UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 

 
FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


 
Date of Report (Date of earliest event reported):  March 30, 2009

OPTEX SYSTEMS HOLDINGS, INC.
(Exact Name of Registrant as Specified in Charter)
 
 
Delaware
 
333- 143215
 
33- 143215
(State or other jurisdiction of incorporation)
 
(Commission File Number)
 
(IRS Employer Identification No.)
 
 
1420 Presidential Drive, Richardson, TX
 
75081-2439
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code: 972-238-1403
 

Sustut Exploration, Inc. 1420 5th Avenue #220
Seattle, Washington 98 101
(Former name or former address, if changed since last report)
 
 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 DFR 240.14a-12)
 
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
o Pre-commencement communications pursuant to Rule 13e-4 (c) under the Exchange Act (17 CFR 240.13e-4(c))



ITEM 1.01 Entry into Material Definitive Agreement.

On March 30, 2009, Optex Systems Holdings, Inc. (formerly known as Sustut Exploration, Inc., and the name was changed on March 26, 2009 pursuant to an amendment to the Articles of Incorporation, filed with the State of Delaware)  (the “Registrant”) entered into an Agreement and Plan of Reorganization (the “Reorganization Agreement”) with Optex Systems, Inc., a privately-held Delaware corporation (“Optex”).

Closing under the Reorganization Agreement was contingent, among other things, upon receipt by the Registrant of (i) financial statements of Optex which have been audited in accordance with generally accepted accounting principles in the U.S,  (ii) written approval from all shareholders of Optex of the terms of Reorganization Agreement,  (iii) receipt of representations from the shareholders of Optex regarding their ownership of the shares and authority to transfer them under the terms of the Reorganization Agreement free and clear of any liens, claims or encumbrances, and (iv) delivery of the share certificates representing all of the issued and outstanding stock of Optex, duly endorsed for transfer.   The parties closed the transaction on or about March 30, 2009.

Registrant, Shareholders and Optex entered into this Agreement which provides, among other things, that (i) the outstanding 85,000,000 shares of Optex Common Stock be exchanged by Registrant for 113,333,282 shares of Registrant Common Stock, (ii) the outstanding 1,027 shares of Optex Series A Preferred Stock be exchanged by Registrant for 1,027 shares of Registrant Series A Preferred Stock and such additional items as more fully described in the Agreement and (iii) the 8,131,667 shares of Optex purchased in the private placement were exchanged by Registrant for 8,131,667 shares of Registrant Common Stock, as acknowledged by Registrant.  Accordingly, following closing, Optex will be a wholly-owned subsidiary of the Registrant, and the Registrant will have a total of approximately 141,464,940 million common stock shares issued and outstanding, of which 19,999,991 million will be owned by persons who were previously shareholders of the Registrant and 121,464,949 will be owned by persons who were previously shareholders of Optex, and/or their nominees. Registrant will also have 1,027 shares of its Series A Preferred Stock outstanding which will be owned by persons who were previously creditors of Optex.

In addition, pursuant to the terms and conditions of the Reorganization Agreement upon Closing:
 
-
The Registrant’s board of directors will be reconstituted to consist initially of Stanley Hirschman, Merrick Okamoto and Ronald Richards.   
 
-
All current officers of the Registrant shall resign and the newly constituted board of directors shall appoint Stanley Hirschman as President, and shall appoint such other officers as it deems necessary and in the best interests of the Registrant.   
 
-
Following closing, the Registrant shall complete the sale, transfer or other disposition of its pre-closing business operations, including all assets and liabilities related to such operations.
 

 
Item 2.01 Completion of Acquisition or Disposition of Assets .
 
As used in this Current Report on Form 8-K, all references to the “Company,” “we,” “our” and “us” for periods prior to the closing of the Reorganization refer to the Registrant, and for periods subsequent to the closing of the Reorganization refer to the Registrant and its subsidiaries. 
 
Information regarding the Company, Optex and the principal terms of the Reorganization are set forth below.

The Reorganization

The Reorganization. On March 30, 2009, a closing occurred whereby the then existing shareholders of Optex exchanged their shares of Optex Common Stock for the shares of Common Stock of Registrant as follows:  (i) the outstanding 85,000,000 shares of Optex Common Stock were exchanged by Registrant for 113,333,282 shares of Registrant Common Stock, (ii) the outstanding 1,027 shares of Optex Series A Preferred Stock were exchanged by Registrant for 1,027 shares of Registrant Series A Preferred Stock and such additional items as more fully described in the Agreement and (iii) the 8,131,667 shares of Optex Common Stock purchased in the private placement will be exchanged by Registrant for 8,131,667 shares of Registrant Common Stock, as acknowledged by Registrant.   Optex shall remain a wholly owned subsidiary of Registrant, and Optex shareholders are now shareholders of Registrant.

Simultaneously with closing of the Reorganization Agreement (and the shares are included above), as of March 30, 2009, Optex accepted subscriptions (“Private Placement”) from accredited investors for a total 27 units (the "Units"), for $45,000 per Unit, with each Unit consisting of Three Hundred Thousand (300,000) shares of common stock, no par value (the "Common Stock") of Optex and warrants to purchase Three Hundred Thousand (300,000) shares of Common Stock for $0.45 per share for a period of five (5) years from the initial closing (the "Warrants"), which were issued by Registrant after the closing referenced above.  Gross proceeds to the Company were $1,219,750, and after deducting a finders fee of $139,555 which was payable in cash, and non-cash consideration which constituted satisfaction of indebtedness owed to an investor of $146,250, net proceeds were $933,945.  The finder also received five year warrants to purchase 2.7 Units, at an exercise price of $49,500 per unit.

Neither the Company nor Optex had any options or warrants to purchase shares of capital stock outstanding immediately prior to or following the Reorganization, except for 8,941,667 warrants issued in the Private Placement. Immediately prior the the closing, Registrant adopted the 2009 Stock Option Plan providing for the issuance of up to 6,000,000 shares for the purpose of having shares available for the granting of options to Company officers, directors, employees and to independent contractors who provide services to the Company.  
 

 
The shares of the Company’s common stock issued in connection with the Reorganization and the private placement offering were not registered under the Securities Act.  All shares issued in connection with the Reorganization were issued in reliance upon the exemption from registration provided by Regulation D under the Securities Act, which exempts transactions to certain accredited. The shares issued in connection with the private placement offering were issued in part in reliance upon the exemption from registration provided by Regulation D under the Securities Act and in part in reliance upon the exemption from registration provided by Section 4(2) under the Securities Act for transactions not involving any public offering.  All such securities constitute “restricted securities” as defined in Rule 144 under the Securities Act of 1933, and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements. Certificates representing these shares contain a restrictive legend stating the same.
 
Changes Resulting from the Reorganization.  Registrant’s business is now the business of Optex.  Optex, which was founded in 1987, is a Richardson, Texas – based ISO 9001:2000 certified concern, which manufactures optical sighting systems and assemblies primarily for Department of Defense (DOD) applications. Its products are installed on a majority of types of U.S. military land vehicles, such as the Abrams and Bradley fighting vehicles, Light Armored and Advanced Security Vehicles and have been selected for installation on the Future Combat Systems (FCS) Stryker vehicle. Optex also manufactures and delivers numerous periscope configurations, rifle and surveillance sights and night vision optical assemblies. Optex delivers its products both directly to the military services and to prime contractors. Optex profitably delivers high volume products, under multi-year contracts, to large defense contractors. Optex has the reputation and credibility with those customers as a strategic supplier.

Following completion of the Reorganization, the Company intends to carry on Optex’s business as its sole line of business. The Company has relocated its executive offices to Optex Systems, Inc., 1420 Presidential Drive, Richardson, TX 75081-2439, and its telephone number is (972) 238-1403.

Changes to the Board of Directors.   In conjunction with closing under the terms of the Reorganization Agreement, the number of members of the Company’s board of directors was increased to three and Stanley Hirschman, Ronald Richards and Merrick Okamoto were appointed to serve as Directors of the Company and Andrey Oks resigned.   Ronald Richards was appointed as Chairman of the board of directors.

All of the Company’s directors will hold office until the next annual meeting of the stockholders or until the election and qualification of their successors. The Company’s officers are elected by the board of directors and serve at the discretion of the board of directors.

Name Change and Stock Option Plan.   On or about March 26, 2009, the Registrant’s board of directors and shareholders approved the change of the Registrant’s name to “Optex Systems Holdings, Inc.” and approved the 2009 Stock Option Plan.

2009 Stock Option Plan.  The purpose of the Plan is to to assist the Registrant in attracting and retaining highly competent employees and to act as an incentive in motivating selected officers and other employees of the Registrant and its subsidiaries, and directors and consultants of the Registrant and its subsidiaries, to achieve long-term corporate objectives.  There are 6,000,000 shares of common stock reserved for issuance under this Plan.  As of March 31, 2009, the Registrant had not issued any stock options under this Plan.
 

 
Description of the Business

Background

On March 30, 2009, a closing occurred whereby the then existing shareholders of the Company exchanged their shares of Company Common Stock with the shares of Common Stock of Sustut Exploration, Inc. (“Registrant”) as follows:  (i) the outstanding 85,000,000 shares of Company Common Stock were exchanged by Registrant for 113,333,282 shares of Registrant Common Stock, (ii) the outstanding 1,027 shares of Company Series A Preferred Stock were exchanged by Registrant for 1,027 shares of Registrant Series A Preferred Stock and such additional items as more fully described in the Agreement and (iii) the 8,131,667 shares of Company purchased in the private placement will be exchanged by Registrant for 8,131,667 shares of Registrant Common Stock, as acknowledged by Registrant.   The Company shall remain a wholly-owned subsidiary of Registrant, and the Company’s shareholders are now shareholders of Registrant.

Simultaneously with closing under the Reorganization Agreement (and the shares are included above), as of March 30, 2009 , the Company accepted subscriptions (“Private Placement”) from accredited investors for a total 27 units (the "Units"), for $45,000.00 per Unit, with each Unit consisting of Three Hundred Thousand (300,000) shares of common stock, no par value (the "Common Stock") of the Company and warrants to purchase Three Hundred Thousand (300,000) shares of Common Stock for $0.45 per share for a period of five (5) years from the initial closing (the "Warrants"), which were issued by Registrant after the closing referenced above.  Gross proceeds to the Company were $1,219,750, and after deducting a finders fee of $139,555 which was payable in cash, and consideration which constituted of satisfaction of indebtedness owed to an investor of $146,250, net proceeds were $933,945.  The finder also received five year warrants to purchase 2.7 Units, at an exercise price of $49,500 per unit.

Optex, which was founded in 1987, is a Richardson, Texas – based ISO 9001:2000 certified concern, which manufactures optical sighting systems and assemblies primarily for Department of Defense (DOD) applications. Its products are installed on a majority of types of U.S. military land vehicles, such as the Abrams and Bradley fighting vehicles, Light Armored and Armored Security Vehicles and have been selected for installation on the Future Combat Systems (FCS) Stryker vehicle. Optex also manufactures and delivers numerous periscope configurations, rifle and surveillance sights and night vision optical assemblies. Optex delivers its products both directly to the military services and to prime contractors.

Optex profitably delivers high volume products, under multi-year contracts, to large defense contractors. Optex has the reputation and credibility with those customers as a strategic supplier. The successful completion of the separation from IRSN has enhanced the Company’s ability to serve its existing customers and will set the stage for it to become a center of manufacturing excellence. The Company also anticipates the opportunity to integrate some of its night vision and optical sights products into retail applications.  The Company now plans to carry on the business of Optex as its sole line of business, and all of the Company’s operations are expected to be conducted by and through Optex.  All references to the “Company,” “we,” “our” and “us” for periods prior to the closing of the Reorganization refer to the Registrant, and references to the “Company,” “we,” “our” and “us” for periods subsequent to the closing of the Reorganization refer to the Registrant and its subsidiaries.
 

 
Organizational History

Optex Systems, Inc., which was founded in 1987, is an ISO 9001:2000 certified concern which manufactures optical sighting systems and assemblies primarily for Department of Defense (DOD) applications. Optex was a privately-held company since inception until being acquired by publicly traded Irvine Sensors Corp. (IRSN) on December 30, 2005 and was operated as a wholly owned subsidiary of IRSN. On October 14, 2008, Optex Systems Inc. (Delaware) acquired Optex Systems in a public auction process. Optex Delaware was formed by the Longview Fund, LP and Alpha Capital Antstalt, former secured creditors of IRSN, to consummate the transaction with the Company, and subsequently, on February 20, 2009, Longview Fund conveyed its ownership interest in the Company to Sileas Corp., an entity owned by three of the Company’s officers.

Products

Optex products are installed on a majority of types of U.S. military land vehicles, such as the Abrams and Bradley fighting vehicles, Light Armored and Advanced Security Vehicles and have been selected for installation on the Future Combat Systems (FCS) Stryker vehicle. Optex also manufactures and delivers numerous periscope configurations, rifle and surveillance sights and night vision optical assemblies. Optex delivers its products both directly to the military services and to prime contractors.

Optex profitably delivers high volume products, under multi-year contracts, to large defense contractors. Optex has the reputation and credibility with those customers as a strategic supplier. The successful completion of the separation from IRSN has enhanced the company’s ability to serve its existing customers and will set the stage for it to become a center of manufacturing excellence. The Company also anticipates the opportunity to integrate some of its night vision and optical sights products into retail applications.

Specific product lines include:

 
·
Electronic sighting systems
 
 
·
Mechanical sighting systems
 
 
·
Laser protected glass periscopes
 
 
·
Laser protected plastic periscopes
 
 
·
Non-laser protected plastic periscopes
 
 
·
Howitzer sighting systems
 
 
·
Ship binoculars
 
 
·
Replacement optics (e.g. filters, mirrors)
 

 
Location and Facility

Optex is located in Richardson, TX in a 49,000 square foot facility and currently has 109 employees. The Company operates with a single shift, and capacity could be expanded by adding a second shift.  The Company’s proprietary processes and methodologies serve to provide barriers to entry by other competing suppliers. In many cases Optex is the sole source provider or one of only two providers of a product.  It has capabilities which include machining, bonding, painting, tracking, engraving and assembly and can perform both optical and environmental testing in-house.

Prior Operational/Financial Challenges; Recovery; and Future Growth Potential

During the IRSN phase of Optex’s history, its parent company faced certain business challenges and utilized the cash flow from Optex to meet other non-Optex needs.  This left Optex with inadequate operating resources.

Since the buyout, the Optex picture has dramatically changed.  Management has made substantial progress in increasing operational efficiencies and productivity and has become profitable.  Based on this progress, management estimates 2009 annual revenue of $27.4 million to be drawn from its $42 million backlog and ongoing contractual business.

Optex is currently bidding on several substantial government contracts to expand sales and production beyond the current production and backlog.  It is also exploring possibilities to adapt some of its products for commercial use where those markets show potential for solid revenue growth.

Market Opportunity – U.S. Military

Optex products are currently marketed in the military and related government markets.  Since 1998, American military spending has increased over 225% on an annual basis to over $600 billion per year.  As the American presence overseas continues, this level of spending should continue to exist.  Also, the market for replacement parts for existing military equipment is significant.

Optex meets the U.S. military requirements in its product lines:

 
·
Reliability – failure can cost lives
 
 
·
Cost effectiveness
 
 
·
Ability to deliver on schedule
 
 
·
Armed forces need to be able to see to perform
 
 
·
Mission critical products.

Therefore, Optex is well positioned to continue to service U.S. military needs.
 

 
Market Opportunity – Commercial/Retail

Optex products are currently sold exclusively to military and related government markets. We believe we have significant potential retail opportunities to commercialize various products we presently manufacture.  Our initial focus will be directed in three product areas.

 
·
Big Eye Binoculars – While the military application we produce is based on mature military designs, Optex owns all castings, tooling and glass technology.  These large fixed mount binoculars could be sold to Cruise Ships, Personal Yachts and Cities/Municipalities.

 
·
Night Vision Goggles – Optex presently manufactures the Optical System for the NL-61 Night Vision Goggles for the Ministry of Defense of Israel. This technology is based on the IR Squared design and could be implemented for retail commercial applications.

 
·
Infrared Imaging Equipment – Optex manufactures and assembles Infrared Imaging Equipment for Textron and components for Raytheon’s Thermal Imaging M36 Mount product. This equipment and technology has potential to be assembled for border patrol, police and security agencies.

Customer Base

Optex serves customers in three primary categories:  as prime contractor (TACOM, U.S. Army, Navy and Marine Corps), as subcontractor (General Dynamics, BAE, Raytheon and Northrop) and also as a supplier to foreign governments (Israel, Australia and NAMSA).  Although we do serve all three of these categories, at present, approximately 90% of the gross revenue from our business is derived from two customers, General Dynamics Land Systems (“GDLS”) and U.S. Army TACOM, with which we have approximately 50 discrete contracts which cover supply of all of vehicles, product lines and spare parts.  Given the size of GDLS and TACOM as well as the fact that the contracts are not interdependent, we are of the opinion that this provides us with a well diversified customer pool.  This broad base enables Optex to mitigate its risk in this economic environment by not relying on a sole or few sources of revenue as well as providing a broad base from which to build its future business.

Marketing Plan

Optex has used two models to help define its Marketing Plan.  First, Michael Porter’s Five Force Model.


 
   

Potential Entrants – Low.   In order to enter this market companies have a large barrier to entry.  The first hurdle is that an entrant would need to prove the existence of a government approved accounting systems for larger contracts.  Second, the entrant would need to develop the processes required to produce the product.  Third, the entrant would need to produce product and submit successful test requirements (many of which need government consultation to complete).  Finally, in many cases the customer has an immediate need, cannot wait for this qualification cycle, and must issue the contracts to existing suppliers.

Buyers – Medium.   In most cases the buyers have two fairly strong suppliers.  It is in their best interest to keep at least two, and therefore in some cases the contracts are split between suppliers.  In the case of larger contracts, the customer can potentially request an open book policy on costs and expect a reasonable margin has been applied.

Substitutes – Low.   Optex has both new vehicle contracts and replacement part contracts for the exact same product.  The US Government has declared that the Abrams/Bradley base vehicles will be the ground vehicle of choice out through 2040.  This allows efficiencies within the supply chain and a very long ROI on new vehicle proposals.

Suppliers – Low to Medium.   The suppliers of standard processes (casting, machining, plating, etc.) have very little power.  Given the current state of the economy, they need to be very competitive to gain and /or maintain contracts.  Those suppliers of products which use Top Secret Clearance processes are slightly better off; however, there continues to be multiple avenues of supply and therefore moderate power.

Industry Competitors – Low.   The current suppliers have been partitioned according to their processes and the products.  Optex and Miller-Holzwarth tend to compete for the plastic periscope products whereas Optex and Seiler have competed on the higher level products.  In the last 12-18 months, Optex has begun to challenge Seiler in areas where they have long held the dominant role.  For example, while the existing Howitzer contracts are at low margins, the new bids will be at a much higher margin now that Optex has proven they can produce the product.
 

 
The second model is a two by two matrix for Products and Customers.

   
 
This model describes three basic actions for Optex:

 
1)
Take Existing Products into the applications of New Customers.

 
2)
Take New Products into our Existing Customers.

 
3)
Expand the Portfolio by developing New Products for New Customers.

Operations Plan

The Operations Plan for Optex can be broken down into three distinct areas:  Material Management, Manufacturing Space Planning, and Efficient Economies of Scale.

Materials Management

The largest portion of costs captured in the Optex Income Statement is Materials.  Optex has completed the following activities in order to demonstrate continuous improvement:

 
-
Successful Completion of ISO9001:2000 Re-Certification

 
-
Weekly Cycle Counts on Inventory Items

 
-
Weekly Material Review Board Meeting on non-moving piece parts

 
-
Kanban kitting on products with consistent weekly ship quantities

 
-
Daily review of Yields and Product Velocity

 
-
Bill of Material Reviews prior to Work Order Release
 

 
Future continuous improvement opportunities include installation and training of the Shop Floor Control module within our ERP system and organizational efficiencies of common procurement techniques among buyers.

Manufacturing Space Planning

The existing square footage occupied by Optex is 49,000.  While not critical at this time, Optex needs to explore expansion opportunities to support future growth.  Given the ample building opportunities along with competitive lease rates, the objective is to maintain building and building related costs consistent on a percent to sales perspective on the Income Statement.  This leads to the third and final area.

Efficient Economies of Scale

Consistent with the aforementioned Space Planning, Optex will drive the economies of scale to reduce support costs on a percentage of sales basis.  These cost reductions can then be either brought directly to the bottom line or used for business investment.

This process is driven by the use of Six Sigma techniques and Process Standardization.  Initial activities in this area have been the success of 5S projects in several production areas which has lead to improved output and customer approval on the aesthetics of the work environment.  In addition to the 5S projects, Optex has used the DMAIC (Define, Measure, Analyze, Improve, Control) Problem Solving technique to identify bottlenecks within the process flow and improve product yields.  These successful techniques can then be duplicated across the production floor and drive operational improvements.

Intellectual Property

We utilize several highly specialized and unique processes in the manufacture of our products.  While we believe that these trade secrets have value, it is probable that our future success will depend primarily on the innovation, technical expertise, manufacturing and marketing abilities of our personnel. We cannot assure you that we will be able to maintain the confidentiality of our trade secrets or that our non-disclosure agreements will provide meaningful protection of our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or other disclosure.  The confidentiality agreements that are designed to protect our trade secrets could be breached, and we might not have adequate remedies for the breach.  Additionally, our trade secrets and proprietary know-how might otherwise become known or be independently discovered by others.  We do not possess any patents.
 

 
Our competitors, many of which have substantially greater resources, may have applied for or obtained, or may in the future apply for and obtain, patents that will prevent, limit or interfere with our ability to make and sell some of our products. Although we believe that our products do not infringe on the patents or other proprietary rights of third parties, we cannot assure you that third parties will not assert infringement claims against us or that such claims will not be successful.

Competition

The markets for our products are competitive. We compete primarily on the basis of our ability to design and engineer products to meet performance specifications set by our customers. Our customers include the military and government end users as well as prime contractors that purchase component parts or subassemblies, which they incorporate into their end products.  Product pricing, quality, customer support, experience, reputation and financial stability are also important competitive factors.

There are a limited number of competitors in each of the markets for the various types of products that we design, manufacture and sell. At this time we consider our primary competitors to be Seiler Instruments, Miller-Holzwarth, Kent Periscopes, and EO System Co.

Our competitors are often well entrenched, particularly in the defense markets. Some of these competitors have substantially greater resources than we do. While we believe that the quality of our technologies and product offerings provides us with a competitive advantage over certain manufacturers, some of our competitors have significantly more financial and other resources than we do to spend on the research and development of their technologies and for funding the construction and operation of commercial scale plants.

We expect our competitors to continue to improve the design and performance of their products. We cannot assure investors that our competitors will not develop enhancements to, or future generations of, competitive products that will offer superior price or performance features, or that new technology or processes will not emerge that render our products less competitive or obsolete. Increased competitive pressure could lead to lower prices for our products, thereby adversely affecting our business, financial condition and results of operations. Also, competitive pressures may force us to implement new technologies at a substantial cost, and we may not be able to successfully develop or expend the financial resources necessary to acquire new technology. We cannot assure you that we will be able to compete successfully in the future.

External Growth Potential/Roll-Up Opportunities

Optex operates in a business environment which is highly fragmented with numerous private companies which were established more than 20 years ago. Some of these companies were founded by family members 2-3 generations before the present family operators.  Optex believes there are opportunities to seek mergers of strategic competitors once we are a public entity. We are not aware of any previous attempts to roll-up companies with our defense manufacturing expertise.
 

 
The typical company we compete with has 50-100 employees and annual revenue of $20-$50 million dollars. Most of these private companies have never had the opportunity to enjoy the benefits of consolidation and the resulting economies of scale which this can provide.

We plan to engage our competition on a selective basis, and explore all opportunities to grow our operations through mergers and/or acquisitions.

We have no acquisition agreements pending at this time and are not currently in discussions or negotiations with any third parties.

Employees

The Company has 109 employees. To the best of its knowledge, the Company is compliant with local prevailing wage, contractor licensing and insurance regulations, and has good relations with its employees.

Forward-Looking Statements

This Current Report on Form 8-K contains forward-looking statements. To the extent that any statements made in this Current Report on Form 8-K contain information that is not historical, these statements are essentially forward-looking. Forward-looking statements can be identified by the use of words such as “expects,” “plans,” “will,” “may,” “anticipates,” believes,” “should,” “intends,” “estimates,” and other words of similar meaning. These statements are subject to risks and uncertainties that cannot be predicted or quantified and, consequently, actual results may differ materially from those expressed or implied by such forward-looking statements. Such risks and uncertainties are outlined in “Risk Factors” and include, without limitation, the Company’s ability to raise additional capital to finance the Company’s activities; the effectiveness, profitability, and the marketability of its products; legal and regulatory risks associated with the Reorganization ; the future trading of the common stock of the Company; the ability of the Company to operate as a public company; the period of time for which the proceeds of the Private Placement will enable the Company to fund its operations; the Company’s ability to protect its proprietary information; general economic and business conditions; the volatility of the Company’s operating results and financial condition; the Company’s ability to attract or retain qualified senior management personnel and research and development staff; and other risks detailed from time to time in the Company’s filings with the SEC, or otherwise.

Information regarding market and industry statistics contained in this Report is included based on information available to the Company that it believes is accurate. It is generally based on industry and other publications that are not produced for purposes of securities offerings or economic analysis. The Company has not reviewed or included data from all sources, and cannot assure investors of the accuracy or completeness of the data included in this Report. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and the additional uncertainties accompanying any estimates of future market size, revenue and market acceptance of products and services. The Company does not undertake any obligation to publicly update any forward-looking statements. As a result, investors should not place undue reliance on these forward-looking statements.
 

 
Management’s Discussion and Analysis or Plan of Operations

All references to the “Company,” “we,” “our” and “us” for periods prior to the closing of the Reorganization refer to Optex, and references to the “Company,” “we,” “our” and “us” for periods subsequent to the closing of the Reorganization refer to the Registrant and its subsidiaries.

The following discussion highlights the principal factors that have affected our financial condition and results of operations as well as our liquidity and capital resources for the periods described.  This discussion contains forward-looking statements. Please see “Special cautionary statement concerning forward-looking statements” and “Risk factors” for a discussion of the uncertainties, risks and assumptions associated with these forward-looking statements. The operating results for the periods presented were not significantly affected by inflation.

Plan of Operation

Through a private placement offering completed in conjunction with closing under the Reorganization Agreement, the Company has raised $1,219,750 ($933,945, net of finders fees and satisfaction of indebtedness owed to an investor) to fund operations.  The proceeds will be used as follows:

Description
 
Offering
 
Additional Personnel
  $ 150,000  
Legal and Accounting Fees
  $ 100,000  
Working Capital
  $ 683,945  
         
Totals:
  $ 933,945  

Results of Operations

Three Months Ended December 31, 2008 Compared to the Three Months Ended December, 2007

Revenues.   During the three months ended December 28, 2008, we recorded revenues of $7.2 million, as compared to revenue for the three months ended December 30, 2007 of $4.4 million, an increase of $2.9 million or 64.5%.  This increase in revenues was primarily due to the ramp up of production on our U.S. government and General Dynamics periscope lines to meet new orders and accelerated delivery customer requirements..
 

 
Cost of Goods Sold.   During the quarter ended December 28, 2008, we recorded cost of goods sold of $6.3 million as opposed to $3.8 million during the quarter ended December 30, 2007, an increase of $2.5 million or 64.2%.  This increase in cost of goods sold was primarily due to increased revenue on our periscope lines in support of higher backlog and accelerated delivery schedules.

G&A Expenses . During the three months ended December 28, 2008, we recorded operating expenses of $ 0.6 million as opposed to $1.2 million during the three months ended December 30, 2007, a decrease of $0.6 million or 50%.  This decrease in G&A expenses was primarily due to the elimination of Corporate Cost allocations from Irvine Sensors of $0.4 million, the Irvine Sensors, Employee Stock Bonus Plan (ESBP) of $0.1 million and further reductions in consulting and travel expenses previously charged to Optex by Irvine Sensors in the three months ended December 30, 2007.

Earnings Before Other Expenses and Taxes. During the three months ended December 28, 2008, we recorded earnings of $0.3 million as opposed to $(0.6 million) during the three months ended December 30, 2007, an increase of 0.9 million or 150%.  This increase in earnings before other expenses and taxes was primarily due to increased sales revenue in the three months ended December 28, 2008 combined with reduced general and administrative expenses driven by the elimination of Irvine Sensors corporate costs pushed down to Optex in the three months ended December 30, 2007.

Net Loss .  During the three months ended December 28, 2008, we recorded a net loss of $0.03 million, as compared to $0.69 million for three months ended December 30, 2007, a decrease of $0.7 million or 97.1%.  This decrease in net loss was principally the result of an reduction in operating expenses related to costs pushed down from Irvine Sensors in the three months ended December 30, 2007 combined with increased revenue in three months ended December 28, 2008.  Additionally, in the three months ended December 28, 2008 Optex incurred $0.5 million in intangible expenses, representing an increase of $0.3 million over the three months ended December 30, 2007.  The increased intangible expenses relate to the acquisition of Optex from Irvine Sensors.

Year Ended September 28, 2008 Compared to Year Ended September 30, 2007

Revenues.   During the year ended September 28, 2008, we recorded revenues of $20.0 million, as compared to revenue for the year ended September 30, 2007 of $15.4 million, an increase of $4.6 million or 29.9%.  This increase in revenues was primarily due to increased shipments on the ICWS periscope, and M137 & M187 Howitzer programs.

Cost of Goods Sold.   During the year ended September 28, 2008, we recorded cost of goods sold of $18.1 million as opposed to $17.4 million during the year ended September 30, 2007, an increase of $0.7 million or 4.5%.  This increase in cost of goods sold was primarily due to increased revenues of $4.6 million.  The margins on the increased revenue is significantly improved over the year ended September 30, 2007 due to equitable price adjustments and accelerated schedule consideration received in the year ended September 2008 on periscopes and Howitzer programs.  Additionally, the gross margin for year ended September 30, 2007 included significant contract loss reserves, excess and obsolescence and other non recurring inventory adjustments related to unrecoverable costs increases on fixed price contracts .
 

 
Loss Before Other Expenses and Taxes. During the year ended September 28, 2008, we recorded a loss of $3.1 million as opposed to $6.8 million during the year ended September 30, 2007, a decrease of $3.7 million or 54.4%.  This decrease in loss was primarily due to the negotiation of several equitable price adjustments and consideration on accelerated delivery schedules in the year ended September 28, 2008.  Additionally, for  the year ended December 30, 2007 non recoverable cost increases on fixed price contracts resulted in significant contract loss and excess and obsolete inventory reserves as discussed above in cost of goods sold.  These losses were partially offset in 2008 with equitable price adjustments negotiated with the customer.

Net Loss .  During the year ended September 28, 2008, we recorded a net loss of $4.8 million, as compared to $6.8 million for year ended September 30, 2007, a decrease of $2.0 million or 29.4%.  This decrease in net loss was principally the result of increased revenues and negotiated equitable and other price adjustments discussed above partially offset by a $1.6 million adjustment for asset impairment of goodwill,  Goodwill was reviewed as of September 28, 2008 based upon the most recent value of the company as determined by the sale to third party purchasers on October 14, 2008.

Liquidity and Capital Resources

We have historically met our liquidity requirements from a variety of sources, including government and customer funding through contract progress bills, short term loans,  and notes from related parties.  Based on our strategy and the anticipated growth in our business, we believe that our liquidity needs will increase. The amount of such increase will depend on many factors, including the costs associated with the fulfillment of our projects, whether we upgrade our technology, and the amount of inventory required for our expanding business.

For the 3 months ended December 28, 2008

Cash and Cash Equivalents.   As of December 28, 2008, we had cash and cash equivalents of $0.5 million, as compared to cash and cash equivalents of $0.1 million as of December 30, 2007.

Net Cash Used in Operating Activities. Net cash provided in operating activities totaled $0.5 million for the 3 months ended December 28, 2008, as compared to $0.3 million used for the 3 months ended December 30, 2007.

Net Cash Used in Investing Activities. Net cash used in investing activities totaled $0.02 million during the 3 months ended December 28, 2008, as compared to net cash used in investing activities of $0.03 million during the 3 months ended December 30, 2007.

Net Cash Provided By Financing Activities. Net cash provided by financing activities totaled $0.2 million during the 3 months ended December 28, 2008, as compared to zero during the 3  months ended December 30, 2007.
 

 
For the 12 months ended September 28, 2008

Cash and Cash Equivalents.   As of September 28, 2008, we had cash and cash equivalents of $0.2 million compared to $0.5 million in 2007.

Net Cash Used in Operating Activities. For the year ended September 28, 2008 we used $0.6 million of net cash in operating activities, as compared to using $1.5 million of net cash in operating activities during 2007.

Net Cash Used in Investing Activities. Net cash used in investing activities totaled $0.1 million during the 12 months ended September 28, 2008, as compared to net cash used in investing activities of $0.06 million during the 12 months ended September 30, 2007.

Net Cash Provided By Financing Activities. Net cash provided by financing activities totaled $0.4 million during the 12 months ended September 28, 2008, as compared to net cash provided by financing activities of $2.0 million during the 12  months ended September 30, 2007

Critical Accounting Policies and Estimates
 
Basis of Presentation

The accompanying financial statements include the historical accounts of Optex Texas (hereinafter, the “Company” or “Optex Texas”). The financial statements have been presented as subsidiary-only financial statements, reflecting the balance sheets, results of operations and cash flows of the subsidiary as a stand-alone entity.

Although, the Company has been majority-owned by various parent companies, no accounts of the parent companies or the effects of consolidation with any parent companies have been included in the accompanying financial statements.

The financial statements have been presented  on the basis of push down accounting in accordance with Staff Accounting Bulletin No. 54 (SAB 54)   Application of “Push Down” Basis of Accounting in Financial Statements of Subsidiaries Acquired by Purchase . SAB 54 states that the push down basis of accounting should be used in a purchase transaction in which the entity becomes wholly-owned. Under the push down basis of accounting certain transactions incurred by the parent company, which would otherwise be accounted for in the accounts of the parent, are “pushed down” and recorded on the financial statements of the subsidiary. Accordingly, items resulting from the purchase transaction such as goodwill, debt incurred by the parent to acquire the subsidiary and other costs related to the purchase have been recorded on the financial statements of the Company.
 

 
Use of Estimates:   The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statement and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the estimates.
 
Accounts Receivable: The Company records its accounts receivable at the original sales invoice amount less shipment liquidations for previously collected advance/progress bills and an allowance for doubtful accounts. An account receivable is considered to be past due if any portion of the receivable balance is outstanding beyond its scheduled due date. On a quarterly basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts, based on its history of past write-offs and collections, and current credit conditions. No interest is accrued on past due accounts receivable. As the customer base is primarily U.S. government and government prime contractors, the Company has concluded that there is no need for an allowance for doubtful accounts for the years ended September 28, 2008 and September 30, 2007.

Warranty Costs:   Optex warrants the quality of its products to meet customer requirements and be free of defects for twelve months subsequent to delivery.  On certain product lines the warranty period has been extended to 24 months due to technical considerations incurred during the manufacture of such products.  In the year ended September 28, 2008, the company incurred $227,000 of warranty expenses representing the estimated cost of repair or replacement for specific customer returned products still covered under warranty as of the return date and awaiting replacement, in addition to estimated future warranty costs for shipments occurring during the twelve months proceeding September 28, 2008.  Future warranty costs were determined, based on estimated cost of replacement for expected returns based upon our most recent experience rate of defects as a percentage of sales.  Prior to fiscal year 2008, all warranty expenses were incurred as product was replaced with no reserve for warranties against deliveries in the covered period.

