<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 10, 1997
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
INVISION TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 3844 94-3123544
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification
organization) Code Number) Number)
--------------
3420 E. THIRD AVENUE
FOSTER CITY, CALIFORNIA 94404
(650) 578-1930
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------
CURTIS P. DISIBIO
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
INVISION TECHNOLOGIES, INC.
3420 E. THIRD AVENUE
FOSTER CITY, CALIFORNIA 94404
(650) 578-1930
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
--------------
COPIES TO:
ROBERT L. JONES, ESQ. EDWARD C. MUNS, ESQ.
JAMES R. JONES, ESQ. BRANTON, WILSON & MUNS
COOLEY GODWARD LLP 701 B STREET
FIVE PALO ALTO SQUARE SUITE 1255
3000 EL CAMINO REAL SAN DIEGO, CALIFORNIA 92101
PALO ALTO, CALIFORNIA 94306-2155 (619) 236-1891
(650) 843-5000 FAX: (619) 236-8175
FAX: (650) 857-0663
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
Upon Consummation of the Merger described herein.
--------------
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. / /
--------------
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
REGISTERED REGISTERED(1) SHARE PRICE(2) FEE(2)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.001 per share. . . . . 777,000 shares (2) $ 2,028,667 $ 615
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
(1) Represents the number of shares of the Common Stock of the Registrant which
may be issued to former shareholders and option holders of Quantum
Magnetics, Inc. ("Quantum") pursuant to the Merger described herein.
(2) There is no established trading market for the securities of Quantum which
are to be converted into shares of Common Stock of the Registrant pursuant
to the Merger described herein. Pursuant to Rule 457(f)(2) under the
Securities Act of 1933, as amended, the Proposed Maximum Aggregate Offering
Price has been calculated on the basis of the principal amount of Quantum
securities as of June 30, 1997.
- --------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
Quantum Magnetics, Inc.
7742 Kenamar Court
San Diego, California 92121-2425
September , 1997
Dear Shareholder:
You are cordially invited to attend the Special Meeting of Shareholders
(the "Quantum Shareholders Meeting") of Quantum Magnetics, Inc. ("Quantum"),
to be held on September 29, 1997 at 10:00 a.m., local time, at the principal
offices of Quantum located at 7742 Kenamar Court, San Diego, California
92121-2425. Attached are a Notice of the Quantum Shareholders Meeting and a
Proxy Statement/Prospectus containing information about the matters to be
acted upon.
At the Quantum Shareholders Meeting you will be asked to consider and vote
upon (i) the approval and adoption of the Agreement and Plan of Merger and
Reorganization, dated as of September 3, 1997 (the "Reorganization Agreement"),
among Quantum, InVision Technologies, Inc. ("InVision") and QP Acquisition
Corp., a wholly owned subsidiary of InVision ("Merger Sub"), and the Merger (as
defined below), and (ii) the approval of an amendment to the Quantum Articles of
Incorporation. A copy of the Reorganization Agreement appears as Appendix A to
the attached Proxy Statement/Prospectus, and a copy of the amendment to the
Quantum Articles of Incorporation to be adopted is attached as Appendix B to the
attached Proxy Statement/Prospectus.
Pursuant to the Reorganization Agreement, Merger Sub will be merged with
and into Quantum (the "Merger"), whereupon Quantum will become a wholly owned
subsidiary of InVision. At that time, each outstanding share of capital stock
of Quantum (other than those held by InVision) will be converted into the right
to receive a fraction of a share of common stock of InVision, par value $0.001
per share ("InVision Common Stock"), in accordance with the terms of the
Reorganization Agreement. Holders of Quantum capital stock will receive cash in
lieu of any fractional shares of InVision Common Stock to which such
shareholders would have been entitled. Each outstanding option to purchase
Quantum Common Stock ("Quantum Option") will be converted into an option to
purchase the same number of shares of InVision Common Stock that would have been
received had the Quantum Option been exercised in full immediately prior to the
effective time of the Merger, rounded down to the next lowest whole number of
shares, at an exercise price equal to the aggregate exercise price of such
option at the time of the Merger divided by the number of shares of InVision
Common Stock issuable upon the exercise of such option following the Merger,
rounded up to the next highest cent. The total number of shares of InVision
Common Stock that may be issued in connection with the Merger, including
pursuant to the exercise of Quantum stock options assumed by InVision, will be
777,000 shares. It is a condition to InVision's obligations to consummate the
Merger that all of the outstanding shares entitled to vote on the Merger be
voted to approve and adopt the Reorganization Agreement and approve the Merger.
On September 5, 1997, the closing sales price of InVision Common Stock was
$15.25 per share. Assuming all of the 777,000 shares of InVision Common Stock
are issued to the shareholders and option holders of Quantum, such shareholders
and option holders will hold approximately 6.5% of the outstanding shares of
InVision Common Stock following the Merger.
It is also a condition to the consummation of the Merger that the Quantum
Articles of Incorporation be amended to clarify that the Quantum Series A
Preferred Stock and Quantum Series C Preferred Stock convert to Quantum Common
Stock at a rate of 1.228 shares and 1 share, respectively. Approval of the
proposed amendment of the Quantum Articles of Incorporation is subject to
approval by the holders of (i) a majority of the outstanding shares of the
Quantum Common Stock entitled to vote, (ii) a majority of the outstanding shares
of Quantum Series A Preferred Stock entitled to vote, (iii) a majority of the
outstanding shares of Quantum Series B Preferred Stock entitled to vote, (iv) a
majority of the outstanding shares of Quantum Series C Preferred Stock entitled
to vote, (v) a majority of the outstanding shares of Quantum Series D Preferred
Stock entitled to vote, and (vi) 2/3 of the votes represented by the shares of
Quantum Series A Preferred Stock and Quantum Series C Preferred Stock entitled
to vote, voting together as a single class. For all voting purposes, each share
of Quantum Series A Preferred Stock is entitled to 1.228 votes, and all other
classes and series of Quantum capital stock are entitled to one vote per share
of such capital stock.
After careful consideration, the Quantum Board of Directors has unanimously
determined that the Merger and the proposed amendment to the Quantum Articles of
Incorporation are fair and in the best interests of Quantum and its shareholders
and has approved and adopted the Reorganization Agreement, approved the Merger
and approved the amendment of the Quantum Articles of Incorporation. The Board
of Directors unanimously recommends that the shareholders of Quantum vote for
the approval and adoption of the Reorganization Agreement, approval of the
Merger and approval of the amendment of the Quantum Articles of Incorporation.
If the requisite approval of the shareholders of Quantum is received, and
the other conditions to closing the Merger are met, the Merger is expected to be
consummated in September 1997.
We urge you to read carefully the enclosed Proxy Statement/Prospectus for
more detailed information concerning Quantum, InVision, the Reorganization
Agreement, the proposed Merger and the amendment of the Quantum Articles of
Incorporation.
Whether or not you plan to attend the Quantum Shareholders Meeting, please
complete, sign and date the enclosed proxy and return it in the enclosed
envelope, which requires no postage. If you attend the Quantum Shareholders
Meeting in person, you may, if you wish, vote your shares personally on all
matters whether or not you have previously returned a proxy. Your prompt
cooperation will be greatly appreciated.
Sincerely,
Dale Sheets
PRESIDENT
1
<PAGE>
Quantum Magnetics, Inc.
7742 Kenamar Court
San Diego, California 92121-2425
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To be held on September 29, 1997
TO THE SHAREHOLDERS OF QUANTUM MAGNETICS, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the "Quantum
Shareholders Meeting") of Quantum Magnetics, Inc., a California corporation
("Quantum"), will be held at the principal offices of Quantum located at 7742
Kenamar Court, San Diego, California 92121-2425, on September 29, 1997 at
10:00 a.m. local time, for the following purposes:
1. To consider and vote upon a proposal to (i) approve and adopt the
Agreement and Plan of Merger and Reorganization, dated as of September 3, 1997
(the "Reorganization Agreement"), among Quantum, InVision Technologies, Inc., a
Delaware corporation ("InVision"), and QP Acquisition Corp., a California
corporation and a wholly owned subsidiary of InVision ("Merger Sub"), and (ii)
approve the merger of Merger Sub with and into Quantum (the "Merger");
2. To consider and vote upon a proposal to amend the Quantum Articles of
Incorporation; and
3. To transact such other business as may properly come before the Quantum
Shareholders Meeting or any adjournments or postponements thereof.
The proposed Merger is more fully described in, and each of the
Reorganization Agreement and the proposed amendment to the Quantum Articles of
Incorporation is annexed to, the attached Proxy Statement/Prospectus. The
holders of record of Quantum capital stock at the close of business on September
5, 1997 are entitled to notice of and to vote at the Quantum Shareholders
Meeting and any adjournments or postponements thereof.
All shareholders are cordially invited to attend the Quantum Shareholders
Meeting. However, to ensure your representation at the Quantum Shareholders
Meeting, you are urged to sign and return the enclosed proxy as promptly as
possible in the enclosed postage-prepaid envelope. Any shareholder attending
the Quantum Shareholders Meeting may vote in person even if the shareholder has
returned a proxy.
THE QUANTUM BOARD HAS UNANIMOUSLY APPROVED AND ADOPTED THE REORGANIZATION
AGREEMENT, APPROVED THE MERGER AND APPROVED THE AMENDMENT OF THE QUANTUM
ARTICLES OF INCORPORATION, AND UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS OF
QUANTUM VOTE FOR THE APPROVAL AND ADOPTION OF THE REORGANIZATION AGREEMENT AND
APPROVAL OF THE MERGER AND FOR THE AMENDMENT OF THE QUANTUM ARTICLES OF
INCORPORATION.
By order of the Board of Directors
Dale Sheets
President
San Diego, California
September , 1997
YOUR VOTE IS VERY IMPORTANT.
PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY PROMPTLY WHETHER OR NOT
YOU PLAN TO ATTEND THE QUANTUM SHAREHOLDERS MEETING.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 10, 1997
QUANTUM MAGNETICS, INC.
PROXY STATEMENT
--------------
INVISION TECHNOLOGIES, INC.
PROSPECTUS
--------------
This Proxy Statement/Prospectus is being furnished to holders of common
stock, no par value per share ("Quantum Common Stock"), Series A Preferred
Stock, no par value per share ("Quantum Series A Stock"), Series B Preferred
Stock, no par value per share ("Quantum Series B Stock"), Series C Preferred
Stock, no par value per share ("Quantum Series C Stock"), and Series D Preferred
Stock, no par value per share ("Quantum Series D Stock" and together with
Quantum Common Stock, Quantum Series A Stock, Quantum Series B Stock and Quantum
Series C Stock, "Quantum Capital Stock"), of Quantum Magnetics, Inc., a
California corporation ("Quantum"), in connection with the solicitation of
proxies by the Quantum Board of Directors for use at Quantum's Special Meeting
of Shareholders or any adjournment or postponement thereof (the "Quantum
Shareholders Meeting"). The Quantum Shareholders Meeting is being called to
consider and vote upon (i) a proposal to approve and adopt the Agreement and
Plan of Merger and Reorganization, dated as of September 3, 1997 (the
"Reorganization Agreement"), among Quantum, InVision Technologies, Inc., a
Delaware corporation ("InVision"), and QP Acquisition Corp., a California
corporation and a wholly owned subsidiary of InVision ("Merger Sub"), and
approve the merger of Merger Sub with and into Quantum (the "Merger"), and (ii)
a proposal to amend the Quantum Articles of Incorporation.
Upon consummation of the proposed Merger, Quantum will become a wholly
owned subsidiary of InVision and each outstanding share of Quantum Capital Stock
(except for any such shares held by InVision) will be converted into the right
to receive a fraction of a share of common stock of InVision, par value $0.001
per share ("InVision Common Stock"), in accordance with the terms of the
Reorganization Agreement. Holders of Quantum Capital Stock will receive cash in
lieu of any fractional shares of InVision Common Stock to which such
shareholders would have been entitled. Each outstanding option to purchase
Quantum Common Stock ("Quantum Option") will be converted into an option to
purchase the same number of shares of InVision Common Stock that would have been
received had the Quantum Option been exercised in full immediately prior to the
effective time of the Merger, rounded down to the next lowest whole number of
shares, at an exercise price equal to the aggregate exercise price of such
option at the time of the Merger divided by the number of shares of InVision
Common Stock issuable upon the exercise of such option following the Merger,
rounded up to the next highest cent. It is a condition to InVision's
obligations to consummate the Merger that all of the outstanding shares entitled
to vote on the Merger be voted to approve and adopt the Reorganization Agreement
and approve the Merger. The total number of shares of InVision Common Stock to
be issued in connection with the Merger, including pursuant to the exercise of
Quantum stock options assumed by InVision, will be 777,000 shares. On September
5, 1997, the closing sales price of InVision Common Stock was $15.25 per share.
Assuming all of the 777,000 shares of InVision Common Stock are issued to the
shareholders and option holders of Quantum, such shareholders and option holders
will hold approximately 6.5% of the outstanding shares of InVision Common Stock
following the Merger.
It is also a condition to the consummation of the Merger that the Quantum
Articles of Incorporation be amended to clarify that the Quantum Series A Stock
and Quantum Series C Stock convert to Quantum Common Stock at a rate of 1.228
shares and 1 share, respectively. Approval of the proposed amendment of the
Quantum Articles of Incorporation is subject to approval by the holders of (i) a
majority of the outstanding shares of Quantum Common Stock entitled to vote,
(ii) a majority of the outstanding shares of Quantum Series A Stock entitled to
vote, (iii) a majority of the outstanding shares of Quantum Series B Stock
entitled to vote, (iv) a majority of the outstanding shares of Quantum Series C
Stock entitled to vote, (v) a majority of the outstanding shares of Quantum
Series D Preferred Stock entitled to vote, and (vi) 2/3 of the votes represented
by the shares of Quantum Series A Stock and Quantum Series C Stock entitled to
vote, voting together as a single class. For all voting purposes, each share of
Quantum Series A Stock is entitled to 1.228 votes, and all other classes and
series of Quantum Capital Stock are entitled to one vote per share of such
capital stock. If the requisite approval of the shareholders of Quantum is
received, and the other conditions to closing the Merger are met, the Merger is
expected to be consummated in September 1997.
This Proxy Statement/Prospectus constitutes the Prospectus of InVision with
respect to up to 777,000 shares of InVision Common Stock to be issued in the
Merger in exchange for outstanding shares of Quantum Capital Stock and options
to purchase Quantum Common Stock.
All information contained or incorporated by reference herein concerning
InVision has been furnished by InVision, and all information contained herein
concerning Quantum has been furnished by Quantum.
This Proxy Statement/Prospectus and the accompanying form of proxy are
first being mailed to shareholders of Quantum on or about September , 1997.
--------------
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS PROXY STATEMENT/PROSPECTUS.
SHAREHOLDERS OF QUANTUM ARE STRONGLY URGED TO READ AND CONSIDER CAREFULLY THIS
PROXY STATEMENT/PROSPECTUS IN ITS ENTIRETY, PARTICULARLY THE MATTERS REFERRED
TO UNDER "RISK FACTORS" BEGINNING AT PAGE 16.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
--------------
The date of this Proxy Statement/Prospectus is September ,1997.
<PAGE>
AVAILABLE INFORMATION
InVision is subject to the information reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Securities and Exchange Commission (the "SEC"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the SEC at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional offices
located at Seven World Trade Center, Suite 1300, New York, New York 10048, and
at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such material may be obtained by mail from the Public
Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The SEC also maintains a Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC at the address
http://www.sec.gov. InVision Common Stock is listed on the Nasdaq National
Market, and such reports, proxy statements and other information can also be
inspected and copied at the offices of The Nasdaq Stock Market, 1735 K Street,
N.W., Washington DC 20006.
InVision has filed with the SEC a registration statement on Form S-4
(herein referred to, together with all amendments and exhibits, as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"). This Proxy Statement/Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the SEC. For further
information, reference is hereby made to the Registration Statement. Copies of
the Registration Statement and the exhibits and schedules are available as
described above.
--------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS IN
CONNECTION WITH THE SOLICITATION OF PROXIES OR THE OFFERING OF SECURITIES MADE
HEREBY, AND, IF GIVEN, ANY SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY INVISION, QUANTUM OR ANY OTHER PERSON. THIS
PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OR THE SOLICITATION OF A PROXY,
IN ANY JURISDICTION TO OR FROM ANY PERSON TO OR FROM WHOM IT IS NOT LAWFUL TO
MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY
OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES HEREUNDER
SHALL CREATE UNDER ANY CIRCUMSTANCES ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF INVISION OR QUANTUM SINCE THE DATE HEREOF, OR THAT ANY
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE AS OF WHICH
SUCH INFORMATION IS PROVIDED.
--------------
InVision intends to furnish its stockholders with annual reports containing
audited consolidated financial statements examined by its independent public
accountants and quarterly reports containing unaudited consolidated financial
information for the first three quarters of each fiscal year.
This Proxy Statement/Prospectus contains trademarks of InVision and Quantum
and may contain trademarks of others companies.
iii
<PAGE>
TABLE OF CONTENTS
PAGE
AVAILABLE INFORMATION.......................................................iii
SUMMARY..................................................................... 1
The Companies........................................................... 1
The Merger.............................................................. 2
Amendment of the Quantum Articles of Incorporation...................... 9
The Quantum Shareholders Meeting........................................ 9
Market and Market Prices................................................ 10
Selected Historical and Pro Forma Financial Information................. 11
Comparative Per Share Data.............................................. 14
FORWARD LOOKING STATEMENTS.................................................. 16
RISK FACTORS................................................................ 16
Risk Factors Relating to the Merger..................................... 16
No Fairness Opinion..................................................... 16
Interests of Certain Persons in the Merger.............................. 16
Certain Federal Income Tax Considerations............................... 16
Uncertainty Relating to Integration of Technologies..................... 17
Uncertainty Relating to Integration of Operations....................... 17
Potential Dilutive Effect to Stockholders; Transaction Expenses and
Writeoffs............................................................. 17
Risk Factors Relating to Holding InVision Common Stock.................. 17
History of Losses; No Assurance of Profitability........................ 17
Single Product; Uncertainty of Market Acceptance........................ 18
Fluctuations in Operating Results....................................... 18
Dependence on Suppliers................................................. 18
Competition............................................................. 19
Dependence on Large Orders; Customer Concentrations; Lengthy
Sales Cycle........................................................... 19
Public Agency Contract and Budget Considerations........................ 20
Limited Field Operations; Dependence on Operator Performance............ 20
Limited Manufacturing Experience; Management of Growth.................. 21
No Assurance of Continued Certification; Risk of Certification
of Competing Technologies; Risk of Changing Standards................. 21
Competition for FAA Grants.............................................. 22
Dependence on Key Personnel............................................. 22
Dependence on Proprietary Technology.................................... 22
International Business; Fluctuation in Exchange Rates; Risk
of Change in Foreign Regulations...................................... 23
Product Liability Risks; Risk of Failure to Detect Explosives;
Availability of Insurance............................................. 24
Risks Associated with Potential Acquisitions............................ 24
Concentration of Ownership; Control by Management....................... 24
Anti-takeover Provisions................................................ 24
Volatility of Stock Price............................................... 25
Shares Eligible for Future Sale; Registration Rights.................... 25
iv
<PAGE>
COMPARATIVE STOCK PRICE DATA AND DIVIDEND HISTORY........................... 26
THE QUANTUM SHAREHOLDERS MEETING.............................................27
Purpose of the Quantum Shareholders Meeting............................. 27
Date, Time and Place of Quantum Shareholders Meeting.................... 27
Record Date and Outstanding Shares...................................... 27
Voting of Proxies....................................................... 27
Vote Required........................................................... 27
Board Recommendation.................................................... 28
Quorum; Abstentions..................................................... 28
Solicitation of Proxies; Expenses....................................... 28
APPROVAL OF THE MERGER AND RELATED TRANSACTIONS............................. 29
Background of the Merger................................................ 29
Quantum Reasons for the Merger.......................................... 30
InVision Reasons for the Merger......................................... 32
Merger Consideration.................................................... 32
Stock Options........................................................... 34
Quantum Warrants........................................................ 35
Conversion of Shares; Procedures for Exchange of Certificates;
No Fractional Shares.................................................. 35
Effect on Certificates.................................................. 35
Appraisal Rights........................................................ 36
Escrow Agreement........................................................ 37
Voting Agreements....................................................... 38
Affiliate Agreements.................................................... 39
Employment Agreements................................................... 40
NonCompetition Agreements............................................... 40
Releases................................................................ 40
Interests of Certain Persons in the Merger.............................. 41
Listing of InVision Common Stock on the Nasdaq National Market.......... 41
Merger Expenses and Fees and Other Costs................................ 41
Accounting Treatment.................................................... 41
Certain Federal Income Tax Consequences................................. 42
THE REORGANIZATION AGREEMENT................................................ 43
General................................................................. 43
Merger Consideration.................................................... 44
Appraisal Rights........................................................ 44
Corporate Matters....................................................... 44
Conditions to the Merger................................................ 44
Representations and Warranties.......................................... 47
Covenants............................................................... 47
Non-Solicitation........................................................ 49
Indemnification......................................................... 49
Termination............................................................. 50
Expenses................................................................ 51
Amendments; Waiver...................................................... 51
APPROVAL OF THE AMENDMENT OF
THE QUANTUM ARTICLES OF INCORPORATION....................................... 51
v
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION................................... 52
Notes to Unaudited Pro Forma Combined Condensed
Financial Statements of InVision and Quantum............................ 55
INVISION SELECTED CONSOLIDATED FINANCIAL DATA............................... 56
INVISION MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................ 58
Overview................................................................ 58
Results of Operations................................................... 59
Comparison of Six Months Ended June 30, 1997 and 1996................... 59
Comparison of Fiscal Years Ended December 31, 1996, 1995 and 1994....... 61
Liquidity and Capital Resources......................................... 62
INVISION BUSINESS........................................................... 63
General................................................................. 63
Industry Background..................................................... 63
The InVision Technology Advantage....................................... 65
Growth Strategy......................................................... 67
Product Development..................................................... 67
Customers............................................................... 68
Sales and Marketing..................................................... 69
Backlog................................................................. 70
Manufacturing........................................................... 70
Recent Developments..................................................... 71
Competition............................................................. 71
Intellectual Property and Proprietary Rights............................ 72
Employees ............................................................. 73
Facilities.............................................................. 73
Legal Proceedings....................................................... 74
INVISION MANAGEMENT......................................................... 74
Executive Officers and Directors........................................ 74
Executive Compensation.................................................. 76
Recent Option Grants.................................................... 76
Options Exercised in Last Fiscal Year and Fiscal Year-End
Option Values......................................................... 76
Employment Agreements................................................... 77
401(k) Plan............................................................. 77
Stock Option Plans...................................................... 77
INVISION CERTAIN TRANSACTIONS............................................... 79
Additional Information Regarding Major Stockholder...................... 80
INVISION PRINCIPAL STOCKHOLDERS ............................................ 81
QUANTUM SELECTED CONSOLIDATED FINANCIAL DATA................................ 83
QUANTUM MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................... 84
Overview................................................................ 84
Results of Operations................................................... 84
Comparison of Nine Months Ended June 30, 1997 and 1996.................. 85
Comparison of Fiscal Year Ended September 30, 1996 and 1995............. 86
vi
<PAGE>
Liquidity and Capital Resources......................................... 86
QUANTUM BUSINESS............................................................ 87
General................................................................. 87
Background.............................................................. 87
Prototypes.............................................................. 88
QUANTUM PRINCIPAL SHAREHOLDERS.............................................. 89
DESCRIPTION OF INVISION CAPITAL STOCK....................................... 92
InVision Common Stock................................................... 92
InVision Preferred Stock................................................ 92
InVision Warrants....................................................... 92
Registration Rights..................................................... 93
Transfer Agent.......................................................... 93
COMPARISON OF RIGHTS OF HOLDERS OF INVISION COMMON STOCK
AND HOLDERS OF QUANTUM CAPITAL STOCK........................................ 93
Liquidation Preference.................................................. 93
Dividends............................................................... 94
Redemption ............................................................. 94
Voting.................................................................. 94
Amendment of Charter Documents.......................................... 95
Anti-Dilution Protection .............................................. 95
Anti-Takeover Statutes.................................................. 96
Percentage of Voting Stock; Influence Over Affairs...................... 96
Shareholder Actions..................................................... 96
Liquidity............................................................... 96
LEGAL MATTERS............................................................... 97
EXPERTS..................................................................... 97
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS..................................F-1
APPENDICES:
APPENDIX A - Agreement and Plan of Merger and Reorganization
APPENDIX B - Proposed Amendment to the Quantum Articles of Incorporation
APPENDIX C - California Statutes Regarding Appraisal Rights
vii
<PAGE>
SUMMARY
THE FOLLOWING CONTAINS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE
IN THIS PROXY STATEMENT/PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN A COMPLETE
STATEMENT OF ALL MATERIAL ELEMENTS OF THE PROPOSALS TO BE VOTED ON AND IS
QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION APPEARING ELSEWHERE
IN THIS PROXY STATEMENT/PROSPECTUS, INCLUDING THE INFORMATION UNDER "RISK
FACTORS" AND IN THE INFORMATION AND DOCUMENTS ANNEXED HERETO.
THE COMPANIES
INVISION TECHNOLOGIES, INC.
InVision Technologies, Inc. ("InVision") is the worldwide leader in
explosive detection technology. InVision develops, manufactures, markets and
supports an explosive detection system ("EDS") for civil aviation security
based on advanced computed tomography ("CT" or "CAT Scan") technology. To
date, InVision's CTX 5000 is the only EDS to be certified by the Federal
Aviation Administration ("FAA") for use in the inspection of checked luggage
on commercial flights. The CTX 5000 is capable of capturing and processing
substantially more data than other explosive detection systems, and of
rendering three-dimensional images of suspicious objects. By combining the
superior capability of CT technology and advanced software for image
processing with simple user interfaces, InVision's CTX 5000 is capable of
providing high detection and low false alarm rates, as well as advanced
threat resolution capability and increased operator efficiency.
InVision's executive offices are located at 3420 E. Third Avenue, Foster
City, California 94404 and its telephone number is (650) 578-1930.
QUANTUM MAGNETICS, INC.
Quantum Magnetics, Inc. ("Quantum") was founded in 1987 to develop and
commercialize patented and proprietary technology for inspection, detection and
analysis of explosives and other materials based on a state-of-the-art, low-cost
version of magnetic resonance. Its products, in the prototype stage, include
devices to inspect checked and carry-on luggage and cargo at airports and
customs facilities, a small scanner to detect explosives and illegal drugs in
mail and other small packages, and an advanced security system for the detection
of liquid explosives and flammables in sealed glass or plastic containers.
Quantum's executive offices are located at 7742 Kenamar Court, San Diego,
California 92121-2425, and its telephone number is (619) 566-9200.
QP ACQUISITION CORP.
QP Acquisition Corp. is a corporation recently organized by InVision for
the purpose of effecting the Merger. It has no material assets and has not
engaged in any activities except in connection with the Merger.
QP Acquisition Corp.'s executive offices are located at 3420 E. Third
Avenue, Foster City, California 94404, and its telephone number
is (650) 578-1930.
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THE MERGER
GENERAL
At the Effective Time (as defined in "-Effective Time of the Merger;
Closing Date" below), Merger Sub will merge with and into Quantum, the separate
existence of Merger Sub will cease and Quantum will become a wholly owned
subsidiary of InVision. It is currently anticipated that the Effective Time
will occur during September 1997.
Subject to the terms and conditions of the Reorganization Agreement, at the
Effective Time, by virtue of the Merger and without any action on the part of
InVision, Merger Sub, Quantum or any holder of shares of Quantum Capital Stock,
the following will occur:
CONVERSION OF QUANTUM CAPITAL STOCK. At the Effective Time, each share of
Quantum Capital Stock then outstanding (except for any such shares held by
InVision) will be converted into the right to receive a fraction of a share of
InVision Common Stock in accordance with the terms of the Reorganization
Agreement. The total number of shares of InVision Common Stock to be issued in
connection with the Merger, including shares issuable pursuant to the exercise
of Quantum stock options assumed by InVision, will be 777,000 shares. Upon the
consummation of the Merger, (i) each then outstanding share of Quantum Common
Stock will automatically be converted into a fraction of a share of InVision
Common Stock equal to the Applicable Fraction (defined below) and (ii) each then
outstanding share of each series of Quantum Preferred Stock will be converted
into a fraction of a share of InVision Common Stock equal to (A) the fraction
obtained by dividing the per share liquidation preference of such series of
Quantum Preferred Stock under the Quantum Articles of Incorporation by the
Designated InVision Stock Price (as defined below) plus (B) in the case of
Quantum Series A Stock and Quantum Series C Stock, the fraction obtained by
multiplying the number of shares of Quantum Common Stock into which one share of
such series of Quantum Preferred Stock converts immediately prior to the Merger
by the Applicable Fraction. Each share of Quantum Series A Stock, Quantum
Series B Stock and Quantum Series C Stock has a liquidation preference of $1.50,
$0.75 and $1.00, respectively, and each share of Quantum Series A Stock and
Quantum Series C Stock converts into 1.228 shares and 1 share of Quantum Common
Stock, respectively. InVision holds all of the outstanding shares of Quantum
Series D Stock and intends to convert them to Quantum Common Stock immediately
prior to the Effective Time. Of the shares of InVision Common Stock issued as
set forth above, 12% of such shares issued to each Quantum shareholder will be
placed in escrow to secure Quantum's indemnification obligations under the
Reorganization Agreement. See "-Escrow Fund." Holders of Quantum Capital Stock
will receive cash in lieu of any fractional shares of InVision Common Stock to
which such shareholders would have been entitled. On September 5, 1997, the
closing sales price of InVision Common Stock was $15.25 per share.
The "Applicable Fraction" will be the fraction: (A) having a numerator
equal to the amount determined by subtracting (1) the aggregated liquidation
preference of all of the shares of Quantum Series A, Series B and Series C Stock
outstanding at the Effective Time from (2) the amount determined by multiplying
(i) 777,000 by (ii) the Designated InVision Stock Price; and (B) having a
denominator equal to the amount determined by multiplying (1) the Adjusted Fully
Diluted Quantum Share Amount (as defined below) by (2) the Designated InVision
Stock Price. The "Adjusted Fully Diluted Quantum Share Amount" will be the sum
of (i) the number of shares of Quantum Common Stock, (ii) the number of shares
of Quantum Common Stock issuable upon conversion of all of the Quantum Series A
Stock and Quantum Series C Stock, and (iii) the aggregate number of shares of
Quantum Common Stock purchasable under or otherwise subject to all stock options
(whether vested or unvested) to purchase Quantum Common Stock, in each case
outstanding immediately prior to the Effective Time, less any such shares held
by or issuable to InVision. The "Designated InVision Stock Price" will be the
average of the closing sale prices of a share of InVision Common Stock as
reported on the Nasdaq National Market for each of the sixty (60) consecutive
trading days ending (and including) the third trading day prior to the Quantum
Shareholders Meeting, weighted in accordance with the number of shares of
InVision Common Stock traded on each such trading day.
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Although the conversion rates cannot be calculated at this time, for
illustrative purposes only, the conversion rates would be as follows at the
Designated InVision Stock Prices shown below (assuming exercise in full of the
outstanding warrants to purchase Quantum Capital Stock prior to consummation of
the Merger):
SERIES A SERIES B SERIES C
DESIGNATED INVISION CONVERSION CONVERSION CONVERSION CONVERSION
STOCK PRICE RATE RATE RATE RATE
-------------------------- ---------- ---------- ---------- -----------
$ 17.00. . . . . . . . . . . 0.14380 0.04412 0.10407 0.04525
16.50. . . . . . . . . . . 0.14522 0.04545 0.10483 0.04423
16.00. . . . . . . . . . . 0.14673 0.04688 0.10564 0.04314
15.50. . . . . . . . . . . 0.14833 0.04839 0.10650 0.04199
15.00. . . . . . . . . . . 0.15005 0.05000 0.10742 0.04075
14.50. . . . . . . . . . . 0.15188 0.05172 0.10840 0.03944
14.00. . . . . . . . . . . 0.15384 0.05357 0.10946 0.03803
13.50. . . . . . . . . . . 0.15596 0.05556 0.11059 0.03651
13.00. . . . . . . . . . . 0.15822 0.05769 0.11180 0.03488
12.50. . . . . . . . . . . 0.16067 0.06000 0.11312 0.03312
12.00. . . . . . . . . . . 0.16333 0.06250 0.11454 0.03121
From the day prior to the announcement of the Merger through September 5,
1997, the closing prices per share of InVision Common Stock ranged from $14.63
to $15.19. See "-Market and Market Prices." The average of the closing sale
prices of a share of InVision Common Stock as reported on the Nasdaq National
Market for each of the sixty (60) day consecutive trading days ending (and
including) September 5, 1997, weighted in accordance with the number of shares
of InVision Common Stock traded on each such trading day, was $14.47.
QUANTUM STOCK OPTIONS. At the Effective Time, all rights with respect to
Quantum Common Stock under each option granted under Quantum's 1994 Qualified
and Nonqualified Stock Option Plan (each, a "Quantum Option") then outstanding
shall be converted into and become rights with respect to InVision Common Stock,
and InVision shall assume each such Quantum Option in accordance with the terms
of the stock option plan under which it was issued and the stock option
agreement by which it is evidenced (with appropriate adjustments based upon the
same ratio at which Quantum Common Stock converts to the right to receive
InVision Common Stock as described in "-Conversion of Quantum Capital Stock").
InVision intends to file with the Commission a Registration Statement on Form
S-8 relating to the shares of InVision Common Stock issuable with respect to the
assumed Quantum Options within sixty (60) days after the Effective Time.
QUANTUM WARRANTS. The outstanding warrants exercisable for Quantum Capital
Stock will become fully exercisable and will terminate if not exercised prior to
the consummation of the Merger. On September 3, 1997, there were outstanding
warrants to purchase 211,917 shares of Quantum Series A Stock and 642,076 shares
of Quantum Series C Stock at exercise prices of $1.50 and $0.50, respectively.
NON-SOLICITATION
Pursuant to the Reorganization Agreement, Quantum has agreed that it will
not, and will not authorize or permit its officers, directors, employees,
agents, attorneys, accountants, ADVISORS AND REPRESENTATIVES, DIRECTLY OR
indirectly, to solicit or exchange the initiation of any inquiry, proposal or
offer from any person (other than
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InVision) relating to a possible Acquisition Transaction (as defined in "The
Reorganization Agreement-Non- Solicitation"), participate in any discussions or
negotiations or enter into any agreement with, or provide any non-public
information to, any person (other than InVision) relating to or in connection
with a possible Acquisition Transaction, or consider, entertain or accept any
proposal or offer from any person (other than InVision) relating to a possible
Acquisition Transaction. In addition, Quantum will promptly notify InVision in
writing of any material inquiry, proposal or offer relating to a possible
Acquisition Transaction that is received by Quantum or any of its officers,
directors, employees, agents, attorneys, accountants, advisors and
representatives during the period prior to the consummation of the Merger.
CONDUCT OF BUSINESS
Pursuant to the Reorganization Agreement, Quantum has made certain
covenants regarding the conduct of Quantum's business during the period from the
date of the execution of the Reorganization Agreement through the Effective
Time, including, without limitation, covenants to: (i) conduct its business and
operations in the ordinary course and in accordance with past practices; (ii)
use reasonable efforts to preserve its business organization and the services of
its current officers and employees and maintain its relations and goodwill with
suppliers, customers, landlords, creditors, employees and other persons; (iii)
maintain insurance policies; and (iv) cause its officers to report regularly to
InVision concerning the status of the business of Quantum. In addition, Quantum
has agreed not to take or to agree to take certain actions relating to: (i)
dividends or distributions; (ii) the sale or issuance of securities; (iii) the
amendment of stock option plans; (iv) the amendment of charter documents; (v)
the formation of subsidiaries or acquisition of equity interests; (vi) capital
expenditures; (vii) material contracts; (viii) the acquisition, lease or license
of or sale or disposal of assets; (ix) the loaning of money; (x) the
establishment or adoption of employee benefit plans; (xi) the hiring of new
employees and consultants; (xii) material changes in accounting; (xiii) tax
elections; and (xiv) commencement or settlement of material legal proceedings.
See "The Reorganization Agreement-Covenants-Certain Covenants of Quantum."
CONDITIONS TO THE MERGER
The obligations of InVision and Merger Sub to effect the Merger and
otherwise consummate the transactions contemplated by the Reorganization
Agreement are subject to the satisfaction of certain conditions relating to,
among other things, (i) the accuracy of the representations and warranties of
Quantum contained in the Reorganization Agreement; (ii) the performance by
Quantum of covenants and obligations contained in the Reorganization Agreement;
(iii) the approval and adoption of the Reorganization Agreement and approval of
the Merger by all of the Quantum shareholders; (iv) receipt of certain consents;
(v) receipt of certain agreements, letters, certificates, legal opinions and
resignations (including a letter relating to the appropriateness of
pooling-of-interests accounting treatment); (vi) continued employment of certain
employees of Quantum; (vii) evidence of termination of Quantum's employee
benefit plans; (viii) the effectiveness of the Registration Statement of which
this Proxy Statement/Prospectus forms a part; (ix) the listing of the InVision
Common Stock to be issued in the Merger on the Nasdaq National Market; (x) the
absence of certain litigation or administrative actions or proceedings; and (xi)
the absence of restraining orders, injunctions and other legal impediments to
the Merger. InVision and Merger Sub may waive any of the conditions to the
consummation of the Merger in their discretion.
The obligation of Quantum to effect the Merger and otherwise consummate the
transactions contemplated by the Reorganization Agreement is subject to the
satisfaction of certain conditions relating to (i) the accuracy of the
representations and warranties of InVision contained in the Reorganization
Agreement; (ii) the performance by InVision of covenants and obligations
contained in the Reorganization Agreement; (iii) the receipt of legal opinions;
(iv) the listing of the InVision Common Stock to be issued in the Merger on the
Nasdaq National Market; and (v) the absence of restraining orders, injunctions
and other legal impediments to the Merger. Quantum may waive any of the
conditions to the consummation of the Merger in its discretion. See "The
Reorganization Agreement-Conditions to the Merger."
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TERMINATION
The Reorganization Agreement may be terminated prior to the Effective Time,
whether before or after approval of the Merger by the shareholders of Quantum:
(i) by InVision if InVision reasonably determines that the timely satisfaction
of any condition to InVision closing the Merger has become impossible (other
than as a result of any failure on the part of InVision or Merger Sub to comply
with or perform any covenant or obligation of InVision or Merger Sub set forth
in the Reorganization Agreement); (ii) by Quantum if Quantum reasonably
determines that the timely satisfaction of any condition to Quantum closing the
Merger has become impossible (other than as a result of any failure on the part
of Quantum to comply with or perform any covenant or obligation set forth in the
Reorganization Agreement or in any other agreement or instrument delivered to
InVision); (iii) by either InVision or Quantum at or after September 30, 1997 if
any condition to such party to the closing of the Merger has not been satisfied
by such time; (iv) subject to certain conditions, by either InVision or Quantum
if the Merger shall not have been consummated by December 15, 1997; (v) by
InVision if InVision shall have determined that there has occurred an event or
series of events resulting, either individually or in the aggregate, in a
material adverse effect on the business, condition, assets, liabilities,
operations, financial performance or prospects of Quantum since the date of the
Reorganization Agreement; or (vi) by mutual consent of InVision and Quantum.
See "The Reorganization Agreement-Termination."
ESCROW FUND
Twelve percent (12%) of the shares of InVision Common Stock issuable to
each shareholder of Quantum in the Merger will be deposited into an escrow fund
to secure certain indemnification obligations of Quantum under the
Reorganization Agreement. The escrow will terminate one year from the closing
of the Merger, provided that shares representing 125% of the value of any
amounts in dispute (based on the Designated InVision Stock Price) shall continue
to be held in escrow until resolution of such disputes. See "Approval of the
Merger and Related Transactions-Escrow Agreement." BY APPROVING THE MERGER
AGREEMENT, QUANTUM SHAREHOLDERS WILL BE DEEMED TO HAVE CONSENTED TO THE
APPOINTMENT OF RANDALL R. LUNN, A DIRECTOR OF QUANTUM AND AN AFFILIATE OF TECHNO
VENTURE MANAGEMENT, WHICH IS A SHAREHOLDER OF QUANTUM, TO ACT AS AGENT ON BEHALF
OF QUANTUM'S SHAREHOLDERS AND TO GIVE AND RECEIVE NOTICES AND COMMUNICATIONS, TO
AUTHORIZE DELIVERY TO INVISION OF INVISION COMMON STOCK FROM THE ESCROW FUND, TO
OBJECT TO SUCH DELIVERIES, TO NEGOTIATE AND AGREE TO SETTLEMENTS AND COMPROMISES
OF SUCH CLAIMS AND TO TAKE CERTAIN OTHER ACTIONS ON BEHALF OF QUANTUM'S
SHAREHOLDERS, ALL AS MORE FULLY DESCRIBED IN SECTION 10.1 OF THE REORGANIZATION
AGREEMENT ATTACHED HERETO AS APPENDIX A AND INCORPORATED BY REFERENCE HEREIN AND
IN THE ESCROW AGREEMENT ATTACHED THERETO.
EXPENSES AND TERMINATION FEES
Pursuant to the Reorganization Agreement, all fees and expenses incurred in
connection with the Reorganization Agreement and the transactions contemplated
by the Reorganization Agreement shall be paid by the party incurring such
expenses, whether or not the Merger is consummated; provided, however, that if
Quantum or any person on its behalf shall incur expenses and fees in excess of
$50,000, such event would constitute a breach of a covenant in the
Reorganization Agreement and such excess amount of fees would be recoverable by
InVision pursuant to the indemnification provisions and obligations of Quantum
under the Reorganization Agreement and the Escrow Agreement (as defined under
"Approval of the Merger and Related Transactions-Escrow Agreement"). See "The
Reorganization Agreement-Indemnification" and "-Expenses."
EFFECTIVE TIME OF THE MERGER; CLOSING DATE
The Merger will become effective upon the filing of an Agreement of Merger
with the Secretary of State of the State of California or at such later time as
may be specified in the Agreement of Merger (the "Effective Time"). The
consummation of the transactions contemplated by the Reorganization Agreement
shall take place on a date to be designated by InVision (the "Closing Date").
Assuming that all of the conditions to the Merger are met or waived, it is
anticipated that the Closing Date will occur during September 1997.
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BY ADOPTING AND APPROVING THE REORGANIZATION AGREEMENT AND APPROVING THE
MERGER, THE SHAREHOLDERS WILL BE APPROVING THE AMENDMENT AND RESTATEMENT OF
QUANTUM'S ARTICLES OF INCORPORATION TO BE EFFECTIVE UPON THE MERGER TO BE AS SET
FORTH AS EXHIBIT B TO THE REORGANIZATION AGREEMENT, WHICH IS ATTACHED TO THIS
PROXY STATEMENT/PROSPECTUS AS APPENDIX A AND INCORPORATED BY REFERENCE HEREIN.
STOCK OWNERSHIP FOLLOWING THE MERGER
Based upon the number of shares of InVision Common Stock issued and
outstanding as of August 20, 1997, and after giving effect to the additional
shares of InVision Common Stock that are proposed to be issued in the Merger,
assuming the exercise of all Quantum Options immediately following the Merger
(and assuming no exercise of outstanding options to purchase InVision Common
Stock), the former holders of Quantum Capital Stock and Quantum Options would
hold and have voting power with respect to approximately 6.5% of the total
issued and outstanding shares of InVision Common Stock.
QUANTUM REASONS FOR THE MERGER
The Quantum Board of Directors considered a wide variety of information and
a number of factors in connection with its evaluation of the Merger and
Reorganization Agreement. The Quantum Board of Directors believes that the
Merger may result in a number of benefits to Quantum and its shareholders
including the following: (i) the necessity of combining the quadrupole
resonance ("QR") technology with other technologies to produce improved products
and accelerate market acceptance; (ii) the synergies that will result from
combining the QR and CT technologies; (iii) the ability of the combined company
to develop complementary product lines; (iv) the ability of the combined company
to develop complementary marketing strategies; (v) access to greater resources
for product development and to InVision's existing worldwide sales and marketing
organization and InVision's customer base to promote commercial sales of
Quantum's products; and (vi) the receipt by Quantum shareholders of InVision
Common Stock in a tax-free exchange at a substantial premium to the value of
Quantum Common Stock and of increased investment liquidity through the exchange
of Quantum Capital Stock for shares of publicly traded stock. See "Approval of
the Merger and Related Transactions-Quantum Reasons for the Merger."
RECOMMENDATION OF QUANTUM BOARD OF DIRECTORS
The Board of Directors of Quantum has unanimously approved the
Reorganization Agreement and the Merger, and recommends a vote FOR approval and
adoption of the Reorganization Agreement and for approval of the Merger by the
shareholders of Quantum.
INVISION REASONS FOR THE MERGER
InVision believes that the addition of the Quantum QR technology and the
expertise of Quantum's employees in QR technology and its applications will
enable InVision: (i) to increase its ability to develop stand alone, low cost
(compared to CT) products for the detection of sheet, military and plastic
explosives in luggage and parcels; (ii) to enhance its capabilities to detect
narcotics; (iii) to improve throughput and decrease false alarm rates of future
lines of CT-based explosive detection systems; (iv) to develop competitive
products for the screening of carry on luggage; and (v) to capitalize on the
backlog of approximately $8.0 million in government contracts for new
development, mostly in the field of quadrupole resonance, to obtain additional
contracts for government sponsored research and to develop technology which can
be used to create new products for the EDS and other markets.
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EXCHANGE OF QUANTUM STOCK CERTIFICATES
As soon as practicable after the Effective time, InVision will mail to the
holders of Quantum Capital Stock (i) a letter of transmittal (the "Letter of
Transmittal") with respect to the surrender of valid certificates representing
shares of Quantum Capital Stock ("Quantum Stock Certificates") in exchange for
certificates representing InVision Common Stock and (ii) instructions for use of
the Letter of Transmittal. QUANTUM SHAREHOLDERS SHOULD NOT SURRENDER THEIR
QUANTUM STOCK CERTIFICATES FOR EXCHANGE UNTIL THEY RECEIVE A LETTER OF
TRANSMITTAL. See "Approval of the Merger and Related Transactions-Conversions
of Shares; Procedures for Exchange of Certificates; No Fractional Shares."
VOTING AGREEMENTS
Pursuant to Voting Agreements dated as of September 3, 1997 (the "Voting
Agreements"), directors and officers of Quantum and their affiliates (excluding
InVision), who collectively own in the aggregate approximately 32.2% of the
outstanding Quantum Common Stock, 67.0% of the outstanding Quantum Series A
Stock, 4.9% of the outstanding Quantum Series B Stock, 24.9% of the outstanding
Quantum Series C Stock, 48.3% of the votes represented by the outstanding
Quantum Series A Stock and Quantum Series C Stock voting together as a single
class, and 37.5% of the votes represented by the outstanding Quantum Preferred
Stock voting together as a single class (based upon the number of shares of
Quantum Capital Stock issued and outstanding as of September 3, 1997), have
agreed that, prior to the earlier of the valid termination of the Reorganization
Agreement or the Effective Time, they will vote their shares (i) in favor of the
adoption and approval of the Reorganization Agreement and approval of the Merger
and approval of the amendment to the Quantum Articles of Incorporation and (ii)
against any action or agreement that would result in a breach of any
representation, warranty, covenant or obligation of Quantum in the
Reorganization Agreement. Such Quantum shareholders have also delivered to
InVision irrevocable proxies with respect to the matters covered by the Voting
Agreements. See "Approval of the Merger and Related Transactions-Voting
Agreements."
NONCOMPETITION AGREEMENTS
It is a condition to the obligation of InVision to consummate the Merger
that certain key employees of Quantum, including Lowell Burnett (Chairman of the
Board), Dale Sheets (President) and Andrew Hibbs (Chief Technical Officer), each
enter into a Noncompetition Agreement with InVision and Quantum that contain
provisions restricting such employees from engaging in certain activities that
are competitive with InVision or Quantum for a period of one to three years
(depending upon the individual agreement) following the Effective Time. See
"Approval of the Merger and Related Transactions-Noncompetition Agreements."
EMPLOYMENT AGREEMENTS
It is a condition to the parties' respective obligations to consummate the
Merger that InVision enter into employment agreements with each of Lowell
Burnett (Chairman of the Board), Dale Sheets (President) and Andrew Hibbs (Chief
Technical Officer) and with certain other key employees of Quantum. All such
employment agreements will become effective upon the consummation of the Merger
and provide for the full-time employment of such persons at their current
salaries and provide for severance benefits ranging from three to six months.
See "Approval of the Merger and Related Transactions-Employment Agreements."
RELEASES
It is a condition to the obligation of InVision to consummate the Merger
that a release (each, a "Release") be executed by the holders of at least 90% of
the outstanding shares of Quantum Common Stock and all of the holders of
outstanding shares of Quantum Preferred Stock (including pursuant to the
exercise of warrants prior to the Effective Time). Each Release releases
InVision, Quantum and their respective affiliates from any and all past, present
and future claims of every kind and nature, known or unknown, whether as a
shareholder, director, officer
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or employee of Quantum, the person executing the Release or certain persons
associated with such person may have (other than rights, if any, under the
Reorganization Agreement or the Escrow Agreement). Released claims are
limited to matters existing on or prior to the date of the Release. Each
Release also contains certain representations and warranties of the person
executing the Release, obligates the person executing the Release to
indemnify InVision, Quantum and their respective affiliates from any and all
losses arising from such person's failure to perform under the Release or the
assertion or purported assertion of any of the released claims by the person
signing the Release or any of their associated parties, and provides that the
person signing the Release confirms the appointment and authority of the
Agent to act in his capacity as such. See "-Escrow Fund."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
OFFICERS AND DIRECTORS OF QUANTUM. Certain members of Quantum's management
and Board of Directors may be deemed to have certain interests in the Merger
that are in addition to their interests as shareholders of Quantum generally.
The Quantum Board of Directors was aware of these interests and considered them,
among other matters, in approving the Reorganization Agreement and the
transactions contemplated thereby. As described above, it is a condition to the
consummation of the Merger that InVision enter into employment agreements with
certain key employees of Quantum. Upon effectiveness of the Merger, each such
Quantum employee will be entitled to receive benefits under his/her respective
employment agreement. In addition, Dr. Sergio Magistri, a director of Quantum,
is also a director and the President and Chief Executive Officer of InVision.
See "Approval of the Merger and Related Transactions-Interests of Certain
Persons in the Merger."
AFFILIATE AGREEMENTS. Certain shareholders of Quantum who may be deemed to
be affiliates of Quantum for purposes of Rule 145 of the Act have executed, or
are expected to execute, agreements that prohibit the sale, transfer or other
disposition of InVision Common Stock received by such shareholders in the
Merger, except under certain circumstances, in order to comply with the
requirements of certain federal securities laws and to the extent necessary to
permit the Merger to receive pooling-of-interests accounting treatment. In
addition, a shareholder and the directors and executive officers of InVision are
expected to execute agreements that prohibit the sale, transfer or other
disposition of InVision Common Stock held by such persons to the extent
necessary to permit the Merger to receive pooling-of-interests accounting
treatment. See "Approval of the Merger and Related Transactions-Affiliate
Agreements."
CONTINUITY OF INTEREST CERTIFICATES. Certain shareholders of Quantum have
delivered to InVision certificates certifying that such shareholders have no
present intention to dispose of certain of the shares of InVision Common Stock
to be received by such shareholders of Quantum in the Merger in order to comply
with the requirements of certain U.S. federal tax laws. See "Approval of the
Merger and Related Transactions-Certain Federal Income Tax Consequences."
LISTING OF INVISION COMMON STOCK ON THE NASDAQ NATIONAL MARKET
It is a condition of InVision's and Quantum's obligation to consummate the
Merger that the shares of InVision Common Stock to be issued pursuant to the
Reorganization Agreement be approved for listing on the Nasdaq National Market.
REGULATORY REQUIREMENTS
There are no federal or state regulatory requirements to be complied with
in connection with the Merger other than obtaining certain consents from the
federal government to the novation of government contracts, if required.
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ACCOUNTING TREATMENT
The Merger is intended to be accounted for as a pooling of interests for
financial reporting purposes in accordance with generally accepted accounting
principles. InVision's obligation to consummate the Merger is conditioned
upon receipt at the closing of the Merger by InVision of a letter from Price
Waterhouse LLP, InVision's independent accountants, as to the appropriateness
of pooling-of-interests accounting for the Merger. See "Approval of the
Merger and Related Transactions-Accounting Treatment."
APPRAISAL RIGHTS
Pursuant to Chapter 13 of the California Corporations Code, the holders of
Quantum Capital Stock are entitled to exercise dissenters' rights with respect
to shares not voted in favor of the Merger. See "Approval of the Merger and
Related Transactions-Appraisal Rights." However, it is a condition to
InVision's obligation to consummate the Merger that all of the shares of Quantum
Capital Stock vote in favor of the Merger. A vote in favor of the Merger
precludes the exercise of dissenters' rights.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Merger is expected to be a tax-free reorganization for federal income
tax purposes, so that no gain or loss will be recognized by the Quantum
shareholders on the exchange of Quantum Capital Stock for InVision Common Stock,
except to the extent that Quantum shareholders receive cash in lieu of
fractional shares. The Reorganization Agreement does not require the parties to
obtain a ruling from the Internal Revenue Service as to the tax consequences of
the Merger. As a condition to Quantum's and InVision's obligations to
consummate the Merger, Quantum and InVision are to receive opinions at the
Closing Date from their respective legal counsel that, based on certain
assumptions and certifications, the Merger will be treated as a tax-free
reorganization for U.S. federal income tax purposes. Quantum shareholders are
urged to consult their own tax advisors regarding such tax consequences. See
"Approval of the Merger and Related Transactions-Certain Federal Income Tax
Consequences."
AMENDMENT OF THE QUANTUM ARTICLES OF INCORPORATION
It is a condition to the closing of the Merger that the Quantum Articles of
Incorporation be amended to clarify that the Quantum Series A Stock and Quantum
Series C Stock convert to Quantum Common Stock at a rate of 1.228 shares and 1
share, respectively. The full text of the proposed amendment to the Quantum
Articles of Incorporation is attached as APPENDIX B to this Proxy
Statement/Prospectus and incorporated by reference herein.
RECOMMENDATION OF QUANTUM BOARD OF DIRECTORS
The Board of Directors of Quantum has unanimously approved the amendment of
the Quantum Articles of Incorporation and recommends a vote FOR approval and
adoption of the amendment to the Quantum Articles of Incorporation.
THE QUANTUM SHAREHOLDERS MEETING
TIME, DATE, PLACE AND PURPOSE
The Quantum Shareholders Meeting will be held at the principal offices of
Quantum located at 7742 Kenamar Court, San Diego, California 92121-2425 on
Monday, September 29, 1997 at 10:00 a.m., local time. The purpose of the
Quantum Shareholders Meeting is (i) to approve and adopt the Reorganization
Agreement and approve the Merger and (ii) to approve and adopt the amendment of
the Quantum Articles of Incorporation.
9
<PAGE>
RECORD DATE AND VOTE REQUIRED
Only Quantum shareholders of record at the close of business on
September 5, 1997 (the "Record Date") are entitled to vote at the Quantum
Shareholders Meeting. Under the California Corporations Code and the charter
documents of Quantum, (i) approval and adoption of the Reorganization
Agreement and the Merger requires the approval by the holders of (A) a
majority of the votes represented by the outstanding shares of each of the
Quantum Common Stock and the Quantum Preferred Stock, voting as separate
classes, (B) 2/3 of the votes represented by the shares of Quantum Series A
Stock and Quantum Series C Stock, voting together as a single class, and (C)
a majority of the outstanding shares of Quantum Series D Stock, voting
together as a single class, and (ii) approval and adoption of the proposed
amendment to the Quantum Articles of Incorporation requires the approval by
the holders of (A) a majority of the votes represented by the outstanding
shares of each of the Quantum Common Stock and each series of Quantum
Preferred Stock, voting as separate classes, and (B) 2/3 of the votes
represented by the shares of Quantum Series A Stock and Quantum Series C
Stock, voting together as a single class. For all voting purposes, each
share of Quantum Series A Stock is entitled to 1.228 votes, and all other
classes and series of Quantum Capital Stock are entitled to one vote per
share of such capital stock. NOTWITHSTANDING THE REQUIREMENTS FOR A
FAVORABLE VOTE ESTABLISHED BY THE CALIFORNIA CORPORATIONS CODE AND QUANTUM'S
ARTICLES OF INCORPORATION, IT IS A CONDITION TO THE OBLIGATIONS OF INVISION
AND MERGER SUB TO CONSUMMATE THE MERGER THAT ALL SHARES OF QUANTUM CAPITAL
STOCK BE VOTED IN FAVOR OF THE APPROVAL AND ADOPTION OF THE REORGANIZATION
AGREEMENT AND IN FAVOR OF APPROVAL OF THE MERGER. On the Record Date,
Quantum's directors and executive officers and their affiliates owned an
aggregate of (i) 32.2% and 46.6% of the votes represented by the outstanding
shares of Quantum Common Stock and Quantum Preferred Stock, respectively,
(ii) 67.0%, 4.9%, 24.9% and 100% of the outstanding shares of Quantum Series
A Stock, Quantum Series B Stock, Quantum Series C Stock and Quantum Series D
Stock, respectively, and (iii) 48.3% of the votes represented by the
outstanding shares of Quantum Series A Stock and Quantum Series C Stock
voting together as a single class.
This Proxy Statement/Prospectus and accompanying Notice of Special Meeting
of Shareholders were mailed to all Quantum shareholders of record as of
September 5, 1997 and constitute notice of the Quantum Shareholders Meeting in
conformity with the requirements of the California Corporations Code.
MARKET AND MARKET PRICES
InVision Common Stock is traded on the Nasdaq National Market under the
symbol "INVN." On September 3, 1997, the last trading day before the
announcement by InVision and Quantum that they had entered into the
Reorganization Agreement, the closing price of InVision Common Stock as reported
on the Nasdaq National Market was $15.19 per share. On September 5, 1997, the
closing price of InVision Common Stock as reported on the Nasdaq National Market
was $15.25. Following the Merger, InVision Common Stock will continue to be
traded on the Nasdaq National Market under the symbol "INVN." There can be no
assurance as to the actual price of InVision Common Stock prior to, at or at any
time following, the Effective Time.
10
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following summary historical financial information of InVision and
Quantum has been derived from financial information included elsewhere in this
Proxy Statement/Prospectus and should be read in conjunction with such
information. The summary pro forma financial information of InVision and
Quantum is derived from the unaudited pro forma combined condensed financial
statements which are included elsewhere herein and should be read in conjunction
with such pro forma statements and the notes thereto. The pro forma information
is presented for illustrative purposes only and is not necessarily indicative of
the operating results or financial position that would have occurred if the
Merger had been consummated as of the beginning of the periods indicated, nor is
it necessarily indicative of the future operating results or financial position
of the combined company.
INVISION
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(In thousands, except per share data)
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
------------------------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1996 1997
--------- -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Revenues . . . . . . . . . $ -- $ -- $ -- $ 9,066 $ 15,841 $ 7,477 $ 22,785
Gross profit . . . . . . . -- -- -- 2,289 6,105 2,836 11,384
Income (loss) from
operations . . . . . . . (2,044) (3,025) (3,324) (2,988)(1) (2,233)(1) (611) 2,555
Net income (loss). . . . . (2,196) (3,307) (3,727) (3,292) (3,572)(2) (2,045) 2,216
Net income (loss) per
share(3) . . . . . . . . $ (0.50) $ (0.44) $ (0.27) $ 0.21
Shares used in per share
calculations(3). . . . . 6,642 8,142 7,499 10,730
<CAPTION>
June 30, 1997
-------------
<S> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments. . . . . . . . . . . . . . . . . . . $21,836
Working capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,761
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,383
Long-term liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,726
</TABLE>
- ---------------
(1) InVision recorded non-cash charges related to grants of stock options
having exercise prices below the fair market value on the date of grant to
employees and directors in the amounts of $369,000, $489,000 and $178,000,
respectively, in 1995, 1996 and the six months ended June 30, 1997. See
Note 8 of Notes to Consolidated Financial Statements of InVision.
(2) InVision recorded a non-cash charge resulting from amortization of a bridge
loan warrant discount in the amount of $1.3 million in 1996, all of which
was recorded in the six months ended June 30, 1996. See Note 6 of Notes to
Consolidated Financial Statements of InVision.
(3) See Note 2 of Notes to Consolidated Financial Statements of InVision for an
explanation of the method used to determine the number of shares used to
compute per share amounts.
11
<PAGE>
QUANTUM
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(In thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months
Year Ended September 30, Ended June 30,
--------------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
--------- -------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Contract revenues. . . . . $ 1,397 $ 2,137 $ 2,389 $ 2,739 $ 3,213 $ 1,964 $ 3,085
Gross profit . . . . . . . 358 350 634 350 377 227 586
Loss from operations . . . (40) (241) (43) (1,149) (2,592) (1,901) (778)
Net loss . . . . . . . . . (40) (241) (59) (1,275) (2,813) (1,989) (1,035)
Net loss per share(1). . . $ (0.03) $ (0.55) $ (1.00) $ (0.71) $ (0.31)
Weighted average shares
outstanding. . . . . . . 2,182 2,332 2,826 2,815 3,308
<CAPTION>
June 30, 1997
-------------
<S> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 659
Working capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,396
Long-term liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,744
Total shareholders' deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,100)
</TABLE>
- --------------
(1) See Note 3 of Notes to Consolidated Financial Statements of Quantum for an
explanation of the method used to determine the number of shares used to
compute per share amounts. Net loss per share is not provided in fiscal
1992 and 1993 due to the significant changes in the equity structure that
occured in fiscal 1994.
12
<PAGE>
INVISION AND QUANTUM
SUMMARY PRO FORMA COMBINED FINANCIAL INFORMATION
(In thousands, except per share data)
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
------------------------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1996 1997
--------- -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
PRO FORMA COMBINED STATEMENTS
OF OPERATIONS DATA:
Revenues . . . . . . . . . $ -- $ -- $ -- $ 9,066 $ 15,841 $ 7,477 $ 22,785
Gross profit . . . . . . . -- -- -- 2,639 6,105 2,836 11,384
Income (loss) from
operations . . . . . . . (2,004) (3,266) (3,367) (4,137) (4,825) (2,212) 2,196(1)
Pro forma net
income (loss). . . . . . (2,156) (3,548) (3,786) (4,567) (6,385) (3,711) 1,621
Pro forma net income (loss)
per share(2) . . . . . . $ (0.62) $ (0.72) $ (0.45) $ 0.14
Weighted average shares
outstanding. . . . . . . 7,418 8,918 8,275 11,701
<CAPTION>
June 30, 1997
-------------
<S> <C>
PRO FORMA COMBINED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments. . . . . . . . . . . . . . . . $23,459
Working capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,035
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,543
Long-term liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 376
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,212(1)
</TABLE>
- -------------
(1) The combined company expects to incur charges to operations currently
estimated to be $700,000 in the quarter in which the Merger is consummated
to reflect transaction fees and costs incident to the Merger. The
estimated charge is not reflected in the pro forma combined statement of
operations data but has been reflected in the pro forma combined balance
sheet data. The amount of this charge is a preliminary estimate and is
therefore subject to change.
(2) Shares used to compute pro forma net income (loss) per share are calculated
by adding the number of shares used to compute InVision historical net
income (loss) per share to the number of shares of InVision Common Stock
expected to be issued in the transaction of 777,000 shares as if such
shares had been outstanding for each period presented.
13
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of
InVision and Quantum and combined per share data on an unaudited pro forma basis
after giving effect to the Merger on a pooling of interests basis of accounting.
The information set forth below should be read in conjunction with the selected
historical financial data and unaudited pro forma combined financial information
included elsewhere in this Proxy Statement/Prospectus. The pro forma combined
per share data are not necessarily indicative of the operating results that
would have been achieved had the Merger been consummated as of the beginning of
the periods presented and should not be construed as representative of future
operating results. InVision and Quantum have never declared dividends.
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------- --------------------
1994(1) 1995 1996 1996 1997
------- -------- -------- -------- ---------
Historical--InVision
Net income (loss). . . . . $ -- $ (0.50) $ (0.44) $ (0.27) $ 0.21
Book value per share(2). . $ 0.99 $ 2.94
YEARS ENDED NINE MONTHS ENDED
SEPTEMBER 30, JUNE 30,
------------------------- --------------------
1994(1) 1995 1996 1996 1997
------- -------- -------- -------- ---------
Historical--Quantum
Net loss . . . . . . . . . $ -- $ (0.55) $ (1.00) $ (0.71) $ (0.31)
Book value (deficit)
per share(2) . . . . . . . $ (0.71) $ (0.58)
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------- --------------------
1994(1) 1995 1996 1996 1997
------- -------- -------- -------- ---------
Pro forma combined net income
(loss) per share:
Pro forma per InVision
share(3) . . . . . . . . . $ -- $ (0.62) $ (0.72) $ (0.45) $ 0.14
Equivalent pro forma
per Quantum share(4) . . . $ -- $ (0.05) $ (0.06) $ (0.03) $ 0.01
Pro forma combined book value per
share:
Pro forma per InVision
share(2) . . . . . . . . . $ 3.25 $ 2.55
Equivalent pro forma
per Quantum share(4) . . . $ 0.25 $ 0.20
- ------------------
(1) Net loss per share amounts have not been presented in 1994 as such amounts
are not deemed meaningful due to the significant changes that occurred to
InVision's equity structure as a result of it's initial public offering of
common stock in April 1996.
(2) Historical book value per share is computed by dividing total stockholders'
equity (deficit) by the number of common shares (assuming the conversion of
all preferred shares into common shares at each date and at the respective
conversion rates) outstanding at the end of each period. Pro forma combined
book value per common share is computed by dividing pro forma stockholders'
equity by the pro forma number of shares of common stock (assuming the
conversion of all preferred shares into common shares at each date and at
the respective conversion rates) outstanding at the end of each period.
14
<PAGE>
(3) Pro forma combined net income (loss) per share is computed by dividing the
pro forma net income (loss) for the combined company by the sum of the
weighted average number of common and common equivalent shares of InVision
Common Stock outstanding during the period and the number of shares of
InVision Common Stock expected to be issued in the transaction of 777,000
shares as if such shares had been outstanding for each period presented.
(4) Equivalent pro forma combined net income (loss) and book value per share
are computed by dividing the pro forma combined net income (loss) or book
value per share by the assumed average exchange ratio of 0.0767 shares of
InVision Common Stock for each share of Quantum Common Stock and common
stock equivalent outstanding.
15
<PAGE>
FORWARD LOOKING STATEMENTS
THIS PROXY STATEMENT/PROSPECTUS MAY CONTAIN FORWARD-LOOKING STATEMENTS
WHICH INVOLVE RISKS AND UNCERTAINTIES. WHEN USED IN THIS PROXY
STATEMENT/PROSPECTUS, THE WORDS "ANTICIPATE," "BELIEVE," "ESTIMATE," AND
"EXPECT" AND SIMILAR EXPRESSIONS AS THEY RELATE TO INVISION OR ITS MANAGEMENT
ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. INVISION'S ACTUAL
RESULTS, PERFORMANCE, OR ACHIEVEMENTS COULD DIFFER MATERIALLY FROM THE RESULTS
EXPRESSED IN, OR IMPLIED BY, THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT
COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE RISKS RELATED TO MARKET
ACCEPTANCE OF INVISION'S SINGLE PRODUCT, FLUCTUATIONS IN INVISION'S QUARTERLY
AND ANNUAL OPERATING RESULTS, THE LOSS OF ORDERS OF INVISION'S PRODUCT,
INCLUDING THE LOSS OF INVISION'S MOST RECENT ORDER FROM THE FAA, LOSS OF ANY OF
INVISION'S SOLE SOURCE SUPPLIERS, INTENSE COMPETITION, RELIANCE ON LARGE ORDERS,
CONCENTRATION OF INVISION'S CUSTOMERS, RISKS RELATED TO THE LENGTHY SALES CYCLES
FOR THE CTX 5000, BUDGETING LIMITATIONS OF INVISION'S CUSTOMERS AND PROSPECTIVE
CUSTOMERS, AND THE RISKS RELATED TO INVISION'S LIMITED MANUFACTURING EXPERIENCE,
AS WELL AS THOSE DISCUSSED IN "RISK FACTORS," IN "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," AND ELSEWHERE IN
THIS PROXY STATEMENT/PROSPECTUS.
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROXY STATEMENT/PROSPECTUS,
THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY BY QUANTUM
SHAREHOLDERS IN DETERMINING WHETHER OR NOT TO VOTE IN FAVOR OF THE APPROVAL AND
ADOPTION OF THE REORGANIZATION AGREEMENT AND APPROVAL OF THE MERGER.
RISK FACTORS RELATING TO THE MERGER
NO FAIRNESS OPINION
Although the Board of Directors of Quantum has determined that the Merger
and the exchange of Quantum Capital Stock for InVision Common Stock pursuant to
the terms of the Reorganization Agreement is fair from a financial point of view
to the shareholders of Quantum, the Board of Directors of Quantum has not
obtained an opinion of a financial advisor with respect to the fairness to the
holders of Quantum Capital Stock of the Merger and the exchange ratio of each
class and series of Quantum Capital Stock from a financial point of view.
Consequently, each shareholder of Quantum should independently consider, and
retain its own financial advisor if appropriate, to determine the fairness of
the Merger and the exchange of Quantum Capital Stock for InVision Common Stock
to such shareholder.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Quantum Board with respect to the
Reorganization Agreement and the Merger, holders of Quantum Capital Stock should
be aware that members of the Quantum Board and the executive officers of Quantum
have certain interests in the Merger that are in addition to the interests of
holders of Quantum Capital Stock generally. In particular, certain employees of
Quantum expect to receive employment agreements pursuant to which the will be
employed by InVision following the Merger and pursuant to which they will
receive certain severance benefits if terminated within a certain time following
the Merger. In addition, Dr. Sergio Magistri, a director of Quantum, is also
the President, Chief Executive Officer and a director of InVision. See
"Approval of the Merger and Related Transactions--Interests of Certain Persons
in the Merger."
