at outside foundries. Currently, there
is a shortage of such capacity, worldwide.
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 in close proximity to the Company's
facilities. The Company is predominantly self-insured for losses and
interruptions caused by earthquakes.
The operations of the Company involve the use of substances regulated
under various federal, state and international laws governing the environment.
It is the Company's policy to apply strict standards for environmental
protection even if not subject to regulations imposed by local governments. The
liability for environmental remediation and related costs is accrued when it is
considered probable and the costs can be estimated. Environmental costs are
presently not material to JMAR's operations or financial position.
Although JMAR believes that it has the necessary product offerings and
resources for continuing success, future revenue and margin trends cannot be
reliably predicted and may cause the Company to adjust its operations. Factors
external to the Company can result in volatility of the Company's common stock
price. Because of the foregoing factors, recent trends should not be considered
reliable indicators of future stock prices or financial results.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has no material investments in marketable securities or
other debt instruments which subject it to material market risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements prepared in accordance
with Regulation S-X and Report of Independent Public Accountants are set forth
at the end of this Report on pages F-1 through F-17.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The officers and directors of the Company are as follows:
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<PAGE> 24
<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 48 President, Chief Operating Officer and
President of JMAR Precision Systems
Dennis E. Valentine 44 Vice President Finance, Chief Financial
Officer, Chief Administrative Officer
and Secretary
Joseph G. Martinez 42 Vice President, General Counsel
Richard M. Foster 67 President of JMAR Research
Marvin W. Sepe 44 President of JMAR Semiconductor
James H. Banister, Jr. 69 Director
C. Neil Beer, Ph.D. 65 Director
Vernon H. Blackman, Ph.D. 70 Director
Barry Ressler 59 Director
</TABLE>
The directors of the Company are elected by the shareholders to hold office
until the next annual meeting of stockholders and until their respective
successors have been elected and qualified. Officers of the Company are elected
annually by the Board of Directors and hold office until their successors are
duly elected and qualified.
JOHN S. MARTINEZ, PH.D., became Chairman of the Board, President, Chief
Executive Officer and a Director of the Company at its inception. He
relinquished the title of President in November 1998 at the time of the hiring
of Mr. 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, N.Y.) in 1951 and is a graduate of the Oak Ridge School of Reactor
Technology. He served on active duty in the U.S. Marine Corps during the Korean
War and was discharged as a Captain in 1954. He is the holder or co-holder of
six patents. Dr. Martinez is the father of Joseph G. Martinez, Vice President,
General Counsel of the Company.
E. FRED SCHIELE joined JMAR in November 1998 as President and Chief
Operating Officer. In November 1999, Mr. Schiele was also appointed 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. From 1993 to 1996 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
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<PAGE> 25
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 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.
JAMES H. BANISTER, JR., has been a director since December 1989 and was a
consultant to the Company from September 1989 until March 1994. Since October
1993, Mr. Banister has been President, Chief Executive Officer and a Director of
Kinetic Ceramics, Inc. From August 1987 to June 1988, he was President and CEO
of MSI, a subsidiary of Olin Corporation, supplying Signal Intelligence and
electronic warfare equipment and services. When that company was sold by Olin,
Mr. Banister retired to manage his personal investments. Mr. Banister was with
Physics International Company (which became a subsidiary of Olin Corp. in 1985),
from June 1964 to August 1987, successively holding the positions of Contracts
Manager, Director of Marketing and Contract Relations, Vice President and
Director of Administration and Senior Vice President responsible for finance and
administration. From 1953 to 1964, Mr. Banister was with Stanford Research
Institute, now SRI International, holding the position of Manager of Contract
Administration. Mr. Banister received a Bachelor of Science degree in Business
and Engineering administration from MIT and has taken graduate courses in law at
Golden Gate College. He has been an officer and director of several subsidiaries
of Physics International Company.
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<PAGE> 26
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 and systems 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. 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 that 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 that 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. (T(3)I), 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.
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<PAGE> 27
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation
for services in all capacities to the Company during each of the last three
fiscal years of the Company's Chief Executive Officer and the other four most
highly compensated individuals serving as executive officers as of December 31,
1999 whose compensation (salary and bonus) exceeded $100,000. Also included are
two individuals who served as executive officers during part of 1999 and would
have been one of the four most highly compensated officers had they served as
executive officers at the end of 1999 (collectively, the "Named Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term Compensation
Annual Compensation(1)(6) Awards(2)
------------------------- -----------------------
Name and Bonus Shares Underlying
Principal Position Year Salary($) ($)(3) Options and Warrants(#)
- ------------------ ---- --------- ------- -----------------------
<S> <C> <C> <C> <C>
John S. Martinez, 1999 192,500 0 102,000
Chief Executive 1998 200,592 87,474 77,960
Officer 1997 187,112 175,000 125,000
E. Fred Schiele, 1999 177,500 0 38,000
President and Chief 1998 6,827(4) 20,000 150,000
Operating Officer of JMAR
and President of JPSI
Marvin W. Sepe, 1999 140,000 28,667 0
President of JSI 1998 125,000 13,500 0
1997 125,000 0 5,000
John P. Ricardi, 1999 150,000 0 0
Senior Vice President 1998 145,331 0 0
for Sales and Marketing of 1997 147,699 25,000 60,000
JMAR Precision Systems(7)
Leonid Yoffe, Senior Vice 1999 140,000 0 0
President of Operations of 1998 150,576 0 0
JMAR Precision Systems(8) 1997 146,905 65,000 0
Joseph G. Martinez, 1999 135,000 0 28,500
Vice President, General 1998 69,578(5) 11,677 50,000
Counsel
Richard M. Foster, 1999 125,000 20,000 0
President of JRI 1998 95,846 26,000 0
1997 100,000 15,000 25,000
</TABLE>
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<PAGE> 28
- -------------------
(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, 1999, 1998 and 1997.
(3) Includes bonus payments under the Management Incentive Bonus Plan (see
page 30) earned by the Named Officers in the year indicated for services
rendered in such year, but which were paid in the following year.
(4) Compensation is for one month.
(5) Compensation is for seven months.
(6) See "Incentive Plans" below.
(7) Mr. Ricardi served as Vice President for Corporate Development of JMAR
until April 1999. Compensation for 1997 is for eleven months and includes
$22,000 commissions on sales.
(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, 1999 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>
POTENTIAL REALIZABLE
SHARES PERCENTAGE VALUE AT ASSUMED
UNDERLYING OF TOTAL ANNUAL RATES OF
OPTIONS OPTIONS EXERCISE STOCK PRICE APPRECIATION
GRANTED GRANTED TO PRICE FOR OPTION TERM
(SHARES) EMPLOYEES IN PER EXPIRATION ------------------------
NAME (1)(7) FISCAL YEAR SHARE DATE(2) 5% 10%
- ---- ---------- ------------ -------- ----------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
John S. Martinez 42,000(3) 10.94 $2.13 February 12, 2009 $56,280 $142,380
10,000(4) 2.61 $1.75 August 13, 2010 11,000 27,900
50,000 13.03 $4.56 December 31, 2009 143,500 363,500
E. Fred Schiele 28,000(5) 7.30 $2.13 February 12, 2009 37,520 94,920
10,000 2.61 $4.56 December 31, 2009 28,700 72,700
Joseph G. Martinez 13,500(6) 3.52 $2.13 February 12, 2009 18,090 45,765
15,000 3.91 $4.56 December 31, 2009 43,050 109,050
Richard M. Foster 0 0 N/A N/A N/A N/A
Marvin W. Sepe 0 0 N/A N/A N/A N/A
John P. Ricardi 0 0 N/A N/A N/A N/A
Leonid Yoffe 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
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.
28
<PAGE> 29
(3) These options are incentive stock options. 4,200 of these options are
currently exercisable and 4,200 become exercisable on February 12 of each
year thereafter through 2009.
(4) These options are non-qualified stock options. They become exercisable and
vest one-third each year commencing on the first year after their grant.
(5) These options are incentive stock options. 2,800 of these options are
currently exercisable and 2,800 become exercisable on February 12 of each
year thereafter through 2009.
(6) These options are incentive stock options. 1,350 of these options are
currently exercisable and 1,350 become exercisable on February 12 of each
year thereafter through 2009.
(7) These options contain a Reload Option feature whereby if the optionee
exercises the option in whole or in part using shares of Common Stock
owned by the optionee for at least six months, the Company shall grant to
the optionee a 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.
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, 1999, the number
of shares of common stock underlying employment related options and warrants
outstanding at December 31, 1999 and the value of such options and warrants
which are "in-the-money":
<TABLE>
<CAPTION>
VALUE OF
SHARES UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AND WARRANTS AND WARRANTS AT
AT DECEMBER 31, 1999 DECEMBER 31, 1999(1)
SHARES ------------------------ ---------------------
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ------------------------ ----------------------
<S> <C> <C> <C> <C>
John S. Martinez 0 $0 200,175/523,061 $539,512/$828,239
E. Fred Schiele 0 0 33,333/154,667 $60,228/$266,609
Joseph G. Martinez 0 0 16,667/61,833 $33,917/$100,660
Richard M. Foster 0 0 36,666/13,468 $69,698/$27,261
Marvin W. Sepe 0 0 100,000/0 $156,000/$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, 1999. The fair market value of a share of common stock at
December 31, 1999 was $4.56 per share as quoted on the NASDAQ Stock Market
at the close of trading.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal year 1999, executive compensation was set by the Board of
Directors acting as the Compensation Committee. The compensation of Dr. Martinez
was set by the Compensation Committee members without the participation by Dr.
Martinez. Except for Dr. Martinez, no member of the Compensation Committee is
either an officer or an employee of the Company.
29
<PAGE> 30
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 Employment Agreement is
automatically renewable on an annual basis unless either party chooses to
terminate it no later than 60 days before the end of the year. 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 36 month's pay.
Pursuant to Mr. Schiele's employment agreement, the Company retained
him as President and Chief Operating Officer of the Company and agreed to pay
him an annual salary of not less than $177,500 plus expenses and normal employee
insurance benefits and a $600 per month auto allowance. If the employment
agreement is terminated by the Company without cause, Mr. Schiele would become
entitled to receive as severance pay an amount equal to 12 month's pay.
INCENTIVE PLANS
The Company has no defined benefit pension or actuarial plans under
which its executive officers participate.
In 1993, JMAR established a Management Incentive Bonus Plan (the
"MIBP") based on profits generated and stock performance each year. Under the
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. MIBP cash bonuses were paid
in fiscal years 1997 and 1998 to those employees deemed to have made the
greatest contributions toward the Company's ability to generate those profits.
Because the Company was not profitable in 1999, no cash bonuses were paid to the
Company's CEO, its President or the other members of its Corporate Staff. Cash
bonuses of $28,667 and $20,000 were paid to Messrs. Sepe and Foster,
respectively, in connection with their services as President of JMAR
Semiconductor and JMAR Research, for achieving the profitability goals of those
divisions. Pursuant to the MIBP, options were awarded to the Named Executive
Officers in fiscal years 1997, 1998 and 1999. (See "Summary Compensation Table"
above.)
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 (the "MIBP Stock Ownership
Requirement") 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 1999 Messrs. Joseph Martinez and Marvin Sepe purchased 1,500 and
1,673 shares, respectively.
In addition to purchases pursuant to the MIBP Stock Ownership
Requirement, in 1999 Messrs. John Martinez and Joseph Martinez made open market
purchases of 45,000 and 5,000 shares of JMAR common stock, respectively.
DIRECTORS' FEES
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
30
<PAGE> 31
meeting and are reimbursed for their travel, lodging and food expense incurred
when attending such meetings. $500 of the Board Meeting compensation is paid in
Company stock.
In addition, the directors are eligible to participate in the Company's
Stock Option Plans on the same basis as key employees of the Company and grants
of options will be made by the Board of Directors on a case-by-case basis on
such terms as the Board in its discretion may provide. It has been the Company's
policy to make an annual grant of options to the directors. During the fiscal
year ended December 31, 1999, a grant of options to purchase 10,000 shares of
Common Stock was received by Messrs. Martinez, Banister, Beer, Ressler and
Blackman in their capacity as directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
As of March 27, 2000, the following person was known by the Company to
be the beneficial owner of more than 5 percent of the Company's Common Stock. A
person is deemed to be the beneficial owner of JMAR Common Stock, whether or not
he has any economic interest therein, if he directly or indirectly has (or
shares with others) voting or investment power with respect to the JMAR shares
or has the right to acquire such beneficial ownership within sixty days.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND ADDRESS BENEFICIALLY OWNED PERCENT OF TOTAL
- ---------------- ------------------ ----------------
<S> <C> <C>
John S. Martinez 1,475,845(1) 6.57%
3956 Sorrento Valley Blvd.
San Diego, CA 92121
</TABLE>
(1) Includes: (a) 447,965 shares owned of record by the John S. Martinez
Separate Property Trust, of which Dr. Martinez as trustee, has sole voting
and investment power; and (b) 1,027,880 shares of Common Stock which are
issuable upon exercise of currently exercisable warrants and stock options.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the beneficial ownership of Common Stock of
the Company as of March 27, 2000 by each director, the "Named Officers" (as
defined in "Executive Compensation" on page 27 above) and by all directors 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.
<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) 1,475,845 6.57%
Marvin W. Sepe(2) 247,942 1.14%
Dennis E. Valentine(3) 197,208 (13)
Richard M. Foster(4) 102,781 (13)
James H. Banister, Jr.(5) 96,285 (13)
</TABLE>
31
<PAGE> 32
<TABLE>
<CAPTION>
NUMBER OF SHARES OF PERCENTAGE OF
COMMON STOCK OUTSTANDING COMMON STOCK
BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED
- ---------------- -------------------- ------------------------
<S> <C> <C>
Vernon H. Blackman(6) 62,490 (13)
E. Fred Schiele(7) 50,000 (13)
Leonid Yoffe(8) 50,000 (13)
Barry Ressler(9) 34,079 (13)
C. Neil Beer(10) 33,959 (13)
Joseph G. Martinez(11) 24,522 (13)
All executive officers and directors as
a group (12 persons)(12) 2,375,111 10.23%
</TABLE>
(1) See footnote (1) to preceding table.
(2) Includes 244,068 shares which are issuable upon exercise of currently
exercisable stock options and warrants.
(3) Includes 170,403 shares which are issuable upon exercise of currently
exercisable stock options and warrants.
(4) Includes 50,134 shares which are issuable upon exercise of currently
exercisable stock options.
(5) Includes 71,192 shares which are issuable upon exercise of currently
exercisable stock options and warrants.
(6) Includes 45,001 shares which are issuable upon exercise of currently
exercisable stock options and warrants.
(7) All shares are issuable upon exercise of currently exercisable stock
options and warrants.
(8) All shares are issuable upon exercise of currently exercisable warrants.
Mr. Yoffe served as President of JMAR Precision Systems, Inc. until March
1999.
(9) Includes 25,000 shares which are issuable upon exercise of currently
exercisable stock options.
(10) Includes 30,009 shares which are issuable upon exercise of currently
exercisable stock options.
(11) Includes 18,017 shares which are issuable upon exercise of currently
exercisable stock options.
(12) Includes 1,781,704 shares which are issuable upon exercise of currently
exercisable stock options and warrants.
(13) Less than one percent.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On March 29, 1993, the Company loaned Dr. Martinez $59,000 with
interest at 6% per annum to assist Dr. Martinez in paying certain income taxes
that he personally incurred in connection with a transaction that he undertook
in support of the Company. The loan amount, including accrued interest, was
$88,344 on December 31, 1999. In February 2000, the Board of Directors of the
Company agreed to forgive the loan.
32
<PAGE> 33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
1. Financial Statements. Index to Consolidated Financial Statements:
<TABLE>
<S> <C>
Report of Independent Public Accountants................................................ F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998............................ F-3
Consolidated Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997.................................................................. F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997..................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997.................................................................. F-6
Notes to Consolidated Financial Statements ............................................. F-7
</TABLE>
2. Financial Statement Schedules. The following financial statement
schedule of JMAR Technologies, Inc., for the years ended December
31, 1999, 1998 and 1997 is filed as part of this Report and should
be read in conjunction with the Consolidated Financial Statements
of JMAR Technologies, Inc.