Estimated Costs to Complete and Accrued Loss on Contracts:   The Company reviews and reports on the performance of its contracts and production orders against the respective resource plans for such contracts/orders. These reviews are summarized in the form of estimates to complete ("ETC”s) and estimates at completion (“EAC”s).  EACs include Optex’s incurred costs to date against the contract/order plus management's current estimates of remaining amounts for direct labor, material, other direct costs and subcontract support and indirect overhead costs based on the completion status and future contractual requirements for each order. If an EAC indicates a potential overrun (loss) against a fixed price contract/order, management generally seeks to reduce costs and /or revise the program plan in a manner consistent with customer objectives in order to eliminate or minimize any overrun and to secure necessary customer agreement to proposed revisions.

If an EAC indicates a potential overrun against budgeted resources for a fixed price contract/order, management first attempts to implement lower cost solutions to still profitably meet the requirements of the fixed price contract.  If such solutions do not appear practicable, management makes a determination whether to seek renegotiation of contract or order requirements from the customer. If neither cost reduction nor renegotiation appears probable, an accrual for the contract loss/overrun is recorded against earnings and the loss is recognized in the first period the loss is identified based on the most recent EAC of the particular contract or product order.
 

 
Goodwill and Other Intangible Assets:   Goodwill represents the cost of acquired businesses in excess of fair value of the related net assets at acquisition.  The Company does not amortize goodwill, but tests it annually for impairment using a fair value approach as of the first day of its fourth fiscal quarter and between annual testing periods, if circumstances warrant.  Goodwill of Optex was reviewed as of September 30, 2007 and based on the assessment, it was determined that no impairment was required.  Goodwill was reviewed as of September 28, 2008, and it was determined that an impairment charge of $1,586,416 was required. The fair values assigned to the assets of the Company and the goodwill was based upon the most recent value of the Company as determined by the sale to third party purchasers on October 14, 2008.

The Company amortizes the cost of other intangibles over their estimated useful lives, unless such lives are deemed indefinite. Amortizable intangible assets are tested for impairment based on undiscounted cash flows and, if impaired, written down to fair value based on either discounted cash flows or appraised values. The identified amortizable intangible assets at September 28, 2008 and September 30, 2007 derived from the acquisition of Optex by Irvine Sensors and consisted of non-competition agreements and customer backlog, with initial useful lives ranging from two to eight years. Intangible assets with indefinite lives are tested annually for impairment, as of the first day of the Company's fourth fiscal quarter and between annual periods, if impairment indicators exist, and are written down to fair value as required.

Revenue Recognition: The Company recognizes revenue upon transfer of title at the time of shipment (F.O.B. shipping point), when all significant contractual obligations have been satisfied, the price is fixed or determinable, and collectability is reasonably assured.

Recent Accounting Pronouncements
 
In June 2006, The FASB issued Interpretation No. 48 “ Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 ” (“FIN 48”). This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB No. 109, “ Accounting for Income Taxes . FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 did not have a material impact on the Company's consolidated financial position, results of operations, or cash flows.
 

 
In September 2006, the FASB issued FASB No. 157, “ Fair Value Measurements ” which establishes a framework for measuring fair value, and expands disclosures about fair value measurements. While FASB No. 157 does not apply to transactions involving share-based payment covered by FASB No. 123, it establishes a theoretical framework for analyzing fair value measurements that is absent from FASB No. 123. We have relied on the theoretical framework established by FASB No. 157 in connection with certain valuation measurements that were made in the preparation of these financial statements. FASB No. 157 is effective for years beginning after November 15, 2007. Subsequent to the Standard’s issuance, the FASB issued an exposure draft that provides a one year deferral for implementation of the Standard for non-financial assets and liabilities. The Company is currently evaluating the impact FASB No. 157 will have on its financial statements.
 
In February 2007, Statement of Financial Accounting Standards No. 159, “ The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115 ,” (FASB 159), was issued. This standard allows a company to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and financial liabilities on a contract-by-contract basis, with changes in fair value recognized in earnings. The provisions of this standard are effective as of the beginning of our fiscal year 2008, with early adoption permitted. The Company is currently evaluating what effect the adoption of FASB 159 will have on its financial statements.
 
In March 2007, the Financial Accounting Standards Board ratified Emerging Issues Task Force (“EITF”) Issue No. 06-10, "Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements”.  EITF 06-10 provides guidance for determining a liability for the postretirement benefit obligation as well as recognition and measurement of the associated asset on the basis of the terms of the collateral assignment agreement.  EITF 06-10 is effective for fiscal years beginning after December 15, 2007.  The Company is currently evaluating the impact of EITF 06-10 on its financial statements, but does not expect it to have a material effect.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations and SFAS No. 160, Accounting and Reporting of Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51 . These new standards will significantly change the accounting for and reporting of business combinations and non-controlling (minority) interests in consolidated financial statements. Statement Nos. 141(R) and 160 are required to be adopted simultaneously and are effective for the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company is currently evaluating the impact of adopting SFAS Nos. 141(R) and SFAS 160 on its financial statements. See Note 14 to the financial statements for the year ended September 28, 2008 for adoption of SFAS 141R subsequent to September 30, 2008.
 
In December 2007, the SEC issued Staff Accounting Bulletin No. 110 (“SAB 110”). SAB 110 permits companies to continue to use the simplified method, under certain circumstances, in estimating the expected term of “plain vanilla” options beyond December 31, 2007. SAB 110 updates guidance provided in SAB 107 that previously stated that the Staff would not expect a company to use the simplified method for share option grants after December 31, 2007. The Company does not have any outstanding stock options.
 

 
In March 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 161, " Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133 ”.  SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities.  SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 with early application encouraged. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended   September 30, 2009 . The Company is currently evaluating the impact of SFAS 161 on its financial statements but does not expect it to have a material effect

In May 2008, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (“SFAS”) No. 162, " The Hierarchy of Generally Accepted Accounting Principles ”.  SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States.  SFAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Company is currently evaluating the impact of SFAS 162 on its consolidated financial statements but does not expect it to have a material effect.

In May 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 163, " Accounting for Financial Guarantee Insurance Contracts—an interpretation of FASB Statement No. 60 " (“SFAS 163”).  SFAS 163 interprets Statement 60 and amends existing accounting pronouncements to clarify their application to the financial guarantee insurance contracts included within the scope of that Statement.  SFAS 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years.  As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended   September 30, 2011.  The Company is currently evaluating the impact of SFAS 163 on its financial statements but does not expect it to have a material effect.

Cautionary Factors That May Affect Future Results

This Current Report on Form 8-K and other written reports and oral statements made from time to time by the Company may contain so-called “forward-looking statements,” all of which are subject to risks and uncertainties. You can identify these forward-looking statements by their use of words such as “expects,” “plans,” “will,” “estimates,” “forecasts,” “projects” and other words of similar meaning. You can identify them by the fact that they do not relate strictly to historical or current facts. These statements are likely to address the Company’s growth strategy, financial results and product and development programs. You must carefully consider any such statement and should understand that many factors could cause actual results to differ from the Company’s forward-looking statements. These factors include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and some that are not. No forward-looking statement can be guaranteed and actual future results may vary materially.
 
The Company does not assume the obligation to update any forward-looking statement. You should carefully evaluate such statements in light of factors described in the Company’s filings with the SEC, especially on Forms 10-K, 10-Q and 8-K. In various filings the Company has identified important factors that could cause actual results to differ from expected or historic results. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete list of all potential risks or uncertainties.
 

 
Risk Factors

Investing in our common stock involves a high degree of risk. Prospective investors should carefully consider the risks described below, together with all of the other information included or referred to in this Current Report on Form 8-K, before purchasing shares of our common stock. There are numerous and varied risks, known and unknown, that may prevent us from achieving our goals. The risks described below are not the only risks we will face. If any of these risks actually occurs, our business, financial condition or results of operations may be materially adversely affected. In such case, the trading price of our common stock could decline and investors in our common stock could lose all or part of their investment. The risks and uncertainties described below are not exclusive and are intended to reflect the material risks that are specific to us , material risks related to our industry and material risks related to companies that undertake a public offering or seek to maintain a class of securities that is registered or traded on any exchange or over-the-counter market.

Risks Related to our Business

We expect that we will need to raise additional capital in the future; additional funds may not be available on terms that are acceptable to us, or at all.

We anticipate we will have to raise additional capital in the future to service our debt and to finance our future working capital needs. We cannot assure you that any additional capital will be available on a timely basis, on acceptable terms, or at all. Future equity or debt financings may be difficult to obtain. If we are not able to obtain additional capital as may be required, our business, financial condition and results of operations could be materially and adversely affected.

We anticipate that our capital requirements will depend on many factors, including:

 
·
our ability to repay our existing debt;

 
·
our ability to fulfill backlog;

 
·
our ability to procure additional production contracts;

 
·
our ability to control costs;

 
·
the timing of payments and reimbursements from government and other contracts;

 
·
increased sales and marketing expenses;

 
·
technological advancements and competitors’ response to our products;

 
·
capital improvements to new and existing facilities;

 
·
our relationships with customers and suppliers; and

 
·
general economic conditions including the effects of future economic slowdowns, acts of war or terrorism and the current international conflicts.
 

 
Even if available, financings can involve significant costs and expenses, such as legal and accounting fees, diversion of management’s time and efforts, and substantial transaction costs. If adequate funds are not available on acceptable terms, or at all, we may be unable to finance our operations, develop or enhance our products, expand our sales and marketing programs, take advantage of future opportunities or respond to competitive pressures.

Certain of our products are dependent on specialized sources of supply that are potentially subject to disruption and attendant adverse impact to our business.

Some of our products currently incorporate components purchased from single sources of supply. If supply from single supply sources is materially disrupted, requiring us to obtain and qualify alternate sources of supply for such components, our revenues could decline, our reputation with our customers could be harmed, and our business and results of operations could be adversely affected.

Current economic conditions may adversely affect our ability to continue operations.

Current economic conditions may cause a decline in business and consumer spending and capital market performance, which could adversely affect our business and financial performance.  Our ability to raise funds, upon which we are fully dependent to continue operations, may be adversely affected by current and future economic conditions, such as a reduction in the availability of credit, financial market volatility and recession.

Our historical operations depend on government contracts and subcontracts.  We face additional risks related to contracting with the federal government, including federal budget issues and fixed price contracts.

General political and economic conditions, which cannot be accurately predicted, may directly and indirectly affect the quantity and allocation of expenditures by federal agencies. Even the timing of incremental funding commitments to existing, but partially funded, contracts can be affected by these factors. Therefore, cutbacks or re-allocations in the federal budget could have a material adverse impact on our results of our future operations. Obtaining government contracts may also involve long purchase and payment cycles, competitive bidding, qualification requirements, delays or changes in funding, budgetary constraints, political agendas, extensive specification development, price negotiations and milestone requirements. In addition, our government contracts are primarily fixed price contracts, which may prevent us from recovering costs incurred in excess of its budgeted costs. Fixed price contracts require us to estimate the total project cost based on preliminary projections of the project’s requirements. The financial viability of any given project depends in large part on our ability to estimate such costs accurately and complete the project on a timely basis. Our exposure to the risks of cost overruns exists in our products business due to the fact that our contracts are solely of a fixed-price nature. Some of those contracts are for products that are new to our business and are thus subject to more potential for unanticipated impacts to manufacturing costs. Given the current economic conditions, it is also possible that even if our estimates are reasonable at the time made, that prices of materials are subject to unanticipated adverse fluctuation.  In the event our actual costs exceed the fixed contractual cost of our product contracts, we will not be able to recover the excess costs.
 

 
Some of our government contracts are also subject to termination or renegotiation at the convenience of the government, which could result in a large decline in revenue in any given quarter. Although government contracts have provisions providing for the reimbursement of costs associated with termination, the termination of a material contract at a time when our funded backlog does not permit redeployment of our staff could result in reductions of employees. Optex generally utilizes contract and temporary labor to supplement the regular workforce.  This allows the company to mitigate impacts of significant fluctuations in volume through flexibility in increasing or decreasing the temporary labor workforce as customer requirements dictate.  In addition, the timing of payments from government contracts is also subject to significant fluctuation and potential delay, where first article acceptance and test requirements are required or where a progress billing clause is not provided for in the contract.. Any such delay could result in a temporary shortage in our working capital.

If we fail to scale our operations appropriately in response to growth and changes in demand, we may be unable to meet competitive challenges or exploit potential market opportunities, and our business could be materially and adversely affected.

Our past growth has placed, and any future growth in our historical business is expected to continue to place, a significant strain on our management personnel, infrastructure and resources. To implement our current business and product plans, we will need to continue to expand, train, manage and motivate our workforce, and expand our operational and financial systems, as well as our manufacturing and service capabilities. All of these endeavors will require substantial management effort and additional capital. If we are unable to effectively manage our expanding operations, we may be unable to scale our business quickly enough to meet competitive challenges or exploit potential market opportunities, and our current or future business could be materially and adversely affected.

We do not have long-term employment agreements with our key personnel, other than our Chief Operating Officer. If we are not able to retain our key personnel or attract additional key personnel as required, we may not be able to implement our business plan and our results of operations could be materially and adversely affected.

We depend to a large extent on the abilities and continued participation of our executive officers and other key employees. The loss of any key employee could have a material adverse effect on our business. We do not presently maintain “key man” insurance on any key employees. We believe that, as our activities increase and change in character, additional, experienced personnel will be required to implement our business plan. Competition for such personnel is intense and we cannot assure you that they will be available when required, or that we will have the ability to attract and retain them. In addition, we do not presently have depth of staffing in our executive, operational and financial management. Until additional key personnel can be successfully integrated with its operations, the timing or success of which we cannot currently predict, our results of operations and ultimate success will be vulnerable to difficulties in recruiting a new executive management team and losses of key personnel.
 

 
Risks Relating to the Reorganization

The Company’s directors and executive officers beneficially own a substantial percentage of the Company’s outstanding common stock, which gives them control over certain major decisions on which the Company’s stockholders may vote, which may discourage an acquisition of the Company .

As a result of the Reorganization, Sileas Corp. which is owned by one of the Company’s directors, and two of the Company’s officers, beneficially owns, in the aggregate, approximately 73% of the Company’s outstanding common stock. The interests of the Company’s management may differ from the interests of other stockholders. As a result, the Company’s executive management will have the right and ability to control virtually all corporate actions requiring stockholder approval, irrespective of how the Company’s other stockholders may vote, including the following actions:

 
·
electing or defeating the election of directors;

 
·
amending or preventing amendment of the Company’s certificate of incorporation or bylaws;

 
·
effecting or preventing a merger, sale of assets or other corporate transaction; and controlling the outcome of any other matter submitted to the stockholders for vote.

The Company’s management’s beneficial stock ownership may discourage a potential acquirer from seeking to acquire shares of the Company’s common stock or otherwise attempting to obtain control of the Company, which in turn could reduce the Company’s stock price or prevent the Company’s stockholders from realizing a premium over the Company’s stock price.
 

 
Public company compliance may make it more difficult to attract and retain officers and directors .
 
The Sarbanes-Oxley Act of 2002 and new rules subsequently implemented by the SEC have required changes in corporate governance practices of public companies. As a public entity, the Company expects these new rules and regulations to increase compliance costs in 2009 and beyond and to make certain activities more time consuming and costly. As a public entity, the Company also expects that these new rules and regulations may make it more difficult and expensive for the Company to obtain director and officer liability insurance in the future and it may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for the Company to attract and retain qualified persons to serve as directors or as executive officers.

Risks Relating to the Common Stock

The Company’s stock price may be volatile .

The market price of the Company’s common stock is likely to be highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond the Company’s control, including the following:

 
·
technological innovations or new products and services by the Company or its competitors;

 
·
additions or departures of key personnel;

 
·
limited “public float” following the Reorganization, in the hands of a small number of persons whose sales or lack of sales could result in positive or negative pricing pressure on the market price for the common stock;

 
·
the Company’s ability to execute its business plan;

 
·
operating results that fall below expectations;

 
·
loss of any strategic relationship;

 
·
industry developments;

 
·
economic and other external factors; and

 
·
period-to-period fluctuations in the Company’s financial results.

In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of the Company’s common stock.
 

 
There is currently no liquid trading market for the Company’s common stock and the Company cannot ensure that one will ever develop or be sustained .

The Company’s common stock is currently approved for quotation on the OTC Bulletin Board trading under the symbol SSTX.OB.  However, there is limited trading activity and not currently a liquid trading market.  There is no assurance as to when or whether a liquid trading market will develop, and if such a market does develop, there is no assurance that it will be maintained.  Furthermore, for companies whose securities are quoted on the Over-The-Counter Bulletin Board maintained by the National Association of Securities Dealers, Inc. (the “OTCBB”), it is more difficult (1) to obtain accurate quotations, (2) to obtain coverage for significant news events because major wire services generally do not publish press releases about such companies, and (3) to obtain needed capital.  As a result, purchasers of the Company’s common stock may have difficulty selling their shares in the public market, and the market price may be subject to significant volatility.

Offers or availability for sale of a substantial number of shares of the Company’s common stock may cause the price of the Company’s common stock to decline or could affect the Company’s ability to raise additional working capital .

If the Company’s current stockholders seek to sell substantial amounts of common stock in the public market either upon expiration of any required holding period under Rule 144 or pursuant to an effective registration statement, it could create a circumstance commonly referred to as “overhang,” in anticipation of which the market price of the Company’s common stock could fall substantially.  The existence of an overhang, whether or not sales have occurred or are occurring, also could make it more difficult for the Company to raise additional financing in the future through sale of securities at a time and price that the Company deems acceptable.

The Company’s common stock is currently deemed to be “penny stock”, which makes it more difficult for investors to sell their shares .

The Company’s common stock is currently subject to the “penny stock” rules adopted under section 15(g) of the Exchange Act. The penny stock rules apply to companies whose common stock is not listed on the NASDAQ Stock Market or other national securities exchange and trades at less than $5.00 per share or that have tangible net worth of less than $5,000,000 ($2,000,000 if the company has been operating for three or more years). These rules require, among other things, that brokers who trade penny stock to persons other than “established customers” complete certain documentation, make suitability inquiries of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances. Many brokers have decided not to trade penny stocks because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. If the Company remains subject to the penny stock rules for any significant period, it could have an adverse effect on the market, if any, for the Company’s securities. If the Company’s securities are subject to the penny stock rules, investors will find it more difficult to dispose of the Company’s securities.
 

 
The elimination of monetary liability against the Company’s directors, officers and employees under Delaware law and the existence of indemnification rights to the Company’s directors, officers and employees may result in substantial expenditures by the Company and may discourage lawsuits against the Company’s directors, officers and employees .

The Company’s certificate of incorporation does not contain any specific provisions that eliminate the liability of directors for monetary damages to the Company and the Company’s stockholders; however, the Company provides such indemnification to its directors and officers to the extent provided by Delaware law. The Company may also have contractual indemnification obligations under its employment agreements with its executive officers. The foregoing indemnification obligations could result in the Company incurring substantial expenditures to cover the cost of settlement or damage awards against directors and officers, which the Company may be unable to recoup. These provisions and resultant costs may also discourage the Company from bringing a lawsuit against directors and officers for breaches of their fiduciary duties and may similarly discourage the filing of derivative litigation by the Company’s stockholders against the Company’s directors and officers even though such actions, if successful, might otherwise benefit the Company and its stockholders.

Security Ownership of Certain Beneficial Owners and Management

The following table sets forth information regarding the number of shares of common stock beneficially owned on March 30, 2009, following consummation of the Reorganization and Private Placement, by:

 
·
Each person who is known by us to beneficially own 5% or more of the Registrant’s common stock;

 
·
Each of the Registrant’s directors and named executive officers; and

 
·
All of the Registrant’s directors and executive officers as a group.

Except as otherwise set forth below, the address of each of the persons listed below is   the Registrant’s address.

Title of Class
 
Name of Beneficial Owner
 
Number of Shares
   
Preferred Conversion
   
Combined Ownership
   
Percentage of Outstanding Shares
 
Common Stock :
                           
5% Holders
 
Arland Holdings, Ltd
    11,148,935       4,040,000       15,188,935       7.93 %
   
Sileas Corp. (1)
    102,184,347       37,040,000       139,224,347       72.71 %
 
                                   
Directors and Officers:
 
Stanley Hirschman (2)
    81,747,478       29,632,000       111,379,478       58.17 %
   
Danny Schoening (2)
    15,327,652       5,556,000       20,883,652       10.91 %
                                     
Directors and officers as a group (3 Individuals) (1) (2)
        102,184,347       37,040,000       139,224,347       72.71 %
 
1
Represents shares held by Sileas Corp. of which Stanley Hirschman a Director/Officer of Registrant has a controlling interest (80%), and both Danny Schoening and Karen Hawkins, officers of Registrant, have an interest (15% and 5% respectively).
 
2
Represents common shares held by Sileas Corp.  See footnote 1 above for description of ownership interests of certain officers of Registrant in Sileas Corp.
 

 
MANAGEMENT

Directors and Executive Officers

The following table sets forth information regarding the members of our board of directors and our executive officers and other significant employees. All of our officers and directors were appointed on March 30, 2009, the closing date of the Reorganization.

The following table sets forth certain information with respect to the directors and executive officers of Optex Systems, Inc.:

Name
Age
Position
     
Stanley A. Hirschman
62
President, Secretary,
Treasurer & Director
     
Merrick D. Okamoto
48
Director
     
Ronald F. Richards
42
Chairman of the Board
     
Danny Schoening
44
Chief Operating Officer
     
Karen Hawkins
44
Vice President of
Finance and Controller

Stanley A. Hirschman .  Stan Hirschman serves the Company as its President, Secretary, Treasurer, and a Director.  Mr. Hirschman is the President of CPointe Associates, Inc., a Plano, Texas executive management and retail operations consulting firm.  He is an investment due diligence specialist and works regularly with public companies dealing with the difficulties in the balance between increased regulatory requirements and reasonable corporate governance.   He is a director of Axion Power International, South Texas Oil, Datascension, Inc. and former chairman of Mustang Software, Inc.  While at Mustang Software, Mr. Hirschman took a hands-on role in the planning and execution of the strategic initiative to increase shareholder value resulting in the successful acquisition of the company by Quintus Corporation.  Prior to establishing CPointe Associates, he was Vice President Operations, Software Etc., Inc., a 396 retail store software chain, from 1989 until 1996.  He has also held executive positions with T.J. Maxx, Gap Stores and Banana Republic. Stan is a member of the National Association of Corporate Directors, the KMPG Audit Committee Institute and is a graduate of the Harvard Business School Audit Committees in the New Era of Governance symposium.  He is active in community affairs and serves on the Advisory Board of the Salvation Army Adult Rehabilitation Centers.
 

 
Merrick D. Okamoto .  Mr. Okamoto serves the Company as a Director. Mr. Okamoto is the President and Managing Member of Viking Asset Management, LLC and has been employed in the securities industry since 1983. Mr. Okamoto performs due diligence and research of potential investments for Viking and he is responsible for research, due diligence, and structuring potential investment opportunities. He is also responsible for all Viking trading operations. Mr. Okamoto is widely recognized as an advanced trader specializing in short-term trading with sector momentum and has more than 25 years of extensive experience in technical market analysis techniques. He has been a frequent speaker at national on-line trading venues. From 1987 to 1990, he hosted the television program, The Income Report. He also has appeared on CNN and The MacNeil-Lehrer Report. Before co-founding Viking in 2002, Mr. Okamoto co-founded and was the President of TradePortal.com, Inc. in 1999. TradePortal.com, Inc. is a software development company and its wholly owned subsidiary, TradePortal Securities, Inc., a direct access execution brokerage firm. Mr. Okamoto was instrumental in developing the proprietary Trade Matrix™ software platform offered by TradePortal Securities. His negotiations were key in selling a minority stake in TradePortal.com Inc. to Thomson Financial, a US $6 billion revenue company. Prior to 1999, He held Vice President positions with  Shearson Lehman Brothers, Prudential Securities and Paine Webber, and he was the founder of First Stage Capital, Inc. (1996 to 2002), which specialized in investment banking and consulting to public and private companies.

Ronald F. Richards .  Mr. Richards serves the Company as its Chairman of the Board.  Mr. Richards is the founder and Managing Director of Gray Wolf Partners, LLC, a strategic and financial advisory firm. He previously served as a Managing Director of Viking Asset Management, LLC where his responsibilities included: (i) sourcing, conducting due diligence, and structuring potential investment opportunities and (ii) working with portfolio companies to enhance shareholder value. He previously served as Chief Financial Officer and Senior Vice President, Business Development of Biopure Corporation, a publicly traded biotechnology company developing oxygen therapeutics and as a Managing Director, Corporate Finance of Wells Fargo Van Kasper. Mr. Richards has over 20 years of experience working with public and private companies in the areas of investment banking, corporate finance, law and accounting. He has structured and executed numerous public offerings and private placements raising a total of more than $660 million. He also co-authored PIPES: A CEO's Guide to Successful Private Placements in Public Equities. Mr. Richards holds JD, MBA and BA degrees from UCLA. He is a member of the State Bar of California and a retired Certified Public Accountant.
 

 
Danny Schoening .  Mr. Schoening serves the Company as its Chief Operating Officer.  He has been instrumental in establishing the systems and infrastructure required to continue Optex System’s rapid growth.  This activity was rewarded with Optex System’s recent ISO9001:2000 Certification.  Prior to joining Optex Systems, Danny was the Vice President of Operations for The Finisar Corporation AOC Division for 4 years where he led a team of up to 200 employees  to produce vertical cavity lasers for the data communications industry at production rates of hundreds of thousands of units per week.  Prior to Finisar, Danny was the Director of Operations for multiple divisions of Honeywell International.  Serving the Automotive, Medical, Aerospace, and Consumer Commercial Markets.  During this 17 year period, Danny was recognized with Honeywell’s Lund Award, their highest award for developing employee resources. Danny has a broad experience level in the following technologies: Mechanical Assembly Processes, Micro-Electronic Assembly Processes, Laser Manufacturing, Plastic Molding, Metal Machining, Plating, Thick Film Printing, Surface Mount Technology, Hall Effect Technology and MEMS based Pressure Devices. Danny received a Bachelors of Science in Manufacturing Engineering Technology from the University of Nebraska, an MBA from Southern Methodist University, and holds three United States Patents.

Karen Hawkins .  Ms. Hawkins serves the Company as its Vice President, Finance and Controller.  Ms. Hawkins is a Certified Public Accountant since 1992 with over 22 years experience in Financial Accounting and Management, primarily focused in the Defense and Transportation Industries. She has a strong background in both Financial & Cost Accounting, with extensive Government Pricing, Financial Analysis, and Internal Auditing experience.  Her past history also includes Program Management, Materials Management and Business Development.  She brings over 14 years direct experience in Government Contracting with a strong knowledge of CAS/FAR . Her previous employment includes General Dynamics – Ordinance and Tactical Division, Garland (formerly known as Intercontinental Manufacturing) for over 13 years.  During her tenure here she served in the roles of Controller (Accounting & IT), Program Manager over a $250M 3 year Army IDIQ contract, as well as Materials Manager with oversight of Purchasing, Production Control & Warehousing functions.  Prior to her employment at General Dynamics, Ms. Hawkins served in various finance and accounting positions at Luminator, a Mark IV Industries Co, and Johnson Controls, Battery Division - Garland.

Family Relationships

There are no family relationships among the officers and directors.

Meetings of Our Board of Directors

The Registrant’s board of directors did not hold any meetings during the fiscal year ended September 28, 2008. Optex’s board of directors held three meetings during the 3 months ended December 31, 2008.
 

 
Board Committees

Audit Committee . The Company intends to establish an audit committee of the board of directors, which will consist of soon-to-be-nominated independent directors. The audit committee’s duties would be to recommend to the Company’s board of directors the engagement of an independent registered public accounting firm to audit the Company’s financial statements and to review the Company’s accounting and auditing principles. The audit committee would review the scope, timing and fees for the annual audit and the results of audit examinations performed by the internal auditors and independent registered public accounting firm, including their recommendations to improve the system of accounting and internal controls. The audit committee would at all times be composed exclusively of directors who are, in the opinion of the Company’s board of directors, free from any relationship which would interfere with the exercise of independent judgment as a committee member and who possess an understanding of financial statements and generally accepted accounting principles.
 
Mr. Ronald Richards is the board of directors’ financial expert to be considered upon the formation of the audit committee.

Compensation Committee . The Company intends to establish a compensation committee of the Board of Directors. The compensation committee would review and approve the Company’s salary and benefits policies, including compensation of executive officers.

Director Compensation

The Company has not paid its directors any separate compensation in respect of their services on the board. However, in the future, the Company intends to implement a market-based director compensation program.

Directors’ and Officers’ Liability Insurance

We currently have directors’ and officers’ liability insurance insuring our directors and officers against liability for acts or omissions in their capacities as directors or officers, subject to certain exclusions.  Such insurance also insures us against losses which we may incur in indemnifying our officers and directors.  In addition, we have entered into indemnification agreements with key officers and directors and such persons shall also have indemnification rights under applicable laws, and our certificate of incorporation and bylaws.

Code of Ethics

As of the date hereof, we have not adopted a written code of ethics that applies to our principal executive officer, principal financial officer or controller, or persons performing similar functions due to our relatively small size. We intend to adopt a written code of ethics in the near future.
 

 
Executive Compensation

Summary Compensation Table

The following table sets forth, for the years indicated, all compensation paid, distributed or accrued for services, including salary and bonus amounts, rendered in all capacities by the Company’s chief executive officer, chief financial officer and all other executive officers who received or are entitled to receive remuneration in excess of $100,000 during the stated periods. These officers are referred to herein as the “named executive officers.” The compensation table excludes other compensation in the form of perquisites and other personal benefits that constituted less than $10,000 in value in 2006.

Summary Compensation Table

The table below sets forth, for our last two fiscal years, the compensation earned by Danny Schoening and Karen Hawkins, our Chief Executive Officer and Chief Financial Officer (the “Named Executive Officer”). Except as provided below, none of our executive officers received annual compensation in excess of $100,000 during the last two fiscal years.
 
 
Name and Principal Position
 
Year
   
Salary
($)
   
Bonus
($)
   
Stock Awards ($) (2)
   
All Other Compensation
($)
   
Total
($)
 
                                     
Danny Schoening
    2008 (1)*   $ 122,646     $ 10,300     $ 7,500       --     $ 140,446  
Chief Operating Officer
    2007       N/A       N/A       N/A       N/A       N/A  
Karen Hawkins
    2008       132,473       - 300       -0-       -0-       132,773  
VP Finance/Controller
    2007 (1)*     56,900       -300       -0-       -0-       57,200  

 
1.
The compensation depicted is not reflective of a full years compensation as Danny Schoening did not begin employment until the second quarter of fiscal year 2008 and Karen Hawkins did not begin employment until the third quarter of fiscal year 2007.

 
2.
Stock awards include issues of 10,000 common shares of Irvine SensorsCommon  Stock on January 16, 2008 at the then current market share price of $0.75 per share
 
Option Grants in Last Fiscal Year

There were no options granted to any of the named executive officers during the fiscal years ended September 28, 2008 and September 30, 2007.

Employment Agreement

The Company entered into an employment agreement with Danny Schoening (“Employee”) dated December 1, 2008 (“Employment Agreement”).  The term of the Agreement commenced as of December 1, 2008 and shall continue through June 1, 2010. Thereafter, the term of the Agreement shall be automatically extended for successive and additional 18 month periods, unless the Company shall provide a written notice of termination at least ninety (90) days, or the Employee shall provide a written notice of termination at least ninety (90) days, prior to the end of the initial term or any extended term, as applicable. During   the first eighteen months of the term of the Agreement, the Company shall pay to Employee a base salary (“Base Salary”) at the annual rate of One Hundred Ninety Thousand Dollars ($190,000).   On each renewal date of the commencement of employment, the Employee’s base salary shall be reviewed by the Board and may be increased to such rate as the Board, in its sole discretion, may hereafter from time to time determine. During the term of the Agreement, Employee shall be entitled to receive bonuses of up to 30% of his base salary per year at the discretion of the Company’s Board of Directors pursuant to performance objectives to be determined by the Board of Directors.  Any bonuses shall be payable in cash and shall be paid within ninety (90) days of any year anniversary of the date of the Agreement. Upon closing of the Reorganization, the Company granted Employee stock options equal to 1% of the issued and outstanding shares of the Company immediately after giving effect to the Reorganization, with 34% of the options vesting on March 30, 2010, and 33% of the options vesting on each of March 31, 2011 and March 31, 2012.  The Agreement contains a standard non solicitation and non-compete agreement that extends for one year subsequent to termination thereof, and contains standard clauses for termination and the like.
 

 
The Company does not have any other employment agreements with its executive officers and directors.

Equity Compensation Plan Information

The Company currently has an option compensation plan for up to 6,000,000 shares.  The purpose of the Plan is to to assist the Registrant in attracting and retaining highly competent employees and to act as an incentive in motivating selected officers and other employees of the Registrant and its subsidiaries, and directors and consultants of the Registrant and its subsidiaries, to achieve long-term corporate objectives.  There are 6,000,000 shares of common stock reserved for issuance under this Plan.  As of March 31, 2009, the Registrant had not issued any stock options under this Plan

Item 3.02  Unregistered Sales of Equity Securities.

On March 30, 2009, a closing occurred whereby the then existing shareholders of the Company exchanged their shares of Company Common Stock with the shares of Common Stock of Sustut Exploration, Inc. (“Registrant”) as follows:  (i) the outstanding 85,000,000 shares of Company Common Stock were exchanged by Registrant for 113,333,282 shares of Registrant Common Stock, (ii) the outstanding 1,027 shares of Company Series A Preferred Stock were exchanged by Registrant for 1,027 shares of Registrant Series A Preferred Stock and such additional items as more fully described in the Agreement and (iii) the 8,131,667 shares of Company purchased in the private placement will be exchanged by Registrant for 8,131,667 shares of Registrant Common Stock, as acknowledged by Registrant.  The Company shall remain a wholly-owned subsidiary of Registrant, and the Company’s shareholders are now shareholders of Registrant.

Simultaneously with closing under the Reorganization Agreement (and the shares are included above), as of March 30, 2009 , the Company accepted subscriptions (“Private Placement”) from accredited investors for a total of 27 units (the "Units"), for $45,000 per Unit, with each Unit consisting of Three Hundred Thousand (300,000) shares of common stock, no par value (the "Common Stock") of the Company and warrants to purchase Three Hundred Thousand (300,000) shares of Common Stock for $0.45 per share for a period of five (5) years from the initial closing (the "Warrants"), which were issued by Registrant after the closing referenced above.  Gross proceeds to the Company were $1,219,750, and after deducting a finders fee of $139,555 which was payable in cash, and consideration which constituted of satisfaction of indebtedness owed to an investor of $146,250, net proceeds were $933,945.  The finder also received five year warrants to purchase 2.7 Units, at an exercise price of $49,500 per unit.
 

 
The Company intends to use the net proceeds from the Private Placement to proceed with the items set forth above.

The issuance of the Reorganization Shares to the shareholders of Optex pursuant to the Reorganization Agreement was exempt from registration under the Securities Act pursuant to Section 4(2) thereof.