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The Merger is intended to qualify as a reorganization under Section
368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), in which
case no gain or loss generally should be recognized by the holders of shares of
Quantum Common Stock on the conversion of their shares of Quantum Capital Stock
solely into shares of InVision Common Stock in the Merger. As a condition to
the consummation of the Merger, InVision and Quantum will have received an
opinion from their respective tax counsel that the Merger will constitute a
16
<PAGE>
reorganization under Section 368(a) of the Code. However, such opinions are not
binding on the Internal Revenue Service or the courts and there can be no
assurance that the merger will qualify as a tax free reorganization. However,
all Quantum shareholders are urged to consult their own tax advisors. See
"Approval of the Merger and Related Transactions--Certain Federal Income Tax
Consequences."
UNCERTAINTY RELATING TO INTEGRATION OF TECHNOLOGIES
Although InVision believes that the combination of InVision's CT technology
with Quantum's QR technology will enhance the ability of InVision to develop and
produce products with greater detection capabilities as well as increase
throughput and decrease false alarm rates, no assurance can be given that the
benefits that InVision believes will result from the Merger will be realized, or
that if realized will be at the level InVision anticipates. InVision has not
produced prototype products incorporating both technologies nor undertaken any
research and development activities relating to integrating the two
technologies. Factors that could inhibit or prevent the realization of the
benefits InVision anticipates from the Merger include, but are not limited to,
unanticipated difficulties arising in integrating the CT and QR technologies in
one product, the QR technology under development may prove to be not as
efficacious as currently believed, unanticipated costs arising during the
development or production of products incorporating the QR technology, and the
development by competitors in the EDS industry of similar QR technologies that
compete favorably against those acquired from Quantum.
UNCERTAINTY RELATING TO INTEGRATION OF OPERATIONS
The integration process of rationalizing research programs, computer and
accounting systems and other aspects of operations, while operating a larger
entity with two locations, presents a significant challenge to the management of
InVision. There can be no assurance that the integration process will be
successful. The need to dedicate management resources to the integration may
detract from the day-to-day operation of InVision's business. There can be no
assurance that InVision will be successful in its attempt to combine the
operations of Quantum and InVision, and the failure to do so could have a
material adverse effect on InVision's business, financial condition or results
of operations. In addition, there can be no assurance that combining the
business of Quantum with the business of InVision, even if achieved in an
efficient and effective manner, will result in combined results of operations
and financial condition superior to what would have been achieved by either
InVision or Quantum independently.
POTENTIAL DILUTIVE EFFECT TO STOCKHOLDERS; TRANSACTION EXPENSES AND WRITEOFFS
The issuance of the InVision Common Stock in connection with the Merger
with Quantum will have a dilutive effect on InVision's earnings per share. See
"Unaudited Pro Forma Financial Information." In addition, certain costs are
generally associated with transactions such as the Merger.
RISK FACTORS RELATING TO HOLDING INVISION COMMON STOCK
HISTORY OF LOSSES; NO ASSURANCE OF PROFITABILITY
InVision commenced operations in September 1990, remained in the
development stage through 1994 and received its first revenues from product
sales in the first quarter of 1995. InVision has experienced net losses for
each quarter and year from inception through December 31, 1996 and, as of
June 30, 1997, had an accumulated deficit of approximately $17.3 million.
Although InVision has recently been profitable on a quarterly basis, there
can be no assurance that InVision will maintain profitability on a quarterly
basis or achieve and maintain profitability on an annual basis. InVision
expects to expand its manufacturing, research and development, sales and
marketing, and administrative capabilities. The anticipated increase in
InVision's operating expenses caused by this expansion could have a material
adverse effect on InVision's business, financial condition and results of
operations if revenues do not increase at an equal or greater rate. See
"InVision Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
17
<PAGE>
SINGLE PRODUCT; UNCERTAINTY OF MARKET ACCEPTANCE
The CTX 5000 currently is the only product offered by InVision and
InVision derives substantially all of its revenues from the sale of CTX 5000
units. InVision's orders to date have been received from a limited number of
customers and the substantial majority of these have been from a single
customer, the FAA. The commercial success of the CTX 5000 will depend upon
its acceptance by domestic and international airports, government agencies
and airlines as a useful and cost-effective alternative to less expensive,
higher throughput (i.e. bags per hour) competing products employing different
technologies. The large capital commitment (approximately $1.0 million)
required to purchase the CTX 5000 may limit the marketability of the CTX
5000. In addition, InVision's failure to compete successfully with respect
to throughput, the ability to scan all sizes of baggage, the ease of
integration of the CTX 5000 into existing baggage handling systems and other
factors could delay, limit or prevent market acceptance of the CTX 5000.
Moreover, the market for explosive detection systems ("EDS") technology is
largely undeveloped, and InVision believes that the overall demand for EDS
technology will depend significantly upon public perception of the risk of
terrorist attacks. There can be no assurance that the public will perceive
the threat of terrorist bombings to be substantial or that the airline
industry and governmental agencies will actively pursue EDS technology. As a
result, there can be no assurance InVision will be able to achieve market
penetration, revenue growth or profitability. See "InVision
Business--Competition" and "--Industry Background."
FLUCTUATIONS IN OPERATING RESULTS
InVision's past operating results have been, and its future operating
results will be, subject to fluctuations resulting from a number of factors,
including: the timing and size of orders from, and shipments to, major
customers; budgeting and purchasing cycles of its customers; delays in
product shipments caused by custom requirements of customers or ability of
the customer to accept shipment; the timing of enhancements to the CTX 5000
by InVision or introduction of new products by its competitors; changes in
pricing policies by InVision, its competitors or suppliers, including
possible decreases in average selling prices of the CTX 5000 in response to
competitive pressures; the proportion of revenues derived from competitive
bid processes; the mix between sales to domestic and international customers;
market acceptance of enhanced versions of the CTX 5000; the availability and
cost of key components; the availability of manufacturing capacity; and
fluctuations in general economic conditions. InVision also may choose to
reduce prices or to increase spending in response to competition or to pursue
new market opportunities, all of which may have a material adverse effect on
InVision's business, financial condition and results of operations.
InVision's systems revenues in any period are derived from sales of multiple
CTX 5000 systems to a limited number of customers and are recognized upon
shipment which, in view of the high sales price of one CTX 5000, causes minor
variations in the number of orders, or the timing of shipments, to
substantially affect InVision's quarterly revenues. Because a significant
portion of InVision's quarterly operating expenses are, and will continue to
be, relatively fixed in nature, such revenue fluctuations will cause
InVision's quarterly and annual operating results to vary substantially.
Accordingly, InVision believes that period-to-period comparisons of its
results of operations are not meaningful and cannot be relied upon as
indicators of future performance. See "InVision Management's Discussion and
Analysis of Financial Condition and Results of Operations--Quarterly Results
of Operations." In addition, certain costs generally associated with
transactions such as the Merger with Quantum, estimated at $700,000, will be
expensed in the quarter the Merger is consummated. While these costs have
not been currently identified, any such costs will have an adverse effect on
InVision's operating results in the period in which they are incurred.
Because of all of the foregoing factors, InVision's operating results may be
below the expectations of public market analysts and investors in some future
quarters, which would likely result in a decline in the trading price of the
Common Stock.
DEPENDENCE ON SUPPLIERS
Certain key components used in InVision's products have been designed by
InVision to its specifications and are currently available only from one or a
limited number of suppliers. InVision currently does not have long-term
agreements with these suppliers. Moreover, in view of the high cost of many of
these components, InVision does not maintain significant inventories of some
necessary components. If InVision's suppliers were to experience financial,
operational, production or quality assurance difficulties, the supply of
components to InVision
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would be reduced or interrupted. In the event that a supplier were to cease
operations, discontinue a product or withhold supply for any reason, InVision
may be unable to acquire such product from alternative sources within a
reasonable period of time. InVision also uses a variety of independent third
party manufacturers and subassemblers. The inability of InVision to develop
alternative sources for single or sole source components, to find alternative
third party manufacturers or subassemblers, or to obtain sufficient quantities
of these components could result in delays or interruptions in product
shipments, which could have a material adverse effect on InVision's business,
financial condition and results of operations.
COMPETITION
The market for explosive detection systems is intensely competitive and
is characterized by continuously developing technology and frequent
introductions of new products and features. InVision expects competition to
increase as other companies introduce additional and more competitive
products in the EDS market and as InVision develops additional capabilities
and enhancements for the CTX 5000 and new applications for its certified
technology. Historically, the principal competitors in the market for
explosive detection systems have been InVision, Vivid Technologies, Inc.,
EG&G Astrophysics, Heimann Systems GmbH, Thermedics Detection Inc., and
Barringer Technologies Inc. Each of these competitors provides EDS solutions
and products for use in the inspection of checked luggage, although to date
only InVision's CTX 5000, operating as two units in parallel to meet the
throughput requirement, has been certified by the FAA. InVision is aware of
certain major corporations competing in other markets that intend to enter
the EDS market. In particular, in January 1996 Lockheed Martin Corporation
received a grant in the amount of approximately $8.5 million from the FAA for
the design and development of a CT-based EDS over a two-year period which it
transferred to a newly-formed affiliate, L-3 Communications Corporation
("L-3"), in May 1997. Announcements of currently planned or other new
products may cause customers to delay their purchasing decisions for EDS
products, which could have a material adverse effect on InVision's business,
financial condition and results of operations. Each of InVision's
competitors may have substantially greater financial resources than InVision.
There can be no assurance that InVision will be able to compete successfully
with its competitors or with new entrants to the EDS market.
InVision believes that its ability to compete in the EDS market is based
upon such factors as: product performance, functionality, quality and
features; quality of customer support services, documentation and training;
and the capability of the technology to appeal to broader applications beyond
the inspection of checked baggage. Although InVision believes that the CTX
5000 is superior to its competitors' products in its explosive detection
capability and accuracy, the CTX 5000 must also compete on the basis of
price, throughput, the ability to handle all sizes of baggage, and the ease
of integration into existing baggage handling systems. Certain of InVision's
competitors may have an advantage over InVision's existing technology with
respect to these factors. Currently, the CTX 5000 has an average selling
price of approximately $1.0 million, compared to substantially lower prices
for systems offered by InVision's competitors; has a throughput rate of
approximately 300 bags per hour ("bph"), compared to rates claimed to exceed
1,000 bph by certain of InVision's competitors; has a gantry size which
limits the ability of the unit to accept all sizes of baggage; and requires
that the baggage remain still while being scanned, making it difficult to
integrate into the continuously moving baggage handling systems found in most
airports. There can be no assurance that InVision will be successful in
convincing potential customers that the CTX 5000 is superior to other systems
given all of the necessary performance criteria, that new systems with
comparable or greater performance, lower price and faster or equivalent
throughput will not be introduced, or that, if such products are introduced,
customers will not delay or cancel existing or future orders for InVision's
system. Further, there can be no assurance that InVision will be able to
enhance the CTX 5000 to better compete on the basis of cost, throughput,
accommodation of baggage size and ease of integration, or that InVision will
otherwise be able to compete successfully with existing or new competitors.
The failure of InVision to develop such enhancements or otherwise
successfully compete in the EDS market for any of the above reasons would
have a material adverse effect on InVision's business, financial condition
and results of operations.
DEPENDENCE ON LARGE ORDERS; CUSTOMER CONCENTRATIONS; LENGTHY SALES CYCLE
In any given fiscal year, InVision's revenues have principally
consisted, and InVision believes will continue to consist, of orders of
multiple units from a limited number of customers. While the number of
individual
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customers may vary from period to period, InVision is nevertheless dependent
upon these multiple orders for a substantial portion of its revenues. There
can be no assurance that InVision will obtain such multiple orders on a
consistent basis. During the first six months of 1997, approximately $19.4
million, or 85.3%, of InVision's revenues were generated from sales to
InVision's four largest customers. During the fiscal year ended December 31,
1996, revenues from InVision's six largest customers were approximately $14.0
million, or 88.4%, of InVision's revenues. During the fiscal year ended
December 31, 1995, revenues from InVision's three largest customers were
approximately $6.8 million, or 74.0%, of InVision's revenues. To date, all
orders from United States customers have been entirely funded by the FAA, and
InVision's largest sales contract to date, for 54 CTX 5000 systems, is with
the FAA. There can be no assurance that such funding or sales will continue
in the future. InVision's inability to obtain sufficient multiple orders or
the failure of the FAA to continue such purchases or funding would have a
material adverse effect on InVision's business, financial condition and
results of operations. Moreover, the timing and shipment of such orders
could cause the operating results in any quarter to differ from the
projections of securities analysts, which could adversely affect the trading
price of the Common Stock. Losses arising from customer disputes regarding
shipping schedules, product condition or performance, or InVision's inability
to collect accounts receivable from any major customer could also have a
material adverse effect on InVision's business, financial condition and
results of operations. See "Invision Business--Recent Developments."
InVision's revenues depend in significant part upon the decision of a
government agency to upgrade and expand existing facilities, alter workflows
and hire additional technical expertise in addition to procuring the CTX
5000, all of which involve a significant capital commitment as well as
significant future support costs. The sales cycle of the CTX 5000 is often
lengthy due to the protracted approval process that typically accompanies
large capital expenditures and the time required to manufacture the CTX 5000
and install and assimilate the CTX 5000. Typically, six to twelve months may
elapse between a new customer's initial evaluation of InVision's system and
the execution of a contract. Another three months to a year may elapse prior
to shipment of the CTX 5000 as the customer site is prepared and the CTX 5000
is manufactured. During this period InVision expends substantial funds and
management resources but recognizes no associated revenue. See
"--Fluctuations in Operating Results," "InVision Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview" and
"--Quarterly Results of Operations."
PUBLIC AGENCY CONTRACT AND BUDGET CONSIDERATIONS
Substantially all of InVision's customers to date have been public
agencies or quasi-public agencies. In contracting with public agencies,
InVision is subject to public agency contract requirements which vary from
jurisdiction to jurisdiction and which are subject to budgetary processes and
expenditure constraints. Budgetary allocations for explosive detection
systems are dependent, in part, upon governmental policies which fluctuate
from time to time in response to political and other factors, including the
public's perception of the threat of commercial airline bombings. Many
domestic and foreign government agencies have experienced budget deficits
that have led to decreased capital expenditures in certain areas. InVision's
results of operations may be subject to substantial period-to-period
fluctuations as a result of these and other factors affecting capital
spending. A reduction of funding for explosive detection technology
deployment could materially and adversely affect InVision's business,
financial condition and results of operations. Future sales to public
agencies will depend, in part, on InVision's ability to meet public agency
contract requirements, certain of which may be onerous or even impossible for
InVision to satisfy. In addition, public agency contracts are frequently
awarded only after formal competitive bidding processes, which have been and
may continue to be protracted, and typically contain provisions that permit
cancellation in the event that funds are unavailable to the public agency.
There can be no assurance that InVision will be awarded any of the contracts
for which its products are bid or, if awarded, that substantial delays or
cancellations of purchases will not result from protests initiated by losing
bidders. See "InVision Business--Sales and Marketing."
LIMITED FIELD OPERATIONS; DEPENDENCE ON OPERATOR PERFORMANCE
As of June 30, 1997, 50 CTX 5000 systems had been shipped to 15 airports
in ten countries around the world. A majority of these units were installed
since January 1996, and InVision's customers have only limited experience
with the operation of the CTX 5000 in high-volume airport operations. Many
of the factors necessary
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to make the overall baggage scanning system a success, such as the CTX 5000's
integration with the baggage handling system, ongoing system maintenance and
the performance of operators, are beyond the control of InVision. In
particular, once the CTX 5000 identifies a threat, the operator must make a
determination whether the threat is actual or a false alarm and, therefore,
whether or not to allow the bag to continue onto the aircraft.
Unsatisfactory performance of operators can lead to reduced efficacy of the
CTX 5000. The failure of the CTX 5000 to perform successfully in
deployments, whether due to the limited experience of InVision's customers
with the CTX 5000, operator error or any other reason, may have an adverse
effect on the market's perception of the efficacy of the CTX 5000, which in
turn could have a material adverse effect on InVision's business, financial
condition and results of operations.
LIMITED MANUFACTURING EXPERIENCE; MANAGEMENT OF GROWTH
As of June 30, 1997, InVision had produced a total of 50 CTX 5000
systems and had not sustained then current production levels for any
significant period of time. As a result of the FAA's recent order of 54 CTX
5000 systems, InVision is in the process of substantially increasing its rate
of manufacture of the CTX 5000, which has placed significant demands on
InVision's management, working capital and financial and management control
systems. Failure to upgrade InVision's operating, management and financial
control systems when necessary, or difficulties encountered during such
upgrades, could have a material adverse effect on InVision's business,
financial condition and results of operations. The success of the increase in
production capability will depend in part upon InVision's ability to continue
to improve and expand its engineering and technical resources and to attract,
retain and motivate key personnel. The failure of InVision to establish such
production capability or to increase its revenues sufficiently to compensate
for the increase in operating expenses resulting from current or any future
expansion would have a material adverse effect on InVision's business,
financial condition and results of operations.
To accommodate the recent increase in the manufacturing rate, InVision
has entered into a lease for a new, substantially larger, manufacturing
facility. The ability of InVision to successfully transition its
manufacturing operation to this new facility is subject to a variety of
factors, including the ability to install appropriate equipment, adapt to a
new working environment, and quickly and efficiently move to the new
facility. The operations of this new facility will also require InVision to
incur substantially larger fixed costs than it has experienced in the past.
Unforeseen delays and complications that may arise in the transition to the
new facility which could interrupt InVision's manufacturing rate, failure of
the FAA to perform under the December 1996 purchase contract, or failure to
maintain an order rate sufficient to fully utilize this new manufacturing
facility each could have a material adverse effect on InVision's business,
financial condition and results of operations. See "InVision Business--Recent
Developments," "--Manufacturing" and "--Facilities."
NO ASSURANCE OF CONTINUED CERTIFICATION; RISK OF CERTIFICATION OF COMPETING
TECHNOLOGIES; RISK OF CHANGING STANDARDS
The FAA has the responsibility for setting and maintaining performance
standards for explosive detection systems for all U.S. airlines, both in the
United States and abroad. The FAA Final Criteria for Certification of EDS,
published in September 1993, requires, among other things, a throughput of
450 bph for an explosive detection system. InVision's CTX 5000 unit
currently has been tested by the FAA at less than 450 bph and therefore has
not been certified as a single unit. The CTX 5000, when combined in a system
consisting of two units, was certified by the FAA in 1994. To date no other
EDS has been certified by the FAA. There currently is no requirement that
U.S. airlines or airports (or international airlines or airports) deploy
FAA-certified explosive detection systems or that U.S. airlines or airports
(or most international airlines or airports) deploy explosive detection
systems at all. Should the standards be lowered, resulting in other lower
priced or higher throughput explosive detection systems becoming certified,
or should other competitive systems otherwise become certified, InVision
would lose a significant competitive advantage. Under such circumstances,
there can be no assurance that InVision's product would be able to compete
successfully with these systems. Accordingly, the certification by the FAA of
any competing EDS could have a material adverse effect on InVision's
business, financial condition and results of operations. In addition, should
the FAA increase its certification standards, there can be no assurance that
the CTX 5000 would meet such standards. See "InVision Business--Industry
Background."
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InVision intends to continue to modify the CTX 5000 in an effort to make
throughput enhancements, cost reductions and other modifications to the CTX
5000 based upon the availability of adequate funds. Any such modifications,
including the planned addition of QR technology to the system, or updated
versions of the CTX 5000 may require FAA approval in order to retain
certification or may require re-certification. There can be no assurance
that any such modifications will be approved or, if required, certified by
the FAA, and the failure to gain approval or certification for such products
could have a material adverse effect on InVision's business, financial
condition and results of operations. InVision believes that its long-term
success will depend in part upon its ability to manufacture an EDS that meets
or exceeds the throughput standards of the FAA Final Certification Criteria
without being combined with another unit. See "InVision Business--Product
Development."
COMPETITION FOR FAA GRANTS
The U.S. Government currently plays an important role in funding the
development of EDS technology and sponsoring its deployment in U.S. airports.
As of June 30, 1997, InVision had received $8.0 million from FAA grants and
contracts, and expects to receive an additional $2.7 million for further
throughput enhancement and cost reduction activities in 1997. InVision is
also aware that Lockheed Martin Corporation was awarded a grant of
approximately $8.5 million in January 1996 from the FAA, subsequently
transferred to its affiliate, L-3, for the design and development of a
CT-based EDS over a two-year period. There can be no assurance that
additional research and development funds from the FAA will become available
in the future or that InVision will receive any such additional funds.
Failure by the FAA to continue to sponsor InVision's technology could have a
material adverse effect on InVision's business, financial condition and
results of operations. In addition, the grant to L-3 and any future grants
to InVision's other competitors may improve such competitors' ability to
develop and market high detection EDS technology and cause InVision's
customers to delay any purchase decisions, which could have a material
adverse effect on InVision's ability to market the CTX 5000 and on InVision's
business, financial condition and results of operations. See "InVision
Business--Product Development."
DEPENDENCE ON KEY PERSONNEL
InVision's performance depends in part on the expertise of certain
technical personnel with skills in the disciplines of x-ray physics, image
reconstruction and expert systems design. In addition, much of InVision's
proprietary technology is known only by certain technical employees and might
be unavailable should such individuals leave InVision. The number of
scientists qualified to perform the development required by InVision is
extremely limited. InVision also depends on the skills of certain key
management personnel. While InVision maintains key-man life insurance for
Dr. Sergio Magistri, its President and Chief Executive Officer, in the amount
of $3.0 million, InVision does not maintain key person life insurance for any
of its other employees and has employment agreements with only four of its
executive officers, which agreements the employees may terminate at will.
There can be no assurance that these individuals will continue employment
with InVision. The loss of certain key personnel or failure of InVision to
attract and retain new key personnel, particularly as InVision seeks to
expand, could materially adversely affect InVision's business, financial
condition and results of operations. See "InVision Management."
DEPENDENCE ON PROPRIETARY TECHNOLOGY
InVision's performance depends in part upon its proprietary technology.
In the United States, InVision relies upon patents, copyrights and trade
secrets for the protection of the proprietary elements of the CTX 5000 and
InVision's CT technology. There can be no assurance, however, that InVision
could enforce such patents, trade secrets or copyrights. InVision has two
United States patents for automatic concealed object detection systems using
a pre-scan stage which expire in the years 2010 and 2011 (the "Patents").
There can be no assurance that the Patents would be effective in preventing
CT-based competition. In accordance with certain Federal Acquisition
Regulations included in InVision's development contract, dated September 27,
1991, with the FAA (the "FAA R&D Contract"), the United States Government has
rights to use certain of InVision's proprietary technology developed after
the award of the FAA R&D Contract and funded by the FAA R&D Contract. The
U.S. Government may use such rights to produce or have produced for the U.S.
Government competing products using InVision's CT
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technology. In the event that the U.S. Government were to exercise these
rights, InVision's exclusivity in supplying the U.S. Government with
certified CT-based explosive detection systems could be materially adversely
affected.
InVision generally enters into confidentiality agreements with each of
its employees, and on a case-by-case basis enters into similar agreements
with distributors, customers, and potential customers. In addition, InVision
limits access to distribution of its software, documentation and other
proprietary information. There can be no assurance that these agreements
will not be breached, that InVision will have adequate remedies for any
breach, or that InVision's trade secrets will not otherwise become known to
or independently developed by others. Outside the United States, the time
period for filing foreign counterparts of the Patents has expired, and
InVision has not sought or obtained patent protection (except to the extent
of licenses held under patents owned by Imatron Inc. (see
"Business--Intellectual Property and Proprietary Rights")) and has relied to
date primarily on software copyrights and trade secrets for the protection of
its proprietary technology. The absence of foreign counterparts to the
Patents could adversely affect InVision's ability to prevent a competitor
from using technology similar to technology used in the CTX 5000. There can
be no assurance that the steps taken by InVision to protect its proprietary
technology will be adequate or that its competitors will not be able to
develop similar, functionally equivalent or superior technology.
InVision in the past has received, and from time to time in the future
may receive, communications from third parties alleging infringements by
InVision or one of its suppliers of patents or other intellectual proprietary
rights owned by such third parties. There can be no assurance that any
infringement claims (or claims for indemnification resulting from
infringement claims against third parties, such as customers) will not be
asserted against InVision. If InVision's product is found to infringe a
patent, a court may grant an injunction to prevent making, selling or using
the product in the applicable country. Protracted litigation may be
necessary to defend InVision against alleged infringement of others' rights.
Irrespective of the validity or success of such claims, defense of such
claims could result in significant costs to InVision and the diversion of
time and effort by management, either of which by itself could have a
material adverse effect on the business, financial condition and results of
operations of InVision. Further, adverse determinations in such litigation
could result in InVision's loss of proprietary rights, subject InVision to
significant liabilities (including treble damages in certain circumstances),
or prevent InVision from selling its products. If infringement claims are
asserted against InVision, InVision may seek to obtain a license of such
third party's intellectual property rights, which may not be available under
reasonable terms or at all. In addition, litigation may be necessary to
enforce patents issued to or licensed exclusively to InVision and to protect
trade secrets or know-how owned or licensed by InVision and, whether or not
InVision is successful in defending such intellectual property, InVision
could incur significant costs and divert considerable management and key
technician time and effort with respect to the prosecution of such
litigation, either of which by itself could have a material adverse effect on
the business, financial condition and results of operations of InVision. See
"InVision Business--Intellectual Property and Proprietary Rights."
INTERNATIONAL BUSINESS; FLUCTUATION IN EXCHANGE RATES; RISK OF CHANGE IN FOREIGN
REGULATIONS
InVision markets its products to customers outside of the United States
and, accordingly, is exposed to the risks of international business
operations, including unexpected changes in regulatory requirements, changes
in foreign control legislation, possible foreign currency controls, uncertain
ability to protect and utilize its intellectual property in foreign
jurisdictions, currency exchange rate fluctuations or devaluation, tariffs or
other barriers, difficulties in staffing and managing foreign operations,
difficulties in obtaining and managing vendors and distributors, and
potentially negative tax consequences. International sales are subject to
certain inherent risks including tariffs, embargoes and other trade barriers,
staffing and operating foreign sales and service operations and collecting
accounts receivable. InVision is also subject to risks associated with
regulations relating to the import and export of high technology products.
InVision cannot predict whether quotas, duties, taxes or other charges or
restrictions upon the importation or exportation of InVision's products in
the future will be implemented by the United States or any other country.
Fluctuations in currency exchange rates could cause InVision's products to
become relatively more expensive to customers in a particular country,
leading to a reduction in sales or profitability in that country. There can
be no assurance that any of these factors will not have a material adverse
effect on InVision's business, financial condition or results of operations.
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PRODUCT LIABILITY RISKS; RISK OF FAILURE TO DETECT EXPLOSIVES; AVAILABILITY OF
INSURANCE
InVision's business exposes it to potential product liability risks
which are inherent in the manufacturing and sale of explosive detection
systems. There are many factors beyond the control of InVision that could
lead to liability claims, such as the reliability of the customer's
operators, the training of the operators after the initial installation and
training period, and the maintenance of the units by the customers. For
these and other reasons, including software and hardware limitations and
malfunctions of the CTX 5000, there can be no assurance that the systems will
detect all explosives hidden in the luggage scanned. InVision does not
believe that it would be liable for any such claims, but the cost of
defending any such claims would be significant and any adverse determination
may be in excess of InVision's insurance coverage. Moreover, the failure of
the CTX 5000 to detect an explosive would also result in negative publicity
which could have a material adverse effect on sales and may cause customers
to cancel orders already placed, either of which could have a material
adverse effect on InVision's business, financial condition and results of
operations. Many of InVision's customers require InVision to maintain
insurance at certain levels. InVision currently has product liability
insurance in the amount of $150 million. There can be no assurance that
additional insurance coverage, if required by customers or otherwise, could
be obtained on acceptable terms, if at all.
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS
An element of InVision's strategy is to review acquisition prospects
that would complement its existing product offerings, augment its market
coverage, enhance its technological capabilities or otherwise offer growth
opportunities. Although InVision has no present understandings, commitments
or agreements with respect to any material acquisition of any businesses,
products or technologies other than with respect to the Merger, InVision may
make acquisitions of businesses, products or technologies in the future.
Future acquisitions by InVision could result in potentially dilutive
issuances of equity securities, the incurrence of debt and contingent
liabilities, and amortization expenses related to goodwill and other
intangible assets, any of which could materially adversely affect InVision's
business, financial condition or results of operations. Acquisitions entail
numerous risks, including difficulties in the assimilation of acquired
operations, technologies and products, diversion of management's attention
from other business concerns, risks of entering markets in which InVision has
no or limited prior experience and potential loss of key employees of
acquired organizations. InVision's management has limited experience in
assimilating acquired organizations. No assurance can be given as to the
ability of InVision to successfully integrate any businesses, products,
technologies or personnel that might be acquired in the future, and the
failure of InVision to do so could have a material adverse effect on
InVision's business, financial condition or results of operations.
CONCENTRATION OF OWNERSHIP; CONTROL BY MANAGEMENT
Upon completion of the Merger, InVision's principal stockholder, HARAX
Holding, S.A. ("HARAX"), and its affiliates will hold approximately 21.8% of
InVision's Common Stock, and the present directors and executive officers of
InVision and their affiliates will, in the aggregate, beneficially own
approximately 12.7% of the outstanding Common Stock, in each case including
shares issuable pursuant to stock options exercisable within 60 days of
August 20, 1997. Consequently, HARAX together with InVision's directors and
executive officers, acting in concert, will have the ability to significantly
affect the election of InVision's directors and have a significant effect on
the outcome of corporate actions requiring stockholder approval. In
addition, HARAX, acting alone, will have the power to significantly affect
matters relating to InVision's affairs and business. See "InVision Principal
Stockholders."
ANTI-TAKEOVER PROVISIONS
InVision's Certificate of Incorporation authorizes InVision's Board of
Directors to issue up to five million shares of preferred stock in one or
more series, to fix the rights, preferences, privileges and restrictions
granted to or imposed upon any wholly unissued shares of preferred stock, to
fix the number of shares constituting any such series, and to fix the
designation of any such series, without further vote or action by its
stockholders. The rights of the holders of Common Stock will be subject to,
and may be materially adversely affected by, the rights of the
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holders of any preferred stock that may be issued in the future. The
issuance of preferred stock could have the effect of making it more difficult
for a third party to acquire a majority of the outstanding voting stock of
InVision. InVision has no present plans to issue shares of preferred stock.
In addition, in the event of certain transactions by which InVision is
acquired or becomes controlled by a single investor or group of investors,
the Board of Directors pursuant to InVision's Employee Stock Purchase Plan,
has discretion to provide that each right to purchase Common Stock will be
assumed or an equivalent right substituted by the successor corporation, if
any, or the Board may shorten the offering period and provide for all sums
collected by payroll deductions to be applied to purchase stock immediately
prior to such transaction. Furthermore, InVision's Certificate of
Incorporation provides for a staggered board and does not permit stockholder
action by written consent, both of which may have the effect of delaying or
preventing changes in control or management of InVision. InVision also is
subject to the provisions of Section 203 of the Delaware General Corporation
Law, which places restrictions on business combinations with certain
interested stockholders. The above factors, coupled with the concentration
of ownership in the directors and executive officers, could discourage
certain types of transactions involving an actual or potential change in
control of InVision, including transactions in which the holders of Common
Stock might otherwise receive a premium for their shares over then current
prices, and may limit the ability of such stockholders to cause or approve
transactions which they may deem to be in their best interests, all of which
could have a material adverse effect on the market price of the Common Stock
offered hereby. See "Description of InVision Capital Stock--Delaware Law and
Certain Charter Provisions."
VOLATILITY OF STOCK PRICE
Since InVision's initial public offering in April 1996, the price of
InVision's Common Stock has fluctuated widely, with sales on The Nasdaq Stock
Market ranging from, on a post-split basis, $4.63 to $17.88. See
"Comparative Stock Price Data and Dividend History." The market price of the
shares of Common Stock, like that of the common stock of many other high
technology companies, is highly volatile. InVision believes that factors
such as the crash of TWA Flight 800, the Gore Commission report and the
entering into of the FAA contract for 54 CTX 5000 systems have greatly
affected the fluctuation in InVision's Common Stock trading price. In the
future such events, as well as announcements of technological innovations or
new products by InVision or its competitors and general market conditions,
may have a significant effect on the market price of the Common Stock. In
addition, in recent years the stock market in general, and the market for
small capitalization stocks in particular, has experienced extreme price
fluctuations which have often been unrelated to the operating performance of
affected companies. Such fluctuations could adversely affect the market
price of InVision's Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of substantial amounts of Common Stock in the public market
following the Merger could have an adverse effect on the trading price of the
Common Stock. Upon consummation of the Merger, based on shares outstanding
as of August 20, 1997, InVision will have outstanding approximately
11,933,000 shares of Common Stock. Of such shares outstanding, approximately
7,529,000 shares, including the 777,000 shares issuable in the Merger, will
be freely tradeable without restriction or further registration under the
Securities Act, unless purchased by "affiliates" of InVision as that term is
defined in Rule 144 under the Securities Act. The remaining approximately
4,404,000 shares of Common Stock outstanding upon consummation of the Merger
are "restricted securities" as that term is defined in Rule 144, and may be
sold under Rule 144 subject to the holding period, volume limitations and
other restrictions under Rule 144.
InVision has entered into an agreement with a stockholder pursuant to
which 479,318 shares are currently registered for resale under the Securities
Act, and has entered into agreements with certain of its stockholders and
others pursuant to which such persons have the right to require InVision to
register up to an aggregate of 482,493 additional shares of Common Stock for
resale under the Securities Act. Of such shares, 302,493 are currently
outstanding and the remaining 180,000 shares are issuable upon the exercise
of currently outstanding warrants. See "Description of InVision Capital
Stock--Registration Rights" and "Certain Transactions."
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COMPARATIVE STOCK PRICE DATA AND DIVIDEND HISTORY
On April 23, 1996, InVision's Common Stock commenced trading on the
Nasdaq SmallCap Market under the symbol "INVN". Prior to that date, there
was no public market for the Common Stock. On May 15, 1997, InVision's
Common Stock commenced trading on the Nasdaq National Market and ceased to
trade on the Nasdaq SmallCap Market. The following table sets forth, for the
periods indicated, the high and low bid quotations of the InVision Common
Stock as reported on the Nasdaq SmallCap Market/Nasdaq National Market giving
effect to InVision's 2-for-1 stock split effected on February 7, 1997 as if
the stock split had occurred on April 23, 1996. These over-the-counter
quotations reflect inter-dealer prices, without retail markup, markdown or
commission, and may not necessarily represent the sales prices in actual
transactions.
HIGH LOW
---- ---
THE NASDAQ
STOCK MARKET
------------
Fiscal 1996
Second quarter (from April 23, 1996) . . . . . $6 5/8 $5 5/8
Third quarter. . . . . . . . . . . . . . . . . 17 1/16 4 5/8
Fourth quarter . . . . . . . . . . . . . . . . 17 5/16 10 7/8
Fiscal 1997
First quarter. . . . . . . . . . . . . . . . . $17 3/4 $13 5/8
Second quarter . . . . . . . . . . . . . . . . 16 1/4 12
Third quarter (through September 5, 1997). . . 16 7/8 12
On September 3, 1997, the last trading day prior to the announcement by
InVision and Quantum that they had reached an agreement concerning the
Merger, the last sale price of the InVision Common Stock on the Nasdaq
National Market was $15.19 per share. On September 5, 1997, the last sale
price of the InVision Common Stock on the Nasdaq National Market was $15.25
per share. On August 20, 1997 there were approximately 200 stockholders of
record of InVision Common Stock.
Because the market price of InVision Common Stock is subject to
fluctuation, the number of shares of InVision Common Stock that the Quantum
shareholders will receive per share of Quantum Capital Stock held will not be
set until three days prior to the Quantum Shareholders Meeting, and the
market value of the shares of InVision Common Stock they will receive in the
Merger may increase or decrease prior to the Merger. Quantum shareholders
are urged to obtain a current market quotation for the InVision Common Stock.
InVision has never declared or paid cash dividends on its Common Stock
and it is currently the intention of the Board of Directors not to pay cash
dividends in the foreseeable future. InVision plans to retain future
earnings, if any, to finance its operations. In addition, InVision's bank
credit facility prohibits the payment of dividends without the lender's
consent.
The Quantum Capital Stock is not traded in an established public trading
market. Quantum has never paid dividends on any class or series of the
Quantum Capital Stock and has no current intention to declare any cash
dividends in the foreseeable future. In addition, Quantum's bank credit
facility prohibits the payment of dividends without the lender's consent.
There were 60 record holders of Quantum Common Stock and 23 record holders of
Quantum Preferred Stock as of September 3, 1997.
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THE QUANTUM SHAREHOLDERS MEETING
PURPOSE OF THE QUANTUM SHAREHOLDERS MEETING
The purpose of the Quantum Shareholders Meeting is to vote upon a
proposal (i) to approve and adopt the Reorganization Agreement and approve
the Merger, (ii) to approve and adopt the proposed amendment to the Quantum
Articles of Incorporation, and (iii) to transact such other business as may
properly come before the Quantum Shareholders Meeting or any adjournments or
postponements thereof.
DATE, TIME AND PLACE OF QUANTUM SHAREHOLDERS MEETING
The Quantum Shareholders Meeting will be held at the principal offices
of Quantum, located at 7742 Kenamar Court, San Diego, California 92121-2425
on September 29, 1997 at 10:00 a.m. local time.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of Quantum Capital Stock on September 5, 1997
(the "Record Date") are entitled to notice of, and to vote at, the Quantum
Shareholders Meeting. As of the Record Date, there were 60 shareholders of
record holding an aggregate of 3,994,216 shares of Quantum Common Stock, 17
shareholders of record holding an aggregate of approximately 1,666,669 shares
of Quantum Series A Stock, 6 shareholders of record holding an aggregate of
711,340 shares of Quantum Series B Stock, 19 shareholders of record holding
an aggregate of 1,643,556 shares of Quantum Series C Stock and one
shareholder of record (InVision) holding an aggregate of 441,328 shares of
Quantum Series D Stock.
This Proxy Statement/Prospectus is being mailed on or about
September , 1997 to all shareholders of record of Quantum as of the
Record Date.
VOTING OF PROXIES
All properly executed proxies that are not revoked will be voted at the
Quantum Shareholders Meeting in accordance with the instructions contained
therein. If a proxy is signed and returned without indicating any voting
instructions, the shares of Quantum Common Stock represented by the proxy
will be voted FOR the proposal to approve and adopt the Reorganization
Agreement and approval of the Merger and FOR approval of the proposed
amendment to the Quantum Articles of Incorporation, in accordance with the
recommendation of the Board of Directors of Quantum, and FOR adjournment or
postponement of the Quantum Shareholders Meeting if an adjournment or
postponement, in the discretion of the proxy holders, is determined to be
necessary or desirable. A shareholder who has executed and returned a proxy
may revoke it at any time before it is voted at the Quantum Shareholders
Meeting by (i) executing and returning a proxy bearing a later date, (ii)
filing written notice of such revocation with the Corporate Secretary of
Quantum stating that the proxy is being revoked or (iii) attending the
Quantum Shareholders Meeting and voting in person. All written notices of
revocation and other communications with respect to revocation of Quantum
proxies should be addressed to: Quantum Magnetics, Inc., 7742 Kenamar Court,
San Diego, California 92121-2425, Attention: Corporate Secretary. Attendance
at the Quantum Shareholders Meeting, in and of itself, will not constitute a
revocation of a proxy.
VOTE REQUIRED
Pursuant to the California General Corporation Law and Quantum's
Articles of Incorporation, approval and adoption of the Reorganization
Agreement and approval of the Merger requires approval by the holders of (i)
a majority of the votes represented by the outstanding shares of Quantum
Common Stock, (ii) a majority of the votes represented by the outstanding
shares of the Quantum Preferred Stock, voting together as a single class,
(iii) 2/3 of the votes represented by the shares of Quantum Series A Stock
and Quantum Series C Stock, voting together as a single class, and (iv) a
majority of the outstanding shares of Quantum Series D Stock. HOWEVER, IN
ADDITION TO THE REQUIREMENTS OF THE CALIFORNIA GENERAL CORPORATION LAW AND
QUANTUM'S ARTICLES OF INCORPORATION, UNDER
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THE REORGANIZATION FROM AGREEMENT, IT IS A CONDITION TO INVISION'S OBLIGATION
TO CONSUMMATE THE MERGER THAT ALL OUTSTANDING SHARES OF QUANTUM CAPITAL STOCK
ENTITLED TO VOTE ON THE MERGER BE VOTED TO APPROVE AND ADOPT THE
REORGANIZATION AGREEMENT AND APPROVE THE MERGER. Approval and adoption of
the proposed amendment of the Quantum Articles of Incorporation requires
approval by the holders of (i) a majority of the outstanding shares of the
Quantum Common Stock entitled to vote, (ii) a majority of the outstanding
shares of Quantum Series A Stock entitled to vote, (iii) a majority of the
outstanding shares of Quantum Series B Stock entitled to vote, (iv) a
majority of the outstanding shares of Quantum Series C Stock entitled to
vote, (v) a majority of the outstanding shares of Quantum Series D Stock
entitled to vote, and (vi) 2/3 of the votes represented by the shares of
Quantum Series A Stock and Quantum Series C Stock entitled to vote, voting
together as a single class. For all voting purposes, each share of Quantum
Series A Stock is entitled to 1.228 votes, and all other classes and series
of Quantum Capital Stock are entitled to one vote per share of such capital
stock. Each shareholder of record of Quantum Capital Stock on the Record
Date is entitled to cast their votes, exercisable in person or by properly
executed proxy, on each matter properly submitted for the vote of the
shareholders of Quantum at the Quantum Shareholders Meeting. On the Record
Date, there were 3,994,216 shares of Quantum Common Stock, 1,666,669 shares
of Quantum Series A Stock, 711,340 shares of Quantum Series B Stock,
1,643,556 shares of Quantum Series C Stock and 441,328 shares of Quantum
Series D Stock outstanding.
Pursuant to the Voting Agreements, directors and officers of Quantum and
their affiliates (excluding InVision), who collectively own in the aggregate
approximately 32.2%, 67.0%, 4.9% and 24.9% of the outstanding Quantum Common
Stock, Quantum Series A Stock, Quantum Series B Stock and Quantum Series C
Stock, respectively, 48.3% of the votes represented by the outstanding
Quantum Series A Stock and Quantum Series C Stock voting together as a single
class, and 37.5% of the votes represented by the outstanding Quantum
Preferred Stock voting together as a single class (based upon the number of
shares of Quantum Capital Stock issued and outstanding as of September 3,
1997), have agreed that, prior to the earlier of the valid termination of the
Reorganization Agreement or the Effective Time, they will vote their shares
(i) in favor of the adoption and approval of the Reorganization Agreement and
approval of the Merger and (ii) against any action or agreement that would
result in a breach of any representation, warranty, covenant or obligation of
Quantum in the Reorganization Agreement. Such Quantum shareholders have also
delivered to InVision irrevocable proxies with respect to the matters covered
by the Voting Agreements. In addition, subject to certain exceptions, such
persons have agreed not to sell, transfer, dispose of, encumber or otherwise
reduce beneficial ownership of, interest in, or risk relating to, their
shares of Quantum Capital Stock beneficially owned or subsequently acquired
by them until the Effective Time or the valid termination of the
Reorganization Agreement. See "Approval of the Merger and Related
Transactions--Voting Agreements." InVision owns all of the outstanding shares
of Quantum Series D Stock.
BOARD RECOMMENDATION
THE BOARD OF DIRECTORS OF QUANTUM HAS UNANIMOUSLY APPROVED AND ADOPTED
THE REORGANIZATION AGREEMENT AND APPROVED THE MERGER, AND HAS APPROVED AND
ADOPTED THE PROPOSED AMENDMENT TO THE QUANTUM ARTICLES OF INCORPORATION, AND
RECOMMENDS A VOTE FOR APPROVAL AND ADOPTION OF THE REORGANIZATION AGREEMENT
AND FOR APPROVAL OF THE MERGER, AND A VOTE FOR APPROVAL AND ADOPTION OF THE
PROPOSED AMENDMENT TO THE QUANTUM ARTICLES OF INCORPORATION, BY THE
SHAREHOLDERS OF QUANTUM.
QUORUM; ABSTENTIONS
The presence, in person or by properly executed proxy, of the holders of
a majority of the outstanding shares of Quantum Capital Stock entitled to
vote at the Quantum Shareholders Meeting is necessary to constitute a quorum.
Abstentions will be counted for purposes of determining a quorum, but will
have the effect of a vote against approval of the matters being voted upon.
SOLICITATION OF PROXIES; EXPENSES
Regardless of whether the Merger is consummated, each of Quantum and
InVision will pay its own costs and expenses incurred in connection with the
Reorganization Agreement and the transactions contemplated by the
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Reorganization Agreement, except that fees and expenses (other than
attorneys' fees) incurred in connection with the printing and filing of the
Registration Statement and this Proxy Statement/ Prospectus will be borne
solely by InVision, and the cost of the solicitation of proxies and all
related costs will be borne by Quantum. Original solicitation of proxies by
mail may be supplemented by telephone, facsimile or personal solicitation,
without payment of additional compensation, by certain directors, officers or
regular employees of Quantum.
APPROVAL OF THE MERGER AND RELATED TRANSACTIONS
BACKGROUND OF THE MERGER
On January 3, 1997, Mr. Dale Sheets, the President of Quantum, wrote a
letter to Dr. Sergio Magistri, Chief Executive Officer and President of
InVision, inquiring whether InVision would be interested in discussing the
advantages and opportunities that Quantum believed might exist in a business
combination between InVision and Quantum. As a result of such letter, during
the week of January 13, 1997, Dr. Magistri and Dr. Lowell Burnett, Chairman
of the Board of Quantum, met in Washington, D.C. and discussed the benefits
and uniqueness of Quantum's technology and the merits of working together in
the EDS industry. On January 21, 1997, Dr. Magistri and Drs. Giovanni
Lanzara and Bruno Trezza, directors of InVision, travelled to Quantum and
received a formal presentation on Quantum's technology, products, and
strategies, and discussed a potential minority investment in Quantum by
InVision. On January 30, 1997, Mr. Sheets, Dr. Burnett, and Messrs. Randall
Lunn and John Downing, directors of Quantum, travelled to InVision and met
with Dr. Magistri, Mr. Curtis DiSibio, Senior Vice President, Finance and
Administration and Chief Financial Officer of InVision, Mr. David Pillor, the
Senior Vice President, Sales and Marketing of InVision, and Dr. Benno
Stebler, the Senior Vice President, Manufacturing of InVision, and discussed
the potential for joint products and marketing strategies, potential benefits
of working together, and possible structures for a transaction. On February
25 and 26, 1997, Drs. Magistri and Trezza, and InVision's outside legal
counsel, met with Dr. Burnett, Messrs. Sheets, Downing and Lunn, and Dr.
Andrew Hibbs, Chief Technical Officer of Quantum, and negotiated a letter of
intent to enter into a transaction in which InVision would purchase
approximately 10% of the outstanding stock of Quantum. On March 12, 1997,
Mr. Dale Sheets and Dr. Burnett met with Steven Wolf, Vice President of
Marketing of InVision, and Mr. DiSibio at Quantum's facility to review
Quantum's technology. During the remainder of March 1997, InVision conducted
due diligence at Quantum and InVision and Quantum negotiated the definitive
terms of a stock purchase agreement. As a result of such negotiations, on
April 10, 1997, InVision purchased 1,091,328 shares of Quantum Series D Stock
for a purchase price of approximately $1.2 million. The equity investment
entitles InVision to designate one member to serve on Quantum's board of
directors (currently Dr. Magistri), and entitles InVision to certain
registration, first refusal and other rights. In connection with the equity
investment, for the period extending through December 1997, Quantum agreed
not to license or transfer its technology related to explosive or drug
detection for use in these areas without the consent of InVision, except in
connection with the sale of Quantum or transfer of substantially all of
Quantum's assets.
On June 2, 1997, Mr. Sheets telephoned Dr. Magistri and inquired whether
InVision was interested in acquiring Quantum. In such telephone conversation
the parties explored the potential benefits of such a combination, various
forms in which a possible transaction could occur and different valuation
possibilities. On June 4, 1997, Drs. Burnett and Hibbs and Messrs. Sheets
and Ben Thorson (a director of Quantum at the time) met with Drs. Magistri
and Stebler and Messrs. DiSibio and Pillor at InVision to further discuss the
benefits of combining the two companies, including potential products and
product strategies. On June 5 and 6, 1997, Drs. Magistri and Trezza, Mr.
DiSibio, and Deborah Lawson Cleveland, InVision's corporate counsel, met with
Dr. Burnett and Messrs. Sheets, Downing, Lunn and Thorson to conduct
preliminary due diligence. Beginning June 10, 1997, Quantum's and InVision's
senior management, for the first time, through a series of informal telephone
calls began to discuss the structure, terms and valuation of a potential
acquisition of Quantum by InVision. In the next several weeks the parties
negotiated the terms of the acquisition. On June 27, 1997, InVision
presented Quantum with a proposed definitive acquisition agreement, and on
July 3, 1997 provided Quantum with additional proposed documents related to
the proposed definitive acquisition agreement. On July 8 through 9, 1997,
Mr. DiSibio, Ms. Cleveland and InVision's outside legal counsel met at
Quantum with Messrs. Sheets, Lunn and
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Downing and Quantum's outside legal counsel to negotiate the terms of the
proposed definitive acquisition agreement. In the afternoon of July 9, 1997,
Dr. Magistri joined the negotiations. On July 17, 1997, representatives of
the two management teams met at InVision to refine the product strategy and
to review the progress on the negotiations, preparation of final acquisition
documents and due diligence. On July 26, 1997, InVision converted 650,000
shares of Quantum Series D Stock to Quantum Common Stock and sold such shares
of Quantum Common Stock to third parties.
Throughout the rest of July and August, InVision continued the due
diligence process and the parties continued to negotiate issues related to
the Reorganization Agreement, the related agreements and the contemplated
Merger, including the number of shares to be issued by InVision in the Merger
and other various terms of the merger documents.
In addition, on August 1, 1997, Mr. DiSibio contacted Price Waterhouse
LLP to discuss difficulties in obtaining a consent from Quantum's independent
accountants for the inclusion of their report on Quantum's consolidated
financial statements in a registration statement. Such difficulties involved
the fees Quantum's independent accountants were requesting for the required
work, and their ability to complete the work on a timely basis. Mr. DiSibio
then requested that Price Waterhouse LLP undertake an engagement to re-audit
Quantum's consolidated financial statements. Price Waterhouse LLP did not
complete their audit until late August 1997.
On August 19, 1997, Drs. Burnett and Hibbs and Messrs. Sheets and Lunn
met at InVision with Drs. Magistri and Stebler, Ms. Lawson and InVision's
outside legal counsel to review technology related due diligence items and
compensation and employment issues. In the final week of August 1997,
InVision and Quantum senior management, through a series of telephone calls,
finalized negotiations on the key terms of the Reorganization Agreement and
the Merger and reached agreement on all significant terms, including the
number of shares to be issued by InVision in the Merger, and proceeded to
finalize the Reorganization Agreement.
On September 2, 1997, the Board of Directors of InVision met and
approved the Reorganization Agreement and the Merger, and the Board of
Directors of Quantum approved the Reorganization Agreement and Merger by
written consent. A more detailed discussion of the matters considered by the
respective boards of directors are set forth under the captions "-InVision
Reasons for the Merger" and "-Quantum Reasons for the Merger." Following
such approvals and after the close of trading on September 3, 1997, Dr.
Magistri, on behalf of InVision and Merger Sub, and Mr. Sheets, on behalf of
Quantum, executed the Reorganization Agreement. The agreement to merge was
announced by issuance of a joint press release following the close of
business on September 3, 1997.
QUANTUM REASONS FOR THE MERGER
The Quantum Board of Directors considered a wide variety of information
and a number of factors in connection with its evaluation of the Merger and
Reorganization Agreement. The Quantum Board of Directors believes that the
Merger may result in a number of benefits to Quantum and its shareholders,
including the following:
(a) NECESSITY OF COMBINED TECHNOLOGIES: Quantum's quadrupole resonance
technology currently detects a range of plastic, sheet and bulk explosives.
These types of explosives are important threats to aviation security, and are
the most difficult to detect using x-ray or CT technologies. However, FAA
certification requires the detection of a wider range of explosives currently
than Quantum's technology is capable of identifying. Initial research
indicates that a significant number of additional explosive and contraband
substances can be detected using QR techniques and work is currently underway
on adding the detection capability for additional compounds. Quantum's
products provide the operator with either a "clear" or an "alarm" indication
for each item that is screened; however, QR is a non-image based technology
and Quantum's products currently do not provide an image to the operator.
The lack of an image and the need to detect a broader range of threat
compounds make it necessary at the present time to combine QR with other
complementary technologies, such as CT or x-ray, in order to accelerate
market acceptance.
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(b) COMPLEMENTARY TECHNOLOGIES: Quantum's quadrupole resonance
technology detects explosives and contraband substances in a manner that is
dissimilar from the way that InVision's CT technology detects the same
materials. Combining the two technologies has synergistic value due to these
differences, which Quantum believes will enable the combined company to
produce products with improved detection and throughput performance while
reducing false alarm levels. Quantum believes that, with both technologies
working together, detection of certain types of compounds could be designated
for the most efficient technology to detect, thereby increasing detection
speeds and throughput. Additionally, the results of the QR scan may be
useful for false alarm resolution. For the same reasons, a combined QR/CT
system with data fusion of information obtained by the combined technologies
may allow the cost and complexity of the CT portion of the system to be
reduced.
(c) COMPLEMENTARY PRODUCT LINES: Quantum's product line and the
scaleable nature of its technology immediately provide the combined company
with a broader product line. These new products are expected to be priced
below InVision's current product and may be able to address other security
applications such as cabin baggage screening, mail and parcel screening and
building security.
(d) COMPLEMENTARY MARKETING STRATEGIES: Effective commercialization
capabilities for emerging technology is key to a successful government
research and development business. Quantum believes that its research
capabilities, when matched with InVision's sales, marketing and manufacturing
capabilities, would create a compelling case for increased levels of
government funding for a wide range of emerging technologies. Quantum also
believes that, by combining government funding with the combined company's
investment in research and development, a cost effective flow of diversified
new products could be realized.
(e) ACCESS TO GREATER RESOURCES: Quantum has focused primarily on its
research and development contract business, with support from numerous
agencies of the federal government. Quantum believes that the Merger will
allow Quantum to have access to greater resources for product development and
will enable it to utilize InVision's existing worldwide sales, marketing and
customer service organizations and existing distribution channels and
customer base. Quantum currently does not have these capabilities in place
necessary to support commercial sales and believes that significant growth
opportunities can be realized by having access to InVision's worldwide
organization.
(f) SHAREHOLDER BENEFITS: The Merger provides Quantum shareholders with
InVision common stock in a tax-free exchange. Receipt of InVision common
stock provides Quantum shareholders with investment liquidity and an
opportunity for increased shareholder value.
The Quantum Board of Directors views the Merger as a means by which
shareholders will be able to obtain liquidity for their Quantum shares. The
Board of Directors of Quantum believes that it is in the best interests of
Quantum's shareholders to obtain marketable securities that may be either
held or sold as determined by each individual shareholder.
The Quantum Board of Directors considered a wide variety of information
and a number of factors in connection with its evaluation of the Merger and
Reorganization Agreement, and determined that the proposed Merger provides an
opportunity that serves the best interests of Quantum and its shareholders.
In particular, the Quantum Board of Directors considered, among other things:
(a) the likelihood of realizing superior benefits through alternative
business strategies and with alternative merger candidates; (b) information
concerning Quantum's and InVision's respective businesses, historical
financial performances, operations and products; (c) the relative value that
Quantum might contribute to future business and prospects of the combined
company; (d) the compatibility of the management and businesses of Quantum
and InVision; and (e) reports from management and legal advisors on specific
terms of the relevant agreements and other matters.
The Quantum Board of Directors believes that the Merger is in the best
interests of Quantum and its shareholders, notwithstanding the following
potentially negative factors: (a) the potential disruption of Quantum's
business that might result from employee uncertainty and lack of focus
following announcements of the Merger in connection with integrating the
operations of Quantum and InVision; (b) the possibility that the Merger might
not
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be consummated, including the risk that the proposed Merger will not be
treated as a pooling of interests; (c) the effects of the public announcement
of the Merger on Quantum's sales and operating results, its ability to
attract and retain key management, marketing and technical personnel and the
progress of certain development projects; and (d) the risk that the other
benefits sought to be achieved by the Merger will not be achieved. See "Risk
Factors."
In view of the complexity and variety of factors considered by the
Quantum Board of Directors in connection with its evaluation of the
Reorganization Agreement and the proposed Merger, the Quantum Board of
Directors did not find it practicable to and did not quantify or otherwise
assign relative weights to the specific factors considered in reaching this
determination. After taking into consideration all of the factors set forth
above, the Quantum Board of Directors determined that the Merger was in the
best interests of Quantum and its shareholders and that Quantum should
proceed with the Merger at this time.
INVISION REASONS FOR THE MERGER
In 1995 after achieving FAA certification for the CTX 5000, the InVision
Board of Directors and its management defined the long term strategy of
InVision. The relevant portions of this strategy included: (i) maintain a
leadership position in the EDS industry by constant improvement of InVision's
core technology achieved both through internal research and development and
through strategic acquisitions; (ii) add complementary EDS technology to
InVision's CT technology (i.e. technologies with good EDS performance that
use a different physics principle to detect explosives, therefore making the
combined system more difficult to defeat); and (iii) extend the application
of InVision's technology to other security areas, including the screening of
carry on luggage, mail screening and narcotics detection. InVision believes
that the acquisition of Quantum is in furtherance of these elements of its
long term strategy. More specifically, InVision believes that the addition
of the Quantum QR technology and the expertise of Quantum's employees in QR
technology and its applications will enable InVision: (i) to increase its
ability to develop stand alone, low cost (compared to CT) products for the
detection of sheet, military and plastic explosives in luggage and parcels;
(ii) to enhance its capabilities to detect narcotics; (iii) to improve
throughput and decrease false alarm rates of future lines of CT-based
explosive detection systems; (iv) to develop competitive products for the
screening of carry on luggage; and (v) to capitalize on the backlog of
approximately $8.0 million in government contracts for new development,
mostly in the field of quadrupole resonance, to obtain additional contracts
for government sponsored research and to develop technology which can be used
to create new products for the EDS and other markets.
The foregoing are forward-looking statements based upon InVision's
current beliefs. No assurance can be given that the benefits that InVision
believes will result from the Merger will be realized, or that if realized
will be at the level InVision anticipates. Factors that could inhibit or
prevent the realization of such benefits include, but are not limited to, the
risk that the CT and QR technologies are not easily integrated into one
product, the risk that the QR technology under development does not prove to
be as efficacious as currently believed, the risk that the development or
production of products incorporating the QR technology will be more costly
than anticipated, the risk that competitors in the EDS industry will be able
to develop similar QR technologies that compete favorably against those
acquired from Quantum, such further risks as are set forth in "Risk
Factors-Risk Factors Relating to the Merger," and such other risks as are set
forth in "Risk Factors" generally.
MERGER CONSIDERATION
QUANTUM CAPITAL STOCK. At the Effective Time, each share of Quantum
Capital Stock then outstanding (except for any such shares held by InVision)
will be converted into the right to receive a fraction of a share of InVision
Common Stock in accordance with the terms of the Reorganization Agreement.
The total number of shares of InVision Common Stock to be issued in
connection with the Merger, including shares issuable pursuant to the
exercise of Quantum stock options assumed by InVision, will be 777,000
shares. Upon the consummation of the Merger, (i) each then outstanding share
of Quantum Common Stock will automatically be converted into a fraction of a
share of InVision Common Stock equal to the Applicable Fraction (defined
below) and (ii) each then outstanding share of each series of Quantum
Preferred Stock will be converted into a fraction of a share of InVision
Common Stock equal to (A) the fraction obtained by dividing the per share
liquidation preference of such series of
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Quantum Preferred Stock under the Quantum Articles of Incorporation by the
Designated InVision Stock Price (as defined below) plus (B) in the case of
Quantum Series A Stock and Quantum Series C Stock, the fraction obtained by
multiplying the number of shares of Quantum Common Stock into which one share
of such series of Quantum Preferred Stock converts immediately prior to the
Merger by the Applicable Fraction. Each share of Quantum Series A Stock,
Quantum Series B Stock and Quantum Series C Stock has a liquidation
preference of $1.50, $0.75 and $1.00, respectively, and each share of Quantum
Series A Stock and Quantum Series C Stock converts into 1.228 shares and 1
share of Quantum Common Stock, respectively. InVision holds all of the
outstanding shares of Quantum Series D Stock and intends to convert them to
Quantum Common Stock immediately prior to the Effective Time. Of the shares
of InVision Common Stock to be issued as set forth above, 12% of such shares
issued to each Quantum shareholder will be placed in escrow to secure
Quantum's indemnification obligations under the Reorganization Agreement.
See "-Escrow Agreement" and "The Reorganization Agreement-Indemnification."
The "Applicable Fraction" will be the fraction: (A) having a numerator
equal to the amount determined by subtracting (1) the aggregated liquidation
preference of all of the shares of Quantum Series A, Series B and Series C
Stock outstanding at the Effective Time from (2) the amount determined by
multiplying (i) 777,000 by (ii) the Designated InVision Stock Price; and (B)
having a denominator equal to the amount determined by multiplying (1) the
Adjusted Fully Diluted Quantum Share Amount (as defined below) by (2) the
Designated InVision Stock Price. The "Adjusted Fully Diluted Quantum Share
Amount" will be the sum of (i) the number of shares of Quantum Common Stock,
(ii) the number of shares of Quantum Common Stock issuable upon conversion of
all of the Quantum Series A Stock and Quantum Series C Stock, and (iii) the
aggregate number of shares of Quantum Common Stock purchasable under or
otherwise subject to all stock options (whether vested or unvested) to
purchase Quantum Common Stock, in each case outstanding immediately prior to
the Effective Time, less any such shares held by or issuable to InVision.
The "Designated InVision Stock Price" will be the average of the closing sale
prices of a share of InVision Common Stock as reported on the Nasdaq National
Market for each of the sixty (60) consecutive trading days ending (and
including) the third trading day prior to the Quantum Shareholders Meeting,
weighted in accordance with the number of shares of InVision Common Stock
traded on each such trading day.
Although the conversion rates cannot be calculated at this time, for
illustrative purposes only, the conversion rates would be as follows at the
Designated InVision Stock Prices shown below (assuming exercise in full of
the outstanding warrants exercisable for Quantum Capital Stock prior to
consummation of the Merger):
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SERIES A SERIES B SERIES C
DESIGNATED INVISION CONVERSION CONVERSION CONVERSION CONVERSION
STOCK PRICE RATE RATE RATE RATE
-------------------------- ---------- ---------- ---------- -----------
$ 17.00. . . . . . . . . . . 0.14380 0.04412 0.10407 0.04525
16.50. . . . . . . . . . . 0.14522 0.04545 0.10483 0.04423
16.00. . . . . . . . . . . 0.14673 0.04688 0.10564 0.04314
15.50. . . . . . . . . . . 0.14833 0.04839 0.10650 0.04199
15.00. . . . . . . . . . . 0.15005 0.05000 0.10742 0.04075
14.50. . . . . . . . . . . 0.15188 0.05172 0.10840 0.03944
14.00. . . . . . . . . . . 0.15384 0.05357 0.10946 0.03803
13.50. . . . . . . . . . . 0.15596 0.05556 0.11059 0.03651
13.00. . . . . . . . . . . 0.15822 0.05769 0.11180 0.03488
12.50. . . . . . . . . . . 0.16067 0.06000 0.11312 0.03312
12.00. . . . . . . . . . . 0.16333 0.06250 0.11454 0.03121
From the day prior to the announcement of the Merger through September
5, 1997, the closing prices per share of InVision Common Stock ranged from
$14.63 to $15.19. See "Comparative Stock Price Data and Dividend History."
The average of the closing sale prices of a share of InVision Common Stock as
reported on the Nasdaq National Market for each of the sixty (60) day
consecutive trading days ending (and including) September 5, 1997, weighted
in accordance with the number of shares of InVision Common Stock traded on
each such trading day, was $14.47.
FRACTIONAL SHARES. No fractional shares of InVision Common Stock will
be issued in connection with the Merger, and no certificates for any such
fractional shares will be issued. In lieu of such fractional shares, any
holder of Quantum Capital Stock who would otherwise be entitled to receive a
fraction of a share of InVision Common Stock (after aggregating all
fractional shares of InVision Common Stock issuable to such holder) will,
upon surrender of such holder's stock certificate(s) representing Quantum
Capital Stock to InVision, be paid in cash the dollar amount (rounded to the
nearest whole cent), without interest, determined by multiplying such
fraction by the Designated InVision Stock Price.
STOCK SUBJECT TO CONDITIONS. If any shares of Quantum Common Stock
outstanding immediately prior to the Effective Time are unvested or are
subject to a repurchase option, risk of forfeiture or other condition under
any applicable restricted stock purchase agreement or other agreement with
Quantum, then the shares of InVision Common Stock issued in exchange for such
shares of Quantum Common Stock will also be unvested and subject to the same
repurchase option, risk of forfeiture or other condition, and the
certificates representing such shares of InVision Common Stock may
accordingly be marked with appropriate legends.
STOCK OPTIONS
At the Effective Time, all rights with respect to Quantum Common Stock
under each Quantum Option then outstanding shall be converted into and become
rights with respect to InVision Common Stock, and InVision shall assume each
such Quantum Option in accordance with the terms of the stock option plan
under which it was issued and the stock option agreement by which it is
evidenced. From and after the Effective Time, (i) each Quantum Option assumed
by InVision may be exercised solely for shares of InVision Common Stock, (ii)
the number of shares of InVision Common Stock subject to each such Quantum
Option shall be equal to the number of shares of
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Quantum Common Stock subject to such Quantum Option immediately prior to the
Effective Time multiplied by the exchange ratio at which Quantum Common Stock
is converted into InVision Common Stock in the Merger, rounded down to the
nearest whole share, (iii) the per share exercise price under each such
Quantum Option shall be adjusted by dividing the per share exercise price
under such Quantum Option by the exchange ratio at which Quantum Common Stock
is converted into InVision Common Stock in the Merger, and rounding up to the
nearest cent, and (iv) any restriction on the exercise of any such Quantum
Option shall continue in full force and effect and the term, exercisability,
vesting schedule and other provisions of such Quantum Option shall otherwise
remain unchanged, subject to adjustment as appropriate to reflect any stock
split, reverse stock split, stock dividend, recapitalization or other similar
transaction subsequent to the Effective Time. In the event a stock option is
exercised during the period prior to the termination of the escrow, a portion
of such shares issued upon the exercise of the stock option will be subject
to the terms of the escrow. See "-Escrow Agreement" and "The Reorganization
Agreement-Indemnification." InVision has agreed to file with the Commission
a Registration Statement on Form S-8 relating to the shares of InVision
Common Stock issuable with respect to assumed Quantum Options no later than
sixty business days after the Effective Time.
QUANTUM WARRANTS
The outstanding warrants exercisable for Quantum Capital Stock will
become fully exercisable and will terminate if not exercised prior to the
consummation of the Merger. On September 3, 1997, there were outstanding
warrants to purchase 211,917 shares of Quantum Series A Stock and 642,076
shares of Quantum Series C Stock.
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES; NO FRACTIONAL
SHARES.
As soon as practicable after the Effective Time, InVision will mail to
the registered holders of Quantum Capital Stock: (i) the Letter of
Transmittal and (ii) instructions for use of the Letter of Transmittal in
effecting the surrender of Quantum Stock Certificates in exchange for
certificates representing InVision Common Stock. Upon surrender of a Quantum
Stock Certificate to InVision for exchange, together with a duly executed
Letter of Transmittal and such other documents as may be reasonably required
by InVision, the holder of such Quantum Stock Certificate shall be entitled
to receive in exchange therefor a certificate representing the whole number
of shares of InVision Common Stock that such holder has the right to receive.
No fractional shares of InVision Common Stock will be issued in connection
with the Merger, and no certificates for any such fractional shares will be
issued. See "-Merger Consideration-Fractional Shares."
If any Quantum Stock Certificate has been lost, stolen or destroyed,
InVision may require the owner of such lost, stolen or destroyed Quantum
Stock Certificate to provide an appropriate affidavit and to deliver a bond
as indemnity against any claim that may be made against InVision or Quantum
with respect to such Quantum Stock Certificate.
QUANTUM SHAREHOLDERS SHOULD NOT SURRENDER THEIR SHARE CERTIFICATES FOR
EXCHANGE UNTIL THEY RECEIVE A LETTER OF TRANSMITTAL.
EFFECT ON CERTIFICATES
At the Effective Time, (i) all shares of Quantum Capital Stock
outstanding immediately prior to the Effective Time will automatically be
canceled and will cease to exist, and all holders of certificates
representing shares of Quantum Capital Stock that were outstanding
immediately prior to the Effective Time will cease to have any rights as
shareholders of Quantum, and (ii) the stock transfer books of Quantum will be
closed with respect to all shares of Quantum Capital Stock outstanding
immediately prior to the Effective Time. No further transfer of any such
shares of Quantum Capital Stock will be made on such stock transfer books
after the Effective Time. If, after the Effective Time, a Quantum Stock
Certificate is presented to InVision or Quantum, such Quantum Stock
Certificate will be canceled and will be exchanged as provided above under
the caption "-Conversion of Shares; Procedure for Exchange of Certificates;
No Fractional Shares."
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APPRAISAL RIGHTS
THE FOLLOWING SUMMARY OF DISSENTERS' RIGHTS UNDER CALIFORNIA LAW IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO CHAPTER 13 OF THE CALIFORNIA
GENERAL CORPORATION LAW ("CCC"), THE COMPLETE TEXT OF WHICH IS ATTACHED
HERETO AS APPENDIX C.