Schedule II. Valuation and Qualifying Accounts
Financial Statement Schedules not listed above have been omitted
because they are not applicable or are not required or the information
required to be set forth therein is included in the Consolidated
Financial Statements or Notes thereto.
3. Exhibits. The Exhibits required to be filed with this Report are
listed in Item 14(c) below.
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the three months ended
December 31, 1999.
33
<PAGE> 34
INDEX TO EXHIBITS
(c) Exhibits. The following exhibits are filed, or incorporated by
reference into, this Report:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- -----------
<S> <C>
3.1(1)(2) Certificate of Incorporation and amendments thereto.
3.2(4) Amendments to Certificate of Incorporation, filed on July 9,
1992, December 11, 1992, January 11, 1993 and February 1, 1993.
3.3(1) Bylaws and amendments thereto.
3.4(5) Amendment to Certificate of Incorporation, filed on August 23,
1994.
3.5(9) Certificate of Ownership and Merger.
4.1(3) Form of Common Stock Certificate.
4.2(10) Rights Agreement, dated as of February 12, 1999 between JMAR
Technologies, Inc. and American Securities Trust & Transfer,
Inc., including the Certificate of Designations, the form of
Rights Certificate and the Summary of Rights attached thereto as
Exhibits A, B and C, respectively.
10.1(8) Amended and Restated Employment Agreement between the Company and
John S. Martinez, dated May 1, 1996.(+)
10.2(1) The Company's 1988 Stock Option Plan.(+)
10.3(2) Form of Warrant, with attached Piggyback Registration Rights
provisions, issued in April, 1991 to John S. Martinez, James H.
Banister, Jr., C. Neil Beer, Jay Borker, Scott Love, A. Lee
Morsell, Vernon H. Blackman, Susan Miller-French, Lester Levy and
Ali M. M. Mojdehi.
10.4(6) The Company's 1991 Stock Option Plan, as amended.(+)
10.5(8) Management Anti-Dilution Incentive Plan, as amended.(+)
10.6(12) The Company's 1999 Stock Option Plan.(+)
10.7 Revolving Credit Loan & Security Agreement dated December 20,
1999, Addendum to Revolving Credit Loan & Security Agreement,
Addendum to Inventory Rider, Inventory Rider and Equipment Rider.
</TABLE>
34
<PAGE> 35
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- -----------
<S> <C>
10.8(5) Form of Warrant, with attached Piggyback Registration Rights
provisions issued to John S. Martinez, Vernon H. Blackman, Robert
S. Hash, Larry M. Levy, Dennis E. Valentine, Barry Ressler,
Leonid Yoffe and Carole Hash issued in connection with the
Company's August, 1994 Loan Program.
10.9(7) Master Lease Agreement and related documents dated as of
September 10, 1996 between Leasing Technologies International,
Inc., the Company and California ASIC Technical Services, Inc.
10.10(8) Management Incentive Plan Agreement for JMAR Precision Systems,
Inc., as amended.
10.11(11) Employment Agreement between the Company and E. Fred Schiele,
dated November 13, 1998.(+)
21.1 Subsidiaries of the Company include JMAR Research, Inc. (a
California corporation), JMAR Precision Systems, Inc. (a
California corporation) and JMAR Semiconductor, Inc. (a
California corporation).
23.1 Consent of Independent Public Accountants.
27.1 Financial Data Schedule.
</TABLE>
- ------------------
(+) These contracts are management compensation contracts required to be
separately identified pursuant to Item 14(c) of Form 10-K.
35
<PAGE> 36
(1) Incorporated by reference to the exhibit filed with the Company's
Registration Statement on Form S-1 (No. 33-32446) filed on December 5,
1989 and amended on January 30, 1990, March 30, 1990 and April 23, 1990,
which Registration Statement became effective May 11, 1990.
(2) Incorporated by reference to the exhibit filed with the Company's Form
10-K for the year ended December 31, 1991.
(3) Incorporated by reference to the exhibit filed with the Company's
Registration Statement on Form S-1 (No. 33-47390) filed on April 22, 1992
and amended November 23, 1992, January 11, 1993, January 27, 1993,
February 9, 1993, February 11, 1993, February 12, 1993 and declared
effective on February 16, 1993.
(4) Incorporated by reference to the exhibit filed with the Company's Form
10-K for the year ended December 31, 1993.
(5) Incorporated by reference to the exhibit filed with the Company's Form
10-K for the year ended December 31, 1994.
(6) Incorporated by reference to the exhibit filed with the Company's Proxy
Statement for the 1996 Annual Meeting of Shareholders.
(7) Incorporated by reference to the exhibit filed with the Company's Form
10-Q for the quarter ended September 30, 1996.
(8) Incorporated by reference to the exhibit filed with the Company's Form
10-K for the year ended December 31, 1996.
(9) Incorporated by reference to the exhibit filed with the Company's Form 8-K
dated June 17, 1998.
(10) Incorporated by reference to the exhibit filed with the Company's Form 8-A
dated March 8, 1999.
(11) Incorporated by reference to the exhibit filed with the Company's Form
10-K for the year ended December 31, 1998.
(12) Incorporated by reference to the exhibit filed with the Company's Proxy
Statement for the 1999 Annual Meeting of Shareholders.
36
<PAGE> 37
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants................................................ F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998............................ F-3
Consolidated Statements of Operations for the Years Ended December 31, 1999,
1998 and 1997........................................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
1999, 1998 and 1997..................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999,
1998 and 1997........................................................................... F-6
Notes to Consolidated Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE> 38
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, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1999. These consolidated financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in Item
14 is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic consolidated financial statements and in our opinion,
fairly states, in all material respects, the financial data required to be set
forth therein in relation to the basic consolidated financial statements taken
as a whole.
ARTHUR ANDERSEN LLP
San Diego, California
March 22, 2000
F-2
<PAGE> 39
JMAR TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
December 31,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ....................................................... $ 2,323,127 $ 3,848,183
Accounts receivable, net ........................................................ 7,079,435 7,766,961
Notes and other receivables...................................................... 32,551 66,682
Inventories ..................................................................... 6,253,336 5,848,936
Prepaid expenses and other ...................................................... 901,688 828,664
------------ ------------
Total current assets ....................................................... 16,590,137 18,359,426
Receivable from officer .............................................................. -- 83,212
Property and equipment, net .......................................................... 2,330,663 2,710,699
Other assets, net .................................................................... 1,355,041 1,245,987
Goodwill, net ........................................................................ 397,927 475,509
------------ ------------
TOTAL ASSETS ................................................................ $ 20,673,768 $ 22,874,833
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ................................................................ $ 2,456,928 $ 4,728,068
Accrued liabilities ............................................................. 593,283 570,945
Accrued payroll and related costs ............................................... 875,693 1,153,304
Line of credit .................................................................. 4,990,000 2,100,000
Notes payable and capital lease obligations ..................................... 205,490 593,975
------------ ------------
Total current liabilities .................................................. 9,121,394 9,146,292
------------ ------------
Notes payable, capital leases and other long-term liabilities,
net of current portion .......................................................... 642,913 475,362
------------ ------------
Commitments and contingencies
Stockholders' equity :
Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued
and outstanding as of December 31, 1999 and December 31, 1998 ............... -- --
Common stock, $.01 par value; 40,000,000 shares authorized;
Issued and outstanding 18,074,836 shares as of December 31, 1999 and
18,080,853 shares as of December 31, 1998 .................................... 180,748 180,809
Additional paid-in capital ...................................................... 36,499,238 36,593,901
Accumulated deficit ............................................................. (25,770,525) (23,521,531)
------------ ------------
Total stockholders' equity ................................................. 10,909,461 13,253,179
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .................................. $ 20,673,768 $ 22,874,833
============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
F-3
<PAGE> 40
JMAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Product sales ..................................................... $ 10,315,686 $ 16,340,637 $ 19,228,621
Contract sales .................................................... 14,452,054 8,220,197 2,233,006
------------ ------------ ------------
Total revenues .......................................... 24,767,740 24,560,834 21,461,627
Product costs of sales ............................................ 6,696,863 9,789,606 11,144,172
Contract costs of sales ........................................... 11,018,883 5,583,337 1,487,139
------------ ------------ ------------
Gross profit ............................................ 7,051,994 9,187,891 8,830,316
------------ ------------ ------------
Operating Expenses:
Selling, general and administrative .......................... 6,916,804 6,153,100 6,194,333
Research, development and engineering ........................ 2,105,294 2,026,482 1,699,010
Asset writedowns and non-recurring items ..................... 175,000 100,000 (589,969)
------------ ------------ ------------
Total operating expenses ................................ 9,197,098 8,279,582 7,303,374
------------ ------------ ------------
Income (loss) from operations ..................................... (2,145,104) 908,309 1,526,942
Interest and other income (expense), net .......................... 137,038 61,963 104,905
Interest expense .................................................. (240,928) (181,227) (181,562)
------------ ------------ ------------
Income (loss) before income taxes ................................. (2,248,994) 789,045 1,450,285
Income tax (provision) benefit .................................... -- (32,204) 345,000
------------ ------------ ------------
Net income (loss) ................................................. $ (2,248,994) $ 756,841 $ 1,795,285
============ ============ ============
Net income (loss) per share:
Basic ........................................................ $ (.12) $ .04 $ .11
============ ============ ============
Diluted ...................................................... $ (.12) $ .04 $ .10
============ ============ ============
Shares used in computation of net income (loss) per share:
Basic ........................................................ 18,045,914 18,046,860 17,065,860
============ ============ ============
Diluted ...................................................... 18,045,914 19,112,634 18,601,119
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
F-4
<PAGE> 41
JMAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Common Stock Preferred Stock Additional Total
----------------------- --------------- Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
----------- --------- ------ ------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 ...... 16,760,269 $ 167,603 -- $ -- $ 35,274,959 $(26,073,657) $ 9,368,905
Stock issued upon exercise of
warrants and options ......... 681,618 6,816 -- -- 661,539 -- 668,355
Debt converted to equity ........ 156,634 1,566 -- -- 467,622 -- 469,188
Issuance of stock ............... 1,008,252 10,083 -- -- 3,219,472 -- 3,229,555
Retirement of stock related to
acquisition of Cal ASIC ...... (715,821) (7,158) -- -- (3,035,918) -- (3,043,076)
Net income ...................... -- -- -- -- -- 1,795,285 1,795,285
----------- --------- ------ ------ ------------ ------------ ------------
Balance, December 31, 1997 ...... 17,890,952 178,910 -- -- 36,587,674 (24,278,372) 12,488,212
Stock issued upon exercise of
warrants and options ......... 213,812 2,138 -- -- 161,546 -- 163,684
Issuance of stock for services .. 44,184 442 -- -- 21,099 -- 21,541
Issuance of stock related to
acquisition of minority
interest of JSI .............. 24,045 240 -- -- 36,864 -- 37,104
Repurchases of stock ............ (184,300) (1,843) -- -- (347,360) -- (349,203)
Issuance of stock related to
acquisition of Continuum
Engineering .................. 92,160 922 -- -- 134,078 -- 135,000
Net income ...................... -- -- -- -- -- 756,841 756,841
----------- --------- ------ ------ ------------ ------------ ------------
Balance, December 31, 1998 ...... 18,080,853 180,809 -- -- 36,593,901 (23,521,531) 13,253,179
Stock issued upon exercise of
warrants and options ........ 38,464 384 -- 18,066 18,450
Issuance of stock for services .. 6,948 69 -- -- 7,731 -- 7,800
Repurchase of stock ............. (68,600) (686) -- -- (133,953) -- (134,639)
Issuance of stock related to
acquisition of Continuum
Engineering ................. 12,171 122 -- -- 3,263 -- 3,385
Issuance of stock related to
acquisition of minority
interest of JSI ............. 5,000 50 -- -- 10,230 -- 10,280
Net loss ........................ -- -- -- -- -- (2,248,994) (2,248,994)
----------- --------- ------ ------ ------------ ------------ ------------
Balance, December 31, 1999 ...... 18,074,836 $ 180,748 -- $ -- $ 36,499,238 $(25,770,525) $ 10,909,461
=========== ========= ==== ==== ============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
F-5
<PAGE> 42
JMAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ..................................................... $ (2,248,994) $ 756,841 $ 1,795,285
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization ..................................... 1,034,675 812,724 700,644
Services received in exchange for
common stock or warrants ....................................... 7,800 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) decrease in:
Accounts receivable, net ......................................... 687,526 (3,409,102) (1,434,015)
Inventories ...................................................... (404,400) (1,133,215) (830,571)
Prepaid expenses and other ....................................... (73,024) (68,696) (556,109)
Other assets ..................................................... 813,436 (592,031) (699,349)
Increase (decrease) in:
Customer deposits ................................................ (7,737) 9,997 (724,325)
Accounts payable and accrued liabilities ......................... (2,518,676) 3,461,361 377,057
------------ ------------ ------------
Net cash used in operating activities ................................. (2,709,394) (40,580) (1,951,488)
------------ ------------ ------------
Cash flows from investing activities:
Patent costs .......................................................... (155,712) (60,628) (47,451)
Capital expenditures .................................................. (1,186,661) (803,498) (763,697)
Increase in notes and other receivables ............................... (13,938) (4,834) (307,939)
Payments received on notes receivable ................................. -- 13,422 897,857
Acquisition costs, net of cash acquired ............................... (12,228) 37,103 --
------------ ------------ ------------
Net cash used in investing activities ............................ (1,368,539) (818,435) (221,230)
------------ ------------ ------------
Cash flows from financing activities:
Net borrowings (payments) under short-term debt agreements ............ 2,890,000 1,625,000 (969,281)
Net borrowings (payments) of notes payable, capital leases
and other long-term liabilities ....................................... (220,934) (376,400) 273,222
Net proceeds from the issuance of common stock ........................ -- -- 3,215,253
Repurchases of stock .................................................. (134,639) (349,203) --
Net proceeds from the exercise of options and warrants ............... 18,450 163,684 668,355
------------ ------------ ------------
Net cash provided by financing activities ........................ 2,552,877 1,063,081 3,187,549
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ....................... (1,525,056) 204,066 1,014,831
Cash and cash equivalents, beginning of period ............................. 3,848,183 3,644,117 2,629,286
------------ ------------ ------------
Cash and cash equivalents, end of period ................................... $ 2,323,127 $ 3,848,183 $ 3,644,117
============ ============ ============
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY: 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 and an additional 12,171 earn-out shares issued in
1999 (See Note 3).
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
F-6
<PAGE> 43
JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
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 cash equivalents to include cash on hand
and cash invested in short-term securities that 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 its 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 accounting
principles generally accepted in the United States 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 Standards ("SFAS") No. 109. Under the asset and
liability method of SFAS No. 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.
F-7
<PAGE> 44
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 No. 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 asset's 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, 1999. Accumulated
amortization of goodwill was $663,037 and $561,312 at December 31, 1999 and
1998, 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 $781,968 and $568,317 at December
31, 1999 and 1998, respectively. SFAS No. 86 "Accounting for the Cost of
Computer Software to be Sold, Leased, or Otherwise Marketed," specifies the
accounting for the costs of internally developed or purchased computer software.
The Company charges all costs incurred in creating a computer software product
as research and development expense when incurred until technological
feasibility has been established.
h. Long-Lived Assets
The Company periodically evaluates the carrying value of its long-lived
assets and applies the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of".
Under SFAS No. 121, long-lived assets and certain identifiable assets to be held
and used in operations are reviewed for impairment whenever events or
circumstances indicate that the carrying amount of an asset may not be fully
recoverable. An impairment loss is recognized if the sum of the expected
long-term, undiscounted cash flows is less than the carrying amount of the
long-lived assets being evaluated. Management believes the carrying value of
its long-lived assets does not exceed their estimated net realizable value.
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.
F-8
<PAGE> 45
JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
j. Earnings Per Share
The Company presents earnings per share in accordance with the
provisions of SFAS No. 128, "Earnings Per Share" (see Note 13).
k. Stock Options
The Company has adopted the disclosure only requirement of SFAS No.