Description of Securities

The Company is authorized to issue 200,000,000 shares of common stock and 5,000 shares of Preferred Stock of which 1,027 shares are designated as Series A Preferred Stock. As of March 30, 2009, there were 141,464,940 shares of common stock issued and outstanding and 1,027 Series A Preferred Stock issued and outstanding.

Common Stock

The holders of common stock are entitled to one vote per share. The holders of common stock are entitled to receive ratably such dividends, if any, as may be declared by the board of directors out of legally available funds. However, the current policy of the board of directors is to retain earnings, if any, for operations and growth. Upon liquidation, dissolution or winding-up, the holders of common stock are entitled to share ratably in all assets that are legally available for distribution. The holders of common stock have no preemptive, subscription, redemption or conversion rights. The rights, preferences and privileges of holders of common stock are subject to, and may be adversely affected by, the rights of the holders of any series of preferred stock, which may be designated solely by action of the board of directors and issued in the future.

Preferred Stock

Series A Preferred Stock

On March 24, 2009, the Company filed a Certificate of Designation with the Secretary of State of the State of Delaware authorizing a series of preferred stock, under its articles of incorporation, known as “Series A Preferred Stock”. This Certificate of Designation was approved by the Registrant’s Board of Directors and Shareholders at a Board Meeting and Shareholders Meeting held on February 25, 2009. The Certificate of Designation sets forth the following terms for the Series A Preferred Stock: (i) Number of authorized shares: 1,027; (ii) per share stated value: $6,000; (iii) liquidation preference per share:  stated value; (iv) conversion price: $0.15 per share as adjusted from time to time; and (v) voting rights: votes along with the Common Stock on an as converted basis with one vote per share.
 

 
The Series A Preferred Shares entitle the holders to receive cumulative dividends at the rate of 6% per annum payable in cash at the discretion of Board of Directors.  Each share of preferred stock is immediately convertible into common shares at the option of the holder which entitles the holder to receive the equivalent number of common shares equal to the stated value of the preferred shares divided by the conversion price initially set at $0.15 per share.

Holders of preferred shares receive preferential rights in the event of liquidation.  Additionally the preferred stock shareholders are entitled to vote together with the common stock on an ”as-converted” basis.

Market Price and Dividends

Optex Delaware has been, a privately-held company and now is a wholly-owned subsidiary of the Company. There is not, and never has been, a public market for the securities of Optex. The Registrant’s common stock is approved for trading on the O TCBB under the symbol “ SSTX ”, but there is currently no liquid trading market for the Registrant’s common stock. For the foreseeable future, the Company does not intend pay cash dividends to its stockholders.

Indemnification of Directors and Officers

Section 145 of the Delaware General Corporation Law provides, in general, that a corporation incorporated under the laws of the State of Delaware, such as the Company, may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (other than a derivative action by or in the right of the corporation) by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person’s conduct was unlawful. In the case of a derivative action, a Delaware corporation may indemnify any such person against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification will be made in respect of any claim, issue or matter as to which such person will have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery of the State of Delaware or any other court in which such action was brought determines such person is fairly and reasonably entitled to indemnity for such expenses.
 

 
Trading Information

The Company’s common stock is currently approved for quotation on the OTCBB under the symbol “SSTX,” but there is currently no liquid trading market for the Company’s common stock. The transfer agent for our common stock is American Registrar.

Item 4.01 Changes in Registrant’s Certifying Accountant.
 
On March 30, 2009, the Company notified Gately & Associates, LLC, the independent accountant engaged as the principal accountant to audit the financial statements of the Company, that the firm was dismissed as the Company’s independent registered accountant, effective immediately.
 
On March 30, 2009, the Company engaged Rotenberg & Co, LLP, as its independent registered accounting firm. The decision to change accountants was recommended and approved by Company’s Board of Directors.
 
The audit report of Gately & Associates, LLC on the Company’s financial statements for the fiscal years ending December 31, 2007 and 2008; the most recent two periods for which said auditor has issued audit reports, did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles.  The auditor was not required or engaged to audit the Company’s internal control over financial reporting.
 
During the past two fiscal years and during the subsequent interim period preceding the date of dismissal, there were no disagreements with the auditor on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of the former accountants, would have caused it to make reference to the subject matter of the disagreements in connection with its report, and there were no reportable events as described in Item 304(a)(1)(iv) of Regulation S-B.
 
The Company has provided a copy of this disclosure to Gately & Associates, LLC and has requested that the firm furnish the Company with a letter addressed to the Securities and Exchange Commission stating whether it agrees with the statements made by the Company, and, if not, stating the respects in which it does not agree. A copy of the firm’s letter is filed as Exhibit 16.1 hereto.
 
During the two most recent fiscal years prior to their engagement, or any subsequent interim period prior to engaging Rotenberg & Co. LLP, neither the Company nor anyone acting on the Company’s behalf consulted with Rotenberg & Co. LLP regarding (i) the application of accounting principles to a specific completed or contemplated transaction, or (ii) the type of audit opinion that might be rendered on the Company’s financial statements where either written or oral advice was provided that was an important factor considered by the Company in reaching a decision as to the accounting, auditing, or financial reporting issue, or (iii) any matter that was the subject of a disagreement with the Company’s former accountant on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of the former accountant, would have caused it to make reference to the subject matter of the disagreements in connection with its audit report.
 

 
Item 5.02   Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.

On March 30, 2009, Andrey Oks resigned as Director and CEO of the Company, and Messrs. Stanley Hirschman, Ronald Richards and Merrick Okamoto were appointed as directors.  Stanley Hirschman, Danny Schoening and Karen Hawkins were appointed as the President, COO and VP of Finance for the Registrant.  Other than as set forth in this Form 8-K there are no compensatory measures to officers and there are standard fees paid to Board members.

Item 5.06   Change in Shell Company Status .

As a result of the consummation of the Reorganization described in Items 1.01 and 2.01 of this Current Report on Form 8-K, the Company believes that it is no longer a “shell corporation,” as that term is defined in Rule 405 of the Securities Act and Rule 12b-2 of the Exchange Act.
 
Item 9.01   Financial Statements and Exhibits .

(a)
Financial statements of businesses acquired.

Optex ’s audited financial statements for the year ended September 28, 2008 and unaudited financial statements for the quarter ended December 30, 2008 are filed as Exhibit 99.1 and 99.2, respectively to this Current Report on Form 8-K and are incorporated herein by reference.

(b) 
Pro Forma Financial Information.

The Company’s pro forma condensed combined financial statements as of December 31, 2008 are filed as Exhibit 99.3 to this Current Report on Form 8-K and are incorporated herein by reference.

(d)
Exhibits.

Exhibit
No.
 
Description
2.1
 
Agreement and Plan of Reorganization (the “Agreement”), dated as of the March 30, 2009, by and between Registrant, a Delaware corporation and Optex Systems, Inc., a Delaware corporation.
     
3.2
 
Bylaws of Optex Systems Holdings Corp.
     
10.1
 
2009 Stock Option Plan
     
10.2
 
Employment Agreement with Danny Schoenig
     
10.3
 
Lease for 1420 Presidential Blvd., Richardson, TX
     
16.1
 
Communication from Gately & Associates
     
21.1
 
List of Subsidiaries – Optex Systems, Inc.
     
99.1
 
Optex Systems, Inc.’s audited financial statements as of September 28, 2008.
     
99.2
 
Optex Systems, Inc.’s quarterly financial statements as of December 30, 2008.
     
99.3
 
Pro forma condensed combined financial statements of the Registrant and Optex as of December 30, 2008.
 

 
SIGNATURE

Pursuant to the requirements 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.

Date:   April 3, 2009
 
 
OPTEX SYTEMS HOLDINGS, INC.  
       
       
 
By:
/s/
 
   
Stanley A. Hirschman
 
   
President
 


AGREEMENT AND PLAN OF REORGANIZATION
 
This Agreement and Plan of Reorganization (the “Agreement”), dated as of the 27th day of March 2009, by and between Sustut Exploration, Inc., Inc., a Delaware corporation (“Sustut”), and Optex Systems, Inc., a Delaware corporation (“Optex”), and Sileas Corporation (“Sileas”), Alpha Capital Anstalt (“Alpha”), and Arland Holdings, Ltd. (“Arland”) (collectively, “Shareholders”) with reference to the following:
 
A.  Sustut is a publicly held Delaware corporation.  Sustut has authorized capital stock of 200,000,000 shares of Common Stock, $.001 par value per share (“Sustut Common Stock”) and 1,027 shares of Series A Preferred Stock (“Sustut Series A Preferred Stock”).  Of such shares, 44,999,991 shares of Sustut Common Stock are issued and outstanding, of which 25,000,000 will be cancelled at closing, leaving 19,999,991 outstanding, and no shares of Sustut Series A Preferred Stock are issued and outstanding.

B.  Optex is a privately held corporation organized under the laws of Delaware .  Optex has authorized capital stock of 300,000,000 shares of Common Stock, $.001 par value per share (“Optex Common Stock”) and 1,027 shares of Series A Preferred Stock (“Optex Series A Preferred Stock).  Of such shares, 85,000,000shares of Optex Common Stock are issued and outstanding, and 1,027 shares of Optex Series A Preferred Stock are issued and outstanding.

C.  The respective Boards of Directors of Sustut and Optex have deemed it advisable and in the best interests of Sustut and Optex and their respective shareholders that, contingent upon approval by shareholders holding 100% of the outstanding stock of Optex, all currently outstanding shares of Optex be acquired by Sustut, pursuant to the terms and conditions set forth in this Agreement.

D.  Certain investors in the private placement of Optex have separately agreed to a share exchange which shall occur on a one-for-one basis for shares of Sustut Common Stock in exchange for their shares of Optex.

E.  Sustut, Shareholders and Optex propose to enter into this Agreement which provides, among other things, that (i) the outstanding 85,000,000 shares of Optex Common Stock be exchanged by Sustut for  113,333,282 shares of Sustut Common Stock, (ii) the outstanding 1,027 shares of Optex Series A Preferred Stock be exchanged by Sustut for 1,027 shares of Sustut Series A Preferred Stock and such additional items as more fully described in the Agreement and (iii) the 8,131,667 shares of Optex purchased in the private placement will be exchanged by Sustut for 8,131,667 shares of Sustut Common Stock, as acknowledged by Sustut.

NOW, THEREFORE, the parties hereto agree as follows:
 
ARTICLE 1
THE EXCHANGE
 
1.01 At the Effective Time (as defined in Section 2.01), subject to the terms and conditions herein, the 85,000,000 shares of Optex Common Stock issued and outstanding immediately prior to the Effective Time shall be acquired by Sustut in exchange for 113,333,282 fully paid and nonassessable shares of Sustut Common Stock and 1,027 shares of Optex Series A Preferred Stock issued and outstanding immediately prior to the Effective Time shall be acquired by Sustut in exchange for 1,027 shares of Sustut Series A Preferred Stock (the exchange of all shares of Optex Common Stock for Sustut Common Stock shall constitute the “Exchange”).  The Sustut Common Stock shall be issued to the Shareholders and/or their nominees in the amounts set forth on a list provided by Optex to Sustut.  
 


 
1.02 As of the Effective Time, each outstanding stock certificate that immediately prior to the Effective Time represents shares of Optex Common Stock shall be deemed for all purposes to evidence ownership and to represent the number of shares of Sustut Common Stock for which such shares of Optex Common Stock have been exchanged pursuant to Section 1.01.  The record holder of each outstanding certificate representing shares of Optex Common Stock shall, after the Effective Time, be entitled to vote the Sustut Common Stock for which such shares of Optex Common Stock have been exchanged on any matters on which the holders of the Sustut Common Stock are entitled to vote.  After the Effective Time, the holders of certificates evidencing outstanding shares of Optex Common Stock immediately prior to the Effective Time shall deliver such certificates of Optex Common Stock, duly endorsed so as to make Sustut the sole holder thereof, free and clear of all claims, and encumbrances and Sustut shall deliver a transmittal letter to the transfer agent of Sustut directing the issuance of the Sustut Common Stock to the shareholders of Optex and/or their nominees.  Any shares of Sustut Common Stock issued pursuant to this Agreement will not be transferable except (a) pursuant to an effective registration statement under the Securities Act of 1933, as amended (the “Act”), or (b) upon receipt by Sustut of a written opinion of counsel for the holder reasonably satisfactory to Sustut to the effect that the proposed transfer is exempt from the registration requirements of the Act, and relevant state securities laws. Restrictive legends shall be placed on all certificates representing Sustut Common Stock issued pursuant to this Agreement, and the shares of Sustut Common Stock into which they may be converted, as set forth in Section 11.02.

In the event any certificate for Optex Common Stock has been lost, stolen or destroyed, Sustut shall issue and pay in exchange for such lost, stolen or destroyed certificate, promptly following its receipt of an affidavit of that fact by the holder thereof, such shares of Sustut Common Stock as may be required pursuant to this Agreement.
 
1.03 Following the Effective Time, there will be a total of 141,464,940 shares of Sustut Common Stock issued and outstanding and 1,027 shares of Sustut Series A Preferred Stock outstanding.  

1.04 Following the Effective Time, Optex will be a wholly-owned subsidiary of Sustut.

 
ARTICLE 2
THE CLOSING
 
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2.01 Subject to the terms and conditions herein, the consummation of the transactions contemplated by this Agreement (the “Closing”) shall take place on or before March 30, 2009 (the “Closing Date”) or at such other place or date and time as may be agreed to in writing by the parties hereto at the earliest practicable time after satisfaction or waiver of the conditions hereof (the “Effective Time” or “Effective Date”).

2.02 The following conditions are a part of this Agreement and must be completed on or as of the Closing Date, or such other date specified by the parties:

(a) At the Closing, the Board of Directors of Sustut shall appoint the following individuals as members of the Board of Directors: Stanley Hirschman, Merrick Okamoto and Ronald Richards.
 
(b)   Immediately following the appointment of the individuals listed in Section 2.02(a) above to the Board of Directors, the Board of Directors of Sustut shall consist of the three directors set forth in (a).

(c) Immediately prior to Closing, all of the current officers of Sustut shall resign as officers of Sustut.  After the Closing Date, the newly constituted Board of Directors of Sustut consisting of the individuals appointed pursuant to Section 2.2(a) shall appoint  such officers as it deems is necessary and in the best interests of Sustut.

(d) Prior to Closing, Sustut shall have obtained board and shareholder approval to the extent necessary to (i) consummate the share exchange contemplated by this Agreement, (ii) create an option pool of 6,000,000 shares of Common Stock, and (iii) complete, following Closing, in a manner which is reasonably acceptable to Optex, the sale, spin-off or other disposition of its pre-Closing operations, including all assets and liabilities.

(e) Optex shall have delivered to Sustut its financial statements for the period from October 1, 2007 – September 30, 2008, which shall have been audited in substantial compliance with generally accepted accounting principles in the U.S. (“U.S. GAAP”), and which shall be capable of being audited in accordance with U.S. GAAP.

ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF SUSTUT
 
Sustut hereby represents and warrants to Optex as follows:
 
3.01 Organization, Standing and Power .  Sustut is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, has all requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted, and is duly qualified and in good standing to do business in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification necessary.

3.02 Capital Structure .  As of the date of execution of this Agreement, the authorized capital stock of Sustut is as described in the recitals hereto. The Exchange Shares to be issued pursuant to this Agreement shall be, when issued pursuant to the terms of the resolution of the Board of Directors of Sustut approving such issuance, validly issued, fully paid and nonassessable and not subject to preemptive rights.  Except as otherwise specified herein, as of the date of execution of this Agreement, there are no other options, warrants, calls, agreements or other rights to purchase or otherwise acquire from Sustut at any time, or upon the happening of any stated event, any shares of the capital stock of Sustut whether or not presently issued or outstanding.
 
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3.03 Certificate of Incorporation, Bylaws, and Minute Books .  The copies of the Articles of Incorporation and of the Bylaws of Sustut which have been delivered to Optex are true, correct and complete copies thereof.  The minute book of Sustut, which has been made available for inspection, contains accurate minutes of all meetings and accurate consents in lieu of meetings of the Board of Directors (and any committee thereof) and of the shareholders of Sustut since the date of incorporation and accurately reflects all transactions referred to in such minutes and consents in lieu of meetings.

3.04 Authority .  Sustut has all requisite power and authority to enter into this Agreement and to consummate the transactions contemplated hereby.  The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by the Board of Directors of Sustut.  No other corporate or shareholder proceedings on the part of Sustut are necessary to authorize the Exchange, or the other transactions contemplated hereby.

3.05 Conflict with Other Agreements; Approvals .  The execution and delivery of this Agreement does not, and the consummation of the transactions contemplated hereby will not result in any violation of, or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or the loss of a material benefit under, or the creation of a lien, pledge, security interest or other encumbrance on assets (any such conflict, violation, default, right of termination, cancellation or acceleration, loss or creation, a “violation”) pursuant to any provision of the Articles of Incorporation or Bylaws or any organizational document of Sustut or, result in any violation of any loan or credit agreement, note, mortgage, indenture, lease, benefit plan or other agreement, obligation, instrument, permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Sustut which violation would have a material adverse effect on Sustut taken as a whole.  No consent, approval, order or authorization of, or registration, declaration or filing with, any court, administrative agency or commission or other governmental authority or instrumentality, domestic or foreign (a “Governmental Entity”) is required by or with respect to Sustut in connection with the execution and delivery of this Agreement by Sustut or the consummation by Sustut of the transactions contemplated hereby.

3.06 Books and Records .  Sustut has made and will make available for inspection by Optex upon reasonable request all the books of Sustut relating to the business of Sustut. Such books of Sustut have been maintained in the ordinary course of business.  All documents furnished or caused to be furnished to Optex by Sustut are true and correct copies, and there are no amendments or modifications thereto except as set forth in such documents.

3.07 Compliance with Laws . Sustut is and has been in compliance in all material respects with all laws, regulations, rules, orders, judgments, decrees and other requirements and policies imposed by any Governmental Entity applicable to it, its properties or the operation of its businesses.
 
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3.08 SEC Filings . As of the date hereof, Sustut is current in its filing obligations.

3.09 Financial Statements .  Copies of Sustut’s audited financial statements for the fiscal year ended December 31, 2008 have been delivered to Optex.

3.10 Banks .  Sustut will deliver to Optex a true and complete list (in all material respects), as of the date of this Agreement, showing (1) the name of each bank in which Sustut has an account or safe deposit box, and (2) the names and addresses of all signatories.
  
3.11 Litigation .  There is no suit, action or proceeding pending, or, to the knowledge of Sustut, threatened against or affecting Sustut which is reasonably likely to have a material adverse effect on Sustut, nor is there any judgment, decree, injunction, rule or order of any Governmental Entity or arbitrator outstanding against Sustut having, or which, insofar as reasonably can be foreseen, in the future could have, any such effect.

3.12 Employees .  Sustut has no employees or consultant contracts and is not in the process of acquiring any employees or consultant contracts.

3.13 Liens, Leases and Contracts .  Sustut has no liens, encumbrances, easements, security interests or similar interests in or on any of its assets.  Sustut has no leases (whether of real or personal property) contracts, promissory notes, mortgages, licenses, franchises, or other written agreement to which Sustut is a party which involves or can reasonably be expected to involve aggregate future payments or receipts by Sustut (whether by the terms of such lease, contract, promissory note, license, franchise or other written agreement or as a result of a guarantee of the payment of or indemnity against the failure to pay same) except any of said instruments which terminate or are cancelable without penalty.

3.14 Absence of Undisclosed Liabilities . Sustut has no liabilities of any nature, whether fixed, absolute, contingent or accrued. As of the Effective Time, Sustut shall have no assets or liabilities other than accounts payable.

3.15 Absence of Changes .  Since January 1, 2009 there has not been any material adverse change in the condition (financial or otherwise), assets, liabilities, earnings or business of Sustut.

3.16 Tax Matters . All taxes and other assessments and levies which Sustut is required by law to withhold or to collect have been duly withheld and collected, and have been paid over to the proper government authorities or are held by Sustut in separate bank accounts for such payment or are represented by depository receipts, and all such withholdings and collections and all other payments due in connection therewith (including, without limitation, employment taxes, both the employee’s and employer’s share) have been paid over to the government or placed in a separate and segregated bank account for such purpose.  There are no known deficiencies in income taxes for any periods and all returns, declarations, reports, estimates and statements required have been filed.  There are no liens or taxes upon any assets of Sustut, except taxes not yet due.  Further, the representations and warranties as to absence of undisclosed liabilities contained in Section 3.14 includes any and all tax liabilities of whatsoever kind or nature (including, without limitation, all federal, state, local and foreign income, profit, franchise, sales, use and property taxes) due or to become due, incurred in respect of or measured by Sustut income or business prior to the Effective Date.  Copies of Sustut’s tax returns for years ending December 31, 2006, 2007 and 2008 have been delivered to Optex.
 
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3.17 Brokers and Finders .  Sustut shall be solely responsible for payment to any broker or finder retained by Sustut for any brokerage fees, commissions or finders’ fees in connection with the transactions contemplated herein.  

3.18 Subsidiaries .  Sustut does not have any subsidiary, or own an ownership interest in any other corporation.

3.19 Valid Issuance of Securities .  The Sustut Common Stock, when issued, sold and delivered in accordance with the terms of this Agreement for the consideration expressed herein, will be duly and validly issued, fully paid and non assessable, and will be free of restrictions on transfer other than restrictions on transfer under this Agreement and under applicable state and federal securities laws.

3.20 Directors, Officers and Controlling Shareholders .  No director, officer or controlling shareholder of Sustut has been subject to a criminal proceeding, bankruptcy, Securities and Exchange Commission or NASD censure in the last five years nor is any such individual under investigation for any of the above.

3.21 Accuracy of Information .  No representation or warranty by Sustut contained in this Agreement and no statement contained in any certificate or other instrument delivered or to be delivered to Optex pursuant hereto or in connection with the transactions contemplated hereby (including without limitation all Schedules and exhibits hereto) contains or will contain any untrue statement of material fact or omits or will omit to state any material fact necessary in order to make the statements contained herein or therein not misleading.

3.22 Full Disclosure .  The representations and warranties of Sustut contained in this Agreement (and in any schedule, exhibit, certificate or other instrument to be delivered under this Agreement) are true and correct in all material respects, and such representations and warranties do not omit any material fact necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading.  There is no fact of which Sustut has knowledge that has not been disclosed to Optex pursuant to this Agreement, including the schedules hereto, all taken together as a whole, which has had or could reasonably be expected to have a material adverse effect on Sustut or Optex or materially adversely affect the ability of Sustut to consummate in a timely manner the transactions contemplated hereby.

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ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF OPTEX
 
Optex hereby represents and warrants to Sustut as follows:
 
4.01 Organization, Standing and Power .  Optex is a corporation duly organized, validly existing and in good standing under the laws of Singapore, has all requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted, and is duly qualified and in good standing to do business in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification necessary.

4.02 Capital Structure .  The capitalization of Optex is as stated in the recitals hereto..  All outstanding shares of Optex stock are validly issued, fully paid and nonassessable and not subject to preemptive rights or other restrictions on transfer.  All of the issued and outstanding shares of Optex were issued in compliance with all applicable securities laws.  Except as otherwise specified herein, there are no options, warrants, calls, agreements or other rights to purchase or otherwise acquire from Optex at any time, or upon the happening of any stated event, any shares of the capital stock of Optex.

4.03 Authority .  Optex has all requisite power to enter into this Agreement and, subject to approval of the proposed transaction by the holders of 100% of its issued and outstanding shares which are entitled to vote to approve the proposed transaction, has the requisite power and authority to consummate the transactions contemplated hereby.  Except as specified herein, no other corporate or shareholder proceedings on the part of Optex are necessary to authorize the Exchange and the other transactions contemplated hereby.

4.04 Conflict with Agreements; Approvals .  The execution and delivery of this Agreement does not, and the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of any provision of the Certificate of Incorporation or Bylaws of Optex or of any loan or credit agreement, note, mortgage, indenture, lease, benefit plan or other agreement, obligation, instrument, permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Optex or its properties or assets. No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity is required by or with respect to Optex in connection with the execution and delivery of this Agreement by Optex, or the consummation by Optex of the transactions contemplated hereby.

4.06 Financial Statements .  Optex will deliver to Sustut financial statements for the period from October 1, 2007 – September 30, 2008, which shall have been audited in substantial compliance with U.S. GAAP, and which shall be capable of being audited in accordance with U.S. GAAP.

4.07 Compliance with Laws .  Optex is and has been in compliance in all material respects with all laws, regulations, rules, orders, judgments, decrees and other requirements and policies imposed by any Governmental Entity applicable to it, its properties or the operation of its businesses.
 
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4.08 Broker and Finders .  Optex shall be solely responsible for payment to any broker or finder retained by Optex for any brokerage fees, commissions or finders’ fees in connection with the transactions contemplated herein.

4.09 Accuracy of Information .  No representation or warranty by Sustut contained in this Agreement and no statement contained in any certificate or other instrument delivered or to be delivered to Optex pursuant hereto or in connection with the transactions contemplated hereby (including without limitation all Schedules and exhibits hereto) contains or will contain any untrue statement of material fact or omits or will omit to state any material fact necessary in order to make the statements contained herein or therein not misleading.
 
4.10 Full Disclosure .  The representations and warranties of Optex contained in this Agreement (and in any schedule, exhibit, certificate or other instrument to be delivered under this Agreement) are true and correct in all material respects, and such representations and warranties do not omit any material fact necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading. There is no fact of which Optex has knowledge that has not been disclosed to Sustut pursuant to this Agreement, including the schedules hereto, all taken together as a whole, which has had or could reasonably be expected to have a material adverse effect on Sustut or Optex or materially adversely affect the ability of Optex to consummate in a timely manner the transactions contemplated hereby.

ARTICLE 5
CONDUCT AND TRANSACTIONS PRIOR TO THE
EFFECTIVE TIME OF THE ACQUISITION
 
5.01 Conduct and Transactions of Sustut .  During the period from the date hereof to the Effective Date, Sustut shall:

(a) C onduct its operations in the ordinary course of business, including but not limited to, paying all obligations as they mature, complying with all applicable tax laws, filing all tax returns required to be filed and paying all taxes due; and

(b) Maintain its records and books of account in a manner that fairly and correctly reflects its income, expenses, assets and liabilities.

Sustut shall not during such period, except in the ordinary course of business, without the prior written consent of Optex:
 
(c) Except as otherwise contemplated or required by this Agreement, sell, dispose of or encumber any of its properties or assets;

(d) Except as set forth in paragraph 5.01(c) above, declare or pay any dividends on shares of its capital stock or make any other distribution of assets to the holders thereof;
 
(e) Except as set forth in paragraph 5.01(d) above, issue, reissue or sell, or issue capital stock of Sustut or options or rights to subscribe to, or enter into any contract or commitment to issue, reissue or sell, any shares of its capital stock or acquire or agree to acquire any shares of its capital stock;
 
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(f) Except as otherwise contemplated and required by this Agreement, amend its Certificate of Incorporation or merge or consolidate with or into any other corporation or sell all or substantially all of its assets or change in any manner the rights of its capital stock or other securities;

(g) Except as contemplated or required by this Agreement, pay or incur any obligation or liability, direct or contingent, of more than $1,000;

(h) Incur any indebtedness for borrowed money, assume, guarantee, endorse or otherwise become responsible for obligations of any other party, or make loans or advances to any other party other than to Optex;

(i) Make any material change in its insurance coverage;

(j) Increase in any manner the compensation, direct or indirect, of any of its officers or executive employees; except in accordance with existing employment contracts;
 
(k) Enter into any agreement or make any commitment to any labor union or organization; or

(l) Make any capital expenditures.

5.02 Conduct and Transactions of Optex .  During the period from the date hereof to Effective Date, Optex shall:

(a) Conduct the operations of Optex in the ordinary course of business.
 
Optex shall not during such period, except in the ordinary course of business, without the prior written consent of Sustut:
 
(b) Declare or pay any dividends on shares of its capital stock or make any other distribution of assets to the holders thereof;

(c) Issue, reissue or sell, or issue capital stock of Optex or options or rights to subscribe to, or enter into any contract or commitment to issue, reissue or sell, any shares of its capital stock or acquire or agree to acquire any shares of its capital stock; or other securities; or
 
(d) Except as otherwise contemplated and required by this Agreement, amend its Certificate of Incorporation or merge or consolidate with or into any other corporation or sell substantially all of its assets or change in any manner the rights of its capital stock or other securities.

ARTICLE 6
RIGHTS OF INSPECTION
 
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6.01 Due Diligence; Access to Information; Confidentiality .

(a) Between the date hereof and the Closing Date, Sustut and Optex shall afford to the other party and their authorized representatives the opportunity to conduct and complete a due diligence investigation of the other party as described herein.  In light of the foregoing, each party shall permit the other party full access on reasonable notice and at reasonable hours to its properties and shall disclose and make available (together with the right to copy) to the other party and its officers, employees, attorneys, accountants and other representatives (hereinafter collectively referred to as “ Representatives ”), all books, papers, and records relating to the assets, stock, properties, operations, obligations and liabilities of such party and its subsidiaries, including, without limitation, all books of account (including, without limitation, the general ledger), tax records, minute books of directors’ and stockholders’ meetings, organizational documents, bylaws, contracts and agreements, filings with any regulatory authority, accountants’ work papers, litigation files (including, without limitation, legal research memoranda), attorney’s audit response letters, documents relating to assets and title thereto (including, without limitation, abstracts, title insurance policies, surveys, environmental reports, opinions of title and other information relating to the real and personal property), plans affecting employees, securities transfer records and stockholder lists, and any books, papers and records (collectively referred to herein as “ Evaluated Material ”) relating to other assets or business activities in which such party may have a reasonable interest, and otherwise provide such assistance as is reasonably requested in order that each party may have a full opportunity to make such investigation and evaluation as it shall reasonably desire to make of the business and affairs of the other party; provided, however, that the foregoing rights granted to each party shall, whether or not and regardless of the extent to which the same are exercised, in no way affect the nature or scope of the representations, warranties and covenants of the respective party set forth herein.  In addition, each party and its Representatives shall cooperate fully (including providing introductions, where necessary) with such other party to enable the party to contact third parties, including customers, prospective customers, specified agencies or others as the party deems reasonably necessary to complete its due diligence; provided that such party agrees not to initiate such contacts without the prior approval of the other party, which approval will not be unreasonably withheld.

(b) Sustut and Optex agree that each such party will not use the Evaluation Material for any purpose other than in connection with the transactions contemplated hereunder.  Each agrees not to disclose or allow disclosure to others of any Evaluation Material, except to such party’s Affiliates or Representatives, in each case, to the extent necessary to permit such Affiliate or Representative to assist such party in connection with the transactions contemplated hereunder.  Each agrees that it will, within ten (10) days of the other party’s request, re-deliver to such party all copies of that party’s Evaluation Material in its possession or that of its affiliates or Representatives if the Exchange contemplated by this Agreement does not close as contemplated herein.

(c) In the event any party or anyone to whom Evaluation Material has been transmitted in accordance with the terms herein is requested in connection with any proceeding to disclose any Evaluation Material, such party will give the other party prompt notice of such request so that the other party may seek an appropriate protective order or other remedy or waive compliance with this Agreement, and such party will cooperate with the other party to obtain such protective order.  In the event such protective order is not obtained, the other party waives compliance with the relevant provisions of this Section, such party (or such person to whom such request is directed) will furnish only that portion of the Evaluation Material which is required to be disclosed.
 
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(d) Notwithstanding any of the foregoing, if prior to Closing, for any reason, the transactions contemplated by this Agreement are not consummated, neither Sustut nor Optex nor any of their Representatives shall disclose to third parties or otherwise use any Evaluation Material or other confidential information received from the other party in the course of investigating, negotiating, and performing the transactions contemplated by this Agreement; provided, however, that nothing shall be deemed to be confidential information which:
 
(i) is or becomes generally available to the public other than as a result of a disclosure by such party, its affiliates or Representatives;

(ii) was available to such party on a non-confidential basis prior to its disclosure;

(iii) becomes available to such party on a non-confidential basis from a source other than the other party or its agents, advisors or Representatives;

(iv) developed by such party independently of any disclosure by the other party; or
 
(v) is disclosed in compliance with Section 6.01(c).

This provision shall not prohibit the disclosure of information required to be made under federal or state securities laws.  If any disclosure is so required, the party making such disclosure shall consult with the other party prior to making such disclosure, and the parties shall use all reasonable efforts, acting in good faith, to agree upon a text for such disclosure which is satisfactory to both parties.
 
6.02 Sustut and Optex each agree that money damages would not be sufficient to remedy any breach by the other party of this Section, and that, in addition to all other remedies, each party against which a breach of this Section has been committed shall be entitled to specific performance and injunctive or other equitable relief as a remedy of such breach.
 
ARTICLE 7
CONDITIONS TO CLOSING
 
7.01 Conditions to Obligations of Optex .  The obligation of Optex to perform this Agreement is subject to the satisfaction of the following conditions on or before the Closing unless waived in writing by Optex.
 
(a) Representations and Warranties .  There shall be no information disclosed in the schedules delivered by Sustut, which in the opinion of Optex, would materially adversely affect the proposed transaction and intent of the parties as set forth in this Agreement.  The representations and warranties of Sustut set forth in Article 3 hereof shall be true and correct in all material respects as of the date of this Agreement and as of the Closing as though made on and as of the Closing, except as otherwise permitted by this Agreement.
 
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(b) Performance of Obligations .  Sustut shall have in all material respects performed all agreements required to be performed by it under this Agreement and shall have performed in all material respects any actions contemplated by this Agreement prior to or on the Closing and Sustut shall have complied in all material respects with the course of conduct required by this Agreement.

(c) Corporate Action and Share Cancellation .  Sustut shall have furnished minutes, certified copies of corporate resolutions and/or other documentary evidence satisfactory to counsel for Optex that Sustut has submitted with this Agreement and any other documents required hereby to such parties for approval as provided by applicable law.  At closing, 25,000,000 Sustut shall cancel 25,000,000 shares held by its former CEO.

(d) Consents .  Execution Consents necessary for or approval of any party listed on any Schedule delivered by Sustut whose consent or approval is required pursuant thereto shall have been obtained.

(e) Statutory Requirements .  All statutory requirements for the valid consummation by Sustut of the transactions contemplated by this Agreement shall have been fulfilled.

(f) Governmental Approval .  All authorizations, consents, approvals, permits and orders of all federal and state governmental agencies required to be obtained by Sustut for consummation of the transactions contemplated by this Agreement shall have been obtained.
 
(g) Market Condition .  Up to and including the Closing Date, Sustut shall have maintained its listing on the OTC Bulletin Board, without any trading and quotation halts or other notices of deficiency received by or imposed against Sustut.

(h) Changes in Financial Condition of Sustut .  There shall not have occurred any material adverse change in the financial condition or in the operations of the business of Sustut, except expenditures in furtherance of this Agreement.

(i) Absence of Pending Litigation .  Sustut is not engaged in or threatened with any suit, action, or legal, administrative or other proceedings or governmental investigations pertaining to this Agreement or the consummation of the transactions contemplated hereunder.