FAILURE TO STRICTLY FOLLOW THE PROCEDURES SET FORTH IN CHAPTER 13 OF THE
CALIFORNIA GENERAL CORPORATION LAW MAY RESULT IN THE LOSS, TERMINATION OR
WAIVER OF APPRAISAL RIGHTS. A QUANTUM SHAREHOLDER WHO SIGNS A PROXY CARD
APPROVING AND AUTHORIZING THE MERGER AGREEMENT OR WHO RETURNS A BLANK
EXECUTED PROXY WILL NOT HAVE A RIGHT TO DISSENT FROM THE APPROVAL OF THE
REORGANIZATION AGREEMENT OR THE APPROVAL OF THE MERGER.
Under the CCC, each Quantum shareholder as of the Record Date who does
not vote in favor of the Merger is entitled to demand and receive payment of
the fair value of all or any portion of such holder's shares of Quantum
Capital Stock pursuant to Chapter 13 of the CCC owned by such holder if the
Merger is consummated. Any Quantum shareholder who elects to perfect such
holder's dissenters' rights and demands payment of the fair value of such
holder's shares must strictly comply with Chapter 13 of the CCC. The
following summary does not purport to be complete and is qualified in its
entirety by reference to Chapter 13 of the CCC, the text of which is attached
as Appendix C and is incorporated herein by reference. Any holder of shares
of Quantum Capital Stock considering demanding dissenters' rights is advised
to consult legal counsel. Dissenting rights will not be available unless and
until the Merger (or a similar business combination) is consummated. To
perfect the right to dissent and receive the fair value of such holder's
shares, the shareholder must not vote in favor of the Merger. A Quantum
dissenting shareholder must either vote against the Merger or abstain on his
proxy or not vote at all.
Within 10 days after the date of approval of the Merger, Quantum will
mail to each Quantum shareholder who did not vote in favor of the Merger
notice (the "Notice") of the approval of the Merger by the Quantum
shareholders, accompanied by a copy of Sections 1300-1304 of the CCC. The
Notice shall also state the price determined by Quantum to be the fair market
value of shares of Quantum Capital Stock with respect to which dissenter's
rights are properly exercised under Chapter 13 of the CCC ("Dissenting
Shares") and a brief description of the procedure to be followed by a
shareholder who elects to dissent. The statement of fair market value
constitutes an offer by Quantum to purchase the shares at such price.
Any dissenting Quantum shareholder who desires that Quantum purchase his
shares of Quantum Capital Stock must make written demand upon Quantum for the
purchase of such shares. The demand must be made no later than 30 days after
the Notice was mailed to the shareholder. The Quantum shareholder's demand
must state the number and class of shares held of record by the Quantum
shareholder which the shareholder demands that Quantum purchase, as well as a
statement by the Quantum shareholder as to what such holder claims the fair
market value of such share was as of the day prior to the announcement of the
Merger. The statement of fair market value constitutes an offer by the
Quantum shareholder to sell the shares at such price. Neither voting
against, abstaining from voting nor failing to vote on the Merger constitutes
such written demand.
Within the same 30 day period following the mailing of the Notice, the
dissenting shareholder must submit to Quantum for endorsement certificates
for any shares which the Quantum shareholder demands Quantum purchase. If
Quantum and the Quantum shareholder agree upon the price of the Dissenting
Shares, the dissenting Quantum shareholder is entitled to the agreed price
with interest at the legal rate on judgments from the date of such agreement.
Payment must be made within 30 days of the later of the date of the
agreement between the Quantum shareholder and Quantum or the date the
contractual conditions to the Merger are satisfied or waived.
If Quantum and the shareholder cannot agree as to the fair market value
or as to the fact that such shares are Dissenting Shares, such Quantum
shareholder may file within six months of the date of mailing of the Notice a
complaint with the California Superior Court for the County of San Diego
demanding judicial determination of
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such matters. Quantum will then be required to make any payments in
accordance with such judicial determination. If the complaint is not filed
within the specified six month period, the Quantum shareholder's rights as a
dissenter are lost.
Dissenting Shares lose their status as such if (i) Quantum abandons the
Merger; (ii) the shares are transferred prior to submission for endorsement
or are surrendered for conversion into shares of another class in accordance
with the Quantum Articles of Incorporation; (iii) the Quantum shareholder and
Quantum do not agree as to the fair market value of such shares and a
complaint is not filed within six months of the date the Notice was mailed;
or (iv) the dissenting Quantum shareholder withdraws, with the consent of
Quantum, his demand for purchase of such shares. If the Quantum shareholder
fails to perfect or withdraws or loses such holder's rights as a dissenter
with respect to such holder's shares of Quantum Capital Stock, such holder's
shares of Quantum Capital Stock will be exchanged for InVision Common Stock
as provided in the Reorganization Agreement.
ESCROW AGREEMENT
Pursuant to the Reorganization Agreement, InVision, Quantum, Randall R.
Lunn, a director of Quantum and an affiliate of Techno Venture Management (a
shareholder of Quantum) appointed to act as Agent pursuant to Section 10.1 of
the Reorganization Agreement (the "Agent"), and an escrow agent to be
designated by InVision (the "Escrow Agent") will enter into an Escrow
Agreement (the"Escrow Agreement") pursuant to which, at the Effective Time,
InVision will cause a number of shares equal to twelve percent (12%) of the
shares of InVision Common Stock into which the outstanding shares of Quantum
Capital Stock convert at the Effective time (the "Escrow Shares") to be
registered in the name of and deposited with the Escrow Agent pursuant to the
terms of the Escrow Agreement. Upon the exercise of Quantum Options prior to
the termination of the escrow, InVision will cause a number of shares of
InVision Common Stock equal to twelve percent (12%) of the shares of InVision
Common Stock issuable upon the exercise of such Quantum Options to be
registered in the name of and deposited with the Escrow Agent and such shares
shall become Escrow Shares. The Escrow Shares will be available to indemnify
and compensate the Indemnitees for Damages (as defined in "The Reorganization
Agreement- Indemnification") to which Quantum's indemnification obligation
applies; provided, however, that only 5/6ths of such Escrow Shares shall be
available to indemnify and compensate the Indemnitees (as defined in "The
Reorganization Agreement-Indemnification") for Damages arising from Breaches
(as defined in "The Reorganization Agreement-Indemnification"). If the Merger
is consummated, the Escrow Fund shall be the exclusive remedy of InVision for
Damages arising from any Breaches or Disputes (as defined in "The
Reorganization Agreement-Indemnification").
Notwithstanding the foregoing, InVision may not receive any Escrow
Shares unless and until an officer's certificate of InVision identifying
Damages has been delivered to the Escrow Agent, and then, with respect to
Damages arising from Breaches, only in the event that all Damages arising
from Breaches have exceeded $100,000. In such event, InVision shall receive
the number of Escrow Shares equal in value to the amount of Damages. For the
purpose of compensating InVision for its Damages, the Escrow Shares shall be
valued at the average of the closing sales prices of InVision Common Stock
for the sixty (60) consecutive trading days ending (and including) the third
trading day prior to the Quantum Shareholders Meeting, weighted in accordance
with the number of shares of InVision Common Stock traded on each such
trading day (the "Designated InVision Stock Price"). In no event shall
InVision receive more than the number of Escrow Shares then remaining in the
Escrow Fund at the time of InVision's claim for Damages.
If any Indemnitee determines in good faith that there is or has been a
possible event giving rise to an indemnification obligation under the
Reorganization Agreement (an "Indemnification Event"), and if InVision shall
have consented to such Indemnitee asserting a claim for indemnification and
such Indemnitee wishes to make a claim against the escrow with respect to
such possible Indemnification Event, then such Indemnitee may deliver to each
of the Agent and the Escrow Agent a written notice of such possible
Indemnification Event (a "Claim Notice") setting forth (i) a brief
description of the circumstances supporting such Indemnitee's belief that
such possible Indemnification Event exists or has occurred, and (ii) a
non-binding, preliminary estimate of the aggregate dollar amount of all
Damages that have arisen and may arise as a direct or indirect result of such
possible Indemnification
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Event (such aggregate amount being referred to as the "Claim Amount").
Within 15 days after the delivery of a Claim Notice to the Agent, the Agent
shall deliver to the Escrow Agent (with a copy to InVision) a written notice
(the "Response Notice") containing: (i) instructions to the effect that
Escrow Shares having a value equal to the entire Claim Amount set forth in
such Claim Notice are to be released from the escrow to such Indemnitee; or
(ii) instructions to the effect that Escrow Shares having a value equal to a
specified portion (but not the entire amount) of the Claim Amount set forth
in such Claim Notice are to be released from the Escrow to such Indemnitee,
together with a statement that the remaining portion of such Claim Amount is
being disputed; or (iii) a statement that the entire Claim Amount set forth
in such Claim Notice is being disputed. If no Response Notice is received by
the Escrow Agent from the Agent within 30 days after the delivery of a Claim
Notice to the Agent, then the Agent shall be deemed to have given
instructions to the Escrow Agent that Escrow Shares having a value equal to
the entire Claim Amount set forth in such Claim Notice are to be released to
such Indemnitee from the Escrow. If the Agent gives (or is deemed to have
given) instructions that Escrow Shares having a value equal to all or a
portion of the entire Claim Amount set forth in a Claim Notice are to be
released from the escrow to an Indemnitee, then the Escrow Agent shall be
authorized to transfer to such Indemnitee, from the escrow, Escrow Shares
having a value equal to such portion of the Claim Amount authorized to be
released by the Agent, and the remainder of the Claim Amount (the "Disputed
Amount"), if any, shall not be released until a settlement is reached or a
court order is obtained instructing the Escrow Agent to release such Escrow
Shares in accordance with the instructions set forth in the court order.
On the date 12 months after the Closing Date, the Escrow Agent shall
release to the Quantum shareholders from the escrow all Escrow Shares then
held in the Escrow, other than any Escrow Shares that are to be retained in
the Escrow relating to Disputed Amounts. The Escrow Agent shall retain
Escrow Shares with a value equal to 125% of the Disputed Amounts in the
escrow (based on the Designated InVision Stock Price), and such Escrow Shares
shall be released to the Quantum shareholders only upon resolution of the
claims related to such Disputed Amounts.
Randall R. Lunn, a director of Quantum and an affiliate of Techno
Venture Management, a shareholder of Quantum, will be appointed Agent and
shall have the discretion to make decisions and take actions on behalf of,
and without the consent of, the Quantum shareholders. Such decisions and
actions of the Agent will be final, binding and conclusive upon each such
Quantum shareholder. BY APPROVING THE REORGANIZATION AGREEMENT, QUANTUM
SHAREHOLDERS WILL BE DEEMED TO HAVE CONSENTED TO THE APPOINTMENT OF RANDALL
R. LUNN, TO ACT AS AGENT ON BEHALF OF THE QUANTUM SHAREHOLDERS TO GIVE AND
RECEIVE COMMUNICATIONS, TO AUTHORIZE DELIVERY TO THE INDEMNITEES OF INVISION
COMMON STOCK FROM THE ESCROW FUND, TO OBJECT TO SUCH DELIVERIES, TO AGREE TO,
NEGOTIATE, AND ENTER INTO SETTLEMENTS AND COMPROMISES OF SUCH CLAIMS AND TO
TAKE CERTAIN OTHER ACTIONS ON BEHALF OF THE QUANTUM SHAREHOLDERS, ALL AS MORE
FULLY DESCRIBED IN SECTION 10.1 OF THE REORGANIZATION AGREEMENT ATTACHED
HERETO AS APPENDIX A AND THE ESCROW AGREEMENT ATTACHED THERETO.
The Escrow Agent will be relieved from any liability to any person for
any acts done by it in accordance with any decisions or actions of the Escrow
Agent other than an action or inaction constituting willful misconduct or
negligence. The Escrow Agent will be entitled to receive an initial fee to be
agreed upon by InVision and the Escrow Agent, which shall cover the first
year of the escrow, plus an annual fee thereafter, together with
reimbursement of extraordinary expenses incurred. InVision will pay all such
fees of Escrow Agent and will be entitled to reimbursement of one-half of
such fees out of the escrow in the form of Escrow Shares. All fees and
expenses of Agent will be paid by the Shareholders and not by InVision, and
shall also be out of the Escrow Shares, subject to subordination of
InVision's claims against the Escrow Shares.
VOTING AGREEMENTS
Pursuant to the Voting Agreements, the directors and officers of Quantum
and their affiliates (excluding InVision, the "Subject Shareholders"), who
collectively beneficially own in the aggregate approximately 32.2% of the
outstanding shares of Quantum Common Stock, approximately 67.0% of the
outstanding shares of Quantum Series A Stock, approximately 4.9% of the
outstanding shares of Quantum Series B Stock, approximately 24.9% of the
outstanding shares of Quantum Series C Stock, 48.3% of the votes represented
by the outstanding shares of
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Quantum Series A Stock and Quantum Series C Stock voting together as a single
class, and 37.5% of the votes represented by the outstanding shares of
Quantum Preferred Stock voting together as a single class (based upon the
number of shares of Quantum Capital Stock issued and outstanding as of
September 3, 1997), have agreed that, prior to the earlier to occur of the
valid termination of the Reorganization Agreement or the Effective Time (the
"Voting Agreement Expiration Date"), they will vote their shares (i) in favor
of the adoption and approval of the Reorganization Agreement and approval of
the Merger and approval of the amendment to the Quantum Articles of
Incorporation and (ii) against any action or agreement that would result in a
breach of any representation, warranty, covenant or obligation of Quantum in
the Reorganization Agreement.
Pursuant to the Voting Agreements, the Subject Shareholders have also
delivered to InVision irrevocable proxies with respect to matters covered by
the Voting Agreements. In addition, subject to certain exceptions, the
Subject Shareholders have agreed not to sell, transfer, dispose of, encumber
or otherwise reduce beneficial ownership of or risk relating to the shares of
Quantum Capital Stock held or subsequently acquired by them until the Voting
Agreement Expiration Date. The Subject Shareholders have also agreed that,
prior to the Voting Agreement Expiration Date, they will not, directly or
indirectly (i) solicit, initiate or encourage or induce the making or
announcement of any offer or proposal (other than an offer or proposal by
InVision) contemplating or otherwise relating to any Acquisition Transaction
(an "Acquisition Proposal") or take any action that could reasonably be
expected to lead to an Acquisition Proposal; (ii) furnish any information
regarding Quantum or any of its direct or indirect majority-owned
subsidiaries to any person in connection with or in response to an
Acquisition Proposal or potential Acquisition Proposal; (iii) engage in
discussions with any Person with respect to any Acquisition Proposal; (iv)
approve, endorse or recommend any Acquisition Proposal; or (v) enter into any
letter of intent or other similar document or any contract contemplating or
otherwise relating to any Acquisition Transaction. An "Acquisition
Transaction" is as defined in "The Reorganization
Agreement-Non-Solicitation."
AFFILIATE AGREEMENTS
It is a condition to consummation of the Merger that each person who is
reasonably determined to be an "affiliate," as such term is defined in Rule
145 promulgated under the Securities Act, of Quantum execute an agreement
that prohibits (i) the sale, pledge, transfer or other disposition of
InVision Common Stock received by such person in connection with the Merger
unless at such time: (a) such transfer shall be in conformity with the
provisions of Rule 145, (b) the Quantum shareholder shall have furnished to
InVision an opinion of counsel reasonably satisfactory to InVision, to the
effect that no registration under the Securities Act would be required in
connection with the proposed offer, sale, pledge, transfer or other
disposition, (c) a registration statement under the Securities Act covering
the proposed offer, sale, pledge, or other disposition shall be effective
under the Securities Act, or (d) if the Quantum shareholder is a partnership,
such transfer shall be a pro rata distribution from the Quantum shareholder
to its partners without receipt of consideration, and (ii) the sale, transfer
or other disposition of InVision Common Stock or options or other rights to
purchase such stock during the period ending on the date on which financial
results covering at least 30 days' combined operations of InVision and
Quantum are published by InVision. In addition, each such agreement
obligates the person signing such agreement to conduct any sale of shares of
InVision Common Stock received in the Merger, for a period of one year from
the Effective Time, through Donald & Co. Securities Inc. ("Donald & Co."),
acting as broker for such transaction, and allows Donald & Co. to inform
InVision of any impending sale of such shares.
In addition, a large shareholder of InVision and the directors and
officers of InVision and their affiliates are expected to enter into
agreements pursuant to which such persons will not sell, transfer or
otherwise dispose of, or reduce such person's interest in or risk relating to
any InVision Common Stock held by such person, or any InVision Common Stock
issued to such person upon exercise of any instrument exercisable for
InVision Common Stock held by such person during the period ending on the
date on which financial results covering at least 30 days' combined
operations of InVision and Quantum are published by InVision.
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EMPLOYMENT AGREEMENTS
It is a condition to the parties' respective obligations to consummate
the Merger that InVision enter into employment agreements (each, an
"Employment Agreement" and collectively, the "Employment Agreements") with
certain key employees of Quantum, including Lowell Burnett (Chairman of the
Board), Dale Sheets (President) and Andrew Hibbs (Chief Technical Officer).
All Employment Agreements will become effective upon the effectiveness of the
Merger and provide for the full-time employment of such persons for a period
of time (the "Employment Period") and with compensation as set forth in the
individual agreements. The Reorganization Agreement specifies that each
Employment Agreements shall provide for (i) a salary in the amount of such
Quantum employee's current salary with Quantum, (ii) severance benefits equal
to six months salary in the case of the three employees named above and three
months salary for the remaining employees, and (iii) shall otherwise be
substantially in the form of InVision's standard form of employment agreement.
NONCOMPETITION AGREEMENTS
It is a condition to the obligation of InVision to consummate the Merger
that certain key employees of Quantum, including Lowell Burnett, Dale Sheets
and Andrew Hibbs (the "Noncompete Employees"), each enter into a
Noncompetition Agreement with InVision and Quantum (each, a "Noncompetition
Agreement"). The Noncompetition Agreements contain provisions restricting
such employees, for a specified period following the later of the Effective
Time or cessation by InVision or Quantum to make salary, consulting fee or
severance payments to such person under a separate agreement or arrangement
(the "Restriction Period") (three years for Messrs. Burnett, Sheets and Hibbs
and one year for the other employees) from (i) owning, managing, operating,
joining, controlling, financing or participating in the ownership,
management, operation, control or financing of, or be connected as an
officer, director, employee, partner, principal, agent, representative,
consultant, licensor, licensee or otherwise with, any business or enterprise
engaged in any business which is competitive with the business of Quantum, or
(ii) engaging in any other manner in any business which is competitive with
the business of Quantum. In addition, the Noncompetition Agreements restrict
such employees from: (i) soliciting employees of Quantum or InVision to leave
his or her employment with such companies; or (ii) interfering or attempting
to interfere with any commercial relationship or prospective commercial
relationship of Quantum or InVision.
RELEASES
It is a condition to the obligation of InVision to consummate the Merger
that a release (each, a "Release") be executed by the holders of at least 90%
of the outstanding shares of Quantum Common Stock and all of the holders of
outstanding shares of Quantum Preferred Stock (including pursuant to the
exercise of warrants prior to the Effective Time) (each, a "Releasor"). Each
Release releases InVision, Quantum and their respective affiliates from any
and all past, present and future claims of every kind and nature, known or
unknown, whether as a shareholder, director, officer or employee of Quantum,
the Releasor or its "Associated Parties" may have (other than rights, if any,
under the Reorganization Agreement or the Escrow Agreement). "Associated
Parties" means and includes: (i) such Releasor's predecessors, successors,
executors, administrators, heirs and estate; (ii) such Releasor's past,
present and future assigns, agents and representatives; (iii) each entity
that such Releasor has the power to bind (by such Releasor's acts or
signature) or over which such Releasor directly or indirectly exercises
control; and (iv) each entity of which such Releasor owns, directly or
indirectly, at least 50% of the outstanding equity, beneficial, proprietary,
ownership or voting interests. Released claims are limited to matters
existing on or prior to the date of the Release.
Each Release contains representations and warranties of the Releasor as
to certain matters, including without limitation: no transfers of any claims;
no existence of claims; the binding nature of the Release; and the validity
of the Release. In addition, each Release obligates the Releasor to
indemnify InVision, Quantum and their respective affiliates from any and all
losses arising from such Releasor's failure to perform under the Release or
the assertion or purported assertion of any of the released claims by the
Releasor or any of their Associated Parties. The Release also provides that
the Releasor confirms the appointment and authority of the Agent to act in
his or her capacity as such. See "-Escrow Agent."
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INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of Quantum's management and Board of Directors may be
deemed to have certain interests in the Merger that are in addition to their
interests as shareholders of Quantum generally. The Quantum Board of
Directors was aware of these interests and considered them, among other
matters, in approving the Reorganization Agreement and the transactions
contemplated thereby. As described above under "-Employment Agreements,"
InVision has entered into employment agreements with certain key employees of
Quantum. Upon effectiveness of the Merger, each such Quantum employee will
be entitled to receive the benefits under his respective employment
agreement. In addition, Dr. Sergio Magistri, a director of Quantum, is also
a director and the President and Chief Executive Officer of InVision.
LISTING OF INVISION COMMON STOCK ON THE NASDAQ NATIONAL MARKET
It is a condition to InVision's and Quantum's obligation to consummate
the Merger that the shares of InVision Common Stock to be issued pursuant to
the Reorganization Agreement be approved for listing on the Nasdaq National
Market.
MERGER EXPENSES AND FEES AND OTHER COSTS
InVision and Quantum estimate that they will incur direct transaction
costs of approximately $700,000 associated with the Merger. See "Unaudited
Pro Forma Financial Information."
InVision and Quantum have agreed that, whether or not the Merger is
consummated, all fees and expenses incurred in connection with the
Reorganization Agreement and the transactions contemplated by the
Reorganization Agreement shall be paid by the party incurring such expenses,
except that fees and expenses (other than attorneys' fees) incurred in
connection with the printing and filing of the Registration Statement and
this Proxy Statement/ Prospectus will be borne solely by InVision, and the
cost of the solicitation of proxies and all related costs will be borne by
Quantum; provided, however, that if Quantum or any person on its behalf shall
incur expenses and fees in excess of $50,000, such event would constitute a
breach of a covenant in the Reorganization Agreement and such excess amount
of fees would be recoverable by InVision pursuant to the indemnification
provisions and obligations of Quantum under the Reorganization Agreement and
the Escrow Agreement (as defined under "-Escrow Agreement").
ACCOUNTING TREATMENT
The Merger is intended to qualify as a pooling of interests for
financial reporting purposes in accordance with generally accepted accounting
principles. Consummation of the Merger is conditioned upon receipt at the
closing of the Merger by InVision of a letter from Price Waterhouse LLP,
InVision's independent accountants, reaffirming their concurrence with
InVision management's and Quantum management's conclusions, respectively, as
to the appropriateness of pooling-of-interests accounting for the Merger, if
consummated in accordance with the Reorganization Agreement, under Accounting
Principles Board Opinion No. 16 and the related interpretation of the
American Institute of Certified Public Accountants and the Financial
Accounting Standard Board and the rules and regulations of the Securities and
Exchange Commission. On September 3, 1997, InVision received a preliminary
letter from Price Waterhouse LLP affirming their concurrence with InVision
management's and Quantum management's conclusions that as of September 3,
1997 no conditions existed that would preclude accounting for the Merger as a
pooling-of-interests.
InVision has the right to waive the condition that the Merger be
accounted for as a pooling of interests. If the Merger is consummated but
fails to qualify for pooling-of-interests accounting treatment, then the
transaction would be accounted for as a purchase. Accounting for the Merger
as a purchase could result in a significant intangible asset or a significant
charge against results of operations or both, which could materially and
adversely affect InVision's future results of operations.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material federal income tax
considerations of the Merger that are generally applicable to holders of
Quantum Capital Stock. This discussion is based on currently existing
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
existing and proposed Treasury Regulations thereunder and current
administrative rulings and court decisions, all of which are subject to
change. Any such change, which may or may not be retroactive, could alter
the tax consequences to InVision, Quantum or Quantum shareholders as
described herein.
Quantum shareholders should be aware that this discussion does not
deal with all U.S. federal income tax considerations that may be relevant to
particular Quantum shareholders in light of their particular circumstances,
such as shareholders who are dealers in securities, who are subject to the
alternative minimum tax provisions of the Code, who are foreign persons, or
who acquired their shares in connection with stock option or stock purchase
plans or in other compensatory transactions. In addition, the following
discussion does not address the tax consequences of the Merger under foreign,
state or local tax laws or the tax consequences of transactions effectuated
prior to or after the Merger (whether or not such transactions are in
connection with the Merger). Accordingly, Quantum SHAREHOLDERS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC CONSEQUENCES OF THE MERGER,
INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES
TO THEM OF THE MERGER IN THEIR PARTICULAR CIRCUMSTANCES.
Neither InVision nor Quantum has requested a ruling from the Internal
Revenue Service (the "IRS") with regard to any of the U.S. federal income tax
consequences of the Merger. Branton, Wilson & Muns, counsel to Quantum, and
Cooley Godward LLP, counsel to InVision, have each rendered an opinion
(collectively, the "Tax Opinions") that the Merger will constitute a
reorganization under Section 368(a) of the Code (a "Reorganization"). Such
opinions are based on certain assumptions as well as representations received
from InVision and Quantum (including an assumption, based on representations,
concerning the "continuity of interest" requirement discussed below) and are
subject to the limitations discussed below. Moreover, such opinions will not
be binding on the IRS nor preclude the IRS from adopting a contrary position.
The discussion below assumes that the Merger will qualify as a
Reorganization, based upon such opinions.
Subject to the limitations and qualifications referred to herein, and as
a result of the Merger's qualifying as a Reorganization, the following U.S.
federal income tax consequences should result:
(i) No gain or loss will be recognized by the holders of Quantum
Capital Stock upon the receipt of InVision Common Stock solely in exchange
for such Quantum Capital Stock in the Merger (except to the extent of cash
received in lieu of fractional shares);
(ii) The aggregate tax basis of the InVision Common Stock so received
by Quantum shareholders in the Merger (including any fractional share of
InVision Common Stock not actually received) will be the same as the
aggregate tax basis of Quantum Common Stock surrendered in exchange therefor;
(iii) The holding period of the InVision Common Stock so received by
each Quantum shareholder in the Merger will include the period for which the
Quantum Capital Stock surrendered in exchange therefor was considered to be
held, provided that the Quantum Capital Stock so surrendered is held as a
capital asset at the Effective Time;
(iv) Cash payments received by holders of Quantum Capital Stock in lieu
of a fractional share will be treated as if such fractional share of
InVision Common Stock had been issued in the Merger and then redeemed by
InVision. A Quantum shareholder receiving such cash will recognize gain or
loss upon such payment, measured by the difference (if any) between the
amount of cash received and the basis in such fractional share. The gain or
loss should be capital gain or loss provided that such share of Quantum
Capital Stock was held as a capital asset at the Effective Time; and
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(v) Neither InVision nor Quantum will recognize gain solely as a result
of the Merger.
The Tax Opinions are subject to certain assumptions and qualifications
and are based on the truth and accuracy of certain representations of
InVision, Quantum and certain shareholders of Quantum, including
representations in certain certificates delivered to counsel by the
respective managements of InVision and Quantum and certain shareholders of
Quantum. Of particular importance are the assumptions and representations
relating to the "continuity of interest" requirement.
To satisfy the "continuity of interest" requirement, Quantum
shareholders must not, pursuant to a plan or intent existing at or prior to
the Effective Time, dispose of or transfer so much of either (i) their
Quantum Capital Stock in anticipation of the Merger or (ii) the InVision
Common Stock to be received in the Merger (collectively, "Planned
Dispositions"), such that the Quantum shareholders, as a group, would no
longer have a significant equity interest in the Quantum business being
conducted by InVision after the Merger. Quantum shareholders will generally
be regarded as having a significant equity interest as long as the InVision
Common Stock received in the Merger (after taking into account Planned
Dispositions), in the aggregate, represents a substantial portion of the
entire consideration received by the Quantum shareholders in the Merger. No
assurance can be made that the "continuity of interest" requirement will be
satisfied, and if such requirement is not satisfied, the Merger would not be
treated as a Reorganization.
A successful IRS challenge to the Reorganization status of the Merger
(as a result of a failure of the "continuity of interest" requirement or
otherwise) would result in significant adverse tax consequences to the
Quantum shareholders. A Quantum shareholder would recognize gain or loss
with respect to each share of Quantum Common Stock surrendered equal to the
difference between the shareholder's basis in such share and the fair market
value, as of the Effective Time, of the InVision Common Stock received in
exchange therefor. In such event, a shareholder's aggregate basis in the
InVision Common Stock so received would equal its fair market value, and the
shareholder's holding period for such stock would begin the day after the
Closing Date.
THE REORGANIZATION AGREEMENT
GENERAL
THE FOLLOWING DESCRIPTION OF THE REORGANIZATION AGREEMENT IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO THE COMPLETE TEXT OF THE REORGANIZATION
AGREEMENT, WHICH IS INCORPORATED BY REFERENCE HEREIN AND A COPY OF WHICH IS
ANNEXED TO THIS PROXY STATEMENT/PROSPECTUS AS APPENDIX A.
The Reorganization Agreement provides for the merger of Merger Sub with
and into Quantum. As a result of the Merger, Merger Sub shall cease to
exist, Quantum will become a wholly owned subsidiary of InVision, and the
former shareholders of Quantum will become shareholders of InVision. Quantum
will continue as the surviving corporation of the Merger (the "Surviving
Corporation") and will retain all of its separate corporate existence, with
all its purposes, objects, rights, privileges, powers and franchises
unaffected by the Merger. Merger Sub has been formed solely for the purpose
of effecting the Merger, and there will be no other activity in Merger Sub.
The Merger will become effective upon the filing of an Agreement of Merger
with the California Secretary of State or at such later time as may be
specified in the Agreement of Merger. Such filing is anticipated to take
place as soon as practicable after the adoption and approval of the
Reorganization Agreement and approval of the Merger by the Quantum
shareholders, subject to the satisfaction or waiver of the other conditions
to the Merger. It is currently anticipated that the Effective Time will
occur at the end of September 1997. There can be no assurance, however, that
the other conditions to the Merger will be satisfied by such date, or at all,
or that the Reorganization Agreement will not be terminated. See
"-Conditions to the Merger."
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MERGER CONSIDERATION
CONSIDERATION FOR CAPITAL STOCK. For a description of the consideration
to be received in the Merger by the holders of Quantum Capital Stock, see
"Approval of the Merger and Related Transactions-Merger Consideration."
STOCK OPTIONS. For a description of the treatment of the Quantum stock
options, see "Approval of the Merger and Related Transactions-Stock Options."
EXCHANGE OF SHARES. For a description of exchange procedures, see
"Approval of the Merger and Related Transactions-Conversion of Shares;
Procedures for Exchange of Certificates; No Fractional Shares."
APPRAISAL RIGHTS
For a discussion of dissenters' appraisal rights, see "Approval of the
Merger and Related Transactions- Appraisal Rights."
CORPORATE MATTERS
As of the Effective Time, the Articles of Incorporation of the Surviving
Corporation will be amended and restated to conform to the form of articles
of incorporation attached to the Reorganization Agreement, and the Bylaws of
the Surviving Corporation will be amended and restated to conform to the
Bylaws of Merger Sub as in effect immediately prior to the Effective Time.
Concurrently with the Effective Time, the directors and officers of Quantum
will resign and the directors and officers of the Surviving Corporation shall
be as set forth in the Reorganization Agreement.
CONDITIONS TO THE MERGER
INVISION AND MERGER SUB. The obligations of InVision and Merger Sub to
effect the Merger and otherwise consummate the transactions contemplated by
the Reorganization Agreement are subject to the satisfaction, at or prior to
the consummation of the transactions contemplated by the Reorganization
Agreement (the "Closing"), of each of the following conditions:
(i) each of the representations and warranties made by Quantum in the
Reorganization Agreement and in each of the other agreements and instruments
delivered to InVision in connection with the transactions contemplated by the
Reorganization Agreement shall have been accurate in all material respects as
of the date of the Reorganization Agreement (without giving effect to any
"Material Adverse Effect" (as defined below) or other materiality
qualifications, or any similar qualifications, contained or incorporated
directly or indirectly in such representations and warranties), and shall be
accurate in all material respects as of the "Scheduled Closing Time" (10:00
a.m. on September 30, 1997 or such other time as InVision shall designate on
at least five day's prior notice to Quantum), as if made at such time
(without giving effect to any update to the disclosure schedule to the
Reorganization Agreement and without giving effect to any Material Adverse
Effect or other materiality qualifications, or any similar qualifications,
contained or incorporated directly or indirectly in such representations and
warranties);
(ii) each covenant or obligation that Quantum is required to comply with
or to perform at or prior to the Closing shall have been complied with and
performed in all material respects (including the covenant to have the
amendment to the Quantum Articles of Incorporation referred to in "Approval
of the Amendment of the Quantum Articles of Incorporation" duly approved by
the Quantum Board of Directors and shareholders and filed with the Secretary
of State of the State of California);
(iii) the Reorganization Agreement shall have been duly adopted and the
Merger shall have been duly approved by holders of all of the shares of
Quantum Capital Stock;
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(iv) all consents required to be obtained in connection with the Merger
and the other transactions contemplated by the Reorganization Agreement, in
form and substance satisfactory to InVision, shall have been obtained and
shall be in full force and effect;
(v) InVision and Quantum shall have received the following agreements
and documents (each of which shall be in full force and effect): (a)
Affiliate Agreements in the form attached to the Reorganization Agreement,
executed by the persons designated in the Reorganization Agreement and each
other person who is reasonably determined to be an "affiliate" of Quantum (as
that term is used in Rule 145 promulgated under the Securities Act); (b) the
Noncompetition Agreements referred to in "Approval of the Merger and Related
Transactions-Noncompetition Agreements," executed by the individuals to whom
they apply; (c) a general release from liability in the form attached to the
Reorganization Agreement, executed by the persons holding at least 90% of the
outstanding shares of Quantum Common Stock and all of the outstanding shares
of Quantum Series A Stock, Quantum Series B Stock and Quantum Series C Stock;
(d) the termination of any existing agreements relating to registration,
pre-emptive or other similar rights of shareholders of Quantum; (e)
confidential invention and assignment agreements, reasonably satisfactory in
form and content to InVision, executed by all employees and former employees
of Quantum and by all consultants and independent contractors and former
consultants and former independent contractors to Quantum who have not
already signed such agreements; (f) the U.S. Treasury Department certificate
specified in Section 6.6(f) of the Reorganization Agreement, executed by
Quantum; (g) Continuity of Interest Certificates in the form attached to the
Reorganization Agreement, executed by each holder of more than 1% of Quantum
Capital Stock; (h) an estoppel certificate, dated as of a date not more than
five days prior to the Closing Date and satisfactory in form and content to
InVision, executed by any and all lessors of real property to Quantum; (i) a
legal opinion of Branton, Wilson & Muns, dated as of the Closing Date,
substantially to the effect as attached to the Reorganization Agreement; (j)
the legal opinion of a reputable law firm reasonably satisfactory, in form
and substance to InVision, relating to government contracts to which Quantum
is a party; (k) a legal opinion of Cooley Godward LLP (it being understood
that, in rendering such opinion, such counsel may rely upon certain tax
representation letters and the Continuity of Interest Certificates referred
to in clause (g) above), dated as of the Closing Date and addressed to
InVision, to the effect that the Merger will constitute a reorganization
within the meaning of Section 368 of the Code; (l) a letter from Price
Waterhouse LLP, dated as of the Closing Date and addressed to InVision,
confirming that InVision may account for the Merger as a "pooling of
interests" in accordance with generally accepted accounting principles,
Accounting Principles Board Opinion No. 16 and all published rules,
regulations and policies of the SEC; (m) a certificate executed by Quantum's
President (the "Closing Certificate") confirming that the representations and
warranties of Quantum set forth in the Reorganization Agreement and the
conditions set forth in conditions set forth in clause "(i)", clause "(ii)",
clause "(iii)", and clause "(iv)" of this paragraph have been duly satisfied;
(n) the Escrow Agreement executed by InVision, Quantum, the Agent and the
Escrow Agent (each as defined in "Approval of the Merger and Related
Transactions-Escrow Agreement"); and (o) the written resignations of all
directors of Quantum, effective as of the Effective Time;
(vi) none of certain specified individuals shall have ceased to be
employed by Quantum, or shall have expressed an intention to terminate his or
her employment with Quantum; and not more than 10% of the remaining employees
of Quantum shall have ceased to be employed by Quantum or shall have
expressed an intention to terminate their employment with Quantum;
(vii) Quantum shall have provided InVision with evidence, reasonably
satisfactory to InVision, relating to proper legending of certain information
provided or made available by or on behalf of InVision to governmental bodies
in connection with government contracts of Quantum;
(viii) Quantum shall have provided InVision with evidence, reasonably
satisfactory to InVision, as to the termination of Quantum's employee benefit
plans;
(ix) Quantum shall have filed with the Internal Revenue Service the
notification required for compliance with certain United States Treasury
Regulations;
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(x) The Registration Statement shall have become effective in accordance
with the provisions of the Securities Act, and no stop order shall have been
issued by the SEC with respect to the Registration Statement;
(xi) the shares of Quantum Common Stock to be issued in the Merger shall
have been approved for listing (subject to notice of issuance) on the Nasdaq
National Market;
(xii) no temporary restraining order, preliminary or permanent
injunction or other order preventing the consummation of the Merger shall
have been issued by any court of competent jurisdiction and remain in effect,
and there shall not be any legal requirement enacted or deemed applicable to
the Merger that makes consummation of the Merger illegal;
(xiii) there shall not be pending or threatened any legal proceeding:
(a) challenging or seeking to restrain or prohibit the consummation of the
Merger; (b) relating to the Merger and seeking to obtain from InVision or any
of its subsidiaries any damages that may be material to InVision; (c) seeking
to prohibit or limit in any material respect InVision's ability to vote,
receive dividends with respect to or otherwise exercise ownership rights with
respect to the stock of the Surviving Corporation; or (d) which would
materially and adversely affect the right of InVision, the Surviving
Corporation or any subsidiary of InVision to own the assets or operate the
business of Quantum; and
(xiv) the Employment Agreements referred to in "Approval of the Merger
and Related Transactions- Employment Agreements," shall have been executed by
the individuals to whom they apply.
For purposes of the Reorganization Agreement, a violation or other
matter will be deemed to have a "Material Adverse Effect" on Quantum if such
violation or other matter (considered together with all other matters that
would constitute exceptions to the representations and warranties set forth
in the Reorganization Agreement or in the Closing Certificate but for the
presence of "Material Adverse Effect" or other materiality qualifications, or
any similar qualifications, in such representations and warranties) would
have a material adverse effect on Quantum's business, condition, assets,
liabilities, operations, financial performance or prospects.
All the conditions to InVision's and Merger Sub's obligation to effect
the Merger must either be satisfied or waived by InVision prior to the
consummation of the Merger.
QUANTUM. The obligation of Quantum to effect the Merger and otherwise
consummate the transactions contemplated by the Reorganization Agreement is
subject to the satisfaction, at or prior to the Closing, of the following
conditions:
(i) the representations and warranties of InVision and Merger Sub
contained in the Reorganization Agreement shall have been accurate in all
material respects as of the date of this Agreement (without giving effect to
any materiality or similar qualifications contained in such representations
and warranties), and shall be accurate in all material respects as of the
Scheduled Closing Time as if made at such time (without giving effect to any
materiality or similar qualifications contained in such representations and
warranties);
(ii) all of the covenants and obligations that InVision and Merger Sub
are required to comply with or to perform at or prior to the Closing shall
have been complied with and performed in all material respects;
(iii) Quantum shall have received the following documents: (a) a legal
opinion of Cooley Godward LLP, dated as of the Closing Date, substantially to
the effect as attached to the Reorganization Agreement; and (b) a legal
opinion of Branton, Wilson & Muns (or, if Branton, Wilson & Muns for any
reason does not render such legal opinion, a legal opinion of Cooley Godward
LLP), dated as of the Closing Date, to the effect that the Merger will
constitute a reorganization within the meaning of Section 368 of the Code (it
being understood that, in rendering such opinion, such counsel may rely upon
the tax representation letters and the Continuity of Interest Certificates it
relies on in rendering such opinion to InVision (see "-InVision and Merger
Sub" above);
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(iv) the shares of InVision Common Stock to be issued in the Merger
shall have been approved for listing (subject to notice of issuance) on the
Nasdaq National Market;
(v) no temporary restraining order, preliminary or permanent injunction
or other order preventing the consummation of the Merger shall have been
issued by any court of competent jurisdiction and remain in effect, and there
shall not be any legal requirement enacted or deemed applicable to the Merger
that makes consummation of the Merger illegal; and
(vi) the Employment Agreements referred to in "Approval of the Merger
and Related Transactions-Employment Agreements," shall have been executed by
InVision.
All the conditions to Quantum's obligation to effect the Merger must
either be satisfied or waived by Quantum prior to the consummation of the
Merger.
REPRESENTATIONS AND WARRANTIES
The Reorganization Agreement contains certain representations and
warranties, including without limitation, representations and warranties by
Quantum as to: (i) due organization and subsidiaries; (ii) charter documents
and bylaws; (iii) capitalization; (iv) financial statements; (v) absence of
certain changes; (vi) title to assets; (vii) bank accounts, receivable and
inventory; (viii) equipment and leaseholds; (ix) proprietary assets; (x)
contracts; (xi) liabilities; (xii) compliance with legal requirements; (xiii)
governmental authorizations; (xiv) tax matters; (xv) employee and labor
matters and benefit plans; (xvi) environmental matters; (xvii) controlled
substances and explosives; (xviii) insurance; (xix) transactions with
affiliates; (xx) legal proceedings and orders; (xxi) authority and binding
nature of the Reorganization Agreement; (xxii) non-contravention and
consents; (xxiii) full disclosure; and (xxiv) brokers, finders, investment
bankers or other fees or commissions.
The Reorganization Agreement contains further representations and
warranties by InVision and Merger Sub as to: (i) filings with the SEC and
financial statements; (ii) authority and binding nature of the Reorganization
Agreement; and (iii) valid issuance of and reservation of InVision Common
Stock.
COVENANTS
CERTAIN COVENANTS OF QUANTUM. The Reorganization Agreement requires
that, from the date of the execution of the Reorganization Agreement until
the Effective Time:
(i) Quantum shall, and shall cause its officers, directors, employees,
agents, attorneys, accountants, advisors and representatives
("Representatives") to, provide InVision and InVision's Representatives with
reasonable access to Quantum's Representatives, personnel, assets, books,
records, tax returns, work papers and other documents and information
relating to Quantum and such copies of the existing books, records, tax
returns, work papers and other documents relating to Quantum, and with such
additional financial, operating and other data and information regarding
Quantum, as InVision may reasonably request;
(ii) (a) Quantum shall conduct its business and operations in the
ordinary course and in accordance with past practices; (b) Quantum shall use
reasonable efforts to preserve intact its current business organization, keep
available the services of its current officers and employees and maintain its
relations and goodwill with all suppliers, customers, landlords, creditors,
employees and other persons or entities having business relationships with
Quantum; (c) Quantum shall keep in full force its material insurance
policies; (d) Quantum shall cause its officers to report regularly in writing
(but in no event less frequently than weekly) to InVision concerning the
status of Quantum's business; (e) Quantum shall not declare, accrue, set
aside or pay any dividend or make any other distribution in respect of any
shares of capital stock, and shall not repurchase, redeem or otherwise
reacquire any shares of capital stock or other securities (except that
Quantum may repurchase Quantum Common Stock from former employees pursuant to
the terms of existing restricted stock purchase agreements); (f) Quantum
shall not sell, issue or authorize the issuance of (i) any capital stock or
other security, (ii) any option or right to acquire any capital stock or
other
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security, or (iii) any instrument convertible into or exchangeable for any
capital stock or other security (except that Quantum shall be permitted (x)
to issue Quantum Common Stock to employees upon the exercise of outstanding
Quantum Options, (y) to issue to holders of outstanding Quantum warrants
Quantum Series A Stock or Quantum Series C Stock issuable upon the exercise
of such Quantum warrants, and (z) to issue shares of Quantum Common Stock
upon the conversion of shares of Quantum's outstanding Preferred Stock); (g)
Quantum shall not amend or waive any of its rights under, or permit the
acceleration of vesting under, (i) any provision of Quantum's 1994 Qualified
and Nonqualified Stock Option Plan, (ii) any provision of any agreement
evidencing any outstanding Quantum Option, (iii) any provision of any
restricted stock purchase agreement, or (iv) any provision of any agreement
evidencing any outstanding Quantum warrant; (h) Quantum shall not amend or
permit the adoption of any amendment to Quantum's articles of incorporation
or bylaws, or effect or permit Quantum to become a party to any Acquisition
Transaction (as defined in "-Non-Solicitation" below), recapitalization,
reclassification of shares, stock split, reverse stock split or similar
transaction; (i) Quantum shall not form any subsidiary or acquire any equity
interest or other interest in any other entity; (j) Quantum shall not make
any capital expenditure, except for capital expenditures that, when added to
all other capital expenditures made on behalf of Quantum during the period
prior to the Closing, do not exceed $10,000 per month; (k) Quantum shall not
(i) enter into, or permit any of the assets owned or used by it to become
bound by, any contract that is or would constitute a material contract, or
(ii) amend or prematurely terminate, or waive any material right or remedy
under, any such contract; (l) Quantum shall not (i) acquire, lease or license
any right or other asset from any other person, (ii) sell or otherwise
dispose of, or lease or license, any right or other asset to any other
person, or (iii) waive or relinquish any right, except for assets acquired,
leased, licensed or disposed of by Quantum pursuant to contracts that are not
material contracts; (m) Quantum shall not (i) lend money to any Person
(except that Quantum may make routine travel advances to employees in the
ordinary course of business), or (ii) incur or guarantee any indebtedness for
borrowed money (except that Quantum may make routine borrowings in the
ordinary course of business under its line of credit with Silicon Valley
Bank, N.A.); (n) Quantum shall not (i) establish, adopt or amend any employee
benefit plan, (ii) pay any bonus or make any profit-sharing payment, cash
incentive payment or similar payment to, or increase the amount of the wages,
salary, commissions, fringe benefits or other compensation or remuneration
payable to, any of Quantum's directors, officers or employees, (iii) hire any
new employees, or (iv) enter into new employment or consulting agreements or
modify existing employment or consulting agreements; (o) Quantum shall not
change any of its methods of accounting or accounting practices in any
material respect; (p) Quantum shall not make any tax election; (q) Quantum
shall not commence or settle any material legal proceeding; and Quantum shall
not agree or commit to take any of the actions described in clauses "(e)"
through "(q)" above;
(iii) Quantum shall promptly notify InVision in writing: (a) of the
discovery by Quantum of any event, condition, fact or circumstance that
occurred or existed on or prior to the date of the Reorganization Agreement
and that caused or constitutes an inaccuracy in or breach of any
representation or warranty made by Quantum in the Reorganization Agreement;
(b) any event, condition, fact or circumstance that occurs, arises or exists
after the date of the Reorganization Agreement and that would cause or
constitute an inaccuracy in or breach of any representation or warranty made
by Quantum in the Reorganization Agreement if (A) such representation or
warranty had been made as of the time of the occurrence, existence or
discovery of such event, condition, fact or circumstance, or (B) such event,
condition, fact or circumstance had occurred, arisen or existed on or prior
to the date of the Reorganization Agreement; (c) any breach of any covenant
or obligation of Quantum; and (d) any event, condition, fact or circumstance
that would make the timely satisfaction of any of the conditions set forth in
"-Conditions to the Merger" impossible or unlikely;
(iv) Quantum shall not (and shall ensure that its Representatives shall
not), directly or indirectly: (a) solicit or encourage the initiation of any
inquiry, proposal or offer from any person (other than InVision) relating to
a possible Acquisition Transaction (as defined in "-Non-Solicitation" below);
(b) participate in any discussions or negotiations or enter into any
agreement with, or provide any non-public information to, any person (other
than InVision) relating to or in connection with a possible Acquisition
Transaction; or (c) consider, entertain or accept any proposal or offer from
any person (other than InVision) relating to a possible Acquisition
Transaction; and
(iv) Quantum shall not incur, nor permit any other person to incur, any
fees, costs and expenses relating to the Merger and the transactions
contemplated by the Reorganization Agreement, by or for the benefit of
InVision
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(including all such fees, costs and expenses incurred prior to the date of
the Reorganization Agreement and including the amount of all special bonuses
and other amounts that may become payable to any officers of Quantum or other
persons in connection with the consummation of the transactions contemplated
by the Reorganization Agreement) that shall exceed $50,000 in the aggregate.
ADDITIONAL COVENANTS OF THE PARTIES. The Reorganization Agreement also
contains certain additional covenants of the parties including covenants
relating to: (i) subject to certain limitations, the making and filing of
filings, consents and notices; (ii) the preparation and filing of the
Registration Statement; (iii) Quantum's obligations with respect to the
Quantum Shareholders Meeting; (iv) press releases, public statements and
other disclosures regarding the Merger, the Reorganization Agreement and the
transactions contemplated thereby; (v) actions regarding "pooling of
interests" accounting for the Merger; (vi) affiliate agreements; (vii)
reasonable best efforts to cause the conditions set forth in "-Conditions to
the Merger" to be timely satisfied; (viii) tax opinion back-up certificates;
(ix) Quantum's obligations to obtain the Noncompetition Agreements referred
to in "Approval of the Merger and Related Transactions-Noncompetition
Agreements"; (x) the termination of certain stockholder agreements; (xi)
employee retention plan; (xii) tax matters; (xiii) Quantum's obligations to
secure releases from liability; (xiv) termination of existing Quantum
employee benefit plans; (xv) the Escrow Agreement (as defined in "Approval of
the Merger and Related Transactions-Escrow Agreement"); and (xvi) InVision's
ability to appoint the Escrow Agent; and (xvii) Quantum's obligations to
cause the proposed amendment to the Quantum Articles of Incorporation to be
approved by the Quantum shareholders and filed with the Secretary of State of
the State of California.
Quantum has agreed in the Reorganization Agreement (i) to take all
action necessary in accordance with all applicable law to call, give notice
of, convene and hold the Quantum Shareholders Meeting, and (ii) not to
withdraw, amend or modify, or propose or resolve to withdraw, amend or
modify, in a manner adverse to InVision the unanimous recommendation of the
Quantum Board of Directors that the Quantum shareholders vote in favor of and
adopt and approve the Reorganization Agreement and the Merger.
NON-SOLICITATION
Pursuant to the Reorganization Agreement, Quantum has agreed that it
will not (and shall ensure that its Representatives shall not), directly or
indirectly: (a) solicit or encourage the initiation of any inquiry, proposal
or offer from any person (other than InVision) relating to a possible
Acquisition Transaction; (b) participate in any discussions or negotiations
or enter into any agreement with, or provide any non-public information to,
any person (other than InVision) relating to or in connection with a possible
Acquisition Transaction; or (c) consider, entertain or accept any proposal or
offer from any person (other than InVision) relating to a possible
Acquisition Transaction. Quantum has also agreed that it shall promptly
notify InVision in writing of any material inquiry, proposal or offer
relating to a possible Acquisition Transaction that is received by Quantum or
any of its Representatives during the period prior to closing.
An "Acquisition Transaction" means any transaction involving: (a) the
sale, license, disposition or acquisition of all or a material portion of
Quantum's business or assets; (b) the issuance, disposition or acquisition of
(i) any capital stock or other equity security of Quantum (other than common
stock issued to employees of Quantum, upon exercise of Quantum Options or
otherwise, in routine transactions in accordance with Quantum's past
practices), (ii) any option, call, warrant or right (whether or not
immediately exercisable) to acquire any capital stock or other equity
security of Quantum (other than stock options granted to employees of Quantum
in routine transactions in accordance with Quantum's past practices), or
(iii) any security, instrument or obligation that is or may become
convertible into or exchangeable for any capital stock or other equity
security of Quantum; or (c) any merger, consolidation, business combination,
reorganization or similar transaction involving Quantum.
INDEMNIFICATION
SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties made by Quantum (including the representations and warranties set
forth in the Closing Certificate) shall survive the Closing and shall
49
<PAGE>
expire on the first anniversary of the Closing Date; PROVIDED, HOWEVER, that
if, at any time prior to the first anniversary of the Closing Date, any
Indemnitee (acting in good faith) delivers to the Agent a written notice
alleging the existence of an inaccuracy in or a breach of any of the
representations and warranties made by Quantum (and setting forth in
reasonable detail the basis for such Indemnitee's belief that such an
inaccuracy or breach may exist) and asserting a claim for recovery based on
such alleged inaccuracy or breach, then the claim asserted in such notice
shall survive the first anniversary of the Closing until such time as such
claim is fully and finally resolved. All representations and warranties made
by InVision and Merger Sub shall terminate and expire as of the Effective
Time, and any liability of InVision or Merger Sub with respect to such
representations and warranties shall thereupon cease.
INDEMNIFICATION. Pursuant to the Reorganization Agreement, Quantum has
agreed that InVision, its current and future affiliates (including the
Surviving Corporation), their respective Representatives and all such
respective successors and assigns (other than Quantum's shareholders,
excluding InVision) (collectively, the "Indemnitees") shall be indemnified
from and against, and shall be compensated and reimbursed, for any loss,
damage, injury, decline in value, lost opportunity, liability, claim, demand,
settlement, judgment, award, fine, penalty, tax, fee (including reasonable
attorneys' fees), charge, cost (including costs of investigation) or expense
of any nature (collectively, "Damages") incurred by any of the Indemnitees or
to which the Indemnitees may otherwise become subject in each case arising
out of (i) any breach of the representations, warranties or covenants given
or made by Quantum in the Reorganization Agreement (collectively, "Breaches")
or (ii) any litigation, controversy or disputes involving Quantum and any of
EG&G Astrophysics, Rapiscan Security Products, Inc., Heimann Systems GmbH or
certain other specified persons or any of their respective affiliates
(collectively, the "Disputes"). No such indemnification payment shall be
made for Breaches until such time as all Damages for Breaches exceed
$100,000. Once the Damages for Breaches exceeds $100,000, the Indemnitees
shall be entitled to be indemnified for all Damages, including such $100,000.
The $100,000 minimum threshold does not apply to Damages arising from the
Disputes.
THE ESCROW. To secure the indemnification obligations of Quantum, 12%
of the shares of InVision Common Stock issued to each Quantum shareholder in
the Merger (and option holder if an option is exercised within one year from
the Closing Date) will be placed in escrow for one year. See "Approval of
the Merger and Related Transactions-Escrow Agreement."
TERMINATION
The Reorganization Agreement may be terminated prior to the Effective
Time, whether before or after approval of the Merger by the shareholders of
Quantum:
(i) by InVision if InVision reasonably determines that the timely
satisfaction of any condition set forth in "-Conditions to the
Merger-InVision and Merger Sub" has become impossible (other than as a result
of any failure on the part of InVision or Merger Sub to comply with or
perform any covenant or obligation of InVision or Merger Sub set forth in the
Reorganization Agreement);
(ii) by Quantum if Quantum reasonably determines that the timely
satisfaction of any condition set forth in "-Conditions to the
Merger-Quantum" has become impossible (other than as a result of any failure
on the part of Quantum to comply with or perform any covenant or obligation
set forth in the Reorganization Agreement or in any other agreement or
instrument delivered to InVision);
(iii) by InVision at or after the Scheduled Closing Time if any
condition set forth in "-Conditions to the Merger-InVision and Merger Sub"
has not been satisfied by the Scheduled Closing Time;
(iv) by Quantum at or after the Scheduled Closing Time if any
condition set forth in "-Conditions to the Merger-Quantum" has not been
satisfied by the Scheduled Closing Time;
50
<PAGE>
(v) by InVision if the Closing has not taken place on or before
December 15, 1997 (other than as a result of any failure on the part of
InVision to comply with or perform any covenant or obligation of InVision set
forth in the Reorganization Agreement);
(vi) by Quantum if the Closing has not taken place on or before
December 15, 1997 (other than as a result of the failure on the part of
Quantum to comply with or perform any covenant or obligation set forth in the
Reorganization Agreement or in any other agreement or instrument delivered to
InVision);
(vii) by InVision if InVision shall have determined that there has
occurred an event or series of events resulting, either individually or in
the aggregate, in a Material Adverse Effect on Quantum since the date of this
Agreement; or
(viii) by the mutual consent of InVision and Quantum.
EXPENSES
Pursuant to the Reorganization Agreement, all fees and expenses incurred
in connection with the Reorganization Agreement and the transactions
contemplated by the Reorganization Agreement shall be paid by the party
incurring such expenses, whether or not the Merger is consummated; provided,
however, that if Quantum or any person on its behalf shall incur expenses and
fees in excess of $50,000, such event would constitute a breach of a covenant
in the Reorganization Agreement and such excess amount of fees would be
recoverable by InVision pursuant to the indemnification provisions and
obligations of Quantum under the Reorganization Agreement and the Escrow
Agreement (as defined under "Approval of the Merger and Related
Transactions-Escrow Agreement"). See "-Indemnification."
AMENDMENTS; WAIVER
The Reorganization Agreement may be amended with the approval of the
respective Boards of Directors of Quantum and InVision at any time before or
after adoption and approval of the Reorganization Agreement by the
shareholders of Quantum; provided, however, that after any such adoption and
approval of the Reorganization Agreement and the Merger by Quantum's
shareholders, no amendment shall be made which by law requires further
approval of the shareholders of Quantum without the further approval of such
shareholders. The Reorganization Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties thereto. No
waiver under the Reorganization Agreement will be effective unless it is
expressly set forth in a written instrument duly executed and delivered on
behalf of the party against whom the enforcement of such waiver is being
sought.
APPROVAL OF THE AMENDMENT OF
THE QUANTUM ARTICLES OF INCORPORATION
It is a condition to the closing of the Merger that the Quantum Articles
of Incorporation be amended to clarify that the Quantum Series A Stock and
Quantum Series C Stock convert to Quantum Common Stock at a rate of 1.228
shares and 1 share, respectively. The full text of the proposed amendment to
the Quantum Articles of Incorporation is set forth in Appendix C to this
Proxy Statement/Prospectus.
Approval of the proposed amendment of the Quantum Articles of
Incorporation is subject to approval by the holders of (i) a majority of the
outstanding shares of the Quantum Common Stock entitled to vote, (ii) a
majority of the outstanding shares of the Quantum Series A Stock entitled to
vote, (iii) a majority of the outstanding shares of the Quantum Series B
Stock entitled to vote, (iv) a majority of the outstanding shares of the
Quantum Series C Stock entitled to vote, (v) a majority of the outstanding
shares of the Quantum Series D Stock entitled to vote, and (vi) 2/3 of the
votes represented by the shares of Quantum Series A Preferred Stock and
Quantum Series C Preferred Stock, voting together as a single class. For all
voting purposes, each share of Quantum Series A Preferred Stock is entitled
to 1.228 votes, and all other classes and series of Quantum Capital Stock are
entitled to one vote per share of such Quantum Capital Stock.
51
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited combined condensed financial statements give effect
to the combination of InVision and Quantum on a pooling of interests basis. The
pro forma combined condensed balance sheet assumes the Merger took place on June
30, 1997 and combines InVision's unaudited consolidated balance sheet at that
date with the unaudited consolidated balance sheet of Quantum at June 30, 1997.
The pro forma combined condensed statements of operations assumes that the
Merger took place as of the beginning of each of the periods presented and
combine InVision's audited consolidated statements of operations for each of the
three years in the period ended December 31, 1996 with Quantum's unaudited
consolidated statement of operations for the year ended September 30, 1994 and
Quantum's audited consolidated statements of operations for the years ended
September 30, 1995 and 1996. The pro forma combined condensed statements of
operations also combine InVision's unaudited consolidated statements of
operations for the six months ended June 30, 1996 and 1997 with the unaudited
consolidated statements of operations of Quantum for the six months ended June
30, 1996 and 1997, respectively. Accordingly, the pro forma combined condensed
statements of operations do not include a $440,000 loss for the three month
period ended December 31, 1996 which has been reflected as a charge to retained
earnings to arrive at the June 30, 1997 retained earnings of Quantum.
The pro forma combined condensed statements of operations are not
necessarily indicative of the operating results which would have been achieved
had the Merger been consummated as of the beginning of such periods and should
not be construed as representative of future operations.
These pro forma combined condensed financial statements should be read in
conjunction with the historical financial statements and the notes thereto of
InVision and Quantum which are included elsewhere herein.
52.
<PAGE>
INVISION AND QUANTUM
PRO FORMA COMBINED CONDENSED BALANCE SHEET
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
InVision Quantum
June 30, June 30, Pro Forma
1997 1997 Adjustments Combined
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash, cash equivalents and short term investments $ 21,836 $ 659 $ 964(5)(6) $ 23,459
Restricted Cash 112 - - 112
Accounts Receivable 7,237 1,033 - 8,270
Inventories 8,324 70 - 8,394
Prepaid expenses 1,755 - - 1,755
--------- ------- ------- ---------
Total current assets 39,264 1,762 964 41,990
Long term restricted cash 800 - - 800
Property and equipment, net 4,087 307 - 4,394
Other assets 1,232 327 (1,200)(3)(6) 359
--------- ------- ------- ---------
$ 45,383 $ 2,396 $ (236) $ 47,543
--------- ------- ------- ---------
--------- ------- ------- ---------
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities $ 7,864 $670 $ 700(4) $ 9,234
Short-term debt 2,200 727 2,927
Deferred revenue 2,407 307 - 2,714
Current maturities of obligations under capital leases 32 48 - 80
--------- ------- ------- ---------
Total current liabilities 12,503 1,752 700 14,955
--------- ------- ------- ---------
Long-term debt obligations including capital leases 154 222 - 376
--------- ------- ------- ---------
Mandatorily redeemable convertible preferred stock - 4,522 (4,522)(1) -
--------- ------- ------- ---------
Stockholders' equity(deficit):
Convertible preferred stock - 533 (533)(1) -
Common stock 11 1,031 (1,030)(1) 12
Additional paid-in capital 50,176 - 6,239(1)(3)(5) 56,415
Deferred stock compensation expense (178) (233) - (411)
Accumulated deficit (17,283) (5,431) (1,090)(4)(6) (23,804)
--------- ------- ------- ---------
Total stockholders' equity (deficit) 32,726 (4,100) 3,586 32,212
--------- ------- ------- ---------
$ 45,383 $ 2,396 $ (236) $ 47,543
--------- ------- ------- ---------
--------- ------- ------- ---------
</TABLE>
See accompanying notes to pro forma combined condensed financial statements
53.
<PAGE>
INVISION AND QUANTUM
PRO FORMA COMBINED CONDENSED
STATEMENTS OF OPERATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ------------------------
1994 1995 1996 1996 1997
-------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues $ - $ 9,066 $ 15,841 $ 7,477 $ 22,785
Cost of revenues - 6,777 9,736 4,641 11,401
-------- --------- --------- --------- ---------
Gross Profit - 2,639 6,105 2,836 11,384
-------- --------- --------- --------- ---------
Operating expenses:
Research and development 1,141 2,159 3,246 1,995 3,798
Sales and marketing 736 2,190 3,800 1,558 2,822
General and administrative 1,490 2,177 3,884 1,767 2,830
-------- --------- --------- --------- ---------
Total operating expenses 3,367 6,426 10,930 5,320 9,450
-------- --------- --------- --------- ---------
Income (loss) from operations (3,367) (4,137) (4,825) (2,212) 2,196
Interest expense (including related
party interest) (426) (464) (1,732) (1,558) (284)
Other income, net 7 34 172 59 183
-------- --------- --------- --------- ---------
Income (loss) before provision for income taxes (3,786) (4,567) (6,385) (3,711) 2,095
Provision for income taxes - - - - 474
-------- --------- --------- --------- ---------
Net income (loss) $ (3,786) $ (4,567) $ (6,385) $ (3,711) $ 1,621
-------- --------- --------- --------- ---------
-------- --------- --------- --------- ---------
Net income (loss) per share (Note 7) $ (0.62) $ (0.72) $ (0.45) $ 0.14
-------- --------- --------- ---------
-------- --------- --------- ---------
Shares used in per share calculations (Note 7) 7,418 8,918 8,275 11,701
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes to pro forms combined condensed financial statements
54.
<PAGE>
INVISION AND QUANTUM
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS
(UNAUDITED)
1. The pro forma combined condensed financial statements reflect the issuance
of up to 777,000 shares of InVision Common Stock for an aggregate of up to
9,284,705 shares of Quantum Common Stock and Common Stock Equivalents on an
as converted basis (based on shares of Quantum Common Stock and Common
Stock Equivalents outstanding as of July 31, 1997) in connection with the
Merger based on (i) the assumed exercise of warrants to purchase 211,917
and 642,076 shares of Quantum Series A and Series C Stock, respectively, at
exercise prices of $1.50 and $0.50 per share, respectively; (ii) the
assumed conversion of 1,091,328 shares of Quantum Series D Stock into
shares of Quantum Common Stock prior to consummation of the Merger;
(iii) the distribution of 163,935, 34,984 and 107,774 shares of InVision
Common Stock to holders of Quantum Series A, Series B and Series C Stock,
respectively, in satisfaction of their liquidation preferences in the
amounts of $1.50, $0.75 and $1.00, respectively; based on an assumed
average closing price of InVision Common Stock of $15.25 per share which
was the closing price per share of InVision Common Stock on September 5,
1997; (iv) the distribution of the remaining 407,360 shares of InVision
Common Stock equally among (A) the holders of Quantum Series A and Series C
Stock based on the number of shares of Quantum Common Stock into which the
respective series of Quantum Preferred Stock would convert (using a
conversion ratio of 1:1.228 for the Quantum Series A Stock and 1:1 for
Quantum Series C Stock) and (B) the holders of Quantum Common Stock, in
each case expected to be outstanding on the date of consummation of the
Merger. Although the total number of shares to be issued is fixed, the
actual number of shares of InVision Common Stock to be issued to the
holders of each class or series of Quantum Capital Stock will be determined
at the effective time of the Merger based on the Designated InVision Stock
Price and the number of shares of Quantum Common and Preferred Stock then
outstanding.
2. Except as discussed in items 3 and 4 below, on a combined basis, there were
no material transactions between InVision and Quantum during any period
presented.
3. In April 1997, InVision purchased 1,091,328 shares of Quantum Series D
Stock for $1,200,000. Quantum used the proceeds from the sale of the Series
D Preferred Stock to repay certain accrued liabilities and short term debt.
4. The combined company expects to incur charges to operations estimated to be
$700,000 in the quarter in which the Merger is consummated for transaction
fees and costs incident to the Merger. This estimated charge is reflected
in the pro forma combined condensed balance sheet as an increase in the
accumulated deficit and an increase to accrued liabilities. The estimated
charge is not reflected in the pro forma combined statement of operations
data because the costs are of a non-recurring nature. The amount of this
charge is an estimate and therefore subject to change upon consummation of
the Merger.
5. Assumes the exercise of Series A and Series C Preferred Stock warrants to
purchase 853,993 shares of Quantum Series A and Series C Preferred Stock
which will occur prior to the consummation of the Merger generating net
proceeds from such exercise of $639,000, as if such exercise had occurred
on June 30, 1997.
6. Assumes the conversion to common stock and subsequent sale by InVision in
July 1997 of 650,000 shares of Series D Preferred Stock generating net
proceeds of $325,000 and a net loss on sale of $390,000, reflected as an
increase in the accumulated deficit, as if such sale had occurred on June
30, 1997. The loss is not reflected in the pro forma combined statement of
operations data.
7. Research and development expenses in the pro forma combined condensed
statement of operations are reflected net of reimbursements and fees
received under research contracts, primarily with U.S. government agencies.
In 1994, such reimbursements and fees exceeded actual costs incurred on a
combined basis.
8. See Notes to Consolidated Financial Statements of InVision and Quantum for
explanations of the methods used to determine the number of shares used to
compute income (loss) per share. Historical net loss per share amounts
have not been presented in 1994 because such amounts are not deemed
meaningful due to the significant changes in InVision's capital structure
that occurred in connection with InVision's initial public offering.
55.
<PAGE>
INVISION SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth for the periods and the dates indicated
certain financial data which should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and notes thereto included elsewhere
herein. The statement of operations data for each of the three fiscal years in
the period ended December 31, 1996, and the balance sheet data at December 31,
1995 and 1996 are derived from the consolidated financial statements of InVision
which have been audited by Price Waterhouse LLP, independent accountants, and
are included elsewhere in this Prospectus. The statement of operations data for
the years ended December 31, 1992 and 1993 and the balance sheet data at
December 31, 1992, 1993, and 1994 are derived from audited financial statements
not otherwise contained herein. The consolidated statements of operations data
for the six months ended June 30, 1996 and 1997 and the consolidated balance
sheet data as of June 30, 1997 are derived from unaudited financial statements
of InVision included elsewhere herein. The unaudited financial statements have
been prepared by InVision on a basis consistent with InVision's audited
consolidated financial statements and, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of InVision's results of operations for such periods and
financial condition at such dates. The results of operations for the six months
ended June 30, 1997 are not necessarily indicative of future results.
56.