123, "Accounting for Stock-Based Compensation" (see Note 12).
l. Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income," establishes standards
for reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses). This statement requires than an enterprise: (a)
classify items of other comprehensive income by their nature in a financial
statement; and (b) display the accumulated balance of other comprehensive income
separately from stockholders' equity in the equity section of a balance sheet.
For the years ended December 31, 1999 and 1998, the Company did not have any
elements of comprehensive income, and therefore, there was no difference in the
Company's net income or loss and comprehensive income or loss for those years.
m. Reclassifications
Certain reclassifications have been made to the prior-year financial
statements to conform with the 1999 presentation.
n. Recent Accounting Pronouncement
In December 1999, the Securities and Exchange Commission ("SEC") issued
Statements." This SAB summarizes the SEC's view in applying generally accepted
accounting principles to revenue recognition in financial statements. This SAB
will become effective as of the quarter ending June 30, 2000. Management has not
determined the impact of the SAB on the Company's consolidated financial
statements.
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). 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.
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. In 1999,
the Company issued 12,171 earn-out shares of Common Stock to the sole
shareholder of CEI, accounted for as additional purchase price. Included in the
Consolidated Balance Sheet at December 31, 1999 is goodwill of $136,290 related
to this acquisition.
F-9
<PAGE> 46
JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. INVENTORIES
At December 31, 1999 and 1998, inventories consisted of the following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Raw materials, components and sub-assemblies ....... $4,096,529 $3,127,225
Work-in-process .................................... 1,711,753 2,068,309
Finished goods ..................................... 445,054 653,402
---------- ----------
$6,253,336 $5,848,936
========== ==========
</TABLE>
5. ACCOUNTS RECEIVABLE
At December 31, 1999 and 1998, accounts receivable consisted of the
following:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Trade ........................................ $ 3,198,806 $ 2,762,563
Trade - unbilled ............................. 692,218 245,013
U.S. Government - billed ..................... 1,074,641 3,988,231
U.S. Government - unbilled ................... 2,184,963 814,524
------------ ------------
7,150,628 7,810,331
Less - Reserve for doubtful accounts ......... (71,193) (43,370)
------------ ------------
$ 7,079,435 $ 7,766,961
============ ============
</TABLE>
All unbilled receivables at December 31, 1999 and 1998, 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, 1999 and 1998, property and equipment consisted of the
following:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Equipment and machinery ....................... $ 5,310,573 $ 5,003,891
Furniture and fixtures ........................ 609,130 609,659
Leasehold improvements ........................ 130,062 106,462
------------ ------------
6,049,765 5,720,012
Less-Accumulated depreciation ................. (3,719,102) (3,009,313)
------------ ------------
$ 2,330,663 $ 2,710,699
============ ============
</TABLE>
F-10
<PAGE> 47
JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES
The Company leases office facilities under operating leases. Minimum
future rental payments as of December 31, 1999, are as follows:
<TABLE>
<CAPTION>
Operating Leases
----------------
<S> <C>
2000............................................................ $ 374,658
2001............................................................ 433,968
2002............................................................ 365,572
2003............................................................ 140,630
2004............................................................ 123,000
----------
$1,437,828
==========
</TABLE>
Related rent expense was $491,159, $380,748 and $363,339 for the years
ended December 31, 1999, 1998 and 1997, respectively.
The Company is a party to a financial services agreement with Sands
Brothers & Co. Inc., ("Sands") which provides for the provision of certain
financial services by Sands. Although the Company does not believe its publicly
traded Warrant exercise program was covered by this agreement, it offered Sands
the right to act as Warrant solicitation agent. When Sands failed to perform
as such more than one month after being asked, the Company retained another
investment banking firm to do so. In February 2000, Sands asserted that it was
entitled to up to 10% of the proceeds from the exercise of the Company's
publicly traded Warrants, which is twice the fee provided for in the Company's
original warrant solicitation agreement. In March 2000, the Company filed a
Declaratory Relief Action in the U.S. District Court in San Diego which seeks a
judicial interpretation that the financial services agreement with Sands does
not apply to the Company's Warrant exercise program. The Company believes
any claim to a fee by Sands is without merit and intends to vigorously contest
any such claims.
The Company has entered into employment agreements with several of its
key employees.
8. NOTES PAYABLE
Notes payable as of December 31, 1999 and 1998, was as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<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 June 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.
The balance was paid in full in
March 2000, however, the availability of the line is still in effect................ $4,990,000 $2,100,000
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............................................................ 84,362 218,741
</TABLE>
F-11
<PAGE> 48
JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<S> <C> <C>
Note payable, due in monthly principal installments of $10,417 plus interest at
prime plus .5% through May 2002, secured by all assets of the Company................ $ 322,913 $ 447,917
Note payable, due in monthly principal installments plus interest at prime
starting June, 2000 through May 2004, secured by certain assets of the Company........ 350,000 187,462
Capital leases ...................................................................... -- 131,115
Other notes payable.................................................................. 1,128 84,102
---------- ----------
5,748,403 3,169,337
Less: Current portion................................................................ (5,195,490) (2,693,975)
---------- ----------
$ 552,913 $ 475,362
========== ==========
</TABLE>
The weighted average interest rate on the loan with Comerica
Bank-California was 7.38% and 8.6% for 1999 and 1998, respectively. The maximum
amount outstanding was $4,990,000 and $3,000,000 and the average amount
outstanding was $2,290,417 and $943,750 during 1999 and 1998, respectively.
Interest paid for the years ended December 31, 1999, 1998 and 1997 was
$219,518, $160,966 and $162,488, respectively.
Future principal payments on long-term debt are as follows:
<TABLE>
<S> <C>
2000............................................................ $ 120,000
2001............................................................ 196,410
2002............................................................ 166,284
2003............................................................ 90,966
2004............................................................ 99,253
--------
Total $ 672,913
========
</TABLE>
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. In February 2000, the Board of Directors of the Company
agreed to forgive an interest bearing loan in the amount of $88,344 made to Dr.
Martinez in 1993.
10. INCOME TAXES
For the year ended December 31, 1997, the Company has recorded a tax
benefit of $345,000, 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, 1999, 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
2014............................................................ 1,566,000
-----------
Total........................................................... $27,739,000
===========
</TABLE>
F-12
<PAGE> 49
JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company has approximately $2,064,000 of temporary differences that
will offset future taxable income subject to the change in ownership limitations
discussed below.
Realization of future tax benefits from utilization of the net
operating loss carryforwards for income tax purposes is limited by the change in
ownership (as defined for Federal Income Tax Reporting Purposes) as a result of
the Company's initial public offering in May 1990. As a result of additional
financings in 1992 and 1993, 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 $4,537,000 of Company and acquired company loss
carryforwards. Approximately $23,202,000 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,
1999 and 1998 are presented below:
DEFERRED TAX ASSETS:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Net operating loss carryforwards .............. $ 9,431,000 $ 8,899,000
Losses from equity and other investments ...... 492,000 492,000
Other ......................................... 209,000 16,000
----------- -----------
Total gross deferred tax assets ...... 10,132,000 9,407,000
Less valuation reserve ............... (9,612,000) (8,887,000)
----------- -----------
Net deferred tax asset ............... $ 520,000 $ 520,000
=========== ===========
</TABLE>
The valuation reserve as of December 31, 1999 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 1999, 1998 and 1997 varied from the
statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate ................ (34)% 34% 34%
State income tax ................................. (6) 6 6
Permanent differences ............................ 1 2 1
Benefit recorded due to net operating loss
carryforward position .......................... 39 (38) (65)
---- ---- ----
-- 4% (24)%
==== ==== ====
</TABLE>
F-13
<PAGE> 50
JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. STOCKHOLDERS' EQUITY
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.
During the year ended December 31, 1999, the Company received net
proceeds of approximately $18,450 from the exercise of warrants and options into
approximately 38,464 shares of common stock. Subsequent to December 31, 1999,
the Company received net proceeds of approximately $14.8 million from the
exercise of warrants and options into approximately 3.8 million shares of common
stock.
12. STOCK-BASED COMPENSATION PLANS
The Company has five stock option or warrant plans, the 1988 Stock
Option Plan (the "1988 Plan"), the 1991 Stock Option Plan (the "1991 Plan"), the
1999 Stock Option Plan (the "1999 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 SFAS No. 123 the Company's net (loss) income and (loss) earnings per share
would have been the following pro forma amounts:
<TABLE>
<CAPTION>
1999 1998 1997
----------- -------- ----------
<S> <C> <C> <C> <C>
Net Income (Loss): As Reported $(2,248,994) $756,841 $1,795,285
Pro Forma (2,488,380) 403,764 1,492,559
Basic EPS: As Reported (.12) .04 .11
Pro Forma (.14) .02 .09
Diluted EPS: As Reported (.12) .04 .10
Pro Forma (.14) .02 .08
</TABLE>
Because the SFAS 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that expected in future years.
The Company 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, 900,000 shares under the 1999 Plan,
806,637 shares under the Anti-Dilution Plan, and 450,000 shares under the JPSI
Plan. As of December 31, 1999, the Company has granted options for 99,168 shares
under the 1988 Plan, 1,479,480 options under the 1991 Plan, 20,000 options under
the 1999 Plan, 424,246 warrants under the Anti-Dilution Plan, and 387,500
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.
F-14
<PAGE> 51
JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
A summary of the status of the total number of stock options or
warrants pursuant to all five of the above "plans" as of December 31, 1997, 1998
and 1999 and changes during the years then ended is presented in the table and
narrative below:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- ----------------------- ----------------------
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 1,920,605 $2.66 1,589,752 $2.54 1,319,369 $2.69
Granted 383,797 1.70 521,067 2.78 587,500 2.67
Exercised (9,500) 0.82 (95,214) 0.90 (70,764) 2.27
Forfeited (192,551) 2.67 (95,000) 3.18 (246,353) 3.69
--------- --------- ---------
Outstanding at end of year 2,102,351 2.70 1,920,605 2.66 1,589,752 2.54
--------- --------- ---------
Exercisable at end of year 729,479 533,294 375,071
Weighted average fair value
of options or warrants
granted 1.70 2.78 2.51
</TABLE>
101,556 of the 2,102,351 options and warrants outstanding at December
31, 1999 have exercise prices between $.53 and $1.09 with a weighted average
exercise price of $.93 and a weighted average remaining contractual life of 5.8
years. All of these options and warrants are exercisable. 969,259 of the options
and warrants outstanding at December 31, 1999 have exercise prices between $1.55
and $2.94 with a weighted average exercise price of $2.38 and a weighted average
remaining contractual life of 8.2 years. 412,802 of these options and warrants
are exercisable. 886,536 of the options and warrants at December 31, 1999 have
an exercise price of $3.00 with a weighted average exercise price of $3.00 and a
weighted average remaining contractual life of 3.8 years. 184,790 of these
options and warrants are exercisable. 145,000 of the options and warrants
outstanding at December 31, 1999 have exercise prices between $3.13 and $4.56
with a weighted average exercise price of $4.19 and a weighted average remaining
contractual life of 8.1 years. 30,331 of these options and warrants are
exercisable.
The fair value of each option and warrant grant is estimated on the date
of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 1997, 1998 and 1999: risk-free
interest rate of approximately 6 percent; expected dividend yields of 0 percent,
expected lives of 6 years, and expected volatility of 75 percent.
13. EARNINGS PER SHARE
In 1997, the Company adopted SFAS No. 128, "Earnings per Share". Basic
earnings per common share was computed by dividing net (loss) income by the
weighted average number of shares of common stock outstanding during the year.
Diluted (loss) earnings per common share for the years ended December 31,
1999, 1998 and 1997, was computed by dividing net (loss) income by the sum
of the weighted average number of shares of common stock (18,045,914, 18,046,860
and 17,065,860 for 1999, 1998 and 1997, respectively) plus dilutive employee
stock options and warrants (130,260 and 314,276 for 1998 and 1997, respectively)
and other dilutive warrants and options (935,514 and 1,220,983 for 1998 and
1997, respectively).
F-15
<PAGE> 52
JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
14. SEGMENT INFORMATION
In 1998, the Company adopted SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information", which required the Company to report
operating information by segment. In the Company's Form 10-K for the year ended
December 31, 1998, three segments were reported. These three segments were the
Precision Systems Segment, the Contract Research and Development Segment and the
Semiconductor Products and Processes Segment.
During 1999, the Company combined the Precision Systems and Contract
Research and Development Segments to form the Microelectronics Equipment
Segment. The Company's two Segments offer varying products and services that are
affected by different economic conditions. Further, the Segments reflect the
manner in which the Company now views the operating segments.
Microelectronics Equipment Segment: This segment includes the
manufacture, marketing and sale of the Company's measurement and inspection
systems, positioning and motion control systems and biotech processing systems.
This segment also includes the development of the Company's microtechnology
emerging products, including: next generation X-ray lithography sources and
other non-lithography X-ray systems for 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 Segment: Using advanced design and
engineering tools and established foundry relationships with semiconductor
producers, this "fabless" 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 services related to the upgrade and enhancement of a CMOS integrated
circuit fabrication facility and related wafer processing technology for the
low-volume and prototype manufacture of electronic circuits used in operational
military systems.
The accounting policies of the reportable segments are the same as
those described in Note 2. The Company evaluates the performance of its
operating segments primarily based on revenues and operating income. Corporate
costs are generally allocated to the segments.
Segment information for the years 1999, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
Semiconductor
Microelectronics Products &
Equipment Processes Corporate Total
---------------- ------------- ---------- ------------
<S> <C> <C> <C> <C>
1999:
Revenues $ 16,464,982 $ 8,302,758 $ -- $ 24,767,740
Operating income (loss) (2,459,721) 314,617 -- (2,145,104)
Total assets 14,782,832 3,592,933 2,298,003 20,673,768
Capital expenditures 531,872 646,429 8,360 1,186,661
Depreciation and
amortization 744,622 271,630 18,423 1,034,675
</TABLE>
F-16
<PAGE> 53
JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1998:
Revenues $ 21,608,708 $ 2,952,126 $ -- $ 24,560,834
Operating income 771,343 136,966 -- 908,309
Intersegment cost
reimbursement 688,144 -- -- 688,144
Total assets 13,592,972 4,895,127 4,386,734 22,874,833
Capital expenditures 664,229 113,492 25,777 803,498
Depreciation and
amortization 631,617 124,258 56,849 812,724
1997:
Revenues 21,183,834 277,793 -- 21,461,627
Operating income
(loss) 1,588,855 (61,913) -- 1,526,942
Total assets 11,411,434 1,924,309 3,933,135 17,268,878
Capital expenditures 516,557 234,681 12,459 763,697
Depreciation and
amortization 447,485 189,184 63,975 700,644
</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.
Within the Microelectronics Equipment segment, the Measurement and
Inspection Systems product line accounted for 19 percent and 44 percent of the
Company's revenues in 1999 and 1998, respectively. In addition, the Lithography
Systems for Bio-Medical Applications product line accounted for 13 percent and 3
percent of the Company's revenues in 1999 and 1998, respectively. Within the
Semiconductor Products and Processes segment, the Technology Services product
line accounted for 33 percent and 8 percent of the Company's revenues in 1999
and 1998, respectively.
SIGNIFICANT CUSTOMERS
Sales to the United States Government aggregated $14,284,957,
$8,220,197 and $2,062,131 in 1999, 1998 and 1997, respectively. Within the
Microelectronics Equipment segment, sales to one customer totaled $2,555,500,
$7,279,778 and $8,285,304 in 1999, 1998 and 1997, respectively. In addition, in
1999, sales to another customer totaled $3,324,580. In January 2000, the Company
received a $1.8 million order from this customer. However, the Company
understands that the customer is considering its future needs for JMAR's current
alignment systems, as well as the need to transition to alternative technologies
for the manufacture of biochips. As a result, there can be no assurance that
the Company will receive any further significant orders for its biochip
alignment systems from this customer.