(j) Authorization for Issuance of Stock .  Optex shall have received in form and substance satisfactory to counsel for Optex a letter instructing and authorizing the transfer agent for the shares of common stock of Sustut to issue stock certificates representing ownership of Sustut common stock to Optex shareholders in accordance with the terms of this Agreement upon surrender by such shareholders of their share certificates representing ownership of shares in Optex duly endorsed for transfer, and a letter from said transfer agent acknowledging receipt of the letter of instruction and stating to the effect that the Transfer Agent holds adequate supplies of stock certificates necessary to comply with the letter of instruction and the terms and conditions of this Agreement.
 
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(k) Books and Records .  Sustut shall deliver to Optex all books and records of Sustut.

7.02 Conditions to Obligations of Sustut .  The obligation of Sustut to perform this Agreement is subject to the satisfaction of the following conditions on or before the Closing unless waived in writing by Sustut.

(a) Performance of Obligations .  Optex shall have in all material respects performed all agreements required to be performed by it under this Agreement and shall have performed in all material respects any actions contemplated by this Agreement prior to or on the Closing and Optex shall have complied in all respects with the course of conduct required by this Agreement.

(b) Corporate Action .  Optex shall have furnished minutes, certified copies of corporate resolutions and/or other documentary evidence satisfactory to counsel for Sustut that Optex has submitted with this Agreement and any other documents required hereby to such parties for approval as provided by applicable law.

(c) Financial Statements .  Sustut shall have been furnished with audited financial statements of Optex including, but not limited to, balance sheets, income statements, statements of stockholders’ equity and statements of cash flows as at and for the year ended September 30, 2008, each prepared in substantial compliance with U.S. GAAP, which are capable of being audited in accordance with U.S. GAAP, and which fairly present the financial condition and results of operations of Optex at the dates thereof and for the periods presented.
 
(d) Statutory Requirements .  All statutory requirements for the valid consummation by Optex of the transactions contemplated by this Agreement shall have been fulfilled.
 
(e) Governmental Approval .  All authorizations, consents, approvals, permits and orders of all federal and state governmental agencies required to be obtained by Optex for consummation of the transactions contemplated by this Agreement shall have been obtained.
 
(f) Shareholder Approval .  All Optex shareholders shall have provided written approval of this Agreement and Plan of Reorganization, shall have provided representations reasonably satisfactory to Sustut to the effect that they own their shares of Optex free and clear of liens, claims or encumbrances of any kind, have the requisite power and authority to transfer such shares pursuant to and in accordance with the terms of this Agreement and Plan of Reorganization, and have delivered the share certificates representing their ownership of shares in Optex to Sustut duly endorsed for transfer.
 
ARTICLE 8
MATTERS SUBSEQUENT TO CLOSING
 
8.01 Covenant of Further Assurance .  The parties covenant and agree that they shall, from time to time, execute and deliver or cause to be executed and delivered all such further instruments of conveyance, transfer, assignments, receipts and other instruments, and shall take or cause to be taken such further or other actions as the other party or parties to this Agreement may reasonably deem necessary in order to carry out the purposes and intent of this Agreement.
 
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ARTICLE 9
NATURE OF REPRESENTATIONS
 
9.01 All statements contained in any written certificate, schedule, exhibit or other written instrument delivered by Sustut or Optex pursuant hereto, or otherwise adopted by Sustut, by its written approval, or by Optex by its written approval, or in connection with the transactions contemplated hereby, shall be deemed representations and warranties by Sustut or Optex as the case may be.  All representations, warranties and agreements made by either party shall survive for the period of the applicable statute of limitations.
 
ARTICLE 10
INDEMNIFICATION

10.01 Indemnity of Optex .  Sustut agrees to defend, indemnify and hold harmless Optex from and against, and to reimburse Optex with respect to, all liabilities, losses, costs and expenses, including, without limitation, reasonable attorneys’ fees and disbursements, asserted against or incurred by Optex by reason of, arising out of, or in connection with any material breach of any representation or warranty contained in this Agreement made by Sustut or in any document or certificate delivered by Sustut pursuant to the provisions of this Agreement or in connection with the transactions contemplated thereby.

10.02 Indemnity of Sustut . Optex agrees to defend, indemnify and hold harmless Sustut from and against, and to reimburse Sustut with respect to, all liabilities, losses, costs and expenses, including, without limitation, reasonable attorneys’ fees and disbursements, asserted against or incurred by Sustut by reason of, arising out of, or in connection with any material breach of any representation or warranty contained in this Agreement made by Optex or in any document or certificate delivered by Optex pursuant to the provisions of this Agreement or in connection with the transactions contemplated thereby.

10.03 Indemnification Procedure . A party (an “Indemnified Party”) seeking indemnification shall give prompt notice to the other party (the “Indemnifying Party”) of any claim for indemnification arising under this Article 10.  The Indemnifying Party shall have the right to assume and to control the defense of any such claim with counsel reasonably acceptable to such Indemnified Party, at the Indemnifying Party’s own cost and expense, including the cost and expense of reasonable attorneys’ fees and disbursements in connection with such defense, in which event the Indemnifying Party shall not be obligated to pay the fees and disbursements of separate counsel for such in such action.  In the event, however, that such Indemnified Party’s legal counsel shall determine that defenses may be available to such Indemnified Party that are different from or in addition to those available to the Indemnifying Party, in that there could reasonably be expected to be a conflict of interest if such Indemnifying Party and the Indemnified Party have common counsel in any such proceeding, or if the Indemnified Party has not assumed the defense of the action or proceedings, then such Indemnifying Party may employ separate counsel to represent or defend such Indemnified Party, and the Indemnifying Party shall pay the reasonable fees and disbursements of counsel for such Indemnified Party. No settlement of any such claim or payment in connection with any such settlement shall be made without the prior consent of the Indemnifying Party which consent shall not be unreasonably withheld.

14

 
ARTICLE 11
TERMINATION OF AGREEMENT AND
ABANDONMENT OF REORGANIZATION
 
11.01 Termination .  Anything herein to the contrary notwithstanding, this Agreement and any agreement executed as required hereunder and the acquisition contemplated hereby may be terminated at any time before the Closing as follows:

(a) By mutual written consent of the Boards of Directors of Sustut and Optex.
 
(b) By the Board of Directors of Sustut if any of the conditions set forth in Section 7.02 shall not have been satisfied by the Closing Date.

(c) By the Board of Directors of Optex if any of the conditions set forth in Section 7.01 shall not have been satisfied by the Closing Date.

(d) By the Board of Directors of Optex if this Agreement and Plan of Reorganization is not duly approved by the stockholders of Optex following a vote of the stockholders of Optex.

(e) By either of the Boards of Directors of Sustut or Optex if the Closing Date is not on or before March 31, 2009, or such later date as Sustut and Optex may mutually agree (except that a party seeking to terminate this Agreement pursuant to this clause may not do so if the failure to consummate the Exchange contemplated by this Agreement by such date shall be due to the action or failure to act of the party seeking to terminate the Agreement in breach of such party’s obligations under this Agreement).

11.02 Termination of Obligations and Waiver of Conditions; Payment of Expenses .  In the event this Agreement and the acquisition are terminated and abandoned pursuant to this Article 11 hereof, this Agreement shall become void and of no force and effect and there shall be no liability on the part of any of the parties hereto, or their respective directors, officers, shareholders or controlling persons to each other.  For the costs and expenses incident to its negotiation and preparation of this Agreement and any of the documents evidencing the transactions contemplated hereby, including fees, expenses and disbursements of counsel, Sustut shareholders shall bear the expenses incurred by Sustut, and Optex shareholders shall bear the expenses incurred by Optex.
 
ARTICLE 12
EXCHANGE OF SHARES
 
12.01 Exchange of Shares .  At the Effective Time, Sustut shall issue a letter to the transfer agent of Sustut with a copy of the resolution of the Board of Directors of Sustut authorizing and directing the issuance of Sustut shares as set forth on a list provided by Optex to Sustut prior to the Effective Time.
 
15

 
12.02 Restrictions on Shares Issued to Optex .  Due to the fact that the offer and sale of the Sustut Common Stock being issued in connection with the acquisition have not been registered under the Act by virtue of the exemption provided in Section 4(2) of such Act, such shares of Sustut will contain the following legend:

The offer and sale of the shares represented by this certificate have not been registered under the Securities Act of 1933.  The shares have been acquired for investment and may not be sold or offered for sale in the absence of an effective Registration Statement for such offer and sale under the Securities Act of 1933 or an opinion of counsel to the Corporation that such registration is not required.
 
ARTICLE 13
MISCELLANEOUS
 
13.01 Expenses .  All costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such costs and expenses.

13.02 Notices .  All notices, requests, demands or other communications hereunder shall be in writing, hand delivered or mailed by certified mail, return receipt required, or by overnight courier, receipt signature required or by facsimile transmission with verification of transmission received by the sender, to each party at the address that follows or at such other place as either party may, by written notice to the other parties hereto, direct:

 
If to “Sustut” :
 
_________________________
 
with a  copy to :
 
_________________________
 
If to “Optex” :
 
Optex Systems, Inc.
1420 Presidential Boulevard
Richardson , TX   75081
Attn: Stanley Hirschman, President

With a copy to :
 
Jolie Kahn, Esq.
61 Broadway, Suite 2820
New York , NY   10006
Fax No.: 866-705-3071
 
16


 
Any such notice, when sent in accordance with the provisions hereof, shall be deemed to have been given and received (a) on the day personally delivered or faxed (with confirmation) or (b) on the second day after the day overnight delivered or (c) on the fifth day following the date mailed.
 
13.03 Amendment and Waiver .  The parties hereby may, by mutual agreement in writing signed by or on behalf of each party, amend this Agreement in any respect.  Any term or provision of this Agreement may be waived in writing signed by an authorized officer at any time by the party against which such waiver is to be charged, such waiver right shall include, but not be limited to, the right of either party to:

(a) Extend the time for the performance of any of the obligations of the other;

(b) Waive any inaccuracies in representations by the other contained in this Agreement or in any document delivered pursuant hereto;

(c) Waive compliance by the other with any of the covenants contained in this Agreement, and performance of any obligations by the other; and

(d) Waive the fulfillment of any condition that is precedent to the performance by the party so waiving of any of its obligations under this Agreement.

 
Any writing on the part of a party relating to such amendment, extension or waiver as provided in this Section 13.03 shall be valid if authorized or ratified by the Board of Directors of such party.
 
13.04 Remedies not Exclusive .  No remedy conferred by any of the specific provisions of this Agreement is intended to be exclusive of any other remedy, and each and every remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute or otherwise.  The election of any one or more remedies by Sustut or Optex shall not constitute a waiver of the right to pursue other available remedies.

13.05 Attorneys’ Fees .  In the event a dispute arises with respect to this Agreement, the party prevailing in such dispute shall be entitled to recover all expenses, including, without limitation, reasonable attorneys’ fees and expenses, incurred in ascertaining such party’s rights, in preparing to enforce, or in enforcing such party’s rights under this Agreement, whether or not it was necessary for such party to institute suit.

13.06 Governing Law; Venue .   Any dispute in the meaning, effect or validity of this Agreement shall be resolved in accordance with the laws of the State of Delaware without regard to the conflict of laws provisions thereof.  The parties hereby expressly consent to the personal jurisdiction of the state and federal courts located in Wilmington , Delaware , for any lawsuit against either party arising from or related to this Agreement.
 
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13.07 Counterparts .  This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

13.08 Benefit .  This Agreement shall be binding upon, and inure to the benefit of, the respective successors and assigns of Sustut and Optex and its shareholders.

13.09 Entire Agreement .  This Agreement and the Schedules and Exhibits attached hereto, represent the entire agreement of the undersigned regarding the subject matter hereof, and supersedes all prior written or oral understandings or agreements between the parties.

13.10 Captions and Section Headings .  Captions and section headings used herein are for convenience only and shall not control or affect the meaning or construction of any provision of this Agreement.

 
Executed as of the date first written above.
 
   
“Sustut”
“Optex”
   
Sustut, Inc.
Optex Systems, Inc.
   
By: /s/ _______________, President
By: /s/ Stanley A. Hirschman, President
   
“Shareholder”
“_______________________”
   
Longview Fund, LP.
Arland Holdings, Ltd.
   
By: /s/ _______________, __________
By: /s/ _______________, _____________
   
Alpha Capital Anstalt
 
By:/s/_________________, __________
 

18

BY-LAWS
Of
Optex Systems Holdings, Inc.

ARTICLE I
The Corporation
 
Section 1 . Name . The legal name of this corporation (hereinafter called the "Corporation") is Optex Systems, Inc.
 
Section 2 . Offices . The Corporation shall have its registered office in the State of Delaware at the location of its registered agent in the State of Delaware as stated in its Articles of Incorporation or as otherwise designated by the Board of Directors. The Corporation may also have offices at such other places within and without the United States as the Board of Directors may from time to time appoint or the business of the Corporation may require.
 
Section 3 . Seal . The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words "Corporate Seal, Delaware". One or more duplicate dies for impressing such seal may be kept and used.
 
ARTICLE II
Meetings of Shareholders
 
Section 1 . Place of Meetings . All meetings of the shareholders shall be held at any place, within or without the State of Delaware, as is fixed in the notice of the meeting.
 
  Section 2 . Annual Meeting . An annual meeting of the shareholders of the Corporation for the election of directors and the transaction of such other business as may properly come before the meeting shall be held on the date and at the time designated by the Board of Directors. If for any reason any annual meeting shall not be held at the time herein specified, the same may be held at any time thereafter upon notice, as herein provided, or the business thereof may be transacted at any special meeting called for the purpose.
 
Section 3 . Special Meetings . Special meetings of shareholders may be called by the President whenever he deems it necessary or advisable. A special meeting of the shareholders shall be called by the President whenever so directed in writing by a majority of the entire Board of Directors or whenever the holders of one-third (1/3) of the number of shares of the capital stock of the Corporation entitled to vote at such meeting shall, in writing, request the same.
 
 
 

 
 
 S ection 4 . Notice of Meetings . Notice of the time and place of the annual and of each special meeting of the shareholders shall be given to each of the shareholders entitled to vote at such meeting by mailing the same in a postage prepaid wrapper addressed to each such shareholders at his address as it appears on the books of the Corporation, or by delivering the same personally to any such shareholder in lieu of such mailing, at least ten (10) and not more than sixty (60) days prior to each meeting. Meetings may be held without notice if all of the shareholders entitled to vote thereat are present in person or by proxy, or if notice thereof is waived by all such shareholders not present in person or by proxy, before or after the meeting. Notice by mail shall be deemed to be given when deposited, with postage thereon prepaid, in the United States mail. If a meeting is adjourned to another time, not more than thirty (30) days hence, or to another place, and if an announcement of the adjourned time or place is made at the meeting, it shall not be necessary to give notice of the adjourned meeting unless the Board of Directors, after adjournment fix a new record date for the adjourned meeting. Notice of the annual and each special meeting of the shareholders shall indicate that it is being issued by or at the direction of the person or persons calling the meeting, and shall state the name and capacity of each such person. Notice of each special meeting shall also state the purpose or purposes for which it has been called. Neither the business to be transacted at nor the purpose of the annual or any special meeting of the shareholders need be specified in any written waiver of notice.
 
  Section 5 . Record Date for Shareholders . For the purpose of determining the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or for the purpose of determining shareholders entitled to receive payment of any dividend or other distribution or the allotment of any rights, or entitled to exercise any rights in respect of any change, conversion, or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action.
 
 
 

 
 
If no record date is fixed, the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the day next preceding the day on which notice is given, or, if no notice is given, the day on which the meeting is held; the record date for determining shareholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is necessary, shall be the day on which the first written consent is expressed; and the record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of shareholders of record entitled to notice of or to vote at any meeting of shareholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.
 
Section 6 . Proxy Representation . Every shareholder may authorize another person or persons to act for him by proxy in all matters in which a shareholder is entitled to participate, whether by waiving notice of any meeting, voting or participating at a meeting, or expressing consent or dissent without a meeting. Every proxy must be signed by the shareholder or by his attorney-in-fact. No proxy shall be voted or acted upon after eleven (11) months from its date unless such proxy provides for a longer period. Every proxy shall be revocable at the pleasure of the shareholder executing it, except as otherwise provided in Section 608 of the Delaware Business Corporation Law.
 
Section 7 . Voting at Shareholders' Meetings . Each share of stock shall entitle the holder thereof to one vote. In the election of directors, a plurality of the votes cast shall elect. Any other action shall be authorized by a majority of the votes cast except where the Delaware Business Corporation Law prescribes a different percentage of votes or a different exercise of voting power. In the election of directors, and for any other action, voting need not be by ballot.

Section 8 . Quorum and Adjournment . Except for a special election of directors pursuant to the Delaware Business Corporation Law, the presence, in person or by proxy, of the holders of a majority of the shares of the stock of the Corporation outstanding and entitled to vote thereat shall be requisite and shall constitute a quorum at any meeting of the shareholders. When a quorum is once present to organize a meeting, it shall not be broken by the subsequent withdrawal of any shareholders. If at any meeting of the shareholders there shall be less than a quorum so present, the shareholders present in person or by proxy and entitled to vote thereat, may adjourn the meeting from time to time until a quorum shall be present, but no business shall be transacted at any such adjourned meeting except such as might have been lawfully transacted had the meeting not adjourned.
 
 
 

 
 
Section 9 . List of Shareholders . The officer who has charge of the stock ledger of the Corporation shall prepare, make and certify, at least ten (10) days before every meeting of shareholders, a complete list of the shareholders, as of the record date fixed for such meeting, arranged in alphabetical order, and showing the address of each shareholder and the number of shares registered in the name of each shareholder. Such list shall be open to the examination of any shareholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city or other municipality or community where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any shareholder who is present. If the right to vote at any meeting is challenged, the inspectors of election, if any, or the person presiding thereat, shall require such list of shareholders to be produced as evidence of the right of the persons challenged to vote at such meeting, and all persons who appear from such list to be shareholders entitled to vote thereat may vote at such meeting.
 
Section 10 . Inspectors of Election . The Board of Directors, in advance of any meeting, may, but need not, appoint one or more inspectors of election to act at the meeting or any adjournment thereof. If an inspector or inspectors are not appointed, the person presiding at the meeting may, and at the request of any shareholder entitled to vote thereat shall, appoint one or more inspectors.
 
In case any person who may be appointed as an inspector fails to appear or act, the vacancy may be filled by appointment made by the Board of Directors in advance of the meeting or at the meeting by the person presiding thereat. Each inspector, if any, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of the inspector at such meeting with strict impartiality and according to the best of his ability. The inspectors, if any, shall determine the number of shares of stock outstanding and the voting power of each, the shares of stock represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all shareholders. On request of the person presiding at the meeting or any shareholder entitled to vote thereat, the inspector or inspectors, if any, shall make a report in writing of any challenge, question or matter determined by him or them and execute a certificate of any fact found by him or them. Any report or certificate made by the inspector or inspectors shall be prima facie evidence of the facts stated and of the vote as certified by them.
 
 
 

 
 
Section 11 . Action of the Shareholders Without Meetings . Any action which may be taken at any annual or special meeting of the shareholders may be taken without a meeting on written consent, setting forth the action so taken, signed by the holders of the number of shares required to take action if a meeting had been held to vote thereon. Written consent thus given by the holders of all outstanding shares entitled to vote shall have the same effect as a vote of the shareholders.

ARTICLE III
Directors
 
Section 1 . Number of Directors . The number of directors which shall constitute the entire Board of Directors shall be at least one (1). Subject to the foregoing limitation, such number may be fixed from time to time by action of a majority of the entire Board of Directors or of the shareholders at an annual or special meeting, or, if the number of directors is not so fixed, the number shall be one (1). No decrease in the number of directors shall shorten the term of any incumbent director.
 
Section 2 . Election and Term . The initial Board of Directors shall be elected by the incorporator and each initial director so elected shall hold office until the first annual meeting of shareholders and until his successor has been elected and qualified. Thereafter, each director who is elected at an annual meeting of shareholders, and each director who is elected in the interim to fill a vacancy or a newly created directorship, shall hold office until the next annual meeting of shareholders and until his successor has been elected and qualified.
 
 
 

 
 
 
Section 3 . Filling Vacancies, Resignation and Removal . Any director may tender his resignation at any time. Any director or the entire Board of Directors may be removed, with or without cause, by vote of the shareholders. In the interim between annual meetings of shareholders or special meetings of shareholders called for the election of directors or for the removal of one or more directors and for the filling of any vacancy in that connection, newly created directorships and any vacancies in the Board of Directors, including unfilled vacancies resulting from the resignation or removal of directors for cause or without cause, may be filled by the vote of a majority of the remaining directors then in office, although less than a quorum, or by the sole remaining director.
 
Section 4 . Qualifications and Powers . Each director shall be at least eighteen (18) years of age. A director need not be a shareholder, a citizen of the United States or a resident of the State of Delaware. The business of the Corporation shall be managed by the Board of Directors, subject to the provisions of the Certificate of Incorporation.
In addition to the powers and authorities by these By-Laws expressly conferred upon it, the Board may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these By-Laws directed or required to be exercised or done exclusively by the shareholders.
 
Section 5 . Regular and Special Meetings of the Board . The Board of Directors may hold its meetings, whether regular or special, either within or without the State of Delaware. The newly elected Board may meet at such place and time as shall be fixed by the vote of the shareholders at the annual meeting, for the purpose of organization or otherwise, and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a majority of the entire Board shall be present; or they may meet at such place and time as shall be fixed by the consent in writing of all directors. Regular meetings of the Board may be held with or without notice at such time and place as shall from time to time be determined by resolution of the Board. Whenever the time or place of regular meetings of the Board shall have been determined by resolution of the Board, no regular meetings shall be held pursuant to any resolution of the Board altering or modifying its previous resolution relating to the time or place of the holding of regular meetings, without first giving at least three (3) days written notice to each director, either personally or by telegram, or at least five (5) days written notice to each director by mail, of the substance and effect of such new resolution relating to the time and place at which regular meetings of the Board may thereafter be held without notice. Special meetings of the Board shall be held whenever called by the President, Vice-President, the Secretary or any director in writing. Notice of each special meeting of the Board shall be delivered personally to each director or sent by telegraph to his residence or usual place of business at least three (3) days before the meeting, or mailed to him to his residence or usual place of business at least five (5) days before the meeting. Meetings of the Board, whether regular or special, may be held at any time and place, and for any purpose, without notice, when all the directors are present or when all directors not present shall, in writing, waive notice of and consent to the holding of such meeting, which waiver and consent may be given after the holding of such meeting. All or any of the directors may waive notice of any meeting and the presence of a director at any meeting of the Board shall be deemed a waiver of notice thereof by him. A notice, or waiver of notice, need not specify the purpose or purposes of any regular or special meeting of the Board.
 
 
 

 
 
Section 6 . Quorum and Action . A majority of the entire Board of Directors shall constitute a quorum except that when the entire Board consists of one director, then one director shall constitute a quorum, and except that when a vacancy or vacancies prevents such majority, a majority of the directors in office shall constitute a quorum, provided that such majority shall constitute at least one-third (1/3) of the entire Board. A majority of the directors present, whether or not they constitute a quorum, may adjourn a meeting to another time and place. Except as herein otherwise provided, and except as otherwise provided by the Delaware Business Corporation Law, the vote of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board.
 
Section 7 . Telephonic Meetings . Any member or members of the Board of Directors, or of any committee designated by the Board, may participate in a meeting of the Board, or any such committee, as the case may be, by means of conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time, and participation in a meeting by such means shall constitute presence in person at such meeting.
 
Section 8 . Action Without a Meeting . Any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee.

Section 9 . Compensation of Directors . By resolution of the Board of Directors, the directors may be paid their expenses, if any, for attendance at each regular or special meeting of the Board or of any committee designated by the Board and may be paid a fixed sum for attendance at such meeting, or a stated salary as director, or both. Nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefore; provided, however, that directors who are also salaried officers shall not receive fees or salaries as directors.
 
ARTICLE IV
Committees
 
Section 1 . In General . The Board of Directors may, by resolution or resolutions passed by the affirmative vote therefore of a majority of the entire Board, designate an Executive Committee and such other committees as the Board may from time to time determine, each to consist of one (1) or more directors, and each of which, to the extent provided in the resolution or in the Certificate of Incorporation or in the By-Laws, shall have all the powers of the Board, except that no such Committee shall have power to fill vacancies in the Board, or to change the membership of or to fill vacancies in any committee, or to make, amend, repeal or adopt By-Laws of the Corporation, or to submit to the shareholders any action that needs shareholder approval under these By-Laws or the Delaware Business Corporation Law, or to fix the compensation of the directors for serving on the Board or any committee thereof, or to amend or repeal any resolution of the Board which by its terms shall not be so amendable or repealable. Each committee shall serve at the pleasure of the Board. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member.
 
 
 

 
 
Section 2 . Executive Committee . Except as otherwise limited by the Board of Directors or by these By-Laws, the Executive Committee, if so designated by the Board of Directors, shall have and may exercise, when the Board is not in session, all the powers of the Board of Directors in the management of the business and affairs of the Corporation, and shall have power to authorize the seal of the Corporation to be affixed to all papers which may require it. The Board shall have the power at any time to change the membership of the Executive Committee, to fill vacancies in it, or to dissolve it. The Executive Committee may make rules for the conduct of its business and may appoint such assistance as it shall from time to time deem necessary. A majority of the members of the Executive Committee, if more than a single member, shall
 
ARTICLE V
Officers
 
Section 1 . Designation, Term and Vacancies . The officers of the Corporation shall be a President, one or more Vice-Presidents, a Secretary, a Treasurer, and such other officers as the Board of Directors may from time to time deem necessary. Such officers may have and perform the powers and duties usually pertaining to their respective offices, the powers and duties respectively prescribed by law and by these By-Laws, and such additional powers and duties as may from time to time be prescribed by the Board. The same person may hold any two or more offices, except that the offices of President and Secretary may not be held by the same person unless all the issued and outstanding stock of the Corporation is owned by one person, in which instance such person may hold all or any combination of offices.
 
The initial officers of the Corporation shall be appointed by the initial Board of Directors, each to hold office until the meeting of the Board of Directors following the first annual meeting of shareholders and until his successor has been appointed and qualified. Thereafter, the officers of the Corporation shall be appointed by the Board as soon as practicable after the election of the Board at the annual meeting of shareholders, and each officer so appointed shall hold office until the first meeting of the Board of Directors following the next annual meeting of shareholders and until his successor has been appointed and qualified. Any officer may be removed at any time, with or without cause, by the affirmative note therefore of a majority of the entire Board of Directors. All other agents and employees of the Corporation shall hold office during the pleasure of the Board of Directors. Vacancies occurring among the officers of the Corporation shall be filled by the Board of Directors. The salaries of all officers of the Corporation shall be fixed by the Board of Directors.
 
Section 2 . President . The President shall preside at all meetings of the shareholders and at all meetings of the Board of Directors at which he may be present.
Subject to the direction of the Board of Directors, he shall be the chief executive officer of the Corporation, and shall have general charge of the entire business of the Corporation. He may sign certificates of stock and sign and seal bonds, debentures, contracts or other obligations authorized by the Board, and may, without previous authority of the Board, make such contracts as the ordinary conduct of the Corporation's business requires. He shall have the usual powers and duties vested in the President of a corporation. He shall have power to select and appoint all necessary officers and employees of the Corporation, except those selected by the Board of Directors, and to remove all such officers and employees except those selected by the Board of Directors, and make new appointments to fill vacancies. He may delegate any of his powers to a Vice-President of the Corporation.
 
Section 3 . Vice-President . A Vice-President shall have such of the President's powers and duties as the President may from time to time delegate to him, and shall have such other powers and perform such other duties as may be assigned to him by the Board of Directors. During the absence or incapacity of the President, the Vice-President, or, if there be more than one, the Vice-President having the greatest seniority in office, shall perform the duties of the President, and when so acting shall have all the powers and be subject to all the responsibilities of the office of President.
 
 
 

 
 
Section 4 . Treasurer . The Treasurer shall have custody of such funds and securities of the Corporation as may come to his hands or be committed to his care by the Board of Directors. Whenever necessary or proper, he shall endorse on behalf of the Corporation, for collection, checks, notes, or other obligations, and shall deposit the same to the credit of the Corporation in such bank or banks or depositaries, approved by the Board of Directors as the Board of Directors or President may designate. He may sign receipts or vouchers for payments made to the Corporation, and the Board of Directors may require that such receipts or vouchers shall also be signed by some other officer to be designated by them. Whenever required by the Board of Directors, he shall render a statement of his cash accounts and such other statements respecting the affairs of the Corporation as may be required. He shall keep proper and accurate books of account. He shall perform all acts incident to the office of Treasurer, subject to the control of the Board.
 
Section 5 . Secretary . The Secretary shall have custody of the seal of the Corporation and when required by the Board of Directors, or when any instrument shall have been signed by the President duly authorized to sign the same, or when necessary to attest any proceedings of the shareholders or directors, shall affix it to any instrument requiring the same and shall attest the same with his signature, provided that the seal may be affixed by the President or Vice-President or other officer of the Corporation to any document executed by either of them respectively on behalf of the Corporation which does not require the attestation of the Secretary.
 He shall attend to the giving and serving of notices of meetings. He shall have charge of such books and papers as properly belong to his office or as may be committed to his care by the Board of Directors. He shall perform such other duties as appertain to his office or as may be required by the Board of Directors.
 
 
Section 6 . Delegation . In case of the absence of any officer of the Corporation, or for any other reason that the Board of Directors may deem sufficient, the Board may temporarily delegate the powers or duties, or any of them, of such officer to any other officer or to any director.
 
 
 

 

 
ARTICLE VI
Stock


Section 1 . Certificates Representing Shares . All certificates representing shares of the capital stock of the Corporation shall be in such form not inconsistent with the Certificate of Incorporation, these By-Laws or the laws of the State of Delaware of the Business Corporation Law. Such shares shall be approved by the Board of Directors, and shall be signed by the President or a Vice-President and by the Secretary or the Treasurer and shall bear the seal of the Corporation and shall not be valid unless so signed and sealed. Certificates countersigned by a duly appointed transfer agent and/or registered by a duly appointed registrar shall be deemed to be so signed and sealed whether the signatures be manual or facsimile signatures and whether the seal be a facsimile seal or any other form of seal. All certificates shall be consecutively numbered and the name of the person owning the shares represented thereby, his residence, with the number of such shares and the date of issue, shall be entered on the Corporation's books. All certificates surrendered shall be cancelled and no new certificates issued until the former certificates for the same number of shares shall have been surrendered and cancelled, except as provided for herein.
 
In case any officer or officers who shall have signed or whose facsimile signature or signatures shall have been affixed to any such certificate or certificates, shall cease to be such officer or officers of the Corporation before such certificate or certificates shall have been delivered by the Corporation, such certificate or certificates may nevertheless be adopted by the Corporation, and may be issued and delivered as though the person or persons who signed such certificates, or whose facsimile signature or signatures shall have been affixed thereto, had not ceased to be such officer or officers of the Corporation.
 
Any restriction on the transfer or registration of transfer of any shares of stock of any class or series shall be noted conspicuously on the certificate representing such shares.
 
Section 2 . Fractional Share Interests . The Corporation, may, but shall not be required to, issue certificates for fractions of a share. If the Corporation does not issue fractions of a share, it shall: (1) arrange for the disposition of fractional interests by those entitled thereto; (2) pay in cash the fair value of fractions of a share as of the time when those entitled to receive such fractions are determined; or (3) issue scrip or warrants in registered or bearer form which shall entitle the holder to receive a certificate for a full share upon the surrender of such scrip or warrants aggregating a full share. A certificate for a fractional share shall, but scrip or warrants shall not unless otherwise provided therein, entitle the holder to exercise voting rights, to receive dividends thereon, and to participate in any distribution of the assets of the Corporation in the event of liquidation. The Board of Directors may cause scrip or warrants to be issued subject to the conditions that they shall become void if not exchanged for certificates representing full shares before a specified date, or subject to the condition that the shares for which scrip or warrants are exchangeable may be sold by the Corporation and the proceeds thereof distributed to the holders of scrip or warrants, or subject to any other conditions which the Board of Directors may impose.
 
Section 3 . Addresses of Shareholders . Every shareholder shall furnish the Corporation with an address to which notices of meetings and other notices may be served upon or mailed to him, and in default thereof notices may be addressed to him at his last known post office address.
 
Section 4 . Stolen, Lost or Destroyed Certificates . The Board of Directors may in its sole discretion direct that a new certificate or certificates of stock be issued in place of any certificate or certificates of stock theretofore issued by the Corporation, alleged to have been stolen, lost or destroyed, and the Board of Directors when authorizing the issuance of such new certificate or certificates, may, in its discretion, and as a condition precedent thereto, require the owner of such stolen, lost or destroyed certificate or certificates or his legal representatives to give to the Corporation and to such registrar or registrars and/or transfer agent or transfer agents as may be authorized or required to countersign such new certificate or certificates, a bond in such sum as the Corporation may direct not exceeding double the value of the stock represented by the certificate alleged to have been stolen, lost or destroyed, as indemnity against any claim that may be made against them or any of them for or in respect of the shares of stock represented by the certificate alleged to have been stolen, lost or destroyed.
 
 
 

 
 
Section 5 . Transfers of Shares . Upon compliance with all provisions restricting the transferability of shares, if any, transfers of stock shall be made only upon the books of the Corporation by the holder in person or by his attorney thereunto authorized by power of attorney duly filed with the Secretary of the Corporation or with a transfer agent or registrar, if any, upon the surrender and cancellation of the certificate or certificates for such shares properly endorsed and the payment of all taxes due thereon. The Board of Directors may appoint one or more suitable banks and/or trust companies as transfer agents and/or registrars of transfers, for facilitating transfers of any class or series of stock of the Corporation by the holders thereof under such regulations as the Board of Directors may from time to time prescribe. Upon such appointment being made all certificates of stock of such class or series thereafter issued shall be countersigned by one of such transfer agents and/or one of such registrars of transfers, and shall not be valid unless so countersigned.

ARTICLE VII
Dividends and Finance
 
Section 1 . Dividends . The Board of Directors shall have power to fix and determine and to vary, from time to time, the amount of the working capital of the Corporation before declaring any dividends among its shareholders, and to direct and determine the use and disposition of any net profits or surplus, and to determine the date or dates for the declaration and payment of dividends and to determine the amount of any dividend, and the amount of any reserves necessary in their judgment before declaring any dividends among its shareholder, and to determine the amount of the net profits of the Corporation from time to time available for dividends.
 
Section 2 . Fiscal Year . The fiscal year of the Corporation shall end on the last business day in the month of September in each year and shall begin on the next succeeding day, or shall be for such other period as the Board of Directors may from time to time designate with the consent of the Department of Taxation and Finance, where applicable.
 
ARTICLE VIII
Miscellaneous Provisions


Section 1 . Stock of Other Corporations . The Board of Directors shall have the right to authorize any director, officer or other person on behalf of the Corporation to attend, act and vote at meetings of the shareholders of any corporation in which the Corporation shall hold stock, and to exercise thereat any and all rights and powers incident to the ownership of such stock, and to execute waivers of notice of such meetings and calls therefore; and authority may be given to exercise the same either on one or more designated occasions, or generally on all occasions until revoked by the Board. In the event that the Board shall fail to give such authority, such authority may be exercised by the President in person or by proxy appointed by him on behalf of the Corporation.
Any stocks or securities owned by this Corporation may, if so determined by the Board of Directors, be registered either in the name of this Corporation or in the name of any nominee or nominees appointed for that purpose by the Board of Directors.
 