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- ---------- --------- --------- --------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Revenues . . . . . . . . . . . . . . . . . $ - $ - $ - $ 9,066 $ 15,841 $ 7,477 $ 22,785
Cost of revenues . . . . . . . . . . . . . - - - 6,777 9,736 4,641 11,401
--------- --------- --------- --------- --------- -------- --------
Gross profit. . . . . . . . . . . . . . - - - 2,289 6,105 2,836 11,384
--------- --------- --------- --------- --------- -------- --------
Operating expenses:
Research and development(1) . . . . . . 744 1,424 1,582 1,940 2,785 1,066 3,574
Sales and marketing . . . . . . . . . . 242 520 664 1,866 2,976 1,235 2,692
General and administrative. . . . . . . 1,058 1,081 1,078 1,471 2,577 1,146 2,563
--------- --------- --------- --------- --------- -------- --------
Total operating expenses . . . . . . 2,044 3,025 3,324 5,277 8,338 3,447 8,829
--------- --------- --------- --------- --------- -------- --------
Income (loss) from operations. . . . . . . (2,044) (3,025) (3,324) (2,988)(2) (2,233)(2) (611) 2,555
Interest expense . . . . . . . . . . . . . (162) (288) (410) (338) (1,511)(3) (1,495)(3) (51)
Other income, net. . . . . . . . . . . . . 10 6 7 34 172 61 186
--------- --------- --------- --------- --------- -------- --------
Income (loss) before income taxes. . . . . (2,196) (3,307) (3,727) (3,292) (3,572) (2,045) 2,690
Provision for income taxes . . . . . . . . - - - - - - 474
Net income (loss). . . . . . . . . . . . . $ (2,196) $ (3,307) $ (3,727) $ (3,292) $ (3,572) $ (2,045) $ 2,216
--------- --------- --------- --------- --------- -------- --------
--------- --------- --------- --------- --------- -------- --------
Net income (loss) per share(4) . . . . . . $ (0.50) $ (0.44) $ (0.27) $ 0.21
--------- --------- -------- --------
--------- --------- -------- --------
Shares used in per share
calculations(4) . . . . . . . . . . . . 6,642 8,142 7,499 10,730
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------------------------------------------- ---------
1992 1993 1994 1995 1996 1997
------ ------ -------- -------- -------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and short-term investments. . . . $ 562 $ 212 $ 2,241 $ 1,927 $ 2,363 $ 21,836
Working capital (deficit). . . . . . . (2,365) (4,759) (4,893) (3,477) 7,380 26,761
Total assets . . . . . . . . . . . . . 1,804 1,950 4,646 7,316 15,256 45,383
Long-term liabilities. . . . . . . . . -- -- -- 34 110 154
Total stockholders' equity (deficit) . (1,696) (3,983) (4,224) (2,522) 9,074 32,726
</TABLE>
- ---------------
(1) Net of amounts reimbursed by the FAA of $3.1 million, $1.5 million,
$821,000, $593,000, $1.5 million, $894,000 and $339,000, respectively,
during the years 1992, 1993, 1994, 1995, and 1996 and the six months ended
June 30, 1996 and 1997. See Note 4 of Notes to Consolidated Financial
Statements of InVision.
(2) InVision recorded non-cash charges related to grants of stock options
having exercise prices below the fair market value on the date of grant to
employees and directors in the amounts of $369,000, $489,000 and $178,000,
respectively, in 1995 and 1996 and the six months ended June 30, 1997. See
Note 8 of Notes to Consolidated Financial Statements of InVision.
(3) InVision recorded a non-cash charge resulting from amortization of a bridge
loan warrant discount in the amount of $1.3 million in 1996, including all
of which was recorded in the six months ended June 30, 1996. See Note 6 of
Notes to Consolidated Financial Statements of InVision.
(4) See Note 2 of Notes to Consolidated Financial Statements of InVision for an
explanation of the method used to compute per share amounts.
57.
<PAGE>
INVISION MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION MAY CONTAIN FORWARD-LOOKING STATEMENTS WHICH
INVOLVE RISKS AND UNCERTAINTIES. WHEN USED IN THIS DISCUSSION, THE WORDS
"ANTICIPATE," "BELIEVE," "ESTIMATE," AND "EXPECT" AND SIMILAR EXPRESSIONS AS
THEY RELATE TO INVISION OR ITS MANAGEMENT ARE INTENDED TO IDENTIFY SUCH
FORWARD-LOOKING STATEMENTS. INVISION'S ACTUAL RESULTS, PERFORMANCE, OR
ACHIEVEMENTS COULD DIFFER MATERIALLY FROM THE RESULTS EXPRESSED IN, OR IMPLIED
BY, THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO
SUCH DIFFERENCES INCLUDE RISKS RELATED TO MARKET ACCEPTANCE OF INVISION'S SINGLE
PRODUCT, FLUCTUATIONS IN INVISION'S QUARTERLY AND ANNUAL OPERATING RESULTS, THE
LOSS OF ORDERS OF INVISION'S PRODUCT, INCLUDING THE LOSS OF INVISION'S MOST
RECENT ORDER FROM THE FAA, LOSS OF ANY OF INVISION'S SOLE SOURCE SUPPLIERS,
INTENSE COMPETITION, RELIANCE ON LARGE ORDERS, CONCENTRATION OF INVISION'S
CUSTOMERS, RISKS RELATED TO THE LENGTHY SALES CYCLES FOR THE CTX 5000, BUDGETING
LIMITATIONS OF INVISION'S CUSTOMERS AND PROSPECTIVE CUSTOMERS, AND THE RISKS
RELATED TO INVISION'S LIMITED MANUFACTURING EXPERIENCE, AS WELL AS THOSE
DISCUSSED IN "RISK FACTORS," IN "INVISION BUSINESS," AND ELSEWHERE IN THIS PROXY
STATEMENT/PROSPECTUS.
OVERVIEW
InVision designs, manufactures and markets an explosive detection system
based on advanced CT technology. InVision was formed in September 1990 to design
and develop the CTX 5000 and remained in the development stage through
December 1994. In March 1994, InVision received its first commercial order for a
CTX 5000 system from the Brussels National Airport in Belgium, and since such
time has received orders for a total of 112 systems, of which a total of 50 had
been shipped as of June 30, 1997. For the fiscal year ended December 31, 1996
and the six months ended June 30, 1997, InVision had revenues of $15.8 million
and $22.8 million, respectively, and at June 30, 1997 had orders in backlog in
the amount of $62.1 million. See "Business-Backlog."
InVision considers research and development to be a vital part of its
operating discipline and continues to dedicate substantial resources to research
to enhance the performance, functionality and reliability of its CTX 5000
hardware and software. At June 30, 1997, InVision had 41 full-time employees
engaged in research and development activities, and also was using the services
of 11 specialized contract employees and consultants in this area. Beginning in
1991, total research and development expenditures by InVision have been
partially offset by amounts reimbursed by the FAA under development contracts
and grants. InVision believes that investment in research and development in
absolute dollars will increase substantially to meet its future needs regardless
of the level of funding received from the FAA. During the year ended
December 31, 1996 and the six months ended June 30, 1997, InVision spent
$4.3 million and $3.9 million, respectively, on research and development
activities, of which $1.5 million in 1996 and $339,000 in the six months ended
June 30, 1997 were funded by the FAA under development contracts and grants. To
the extent that FAA contract and grant receipts decline in the future, research
and development expenditures borne by InVision would increase, and InVision
expects that its results of operations would be adversely impacted. See "Risk
Factors-Competition for FAA Grants."
In any given fiscal year, InVision's revenues have principally consisted,
and InVision believes will continue to consist, of orders of multiple units from
a limited number of customers. During the first six months of 1997,
approximately $19.4 million, or 85.3%, of InVision's revenues were generated
from sales to InVision's four largest customers. During the fiscal year ended
December 31, 1996, revenues from InVision's six largest customers were
approximately $14.0 million, or 88.4%, of InVision's revenues. During the fiscal
year ended December 31, 1995, revenues from InVision's three largest customers
were approximately $6.8 million, or 75.0%, of InVision's revenues. See "Risk
Factors-Dependence on Large Orders; Customer Concentrations; Lengthy Sales
Cycle."
InVision markets its products both directly through internal sales
personnel and indirectly through authorized agents, distributors and systems
integrators. In the United States, InVision markets its CTX 5000 primarily
through direct sales personnel. Internationally, InVision utilizes both a direct
sales force and authorized agents to sell its products. During the six months
ended June 30, 1997 and the years ended December 31, 1996 and 1995,
international sales represented 62.3%, 76.2% and 89.2%, respectively, of
InVision's revenues. See "Risk Factors-International Business; Fluctuation in
Exchange Rates; Risk of Change in Foreign Regulations."
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The sales cycle of the CTX 5000 is often lengthy due to the protracted
approval process that typically accompanies large capital expenditures and the
time required to manufacture the CTX 5000 and install and assimilate the
CTX 5000. Typically, six to twelve months may elapse between a new customer's
initial evaluation of InVision's system and the execution of a contract. Another
three months to a year may elapse prior to shipment of the CTX 5000 as the
customer site is prepared and the CTX 5000 is manufactured. During this period
InVision expends substantial funds and management resources but recognizes no
associated revenue. See "Risk Factors-Dependence on Large Orders; Customer
Concentrations; Lengthy Sales Cycle" and "-Public Agency Contract and Budget
Considerations."
InVision recognizes revenue on shipment unless extended acceptance criteria
exist, in which case revenue is recognized upon completion of such acceptance
criteria. InVision typically requires significant customer deposits and progress
payments in advance of shipment on customer purchase orders. Provision for
estimated installation, training and warranty costs is recorded at the time
revenue is recognized. Systems typically carry a one-year warranty.
RESULTS OF OPERATIONS
The following table sets forth certain income and expenditure items from
InVision's consolidated statements of operations expressed as a percentage of
revenues for the periods indicated. Information for 1994 has been omitted as
InVision did not recognize revenue in that year.
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------ --------
1995 1996 1996 1997
---- ---- ---- ----
Revenues . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Cost of revenues. . . . . . . . . . . . 74.8 61.5 62.1 50.0
------ ------ ------ ------
Gross profit . . . . . . . . . . . . . 25.2 38.5 37.9 50.0
------ ------ ------ ------
Operating expenses:
Research and development . . . . . . . 21.4 17.6 14.3 15.7
Sales and marketing. . . . . . . . . . 20.6 18.8 16.5 11.8
General and administrative . . . . . . 16.2 16.3 15.3 11.3
------ ------ ------ ------
Total operating expenses. . . . . . 58.2 52.7 46.1 38.8
------ ------ ------ ------
Income (loss) from operations . . . . . (33.0) (14.2) (8.2) 11.2
Interest expense. . . . . . . . . . . . (3.7) (9.5) (20.0) (0.2)
Other income, net . . . . . . . . . . . 0.4 1.1 0.8 0.8
------ ------ ------ ------
Income (loss) before income taxes . . . (36.3) (22.6) (27.4) 11.8
Provision for income taxes. . . . . . . - - - 2.1
------ ------ ------ ------
Net income (loss) . . . . . . . . . . . (36.3)% (22.6)% (27.4)% 9.7%
------ ------ ------ ------
------ ------ ------ ------
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1997 AND 1996
REVENUES. InVision's revenues are comprised of system revenues, which
include sales of the CTX 5000, accessories, installation and configuration, and
maintenance related to product support.
The quarter ended June 30, 1997 was InVision's second profitable quarter
since the inception of InVision. Revenues increased by 272% to $13.4 million in
the second quarter of 1997 from $3.6 million in the second quarter of 1996. Net
revenues for the first six months ended June 30, 1997 grew 205% to $22.8 million
from $7.5 million in the same period last year. This increase was primarily the
result of the growth in unit shipments generated from initial deliveries on the
54 unit order by the FAA, and continuing demand from international markets.
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GROSS PROFIT. Cost of revenues primarily consists of purchased materials
procured for use in the assembly of InVision's products, as well as
manufacturing labor, overhead and warranty costs. In any given period InVision's
gross profit may be affected by several factors, including product
configuration, location of the installation, and complexity of integration into
various airport environments.
Gross profit increased by 378.6% to $6.7 million in the second quarter of
1997 from $1.4 million in the second quarter of 1996. Gross profit increased by
302% to $11.4 million in the first half of 1997 from $2.8 million in the first
half of 1996. Gross margins were 50.0% in the second quarter of 1997 and 38.5%
in the second quarter of 1996. This increase in gross margins is largely the
result of improved manufacturing efficiencies and lower overhead cost per unit
resulting from increased production volume.
RESEARCH AND DEVELOPMENT. Research and development expenditures consist
primarily of compensation paid to personnel engaged in research and development
activities, amounts paid for outside services, and costs of materials utilized
in the development of hardware products, including prototype units. All software
and hardware development costs are expensed as incurred. Beginning in 1991,
total research and development expenditures by InVision have been partially
offset by amounts reimbursed by the FAA under development contracts and grants.
InVision believes that research and development expenditures in absolute dollars
will increase substantially in the future regardless of the level of funding
received from the FAA.
Total research and development expenditures increased by 357.4% to $2.2
million in the second quarter of 1997 from $481,000 in the second quarter of
1996. Total research and development expenditures for the six months ended June
30, 1997 increased by 95.0% to $3.9 million from $2.0 million in the first half
of 1996. Of these amounts, $339,000 and $894,000, respectively, were funded by
research and development contracts and grants from the FAA in the first six
months of 1997 and 1996. As a percentage of revenues, total net research and
development expenditures increased to 16.4% in the second quarter of 1997 from
13.5% in the second quarter of 1996 and for the first six months of 1997
research and development expenditures increased to 15.8% from 14.3% in the first
six months of 1996. The growth in total research and development expenditures is
primarily the result of personnel additions and increased spending on
engineering materials and services.
SALES AND MARKETING. Sales and marketing expenditures consist primarily of
compensation paid to direct and indirect sales and marketing personnel, payments
to consultants, travel related to the sales process, and other selling and
distribution costs.
Sales and marketing expenditures increased by 128.7% to $1.5 million in the
second quarter of 1997 from $638,000 in the second quarter of 1996. Sales and
marketing expenditures for the first half of 1997 increased 118% to $2.7 million
from $1.2 million in the same period last year. As a percentage of revenues,
sales and marketing expenditures declined to 10.9% in the second quarter of 1997
from 17.9% in the second quarter of 1996 and to 11.8% for the first six months
of 1997 from 16.5% for the same period last year. The increased level of
expenditures in the 1997 periods reflects higher commissions and other direct
selling expenses resulting from the increase in revenues, as well as increases
in staffing.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of compensation paid to administrative personnel, including directors,
payments to consultants, professional service fees, and travel and other general
expenses.
General and administrative expenses increased by 81% to $1.2 million in the
second quarter of 1997 from $674,000 in the second quarter of 1996. As a
percentage of revenues, general and administrative expenses decreased to 9.1% in
the second quarter of 1997 from 19.0% in the second quarter of 1996. General and
administrative expenses for the first six months of 1997 increased 123.6% to
$2.6 million from $1.1 million in the corresponding period of 1996. The increase
in general and administrative expenses in absolute dollars is primarily the
result of personnel additions and increased professional and consulting costs
incurred to prepare for planned growth, increased insurance costs, and increased
costs of operations associated with being a publicly traded company.
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INTEREST EXPENSE. Interest expense decreased to $41,000 in the second
quarter of 1997 from $455,000 in the second quarter of 1996. For the first six
months, interest expense decreased to $51,000 from $1.5 million in the
corresponding period of 1996. Interest expense in the first half of 1996
reflects the effect of a non-cash charge of $1.3 million resulting from the
amortization of a bridge loan warrant discount arising in December 1995.
INCOME TAXES. The provision for income taxes was $343,000 for the second
quarter of 1997 and $474,000 for the first six months of 1997 representing an
effective tax rate of 17.0%. No provision for income taxes was recorded in the
first six months of 1996. InVision's effective tax rate of 17.0% for the first
half of 1997 is lower than the U.S. federal statutory rate of 34.0% as a result
of utilization of net operating loss and other credit carry-forwards. At
December 31, 1996 InVision had federal net operating loss carry-forwards of
approximately $11.0 million available to reduce future federal taxable income.
InVision's net operating loss carry-forwards expire from 2005 to 2011. As a
result of changes in ownership that occurred in the 1995 financings, future
utilization of certain of InVision's carry-forwards are limited to not more than
approximately $500,000 per year.
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
REVENUES. Revenues increased by 74.7% to $15.8 million in 1996 from $9.0
million in 1995. The increase in 1996 revenues is attributable to increased
sales of the CTX 5000, reflecting a 63.6% increase in unit shipments to 18 units
in 1996 from 11 units in 1995 and, to a lesser extent, changes in product
configuration leading to an increase in the average selling price per unit and
sales of add-on products to current customers. There were no revenues recorded
in 1994.
GROSS PROFIT. Gross profit increased by 167% to $6.1 million in 1996 from
$2.3 million in 1995. Gross margins were 38.5% in 1996 and 25.2% in 1995. The
increase in gross margins was primarily caused by lower unit costs resulting
from increased manufacturing efficiency and reduced overhead cost per unit due
to increased volume, as well as changes in product configurations leading to an
increase in the average selling price. Increased operating efficiencies
resulting from a larger installed base also reduced the average cost of
maintenance and warranty service. There was no gross profit in 1994.
RESEARCH AND DEVELOPMENT. Total research and development expenditures
increased by 68.2% to $4.3 million in 1996 from $2.5 million in 1995 and by 5.4%
in 1995 from $2.4 million in 1994. During 1996, 1995 and 1994, InVision was
entitled to reimbursements of $1.5 million, $593,000 and $821,000, respectively,
under research and development contracts and grants from the FAA to develop and
enhance the CTX 5000. Such reimbursements have been reflected as a reduction to
research and development expense in each period presented. Billings are rendered
to the FAA monthly on the basis of actual costs incurred. As a percentage of
revenues, total research and development expenditures remained at approximately
27.3% for both 1996 and 1995. In 1996, the increase in total expenditures
reflects the effects of personnel additions, costs of prototype development,
efforts to increase throughput and develop systems for more effective airport
integration, and conceptual design.
SALES AND MARKETING. Sales and marketing expenditures increased by 59.5%
to $3.0 million in 1996 from $1.9 million in 1995 and by 181% in 1995 from
$664,000 in 1994. As a percentage of revenues, sales and marketing expenses
declined to 18.8% in 1996 from 20.6% in 1995. The increased levels of
expenditures in absolute dollars for 1996 and 1995 reflect increased selling
costs associated with the higher unit sales, including foreign travel, trade
shows, public relations and commissions.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
by 75.2% to $2.6 million in 1996 from $1.5 million in 1995 and by 36.5% in 1995
from $1.1 million in 1994. As a percentage of revenues, general and
administrative expenses were 16.3% for 1996 and 16.2% for 1995. The increases
for 1996 and 1995 reflect additions to support capabilities required by the
growth in revenues and corporate headcount. The increase in absolute dollars in
1996 also reflects increased costs of operating as a public company.
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INTEREST EXPENSE. Interest expense increased to $1.5 million in 1996 from
$338,000 in 1995 and decreased in 1995 from $410,000 in 1994. Interest expense
in 1996 reflects the effect of $1.3 million of amortization of the fair market
value of warrants issued in connection with a bridge loan obtained in
December 1995. Interest expense during 1995 and 1994 resulted directly from
short-term debt outstanding during each period.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, InVision has financed its operations primarily through
private sales of $16.5 million of Preferred and Common Stock (of which $5.6
million represents indebtedness converted to equity), the sale of $9.5
million of Common Stock in InVision's Initial Public Offering in April 1996
and $21.2 million in a second public offering in May 1997, and short-term
borrowings. At June 30, 1997, InVision had $21.8 million in cash and
short-term investments, and $2.2 million of short-term borrowings.
In February 1997, InVision entered into two one-year revolving line of
credit agreements with Silicon Valley Bank. The first agreement provides for
maximum borrowings generally in an amount up to the lower of 80% of domestic
eligible accounts receivable or $4.5 million. Borrowings under this agreement
generally bear interest at the bank's prime rate plus 0.50% per annum (9.25% at
June 30, 1997). The second agreement is partially guaranteed by the
Export-Import Bank of the United States and provides for maximum borrowings
generally in an amount up to the lower of (i) the sum of 90% of eligible export
accounts receivable plus 70% of eligible raw materials and work-in-process
inventory designated for export customers, (ii) $4.5 million less outstanding
letters of credit or (iii) $3.0 million. Borrowings under this agreement
generally bear interest at the bank's prime rate plus 0.25% per annum (9.00% at
June 30, 1997). Borrowings under both agreements are secured by all of
InVision's assets. The agreements require that InVision maintain certain
financial ratios and levels of tangible net worth and profitability and also
prohibit InVision from paying cash dividends. Proceeds of loans under the first
line of credit may be used for general corporate purposes, and proceeds of loans
under the second line of credit must be used to finance goods intended for
export.
Cash used in operating activities was $1.3 million in the first six months
of 1997 and $4.7 million in first six months of 1996. Net cash used in operating
activities in the first half of 1997 was principally due to net income of $2.2
million, a $2.7 million increase in accounts payable and accrued expenses and a
$2.2 million increase in short-term borrowings, which were partially offset by a
$912,000 increase in restricted cash, a $3.5 million increase in inventories and
a $1.3 million increase in accounts receivable and a $1.5 million increase in
prepaid expenses. Net cash used in operations for the first half of 1996 was
primarily due to the net loss of $2.0 million, a $1.3 million increase in
accounts receivable, a $1.2 million decrease in accounts payable and accrued
liabilities and a $1.8 million decrease in deferred revenues which were
partially offset by a non-cash charge for the amortization of the warrant
discount of $1.3 million.
Net cash used in investing activities was $20.4 million in the first half
of 1997 and $314,000 in the first half of 1996, in each case due primarily to
the purchase of property and equipment. InVision anticipates spending
approximately $2.0 million for facility improvements and approximately $1.5
million for purchases of capital equipment in the second and third quarters of
1997 in connection with a move of InVision's principal executive offices and
manufacturing facility. InVision has no other significant capital spending or
purchase commitments other than normal purchase commitments and commitments
under leases.
Net cash provided by financing activities was $23.5 million in the first
half of 1997 and $6.5 million in the first half of 1996. The increase in the
first six months of 1997 was primarily due to $21.1 million in net proceeds from
issuance of common stock in its May 1997 Public Offering.
On May 14, 1997, InVision sold in a public equity offering of 1,875,000
shares of its common stock at $12.00 per share. InVision received net proceeds
of $20,706,000. On June 12, 1997, InVision's managing underwriter, Robertson,
Stephens & Co., under the terms of the over-allotment option provided in the
equity offering, sold an additional 42,742 shares of InVision Common Stock, at
$12.00 per share. InVision received net proceeds of $483,000.
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InVision believes that cash, cash equivalents and short-term investments
of $21.8 million as of June 30, 1997 and available borrowings under
InVision's line of credit agreements will be sufficient to finance its
working capital and capital expenditure requirements for at least the next 12
months.
INVISION BUSINESS
THE FOLLOWING DISCUSSION MAY CONTAIN FORWARD-LOOKING STATEMENTS WHICH
INVOLVE RISKS AND UNCERTAINTIES. WHEN USED IN THIS DISCUSSION, THE WORDS
"ANTICIPATE," "BELIEVE," "ESTIMATE," AND "EXPECT" AND SIMILAR EXPRESSIONS AS
THEY RELATE TO INVISION OR ITS MANAGEMENT ARE INTENDED TO IDENTIFY SUCH
FORWARD-LOOKING STATEMENTS. INVISION'S ACTUAL RESULTS, PERFORMANCE, OR
ACHIEVEMENTS COULD DIFFER MATERIALLY FROM THE RESULTS EXPRESSED IN, OR IMPLIED
BY, THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO
SUCH DIFFERENCES INCLUDE RISKS RELATED TO MARKET ACCEPTANCE OF INVISION'S SINGLE
PRODUCT, FLUCTUATIONS IN INVISION'S QUARTERLY AND ANNUAL OPERATING RESULTS, THE
LOSS OF ORDERS OF INVISION'S PRODUCT, INCLUDING THE LOSS OF INVISION'S MOST
RECENT ORDER FROM THE FAA, LOSS OF ANY OF INVISION'S SOLE SOURCE SUPPLIERS,
INTENSE COMPETITION, RELIANCE ON LARGE ORDERS, CONCENTRATION OF INVISION'S
CUSTOMERS, RISKS RELATED TO THE LENGTHY SALES CYCLES FOR THE CTX 5000, BUDGETING
LIMITATIONS OF INVISION'S CUSTOMERS AND PROSPECTIVE CUSTOMERS, AND THE RISKS
RELATED TO INVISION'S LIMITED MANUFACTURING EXPERIENCE, AS WELL AS THOSE
DISCUSSED IN "RISK FACTORS," IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN THIS PROXY
STATEMENT/PROSPECTUS.
GENERAL
InVision is the worldwide leader in explosive detection technology.
InVision develops, manufactures, markets and supports an explosive detection
system for civil aviation security based on advanced CT technology. To date,
InVision's CTX 5000 is the only EDS to be certified by the FAA for use in the
inspection of checked luggage on commercial flights. Historically, the FAA has
been the leader in establishing standards for aviation security worldwide, and
InVision believes that airports around the world will migrate over time towards
security policies consistent with those of the FAA. As a result, InVision
believes that the CTX 5000 is well positioned to become the industry standard.
In December 1996, InVision received an order from the FAA for 54 CTX 5000
systems to be installed at the busiest U.S. airports. For the fiscal year ended
December 31, 1996 and the six months ended June 30, 1997, InVision had revenues
of $15.8 million and $22.8 million, respectively, and at June 30, 1997 had
orders in backlog in the amount of $62.1 million. As of June 30, 1997, 50 CTX
5000 systems had been shipped to 15 airports in ten countries around the world.
InVision believes that the CTX 5000 is the only EDS capable of detecting
all types of explosives designated by the FAA to be a threat to commercial
aviation and that the CTX 5000 is superior to competing systems by virtue of its
advanced detection technology. The CTX 5000 is capable of capturing and
processing substantially more data than other explosive detection systems.
InVision believes that there are important technological advantages that lead to
the superiority of the CTX 5000 over systems of InVision's primary competitors.
By combining heightened levels of data capture and diagnosis capabilities with
simple user interfaces, InVision's CTX 5000 is capable of providing high
detection and low false alarm rates, as well as advanced threat resolution
capability and increased operator efficiency.
InVision's objective is to become the dominant provider of explosive
detection systems worldwide and to extend its expertise in EDS technology to
address broader applications. Specific elements of InVision's growth strategy
are to enhance its technological leadership, expand its sales and marketing
organization, leverage its detection technology expertise to enter new markets
for detection, and selectively pursue strategic relationships and acquisitions.
INDUSTRY BACKGROUND
MARKET SIZE. There are over 600 airports worldwide providing scheduled
service for an aggregate of approximately 2.5 billion passengers per year. Of
these airports, over 400 are located in the United States, and a
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substantial portion of the remainder are located in Europe and the Asia/Pacific
region. It is estimated that it will cost approximately $2.2 billion to equip
the 76 largest airports in the United States with certified explosive detection
systems.
THE TERRORIST THREAT. In recent years, increased incidents of bombings and
airline terrorism have contributed to an enhanced perception of the threat of
terrorism among the general public. According to a report of the President's
Commission on Aviation Security and Terrorism dated May 15, 1990, there were 41
bombings against civilian aviation targets worldwide between 1975 and 1989.
According to Time Magazine, there were 10,222 bombings in the United States
between 1983 and 1993. According to a CBS poll conducted in July 1996, airline
passengers have expressed a willingness to pay more for airline travel and
endure delays if such actions will decrease the threat of successful airline
bombings.
THE EVOLUTION OF EXPLOSIVE DETECTION TECHNOLOGIES. In the 1970's, in
response to hijackings, airports worldwide began to install x-ray systems to
screen carry-on baggage for weapons such as guns and knives. In response to the
implementation of this technology, terrorists in some cases adopted the tactic
of airline bombings. The effort to develop automated explosive detection
capabilities was first established in the late 1970's by the FAA and was
predicated on the application of conventional x-ray technology. However, until
the advent of certified explosive detection systems in 1994, InVision believes
that EDS technology remained largely inadequate. Following the bombing of Pan
American Flight 103 over Lockerbie, Scotland in December 1988, certain European
countries hastened to implement explosive detection capabilities based upon
then-existing technologies. In order to placate immediate public safety
concerns, these conventional systems were designed to process 100% of checked
baggage. However, these conventional systems were and continue to remain
deficient in that they are unable to reliably detect and identify all of the
types and amounts of explosives determined by the FAA to be a threat to civil
aviation.
Several advanced explosive detection technologies have been developed to
attempt to address the need for effective explosive detection. These systems
include CT, dual energy x-ray and trace detection. CT technology uses a source
of x-rays rotating around an object to create multiple two-dimensional images,
commonly know as "slices," of the density distribution of the object's cross
section and compares parameters derived from the analysis of the density images
to a database of explosives characteristics. Dual energy x-ray systems measure
the x-ray absorption properties of a bag's contents at two different x-ray
energies to determine if any of the contents have the physical characteristics
of explosive materials. Trace detection equipment, known as "sniffers," detect
particulate and chemical traces of explosive materials collected by an operator
by wiping or vacuuming the bag under inspection. The only explosive detection
system to be certified by the FAA is InVision's CTX 5000, which is based on CT
technology.
THE EMERGENCE OF WORLDWIDE STANDARDS AND FAA CERTIFICATION. Throughout the
history of civil aviation, the FAA has been a leader in setting the standards
for aviation security worldwide. In the 1970's, the FAA first established
standards for worldwide security by setting guidelines for screening of carry-on
baggage for guns and knives. These standards were subsequently mandated by the
United Nations for adoption by all of its member states, leading to the
installation of over 7,000 detection systems worldwide. Following the December
1988 bombing of Pan American Flight 103, the United States enacted the Aviation
Security Improvement Act of 1990 (the "Aviation Security Act"), in response to
which the FAA increased research and development funding for advanced explosives
detection technology. To date the FAA has spent approximately $150 million on
such activities.
In 1993, as required by the Aviation Security Act, the FAA adopted a
certification protocol regarding explosive detection systems for use on checked
baggage. The FAA certification process was developed to certify equipment that,
alone or as part of an integrated system, can detect under realistic air carrier
operating conditions the amounts, configurations and types of explosive material
which would be likely to be used to cause catastrophic damage to commercial
aircraft. To do so, the FAA contracted with the National Academy of Sciences to
establish a scientifically valid protocol for certification. The FAA also
consulted with a variety of public agencies, including the Federal Bureau of
Investigation and the Central Intelligence Agency. The result of this
collaboration was the establishment of a detection protocol which focuses on
(i) the categories of explosive substances to be detected, (ii) the probability
of detection by explosive category, (iii) the minimum quantity of explosive that
must be
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detectable, (iv) the number of bags processed per hour, and (v) the maximum
acceptable false alarm rates. To date only one explosive detection system,
InVision's CTX 5000, has met the requirements of the protocol and has been
certified by the FAA. In order to meet the throughput criteria established in
the FAA protocol, the CTX 5000 was certified with two units operating in
parallel.
IMPLEMENTATION OF MULTI-LEVEL SCREENING PROCESSES. As the capabilities of
EDS technology have evolved and worldwide detection standards have become more
pervasive, certain airports around the world have sought to augment their
detection capabilities by implementing various multi-level screening processes.
To date, two distinct processes have become most prevalent: a system first
implemented by the British Airport Authority (the "BAA Approach"); and a system
endorsed by the FAA (the "FAA Approach"). Prior to the development of certified
detection technology and in recognition of the deficiencies of existing x-ray
technology in providing comprehensive detection, certain European airports
adopted the BAA Approach, which consists of the use of several explosive
detection systems operating in series in order to attempt to increase detection
rates while maintaining throughput rates.
The FAA Approach was developed following the advent of certified detection
technology. Currently, the FAA Approach is comprised of a process of passenger
"profiling" combined with the use of certified EDS equipment for the detection
of explosives in baggage deemed to be high risk. Profiling involves an initial
determination of whether a particular passenger represents a high threat based
on certain decision criteria which are believed to be reasonable predictors of
risk. Based on this determination, a passenger's baggage may undergo a higher
level of investigation, which will in most cases involve the baggage being
screened with the use of certified EDS equipment. In contrast to the BAA
Approach, in which the effectiveness of the entire detection process is
dependent on technologies with greater emphasis on throughput than detection,
the FAA Approach is predicated on the use of high-detection technology and is
focused on the ability to accurately and effectively detect explosives and to
identify individuals believed to pose the greatest threat to civil aviation.
InVision believes that the FAA Approach, as it is currently being implemented at
major airports throughout the United States, will prove to be the more
effective process in reducing the dangers associated with the use of explosives
against civil aviation.
THE GORE COMMISSION. In response to the recent crash of TWA Flight 800 off
Long Island, New York in July 1996, President Clinton announced the formation of
the White House Commission on Aviation Safety and Security, chaired by Vice
President Gore (the "Gore Commission"), to review airline and airport security
and oversee aviation safety. The Gore Commission concluded that "the threat
against civil aviation is changing and growing, and that the federal government
must lead the fight against it" and recommended that "the federal government
commit greater resources to improving aviation security." The Gore Commission
released its initial report in September 1996, and in October 1996 the United
States enacted legislation which includes a $144 million appropriation for 1997
for the deployment of explosives detection systems and other advanced security
equipment for use by air carriers and airport authorities. Of this amount, $52.2
million, or 36.2%, was allocated to the purchase of certified CT technology.
THE INVISION TECHNOLOGY ADVANTAGE
InVision believes that the CTX 5000 is the only EDS presently capable of
reliably detecting all types of explosives designated by the FAA to be a threat
to commercial aviation and that the CTX 5000 is superior to competing systems by
virtue of its advanced detection technology.
InVision's CTX 5000 employs CT technology which was pioneered in the
medical field in the 1970's and enhanced for use in explosive detection by
InVision's engineers in the 1990's. As its principal detection vehicle, the CTX
5000 uses a source of x-rays rotating around an object to create two-dimensional
images of the density distribution of the object's cross section. These
cross-sectional images are commonly known as "slices." The CTX 5000 is capable
of measuring data from several contiguous slices of an object in order to
capture the 3-dimensional characteristics of an object. The data gathered from
the slices is used to measure the physical characteristics of objects by
determining their linear attenuation coefficients (density), morphology (shape),
and granularity (uniformity). Once measured, each characteristic is
automatically compared, using sophisticated image processing
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algorithms, to a database of characteristics of compounds used in explosive
devices in order to assess the threat. If an object is determined to contain the
characteristics of an explosive, additional slices of the object are collected
in order to determine the mass discriminates (quantity) of the threat. At this
stage, potential threats which cannot be cleared automatically by the CTX 5000
are submitted to an operator for threat resolution. The operator is also
presented with information regarding the presence of detonators, power sources,
proximity charges, metallic objects and other characteristics of a potential
bomb, and the suspicious objects are highlighted in different colors.
InVision believes that there are three important technical characteristics
which lead to the superiority of the CTX 5000 over systems of InVision's primary
competitors, which are based on dual energy technology. These characteristics
are:
DATA QUALITY AND QUANTITY. Dual energy x-ray systems collect data from one
or two views of an object to determine the atomic number of materials
encountered during the scan. CT technology, with approximately 500 views per
slice, yields more data and is capable of measuring the density of an object.
While explosives have well defined density ranges which are generally distinct
from those of the contents of checked baggage, certain classes of explosives
have atomic numbers which are similar to those of many materials found in
checked baggage. As a result, the CTX 5000 is better able to distinguish between
explosives and the benign contents of checked baggage, resulting in higher
detection and lower false alarm rates.
THREE DIMENSIONAL DATA. CT technology's ability to render three
dimensional data concerning an object also contributes to its superior detection
compared to dual energy x-ray technology. By utilizing these data, CT technology
is able to map characteristics of an object, such as mass and density,
regardless of the object's position in the bag and the superposition of other
objects. Dual energy x-ray systems render only two dimensional data. As a
result, if multiple objects are superimposed over the potential explosive, the
system's ability to calculate the atomic number of the potential explosive is
diminished. Given the inherent limitations of the use of atomic numbers as a
parameter for explosive detection, this diminished capacity with regard to
stacked objects is particularly problematic.
ADVANCED THREAT RESOLUTION. Threat resolution refers to the process
following an alarm of determining whether checked baggage is safe or contains a
threat. Once an alarm occurs, the CTX 5000 presents its operators with images
and threat analysis tools that are unavailable in dual energy systems. For
example, the CTX 5000 simultaneously provides operators with both x-ray images
and CT images on separate screens. These data are cross-referenced with each
other to give the operator an overall image of a suitcase and detailed CT
information relating to the contents, and in particular relating to the
potential threat. In addition to the images, the CTX 5000 provides an abundance
of tools and data, designed to allow operators to determine whether a bag is a
threat requiring further action or is safe to clear to the plane. One of these
tools is the ability to take additional slices to provide more data and focus in
on the threat. In contrast, dual energy x-ray systems display a single x-ray
image of a potential threat and have a limited ability to provide additional
information to an operator who suspects that an explosive is present.
InVision believes that the strengths of the CTX 5000 with respect to these
three important technical characteristics were central to the CTX 5000 meeting
the stringent FAA standards for certification and to gaining operational
acceptance by the commercial aviation industry. In addition, InVision believes
that the limitations of competing technologies with respect to these important
characteristics will limit these technologies' ability to attain the high
detection and low false alarm rates necessary to obtain FAA certification.
However, there can be no assurance that future technological innovations will
not enable these technologies to overcome these limitations. As the only EDS to
be certified by the FAA, InVision believes its CTX 5000 system is well
positioned to be the cornerstone of the advanced explosive detection process
being promoted by the FAA for implementation at airports around the world.
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GROWTH STRATEGY
InVision's objective is to be the leading provider of explosive detection
systems worldwide and to extend its technology expertise to address broader
applications for detection. Specific elements of InVision's growth strategy are
to:
ENHANCE TECHNOLOGICAL LEADERSHIP. InVision believes that its technological
capabilities provide it with a significant competitive advantage. Accordingly,
InVision considers research and development to be a vital part of its operating
discipline, and continues to make substantial investments to enhance the
performance, functionality and reliability of its CTX 5000 hardware and
software. Among InVision's priorities in enhancing its technological
capabilities are to increase throughput rates while maintaining certified
detection capability and to increase threat resolution capabilities. In 1996 and
the first six months of 1997, InVision spent $4.3 million and $3.6 million,
respectively for research and development to improve InVision's technology.
EXPAND SALES AND MARKETING CAPABILITIES. InVision believes that its sales
and marketing capability is vital to achieving high levels of market penetration
for its systems. The objectives of InVision's sales force include promoting
broader acceptance for EDS technology worldwide and emphasizing the importance
of high detection rate EDS technology. Because sales cycles for the CTX 5000 can
be lengthy, InVision's sales and marketing efforts are focused on developing and
maintaining close working relationships with key management personnel at
regulatory authorities, airports and airport authorities worldwide. As the
market for certified explosive detection technology expands, InVision intends to
supplement its sales and marketing capability by adding sales personnel in the
U.S. and in Asia, enhancing customer support capabilities in Europe through the
addition of systems integration expertise, and continuing to educate
governmental entities worldwide about the benefits of certified detection and
the advantages of the CTX 5000.
LEVERAGE TECHNOLOGY EXPERTISE TO ENTER NEW MARKETS FOR DETECTION. InVision
believes that installations of advanced automated explosive detection systems at
airports will accelerate the adoption of this technology for additional aviation
applications such as screening of carry-on baggage and trailer-mounted mobile
units for inspections at remote location, as well as for other security
applications, including the detection of drugs, the protection of government and
private facilities, and the screening of mail. Since the amount of government
money spent in drug interdiction efforts far surpasses the amount spent for the
development of EDS technology, InVision believes that drug detection
applications afford significant market opportunities for the application of
InVision's certified detection technology. InVision believes that its leadership
in high detection technology will be a competitive advantage as these markets
develop.
PURSUE STRATEGIC RELATIONSHIPS AND ACQUISITIONS. From time to time
InVision reviews strategic relationship opportunities, including potential
acquisitions, that would complement its existing product offerings, augment its
market coverage, enhance its technological capabilities or otherwise offer
growth opportunities. InVision believes that the CTX 5000 is suited to the
integration of applications which are direct extensions of its strength in
explosive detection technology. Pursuant to this strategy, InVision has entered
a strategic relationship with EG&G Astrophysics for the development of an
explosive detection system based upon a combination of the CTX 5000 as it
currently exists and a pre-scanner based upon EG&G's x-ray scanning technology.
In addition, InVision has made a minority equity investment in Quantum
Magnetics, Inc. ("Quantum") and, in connection with such investment, Quantum has
agreed to certain limitations on its ability to license or transfer certain of
its explosives detection technology. See "-Recent Developments."
PRODUCT DEVELOPMENT
InVision considers research and development to be a vital part of its
operating discipline and continues to dedicate substantial resources to research
and development to enhance the performance, functionality and reliability of its
CTX 5000 hardware and software. In particular, InVision recognizes the need to
improve certain of its system capabilities, specifically related to throughput
and gantry size, in order to accommodate the breadth of market potential for EDS
technology. At June 30, 1997 InVision had 41 full-time employees engaged in
research and
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development activities, and also was using the services of 11 specialized
contract employees and consultants in this area. During the years ended
December 31, 1996, 1995 and 1994, respectively, InVision spent $4.3 million,
$2.5 million and $2.4 million on research and development activities, of which
$1.5 million, $587,000 and $720,000, respectively, was funded by the FAA under
development contracts and grants. In order to fulfill the objectives of its
growth strategy, InVision intends to continue to invest heavily in product
development.
InVision's development efforts under the current FAA research grant are
primarily focused on increasing the speed (throughput) and decreasing the
manufacturing cost of the CTX 5000. InVision is also developing, in conjunction
with the FAA, improvements to the user-interface, inspection algorithms, and
operator on-line testing techniques. See "Risk Factors-Competition" and "-No
Assurance of Continued Certification; Risk of Certification of Competing
Technologies; Risk of Changing Standards."
CUSTOMERS
In order to capitalize on the global opportunity for deployment of
explosive detection technology for civil aviation, InVision focuses on three
important markets: (i) installations at key U.S. airports, (ii) installations at
new airports under construction worldwide and (iii) installations at
international airports.
The following is a list of the airports which are employing InVision's CTX
5000 technology or have a CTX 5000 on order as of June 30, 1997:
<TABLE>
<CAPTION>
AIRPORT LOCATION OPERATED BY
------- -------- -----------
<S> <C> <C>
John F. Kennedy International (1 unit) New York, New York El Al Israel Airlines
Hartsfield International (2 units) Atlanta, Georgia Delta Airlines
San Francisco International (1 unit) San Francisco, California United Airlines
London Heathrow (4 units) London, England British Airport Authority
Manchester International (10 units)(2 UNITS) Manchester, England Manchester Airport
Brussels National (1 unit) Brussels, Belgium Brussels Airport
Amsterdam Airport (1 unit) Amsterdam (Netherlands) Amsterdam Airport
Narita International (1 unit) Tokyo, Japan A distributor
Ben Gurion International (6 units) Tel Aviv, Israel Israel Airports Authority
Nino Aquino International (2 units) Manila, Philippines Northwest Airlines
King Khaled International (1 unit) Riyadh, Saudi Arabia A distributor
Subang Kuala Lumpur Kuala Lumpur, Malaysia Kuala Lumpur Airport
International (6 units)
Schiphol Chek Lapkok (4 UNITS) Hong Kong Hong Kong Airport Authority
Various (3 UNITS) Various El Al Israel Airlines
French Airports (4 units) (8 UNITS) (1) France Direction Generale de L'Aviation Civi le
U.S. Airports (9 units) (45 UNITS) (1)(2) United States Various U.S. Airlines
</TABLE>
- -----------
ITALICIZED ITEMS DENOTE NUMBER OF UNITS ON ORDER BUT NOT YET SHIPPED.
(1) For security reasons, the locations remain undisclosed.
(2) Under the FAA Contract
In December 1996, as an extension of legislation enacted upon the
recommendation of the Gore Commission, InVision received an order for 54 CTX
5000 systems from the FAA. Under the terms of the FAA contract, these systems
are to be installed during 1997 at America's busiest airports. As of June 30,
1997, nine of
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these systems have been shipped. For reasons of security, the FAA will not
divulge the deployment schedule or locations of the systems at this time. See
"-Recent Developments."
InVision believes that customer service and support are critical to its
success and has committed significant resources to these functions. Accordingly,
InVision provides a high level of customer support to assist in the site
planning, installation and integration of InVision's products into its
customer's facilities in addition to field service for maintaining the
reliability of InVision's products once installed. InVision's service
organization includes customer service engineers, product application
specialists, operator training engineers and technical support engineers. As of
June 30, 1997 InVision had 27 individuals employed in customer service and
support roles. InVision typically hires and trains its own support staff
throughout the world rather than relying on third-party maintenance services. In
addition to providing generally a one year parts warranty, InVision offers
fee-based primary and back-up service contracts to its customers to provide
system maintenance, ongoing technical support, documentation, training and,
under full service contracts, periodic software releases.
InVision believes that operator qualification and training is as important
to the explosives detection process as the CTX 5000's automated detection
process. In this regard, InVision has developed and provides in depth operator
training and testing as a critical component of each sale and installation. See
"Risk Factors-Limited Field Operations; Dependence on Operator Performance."
SALES AND MARKETING
InVision markets its products both directly through internal sales
personnel and indirectly through authorized agents, distributors and systems
integrators. As of June 30, 1997, InVision employed a total of 13 people in
sales and marketing. In North America, InVision markets its CTX 5000 primarily
through direct sales personnel, which as of June 30, 1997 consisted of three
individuals. Internationally, InVision utilizes both a direct sales force and
authorized agents to sell its products. As of June 30, 1997, InVision had five
direct international sales personnel broadly covering Europe, Asia, and the
Middle East and additional authorized agents representing InVision in specific
countries. For sales through its authorized agents and distributors, InVision
generally is directly involved in developing proposal documents and negotiating
contract terms. During the six months ended June 30, 1997 and the fiscal years
ended December 31, 1996 and 1995, international sales represented 62.3%, 76.2%
and 89.2%, respectively, of InVision's revenues. See "Risk Factors-International
Business; Fluctuation in Exchange Rates; Risk of Change in Foreign Regulations."
Support for the direct and indirect sales representatives is provided by
product application specialists who assist in pre- and post-sale support. Such
support includes assistance in designing customer configurations, educating
customers on the system and technology and supporting the implementation and
integration process. In addition, InVision provides its sales representatives
with training, promotional literature, a multi-media presentation, videos and
competitive analysis.
The selling process often involves a team comprised of individuals from
sales, marketing, engineering, customer service and support, and senior
management. The team frequently engages in a multi-level sales effort directed
toward a variety of constituents, including government regulators, the local
airport operator or authority, systems and or conveyor integrators, individual
airlines and airline operating committees. The combination of the high average
selling prices, the time needed for various agencies to secure funding for
systems and the negotiation and execution of actual contracts leads to a typical
sales cycle lasting from six to twelve months, or more, from initial contact
with a customer. Often, local government regulators become involved in the sales
decision process or provide funds for the purchase. For repeat orders from
existing customers, InVision can often expedite the sales cycle by utilizing
existing contracts and contract extensions and thereby avoiding lengthy
procurement processes. See "Risk Factors-Dependence on Large Orders; Customer
Concentrations; Lengthy Sales Cycle" and "-Public Agency Contract and Budget
Considerations."
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BACKLOG
InVision measures its backlog of system revenues as orders for which
contracts or purchase orders have been signed, but which have not yet been
shipped and for which revenues have not yet been recognized. InVision includes
in its backlog only those customer orders which are scheduled for delivery
within the next 18 months. InVision typically ships its products within three to
twelve months after receiving an order. However, such shipments may be impacted
by delays which occur in the delivery of components to InVision or customers'
readiness to accept delivery for reasons of site preparation or otherwise. At
June 30, 1997, InVision's system revenues backlog was approximately $62.1
million.
A majority of InVision's backlog as of June 30, 1997 is expected to be
shipped during the next twelve months. Any failure of InVision to meet an
agreed upon schedule could lead to the cancellation of the related order.
Variations in the size, complexity and delivery requirements of the customer
order may result in substantial fluctuations in backlog from period to period.
InVision believes that it is important for competitive reasons and to better
satisfy customer requirements to reduce order lead times and expects that
InVision's backlog may decrease on a relative basis over time. In addition, all
orders are subject to cancellation or delay by the customer and, accordingly,
there can be no assurance that such backlog will eventually result in revenues.
For these reasons, InVision believes that backlog cannot be considered a
meaningful indicator of InVision's performance on an annual or quarterly basis.
MANUFACTURING
InVision seeks to focus its manufacturing resources on activities which
emphasize InVision's core competencies and distinctive value. InVision's
manufacturing operations consist primarily of: materials management; assembly,
test and quality control of parts and components subassemblies; and final system
testing. Using InVision's designs and specifications, subcontractors assemble
mechanical and electrical sub-components. InVision performs final assembly and
test of systems, including configuration to customers orders and testing with
current release software, prior to shipment. InVision's manufacturing
organization has expertise in mechanical, electrical, electronic and software
assembly and testing. In addition, because quality and reliability over the life
of InVision's products are vital to customer satisfaction and repeat purchases,
InVision believes its quality assurance program to be a key component of its
business strategy.
InVision generally purchases major contracted assemblies from single source
suppliers in order to ensure high quality, prompt delivery and low cost.
InVision reviews its single source procurements on a case by case basis and
began to qualify second sources for certain contracted assemblies in 1996.
InVision purchases components, materials and electro-mechanical subsystems from
single source suppliers pursuant to purchase orders placed from time to time in
the ordinary course of business and has no guaranteed supply arrangements with
such suppliers. Although to date InVision has not experienced any significant
delays in obtaining any of its single source assemblies, there can be no
assurance that InVision will not face shortages of one or more of these systems
in the future. See "Risk Factors-Dependence on Suppliers."
InVision outsources certain manufacturing processes, including standard and
build-to-print fabricated parts such as mechanical sub-assemblies, sheet metal
fabrication, cables and assembled printed circuit boards. This strategy enables
InVision to leverage product development, manufacturing and management resources
while retaining greater control over product delivery, final product
configuration and timing of new product introductions, all of which InVision
believes are critical to exceeding customer expectations.
InVision is currently producing approximately four systems per month and
has the capacity to accommodate production of over six systems per month in
its current facility. In February 1997, InVision entered into a lease
agreement for a new headquarters and manufacturing facility. The new facility
is expected to be outfitted for occupancy in October 1997. The new facility
is expected to have an initial capacity in excess of 15 systems per month.
InVision's plans call for production levels which may be in excess of its
current facility's capacity. Any delays in the availability of the new
facility for the production of CTX 5000 systems could cause delays in
shipments
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of such systems to customers, which could have a material adverse effect on
InVision's business, financial condition and results of operations. See
"-Facilities" and "Risk Factors-Limited Manufacturing Experience; Management
of Growth."
RECENT DEVELOPMENTS
FAA PROCUREMENT CONTRACT. On December 24, 1996, the FAA awarded a $52.2
million contract to InVision for the purchase of 54 CTX 5000 systems to be
installed at major airports throughout the United States. This contract calls
for all 54 units to be delivered to airports by the end of 1997. In addition,
the government has the option to purchase up to 46 additional systems for 1998,
bringing the total purchase price under such contract, if such option is fully
exercised, to $110.9 million. The FAA may cancel this contract at any time and
for any reason, in which case the FAA would only be obligated to pay for units
delivered and to reimburse InVision for costs incurred and commitments made by
InVision in order to fulfill the contract.
EG&G ASTROPHYSICS. In November 1996, InVision entered into a Research and
Development Agreement with EG&G Astrophysics ("EG&G") whereby the parties agreed
to attempt to jointly develop and introduce to the EDS marketplace a system
combining the two companies' products into an automatic, high throughput, high
detection system. The terms of the agreement provide for the parties to equally
fund and jointly own the technology developed in the development program. Either
party may terminate the agreement for cause, or may terminate the agreement
without cause (which in certain cases would result in a penalty) on 60 days'
notice. The agreement terminates in May 1998. This alliance targets the
furtherance of InVision's strategy to increase throughput and provide a better
solution than multi-level detection systems currently in use in certain airports
in the United Kingdom and Asia which, InVision believes, represent a significant
compromise in detection and increase the cost and complexity of the baggage
handling system. There can be no assurance that InVision and EG&G will be able
to develop such an EDS in a cost-effective manner or at all. In connection with
the collaboration, an affiliate of EG&G made an equity investment of
$2.0 million in InVision.
QUANTUM MAGNETICS, INC. In April 1997, InVision made an equity investment
of approximately $1.2 million, representing an approximate 10% ownership
interest, in Quantum Magnetics, Inc. ("Quantum"). The equity investment entitles
InVision to designate one member to serve on Quantum's board of directors and
entitles InVision to certain registration, first refusal and other rights. In
connection with the equity investment, for the period extending through December
1997, Quantum has agreed not to license or transfer its technology related to
explosive detection for use in explosives or drug detection without consent of
InVision except in connection with the sale of Quantum or transfer of
substantially all of its assets. InVision subsequently sold a portion of this
equity investment to unrelated parties. See "Approval of the Merger and Related
Transactions-Background of the Merger."
COMPETITION
The market for explosive detection systems is intensely competitive and
is characterized by continuously developing technology and frequent
introductions of new products and features. InVision expects competition to
increase as other companies introduce additional and more competitive
products in the EDS market and as InVision develops additional capabilities
and enhancements for the CTX 5000 and new applications for its certified
technology. Historically, the principal competitors in the market for
explosive detection systems have been InVision, Vivid Technologies, Inc.,
EG&G Astrophysics, Heimann Systems GmbH, Thermedics Detection Inc., and
Barringer Technologies Inc. Each of these competitors provides EDS solutions
and products for use in the inspection of checked luggage, although to date
only InVision's CTX 5000 has been certified by the FAA. InVision is aware of
certain major corporations competing in other markets that intend to enter
the EDS market. In particular, in January 1996 Lockheed Martin Corporation
received a grant in the amount of approximately $8.5 million from the FAA for
the design and development of a CT-based EDS over a two-year period, which it
transferred to its newly-formed affiliate, L-3, in May 1997. Announcements of
currently planned or other new products may cause customers to delay their
purchasing decisions for EDS products, which could have a material adverse
effect on InVision's business, financial condition and results of operations.
Each of InVision's competitors may have
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substantially greater financial resources than InVision. There can be no
assurance that InVision will be able to compete successfully with its
competitors or with new entrants to the EDS market.
InVision believes that its ability to compete in the EDS market is based
upon such factors as: product performance, functionality, quality and features;
quality of customer support services, documentation and training; and the
capability of the technology to appeal to broader applications beyond the
inspection of checked baggage. Although InVision believes that the CTX 5000 is
superior to its competitors' products in its explosive detection capability and
accuracy, the CTX 5000 must also compete on the basis of price, throughput, the
ability to handle all sizes of baggage, and the ease of integration into
existing baggage handling systems. Certain of InVision's competitors may have an
advantage over InVision's existing technology with respect to these factors.
Currently, the CTX 5000 has an average selling price of approximately $1.0
million, compared to substantially lower prices for systems offered by
InVision's competitors; has a throughput rate of approximately 300 bags per hour
("bph"), compared to rates claimed to exceed 1,000 bph by certain of InVision's
competitors; has a gantry size which limits the ability of the unit to accept
all sizes of baggage; and requires that the baggage remain still while being
scanned, making it difficult to integrate into the continuously moving baggage
handling systems found in most airports. There can be no assurance that InVision
will be successful in convincing potential customers that the CTX 5000 is
superior to other systems given all of the necessary performance criteria, that
new systems with comparable or greater performance, lower price and faster or
equivalent throughput will not be introduced, or that, if such products are
introduced, customers will not delay or cancel existing or future orders for
InVision's system. Further, there can be no assurance that InVision will be able
to enhance the CTX 5000 to better compete on the basis of cost, throughput,
accommodation of baggage size and ease of integration, or that InVision will
otherwise be able to compete successfully with existing or new competitors. The
failure of InVision to develop such enhancements or otherwise successfully
compete in the EDS market for any of the above reasons would have a material
adverse effect on InVision's business, financial condition and results of
operations.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
InVision's performance depends in part upon its proprietary technology. In
the United States, InVision relies upon patents, copyrights and trade secrets
for the protection of the proprietary elements of the CTX 5000 and InVision's CT
technology. There can be no assurance, however, that InVision could enforce such
patents, trade secrets or copyrights. InVision has two United States patents for
automatic concealed object detection systems using a pre-scan stage which expire
in the years 2010 and 2011 (the "Patents"). There can be no assurance that the
Patents would be effective in preventing CT-based competition. In accordance
with certain Federal Acquisition Regulations included in InVision's development
contract, dated September 27, 1991, with the FAA (the "FAA R&D Contract"), the
United States Government has rights to use certain of InVision's proprietary
technology developed after the award of the FAA R&D Contract and funded by the
FAA R&D Contract. The U.S. Government may use such rights to produce or have
produced for the U.S. Government competing products using InVision's CT
technology. In the event that the U.S. Government were to exercise these rights,
InVision's exclusivity in supplying the U.S. Government with certified CT-based
explosive detection systems could be materially adversely affected.
InVision generally enters into confidentiality agreements with each of its
employees, and on a case-by-case basis enters into similar agreements with
distributors, customers, and potential customers. In addition, InVision limits
access to distribution of its software, documentation and other proprietary
information. There can be no assurance that these agreements will not be
breached, that InVision will have adequate remedies for any breach, or that
InVision's trade secrets will not otherwise become known to or independently
developed by others. Outside the United States, the time period for filing
foreign counterparts of the Patents has expired, and InVision has not sought or
obtained patent protection (except to the extent of licenses held under patents
owned by Imatron Inc. ("Imatron")) and has relied to date primarily on software
copyrights and trade secrets for the protection of its proprietary technology.
The absence of a foreign counterparts to the Patents could adversely affect
InVision's ability to prevent a competitor from using technology similar to
technology used in the CTX 5000. There can be no assurance that the steps taken
by InVision to protect its proprietary technology will be adequate or that its
competitors will not be able to develop similar, functionally equivalent or
superior technology.
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InVision in the past has received, and from time to time in the future
may receive, communications from third parties alleging infringements by
InVision or one of its suppliers of patents or other intellectual proprietary
rights owned by such third parties. There can be no assurance that any
infringement claims (or claims for indemnification resulting from
infringement claims against third parties, such as customers) will not be
asserted against InVision. If InVision's product is found to infringe a
patent, a court may grant an injunction to prevent making, selling or using
the product in the applicable country. Protracted litigation may be necessary
to defend InVision against alleged infringement of others' rights.
Irrespective of the validity or success of such claims, defense of such
claims could result in significant costs to InVision and the diversion of
time and effort by management, either of which by itself could have a
material adverse effect on the business, financial condition and results of
operations of InVision. Further, adverse determinations in such litigation
could result in InVision's loss of proprietary rights, subject InVision to
significant liabilities (including treble damages in certain circumstances),
or prevent InVision from selling its products. If infringement claims are
asserted against InVision, InVision may seek to obtain a license of such
third party's intellectual property rights, which may not be available under
reasonable terms or at all. In addition, litigation may be necessary to
enforce patents issued to or licensed exclusively to InVision and protect
trade secrets or know-how owned or licensed by InVision and, whether or not
InVision is successful in defending such intellectual property, InVision
could incur significant costs and divert considerable management and key
technician time and effort with respect to the prosecution of such
litigation, either of which by itself could have a material adverse effect on
the business, financial condition and results of operations of InVision.
InVision also holds an exclusive, worldwide, perpetual and fully-paid
license from Imatron (obtained in connection with the formation of InVision)
under Imatron's patents and know-how to develop, manufacture and sell
(a) systems for the inspection of mail, freight, parcels and baggage, and
(b) compact medical scanner products for military field applications. InVision,
in exchange, granted to Imatron an exclusive, worldwide, perpetual and
fully-paid license under InVision's patent or future patents and know-how to
permit Imatron to utilize such technology in medical scanner products (other
than compact medical scanner products for military field applications). Imatron
is a manufacturer of medical scanning systems and holds a portfolio of CT
patents.
While InVision believes that its intellectual property rights are valuable,
InVision also believes that because of the rapid pace of technological change in
the industry, factors such as innovative skills, technical expertise, the
ability to adapt quickly to new technologies and evolving customer requirements,
product support, and customer relations are of greater competitive significance.
EMPLOYEES
As of June 30, 1997, InVision employed 176 people, of whom 41 were
primarily engaged in research and development activities, 36 in marketing and
sales, customer support and field service, 41 in manufacturing and 25 in
administration and finance. In addition, InVision utilized the services of 33
full-time consultants and temporary employees in the first six months of 1997.
Management believes that InVision's relationship with its employees is good.
FACILITIES
InVision's principal administrative, marketing, development and
manufacturing facility is located in Foster City, California and consists of
approximately 27,000 square feet under a lease which expires in October 1998.
InVision has an option to extend the lease for one year. The base rent under
this lease is approximately $300,000 per year. In March 1997, InVision entered
into a lease for new principal corporate offices and manufacturing facilities in
Newark, California, which consists of approximately 95,000 square feet under a
lease which expires in May 2007. InVision has an option to extend the lease for
five years. The initial base rent under this lease is approximately $672,000 per
year. InVision anticipates relocating to this new facility upon completion of
tenant improvements, currently scheduled for October 1997. Management believes
that the new facilities will be sufficient to satisfy InVision's administrative
and manufacturing needs for the foreseeable future.
73.
<PAGE>
InVision's manufacturing facility is currently producing approximately
five systems per month and has the capacity to accommodate production in
excess of six systems per month. The new facility is expected to have a
capacity in excess of 15 systems per month before the implementation of
activities for manufacturing cycle time reduction and multiple shifts.
LEGAL PROCEEDINGS
From time to time, InVision may be involved in litigation, including
litigation relating to claims arising out of its operations in the normal course
of business. As of the date of this Proxy Statement/Prospectus, InVision is not
a party to any legal proceedings, the adverse outcome of which, in InVision
management's opinion, individually or in aggregate would have a material adverse
effect on InVision's business, financial condition or results of operations.
INVISION MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following sets forth certain information regarding InVision's executive
officers and directors as of September 3, 1997:
NAME AGE POSITION
- ---- --- --------
Dr. Sergio Magistri . . . . . 44 President, Chief Executive Officer and
Director
Curtis P. DiSibio . . . . . . 41 Senior Vice President, Finance and
Administration and Chief Financial Officer
David M. Pillor . . . . . . . 43 Senior Vice President, Sales and Marketing
Dr. Benno Stebler . . . . . . 45 Senior Vice President, Manufacturing
Dr. Douglas P. Boyd(1)(2) . . 56 Director
Dr. Giovanni Lanzara(2) . . . 57 Chairman of the Board
Dr. Bruno Trezza(1) . . . . . 60 Director
- -----------
(1) Member of Audit Committee
(2) Member of Compensation Committee
DR. SERGIO MAGISTRI has served as President, Chief Executive Officer and
Director of InVision since December 1992. From June 1991 to November 1992, he
was a Project Manager with AGIE, Switzerland, a manufacturer of high precision
tooling equipment, responsible for all aspects of a family of new products for
high precision electro-erosion machining with sub-micron precision. From 1988 to
June 1991, Dr. Magistri was a consultant to high technology companies, including
FI.M.A.I. Holding, S.A. As a consultant to FI.M.A.I., Dr. Magistri was involved
in the formation of InVision and the development of its business plan and of its
technology. From 1983 to 1988, Dr. Magistri held various positions with
Imatron Inc. ("Imatron"), a CT medical scanner company, including as an
Engineering Physicist and Manager of Advanced Reconstruction Systems, and
Director of Computer Engineering. Dr. Magistri holds a degree in Electrical
Engineering and a doctorate in Biomedical Engineering from the Swiss Institute
of Technology, Zurich, Switzerland.
CURTIS P. DISIBIO has served as Vice President, Finance and Administration
of InVision since April 1991 (Senior Vice President since August 1997) and Chief
Financial Officer since March 1993. From 1980 to 1986, Mr. DiSibio worked in
public accounting. In 1986 Mr. DiSibio served as controller of Trilogy Systems
Corporation ("Trilogy"), a development stage mainframe computer company, and was
involved in the sale of Trilogy's operations to Digital Equipment Corporation.
From 1987 to 1990, Mr. DiSibio held various positions including
74.
<PAGE>
Treasurer and Chief Financial Officer of ELXSI Corporation, a publicly traded
mini-super computer company which Trilogy had acquired. Mr. DiSibio received
a Masters degree in Business Administration degree from Santa Clara
University.
DAVID M. PILLOR joined InVision in July 1994 as Vice President, Sales and
Marketing, and has served as Senior Vice President, Sales and Marketing since
November 1995. From 1988 to July 1994, Mr. Pillor held various positions
including Area Sales Manager, National Sales Manager and Vice President of Sales
of Technomed International, a medical products company. Mr. Pillor holds a
Bachelor of Science degree in Chemistry from the University of Maryland.
DR. BENNO STEBLER joined InVision in May 1991 as Vice President,
Engineering, and has served as Vice President, Manufacturing, of InVision since
September 1995 (Senior Vice President since August 1997). From 1989 to 1991,
Dr. Stebler served as Staff Engineer at Toshiba America, a consumer electronics
company. From 1986 to 1989, Dr. Stebler served in various positions at Imatron
including Software Manager of the Compact Medical Scanner, a predecessor to the
CTX 5000. Dr. Stebler holds a diploma of Electrical Engineering and a doctorate
in Biomedical Engineering from the Swiss Institute of Technology, Zurich,
Switzerland.
DR. DOUGLAS P. BOYD served as a Director of InVision from September 1990 to
December 1992, and since June 1993. Dr. Boyd was a founder of Imatron in 1981
and has held various positions at Imatron, and currently serves as its Chairman
of the Board and Chief Technology Officer. Dr. Boyd is an Adjunct Professor of
Radiology at the University of California, San Francisco.
DR. GIOVANNI LANZARA has served as a Director of InVision since
September 1990 and as Chairman of the Board since March 1994. Since 1978, he has
served as a professor and President of the Transportation Engineering Department
at the University of Aquila, Rome, Italy. Dr. Lanzara has been President of the
International Center for Transportation Studies since 1987. Dr. Lanzara served
as director of Imatron from August 1993 to June 1996.
DR. BRUNO TREZZA has served as a Director of InVision since November 1993.
Since 1974, he has served as a professor of economics at the University
"La Sapienza" in Rome, Italy. From 1980 to 1981, Dr. Trezza served as an
economic advisor to the Italian Prime Minister. From 1974 to 1983, he served as
a member of the Committee for Economic Planning of the Italian Ministry of
Planning. He has served as a director of several private companies and public
institutions in Italy.
The Board of Directors has set the size of the Board at five directors.
Since there are currently only four elected directors, a vacancy exists which
may be filled at the Board's discretion. InVision's Board of Directors is
divided into three classes with the members of each class serving for terms of
office expiring at the third annual meeting of stockholders following their
election and until successors are duly qualified. The terms of office of the
Class I, II, and III directors expire at the annual meetings of stockholders in
2000, 1998 and 1999, respectively. The Class I director is Dr. Magistri; the
Class II director is Dr. Lanzara (the other Class II position is currently
vacant); and the Class III directors are Drs. Boyd and Trezza. Executive
officers serve at the discretion of the Board of Directors. See "-Employment
Agreements."
The Board of Directors has an Audit Committee and a Compensation Committee.
The functions of the Audit Committee include recommending to the Board the
retention of independent auditors, reviewing the scope of the annual audit
undertaken by InVision's independent auditors and the progress and results of
their work, and reviewing the financial statements of InVision and its internal
accounting and auditing procedures. The functions of the Compensation Committee
include reviewing and approving executive compensation policies and practices,
reviewing salaries and bonuses for certain officers of InVision, administering
InVision's employee stock option plans, and considering such other matters as
may, from time to time, be delegated to the Compensation Committee by the Board
of Directors.
Non-employee directors currently receive $1,200 per day in cash
compensation for their services as members of the Board of Directors and are
reimbursed for expenses incurred in connection with the performance
75.
<PAGE>
of services as directors. In addition, non-employee directors of InVision
currently receive $1,200 per day for each day of consulting services rendered to
InVision not in connection with their services as directors.
Aggregate consulting fees earned by directors of InVision were $136,280 in
1994, $115,800 in 1995 and $263,600 in 1996. During these years Giovanni Lanzara
(who earned $100,000 in 1994, $71,400 in 1995 and $117,600 in 1996) and
Bruno Trezza (who earned $104,400 in 1996) were the only individual directors
who earned consulting fees in excess of $60,000 in any individual calendar year.
EXECUTIVE COMPENSATION
The following table sets forth certain compensation earned by InVision's
Chief Executive Officer and InVision's other four most highly compensated
executive officers whose salary and bonus for the year ended December 31, 1996
exceeded $100,000 (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
SECURITIES
UNDERLYING
ANNUAL COMPENSATION OPTIONS
------------------------------------ -------
LONG-TERM
COMPENSATION ALL OTHER
NAME FISCAL YEAR SALARY BONUS AWARDS COMPENSATION
- ------------------------------------------ ----------- -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Dr. Sergio Magistri . . . . . . . . . . . . 1996 $136,666 $- - $-
President and Chief Executive Officer 1995 131,982 - 63,272 10,000(1)
Curtis P. DiSibio . . . . . . . . . . . . . 1996 111,250 34,750 - -
Chief Financial Officer 1995 109,000 18,790 39,326 -
David M. Pillor . . . . . . . . . . . . . . 1996 110,000 117,603(2) - -
Senior Vice President, Sales & Marketing 1995 100,000 117,790(2) 154,186 -
Dr. Benno Stebler . . . . . . . . . . . . . . 1996 116,000 37,876 - -
Vice President, Manufacturing 1995 114,000 19,206 43,798 -
Sauveur Chemouni. . . . . . . . . . . . . . . 1996 104,478 33,000 - -
Vice President, Engineering 1995 100,000 - 51,848 -
</TABLE>
- -----------
(1) Represents relocation expenses.
(2) Includes commission payments of $97,603 in 1996 and $70,790 in 1995; amount
in 1995 includes $47,000 related to orders received in 1994.
InVision has a policy of granting certain cash incentive awards to its
senior management based upon the achievement of certain performance goals. The
specific performance goals are determined by InVision's Board of Directors and
are designed to fairly reward senior management for significant positive
contributions to InVision.
RECENT OPTION GRANTS
InVision did not grant any stock options to its Named Executive Officers
during fiscal 1996.
OPTIONS EXERCISED IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
During the last fiscal year no options were exercised by the Named
Executive Officers. The following table sets forth information with respect to
the number of securities underlying unexercised options held by the Named
76.