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>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
United States $21,954,053 $16,605,291 $12,523,252
Mexico 770,623 4,723,499 3,619,195
Malaysia 843,399 1,801,438 1,830,602
Costa Rica 11,809 522,015 263,059
Hong Kong -- -- 1,548,198
Others 1,187,856 908,591 1,677,321
----------- ----------- -----------
Total $24,767,740 $24,560,834 $21,461,627
=========== =========== ===========
</TABLE>
All assets of the Company are located in the United States.
15. Subsequent Events (Unaudited)
Subsequent to December 31, 1999, the Company received net proceeds of
approximately $14.8 million from the exercise of approximately 3.8 million
outstanding options and warrants, including its publicly traded warrants. Of
these funds, $4,990,000 were used to pay down the Company's working capital line
of credit (the "Line").
The following unaudited performa condensed consolidated balance
sheets give effect to the exercise of the warrants and options and receipt of
the proceeds and payoff of the Line as if they had occurred on December 31,
1999.
<TABLE>
<CAPTION>
in (000's)
----------
Historical Pro Forma
---------- -----------
ASSETS
------
<S> <C> <C>
Cash and cash equivalents ........... $2,323 $12,133
Other current assets................. 14,267 14,267
Other assets......................... 4,084 4,084
---------- -----------
TOTAL ASSETS......................... $20,674 $30,484
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Line of credit....................... $4,990 $ -
Other current liabilities............ $4,131 4,131
Long-term liabilities................ 643 643
Stockholders' equity................. 10,909 25,710
---------- -----------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY ................ $20,674 $30,484
========== ===========
</TABLE>
16. Quarterly Financial Information (Unaudited)
The following is a summary of unaudited quarterly results for the years
ended December 31, 1999 and 1998.
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended Net (Loss)
December 31, 1999 Revenues Gross Profit Net (Loss) per Share
- ----------------- -------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
December 31 $6,625,794 $1,810,461 (1) $(952,739) (2) $(0.05)
September 30 4,677,464 1,610,233 (438,897) (0.02)
June 30 6,769,017 1,968,411 (263,953) (0.01)
March 31 6,695,465 1,662,889 (593,405) (0.03)
</TABLE>
<TABLE>
<CAPTION>
Year Ended Net Income
December 31, 1998 Revenues Gross Profit Net Income per Share
- ----------------- -------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
December 31 $8,397,860 $2,927,247 $ 137,700 $ 0.01
September 30 5,799,458 2,352,661 301,937 0.02
June 30 6,063,437 2,245,167 299,121 0.02
March 31 4,300,079 1,662,816 18,083 0.00
</TABLE>
(1) After inventory reserve of $389,000.
(2) After inventory reserve of $389,000, employee termination accrual of
$175,000 and asset writedown of $88,344.
F-17
<PAGE> 54
SIGNATURES
Pursuant to the requirement of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
JMAR TECHNOLOGIES, INC.
Date: March 29, 2000 By: /s/ John S. Martinez
---------------------------------------
John S. Martinez
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ John S. Martinez Chairman of the Board, March 29, 2000
- ---------------------------------- Chief Executive Officer and Director
John S. Martinez
/s/ Dennis E. Valentine Chief Financial Officer and March 29, 2000
- ---------------------------------- Chief Accounting Officer
Dennis E. Valentine
/s/ James H. Banister, Jr. Director March 26, 2000
- ----------------------------------
James H. Banister, Jr.
/s/ C. Neil Beer Director March 22, 2000
- ----------------------------------
C. Neil Beer
/s/ Vernon H. Blackman Director March 23, 2000
- ----------------------------------
Vernon H. Blackman
/s/ Barry Ressler Director March 23, 2000
- ----------------------------------
Barry Ressler
</TABLE>
<PAGE> 55
SCHEDULE II
JMAR TECHNOLOGIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Additions
-----------------------------------------------------
Balance at Charged to
Beginning Costs and Balance at
Description of Year Expenses Other Deductions End of Year
- ----------- ---------- ---------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
For the year ended December 31, 1999:
Warranty reserve ......................... $ -- $ -- $ -- $ -- $ --
Reserve for inventory obsolescence ....... 181,157 389,000 -- -- 570,157
Allowance for doubtful accounts .......... 43,370 27,823 -- -- 71,193
-------- -------- -------- -------- --------
For the year ended December 31, 1998:
Warranty reserve ......................... $ 27,071 $ -- $ -- $(27,071) $ --
Reserve for inventory obsolescence ....... 181,157 -- -- -- 181,157
Allowance for doubtful accounts .......... 35,547 27,823 -- (20,000) 43,370
-------- -------- -------- -------- --------
For the year ended December 31, 1997:
Warranty reserve ......................... $ 14,800 $ 27,000 $(14,729) $ -- $ 27,071
Reserve for inventory obsolescence ....... 118,976 55,000 7,181 -- 181,157
Allowance for doubtful accounts .......... 17,230 20,000 (1,683) -- 35,547
-------- -------- -------- -------- --------
</TABLE>
S-1
<PAGE> 1
EXHIBIT 10.7
REVOLVING CREDIT
LOAN & SECURITY AGREEMENT
(ACCOUNTS AND INVENTORY)
- --------------------------------------------------------------------------------
OBLIGOR # NOTE # AGREEMENT DATE
3954357024 December 20, 1999
- --------------------------------------------------------------------------------
CREDIT LIMIT INTEREST RATE OFFICER NO./INITIALS
$5,000,000.00 Base Rate+ 0.000% 48234, Brock Mullins
- --------------------------------------------------------------------------------
THIS AGREEMENT is entered into on December 20, 1999, between Comerica
Bank-California ("Bank") as secured party, whose Headquarter Office is 333
West Santa Clara Street, San Jose, CA and JMAR Technologies, Inc. ("Borrower"),
a Corporation whose sole place of business (if it has only one), chief
executive office (If it has more than one place of business) or residence (if
an individual) is located at 3956 Sorrento Valley Blvd., San Diego, CA. The
parties agree as follows:
1. DEFINITIONS
1.1 "Agreement" as used in this Agreement means and includes this
Revolving Credit Loan & Security Agreement (Accounts and Inventory), any
concurrent or subsequent rider to this Revolving Credit Loan & Security
Agreement (Accounts and Inventory) and any extensions, supplements,
amendments or modifications to this Revolving Credit Loan & Security
Agreement (Accounts and Inventory) and to any such rider.
1.2 "Bank Expenses" as used in this Agreement means and includes:
all costs or expenses required to be paid by Borrower under this Agreement
which are paid or advanced by Bank; taxes and insurance premiums of every
nature and kind of Borrower paid by Bank; filing, recording, publication
and search fees, appraiser fees, auditor fees and costs, and title
insurance premiums paid or incurred by Bank in connection with Bank's
transactions with Borrower; costs and expenses incurred by Bank in
collecting the Receivables (with or without suit) to correct any default
or enforce any provision of this Agreement, or in gaining possession of,
maintaining, handling, preserving, storing, shipping, selling, disposing
of, preparing for sale and/or advertising to sell the Collateral, whether
or not a sale is consummated; costs and expenses of suit incurred by Bank
in enforcing or defending this Agreement or any portion hereof, including,
but not limited to, expenses incurred by Bank in attempting to obtain
relief from any stay, restraining order, injunction or similar process
which prohibits Bank from exercising any of its rights or remedies; and
attorneys' fees and expenses incurred by Bank in advising, structuring,
drafting, reviewing, amending, terminating, enforcing, defending or
concerning this Agreement, or any portion hereof or any agreement related
hereto, whether or not suit is brought. Bank Expenses shall include Bank's
in-house legal charges at reasonable rates.
1.3 "Base Rate" as used in this Agreement means that variable rate
of interest so announced by Bank at its headquarters office in San Jose,
California as its "Base Rate" from time to time and which serves as the
basis upon which effective rates of interest are calculated for those
loans making reference thereto. See Addendum B attached.
1.4 "Borrower's Books" as used in this Agreement means and includes
all of the Borrower's books and records including but not limited to:
minute books; ledgers; records indicating, summarizing or evidencing
Borrower's assets, liabilities, Receivables, business operations or
financial condition, and all information relating thereto, computer
programs; computer disk or tape files; computer printouts; computer runs;
and other computer prepared information and equipment of any kind.
1.5 "Borrowing Base" as used in this Agreement means the sum of:
(1) Eighty percent (80.000%) of the net amount of Eligible Accounts after
deducting therefrom all payments, adjustments and credits applicable
thereto ("Accounts Receivable Borrowing Base"); and (2) the amount, if
any, of the advances against inventory agreed to be made pursuant to any
Inventory Rider ("Inventory Borrowing Base"), or other rider, amendment or
modification to this Agreement, that may now or hereafter be entered into
by Bank and Borrower. See Addendum A attached.
1.6 "Cash Flow" as used in this Agreement means, for any applicable
period of determination, the Net Income (after deduction for income taxes
and other taxes of such person determined by reference to income or
profits of such person) for such period, plus, to the extent deducted in
computation of such Net Income, the amount of depreciation and
amortization expense and the amount of deferred tax liability during such
period, all as determined in accordance with GAAP. The applicable period
of determination will be N/A, beginning with the period from _____________
__________ to __________________________.
1.7 "Collateral" as used in this Agreement means and includes each
and all of the following: the Receivables; the Intangibles; the negotiable
collateral, the Inventory; all money, deposit accounts and all other
assets of Borrower in which Bank receives a security interest or which
hereafter come into the possession, custody or control of Bank; and
the proceeds of any of the foregoing, including, but not limited to,
proceeds of insurance covering the collateral and any and all Receivables,
Intangibles, negotiable collateral, Inventory, equipment, money, deposit
accounts or other tangible and intangible property of borrower resulting
from the sale or other disposition of the collateral, and the proceeds
thereof. Notwithstanding anything to the contrary contained herein,
collateral shall not include any waste or other materials which have been
or may be designated as toxic or hazardous by Bank.
1.8 "Credit" as used in this Agreement means all Obligations, except
those obligations arising pursuant to any other separate contract,
instrument, note, or other separate agreement which, by its terms,
provides for a specified interest rate and term.
1.
<PAGE> 2
REVOLVING CREDIT
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
1.9 "Current Assets" as used in this Agreement means, as of any
applicable date of determination, all cash, non-affiliated customer
receivables, United States government securities, claims against the United
States government, and inventories.
1.10 "Current Liabilities" as used in this Agreement means, as of any
applicable date of determination, (i) all liabilities of a person that should
be classified as current in accordance with GAAP, including without limitation
any portion of the principal of the Indebtedness classified as current, plus
(ii) to the extent not otherwise included, all liabilities of the Borrower to
any of its affiliates whether or not classified as current in accordance with
GAAP.
1.11 "Daily Balance" as used in this Agreement means the amount determined
by taking the amount of the Credit owed at the beginning of a given day, adding
any new Credit advanced or incurred on such date, and subtracting any payments
or collections which are deemed to be paid and are applied by Bank in reduction
of the Credit on that date under the provisions of this Agreement.
1.12 "Eligible Accounts" as used in this Agreement means and includes those
accounts of Borrower which are due and payable within Thirty (30) days, or less,
from the date of invoice, have been validly assigned to Bank and strictly comply
with all of Borrower's warranties and representations to Bank; but Eligible
Accounts shall not include the following: (a) accounts with respect to which the
account debtor is an officer, employee, partner, joint venturer or agent of
Borrower; (b) accounts with respect to which goods are placed on consignment,
guaranteed sale or other terms by reason of which the payment by the account
debtor may be conditional; (c) accounts with respect to which the account debtor
is not a resident of the United States; (d) accounts with respect to which the
account debtor is the United States or any department, agency or instrumentality
of the United States; (e) accounts with respect to which the account debtor is
any State of the United States or any city, county, town, municipality or
division thereof; (f) accounts with respect to which the account debtor is a
subsidiary of, related to, affiliated or has common shareholders, officers or
directors with Borrower; (g) accounts with respect to which Borrower is or may
become liable to the account debtor for goods sold or services rendered by the
account debtor to Borrower; (h) accounts not paid by an account debtor within
ninety (90) days from the date of the invoice; (i) accounts with respect to
which account debtors dispute liability or make any claim, or have any defense,
crossclaim, counterclaim, or offset; (j) accounts with respect to which any
Insolvency Proceeding is filed by or against the account debtor, or if account
debtor becomes insolvent, fails or goes out of business; and (k) accounts owed
by any single account debtor which exceed twenty percent (20%) of all of the
Eligible Accounts; and (l) accounts with a particular account debtor on which
over twenty-five percent (25%) of the aggregate amount owing is greater than
ninety (90) days from the date of the invoice. See Addendum A attached.
1.13 "Event of Default" as used in this Agreement means those events
described in Section 7 contained herein below.
1.14 "Fixed Charges" as used in this Agreement means and includes, for any
applicable period of determination, the sum, without duplication, of (a) all
interest paid or payable during such period by a person on debt of such person,
plus (b) all payments of principal or other sums paid or payable during such
period by such person with respect to debt of such person having a final
maturity more than one year from the date of creation of such debt, plus (c) all
debt discount and expense amortized or required to be amortized during such
period by such person, plus (d) the maximum amount of all rents and other
payments paid or required to be paid by such person during such period under any
lease or other contract or arrangement providing for use of real or personal
property in respect of which such person is obligated as a lessee, use or
obligor, plus (e) all dividends and other distributions paid or payable by such
person or otherwise accumulating during such period on any capital stock of such
person, plus (f) all loans or other advances made by such person during such
period to any Affiliate of such person. The applicable period of determination
will be N/A, beginning with the period from ____________________ to
___________________.
1.15 "GAAP" as used in this Agreement means as of any applicable period,
generally accepted accounting principles in effect during such period.
1.16 "Insolvency Proceeding" as used in this Agreement means and includes
any proceeding or case commenced by or against the Borrower, or any guarantor
of Borrower's Obligations, or any of borrower's account debtors, under any
provisions of the Bankruptcy Code, as amended, or any other bankruptcy or
insolvency law, including but not limited to assignments for the benefit of
creditors, formal or informal moratoriums, composition or extensions with
some or all creditors, any proceeding seeking a reorganization, arrangement or
any other relief under the Bankruptcy code, as amended, or any other bankruptcy
or insolvency law.
1.17 "Intangibles" as used in this Agreement means and includes all of
Borrower's present and future general Intangibles and other personal property
(including, without limitation, any and all rights in any legal proceedings,
goodwill, patents, trade names, copyrights, trademarks, blueprints, drawings,
purchase orders, computer programs, computer disks, computer tapes, literature,
reports, catalogs and deposit accounts) other than goods and Receivables, as
well as Borrower's Books relating to any of the foregoing.
1.18 "Inventory" as used in this Agreement means and includes all present
and future inventory in which Borrower has any interest, including, but not
limited to, goods held by Borrower for sale or lease or to be furnished under
a contract of service and all of Borrower's present and future raw materials,
work in process, finished goods, advertising materials, and packing and
shipping materials, wherever located and any documents of title representing
any of the above, and any equipment, fixtures or other property used in the
storing, moving, preserving, identifying, accounting for and shipping or
preparing for the shipping of inventory, and any and all other items hereafter
acquired by Borrower by way of substitution,
2.
<PAGE> 3
REVOLVING CREDIT
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
replacement, return, repossession or otherwise, and all additions and
accessions thereto, and the resulting product or mass, and any documents of
title respecting any of the above.
1.19 "Net Income" as used in this Agreement means the net income (or
loss) of a person for any period determined in accordance with GAAP but
excluding in any event:
(a) any gains or losses on the sale or other disposition, not in the
ordinary course of business, of investments or fixed or capital assets,
and any taxes on the excluded gains and any tax deductions or credits on
account on any excluded losses; and
1.20 "Judicial Officer or Assignee" as used in this Agreement means and
includes any trustee, receiver, controller, custodian, assignee for the benefit
of creditors or any other person or entity having powers or duties like or
similar to the powers and duties of trustee, receiver, controller, custodian or
assignee for the benefit of creditors.