Section 2 . Books and Records . Subject to the Delaware Business Corporation Law, the Corporation may keep its books and accounts outside the State of Delaware.
 
Section 3 . Notices . Whenever any notice is required by these By-Laws to be given, personal notice is not meant unless expressly so stated, and any notice so required shall be deemed to be sufficient if given by depositing the same in a post office box in a sealed postpaid wrapper, addressed to the person entitled thereto at his last known post office address, and such notice shall be deemed to have been given on the day of such mailing.
Whenever any notice whatsoever is required to be given under the provisions of any law, or under the provisions of the Certificate of Incorporation or these By-Laws a waiver in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto.
 
Section 4 . Amendments . Except as otherwise provided herein, these By-Laws may be altered, amended or repealed and By-Laws may be made at any annual meeting of the shareholders or at any special meeting thereof if notice of the proposed alteration, amendment or repeal, or By-Law or By-Laws to be made be contained in the notice of such special meeting, by the holders of a majority of the shares of stock of the Corporation outstanding and entitled to vote thereat; or by a majority of the Board of Directors at any regular meeting of the Board of Directors, or at any special meeting of the Board of Directors, if notice of the proposed alteration, amendment or repeal, or By-Law or By-Laws to be made, be contained in the notice of such special meeting.

 
 

 
OPTEX SYSTEMS HOLDINGS, INC.
2009 STOCK OPTION PLAN

ARTICLE I

PURPOSE AND ADOPTION OF THE PLAN

1.01 Purpose .  The purpose of the Optex Systems Corporation (“Company”) 2009 Stock Option Plan is to assist the Company (as defined below) in attracting and retaining highly competent employees and to act as an incentive in motivating selected officers and other employees of the Company and its subsidiaries, and directors and consultants of the Company and its subsidiaries, to achieve long-term corporate objectives.

1.02 Adoption and Term .  The Plan has been approved by the Board of Directors and shareholders of the Company. The Plan is effective from the date approved by the shareholders of the Company (the “Effective Date”) and shall remain in effect until terminated by action of the Board; provided , however , that no Option (as defined below) or Stock Purchase Right (as defined below) may be granted hereunder after the tenth anniversary of the Effective Date.

ARTICLE II

DEFINITIONS

For the purpose of this Plan, the following capitalized terms shall have the following meanings:

2.01  Applicable Laws means the requirements relating to the administration of stock option plans under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Options or Stock Purchase Rights are, or will be, granted under the Plan.

2.02 Beneficiary means an individual, trust or estate who or which, by a written designation of the Participant filed with the Company or by operation of law, succeeds to the rights and obligations of the Participant under the Plan and the Option Agreement or Restricted Stock Purchase Agreement upon the Participant’s death.

2.03 Board means the Board of Directors of the Company.

2.04 Code means the Internal Revenue Code of 1986, as amended.  References to a section of the Code shall include that section and any comparable section or sections of any future legislation that amends, supplements or supersedes said section
 
 
 

 
 
2.05 Committee means the Committee defined in Section 3.01.

2.06 Company means Optex Systems Corporation., a Delaware corporation, and its successors.

2.07 Common Stock means the Common Stock of the Company, par value $.001 per share.

2.08 Date of Grant means the date designated by the Committee as the date as of which it grants an Option or Stock Purchase Right, which shall not be earlier than the date on which the Committee approves the granting of such Option or Stock Purchase Right.

2.09 Exchange Act means the Securities Exchange Act of 1934, as amended.

2.10 Fair Market Value means, as of any applicable date, the fair market value of the Common Stock as determined by the Board based upon such evidence as it may think necessary or desirable.

2.11 Incentive Stock Option means a stock option within the meaning of Section 422 of the Code.

2.12 Merger means any merger, reorganization, consolidation, exchange, transfer of assets or other transaction having similar effect involving the Company.

2.13 Nonstatutory Stock Option means a stock option which is not an Incentive Stock Option.

2.14 Option Agreement means a written agreement between the Company and a Participant, specifically setting forth the terms and conditions of an Option granted under the Plan, substantially in the form of Exhibit A attached hereto or such other form as shall be determined from time to time by the Committee.

2.15 Option Price , with respect to Options, shall have the meaning set forth in Section 6.01(b).

2.16 Option Term means, with respect to an Option, the period of time set forth in the Option Agreement during which the Option may be exercised.

2.17 Options means all Nonstatutory Stock Options and Incentive Stock Options granted at any time under the Plan.

2.18 Participant means a person designated to receive an Option or Stock Purchase Right under the Plan in accordance with Section 4.03.
 
 
 

 
 
2.19 Plan means the Treasure Mountain Holdings, Inc. 2005 Stock Option Plan as described herein, as the same may be amended from time to time.

2.20 Restricted Stock means shares of Common Stock acquired pursuant to a grant of Stock Purchase Rights under Article V of the Plan.

2.21 Restricted Stock Purchase Agreement means a written agreement between the Company and an Optionee evidencing the terms and restrictions applying to stock purchased under a Stock Purchase Right. Each Restricted Stock Purchase Agreement is subject to the terms and conditions of the Plan and shall be substantially in the form of Exhibit B attached hereto or such other form as shall be determined from time to time by the Committee.

2.22 Stock Purchase Right means the right to purchase Common Stock pursuant to Article V of the Plan, as evidenced by a notice of grant included within the applicable Restricted Stock Purchase Agreement (the “Notice of Grant”).

2.23 Ten Percent Shareholder means any individual who, at the time an Option is granted, owns stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company.

ARTICLE III

ADMINISTRATION

The Plan shall be administered by the Board or, in the discretion of the Board, by a committee of the Board (the “Committee”) comprised of at least two persons.  The Committee or Board shall have exclusive and final authority in each determination, interpretation or other action affecting the Plan and its Participants.  The Board or Committee shall have the sole discretionary authority to interpret the Plan, to establish and modify administrative rules for the plan, to impose such conditions and restrictions on Options and Stock Purchase Rights as it determines appropriate, and to take such steps in connection with the Plan and Options and Stock Purchase Rights granted hereunder as it may deem necessary or advisable.  The Board or Committee may delegate such of its powers and authority under the Plan as it deems appropriate to designated officers or employees of the Company.  In the event of such delegation of authority or exercise of authority by the Board or Committee, references in the Plan to the Committee shall be deemed to refer to the delegate of the Board or the Committee as the case may be.  For purposes of this Plan, references to the Committee shall be deemed references to the Board to the extent that the Board has not appointed a Committee to administer the Plan.
 
 
 

 

 
ARTICLE IV

SHARES AND PARTICIPATION

4.01 Number of Shares Issuable.   The total number of shares initially authorized to be issued under the Plan shall be 6,000,000 shares of Common Stock. The number of shares available for issuance under the Plan shall be further subject to adjustment in accordance with Section 7.06.  The shares to be offered under the Plan shall be authorized and unissued Common Stock, or issued Common Stock which shall have been reacquired by the Company,

4.02 Shares Subject to Terminated Options and Stock Purchase Rights .  Common Stock covered by any unexercised portions of terminated Options and Stock Purchase Rights (including canceled Options and Stock Purchase Rights) granted under Articles V and VI of the Plan and Common Stock subject to any Options and Stock Purchase Rights which are otherwise surrendered by a Participant may again be subject to new Options and Stock Purchase Rights under the Plan.

4.03  Participation. Participants in the Plan shall be such consultants, directors, officers and other employees of the Company and its subsidiaries as the Committee, in its sole discretion, may designate from time to time. The Committee’s designation of a Participant in any year shall not require the Committee to designate such person to receive Options, Stock Purchase Rights or grants in any other year.  The Committee shall consider such factors as it deems pertinent in selecting Participants and in determining the type and amount of their respective Options and Stock Purchase Rights.

ARTICLE V

STOCK PURCHASE RIGHTS

5.01 Rights to Purchase . Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Committee determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing or electronically, by means of a Restricted Stock Purchase Agreement, of the terms, conditions and restrictions related to the offer, including the number of shares of Common Stock that the offeree shall be entitled to purchase and the price to be paid for such shares. The offer shall be accepted by execution of the Restricted Stock Purchase Agreement.

5.02 Repurchase Option . Unless the Committee determines otherwise, the Restricted Stock Purchase Agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's service with the Company for any reason (including death or “Permanent Disability” (as defined in Section 6.03)). The purchase price for shares repurchased pursuant to the Restricted Stock Purchase Agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at a rate determined by the Committee. In the event that the Restricted Stock Purchase Agreement does not provide for a lapsing schedule, the restrictions shall lapse as to (a) one third of the shares subject to the Restricted Stock Purchase Agreement on the first anniversary of the grant of the Stock Purchase Right, (b) one third of the shares subject to the Restricted Stock Purchase Agreement on the second anniversary of the grant of the Stock Purchase Right and (c) one third of the shares subject to the Restricted Stock Purchase Agreement on the third anniversary of the grant of the Stock Purchase Right.
 
 
 

 

 
5.03 Other Provisions . The Restricted Stock Purchase Agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Committee in its sole discretion.

5.04 Rights as a Shareholder . Once the Stock Purchase Right is exercised, the purchaser shall have the rights equivalent to those of a shareholder, and shall be a shareholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised; provided , however , that Participants are entitled to share adjustments to reflect capital changes under Section 7.06.


ARTICLE VI

STOCK OPTIONS

6.01           Option Awards.

(a)             General.   The Committee may grant, to such Participants as the Committee may select, Options entitling the Participant to purchase shares of Common Stock from the Company in such number, at such price, and on such terms and subject to such conditions, not inconsistent with the terms of this Plan, as may be established by the Committee.  The terms of any Option granted under this Plan shall be set forth in an Option Agreement.

(b)             Purchase Price of Options.   The Option Price of each share of Common Stock which may be purchased upon exercise of any Option granted under the Plan shall be determined by the Committee; provided , however , that (i) with respect to Incentive Stock Options, the Option Price per share shall in all cases be equal to or greater than the Fair Market Value of a share of Common Stock on the Date of Grant as required under Section 422 of the Code, and (ii) with respect to any Incentive Stock Option granted to any Ten Percent Shareholder, the Option Price per share shall in all cases be equal to or greater than 110 percent of the Fair Market Value of a share of Common Stock on the Date of Grant as required under Section 422 of the Code.
 
 
 

 

 
(c)             Designation of Options.   Except as otherwise expressly provided in the Plan, the Committee may designate, at the time of the grant of each Option, the Option as an Incentive Stock Option or a Nonstatutory Stock Option.

(d)             Incentive Stock Option Limitations .  No Participant may be granted Incentive Stock Options under the Plan (or any other plans of the Company), which would result in shares with an aggregate Fair Market Value (measured on the Date of Grant) of more than $100,000 first becoming exercisable in any one calendar year. No Participant may be granted Incentive Stock Options under the Plan (or any other plans of the Company) unless the Participant is an employee of the Company or its Subsidiaries. An individual shall not cease to be an employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company and its subsidiaries. For purposes of an Option initially granted as an Incentive Stock Option, if a leave of absence of more than three months precludes such Option from being treated as an Incentive Stock Option under the Code, such Option thereafter shall be treated as a Nonstatutory Stock Option for purposes of this Plan. Neither service as a director nor payment of a director’s fee by the Company shall be sufficient to constitute “employment” by the Company.

(e)             Rights as a Shareholder .  A Participant or a transferee of an Option pursuant to Section 7.04 shall have no rights as a shareholder with respect to Common Stock covered by an Option until the Participant or transferee shall have become the holder of record of any such shares, and no adjustment shall be made for dividends in cash or other property or distributions or other rights with respect to any such Common Stock for which the record date is prior to the date on which the Participant or a transferee of the Option shall have become the holder of record of any such shares covered by the Option; provided , however , that Participants are entitled to share adjustments to reflect capital changes under Section 7.06.

(f)            Vesting. In the event that an Option Agreement does not provide for a vesting schedule, the Options covered thereby shall become exercisable as to (a) one third of the shares subject to the Option Agreement on the first anniversary of the grant of the Option, (b) one third of the shares subject to the Option on the second anniversary of the grant of the Option and (c) one third of the shares subject to the Option on the third anniversary of the grant of the Option.

6.02           Terms of Stock Options.

(a)             Conditions on Exercise.   An Option Agreement with respect to Options may contain such waiting periods, exercise dates and restrictions on exercise (including, but not limited to, periodic installments) as may be determined by the Committee as of the Date of Grant.

(b)             Duration of Options .  Options shall terminate after the first to occur of the following events:
 
 
 

 

 
(i)           Expiration of the Option as provided in the Option Agreement;

(ii)           Termination of the Option as provided in Section 6.03, following the Participant’s termination of employment; or

(iii)           Ten years from the Date of Grant (five years from the Date of Grant in the case of any Incentive Stock Option granted to a Ten Percent Shareholder).

(c)             Acceleration of Exercise Time .  The Committee, in its sole discretion, shall have the right (but shall not in any case be obligated), exercisable at any time after the Date of Grant, to permit the exercise of any Option prior to the time such Option would otherwise become exercisable under the terms of the Option Agreement.

(d)             Extension of Exercise Time .  The Committee, in its sole discretion, shall have the right (but shall not in any case be obligated), exercisable on or at any time after the Date of Grant, to permit any Option granted under this Plan to be exercised after its expiration date, subject, however, to the limitation described in Section 6.02(b)(iii).

6.03           Exercise of Options upon Termination of Employment.

(a)             General.   In the event of the termination of employment of the Participant by the Participant or the Company and its subsidiaries for any reason whatsoever other than death, Permanent Disability (as defined in Section 6.03(b)) or retirement after attainment of age 65, (i) any Options that were not vested prior to the date of such termination of employment shall terminate on such date and (ii) any Options that were vested prior to the date of such termination of employment (and which were not previously exercised) shall terminate on the ninetieth (90th) day following the date of such termination of employment or the last day of the Option Term, whichever is earlier.

(b)            Death, Permanent Disability or Retirement .  In the event of the termination of the employment of the Participant by reason of death, Permanent Disability or retirement after attainment of age 65, any Options that were vested prior to the date of such termination (and which were not previously exercised), together with any other Options designated by the Committee, shall terminate on the earlier of (i) the first anniversary of the date of such termination and (ii) the last day of the Option Term.  Any Options that were not vested prior to the date of such termination and do not become vested pursuant to the immediately preceding sentence shall terminate as of the date of such termination.  As used in this Plan, the term “Permanent Disability” means the Participant being deemed to have suffered a disability that makes the Participant eligible for immediate benefits under any long-term disability plan of the Company, as in effect from time to time.
 
 
 

 

 
(c)            Termination of Employment. For purposes of the Plan, there shall have been a termination of employment of a Participant if such Participant is no longer an employee, consultant, director or officer of the Company or of any of its subsidiaries.

6.04             Exercise Procedures .  Each Option granted under the Plan shall be exercised by written notice to the Company which must be received by the officer or employee of the Company designated in the Option Agreement on or before the close of business on the expiration date of the Option.  The Option Price of shares purchased upon exercise of an Option granted under the Plan shall be paid in full in cash by the Participant pursuant to the Option Agreement; provided , however , that the Committee may (but shall not be required to) permit payment to be made by delivery to the Company of either (a) Common Stock (which may include shares otherwise issuable in connection with the exercise of the Option, subject to such rules as the Committee deems appropriate), (b) any combination of cash and Common Stock, or (c) such other consideration as the Committee deems appropriate.  In the event that any Common Stock shall be transferred to the Company to satisfy all or any part of the Option Price, the part of the Option Price deemed to have been satisfied by such transfer of Common Stock shall be equal to the product derived by multiplying the Fair Market Value of a share of Common Stock as of the date of exercise times the number of shares of Common Stock transferred to the Company.  The Participant may not transfer to the Company in satisfaction of the Option Price any fractional share of Common Stock.  Any part of the Option Price paid in cash upon the exercise of any Option shall be added to the general funds of the Company and may be used for any proper corporate purpose.  Unless the Committee shall otherwise determine, any Common Stock transferred to the Company as payment of all or part of the Option Price upon the exercise of any Option shall be held as treasury shares.

ARTICLE VII

MISCELLANEOUS

7.01             Plan Provisions Control Option and Stock Purchase Right Terms.   The terms of the Plan shall govern all Options and Stock Purchase Rights granted under the Plan, and in no event shall the Committee have the power to grant any option or stock purchase right under the Plan which is contrary to any of the provision of the Plan.  In the event any provision of any Options or Stock Purchase Rights granted under the Plan shall conflict with any term in the Plan as constituted on the Date of Grant of such Option or Stock Purchase Right, the term in the Plan as constituted on the Date of Grant of such Option or Stock Purchase Right shall control.  Except as provided in Section 7.03 and Section 7.06, the terms of any Option or Stock Purchase Right granted under the Plan may not be changed after the Date of Grant of such Option or Stock Purchase Right so as to materially decrease the value of the Option or Stock Purchase Right without the express written approval of the holder.
 
 
 

 

 
7.02             Option Agreement.   No person shall have any rights under any Option granted under the Plan unless and until the Company and the Participant to whom such Option shall have been granted shall have executed and delivered an Option Agreement or received any other Option acknowledgment authorized by the Committee expressly granting the Option to such person and containing provisions setting forth the terms of the Option.

7.03             Modification of Option After Grant.   No Option or Stock Purchase Right granted under the Plan to a participant may be modified (unless such modification does not materially decrease the value of the Option or Stock Purchase Right) after the Date of Grant except by express written agreement between the Company and the Participant, provided that any such change (a) shall not be inconsistent with the terms of the Plan, and (b) shall be approved by the Committee.

7.04             Limitation on Transfer.   Unless determined otherwise by the Committee, a Participant’s rights and interest under the Plan may not be assigned or transferred other than by will or the laws of descent and distribution, and during the lifetime of a Participant, only the Participant personally (or the Participant’s personal representative) may exercise rights under the Plan.  The Participant’s Beneficiary may exercise the Participant’s rights to the extent they are exercisable under the Plan following the death of the Participant. In the event that the Committee makes an Option or Stock Purchase Right transferable, such Option or Stock Purchase Right shall contain such additional terms and conditions as the Committee deems appropriate.

7.05             Taxes .  The Company shall be entitled, if the Committee deems it necessary or desirable, to withhold (or secure payment from the Participant in lieu of withholding) the amount of any withholding or other tax required by law to be withheld or paid by the Company with respect to any amount payable and/or shares issuable with respect to such Participant’s Option or Stock Purchase Right, or with respect to any income recognized upon a disqualifying disposition of shares received pursuant to the exercise of an Incentive Stock Option, and the Company may defer payment or issuance of shares upon exercise of an Option or Stock Purchase Right unless indemnified to its satisfaction against any liability for any such tax.  The amount of such withholding or tax payment shall be determined by the Committee and shall be payable by the Participant at such time as the Committee determines.  The Participant shall meet his or her withholding requirement by direct payment to the Company in cash of the amount of any taxes required to be withheld with respect to such Option or Stock Purchase Right; provided, however, that the Committee may (but shall not be required to) permit the Participant to meet his or her withholding requirement by (i) having withheld from such Option or Stock Purchase Right at the appropriate time that number of shares of Common Stock, rounded up to the next whole share, whose Fair Market Value is equal to the amount of withholding taxes due, or (ii) a combination of shares and cash.
 
 
 

 

 
7.06           Adjustments to Reflect Capital Changes.

(a)             Recapitalization.   The number and kind of shares subject to outstanding Options or Stock Purchase Rights, the Option Price for such shares, the number and kind of shares available for Options and Stock Purchase Rights subsequently granted under the Plan and the maximum number of shares in respect of which Options can be granted to any Participant in any calendar year shall be appropriately adjusted to reflect any stock dividend, stock split, combination or exchange of shares, merger, consolidation or other change in capitalization with a similar substantive effect upon the Plan or the Options or Stock Purchase Rights granted under the Plan.  The Committee shall have the power and sole discretion to determine the amount of the adjustment to be made in each case.

(b)             Merger.   After any Merger in which the Company is the surviving corporation, each Participant shall, at no additional cost, be entitled upon any exercise of an Option or Stock Purchase Right to receive (subject to any required action by shareholders), in lieu of the number of shares of Common Stock receivable or exercisable pursuant to such Option or Stock Purchase Right, the number and class of shares or other securities to which such Participant would have been entitled pursuant to the terms of the Merger if, at the time of the Merger, such participant had been the holder of record of a number of shares equal to the number of shares receivable or exercisable pursuant to such Option or Stock Purchase Right.  Comparable rights shall accrue to each Participant in the event of successive Mergers of the character described above.  In the event of a Merger in which the Company is not the surviving corporation, the surviving, continuing, successor, or purchasing corporation, as the case may be (the “Acquiring Corporation”), shall either assume the Company’s rights and obligations under outstanding Options and Stock Purchase Rights or substitute comparable options and stock purchase rights in respect of the Acquiring Corporation’s stock for such outstanding Options and Stock Purchase Rights. In the event the Acquiring Corporation elects not to assume or substitute comparable options and stock purchase rights for such outstanding Options and Stock Purchase Rights, the Board shall provide that any unexercisable and/or unvested portion of the outstanding Options and Stock Purchase Rights shall be immediately exercisable and vested as of a date prior to such Merger or consolidation, as the Board so determines.  The exercise and/or vesting of any Option and any Stock Purchase Right that was permissible solely by reason of this Section 7.07(b) shall be conditioned upon the consummation of the Merger or consolidation.  Any Options and Stock Purchase Rights which are neither assumed by the Acquiring Corporation nor exercised as of the date of the Merger shall terminate effective as of the effective date of the Merger.

For purposes of the Plan, all outstanding Options and Stock Purchase Rights will be considered assumed if, following the consummation of the Merger, the option or stock purchase rights confers the right to purchase or receive, for each share of stock subject to the Option or Stock Purchase Right immediately prior to the consummation of the Merger, the consideration (whether stock, cash, or other securities property) received in the Merger by holders of Common Stock for each share of the Company’s Common Stock held on the effective date of the transaction (and if holders were offered a choice of consideration, the type chosen by the holders of a majority of the outstanding shares of the Company’s Common Stock); provided, however, that if such consideration received in the Merger is not solely common stock of the successor corporation or its parent, the Committee may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option or Stock Purchase Right, for each share of stock subject to the Option or Stock Purchase Right, to be solely common stock of the successor corporation or its parent or subsidiary equal in fair market value to the per share consideration received by holders of the Company’s Common Stock in the Merger.
 
 
 

 

 
Any outstanding Option which is assumed or replaced in the event of a Merger and does not otherwise accelerate at that time will automatically accelerate in the event that the Participant’s service terminates through an “Involuntary Termination” effected within eighteen (18) months following the effective date of such Merger . Any Option so accelerated will remain exercisable until the earlier of (i) the expiration of the Option Term or (ii) the end of the one-year period measured from the date of the Involuntary Termination.

An Involuntary Termination will be deemed to occur upon (i) the Participant's involuntary dismissal or discharge by the Company or its subsidiaries or their successors for reasons other than cause or (ii) such individual’s voluntary resignation following (A) a reduction in his or her level of compensation (including base salary, fringe benefits and any corporate-performance based bonus or incentive programs) by more than ten percent or (B) a relocation of such individual’s place of employment by more than fifty (50) miles, provided and only if such reduction or relocation is effected by the Company or its subsidiaries or their successor without the Participant’s written consent.

(c)             Options to Purchase Shares of Stock of Acquired Companies.   After any Merger in which the Company shall be a surviving corporation, the Committee may grant substituted options outside of the terms of this Plan, pursuant to Section 424 of the Code, replacing old options granted under a plan of another party to the Merger whose shares or stock subject to the old options may no longer be issued following the Merger.  The foregoing manner of application of the foregoing provisions shall be determined by the Committee in its sole discretion.  Any such application may provide for the elimination of any fractional shares, which might otherwise become subject to any Options.

7.07             No Right to Employment.   No employee or other person shall have any claim of right to be granted an Option under this Plan.  Neither the Plan nor any action taken hereunder shall be construed as giving any employee any right to be retained in the employ of the Company or any of its subsidiaries.

7.08             Options Not Includable for Benefit Purposes .  Common Stock received by a Participant pursuant to the provisions of the Plan shall not be included in the determination of benefits under any pension, group insurance or other benefit plan applicable to the Participant, which is maintained by the Company, except as may be provided under the terms of such plans or determined by the Board.
 
 
 

 

 
7.09             Governing Law.   All determinations made and actions taken pursuant to the Plan shall be governed by the laws of the State of Delaware and construed in accordance therewith (except where the law of the state of incorporation of the Company controls).

7.10             No Strict Construction.   No rule of strict construction shall be implied against the Company, the Board, the Committee, or any other person in the interpretation of any of the terms of the Plan, any Option or Stock Purchase Right granted under the Plan or any rule or procedure established by the Committee.

7.11             Captions.   The captions (i.e., all Section headings) used in the Plan are for convenience only, do not constitute a part of the Plan, and shall not be deemed to limit, characterize or affect in any way any provisions of the Plan, and all provisions of the Plan shall be construed as if no captions have been used in the Plan.

7.12             Severability.   Whenever possible, each provision in the Plan and every Option and Stock Purchase Right at any time granted under the Plan shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of the Plan or any Option or Stock Purchase Right at any time granted under the Plan shall be held to be prohibited by or invalid under applicable law, then (a) such provision shall be deemed amended to accomplish the objectives of the provision as originally written to the fullest extent permitted by law and (b) all other provisions of the Plan and every other Option and Stock Purchase Right at any time granted under the Plan shall remain in full force and effect.

7.13           Amendment and Termination.

(a)             Amendment.   The Board shall have complete power and authority to amend the Plan at any time.  No termination or amendment of the Plan may, without the consent of the Participant to whom any Option or Stock Purchase Right shall theretofore have been granted under the Plan, adversely affect the right of such individual under such Option or Stock Purchase Right.

(b)             Termination.   The Board shall have the right and the power to terminate the Plan at any time; provided, however, that the Plan shall terminate no later than ten years after the adoption of the Plan by the Board.  No Option or Stock Purchase Right shall be granted under the Plan after the termination of the Plan, but the termination of the Plan shall not have any other effect and any Option or Stock Purchase Right outstanding at the time of the termination of the Plan may be exercised after termination of the Plan at any time prior to the expiration date of such Option or Stock Purchase Right to the same extent such Option or Stock Purchase Right would have been exercisable had the Plan not terminated.
 
 
 

 

 
7.14  Limitations.    The following limitations shall apply to grants of Options:

(i) No Participant shall be granted, in any fiscal year of the Company, Options to purchase more than 1,000,000 shares of Common Stock, other than grants made to the chief executive officer of the Company pursuant to an employment agreement approved by the Board of Directors of the Company, in which case the maximum number of shares covered by Options granted to such officer in any fiscal year shall not exceed 5% of the Company’s outstanding common stock, calculated on a fully diluted basis.

(ii) The foregoing limitation shall be adjusted proportionately in connection with any change in the Company's capitalization as described in Section 7.06(b).

(iii) If an Option is canceled in the same fiscal year of the Company in which it was granted (other than in connection with a transaction described in Section 7.06(b)), the canceled Option will be counted against the limits set forth in subsections (i) and (ii) above.

7.15    Conditions Upon Issuance of Shares.

(a) Legal Compliance . Shares of Common Stock shall not be issued pursuant to the exercise of an Option or Stock Purchase Right unless the exercise of such Option or Stock Purchase Right and the issuance and delivery of such shares shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance.

(b) Investment Representations. As a condition to the exercise of an Option or Stock Purchase Right, the Company may require the person exercising such Option or Stock Purchase Right to represent and warrant at the time of any such exercise that the shares of Common Stock are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required.

(c) Additional Conditions .  The Committee shall have the authority to condition the grant of any Option or Stock Purchase Right in such other manner that the Committee determines to be appropriate, provided that such condition is not inconsistent with the terms of the Plan. Such conditions may include, among other things, obligations of Optionees to execute lock-up agreements and shareholder agreements in the future.

(d)  Other.   The Company shall have the right but not the obligation to file a resale registration statement on behalf of one or more Optionees with respect to shares underlying options on Form S-8 or other applicable registration statement.
 
 
 

 

 
7.16 . Inability to Obtain Authority . The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any shares of Common Stock hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained.

7.17. Reservation of Shares . The Company, during the term of this Plan, will at all times reserve and keep available such number of shares of Common Stock as shall be sufficient to satisfy the requirements of the Plan.


 
 

 

























































































































April 3, 2009

Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549

 
RE:
Optex Systems Holdings, Inc.
 
Ladies and Gentlemen:
 
I have read the statements made by Optex Systems Holdings, Inc. in Item 4.01 of the accompanying Form 8-K. which is being filed with the Securities and Exchange Commission. I agree with the statements contained therein concerning the firm.

Optex Systems Holdings, Inc. has my permission to file this letter as Exh 16 to Form 9-K.
 
Very truly yours,
 
/s/ Gately & Associates, LLC                         
Name:
 
 
 

 
EXHIBIT 21.1

SUBISDIARIES OF OPTEX SYSTEMS HOLDINGS, INC.

Optex Sytems, Inc., a Delaware corporation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and
Stockholders of Optex Systems, Inc.
Richardson, Texas
 
We have audited the accompanying balance sheets of Optex Systems, Inc. (the Company) as of September 28, 2008 and September 30, 2007, and the related statements of operations, stockholders’ equity, and cash flows for the years then ended. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (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. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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 Optex Systems, Inc. as of December September 28, 2008 and September 30, 2007, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
 
/s/Rotenberg & Co., LLP
 
Rotenberg & Co., LLP
Rochester, New York
April 3, 2009
 

 
Optex Systems, Inc.
Balance Sheets

   
09/28/08
   
09/30/07
 
             
 ASSETS
           
             
 Current Assets
           
 Cash
    170,183       504,753  
 Accounts Receivable
    2,454,235       2,043,634  
 Net Inventory
    4,547,726       6,112,565  
 Prepaid Expenses
    307,507       17,072  
                 
 Total Current Assets
    7,479,651       8,678,024  
                 
 Property and Equipment
               
Property Plant and Equipment
    1,314,109       1,196,543  
Accumulated Depreciation
    (994,542 )     (830,108 )
                 
 Total Property and Equipment
    319,567       366,435  
                 
 Other Assets
               
 Security Deposits
    20,684       20,684  
 Intangibles
    1,100,140       1,696,507  
 Goodwill
    10,047,065       11,633,481  
                 
 Total Other Assets
    11,167,889       13,350,672  
                 
  Total Assets
    18,967,107       22,395,131  

The accompanying notes are an integral part of these financial statements

 
 

 

Optex Systems, Inc.
Balance Sheets - continued

   
09/28/08
   
09/30/07
 
             
 LIABILITIES AND STOCKHOLDERS’ EQUITY
           
             
 Current Liabilities
           
 Accounts Payable
    1,821,534       3,381,508  
 Accrued Expenses
    798,974       371,320  
 Accrued Warranties
    227,000       -  
 Accrued Contract Losses
    821,885       1,377,348  
 Loans Payable
    373,974       -  
 Income Tax Payable
    4,425       25,969  
                 
 Total Current Liabilities
    4,047,792       5,156,145  
                 
 Other Liabilities
               
 Note Payable
    2,000,000       2,000,000  
 Accrued Interest on Note
    336,148       136,148  
 Due to IRSN (Parent)
    4,300,151       1,987,870  
                 
 Total Other Liabilities
    6,636,299       4,124,018  
                 
 Total Liabilities
    10,684,091       9,280,163  
                 
 Stockholders' Equity
               
 Common Stock (no par 100,000 authorized, 18,870 shares issued and 10,000 shares outstanding)
    164,834       164,834  
 Treasury Stock (8,870 shares at cost)
    (1,217,400 )     (1,217,400 )
 Additional Paid-in-capital
    15,246,282       15,246,282  
 Retained Earnings (Deficit)
    (5,910,700 )     (1,078,748 )
                 
 Total Stockholders' Equity
    8,283,016       13,114,968  
                 
 Total Liabilities and Stockholders' Equity
    18,967,107       22,395,131  

The accompanying notes are an integral part of these financial statements

 
 

 

Optex Systems, Inc.
Statements of Operations

   
Year Ended
September 28, 2008
   
Year Ended
September 30, 2007
 
             
Revenues
    20,017,209       15,406,186  
                 
Cost of Goods Sold
    18,145,211       17,361,378  
                 
Gross Margin
    1,871,998       (1,955,192 )
                 
General and Administrative
               
Salaries and Wages
    910,854       876,366  
Employee Benefits
    190,489       222,433  
Employee Stock Bonus Plan
    378,716       388,756  
Amortization of Intangibles
    223,491       223,835  
Rent, Utilities and Building Maintenance
    228,694       210,936  
Legal and Accouting Fees
    223,715       374,845  
Consulting and Contract Service Fees
    325,723       212,925  
Corporate Allocations
    2,076,184       2,010,027  
Other Expenses
    381,459       361,932  
Total General and Administrative
    4,939,325       4,882,055  
                 
Loss before Other Expenses and Taxes
    (3,067,327 )     (6,837,247 )
                 
Other Expenses
               
Asset Impairment of Goodwill
    1,586,416       -  
Interest Expense - Net
    199,753       136,148  
                 
Total Other
    1,786,169       136,148  
                 
Loss Before Taxes
    (4,853,496 )     (6,973,395 )
Income Taxes (Benefit)
    (21,544 )     (162,541 )
Net Loss After Taxes
    (4,831,952 )     (6,810,854 )
                 
Basic and diluted loss per share
  $ (483.20 )   $ (681.09 )
                 
Weighted Average Common Shares Outstanding
    10,000       10,000  

The accompanying notes are an integral part of these financial statements

 
 

 

Optex Systems, Inc.
Statements of Cash Flows
 
   
Year   Ended
September   28,   2008
   
Year   Ended
September   30,   2007
 
             
Cash flows from operating activities:
           
Net Loss
    (4,831,952 )     (6,810,854 )
                 
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    760,801       1,068,938  
Provision for (use of) allowance for inventory valuation
    (102,579 )     701,308  
Noncash interest expense
    200,000       136,148  
(Gain) loss on disposal and impairment of assets
    1,586,416       -  
(Increase) decrease  in accounts receivable
    (410,602 )     688,023  
(Increase) decrease in inventory (net of progress billed)
    1,667,418       (1,124,352 )
(Increase) decrease in other current assets
    (290,435 )     (757 )
(Increase) decrease in other assets
    -       (530 )
Increase (decrease) in accounts payable and accrued expenses
    (1,132,319 )     61,917  
Increase (decrease) in accrued warranty costs
    227,000       -  
Increase (decrease) in due to parent
    2,312,280       2,385,105  
Increase (decrease) in accrued estimated loss on contracts
    (555,462 )     1,377,348  
Increase (decrease) in income taxes payable
    (21,544 )     30,558  
Total adjustments
    4,240,974       5,323,706  
Net cash (used)/provided by operating activities
    (590,978 )     (1,487,149 )
                 
Cash flows from investing activities:
               
Purchase of property and equipment
    (117,566 )     (61,465 )
Net cash used in investing activities
    (117,566 )     (61,465 )
                 
Cash flows from financing activities:
               
Proceeds from Notes Payable
    373,974       2,000,000  
                 
Net cash provided by financing activities
    373,974       2,000,000  
                 
Net increase (decrease) in cash and cash equivalents
    (334,570 )     451,385  
Cash and cash equivalents at beginning of period
    504,753       53,367  
Cash and cash equivalents at end of period
    170,183       504,753  
                 
Noncash investing and financing activities:
               
Irvine Sensors purchase of remaining 30% interest in Optex Texas pushed
down to subsidiary’s equity
         
Intangible Assets
    -       954,000  
Goodwill
    -       3,223,633  
Other
    -       (10,093 )
Additional Paid in Capital
    -       4,167,540  
                 
Supplemental cash flow information:
               
Cash paid for interest
    -       -  
Cash paid for taxes
    -       6,681  

The accompanying notes are an integral part of these financial statements

 
 

 

Optex Systems, Inc.
Statements of Stockholders' Equity

   
Number of
Outstanding
Shares
   
Common
Stock
   
Treasury
Stock
   
Additional
Paid in
Capital
   
Retained
Earnings
   
Total
Stockholders
Equity
 
                                     
 Balance at September 30, 2006
    10,000       164,834       (1,217,400 )     11,078,742       5,732,106       15,758,282  
Net Earnings (Loss) from continuing operations
                                    (6,810,854 )     (6,810,854 )
30% acquistion of Optex by Irvine Sensors pushed down to subsidiary’s equity
                            4,167,540               4,167,540  
 Balance at September 30, 2007
    10,000       164,834       (1,217,400 )     15,246,282       (1,078,748 )     13,114,968  
Net Earnings (Loss) from continuing operations
                                    (4,831,952 )     (4,831,952 )
 Balance at September 28, 2008
    10,000       164,834       (1,217,400 )     15,246,282       (5,910,700 )     8,283,016  

The accompanying notes are an integral part of these financial statements

 
 

 

Note 1 - Organization and Operations   

Optex Systems, Inc. ( “Optex Texas”) was a privately held Texas Subchapter “S” Corporation from inception in 1987 until December 30, 2005 when 70% of the issued and outstanding stock was acquired by Irvine Sensors Corp. (“IRSN”) and Optex Texas was automatically converted to a Subchapter “C” Corporation.  On December 29, 2006, the remaining 30% equity interest in Optex Texas was purchased by IRSN.