<PAGE>
Executive Officers as of December 31, 1996 and the value of unexercised
in-the-money options as of December 31, 1996:
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END(1)
-------------------------- ---------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
Dr. Sergio Magistri. . . . 139,732 81,714 $2,221,726 $1,298,338
Curtis P. DiSibio. . . . . 50,788 14,895 799,669 230,146
David M. Pillor. . . . . . 125,530 49,829 1,969,076 774,679
Dr. Benno Stebler. . . . . 58,004 15,054 913,573 231,831
Sauveur Chemouni . . . . . 45,590 20,092 711,690 309,416
- -----------
(1) Based on a per share price of $16.50, the closing price of the Common Stock
as reported on the Nasdaq SmallCap Market on December 31, 1996, minus the
exercise price of the option, multiplied by the number of shares underlying
the option.
EMPLOYMENT AGREEMENTS
InVision has entered into employment agreements with Messrs. Magistri,
DiSibio, Pillor and Stebler which provide for salaries and other employment
terms. The agreements with Messrs. Magistri, DiSibio, Pillor and Stebler each
provide that if InVision terminates the employee's employment without cause, the
employee is entitled to a severance payment equal to his annual base salary for
six months. All of the employment agreements are terminable at the will of
either the employee or InVision, with or without cause. In each case,
termination by the employee requires two months notice to InVision.
401(k) PLAN
In April 1992, InVision adopted a tax-qualified employee savings and
retirement plan (the "401(k) Plan") covering all of InVision's employees.
Pursuant to the 401(k) Plan, employees may elect to reduce their current
compensation by up to the annual limit prescribed by statute ($9,500 in 1996
unless limited by other statutory provisions) and contribute the amount of such
reduction to the 401(k) Plan. The 401(k) Plan does not provide for any matching
or discretionary contributions to the 401(k) Plan by InVision. The trustee under
the 401(k) Plan, at the direction of each participant, invests the assets of the
401(k) Plan in specified investment options. The 401(k) Plan is intended to
qualify under Section 401 of the Internal Revenue Code so that contributions by
employees to the 401(k) Plan, and income earned on plan contributions, are not
taxable until withdrawn, and so that the contributions by employees will be
deductible by InVision when made.
STOCK OPTION PLANS
EQUITY INCENTIVE PLAN
InVision's 1991 Stock Option Plan was adopted by the Board of Directors in
May 1991 and approved by the shareholders in June 1991. In March 1996, the 1991
Stock Option Plan was amended and restated as the Equity Incentive Plan (the
"Equity Plan"). In December 1996 the Board of Directors approved an amendment to
the Equity Plan, which was approved by the stockholders of InVision in June
1997, increasing the number of shares available thereunder by 640,000 shares. A
total of 2,221,818 shares of Common Stock have been reserved for issuance under
the Equity Plan. The Equity Plan provides for grants of incentive stock options,
nonstatutory stock options, stock bonuses, rights to purchase restricted stock,
and stock appreciation rights (collectively "Stock Awards") to employees
(including officers and employee directors) and consultants of InVision and its
affiliates. The Equity Plan is presently being administered by the Compensation
Committee, which determines optionees and the terms of options granted,
including the exercise price, number of shares subject to the option and the
exercisability thereof.
77.
<PAGE>
The terms of options granted under the Equity Plan may not exceed ten years
from the date of grant. Options granted under the Equity Plan to date have been
at the discretion of the Board and have typically vested at the rate of 25% of
the shares subject to option at the end of the first anniversary of the date of
grant and 1/16th of such shares at the end of each quarter thereafter. No
incentive stock option may be transferred by the optionee other than by will or
the laws of descent or distribution. Incentive stock options shall be
exercisable during the lifetime of the person to whom the option is granted only
by such person. An optionee whose relationship with InVision or any related
corporation ceases for any reason (other than by death or permanent and total
disability) may exercise options in the three month period following such
cessation (unless such options terminate or expire sooner by their terms) or in
such shorter period (not to be less than 30 days) determined by the Board of
Directors.
Shares subject to Stock Awards (other than stock appreciation rights)
granted under the Equity Plan which have lapsed or terminated may again be
subject to Stock Awards granted under the Equity Plan. The Board of Directors
has the authority to effect, with the consent of affected holders, the
cancellation of outstanding Stock Awards under the Equity Plan in return for the
grant of new Stock Awards for the same or different number of Stock Awards with
an exercise price per share of 85%, 100% or, under certain circumstances, 110%
of fair market value of the Common Stock on the new grant date, with the shares
subject to the outstanding Stock Awards again becoming available for grant under
the Equity Plan. Upon any merger or consolidation in which InVision is not the
surviving corporation, all outstanding Stock Awards shall either be assumed by
the surviving entity or continue in full force and effect. If any surviving
entity refuses to assume or continue such Stock Awards or substitute similar
Stock Awards then such Stock Awards shall be terminated if not exercised prior
to such event.
As of June 30, 1997, approximately 63,009 shares of Common Stock had been
issued upon the exercise of options granted under the Equity Plan, options to
purchase approximately 1,156,000 shares of Common Stock at a weighted average
exercise price of $2.84 per share were outstanding and approximately 757,000
shares remained available for future option grants. The Equity Plan will
terminate on May 2, 2001 unless sooner terminated by the Board of Directors. To
date, no stock bonuses, restricted stock, or stock appreciation rights have been
granted under the Equity Plan.
1996 EMPLOYEE STOCK PURCHASE PLAN
In March 1996, InVision adopted the Employee Stock Purchase Plan (the
"Purchase Plan") covering an aggregate of 300,000 shares of Common Stock. The
Purchase Plan is intended to qualify as an employee stock purchase plan within
the meaning of Section 423 of the Internal Revenue Code. Under the Purchase
Plan, the Board of Directors may authorize participation by eligible employees,
including officers, in periodic offerings following the adoption of the Purchase
Plan. The offering period for any offering will be no more than 27 months.
Employees are eligible to participate if they are employed by InVision or
an affiliate of InVision designated by the Board of Directors for at least 20
hours per week and are employed by InVision or a subsidiary of InVision
designated by the Board for at least five months per calendar year. Employees
who participate in an offering can have up to 15% of their earnings withheld
pursuant to the Purchase Plan. The amount withheld will then be used to purchase
shares of the Common Stock on specified dates determined by the Board of
Directors. The price of Common Stock purchased under the Purchase Plan will be
equal to 85% of the lower of the fair market value of the Common Stock on the
commencement date of each offering period or the relevant purchase date.
Employees may end their participation in the offering at any time during the
offering period except as provided in the terms of the offering, and
participation ends automatically on termination of employment with InVision.
78.
<PAGE>
In the event of a change of control of InVision, the Board of Directors has
discretion to provide that each right to purchase Common Stock will be assumed
or an equivalent right substituted by the successor corporation, if any, or the
Board may shorten the offering period and provide for all sums collected by
payroll deductions to be applied to purchase stock immediately prior to such
transaction. The Purchase Plan will terminate in March 2006 unless earlier
terminated by the Board of Directors. The Board has the authority to amend or
terminate the Purchase Plan, subject to the limitation that no such action may
adversely affect any outstanding rights to purchase Common Stock and subject, in
certain cases, to stockholder approval. No shares were issued under the Purchase
Plan in 1996 or the first six months of 1997.
INVISION CERTAIN TRANSACTIONS
In connection with the formation of InVision, FI.M.A.I., a founder of
InVision, entered into a Manufacturing and Distribution Agreement dated as of
September 11, 1990 (the "Distribution Agreement"), which agreement appointed
FI.M.A.I. as the exclusive manufacturer, purchaser and distributor for the CTX
5000 in Europe. FI.M.A.I. transferred its rights under the Distribution
Agreement to ElectroParts, S.A. and HARAX, affiliates of FI.M.A.I, in April 1995
in connection with the transfer from FI.M.A.I. to HARAX and ElectroParts of
FI.M.A.I.'s entire equity interest in InVision. In June 1995, InVision issued
56,818 shares of Series D Preferred Stock to ElectroParts, and 170,455 shares of
Series D Preferred Stock to HARAX in exchange for the cancellation of the
Distribution Agreement.
In July 1991, InVision entered into a Standby Financing Agreement with
FI.M.A.I. (the "Standby Financing") pursuant to which FI.M.A.I. agreed to
provide an equity investment in InVision of up to $3,000,000 and to guarantee a
line of credit for InVision of up to $3,000,000. From July 1991 to April 1994,
FI.M.A.I. guaranteed approximately $3,000,000 in bank indebtedness and purchased
151,515 shares of Series C Preferred Stock at a purchase price of $19.80 per
share or an aggregate of $3,000,000. In June 1994, InVision issued 802,139
shares of Series D Preferred Stock to HARAX at a purchase price of $3.74 per
share or an aggregate purchase price of $3,000,000. The funds received from the
sale of the Series D Preferred Stock were used to pay down $3,000,000 of
InVision's $5,300,000 debt then outstanding and to terminate FI.M.A.I.'s
guarantee with respect to such amount. The Series D Preferred Stock was issued
to FI.M.A.I. on the same terms offered to all investors in InVision's Series D
Preferred Stock.
From July 1993 to November 1994, InVision borrowed approximately $2,325,000
from HARAX at an interest rate of prime plus 1%. In May 1995, InVision issued
649,434 shares of Series D Preferred Stock to HARAX at a purchase price of $3.74
per share in exchange for the cancellation by HARAX of the principal amount and
interest of such indebtedness, or an aggregate purchase price of $2,428,882.
In October 1995, InVision issued 33,406 shares of InVision's Series D
Preferred Stock in exchange for the assumption by ElectroParts of InVision's
outstanding debt obligations to Instituto Bancario San Paolo di Torino in the
amount of $125,000.
HARAX and ElectroParts are participation holding companies that are
affiliated with FI.M.A.I. HARAX currently holds approximately 23.3% of the
outstanding equity of InVision and will hold approximately 21.8% of the
outstanding equity of InVision following the Merger. ElectroParts currently
holds 1.9% of the outstanding equity of InVision and will hold 1.8% of the
outstanding equity of InVision following the Merger.
On October 13, 1994, InVision issued 3,818 shares of Series D Preferred
Stock to Louis Turpen in consideration of services previously rendered by
Mr. Turpen. Mr. Turpen served as a director of InVision from December 1992 until
June 1995.
On November 11, 1994, InVision issued 5,455 shares of Series D Preferred
Stock to Lucio Lanza in consideration of services previously rendered by
Mr. Lanza. Mr. Lanza acted as Chairman of the Board of InVision from
December 1992 until November 1993.
79.
<PAGE>
In July 1994, Dr. Sergio Magistri loaned InVision $50,000 for working
capital. In June 1995 InVision issued 13,368 shares of Series D Preferred Stock
to Dr. Sergio Magistri in exchange for the cancellation by Dr. Magistri of such
indebtedness.
In August 1996, Anaconda Opportunity Fund, L.P. ("Anaconda"), the successor
to Anaconda Partners, L.P., exercised warrants to purchase 420,454 shares of
Common Stock at an exercise price of $4.40 per share and 58,864 shares of Common
Stock at an exercise price of $5.50 per share. The original warrants were issued
to Anaconda in connection with a certain Bridge Loan and Security Agreement,
dated as of December 28, 1995, entered into between InVision and Anaconda
Partners, L.P. Also in August 1996, LEO Holding, Inc. exercised a warrant to
purchase 34,090 shares of Common Stock at an exercise price of $4.40 per share
and 4,772 shares of Common Stock at an exercise price of $5.50 per share. Such
warrant was originally issued to Anaconda Partners, L.P. and was subsequently
transferred to LEO Holding, Inc. In connection with the warrant issuance
InVision agreed to register the offer and resale of shares issuable upon
exercise of the warrants. In June 1996, InVision registered the offer and resale
of such shares. Of such shares, 479,318 shares continue to remain registered for
resale by Anaconda.
On December 31, 1996, InVision issued 32,000 shares of Common Stock to
Fredrick L. Roder, Vice President, Federal Systems of InVision, in consideration
of all of the outstanding common voting stock of Imatron Federal Systems, Inc.
The foregoing share issuances have been retroactively adjusted to reflect a
1-for-11 reverse stock split of Preferred Stock and Common Stock effected on
March 15, 1996. As of the date of this Prospectus there is no Preferred Stock
outstanding. The foregoing Common Stock issuances have also been adjusted to
reflect a 2-for-1 Common Stock split in the form of a stock dividend effected on
February 7, 1997.
InVision believes that the foregoing transactions were in its best
interests and were on terms no less favorable to InVision than could be obtained
from unaffiliated third parties.
ADDITIONAL INFORMATION REGARDING MAJOR STOCKHOLDER
HARAX, a major stockholder of InVision, is owned and controlled by Eugenio
Rendo. Mr. Rendo was a senior executive of the Italimprese Group, a large,
privately-held conglomerate based in Italy. Mr. Rendo has been charged in Italy
with bribery of public officials in connection with obtaining public sector
contracts. These charges arise from political contributions made by Mr. Rendo in
1991. Mr. Rendo denies such allegations and is vigorously defending himself in
such matter. In particular, Mr. Rendo asserts that the payments made by him
which have been called into question were lawful contributions to a political
party and he denies that any favor or other improper benefit was received in
exchange. In early 1996, the proceedings with respect to such charges were
relocated from Milan, Italy to Rome, Italy, and the formal indictment in Milan
was annulled. To resume the proceedings, a new indictment would be required from
the judges in Rome; however, to date no new indictment has been issued. In the
event that a new indictment is issued, under Italian law two trials must be held
before a conviction is obtained. InVision believes that, regardless of the
outcome of any such legal proceedings, such events will not have an adverse
effect on the business or operations of InVision.
80.
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INVISION PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of InVision Common Stock as of August 20, 1997, and as adjusted to
reflect the consummation of the Merger, by: (i) each person (or group of
affiliated persons) known by InVision to beneficially own 5% or more of the
InVision Common Stock; (ii) each director of InVision; (iii) each Named
Executive Officer; and (iv) all directors and executive officers of InVision as
a group. Unless otherwise indicated below, to the knowledge of InVision, all
persons listed below have sole voting and investment power with respect to their
shares of Common stock, except to the extent authority is shared by spouses
under applicable law. The information set forth in the table and accompanying
footnotes has been furnished by the named beneficial owners.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
MERGER(1) MERGER(1)
--------- ---------
NAME NUMBER PERCENTAGE NUMBER PERCENTAGE
---- ------ ---------- ------ ----------
<S> <C> <C> <C> <C>
HARAX Holding, S.A.(2). . . . . . 2,601,584 23.3% 2,601,584 21.8%
Dr. Sergio Magistri(3). . . . . . 246,685 2.2 246,685 2.0
Sauveur Chemouni(4) . . . . . . . 61,878 * 61,878 *
Curtis P. DiSibio(5). . . . . . . 62,986 * 62,986 *
David M. Pillor(6). . . . . . . . 161,661 1.4 161,661 1.3
Dr. Benno Stebler(7). . . . . . . 63,841 * 63,841 *
Dr. Douglas P. Boyd(8). . . . . . 69,093 * 69,093 *
Dr. Giovanni Lanzara(9) . . . . . 441,674 3.9 441,674 3.7
Dr. Bruno Trezza(10). . . . . . . 440,400 3.9 440,400 3.7
All directors and executive
officers as a group
(8 persons)(11). . . . . . . . . 1,613,774 13.6 1,613,774 12.7
</TABLE>
- -----------
* Less than 1% of the outstanding InVision Common Stock.
(1) Applicable percentage of ownership at August 20, 1997 is based upon
11,156,000 shares of InVision Common Stock outstanding. Applicable
percentage ownership after the Merger is based upon 11,933,000 shares of
InVision Common Stock outstanding. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
includes sole or shared voting or investment power with respect to shares
shown as beneficially owned. Shares of InVision Common Stock subject to
options currently exercisable or exercisable within 60 days are deemed
outstanding for computing the percentage ownership of the person holding
such options, but are not deemed outstanding for computing the percentage
ownership of any other person.
(2) The business address for the named stockholder is 231, Val des Bons
Malades, Luxembourg-Kirchberg, Luxembourg L-2121. Eugenio Rendo is the
controlling stockholder of HARAX and is deemed to beneficially own such
shares. In addition, HARAX is the pledgee of an additional 210,642 shares
of InVision Common Stock which have been pledged to secure a loan by HARAX,
which loan becomes due and payable in October 1997.
(3) Includes 219,636 shares issuable pursuant to options exercisable within 60
days of August 20, 1997.
(4) Includes 61,669 shares issuable pursuant to options exercisable within 60
days of August 20, 1997.
(5) Represents 62,986 shares issuable pursuant to options exercisable within 60
days of August 20, 1997.
(6) Represents 161,661 shares issuable pursuant to option exercisable within 60
days of August 20, 1997.
(7) Includes 400 shares held by Dr. Stebler's wife and 63,441 shares issuable
pursuant to options exercisable within 60 days of August 20, 1997.
81.
<PAGE>
(8) Includes 65,048 shares issuable pursuant to options exercisable within 60
days of August 20, 1997.
(9) Includes 341,886 shares held by PASTEC, Holdings, S.A. Giovanni Lanzara is
the controlling stockholder of PASTEC. Also includes 41,666 shares issuable
pursuant to option exercisable within 60 days of August 20, 1997.
(10) Includes 385,474 shares held by HAKON Holdings, S.A. Bruno Trezza is the
controlling stockholder of HAKON. Also includes 54,926 shares issuable
pursuant to options exercisable within 60 days of August 20, 1997.
(11) Includes 727,360 shares held by entities affiliated with certain directors
of InVision as described in footnotes 9 and 10 above and 751,812 shares
subject to options exercisable within 60 days of August 20, 1997.
82.
<PAGE>
QUANTUM SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth for the periods and the dates indicated
certain financial data which should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and notes thereto included elsewhere
herein. The statement of operations data for each of the two fiscal years in
the period ended September 30, 1996, and the balance sheet data at September
30, 1995 and 1996 are derived from the consolidated financial statements of
Quantum which have been audited by Price Waterhouse LLP, independent
accountants, and are included elsewhere in this Prospectus. The statement of
operations data for the years ended September 30, 1992 and 1993 and the
balance sheet data at September 30, 1992, 1993, and 1994 are derived from
unaudited financial statements not otherwise contained herein. The
consolidated statements of operations derived for the six months ended June
30, 1996 and 1997, and the consolidated balance sheet data as of June 30,
1997 are derived from unaudited financial statements of Quantum included
elsewhere herein. The unaudited financial statements have been prepared by
Quantum on a basis consistent with Quantum's audited consolidated financial
statements and, in the opinion of management, include all adjustments,
consisting only of normal recurring accruals, necessary for a fair
presentation of Quantum's results of operations for such periods and
financial condition at such dates. The results of operations for the nine
months ended June 30, 1997 are not necessarily indicative of future results.
(In thousands, except per share data)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS Nine Months
OF OPERATIONS DATA: Year Ended December 31, Ended June 30,
--------------------------------------------------------- -----------------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Contract revenues $ 1,397 $ 2,137 $ 2,389 $ 2,739 $ 3,213 $ 1,964 $ 3,085
Cost of contract revenues 1,039 1,787 1,755 2,389 2,836 1,737 2,499
-------- -------- -------- -------- -------- -------- --------
Gross profit 358 350 634 350 377 227 586
-------- -------- -------- -------- -------- -------- --------
Operating expenses:
Research and development 30 76 193 469 838 717 585
Sales and marketing 16 42 72 324 824 478 213
General and administrative 352 471 412 706 1,307 933 566
-------- -------- -------- -------- -------- -------- --------
Total operating expenses 398 591 677 1,499 2,969 2,128 1,364
-------- -------- -------- -------- -------- -------- --------
Loss from operations (40) (241) (43) (1,149) (2,592) (1,901) (778)
Interest expense - - (16) (126) (221) (88) (257)
-------- -------- -------- -------- -------- -------- --------
Loss before income taxes (40) (241) (59) (1,275) (2,813) (1,989) (1,035)
Provision for income taxes - - - - - - -
-------- -------- -------- -------- -------- -------- --------
Net loss $ (40) $ (241) $ (59) $ (1,275) $ (2,813) $ (1,989) $ (1,035)
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Net loss per share $ (0.55) $ (1.00) $ (0.71) $ (0.31)
-------- -------- -------- --------
-------- -------- -------- --------
Shares used in per share calculations(1) 2,332 2,826 2,815 3,308
</TABLE>
<TABLE>
<CAPTION>
December 31
-------------------------------------- June 30,
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and short-term investments $ 35 $ 20 $ 24 $ 60 $ 107 $ 659
Working capital (deficit) (64) (229) 233 (1,356) (601) 10
Total assets 459 740 665 953 2,083 2,396
Long-term liabilities - - 547 341 598 222
Mandatorily redeemable convertible
preferred stock - - - - 2,500 4,522
Total stockholders' equity (deficit) (64) (229) (233) (1,447) (3,174) (4,100)
</TABLE>
(1) See Note 3 of Notes to Consolidated Financial Statements of Quantum for an
explanation of the method used to determine the number of shares used to
compute per share amounts.
83.
<PAGE>
QUANTUM MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Quantum was incorporated in 1987 by Quantum Design, Inc. ("Quantum
Design"), a leading manufacturer of high-end laboratory instrumentation for
magnetic measurements. Quantum's primary function was to investigate and
commercialize methods of magnetic-field based detection, inspection and
analysis. Although operated independently, until 1994 Quantum was primarily
engaged in product development for Quantum Design, which owned eighty-five
percent (85%) of the outstanding capital stock of Quantum. In April 1994,
Quantum's management team purchased from Quantum Design stock representing a
controlling interest in Quantum, and redirected Quantum's focus toward research
and development contracting and opportunities in the security market made
possible by scientific advances in magnetic resonance techniques, specifically
quadrupole resonance ("QR"), a state-of-the-art, low-cost (compared to CT)
version of magnetic resonance.
Since 1992, Quantum has undertaken over 100 research and development
programs for various federal government agencies and private companies for
which it has received revenues through June 30, 1997 of approximately $13
million and has additional contractual funding at June 30, 1997 of
approximately $8 million. Through participation in these programs, Quantum
has established itself as a leading developer of novel applications for
magnetic sensing technology, has formed research and development
relationships with over 20 leading academic institutions and research groups
world-wide, and has developed a substantial body of proprietary knowledge and
patented technology.
Quantum has developed several prototype baggage scanning systems for the
aviation security market based on its QR technology. Quantum's aviation
security prototypes are designed to address the primary concern of the
international security market today - the detection of explosives and illegal
drugs. However, these prototypes do not detect a wide enough range of
explosives in order to be certifiable as an explosive detection system
("EDS") by the FAA. In 1995, Quantum entered into an exclusive Product
Development and Supply Agreement with a leading aviation security company.
This agreement contemplated the commercialization of Quantum's existing
prototypes as well as the joint development of additional aviation security
products based on combining dual energy x-ray technology and Quantum's QR
technology. No sales of Quantum products were made and no combined products
were developed in connection with the agreement however, and Quantum
terminated the agreement in accordance with its terms in June 1996. Quantum
subsequently reduced its commercialization efforts, eliminated its commercial
sales and marketing personnel, and re-focused its efforts on providing
contract research and development services. Product development has continued
only through the funding support from key research and development contracts
from several customers, including the FAA and the Defense Advanced Research
Projects Agency ("DARPA"). Research and development spending has been
shifted from commercial product development and is focused primarily on
internal research and development to support Quantum's government contracting
business.
RESULTS OF OPERATIONS
The following table sets forth certain income and expenditure items from
Quantum's consolidated statements of operations expressed as a percentage of
contract revenues for the periods indicated.
84.
<PAGE>
YEAR ENDED NINE MONTHS ENDED
SEPTEMBER 30, JUNE 30,
------------------ -------------------
1995 1996 1996 1997
------ ------ ------ ------
Contract revenues............. 100 % 100 % 100 % 100 %
Cost of contract revenues..... 87 % 88 % 88 % 81 %
------ ------ ------ ------
Gross profit................ 13 % 12 % 12 % 19 %
------ ------ ------ ------
Operating expenses
Research and development..... 17 % 26 % 37 % 19 %
Sales and marketing.......... 12 % 26 % 24 % 7 %
General and administrative... 26 % 41 % 48 % 18 %
------ ------ ------ ------
Total operating expenses... 55 % 93 % 109 % 44 %
------ ------ ------ ------
Loss from operations........... (42)% (81)% (97)% (25)%
Interest expense............... (5)% (7)% (4)% (8)%
------ ------ ------ ------
Net loss....................... (47)% (88)% (101)% (34)%
------ ------ ------ ------
------ ------ ------ ------
COMPARISON OF NINE MONTHS ENDED JUNE 30, 1997 AND 1996
CONTRACT REVENUES. Contract revenues for the first nine months of fiscal
1997 were $3.1 million, an increase of $1.1 million or 57% from $2.0 million of
contract revenues for the first comparative period in fiscal 1996. These
revenues were generated solely from Quantum's government and corporate research
and development contracts. The increase was primarily due to several large
contract awards, including a $4.5 million, multi-year contract to develop a
QR-based mine detection system for detecting plastic land mines, a $400,000
contract with the FAA to develop a QR cabin-baggage screening system to mate
with existing installed cabin-baggage x-ray systems, and a $1.2 million phase IV
follow-on contract from the FAA to further improve Quantum's QR technology.
These and other contract awards comprise a contract backlog of approximately $8
million as of June 30, 1997.
GROSS PROFIT. Quantum's gross profit on research and development sales was
$586,000, or 19%, for the first nine months of fiscal 1997, an increase from
gross profit of $227,000 or 12% for the comparative period in fiscal 1996. Sales
increased significantly during the first nine months of fiscal 1997 while
overhead expenses, which have significant cost components that are fixed,
increased at a slower rate, accounting for the increased gross profit margin.
RESEARCH AND DEVELOPMENT. Research and development expenses were $585,000
for the first nine months of fiscal 1997, a decrease of $132,000 or 18% from
$717,000 for the comparative period in fiscal 1996. In May of 1996 unfunded
product development projects were eliminated. However, product development has
continued through the funding support of key research and development contracts
from several customers such as the FAA and DARPA. Research and development
spending has been redirected from commercial product development to internal
research and development to support Quantum's government contracting business.
Included in the 1997 research and development expenses is an expenditure of
$230,000 for the purchase of a license to use in-process high temperature
superconductor ("HiTc") fabrication research and development from IBM.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses were $779,000 for the first nine months of fiscal 1997, a decrease of
$632,000 or 45% from $1.4 million for the comparative period in fiscal 1996.
Commercial sales and marketing efforts were eliminated in May of 1996 including
the winding up of Quantum's United Kingdom sales office, Quantum Magnetics, Ltd.
Since that time Quantum has re-focused its efforts on its contract research and
development business. The reduction in spending has resulted from decreased
staffing, public relations, trade show and related expenses, partially offset by
an increase in legal expenses.
INTEREST EXPENSE. Interest expense was $257,000 for the first nine months
of fiscal 1997, an increase of $169,000 or 192% from $88,000 of interest expense
for the comparative period in fiscal 1996. The increase is attributable to the
cost of warrants provided to lenders and guarantors of the Company's line of
credit, which is
85.
<PAGE>
reflected as a discount and which is being amortized into interest expense over
the respective lives of the underlying borrowings.
COMPARISON OF YEARS ENDED SEPTEMBER 30, 1996 AND 1995
CONTRACT REVENUE. Contract revenues for the year ended September 30, 1996
of $3.2 million were generated from Quantum's government research and
development contracts, an increase of $474,000 or 17% from $2.7 million for the
year ended September 30, 1995. Included in fiscal 1996 revenue was the sale of
one of Quantum's QSCAN-500 prototype systems to the Technical Support Working
Group, an interagency organization, for deployment at Atlanta's Hartsfield
International Airport. Sales to Quantum Design decreased to $18,000 for fiscal
1996, down from $168,000 for fiscal 1995.
GROSS PROFIT. Quantum's gross profit on research and development contracts
was approximately $377,000, or 12%, for the year ended September 30, 1996,
compared to $350,000, or 13%, for the year ended September 30, 1995. This
increase was due primarily to increased overhead costs, some of which is
attributed to the move of the Company to a new facility in June of 1996.
RESEARCH AND DEVELOPMENT. Research and development expenses increased to
approximately $838,000 for the year ended September 30, 1996, an increase of
$369,000 or 79% from $469,000 for the year ended September 30, 1995. This
increased level of spending in fiscal 1996 was a result of increased product
development staffing and other expenses associated with the development of
QSCAN and QED aviation security prototypes.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased to $2.1 million in the year ended September 30, 1996, an
increase of $1.1 million or 110% from $1.0 million for the year ended September
30, 1995. Approximately $500,000 of this increase resulted from increased
general and administrative expenses associated with increased rent due to moving
Quantum to a new facility, increased staffing and increased legal expenses. The
balance of the increase was related to sales and marketing expenses associated
with the unsuccessful launch of Quantum's aviation security products. These
increased selling expenses included increased staffing, travel, public
relations, trade show and marketing materials expenses. Additionally, in April
of 1996 Quantum established a sales office in the United Kingdom, Quantum
Magnetics, Ltd.
INTEREST EXPENSE. Interest expense was $221,000 for the year ended
September 30, 1996, an increase of $95,000 or 75% from interest expense of
$126,000 for the year ended September 30, 1995. The increase is attributable to
the cost of warrants provided to lenders and guarantors of Quantum's line of
credit which is reflected as a discount which is being amortized into interest
expense over the respective lives of the underlying borrowings.
INCOME TAXES. As a result of losses generated during fiscal 1995 and 1996,
Quantum has recorded no provision for income taxes.
LIQUIDITY AND CAPITAL RESOURCES
From inception through June 30, 1997, Quantum has financed its operations
primarily from cash provided by research and development contracts, private
placements of equity securities with aggregate net proceeds of approximately
$5.3 million (of which $1.1 million represents indebtedness and accrued interest
converted to equity) from outside venture capital firms, individual investors
and Quantum Design. Additionally, Quantum has $930,000 in notes payable at June
30, 1997, of which $727,000 is short-term and $67,000 in capital lease
financing.
For the years ended September 30, 1995 and 1996, and for the nine month
period ended June 30, 1997, Quantum incurred negative cash flows from operations
of $612,000, $2.8 million and $727,000, respectively, and incurred net losses of
$1.3 million, $2.8 million and $1.0 million, respectively, resulting in an
accumulated deficit of $5.4 million at June 30, 1997.
86.
<PAGE>
Quantum anticipates spending approximately $750,000 for capital
expenditures in aggregate in fiscal 1997 and 1998. In order to fund future
operating activities and anticipated capital expenditures, Quantum's management
is seeking additional capital from investors or a strategic partner. If
management is unable to obtain such additional capital, it may be required to
liquidate assets in satisfaction of liabilities.
QUANTUM BUSINESS
GENERAL
Quantum is a leading provider of research and development services related
to magnetic sensing and detection technologies. Quantum conducts research and
development for a wide range of government and corporate customers, including
the U.S. Department of Transportation, the FAA, the Defense Advanced Research
Projects Agency, the U.S. Navy, the U.S. Army, the U.S. Air Force, the U.S.
National Institute of Justice, the U.S. Customs Service, the Office of National
Drug Control Policy, the U.S. National Aeronautics and Space Administration,
Lockheed Martin, Alliant Techsystems, International Business Machines ("IBM"),
Frito-Lay and Boeing Aerospace Corporation. In addition to providing services
to others, Quantum has developed several aviation security prototypes. These
prototypes use an advanced technology known as quadrupole resonance ("QR") to
detect explosives and contraband contained in baggage, mail and cargo.
BACKGROUND
Quantum was incorporated in 1987 by Quantum Design, Inc. ("Quantum
Design"), one of the world's leading manufacturers of high-end laboratory
instrumentation for magnetic measurements. Quantum's primary function was to
investigate and commercialize methods of magnetic-field based detection,
inspection and analysis. Although operated independently, until 1994 Quantum
was primarily engaged in product development for Quantum Design, which owned
eighty-five percent (85%) of the outstanding capital stock of Quantum. In April
1994, Quantum's management team purchased from Quantum Design stock representing
a controlling interest in Quantum, and redirected Quantum's focus toward
research and development contracting and opportunities in the security market
made possible by scientific advances in magnetic resonance techniques,
specifically QR, a state-of-the-art, low-cost (compared to CT) version of
magnetic resonance.
Since 1994, Quantum has completed over 100 research and development
programs for various federal government agencies and private companies,
establishing itself as a leading developer of novel applications for magnetic
sensing while developing substantial proprietary know-how and patented
technology. As part of these programs, Quantum has formed research and
development collaborations, worth an aggregate of approximately $21 million,
with over 20 leading academic institutions and research groups world-wide.
Quantum continues to perform contract research and development services in order
to stay at the technical forefront of the industry and to augment its product
development.
Quantum has developed several prototype baggage scanning systems for the
aviation security market based on its QR technology. Quantum's aviation
security prototypes are designed to address the primary concern of the
international security market today - the detection of explosives and illegal
drugs. Potential customers for Quantum's quadrupole resonance-based security
prototypes include airports, airlines, international and domestic mail services,
corporate offices and mailrooms, banks, embassies, public buildings, customs
facilities, prisons and police forces. Quantum believes that most of these
potential customers have a need for automated explosive and drug detection
equipment similar to Quantum's security prototypes.
In 1995, Quantum entered into an exclusive Product Development and Supply
Agreement with a leading aviation security company. This agreement contemplated
the commercialization of Quantum's existing prototypes as well as the joint
development of aviation security products based on dual energy x-ray technology
and Quantum's QR technology. No sales of Quantum products were made and no
combined products were developed in connection with the agreement however, and
Quantum terminated the agreement in accordance with its terms in June 1996.
87.
<PAGE>
Quantum subsequently reduced its commercialization efforts, eliminated its
commercial sales and marketing personnel, and re-focused its efforts on
providing contract research and development services.
PROTOTYPES
Quantum has developed several detection prototypes based on its QR
technology that are not x-ray or CT-based, require no operator intervention and
combine a high detection probability with a low false alarm rate. Quantum has
ongoing joint research and development programs with the FAA and the Naval
Research Laboratory ("NRL") to enhance and improve the explosives and narcotics
detection capabilities of its QR technology. In addition to an exclusive
license under several patents held by the NRL, Quantum has developed significant
know-how, filed numerous invention disclosures and been issued additional
patents for QR and other related technologies.
Preliminary testing has indicated that, although Quantum's aviation
security prototypes do not detect a wide enough range of explosives to be
certifiable by the FAA as an explosive detection system, they are highly
effective at detecting plastic, sheet and bulk military explosives. In
addition, although they do not provide their operators with an image similar to
that provided by currently-deployed x-ray systems and InVision's CT-based
systems, Quantum's detection prototypes are fully automatic. To date, Quantum
has not been successful in selling stand alone QR systems. Quantum continues to
believe that, in order to achieve wide-spread market acceptance of its aviation
security products, Quantum's QR technology will need to be combined with an
image-based technology, and possibly other complementary technologies, that will
facilitate the detection of a broader range of explosives and reduce the
incidence of false alarms.
PRODUCT PROTOTYPES:
QSCAN-500 AND QSCAN-1000 SECURITY SCREENING SYSTEMS. The QSCAN-500 and
QSCAN-1000 Security Screening Systems are high-speed, conveyorized systems
designed for inspection of personal luggage, mail and cargo at airports, customs
facilities, post office air mail centers, transportation offices and other
high-security facilities. The QSCAN-1000 Security Screening System was
developed with financial support and technical input from the FAA and was named
the "Most Innovative Product" for 1996 by Aviation Week and Space Technology
magazine.
The White House Commission on Aviation Safety and Security has requested
that five of Quantum's QSCAN-500 systems be included in its recommended purchase
and deployment of advanced technology systems. The FAA and Quantum are currently
negotiating with respect to the purchase of two (2) to five (5) QSCAN-500
systems from Quantum. However, there can be no assurance that an agreement
regarding such purchase will be negotiated on terms favorable to Quantum, if at
all, or, if such an agreement is negotiated, that a procurement contract for
such systems will be executed by the FAA.
QSCAN-160 SECURITY SCREENING SYSTEM. The QSCAN-160 Security Screening
System is a compact, high-speed, conveyorized system designed for inspection of
carry-on luggage and packages at airports, customs facilities, transportation
offices and other high-security facilities. The QSCAN-160 Security Screening
System was developed with financial support and technical input from the FAA.
Quantum has not completed any sales of this system.
QED PACKAGE SCREENING SYSTEM. The QED Package Screening System is small,
non-invasive scanner designed for rapid detection of explosives and illegal
drugs contained in passenger carry-on luggage at airports and other
transportation facilities, as well as incoming mail, boxes, briefcases and
packages received by corporate mailrooms and offices. The QED Package Screening
System was awarded the 1995 R&D 100 Award by R&D Magazine. Quantum has not
completed any sales of this system.
At the request of the FAA, Quantum has agreed to have its QED Package
Screening System acceptance tested by the FAA. Successful completion of such
testing would qualify the QED Package Screening System for purchase by the FAA's
Security Equipment Integrated Product Team, and allow the QED Package Screening
System to be used at airport security checkpoints in the United States.
88.
<PAGE>
LIQUISCAN LIQUID EXPLOSIVES DETECTOR. The LIQUISCAN Explosives Detector,
which was developed and continues to be improved with financial support and
technical input from the FAA, is an advanced security system for the detection
of liquid explosives and flammables contained in sealed glass or plastic
containers. Quantum has not completed any sales of this system.
QUANTUM PRINCIPAL SHAREHOLDERS
The following sets forth certain information as to the number of shares of
Quantum Common Stock and Quantum Preferred Stock beneficially owned as of
September 3, 1997 and the number of shares of InVision Common Stock to be
beneficially owned immediately upon consummation of the Merger by (i) each
person who is known to Quantum to beneficially own 5% or more of the outstanding
shares of any class of Quantum Capital Stock, (ii) each director of Quantum,
(iii) each Quantum executive officer and (iv) all directors and executive
officers of Quantum as a group. Unless otherwise noted, (i) the persons named
in the table have sole voting and investment power with respect to all shares
indicated as being beneficially owned by them, and (ii) all officers and
directors can be reached at the principal offices of Quantum.
<TABLE>
<CAPTION>
SHARES OF INVISION
COMMON STOCK
BENEFICIALLY OWNED
SHARES OF QUANTUM CAPITAL STOCK BENEFICIALLY OWNED (1) AFTER THE MERGER (1)
------------------------------------------------------ --------------------
COMMON STOCK PREFERRED STOCK PERCENT
---------------------- ----------------------- OF ALL
QUANTUM
NAME AND ADDRESS OF NUMBER PERCENT NUMBER PERCENT CAPITAL NUMBER
BENEFICIAL HOLDER OF SHARES OF CLASS OF SHARES OF CLASS STOCK OF SHARES PERCENT
- ------------------------------ --------- -------- --------- -------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
5% SHAREHOLDERS:
Techno Venture Management (2)
101 Arch Street
Suite 1950
Boston, MA 02110 -- -- 1,750,667 35.3% 21.2% 233,281 1.9%
Quantum Dynamics, Inc. (3)
11578 Sorrento Valley Road
San Diego, CA 92121 125,001 3.1% 884,369 19.7 11.4 101,462 *
William Grathwol
P.O. Box 3215
Wilmington, NC 28406 441,650 11.1 -- -- 5.0 17,418 *
InVision Technologies, Inc.
3420 E. Third Avenue
Foster City, CA 94404 -- -- 441,328 9.9 5.0 -- --
Barton G. Ice(4)
c/o John A. Levin Company
One Rockefeller Plaza,
25th Floor
New York, NY 10020 -- -- 439,677 9.7 5.2 40,713 *
Signal Ventures
777 South Pacific Coast Highway,
Suite 107
Solana Beach, CA 92075 -- -- 379,398 8.5 4.5 31,917 *
</TABLE>
89.
<PAGE>
<TABLE>
<CAPTION>
SHARES OF INVISION
COMMON STOCK
BENEFICIALLY OWNED
SHARES OF QUANTUM CAPITAL STOCK BENEFICIALLY OWNED (1) AFTER THE MERGER (1)
------------------------------------------------------ --------------------
COMMON STOCK PREFERRED STOCK PERCENT
---------------------- ----------------------- OF ALL
QUANTUM
NAME AND ADDRESS OF NUMBER PERCENT NUMBER PERCENT CAPITAL NUMBER
BENEFICIAL HOLDER OF SHARES OF CLASS OF SHARES OF CLASS STOCK OF SHARES PERCENT
- ------------------------------ --------- -------- --------- -------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
William Lindgren
1361 Cherrytree Court
Encinitas, CA 92024 249,906 6.3 -- -- 2.8 9,856 *
Michael Simmonds
c/o Quantum Design
11578 Sorrento Valley Road
San Diego, CA 92121 235,228 5.9 -- -- 2.7 9,277 *
David Cox (5)
c/o Quantum Design
11578 Sorrento Valley Road
San Diego, CA 92121 201,566 5.0 33,333 * 2.7 11,707 *
Ronald Sager
c/o Quantum Design
11578 Sorrento Valley Road
San Diego, CA 92121 201,566 5.0 -- -- 2.3 7,949 *
DIRECTORS AND EXECUTIVE
OFFICERS:
Lowell J. Burnett (6) 692,764 17.1 157,009 3.4 9.5 42,653 *
Dale Sheets (7) 110,202 2.7 -- -- 1.2 4,346 *
Andrew D. Hibbs (8) 669,505 16.5 -- -- 7.5 26,405 *
John C. Downing (9) 20,000 * 216,000 4.9 3.1 31,420 *
Randall R. Lunn (10) 20,000 * 1,750,667 35.3 21.4 234,069 1.9
Sergio Magistri (11) -- -- 441,328 9.9 5.0 -- --
All directors and executive
officers as a group
(6 persons) (12) 1,512,471 35.8 2,565,004 51.6 45.1 338,896 2.8
</TABLE>
* Less than 1%.
(1) Applicable percentage of ownership of Quantum Preferred Stock and Quantum
Common Stock at August 20, 1997 is based upon 4,462,893 shares of Quantum
Preferred Stock and 3,994,216 shares of Quantum Common Stock outstanding,
and does not include the conversion of Quantum Preferred Stock to Quantum
Common Stock. Percent of all Quantum Capital Stock is calculated on an
as-if-converted basis based upon the share numbers set forth above. Share
numbers and applicable percentage ownership after the Merger is based upon
approximately 11,933,000 shares of InVision Common Stock outstanding, which
assumes the issuance of 777,000 shares of InVision Common Stock in the
Merger and a Designated InVision Stock Price of $14.50. See "Approval of
the Merger and Related Transactions-Merger Consideration." Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and includes sole or shared voting or investment power
with respect to shares shown as beneficially owned. Shares of Quantum
Preferred Stock subject to warrants and Quantum Common Stock subject to
options, in each case currently exercisable or exercisable within 60 days
are deemed outstanding for computing the percentage ownership of the person
holding such warrants or options, but are not
90.
<PAGE>
deemed outstanding for computing the percentage ownership of any other
person. All warrants to purchase Quantum Preferred Stock are deemed to be
fully exercisable for purposes of this table.
(2) Includes: 370,000 shares of Quantum Preferred Stock held by TVM Techno
Venture Enterprises No. II Limited Partnership ("TVM II"); 246,667 shares
of Quantum Preferred Stock held by TVM Intertech Limited Partnership ("TVM
Intertech"); 246,667 shares of Quantum Preferred Stock held by TVM Eurotech
Limited Partnership ("TVM Eurotech"); 370,000 shares of Quantum Preferred
Stock held by TVM Zweite Beteilgung-US Limited Partnership ("TVM ZB");
17,333 shares of Quantum Preferred Stock held by TVM Techno Venture
Investors No. I Limited Partnership ("TVM No. 1"); and 150,000, 150,000,
100,000 and 100,000 shares of Quantum Preferred Stock issuable upon the
exercise of outstanding warrants held by TVM II, TVM ZB, TVM Intertech and
TVM Eurotech, respectively. TVM Management Corporation, the general
partner of TVM Techno Venture Management Limited Partnership ("TVM LP"),
and TVM LP, the general partner of each of TVM II, TVM ZB, TVM Intertech
and TVM Eurotech, may be deemed to beneficially own the shares held by TVM
II, TVM ZB, TVM Intertech and TVM Eurotech. Randall R. Lunn, John J.
DiBello and Waldemar Jantz, the general partners of TVM No. 1, may be
deemed to beneficially own the shares held by TVM No. 1.
(3) Includes 15,333 shares of Quantum Preferred Stock issuable upon the
exercise of outstanding warrants.
(4) Includes: 61,166 shares of Quantum Preferred Stock issuable upon the
exercise of outstanding warrants held by Mr. Ice; 25,000 shares of Quantum
Preferred Stock held by The Lawrence Everett Ice Testamentary Trust, Dated
12/20/82 (the "Ice Trust"); and 30,500 shares of Quantum Preferred Stock
issuable upon the exercise of outstanding warrants held by the Ice Trust.
Mr. Ice may be deemed to have beneficial ownership of the shares of Quantum
Capital Stock held by the Ice Trust by virtue of his advisory capacity to
the trustee of the Ice Trust.
(5) Includes 13,333 shares of Quantum Preferred Stock issuable upon the
exercise of outstanding warrants.
(6) Includes: 62,102 shares of Quantum Preferred Stock issuable upon the
exercise of outstanding warrants; and 56,691 shares of Quantum Common Stock
issuable upon the exercise of outstanding options exercisable within 60
days of August 15, 1997.
(7) Consists solely of shares of Quantum Common Stock issuable upon the
exercise of outstanding options exercisable within 60 days of August 15,
1997.
(8) Includes 58,505 shares of Quantum Common Stock issuable upon the exercise
of outstanding options exercisable within 60 days of August 15, 1997.
(9) The 216,000 shares of Quantum Preferred Stock are owned of record by John
C. Downing, Trustee of the John C. Downing Trust dated 5/20/94.
(10) Quantum Preferred Stock holdings consist solely of the shares of Quantum
Preferred Stock beneficially owned by the entities affiliated by Techno
Venture Management. See note 2.
(11) Consists solely of shares of Quantum Preferred Stock held of record by
InVision, of which Dr. Magistri is a director and executive officer.
(12) Includes 562,102 shares of Quantum Preferred Stock issuable upon the
exercise of outstanding warrants, and 225,398 shares of Quantum Common
Stock issuable upon the exercise of outstanding options, in each case
collectively beneficially owned by the directors and executive officers of
Quantum and exercisable within 60 days of August 15, 1997. See notes 6
through 11.
As of September 3, 1997, Quantum had outstanding options to purchase a
total of 1,257,456 shares of Quantum Common Stock.
91.
<PAGE>
DESCRIPTION OF INVISION CAPITAL STOCK
The authorized capital stock of InVision consists of 20,000,000 shares of
Common Stock, par value $0.001, and 5,000,000 shares of Preferred Stock, par
value $0.001. As of August 20, 1997, approximately 11,516,000 shares of InVision
Common Stock were outstanding, held of record by approximately 175 stockholders.
After consummation of the Merger, assuming the exercise of all Quantum Options
and Quantum Warrants, there will be approximately 12,293,000 shares of InVision
Common Stock outstanding. No shares of Preferred Stock are currently
outstanding.
The following description of the capital stock of InVision and certain
provisions of InVision's Amended and Restated Certificate of Incorporation (the
"InVision Certificate") and Amended Bylaws (the "InVision Bylaws") is a summary
and is qualified in its entirety by the provisions of the InVision Certificate
and InVision Bylaws which have been filed as exhibits to InVision's Registration
Statement, of which this Proxy Statement/Prospectus is a part.
INVISION COMMON STOCK
The holders of InVision Common Stock are entitled to one vote for each
share held of record on all matters submitted to a vote of the stockholders. The
holders of InVision Common Stock are not entitled to cumulative voting rights
with respect to the election of directors and, as a consequence, minority
stockholders will not be able to elect directors on the basis of their votes
alone.
Subject to preferences that may be applicable to any outstanding shares of
Preferred Stock, holders of InVision Common Stock are entitled to receive
ratably such dividends as may be declared by the Board of Directors out of funds
legally available therefor. See "Comparative Stock Price Data and Dividend
History." In the event of liquidation, dissolution or winding up of InVision,
holders of InVision Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference of any
then outstanding shares of Preferred Stock. Holders of InVision Common Stock
have no preemptive rights and no right to convert their InVision Common Stock
into any other securities. There are no redemption or sinking fund provisions
applicable to InVision Common Stock. All outstanding shares of InVision Common
Stock are, and all shares of InVision Common Stock to be outstanding upon
completion of this offering will be, fully paid and nonassessable.
INVISION PREFERRED STOCK
The Board of Directors is authorized to issue up to 5,000,000 shares of
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption, liquidation preferences, sinking
fund terms and the number of shares constituting any series or the designation
of such series, without any further vote or action by the stockholders. The
issuance of Preferred Stock could adversely affect the voting power of holders
of InVision Common Stock and the likelihood that such holders will receive
dividend payments and payments upon liquidation and may have the effect of
delaying, deferring or preventing a change in control of InVision, which could
have a depressive effect on the market price of InVision Common Stock. InVision
has no present plan to issue any shares of Preferred Stock.
INVISION WARRANTS
In connection with InVision's initial public offering, InVision issued to
Donald & Co. Securities, Inc. a warrant to purchase 180,000 shares of InVision
Common Stock at an exercise price of $6.60 per share. Such warrant contains
provisions for the adjustment of the exercise price and the aggregate number of
shares issuable upon exercise of the warrant under certain circumstances,
including stock dividends, stock splits, reorganizations, reclassification and
consolidations, and will expire on April 22, 2001.
92.
<PAGE>
REGISTRATION RIGHTS
The holders of 302,493 shares of InVision Common Stock and a warrant to
purchase up to 180,000 shares of InVision Common Stock (collectively, the
"Registrable Securities") or their transferees, will have certain rights with
respect to the registration of such shares under the Securities Act. In
addition, in June 1996 InVision registered shares of InVision Common Stock on a
shelf registration statement pursuant to registration rights held by a
stockholder of InVision, of which 479,318 of such shares have yet to be sold.
TRANSFER AGENT
The transfer agent for InVision Common Stock is Continental Stock
Transfer & Trust Company.
COMPARISON OF RIGHTS OF HOLDERS OF INVISION COMMON STOCK
AND HOLDERS OF QUANTUM CAPITAL STOCK
The authorized capital stock of Quantum consists of 17,000,000 shares of
Common Stock, no par value, and 7,911,340 shares of Preferred Stock, no par
value. The Preferred Stock of Quantum is divided into four series: Series A
Preferred Stock ("Quantum Series A Stock"), Series B Preferred Stock ("Quantum
Series B Stock"), Series C Preferred Stock ("Quantum Series C Stock") and Series
D Preferred Stock ("Quantum Series D Stock" and together with the Quantum Series
A Stock, Quantum Series B Stock, Quantum Series C Stock, "Quantum Preferred
Stock"). As of September 2, 1997, 3,994,216 shares of Quantum Common Stock were
outstanding, held of record by approximately 60 shareholders, 1,666,669 shares
of Quantum Series A Stock were outstanding, held of record by 17 shareholders,
711,340 shares of Quantum Series B Stock were outstanding, held of record by 6
shareholders, 1,643,556 shares of Quantum Series C Stock were outstanding, held
of record by 19 shareholders, and 441,328 shares of Quantum Series D Stock were
outstanding, all of which were held of record by InVision. InVision intends to
convert all of the shares of Quantum Series D Stock to Quantum Common Stock
immediately prior to the Merger. The shares of Quantum Preferred Stock may be
converted to Quantum Common Stock at the option of the holder thereof, and
automatically will be converted upon an initial public offering of Quantum
Common Stock meeting certain size qualifications.
Upon consummation of the Merger, the holders of Quantum Capital Stock will
become holders of InVision Common Stock. There are certain material differences
between the rights and privileges of the holders of Quantum Capital Stock and
InVision Common Stock.
LIQUIDATION PREFERENCE
The Amended and Restated Articles of Incorporation of Quantum (the "Quantum
Articles") provide that upon a voluntary or involuntary liquidation, dissolution
or winding up of Quantum, all assets or surplus funds of Quantum will be
distributed to the holders of Quantum Capital Stock as follows: first, ratably
among the holders of Quantum Series A Stock, Quantum Series C Stock and Quantum
Series D Stock in the amount per share of $1.50, $1.00 and $1.10, respectively,
(ii) second, out of any remaining assets or surplus funds, ratably among the
holders of Quantum Series B Stock in the amount per share of $0.75, and (iii)
third, out of any remaining assets or surplus funds, ratably among the holders
of Quantum Common Stock, Quantum Series A Stock, Quantum Series C Stock and
Quantum Series D Stock on an as-if-converted basis. The liquidation,
dissolution or winding up of Quantum includes a sale, or a series of related
sales, of all or substantially all of the assets or capital stock of Quantum or
an acquisition of Quantum by merger or consolidation. The Merger constitutes a
liquidation, dissolution or winding up of Quantum.
Upon a voluntary or involuntary liquidation, dissolution or winding up of
InVision, all assets or surplus funds of InVision, assuming no shares of
InVision Preferred Stock have been issued, will be distributed ratably among the
holders of InVision Common Stock. In the event that a series of InVision
Preferred Stock is designated
93.
<PAGE>
and issued, the holders of such series of InVision Preferred Stock may be
entitled to a liquidation preference over the holders of InVision Common Stock.
DIVIDENDS
The Quantum Articles provide that: (i) the holders of Quantum Series D
Stock shall be entitled to receive in preference to any dividend received by any
other series or class of Quantum Capital Stock, when and if declared, a
quarterly dividend in the amount per share of $0.011 per share; (ii) the holders
of Quantum Series A Stock, Quantum Series B Stock and Quantum Series C Stock
shall be entitled to receive in preference, after the dividend set forth in (i)
above, to any dividend received by the holders of Quantum Common Stock, when and
if declared, a quarterly dividend in the amount per share of $0.015, $0.0075 and
$0.005, respectively; and (iii) the holders of Quantum Series A Stock, Quantum
Series B Stock, Quantum Series C Stock and Quantum Series D Stock shall be
entitled to receive in preference, after the dividends set forth in (i) and (ii)
above, to any dividend received by the holders of Quantum Common Stock in a
fiscal year, when and if declared, cash dividends in the amount per share of
such cash dividends to be paid to the holders of Quantum Common Stock in such
fiscal year on an as-if-converted basis.
The holders of InVision Common Stock hold no dividend preference, and in
the event that a series of Quantum Preferred Stock is designated and issued, the
holders of such series of InVision Preferred Stock may be entitled to a dividend
preference over the holders of InVision Common Stock.
REDEMPTION
The Quantum Articles provide that Quantum shall not have the right to
purchase, call, redeem, or otherwise acquire for value any shares of the Quantum
Preferred Stock, with the exception that, at the election of the holders of a
majority of the Quantum Series D Stock, voting as a separate class, and the
holders of a majority of the Quantum Series A Stock and Quantum Series C Stock,
voting together as a single class, Quantum shall redeem to the extent of
lawfully available funds, one-third (1/3) of the shares of the Quantum Series A
Stock, Quantum Series C Stock and Quantum Series D Stock outstanding on January
2, 2001, and on the 2nd day of each January thereafter, through and including
January 2, 2003, at a redemption price equal to their respective original issue
prices of $1.50, $0.50 and $1.10 per share, respectively, as adjusted for stock
splits, plus any declared but unpaid dividends.
The Invision Certificate does not contain any limitations on, or rights
with respect to, the redemption of InVision Common Stock. However, if in the
future a series of InVision Preferred Stock is designated and issued, such
series of InVision Preferred Stock could impose limitations on, or be entitled
to, redemption rights.
VOTING
The Quantum Articles provide that the holders of Quantum Series A Stock,
Quantum Series B Stock, Quantum Series C Stock, Quantum Series D Stock and
Quantum Common Stock, voting together as a single class, shall vote on an
as-if-converted basis as a single class on all matters with the following
exceptions: (i) with respect to the election of directors (A) two Quantum
directors shall be elected by holders of Quantum Series A Stock and Quantum
Series C Stock, voting together as a single class, (B) two Quantum directors
shall be elected by holders of Quantum Series B Stock and Quantum Common Stock,
voting together on an as-if-converted basis as a single class, (C) one Quantum
director shall be elected by the holders of Series D Preferred, voting as a
separate class, and (D) two Quantum directors shall be elected by the holders of
the Quantum Series A Stock, Quantum Series B Stock, Quantum Series C Stock,
Quantum Series D Stock and Quantum Common Stock, voting together on an
as-if-converted basis as a single class; (ii) so long as 1,000,000 shares of
Quantum Series A Stock or Quantum Series C Stock (or a combination thereof)
remain outstanding, without the affirmative vote of two thirds (2/3) of the
outstanding shares of Quantum Series A Stock and Quantum Series C Stock, voting
together on an as-if-converted basis as a single class, Quantum shall not take
certain actions with respect to redemptions, liquidations, dividends, major
transactions, amendments to the Quantum Articles or the Bylaws of Quantum (the
"Quantum Bylaws"),
94.
<PAGE>
alterations to the powers and preferences of the Quantum Series A Stock and
Quantum Series C Stock, or issuances of additional preferred stock; and (iii) so
long as any shares of Quantum Series D Stock remain outstanding, without the
affirmative vote of a majority of the outstanding shares of Quantum Series D
Stock, Quantum shall not take certain actions with respect to alterations to the
powers and preferences of the Quantum Series D Stock, increases or decreases in
the authorized number of shares of Quantum Series D Stock, and amendments to the
Quantum Articles the Quantum Bylaws with respect to the Quantum Series D Stock.
The Quantum Articles provides for a board of seven directors, and the Quantum
Bylaws provide that such directors are elected annually. Under California law,
Quantum shareholders are entitled to cumulative voting and, accordingly,
shareholders controlling more than 50% of a class entitled to vote may not be
able to elect all of the directors to be elected by such class.
The InVision Certificate does not provide for any disparate voting rights
with respect to the shares of InVision Common Stock; however, if in the future a
series of InVision Preferred Stock is designated, such series of InVision
Preferred Stock could be granted separate voting rights. Pursuant to the
InVision Certificate, the number of directors is determined by resolutions
adopted by the Board, which currently consists of four members. The authorized
number of directors is currently five. The InVision Certificate provides that
each director will serve for a three-year term and that approximately one-third
of the directors are to be elected annually. Candidates for directors shall be
nominated only by the Board of Directors or by a stockholder who gives written
notice to InVision at least 20 days before the annual meeting. Between
stockholder meetings, the Board may appoint new directors to fill vacancies or
newly created directorships. The InVision Certificate does not provide for
cumulative voting at stockholder meetings for election of directors.
Stockholders controlling more than 50% of the outstanding InVision Common Stock
can elect the entire Board of Directors, while stockholders controlling 49% of
the outstanding InVision Common Stock may not be able to elect any directors.
AMENDMENT OF CHARTER DOCUMENTS
The Quantum Articles and Bylaws may be amended by a majority vote of the
Quantum Capital Stock, voting on an as-if-converted basis as a single class,
provided that (i) so long as 1,000,000 shares of Quantum Series A Stock or
Quantum Series C Stock (or a combination thereof) remain outstanding, the
affirmative vote of two thirds (2/3) of the outstanding shares of Quantum Series
A Stock and Quantum Series C Stock, voting together on an as-if-converted basis
as a single class, is also required to amend the Quantum Articles or Quantum
Bylaws, and (ii) the affirmative vote of a majority of the outstanding shares of
Quantum Series D Stock is required to amend any provisions of the Quantum
Articles or Quantum Bylaws related to the Series D Preferred Stock. The Quantum
Bylaws can be amended by the Quantum board of directors, subject to the
protective voting provisions set forth in the immediately preceding sentence,
other than to change the authorized number of directors.
The Invision Certificate provides that, in addition to any affirmative vote
of the holders of any particular class or series of the voting stock required by
law, the affirmative vote of at least two thirds (2/3) of the outstanding shares
entitled to vote, voting together as a single class, shall be required to alter,
amend, or repeal the provisions of the InVision Certificate dealing with the
board structure, the election of directors, the amendment of the bylaws,
personal liabilities and indemnification of directors, and amendment of charter
documents. The Invision Bylaws may be amended or repealed, or new bylaws may be
adopted, either by the vote of the holders of two thirds (2/3) of the
outstanding shares entitled to vote, or by the InVision board of directors.
ANTI-DILUTION PROTECTION
The Articles provide anti-dilution protection for each series of Quantum
Preferred Stock. In the event of an issuance of shares of Quantum Capital Stock
(with certain exceptions) at a price lower than the conversion price for the
series of preferred stock (as of August 1, 1997, $1.2215 in the case of Quantum
Series A Stock, $0.50 in the case of Quantum Series B Stock, $0.75 in the case
of Quantum Series C Stock and $1.10 in the case of Quantum Series D Stock), or
upon certain other dilutive events, the ratio at which the applicable series of
Quantum Preferred Stock will be converted into Quantum Common Stock will be
adjusted to provide that such shares of Quantum Preferred Stock convert into a
greater number of shares of Quantum Common Stock.
95.
<PAGE>
The Invision Certificate does not contain similar provisions and,
consequently, the holders of InVision Common Stock will suffer dilution in the
event that InVision issues any capital stock at a price lower than the price at
which such holder purchased its InVision Common Stock.
ANTI-TAKEOVER STATUTES
Stockholders rights and related matters relating to Invision are governed
by the Delaware General Corporation Law (the "Delaware Law") and the InVision
Certificate and InVision Bylaws. InVision is subject to the provisions of
Section 203 of the Delaware Law, an anti-takeover law. In general, the statute
prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
A "business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the stockholder. For purposes of Section
203, an "interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock.
California law, which governs Quantum, does require that holders of
nonredeemable common stock receive nonredeemable common stock in a merger of the
corporation with the holder of more than 50% but less than 90% of such common
stock or its affiliate unless all of the holders of such common stock consent to
the transaction. This provision of California law may have the effect of making
a "cash-out" merger by a majority shareholder more difficult to accomplish.
However, California law does not have a statute similar to Section 203 of the
Delaware Law.
PERCENTAGE OF VOTING STOCK; INFLUENCE OVER AFFAIRS
Upon completion of the Merger, the percentage ownership of InVision by each
former shareholder of Quantum will be substantially less than such shareholder's
current percentage ownership of Quantum. Accordingly, the former Quantum
shareholders will have a significantly smaller voting influence over the affairs
of InVision than they currently enjoy over the affairs of Quantum.
SHAREHOLDER ACTIONS
The InVision Certificate requires that any action required or permitted to
be taken by stockholders of InVision must be effected at a duly called annual or
special meeting of stockholders and may not be effected by a consent in writing.
Under the InVision Bylaws, special meetings of the shareholders may be called
only by the President, the Chairman of the Board, a majority of the directors,
or the holders of record of 10% or more of InVision's outstanding shares of
stock entitled to vote at such meeting. This provision may impede a shareholder
who wishes to require InVision to call a special meeting of shareholders to
consider any proposed corporate action. The Quantum Bylaws provide for Quantum
shareholders to take action by written consent.
LIQUIDITY
There is no active market for the Quantum Capital Stock and, in addition,
the Quantum Bylaws restrict transfer of any of the Quantum Common Stock by any
shareholder by requiring the shareholder to first give notice to the secretary
of and by granting discretion to the Quantum board of directors in deciding,
within 30 days, as to whether or not to purchase such common stock at the price
and upon the terms stated in the shareholder's notice. Accordingly, the ability
of a Quantum shareholder to dispose of Quantum Capital Stock is limited. The
InVision Common Stock is not subject to a right of first refusal by InVision and
is actively traded on the Nasdaq National Market. See "Comparative Stock Price
Data and Dividend History."
96.
<PAGE>
LEGAL MATTERS
The validity of the shares of InVision Common Stock offered hereby will be
passed upon for InVision by Cooley Godward LLP, Palo Alto, California. Certain
legal matters in connection with the Merger will be passed upon for Quantum by
Branton, Wilson & Muns, San Diego, California.
EXPERTS
The consolidated financial statements of InVision as of December 31, 1995
and 1996 and for each of the three years in the period ended December 31,
1996, and the consolidated financial statements of Quantum as of September
30, 1995 and 1996 and for each of the two years in the period ended September
30, 1996 in each case included in this Proxy Statement/Prospectus have been
so included in reliance on the reports (one of which contains an explanatory
paragraph after the original paragraph relating to Quantum's ability to
continue as a going concern as described in Note 1 to Quantum's consolidated
financial statements) of Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting. Price
Waterhouse LLP is not the independent accountant of Quantum. InVision
retained Price Waterhouse LLP to audit Quantum's consolidated financial
statements for inclusion in this Registration Statement and Proxy
Statement/Prospectus after InVision determined that Quantum's independent
accountants would be unable to perform the additional work necessary with
respect to the inclusion of Quantum's consolidated financial statements
herein on a timely basis.
97.
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INVISION TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996, and June 30,
1997 (unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations for the Years Ended December 31,
1994, 1995 and 1996 and the Six Months Ended June 30, 1996 and 1997
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Cash Flows for the Years Ended December 31,
1994, 1995 and 1996 and the Six Months Ended June 30, 1996 and 1997
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Stockholders' Equity (Deficit) for the Years
Ended December 31, 1994, 1995 and 1996 and the Six Months Ended
June 30, 1997 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . F-8
QUANTUM MAGNETICS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . F-20
Consolidated Balance Sheets as of September 30, 1995 and 1996, and
June 30, 1997 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . F-21
Consolidated Statements of Operations for the Years Ended September 30,
1995 and 1996, and the Nine Months Ended June 30, 1996 and 1997
(unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-22
Consolidated Statements of Cash Flows for the Years Ended September 30,
1995 and 1996, and the Nine Months Ended June 30, 1996 and 1997
(unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-23
Consolidated Statement of Shareholders' Deficit for the Years Ended
September 30, 1995 and 1996 and the Nine Months Ended June 30,
1997 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-24
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . F-25
F-1.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
InVision Technologies, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of cash flows and of
stockholders' equity (deficit) present fairly, in all material respects, the
financial position of InVision Technologies, Inc. and its subsidiary at
December 31, 1995 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1996,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of InVision's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Jose, California
February 20, 1997, except as to Note 13
(Secondary Offering of Common Stock and
Merger Agreement),
which is as of September 3, 1997
F-2.
<PAGE>
INVISION TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31,
----------------- JUNE 30,
1995 1996 1997
---- ---- ----
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . $1,927 $2,363 $4,099
Restricted cash . . . . . . . . . . . . -- -- 112
Short-term investments . . . . . . . . -- -- 17,737
Accounts receivable . . . . . . . . . . 735 5,987 7,237
Inventories . . . . . . . . . . . . . . 3,413 4,810 8,324
Prepaid expenses . . . . . . . . . . . 252 292 1,755
------- ------- -------
Total current assets . . . . . . . 6,327 13,452 39,264
Long-term restricted cash . . . . . . . . -- -- 800
Property and equipment, net . . . . . . . 914 1,804 4,087
Other assets . . . . . . . . . . . . . . . 75 -- 1,232
------- ------- -------
$7,316 $15,256 $45,383
------- ------- -------
------- ------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable . . . . . . . . . . . . $3,035 $2,541 $5,207
Accrued liabilities . . . . . . . . . . . 1,217 1,020 2,657
Short-term debt . . . . . . . . . . . . . 2,260 -- 2,200
Advances from stockholders . . . . . . . 200 -- --
Deferred revenue . . . . . . . . . . . . 3,082 2,443 2,407
Current maturities of obligations under
capital lease . . . . . . . . . . . . . 10 68 32
------- ------- -------
Total current liabilities . . . . . 9,804 6,072 12,503
------- ------- -------
Long-term obligations under capital
lease, less current portion . . . . . . . 34 110 154
------- ------- -------
Commitments (Notes 9, 11 and 12)
Stockholders' equity (deficit):
Convertible preferred stock, $0.001
par value; 5,000 shares authorized;
2,619 shares, none issued and
outstanding in 1996 and 1997 . . . . 12,212 -- --
Preferred stock, $0.001 par value;
5,000 shares authorized; none issued
and outstanding . . . . . . . . . . . -- -- --
Common stock, $0.001 par value; 20,000
shares authorized; 124; 9,160 and
11,141 shares issued and outstanding -- 9 11
Additional paid-in capital . . . . . . 1,885 28,919 50,176
Deferred stock compensation expense . . (692) (355) (178)
Accumulated deficit . . . . . . . . . . (15,927) (19,499) (17,283)
-------- -------- -------
Total stockholders' equity
(deficit) . . . . . . . . . . . . (2,522) 9,074 32,726
-------- -------- -------
$7,316 $15,256 $45,383
-------- -------- -------
-------- -------- -------
The accompanying notes are an integral part of these
consolidated financial statements.
F-3.
<PAGE>
INVISION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- --------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues . . . . . . . . . . . $ -- $ 9,066 $15,841 $7,477 $22,785
Cost of revenues . . . . . . . -- 6,777 9,736 4,641 11,401
-------- -------- -------- -------- -------
Gross profit . . . . . . . -- 2,289 6,105 2,836 11,384
-------- -------- -------- -------- -------
Operating expenses:
Research and development . 1,582 1,940 2,785 1,066 3,574
Sales and marketing . . . 664 1,866 2,976 1,235 2,692
General and
administrative . . . . . 1,078 1,471 2,577 1,146 2,563
-------- -------- -------- -------- -------
Total operating
expenses . . . . 3,324 5,277 8,338 3,447 8,829
-------- -------- -------- -------- -------
Income (loss) from operations . (3,324) (2,988) (2,233) (611) 2,555
Interest expense (including
related party interest
expense of $90; $104; $54;
$14 and none) . . . . . . (410) (338) (1,511) (1,495) (51)
Other income, net . . . . . . . 7 34 172 61 186
-------- -------- ------- ------- -------
Income (loss) before provision
for income taxes . . . . . (3,727) (3,292) (3,572) (2,045) 2,690
Provision for income taxes . . -- -- -- -- 474
-------- -------- -------- -------- -------
Net income (loss) . . . . . . . $(3,727) $(3,292) $(3,572) $(2,045) $2,216
-------- -------- -------- -------- -------
-------- -------- -------- -------- -------
Net income (loss) per share
(Note 2) . . . . . . . . . $(0.50) $(0.44) $(0.27) $0.21
-------- ------- -------- -------
-------- ------- -------- -------
Shares used in per share
calculations (Note 2) . . 6,642 8,142 7,499 10,730
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4.