1.21 "Obligations" as used in this Agreement means and includes any and
all loans, advances, overdrafts, debts, liabilities (including, without
limitation, any and all amounts charged to Borrower's account pursuant to any
agreement authorizing Bank to charge Borrower's account), obligations, lease
payments, guaranties, covenants and duties owing by Borrower to Bank of any
kind and description whether advanced pursuant to or evidenced by this
Agreement; by any note or other instrument; or by any other agreement between
Bank and Borrower and whether or not for the payment of money, whether direct
or indirect, absolute or contingent, due or to become due, now existing or
hereafter arising, and including, without limitation, any debt, liability owing
from Borrower to others which Bank may have obtained by assignment,
participation, purchase or otherwise, and further including, without
limitation, all interest not paid when due and all Bank Expenses which Borrower
is required to pay or reimburse by this Agreement, by law, or otherwise.
1.22 "Person" or "person" as used in this Agreement means and includes
any individual, corporation, partnership, joint venture, association, trust,
unincorporated association, joint stock company, government, municipality,
political subdivision or agency, or other entity.
1.23 "Receivables" as used in this Agreement means and includes all
presently existing and hereafter arising accounts, instruments, documents,
chattel paper, general intangibles, all other forms of obligations owing to
Borrower, all of Borrower's rights in, to and under all purchase orders
heretofore or hereafter received, all moneys due to Borrower under all
contracts or agreements (whether or not yet earned or due), all merchandise
returned to or reclaimed by Borrower and the Borrower's books (except minute
books) relating to any of the foregoing.
1.24 "Subordinated Debt" as used in this Agreement means indebtedness of
the Borrower to third parties which has been subordinated to the Obligations
pursuant to a subordination agreement in form and content satisfactory to the
Bank.
1.25 "Subordination Agreement" as used in this Agreement means a
subordination agreement in form satisfactory to Bank making all present and
future indebtedness of the Borrower to N/A subordinate to the Obligations.
1.26 "Tangible Effective Net Worth" as used in this Agreement means net
worth as determined in accordance with GAAP consistently applied, increased by
Subordinated Debt, if any, and decreased by the following: patents, licenses,
goodwill, subscription lists, organization expenses, trade receivables
converted to notes, money due from affiliates (including officers, directors,
subsidiaries and commonly held companies).
1.27 "Tangible Net Worth" as used in this Agreement means, as of any
applicable date of determination, the excess of
a. the net book value of all assets of a person (other than patents,
patent rights, trademarks, trade names, franchises, copyrights,
licenses, goodwill, and similar intangible assets) after all appropriate
deductions in accordance with GAAP (including, without limitation,
reserves for doubtful receivables, obsolescence, depreciation and
amortization), over
b. all Debt of such person.
1.28 "Total Liabilities" as used in this Agreement means the total of
all items of indebtedness, obligation or liability which, in accordance with
GAAP consistently applied, would be included in determining the total
liabilities of the Borrower as of the date Total Liabilities is to be
determined, including without limitation (a) all obligations secured by any
mortgage, pledge, security interest or other lien on property owned or
acquired, whether or not the obligations secured thereby shall have been
assumed; (b) all obligations which are capitalized lease obligations; and (c)
all guaranties, endorsements or other contingent or surety obligations with
respect to the indebtedness of others, whether or not reflected on the balance
sheets of the Borrower, including any obligation to furnish funds, directly or
indirectly through the purchase of goods, supplies, services, or by way of
stock purchase, capital contribution, advance or loan or any obligation to
enter into a contract for any of the foregoing.
1.29 "Working Capital" as used in this Agreement means, as of any
applicable date of determination, Current Assets less Current Liabilities.
3.
<PAGE> 4
REVOLVING CREDIT
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
1.30 Any and all terms used in this Agreement shall be construed and
defined in accordance with the meaning and definition of such terms under and
pursuant to the California Uniform Commercial Code (hereinafter referred to as
the "Code") as amended.
2. LOAN AND TERMS OF PAYMENT
For value received, Borrower promises to pay to the order of Bank such
amount, as provided for below, together with interest, as provided for
below.
2.1 Upon the request of Borrower, made at any time and from time to time
during the term hereof, and so long as no Event of Default has occurred, Bank
shall lend to Borrower an amount equal to the Borrowing Base; provided,
however, that in no event shall Bank be obligated to make advances to Borrower
under this Section 2.1 whenever the Daily Balance exceeds, at any time, either
the Borrowing Base or the sum of Five Million and no/100 ($5,000,000.00), such
amount being referred to herein as an "Overadvance".
2.2 Except as hereinbelow provided, the Credit shall bear interest, on
the Daily Balance owing, at a rate of Zero (0.000) percentage points per annum
above the Base Rate (the "Rate"). The Credit shall bear interest, from and after
the occurrence of an Event of Default and without constituting a waiver of any
such Event of Default, on the Daily Balance owing, at a rate three (3)
percentage points per annum above the Rate. All interest chargeable under this
Agreement that is based upon a per annum calculation shall be computed on the
basis of a three hundred sixty (360) day year for actual days elapsed.
The Base Rent as of the date of this Agreement is Eight and 5/10 (8.500%)
per annum. In the event that the Base Rent announced is, from time to time
hereafter changed, adjustment in the Rate shall be made and based on the Base
Rate in effect on the date of such change. The Rate, as adjusted, shall apply
to the Credit until the Base Rate is adjusted again. The minimum interest
payable by the Borrower under this Agreement shall in no event be less than N/A
per month. All interest payable by Borrower under the Credit shall be due and
payable on the first day of each calendar month during the term of this
Agreement. A late payment charge equal to 5% of each late payment may be
charged on any payment not received by the Bank within 10 calendar days after
the payment due date, but acceptance of payment of this charge shall not waive
any Default under this Agreement.
2.3 Without affecting Borrower's obligation to repay immediately any
Overadvance in accordance with Section 2.1 hereof, all Overadvances shall bear
additional interest on the amount thereof at a rate equal to N/A (N/A%)
percentage points per month in excess of the interest rate set forth in Section
2.2, from the date incurred and for each month thereafter, until repaid in full.
3. TERM.
3.1 This Agreement shall remain in full force and effect until June 1,
2000, or until terminated by notice by Borrower. Notice of such termination by
Borrower shall be effectuated by mailing of a registered or certified letter not
less than thirty (30) days prior to the effective date of such termination,
addressed to the Bank at the address set forth herein and the termination shall
be effective as of the date so fixed in such notice. Notwithstanding the
foregoing, should Borrower be in default of one or more of the provisions of
this Agreement, Bank may terminate this Agreement at any time without notice.
Notwithstanding the foregoing, should either Bank or Borrower become insolvent
or unable to meet its debts as they mature, or fail, suspend, or go out of
business, the other party shall have the right to terminate this Agreement at
any time without notice. On the date of termination all Obligations shall become
immediately due and payable without notice or demand; no notice of termination
by Borrower shall be effective until Borrower shall have paid all Obligations to
Bank in full. Notwithstanding termination, until all Obligations have been fully
satisfied, Bank shall retain its security interest in all existing Collateral
and Collateral arising thereafter, and Borrower shall continue to perform all of
its Obligations.
3.2 After termination and when Bank has received payment in full of
Borrower's Obligations to Bank, Bank shall reassign to Borrower all Collateral
held by Bank, and shall execute a termination of all security agreements and
security interests given by Borrower to Bank, upon the execution and delivery
of mutual general releases.
4. CREATION OF SECURITY INTEREST
4.1 Borrower hereby grants to Bank a continuing security interest in all
presently existing and hereafter arising Collateral in order to secure prompt
repayment of any and all Obligations owed by Borrower to Bank and in order to
secure prompt performance by Borrower of each and all of its covenants and
Obligations under this Agreement and otherwise created. Bank's security
interest in the Collateral shall attach to all Collateral without further act
on the part of Bank or Borrower. In the event that any Collateral, including
proceeds, is evidenced by or consists of a letter of credit, advice of credit,
instrument, money, negotiable documents, chattel paper or similar property
(collectively, "Negotiable Collateral"), Borrower shall, immediately upon
receipt thereof, endorse and assign such Negotiable Collateral over to Bank and
deliver actual physical possession of the Negotiable Collateral to Bank.
4.2 Bank's security interest in Receivables shall attach to all
Receivables without further act on the part of Bank or Borrower. Upon request
from Bank, Borrower shall provide Bank with schedules describing all
Receivables created or acquired by Borrower (including without limitation agings
listing the names and addresses of, and amounts owing by date by account
debtors), and shall execute and deliver written assignments of all Receivables
to Bank all in a form acceptable to Bank, provided, however, Borrower's failure
to execute and deliver such schedules and/or assignments shall not affect or
limit Bank's security interest and other rights in and to the Receivables.
Together with each schedule,
4.
<PAGE> 5
REVOLVING CREDIT
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
Borrower shall furnish Bank with copies of Borrower's customers' invoices
or the equivalent, and original shipping or delivery receipts for all
merchandise sold, and Borrower warrants the genuineness thereof. Bank or
Bank's designee may notify customers or account debtors of collection costs
and expenses to Borrower's account but, unless and until Bank does so or
gives Borrower other written instructions, Borrower shall collect all
Receivables for Bank, receive in trust all payments thereon as Bank's
trustee, and, if so requested to do so from Bank, Borrower shall
immediately deliver said payments to Bank in their original form as
received from the account debtor and all letters of credit, advices of
credit, instruments, documents, chattel paper or any similar property
evidencing or constituting Collateral. Notwithstanding anything to the
contrary contained herein, if sales of Inventory are made for cash,
Borrower shall immediately deliver to Bank, in identical form, all such
cash, checks, or other forms of payment which Borrower receives. The
receipt of any check or other item of payment by Bank shall not be
considered a payment on account until such check or other item of payment
is honored when presented for payment, in which event, said check or other
item of payment shall be deemed to have been paid to Bank Two (2) calendar
days after the date Bank actually receives such check or other item of
payment.
4.3 Bank's security interest in Inventory shall attach to all
Inventory without further act on the part of Bank or Borrower. Upon Bank's
request Borrower will from time to time at Borrower's expense pledge,
assemble and deliver such Inventory to Bank or to a third party as Bank's
bailee; or hold the same in trust for Bank's account or store the same in
a warehouse in Bank's name; or deliver to Bank documents of title
representing said Inventory; or evidence of Bank's security interest in
some other manner acceptable to Bank. Until a default by Borrower under
this Agreement or any other Agreement between Borrower and Bank, Borrower
may, subject to the provisions hereof and consistent herewith, sell the
Inventory, but only in the ordinary course of Borrower's business. A sale
of Inventory in Borrower's ordinary course or business does not include an
exchange or a transfer in partial or total satisfaction of a debt owing by
Borrower.
4.4 Borrower shall execute and deliver to Bank concurrently with
Borrower's execution of this Agreement, and at any time or times hereafter
at the request of Bank, all financing statements, continuation financing
statements, security agreements, mortgages, assignments, certificates of
title, affidavits, reports, notices, schedules of accounts, letters of
authority and all other documents that Bank may request, in form
satisfactory to Bank, to perfect and maintain perfected Bank's security
interest in the Collateral and in order to fully consummate all of the
transactions contemplated under this Agreement. Borrower hereby
irrevocably makes, constitutes and appoints Bank (and any of Bank's
officers, employees or agents designated by Bank) as Borrower's true and
lawful attorney-in-fact with power to sign the name of Borrower on any
financing statements, continuation financing statements, security
agreement, mortgage, assignment, certificate of title, affidavit, letter
of authority, notice of other similar documents which must be executed
and/or filed in order to perfect or continue perfected Bank's security
interest in the Collateral.
Borrower shall make appropriate entries in Borrower's Books disclosing
Bank's security interest in the Receivables. Bank (through any of its
officers, employees or agents) shall have the right at any time or times
hereafter during Borrower's usual business hours, or during the usual
business hours of any third party having control over the records of
Borrower, to inspect and verify Borrower's Books in order to verify the
amount or condition of, or any other matter, relating to, said Collateral
and Borrower's financial condition.
4.5 Borrower appoints Bank or any other person whom Bank may
designate as Borrower's attorney-in-fact, with power to endorse Borrower's
name on any checks, notes, acceptances, money order, drafts or other forms
of payment or security that may come into Bank's possession; to sign
Borrower's name on any invoice or bill of lading relating to any
Receivables, on drafts against account debtors, on schedules and
assignments of Receivables, on verifications of Receivables and on notices
to account debtors; to establish a lock box arrangement and/or to notify
the post office authorities to change the address for delivery of
Borrower's mail addressed to Borrower to an address designated by Bank, to
receive and open all mail addressed to Borrower, and to retain all mail
relating to the Collateral and forward all other mail to Borrower; to
send, whether in writing or by telephone, requests for verification of
Receivables; and to do all things necessary to carry out this Agreement.
Borrower ratifies and approves all acts of the attorney-in-fact. Neither
Bank nor its attorney-in-fact will be liable for any act or omissions or
for any error of judgement or mistake of fact or law. This power being
coupled with an interest, is irrevocable so long as any Receivables in
which Bank has a security interest remain unpaid and until the Obligations
have been fully satisfied.
4.6 In order to protect or perfect any security interest which Bank
is granted hereunder, Bank may, in its sole discretion, discharge any lien
or encumbrance or bond the same, pay any insurance, maintain guards,
warehousemen, or any personnel to protect the Collateral, pay any service
bureau, or, obtain any records, and all costs for the same shall be added
to the Obligations and shall be payable on demand.
4.7 Borrower agrees that Bank may provide information relating to
this Agreement or relating to Borrower to Bank's parent, affiliates,
subsidiaries and service providers.
5. CONDITIONS PRECEDENT
5.1 Conditions precedent to the making of the loans and the
extension of the financial accommodations hereunder, Borrower shall
execute, or cause to be executed, and deliver to Bank, in form and
substance satisfactory to Bank and its counsel, the following:
a. This Agreement and other documents required by Bank;
b. Financing statements (Form UCC-1) in form satisfactory to
Bank for filing and recording with the appropriate governmental
authorities;
5.
<PAGE> 6
REVOLVING CREDIT
LOAN & SECURITY AGREEMENT
(ACCOUNTS & INVENTORY)
c. If Borrower is a corporation, then certified extracts from the
minutes of the meeting of its board of directors, authorizing
the borrowings and the granting of the security interest
provided for herein and authorizing specific officers to execute
and deliver the agreements provided for herein;
d. If Borrower is a corporation, then a certificate of good
standing showing that Borrower is in good standing under the
laws of the state of its incorporation and certificates that
Borrower is qualified to transact business and is in good
standing in any other state in which it conducts business;
e. If Borrower is a partnership, then a copy of Borrower's
partnership agreement certified by each general partner of
Borrower;
f. UCC searches, tax lien and litigation searches, fictitious
business statement filings, insurance certificates, notices or
other similar documents which Bank may require and in such form
as Bank may require, in order to reflect, perfect or protect
Bank's first priority security interest in the Collateral and in
order to fully consummate all of the transactions contemplated
under this Agreement;
g. Evidence that Borrower has obtained insurance and acceptable
endorsements;
h. Waivers executed by landlords and mortgagees of any real
property on which any Collateral is located; and
i. Warranties and representations of officers.
6. WARRANTIES REPRESENTATIONS AND COVENANTS.
6.1 If so requested by Bank, Borrower shall, at such intervals
designated by Bank, during the term hereof execute and deliver a Report of
Accounts Receivable or similar report, in form customarily used by Bank.
Borrower's Borrowing Base at all times pertinent hereto shall not be less than
the advances made hereunder. Bank shall have the right to recompute Borrower's
Borrowing Base in conformity with this Agreement.