On October 14, 2008, certain senior secured creditors of IRSN, Longview Fund, L.P. (“Longview Fund”) and Alpha Capital Anstalt (“Alpha”) formed Optex Systems, Inc., a Delaware Corporation, (“Optex Delaware”),which acquired substantially all of the assets and assumed certain liabilities of Optex Texas in a transaction that was consummated via purchase at a public auction. Longview and Alpha owned Optex Delaware until February 20, 2009, when Longview sold 100% of its equity interests in Optex Delaware to Sileas Corp, as discussed in the following paragraph.  After this asset purchase, Optex Texas remained a wholly-owned subsidiary of IRSN.   Although Optex Delaware is the legal acquirer of Optex Texas in the transaction, Optex Texas is considered the accounting acquirer since the acquisition by Optex Delaware was deemed to be the purchase of a business.  Accordingly, in subsequent periods the financial statements presented will be those of the accounting acquirer.

On February 20, 2009, Sileas Corp. (“Sileas”), a newly-formed Delaware corporation, owned by present members of the company’s management, purchased 100% of the equity interest held by Longview, representing 90% of Optex Delaware in a private transaction (the “Acquisition”).  See Note 14.
 
Optex’s operations are based in Richardson, Texas in a leased facility comprising 49,100 square feet.  As of fiscal year ended September 28, 2008 the company operated with 109 full-time equivalent employees.

Optex Systems manufactures optical sighting systems and assemblies primarily for Department of Defense (DOD) applications. Its products are installed on a variety of U.S. military land vehicles such as the Abrams and Bradley fighting vehicles, Light Armored and Advanced Security Vehicles and have been selected for installation on the Future Combat Systems (FCS) Stryker vehicle. Optex also manufactures and delivers numerous periscope configurations, rifle and surveillance sights and night vision optical assemblies. The Company products consist primarily of build to customer print products that are delivered both directly to the military   services and to other defense prime contractors.
 
In May 2008, Optex Systems was awarded ISO9001:2000 certification.

Note 2 - Accounting Policies

Basis of Presentation

The accompanying financial statements include the historical accounts of Optex Texas (hereinafter, the “Company” or Optex Texas). The financial statements have been presented as subsidiary-only financial statements, reflecting the balance sheets, results of operations and cash flows of the subsidiary as a stand-alone entity.

Although, the Company was majority-owned by IRSN during the fiscal periods presented, no accounts of IRSN or the effects of consolidation with IRSN have been included in the accompanying financial statements.

 
 

 

The financial statements have been presented  on the basis of push down accounting in accordance with Staff Accounting Bulletin No. 54 (SAB 54)   Application of “Push Down” Basis of Accounting in Financial Statements of Subsidiaries Acquired by Purchase . SAB 54 states that the push down basis of accounting should be used in a purchase transaction in which the entity becomes wholly-owned. Under the push down basis of accounting certain transactions incurred by the parent company, which would otherwise be accounted for in the accounts of the parent, are “pushed down” and recorded on the financial statements of the subsidiary. Accordingly, items resulting from the purchase transaction such as goodwill, debt incurred by the parent to acquire the subsidiary and other cost related to the purchase have been recorded on the financial statements of the Company.
 
Use of Estimates:   The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statement and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the estimates.
 
Segment Reporting: Management has determined that the Company is organized, managed and internally reported as one business segment. Segments are determined based on differences in products, internal reporting and how operational decisions are made.
 
Fiscal Year:   The Company’s fiscal year ends on the Sunday nearest September 30.  Fiscal year 2008 ended on September 28, 2008 and included 52 weeks.  Fiscal year 2007 ended on September 30 and included 52 weeks.  Fiscal year 2009 will end on September 27, 2009 and will include 52 weeks.

Fair Value of Financial Instruments:   FASB No. 107, " Disclosures about Fair Value of Financial Instruments ," requires disclosure of fair value information about certain financial instruments, including, but not limited to, cash and cash equivalents, accounts receivable, refundable tax credits, prepaid expenses, accounts payable, accrued expenses, notes payable to related parties and convertible debt-related securities. Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of fiscal years ended September 28, 2008 and September 30, 2007. The carrying value of the balance sheet financial instruments included in the Company’s consolidated financial statements approximated their fair values.
 
Cash and Cash Equivalents:   For financial statement presentation purposes, the Company considers those short-term, highly liquid investments with original maturities of three months or less to be cash or cash equivalents.
 
Concentration of Credit Risk: The Company’s cash and cash equivalents are on deposit with banks. Only a portion of the cash and cash equivalents would be covered by deposit insurance and the uninsured balances are substantially greater than the insured amounts. Although cash and cash equivalent balances exceed insured deposit amounts, management does not anticipate non-performance by the banks.

Most of the Company’s accounts receivable are derived from sales to U.S. government agencies or prime government contractors.  The Company does not believe that this concentration increases credit risks because of the financial strength of the payees.

 
 

 

Accounts Receivable: The Company records its accounts receivable at the original sales invoice amount less shipment liquidations for previously collected advance/progress bills and an allowance for doubtful accounts. An account receivable is considered to be past due if any portion of the receivable balance is outstanding beyond its scheduled due date. On a quarterly basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts, based on its history of past write-offs and collections, and current credit conditions. No interest is accrued on past due accounts receivable. As the customer base is primarily U.S. government and government prime contractors, the Company has concluded that there is no need for an allowance for doubtful accounts for the years ended September 28, 2008 and September 30, 2007.
 
Inventory: Inventory is recorded at the lower of cost or market value, and adjusted as appropriate for decreases in valuation and obsolescence. Adjustments to the valuation and obsolescence reserves are made after analyzing market conditions, current and projected sales activity, inventory costs and inventory balances to determine appropriate reserve levels. Cost is determined using the first-in first-out (FIFO) method. Under arrangements by which progress payments are received against certain contracts, the customer retains a security interest in the undelivered inventory identified with these contracts.  Payments received for such undelivered inventory are classified as unliquidated progress payments and deducted from the gross inventory balance.  As of years ended September 28, 2008, and September 30, 2007 inventory included:

   
As of 9/28/2008
   
As of 9/30/2007
 
             
Raw Materials
  $ 4,199,657     $ 6,812,810  
Work in Process
    5,575,520       6,423,902  
Finished Goods
    28,014       157,389  
Gross Inventory
  $ 9,803,191     $ 13,394,101  
Less:
               
Unliquidated Progress Payments
    (4,581,736 )     (6,505,228 )
Inventory Reserves
    (673,729 )     (776,308 )
Net Inventory
  $ 4,547,726     $ 6,112,565  

Warranty Costs:   Optex Systems warrants the quality of its products to meet customer requirements and be free of defects for twelve months subsequent to delivery.  On certain product lines the warranty period has been extended to 24 months due to technical considerations incurred during the manufacture of such products.  In the year ended September 28, 2008, the company incurred $227,000 of warranty expenses representing the estimated cost of repair or replacement for specific customer returned products still covered under warranty as of the return date and awaiting replacement, in addition to estimated future warranty costs for shipments occurring during the twelve months proceeding September 28, 2008.  Future warranty costs are based on the estimated cost of replacement for expected returns based upon our most recent experience rate of defects as a percentage of sales.  Prior to fiscal year 2008, all warranty expenses were incurred as product was replaced with no reserve for warranties against deliveries in the covered period.

Estimated Costs to Complete and Accrued Loss on Contracts:   The Company reviews and reports on the performance of its contracts and production orders against the respective resource plans for such contracts/orders. These reviews are summarized in the form of estimates to complete ("ETC”s) and estimates at completion (“EAC”s).  EACs include Optex’s incurred costs to date against the contract/order plus management's current estimates of remaining amounts for direct labor, material, other direct costs and subcontract support and indirect overhead costs based on the completion status and future contractual requirements for each order. If an EAC indicates a potential overrun (loss) against a fixed price contract/order, management generally seeks to reduce costs and /or revise the program plan in a manner consistent with customer objectives in order to eliminate or minimize any overrun and to secure necessary customer agreement to proposed revisions.

 
 

 

If an EAC indicates a potential overrun against budgeted resources for a fixed price contract/order, management first attempts to implement lower cost solutions to still profitably meet the requirements of the fixed price contract.  If such solutions do not appear practicable, management makes a determination whether to seek renegotiation of contract or order requirements from the customer. If neither cost reduction nor renegotiation appears probable, an accrual for the contract loss/overrun is recorded against earnings and the loss is recognized in the first period the loss is identified based on the most recent EAC of the particular contract or product order.

For years ended September 28, 2008 and September 30, 2007, estimated loss reserves were estimated as $821,885 and $1,377,348, respectively.  Decreases in estimated loss reserves from 2007 to 2008 of $555,463 were primarily attributable to the successful negotiation of an equitable price adjustment for technical issues related to our US Government M187 program and several negotiated price increases in exchange for accelerated schedule deliveries on US Government periscope contracts.

Property and Equipment:   Property and equipment are recorded at cost. Depreciation is computed using the straight line method over the estimated useful lives of the assets, ranging from three to seven years. Expenditures for renewals and betterments are capitalized.  Expenditures for minor items, repairs and maintenance are charged to operations as incurred. Gain or loss upon sale or retirement due to obsolescence is reflected in the operating results in the period the event takes place.

Goodwill and Other Intangible Assets:   Goodwill represents the cost of acquired businesses in excess of fair value of the related net assets at acquisition. (See also notes 9 and 14). The Company does not amortize goodwill, but tests it annually for impairment using a fair value approach as of the first day of its fourth fiscal quarter and between annual testing periods, if circumstances warrant.  Goodwill of Optex was reviewed as of September 30, 2007 and based on the assessment, it was determined that no impairment was required.  Goodwill was reviewed as of September 28, 2008, and it was determined that an impairment charge of $1,586,416 was required. The fair values assigned to the assets of the Company and the goodwill was based upon the most recent value of the Company as determined by the sale to third party purchasers on October 14, 2008.

The Company amortizes the cost of other intangibles over their estimated useful lives, unless such lives are deemed indefinite. Amortizable intangible assets are tested for impairment based on undiscounted cash flows and, if impaired, written down to fair value based on either discounted cash flows or appraised values. The identified amortizable intangible assets at September 28, 2008 and September 30, 2007 derived from the acquisition of Optex by Irvine Sensors and consisted of non-competition agreements and customer backlog, with initial useful lives ranging from two to eight years. (See Note 9). Intangible assets with indefinite lives are tested annually for impairment, as of the first day of the Company's fourth fiscal quarter and between annual periods, if impairment indicators exist, and are written down to fair value as required.

 
 

 

Impairment or Disposal of Long-Lived Assets: The Company adopted the provisions of FASB No. 144 (FASB 144), “ Accounting for the Impairment or Disposal of Long-lived Assets .” This standard requires, among other things, that long-lived assets be reviewed for potential impairment whenever events or circumstances indicate that the carrying amounts may not be recoverable. The assessment of possible impairment is based on the ability to recover the carrying value of the asset from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these expected cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. The primary measure of fair value is based on discounted cash flows. The measurement of impairment requires management to make estimates of these cash flows related to long-lived assets, as well as other fair value determinations.

  Revenue Recognition: The Company recognizes revenue upon transfer of title at the time of shipment (F.O.B. shipping point), when all significant contractual obligations have been satisfied, the price is fixed or determinable, and collectability is reasonably assured.

  Shipping and Handling Costs: All shipping and handling costs are included as a component of Cost of Goods sold.
 
Income Taxes:   The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 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. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations.

Earnings per Share: Basic earnings per common share is computed by dividing net earnings by the weighted average number of common shares outstanding during each year presented.  Diluted earnings per common share gives effect to the assumed exercise of stock options when dilutive.  There were no dilutive stock options during 2008 or 2007.

Note 3 - Recent Accounting Pronouncements
 
In June 2006, The FASB issued Interpretation No. 48 “ Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 ” (“FIN 48”). This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB No. 109, “ Accounting for Income Taxes . FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 did not have a material impact on the Company's consolidated financial position, results of operations, or cash flows.
 
In September 2006, the FASB issued FASB No. 157, “ Fair Value Measurements ” which establishes a framework for measuring fair value, and expands disclosures about fair value measurements. While FASB No. 157 does not apply to transactions involving share-based payment covered by FASB No. 123, it establishes a theoretical framework for analyzing fair value measurements that is absent from FASB No. 123. We have relied on the theoretical framework established by FASB No. 157 in connection with certain valuation measurements that were made in the preparation of these financial statements. FASB No. 157 is effective for years beginning after November 15, 2007. Subsequent to the Standard’s issuance, the FASB issued an exposure draft that provides a one year deferral for implementation of the Standard for non-financial assets and liabilities. The Company is currently evaluating the impact FASB No. 157 will have on its financial statements.

 
 

 

In February 2007, Statement of Financial Accounting Standards No. 159, “ The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115 ,” (FASB 159), was issued. This standard allows a company to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and financial liabilities on a contract-by-contract basis, with changes in fair value recognized in earnings. The provisions of this standard are effective as of the beginning of our fiscal year 2008, with early adoption permitted. The Company is currently evaluating what effect the adoption of FASB 159 will have on its financial statements.
 
In March 2007, the Financial Accounting Standards Board ratified Emerging Issues Task Force (“EITF”) Issue No. 06-10, "Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements”.  EITF 06-10 provides guidance for determining a liability for the postretirement benefit obligation as well as recognition and measurement of the associated asset on the basis of the terms of the collateral assignment agreement.  EITF 06-10 is effective for fiscal years beginning after December 15, 2007.  The Company is currently evaluating the impact of EITF 06-10 on itsfinancial statements, but does not expect it to have a material effect.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations and SFAS No. 160, Accounting and Reporting of Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51 . These new standards will significantly change the accounting for and reporting of business combinations and non-controlling (minority) interests in consolidated financial statements. Statement Nos. 141(R) and 160 are required to be adopted simultaneously and are effective for the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company is currently evaluating the impact of adopting SFAS Nos. 141(R) and SFAS 160 on its financial statements. See Note 14 for adoption of SFAS 141R subsequent to September 30, 2008.
 
In December 2007, the SEC issued Staff Accounting Bulletin No. 110 (“SAB 110”). SAB 110 permits companies to continue to use the simplified method, under certain circumstances, in estimating the expected term of “plain vanilla” options beyond December 31, 2007. SAB 110 updates guidance provided in SAB 107 that previously stated that the Staff would not expect a company to use the simplified method for share option grants after December 31, 2007. The Company does not have any outstanding stock options.

In March 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 161, " Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133 ”.  SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities.  SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 with early application encouraged. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended   September 30, 2009 . The Company is currently evaluating the impact of SFAS 161 on its financial statements but does not expect it to have a material effect

In May 2008, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (“SFAS”) No. 162, " The Hierarchy of Generally Accepted Accounting Principles ”.  SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States.  SFAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Company is currently evaluating the impact of SFAS 162 on its consolidated financial statements but does not expect it to have a material effect.

 
 

 

In May 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 163, " Accounting for Financial Guarantee Insurance Contracts—an interpretation of FASB Statement No. 60 " (“SFAS 163”).  SFAS 163 interprets Statement 60 and amends existing accounting pronouncements to clarify their application to the financial guarantee insurance contracts included within the scope of that Statement.  SFAS 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years.  As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended   September 30, 2011.  The Company is currently evaluating the impact of SFAS 163 on its financial statements but does not expect it to have a material effect.

Note 4 - Property and Equipment
 
A summary of property and equipment at September 28, 2007 and September 30, 2007 is as follows:

 
Estimated Useful Life
 
Year Ended
09/28/08
   
Year Ended
09/30/07
 
Property and Equipment
             
Office Furniture/Equipment
3-5yrs
  $ 145,071     $ 127,502  
Machinery and Equipment
5 yrs
    1,026,250       926,253  
Leasehold Improvements
7 yrs
    142,788       142,788  
Less: Accumulated Depreciation
      (994,542 )     (830,108 )
Net Property & Equipment
    $ (319,567 )   $ (366,435 )
                   
Depreciation Expense
    $ 164,434     $ 129,069  

Depreciation expense included in cost of goods sold and general and administrative expense for 2008 is $104,837 and 59,597 respectively.  Depreciation expense included in cost of goods sold and general and administrative expense for 2007 is $68,663 and $60,406 respectively.

Note 5 – Accrued Liabilities

The components of accrued liabilities for years ended 2008 and 2007 are summarized below:

   
Year End as of 09/28/08
   
Year End as of 09/30/07
 
             
Customer Advance Payments
  $ -     $ 62,784  
Deferred Rent Expense
    84,435       119,073  
Accrued Vacation
    94,311       69,803  
Property Taxes
    17,557       13,031  
Contract Settlement
    351,217       -  
Operating Expenses
    128,717       -  
Payroll & Payroll Related
    122,737       106,629  
Total Accrued Expenses
  $ 798,974     $ 371,320  

 
 

 

Contract Settlement Costs represent amounts due to the US government in relation to a progress billed contract that was cancelled prior to completion.  The remaining government-owned (progress billed) materials on the contract were subsequently used to satisfy other existing and new contracts at full value, although the unliquidated progress payments for the original contract have yet to be refunded.  Optex expects to settle the contract overpayment with the customer by third quarter of fiscal year 2009.  Accrued operating expenses include additional operating costs for estimated costs not yet invoiced or invoices not vouched into accounts payable as of year-end period close.

Note 6 - Commitments and Contingencies
 
Leases

The company leases its office and manufacturing facilities under two non-cancellable operating leases expiring November 2009 and February 2010 in addition to maintaining several non-cancellable operating leases for office and manufacturing equipment.  Total expenses under these facility lease agreements for the year ended September 28, 2008 was $313,032 and total expenses for manufacturing and office equipment was $21,830.  At September 28, 2008, the minimum lease payments under non-cancelable operating leases for equipment, office and facility space are as follows:

   
Operating
 
   
Leases
 
Years ended December 31,
     
2009
  $ 364,260  
2010
    79,867  
2011
    16,753  
2012
    -  
2013
    -  
Thereafter
    -  
Total minimum lease payments
  $ 460,880  

Note 7 - Transactions with a Related Party

Corporate Cost Allocations:   In accordance with government contracting regulations, IRSN (the Company’s owner for years 2007 and 2008) was required to allocate some portion of its corporate general and administrative expense to its operating subsidiaries, such as Optex Systems.  IRSN elected to use a recognized government contract allocation method to satisfy this requirement in which the proportional contribution of Optex to the IRSN total revenues, payroll expense and net book value of tangible assets serves as the basis for determination of the percentage of corporate general and administrative expense for the Optex allocation.  The total IRSN Corporate Cost Allocations for 2008 and 2007 were $2,076,184 and $2,010,027 respectively.  Due to the transfer of ownership from IRSN on October 14, 2008, there will be no future IRSN Corporate Cost Allocations.

 
 

 

Due to IRSN (Parent):   Due to Parent relate to expenses of Optex Systems, incurred by or shared with IRSN and pushed down to Optex Systems through an intercompany payable account “Due to Parent”.  The ending amounts reflected as of September 28, 2008 and September 30, represent the cumulative amount of expenses incurred, net of any cash transfers made to/from IRSN since inception at January 2006.  Significant amounts charged through this account include IRSN corporate cost allocations, legal expenses, accounting and audit fees, travel expenses, consulting fees, and insurance costs.  Future expenses for these items with the exception of IRSN related cost allocations, consulting fees and travel expenses will be paid from Optex Systems’ working capital.

Note 8 - Debt Financing

Related Parties

Note Payable/Timothy Looney -     In January 2007,  IRSN amended its earn-out agreement with Timothy Looney in consideration for Mr. Looney providing Optex Texas with a secured subordinated term note providing for advances of up to $2 million, bearing interest at 10% per annum and maturing on the earlier of February 2009 or sixty days after retirement of IRSN’s senior debt. Aggregate advances of $2 million were provided to Optex Texas in January 2007 pursuant to the secured subordinated term note, and the advances and accrued interest were outstanding at September 28, 2008 and September 30, 2007.  This Note is secured by the assets of Optex Texas, but subordinated to the liens of Alpha and Longview.  Following the public sale of the assets of the Company to Optex Delaware on October 14, 2008, the entire $2,000,000 Note Payable with accrued interest of $345,648 remained a liability of Optex Texas.

Non-Related Parties

Short Term Note Payable/Longview Fund -   On September 23, 2008 Optex Delaware borrowed $146,709 from Longview and issued a promissory note dated September 23, 2008, to Longview in connection therewith.  The September 23, 2008 Note bears interest at the rate of 10% per annum with interest accruing until the maturity date of the September 23, 2008 Note, which was originally set as November 7, 2008 (“Maturity Date”).  Pursuant to an Allonge No. 1 to Promissory Note, dated January 20, 2009, the Maturity Date was extended until March 31, 2009 and is to be exchanged for Series A Preferred Stock of Optex Delaware ( See Note 14). .
 
Short term note payable (Qioptic) - On November 20, 2008, Optex Delaware issued a promissory note (“Note”) to Qioptiq Limited (“Qioptiq”) in the amount of $117,780. The Note originated as a trade payable and as of September 28, 2008 had an outstanding balance of $227,235. The note has been recorded, as such, retroactively to Notes Payable in the accompanying financial statements at September 28, 2008.The Note bears interest at the rate of six percent per annum and had a maturity date of February 13, 2009  (and was repaid in full as of that date) (“Maturity Date”).  The terms of the Note call for weekly payments of $10,000 each on the last business day of every week commencing on the last business day of the first week after November 20, 2008 and continuing thereafter until the Maturity Date, on which date the remaining principal amount of the Note and all accrued and unpaid interest thereon shall become immediately due and payable.

Note 9  – Intangible Assets and Goodwill

On December 30, 2005, IRSN entered into an agreement with Optex Texas pursuant to which IRSN purchased 70% of the issued and outstanding common stock of Optex Texas , thereby becoming its majority shareholder.   On December 29, 2006, IRSN exercised a buyer option to acquire the remaining 30% ownership interest in Optex Texas.

 
 

 

Optex Texas has allocated the purchase consideration for the purchase to tangible and intangible assets acquired and liabilities assumed based on the valuation determinations made in connection with the Initial Acquisition of Optex Texas in December 2005 as shown in the following table, which sets forth the estimated amounts related to the full Optex Texas acquisition. The excess of the purchase price over such values is presented as goodwill in the accompanying consolidated balance sheet at September 30, 2007.

The goodwill resulting from the IRSN acquisition was recorded under the push down basis of accounting and accordingly has been recorded on the financial statements of the subsidiary.
 
Assets:
 
Current assets, consisting primarily of inventory of $5,734,500 and accounts receivable of $2,191,800
        $ 8,070,300  
Identifiable intangible assets
          3,180,000  
Other non-current assets, principally property and equipment
          455,100  
Total assets
          11,705,400  
               
Liabilities:
 
Current liabilities, consisting of accounts payable of $1,638,600, tax liabilities of $112,800 and accrued liabilities of $682,100
 
 
      2,433,481  
Acquired net assets
 
 
      9,271,919  
Purchase price
 
 
         
Total consideration to seller
  $ 19,865,400          
Direct acquisition costs
    1,040,000           
              20,905,400  
Excess purchase price reported as goodwill
          $ 11,633,481  

Goodwill related to the IRSN acquisition of Optex Texas was reviewed as of September 30, 2008 and it was determined that an impairment charge of $1,586,416 was required. The fair values assigned to the assets of the Company and the goodwill was based upon the most recent value of the company as determined by the sale to third party purchasers on October 14, 2008.
 
Identifiable intangible assets included non-competition agreements and customer backlog, and is amortized over the respective estimated useful lives as follows:
 
   
Useful Life in Years
   
Acquired Fair Value
 
             
Non-competition agreement
    2     $ 80,000  
Contractual backlog
    2     $ 1,570,000  
Program backlog
    8     $ 1,530,000  
 
The amortization of identifiable intangible assets associated with the Optex Texas acquisition in fiscal 2008 and fiscal 2007 was $596,367 and, $949,962 respectively. The identifiable intangible assets and recorded goodwill are not deductible for income tax purposes. As of the year ended September 28, 2008 the total unamortized balance of intangible assets was $1,100,140.  As of the year ended September 30, 2007 the total unamortized balance of intangible assets was $1,696,507.

The September 28, 2008 unamortized balance of intangible assets is estimated to be amortized as follows:
 

 
Year
 
Annual
Amortization
 
2009
        266,365  
2010
    204,490  
2011
    204,490  
2012
    204,490  
2013
    186,837  
2014
    33,468  
 Total
  $ 1,100,140  

Note 10  –  Stockholders Equity
 
  Common Stock:   The Company is authorized to issue 100,000 shares of no par common stock.  At September 28, 2008 and 2007 there were18,870 and 10,000 shares issued and outstanding, respectively. 
 
The common stock, treasury stock and additional paid in Capital accounts have been presented to reflect the ownership structure of the Company as it existed prior to the acquisition by IRSN, since the Company is presenting its financial statements as a separate entity.
 
Note 11 - Equity Compensation
 
Total stock-based compensation expense of Optex Systems associated with IRSN stock grants during fiscal years 2008 and 2007 was $378,716 and $388,756 respectively.   These amounts were pushed down by IRSN and charged to general and administrative expense for each of the periods.   There were no stock options issued to Optex Texas employees or equity instruments issued to consultants and vendors in either 2007 or 2008.
 
Note 12 - Income Taxes

As of September 28, 2008, and September 30, 2007, the Company had generated net losses for financial accounting purposes in the amounts of approximately $4,831,952 and $6,810,854, respectively. During these periods the Company was a member of a consolidated entity for tax reporting purposes. As such, any losses that would have qualified as Net Operating Losses for Federal Income Taxes purposes as potential deductions were available to the consolidated entity. Such losses may have been utilized by the consolidated entity and are not available to Optex Delaware to offset its future taxable income.  Additionally, since the Company was acquired in a transaction effected as an asset purchase, Optex Delaware would only be entitled to tax deductions generated after the date of the acquisition. Accordingly, no deferred tax assets have been recorded in the accompanying financial statements for net operating losses generated by the Company.

No current provision for income taxes for the fiscal years ended September 28, 2008 is required, except for minimum state taxes, since the Company incurred losses during each year. There was no provision for income taxes in fiscal 2008 or 2007.

Prior to January 2006, the Company had elected to be a “S” corporation.  “S” corporations pass through all items of profits, losses and tax credits to the stockholders of the Company who are responsible for taxes other than annual state franchise taxes.  Effective December 30, 2005, concurrent with the Sale of the Company to Irvine Sensors Corp., the Company terminated their “S” corporation election and, as a result, is now treated as a “C” corporation for both Federal and State corporation income tax purposes. Profits, losses, and tax credits are reported by the corporation on its tax return and the Corporation pays taxes accordingly. “S” corporation retained earnings were $6,711,750. The “C” corporation retained deficit is $7,790,534.

 
 

 

Note 13—Earnings/Loss Per Share  
 
Basic earnings per share is computed by dividing income available to common shareholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) for the period.  Diluted earnings per share is computed by assuming that any dilutive convertible securities outstanding were converted, with related preferred stock dividend requirements and outstanding common shares adjusted accordingly. For all periods presented herein, there are no dilutive convertible securities.

The following table sets forth the computation of basic and diluted net loss attributable to common stockholders per share for the years ended September 28, 2008, and September 30, 2007.

   
2008
   
2007
 
Numerator:
           
Net loss
  $ (4,831,952 )   $ (6,810,854 )
Denominator:
               
Weighted average shares
    10,000       10,000  
Basic and diluted net loss per share
  $ (483.20 )   $ (681.09 )

Note 14 — Subsequent Events

Acquisition by Longview Fund, LP on October 14, 2008

On October 14, 2008, in a purchase transaction that was consummated via public auction, Optex Delaware exchanged $15 million of IRSN debt owned by it and assumed approximately $3.8 million of certain Optex Texas liabilities for substantially all of the assets of Optex Texas.  The $15 million of IRSN debt was contributed by Longview Fund and Alpha to Optex Delaware in exchange for a $6 million note payable from Optex Delaware and a $9 million equity interest in Optex Delaware.  There is no contingent consideration associated with the purchase.  Longview and Alpha, which were secured creditors of IRSN, owned Optex Delaware until February 20, 2009, when Longview sold 100% of its equity interests in Optex Delaware to Sileas Corp, as discussed in the following paragraph.

Among other assets, Optex Delaware purchased the following categories of assets from Optex Texas:  intellectual property, production processes and know how, and outstanding contracts and customer relationships.  Optex Delaware’s management intends to improve the business’s ability to serve its existing customers and to attract new customers through quality product and service that will be enabled by improved working capital availability as compared to the working capital available during the time period in which the assets were owned by IRSN.

Optex Systems has allocated the consideration for its acquisition of the Purchased Assets among tangible and intangible assets acquired and liabilities assumed based upon their fair values. Assets that met the criteria for recognition as intangible assets apart from goodwill were also valued at their fair values.

The Purchase Price was assigned to the acquired interest in the assets and liabilities of the Company as of October 14, 2008 as follows:

 
 

 

Assets:
 
Current assets, consisting primarily of inventory of $5,383,929 and accounts receivable of $1,404,434
  $ 7,330,910  
Identifiable intangible assets
    4,036,789  
Purchased Goodwill
    7,110,416  
Other non-current assets, principally property and equipment
    343,898  
 
       
Total assets
    18,822,013  
Liabilities:
 
Current liabilities, consisting of accounts payable of $1,953,833 and accrued liabilities of $1,868,180
  $ 3,822,013  
 
       
Acquired net assets
  $ 15,000,000  

The following table summarizes the estimate of the fair values of the intangible assets as of the asset transfer date:
   
Total
 
Contracted Backlog - Existing Orders
  $ 2,763,567  
Program Backlog - Forecasted IDIQ awards
  $ 1,273,222  
Total Intangible Asset to be amortized
  $ 4,036,789  

Identifiable intangible assets primarily consist of customer and program backlog and will be amortized between general and administrative expenses and costs of sales according to their respective estimated useful lives.

Proforma revenue and earnings per share information is presented cumulatively in the following section regarding the subsequent acquisition of Optex Delaware by Sileas Corporation.“

Other Transaction in connection with Purchase by Optex Delaware

Secured Promissory Note Due September 19, 2011/Longview Fund and Alpha   - In connection with the public sale of the Optex Texas assets to Optex Delaware, Optex Delaware delivered to each of Longview Fund and Alpha a Secured Promissory Note due September 19, 2011 in the principal amounts of $5,409,762 and $540,976, respectively.  Each Note bears simple interest at the rate of 6% per annum, and the interest rate upon an event of default increases to 8% per annum.  After 180 days from the Issue Date, the principal amount of the Notes and accrued and unpaid interest thereon may be converted into Optex common stock at a conversion price of $1.80 per share.  The Notes may be redeemed prior to maturity at a price of 120% of the then outstanding principal amount plus all accrued and unpaid interest thereon.  The obligations of Optex under the Notes are secured by a lien of all of the assets of Optex in favor of Longview and Alpha.   On March 27 2009, Sileas and Alpha exchanged their Notes plus accrued and unpaid interest for one thousand twenty seven (1,027) shares of Optex Delaware Series A Preferred Stock

 
 

 

Acquisition by Sileas Corp on February 20, 2009

On February 20, 2009, Sileas Corp. (“Sileas”), a newly-formed Delaware corporation, owned by present members of the company’s management, purchased 100% of the equity interest held by Longview , representing 90% of Optex Delaware, in a private transaction (the “Acquisition”).

The Primary reasons for the Acquisition by Sileas was to effect synergies that the management of Sileas and the corporate structure of Sileas would produce in achieving competitive advantages in the contract bidding process. Additional operating efficiencies were expected to result from the ownership by present members of management who are active in the daily operations of the Company.

The Acquisition was accounted in accordance with “Statement of Financial Accounting Standards No. 141R” Business Combinations” effective for transactions after December 15, 2008.

The purchase price (“Purchase Price”) for the Acquisition was $13,524,405.  Sileas issued a note to the Longview Fund LP for the full amount of the Purchase Price in exchange for 45,081,350 shares of common stock (the “Common Stock”) issued by the Company (representing 90% of the outstanding shares) and a note dated December 2, 2008, issued by the Company to Longview in the principal amount of $5,409,762 (the “Optex Note”). No contingent consideration is due the seller in the transaction..  The Note is secured by the assets of Sileas Corp. and a pledge of the outstanding stock of Sileas Corp.

Sileas has no operations or business activities other than holding the Purchased Assets and has no revenues.

The fair value of the 10% non-controlling interest at the date of acquisition is estimated to be approximately $1,500,000. The fair value was derived by computing 10% of the value of the Company as a whole based on the value of the consideration given by Sileas for its 90% acquisition. The fair value of the Company as a whole was established by the consideration of $15,000,000 given in the previous transaction whereby Longview and Alpha Capital acquired the Company in a public auction on October 14, 2008. Based the stability of the nature of the company operations in the current marketplace, the fair value of the prior consideration was deemed to be representative of the current market value.

 Sileas has allocated the consideration for its acquisition of the Purchased Assets among tangible and intangible assets acquired and liabilities assumed based upon their fair values. Assets that met the criteria for recognition as intangible assets apart from goodwill were also valued at their fair values. The excess of the purchase price over the fair values of the identifiable tangible assets, intangibles assets and the fair value of the non controlling interest is recognized as goodwill in the accompanying balance sheet in the amount of $1,012,058. Goodwill is not amortized for financial reporting purposes but measured at least annually for impairment.