<PAGE>
INVISION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . $(3,727) $(3,292) $(3,572) $(2,045) $2,216
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization . . . . . . . . . . 255 239 371 164 382
Amortization of bridge loan warrant expense . . . -- -- 1,330 1,330 --
Stock compensation expense . . . . . . . . . . . -- 369 489 188 177
Changes in assets and liabilities:
Restricted cash . . . . . . . . . . . . . . . -- -- -- -- (912)
Accounts receivable . . . . . . . . . . . . . . 163 (611) (5,252) (1,343) (1,250)
Inventories . . . . . . . . . . . . . . . . . . (939) (1,887) (1,397) (27) (3,514)
Prepaid expenses . . . . . . . . . . . . . . . -- -- (34) (113) (1,463)
Other assets . . . . . . . . . . . . . . . . . (29) (135) -- -- (1,232)
Accounts payable . . . . . . . . . . . . . . . 618 2,219 (522) (1,202) 2,666
Accrued liabilities . . . . . . . . . . . . . . 121 915 (202) 97 1,637
Deferred revenues . . . . . . . . . . . . . . . 2,948 134 (639) (1,756) (36)
-------- ------- -------- -------- --------
Net cash provided by (used in)
operating activities . . . . . . . . . . . (590) (2,049) (9,428) (4,707) (1,329)
-------- ------- -------- -------- --------
Cash flows from investing activities:
Acquisition of property and equipment . . . . . . . (117) (590) (1,074) (314) (2,665)
Purchase of short-term investments . . . . . . . . -- -- -- -- (17,737)
-------- ------- -------- -------- --------
Net cash used in investing
activities . . . . . . . . . . . . . . . . (117) (590) (1,074) (314) (20,402)
-------- ------- -------- -------- --------
Cash flows from financing activities:
Proceeds from short-term debt . . . . . . . . . . . 2,250 1,000 1,000 1,036 2,200
Repayments of short-term debt . . . . . . . . . . . -- -- (4,200) (4,036) --
Proceeds from capital lease financing . . . . . . . -- 53 169 -- 44
Repayments of capital lease financing . . . . . . . -- (9) (35) -- (36)
Proceeds from issuance of preferred stock . . . . . 464 1,244 -- -- --
Proceeds from issuance of common stock, net . . . . 22 37 14,004 9,543 21,259
-------- ------- -------- -------- --------
Net cash provided by financing
activities . . . . . . . . . . . . . . . . 2,736 2,325 10,938 6,543 23,467
-------- ------- -------- -------- --------
Net increase (decrease) in cash and
cash equivalents for the period . . . . . . . . . . 2,029 (314) 436 1,522 1,736
Cash and cash equivalents at
beginning of period . . . . . . . . . . . . . . . . 212 2,241 1,927 1,927 2,363
-------- ------- -------- -------- --------
Cash and cash equivalents at end of
period . . . . . . . . . . . . . . . . . . . . . $2,241 $1,927 $2,363 $3,449 $4,099
-------- ------- -------- -------- --------
-------- ------- -------- -------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid . . . . . . . . . . . . . . . . . . . $319 $220 $233 $164 $2
-------- ------- -------- -------- --------
-------- ------- -------- -------- --------
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND
INVESTING ACTIVITIES:
Issuance of common stock upon
conversion of preferred stock . . . . . . . . . . $ -- $ -- $12,212 $ -- $ --
Issuance of Series D preferred
stock upon the conversion of
short-term debt and accrued
interest . . . . . . . . . . . . . . . . . . . . $3,000 $2,604 $ -- $ -- $ --
Warrants issued in connection with
bridge loan financing . . . . . . . . . . . . . . $ -- $ 740 $ 590 $ 590 $ --
Issuance of common stock in
connection with acquisition of
subsidiary . . . . . . . . . . . . . . . . . . . $ -- $ -- $ 85 $ -- $ --
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5.
<PAGE>
INVISION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE DEFERRED TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCK STOCKHOLDERS'
----------------- ---------------- PAID-IN COMPENSATION ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL EXPENSE DEFICIT (DEFICIT)
------ ------ ------ ------ ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993 . . . . . . . . . 586 $4,900 32 $-- $25 $-- $(8,908) $(3,983)
Issuance of Series D
preferred stock . . . 926 3,464 -- -- -- -- -- 3,464
Exercise of common stock
options . . . . . . . -- -- 26 -- 22 -- -- 22
Net loss . . . . . . . . -- -- -- -- -- -- (3,727) (3,727)
----- ------- --- ----- ------ ----- -------- -------
Balance at December 31,
1994 . . . . . . . . . 1,512 8,364 58 -- 47 -- (12,635) (4,224)
Issuance of Series D
preferred stock . . . 789 2,948 -- -- -- -- -- 2,948
Issuance of Series D
preferred stock to
stockholders for
distribution rights . 227 -- -- -- -- -- -- --
Issuance of Series E
preferred stock . . . 91 900 -- -- -- -- -- 900
Deferred stock
compensation . . . . . -- -- -- -- 1,061 (1,061) -- --
Amortization of
deferred stock
compensation . . . . -- -- -- -- -- 369 -- 369
Issuance of warrant . . -- -- -- -- 740 -- -- 740
Exercise of common stock
options . . . . . . . -- -- 66 -- 37 -- -- 37
Net loss . . . . . . . . -- -- -- -- -- -- (3,292) (3,292)
----- ------- --- ----- ------ ----- -------- -------
Balance at December 31,
1995 . . . . . . . . . 2,619 $12,212 124 $ -- $1,885 $(692) $(15,927) $(2,522)
----- ------- --- ----- ------ ----- -------- -------
----- ------- --- ----- ------ ----- -------- -------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6.
<PAGE>
INVISION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE DEFERRED TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCK STOCKHOLDERS'
----------------- ---------------- PAID-IN COMPENSATION ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL EXPENSE DEFICIT (DEFICIT)
------ ------ ------ ------ ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995 . . . . . . . . . . 2,619 $12,212 124 $ - $1,885 $(692) $(15,927) $(2,522)
Issuance of common stock
pursuant to initial
public offering, net
of expenses . . . . . . -- -- 2,070 2 9,530 -- -- 9,532
Conversion of preferred
stock to common stock
upon completion of
initial public
offering . . . . . . . . (2,619) (12,212) 6,106 6 12,206 -- -- --
Deferred stock
compensation . . . . . . -- -- -- -- 152 (152) -- --
Amortization of deferred
stock compensation . . -- -- -- -- -- 489 -- 489
Issuance of warrant . . . -- -- -- -- 590 -- -- 590
Exercise of common stock
options . . . . . . . . -- -- 122 -- 84 -- -- 84
Exercise of common stock
warrants . . . . . . . . -- -- 518 1 2,318 -- -- 2,319
Issuance of common stock
pursuant to EG&G
agreement . . . . . . . -- -- 184 -- 1,974 -- -- 1,974
Issuances of common
stock primarily pursuant
to acquisition of
subsidiary . . . . . . . -- -- 36 -- 180 -- -- 180
Net loss . . . . . . . . . -- -- -- -- -- -- (3,572) (3,572)
------ ------- ------ ----- ------- ----- -------- -------
Balance at December 31,
1996 . . . . . . . . . . -- -- 9,160 9 28,919 (355) (19,499) 9,074
Amortization of Deferred
Stock Compensation
(unaudited). . . . . . . -- -- -- -- 177 -- 177
Issuance of common
stock pursuant to
secondary public
offering (unaudited) . . -- -- 1,918 2 21,187 -- -- 21,189
Exercise of common
stock options
(unaudited) . . . . . . . -- -- 63 -- 70 -- -- 70
Net income (unaudited) . . -- -- -- -- -- -- 2,216 2,216
------ ------- ------ ----- ------- ----- -------- -------
Balance at June 30, 1997
(unaudited) . . . . . . -- $ -- 11,141 $ 11 $50,176 $(178) $(17,283) $32,726
------ ------- ------ ----- ------- ----- -------- -------
------ ------- ------ ----- ------- ----- -------- -------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-7.
<PAGE>
INVISION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY:
InVision Technologies, Inc. ("InVision," or the "Company") is the
worldwide leader in explosive detection technology. InVision develops,
manufactures, markets and supports an explosive detection system ("EDS") for
civil aviation security based on advanced computed tomography ("CT" or "CAT
Scan" technology).
Formed in 1990, InVision exited the development stage in 1995 upon the
first commercial sales of its product, the CTX 5000 explosive detection
system. The CTX 5000 is sold to airport and regulatory authorities and
airlines throughout the world.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The consolidated financial statements include the financial statements
of InVision and its wholly owned subsidiary, Imatron Federal Systems, Inc.,
acquired in December 1996. All significant intercompany transactions and
accounts have been eliminated. The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities, disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
STOCK SPLIT
Share information for all periods presented has been retroactively
adjusted to reflect a 1-for-11 reverse stock split of Common Stock and
Preferred Stock effected on March 15, 1996, and a 2-for-1 Common Stock split
in the form of a stock dividend effected on February 7, 1997.
REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment unless extended
acceptance criteria exist, in which case revenue is recognized upon
completion of such acceptance criteria. Provision for estimated installation,
training and warranty costs is recorded at the time revenue is recognized.
CASH EQUIVALENTS
The Company considers all liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
SHORT-TERM INVESTMENTS
Short-term investments consist primarily of commercial paper with
original maturities at date of purchase beyond three months and less than 12
months. Such short-term investments are carried at cost, which approximates
fair market value, due to the short period of time to maturity.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market.
F-8.
<PAGE>
INVISION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed
using the straight-line method based upon the estimated useful lives of the
assets, which range from one to five years. Leasehold improvements are
amortized using the straight-line method over the shorter of their useful
lives or the terms of the leases.
In 1996, InVision adopted Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." Accordingly, InVision evaluates the
recoverability of its assets when events and changes in circumstances
indicate that such amounts may not be recoverable. InVision determines the
recoverability of the carrying amount of each intangible asset by reviewing
the following factors: the undiscounted value of expected operating cash
flows in relation to its net capital investment; the estimated useful or
contractual life of the intangible asset; the contract or product supporting
the intangible asset; and, in the case of purchased technology, InVision
periodically reviews the recoverability of the asset value by evaluating its
products with respect to technological advances, competitive products and the
long-lived asset impairment losses.
DEFERRED REVENUE
Deferred revenue arises from advance payments received from customers
for systems to be delivered within the next year.
INCOME TAXES
InVision accounts for income taxes using an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in
InVision's financial statements or tax returns.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations as incurred.
Contractually reimbursable costs for certain research and development
activities are reflected as a reduction to research and development expense
in the period the related costs are incurred (Note 4).
SOFTWARE DEVELOPMENT COSTS
To date, the period between achieving technological feasibility and the
general availability of software included in InVision's product has been
short and software development costs qualifying for capitalization have been
insignificant. Accordingly, InVision has not capitalized any software
development costs.
STOCK COMPENSATION
InVision accounts for employee stock-based compensation in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees." In January 1996, InVision adopted the disclosure requirements
of Statement of Financial Accounting Standards No. 123 ("FAS 123"),
"Accounting for Stock-Based Compensation" (see Note 8).
DEPENDENCE ON SUPPLIERS
InVision's ability to timely deliver its products is dependent upon the
availability of quality components and subsystems used in these products.
InVision depends in part upon subcontractors to manufacture, assemble and
F-9.
<PAGE>
INVISION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
deliver certain items in a timely and satisfactory manner. InVision obtains
certain components and subsystems from single, or a limited number of,
sources. A significant interruption in the delivery of such items could have
a material adverse effect on InVision's financial condition and results of
operations.
EXPORT SALES AND CONCENTRATION OF CREDIT RISK
InVision markets its systems both internationally and domestically.
Product sales by geographic region are as follows (in thousands):
YEAR ENDED
DECEMBER 31,
----------------
1995 1996
---- ----
Europe (primarily United Kingdom) . . . . . . . $6,578 $7,488
United States . . . . . . . . . . . . . . . . . 975 3,766
Pacific Rim . . . . . . . . . . . . . . . . . . 863 2,062
Middle East . . . . . . . . . . . . . . . . . . 650 2,525
------ -------
$9,066 $15,841
------ -------
------ -------
Financial instruments that potentially subject InVision to significant
concentrations of credit risk consist primarily of cash and accounts
receivable. InVision limits the amount of credit exposure of cash balances by
maintaining its accounts in a high credit quality financial institution.
Except for the Federal Aviation Administration contract (see Note 3),
InVision's standard credit policy requires prepayment of up to 50% prior to
shipment on all sales. To date, InVision has not experienced any material
credit losses and accordingly has not recorded an allowance for doubtful
accounts at December 31, 1995 or 1996. InVision's revenues are denominated in
U.S. dollars. At December 31, 1996, two customers accounted for 59% and 18%
of total accounts receivable. Significant customers which represented 10% or
more of revenues for the respective periods were as follows:
YEAR ENDED
DECEMBER 31,
-------------
1995 1996
---- ----
Customer A . . . . . . . . . . . 51% 22%
Customer B . . . . . . . . . . . 12% --
Customer C . . . . . . . . . . . 11% --
Customer D . . . . . . . . . . . -- 13%
Customer E . . . . . . . . . . . -- 12%
Customer F . . . . . . . . . . . -- 12%
Customer G . . . . . . . . . . . -- 16%
Customer H . . . . . . . . . . . -- 13%
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed using the weighted average
number of Common Stock and common equivalent shares, when dilutive, from
stock options and warrants (using the treasury stock method). Pursuant to
Securities and Exchange Commission Staff Accounting Bulletins, Common Stock
and common equivalent shares issued by InVision during the 12-month period
prior to InVision's initial public offering consisting of convertible
preferred stock (using the if-converted method), and stock options and
warrants (using the treasury stock method) have been included in the
calculation as if they were outstanding for all periods prior to and
including June 30, 1996, even though their effect is antidilutive. Historical
net loss per share amounts have not been presented in 1994 because such
amounts are not deemed meaningful due to the significant changes in
InVision's capital structure that occurred in connection with the initial
public offering.
F-10.
<PAGE>
INVISION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED INTERIM FINANCIAL DATA
The unaudited interim financial statements as of June 30, 1997 and for
the six months ended June 30, 1996 and 1997 have been prepared on the same
basis as the audited financial statements and, in the opinion of management,
include all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the financial information set forth therein, in
accordance with generally accepted accounting principles. The data disclosed
in the notes to the financial statements for these periods are unaudited. The
results of operations for the interim periods are not necessarily indicative
of the results to be expected for any future period.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to be consistent with
the 1996 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128"). SFAS 128 is effective for the year ending December 31, 1997.
Under SFAS 128, primary earnings per share is replaced by basic earnings per
share and fully diluted earnings per share is replaced by diluted earnings
per share. If the Company had adopted SFAS 128, the Company's basic and
diluted loss per share would not have differed materially from the reported
amounts for the years ending December 31, 1995 and 1996. For the six month
period ending June 30, 1997, basic and diluted earnings per share would have
been $0.23 and $0.21, respectively. The Company will adopt SFAS 128 for the
year ending December 31, 1997.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 establishes standards for the reporting of
comprehensive income and its components in a full set of general-purpose
financial statements for periods ending after December 15, 1997.
Reclassification of financial statements for earlier periods for comparative
purposes is required. The Company will adopt SFAS 130 for the year ending
December 31, 1998.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures About Segments of An
Enterprise and Related Information" ("SFAS 131"). SFAS 131 revises
information requirements regarding the reporting of operating segments. It
also establishes standards for related disclosures about products and
services, geographic areas and major customers. The Company will adopt SFAS
131 for the year ending December 31, 1998.
NOTE 3--FEDERAL AVIATION ADMINISTRATION (FAA) CONTRACT:
In December 1996, InVision entered into a contract with the Federal
Aviation Administration ("FAA" and the "FAA Contract") to deliver fifty-four
(54) CTX 5000 systems to various airports in the United States beginning in
January and ending in December 1997. The minimum amount due from the FAA
under this contract, including all related products and associated
installation and support services, is $52.2 million. InVision will invoice
and collect progress payments while systems are being manufactured in an
amount equal to 80% of manufacturing costs incurred. The balance will be
invoiced and collected after delivery and installation of each system.
The number of systems deliverable under the FAA Contract during 1997
exceeds the total number of systems manufactured by InVision to date.
InVision has determined that its existing manufacturing facilities are
inadequate to meet its obligation to deliver 54 systems under the FAA
Contract and, accordingly, has entered into a lease agreement for new primary
operating facilities including new manufacturing facilities (see Note 12).
InVision believes that these new facilities will be adequate to meet its
current delivery obligations.
F-11.
<PAGE>
INVISION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--RESEARCH AND DEVELOPMENT CONTRACTS:
InVision has been awarded various research and development contracts and
grants by the FAA to share in the costs of developing and enhancing
InVision's product. During 1994, 1995 and 1996, InVision was entitled to
reimbursements of $821,000, $593,000 and $1,476,000, respectively, under
these contracts and grants. Such reimbursements have been reflected as a
reduction to research and development expense in each period presented.
Billings are rendered to the FAA monthly on the basis of actual costs
incurred. At December 1995 and 1996, the related receivable balance from the
FAA was $17,000 and $331,000, respectively.
NOTE 5--BALANCE SHEET COMPONENTS (IN THOUSANDS):
DECEMBER 31,
------------- JUNE 30,
1995 1996 1997
---- ---- ----
(UNAUDITED)
Accounts receivable:
Billed . . . . . . . . . . . . $388 $5,026 $5,924
Unbilled . . . . . . . . . . . 347 961 1,313
------- ------ ------
$735 $5,987 $7,237
------- ------ ------
------- ------ ------
Inventories:
Raw material and purchased
components . . . . . . . . . . $1,853 $3,003 $4,789
Work-in-process . . . . . . . . 779 1,331 3,461
Finished goods . . . . . . . . 781 476 74
------- ------ ------
$3,413 $4,810 $8,324
------- ------ ------
------- ------ ------
Property and equipment:
Machinery and equipment . . . . $868 $1,400 $2,268
Self constructed assets . . . . 606 1,140 1,499
Furniture and fixtures . . . . 71 160 175
Leasehold improvements . . . . 73 145 1,568
------- ------ ------
1,618 2,845 5,510
Less accumulated depreciation and
amortization . . . . . . . . . (704) (1,041) (1,423)
------- ------ ------
$914 $1,804 $4,087
------- ------ ------
------- ------ ------
Self-constructed assets are manufactured by InVision for use in system
testing and support, and include the cost of parts and materials, and an
overhead allocation. InVision depreciates self-constructed assets over their
respective estimated useful lives which range from three to five years.
At December 31, 1995 and 1996 InVision had $53,000 and $222,000,
respectively, of capitalized lease equipment and related accumulated
amortization of $6,000 and $39,000, respectively.
DECEMBER 31,
---------------- JUNE 30,
1995 1996 1997
------ ------ ----
Accrued liabilities: (UNAUDITED)
Warranty reserves . . . . . . . . $695 $645 $1,550
Accrued employee compensation . . 327 311 261
Income taxes . . . . . . . . . . -- -- 95
Other . . . . . . . . . . . . . . 195 64 751
------ ------ ------
$1,217 $1,020 $2,657
------ ------ ------
------ ------ ------
F-12.
<PAGE>
INVISION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--SHORT-TERM DEBT:
At December 31, 1995, $2,000,000 of short-term debt was outstanding
representing all of the funds available under a line of credit agreement with
a bank. Interest accrued under the line of credit agreement at a rate of
prime plus 1%. The rate in effect at December 31, 1995 was 9.75%. All amounts
outstanding under this line of credit agreement were repaid in May 1996, and
the line of credit agreement was subsequently terminated.
In December 1995, InVision entered into a $2,000,000 Bridge Loan
Agreement (the "Bridge Loan") with a lender. Under the agreement, InVision
borrowed $1,000,000 in December 1995, and an additional $1,000,000 in
February 1996. Principal outstanding under the agreement was secured by all
assets of InVision. The Bridge Loan was repaid in full on May 1, 1996, in
accordance with its terms.
In connection with the Bridge Loan, the lender received the Bridge Loan
Warrants described in Note 7, below. The aggregate fair value of the Bridge
Loan Warrants, as determined at their respective dates of issuance, was
$1,330,000. Such value represents a discount that was amortized as a
financing cost over the period that the Bridge Loan was outstanding.
At December 31, 1995, certain of InVision's stockholders had advanced
$200,000 directly to InVision. Interest accrued at prime plus 1%. This
advance was repaid in December 1996.
NOTE 7--STOCKHOLDERS' EQUITY (DEFICIT):
COMMON STOCK
In November 1996, InVision issued 183,750 shares of unregistered Common
Stock to EG&G International Ltd. at $10.88 per share, reflecting a 10%
discount from the market price of InVision's Common Stock in connection with
the signing of a Research, Development and License Agreement (Note 11). Net
proceeds totaled $1,974,000. During the Company's follow-on public offering
in May 1997, 64,312 shares were registered and sold. The remaining shares
will be registered at the request of the shareholder upon the earlier of a
public offering by InVision resulting in net proceeds of at least $10,000,000
or November 1997.
In April 1996, InVision issued 1,800,000 shares of Common Stock at $5.50
per share in conjunction with InVision's initial public offering ("IPO").
Proceeds to InVision, net of discounts, commissions and offering expenses,
totaled $8,211,000. In May 1996, the underwriters exercised their
over-allotment option to purchase 270,000 additional shares of Common Stock
for total net proceeds to InVision of $1,321,000. Proceeds from the IPO were
used primarily to repay short term debt, reduce outstanding accounts payable
and to provide working capital for InVision.
In connection with InVision's IPO, Donald & Co. Securities Inc., the
underwriter, received, under the terms of the underwriting agreement,
four-year warrants to purchase 180,000 shares of InVision's Common Stock at a
price of $6.60 per share commencing April 23, 1997.
PREFERRED STOCK
In conjunction with InVision's IPO, all outstanding Convertible
Preferred Stock converted to Common Stock. As of December 31, 1996, there
were 5,000,000 shares of Preferred Stock authorized and no shares were issued
and outstanding. The Board of Directors is authorized to issue Preferred
Stock in one or more series and to fix the rights, preferences, privileges
and restrictions thereof, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences, and number of shares constituting any series or the
designation of such series, without further action or vote by InVision's
stockholders.
F-13.
<PAGE>
INVISION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WARRANTS
In connection with the Bridge Loan, InVision issued three-year warrants
to purchase 63,636 and 227,272 shares of Common Stock in 1995 at $5.50 and
$4.40 per share, respectively, and 227,272 shares of Common Stock at $4.40
per share in 1996. The Bridge Loan warrants were exercised in full at various
times during the month of August 1996, with InVision receiving net proceeds
from the exercise of $2,319,000.
NOTE 8--EMPLOYEE STOCK AND BENEFIT PLANS:
EQUITY INCENTIVE PLAN
In March 1996, the Board of Directors approved the amended and restated
1991 Stock Option Plan, which was renamed the Equity Incentive Plan. The
Equity Incentive Plan provides for the granting of incentive stock options
and non qualified stock options for the purchase of up to an aggregate of
2,221,818 shares of InVision's common stock by officers, employees,
consultants and directors of InVision. The Board of Directors is responsible
for administration of the Equity Incentive Plan. The Board of Directors
determines the term of each option, option exercise price, number of shares
for which each option is granted and the rate at which each option is
exercisable. Options granted under the Equity Incentive Plan generally vest
over a four year period.
Incentive and non qualified stock options may be granted at an exercise
price per share of not less than 85% of the fair value per common share on
the date of the grant (not less than 110% of the fair value in the case of
holders of more than 10% of InVision's voting stock). Options granted under
the Equity Incentive Plan generally expire ten years from the date of the
grant (five years for incentive stock options granted to holders of more than
10% of InVision's voting stock). In December 1994, InVision repriced all
outstanding options in order to reconstitute the option pool as a result of
the dilutive effect on common stock of the issuance of Series D Preferred
Stock during the year. The outstanding options were cancelled and new options
were issued at an exercise price of $0.55 per share, which represented the
fair value of common stock as determined by the Board of Directors.
Cumulative vesting percentages applicable to the cancelled options were given
to the regranted options.
In connection with grants of stock options to employees and directors in
1995 and 1996, InVision recorded $1,061,000 and $152,000, respectively, of
deferred compensation representing the difference between the deemed fair
value of InVision's Common Stock and the exercise price at the date of grant.
Of such amounts, $369,000 and $489,000 were recorded to expense in 1995 and
1996, respectively. The remaining $355,000 is being amortized over the
remaining vesting period of the related options.
F-14.
<PAGE>
INVISION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--EMPLOYEE STOCK AND BENEFIT PLANS:
Transactions under the Equity Incentive Plan are summarized as follows
(in thousands except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995 1996
------------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period . . 234 $1.23 383 $0.57 1,190 $0.82
Granted . . . . . . . . . . . . . . 402 0.63 896 0.92 150 9.13
Exercised . . . . . . . . . . . . . (26) 0.61 (66) 0.55 (122) 0.69
Canceled . . . . . . . . . . . . . (227) 1.36 (23) 0.96 (77) 0.85
----- ----- ------
Outstanding at period end . . . . . . 383 0.57 1,190 0.82 1,141 1.92
----- ----- ------
----- ----- ------
Options exercisable at period end . . 202 0.58 384 0.56 643 0.80
----- ----- ------
----- ----- ------
Weighted average grant date fair
value of such options granted
during the year . . . . . . . . . . $4.04
------
------
Weighted average grant date fair
value of options granted during
the year at exercise prices
below market prices . . . . . . . . $ -
------
------
</TABLE>
The following table summarizes information about employee and director
stock options outstanding at December 31, 1996 (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER AVERAGE REMAINING EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- ----------------- ----------- ---------------- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$0.55 . . . . . . . . 479 7.9 $0.55 356 $0.55
$1.10 . . . . . . . . 512 8.8 1.10 287 1.10
$3.30 . . . . . . . . 9 9.0 3.30 -- --
$4.40 . . . . . . . . 15 9.2 4.40 -- --
$5.50 . . . . . . . . 28 9.4 5.54 -- --
$10.50 . . . . . . . 7 9.8 10.50 -- --
$11.25 . . . . . . . 41 10.0 11.25 -- --
$11.88 . . . . . . . 50 9.9 11.88 -- --
----- -----
1,141 8.5 1.92 643 0.80
----- -----
----- -----
</TABLE>
FAIR VALUE DISCLOSURES
Had compensation cost for options granted in 1995 and 1996 under InVision's
1996 Equity Incentive Plan been determined based on the fair value at the grant
dates, as prescribed in FAS 123, InVision's net loss and pro forma net loss per
share would have been as follows (in thousands except per share amounts):
F-15.
<PAGE>
INVISION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996
---------- ----------
Net loss:
As reported . . . . . . . . . . . . . . $(3,292) $(3,572)
Pro forma . . . . . . . . . . . . . . . (3,330) (3,665)
Pro forma net loss per share:
As reported . . . . . . . . . . . . . . $(0.50) $(0.44)
Pro forma . . . . . . . . . . . . . . . (0.50) (0.47)
The fair value of each option grant is estimated on the date of grant
using the minimum value method with the following assumptions used for grants
during the applicable period: dividend yield of 0.0% for both periods;
risk-free interest rates of 5.89% to 6.00% for options granted during the
year ended December 31, 1995 and 5.19% to 6.38% for options granted during
the year ended December 31, 1996; weighted average expected option term of
five years for both periods; and a volatility rate of 65%.
1996 EMPLOYEE STOCK PURCHASE PLAN
InVision's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted in March 1996. A total of 300,000 shares of Common Stock has been
reserved for issuance under the Purchase Plan. As of December 31, 1996, no
shares have been issued under the Purchase Plan.
NOTE 9--COMMITMENTS:
InVision leases facilities and equipment under non-cancelable leases
expiring at various times through 2000. Future minimum lease payments under
these leases at December 31, 1996 are as follows (in thousands):
OPERATING LEASE CAPITAL LEASE
--------------- -------------
YEAR ENDING DECEMBER 31,
1997 . . . . . . . . . . . . . . . $370 $89
1998 . . . . . . . . . . . . . . . 286 89
1999 . . . . . . . . . . . . . . . -- 37
---- ----
$656 215
----
----
Less amount representing interest . (37)
----
Present value of capital lease
obligation . . . . . . . . . . . . 178
Less current portion . . . . . . . . (68)
----
Long term capital lease
obligation . . . . . . . . . $110
----
----
Rent expense for 1994, 1995 and 1996 was $252,000, and $289,000 and $328,000,
respectively.
NOTE 10--INCOME TAXES:
As a result of the losses generated during 1994, 1995 and 1996 InVision
has recorded no provision for income taxes and therefore a reconciliation of
the federal statutory rate to the effective rate is not meaningful.
F-16.
<PAGE>
INVISION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Significant components of InVision's deferred tax assets and liabilities
are as follows (in thousands):
DECEMBER 31,
---------------
1995 1996
---- ----
Net operating loss carryforwards . . . . . . $2,810 $4,256
Credit carryforwards . . . . . . . . . . . . 750 877
Depreciation and amortization . . . . . . . . 31 (103)
Accrued expenses . . . . . . . . . . . . . . 380 490
Other . . . . . . . . . . . . . . . . . . . . 199 60
------ ------
Gross deferred tax assets . . . . . . . . . . 4,170 5,580
Deferred tax asset valuation allowance . . . (4,170) (5,580)
------ ------
Net deferred tax assets . . . . . . . . . . . $ -- $ --
------ ------
------ ------
InVision provides a valuation allowance for deferred tax assets when it
is more likely than not, based upon currently available evidence including
its prior history of losses, that some portion or all of the deferred tax
assets will not be realized.
At December 31, 1996, InVision had federal net operating loss
carryforwards of approximately $10,969,000 available to reduce future federal
and state taxable income. InVision's net operating loss carryforwards expire
from 2005 to 2011. The tax benefit of the net operating loss and credit
carryforwards may be limited due to the impact of the Tax Reform Act of 1986.
Events which may cause the tax benefit to be limited include, but are not
limited to, a cumulative stock ownership change of more than 50%, as defined,
over a three-year period and the timing of utilization of various tax
benefits carried forward. As a result of changes in ownership that have
occurred, future utilization of certain of InVision's carryforwards will be
limited to approximately $500,000 per year. Accordingly, the balance of net
operating loss carryforwards at December 31, 1996 has been adjusted to
reflect the limitation.
NOTE 11--RELATED PARTY TRANSACTIONS:
In November 1996, InVision entered into a Research, Development and
License Agreement with EG&G Astrophysics, an affiliate of EG&G International
Ltd. Under the terms of this agreement, InVision and EG&G Astrophysics are
each committed to contribute up to $1,000,000 to fund a joint research and
development effort to develop an explosive detection system with enhanced
capability for reliable detection of explosives at higher rates of
through-put than InVision's existing system. Any new technology developed in
connection with the research and development effort will be jointly owned.
The agreement terminates in May 1998. As of December 31, 1996, InVision has
made no expenditures related to its commitment under this agreement.
InVision was originally formed as a joint venture arrangement between
Imatron, Inc. ("Imatron", a publicly traded company in the U.S.) and
F.I.M.A.I. Holding, S.A. ("FIMAI", a Luxembourg corporation). In connection
with the formation of InVision, InVision and FIMAI entered into a
Manufacturing and Distribution Agreement (the "Distribution Agreement") which
appointed FIMAI as the exclusive manufacturer, purchaser and distributor for
InVision's CTX 5000 systems in Europe. At December 31, 1994, InVision had
obtained a temporary consent from FIMAI for InVision to manufacture and sell
the CTX 5000 in Europe. In April 1995, FIMAI transferred all of its shares of
InVision to HARAX Holding, S.A. ("HARAX," a Luxembourg Corporation) and
ElectroParts Holding, S.A. ("ElectroParts," a Luxembourg Corporation). Both
Harax and ElectroParts have significant common ownership with FIMAI. As a
consequence of the transfer of ownership, FIMAI's rights under the
Distribution Agreement were transferred to HARAX and ElectroParts.
F-17.
<PAGE>
INVISION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In June 1995, InVision issued 56,818 and 170,455 shares of Series D
Preferred Stock to ElectroParts and HARAX, respectively, in exchange for the
cancellation of the Distribution Agreement. Pursuant to Securities and
Exchange Commission Staff Accounting Bulletin No. 48, this transaction is
valued at zero, the historical cost basis of the Distribution Agreement to
ElectroParts and HARAX.
During 1995 and 1996, InVision paid $116,000 and $264,000, respectively
to certain of InVision's directors for professional and/or consulting
services. In May 1995, InVision issued 649,434 shares of Series D Preferred
Stock in satisfaction of $2,429,000 of indebtedness. In June 1995, InVision
issued 13,368 shares of Series D Preferred Stock to an officer of InVision in
satisfaction of $50,000 in indebtedness.
NOTE 12--SUBSEQUENT EVENTS:
NEW FACILITY LEASE
In February 1997, InVision entered into a new lease for its future
primary operating facility. InVision plans to relocate to the new facility in
October 1997 upon the completion of tenant improvement construction. The
lease covers an initial ten year term and includes a five year renewal
option. The initial rental rate of $672,000 per year increases annually to
$1,326,000 in year ten. InVision plans to sub-lease its current primary
operating facilities subsequent to its relocation. Based on current market
rental rates for similar facilities, InVision estimates that sub-lease rental
rates will not be less than InVision's existing rental rate for the remainder
of the lease term.
LINE OF CREDIT
In February 1997, InVision entered into two one-year revolving line of
credit agreements with Silicon Valley Bank. The first agreement provides for
maximum borrowings generally in an amount up to the lower of 80% of eligible
domestic accounts receivable or $4.5 million. Borrowings under this agreement
generally bear interest at the bank's prime rate plus 1.00% per annum (9.25%
at December 31, 1996). The second agreement is partially guaranteed by the
Export-Import Bank of the United States and provides for maximum borrowings
generally in an amount up to the lower of (i) the sum of 90% of eligible
export accounts receivable plus 70% of eligible raw materials and
work-in-process inventory designated for export customers (ii) $4.5 million
less outstanding letters of credit or (iii) $3.0 million. Borrowings under
this agreement generally bear interest at the bank's prime rate plus 0.75%
per annum (9.00% at December 31, 1996). Borrowings under both agreements are
secured by all of InVision's assets. The agreements require that InVision
maintain certain financial ratios and levels of tangible net worth and
profitability and also prohibit InVision from paying cash dividends. Proceeds
of loans under the first line of credit may be used for general corporate
purposes and proceeds of loans under the second line of credit must be used
to finance goods intended for export. Borrowings under this line of credit
were $2.2 million at June 30, 1997.
NOTE 13-SECONDARY OFFERING OF COMMON STOCK AND MERGER AGREEMENT:
On May 14, 1997, the Company sold in a public equity offering 1,875,000
shares of its common stock at $12.00 per share. The Company received net
proceeds of $20,706,000. On June 12, 1997, the Company's managing
underwriter, Robertson, Stephens & Co., under the terms of the over-allotment
option provided in the equity offering, sold an additional 42,742 shares of
the Company's common stock at $12.00 per share from which the Company
received net proceeds of $483,000. The Company intends to use the net
proceeds from the offering to purchase capital equipment and undertake
facility improvements, to fund research and development, for working capital,
for other general corporate purposes, and to pursue possible acquisitions.
On September 3, 1997 the Company entered into an Agreement and Plan of
Merger and Reorganization with Quantum Magnetics, Inc. ("Quantum") setting
forth the terms for the Company's acquisition of Quantum (the "Merger").
Under the terms of the Merger, which is subject to Quantum shareholder
approval, Quantum will become a wholly owned subsidiary of the Company. The
Merger will be effected through an exchange of Quantum
F-18.
<PAGE>
INVISION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
capital stock for InVision common stock based upon an agreed upon exchange
ratio. The Merger is intended to qualify as a pooling of interests for
financial reporting purposes.
F-19.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
InVision Technologies, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of cash flows and of
shareholders' deficit present fairly, in all material respects, the financial
position of Quantum Magnetics, Inc. and its subsidiary at September 30, 1996 and
1995, and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and negative cash flows, and has a net capital deficiency that
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
PRICE WATERHOUSE LLP
San Jose, California
August 22, 1997, except as to Note 15
(Merger Agreement), which is as
of September 3, 1997
F-20.
<PAGE>
QUANTUM MAGNETICS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------- JUNE 30,
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . $ 60 $ 107 $ 659
Accounts receivable . . . . . . . 501 1,338 1,033
Inventories . . . . . . . . . . . 142 113 70
---------- ---------- -----------
Total current assets 703 1,558 1,762
Property and equipment, net . . . . 202 353 307
Other assets . . . . . . . . . . . 48 172 327
---------- ---------- -----------
$ 953 $ 2,083 $ 2,396
---------- ---------- -----------
---------- ---------- -----------
LIABILITIES, MANDATORILY REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND
SHAREHOLDERS' DEFICIT
Current liabilities:
Notes payable . . . . . . . . . . $ 742 $ 106 $ 727
Notes payable, related party . . 275 542 -
Accounts payable . . . . . . . . 283 816 233
Accrued liabilities . . . . . . . 759 532 437
Deferred revenue . . . . . . . . - 120 307
Current maturities of obligations
under capital leases . . . . . - 43 48
---------- ---------- -----------
Total current liabilities 2,059 2,159 1,752
---------- ---------- -----------
Notes payable . . . . . . . . . . . - 552 203
Notes payable, related party . . . 280 - -
Long-term obligations under capital
leases, less current portion. . . 61 46 19
---------- ---------- -----------
341 598 222
---------- ---------- -----------
Mandatorily redeemable convertible
preferred stock . . . . . . . . . - 2,500 4,522
---------- ---------- -----------
Commitments and contingencies
(Notes 11, 12 and 13)
Shareholders' deficit:
Series B Convertible Preferred
Stock, noncumulative without
stated value; 711 shares
authorized, 711 shares issued
and outstanding at September 30,
1996 and June 30, 1997 . . . . . - 533 533
---------- ---------- -----------
Common Stock, without stated
value; 10,000, 15,000 and 17,000
shares authorized; 2,357, 3,272
and 3,343 shares issued and
outstanding . . . . . . . . . . 136 718 1,031
Deferred stock compensation
expense . . . . . . . . . . . . - (29) (233)
Accumulated deficit . . . . . . . (1,583) (4,396) (5,431)
---------- ---------- -----------
Total shareholders' deficit. . (1,447) (3,174) (4,100)
---------- ---------- -----------
$ 953 $ 2,083 $ 2,396
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-21.
<PAGE>
QUANTUM MAGNETICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
SEPTEMBER 30, JUNE 30,
-------------------- -------------------
1995 1996 1996 1997
--------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Contract Revenues . . . . . . . $ 2,739 $ 3,213 $ 1,964 $ 3,085
Cost of contract revenues . . . 2,389 2,836 1,737 2,499
--------- -------- -------- --------
Gross profit . . . . . . . . 350 377 227 586
--------- -------- -------- --------
Operating expenses:
Research and development . . 469 838 717 585
Sales and marketing . . . . . 324 824 478 213
General and administrative . 706 1,307 933 566
--------- -------- -------- --------
Total operating expenses . 1,499 2,969 2,128 1,364
--------- -------- -------- --------
Loss from operations . . . . . (1,149) (2,592) (1,901) (778)
Interest expense, including
related party interest
expense of $31, $47, $36
and $0 . . . . . . . . . . . (126) (221) (88) (257)
--------- -------- -------- --------
Net loss . . . . . . . . . . . $ (1,275) $ (2,813) $ (1,989) $ (1,035)
--------- -------- -------- --------
--------- -------- -------- --------
Net loss per share (Note 3) . . $ (0.55) $ (1.00) $ (0.71) $ (0.31)
--------- -------- -------- --------
--------- -------- -------- --------
Weighted average shares
outstanding (Note 3) . . . . . 2,332 2,826 2,815 3,308
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-22.
<PAGE>
QUANTUM MAGNETICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
SEPTEMBER 30, JUNE 30,
-------------------- --------------------
1995 1996 1996 1997
--------- -------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . $ (1,275) $ (2,813) $ (1,989) $ (1,035)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization . . 34 76 35 80
Stock compensation expense . . . . 61 149 147 36
Amortization of warrant expense . 18 148 69 185
Write-off of purchased in-process
research and development . . . - - - 230
Changes in assets and liabilities:
Accounts receivable . . . . . . . 47 (837) (131) 305
Inventories . . . . . . . . . . . (142) 29 (345) 43
Other assets . . . . . . . . . . . (29) (124) (83) (80)
Accounts payable . . . . . . . . . 189 533 263 (583)
Accrued liabilities . . . . . . . 485 (66) (241) (95)
Deferred revenue . . . . . . . . . - 120 16 187
-------- ------- --------- --------
Net cash used in operating
activities . . . . . . . . . . (612) (2,785) (2,259) (727)
-------- ------- --------- --------
Cash flows from investing activities:
Acquisitions of property and
equipment . . . . . . . . . . . . . (69) (168) (165) -
-------- ------- --------- --------
Cash flows from financing activities:
Proceeds from debt financing . . . . 852 495 - 423
Repayments of debt financing . . . . (103) (45) (45) (550)
Repayments of capital lease
financing . . . . . . . . . . . . . (32) (31) (19) (31)
Proceeds from exercise of stock
options . . . . . . . . . . . . . . - 81 4 17
Proceeds from issuance of preferred
stock . . . . . . . . . . . . . . . - 2,500 2,500 1,420
-------- ------- --------- --------
Net cash provided by financing
activities . . . . . . . . . . 717 3,000 2,440 1,279
-------- ------- --------- --------
Net increase in cash and cash
equivalents for the period. . . 36 47 16 552
Cash and cash equivalents at beginning
of period . . . . . . . . . . . . . . 24 60 60 107
-------- ------- --------- --------
Cash and cash equivalents at end of
period . . . . . . . . . . . . . . . $ 60 $ 107 $ 76 $ 659
-------- ------- --------- --------
-------- ------- --------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid . . . . . . . . . . . . $ 49 $ 54 $ 19 $ 72
SUPPLEMENTAL DISCLOSURE OF NONCASH
ACTIVITIES:
Acquisition of equipment under
capital lease . . . . . . . . . . . $ 93 $ 59 $ 59 $ 9
Issuance of Common Stock as
compensation . . . . . . . . . . . $ 61 $ 178 $ 178 $ 240
Issuance of Preferred Stock upon
the conversion of debt and accrued
interest . . . . . . . . . . . . . $ - $ 533 $ 533 $ 602
Warrants issued in connection with
debt financings . . . . . . . . . . $ 53 $ 270 $ 57 $ 56
Purchase of in-process research and
development and property and
equipment in exchange for note
payable . . . . . . . . . . . . . . $ - $ - $ - $ 330
Sale of equipment in exchange for
note receivable . . . . . . . . . . $ - $ - $ - $ 100
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-23.
<PAGE>
QUANTUM MAGNETICS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES B
CONVERTIBLE
PREFERRED STOCK COMMON STOCK DEFERRED TOTAL
------------------- ------------------- STOCK ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT COMPENSATION DEFICIT DEFICIT
-------- --------- --------- -------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1994 . . . . - $ - 2,182 $ 75 $ - $ (308) $ (233)
Stock compensation . . . . . . . . . - - 200 62 - - 62
Rescinded shares . . . . . . . . . . - - (25) (1) - - (1)
Net loss . . . . . . . . . . . . . . - - - - - (1,275) (1,275)
------- --------- -------- ------- --------- ---------- ---------
Balance at September 30, 1995 . . . . - - 2,357 136 - (1,583) (1,447)
Stock compensation . . . . . . . . . - - 367 103 (34) - 69
Amortization of deferred
stock compensation . . . . . . . . - - - - 5 - 5
Stock options exercised . . . . . . . - - 48 6 - - 6
Fair value of warrants
issued . . . . . . . . . . . . . . - - - 323 - - 323
Shares issued under the
employee stock purchase plans . . . - - 500 150 - - 150
Series B Convertible Preferred
Stock issued in exchange for
bank debt and accrued interest . . 711 533 - - - - 533
Net loss . . . . . . . . . . . . . . - - - - - (2,813)
------- --------- -------- ------- --------- ---------- ---------
Balance at September 30, 1996 . . . . 711 533 3,272 718 (29) (4,396) (3,174)
Stock compensation (unaudited) . . . - - - 240 (240) - -
Amortization of deferred stock
compensation (unaudited) . . . . . - - - - 36 - 36
Fair value of warrants
issued (unaudited) . . . . . . . . - - - 56 - - 56
Stock options exercised
(unaudited) . . . . . . . . . . . . - - 71 17 - - 17
Net loss (unaudited) . . . . . . . . - - - - - (1,035) (1,035)
------- --------- -------- ------- --------- ---------- ---------
Balance at June 30, 1997
(unaudited) . . . . . . . . . . . . 711 $ 533 3,343 $ 1,031 $ (233) $ (5,431) $ (4,100)
------- --------- -------- ------- --------- ---------- ---------
------- --------- -------- ------- --------- ---------- ---------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-24.
<PAGE>
QUANTUM MAGNETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GOING CONCERN:
For the years ended September 30, 1995 and 1996 and for the nine month
period ended June 30, 1997, Quantum Magnetics, Inc. (the "Company") incurred
negative cash flows from operations of $612,000, $2,785,000 and $727,000,
respectively, and incurred net losses of $1,275,000, $2,813,000, and
$1,035,000, respectively, resulting in an accumulated deficit of $5,431,000
at June 30, 1997.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern which contemplates
continuity of operations, realization of assets and liquidation of
liabilities in the ordinary course of business. In October 1996 and April
1997, the Company received additional equity funding (Note 8) to be used for
working capital purposes and to fund operating activities. In order to
continue to fund operating activities, management is seeking additional
capital from investors or a strategic partner. If management is unable to
obtain such additional capital, it may be required to liquidate assets in
satisfaction of liabilities.
NOTE 2 - ORGANIZATION AND DESCRIPTION OF BUSINESS:
The Company, which was organized in 1987 and began operations in 1988,
performs research and development services in the areas of magnetic sensing and
detecting technologies on a contract basis, principally to various agencies of
the U.S. government. The Company has also developed several aviation security
products to the prototype level. These products use advanced technology known
as quadrupole resonance to detect explosives and contraband contained in
baggage, mail and cargo.
During fiscal 1996, the Company began marketing its products in Europe
through its London based wholly-owned subsidiary, QM Ltd., Inc. However no
significant sales have been recorded, and the Company has curtailed efforts to
commercially market its products in Europe.
The Company was an 85%-owned subsidiary of Quantum Design, Inc. ("QD")
until April 1994 when additional shares of the Company were issued to outside
management and employees of the Company. As of September 30, 1996, the four
principal shareholders who own 96% of QD's common stock also own approximately
27% of the outstanding common stock of the Company.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiary. All significant intercompany transactions and balances have
been eliminated.
CASH EQUIVALENTS
The Company considers all liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents and
accounts receivable which are not collateralized. The Company maintains its
cash and cash equivalents in high credit quality financial institutions. Most
of the Company's accounts
F-25.
<PAGE>
QUANTUM MAGNETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
receivable are from U.S. government agencies and companies under contract
with U.S. government agencies under grants which have received funding
approval. To date, the Company has not experienced material losses resulting
from uncollectible receivables.
U.S. government agencies and companies under contract with U.S. government
agencies accounted for 84%, 97% and 100% of contract revenues in fiscal 1995 and
1996 and the nine month period ended June 30, 1997, respectively, and 100% of
September 30, 1995 and 1996 and June 30, 1997 accounts receivable. There can be
no assurance that U.S. government spending on research activities performed by
the Company will be continued in the future, or that the Company will be able to
find alternate sources of funding for its research activities.
INVENTORIES
Inventories are stated at the lower of cost (which approximates the first-
in, first-out (FIFO) basis) or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Expenditures significantly
increasing asset lives are capitalized, while ordinary maintenance and repairs
are charged to operations as incurred.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, usually five years. Leasehold improvements are
amortized using the straight-line method over the lesser of the remaining lease
term or useful life of the improvements.
LONG-LIVED ASSETS
The Company investigates potential impairments of long-lived assets,
primarily consisting of patents, when events or changes in circumstances
indicate that an asset's carrying value may not be recoverable. An impairment
loss is recognized when the sum of the expected future undiscounted net cash
flows is less than the carrying amount of the assets. No such losses have been
identified by the Company.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's notes payable and capital lease obligations
approximate fair value as the rates of interest for these instruments
approximate market rates of interest currently available to the Company for
similar instruments. The carrying amounts of the Company's accrued liabilities
and its bank line of credit approximate their fair values due to their short-
term maturities.
RECOGNITION OF REVENUE
Contract revenues are derived primarily from the performance of services
for various agencies of the U.S. government, through prime government contracts
or through subcontracts issued by U.S. government prime contractors. Contracts
generally are in the form of reimbursement of costs under cost-plus fixed fee
contracts or fixed price contracts which are generally on a best efforts basis.
Revenues are generally recognized as costs are incurred and include a portion of
the total estimated earnings to be realized based upon the relationship between
contract costs incurred to date and total estimated contract costs at
completion. Provision is made for any expected losses on contracts by a charge
to operations in the period during which the losses are first determined to be
probable.
F-26.
<PAGE>
QUANTUM MAGNETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RESEARCH AND DEVELOPMENT COSTS
Company-sponsored research and development costs to develop new concepts
and proprietary systems and products including prototypes are charged to
operations as incurred.
NET LOSS PER SHARE
Net loss per share is computed on the basis of the weighted average number
of common and common equivalent shares from dilutive convertible preferred stock
and stock options outstanding during the period.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period.
Actual results could differ from those estimates.
UNAUDITED INTERIM FINANCIAL DATA
The unaudited interim financial statements as of June 30, 1997 and for the
nine-month periods ended June 30, 1996 and 1997 have been prepared on the same
basis as the audited financial statements and, in the opinion of management,
include all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the financial information set forth therein, in
accordance with generally accepted accounting principles. The data disclosed in
the notes to the financial statements at such dates and for such periods are
unaudited. The results of operations for the interim periods are not
necessarily indicative of the results to be expected for any future period.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No.123, "Accounting for Stock Based
Compensation" ("SFAS 123"). SFAS 123 is effective for transactions entered into
in fiscal years beginning after December 15, 1995. This statement establishes a
fair value based method of accounting for employee stock-based compensation
plans. An entity may continue to apply the intrinsic value method of accounting
for such plans, however, it must disclose pro forma net income determined as if
the fair value based method has been applied in measuring compensation cost.
The Company will adopt the disclosure method for the year ending September 30,
1997.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128").
SFAS 128 is effective for the year ending September 30, 1998. Under SFAS 128,
primary earnings per share is replaced by basic earnings per share and fully
diluted earnings per share is replaced by diluted earnings per share. If the
Company had adopted SFAS 128, the Company's basic and diluted loss per share
would not have differed materially from the reported amounts in each period
presented. The Company will adopt SFAS 128 for the year ending September 30,
1998.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes standards for the reporting of comprehensive income
and its components in a full set of general-purpose financial statements for
periods ending after December 15, 1997. Reclassification of financial statements
for earlier periods for comparative purposes is required. The Company will adopt
SFAS 130 for the year ending September 30, 1998.
F-27.
<PAGE>
QUANTUM MAGNETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of An
Enterprise and Related Information" ("SFAS 131"). SFAS 131 revises information
requirements regarding the reporting of operating segments. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. The Company will adopt SFAS 131 for the year ending
September 30, 1998.
NOTE 4 - BALANCE SHEET COMPONENTS (IN THOUSANDS):
SEPTEMBER 30,
---------------------------- JUNE 30,
1995 1996 1997
------------- ------------- -----------
(UNAUDITED)
ACCOUNTS RECEIVABLE:
Billed $ 382 $ 1,100 $ 685
Unbilled 119 238 348
---------- ----------- -----------
$ 501 $ 1,338 $ 1,033
---------- ----------- -----------
---------- ----------- -----------
Accounts receivable are primarily derived from contracts and subcontracts
with various agencies of the U.S. government. Reimbursable costs incurred under
U.S. government contracts and subcontracts, including allocated indirect
expenses, are subject to audit and adjustment by negotiations between the
Company and U.S. government representatives. Contract revenues have been
recorded in amounts which are expected to be realized upon final audit.
Unbilled receivables are stated at their estimated realizable value and consist
of amounts billed subsequent to the balance sheet date or which are billable
upon the occurrence of specified events, as well as contract retentions and
unreimbursed costs subject to contract execution or modification. Contract
retentions of $36 and $62 at September 30, 1995 and 1996, respectively, are
collectible upon contract completion, final customer approval and final indirect
rate settlement, and the majority thereof is expected to be collected within one
year.
SEPTEMBER 30,
---------------------------- JUNE 30,
1995 1996 1997
------------- ------------- -----------
(UNAUDITED)
INVENTORIES:
Raw material $ 31 $ 113 $ 70
Work-in-progress 38 - -
Finished goods 73 - -
--------- ---------- --------
$ 142 $ 113 $ 70
--------- ---------- --------
--------- ---------- --------
F-28.
<PAGE>
QUANTUM MAGNETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30,
---------------------------- JUNE 30,
1995 1996 1997
------------- ------------- -----------
(UNAUDITED)
PROPERTY AND EQUIPMENT:
Machinery and equipment $ 302 $ 475 $ 484
Leasehold improvements 17 71 71
------------ ------------ -----------
319 546 555
Less: accumulated
depreciation and
and amortization (117) (193) (248)
------------ ------------ -----------
$ 202 $ 353 $ 307
------------ ------------ -----------
------------ ------------ -----------
Included in property and equipment is $93 and $127 of assets under capital
leases with $4 and $23 of accumulated amortization on September 30, 1995 and
1996, respectively.
SEPTEMBER 30,
---------------------------- JUNE 30,
1995 1996 1997
------------- ------------- -----------
(UNAUDITED)
ACCRUED LIABILITIES:
Accrued employee
compensation $ 223 $ 252 $ 222
Reserve for losses on
contracts 99 124 117
Customer deposits 129 - -
Accrued interest 27 28 48
Other 281 128 50
----------- ----------- ----------
$ 759 $ 532 $ 437
----------- ----------- ----------
----------- ----------- ----------
F-29.
<PAGE>
QUANTUM MAGNETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - NOTES PAYABLE:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------- JUNE 30,
1995 1996 1997
------------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Notes payable are summarized as follows
(in thousands):
Revolving credit agreement (the "Line
of Credit") with a bank that provides
up to $500,000, due December 1997. The
outstanding balance bears interest at
the prime rate plus 0.5% (8.75% at
September 30, 1996) $ - $ 203 $ 203
Subordinated promissory notes payable
(the "Notes Payable II") to a third
party, due December 1997. The outstanding
balance bears interest at 6% payable
upon maturity - 200 -
Subordinated promissory notes payable
(the "Notes Payable III") to a group
of investors, due at the earlier of
October 1997 or a qualified equity
financing. The outstanding balance
bears interest at 8% payable upon
maturity 352 352 352
Convertible subordinated promissory
notes payable to a group of investors,
due March 1996. The outstanding
balance bears interest at 10%
payable upon maturity 425 - -
Subordinated promissory note payable to
a third party, payable quarterly through
January 1998. The outstanding balance
bears interest at 10% also payable
quarterly - - 403
Less discount attributable to warrants (35) (97) (28)
-------- -------- ---------
742 658 930
Less current portion (742) (106) (727)
-------- -------- ---------
$ - $ 552 $ 203
-------- -------- ---------
-------- -------- ---------
</TABLE>
The Line of Credit is collateralized by the Company's accounts receivable
and inventory and by third party pledge agreements. The Company is able to draw
down on the Line of Credit up to the dollar amount of cash pledged with a
maximum of $500,000. At September 30, 1996, $212,640 had been pledged by a
group of investors. Of this amount, $30,000 was pledged by the directors of the
Company. In exchange for the pledged amounts, the group of investors received
warrants to purchase shares of Series C Preferred Stock (Note 8). Such value
represents a discount to be amortized as a financing cost over the original term
of the Line of Credit. The aggregate fair value of warrants, as determined at
their grant dates, was $102,000. Amortization of $0, $15,000 and $87,000 was
recorded as interest expense for the years ended September 30, 1995 and 1996,
and the nine-month period ended June 30, 1997, respectively.
The Notes Payable II were issued with nondetachable warrants to purchase
108,145 shares of Series A Preferred Stock at a price of $1.50 per share. The
warrants were exercisable upon an event of default on the Notes Payable II and
were subsequently canceled upon repayment of the Notes Payable II (Note 14).
F-30.
<PAGE>
QUANTUM MAGNETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Notes Payable III were issued in August 1995 and were initially due in
October 1996. In connection with the Notes Payables III, the holders received
warrants to purchase shares of Series A Preferred Stock (Note 8). The aggregate
fair value of the warrants was determined to be $53,000. Amortization of the
discount of $18,000, $35,000 and $0 was included in interest expense for the
years ended September 30, 1995 and September 30, 1996 and the nine-month period
ended June 30, 1997, respectively.
In November 1995, the Notes Payable III were amended and the maturity date
extended to October 1997. In connection with this extension, the Company issued
warrants to purchase shares of Series A Preferred Stock (Note 8). The aggregate
fair value of the warrants was determined to be $19,000. Amortization of the
discount of $0, $9,000 and $10,000 was included in interest expense for the
years ended September 30, 1995 and 1996 and the nine-month period ended June 30,
1997, respectively.
NOTE 6 - NOTES PAYABLE, RELATED PARTIES:
Notes payable to related parties consist of the following (in thousands):
SEPTEMBER 30,
---------------------
1995 1996
--------- ---------
Promissory note payable to QD ("Agreement I"),
payable in monthly installments of $6,200,
including interest at prime plus 2% adjusted
periodically through December 1996, with the
remaining balance due January 1997. The note
is collateralized by substantially all of the
assets of the Company $ 332 $ 287
Revolving note payable to QD ("Agreement II"),
interest only payments made until maturity
in October 1996, interest accrues at prime
plus 1.5% 148 148
Convertible subordinated promissory notes (the
"Notes Payable I") due to certain shareholders
of the Company, maturing December 1996.
Outstanding balance bears interest at 10%
payable upon maturity 75 167
Less discount attributable to warrants - (60)
-------- -------
555 542
Less current portion (275) (542)
-------- -------
$ 280 $ -
-------- -------
-------- -------
Agreements I and II (collectively, the "Agreements") each contain a right
to convert clause allowing QD to convert the outstanding balances of the notes
and accrued interest into common stock of the Company at the fair market value
of such stock in an event of default, subject to certain restrictions, as
defined in the Agreements. The Company must comply with certain covenants which
include, but are not limited to, a requirement that the Company maintain a
senior liability balance, as defined by the Agreement, excluding debt to QD, of
less than $850,000 and a tangible net worth plus subordinated debt balance of
not less than negative $650,000. In November 1995, Agreement I was amended and
the maturity date extended to January 1997. In exchange for the extension, the
F-31.
<PAGE>
QUANTUM MAGNETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company issued warrants to purchase shares of Series A Preferred Stock, as
described in Note 8. The aggregate fair value of the warrants was determined to
be $15,000. Amortization of the discount of $0, $11,000 and $4,000 was included
in interest expense for the years ended September 30, 1995 and 1996 and the
nine-month period ended June 30, 1997, respectively. In October 1996, the
principal and accrued interest of Agreements I and II were converted to 869,036
shares of Series C Preferred Stock (Note 8).
The Notes Payable I contain an automatic conversion clause whereby, if the
Company issues and sells equity securities for gross proceeds of $300,000 or
more prior to repayment, the Notes Payable I are automatically converted into
the number of shares of such equity security that could be purchased for the
principal and accrued interest of the Notes Payable I at the price per share at
which such equity security is sold by the Company. In connection with the Notes
Payable I, the holders received warrants to purchase shares of Series C
Preferred Stock (Note 8). The aggregate fair value of the warrants was
determined to be $111,000. Amortization of the discount of $0, $56,000 and
$55,000 was included in interest expense for the years ended September 30, 1995
and 1996 and the nine-month period ended June 30, 1997, respectively. Upon
consummation of the Series C Preferred Stock offering in October 1996, the
principal balance of Notes Payable I and accrued interest thereon aggregating
$167,000 were converted into 335,436 shares of Series C Preferred Stock.
NOTE 7 - OTHER RELATED PARTY TRANSACTIONS:
In fiscal 1995 and 1996, revenues from services performed for QD were
$168,000 and $18,000, respectively, and payments to QD for research and
development services performed on behalf of the Company were $179,000 and
$24,000, respectively. There were no material amounts owed by the Company to QD
or amounts owing by QD to the Company at either September 30, 1995 or 1996.
The Company utilizes computer processing services provided by QD without
charge. The value of these services is not considered material and,
accordingly, has not been reflected in these consolidated financial statements.
NOTE 8 - MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SERIES A
PREFERRED STOCK:
The Company has authorized 7,911,340 shares of Preferred Stock, no par
value, of which 2,000,000, 711,340, 3,500,000 and 1,200,000 have been designated
Series A, B, C and D, respectively (collectively referred to as "Preferred
Stock"). The Series A, B and D Preferred Stock is mandatorily redeemable (see
"Redemption" below).
F-32.
<PAGE>
QUANTUM MAGNETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of Mandatorily Redeemable Convertible Preferred Stock activity is
as follows (in thousands, except per share amounts):
Shares Amount
-------- --------
Issuance of Mandatorily Redeemable
Convertible Series A Preferred Stock
at $1.50 per share 1,667 $ 2,500
------- --------
Balance at September 30, 1996 1,667 2,500
Issuance of Mandatorily Redeemable
Convertible Series C Preferred Stock
at $0.50 per share (unaudited) 1,644 822
Issuance of Mandatorily Redeemable
Convertible Series D Preferred Stock
at $1.10 per share (unaudited) 1,091 1,200
------- --------
Balance at June 30, 1997 (unaudited) 4,402 $ 4,522
------- --------
------- --------
Holders of Preferred Stock have certain rights, preferences and
restrictions with respect to dividends, redemption, conversion, liquidation,
anti-dilution and voting as set forth in the Amended and Restated Articles of
Incorporation, which are summarized below:
DIVIDENDS
Holders of Series A, B, C and D Preferred Stock are entitled to receive
noncumulative, preferential annual dividends when declared of $0.015, $0.0075,
$0.005 and $0.011, respectively, per share. Under the California Corporations
Code, the Company is legally restricted from distributing dividends because of
its accumulated deficit.
REDEMPTION
At the election of the holders of a majority of the Series D Preferred
Stock voting as a separate class and the holders of a majority of the Series A
and C Preferred Stock voting together as a single class, the Company must redeem
one-third of the outstanding shares of the respective series of Preferred Stock
that are requested to be redeemed by such holders per year beginning January
2001 until all such shares of Preferred Stock are redeemed. The redemption
price will be the original issue price plus any declared and unpaid dividends.
CONVERSION
At the option of the holder, each share of Series A Preferred Stock is
convertible into 1.228 shares of common stock and each share of Series B, C and
D Preferred Stock is convertible into one share of common stock. Such
conversion prices are subject to adjustment to give effect to certain dilutive
events that may occur. Conversion occurs automatically for each share of
Preferred Stock upon closing of an underwritten public offering with a minimum
price per share of $5.00 and aggregate proceeds to the Company of at least
$10,000,000.
F-33.
<PAGE>
QUANTUM MAGNETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LIQUIDATION
In the event of liquidation, acquisition, merger or sale of substantially
all of the assets of the Company, holders of Series A, B, C and D Preferred
Stock are entitled to a per share distribution in preference to holders of
common stock equal to $1.50, $0.75, $1.00 and $1.10 respectively, plus any
declared but unpaid dividends. Thereafter, any excess will be distributed pro
rata to the common shareholders and the Series A, C and D Preferred shareholders
on an if converted basis. In the event funds are insufficient to make a
complete distribution to the holders of Preferred Stock, as described above, the
remaining assets of the Company will be distributed first to the holders of
Series D Preferred Stock, second, to the holders of Series A and C Preferred
Stock, and third, to the holders of Series B Preferred Stock.
VOTING
The holders of each share of Preferred Stock shall have the right to one
vote for each share of common stock into which the Preferred Shares could then
be converted. The holders of Preferred Stock have full voting rights and powers
equal to the voting rights and powers of the holders of common stock.
WARRANTS
In connection with the Line of Credit (Note 5), the Company issued warrants
to purchase 306,640 shares of Series C Preferred Stock at a price of $0.50 per
share. The warrants expire in August 2001, and the Company has reserved 309,840
shares of Series C Preferred Stock for issuance upon exercise of these warrants.
In connection with the Notes Payable I (Note 6), the Company issued
warrants to purchase 335,436 shares of Series C Preferred Stock at a price of
$0.50 per share. The warrants are exercisable commencing upon the closing of a
qualified equity financing and expire in July 2001. At September 30, 1996, the
Company has reserved 223,624 shares of Series A Preferred Stock for issuance
upon exercise of these warrants.
In connection with the Notes Payable III (Note 5), the Company issued
warrants to purchase 52,800 shares of Series A Preferred Stock at a price of
$1.50 per share. The warrants are exercisable on the earlier of a qualified
equity financing or October 1997 and expire in August 2000. The Company has
reserved 52,800 shares of Series A Preferred Stock for issuance upon exercise of
the warrants.
In connection with the extension of Agreement I (Note 6), the Company
issued warrants to purchase 15,333 shares of Series A Preferred Stock at a price
of $1.50 per share. The warrants expire in October 2000, and the Company has
reserved 15,333 shares of Series A Preferred Stock for issuance upon exercise of
these warrants.
In November 1995, the Company issued a warrant to purchase 22,800 shares of
Series A Preferred Stock at a price of $1.50 per share in exchange for services
performed by a consultant during the year. The warrant is exercisable and
expires on November 27, 2000. The Company has reserved 22, 800 shares of Series
A Preferred Stock for issuance upon exercise of the warrant. The fair value of
the warrant of $23,000 was charged to operations in the year ended September 30,
1996.
NOTE 9 - INCOME TAXES:
As a result of the losses generated during fiscal 1995 and 1996, the
Company has recorded no provision for income taxes and therefore a
reconciliation of the federal statutory rate to the effective rate is not
meaningful.
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
F-34.
<PAGE>
QUANTUM MAGNETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30,
1995 1996
--------- ---------
Net operating loss carryforwards $ 483 $ 1,468
Credit carryforwards 94 131
Other 67 102
------- -------
Gross deferred tax assets 644 1,701
Deferred tax asset valuation (644) (1,701)
allowance
------- -------
Net deferred tax assets $ - $ -
------- -------
------- -------
The Company provides a valuation allowance for deferred tax assets when it
is more likely than not, based upon currently available evidence including its
prior history of losses, that some portion or all of the deferred tax assets
will not be realized. At September 30, 1996, the Company had federal net
operating loss carryforwards of approximately $4,000,000 available to reduce
future federal and state taxable income. The Company's net operating loss
carryforwards begin to expire in 2005. Utilization of the Company's net
operating loss and research and development credit carryforwards is subject to
limitations based on ownership changes that have occurred and may be further
limited should additional ownership changes occur. The annual limitation may
result in the expiration of the net operating loss and credit carryforwards
before their utilization.
NOTE 10 - EMPLOYEE BENEFIT PLANS:
401(k) SAVINGS PLAN
In fiscal 1995, the Company established a contributory 401(k) savings plan
covering employees working over 1,000 hours in a plan year after completion of
one year of employment. Participants can contribute up to 15% of their
compensation and, at the sole discretion of the Board, the Company can
contribute up to 5% of the participants' compensation to the 401(k) savings
plan. Participants vest in the Company's contributions over six years. The
Company contributed $48,000 and $71,000 to this plan in the years ended
September 30, 1995 and 1996, respectively.
COMMON STOCK AWARDS
In November 1995, the Company issued 367,000 shares of Common Stock to its
employees at a price of $0.15 per share, for net proceeds aggregating $55,000.
The Company recorded compensation expense of $14,000 in connection with this
issuance, representing the difference between the deemed fair value of the
underlying common stock and the issue price at the date of grant.
STOCK PURCHASE PLANS
In June 1996, the Company adopted the Employee Stock and the Key Employee
Stock Purchase Plans (the "Purchase Plans"), whereby eligible employees and key
employees may purchase shares of common stock of the Company, not to exceed
500,000 shares in aggregate. As of September 30, 1996, 500,000 shares were
issued under the Purchase Plans for net proceeds of $75,000.
The Company recorded compensation expense of $75,000 in fiscal 1996 in
connection with this issuance, representing the difference between the deemed
fair value of the underlying common stock and the issue price at the date of
grant.
F-35.
<PAGE>
QUANTUM MAGNETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STOCK OPTION PLAN
The Company sponsors a Stock Option Plan (the "Plan") that provides for
the issuance of incentive and non-qualified stock options to officers and
employees. There are 1,000,000 shares of the Company's common stock
authorized for issuance under the Plan. The outstanding stock options
generally vest over a four year period, are exercisable at a price of $0.04
to $0.15 per share and expire ten years from date of grant. At September 30,
1996, 131,126 shares are exercisable under the Plan.
A summary of activity under the Plan is as follows (in thousands, except
per share amounts):
EXERCISE OPTIONS
PRICE OUTSTANDING
---------- -----------
Outstanding as of $ - -
September 30, 1994
Granted 0.04 344
Exercised - -
Canceled 0.04 (4)
---------- -------
Outstanding as of 0.04 340
September 30, 1995
Granted 0.15 196
Exercised 0.04-0.15 (48)
Canceled 0.04-0.15 (24)
---------- -------
Outstanding as of $0.04-0.15 464
September 30, 1996
---------- -------
---------- -------
For the year ended September 30, 1996 and the nine-month period ended June
30, 1997, the Company recorded $34,000 and $240,000, respectively, of deferred
stock compensation for the excess of the deemed fair value at the date of grant
over the exercise price related to options granted under the Plan from December
1995 to January 1997. Of such amounts, $5,000 and $36,000 were recorded as
expense in the year ended September 30, 1996 and the nine-month period ended
June 30, 1997, respectively. The remaining $233,000 is being amortized over the
remaining vesting period of the related options.