6.2 If any warranty is breached as to any account, or any account is not
paid in full by an account debtor within Ninety (90) days from the date of
invoice, or an account debtor disputes liability or makes any claim with
respect thereto, or a petition in bankruptcy or other application for relief
under the Bankruptcy Code or any other insolvency law is filed by or against an
account debtor, or an account debtor makes an assignment for the benefit of
creditors, becomes insolvent, fails or goes out of business, then Bank may deem
ineligible any and all accounts owing by that account debtor, and reduce
Borrower's Borrowing Base by the amount thereof. Bank shall retain its security
interest in all Receivables and accounts, whether eligible or ineligible, until
all Obligations have been fully paid and satisfied. Returns and allowances, if
any, as between Borrower and its customers, will be on the same basis and in
accordance with the usual customary practices of the Borrower, as they exist at
this time. Any merchandise which is returned by an account debtor or otherwise
recovered shall be set aside, marked with Bank's name, and Bank shall retain a
security interest therein. Borrower shall promptly notify Bank of all disputes
and claims and settle or adjust them on terms approved by Bank. After default
by Borrower hereunder, no discount, credit or allowance shall be granted to any
account debtor by Borrower and no return of merchandise shall be accepted by
Borrower without Bank's consent. Bank may, after default by Borrower, settle or
adjust disputes and claims directly with account debtors for amounts and upon
terms which Bank considers advisable, and in such cases Bank will credit
Borrower's account with only the net amounts received by Bank in payment of the
accounts, after deducting all Bank Expenses in connection therewith.
6.3 Borrower warrants, represents, covenants and agrees that:
a. Borrower has good and marketable title to the Collateral.
Bank has and shall continue to have a first priority perfected
security interest in and to the Collateral. The Collateral shall
at all times remain free and clear of all liens, encumbrances
and security interests (except those in favor of Bank).
b. All accounts are and will, at all times pertinent hereto, be
bona fide existing obligations created by the sale and delivery
of merchandise or the rendition of services to account debtors
in the ordinary course of business, free of liens, claims,
encumbrances and security interests (except as held by Bank and
except as may be consented to, in writing, by Bank) and are
unconditionally owed to Borrower without defenses, disputes,
offsets, counterclaims, rights of return or cancellation, and
Borrower shall have received no notice of actual or imminent
bankruptcy or insolvency of any account debtor at the time an
account due from such account debtor is assigned to Bank.
c. At the time each account is assigned to Bank, all property
giving rise to such account shall have been delivered to the
account debtor or to the agent for the account debtor for
immediate shipment to, and unconditional acceptance by, the
account debtor. Borrower shall deliver to Bank, as Bank may from
time to time require, delivery receipts, customer's purchase
orders, shipping instruction, bills of lading and any other
evidence of shipping arrangements. Absent such a request by
Bank, copies of all such documentation shall be held by Borrower
as custodian for Bank.
6.4 At the time each Eligible Account is assigned to Bank, all such
Eligible Accounts will be due and payable on terms set forth in Section 1.12,
or on such other terms approved in writing by Bank in advance of the creation
of such accounts and which are expressly set forth on the face of all invoices,
copies of which shall be held by Borrower as custodian for Bank, and no such
eligible account will then be past due.
6.
<PAGE> 7
REVOLVING CREDIT
LOAN & SECURITY AGREEMENT
(ACCOUNTING & INVENTORY)
6.5 Borrower shall keep the inventory only at the following locations,
while allowing demo. inventory to be at different locations: 3956 Sorrento
Valley Blvd., San Diego, CA; 13845-B Alton Pkwy, Irvine, CA; 9207 Eton Ave.,
Chatsworth, CA.
a. Borrower, immediately upon demand by Bank therefor, shall now
and from time to time hereafter, at such intervals as are
requested by Bank, deliver to Bank, designations of inventory
specifying Borrower's cost of inventory, the wholesale market
value thereof and such other matters and information relating to
the inventory as Bank may request;
b. Borrower's inventory, valued at the lower of Borrower's cost
or the wholesale market value thereof, at all times pertinent
hereto shall not be less than N/A Dollars ($N/A) of which no less
than N/A Dollars ($N/A) shall be in raw materials and finished
goods;
c. All of the inventory is and shall remain free from all
purchase money or other security interests, liens or
encumbrances, except as held by Bank;
d. Borrower does now keep and hereafter at all times shall keep
correct and accurate records itemizing and describing the kind,
type, quality and quantity of the inventory, its cost therefor
and selling price thereof, and the daily withdrawals therefrom
and additions thereto, all of which records shall be available
upon demand to any of the Bank's officers, agents and employees
for inspection and copying;
e. All inventory, now and hereafter at all times, shall be new
inventory of good and merchantable quality free from defects;
f. Inventory is not now and shall not at any time or times
hereafter be located or stored with a bailee, warehouseman or
other third party without Bank's prior written consent, and, in
such event, Borrower will concurrently therewith cause any such
bailee, warehouseman or other third party to issue and deliver
to Bank, in a form acceptable to Bank, warehouse receipts in
Bank's name evidencing the storage of inventory or other
evidence of Bank's prior rights in the inventory. In any event,
Borrower shall instruct any third party to hold all such
inventory for Bank's account subject to Bank's security
interests and its instructions; and
g. Bank shall have the right upon demand now and/or at all times
hereafter, during Borrower's usual business hours, to inspect
and examine the inventory and to check and test the same as to
quality, quantity, value and condition and Borrower agrees to
reimburse Bank for Bank's reasonable costs and expenses in so
doing.
6.6 Borrower represents, warrants and covenants with Bank that Borrower
will not, without Bank's prior written consent:
a. Grant a security interest in or permit a lien, claim or
encumbrance upon any of the Collateral to any person,
association, firm, corporation, entity or governmental agency or
instrumentality;
b. Permit any levy, attachment or restraint to be made affecting
any of Borrower's assets;
c. Permit any Judicial Officer or Assignee to be appointed or to
take possession of any or all of Borrower's assets;
d. Other than sales of inventory in the ordinary course of
Borrower's business, to sell, lease, or otherwise dispose of,
move, or transfer, whether by sale or otherwise, any of
Borrower's assets;
e. Change its name, business structure, corporate identity or
structure; add any new fictitious names, liquidate, merge or
consolidate with or into any other business organization;
f. Move or relocate any Collateral;
g. Acquire any other business organization;
h. Enter into any transaction not in the usual course of
Borrower's business;
i. Make any investment in securities of any person, association,
firm, entity, or corporation other than the securities of the
United States of America;
j. Make any change in Borrower's financial structure or in any
of its business objectives, purposes or operations which would
adversely effect the ability of Borrower to repay Borrower's
Obligations;
k. Incur any debts outside the ordinary course of Borrower's
business except renewals or extensions of existing debts and
interest thereon;
l. Make any advance or loan except in the ordinary course of
Borrower's business as currently conducted;
7.
<PAGE> 8
REVOLVING CREDIT
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
m. Make loans, advances or extensions of credit to any Person, except for
sales on open account and otherwise in the ordinary course of business;
n. Guarantee or otherwise, directly or indirectly, in any way be or become
responsible for obligations of any other Person, whether by agreement to
purchase the indebtedness of any other Person, agreement for the furnishing of
funds to any other Person through the furnishing of goods, supplies or services,
by way of stock purchase, capital contribution, advance or loan, for the purpose
of paying or discharging (or causing the payment or discharge of) the
indebtedness of any other Person, or otherwise, except for the endorsement of
negotiable instruments by the Borrower in the ordinary course of business for
deposit or collection.
o. (a) Sell, lease, transfer or otherwise dispose of properties and assets
having an aggregate book value of more than One Hundred Thousand and 00/100
Dollars ($100,000.00) (whether in one transaction or in a series of
transactions) except as to the sale of inventory in the ordinary course of
business; (b) change its name, consolidate with or merge into any other
corporation, permit another corporation to merge into it, acquire all or
substantially all the properties or assets of any other Person, enter into any
reorganization or recapitalization or reclassify its capital stock, or (c)
enter into any sale-leaseback transaction;
p. Subordinate any indebtedness due to it from a person to indebtedness of
other creditors of such person;
q. Purchase or hold beneficially any stock or other securities of, or make
any investment or acquire any interest whatsoever in, any other Person, except
for the common stock of the Subsidiaries owned by the Borrower on the date of
this Agreement and except for certificates of deposit with maturities of one
year or less of United States commercial banks with capital, surplus and
undivided profits in excess of $100,000,000 and direct obligations of the
United States Government maturing within one year from the date of acquisition
thereof; or
r. Allow any fact, condition or event to occur or exist with respect to any
employee pension or profit sharing plans established or maintained by it which
might constitute grounds for termination of any such plan or for the court
appointment of a trustee to administer any such plan.
6.7 Borrower is not a merchant whose sales for resale of goods for personal,
family or household purposes exceeded seventy-five percent (75%) in dollar
volume of its total sales of all goods during the 12 months preceding the filing
by Bank of a financing statement describing the Collateral. At no time hereafter
shall Borrower's sales for resale of goods for personal, family or household
purposes exceed seventy-five percent (75%) in dollar volume of its total sales.
6.8 Borrower's sole place of business or chief executive office or residence
is located at the address indicated above and Borrower covenants and agrees
that it will not, during the term of this Agreement, without prior written
notification to Bank, relocate said sole place of business or chief executive
office or residence.
6.9 If Borrower is a corporation, Borrower represents, warrants and covenants
as follows:
a. Borrower will not make any distribution or declare or pay any dividend
(in stock or in cash) to any shareholder or on any of its capital stock, of
any class, whether now or hereafter outstanding, or purchase, acquire,
repurchase, redeem or retire any such capital stock;
b. Borrower is and shall at all times hereafter be a corporation duly
organized and existing in good standing under the laws of the state of its
incorporation and qualified and licensed to do business in California or
any other state in which it conducts its business;
c. Borrower has the right and power and is duly authorized to enter into
this Agreement; and
d. The execution by Borrower of this Agreement shall not constitute a
breach of any provision contained in Borrower's articles of incorporation
or by-laws.
6.10 The execution of and performance by Borrower of all of the terms and
provisions contained in this Agreement shall not result in a breach of or
constitute an event of default under any agreement to which Borrower is now or
hereafter becomes a party.
6.11 Borrower shall promptly notify Bank in writing of its acquisition by
purchase, lease or otherwise of any after acquired property of the type
included in the Collateral, with the exception of purchases of Inventory in the
ordinary course of business, and with the exception of acquired property under
a cost of $100,000.
6.12 All assessments and taxes, whether real, personal or otherwise, due or
payable by, or imposed, levied or assessed against, Borrower or any of its
property have been paid, and shall hereafter be paid in full, before
delinquency. Borrower shall make due and timely payment or deposit of all
federal, state and local taxes, assessments or contributions required of it by
law, and will execute and deliver to Bank, on demand, appropriate certificates
attesting to the payment or deposit thereof. Borrower will make timely payment
or deposit of all F.I.C.A. payments and withholding taxes required of it by
applicable laws, and will upon request furnish Bank with proof satisfactory to
it that Borrower has made such payments or deposit. If Borrower fails to pay any
such assessment, tax, contribution, or make such deposit, or furnish the
required proof, Bank may, in its sole and absolute discretion and without notice
to Borrower,
8.
<PAGE> 9
REVOLVING CREDIT
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
(i) make payment of the same or any part thereof; or (ii) set up such reserves
in Borrower's account as Bank deems necessary to satisfy the liability
therefor, or both. Bank may conclusively rely on the usual statements of the
amount owing or other official statements issued by the appropriate
governmental agency. Each amount so paid or deposited by Bank shall constitute
a Bank Expense and an additional advance to Borrower.
6.13 There are no actions or proceedings pending by or against Borrower
or any guarantor of Borrower before any court of administrative agency and
Borrower has no knowledge of any pending, threatened or imminent litigation,
governmental investigations or claims, complaints, actions or prosecutions
involving Borrower or any guarantor of Borrower, except as heretofore
specifically disclosed in writing to Bank. If any of the foregoing arise during
the term of the Agreement, Borrower shall immediately notify Bank in writing.
6.14 a. Borrower, at its expense, shall keep and maintain its assets
insured against loss or damage by fire, theft, explosion, sprinklers and all
other hazards and risks ordinarily insured against by other owners who use such
properties in similar businesses for the full insurable value thereof. Borrower
shall also keep and maintain business interruption insurance and public
liability and property damage insurance relating to Borrower's ownership and
use of the Collateral and its other assets. All such policies of insurance
shall be in such form, with such companies, and in such amounts as may be
satisfactory to Bank. Borrower shall deliver to Bank certified copies of such
policies of insurance and evidence of the payments of all premiums therefor.
All such policies of insurance (except those of public liability and property
damage) shall contain an endorsement in a form satisfactory to Bank showing
Bank as a loss payee thereof, with a waiver of warranties (Form 438-BFU), and
all proceeds payable thereunder shall be payable to Bank and, upon receipt by
Bank, shall be applied on account of the Obligations owing to Bank. To secure
the payment of the Obligations, Borrower grants Bank a security interest in and
to all such policies of insurance (except those of public liability and
property damage) and the proceeds thereof, and Borrower shall direct all
insurers under such policies of insurance to pay all proceeds thereof directly
to Bank.
b. Borrower hereby irrevocably appoints Bank (and any of Bank's officers,
employees or agents designated by Bank) as Borrower's attorney for the purpose
of making, selling and adjusting claims under such policies of insurance,
endorsing the name of Borrower on any check, draft, instrument or other item of
payment for the proceeds of such policies of insurance and for making all
determinations and decisions with respect to such policies of insurance.
Borrower will not cancel any of such policies without Bank's prior written
consent. Each such insurer shall agree by endorsement upon the policy or
policies of insurance issued by it to Borrower as required above, or by
independent instruments furnished to Bank, that it will give Bank at least ten
(10) days written notice before any such policy or policies of insurance shall
be altered or cancelled, and that no act or default of Borrower, or any other
person, shall affect the right of Bank to recover under such policy or policies
of insurance required above or to pay any premium in whole or in part relating
thereto Bank, without waiving or releasing any Obligations or any Event of
Default, may, but shall have no obligation to do so, obtain and maintain such
policies of insurance and pay such premiums and take any other action with
respect to such policies which Bank deems advisable. All sums so disbursed by
Bank, as well as reasonably attorneys' fees, court costs, expenses and other
charges relating thereto, shall constitute Bank Expenses and are payable on
demand.
6.15 All financial statements and information relating to Borrower
which have been or may hereafter be delivered by Borrower to Bank are true and
correct and have been prepared in accordance with GAAP consistently applied
and there has been no material adverse change in the financial condition of
Borrower since the submission of such financial information to Bank.
6.16 a. Borrower at all times hereafter shall maintain a standard and
modern system of accounting in accordance with GAAP consistently applied with
ledger and account cards and/or computer tapes and computer disks, computer
printouts and computer records pertaining to the Collateral which contain
information as may from time to time be requested by Bank, not modify or change
its method of accounting or enter into, modify or terminate any agreement
presently existing, or at any time hereafter entered into with any third party
accounting firm and/or service bureau for the preparation and/or storage of
Borrower's accounting records without the written consent of Bank first obtained
and without said accounting firm and/or service bureau agreeing to provide
information regarding the Receivables and Inventory and Borrower's financial
condition to Bank; permit Bank and any of its employees, officers or agents,
upon demand, during Borrower's usual business hours, or the usual business hour
of third parsons having control thereof, to have access to and examine all of
the Borrower's Books relating to the Collateral, Borrower's Obligations to
Bank, Borrower's financial condition and the results of Borrower's operations
and in connection therewith, permit Bank or any of its agents, employees or
officers to copy and make extracts therefrom.
b. Borrower shall deliver to Bank within forty-five (45) days after the end of
each Quarter, a COMPANY PREPARED balance sheet and profit and loss statement
covering Borrower's operations and deliver to Bank within ninety (90) days
after the end of each of Borrower's fiscal years a(n) AUDITED statement of the
financial condition of the Borrower for each such fiscal year, including but
not limited to, a balance sheet and profit and loss statement and any other
report requested by Bank relating to the Collateral and the financial condition
of Borrower, and a certificate signed by an authorized employee of Borrower to
the effect that all reports, statements, computer disk or tape files, computer
printouts, computer runs, or other computer prepared information of any kind or
nature relating to the foregoing or documents delivered or caused to be
delivered to Bank under this subparagraph are complete, correct and thoroughly
present the financial condition of Borrower and that there exists on the date
of delivery to Bank no condition or event which constitutes a breach or Event
of Default under this Agreement. See Addendum A attached.
9.