The Purchase Price was assigned to the acquired interest in the assets and liabilities of the Company as of February 20, 2009 as follows:

 
 

 
 
Assets:
 
Current assets, consisting primarily of inventory of $5,327,438 and accounts receivable of $2,897,583
        $ 8,687,102  
Identifiable intangible assets
          3,173,793  
Purchased Goodwill
          7,110,415  
Other non-current assets, principally property and equipment
          316,923  
               
Total assets
        $ 19,288,233  
Liabilities:
 
Current liabilities, consisting primarily of accounts payable of $2,068,653 and accrued liabilities of $2,039,663
        $ 5,275,886  
               
Acquired net assets
        $ 14,012,347  
               
Purchase price
             
Total consideration to seller (Sileas 90% interests)
  $ 13,524,405          
Fair Value minority interest under FAS 141R
    1,500,000          
                 
            $ 15,024,405  
                 
Excess purchase price reported as goodwill
          $ 1,012,058  
 
Accounts receivable represent the amounts due from customers in the ordinary course of business. The carrying amounts approximate their fair value and the Company expects to collect the receivables subject to their normal historical experiences.

Qualitative factors that result in the recognition of goodwill exist from the synergies expected to be achieved by combining the existing operations and the business relationships of Sileas Corp as well as intangible assets that exist that do not meet the criteria for separate recognition apart from goodwill such as the intellectual capital inherent in its existing workforce, production methods and its overall customer base. The identifiable intangible assets and recorded goodwill are not deductible for income tax purposes.

As of the February 20,   2009 change in ownership, it was determined that there was no significant impact to the unamortized intangible assets since the original determination on October 14, 2008.

Identifiable intangible assets primarily consist of customer and program backlog, and will be amortized between general and administrative expenses and costs of sales according to their respective estimated useful lives.
 
The accompanying unaudited pro forma financial information for fiscal 2008 and 2007 present the historical financial information of the accounting acquirer. The pro forma financial information is presented for information purposes only. Such information is based upon the standalone historical results of each company and does not reflect the actual results that would have been reported had the acquisition been completed when assumed, nor is it indicative of the future results of operations for the combined enterprise.

The following represents condensed pro forma revenue and earnings information for the years ended September 28, 2008 and September 30, 2007 as if the acquisition of Optex had occurred on the first day of each of the fiscal years.

 
 

 

   
2008
   
2007
 
Revenues
    20,017,209       15,406,186  
Net Loss
    (4,021,601 )     (5,776,875 )
Diluted earnings per share
  $ (0.03 )   $ (0.04 )
                 
Weighted Average Shares Outstanding
    141,464,940       141,464,940  

The pro forma statements depicted above reflect the impacts of reduced interest costs of $200,000 and $136,148, increased intangible amortization expenses of $1,474,829, and $1,121,232,  the elimination of corporate allocation costs from IRSN of $ 2,076,184 and $2,010,027, and the elimination for employee stock bonus compensation (ESBP) pushed down from IRSN of $378,716 and $388,756 for years ended September 28, 2008 and September 30, 2007  respectively,   There is no expected impact on Federal Income taxes as the Company had a cumulative retained deficit as of the end of each year.

Other Transactions in connection with Purchase by Sileas

Secured Promissory Note Due February 20, 2012/Longview Fund, LP -   As a result of the transaction described above between Sileas on Longview fund described in note 7 and in note 14, on February 20, 2009 and effective as of February 20, 2009 (the “Issue Date”), Sileas, the new majority owner of Optex Systems, executed and delivered to Longview LP, a Secured Promissory Note due February 20, 2012 in the principal amount of $13,524,405.  The Note bears simple interest at the rate of 4% per annum, and the interest rate upon an event of default increases to 10% per annum.  In the event Optex sells or conveys all or substantially all its assets to a third party entity for more than nominal consideration, other than a merger into its parent company (“Sileas”) or reincorporation in another jurisdiction, then this Note shall be immediately due and owing without demand.  In the event that a Major Transaction occurs prior to the maturity date resulting in the Borrower receiving Net Consideration with a fair market value in excess of the principal and interest due under the terms of this Secured Note, (the “Optex Consideration”), then in addition to paying the principal and interest due, Optex (“Sileas”) shall also pay an amount equal to 90% of the Optex Consideration.  The obligations of Optex under the Note are secured by a security interest granted to Longview Fund pursuant to a Stock Pledge Agreement delivered by Sileas to Longview.

The note payable has been accounted for on the basis of push-down accounting upon the acquisition since Sileas acquired a 90% controlling interest and as such the note payable by Sileas (Parent) will be recorded on the financial statements of Optex Delaware (Subsidiary) as of February 20, 2009.  Concurrent with the planned reverse merger with a publicly-traded shell entity, Sileas’ ownership will be diluted to a percentage less than that under which push-down accounting applies.  Accordingly, the note payable owned by Sileas to Longview will be reflected solely on the financial statements of Sileas (Parent) and will no longer be reflected as a liability in the financial statements of Optex Delaware.

 
 

 

Reorganization/Share Exchange

On March 30, 2009, a reorganization/share exchange occurred whereby the then existing shareholders of the Company exchanged their shares of Company Common Stock with the shares of Common Stock of Sustut Exploration, Inc. (“Registrant”) as follows:   (i) the outstanding 85,000,000 shares of Company Common Stock be exchanged by Registrant for  113,333,282 shares of Registrant Common Stock, (ii) the outstanding 1,027 shares of Company Series A Preferred Stock be exchanged by Registrant for 1,027 shares of Registrant Series A Preferred Stock and such additional items as more fully described in the Agreement and (iii) the 8,131,667 shares of Company Common Stock purchased in the private placement will be exchanged by Registrant for 8,131,667 shares of Registrant Common Stock, as acknowledged by Registrant.   The Company shall remain a wholly owned subsidiary of Registrant, and the Company’s shareholders are now shareholders of Registrant.

Private Placement

Simultaneously with the closing of the Reorganization Agreement, as of March 30, 2009 , the Company accepted subscriptions from accredited investors for a total of 27 units (the "Units"), for $45,000 per Unit, with each Unit consisting of Three Hundred Thousand (300,000) shares of common stock, no par value (the "Common Stock") of the Company and warrants to purchase Three Hundred Thousand (300,000) shares of Common Stock for $0.45 per share for a period of five (5) years from the initial closing (the "Warrants"), which were issued by Sustut after the closing referenced above.  Gross proceeds to the Company were $1,219,750, and after deducting a finders fee of $139,555 which was payable in cash, and non-cash consideration of forgiveness of indebtedness owed to an investor of $146,250, net proceeds were $933,945.  The finder also received five year warrants to purchase 2.7 Units, at an exercise price of $49,500 per unit.

Series A Preferred Stock

On March 24, 2009, the Company filed a Certificate of Designation with the Secretary of State of the State of Delaware authorizing a series of preferred stock, under its articles of incorporation, known as “Series A Preferred Stock”. This Certificate of Designation was approved by the Registrant’s Board of Directors and Shareholders at a Board Meeting and Shareholders Meeting held on February 25, 2009. The Certificate of Designation sets forth the following terms for the Series A Preferred Stock: (i) Number of authorized shares: 1,027; (ii) per share stated value: $6,000; (iii) liquidation preference per share:  stated value; (iv) conversion price: $0.15 per share as adjusted from time to time; and (v) voting rights: votes along with the Common Stock on an as converted basis with one vote per share.

The Series A Preferred Shares entitle the holders to receive cumulative dividends at the rate of 6% per annum payable in cash at the discretion of Board of Directors.  Each share of preferred stock is immediately convertible into common shares at the option of the holder which entitles the holder to receive the equivalent number of common shares equal to the stated value of the preferred shares divided by the conversion price initially set at $0.15 per share.

Holders of preferred shares receive preferential rights in the event of liquidation.  Additionally the preferred stock shareholders are entitled to vote together with the common stock on an ”as-converted” basis.

On March 27, 2009, Sileas and Alpha Capital Anstalt exchanged their promissory notes in the total amount of $6,000,000 plus accrued and unpaid interest thereon into 1,027 shares of Series A Preferred Stock.

Stock Split

On March 26, 2009, the Company’s Board of Directors reconfirmed a 1.7:1 forward split of its Common Stock to holders of record as of February 23, 2009.  Accordingly, as a result of the forward split, the 45,081,350 shares of Common Stock held by Sileas Corp. was split into 76,638,295 shares, and the 4,918,650 shares of Common Stock held by Arland Holdings, Ltd. was split into 8,361,705 shares.

 
 

 
 

OPTEX SYSTEMS, INC. UNAUDITED
INTERIM FINANCIAL STATEMENTS
FOR THE QUARTER ENDED DECEMBER 28, 2008
Optex Systems, Inc.
Balance Sheets

   
Unaudited 12/28/08
   
Year End as of
09/28/08
 
             
ASSETS
           
             
Current Assets
           
Cash
    497,152       170,183  
Accounts Receivable
    2,124,827       2,454,235  
Net Inventory
    5,848,508       4547,726  
Prepaid Expenses
    46,811       307,507  
      -       -  
Total Current Assets
    8,517,298       7,479,651  
                 
Property and Equipment
               
Property Plant and Equipment
    1,339,636       1,314,109  
Accumulated Depreciation
    (1,030,984 )     (994,542 )
                 
Total Property and Equipment
    308,652       319,567  
                 
Other Assets
               
Security Deposits
    20,684       20,684  
Intangibles
    3,518,992       1,100,140  
Goodwill
    7,110,415       10,047,065  
                 
Total Other Assets
    10,650,091       11,167,889  
                 
 Total Assets
    19,476,041       18,967,107  

The accompanying notes are an integral part of these financial statements

 
 

 

Optex Systems, Inc.
Balance Sheets - Continued

   
Unaudited
Quarter End as of
12/28/08
   
Year End as of
09/28/08
 
             
LIABILITIES AND STOCKHOLDERS EQUITY
           
             
Current Liabilities
           
Accounts Payable
    1,964,795       1,821,534  
Accrued Expenses
    1,044,075       798,974  
Accrued Warranties
    256,397       227,000  
Accrued Contract Losses
    743,319       821,885  
Loans Payable
    214,490       373,974  
Interest on Loans Payable
    6,798          
Income Tax Payable
    263,654       4,425  
                 
Total Current Liabilities
    4,493,528       4,047,792  
                 
Other Liabilities
               
Note Payable
    -       2,000,000  
Accrued Interest on Note
    -       336,148  
Long Term Debt
    6,000,000       -  
Accrued Interest on Debt
    76,000       -  
Due to Parent
    -       4,300,151  
                 
Total Other Liabilities
    6,076,000       6,636,299  
                 
Total Liabilities
    10,569,528       10,684,091  
                 
Stockholders' Equity
               
Optex Systems, Inc. – Delaware Common Stock (par $0.001, 300,000,000 authorized, 50,000,000 shares issued and outstanding as of December 28, 2008)
    50,000          
                 
Optex Systems, Inc. – Texas Common Stock (no par 100,000 authorized, 18,870 shares issued and 10,000 shares outstanding)
            164,834  
Optex Systems, Inc. – Texas Treasury Stock (8,870 shares at cost)
    -       (1,217,400 )
Additional Paid-in-capital
    14,795,368       15,246,282  
Retained Earnings (Deficit)
    (5,938,855 )     (5,910,700 )
                 
Total Stockholders' Equity
    8,906,513       8,283,016  
                 
Total Liabilities and Stockholders' Equity
    19,476,041       18,967,107  

The accompanying notes are an integral part of these financial statements

 
 

 

Optex Systems, Inc.
Statements of Operations

   
Unaudited Quarter Ended
December 28, 2008
   
Unaudited Quarter Ended
December 30, 2007
 
             
Revenues
    7,264,084       4,415,905  
                 
Total Cost of Sales
    6,305,050       3,839,494  
                 
Gross Margin
    959,034       576,411  
                 
General and Administrative
               
Salaries and Wages
    158,876       173,688  
Employee Benefits
    83,420       59,264  
Employee Stock Bonus Plan
    -       101,766  
Amortization of Intangible
    101,158       61,122  
Rent, Utilities and Building Maintenance
    55,332       58,150  
Legal and Accounting Fees
    76,219       67,296  
Consulting and Contract Service Fees
    79,323       120,439  
Corporate Allocations
    -       433,934  
Other Expenses
    77,345       144,775  
Total General and Administrative
    631,673       1,220,434  
                 
Earnings (Loss) before Other Expenses and Taxes
    327,361       (644,023 )
                 
Other Expenses
               
Other Income and Expense
    (436 )        
Interest (Income) Expense - Net
    92,298       49,640  
Total Other
    91,862       49,640  
                 
Income (Loss) Before Taxes
    235,499       (693,663 )
Income Taxes (Benefit)
    263,654          
                 
Net Income (Loss) After Taxes
    (28,155 )     (693,663 )
                 
Basic and diluted loss per share (1)
  $ (0.00 )   $ (0.01 )
                 
Weighted Average Common Shares Outstanding
    50,000,000       50,000,000  

1.  Quarter ended December 30, 2007 is shown depicting recapitalization of the entity

The accompanying notes are an integral part of these financial statements

 
 

 

Optex Systems, Inc.
 
Statements of Cash Flows

   
Unaudited Quarter
End December 28,
2008
   
Unaudited Quarter
End December 30,
2007
 
             
Cash flows from operating activities:
           
Net Loss
    (28,155 )     (693,663 )
                 
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    554,240       289,382  
Provision for (use of) allowance for inventory valuation
    60,636       -  
Noncash interest expense
    92,298       49,863  
(Increase) decrease  in accounts receivable
    329,408       (78,304 )
(Increase) decrease in inventory (net of progress billed)
    (1,361,418 )     (960,085 )
(Increase) decrease in other current assets
    260,695       15,666  
Increase (decrease) in accounts payable and accrued expenses
    388,364       975,532  
Increase (decrease) in accrued warranty costs
    29,397       -  
Increase (decrease) in due to parent
    1,428       386,008  
Increase (decrease) in accrued estimated loss on contracts
    (78,567 )     (312,480 )
Increase (decrease) in income taxes payable
    263,654       -  
Total adjustments
    540,135       365,582  
Net cash (used)/provided by operating activities
    511,980       (328,081 )
                 
Cash flows from investing activities:
               
Purchased of property and equipment
    (25,527 )     (38,127 )
Net cash used in investing activities
    (25,527 )     (38,127 )
                 
Cash flows from financing activities:
               
Proceeds from Loans Payable
    (159,484 )     -  
Net cash provided by financing activities
    (159,484 )     -  
                 
Net increase (decrease) in cash and cash equivalents
    326,969       (366,208 )
Cash and cash equivalents at beginning of period
    170,183       504,753  
Cash and cash equivalents at end of period
    497,152       138,545  
                 
Noncash investing and financing activities:
               
Optex Delaware purchase of Optex Systems from Irvine Sensors
               
Liabilities not assumed
               
Loan Payable
    2,000,000          
Accrued Interest on Loan Payable
    345,648          
Income Taxes Payable attributable to Irvine
    4,425          
Due to Parent (Irvine Sensors)
    4,301,579          
                 
Total liabilities not assumed
    6,651,652          
                 
Debt Incurred for Purchase
    (6,000,000 )        
Additional Purchased Intangible Assets
    2,936,650          
Decrease to Goodwill
    (2,936,650 )        
Recapitalization of Stockholders' Equity in Connection with sale to Optex Systems Inc. - Delaware
    (1,102,566 )        
                 
Effect on additional paid in capital
    (450,914 )        
                 
Supplemental cash flow information:
               
Cash paid for interest
    -       -  
Cash paid for taxes
    -       -  

The accompanying notes are an integral part of these financial statements
 
 
 

 

Optex Systems, Inc.
 
Statement of Stockholders' Equity and Comprehensive Income/(Loss)

   
Outstanding
Shares
(Optex-Texas)
   
Outstanding
Shares
Optex
Systems,  Inc.
   
Common
Stock
(Optex -
Texas)
   
Common
     Stock
   (Optex
 Systems,
       Inc.)
   
Treasury
Stock
(Optex-
Texas)
   
Additional
Paid in
Capital
   
Retained
Earnings
   
Total
Stockholders
Equity
 
                                                 
Balance at September 28, 2008
    10,000             164,834             (1,217,400 )     15,246,282       (5,910,700 )     8,283,016  
                                                             
Optex Delaware Acquisition
    (10,000 )           (164,834 )           1,217,400       (450,914 )             - 601,652  
                                                             
Issuance of 50,000,000 Optex Delaware shares
            50,000,000               50,000                               50,000-  
                                                                 
Net Earnings (Loss) from continuing operations
                                                    (28,155 )     (28,155 )
                                                                 
Balance at December 28, 2008
            50,000,000       -       50,000       -       14,795,368       (5,938,855 )     8,906,513  

The accompanying notes are an integral part of these financial statements

Note 1 - Organization and Operations   
Optex Systems, Inc. (“Optex Texas”) was a privately held Texas Subchapter “S” Corporation from inception in 1987 until December 30, 2005 when 70% of the issued and outstanding stock was acquired by Irvine Sensors Corp. (“IRSN”) and Optex Texas was automatically converted to a Subchapter “C” Corporation.  On December 29, 2006, the remaining 30% equity interest in Optex Texas was purchased by IRSN.

On October 14, 2008, certain senior secured creditors of IRSN, Longview Fund, L.P. (“Longview Fund”) and Alpha Capital Anstalt (“Alpha”) formed Optex Systems, Inc., a Delaware Corporation, (“Optex Delaware”),which acquired substantially all of the assets and assumed certain liabilities of Optex Texas in a transaction that was consummated via purchase at a public auction. Longview and Alpha owned Optex Delaware until February 20, 2009, when Longview sold 100% of its equity interests in Optex Delaware to Sileas Corp, as discussed in the following paragraph.  After this asset purchase, Optex Texas remained a wholly owned subsidiary of IRSN.   Although Optex Delaware is the legal acquirer of Optex Texas in the transaction, Optex Texas is considered the accounting acquirer since the acquisition by Optex Delaware was deemed to be the purchase of a business.  Accordingly, in subsequent periods the financial statements presented will be those of the accounting acquirer.

On February 20, 2009, Sileas Corp. (“Sileas”), a newly-formed Delaware corporation, owned by present members of the company’s management, purchased 100% of the equity interest held by Longview, representing 90% of Optex Delaware in a private transaction (the “Acquisition”).  See Note 9.
 
Optex’s operations are based in Richardson, Texas in a leased facility comprising 49,100 square. feet.  As of the three months ended December 28, 2008 the company operated with 117 full-time equivalent employees.

 
 

 

Optex Systems manufactures optical sighting systems and assemblies primarily for Department of Defense (DOD) applications. Its products are installed on a variety of U.S. military land vehicles such as the Abrams and Bradley fighting vehicles, Light Armored and Advanced Security Vehicles and have been selected for installation on the Future Combat Systems (FCS) Stryker vehicle. Optex also manufactures and delivers numerous periscope configurations, rifle and surveillance sights and night vision optical assemblies. The Company products consist primarily of build to customer print products that are delivered both directly to the military   services and to other defense prime contractors.
 
In May 2008, Optex Systems was awarded ISO9001:2000 certification.

Note 2 - Accounting Policies

Basis of Presentation

The accompanying financial statements include the historical accounts of Optex Sytems, Inc the Texas Corporation. The financial statements have been presented as the subsidiary-only financial statements reflecting the balance sheets, results of operations and cash flows of the subsidiary as separate entity.

Although, the Company has been majority owned by various parent companies described in the preceding paragraphs, no accounts of the parent companies or the effects of consolidation with any parent companies have been included in the accompanying financial statements.

The financial statements have been presented  on the basis of push down accounting in accordance with Staff Accounting Bulletin No. 54 (SAB 54)   Application of “Push Down” Basis of Accounting in Financial Statements of Subsidiaries Acquired by Purchase . SAB 54 states that the push down basis of accounting should be used in a purchase transaction in which the entity becomes wholly owned. Under the push down basis of accounting certain transactions incurred by the parent company are that would otherwise be accounted for in the accounts of the parent, are “pushed down” and recorded on the financial statements of the subsidiary. Accordingly, items resulting from the purchase transaction such as goodwill, debt incurred by the parent to acquire the subsidiary and other cost related to the purchase have been   recorded on the financial statements of the Company.

The condensed financial statements of Optex Systems Inc., (the “Company”) included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in conjunction with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These condensed financial statements should be read in conjunction with the annual audited financial statements and the notes thereto included in the Company’s Form 8k and other reports filed with the SEC.

The accompanying unaudited interim financial statements reflect all adjustments of a normal and recurring nature which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows of the Company for the interim periods presented. The results of operations for these periods are not necessarily comparable to, or indicative of, results of any other interim period or for the fiscal year taken as a whole. Certain information that is not required for interim financial reporting purposes has been omitted.
 
Use of Estimates:   The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statement and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the estimates.

 
 

 

Earnings per Share: Basic earnings per common share is computed by dividing net earnings by the weighted average number of common shares outstanding during each year presented.  Diluted earnings per common share give the effect to the assumed exercise of stock options when dilutive.  There were no dilutive stock options during the three months ended December 28, 2008 or December 30, 2007.

Note 3 - Recent Accounting Pronouncements
 
In June 2006, The FASB issued Interpretation No. 48 “ Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 ” (“FIN 48”). This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB No. 109, “ Accounting for Income Taxes . FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 did not have a material impact on the Company's financial position, results of operations, or cash flows.
 
In September 2006, the FASB issued FASB No. 157, “ Fair Value Measurements ” which establishes a framework for measuring fair value, and expands disclosures about fair value measurements. While FASB No. 157 does not apply to transactions involving share-based payment covered by FASB No. 123, it establishes a theoretical framework for analyzing fair value measurements that is absent from FASB No. 123. We have relied on the theoretical framework established by FASB No. 157 in connection with certain valuation measurements that were made in the preparation of these financial statements. FASB No. 157 is effective for years beginning after November 15, 2007. Subsequent to the Standard’s issuance, the FASB issued an exposure draft that provides a one year deferral for implementation of the Standard for non-financial assets and liabilities.
The adoption of FASB No. 157 did not have a material impact on the Company's financial position, results of operations, or cash flows.
 
In February 2007, Statement of Financial Accounting Standards No. 159, “ The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115 ,” (FASB 159), was issued. This standard allows a company to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and financial liabilities on a contract-by-contract basis, with changes in fair value recognized in earnings. The provisions of this standard are effective as of the beginning of our fiscal year 2008, with early adoption permitted.
The adoption of FASB No. 159 did not have a material impact on the Company's financial position, results of operations, or cash flows.
 
In March 2007, the Financial Accounting Standards Board ratified Emerging Issues Task Force (“EITF”) Issue No. 06-10, "Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements”.  EITF 06-10 provides guidance for determining a liability for the postretirement benefit obligation as well as recognition and measurement of the associated asset on the basis of the terms of the collateral assignment agreement.  EITF 06-10 is effective for fiscal years beginning after December 15, 2007.  The adoption of EITF 06-10 did not have a material impact on the Company's financial position, results of operations, or cash flows.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations and SFAS No. 160, Accounting and Reporting of Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51 . These new standards will significantly change the accounting for and reporting of business combinations and non-controlling (minority) interests in consolidated financial statements. Statement Nos. 141(R) and 160 are required to be adopted simultaneously and are effective for the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company is currently evaluating the impact of adopting SFAS Nos. 141(R) and SFAS 160 on its financial statements. See Note 9 for adoption of SFAS 141R subsequent to December 28, 2008.

 
 

 
 
In December 2007, the SEC issued Staff Accounting Bulletin No. 110 (“SAB 110”). SAB 110 permits companies to continue to use the simplified method, under certain circumstances, in estimating the expected term of “plain vanilla” options beyond December 31, 2007. SAB 110 updates guidance provided in SAB 107 that previously stated that the Staff would not expect a company to use the simplified method for share option grants after December 31, 2007. The Company does not have any outstanding stock options.

In March 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 161, " Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133 ”.  SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities.  SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 with early application encouraged. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended September 30, 2009. The Company is currently evaluating the impact of SFAS 161 on its financial statements but does not expect it to have a material effect

In May 2008, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (“SFAS”) No. 162, " The Hierarchy of Generally Accepted Accounting Principles ”.  SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States.  SFAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The adoption of FASB No. 162 did not have a material impact on the Company's financial position, results of operations, or cash flows.

In May 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 163, " Accounting for Financial Guarantee Insurance Contracts—an interpretation of FASB Statement No. 60 " (“SFAS 163”).  SFAS 163 interprets Statement 60 and amends existing accounting pronouncements to clarify their application to the financial guarantee insurance contracts included within the scope of that Statement.  SFAS 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years.  As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended September 30, 2011.  The Company is currently evaluating the impact of SFAS 163 on its financial statements but does not expect it to have a material effect.

Note 4 — Acquisition of Optex Systems, Inc. Delaware

Acquisition by Longview Fund, LP on October 14, 2009

On October 14, 2008, in a purchase transaction that was consummated via public auction, Optex Delaware exchanged $15 million of IRSN debt owned by it and assumed approximately $3.8 million of certain Optex Texas liabilities for substantially all of the assets of Optex Texas .  The $15 million of IRSN debt was contributed by Longview Fund and Alpha to Optex Delaware in exchange for a $6 million note payable from Optex Delaware and a $9 million equity interest in Optex Delaware.  There is no contingent consideration associated with the purchase.  Longview and Alpha, which were secured creditors of IRSN, owned Optex Delaware until February 20, 2009, when Longview sold 100% of its equity interests in Optex Delaware to Sileas Corp, as discussed in Note 9.

 
 

 

Among other assets, Optex Delaware purchased the following categories of assets from Optex Texas:  intellectual property, production processes and know how, and outstanding contracts and customer relationships.  Optex Delaware’s management intends to improve the business’s ability to serve its existing customers and to attract new customers through quality product and service which will be enabled by improved working capital availability as opposed to working capital available during the time period in which the assets were owned by IRSN.

Optex Systems has allocated the consideration for its acquisition of the Purchased Assets among tangible and intangible assets acquired and liabilities assumed based upon their fair values. Assets that met the criteria for recognition as intangible assets apart from goodwill were also valued at their fair values.

The Purchase Price was assigned to the acquired interest in the assets and liabilities of the Company as of October 14, 2008 as follows:

Assets:
     
Current assets, consisting primarily of inventory of $5,383,929 and accounts receivable of $1,404,434
  $ 7,330,910  
Identifiable intangible assets
    4,036,789  
Purchased Goodwill
    7,110,416  
Other non-current assets, principally property and equipment
    343,898  
         
Total assets
    18,822,013  
Liabilities:
       
Current liabilities, consisting of accounts payable of $1,953,833 and accrued liabilities of $1,868,180
  $ 3,822,013  
         
Acquired net assets
  $ 15,000,000  

The following table summarizes the estimate of the fair values of the intangible assets as of the asset transfer date:
   
Total
 
Contracted Backlog - Existing Orders
  $ 2,763,567  
Program Backlog - Forecasted IDIQ awards
  $ 1,273,222  
Total Intangible Asset to be amortized
  $ 4,036,789  

Identifiable intangible assets primarily consist of customer and program backlog and will be amortized between general and administrative expenses and costs of sales according to their respective estimated useful lives.

Pro forma revenue and earnings per share information is presented cumulatively in Note 9 regarding the subsequent acquisition of Optex Delaware by Sileas Corporation.

 
 

 

The accompanying financial statements present the combined accounts of Optex Texas and Optex Delaware from the date of the business combination which was October 14, 2008.

Other Transaction in connection with Purchase by Optex Delaware

Secured Promissory Note Due September 19, 2011/Longview Fund and Alpha   - In connection with the public sale of the Optex Texas assets to Optex Delaware, Optex Delaware delivered to each of Longview Fund and Alpha a Secured Promissory Note due September 19, 2011 in the principal amounts of $5,409,762 and $540,976, respectively.  Each Note bears simple interest at the rate of 6% per annum, and the interest rate upon an event of default increases to 8% per annum.  After 180 days from the Issue Date, the principal amount of the Notes and accrued and unpaid interest thereon may be converted into Optex common stock at a conversion price of $1.80 per share.  The Notes may be redeemed prior to maturity at a price of 120% of the then outstanding principal amount plus all accrued and unpaid interest thereon.  The obligations of Optex under the Notes are secured by a lien of all of the assets of Optex in favor of Longview and Alpha.   On March 27 2009, Sileas and Alpha exchanged their Notes plus accrued and unpaid interest for one thousand twenty seven (1,027) shares of Optex Delaware Series A Preferred Stock

Note 5 - Commitments and Contingencies
 
Leases

The company leases its office and manufacturing facilities under two non-cancellable operating leases expiring November 2009 and February 2010 in addition to maintaining several non-cancellable operating leases for office and manufacturing equipment.  Total expenses under these facility lease agreements for the year ended September 28, 2008 was $313,032 and total expenses for manufacturing and office equipment was $21,830.  At September 28, 2008, the minimum lease payments under non-cancelable operating leases for equipment, office and facility space are as follows:

   
Operating
 
   
Leases
 
Years ended December 31,
     
2009
 
$ 364,260  
2010
    79,867  
2011
    16,753  
2012
    -  
2013
    -  
Thereafter
    -  
Total minimum lease payments
  $ 460,880  

Note 6 - Debt Financing

Non-Related parties

Short Term Note Payable/Longview Fund -   On September 23, 2008 Optex Delaware borrowed $146,709 from Longview and issued a promissory note dated September 23, 2008, to Longview in connection therewith.  The September 23, 2008 Note bears interest at the rate of 10% per annum with interest accruing until the maturity date of the September 23, 2008 Note, which was originally set as November 7, 2008 (“Maturity Date”).  Pursuant to an Allonge No. 1 to Promissory Note, dated January 20, 2009, the Maturity Date was extended until March 31, 2009 and is to be exchanged for Series A Preferred Stock of Optex Delaware ( See Note 9). .

 
 

 

Short term note payable (Qioptic) - On November 20, 2008, Optex Delaware issued a promissory note (“Note”) to Qioptiq Limited (“Qioptiq”) in the amount of $117,780. The Note originated as a trade payable and as of December 28, 2008 had an outstanding balance of $67,781.  The Note bears interest at the rate of six percent per annum and had a maturity date of February 13, 2009  (and was repaid in full as of that date) (“Maturity Date”).  The terms of the Note call for weekly payments of $10,000 each on the last business day of every week commencing on the last business day of the first week after November 20, 2008 and continuing thereafter until the Maturity Date, on which date the remaining principal amount of the Note and all accrued and unpaid interest thereon shall become immediately due and payable

Note 7  –  Stockholders Equity
 
  Common Stock:  

As of December 28, 2008, the Company was authorized to issue 300,000,000 shares of $.001 par value common stock, of which 50,000,000 shares were issued and outstanding as follows:

Longview Fund, LP
    45,081,350  
Arnold Holding, LTD
    4,918,650  
Total Outstanding
    50,000,000  

Each share of stock entitles the holder to one vote

The outstanding shares as of December 30, 2007 have been restated to reflect the recapitalization of Optex Delaware above.

Note 8—Earnings/Loss Per Share  
 
Basic earnings per share is computed by dividing income available to common shareholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) for the period. Diluted earnings per share is computed by assuming that any dilutive convertible securities outstanding were converted, with related preferred stock dividend requirements and outstanding common shares adjusted accordingly. For all periods presented herein, there are no dilutive convertible securities.
The following table sets forth the computation of basic and diluted net loss attributable to common stockholders per share for the three months ended December 28, 2008, and December 30, 2007.

   
Three months
ended
December 28,
2008
   
Three months
ended
December 30,
2007
 
             
Numerator:
           
Net loss
  $ (28,155 )   $ (693,663 )
Denominator:
               
Weighted average shares
    50,000,000       50,000,000  
Basic and diluted net loss per share
  $ (0.00 )   $ (0.01 )

Quarter ended December 30, 2007 is shown depicting recapitilization of the entity

 
 

 

Note 9 — Subsequent Events

Acquisition by Sileas Corp on February 20, 2009

On February 20, 2009, Sileas Corp. (“Sileas”), a newly-formed Delaware corporation, owned by present members of the company’s management, purchased 100% of the equity interest held by Longview , representing 90% of Optex Delaware, in a private transaction (the “Acquisition”).

The Primary reasons for the Acquisition by Sileas was to effect synergies that the management of Sileas and the corporate structure of Sileas would produce in achieving competitive advantages in the contract bidding process. Additional operating efficiencies were expected to result from the ownership by present members of management who are active in the daily operations of the Company.

The Acquisition was accounted in accordance with “Statement of Financial Accounting Standards No. 141R” Business Combinations” effective for transactions after December 15, 2008.

The purchase price (“Purchase Price”) for the Acquisition was $13,524,405.  Sileas issued a note to the Longview Fund LP for the full amount of the Purchase Price in exchange for 45,081,350 shares of common stock (the “Common Stock”) issued by the Company (representing 90% of the outstanding shares) and a note dated December 2, 2008, issued by the Company to Longview in the principal amount of $5,409,762 (the “Optex Note”). No contingent consideration is due the seller in the transaction..  The Note is secured by the assets of Sileas Corp. and a pledge of the outstanding stock of Sileas Corp.

Sileas has no operations or business activities other than holding the Purchased Assets and has no revenues.

The fair value of the 10% non-controlling interest at the date of acquisition is estimated to be approximately $1,500,000. The fair value was derived by computing 10% of the value of the Company as a whole based on the value of the consideration given by Sileas for its 90% acquisition. The fair value of the Company as a whole was established by the consideration of $15,000,000 given in the previous transaction whereby Longview and Alpha Capital acquired the Company in a public auction on October 14, 2008. Based the stability of the nature of the company operations in the current marketplace, the fair value of the prior consideration was deemed to be representative of the current market value.

Sileas has allocated the consideration for its acquisition of the Purchased Assets among tangible and intangible assets acquired and liabilities assumed based upon their fair values. Assets that met the criteria for recognition as intangible assets apart from goodwill were also valued at their fair values. The excess of the purchase price over the fair values of the identifiable tangible assets, intangibles assets and the fair value of the non controlling interest is recognized as goodwill in the accompanying balance sheet in the amount of $1,012,058. Goodwill is not amortized for financial reporting purposes but measured at least annually for impairment.

 
 

 

The Purchase Price was assigned to the acquired interest in the assets and liabilities of the Company as of February 20, 2009 as follows:

Assets:
           
Current assets, consisting primarily of inventory of $5,327,438 and accounts receivable of $2,897,583
        $ 8,687,102  
Identifiable intangible assets
          3,173,793  
Purchased Goodwill
          7,110,415  
Other non-current assets, principally property and equipment
          316,923  
               
Total assets
        $ 19,288,233  
Liabilities:
             
Current liabilities, consisting primarily of accounts payable of $2,068,653 and accrued liabilities of $2,039,663
        $ 5,275,886  
               
Acquired net assets
        $ 14,012,347  
               
Purchase price
             
Total consideration to seller (Sileas 90% interests)
  $ 13,524,405          
Fair Value minority interest under FAS 141R
    1,500,000          
                 
            $ 15,024,405  
                 
Excess purchase price reported as goodwill
          $ 1,012,058  

Accounts receivable represent the amounts due from customers in the ordinary course of business. The carrying amounts approximate their fair value and the Company expects to collect the receivables subject to their normal historical experiences.

Qualitative factors that result in the recognition of goodwill exist from the synergies expected to be achieved by combining the existing operations and the business relationships of Sileas Corp as well as intangible assets that exist that do not meet the criteria for separate recognition apart from goodwill such as the intellectual capital inherent in its existing workforce, production methods and its overall customer base. The identifiable intangible assets and recorded goodwill are not deductible for income tax purposes.