NOTE 11 - LEASES:
The Company leases office and research and development space under
noncancelable operating leases expiring in April 2002 and equipment under
noncancelable capital leases expiring through 1999. Future minimum lease
payments under noncancelable leases at September 30, 1996 were as follows (in
thousands):
F-36.
<PAGE>
QUANTUM MAGNETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CAPITAL OPERATING
LEASES LEASES
--------- -----------
1997 $ 55 $ 235
1998 44 235
1999 7 235
2000 - 235
2001 - 235
Thereafter - 69
------- -------
Total minimum lease payments 106 $ 1,244
-------
-------
Less: amount representing
interest (17)
-------
Present value of capitalized
lease obligations 89
Less: current portion (43)
-------
Long-term portion of
capitalized leases
obligations $ 46
-------
-------
NOTE 12 - LITIGATION:
The Company is involved in various potential claims which management
believes will not have a material adverse effect on the results of operations
and liquidity of the Company.
NOTE 13 - LICENSE AGREEMENTS:
In October 1994, the Company entered into a twelve year license agreement
with a third party. As amended in May 1997, the agreement provides the Company
with a non-exclusive, irrevocable license to certain in-process detection
technology, as well as equipment with a fair value of $100,000 in exchange for a
$330,000 note payable due in unequal quarterly payments plus 11% interest. The
fair value of the technology license of $230,000 was charged to operations in
May 1997.
In March 1995, the Company executed a ten year exclusive license agreement
with a third party. The Company is subject to royalty payments based on a
percentage of the net sales price of certain products made, used or sold.
Minimum annual royalties of $20,000 are due beginning in calendar year 1997
through the remaining term of the agreement. The Company did not incur royalty
expense under this agreement in fiscal 1995 or 1996.
In June 1995, the Company entered into an exclusive license agreement with
a third party. Per the agreement terms, the Company is subject to royalty
payments based on a percentage of the net sales price of certain products sold
and requires a minimum royalty payment of $25,000 in June 1997 to guarantee
continued license exclusivity. The Company has requested an extension in payment
terms for this payment but is uncertain whether the request will be granted.
Additionally, within the first three years of the agreement, the Company is
required to spend a minimum of $300,000 for the development of certain related
technology; as of June 30, 1997 the Company has incurred costs of $84,000. The
final payment of the license fee was due in June 1996; however, the license was
declared non-exclusive and the payment due date was extended until June 30,
1997. The Company has
F-37.
<PAGE>
QUANTUM MAGNETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
since requested extension of the final payment to September 30, 1997;
however, that request has not been granted and the license may be terminated
at any time by the third party.
In recognition of development costs incurred by QD, the Company agreed to
pay QD a royalty rate of 4% of net sales of certain products, whether sold by
the Company or any licensee, for a period of six years from the effective date
of the agreement, April 15, 1994. The agreement also established future minimum
royalty payments of $50,000 in fiscal years 1997 and 1998, which will be applied
against royalties that may become due to QD in the respective fiscal years.
NOTE 14 - SUBSEQUENT EVENTS:
In October and December 1996, the Company issued two subordinated
promissory notes payable to an investor for $150,000 each. The notes were
issued with nondetachable stock purchase warrants to purchase 214,219 shares of
Series A Preferred Stock at an exercise price of $1.50 per share. The warrants
were exercisable upon an event of default on the notes and were to expire on
December 31, 2002. These notes and the Notes Payable II were repaid in May
1997, and the warrants were canceled.
In January 1997, the Board of Directors approved the issuance of employee
incentive stock options to purchase an aggregate of 1,358,212 shares of common
stock at an exercise price of price of $0.15 per share. The options vest over a
four year period and expire ten years from the date of grant.
In May 1997, the Company renewed its Line of Credit and the due date was
extended to December 1997. In exchange for the extension of the collateral
pledged for the Line of Credit, the investors received warrants to purchase
102,211 shares of Series A Preferred Stock at a price of $1.50 per share. The
warrants vest ratably through December 31, 1997 and expire in May 2002. The
Company has reserved 102,211 shares of Series A Preferred Stock for issuance
upon exercise of these warrants. The aggregate fair value of the warrants was
determined to be $56,000. Amortization of the discount of $28,000 was included
in interest expense for the nine-month period ended June 30, 1997.
In June 1997, the Company entered into a joint venture to perform research
and development related to certain detection technologies. In exchange for a
38% ownership interest in the joint venture, the Company has granted a non-
exclusive, royalty free, perpetual, transferable sub-license on certain
superconductor technology, has agreed that the joint venture will be the sole
source of fabrication and testing products developed by the joint venture, and
has agreed to jointly guarantee a $200,000 working capital loan to the joint
venture. In connection with the formation of the joint venture, the Company
sold equipment to the joint venture in exchange for an eleven year note
receivable being interest at 6.7% per annum.
In July 1997, a Series D Preferred shareholder converted 650,000 shares
into 650,000 shares of common stock.
NOTE 15 - MERGER AGREEMENT
On September 3, 1997 the Company entered into an Agreement and Plan of
Merger and Reorganization with InVision Technologies, Inc. ("InVision") setting
forth the terms for InVision's acquisition of the Company (the "Merger"). Under
the terms of the Merger, which is subject to shareholder approval, the Company
will become a wholly-owned subsidiary of InVision. The Merger will be effected
through the exchange of common stock based upon an agreed upon exchange ratio.
The Merger is intended to qualify as a pooling of interests for financial
reporting purposes.
F-38.
<PAGE>
APPENDIX A
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
among:
INVISION TECHNOLOGIES, INC.,
a Delaware corporation;
QP ACQUISITION CORP.,
a California corporation;
and
QUANTUM MAGNETICS, INC.,
a California corporation
___________________________
Dated as of September 3, 1997
___________________________
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
SECTION 1. DESCRIPTION OF TRANSACTION. . . . . . . . . . . . . . . . . . . . . . . .A-1
1.1 Merger of Merger Sub into the Company . . . . . . . . . . . . . . . . . .A-1
1.2 Effect of the Merger. . . . . . . . . . . . . . . . . . . . . . . . . . .A-1
1.3 Closing; Effective Time . . . . . . . . . . . . . . . . . . . . . . . . .A-1
1.4 Articles of Incorporation and Bylaws; Directors and Officers. . . . . . .A-1
1.5 Conversion of Shares. . . . . . . . . . . . . . . . . . . . . . . . . . .A-2
1.6 Employee Stock Options. . . . . . . . . . . . . . . . . . . . . . . . . .A-4
1.7 Closing of the Company's Transfer Books . . . . . . . . . . . . . . . . .A-5
1.8 Exchange of Certificates. . . . . . . . . . . . . . . . . . . . . . . . .A-5
1.9 Dissenting Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-6
1.10 Tax Consequences. . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-6
1.11 Accounting Treatment. . . . . . . . . . . . . . . . . . . . . . . . . . .A-6
1.12 Further Action. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-6
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY . . . . . . . . . . . . . .A-6
2.1 Due Organization; No Subsidiaries; Etc. . . . . . . . . . . . . . . . . .A-6
2.2 Articles of Incorporation and Bylaws; Records. . . . . . . . . . . . . .A-7
2.3 Capitalization, Etc.. . . . . . . . . . . . . . . . . . . . . . . . . . .A-7
2.4 Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . .A-8
2.5 Absence of Changes. . . . . . . . . . . . . . . . . . . . . . . . . . . .A-9
2.6 Title to Assets.. . . . . . . . . . . . . . . . . . . . . . . . . . . . A-10
2.7 Bank Accounts; Receivables; Inventory.. . . . . . . . . . . . . . . . . A-11
2.8 Equipment; Leasehold. . . . . . . . . . . . . . . . . . . . . . . . . . A-11
2.9 Proprietary Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . A-11
2.10 Contracts.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-12
2.11 Liabilities.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-16
2.12 Compliance with Legal Requirements. . . . . . . . . . . . . . . . . . . A-16
2.13 Governmental Authorizations.. . . . . . . . . . . . . . . . . . . . . . A-17
2.14 Tax Matters.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-17
2.15 Employee and Labor Matters; Benefit Plans.. . . . . . . . . . . . . . . A-18
2.16 Environmental Matters.. . . . . . . . . . . . . . . . . . . . . . . . . A-20
2.17 Controlled Substances; Explosives.. . . . . . . . . . . . . . . . . . . A-20
2.18 Insurance.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-20
2.19 Related Party Transactions. . . . . . . . . . . . . . . . . . . . . . . A-21
2.20 Legal Proceedings; Orders.. . . . . . . . . . . . . . . . . . . . . . . A-21
2.21 Authority; Binding Nature of Agreement. . . . . . . . . . . . . . . . . A-21
2.22 Non-Contravention; Consents.. . . . . . . . . . . . . . . . . . . . . . A-21
2.23 Full Disclosure.. . . . . . . . . . . . . . . . . . . . . . . . . . . . A-22
2.24 No Brokers or Finders.. . . . . . . . . . . . . . . . . . . . . . . . . A-23
SECTION 3. REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB. . . . . . . . A-23
3.1 SEC Filings; Financial Statements.. . . . . . . . . . . . . . . . . . . A-23
3.2 Authority; Binding Nature of Agreement. . . . . . . . . . . . . . . . . A-23
3.3 Valid Issuance; Reservation of Shares.. . . . . . . . . . . . . . . . . A-23
SECTION 4. CERTAIN COVENANTS OF THE COMPANY. . . . . . . . . . . . . . . . . . . . A-23
4.1 Access and Investigation. . . . . . . . . . . . . . . . . . . . . . . . A-23
4.2 Operation of the Company's Business.. . . . . . . . . . . . . . . . . . A-24
4.3 Notification; Updates to Disclosure Schedule. . . . . . . . . . . . . . A-25
4.4 No Negotiation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-26
i
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
4.5 Fees and Expenses.. . . . . . . . . . . . . . . . . . . . . . . . . . . A-26
SECTION 5. ADDITIONAL COVENANTS OF THE PARTIES . . . . . . . . . . . . . . . . . . A-26
5.1 Filings and Consents. . . . . . . . . . . . . . . . . . . . . . . . . . A-26
5.2 Registration Statement; Proxy Statement/Prospectus. . . . . . . . . . . A-26
5.3 Company Shareholders Meeting. . . . . . . . . . . . . . . . . . . . . . A-27
5.4 Public Announcements. . . . . . . . . . . . . . . . . . . . . . . . . . A-27
5.5 Pooling of Interests. . . . . . . . . . . . . . . . . . . . . . . . . . A-27
5.6 Affiliate Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . A-27
5.7 Reasonable Efforts. . . . . . . . . . . . . . . . . . . . . . . . . . . A-27
5.8 Tax Matters.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-28
5.9 Noncompetition Agreements . . . . . . . . . . . . . . . . . . . . . . . A-28
5.10 Termination of Agreements . . . . . . . . . . . . . . . . . . . . . . . A-28
5.11 FIRPTA Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-28
5.12 Release . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-28
5.13 Termination of Employee Plans . . . . . . . . . . . . . . . . . . . . . A-28
5.14 Escrow Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . A-28
5.15 Escrow Agent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-28
5.16 Amendment of Articles of Incorporation. . . . . . . . . . . . . . . . . A-28
SECTION 6. CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGER SUB . . . . . A-28
6.1 Accuracy of Representations.. . . . . . . . . . . . . . . . . . . . . . A-29
6.2 Performance of Covenants. . . . . . . . . . . . . . . . . . . . . . . . A-29
6.3 Shareholder Approval. . . . . . . . . . . . . . . . . . . . . . . . . . A-29
6.4 Consents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-29
6.5 Agreements and Documents. . . . . . . . . . . . . . . . . . . . . . . . A-29
6.6 Employees.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-30
6.7 Legends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-30
6.8 Termination of Employee Plans . . . . . . . . . . . . . . . . . . . . . A-30
6.9 FIRPTA Compliance.. . . . . . . . . . . . . . . . . . . . . . . . . . . A-30
6.10 Effectiveness of Registration Statement.. . . . . . . . . . . . . . . . A-31
6.11 Listing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-31
6.12 No Restraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-31
6.13 No Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . A-31
6.14 Employment Agreements.. . . . . . . . . . . . . . . . . . . . . . . . . A-31
SECTION 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY. . . . . . . . . . . A-31
7.1 Accuracy of Representations . . . . . . . . . . . . . . . . . . . . . . A-31
7.2 Performance of Covenants. . . . . . . . . . . . . . . . . . . . . . . . A-31
7.3 Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-31
7.4 Listing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-32
7.5 No Restraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-32
7.6 Employment Agreements.. . . . . . . . . . . . . . . . . . . . . . . . . A-32
SECTION 8. TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-32
8.1 Termination Events. . . . . . . . . . . . . . . . . . . . . . . . . . . A-32
8.2 Termination Procedures. . . . . . . . . . . . . . . . . . . . . . . . . A-33
ii
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
8.3 Effect of Termination.. . . . . . . . . . . . . . . . . . . . . . . . . A-33
SECTION 9. INDEMNIFICATION, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . A-33
9.1 Survival of Representations, Etc. . . . . . . . . . . . . . . . . . . . A-33
9.2 Indemnification.. . . . . . . . . . . . . . . . . . . . . . . . . . . . A-33
9.3 Threshold.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-34
9.4 Satisfaction of Indemnification Claim.. . . . . . . . . . . . . . . . . A-34
9.5 No Contribution.. . . . . . . . . . . . . . . . . . . . . . . . . . . . A-35
9.6 Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-35
9.7 Defense of Third Party Claims.. . . . . . . . . . . . . . . . . . . . . A-35
9.8 Exercise of Remedies by Indemnitees Other Than Parent.. . . . . . . . . A-35
SECTION 10. MISCELLANEOUS PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . A-35
10.1 Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-35
10.2 Further Assurances. . . . . . . . . . . . . . . . . . . . . . . . . . . A-36
10.3 Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . A-36
10.4 Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-36
10.5 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-36
10.6 Time of the Essence . . . . . . . . . . . . . . . . . . . . . . . . . . A-37
10.7 Headings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-37
10.8 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-37
10.9 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-37
10.10 Successors and Assigns. . . . . . . . . . . . . . . . . . . . . . . . . A-37
10.11 Remedies Cumulative; Specific Performance . . . . . . . . . . . . . . . A-37
10.12 Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-37
10.13 Amendments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-38
10.14 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-38
10.15 Parties in Interest. . . . . . . . . . . . . . . . . . . . . . . . . . A-38
10.16 Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . A-38
10.17 Construction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-38
</TABLE>
iii
<PAGE>
EXHIBITS
Exhibit A - Certain definitions
Exhibit B - Form of Amended and Restated Articles of Incorporation of
Surviving Corporation
Exhibit C - Directors and officers of Surviving Corporation
Exhibit D-1 - Form of Affiliate Agreement
Exhibit D-2 - Persons to execute Affiliate Agreements
Exhibit E - Form of Continuity of Interest Certificate
Exhibit F - Persons to sign Noncompetition Agreements
Exhibit G - Form of Noncompetition Agreement
Exhibit H - Form of Release
Exhibit I - Form of legal opinion of Branton, Wilson & Muns
Exhibit J - Certain employees
Exhibit K - Form of legal opinion of Cooley Godward LLP
Exhibit L - Escrow Agreement
<PAGE>
AGREEMENT AND PLAN
OF MERGER AND REORGANIZATION
THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION (the "Agreement") is
made and entered into as of September 3, 1997, by and among: INVISION
TECHNOLOGIES, INC., a Delaware corporation ("Parent"); QP ACQUISITION CORP., a
California corporation and a wholly owned subsidiary of Parent ("Merger Sub");
and QUANTUM MAGNETICS, INC., a California corporation (the "Company"). Certain
other capitalized terms used in this Agreement are defined in Exhibit A.
RECITALS
A. Parent, Merger Sub and the Company intend to effect a merger of Merger
Sub into the Company in accordance with this Agreement and the California
General Corporation Law (the "Merger"). Upon consummation of the Merger, Merger
Sub will cease to exist, and the Company will become a wholly owned subsidiary
of Parent.
B. It is intended that the Merger qualify as a tax-free reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code").
C. For accounting purposes, it is intended that the Merger be treated as
a "pooling of interests."
AGREEMENT
The parties to this Agreement agree as follows:
SECTION 1. DESCRIPTION OF TRANSACTION
1.1 MERGER OF MERGER SUB INTO THE COMPANY. Upon the terms and subject to
the conditions set forth in this Agreement, at the Effective Time (as defined in
Section 1.3), Merger Sub shall be merged with and into the Company, and the
separate existence of Merger Sub shall cease. The Company will continue as the
surviving corporation in the Merger (the "Surviving Corporation").
1.2 EFFECT OF THE MERGER. The Merger shall have the effects set forth in
this Agreement and in the applicable provisions of the California General
Corporation Law.
1.3 CLOSING; EFFECTIVE TIME. The consummation of the transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of Cooley Godward LLP, Five Palo Alto Square, Palo Alto, California 94306 at
10:00 a.m. on September 30, 1997, or at such other time and date as Parent may
designate upon not less than five days' prior notice to the Company (the
"Scheduled Closing Time"). (The date on which the Closing actually takes place
is referred to in this Agreement as the "Closing Date.") Contemporaneously with
or as promptly as practicable after the Closing, a properly executed agreement
of merger conforming to the requirements of Chapter 11 of the California General
Corporation Law shall be filed with the Secretary of State of the State of
California. The Merger shall become effective at the time such agreement of
merger is filed with and accepted by the Secretary of State of the State of
California (the "Effective Time").
1.4 ARTICLES OF INCORPORATION AND BYLAWS; DIRECTORS AND OFFICERS. Unless
otherwise determined by Parent and the Company prior to the Effective Time:
A-1
<PAGE>
(a) the Articles of Incorporation of the Surviving Corporation shall
be amended and restated as of the Effective Time to conform to Exhibit B;
(b) the Bylaws of the Surviving Corporation shall be amended and
restated as of the Effective Time to conform to the Bylaws of Merger Sub as
in effect immediately prior to the Effective Time; and
(c) the directors and officers of the Surviving Corporation
immediately after the Effective Time shall be the individuals identified on
Exhibit C.
1.5 CONVERSION OF SHARES.
(a) Subject to Sections 1.5(b), 1.8(c) and 1.9, at the Effective
Time, by virtue of the Merger and without any further action on the part of
Parent, Merger Sub, the Company or any shareholder of the Company:
(i) each share of Common Stock, no par value, of the Company
(the "Company Common Stock") outstanding immediately prior to the
Effective Time shall be converted into the right to receive (A) such
fraction of a share of common stock (par value $.001 per share) of
Parent ("Parent Common Stock") as is equal to 0.88 multiplied by the
"Applicable Fraction" (as defined in Section 1.5(c)(i)) plus (B) up to
such fraction of a share of Parent Common Stock as is equal to 0.12
multiplied by the Applicable Fraction if and when released, in whole
or in part, from escrow pursuant to the terms of the Escrow Agreement;
(ii) each share of Series A Preferred Stock, no par value, of the
Company (the "Series A Stock") outstanding immediately prior to the
Effective Time shall be converted into the right to receive (A) such
fraction of a share of Parent Common Stock as is equal to 0.88
multiplied by the "Series A Fraction" (as defined in Section
1.5(c)(ii)) plus (B) up to such fraction of a share of Parent Common
Stock as is equal to 0.12 multiplied by the Series A Fraction if and
when released, in whole or in part, from escrow pursuant to the terms
of the Escrow Agreement;
(iii) each share of Series B Preferred Stock, no par value,
of the Company (the "Series B Stock") outstanding immediately prior to
the Effective Time shall be converted into the right to receive (A)
such fraction of a share of Parent Common Stock as is equal to 0.88
multiplied by the "Series B Fraction" (as defined in Section
1.5(c)(iv)) plus (B) up to such fraction of a share of Parent Common
Stock as is equal to 0.12 multiplied by the Series B Fraction if and
when released, in whole or in part, from escrow pursuant to the terms
of the Escrow Agreement;
(iv) each share of Series C Preferred Stock, no par value, of the
Company (the "Series C Stock") outstanding immediately prior to the
Effective Time shall be converted into the right to receive (A) such
fraction of a share of Parent Common Stock as is equal to 0.88
multiplied by the "Series C Fraction" (as defined in Section
1.5(c)(v)) plus (B) up to such fraction of a share of Parent Common
Stock as is equal to 0.12 multiplied by the Series C Fraction if and
when released, in whole or in part, from escrow pursuant to the terms
of the Escrow Agreement;
(v) each share of the common stock, $0.001 par value, of Merger
Sub outstanding immediately prior to the Effective Time shall be
converted into one share of common stock of the Surviving Corporation.
(b) Each share of Company Common Stock, Series A Stock, Series B
Stock, Series C Stock outstanding immediately prior to the Effective Time and
owned by Parent and each share of Series D Preferred stock, no par value, of the
Company ("Series D Stock") outstanding immediately prior to the Effective Time,
all of which are owned by Parent, shall automatically be canceled and no
conversion shall be made in respect thereof.
(c) For purposes of this Agreement:
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(i) The "Applicable Fraction" shall be the fraction: (A) having
a numerator equal to the amount determined by subtracting (1) the
"Aggregate Liquidation Preference" (as defined in Section 1.5(c)(vi))
from (2) the amount determined by multiplying (i) 777,000 by (ii) the
Designated Parent Stock Price (as defined in Section 1.5(c)(viii));
and (B) having a denominator equal to the amount determined by
multiplying (1) the "Adjusted Fully Diluted Company Share Amount" (as
defined in Section 1.5(c)(vii)) by (2) the "Designated Parent Stock
Price" (as defined in Section 1.5(c)(viii));
(ii) The "Series A Fraction" means the sum of: (A) the fraction
determined by dividing (1) $1.50 (representing the liquidation
preference of each share of Series A Stock under the Company's
Articles of Incorporation) by (2) the "Designated Parent Stock Price"
(as defined in Section 1.5(c)(viii)); and (B) the fraction determined
by multiplying (1) the "Series A Conversion Rate" (as defined in
Section 1.5(c)(iii)) by (2) the "Applicable Fraction" (as defined in
Section 1.5(c)(i));
(iii) The "Series A Conversion Rate" shall be the fraction
determined by dividing (1) the total number of shares of Common Stock
issuable upon the conversion of all shares of Series A Stock
outstanding immediately prior to the Effective Time by (2) the total
number of shares of Series A Stock outstanding immediately prior to
the Effective Time.
(iv) The "Series B Fraction" means the fraction determined by
dividing (A) $0.75 (representing the liquidation preference of each
share of Series B Stock under the Company's Articles of Incorporation)
by (B) the "Designated Parent Stock Price" (as defined in Section
1.5(c)(viii));
(v) The "Series C Fraction" means the sum of: (A) the fraction
determined by dividing (1) $1.00 (representing the liquidation
preference of each share of Series C Stock under the Company's
Articles of Incorporation) by (2) the "Designated Parent Stock Price"
(as defined in Section 1.5(c)(viii)); and (B) the "Applicable
Fraction" (as defined in Section 1.5(c)(i));
(vi) The "Aggregate Liquidation Preference" shall be the amount
equal to the sum of: (A) $1.50 (representing the liquidation
preference of each share of Series A Stock under the Company's
Articles of Incorporation) multiplied by the number of shares of
Series A Stock outstanding immediately prior to the Effective Time;
(B) $0.75 (representing the liquidation preference of each share of
Series B Stock under the Company's Articles of Incorporation)
multiplied by the number of shares of Series B Stock outstanding
immediately prior to the Effective Time; and (C) $1.00 (representing
the liquidation preference of each share of Series C Stock under the
Company's Articles of Incorporation) multiplied by the number of
shares of Series C Stock outstanding immediately prior to the
Effective Time;
(vii) The "Adjusted Fully Diluted Company Share Amount" shall
be the sum of: (A) the number of shares resulting from the
subtraction of (1) the number of shares of Company Common Stock
outstanding immediately prior to the Effective Time and held by Parent
from (2) the aggregate number of shares of Company Common Stock
outstanding immediately prior to the Effective Time (including any
such shares that are subject to a repurchase option or risk of
forfeiture under any restricted stock purchase agreement or other
agreement); (B) the aggregate number of shares of Company Common Stock
issuable upon conversion of all of the Series A Stock and Series C
Stock collectively outstanding immediately prior to the Effective Time
and not held by Parent; and (C) the aggregate number of shares of
Company Common Stock purchasable under or otherwise subject to all
Company Options (as defined in Section 1.6) outstanding immediately
prior to the Effective Time (including all shares of Company Common
Stock that may ultimately be purchased under Company Options that are
unvested or are otherwise not then exercisable); and
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(viii) The "Designated Parent Stock Price" shall be the
average of the closing sale prices of a share of Parent Common Stock
as reported on the Nasdaq National Market for each of the sixty (60)
consecutive trading days ending (and including) the third trading day
prior to the Company Shareholders Meeting, weighted in accordance with
the number of shares of Parent Common Stock traded on each such
trading day.
(d) If any shares of Company Common Stock outstanding immediately
prior to the Effective Time are unvested or are subject to a repurchase option,
risk of forfeiture or other condition under any applicable restricted stock
purchase agreement or other agreement with the Company, then the shares of
Parent Common Stock issued in exchange for such shares of Company Common Stock
will also be unvested and subject to the same repurchase option, risk of
forfeiture or other condition, and the certificates representing such shares of
Parent Common Stock may accordingly be marked with appropriate legends.
(e) All calculations made pursuant to this Section 1.5 shall be
calculated to the nearest fifth decimal place, with five millionths rounded up
to the nearest one-hundred-thousandth.
1.6 EMPLOYEE STOCK OPTIONS. At the Effective Time, each stock option that
is then outstanding under the Company's 1994 Qualified and Nonqualified Stock
Option Plan (the "Company Stock Plan"), whether vested or unvested (a "Company
Option"), shall be assumed by Parent in accordance with the terms (as in effect
as of the date of this Agreement) of the Company Stock Plan and the stock option
agreement by which such Company Option is evidenced. All rights with respect to
Company Common Stock under outstanding Company Options shall thereupon be
converted into rights with respect to Parent Common Stock. Accordingly, from
and after the Effective Time, (a) each Company Option assumed by Parent may be
exercised solely for shares of Parent Common Stock, (b) the number of shares of
Parent Common Stock subject to each such assumed Company Option shall be equal
to the number of shares of Company Common Stock that were subject to such
Company Option immediately prior to the Effective Time multiplied by the
Applicable Fraction, rounded down to the nearest whole number of shares of
Parent Common Stock, (c) the per share exercise price for the Parent Common
Stock issuable upon exercise of each such assumed Company Option shall be
determined by dividing the exercise price per share of Company Common Stock
subject to such Company Option, as in effect immediately prior to the Effective
Time, by the Applicable Fraction, and rounding the resulting exercise price up
to the nearest whole cent, and (d) all restrictions on the exercise of each such
assumed Company Option shall continue in full force and effect, and the term,
exercisability, vesting schedule and other provisions of such Company Option
shall otherwise remain unchanged; PROVIDED, HOWEVER, that each such assumed
Company Option shall, in accordance with its terms, be subject to further
adjustment as appropriate to reflect any stock split, reverse stock split, stock
dividend, recapitalization or other similar transaction effected by Parent after
the Effective Time; PROVIDED FURTHER, that upon the issuance of Parent Common
Stock pursuant to the exercise of an assumed Company Option prior to the release
of all shares of Parent Common Stock held in escrow pursuant to the Escrow
Agreement, (i) Parent shall issue to the Person exercising such assumed Company
Option only that portion of the shares of Parent Common Stock issuable upon such
exercise of such assumed Company Option that such holder would have received had
such assumed Company Option been exercised prior to the Effective Time and
converted into shares of Parent Common Stock pursuant to Section 1.5(a)(i), (ii)
the remainder of the shares of Parent Common Stock issuable upon the exercise of
such assumed Company Option shall be held in escrow pursuant to the terms of the
Escrow Agreement, and (iii) any such shares of Parent Common Stock shall be
deemed to have been deposited into escrow as of the Effective Time and
appropriate adjustments shall be made in Exhibit A of the Escrow Agreement with
respect to the incidence of any prior release of shares of Parent Common Stock
to an Indemnitee, so that any such Person bears a proportionate share of any
release to an Indemnitee that occurs after the Effective Time. The Company and
Parent shall take all actions that may be necessary (under the Company Stock
Plan and otherwise) to effectuate the provisions of this Section 1.6. Following
the Closing, Parent will send to each holder of an assumed Company Option a
written notice setting forth (i) the number of shares of Parent Common Stock
subject to such assumed Company Option, and (ii) the exercise price per share of
Parent Common Stock issuable upon exercise of such assumed Company Option.
Parent shall file with the SEC, within sixty (60) days after the Closing Date, a
registration statement on Form S-8 registering the exercise of the Company
Options assumed by Parent pursuant to this Section 1.6.
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1.7 CLOSING OF THE COMPANY'S TRANSFER BOOKS. At the Effective Time,
holders of certificates representing shares of the Company's capital stock that
were outstanding immediately prior to the Effective Time shall cease to have any
rights as shareholders of the Company, and the stock transfer books of the
Company shall be closed with respect to all shares of such capital stock
outstanding immediately prior to the Effective Time. No further transfer of any
such shares of the Company's capital stock shall be made on such stock transfer
books after the Effective Time. If, after the Effective Time, a valid
certificate previously representing any of such shares of the Company's capital
stock (a "Company Stock Certificate") is presented to the Surviving Corporation
or Parent, such Company Stock Certificate shall be canceled and shall be
exchanged as provided in Section 1.8.
1.8 EXCHANGE OF CERTIFICATES.
(a) At or as soon as practicable after the Effective Time, Parent
will send to the holders of Company Stock Certificates (i) a letter of
transmittal in customary form and containing such provisions as Parent may
reasonably specify, and (ii) instructions for use in effecting the surrender of
Company Stock Certificates in exchange for certificates representing Parent
Common Stock. Upon surrender of a Company Stock Certificate to Parent for
exchange, together with a duly executed letter of transmittal and such other
documents as may be reasonably required by Parent, the holder of such Company
Stock Certificate shall be entitled to receive in exchange therefor a
certificate representing the number of whole shares of Parent Common Stock that
such holder has the right to receive pursuant to the provisions of this Section
1, and the Company Stock Certificate so surrendered shall be canceled. Until
surrendered as contemplated by this Section 1.8, each Company Stock Certificate
shall be deemed, from and after the Effective Time, to represent only the right
to receive upon such surrender a certificate representing shares of Parent
Common Stock (and cash in lieu of any fractional share of Parent Common Stock)
as contemplated by this Section 1. If any Company Stock Certificate shall have
been lost, stolen or destroyed, Parent may, in its discretion and as a condition
precedent to the issuance of any certificate representing Parent Common Stock,
require the owner of such lost, stolen or destroyed Company Stock Certificate to
provide an appropriate affidavit and to deliver a bond (in such sum as Parent
may reasonably direct) as indemnity against any claim that may be made against
Parent or the Surviving Corporation with respect to such Company Stock
Certificate.
(b) No dividends or other distributions declared or made with respect
to Parent Common Stock with a record date after the Effective Time shall be paid
to the holder of any unsurrendered Company Stock Certificate with respect to the
shares of Parent Common Stock represented thereby, and no cash payment in lieu
of any fractional share shall be paid to any such holder, until such holder
surrenders such Company Stock Certificate in accordance with this Section 1.8
(at which time such holder shall be entitled to receive all such dividends and
distributions and such cash payment).
(c) No fractional shares of Parent Common Stock shall be issued in
connection with the Merger, and no certificates for any such fractional shares
shall be issued. In lieu of such fractional shares, any holder of capital stock
of the Company who would otherwise be entitled to receive a fraction of a share
of Parent Common Stock (after aggregating all fractional shares of Parent Common
Stock issuable to such holder) shall, upon surrender of such holder's Company
Stock Certificate(s), be paid in cash the dollar amount (rounded to the nearest
whole cent), without interest, determined by multiplying such fraction by the
Designated Parent Stock Price.
(d) Parent and the Surviving Corporation shall be entitled to deduct
and withhold from any consideration payable or otherwise deliverable to any
holder or former holder of capital stock of the Company pursuant to this
Agreement such amounts as Parent or the Surviving Corporation may be required to
deduct or withhold therefrom under the Code or under any provision of state,
local or foreign tax law. To the extent such amounts are so deducted or
withheld, such amounts shall be treated for all purposes under this Agreement as
having been paid to the Person to whom such amounts would otherwise have been
paid.
(e) Neither Parent nor the Surviving Corporation shall be liable to
any holder or former holder of capital stock of the Company for any shares of
Parent Common Stock (or dividends or distributions with
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respect thereto), or for any cash amounts, delivered to any public official
pursuant to any applicable abandoned property, escheat or similar law.
1.9 DISSENTING SHARES.
(a) Notwithstanding anything to the contrary contained in this
Agreement, any shares of capital stock of the Company that, as of the
Effective Time, are or may become "dissenting shares" within the meaning of
Section 1300(b) of the California Corporations Code shall not be converted
into or represent the right to receive Parent Common Stock in accordance with
Section 1.5 (or cash in lieu of fractional shares in accordance with Section
1.8(c)), and the holder or holders of such shares shall be entitled only to
such rights as may be granted to such holder or holders in Chapter 13 of the
California General Corporation Law; PROVIDED, HOWEVER, that if the status of
any such shares as "dissenting shares" shall not be perfected, or if any such
shares shall lose their status as "dissenting shares," then, as of the later
of the Effective Time or the time of the failure to perfect such status or
the loss of such status, such shares shall automatically be converted into
and shall represent only the right to receive (upon the surrender of the
certificate or certificates representing such shares) Parent Common Stock in
accordance with Section 1.5 (and cash in lieu of fractional shares in
accordance with Section 1.8(c)).
(b) The Company shall give Parent (i) prompt notice of any written
demand received by the Company prior to the Effective Time to require the
Company to purchase shares of capital stock of the Company pursuant to Chapter
13 of the California General Corporation Law and of any other demand, notice or
instrument delivered to the Company prior to the Effective Time pursuant to the
California General Corporation Law, and (ii) the opportunity to participate in
all negotiations and proceedings with respect to any such demand, notice or
instrument. The Company shall not make any payment or settlement offer prior to
the Effective Time with respect to any such demand unless Parent shall have
consented in writing to such payment or settlement offer.
1.10 TAX CONSEQUENCES. For federal income tax purposes, the Merger is
intended to constitute a reorganization within the meaning of Section 368 of the
Code. The parties to this Agreement hereby adopt this Agreement as a "plan of
reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the
United States Treasury Regulations.
1.11 ACCOUNTING TREATMENT. For accounting purposes, the Merger is intended
to be treated as a "pooling of interests."
1.12 FURTHER ACTION. If, at any time after the Effective Time, any further
action is determined by Parent to be necessary or desirable to carry out the
purposes of this Agreement or to vest the Surviving Corporation or Parent with
full right, title and possession of and to all rights and property of Merger Sub
and the Company, the officers and directors of the Surviving Corporation and
Parent shall be fully authorized (in the name of Merger Sub, in the name of the
Company and otherwise) to take such action.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants, to and for the benefit of the
Indemnitees, as follows:
2.1 DUE ORGANIZATION; NO SUBSIDIARIES; ETC.
(a) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of California and has all necessary
power and authority: (i) to conduct its business in the manner in which its
business is currently being conducted;(ii) to own and use its assets in the
manner in which its assets are currently owned and used; and (iii) to perform
its obligations under all Company Contracts.
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(b) Except as set forth in Part 2.1 of the Disclosure Schedule, the
Company has not conducted any business under or otherwise used, for any purpose
or in any jurisdiction, any fictitious name, assumed name, trade name or other
name, other than the name "Quantum Magnetics, Inc."
(c) The Company is not and has not been required to be qualified,
authorized, registered or licensed to do business as a foreign corporation in
any jurisdiction other than the jurisdictions identified in Part 2.1 of the
Disclosure Schedule, except where the failure to be so qualified, authorized,
registered or licensed has not had and will not have a Material Adverse Effect
on the Company. The Company is in good standing as a foreign corporation in
each of the jurisdictions identified in Part 2.1 of the Disclosure Schedule.
(d) Part 2.1 of the Disclosure Schedule accurately sets forth (i) the
names of the members of the Company's board of directors, (ii) the names of the
members of each committee of the Company's board of directors, and (iii) the
names and titles of the Company's officers.
(e) The Company does not own any controlling interest in any Entity
and, except for the equity interests identified in Part 2.1 of the Disclosure
Schedule, the Company has never owned, beneficially or otherwise, any shares or
other securities of, or any direct or indirect equity interest in, any Entity.
The Company has not agreed and is not obligated to make any future investment in
or capital contribution to any Entity. The Company has not guaranteed and is
not responsible or liable for any obligation of any of the Entities in which it
owns or has owned any equity interest.
2.2 ARTICLES OF INCORPORATION AND BYLAWS; RECORDS. The Company has
delivered to Parent accurate and complete copies of: (1) the Company's articles
of incorporation and bylaws, including all amendments thereto; (2) the stock
records of the Company; and (3) except as set forth in Part 2.2 of the
Disclosure Schedule, the minutes and other records of the meetings and other
proceedings (including any actions taken by written consent or otherwise without
a meeting) of the shareholders of the Company, the board of directors of the
Company and all committees of the board of directors of the Company. There have
been no formal meetings or other proceedings of the shareholders of the Company,
the board of directors of the Company or any committee of the board of directors
of the Company that are not fully reflected in such minutes or other records.
There has not been any violation of any of the provisions of the Company's
articles of incorporation or bylaws, and the Company has not taken any action
that is inconsistent in any material respect with any resolution adopted by the
Company's shareholders, the Company's board of directors or any committee of the
Company's board of directors. The books of account, stock records, minute books
and other records of the Company are accurate, up-to-date and complete in all
material respects, and have been maintained in accordance with prudent business
practices.
2.3 CAPITALIZATION, ETC.
(a) The authorized capital stock of the Company consists of:
(i) 17,000,000 shares of Common Stock (with no par value), of which 3,994,216
shares have been issued and are outstanding as of the date of this Agreement;
and (ii) 7,911,340 shares of Preferred Stock (with no par value), of which (A)
2,500,000 shares have been designated "Series A Preferred Stock," of which
1,666,669 shares have been issued and are outstanding as of the date of this
Agreement; (B) 711,340 shares have been designated "Series B Preferred Stock,"
of which 711,340 shares have been issued and are outstanding; (C) 3,500,000
shares have been designated "Series C Preferred Stock," of which 1,643,556
shares have been issued and are outstanding as of the date of this Agreement;
and (D) 1,200,000 shares have been designated "Series D Preferred Stock," of
which 441,328 shares have been issued and are outstanding. Each outstanding
share of Series A Stock, Series B Stock, Series C Stock and Series D Stock is
convertible into one share of Company Common Stock. All of the outstanding
shares of Company Common Stock, Series A Stock, Series B Stock, Series C Stock
and Series D Stock have been duly authorized and validly issued, and are fully
paid and non-assessable. Part 2.3 of the Disclosure Schedule provides an
accurate and complete description of the terms of each repurchase option which
is held by the Company and to which any of such shares is subject.
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(b) The Company has reserved 2,200,000 shares of Company Common Stock
for issuance under the Company Stock Plan, of which options to purchase
1,344,119 shares are outstanding as of the date of this Agreement. Part 2.3 of
the Disclosure Schedule accurately sets forth, with respect to each Company
Option that is outstanding as of the date of this Agreement: (i) the name of the
holder of such Company Option; (ii) the total number of shares of Company Common
Stock that are subject to such Company Option and the number of shares of
Company Common Stock with respect to which such Company Option is immediately
exercisable; (iii) the date on which such Company Option was granted and the
term of such Company Option; (iv) the vesting schedule for such Company Option;
(v) the exercise price per share of Company Common Stock purchasable under such
Company Option; and (vi) whether such Company Option has been designated an
"incentive stock option" as defined in Section 422 of the Code.
(c) The Company has warrants (the "Company Warrants") to purchase
211,917 shares of Series A Stock and 642,076 shares of Series C Stock
outstanding as of the date of this Agreement. The Company has reserved 211,917
shares of Series A Stock and 642,076 shares of Series C Stock for issuance upon
exercise of the Company Warrants. Part 2.3 of the Disclosure Schedule
accurately sets forth, with respect to each Company Warrant that is outstanding
as of the date of this Agreement: (i) the name of the holder of such Company
Warrant; (ii) the total number of shares of Series A Stock or Series C Stock (as
the case may be) that are subject to such Company Warrant and the number of
shares of Series A Stock or Series C Stock (as the case may be) with respect to
which such Company Warrant is immediately exercisable; (iii) the date on which
such Company Warrant was granted and the term of such Company Warrant; (iv) the
vesting schedule for such Company Warrant; and (v) the exercise price per share
of Series A Stock or Series C Stock (as the case may be) purchasable under such
Company Warrant. As of the date of this Agreement, as a consequence of the
transactions contemplated by this Agreement or otherwise, all Company Warrants
are fully exercisable. All Company Warrants not previously exercised will
terminate at the Effective Time and there will be no right (whether or not then
exercisable) to acquire capital stock or other securities of the Company or any
other Entity under any Company Warrants at or after the Effective Time. All
Company Warrants exercisable for Series C Stock are in the form provided by Dale
Sheets to Deborah Lawson Cleveland by facsimile transmission dated June 26,
1997.
(d) Except as set forth in Part 2.3 of the Disclosure Schedule, there
is no: (i) outstanding subscription, option, call, warrant or right (whether or
not currently exercisable) to acquire any shares of the capital stock or other
securities of the Company; (ii) outstanding security, instrument or obligation
that is or may become convertible into or exchangeable for any shares of the
capital stock or other securities of the Company; (iii) Contract under which the
Company is or may become obligated to sell or otherwise issue any shares of its
capital stock or any other securities; or (iv) to the best of the knowledge of
the Company, condition or circumstance that may give rise to or provide a basis
for the assertion of a claim by any Person to the effect that such Person is
entitled to acquire or receive any shares of capital stock or other securities
of the Company.
(e) All outstanding shares of Company Common Stock, Series A Stock,
Series B Stock, Series C Stock and Series D Stock, and all outstanding Company
Warrants and Company Options, have been issued and granted in compliance with
(i) all applicable securities laws and other applicable Legal Requirements, and
(ii) all requirements set forth in applicable Contracts.
(f) Except as set forth in Part 2.3 of the Disclosure Schedule, the
Company has never repurchased, redeemed or otherwise reacquired any shares of
capital stock or other securities of the Company. All securities so reacquired
by the Company were reacquired in compliance with (i) the applicable provisions
of the California General Corporation Law and all other applicable Legal
Requirements, and (ii) all requirements set forth in applicable restricted stock
purchase agreements and other applicable Contracts.
2.4 FINANCIAL STATEMENTS.
(a) The Company has delivered to Parent the following financial
statements and notes (collectively, the "Company Financial Statements"):
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(i) The audited balance sheets of the Company as of September
30, 1996 and 1995, and the related audited income statements, statements of
shareholders equity and statements of cash flows of the Company for the
years then ended, together with the notes thereto and the unqualified
report and opinion of Coopers & Lybrand LLP relating thereto; and
(ii) the unaudited balance sheet of the Company as of May 31,
1997 (the "Unaudited Interim Balance Sheet"), and the related unaudited
income statement of the Company for the eight months then ended.
(b) The Company Financial Statements are accurate and complete in all
material respects and present fairly the financial position of the Company as of
the respective dates thereof and the results of operations and (in the case of
the financial statements referred to in Section 2.4(a)(i)) cash flows of the
Company for the periods covered thereby. The Company Financial Statements have
been prepared in accordance with generally accepted accounting principles
applied on a consistent basis throughout the periods covered (except that the
financial statements referred to in Section 2.4(a)(ii) do not contain footnotes
and are subject to normal and recurring year-end audit adjustments, which will
not, individually or in the aggregate, be material in magnitude).
2.5 ABSENCE OF CHANGES. Except as set forth in Part 2.5 of the Disclosure
Schedule, since May 31, 1997:
(a) there has not been any material adverse change in the Company's
business, condition, assets, liabilities, operations, financial performance
or prospects, and, to the best of the knowledge of the Company, no event
has occurred that will, or could reasonably be expected to, have a Material
Adverse Effect on the Company;
(b) there has not been any material loss, damage or destruction to,
or any material interruption in the use of, any of the Company's assets
(whether or not covered by insurance);
(c) the Company has not declared, accrued, set aside or paid any
dividend or made any other distribution in respect of any shares of capital
stock, and has not repurchased, redeemed or otherwise reacquired any shares
of capital stock or other securities;
(d) the Company has not sold, issued or authorized the issuance of
(i) any capital stock or other security (except for Company Common Stock
issued upon the exercise of outstanding Company Options and Series A Stock
or Series C Stock issued upon the exercise of outstanding Company
Warrants), (ii) any option or right to acquire any capital stock or any
other security, or (iii) any instrument convertible into or exchangeable
for any capital stock or other security;
(e) the Company has not amended or waived any of its rights under, or
permitted the acceleration of vesting under, (i) any provision of the
Company Stock Plan, (ii) any provision of any agreement evidencing any
outstanding Company Option, (iii) any restricted stock purchase agreement,
or (iv) any Company Warrant;
(f) there has been no amendment to the Company's articles of
incorporation or bylaws, and the Company has not effected or been a party
to any Acquisition Transaction, recapitalization, reclassification of
shares, stock split, reverse stock split or similar transaction;
(g) the Company has not formed any subsidiary or acquired any equity
interest or other interest in any other Entity;
(h) the Company has not made any capital expenditure which, when
added to all other capital expenditures made on behalf of the Company since
May 31, 1997, exceeds $10,000;
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(i) the Company has not (i) entered into or permitted any of the
assets owned or used by it to become bound by any Contract that is or would
constitute a Material Contract (as defined in Section 2.10(a)), or (ii)
amended or prematurely terminated, or waived any material right or remedy
under, any such Contract;
(j) the Company has not (i) acquired, leased or licensed any right or
other asset from any other Person, (ii) sold or otherwise disposed of, or
leased or licensed, any right or other asset to any other Person, or (iii)
waived or relinquished any right, except for immaterial rights or other
immaterial assets acquired, leased, licensed or disposed of in the ordinary
course of business and consistent with the Company's past practices;
(k) the Company has not written off as uncollectible, or established
any extraordinary reserve with respect to, any account receivable or other
indebtedness;
(l) the Company has not made any pledge of any of its assets or
otherwise permitted any of its assets to become subject to any Encumbrance,
except for pledges of immaterial assets made in the ordinary course of
business and consistent with the Company's past practices;
(m) the Company has not (i) lent money to any Person (other than
pursuant to routine travel advances made to employees in the ordinary
course of business), or (ii) incurred or guaranteed any indebtedness for
borrowed money;
(n) the Company has not (i) established or adopted any Employee
Benefit Plan, (ii) paid any bonus or made any profit-sharing or similar
payment to, or increased the amount of the wages, salary, commissions,
fringe benefits or other compensation or remuneration payable to, any of
its directors, officers or employees, or (iii) hired any new employee;
(o) the Company has not changed any of its methods of accounting or
accounting practices in any respect;
(p) the Company has not made any Tax election;
(q) the Company has not commenced or settled any Legal Proceeding;
(r) the Company has not entered into any material transaction or
taken any other material action outside the ordinary course of business or
inconsistent with its past practices; and
(s) the Company has not agreed or committed to take any of the
actions referred to in clauses "(c)" through "(r)" above.
2.6 TITLE TO ASSETS. The Company owns, and has good, valid and marketable
title to, all assets purported to be owned by it, including: (i) all assets
reflected on the Unaudited Interim Balance Sheet; (ii) all assets referred to
in Parts 2.1, 2.7(b), 2.8(b) and 2.9 of the Disclosure Schedule and all of the
Company's rights under the Contracts identified in Part 2.10 of the Disclosure
Schedule; and (iii) all other assets reflected in the Company's books and
records as being owned by the Company. Except as set forth in Part 2.6 of the
Disclosure Schedule, all of said assets are owned by the Company free and clear
of any liens or other Encumbrances, except for (x) any lien for current taxes
not yet due and payable, and (y) minor liens that have arisen in the ordinary
course of business and that do not (in any case or in the aggregate) materially
detract from the value of the assets subject thereto or materially impair the
operations of the Company.
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2.7 BANK ACCOUNTS; RECEIVABLES; INVENTORY.
(a) Part 2.7(a) of the Disclosure Schedule provides accurate
information with respect to each account maintained by or for the benefit of the
Company at any bank or other financial institution.
(b) Part 2.7(b) of the Disclosure Schedule provides an accurate and
complete breakdown and aging of all accounts receivable, notes receivable and
other receivables of the Company as of May 31, 1997. Except as set forth in
Part 2.7(b) of the Disclosure Schedule, all existing accounts receivable of the
Company (including those accounts receivable reflected on the Unaudited Interim
Balance Sheet that have not yet been collected and those accounts receivable
that have arisen since May 31, 1997 and have not yet been collected) (i)
represent valid obligations of customers of the Company arising from bona fide
transactions entered into in the ordinary course of business and (ii) are
current and will be collected in full when due, without any counterclaim or set
off (net of an allowance for doubtful accounts not to exceed $10,000 in the
aggregate).
(c) All inventory of the Company, whether or not reflected in the
Company Financial Statements, consists of a quality and quantity usable and
salable in the ordinary course of business, except for obsolete items and items
of below-standard quality, all of which have been written off or written down to
net realizable value in the Company Financial Statements or on the accounting
records of the Company as of the Closing Date, as the case may be. All
inventories not written off have been priced at the lower of cost or market on a
first in, first out basis. The quantities of each item of inventory (whether
raw materials, work-in-process, or finished goods) are not excessive, but are
reasonable in the present circumstances of the Company.
2.8 EQUIPMENT; LEASEHOLD.
(a) All material items of equipment and other tangible assets owned
by or leased to the Company are adequate for the uses to which they are being
put, are in good condition and repair (ordinary wear and tear excepted) and are
adequate for the conduct of the Company's business in the manner in which such
business is currently being conducted.
(b) Part 2.8(b) of the Disclosure Schedule identifies all tangible
assets owned by the Company with an original cost to the Company in excess of
$5,000.
(c) Part 2.8(c) of the Disclosure Schedule identifies all tangible
assets leased to the Company.
(d) The Company does not own any real property or any interest in
real property, except for the leasehold created under the real property lease
identified in Part 2.10 of the Disclosure Schedule.
2.9 PROPRIETARY ASSETS.
(a) Part 2.9(a)(i) of the Disclosure Schedule sets forth, with
respect to each Company Proprietary Asset registered with any Governmental Body
or for which an application has been filed with any Governmental Body, (i) a
brief description of such Proprietary Asset, and (ii) the names of the
jurisdictions covered by the applicable registration or application. Part
2.9(a)(ii) of the Disclosure Schedule identifies and provides a brief
description of all other Company Proprietary Assets owned by the Company. Part
2.9(a)(iii) of the Disclosure Schedule identifies and provides a brief
description of each Proprietary Asset licensed to the Company by any Person
(except for any Proprietary Asset that is licensed to the Company under any
third party software license generally available to the public at a cost of less
than $5,000), and identifies the license agreement under which such Proprietary
Asset is being licensed to the Company. Except as set forth in Part 2.9(a)(iv)
of the Disclosure Schedule, the Company has good, valid and marketable title to
all of the Company Proprietary Assets identified in Parts 2.9(a)(i) and
2.9(a)(ii) of the Disclosure Schedule, free and clear of all Encumbrances, and
has a valid right to use all Proprietary Assets identified in Part 2.9(a)(iii)
of the Disclosure Schedule. Except as set forth in Part 2.9(a)(v) of the
Disclosure Schedule, the Company is not obligated to make any payment to any
Person for the use of any Company Proprietary Asset. Except as set forth in
Part 2.9(a)(vi) of the Disclosure Schedule, the Company
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has not developed jointly with any other Person any Company Proprietary Asset
with respect to which such other Person has any rights.
(b) The Company has taken all measures and precautions necessary to
protect and maintain the confidentiality and secrecy of all Company Proprietary
Assets (except Company Proprietary Assets whose value would be unimpaired by
public disclosure) and otherwise to maintain and protect the value of all
Company Proprietary Assets. Except as set forth in Part 2.9(b) of the
Disclosure Schedule, the Company has not (other than pursuant to license
agreements identified in Part 2.10 of the Disclosure Schedule) disclosed or
delivered to any Person, or permitted the disclosure or delivery to any Person
of, (i) the source code, or any portion or aspect of the source code, of any
Company Proprietary Asset, or (ii) the object code, or any portion or aspect of
the object code, of any Company Proprietary Asset.
(c) None of the Company Proprietary Assets infringes or conflicts
with any Proprietary Asset owned or used by any other Person. The Company is
not infringing, misappropriating or making any unlawful use of, and the Company
has not at any time infringed, misappropriated or made any unlawful use of, or
received any notice or other communication (in writing or otherwise) of any
actual, alleged, possible or potential infringement, misappropriation or
unlawful use of, any Proprietary Asset owned or used by any other Person. To the
best of the knowledge of the Company, no other Person is infringing,
misappropriating or making any unlawful use of, and no Proprietary Asset owned
or used by any other Person infringes or conflicts with, any Company Proprietary
Asset.
(d) Except as set forth in Part 2.9(d) of the Disclosure Schedule:
(i) each Company Proprietary Asset conforms in all material respects with any
specification, documentation, performance standard, representation or statement
made or provided with respect thereto by or on behalf of the Company; and (ii)
there has not been any claim by any customer or other Person alleging that any
Company Proprietary Asset (including each version thereof that has ever been
licensed or otherwise made available by the Company to any Person) does not
conform in all material respects with any specification, documentation,
performance standard, representation or statement made or provided by or on
behalf of the Company, and, to the best of the knowledge of the Company, there
is no basis for any such claim. The Company has established adequate reserves
on the Unaudited Interim Balance Sheet to cover all costs associated with any
obligations that the Company may have with respect to the correction or repair
of programming errors or other defects in the Company Proprietary Assets.
(e) The Company Proprietary Assets constitute all the Proprietary
Assets necessary to enable the Company to conduct its business in the manner in
which such business has been and is being conducted. Except as set forth in
Part 2.9(e) of the Disclosure Schedule, (i) the Company has not licensed any of
the Company Proprietary Assets to any Person, and (ii) the Company has not
entered into any covenant not to compete or Contract limiting its ability to
exploit fully any of its Proprietary Assets or to transact business in any
market or geographical area or with any Person.
(f) Except as set forth in Part 2.9(f) of the Disclosure Schedule,
(i) all current and former employees of the Company have executed and delivered
to the Company an agreement (containing no exceptions to or exclusions from the
scope of its coverage) that is substantially identical to the form of
Confidential Information and Invention Assignment Agreement previously delivered
to Parent, and (ii) all current and former consultants and independent
contractors to the Company have executed and delivered to the Company an
agreement (containing no exceptions to or exclusions from the scope of its
coverage) that is substantially identical to the form of Consultant Confidential
Information and Invention Assignment Agreement previously delivered to Parent.
2.10 CONTRACTS.
(a) Part 2.10 of the Disclosure Schedule identifies:
(i) each Company Contract relating to the employment of, or the
performance of services by, any employee, consultant or independent
contractor;
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(ii) each Company Contract relating to the acquisition, transfer,
use, development, sharing or license of any technology or any Proprietary
Asset;
(iii) each Company Contract imposing any restriction on the
Company's right or ability (A) to compete with any other Person, (B) to
acquire any product or other asset or any services from any other Person,
to sell any product or other asset to or perform any services for any other
Person or to transact business or deal in any other manner with any other
Person, or (C) develop or distribute any technology;
(iv) each Company Contract creating or involving any agency
relationship, distribution arrangement or franchise relationship;
(v) each Company Contract relating to the acquisition, issuance
or transfer of any securities;
(vi) each Company Contract relating to the creation of any
Encumbrance with respect to any asset of the Company;
(vii) each Company Contract involving or incorporating any
guaranty, any pledge, any performance or completion bond, any indemnity or
any surety arrangement;
(viii) each Company Contract creating or relating to any
partnership or joint venture or any sharing of revenues, profits, losses,
costs or liabilities;
(ix) each Company Contract relating to the purchase or sale of
any product or other asset by or to, or the performance of any services by
or for, any Related Party (as defined in Section 2.19);
(x) each Company Contract constituting or relating to a
Government Contract or Government Bid;
(xi) any other Company Contract that was entered into outside the
ordinary course of business or was inconsistent with the Company's past
practices;
(xii) any other Company Contract that has a term of more than 60
days and that may not be terminated by the Company (without penalty) within
60 days after the delivery of a termination notice by the Company; and
(xiii) any other Company Contract that contemplates or involves
(A) the payment or delivery of cash or other consideration in an amount or
having a value in excess of $10,000 in the aggregate, or (B) the
performance of services having a value in excess of $10,000 in the
aggregate.
(Contracts in the respective categories described in clauses "(i)" through
"(xiii)" above are referred to in this Agreement as "Material Contracts.")
(b) The Company has delivered to Parent accurate and complete copies
of all written Contracts identified in Part 2.10 of the Disclosure Schedule,
including all amendments thereto. Part 2.10 of the Disclosure Schedule provides
an accurate description of the terms of each Company Contract that is not in
written form. Each Contract identified in Part 2.10 of the Disclosure Schedule
is valid and in full force and effect, and, to the best of the knowledge of the
Company, is enforceable by the Company in accordance with its terms, subject to
(i) laws of general application relating to bankruptcy, insolvency and the
relief of debtors, and (ii) rules of law governing specific performance,
injunctive relief and other equitable remedies.
(c) Except as set forth in Part 2.10 of the Disclosure Schedule:
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(i) the Company has not violated or breached, or committed any
default under, any Company Contract, and, to the best of the knowledge of
the Company, no other Person has violated or breached, or committed any
default under, any Company Contract;
(ii) to the best of the knowledge of the Company, no event has
occurred, and no circumstance or condition exists, that (with or without
notice or lapse of time) will, or could reasonably be expected to,
(A) result in a violation or breach of any of the provisions of any Company
Contract, (B) give any Person the right to declare a default or exercise
any remedy under any Company Contract, (C) give any Person the right to
accelerate the maturity or performance of any Company Contract, or (D) give
any Person the right to cancel, terminate or modify any Company Contract;
(iii) since September 30, 1993, the Company has not received
any notice or other communication regarding any actual or possible
violation or breach of, or default under, any Company Contract; and
(iv) the Company has not waived any of its material rights under
any Company Contract.
(d) No Person is renegotiating, or has a right pursuant to the terms
of any Company Contract to renegotiate, any amount paid or payable to the
Company under any Material Contract or any other material term or provision of
any Material Contract.
(e) The Contracts identified in Part 2.10 of the Disclosure Schedule
collectively constitute all of the Contracts necessary to enable the Company to
conduct its business in the manner in which its business is currently being
conducted.
(f) Part 2.10 of the Disclosure Schedule identifies and provides a
brief description of each proposed Contract as to which any bid, offer, award,
written proposal, term sheet or similar document has been submitted or received
by the Company since January 1, 1997.
(g) Part 2.10 of the Disclosure Schedule provides an accurate
description and breakdown of the Company's backlog under Company Contracts and
Government Bids.
(h) Except as set forth in Part 2.10(h) of the Disclosure Schedule:
(i) the Company has not, in obtaining or performing any
Government Contract, violated (A) the Truth in Negotiations Act of 1962, as
amended, (B) the Service Contract Act of 1965, as amended, (C) the Contract
Disputes Act of 1978, as amended, (D) the Office of Federal Procurement
Policy Act, as amended, (E) the Federal Acquisition Regulations (the "FAR")
or any applicable agency supplement thereto, (F) the Cost Accounting
Standards, (G) the Defense Industrial Security Manual (DOD 5220.22-M), (H)
the Defense Industrial Security Regulation (DOD 5220.22-R) or any related
security regulations;
(ii) to the best knowledge of the Company, its directors, and its
officers, none of the Company's directors, officers, employees, agents or
consultants is (or for the last five (5) years has been) under
administrative, civil or criminal investigation, indictment or information,
audit or internal investigation with respect to any alleged irregularity,
misstatement or omission arising under or relating to any Government
Contract or Government Bid;
(iii) Company has not made a voluntary disclosure to the U.S.
Government or any state government with respect to any alleged
irregularity, misstatement or omission arising under or relating to a
Government Contract or Government Bid;
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(iv) neither the Company, its directors, nor its officers have
any knowledge of any irregularity, misstatement or omission arising under
or relating to any Government Contract or Government Bid that has led or
could lead, either before or after the Closing Date, to any adverse
consequences or any damage, penalty assessment, recoupment of payment or
disallowance of cost;
(v) neither the Company, its directors, nor its officers have
any reason to believe that any employee, agent, consultant, representative
or affiliate of the Company is in receipt or possession of any competitor
or government proprietary or procurement sensitive information under
circumstances where there is reason to believe that such receipt or
possession is unlawful or unauthorized;
(vi) neither the Company nor any of its directors, officers of is
(or for the last five (5) years has been) suspended or debarred from doing
business with the U.S. Government or any State Government, or has been
declared ineligible for U.S. Government or State Government contracting.
The Company, its directors, and its officers know of no circumstances that
would warrant the initiation of suspension or debarment proceedings or the
finding of nonresponsibility or ineligibility on the part of the Company in
the future;
(vii) no negative determinations of responsibility have been
issued against the Company in connection with any Government Contract or
Government Bid;
(viii) no direct or indirect costs incurred by the Company
have been questioned or disallowed as a result of a finding or
determination of any kind by any Governmental Body;
(ix) no Governmental Body, and no prime contractor or higher-tier
subcontractor of any Governmental Body, has withheld or set off, or
threatened to withhold or set off, any amount due to the Company under any
Government Contract;
(x) to the best of the knowledge of the Company, there are not
and have not been any irregularities, misstatements or omissions relating
to any Government Contract or Government Bid that have led to or could
reasonably be expected to lead to (A) the recoupment of any payments
previously made to the Company, (B) a finding or claim of fraud, defective
pricing, mischarging or improper payments on the part of the Company, or
(E) the assessment of any penalties or damages of any kind against the
Company;
(xi) there is not and has not been any (A) outstanding claim
against the Company by, or dispute involving the Company with, any prime
contractor, subcontractor, vendor or other Person arising under or relating
to the award or performance of any Government Contract, (B) fact known by
the Company upon which any such claim could reasonably be expected to be
based or which may give rise to any such dispute, (C) final decision of any
Governmental Body against the Company;
(xii) no termination for convenience, termination for default, cure
notice, show cause notice, or notice of breach has been issued by any
Government Body;
(xiii) the Company has not entered into any financing arrangement or
assignment of proceeds with respect to the performance of any Government
Contract;
(xiv) no payment has been made by the Company or by any Person
acting on the Company's behalf to any Person (other than to any bona
fide employee or agent (as defined in subpart 3.4 of the FAR) of the
Company) which is or was contingent upon the award of any Government
Contract or which would otherwise be in violation of any applicable
procurement law or regulation or any other Legal Requirement;
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(xv) the Company's cost accounting system is in compliance with
applicable regulations and other applicable Legal Requirements, and has not
been determined by any Governmental Body not to be in compliance with any
Legal Requirement;
(xvi) the Company has complied with all applicable regulations and
other Legal Requirements and with all applicable contractual requirements
relating to the placement of legends or restrictive markings on technical
data, computer software and other Proprietary Assets;
(xvii) in each case in which the Company has delivered or
otherwise provided any technical data, computer software or Company
Proprietary Asset to any Governmental Body in connection with any
Government Contract, the Company has marked such technical data, computer
software or Company Proprietary Asset with all markings and legends
(including any "restricted rights" legend and any "government purpose
license rights" legend) permitted (under the FAR or other applicable Legal
Requirements) to ensure that Company has retained the maximum rights
permitted by Government Body regulations;
(xviii) the Company has reached agreement with the cognizant
government representatives approving and "closing" all indirect costs
charged to Government Contracts for 1991, 1992, 1993, 1994 and 1995, and
those years are closed;
(xix) the responsible government representatives have agreed
with the Company on the "forward pricing rates" that the Company is
charging on cost-type Government Contracts and including in Government
Bids;
(xx) the Company is not and will not be required to make any
filing with or give any notice to, or to obtain any Consent from, any
Governmental Body under or in connection with any Government Contract or
Government Bid as a result of or by virtue of (A) the execution, delivery
of performance of this Agreement or any of the other agreements referred to
in this Agreement, or (B) the consummation of the Merger or any of the
other transactions contemplated by this Agreement;
(xxi) the Company has fully complied with all material terms
and conditions of all Government Contracts and Government Bids, including
all clauses, provisions and requirements incorporated expressly, by
reference or by operation of law therein;
(xxii) the Company has fully complied with all requirements of
statute, rule, regulation, order or agreement pertaining to such Government
Contract and Government Bid; and
(xxiii) all representations and certifications executed,
acknowledged or set forth in or pertaining to such Government Contract and
Government Bid were current, accurate and complete as of their effective
date, and the Seller has fully complied with all such representations and
certifications.
2.11 LIABILITIES. The Company has no accrued, contingent or other
liabilities of any nature, either matured or unmatured (whether or not required
to be reflected in financial statements in accordance with generally accepted
accounting principles, and whether due or to become due), except for: (a)
liabilities identified as such in the "liabilities" column of the Unaudited
Interim Balance Sheet; (b) accounts payable or accrued salaries that have been
incurred by the Company since May 31, 1997 in the ordinary course of business
and consistent with the Company's past practices; (c) liabilities under the
Company Contracts identified in Part 2.10 of the Disclosure Schedule, to the
extent the nature and magnitude of such liabilities can be specifically
ascertained by reference to the text of such Company Contracts; and (d) the
liabilities identified in Part 2.11 of the Disclosure Schedule.
2.12 COMPLIANCE WITH LEGAL REQUIREMENTS. The Company is, and has at all
times since September 30, 1993 been, in compliance with all applicable Legal
Requirements, except where the failure to comply with such Legal Requirements
has not had and will not have a Material Adverse Effect on the Company. Except
as set forth
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in Part 2.12 of the Disclosure Schedule, since September 30, 1993, the
Company has not received any notice or other communication from any
Governmental Body regarding any actual or possible violation of, or failure
to comply with, any Legal Requirement.
2.13 GOVERNMENTAL AUTHORIZATIONS. Part 2.13 of the Disclosure Schedule
identifies each material Governmental Authorization held by the Company, and
the Company has delivered to Parent accurate and complete copies of all
Governmental Authorizations identified in Part 2.13 of the Disclosure
Schedule. The Governmental Authorizations identified in Part 2.13 of the
Disclosure Schedule are valid and in full force and effect, and collectively
constitute all Governmental Authorizations necessary to enable the Company to
conduct its business in the manner in which its business is currently being
conducted. The Company is, and at all times since September 30, 1993 has
been, in substantial compliance with the terms and requirements of the
respective Governmental Authorizations identified in Part 2.13 of the
Disclosure Schedule. Since September 30, 1993, the Company has not received
any notice or other communication from any Governmental Body regarding (a)
any actual or possible violation of or failure to comply with any term or
requirement of any Governmental Authorization, or (b) any actual or possible
revocation, withdrawal, suspension, cancellation, termination or modification
of any Governmental Authorization.
2.14 TAX MATTERS.
(a) All Tax Returns required to be filed by or on behalf of the
Company with any Governmental Body with respect to any taxable period ending
on or before the Closing Date (the "Company Returns") (i) have been or will
be filed on or before the applicable due date (including any extensions of
such due date), and (ii) have been, or will be when filed, accurately and
completely prepared in all material respects in compliance with all
applicable Legal Requirements. All amounts shown on the Company Returns to
be due on or before the Closing Date have been or will be paid on or before
the Closing Date. The Company has delivered to Parent accurate and complete
copies of all Company Returns filed since September 30, 1990 which have been
requested by Parent.
(b) The Company Financial Statements fully accrue all actual and
contingent liabilities for Taxes with respect to all periods through the
dates thereof in accordance with generally accepted accounting principles.
The Company will establish, in the ordinary course of business and consistent
with its past practices, reserves adequate for the payment of all Taxes for
the period from May 31, 1997 through the Closing Date, and the Company will
disclose the dollar amount of such reserves to Parent on or prior to the
Closing Date.
(c) No Company Return relating to income Taxes has ever been
examined or audited by any Governmental Body. Except as set forth in Part
2.14 of the Disclosure Schedule, there have been no examinations or audits of
any Company Return. The Company has delivered to Parent accurate and
complete copies of all audit reports and similar documents (to which the
Company has access) relating to the Company Returns. Except as set forth in
Part 2.14 of the Disclosure Schedule, no extension or waiver of the
limitation period applicable to any of the Company Returns has been granted
(by the Company or any other Person), and no such extension or waiver has
been requested from the Company.
(d) Except as set forth in Part 2.14 of the Disclosure Schedule, no
claim or Proceeding is pending or has been threatened against or with respect
to the Company in respect of any Tax. There are no unsatisfied liabilities
for Taxes (including liabilities for interest, additions to tax and penalties
thereon and related expenses) with respect to any notice of deficiency or
similar document received by the Company with respect to any Tax (other than
liabilities for Taxes asserted under any such notice of deficiency or similar
document which are being contested in good faith by the Company and with
respect to which adequate reserves for payment have been established). There
are no liens for Taxes upon any of the assets of the Company except liens for
current Taxes not yet due and payable. The Company has not entered into or
become bound by any agreement or consent pursuant to Section 341(f) of the
Code. The Company has not been, and the Company will not be, required to
include any adjustment in taxable income for any tax period (or portion
thereof) pursuant to Section 481 or 263A
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of the Code or any comparable provision under state or foreign Tax laws as a
result of transactions or events occurring, or accounting methods employed,
prior to the Closing.