<PAGE> 10
REVOLVING CREDIT
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
C. In addition to the financial statements requested above, the Borrower
agrees to provide Bank with the following schedules:
XX Accounts Receivable Agings on a Monthly basis;
---------------- ----------------
XX Accounts Payable Agings on a Monthly basis;
---------------- ----------------
Job Progress Reports on a basis; and
---------------- ----------------
XX Borrowing Base Certificates on a Monthly basis
---------------- ----------------
See Addendum "A" attached for additional controls for subsidiaries
6.17 Borrower shall maintain the following financial ratios and covenants on
a consolidated and non-consolidated basis:
a. Working Capital in an amount not less than N/A
--------------------------------
-----------------------------------------------------------------------------
b. Tangible Effective Net Worth in an amount not less than $9,000,000,
------------------
increasing to $9,500,000 at 3/31/00.
-----------------------------------------------------------------------------
c. a ratio of Current Assets to Current Liabilities of not less than
1.75:1.00
-----------------------------------------------------------------------------
d. a quick ratio of cash plus securities plus Receivables to Current
Liabilities of not less than N/A
-------------------------------------------------
-----------------------------------------------------------------------------
e. a ratio of Total Liabilities (less debt subordinated to Bank) to Tangible
Effective Net Worth of less than 1.25:1.00
---------------------------------------------
-----------------------------------------------------------------------------
f. a ratio of Cash Flow to Fixed Charges of not less than N/A
--------------------
-----------------------------------------------------------------------------
g. Net Income after taxes of Net loss before one-time writeoffs for FYE
------------------------------------------------
12/31/99 of no greater than ($1,600,000). Minimum net income after taxes of
-----------------------------------------------------------------------------
$500,000 annually beginning 12/31/00. Quarterly net loss of no greater than
-----------------------------------------------------------------------------
($450,000) for the quarter ending 3/31/00, ($50,000) quarterly thereafter.
-----------------------------------------------------------------------------
h. Borrower shall not without Bank's prior written consent acquire or expend
for or commit itself to acquire or expend for fixed assets by lease, purchase
or otherwise in an aggregate amount that exceeds N/A
-----------------------------
Dollars ($ ) in any fiscal year; and
------------------------ ------------
i. Monthly report of costs completed on the IBM Laser Station Contract.
-----------------------------------------------------------------------------
j. Semi-annual Accounts Receivable and Inventory Audit.k. Quarterly backlog
-----------------------------------------------------------------------------
report.
-------
All financial covenants shall be computed in accordance with GAAP
consistently applied except as otherwise specifically set forth in this
Agreement. All monies due from affiliates (including officers, directors and
shareholders) shall be excluded from Borrower's assets for all purposes
hereunder.
6.18 Borrower shall promptly supply Bank (and cause any guarantor to supply
Bank) with such other information (including tax returns) concerning its
financial affairs (or that of any guarantor) as Bank may request from time to
time hereafter, and shall promptly notify Bank of any material adverse change
in Borrower's financial condition and of any condition or event which
constitutes a breach of or an event which constitutes an Event of Default under
this Agreement.
6.19 Borrower is now and shall be at all times hereafter solvent and able to
pay its debts (including trade debts) as they mature.
6.20 Borrower shall immediately and without demand reimburse Bank for all
sums expended by Bank in connection with any action brought by Bank to correct
any default or enforce any provision of this Agreement, including all Bank
Expenses; Borrower authorizes and approves all advances and payments by Bank
for items described in this Agreement as Bank Expenses.
6.21 Each warranty, representation and agreement contained in this Agreement
shall be automatically deemed repeated with each advance and shall be
conclusively presumed to have been relied on by Bank regardless of any
investigation made or information possessed by Bank. The warranties,
representations and agreements set forth herein shall be cumulative and in
addition to any and all other warranties, representations and agreements which
Borrower shall give, or cause to be given, to Bank, either now or hereafter.
6.22 Borrower shall keep all of its principal bank accounts with Bank and
shall notify the Bank immediately in writing of the existence of any other bank
account, deposit account, or any other account into which money can be
deposited.
6.23 Borrower shall furnish to the Bank: (a) as soon as possible, but in no
event later than thirty (30) days after Borrower knows or has reason to know
that any reportable event with respect to any deferred compensation plan has
occurred, a statement of the chief financial officer of Borrower setting forth
the details concerning such reportable
10.
<PAGE> 11
REVOLVING CREDIT
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
event and the action which Borrower proposes to take with respect thereto,
together with a copy of the notice of such reportable event given to the
Pension Benefit Guaranty Corporation, if a copy of such notice is available to
Borrower; (b) promptly after the filing thereof with the United States
Secretary of Labor or the Pension Benefit Guaranty Corporation, copies of each
annual report with respect to each deferred compensation plan; (c) promptly
after receipt thereof, a copy of any notice Borrower may receive from the
Pension Benefit Guaranty Corporation or the Internal Revenue Service with
respect to any deferred compensation plan; provided, however, this subparagraph
shall not apply to notice of general application issued by the Pension Benefit
Guaranty Corporation or the Internal Revenue Service; and (d) when the same is
made available to participants in the deferred compensation plan, all notices
and other forms of information from time to time disseminated to the
participants by the administrator of the deferred compensation plan.
6.24 Borrower is now and shall at all times hereafter remain in
compliance with all federal, state and municipal laws, regulations and
ordinances relating to the handling, treatment and disposal of toxic
substances, wastes and hazardous material and shall maintain all necessary
authorizations and permits.
6.25 Borrower shall maintain insurance on the life of N/A
-------------------
in an amount not to be less than Dollars
- ----------------------- ---------------
($ ) under one or more policies issued by insurance
---------------------
companies satisfactory to Bank, which policies shall be assigned to Bank as
security for the Obligations and on which Bank shall be named as sole
beneficiary.
6.26 Borrower shall limit direct and indirect compensation paid to the
following employees: , ,
------------------------------- -------------------------
to an aggregate of Dollars ($ N/A ) per
--------------------------- ------------------
N/A .
- -----------------------------------------------
6.27 Borrower shall perform all acts reasonably necessary to ensure
that: (i) Borrower and any business in which Borrower holds a substantial
interest, and (ii) all customers, suppliers and vendors that are material to
Borrower's business, become Year 2000 Compliant in a timely manner. Such acts
shall include, without limitation, performing a comprehensive review and
assessment of all of Borrower's systems and adopting a detailed plan, with
itemized budget, for the remediation, monitoring and testing of such systems,
As used in this paragraph, "Year 2000 Compliant" shall mean, in regard to any
entity, that all software, hardware, firmware, equipment, goods or systems
utilized by or material to the business operations or financial condition of
such entity, will properly perform date sensitive function before, during and
after the year 2000. Borrower, shall, immediately upon request, provide to Bank
such certifications or other evidence of Borrower's compliance with terms of
this paragraph as Bank may from time to time require.
7. EVENTS OF DEFAULT
Any one or more of the following events shall constitute a default by
Borrower under this Agreement:
a. If Borrower fails or neglects to perform, keep or observe any term,
provision, condition, covenant, agreement, warranty or representation contained
in this Agreement, or any other present or future agreement between Borrower and
Bank;
b. If any representation, statement, report or certificate made or delivered by
Borrower, or any of its officers, employees or agents to Bank is not true and
correct;
c. If Borrower fails to pay when due and payable or declared due and payable,
all or any portion of the Borrower's Obligations (whether of principal,
interest, taxes, reimbursement of Bank Expenses, or otherwise);
d. If there is a material impairment of the prospect of repayment of all or any
portion of Borrower's Obligations or a material impairment of the value or
priority of Bank's security interest in the Collateral;
e. If all or any of Borrower's assets are attached, seized, subject to a writ or
distress warrant, or are levied upon, or come into the possession of any
Judicial Officer or Assignee and the same are not released, discharged or bonded
against within ten (10) days thereafter;
f. If any Insolvency Proceeding is filed or commenced by or against Borrower
without being dismissed within ten (10) days thereafter;
g. If any proceeding is filed or commenced by or against Borrower for its
dissolution or liquidation;
h. If Borrower is enjoined, restrained or in any way prevented by court order
from continuing to conduct all or any material part of its business affairs;
i. If a notice of lien, levy or assessment is filed of record with respect to
any or all of Borrower's assets by the United States Government, or any
department, agency or instrumentality thereof, or by any state, county,
municipal or other government agency, or if any taxes or debts owing at any time
hereafter to any one or more of such entities becomes a lien, whether choate or
otherwise, upon any or all of the Borrower's assets and the same is not paid on
the payment date thereof;
j. If a judgment or other claim becomes a lien or encumbrance upon any or all of
Borrower's assets and the same is not satisfied, dismissed or bonded against
within ten (10) days thereafter;
k. If Borrower's records are prepared and kept by an outside computer service
bureau at the time this Agreement is entered into or during the term of this
Agreement such an agreement with an outside service bureau is entered into, and
at any time thereafter, without first obtaining the written consent of Bank,
Borrower terminates, modifies, amends or changes its contractual relationship
with said computer service bureau or said computer service bureau fails to
provide Bank with any requested information or financial data pertaining to
Bank's Collateral, Borrower's financial condition or the results of Borrower's
operations;
11.
<PAGE> 12
REVOLVING CREDIT
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
l. If Borrower permits a default in any material agreement to which
Borrower is a party with third parties so as to result an acceleration of
the maturity of Borrower's indebtedness to others, whether under any
indenture, agreement or otherwise;
m. If Borrower makes any payment on account of indebtedness which has been
subordinated to Borrower's Obligations to Bank;
n. If any misrepresentation exists now or thereafter in any warranty or
representation made to Bank by any officer or director of Borrower, or if
any such warranty or representation is withdrawn by any officer or
director;
o. If any party subordinating its claims to that of Bank's or any guarantor
of Borrower's Obligations dies or terminates its subordination or guaranty,
becomes insolvent or an insolvency Proceeding is commenced by or against
any such subordinating party or guarantor;
p. If Borrower is an individual and Borrower dies;
q. If there is a change of ownership or control of N/A percent (N/A%) or
more of the issued and outstanding stock of Borrower; or
r. If any reportable event, which the Bank determines constitutes grounds
for the termination of any deferred compensation plan by the Pension
Benefit Guaranty Corporation or for the appointment by the appropriate
United States District Court of a trustee to administer any such plan,
shall have occurred and be continuing thirty (30) days after written notice
of such determination shall have been given to Borrower by Bank, or any
such Plan shall be terminated within the meaning of Title IV of the
Employment Retirement Income Security Act ("ERISA"), or a trustee shall be
appointed by the appropriate United States District Court to administer any
such plan, or the Pension Benefit Guaranty Corporation shall institute
proceedings to terminate any plan and in case of any event described in
this Section 7.0, the aggregate amount of the Borrower's liability to the
Pension Benefit Guaranty Corporation under Sections 4062, 4063 or 4064 of
ERISA shall exceed five percent (5%) of Borrower's Tangible Effective Net
Worth.
Notwithstanding anything contained in Section 7 to the contrary, Bank
shall refrain from exercising its rights and remedies and Events of Default
shall thereafter not be deemed to have occurred by reason of the occurrence
of any of the events set forth in Sections 7.e, 7.f or 7.j of this
Agreement if, within ten (10) days from the date thereof, the same is
released, discharged, dismissed, bonded against or satisfied; provided,
however, if the event is the institution of insolvency Proceedings against
Borrower, Bank shall not be obligated to make advances to Borrower during
such cure period.
8. BANK'S RIGHTS AND REMEDIES
8.1 Upon the occurrence of an Event of Default by Borrower under this
Agreement, Bank may, at its election, without notice of its election and
without demand, do any one or more of the following, all of which are
authorized by Borrower:
a. Declare Borrower's Obligations, whether evidenced by this
Agreement, Installment notes, demand notes or otherwise, immediately
due and payable to the Bank;
b. Cease advancing money or extending credit to or for the benefit of
Borrower under this Agreement, or any other agreement between
Borrower and Bank;
c. Terminate this Agreement as to any future liability or obligation
of Bank, but without affecting Bank's rights and security interests
in the Collateral, and the Obligations of Borrower to Bank;
d. Without notice to or demand upon Borrower or any guarantor, make
such payments and do such acts as Bank considers necessary or
reasonable to protect its security interest in the Collateral.
Borrower agrees to assemble the Collateral if Bank so requires and to
make the Collateral available to Bank as Bank may designate. Borrower
authorizes Bank to enter the premises where the Collateral is
located, take and maintain possession of the Collateral and the
premises (at no charge to Bank), or any part thereof, and to pay,
purchase, contest or compromise any encumbrance, charge or lien which
in the opinion of Bank appears to be prior or superior to its
security interest and to pay all expenses incurred in connection
therewith;
e. Without limiting Bank's rights under any security interest, Bank
is hereby granted a license or other right to use, without charge,
Borrower's labels, patents, copyrights, rights of use of any name,
trade secrets, trade names, trademarks and advertising matter, or any
property of a similar nature as it pertains to the Collateral, in
completing production of, advertising for sale and selling any
Collateral and Borrower's rights under all licensees and all
franchise agreement shall inure to Bank's benefit, and Bank shall
have the right and power to enter into sublicense agreements with
respect to all such rights with third parties on terms acceptable to
Bank;
f. Ship, reclaim, recover, store, finish, maintain, repair, prepare
for sale, advertise for sales and sell (in the manner provided for
herein) the inventory;
g. Sell or dispose the Collateral at either a public or private sale,
or both, by way of one or more contracts or transactions, for cash or
on terms, in such manner and at such places (including Borrower's
premises) as is commercially reasonable in the opinion of Bank. It is
not necessary that the Collateral be present at any such sale;
h. Bank shall give notice of the disposition of the Collateral as
follows:
12.
<PAGE> 13
REVOLVING CREDIT
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
(1) Bank shall give the Borrower and each holder of a security
interest in the Collateral who has filed with Bank a written
request for notice, a notice in writing of the time and place of
public sale, or, if the sale is a private sale or some
disposition other than a public sale is to be made of the
Collateral, the time on or after which the private sale or other
disposition is to be made;
(2) The notice shall be personally delivered or mailed, postage
prepaid, to Borrower's address appearing in this Agreement, at
least five (5) calendar days before the date fixed for the sale,
or at least five (5) calendar days before the date on or after
which the private sale or other disposition is to be made, unless
the Collateral is perishable or threatens to decline speedily in
value. Notice to persons other than Borrower claiming an interest
in the Collateral shall be sent to such addresses as they have
furnished to Bank;
(3) If the sale is to be a public sale, Bank shall also give
notice of the time and place by publishing a notice one time at
least five (5) calendar days before the date of the sale in a
newspaper of general circulation in the county in which the sale
is to be held; and
(4) Bank may credit bid and purchase at any public sale.
i. Borrower shall pay all Bank Expenses incurred in connection with
Bank's enforcement and exercise of any of its rights and remedies as
herein provided, whether or not suit is commenced by Bank;
j. Any deficiency which exists after disposition of the Collateral
as provided above will be paid immediately by Borrower. Any excess
will be returned, without interest and subject to the rights of third
parties, to Borrower by Bank, or, in Bank's discretion, to any party
who Bank believes, in good faith, is entitled to the excess; and
k. Without constituting a retention of Collateral in satisfaction of
an obligation within the meaning of 9505 of the Uniform Commercial
Code or an action under California Code of Civil Procedure 726, apply
any and all amounts maintained by Borrower as deposit accounts (as
that term is defined under 9105 of the Uniform Commercial Code) or
other accounts that Borrower maintains with Bank against the
Obligations.
8.2 Bank's rights and remedies under this Agreement and all other
agreements shall be cumulative. Bank shall have all other rights and
remedies not inconsistent herewith as provided by law or in equity. No
exercise by Bank of one right or remedy shall be deemed an election, and no
waiver by Bank of any default on Borrower's part shall be deemed a
continuing waiver. No delay by Bank shall constitute a waiver, election or
acquiescence by Bank.