As of the February 20,   2009 change in ownership, it was determined that there was no significant impact to the unamortized intangible assets since the original determination on October 14, 2008.

Identifiable intangible assets primarily consist of customer and program backlog, and will be amortized between general and administrative expenses and costs of sales according to their respective estimated useful lives.
 
The accompanying unaudited pro forma financial information for the three months ended December 28, 2008 and December 30, 2007 present the historical financial information of the accounting acquirer. The pro forma financial information is presented for information purposes only. Such information is based upon the standalone historical results of each company and does not reflect the actual results that would have been reported had the acquisition been completed when assumed, nor is it indicative of the future results of operations for the combined enterprise.

 
 

 

The following represents condensed pro forma revenue and earnings information for the three months ended December 28, 2008  and December 30, 2007 as if the acquisition of Optex had occurred on the first day of each of the quarters.

   
Unaudited
Quarter Ended
December 28,
2008
   
Unaudited
Quarter Ended
December 30,
2007
 
Revenues
    7,264,084       4,415,905  
Net Loss
    (65,010 )     (481,062 )
Diluted earnings per share
  $ (0.00 )   $ (0.00 )
                 
Weighted Average Shares Outstanding
    141,464,940       141,464,940  

The pro forma information depicted above reflect the impacts of reduced interest expense of $85,500 and $49,640 for three months ended December 28, 2008 and December 30, 2007 respectively, the increased intangible amortization expenses of $280,308, the elimination of corporate allocation costs from IRSN of $   433,934, the elimination employee stock bonus compensation pushed down from IRSN of $ 101,766  for the three months ended December 30, 2007, and the tax increase of $29,925 for three months ended December 28, 2008 resulting from lower interest expense.  There is no expected tax effect for the three months ended December 30, 2007 as the company had an accumulated retained deficit.

Other Transactions in connection with Purchase by Sileas

Secured Promissory Note Due February 20, 2012/Longview Fund, LP -   As a result of the transaction described above between Sileas on Longview fund described in note 7 and in note 14, on February 20, 2009 and effective as of February 20, 2009 (the “Issue Date”), Sileas, the new majority owner of Optex Systems, executed and delivered to Longview LP, a Secured Promissory Note due February 20, 2012 in the principal amount of $13,524,405.  The Note bears simple interest at the rate of 4% per annum, and the interest rate upon an event of default increases to 10% per annum.  In the event Optex sells or conveys all or substantially all its assets to a third party entity for more than nominal consideration, other than a merger into its parent company (“Sileas”) or reincorporation in another jurisdiction, then this Note shall be immediately due and owing without demand.  In the event that a Major Transaction occurs prior to the maturity date resulting in the Borrower receiving Net Consideration with a fair market value in excess of the principal and interest due under the terms of this Secured Note, (the “Optex Consideration”), then in addition to paying the principal and interest due, Optex (“Sileas”) shall also pay an amount equal to 90% of the Optex Consideration.  The obligations of Optex under the Note are secured by a security interest granted to Longview Fund pursuant to a Stock Pledge Agreement delivered by Sileas to Longview.

The note payable has been accounted for on the basis of push-down accounting upon the acquisition since Sileas acquired a 90% controlling interest and as such the note payable by Sileas (Parent) will be recorded on the financial statements of Optex Delaware (Subsidiary) as of February 20, 2009.  Concurrent with the planned reverse merger with a publicly-traded shell entity, Sileas’ ownership will be diluted to a percentage less than that under which push-down accounting applies.  Accordingly, the note payable owned by Sileas to Longview will be reflected solely on the financial statements of Sileas (Parent) and will no longer be reflected as a liability in the financial statements of Optex Delaware.

 
 

 

Reorganization/Share Exchange

On March 30, 2009, a reorganization/share exchange occurred whereby the then existing shareholders of the Company exchanged their shares of Company Common Stock with the shares of Common Stock of Sustut Exploration, Inc. (“Registrant”) as follows:   (i) the outstanding 85,000,000 shares of Company Common Stock be exchanged by Registrant for  113,333,282 shares of Registrant Common Stock, (ii) the outstanding 1,027 shares of Company Series A Preferred Stock be exchanged by Registrant for 1,027 shares of Registrant Series A Preferred Stock and such additional items as more fully described in the Agreement and (iii) the 8,131,667 shares of Company Common Stock purchased in the private placement will be exchanged by Registrant for 8,131,667 shares of Registrant Common Stock, as acknowledged by Registrant.   The Company shall remain a wholly owned subsidiary of Registrant, and the Company’s shareholders are now shareholders of Registrant.

Private Placement

Simultaneously with the closing of the Reorganization Agreement, as of March 30, 2009 , the Company accepted subscriptions from accredited investors for a total of 27 units (the "Units"), for $45,000.00 per Unit, with each Unit consisting of Three Hundred Thousand (300,000) shares of common stock, no par value (the "Common Stock") of the Company and warrants to purchase Three Hundred Thousand (300,000) shares of Common Stock for $0.45 per share for a period of five (5) years from the initial closing (the "Warrants"), which were issued by Sustut after the closing referenced above.  Gross proceeds to the Company were $1,219,750, and after deducting a finders fee of $139,555 which was payable in cash, and non-cash consideration of forgiveness of indebtedness owed to an investor of $146,250, net proceeds were $933,945.  The finder also received five year warrants to purchase 2.7 Units, at an exercise price of $49,500 per unit.

Series A Preferred Stock

On March 24, 2009, the Company filed a Certificate of Designation with the Secretary of State of the State of Delaware authorizing a series of preferred stock, under its articles of incorporation, known as “Series A Preferred Stock”. This Certificate of Designation was approved by the Registrant’s Board of Directors and Shareholders at a Board Meeting and Shareholders Meeting held on February 25, 2009. The Certificate of Designation sets forth the following terms for the Series A Preferred Stock: (i) Number of authorized shares: 1,027; (ii) per share stated value: $6,000; (iii) liquidation preference per share:  stated value; (iv) conversion price: $0.15 per share as adjusted from time to time; and (v) voting rights: votes along with the Common Stock on an as converted basis with one vote per share.

The Series A Preferred Shares entitle the holders to receive cumulative dividends at the rate of 6% per annum payable in cash at the discretion of Board of Directors.  Each share of preferred stock is immediately convertible into common shares at the option of the holder which entitles the holder to receive the equivalent number of common shares equal to the stated value of the preferred shares divided by the conversion price initially set at $0.15 per share.

Holders of preferred shares receive preferential rights in the event of liquidation.  Additionally the preferred stock shareholders are entitled to vote together with the common stock on an ”as-converted” basis.

On March 27, 2009, Sileas and Alpha Capital Anstalt exchanged their promissory notes in the total amount of $6,000,000 plus accrued and unpaid interest thereon into 1,027 shares of Series A Preferred Stock.

 
 

 

Stock Split

On March 26, 2009, the Company’s Board of Directors reconfirmed a 1.7:1 forward split of its Common Stock to holders of record as of February 23, 2009.  Accordingly, as a result of the forward split, the 45,081,350 shares of Common Stock held by Sileas Corp. was split into 76,638,295  shares, and the 4,918,650 shares of Common Stock held by Arland Holdings, Ltd. was split into 8,361,705  shares.

 
 

 
PROFORMA CONDENSED FINANCIAL STATEMENTS (UNAUDITED )

On October 14, 2008, in a purchase transaction that was consummated via public auction, Optex Delaware exchanged $15 million of IRSN debt owned by it and assumed approximately $3.8 million of certain Optex Texas liabilities for substantially all of the assets of Optex Texas. The $15 million of IRSN debt was contributed by Longview Fund and Alpha (secured creditors of IRSN) to Optex Delaware in exchange for a six percent (6%) $6 million note payable, $5.4 million and $0.6 million respectively, and $9 million equity interest in Optex Delaware of 45,081,350 and 4,918,650 shares respectively. There is no contingent consideration associated with the purchase. On October 30, 2008 Alpha Capital Anstalt sold their common stock interest to Arland Holding, Ltd. On February 20, 2009 Longview sold 100% of its equity interests in Optex Delaware to Sileas Corp.

On February 20, 2009, Sileas Corp. (“Sileas”), a newly-formed Delaware corporation owned by present members of the Company’s management, purchased 45,081,350 shares of Optex Delaware common stock held by Longview Fund, LP (representing 90% of the outstanding shares of Optex Delware) and the note issued to Longview in the principal amount of $5,409,762.

The purchase price for the Sileas acquisition was $13,524,405. The purchase was paid by a note made by Sileas, payable to Longview in the principal amount of the purchase price carrying four percent (4%) annual interest, ,and maturing on February 20, 2012 and secured by a pledge of the purchased assets.

Sileas has no operations or business activities other than holding the Purchased Assets and has no revenues.

On March 26, 2009, the Company’s Board of Directors approved a 1.7:1 forward split of its Common Stock to holders of record as of February 23, 2009. Accordingly, as a result of the forward split, the 45,081,350 shares of Common Stock held by Sileas Corp. were split into 76,638,295 shares, and the 4,918,650 shares of Common Stock held by Arland Holdings, Ltd. were split into 8,361,705 shares.

On March 27, 2009, Sileas and Alpha Capital Anstalt exchanged their promissory notes in the total amount of $6,000,000 plus accrued and unpaid interest thereon into 1,027 shares of Series A Preferred Stock. The Series A Preferred Shares entitle the holders to receive cumulative dividends at the rate of 6% per annum payable in cash at the discretion of Board of Directors.

On March 30, 2009, a reorganization/share exchange occurred whereby the then existing shareholders of the Company exchanged their shares of Company Common Stock with the shares of Common Stock of Sustut Exploration, Inc. (“Sustut”). For each share of Optex Common Stock tendered, the shareholder received 1.33 shares of Sustut Common Stock. For each share of Series A Preferred Stock of the Company tendered, the shareholder received 1 share of Sustut Series A Preferred Stock. The Company shall remain a wholly owned subsidiary of Sustut, and the Company’s shareholders are now shareholders of Sustut.

As of March 30, 2009 , the Company accepted subscriptions from accredited investors for a total of 27 units (the "Units"), for $45,000.00 per Unit, with each Unit consisting of Three Hundred Thousand (300,000) shares of common stock, no par value (the "Common Stock") of the Company and warrants to purchase Three Hundred Thousand (300,000) shares of Common Stock for $0.45 per share for a period of five (5) years from the initial closing (the "Warrants"), which were issued by Sustut after the closing referenced above. Gross proceeds to the Company were $1,219,750, and after deducting a finders fee of $139,555 which was payable in cash, and non-cash consideration of forgiveness of indebtedness owed to an investor of $146,250, net proceeds were $933,945. The finder also received five year warrants to purchase 2.7 Units, at an exercise price of $49,500 per unit.

 
 

 

The unaudited pro forma statements of operations of Optex Systems, Inc. for the year ended September 28, 2008 and three months ended December 28, 2008, give effect to (i) both the Optex Delaware acquisition as of October 14, 2008 and subsequent Sileas acquisition as of February 20, 2009 by applying the purchase method of accounting, (ii) certain adjustments that are directly attributable to the change in ownership from Irvine Sensors Corporation, (iii) certain adjustments related to the issuance of notes payable to Longview Fund, LP and Alpha Capital Anstalt as if the transactions were consummated as of October 1, 2007 and September 29, 2008.

The unaudited pro forma condensed balance sheets as of year ended September 28, 2008 and three months ended December 28, 2008 are presented as if both the Optex Delaware and Sileas acquisitions including the issuance of Optex Delaware common stock and notes payable had occurred on September 28, 2008 and December 28, 2008, respectively.

The fair value of the net assets acquired, in both transactions have been estimated based on the final offering price at the public auction held on October 14, 2008.

In the opinion of Optex System, Inc. all adjustments and/or disclosures necessary for a fair presentation of the pro forma data have been made. These pro forma financial statements are presented for illustrative purposes only and are not necessarily indicative of the operating results or the financial position that would have been achieved had the acquisitions been consummated as of the dates indicated or of the results that may be obtained in the future.

These pro forma financial statements and notes thereto should be read in conjunction with Optex System, Inc. financial statements and the notes thereto as of and for the year ended September 28, 2008 and three months ended December 28, 2008.

 
 

 

2008 Annual Balance Sheets 1

Optex Systems, Inc.
Proforma Balance Sheets (Unaudited)
Year Ended September 28, 2008

   
Optex-Texas
   
Optex  Delaware
Proforma  Adjustments
(10/14/09)
   
Sileas  Proforma
Adjustments
(2/20/09)
   
Subtotal
   
Sustut  Exploration, 
Inc.
   
Reorganization/share
exchange (3/30/09)
   
Proforma
 
                                           
ASSETS
                                         
                                           
Current Assets
                                         
Cash
    170,183                   170,183             933,945 (12)     1,104,128  
Accounts Receivable
    2,454,235                   2,454,235                     2,454,235  
Net Inventory
    4,547,726                   4,547,726                     4,547,726  
Prepaid Expenses
    307,507                   307,507                     307,507  
                                                   
Total Current Assets
    7,479,651       -       -       7,479,651       -       933,945       8,413,596  
                                                         
Property and Equipment
                                                       
Property and Equipment
    1,314,109                       1,314,109                       1,314,109  
Accumulated Depreciation
    (994,542 )                     (994,542 )                     (994,542 )
                                                         
Total Property and Equipment
    319,567       -       -       319,567       -       -       319,567  
                                                         
Other Assets
                                                       
Security Deposits
    20,684                       20,684                       20,684  
Intangibles
    1,100,140       2,936,650 (2)             4,036,790                       4,036,790  
Goodwill
    10,047,065       (2,936,650 )(2)     1,012,058 (3)     8,122,473               (1,012,058 )(13)     7,110,415  
                                                         
Total Other Assets
    11,167,889       -       1,012,058       12,179,947       -       (1,012,058 )     11,167,889  
                                                         
Total Assets
    18,967,107       -       1,012,058       19,979,165       -       (78,113 )     19,901,052  

See accompanying notes to pro forma financial statements

 
 

 

Optex Systems, Inc.
Proforma Balance Sheets (Unaudited) - Continued
Year Ended September 28, 2008

   
Optex-Texas
   
Optex Delaware 
Proforma  Adjustments
(10/14/09)
   
Sileas  Proforma
Adjustments
(2/20/09)
   
Subtotal
   
Sustut  Exploration, 
Inc.
   
Reorganization/share
exchange (3/30/09)
   
Proforma
 
                                           
LIABILITIES AND EQUITY
                                         
                                           
Current Liabilities
                                         
Accounts Payable
    1,821,534                   1,821,534       1,950 (10)           1,823,484  
Accrued Expenses
    798,974                   798,974               65,000 (12)     863,974  
Accrued Warranties
    227,000                   227,000                       227,000  
Accrued Contract Losses
    821,885                   821,885                       821,885  
Loans Payable
    373,974                   373,974               (146,250 )(12)     227,724  
Income Tax Payable
    4,425       (4,425 )(1)           -                       -  
                                                       
Total Current Liabilities
    4,047,792       (4,425 )     -       4,043,367       1,950       (81,250 )     3,964,067  
                                                         
Other Liabilities
                                                       
Note Payable
    2,000,000       (2,000,000 )(1)             -                       -  
Accrued Interest on Note
    336,148       (345,648 )(1)                                        
              9,500               -                       -  
Long Term Debt - Longview Fund LP
    -       5,409,762 (1)     8,114,643 (3)     13,524,405               (5,409,762 )(11)        
                                              (8,114,643 )(13)     -  
Long Term Debt - Alpha Capital Anstalt
            590,238 (1)             590,238               (590,238 )(11)     -  
Accrued Interest on Notes
                                            159,781 (11)        
                                              (159,781 )(11)     -  
Due to Parent
    4,300,151       (4,301,579 )(1)                                        
      -       1,428               -                       -  
                                                         
Total Other Liabilities
    6,636,299       (636,299 )     8,114,643       14,114,643       -       (14,114,643 )     -  
                                                         
Total Liabilities
    10,684,091       (640,724 )     8,114,643       18,158,010       1,950       (14,195,893 )     3,964,067  
                                                         
Equity
                                                       
Optex Systems, Inc. Stockholders' Equity
                                                       
                                                         
Sustut - Preferred Stock (.001 par 5,000 authorized,  1027 series A preferred issued issed and outstanding)
                                            1 (14)     1  
                                                         
Sustut - Common Stock (.001 par 200,000,000 authorized, 19,999,991 shares issued and outstanding)
                                    20,000 (10)     121,465 (14)     141,465  
Preferred Stock (.001 par 1,027 authorized, 1,027 shares issued and outstanding)
                                            1 (11)        
                                              (1 )(14)     -  
Optex Systems, Inc. Deleware - Common Stock (par $0.001, 300,000,000 authorized, 85,000,000 shares issued and outstanding)
            50,000 (1)                                        
              35,000 (9)             85,000                          
                                              8,132 (12)        
                                              (93,132 )(14)     -  
Optex Systems, Inc. Texas - Common Stock (no par 100,000 authorized, 18,870 shares issued and 10,000 shares outstanding)
    164,834       (164,834 )(1)             -                       -  
Optex Systems, Inc. Texas - Treasury Stock (8,870 shares at cost)
    (1,217,400 )     1,217,400 (1)             -                       -  
Additional Paid-in-capital
    15,246,282       (450,914 )(1)     (8,602,585 )(3)                                
                                                         
              (35,000 )(9)             6,157,783       467,700 (10)                
                                              552,646 (12)        
                                              454,417 (12)        
                                              (517,983 )(14)        
                                              8,602,585 (13)        
                                              6,159,780 (11)     21,876,928  
Retained Earnings (Deficit)
    (5,910,700 )     (10,928 )             (5,921,628 )     (489,650 )(10)                
                                              (159,781 )(11)        
                                              489,650 (14)     (6,081,409 )
                                                         
Total Optex Systems, Inc. Stockholders' Equity
    8,283,016       640,724       (8,602,585 )     321,155       (1,950 )     15,617,780       15,936,985  
                                                         
Non Controlling Interest
                    1,500,000 (3)     1,500,000               (1,500,000 )(13)     -  
                                                         
Total Liabilities and Equity
    18,967,107       -       1,012,058       19,979,165       -       (78,113 )     19,901,052  

See accompanying notes to pro forma financial statements

 
 

 
 
2008 Annual Income Statement 1
 
Optex Systems, Inc.
Pro Forma Statements of Operations (Unaudited)
Year Ended September 28, 2008

   
Optex   -   Texas
   
Pro   forma
Adjustments
   
Proforma
 
         
 
       
Revenues
    20,017,209    
 
      20,017,209  
           
 
         
Total Cost of Sales
    18,145,211        1,327,346 (4)     19,472,557  
                         
Gross Margin
    1,871,998       (1,327,346 )       544,651  
                         
General and Administrative
                       
Salaries and Wages
    910,854               910,854  
Employee Benefits
    190,489               190,489  
Employee Stock Bonus Plan
    378,716       (378,716
)(7)
    -  
Amortization of Intangible
    223,491               223,491  
Rent, Utilities and Building Maintenance
    228,694               228,694  
Legal and Accouting Fees
    223,715               223,715  
Consulting and Contract Service Fees
    325,723               325,723  
Corporate Allocations
    2,076,184       (2,076,184 )(6)     -  
Other Expenses
    381,459       147,483 (4)     528,942  
Total General and Administrative
    4,939,325       (2,307,417 )       2,631,908  
                         
Earnings (Loss) before Other Expenses and Taxes
    (3,067,327 )     980,071       (2,087,256 )
                         
Other Expenses
                       
Asset Impairment of Goodwill
    1,586,416               1,586,416  
Interest (Income) Expense - Net
    199,753       (200,000 )(5)     (247 )
                         
Total Other
    1,786,169       (200,000 )       1,586,169  
                         
Income (Loss) before Taxes
    (4,853,496 )     1,180,071       (3,673,425 )
Federal Income Tax Expense (Benefit)
    (21,544 )             (21,544 )
                         
Net Income (Loss) After Taxes
    (4,831,952 )     1,180,071       (3,651,881 )
                         
Less preferred stock dividend
    -       (369,720 )(15)     (369,720 )
                         
Net loss applicable to common shareholders
    (4,831,952 )     810,351       (4,021,601 )
                         
Basic and diluted loss per share
  $ (483.20 )           $ (0.03 )
                         
Weighted Average Common Shares Outstanding
    10,000               141,464,940 (16)

See accompanying notes to pro forma financial statements

 
 

 

Qtr 1 Balance Sheets 1
Optex Systems, Inc.
Proforma Balance Sheets (Unaudited)
as of Three months ended December 28, 2008

   
Optex-Texas
   
Sileas   Proforma
Adjustments
   
Subtotal
   
Sustut
Exploration,  Inc
   
Reorganization/share
exchange
(3/30/09)
   
Proforma
 
                                     
ASSETS
                                   
                                     
Current Assets
                                   
Cash
    497,152             497,152             933,945 (12)     1,431,097  
Accounts Receivable
    2,124,827             2,124,827                     2,124,827  
Net Inventory
    5,848,508             5,848,508                     5,848,508  
Prepaid Expenses
    46,811             46,811                     46,811  
                                             
Total Current Assets
    8,517,298       -       8,517,298       -       933,945       9,451,243  
                                                 
Property and Equipment
                                               
Property and Equipment
    1,339,636               1,339,636                       1,339,636  
Accumulated Depreciation
    (1,030,984 )             (1,030,984 )                     (1,030,984 )
                                                 
Total Property and Equipment
    308,652       -       308,652       -       -       308,652  
                                                 
Other Assets
                                               
Security Deposits
    20,684               20,684                       20,684  
Intangibles
    3,518,992               3,518,992                       3,518,992  
Goodwill
    7,110,415       1,012,058 (3)     8,122,473               (1,012,058 )(13)     7,110,415  
                                                 
Total Other Assets
    10,650,091       1,012,058       11,662,149       -       (1,012,058 )     10,650,091  
                                                 
Total Assets
    19,476,041       1,012,058       20,488,099       -       (78,113 )     20,409,986  

See accompanying notes to pro forma financial statements


 
Optex Systems, Inc.
Proforma Balance Sheets (Unaudited) - Continued
as of Three months ended December 28, 2008
 
   
Optex-Texas
   
Sileas Proforma
Adjustments
   
Subtotal
   
Sustut
Exploration  Inc.
   
Reorganization/share
exchange
(3/30/09)
   
Proforma
 
                                     
                                     
LIABILITIES AND EQUITY
                                   
                                     
Current Liabilities
                                   
Accounts Payable
    1,964,795             1,964,795       1,950 (10)           1,966,745  
Accrued Expenses
    1,044,075             1,044,075               65,000 (12)     1,109,075  
Accrued Warranties
    256,397             256,397                       256,397  
Accrued Contract Losses
    743,319             743,319                       743,319  
Loans Payable
    214,490             214,490               (146,250 )(12)     68,240  
Interest on Loans Payable
    6,798             6,798                       6,798  
Income Tax Payable
    263,654             263,654                       263,654  
                                               
Total Current Liabilities
    4,493,528       -       4,493,528       1,950       (81,250 )     4,414,228  
                                                 
Other Liabilities
                                               
Long Term Debt - Longview Fund LP
    5,409,762                               (5,409,762 )(11)     -  
              8,114,643 (3)     13,524,405               (8,114,643 )(13)     -  
Long Term Debt - Alpha Capital Anstalt
    590,238               590,238               (590,238 )(11)     -  
Accrued Interest on Notes
    76,000               76,000               83,781 (11)     -  
                                      (159,781 ) (11)     -  
                                                 
Total Other Liabilities
    6,076,000       8,114,643       14,190,643       -       (14,190, 643 )     -  
                                                 
Total Liabilities
    10,569,528       8,114,643       18,684,171       1,950       (14,271,893 )     4,414,228  
                                                 
Equity
                                               
Optex Systems, Inc. Stockholders' Equity
                                               
Sustut - Preferred Stock (.001 par 5,000 authorized,  1027 series A preferred issued issed and outstanding)
                                    1 (14)     1  
Sustut - Common Stock (.001 par 200,000,000 authorized, 19,999,991 shares issued and outstanding)
                            20,000 (10)     121,465 (14)     141,465  
Preferred Stock (.001 par 1,027 authorized, 1,027 shares issued and outstanding)
                                    1 (11)     -  
                                      (1 )(14)     -  
Optex Systems, Inc. Deleware - Common Stock (par $0.001, 300,000,000 authorized, 85,000,000 shares issued and outstanding)
    50,000                                       -  
      35,000 (9)             85,000                       -  
                                      8,132 (12)        
                                      (93,132 )(14)        
Additional Paid-in-capital
    14,795,368       (8,602,585 )(3)                             -  
      (35,000 )(9)             6,157,783       467,700 (10)             -  
                                      552,646 (12)        
                                      454,417 (12)        
                                      (517,983 )(14)        
                                      8,602,585 (13)        
                                      6,159,780 (11)     21,876,928  
Retained Earnings (Deficit)
    (5,938,855 )             (5,938,855 )     (489,650 )(10)             -  
                                      (83,781 )(11)        
                                      489,650 (14)     (6,022,636 )
                                                 
Total Optex Systems, Inc. Stockholders' Equity
    8,906,513       (8,602,585 )     303,928       (1,950 )     15,693,780       15,995,758  
                                                 
Non Controlling Interest
            1,500,000 (3)     1,500,000               (1,500,000 )(13)     -  
                                                 
Total Liabilities and Equity
    19,476,041       1,012,058       20,488,099       -       (78,113 )     20,409,986  

See accompanying notes to pro forma financial statements

 
 

 

Qtr 1 Income Statements 1
 
Pro Forma Statements of Operations (Unaudited)
Three months ended December 28, 2008

   
Optex   -   Texas
   
Pro   forma  
Adjustments
   
Proforma
 
                 
Revenues
    7,264,084             7,264,084  
                       
Total Cost of Sales
    6,305,050             6,305,050  
                       
Gross Margin
    959,034       -       959,034  
                         
General and Administrative
                       
Salaries and Wages
    158,876               158,876  
Employee Benefits
    83,420               83,420  
Employee Stock Bonus Plan
    -       -       -  
Amortization of Intangible
    101,158               101,158  
Rent, Utilities and Building Maintenance
    55,332               55,332  
Legal and Accouting Fees
    76,219               76,219  
Consulting and Contract Service Fees
    79,323               79,323  
Corporate Allocations
    -       -       -  
Other Expenses
    77,345               77,345  
Total General and Administrative
    631,673       -       631,673  
                         
Earnings (Loss) before Other Expenses and Taxes
    327,361       -       327,361  
                         
Other Expenses
                       
Other Income and Expense
    (436 )             (436 )
Interest (Income) Expense - Net
    92,298       (85,500 ) (5)     6,798  
                         
Total Other
    91,862       (85,500 )     6,362  
                         
Income (Loss) before Taxes
    235,499       85,500       320,999  
Federal Income Tax Expense (Benefit)
    263,654       - (8)     263,654  
Net Income (Loss) After Taxes
    (28,155 )     85,500       57,345  
                         
Less preferred stock dividend
    -       (92,430 ) (15)     (92,430 )
                         
Net loss applicable to common shareholders
    (28,155 )     (6,930 )     (35,085 )
                         
Basic and diluted loss per share
  $ (2.82 )           $ (0.00 )
                         
Weighted Average Common Shares Outstanding
    10,000               141,464,940 (16)

See accompanying notes to pro forma financial statements

 
 

 

 (A.)  BASIS OF PRESENTATION

The purchase method of accounting has been used in the preparation of the accompanying unaudited pro forma condensed financial statements.  Under this method of accounting, the purchase consideration is allocated to tangible and intangible assets acquired and liabilities assumed based on their respective fair values.  For purposes of the unaudited pro forma condensed consolidated financial statements, the fair values were established based on the final offering price at the public auction held on October 14, 2008.

The fair value of the ten percent (10%) non-controlling interest at the date of acquisition by Sileas on February 20, 2009 is estimated to be approximately $1,500,000. The fair value was derived by computing 10% of the value of the company as a whole, based on the value of the consideration given by Sileas for its ninety (90%) acquisition. The fair value of the Company as a whole was established by the consideration of $15,000,000 given in the previous transaction whereby Longview and Alpha Capital acquired the Company in a public auction on October 14, 2008. Based on the stability of the nature of the Company’s operations in the current marketplace, the fair value of the October 14, 2008 consideration was deemed to be representative of the current market value

( B.) CONSIDERATION

The aggregate consideration for the transfer of the assets of Optex Texas via public sale on October 14, 2008 consisted of $15 million of debt issued by IRSN and held by Optex Delaware and the assumption of approximately $3.8 million of Optex Texas liabilities by Optex Delaware.

The aggregate consideration for the subsequent acquisition of Longview Fund, LP’s 90% interest in Optex Delaware as of February 20, 2009 was fully funded by a $ 13,524,405 Note issued to Longview Fund, LP by Sileas that bears annual interest of 4%.  In exchange for the Note, Longview transferred 45,081,350 shares of Optex common stock  and the Optex Note, dated December 2, 2008, issued to Longview in the principal amount of $5,409,762.

(C.) DETAILS OF THE PRO FORMA ADJUSTMENTS RELATING TO THE LONGVIEW AND SILEAS ACQUISITONS ARE AS FOLLOWS :

1.            To record the acquisition of the net assets of Optex Systems, Inc. by Optex Delaware on October 14, 2008 for $15,000,000 and the effects of the purchase on asset, liability, and equity accounts for the assets transferred, notes and common stock issued and impacts to goodwill.

The purchase price consisted of:

As of October 14, 2008
 
Notes Payable
     
Longview Fund, LP
  $ 5,409,762  
Alpha Capital Anstalt
  $ 590,238  
Fair Value of Common Stock Issued (50,000,000 shares at .001 par)
  $ 9,000,000  
Total
  $ 15,000,000  
 
 
 

 

The Optex Delaware purchase was allocated as follows:

Assets:
     
Current assets, consisting primarily of inventory of $5,383,929 and accounts receivable of $1,404,434
  $ 7,330,910  
Identifiable intangible assets
    4,036,789  
Purchased Goodwill
    7,110,416  
Other non-current assets, principally property and equipment
    343,898  
         
Total assets
    18,822,013  
Liabilities:
       
Current liabilities, consisting of accounts payable of $1,953,833 and accrued liabilities of $1,868,180
  $ 3,822,013  
         
Acquired net assets
  $ 15,000,000  

Liabilities not assumed by Optex Delaware as of the acquisition are summarized below:

Optex "Texas" Liabilities not assumed :
 
As of October 14, 2008
 
       
Income Tax Payable
  $ 4,425  
Note Payable - Tim Looney
    2,000,000  
Accrued Interest on Looney Note
    345,648  
Intercompany Payable
    4,301,579  
Total Liabilities assumed by Irvine Sensors, Inc.
  $ 6,651,652  

2.           To record the effect of evaluation of intangible assets as of October 14, 2008 for the amortizable value as of the Optex Delaware acquisiton.  The unamortized balance of intangible assets as of September 28, 2008 and the acquisition date was $ $ 1,100,140. The amortizable intangible assets determined as a result of the evaluation is $4,036,790.  The resultant difference of $2,936,650 has been reflected as of the September 28, 2008 pro forma balance sheet.  The intangible assets acquired by Optex Delaware consist primarily of customer and program backlog with an expected amortization period of 5 years based on customer delivery schedules (contract backlog) and expected benefit period (program backlog) of the acquired asset.

3.           To record the Sileas acquisition of 90% interest in Optex Delaware as of February 20, 2009.

 
 

 

Assets:
           
Current assets, consisting primarily of inventory of $5,327,438 and accounts receivable of $2,897,583
        $ 8,687,102  
Identifiable intangible assets
          3,173,793  
Purchased Goodwill
          7,110,415  
Other non-current assets, principally property and equipment
          316,923  
               
Total assets
        $ 19,288,233  
Liabilities:
             
Current liabilities, consisting primarily of accounts payable of $2,068,653 and accrued liabilities of $2,039,663
        $ 5,275,886  
               
Acquired net assets
        $ 14,012,347  
               
Purchase price
             
Total consideration to seller (Sileas 90% interests)
  $ 13,524,405          
Fair Value minority interest under FAS 141R
    1,500,000          
                 
            $ 15,024,405  
                 
Excess purchase price reported as goodwill
          $ 1,012,058  

The purchase of 90% interest by Sileas was fully funded by a Note issued in the amount of $13,524,405.

The management believes the evaluation of intangible assets as of the October 14, 2008 acquisition by Optex Delaware  to be a fair representation of the acquired asset as of February 20, 2009 as there has been no substantial change in customer or program backlog since the initial review.  The intangible balance of $3,173,793 represents the amount as of February 20, 2009, net of accumulated amortization of $862,997 expensed through the Sileas acquisition date.

4.           To record the total increased amortization expense of intangible assets of $1,474,829 for the year ended September 28, 2008.  This amount was based on the new amortization schedule amount as determined for the Optex Delaware acquisition of $2,071,194, less the $596,365 recorded for the respective year.  The amounts of $1,327,346 and $147,483 were allocated between cost of sales and general and administrative expenses, respectively.   The intangible amortization is not deductible for tax reporting purposes.

5.           To record the reduction in interest expense of $200,000 for year ended September 28, 2008 for the $2,000,000 Note to Tim Looney that was not assumed in the Optex Delaware acquisition.  To record the reduction in interest expense of $85,500 for the three months ended December 28, 2008 for the Tim Looney Note ($9,500) and Alpha Capital and Longview Fund $6,000,000 Notes ($76,000).

6.           To record the reduction in general administrative expenses for the elimination of IRSN corporate cost allocations of $2,076,184 for the year ended September 28, 2008.

7.           To record the reduction in employee stock bonus compensation for IRSN stock issues made to Optex employees of $378,716 for year ended September 28, 2008.

8.           To record the federal income tax benefit of $29,925 for the interest expense reduction during the three months ended December 28, 2008 based on an assumed tax rate of thirty-five percent (35%) of net income before intangible amortization. There are no federal income tax benefits for the year ended September 28, 2008 as the company had a cumulative retained deficit.

9.            To record the effect of the 1.7:1 Optex Delaware Stock split for the year ended September 28, 2008 and three months ended December 28, 2008.

 
 

 

10.           To record Sustut Exploration Company audited financial statement balances for December 31, 2008.  The financials as presented reflect the Sustut 2.5:1 stock split and cancellation of 25,000,000 common stock shares as of March 30, 2009.

11.           To record the effect of the conversion of debt and associated accrued and unpaid interest by Sileas and Alpha Capital Anstalt into 1,027 shares of series A preferred stock

12.           To record the effect of the private placement on cash, loan payable and equity as of September 28, 2008 and December 28, 2008.

13.           To remove the impact of the Sileas purchase on the Note Payable to Longview, goodwill and non controlling interest from Optex Delaware as of September 28, 2008 and December 28, 2008.  The Sileas ownership will have been diluted to a percentage less than that under which push-down accounting applies, and thus these amounts will be carried on the Sileas financial statements rather than Optex Delaware.

14.           To record the reorganization/share exchange between Optex and Sustut at a 1.16: 1 ratio of  Sustut common shares for each Optex common share.  Preferred shares are exchanged on a 1:1 ratio.

15.           To record effect of preferred stock dividend for year ended September 28, 2008 and three months ended December 28, 2008.

16.           To reflect new capitalized shares outstanding after reorganization for year ended September 28, 2008 and three months ended December 28, 2008.