9. TAXES AND EXPENSES REGARDING BORROWER'S PROPERTY.
If Borrower fails to pay promptly when due to another person or entity, monies
which Borrower is required to pay by reason of any provision in this Agreement,
Bank may, but need not, pay the same and charge Borrower's account therefor,
and Borrower shall promptly reimburse Bank. All such sums shall become
additional indebtedness owing to Bank, shall bear interest at the rate
hereinabove provided, and shall be secured by all Collateral. Any payments made
by Bank shall not constitute (i) an agreement by it to make similar payments in
the future; or (ii) a waiver by Bank of any default under this Agreement. Bank
need not inquire as to, or contest the validity of, any such expense, tax,
security interest, encumbrance or lien and the receipt of the usual official
notice of the payment thereof shall be conclusive evidence that the same was
validly due and owing. Such payments shall constitute Bank Expenses and
additional advances to Borrower.
10. WAIVERS.
10.1 Borrower agrees that checks and other instruments received by
Bank in payment or on account of Borrower's Obligations constitute only
conditional payment until such items are actually paid to Bank and
Borrower waives the right to direct the application of any and all
payments at any time or times thereafter received by Bank on account of
Borrower's Obligations and Borrower agrees that Bank shall have the
continuing exclusive right to apply and reapply such payments in any
manner as Bank may deem advisable, notwithstanding any entry by Bank upon
its books.
10.2 Borrower waives demand, protest, notice of protest, notice of
default or dishonor, notice of payment and nonpayment, notice of any
default, nonpayment at maturity, release, compromise, settlement,
extension or renewal or any or all commercial paper, accounts, documents,
instruments chattel paper, and guarantees at any time held by Bank on
which Borrower may in any way be liable.
10.3 Bank shall not in any way or manner be liable or responsible for
(a) the safekeeping of the Inventory; (b) any loss or damage thereto
occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency or other person whomsoever. All
risk of loss, damage or destruction of Inventory shall be borne by
Borrower.
10.4 Borrower waives the right and the right to assert a confidential
relationship, if any, it may have with any accountant, accounting firm
and/or service bureau or consultant in connection with any information
requested by Bank pursuant to or in accordance with this Agreement, and
agrees that a Bank may contact directly any such accountants, accounting
firm and/or service bureau or consultant in order to obtain such
information.
10.5 BORROWER AND BANK EACH WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY
ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY TRANSACTION
HEREUNDER, OR CONTEMPLATED HEREUNDER, OR ANY OTHER CLAIM (INCLUDING TORT
OR BREACH OF DUTY CLAIMS) OR DISPUTE HOWSOEVER ARISING BETWEEN BANK AND
BORROWER.
13.
<PAGE> 14
REVOLVING CREDIT
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
10.6 In the event that Bank elects to waive any rights or remedies
hereunder, or compliance with any of the terms hereof, or delays or fails
to pursue or enforce any terms, such waiver, delay or failure to pursue or
enforce shall only be effective with respect to that single act and shall
not be construed to affect any subsequent transactions or Bank's right to
later pursue such rights and remedies.
11. ONE CONTINUING LOAN TRANSACTION.
All loans and advances heretofore, now or at any time or times hereafter made
by Bank to Borrower under this Agreement or any other agreement between Bank
and Borrower, shall constitute one loan secured by Bank's security interests
in the Collateral and by all other security interests, liens, encumbrances
heretofore, now or from time to time hereafter granted by Borrower to Bank.
Notwithstanding the above, (i) to the extent that any portion of the
Obligations are a consumer loan, that portion shall not be secured by any deed
of trust or mortgage on or other security interest in Borrower's principal
dwelling which is not a purchase money security interest as to that portion,
unless expressly provided to the contrary in another place, or (ii) if the
Borrower (or any of them) has (have) given or give(s) Bank a deed of trust or
mortgage covering real property, that deed of trust or mortgage shall not
secure the loan and any other Obligation of the Borrower (or any of them),
unless expressly provided to the contrary in another place.
12. NOTICES.
Unless otherwise provided in this Agreement, all notices or demands by either
party on the other relating to this Agreement shall be in writing and sent by
regular United States mail, postage prepaid, properly addressed to Borrower or
to Bank at the addresses stated in this Agreement, or to such other addresses
as Borrower or Bank may from time to time specify to the other in writing.
Requests to Borrower by Bank hereunder may be made orally.
13. AUTHORIZATION TO DISBURSE.
Bank is hereby authorized to make loans and advances hereunder upon telephonic
or other instructions received from anyone purporting to be an officer,
employee, or representative of Borrower, or at the discretion of Bank if said
loans and advances are necessary to meet any Obligations of Borrower to Bank.
Bank shall have no duty to make inquiry or verify the authority of any such
party, and Borrower shall hold Bank harmless from any damage, claims or
liability by reason of Bank's honor of, or failure to honor, any such
instructions.
14. DESTRUCTION OF BORROWER'S DOCUMENTS.
Any documents, schedules, invoices or other papers delivered to Bank, may be
destroyed or otherwise disposed of by Bank six (6) months after they are
delivered to or received by Bank, unless Borrower requests, in writing, the
return of the said documents, schedules, invoices or other papers and makes
arrangements, at Borrower's expense, for their return.
15. CHOICE OF LAW.
The validity of this Agreement, its construction, interpretation and
enforcement, and the rights of the parties hereunder and concerning the
Collateral, shall be determined according to the laws of the State of
California. The parties agree that all actions or proceedings arising in
connection with this Agreement shall be tried and litigated only in the state
and federal courts in the Northern District of California or County of Santa
Clara.
16. GENERAL PROVISIONS.
16.1 This Agreement shall be binding and deemed effective when
executed by the Borrower and accepted and executed by Bank at its
Headquarter Office.
16.2 This Agreement shall bind and inure to the benefit of the
respective successors and assigns of each of the parties, provided,
however, that Borrower may not assign this Agreement or any rights
hereunder without Bank's prior written consent and any prohibited
assignment shall be absolutely void. No consent to an assignment by Bank
shall release Borrower or any guarantor from their Obligations to Bank.
Bank may assign this Agreement and its rights and duties hereunder. Bank
reserves the right to sell, assign, transfer, negotiate or grant
participations in all or any part of, or any interest in Bank's rights and
benefits hereunder. In connection therewith, Bank may disclose all
documents and information which Bank now or hereafter may have relating to
Borrower or Borrower's business.
16.3 Paragraph headings and paragraph numbers have been set forth
herein for convenience only; unless the contrary is compelled by the
context, everything contained in each paragraph applies equally to this
entire Agreement.
16.4 Neither this Agreement nor any uncertainty or ambiguity herein
shall be construed or resolved against Bank or Borrower, whether under any
rule of construction or otherwise; on the contrary, this Agreement has been
reviewed by all parties and shall be construed and interpreted according to
the ordinary meaning of the words used so as to fairly accomplish the
purposes and intentions of all parties hereto. When permitted by the
context, the singular includes the plural and vice versa.
14.
<PAGE> 15
REVOLVING CREDIT
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
16.5 Each provision of this Agreement shall be severable from every other
provision of this Agreement for the purpose of determining the legal
enforceability of any specific provision.
16.6 This Agreement cannot be changed or terminated orally. Except as to
currently existing Obligations owing by Borrower to Bank, all prior agreements,
understandings, representations, warranties, and negotiations, if any, with
respect to the subject matter hereof, are merged into this Agreement.
16.7 The parties intend and agree that their respective rights, duties,
powers, liabilities, obligations and discretions shall be performed, carried
out, discharged and exercised reasonably and in good faith.
IN WITNESS WHEREOF, the parties hereto have caused this Revolving Credit
Loan & Security Agreement (Accounts and Inventory) to be executed as of the
date first hereinabove written.
ATTEST: BORROWER: JMAR Technologies, Inc.
- ------------------------------- By: /s/ Dennis E. Valentine
Title --------------------------------
Signature of Dennis E. Valentine
Accepted and effective as of
December 20, 1999 Title: Chief Financial Officer
- ------------------------------- -----------------------------
at Bank's Headquarter Office
(Bank) Comerica Bank-California
By: By: /s/ Brock Mullins
---------------------------- -------------------------------
Signature of Brock Mullins
Title: Vice President Title:
-------------------------- -----------------------------
By:
--------------------------------
Signature of
Title:
------------------------------
15.
<PAGE> 16
Addendum "A" to Revolving Credit Loan & Security Agreement
Dated December 20, 1999
Section 1.5 is amended by adding the following:
...Plus (3) 50% of unbilled revenue on IBM Laser Station contract up to a
maximum advance of $750,000, plus (4) $750,000 overformula to be reduced to $0
for 30 consecutive days annually.
Section 1.12 is amended by substituting the following underlined passage for
"Borrower":
1.12 "Eligible Accounts" as used in this Agreement means and includes
those accounts of JMAR Precision Systems which ...
Section 1.12(c) is hereby deleted in its entirety and replaced with the
following:
(c) accounts with respect to which the account debtor is not a resident
of the United States, except that account debtors that are foreign subsidiaries
of IBM shall be eligible up to an aggregate of $500,000.00.
Section 1.12(k) is hereby deleted in its entirety and replaced with the
following:
(k) accounts owed by any single account debtor which exceed twenty
percent (20% of all of the Eligible Accounts, except that with respect to
account debtor Affymetrix, Inc. the accounts owed by them shall not exceed
sixty percent (60%) and account debtor IBM (combined foreign and domestic) the
accounts owed by them shall not exceed fifty percent (50%).
Section 6.16(b) is hereby deleted in its entirety and replaced with the
following:
b. Borrower shall deliver to Bank within Forty-five (45) days after the
end of each Quarter, a consolidated and consolidating company-prepared balance
sheet and profit and loss statement covering Borrower's and JMAR Precision
Systems' operations and deliver to Bank within ninety (90) days after the end
of each of Borrower's fiscal years a consolidated and consolidating audited
statement of the financial condition of the Borrower for each such fiscal year,
including but not limited to, a balance sheet and profit and loss statement and
any other report requested by Bank relating to the Collateral and the financial
condition of Borrower, and a certificate signed by an authorized employee of
Borrower to the effect that all reports, statements, computer disk or tape
files, computer printouts, computer runs, or other computer prepared
information of any kind or nature relating to the foregoing or documents
delivered or caused to be delivered to Bank under this subparagraph are
complete, correct and thoroughly present the financial condition of borrower
and that there exists on the date of delivery to Bank no condition or event
which constitutes a breach or Event of Default under this Agreement.
<PAGE> 17
Section 6.16(c) is amended by adding the following schedules:
Monthly Accounts Receivable and Accounts Payable agings of JMAR
Precision systems on a monthly basis.
Quarterly Accounts Receivable and Accounts Payable agings of JMAR
Semiconductor and JMAR Research.
/s/ DENNIS E. VALENTINE
- --------------------------------------
JMAR Technologies
<PAGE> 18
[COMERICA LOGO]
INVENTORY RIDER
(REVOLVING ADVANCE)
BORROWER(S): JMAR Technologies, Inc.
Borrower has entered into a certain Revolving Credit and Security
Agreement (Accounts and Inventory) or a certain Loan and Security Agreement
(Accounts and Inventory) (either hereinafter referred to as "Agreement") dated
December 20, 1999 with Bank (Secured Party). This INVENTORY RIDER (hereinafter
referred to as this Rider) dated December 20, 1999 is hereby made a part of and
incorporated into that agreement.
1. At the request of Borrower, made at any time and from time to time
during the term of the Agreement, and so long as no event of default under the
Agreement has occurred and Borrower is in full, faithful and timely compliance
with each and all of the covenants, conditions, warranties and representations
contained in the Agreement, this Rider and/or any other agreement between Bank
and Borrower, Bank agrees to lend Borrower Thirty Five Percent (35.000%) of the
lower of cost or market value of Borrower's raw materials and finished goods
Inventory, and as may be adjusted by Bank, in Bank's discretion, for age and
seasonality or other factors affecting the value of the Inventory, up to a
maximum advance outstanding at any one time of Two Million Five Hundred
Thousand and no/100 Dollars ($2,500,000.00) upon Borrower's concurrent
execution and delivery to Bank of a Designation of Inventory, or Certification
of Borrowing Base, in form customarily used by Bank. All advances made and to
be made pursuant to this Rider are solely and exclusively to enable Borrower to
acquire rights in and purchase new Inventory, and Borrower represents and
warrants that all advances by Bank pursuant to this Rider will be used solely
and exclusively for such purpose; and since such advances will be used for the
foregoing purposes, Bank's security interest in Borrower's Inventory is and
shall be at all times a purchase money security interest as that term is
described in Section 9107 of the California Uniform Commercial Code.
2. Advances made by Bank to Borrower pursuant to this Rider shall be
included as part of the Obligations of Borrower to Bank as the term
"Obligations" is defined in the Agreement; and at Bank's option, advances
pursuant to this Rider may be evidenced by promissory note(s), in form and on
terms satisfactory to Bank. All such advances shall bear interest at the rate
and be payable in the manner specified in said promissory note(s) in the event
Bank exercises the aforementioned option, and in the event Bank does not, such
advances shall bear interest at the rate and be payable in the manner specified
in the Agreement.
3. All of the terms, covenants, warranties, conditions, agreements and
representations of the Agreement are incorporated herein as though set forth in
their entirety and are hereby reaffirmed by Borrower and Bank as though fully
set forth herein.
BORROWER(S): JMAR Technologies, Inc.
/s/ DENNIS E. VALENTINE
- -------------------------------- -----------------------------------
By: By:
- -------------------------------- -----------------------------------
By: By:
Accepted this 20th day of December, 1999 at Bank's place of business in San
Jose, CA 95113.
/s/ BROCK MULLINS
-----------------------------------
By: Brock Mullins, Vice President
<PAGE> 19
Addendum to Inventory Rider (Revolving Advance)
Dated December 30, 1999
Section 1 is hereby amended as follows:
1. At the request of Borrower, made at any time and from time to time
during the term of the Agreement, and so long as no event of default under the
Agreement has occurred and Borrower is in full, faithful and timely compliance
with each and all of the covenants, conditions, warranties and representations
contained in the Agreement, this Rider and/or any other agreement between Bank
and Borrower, Bank agrees to lend Borrower Thirty Five Percent (35.00%) of the
lower of cost or market value of JMAR Precision Systems' total inventory, and as
may be . . .
/s/ DENNIS E. VALENTINE
- -------------------------------
JMAR Technologies
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY INCLUDE:
JMAR Research, Inc. (a California corporation)
JMAR Precision Systems, Inc. (a California corporation)
JMAR Semiconductor, Inc. (a California corporation)
<PAGE> 1
EXHIBIT 23.1
[ARTHUR ANDERSON LLP LETTERHEAD]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we
hereby consent to the incorporation by reference in Form S-8 Registration
Statements (Nos. 33-66672 and 33-66674) pertaining to the 1988 Stock Option Plan
and the 1991 Stock Option Plan of JMAR Technologies, Inc., Form S-3 Registration
Statements (Nos. 33-47390, 33-96848, 333-24353 and 333-52703) and Form S-8
Registration Statements (Nos. 333-10923 and 333-10925) of our report dated March
22, 1999 with respect to the consolidated financial statements and the financial
statement schedule included in this Annual Report (Form 10-K) of JMAR
Technologies, Inc.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
San Diego, California
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,323,127
<SECURITIES> 0
<RECEIVABLES> 7,150,628
<ALLOWANCES> 71,193
<INVENTORY> 6,253,336
<CURRENT-ASSETS> 16,590,137
<PP&E> 6,049,765
<DEPRECIATION> 3,719,102
<TOTAL-ASSETS> 20,673,768
<CURRENT-LIABILITIES> 9,121,394
<BONDS> 642,913
0
0
<COMMON> 180,748
<OTHER-SE> 10,728,713
<TOTAL-LIABILITY-AND-EQUITY> 20,673,768
<SALES> 24,767,740
<TOTAL-REVENUES> 24,767,740
<CGS> 17,715,746
<TOTAL-COSTS> 17,715,746
<OTHER-EXPENSES> 9,197,098
<LOSS-PROVISION> 116,167
<INTEREST-EXPENSE> 240,928
<INCOME-PRETAX> (2,248,994)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,248,994)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,248,994)
<EPS-BASIC> (.12)
<EPS-DILUTED> (.12)
</TABLE>