(e) There is no agreement, plan, arrangement or other Contract
covering any employee or independent contractor or former employee or
independent contractor of the Company that, considered individually or
considered collectively with any other such Contracts, will, or could reasonably
be expected to, give rise directly or indirectly to the payment of any amount
that would not be deductible pursuant to Section 280G or Section 162 of the
Code. The Company is not, and has never been, a party to or bound by any tax
indemnity agreement, tax sharing agreement, tax allocation agreement or similar
Contract.
2.15 EMPLOYEE AND LABOR MATTERS; BENEFIT PLANS.
(a) Part 2.15(a) of the Disclosure Schedule identifies each salary,
bonus, deferred compensation, incentive compensation, stock purchase, stock
option, severance pay, termination pay, hospitalization, medical, life or other
insurance, supplemental unemployment benefits, profit-sharing, pension or
retirement plan, program or agreement (collectively, the "Plans") sponsored,
maintained, contributed to or required to be contributed to by the Company for
the benefit of any employee of the Company ("Employee"), except for Plans which
would not require the Company to make payments or provide benefits having a
value in excess of $10,000 in the aggregate.
(b) Except as set forth in Part 2.15(a) of the Disclosure Schedule,
the Company does not maintain, sponsor or contribute to, and, to the best of the
knowledge of the Company, has not at any time in the past maintained, sponsored
or contributed to, any employee pension benefit plan (as defined in Section 3(2)
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
whether or not excluded from coverage under specific Titles or Merger Subtitles
of ERISA) for the benefit of Employees or former Employees (a "Pension Plan").
(c) The Company maintains, sponsors or contributes only to those
employee welfare benefit plans (as defined in Section 3(1) of ERISA, whether or
not excluded from coverage under specific Titles or Merger Subtitles of ERISA)
for the benefit of Employees or former Employees which are described in Part
2.15(c) of the Disclosure Schedule (the "Welfare Plans"), none of which is a
multiemployer plan (within the meaning of Section 3(37) of ERISA).
(d) With respect to each Plan, the Company has delivered to Parent:
(i) an accurate and complete copy of such Plan (including all
amendments thereto);
(ii) an accurate and complete copy of the annual report, if
required under ERISA, with respect to such Plan for the last two
years;
(iii) an accurate and complete copy of the most recent
summary plan description, together with each Summary of Material
Modifications, if required under ERISA, with respect to such
Plan, and all material employee communications relating to
such Plan;
(iv) if such Plan is funded through a trust or any third party
funding vehicle,an accurate and complete copy of the trust or other
funding agreement (including all amendments thereto) and accurate and
complete copies the most recent financial statements thereof;
(v) accurate and complete copies of all Contracts relating to
such Plan, including service provider agreements, insurance contracts,
minimum premium contracts, stop-loss agreements, investment
management agreements, subscription and participation
agreements and recordkeeping agreements; and
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(vi) an accurate and complete copy of the most recent
determination letter received from the Internal Revenue Service with
respect to such Plan (if such Plan is intended to be qualified under
Section 401(a) of the Code).
(e) The Company is not required to be, and, to the best of the
knowledge of the Company, has never been required to be, treated as a single
employer with any other Person under Section 4001(b)(1) of ERISA or Section
414(b), (c), (m) or (o) of the Code. The Company has never been a member of an
"affiliated service group" within the meaning of Section 414(m) of the Code. To
the best of the knowledge of the Company, the Company has never made a complete
or partial withdrawal from a multiemployer plan, as such term is defined in
Section 3(37) of ERISA, resulting in "withdrawal liability," as such term is
defined in Section 4201 of ERISA (without regard to subsequent reduction or
waiver of such liability under either Section 4207 or 4208 of ERISA).
(f) The Company does not have any plan or commitment to create any
additional Welfare Plan or any Pension Plan, or to modify or change any existing
Welfare Plan or Pension Plan (other than to comply with applicable law) in a
manner that would affect any Employee.
(g) Except as set forth in Part 2.15(g) of the Disclosure Schedule,
no Welfare Plan provides death, medical or health benefits (whether or not
insured) with respect to any current or former Employee after any such
Employee's termination of service (other than (i) benefit coverage mandated by
applicable law, including coverage provided pursuant to Section 4980B of the
Code, (ii) deferred compensation benefits accrued as liabilities on the
Unaudited Interim Balance Sheet, and (iii) benefits the full cost of which are
borne by current or former Employees (or the Employees' beneficiaries)).
(h) With respect to each of the Welfare Plans constituting a group
health plan within the meaning of Section 4980B(g)(2) of the Code, the
provisions of Section 4980B of the Code ("COBRA") have been complied with in all
material respects.
(i) Each of the Plans has been operated and administered in all
material respects in accordance with applicable Legal Requirements, including
but not limited to ERISA and the Code.
(j) Each of the Plans intended to be qualified under Section 401(a)
of the Code has received a favorable determination from the Internal Revenue
Service, and the Company is not aware of any reason why any such determination
letter should be revoked.
(k) Except as set forth in Part 2.15(k) of the Disclosure Schedule,
neither the execution, delivery or performance of this Agreement, nor the
consummation of the Merger or any of the other transactions contemplated by this
Agreement, will result in any payment (including any bonus, golden parachute or
severance payment) to any current or former Employee or director of the Company
(whether or not under any Plan), or materially increase the benefits payable
under any Plan, or result in any acceleration of the time of payment or vesting
of any such benefits.
(l) Part 2.15(l) of the Disclosure Schedule contains a list of all
salaried employees of the Company as of the date of this Agreement, and
correctly reflects, in all material respects, their salaries, any other
compensation payable to them (including compensation payable pursuant to bonus,
deferred compensation or commission arrangements), their dates of employment and
their positions. The Company is not a party to any collective bargaining
contract or other Contract with a labor union involving any of its Employees.
All of the Company's employees are "at will" employees.
(m) Part 2.15(m) of the Disclosure Schedule identifies each Employee
who is not fully available to perform work because of disability or other leave
and sets forth the basis of such leave and the anticipated date of return to
full service.
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(n) The Company is in compliance in all material respects with all
applicable Legal Requirements and Contracts relating to employment, employment
practices, wages, bonuses and terms and conditions of employment, including
employee compensation matters.
(o) Except as set forth in Part 2.15(o) of the Disclosure Schedule,
the Company has good labor relations, and the Company does not have any reason
to believe that (i) the consummation of the Merger or any of the other
transactions contemplated by this Agreement will have a material adverse effect
on the Company's labor relations, or (ii) any of the Company's employees intends
to terminate his or her employment with the Company.
2.16 ENVIRONMENTAL MATTERS. The Company is in compliance in all material
respects with all applicable Environmental Laws, which compliance includes the
possession by the Company of all permits and other Governmental Authorizations
required under applicable Environmental Laws, and compliance with the terms and
conditions thereof. The Company has not received any notice or other
communication (in writing or otherwise), whether from a Governmental Body,
citizens group, employee or otherwise, that alleges that the Company is not in
compliance with any Environmental Law, and, to the best of the knowledge of the
Company, there are no circumstances that may prevent or interfere with the
Company's compliance with any Environmental Law in the future. To the best of
the knowledge of the Company, no current or prior owner of any property leased
or controlled by the Company has received any notice or other communication (in
writing or otherwise), whether from a Government Body, citizens group, employee
or otherwise, that alleges that such current or prior owner or the Company is
not in compliance with any Environmental Law. All Governmental Authorizations
currently held by the Company pursuant to Environmental Laws are identified in
Part 2.16 of the Disclosure Schedule. (For purposes of this Section 2.16: (i)
"Environmental Law" means any federal, state, local or foreign Legal Requirement
relating to pollution or protection of human health or the environment
(including ambient air, surface water, ground water, land surface or subsurface
strata), including any law or regulation relating to emissions, discharges,
releases or threatened releases of Materials of Environmental Concern, or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Materials of Environmental Concern;
and (ii) "Materials of Environmental Concern" include chemicals, pollutants,
contaminants, wastes, toxic substances, petroleum and petroleum products and any
other substance that is now or hereafter regulated by any Environmental Law or
that is otherwise a danger to health, reproduction or the environment.)
2.17 CONTROLLED SUBSTANCES; EXPLOSIVES. The Company is in compliance in
all material respects with all applicable laws relating to (i) the possession,
use and storage of drugs and other controlled substances of a similar nature
(collectively, "Controlled Substances") and (ii) the possession, use and storage
of explosive materials and devices (collectively, "Explosives"), in each case
which compliance includes the possession by the Company of all permits and other
Governmental Authorizations required under such applicable laws and compliance
with the terms and conditions thereof. All Governmental Authorizations
currently held by the Company pursuant to such applicable laws are identified in
Part 2.13 of the Disclosure Schedule. The Company maintains inventory controls
and use and storage procedures to ensure that all Controlled Substances and
Explosives will not be lost, stolen or otherwise go unaccounted for. The
Company is in possession of all Controlled Substances and Explosives which it
has obtained or used in the course of its business, other than such Controlled
Substances and Explosives that the Company has returned to Governmental Bodies
from which such Controlled Substances and Explosives had been obtained. No
employee of the Company or other Person has suffered any injury as a result of
the use or handling any Controlled Substances or Explosives on the premises of
the Company or while engaging in their employment activities with the Company.
2.18 INSURANCE. Part 2.18 of the Disclosure Schedule identifies all
insurance policies maintained by, at the expense of or for the benefit of the
Company and identifies any material claims made thereunder, and the Company has
delivered to Parent accurate and complete copies of the insurance policies
identified on Part 2.18 of the Disclosure Schedule. Each of the insurance
policies identified in Part 2.18 of the Disclosure Schedule is in full force and
effect. Since September 30, 1993, the Company has not received any notice or
other communication regarding any actual or possible (a) cancellation or
invalidation of any insurance policy, (b) refusal of any coverage
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or rejection of any claim under any insurance policy, or (c) material
adjustment in the amount of the premiums payable with respect to any
insurance policy.
2.19 RELATED PARTY TRANSACTIONS. Except as set forth in Part 2.19 of the
Disclosure Schedule: (a) no Related Party has, and no Related Party has at any
time since September 30, 1993 had, any direct or indirect interest in any
material asset used in or otherwise relating to the business of the Company; (b)
no Related Party is, or has at any time since September 30, 1993 been, indebted
to the Company; (c) since September 30, 1993, no Related Party has entered into,
or has had any direct or indirect financial interest in, any material Contract,
transaction or business dealing involving the Company; (d) no Related Party is
competing, or has at any time since September 30, 1993 competed, directly or
indirectly, with the Company; and (e) no Related Party has any claim or right
against the Company (other than rights under Company Options, rights under
Company Warrants and rights to receive compensation for services performed as an
employee of the Company). (For purposes of the Section 2.19 each of the
following shall be deemed to be a "Related Party": (i) shareholders of the
Company; (ii) each individual who is, or who has at any time since September 30,
1993 been, an officer or director of the Company; (iii) each member of the
immediate family of each of the individuals referred to in clauses "(i)" and
"(ii)" above; and (iv) any trust or other Entity (other than the Company) in
which any one of the individuals referred to in clauses "(i)", "(ii)" and
"(iii)" above holds (or in which more than one of such individuals collectively
hold), beneficially or otherwise, a material voting, proprietary or equity
interest.)
2.20 LEGAL PROCEEDINGS; ORDERS.
(a) Except as set forth in Part 2.21 of the Disclosure Schedule,
there is no pending Legal Proceeding, and (to the best of the knowledge of the
Company) no Person has threatened to commence any Legal Proceeding: (i) that
involves the Company or any of the assets owned or used by the Company or any
Person whose liability the Company has or may have retained or assumed, either
contractually or by operation of law; or (ii) that challenges, or that may have
the effect of preventing, delaying, making illegal or otherwise interfering
with, the Merger or any of the other transactions contemplated by this
Agreement. To the best of the knowledge of the Company, except as set forth in
Part 2.21 of the Disclosure Schedule, no event has occurred, and no claim,
dispute or other condition or circumstance exists, that will, or that could
reasonably be expected to, give rise to or serve as a basis for the commencement
of any such Legal Proceeding.
(b) Except as set forth in Part 2.21 of the Disclosure Schedule, no
Legal Proceeding has ever been commenced by or has ever been pending against the
Company.
(c) There is no order, writ, injunction, judgment or decree to which
the Company, or any of the assets owned or used by the Company, is subject. To
the best of the knowledge of the Company, no director, officer or other employee
of the Company is subject to any order, writ, injunction, judgment or decree
that prohibits such director, officer or other employee from engaging in or
continuing any conduct, activity or practice relating to the Company's business.
2.21 AUTHORITY; BINDING NATURE OF AGREEMENT. The Company has the absolute
and unrestricted right, power and authority to enter into and to perform its
obligations under this Agreement; and the execution, delivery and performance by
the Company of this Agreement have been duly authorized by all necessary action
on the part of the Company and its board of directors. This Agreement
constitutes the legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, subject to (i) laws of general
application relating to bankruptcy, insolvency and the relief of debtors, and
(ii) rules of law governing specific performance, injunctive relief and other
equitable remedies.
2.22 NON-CONTRAVENTION; CONSENTS. Except as set forth in Part 2.22 of the
Disclosure Schedule, neither (1) the execution, delivery or performance of this
Agreement or any of the other agreements referred to in this Agreement, nor (2)
the consummation of the Merger or any of the other transactions contemplated by
this Agreement, will directly or indirectly (with or without notice or lapse of
time):
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(a) contravene, conflict with or result in a violation of (i) any of
the provisions of the Company's articles of incorporation or bylaws, or
(ii) any resolution adopted by the Company's shareholders, the Company's
board of directors or any committee of the Company's board of directors;
(b) contravene, conflict with or result in a violation of, or give
any Governmental Body or other Person the right to challenge any of the
transactions contemplated by this Agreement or to exercise any remedy or
obtain any relief under, any Legal Requirement or any order, writ,
injunction, judgment or decree to which the Company, or any of the assets
owned or used by the Company, is subject;
(c) contravene, conflict with or result in a violation of any of the
terms or requirements of, or give any Governmental Body the right to
revoke, withdraw, suspend, cancel, terminate or modify, any Governmental
Authorization that is held by the Company or that otherwise relates to the
Company's business or to any of the assets owned or used by the Company;
(d) contravene, conflict with or result in a violation or breach of,
or result in a default under, any provision of any Company Contract that is
or would constitute a Material Contract, or give any Person the right to
(i) declare a default or exercise any remedy under any such Company
Contract, (ii) accelerate the maturity or performance of any such Company
Contract, or (iii) cancel, terminate or modify any such Company Contract;
or
(e) result in the imposition or creation of any Encumbrance upon or
with respect to any asset owned or used by the Company (except for minor
liens that will not, in any case or in the aggregate, materially detract
from the value of the assets subject thereto or materially impair the
operations of the Company).
Except as set forth in Part 2.22 of the Disclosure Schedule, the Company is not
and will not be required to make any filing with or give any notice to, or to
obtain any Consent from, any Person in connection with (x) the execution,
delivery or performance of this Agreement or any of the other agreements
referred to in this Agreement, or (y) the consummation of the Merger or any of
the other transactions contemplated by this Agreement.
2.23 FULL DISCLOSURE.
(a) This Agreement (including the Disclosure Schedule) does not, and
the Closing Certificate (as defined in Section 6.5(m)) will not, (i) contain any
representation, warranty or information that is false or misleading with respect
to any material fact, or (ii) omit to state any material fact required to be
stated therein or necessary in order to make the representations, warranties and
information contained and to be contained herein and therein (in the light of
the circumstances under which such representations, warranties and information
were or will be made or provided) not false or misleading.
(b) None of the information supplied or to be supplied by or on
behalf of the Company for inclusion or incorporation by reference in the
registration statement on Form S-4 to be filed with the SEC by Parent in
connection with the issuance of Parent Common Stock in the Merger (the "S-4
Registration Statement") will, at the time the S-4 Registration Statement
becomes effective under the Securities Act, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they are made, not misleading. None of the
information supplied or to be supplied by or on behalf of the Company for
inclusion or incorporation by reference in the Proxy Statement/Prospectus to be
filed with the SEC as part of the S-4 Registration Statement (the "Proxy
Statement/Prospectus"), will, at the time the Proxy Statement/Prospectus is
mailed to the shareholders of the Company, at the time of the Company
Shareholders Meeting or as of the Effective Time, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in the light of
the circumstances under which they are made, not misleading. The Proxy
Statement/Prospectus will comply as to form in all material respects with the
provisions of the Exchange Act and the rules and regulations promulgated by the
SEC thereunder.
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2.24 NO BROKERS OR FINDERS. No broker, finder or investment banker is
entitled to any brokerage, finder's or other fee or commission in connection
with the Merger or any of the other transactions contemplated by this Agreement
based upon arrangements made by or on behalf of the Company.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub jointly and severally represent and warrant to
the Company as follows:
3.1 SEC FILINGS; FINANCIAL STATEMENTS.
(a) Parent has delivered to the Company accurate and complete copies
(excluding copies of exhibits) of each report, registration statement (on a form
other than Form S-8) and definitive proxy statement filed by Parent with the SEC
between April 23, 1996 and the date of this Agreement (the "Parent SEC
Documents"). As of the time it was filed with the SEC (or, if amended or
superseded by a filing prior to the date of this Agreement, then on the date of
such filing): (i) each of the Parent SEC Documents complied in all material
respects with the applicable requirements of the Securities Act or the Exchange
Act (as the case may be); and (ii) none of the Parent SEC Documents contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
(b) The consolidated financial statements contained in the Parent SEC
Documents: (i) complied as to form in all material respects with the published
rules and regulations of the SEC applicable thereto; (ii) were prepared in
accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods covered, except as may be indicated in the notes to
such financial statements and (in the case of unaudited statements) as permitted
by Form 10-Q of the SEC, and except that unaudited financial statements may not
contain footnotes and are subject to year-end audit adjustments; and (iii)
fairly present the consolidated financial position of Parent and its
subsidiaries as of the respective dates thereof and the consolidated results of
operations of Parent and its subsidiaries for the periods covered thereby.
3.2 AUTHORITY; BINDING NATURE OF AGREEMENT. Parent and Merger Sub have
the absolute and unrestricted right, power and authority to perform their
obligations under this Agreement; and the execution, delivery and performance by
Parent and Merger Sub of this Agreement (including the contemplated issuance of
Parent Common Stock in the Merger in accordance with this Agreement) have been
duly authorized by all necessary action on the part of Parent and Merger Sub and
their respective boards of directors. No vote of Parent's stockholders is
needed to approve the Merger. This Agreement constitutes the legal, valid and
binding obligation of Parent and Merger Sub, enforceable against them in
accordance with its terms, subject to (i) laws of general application relating
to bankruptcy, insolvency and the relief of debtors, and (ii) rules of law
governing specific performance, injunctive relief and other equitable remedies.
3.3 VALID ISSUANCE; RESERVATION OF SHARES. Subject to Section 1.5(c), the
Parent Common Stock to be issued in the Merger will, when issued in accordance
with the provisions of this Agreement, be validly issued, fully paid and
nonassessable. Parent has reserved for issuance, or will have reserved for
issuance prior to the Closing, a sufficient number of shares of Parent Common
Stock to cover the Company Options to be assumed by Parent at the Closing
pursuant to Section 1.6 upon exercise of such rights in accordance with their
terms.
SECTION 4. CERTAIN COVENANTS OF THE COMPANY
4.1 ACCESS AND INVESTIGATION. During the period from the date of this
Agreement through the Effective Time (the "Pre-Closing Period"), the Company
shall, and shall cause its Representatives to: (a) provide Parent and Parent's
Representatives with reasonable access to the Company's Representatives,
personnel and assets and to all existing books, records, Tax Returns, work
papers and other documents and information relating to the Company; and (b)
provide Parent and Parent's Representatives with copies of such existing books,
records, Tax Returns, work papers and other documents and information relating
to the
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Company, and with such additional financial, operating and other data and
information regarding the Company, as Parent may reasonably request.
4.2 OPERATION OF THE COMPANY'S BUSINESS. During the Pre-Closing Period:
(a) the Company shall conduct its business and operations in the
ordinary course and in substantially the same manner as such business and
operations have been conducted prior to the date of this Agreement;
(b) the Company shall use reasonable efforts to preserve intact its
current business organization, keep available the services of its current
officers and employees and maintain its relations and good will with all
suppliers, customers, landlords, creditors, employees and other Persons
having business relationships with the Company;
(c) the Company shall keep in full force all insurance policies
identified in Part 2.18 of the Disclosure Schedule;
(d) the Company shall cause its officers to report regularly in
writing (but in no event less frequently than weekly) to Parent concerning
the status of the Company's business;
(e) the Company shall not declare, accrue, set aside or pay any
dividend or make any other distribution in respect of any shares of capital
stock, and shall not repurchase, redeem or otherwise reacquire any shares
of capital stock or other securities (except that the Company may
repurchase Company Common Stock from former employees pursuant to the terms
of existing restricted stock purchase agreements);
(f) the Company shall not sell, issue or authorize the issuance of
(i) any capital stock or other security, (ii) any option or right to
acquire any capital stock or other security, or (iii) any instrument
convertible into or exchangeable for any capital stock or other security
(except that the Company shall be permitted (x) to issue Company Common
Stock to employees upon the exercise of outstanding Company Options, (y) to
issue to holders of outstanding Company Warrants Series A Stock or Series C
Stock issuable upon the exercise of such Company Warrants, and (z) to issue
shares of Company Common Stock upon the conversion of shares of the
Company's outstanding Preferred Stock);
(g) the Company shall not amend or waive any of its rights under, or
permit the acceleration of vesting under, (i) any provision of the Company
Stock Plan, (ii) any provision of any agreement evidencing any outstanding
Company Option, (iii) any provision of any restricted stock purchase
agreement, or (iv) any provision of any agreement evidencing any
outstanding Company Warrant;
(h) the Company shall not amend or permit the adoption of any
amendment to the Company's articles of incorporation or bylaws, or effect
or permit the Company to become a party to any Acquisition Transaction,
recapitalization, reclassification of shares, stock split, reverse stock
split or similar transaction;
(i) the Company shall not form any subsidiary or acquire any equity
interest or other interest in any other Entity;
(j) the Company shall not make any capital expenditure, except for
capital expenditures that, when added to all other capital expenditures
made on behalf of the Company during the Pre-Closing Period, do not exceed
$10,000 per month;
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(k) the Company shall not (i) enter into, or permit any of the assets
owned or used by it to become bound by, any Contract that is or would
constitute a Material Contract, or (ii) amend or prematurely terminate, or
waive any material right or remedy under, any such Contract;
(l) the Company shall not (i) acquire, lease or license any right or
other asset from any other Person, (ii) sell or otherwise dispose of, or
lease or license, any right or other asset to any other Person, or (iii)
waive or relinquish any right, except for assets acquired, leased, licensed
or disposed of by the Company pursuant to Contracts that are not Material
Contracts;
(m) the Company shall not (i) lend money to any Person (except that
the Company may make routine travel advances to employees in the ordinary
course of business), or (ii) incur or guarantee any indebtedness for
borrowed money (except that the Company may make routine borrowings in the
ordinary course of business under its line of credit with Silicon Valley
Bank, N.A.);
(n) the Company shall not (i) establish, adopt or amend any Employee
Benefit Plan, (ii) pay any bonus or make any profit-sharing payment, cash
incentive payment or similar payment to, or increase the amount of the
wages, salary, commissions, fringe benefits or other compensation or
remuneration payable to, any of its directors, officers or employees, (iii)
hire any new employees, or (iv) enter into new employment or consulting
agreements or modify existing employment or consulting agreements;
(o) the Company shall not change any of its methods of accounting or
accounting practices in any material respect;
(p) the Company shall not make any Tax election;
(q) the Company shall not commence or settle any material Legal
Proceeding; and
(r) the Company shall not agree or commit to take any of the actions
described in clauses "(e)" through "(q)" above.
Notwithstanding the foregoing, the Company may take any action described in
clauses "(e)" through "(r)" above if Parent gives its prior written consent to
the taking of such action by the Company.
4.3 NOTIFICATION; UPDATES TO DISCLOSURE SCHEDULE.
(a) During the Pre-Closing Period, the Company shall promptly notify
Parent in writing of:
(i) the discovery by the Company of any event, condition, fact
or circumstance that occurred or existed on or prior to the date of this
Agreement and that caused or constitutes an inaccuracy in or breach of any
representation or warranty made by the Company in this Agreement;
(ii) any event, condition, fact or circumstance that occurs,
arises or exists after the date of this Agreement and that would cause or
constitute an inaccuracy in or breach of any representation or warranty
made by the Company in this Agreement if (A) such representation or
warranty had been made as of the time of the occurrence, existence or
discovery of such event, condition, fact or circumstance, or (B) such
event, condition, fact or circumstance had occurred, arisen or existed on
or prior to the date of this Agreement;
(iii) any breach of any covenant or obligation of the
Company; and
(iv) any event, condition, fact or circumstance that would make
the timely satisfaction of any of the conditions set forth in Section 6 or
Section 7 impossible or unlikely.
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(b) If any event, condition, fact or circumstance that is required to
be disclosed pursuant to Section 4.3(a) requires any change in the Disclosure
Schedule, or if any such event, condition, fact or circumstance would require
such a change assuming the Disclosure Schedule were dated as of the date of the
occurrence, existence or discovery of such event, condition, fact or
circumstance, then the Company shall promptly deliver to Parent an update to the
Disclosure Schedule specifying such change. No such update shall be deemed to
supplement or amend the Disclosure Schedule for the purpose of (i) determining
the accuracy of any of the representations and warranties made by the Company in
this Agreement, or (ii) determining whether any of the conditions set forth in
Section 6 has been satisfied.
4.4 NO NEGOTIATION. During the Pre-Closing Period, the Company shall not
(and the Company shall ensure that its Representatives shall not), directly or
indirectly:
(a) solicit or encourage the initiation of any inquiry, proposal or
offer from any Person (other than Parent) relating to a possible
Acquisition Transaction;
(b) participate in any discussions or negotiations or enter into any
agreement with, or provide any non-public information to, any Person (other
than Parent) relating to or in connection with a possible Acquisition
Transaction; or
(c) consider, entertain or accept any proposal or offer from any
Person (other than Parent) relating to a possible Acquisition Transaction.
The Company shall promptly notify Parent in writing of any material inquiry,
proposal or offer relating to a possible Acquisition Transaction that is
received by the Company or any of its Representatives during the Pre-Closing
Period.
4.5 FEES AND EXPENSES. The Company shall not incur, nor permit any other
Person to incur, any fees, costs and expenses of the type referred to in Section
10.3, by or for the benefit of the Company (including all such fees, costs and
expenses incurred prior to the date of this Agreement and including the amount
of all special bonuses and other amounts that may become payable to any officers
of the Company or other Persons in connection with the consummation of the
transactions contemplated by this Agreement) that shall exceed $50,000 in the
aggregate.
SECTION 5. ADDITIONAL COVENANTS OF THE PARTIES
5.1 FILINGS AND CONSENTS. As promptly as practicable after the execution
of this Agreement, each party to this Agreement (a) shall make all filings (if
any) and give all notices (if any) required to be made and given by such party
in connection with the Merger and the other transactions contemplated by this
Agreement, and (b) shall use all commercially reasonable efforts to obtain all
Consents (if any) required to be obtained (pursuant to any applicable Legal
Requirement or Contract, or otherwise) by such party in connection with the
Merger and the other transactions contemplated by this Agreement. The Company
shall (upon request) promptly deliver to Parent a copy of each such filing made,
each such notice given and each such Consent obtained by the Company during the
Pre-Closing Period.
5.2 REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS. As promptly as
practicable after the date of this Agreement, the Company and Parent shall
prepare and cause to be filed with the SEC the S-4 Registration Statement,
together with the Proxy Statement/Prospectus and any other documents required by
the Securities Act or the Exchange Act in connection with the Merger. Each of
Parent and the Company shall use all reasonable efforts to cause the S-4
Registration Statement (including the Proxy Statement/Prospectus) to comply with
the rules and regulations promulgated by the SEC, to respond promptly to any
comments of the SEC or its staff and to have the S-4 Registration Statement
declared effective under the Securities Act as promptly as practicable after it
is filed with the SEC. The Company shall promptly furnish to Parent all
information concerning the Company and the
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Company's shareholders that may be required or reasonably requested in
connection with any action contemplated by this Section 5.2. If any event
relating to the Company occurs, or if the Company becomes aware of any
information, that should be set forth in an amendment or supplement to the
S-4 Registration Statement or the Proxy Statement/Prospectus, then the
Company shall promptly inform Parent thereof and shall cooperate with Parent
in filing such amendment or supplement with the SEC and, if appropriate, in
mailing such amendment or supplement to the shareholders of the Company.
5.3 COMPANY SHAREHOLDERS MEETING.
(a) The Company shall take all action necessary under all applicable
Legal Requirements to call, give notice of, convene and hold the Company
Shareholders Meeting. The Company Shareholders Meeting will be held as promptly
as practicable and in any event within thirty (30) days after the S-4
Registration Statement is declared effective by the SEC. The Company shall
ensure that the Company Shareholders Meeting is called, noticed, convened, held
and conducted, and that all proxies solicited in connection with the Company
Shareholders Meeting are solicited, in compliance with all applicable Legal
Requirements. The Company's obligation to call, give notice of, convene and
hold the Company Shareholders Meeting in accordance with this Section 5.3(a)
shall not be limited or otherwise affected by the commencement, disclosure,
announcement or submission to the Company of any proposal by a third party to
acquire the Company or substantially all of the assets of the Company, or by any
withdrawal, amendment or modification of the recommendation of the Board of
Directors of the Company with respect to the Merger.
(b) The Board of Directors of the Company shall unanimously recommend
that the Company's shareholders vote in favor of and adopt and approve this
Agreement and the Merger at the Company Shareholders Meeting. The Proxy
Statement/Prospectus shall include a statement to the effect that the Board of
Directors of the Company has unanimously recommended that the Company's
shareholders vote in favor of and adopt and approve this Agreement and the
Merger at the Company Shareholders Meeting. Neither the Board of Directors of
the Company nor any committee thereof shall withdraw, amend or modify, or
propose or resolve to withdraw, amend or modify, in a manner adverse to Parent,
the unanimous recommendation of the Board of Directors of the Company that the
Company's shareholders vote in favor of and adopt and approve this Agreement and
the Merger. For purposes of this Agreement, such recommendation of the Board of
Directors shall be deemed to have been modified in a manner adverse to Parent if
such recommendation shall no longer be unanimous.
5.4 PUBLIC ANNOUNCEMENTS. During the Pre-Closing Period, (a) the Company
shall not (and the Company shall not permit any of its Representatives to) issue
any press release or make any public statement regarding this Agreement or the
Merger, or regarding any of the other transactions contemplated by this
Agreement, without Parent's prior written consent, and (b) Parent will use
reasonable efforts to consult with the Company prior to issuing any press
release or making any public statement regarding the Merger.
5.5 POOLING OF INTERESTS. During the Pre-Closing Period, the Company
shall not take any action that could reasonably be expected to have an adverse
effect on the ability of Parent to account for the Merger as a "pooling of
interests."
5.6 AFFILIATE AGREEMENTS. The Company shall use all commercially
reasonable efforts to cause each other Person identified on Exhibit D-2 (and any
other Person that could reasonably be deemed to be an "affiliate" of the Company
for purposes of the Securities Act), to execute and deliver to Parent, as
promptly as practicable after the execution of this Agreement, an Affiliate
Agreement in the form of Exhibit D-1.
5.7 REASONABLE EFFORTS. During the Pre-Closing Period, (a) the Company
shall use all reasonable efforts to cause the conditions set forth in Sections
6.1 through and including 6.9, and Section 6.14, to be satisfied on a timely
basis, and (b) Parent and Merger Sub shall use all reasonable efforts to cause
the conditions set forth in Sections 7.1 and 7.2 to be satisfied on a timely
basis.
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5.8 TAX MATTERS. Prior to the Closing, (a) Parent and the Company shall
execute and deliver, to Cooley Godward LLP and to Branton, Wilson & Muns, tax
representation letters (which will be used in connection with the legal opinions
contemplated by Sections 6.5(k) and 7.3(b)), and (b) the Company shall use all
reasonable efforts to cause each holder of more than one percent (1%) of the
capital stock of the Company to execute and deliver to Parent a Continuity of
Interest Certificate in the form of Exhibit E.
5.9 NONCOMPETITION AGREEMENTS. The Company shall use all reasonable
efforts to cause each of the Persons identified on Exhibit F to execute and
deliver to the Company and Parent, at the Closing, a Noncompetition Agreement in
the form of Exhibit G.
5.10 TERMINATION OF AGREEMENTS. Prior to the Closing the Company and the
holders of capital stock of the Company shall enter into one or more agreements,
reasonably satisfactory in form and content to Parent (and conditioned and
effective upon the Closing), terminating all of the such holders' rights under
(i) all agreements pursuant to which Series A Stock, Series B Stock or Series C
Stock were issued and (ii) all agreements pursuant to which any holders of the
Company's outstanding capital stock have registration rights, rights of first
refusal, co-sale rights, information rights, inspection rights or the like
(collectively the "Shareholder Agreements").
5.11 FIRPTA MATTERS. At the Closing, (a) the Company shall deliver to
Parent a statement (in such form as may be reasonably requested by counsel to
Parent) conforming to the requirements of Section 1.897 - 2(h)(1)(i) of the
United States Treasury Regulations, and (b) the Company shall deliver to the
Internal Revenue Service the notification required under Section 1.897 - 2(h)(2)
of the United States Treasury Regulations.
5.12 RELEASE. At the Closing, the Company shall use all reasonable efforts
to cause each of its shareholders (other than Parent) to execute and deliver to
the Company a Release in the form of Exhibit H.
5.13 TERMINATION OF EMPLOYEE PLANS. At the Closing, the Company shall
terminate its Plans and shall ensure that no employee or former employee of the
Company has any rights under any of such Plans and that any liabilities of the
Company under such Plans (including any such liabilities relating to services
performed prior to the Closing) are fully extinguished at no cost to the
Company.
5.14 ESCROW AGREEMENT. The Company shall execute and deliver the Escrow
Agreement and use all reasonable efforts to cause the Agent (as defined in
Section 10.1) to execute and deliver the Escrow Agreement.
5.15 ESCROW AGENT. Parent may determine the initial escrow agent under the
Escrow Agreement, so long as the person selected by Parent is a bank, trust
company, escrow company or other person regularly in the business of providing
escrow services. Otherwise, the initial Escrow Agent shall be determined by the
mutual agreement of Parent and the Company. Parent shall also be entitled to
determine the Escrow Agent's acceptance fee.
5.16 AMENDMENT OF ARTICLES OF INCORPORATION. Prior to the Closing Date,
the Company shall duly and properly file with the California Secretary of State
an amendment to its Articles of Incorporation, in form and substance
satisfactory to Parent, confirming that the effective conversion prices for its
Series A, Series B, Series E and Series D Preferred Stock are $1.2215, $0.50,
$1.00 and $1.10, respectively. Prior to such filing, such amendment shall be
approved by the Board of Directors and Shareholders of the Company as required
by California law.
SECTION 6. CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGER SUB
The obligations of Parent and Merger Sub to effect the Merger and otherwise
consummate the transactions contemplated by this Agreement are subject to the
satisfaction, at or prior to the Closing, of each of the following conditions:
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6.1 ACCURACY OF REPRESENTATIONS. Each of the representations and
warranties made by the Company in this Agreement and in each of the other
agreements and instruments delivered to Parent in connection with the
transactions contemplated by this Agreement shall have been accurate in all
material respects as of the date of this Agreement (without giving effect to any
"Material Adverse Effect" or other materiality qualifications, or any similar
qualifications, contained or incorporated directly or indirectly in such
representations and warranties), and shall be accurate in all material respects
as of the Scheduled Closing Time as if made at the Scheduled Closing Time
(without giving effect to any update to the Disclosure Schedule and without
giving effect to any "Material Adverse Effect" or other materiality
qualifications, or any similar qualifications, contained or incorporated
directly or indirectly in such representations and warranties).
6.2 PERFORMANCE OF COVENANTS. All of the covenants and obligations that
the Company is required to comply with or to perform at or prior to the Closing
shall have been complied with and performed in all respects.
6.3 SHAREHOLDER APPROVAL. The principal terms of the Merger shall have
been duly approved by the affirmative vote of all of the shares of Company
Common Stock, Series A Stock, Series B Stock and Series C Stock entitled to vote
with respect thereto.
6.4 CONSENTS. All Consents required to be obtained in connection with the
Merger and the other transactions contemplated by this Agreement (including the
Consents identified in Part 2.22 of the Disclosure Schedule), in form and
substance satisfactory to Parent, shall have been obtained and shall be in full
force and effect.
6.5 AGREEMENTS AND DOCUMENTS. Parent and the Company shall have received
the following agreements and documents, each of which shall be in full force and
effect:
(a) Affiliate Agreements in the form of Exhibit D-1, executed by the
Persons identified on Exhibit D-2 and by any other Person who could
reasonably be deemed to be an "affiliate" of the Company for purposes of
the Securities Act;
(b) Noncompetition Agreements in the form of Exhibit G, executed by
the individuals identified on Exhibit F and effective for the periods
identified in Exhibit F;
(c) a Release in the form of Exhibit H, executed by the holders of at
least ninety percent (90%) of the outstanding shares of Company Common
Stock and the holders of all of the outstanding shares of Series A Stock,
Series B Stock and Series C Stock (including those Persons who became
holders by virtue of the exercise of Company Warrants prior to the
Effective Time);
(d) the agreements referred to in Section 5.10, executed by the
requisite persons necessary to cause the Shareholder Agreements to be
terminated;
(e) confidential invention and assignment agreements, reasonably
satisfactory in form and content to Parent, executed by all employees and
former employees of the Company and by all consultants and independent
contractors and former consultants and former independent contractors to
the Company who have not already signed such agreements (including the
individuals identified in Part 2.9(f) of the Disclosure Schedule);
(f) the statement referred to in Section 5.11(a), executed by the
Company;
(g) Continuity of Interest Certificates in the form of Exhibit E,
executed by the Persons identified in Section 5.8(b);
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(h) an estoppel certificate, dated as of a date not more than five
days prior to the Closing Date and satisfactory in form and content to
Parent, executed by any and all lessors of real property leased by the
Company;
(i) a legal opinion of Branton, Wilson & Muns, dated as of the
Closing Date, substantially to the effect of Exhibit I;
(j) a legal opinion of a reputable law firm (reasonably acceptable to
Parent) experienced in government contracts matters, reasonably
satisfactory in form and content to Parent, to the effect that the
execution, delivery and performance of this Agreement and the consummation
of the Merger and the other transactions contemplated by this Agreement do
not and will not contravene, conflict with or result in a violation of or
default under, or give any Governmental Body or other Person the right to
terminate, to exercise any remedy or to obtain any relief under, any
Government Contract to which the Company is a party or under which the
Company has any rights or obligations;
(k) a legal opinion of Cooley Godward LLP, dated as of the Closing
Date, to the effect that the Merger will constitute a reorganization within
the meaning of Section 368 of the Code (it being understood that, in
rendering such opinion, such counsel may rely upon the tax representation
letters referred to in Section 5.8(a) and the Continuity of Interest
Certificates referred to in Section 6.5(g));
(l) a letter from Price Waterhouse LLP, dated as of the Closing Date,
confirming that Parent may account for the Merger as a "pooling of
interests" in accordance with generally accepted accounting principles,
Accounting Principles Board Opinion No. 16 and all published rules,
regulations and policies of the SEC;
(m) a certificate executed by the President of the Company and
containing the representation and warranty of the Company that each of the
representations and warranties set forth in Section 2 is accurate in all
respects as of the Closing Date as if made on the Closing Date and that the
conditions set forth in Sections 6.1, 6.2, 6.3 and 6.4 have been duly
satisfied (the "Closing Certificate");
(n) the Escrow Agreement, executed by the Company, the Agent (as
defined in Section 10.1) and the Escrow Agent (as defined in the Escrow
Agreement); and
(o) written resignations of all directors of the Company, effective
as of the Effective Time.
6.6 EMPLOYEES. All of the individuals identified on Exhibit J, and no
more than ninety percent (90%) of the remaining employees of the Company on the
date hereof, shall not have ceased to be employed by, or expressed an intention
to terminate their employment with, the Company.
6.7 LEGENDS. The Company shall have provided Parent with evidence,
reasonably satisfactory to Parent, that all technical data, computer software
and Company Proprietary Assets delivered or otherwise provided or made available
by or on behalf of the Company to Governmental Bodies in connection with
Government Contracts have been marked with all markings and legends (including
any "restricted rights" legend and any "government purpose license rights"
legend) appropriate (under the FAR, under other applicable Legal Requirements or
otherwise) to ensure that no Governmental Body or other Person is able to
acquire any unlimited rights with respect to any of such technical data,
computer software or Company Proprietary Assets and to ensure that the Company
has not lost or relinquished and will not lose or relinquish any material rights
with respect thereto.
6.8 TERMINATION OF EMPLOYEE PLANS. The Company shall have provided Parent
with evidence, reasonably satisfactory to Parent, as to the termination of the
benefit plans referred to in Section 5.13.
6.9 FIRPTA COMPLIANCE. The Company shall have filed with the Internal
Revenue Service the notification referred to in Section 5.11(b).
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6.10 EFFECTIVENESS OF REGISTRATION STATEMENT. The S-4 Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order shall have been issued by the SEC with respect
to the S-4 Registration Statement.
6.11 LISTING. The shares of Parent Common Stock to be issued in the Merger
shall have been approved for listing (subject to notice of issuance) on the
Nasdaq National Market.
6.12 NO RESTRAINTS. No temporary restraining order, preliminary or
permanent injunction or other order preventing the consummation of the Merger
shall have been issued by any court of competent jurisdiction and remain in
effect, and there shall not be any Legal Requirement enacted or deemed
applicable to the Merger that makes consummation of the Merger illegal.
6.13 NO LEGAL PROCEEDINGS. No Person shall have commenced or threatened to
commence any Legal Proceeding (a) challenging or seeking to restrain or prohibit
the consummation of the Merger; (b) relating to the Merger and seeking to obtain
from Parent or any of its subsidiaries any damages that may be material to
Parent; (c) seeking to prohibit or limit in any material respect Parent's
ability to vote, receive dividends with respect to or otherwise exercise
ownership rights with respect to the stock of the Surviving Corporation; or (d)
which would affect adversely the right of Parent, the Surviving Corporation or
any subsidiary of Parent to own the assets or operate the business of the
Company.
6.14 EMPLOYMENT AGREEMENTS. Each of (i) Lowell Burnett, Andrew Hibbs and
Dale Sheets shall have entered into an employment agreement with Parent
substantially in the form of Parent's standard form of employment agreement
providing such Person with a salary equal to such Person's current salary with
the Company and providing such Person with severance benefits equal to six
months' salary, and (ii) Mike Law, Peter Czipott, Tim Raynor, Simon Beevor, Mike
Urbach and Victor Burns shall have entered into an employment agreement with
Parent substantially in the form of Parent's standard form of employment
agreement providing such Person with a salary equal to such Person's current
salary with the Company and providing such Person with severance benefits equal
to three months' salary.
SECTION 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY
The obligations of the Company to effect the Merger and otherwise
consummate the transactions contemplated by this Agreement are subject to the
satisfaction, at or prior to the Closing, of the following conditions:
7.1 ACCURACY OF REPRESENTATIONS. Each of the representations and
warranties made by Parent and Merger Sub in this Agreement shall have been
accurate in all material respects as of the date of this Agreement (without
giving effect to any materiality or similar qualifications contained in such
representations and warranties), and shall be accurate in all material respects
as of the Scheduled Closing Time as if made at the Scheduled Closing Time
(without giving effect to any materiality or similar qualifications contained in
such representations and warranties).
7.2 PERFORMANCE OF COVENANTS. All of the covenants and obligations that
Parent and Merger Sub are required to comply with or to perform at or prior to
the Closing shall have been complied with and performed in all respects.
7.3 DOCUMENTS. The Company shall have received the following documents:
(a) a legal opinion of Cooley Godward LLP, dated as of the Closing
Date, substantially to the effect of Exhibit K; and
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(b) a legal opinion of Branton, Wilson & Muns (or, if Branton, Wilson
& Muns for any reason does not render such legal opinion, a legal opinion
of Cooley Godward LLP), dated as of the Closing Date, to the effect that
the Merger will constitute a reorganization within the meaning of Section
368 of the Code (it being understood that, in rendering such opinion, such
counsel may rely upon the tax representation letters referred to in Section
5.8(a) and the Continuity of Interest Certificates referred to in Section
6.5(g)).
7.4 LISTING. The shares of Parent Common Stock to be issued in the Merger
shall have been approved for listing (subject to notice of issuance) on the
Nasdaq National Market.
7.5 NO RESTRAINTS. No temporary restraining order, preliminary or
permanent injunction or other order preventing the consummation of the Merger
shall have been issued by any court of competent jurisdiction and remain in
effect, and there shall not be any Legal Requirement enacted or deemed
applicable to the Merger that makes consummation of the Merger illegal.
7.6 EMPLOYMENT AGREEMENTS. Parent shall have executed and delivered to
each of (i) Lowell Burnett, Andrew Hibbs and Dale Sheets an employment agreement
with Parent substantially in the form of Parent's standard form of employment
agreement providing such Person with a salary equal to such Person's current
salary with the Company and providing such Person with severance benefits equal
to six months' salary, and (ii) Mike Law, Peter Czipott, Tim Raynor, Simon
Beevor, Mike Urbach and Victor Burns an employment agreement with Parent
substantially in the form of Parent's standard form of employment agreement
providing such Person with a salary equal to such Person's current salary with
the Company and providing such Person with severance benefits equal to three
months' salary.
SECTION 8. TERMINATION
8.1 TERMINATION EVENTS. This Agreement may be terminated prior to the
Closing:
(a) by Parent if Parent reasonably determines that the timely
satisfaction of any condition set forth in Section 6 has become impossible
(other than as a result of any failure on the part of Parent or Merger Sub
to comply with or perform any covenant or obligation of Parent or Merger
Sub set forth in this Agreement);
(b) by the Company if the Company reasonably determines that the
timely satisfaction of any condition set forth in Section 7 has become
impossible (other than as a result of any failure on the part of the
Company to comply with or perform any covenant or obligation set forth in
this Agreement or in any other agreement or instrument delivered to
Parent);
(c) by Parent at or after the Scheduled Closing Time if any condition
set forth in Section 6 has not been satisfied by the Scheduled Closing
Time;
(d) by the Company at or after the Scheduled Closing Time if any
condition set forth in Section 7 has not been satisfied by the Scheduled
Closing Time;
(e) by Parent if the Closing has not taken place on or before
December 15, 1997 (other than as a result of any failure on the part of
Parent to comply with or perform any covenant or obligation of Parent set
forth in this Agreement);
(f) by the Company if the Closing has not taken place on or before
December 15, 1997 (other than as a result of the failure on the part of the
Company to comply with or perform any covenant or obligation set forth in
this Agreement or in any other agreement or instrument delivered to
Parent);
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(g) by Parent if Parent shall have determined that there has occurred
an event or series of events resulting, either individually or in the
aggregate, in a Material Adverse Effect on the Company since the date of
this Agreement; or
(h) by the mutual consent of Parent and the Company.
8.2 TERMINATION PROCEDURES. If Parent wishes to terminate this Agreement
pursuant to Section 8.1(a), Section 8.1(c), Section 8.1(e) or Section 8.1(g),
Parent shall deliver to the Company a written notice stating that Parent is
terminating this Agreement and setting forth a brief description of the basis on
which Parent is terminating this Agreement. If the Company wishes to terminate
this Agreement pursuant to Section 8.1(b), Section 8.1(d) or Section 8.1(f), the
Company shall deliver to Parent a written notice stating that the Company is
terminating this Agreement and setting forth a brief description of the basis on
which the Company is terminating this Agreement.
8.3 EFFECT OF TERMINATION. If this Agreement is terminated pursuant to
Section 8.1, all further obligations of the parties under this Agreement shall
terminate; PROVIDED, HOWEVER, that:(a) neither the Company nor Parent shall be
relieved of any obligation or liability arising from any prior breach by such
party of any provision of this Agreement;(b) the parties shall, in all events,
remain bound by and continue to be subject to the provisions set forth in
Section 10; and (c)the Company shall, in all events, remain bound by and
continue to be subject to Section 5.4.
SECTION 9. INDEMNIFICATION, ETC.
9.1 SURVIVAL OF REPRESENTATIONS, ETC.
(a) The representations and warranties made by the Company (including
the representations and warranties set forth in Section 2 and the
representations and warranties set forth in the Closing Certificate) shall
survive the Closing and shall expire on the first anniversary of the Closing
Date; PROVIDED, HOWEVER, that if, at any time prior to the first anniversary of
the Closing Date, any Indemnitee (acting in good faith) delivers to the Agent
(as defined in Section 10.1) a written notice alleging the existence of an
inaccuracy in or a breach of any of the representations and warranties made by
the Company (and setting forth in reasonable detail the basis for such
Indemnitee's belief that such an inaccuracy or breach may exist) and asserting a
claim for recovery under Section 9.2 based on such alleged inaccuracy or breach,
then the claim asserted in such notice shall survive the first anniversary of
the Closing until such time as such claim is fully and finally resolved. All
representations and warranties made by Parent and Merger Sub shall terminate and
expire as of the Effective Time, and any liability of Parent or Merger Sub with
respect to such representations and warranties shall thereupon cease.
(b) The representations, warranties, covenants and obligations of the
Company, and the rights and remedies that may be exercised by the Indemnitees,
shall not be limited or otherwise affected by or as a result of any information
furnished to, or any investigation made by or knowledge of, any of the
Indemnitees or any of their Representatives.
(c) For purposes of this Agreement, each statement or other item of
information set forth in the Disclosure Schedule or in any update to the
Disclosure Schedule shall be deemed to be a representation and warranty made by
the Company in this Agreement.
9.2 INDEMNIFICATION.
(a) From and after the Effective Time (but subject to Section
9.1(a)), each of the Indemnitees shall be held harmless and indemnified from and
against, and shall be compensated and reimbursed for, any Damages which are
directly or indirectly suffered or incurred by any of the Indemnitees or to
which any of the
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Indemnitees may otherwise become subject (regardless of whether or not such
Damages relate to any third-party claim) and which arise from or as a result
of, or are directly or indirectly connected with:
(i) any inaccuracy in or breach of any representation or
warranty of the Company set forth in this Agreement or in the Closing
Certificate (without giving effect to any "Material Adverse Effect" or
other materiality qualification or any similar qualification contained or
incorporated directly or indirectly in such representation or warranty);
(ii) any inaccuracy of any representation, warranty, statement,
information or other provision contained in the Disclosure Schedule or in
any other document delivered or otherwise made available to Parent or any
of its Representatives by or on behalf of the Company or any of the
Company's Representatives;
(iii) any breach of any covenant or obligation of the Company
(including the covenants set forth in Sections 4 and 5);
(iv) any litigation, arbitration, controversy, dispute or
disagreement involving the Company and any of EG&G Astrophysics, Rapiscan
Security Products, Inc., Heimann Systems GmbH or any other person
identified in Part 2.21 of the Disclosure Schedule or any of their
respective affiliates (collectively, the "Disputes"); or
(v) any Legal Proceeding relating to any inaccuracy or breach or
other matter of the type referred to in clause "(i)", "(ii)", "(iii)", or
"(iv)" above (including any Legal Proceeding commenced by any Indemnitee
for the purpose of enforcing any of its rights under this Section 9).
(b) If the Surviving Corporation suffers, incurs or otherwise becomes
subject to any Damages as a result of or in connection with any inaccuracy in or
breach of any representation, warranty, covenant or obligation or any of the
Disputes, then (without limiting any of the rights of the Surviving Corporation
as an Indemnitee) Parent shall also be deemed, by virtue of its ownership of the
stock of the Surviving Corporation, to have incurred Damages as a result of and
in connection with such inaccuracy or breach or Dispute.
9.3 THRESHOLD. There shall be no indemnification payment pursuant to
Section 9.2(a) for any inaccuracy in or breach of any of their representations
and warranties set forth in Section 2 until such time as the total amount of all
Damages (including the Damages arising from such inaccuracy or breach and all
other Damages arising from any other inaccuracies in or breaches of any
representations or warranties) that have been directly or indirectly suffered or
incurred by any one or more of the Indemnitees, or to which any one or more of
the Indemnitees has or have otherwise become subject, exceeds $100,000 in the
aggregate. If the total amount of such Damages exceeds $100,000, then the
Indemnitees shall be entitled to be indemnified against and compensated and
reimbursed for all Damages, including such $100,000. Notwithstanding anything
to the contrary set forth in this Section 9.3, the $100,000 minimum threshold
shall not apply to Damages arising under the Disputes.
9.4 SATISFACTION OF INDEMNIFICATION CLAIM.
(a) The escrow under the Escrow Agreement shall serve as security for
the obligations owed the Indemnitees under this Section 9. Any liability (for
indemnification or otherwise) to any Indemnitee under this Section 9 may be
satisfied by the delivery to such Indemnitee, from the shares escrowed pursuant
to the Escrow Agreement, of the number of shares of Parent Common Stock
determined by dividing (i) the aggregate dollar amount of such liability BY (ii)
the Designated Parent Stock Price (as defined in Section 1.5(c)(viii) and as
adjusted as appropriate to reflect any stock split, reverse stock split, stock
dividend, recapitalization or other similar transaction effected by Parent
between the Effective Time and the date such liability is satisfied).
(b) Except with respect to claims based on knowing and intentional
misrepresentations of representations and warranties, Parent and Merger Sub
agree that, after the Closing, the sole recourse of the
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Indemnitees with respect to a breach by the Company of its representations or
warranties made in this Agreement or in the Disclosure Schedule or the other
indemnification rights set forth in this Section 9 shall be against the
shares held in escrow under the Escrow Agreement.
9.5 NO CONTRIBUTION. No Person shall have any right of contribution,
right of indemnity or other right or remedy against the Surviving Corporation in
connection with any indemnification obligation or any other liability under or
in connection with this Agreement or the Closing Certificate.
9.6 INTEREST. Any Indemnitee entitled to recover Damages pursuant to this
Section 9 shall also be entitled to interest on the amount of such Damages (for
the period commencing as of the date on which the Agent (as defined in Section
10.1) first received notice of a claim for recovery by such Indemnitee and
ending on the date on which the liability to such Indemnitee is fully satisfied)
at a floating rate equal to the rate of interest publicly announced by Bank of
America, N.T. & S.A. from time to time as its prime, base or reference rate.
9.7 DEFENSE OF THIRD PARTY CLAIMS. In the event of the assertion or
commencement by any Person of any claim or Legal Proceeding (whether against the
Surviving Corporation, against Parent or against any other Person) with respect
to which there may be any obligation to hold harmless, indemnify, compensate or
reimburse any Indemnitee pursuant to this Section 9, Parent shall have the
right, at its election, to proceed with such claim or Legal Proceeding on its
own. If Parent so proceeds with any such claim or Legal Proceeding:
(a) all reasonable expenses relating to such claim or Legal
Proceeding shall be deemed Damages, subject to recovery by the Indemnitee
under Section 9.2; and
(b) Parent shall have the right to settle, adjust or compromise such
claim or Legal Proceeding with the consent of the Agent (as defined in
Section 10.1); PROVIDED, HOWEVER, that such consent shall not be
unreasonably withheld.
Parent shall give the Agent (as defined in Section 10.1) prompt notice of the
commencement of any such Legal Proceeding against Parent or the Surviving
Corporation; PROVIDED, HOWEVER, that any failure on the part of Parent to so
notify the Agent shall not limit any of the rights of any Indemnitees under this
Section 9 (except to the extent such failure materially prejudices the defense
of such Legal Proceeding).
9.8 EXERCISE OF REMEDIES BY INDEMNITEES OTHER THAN PARENT. No Indemnitee
(other than Parent or any successor thereto or assign thereof) shall be
permitted to assert any indemnification claim or exercise any other remedy under
this Agreement unless Parent (or any successor thereto or assign thereof) shall
have consented to the assertion of such indemnification claim or the exercise of
such other remedy.
SECTION 10. MISCELLANEOUS PROVISIONS
10.1 AGENT. The Company hereby irrevocably appoints Randall R. Lunn as
its and its shareholders' agent for purposes of Section 9 (the "Agent").
Parent shall be entitled to deal exclusively with the Agent on all matters
relating to Section 9, and shall be entitled to rely conclusively (without
further evidence of any kind whatsoever) on any document executed or
purported to be executed on behalf of the Company or its shareholders by the
Agent, and on any other action taken or purported to be taken on behalf of
the Company or its shareholders by the Agent, as fully binding upon the
shareholders of the Company. If the Agent shall die, become disabled or
otherwise be unable to fulfill his responsibilities as agent of the
shareholders of the Company, then the shareholders of the Company shall,
within ten days after such death or disability, appoint a successor agent
and, promptly thereafter, shall notify Parent of the identity of such
successor. Any such successor shall become the "Agent" for purposes of
Section 9 and this Section 10.1. If for any reason there is no Agent at any
time, all references herein to the Agent shall be deemed to refer to the
shareholders of the Company.
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10.2 FURTHER ASSURANCES. Each party hereto shall execute and cause to be
delivered to each other party hereto such instruments and other documents, and
shall take such other actions, as such other party may reasonably request (prior
to, at or after the Closing) for the purpose of carrying out or evidencing any
of the transactions contemplated by this Agreement.
10.3 FEES AND EXPENSES. Each party to this Agreement shall bear and pay
all fees, costs and expenses (including legal fees and accounting fees) that
have been incurred or that are incurred by such party in connection with the
transactions contemplated by this Agreement, including all fees, costs and
expenses incurred by such party in connection with or by virtue of (a) the
investigation and review conducted by Parent and its Representatives with
respect to the Company's business (and the furnishing of information to Parent
and its Representatives in connection with such investigation and review), (b)
the negotiation, preparation and review of this Agreement (including the
Disclosure Schedule) and all agreements, certificates, opinions and other
instruments and documents delivered or to be delivered in connection with the
transactions contemplated by this Agreement, (c) the preparation and submission
of any filing or notice required to be made or given in connection with any of
the transactions contemplated by this Agreement, and the obtaining of any
Consent required to be obtained in connection with any of such transactions, and
(d) the consummation of the Merger.
10.4 ATTORNEYS' FEES. If any action or proceeding relating to this
Agreement or the enforcement of any provision of this Agreement is brought
against any party hereto, the prevailing party shall be entitled to recover
reasonable attorneys' fees, costs and disbursements (in addition to any other
relief to which the prevailing party may be entitled).
10.5 NOTICES. Any notice or other communication required or permitted to
be delivered to any party under this Agreement shall be in writing and shall be
deemed properly delivered, given and received when delivered (by hand, by
registered mail, by courier or express delivery service or by facsimile) to the
address or facsimile telephone number set forth beneath the name of such party
below (or to such other address or facsimile telephone number as such party
shall have specified in a written notice given to the other parties hereto):
IF TO PARENT:
InVision Technologies, Inc.
3420 E. Third Avenue
Foster City, CA 94404
Attention: Chief Financial Officer
Facsimile: (415) 578-0930
with a copy to:
Robert L. Jones, Esq.
Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306-2155
Facsimile: (415) 857-0663
IF TO THE COMPANY:
Quantum Magnetics, Inc.
7740 Kenamar Court
San Diego, CA 92121-2425
Attention: President
Facsimile: (619) 566-9388
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<PAGE>
with a copy to:
Edward C. Muns, Esq.
Branton, Wilson & Muns
701 B Street, Suite 1255
San Diego, CA 92101
Facsimile: (619) 236-8175
IF TO AGENT:
Randall R. Lunn
Techno Venture Management
101 Arch Street
Suite 1950
Boston, MA 02110
Facsimile: (617) 345-9377
10.6 TIME OF THE ESSENCE. Time is of the essence of this Agreement.
10.7 HEADINGS. The underlined headings contained in this Agreement are for
convenience of reference only, shall not be deemed to be a part of this
Agreement and shall not be referred to in connection with the construction or
interpretation of this Agreement.
10.8 COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall constitute an original and all of which, when taken
together, shall constitute one agreement.
10.9 GOVERNING LAW. This Agreement shall be construed in accordance with,
and governed in all respects by, the internal laws of the State of California
(without giving effect to principles of conflicts of laws).
10.10 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon:
the Company and its successors and assigns (if any); Parent and its successors
and assigns (if any); and Merger Sub and its successors and assigns (if any).
This Agreement shall inure to the benefit of: the Company; the Company's
shareholders (to the extent set forth in Section 1.5); the holders of assumed
Company Options (to the extent set forth in Section 1.6); Parent; Merger Sub;
the other Indemnitees (subject to Section 9.8); and the respective successors
and assigns (if any) of the foregoing. Parent may freely assign any or all of
its rights under this Agreement (including its indemnification rights under
Section 9), in whole or in part, to any other Person without obtaining the
consent or approval of any other party hereto or of any other Person.
10.11 REMEDIES CUMULATIVE; SPECIFIC PERFORMANCE. The rights and
remedies of the parties hereto shall be cumulative (and not alternative). The
parties to this Agreement agree that, in the event of any breach or threatened
breach by any party to this Agreement of any covenant, obligation or other
provision set forth in this Agreement for the benefit of any other party to this
Agreement, such other party shall be entitled (in addition to any other remedy
that may be available to it) to (a) a decree or order of specific performance or
mandamus to enforce the observance and performance of such covenant, obligation
or other provision, and (b) an injunction restraining such breach or threatened
breach.
10.12 WAIVER.
(a) No failure on the part of any Person to exercise any power,
right, privilege or remedy under this Agreement, and no delay on the part of any
Person in exercising any power, right, privilege or remedy under this Agreement,
shall operate as a waiver of such power, right, privilege or remedy; and no
single or partial exercise of any such power, right, privilege or remedy shall
preclude any other or further exercise thereof or of any other power, right,
privilege or remedy.
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(b) No Person shall be deemed to have waived any claim arising out of
this Agreement, or any power, right, privilege or remedy under this Agreement,
unless the waiver of such claim, power, right, privilege or remedy is expressly
set forth in a written instrument duly executed and delivered on behalf of such
Person; and any such waiver shall not be applicable or have any effect except in
the specific instance in which it is given.
10.13 AMENDMENTS. This Agreement may not be amended, modified, altered
or supplemented other than by means of a written instrument duly executed and
delivered on behalf of all of the parties hereto.
10.14 SEVERABILITY. In the event that any provision of this Agreement,
or the application of any such provision to any Person or set of circumstances,
shall be determined to be invalid, unlawful, void or unenforceable to any
extent, the remainder of this Agreement, and the application of such provision
to Persons or circumstances other than those as to which it is determined to be
invalid, unlawful, void or unenforceable, shall not be impaired or otherwise
affected and shall continue to be valid and enforceable to the fullest extent
permitted by law.
10.15 PARTIES IN INTEREST. Except for the provisions of Sections 1.5,
1.6 and 9, none of the provisions of this Agreement is intended to provide any
rights or remedies to any Person other than the parties hereto and their
respective successors and assigns (if any).
10.16 ENTIRE AGREEMENT. This Agreement and the other agreements
referred to herein set forth the entire understanding of the parties hereto
relating to the subject matter hereof and thereof and supersede all prior
agreements and understandings among or between any of the parties relating to
the subject matter hereof and thereof; PROVIDED, HOWEVER, that the
Confidentiality Agreement executed on behalf of Parent on and the Company on
June 4, 1997 shall not be superseded by this Agreement and shall remain in
effect in accordance with its terms until the earlier of (a) the Effective Time,
or (b) the date on which such Confidentiality Agreement is terminated in
accordance with its terms.
10.17 CONSTRUCTION.
(a) For purposes of this Agreement, whenever the context requires:
the singular number shall include the plural, and vice versa; the masculine
gender shall include the feminine and neuter genders; the feminine gender shall
include the masculine and neuter genders; and the neuter gender shall include
the masculine and feminine genders.
(b) The parties hereto agree that any rule of construction to the
effect that ambiguities are to be resolved against the drafting party shall not
be applied in the construction or interpretation of this Agreement.
(c) As used in this Agreement, the words "include" and "including,"
and variations thereof, shall not be deemed to be terms of limitation, but
rather shall be deemed to be followed by the words "without limitation."
(d) Except as otherwise indicated, all references in this Agreement
to "Sections" and "Exhibits" are intended to refer to Sections of this Agreement
and Exhibits to this Agreement.
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<PAGE>
The parties hereto have caused this Agreement to be executed and delivered
as of September 3, 1997.
INVISION TECHNOLOGIES, INC.,
a Delaware corporation
By: /Sergio Magistri
-------------------------------------
Sergio Magistri
Chief Executive Officer and President
QP ACQUISITION CORP.,
a California corporation
By: /s/ Sergio Magistri
-------------------------------------
Sergio Magistri
President
QUANTUM MAGNETICS, INC.,
a California corporation
By: /s/ Dale Sheets
-------------------------------------
Dale Sheets
President
<PAGE>
EXHIBIT A
CERTAIN DEFINITIONS
For purposes of the Agreement (including this Exhibit A):
ACQUISITION TRANSACTION. "Acquisition Transaction" shall mean any
transaction involving:
(a) the sale, license, disposition or acquisition of all or a
material portion of the Company's business or assets;
(b) the issuance, disposition or acquisition of (i) any capital stock
or other equity security of the Company (other than common stock issued to
employees of the Company, upon exercise of Company Options or otherwise, in
routine transactions in accordance with the Company's past practices), (ii)
any option, call, warrant or right (whether or not immediately exercisable)
to acquire any capital stock or other equity security of the Company (other
than stock options granted to employees of the Company in routine
transactions in accordance with the Company's past practices), or (iii) any
security, instrument or obligation that is or may become convertible into
or exchangeable for any capital stock or other equity security of the
Company; or
(c) any merger, consolidation, business combination, reorganization
or similar transaction involving the Company.
AGREEMENT. "Agreement" shall mean the Agreement and Plan of Merger and
Reorganization to which this Exhibit A is attached (including the Disclosure
Schedule), as it may be amended from time to time.
COMPANY. "Company" shall mean Quantum Magnetics, Inc., a California
corporation.
COMPANY CONTRACT. "Company Contract" shall mean any Contract: (a) to
which the Company is a party; (b) by which the Company or any of its assets is
or may become bound or under which the Company has, or may become subject to,
any obligation; or (c) under which the Company has or may acquire any right or
interest.
COMPANY SHAREHOLDERS MEETING. "Company Shareholders Meeting" shall mean a
meeting of the holders of the capital stock of the Company to be held to
consider, act upon and vote upon the approval of the Agreement and the Merger.
COMPANY PROPRIETARY ASSET. "Company Proprietary Asset" shall mean any
Proprietary Asset owned by or licensed to the Company or otherwise used by the
Company.
CONSENT. "Consent" shall mean any approval, consent, ratification,
permission, waiver or authorization (including any Governmental Authorization).
CONTRACT. "Contract" shall mean any written, oral or other agreement,
contract, subcontract, lease, understanding, instrument, note, warranty,
insurance policy, benefit plan or legally binding commitment or undertaking of
any nature.
DAMAGES. "Damages" shall include any loss, damage, injury, decline in
value, lost opportunity, liability, claim, demand, settlement, judgment, award,
fine, penalty, Tax, fee (including reasonable attorneys' fees), charge, cost
(including costs of investigation) or expense of any nature.
DISCLOSURE SCHEDULE. "Disclosure Schedule" shall mean the schedule (dated
as of the date of the Agreement) delivered to Parent on behalf of the Company.
ENCUMBRANCE. "Encumbrance" shall mean any lien, pledge, hypothecation,
charge, mortgage, security interest, encumbrance, claim, infringement,
interference, option, right of first refusal, preemptive right, community
property interest
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or restriction of any nature (including any restriction on the voting of any
security, any restriction on the transfer of any security or other asset, any
restriction on the receipt of any income derived from any asset, any
restriction on the use of any asset and any restriction on the possession,
exercise or transfer of any other attribute of ownership of any asset).
ENTITY. "Entity" shall mean any corporation (including any non-profit
corporation), general partnership, limited partnership, limited liability
partnership, joint venture, estate, trust, company (including any limited
liability company or joint stock company), firm or other enterprise,
association, organization or entity.
ESCROW AGREEMENT. "Escrow Agreement" shall mean an escrow agreement in the
form attached hereto as Exhibit L.
EXCHANGE ACT. "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
GOVERNMENT BID. "Government Bid" shall mean any quotation, bid or
proposal submitted to any Governmental Body or any proposed prime contractor or
higher-tier subcontractor of any Governmental Body.
GOVERNMENT CONTRACT. "Government Contract" shall mean any prime
contract, Subcontract, letter contract, purchase order or delivery order
executed or submitted to or on behalf of any Governmental Body or any prime
contractor or higher-tier subcontractor, or under which any Governmental Body
or any such prime contractor or subcontractor otherwise has or may acquire
any right or interest. Government Contract includes a cooperative agreement,
grant, and other "transaction."
GOVERNMENTAL AUTHORIZATION. "Governmental Authorization" shall mean any:
(a) permit, license, certificate, franchise, permission, clearance,
registration, qualification or authorization issued, granted, given or
otherwise made available by or under the authority of any Governmental Body
or pursuant to any Legal Requirement; or (b) right under any Contract with
any Governmental Body.
GOVERNMENTAL BODY. "Governmental Body" shall mean any: (a) nation, state,
commonwealth, province, territory, county, municipality, district or other
jurisdiction of any nature; (b) federal, state, local, municipal, foreign or
other government; or (c) governmental or quasi-governmental authority of any
nature (including any governmental division, department, agency, commission,
instrumentality, official, organization, unit, body or Entity and any court or
other tribunal).
INDEMNITEES. "Indemnitees" shall mean the following Persons: (a) Parent;
(b) Parent's current and future affiliates (including the Surviving
Corporation); (c) the respective Representatives of the Persons referred to in
clauses "(a)" and "(b)" above; and (d) the respective successors and assigns of
the Persons referred to in clauses "(a)", "(b)" and "(c)" above; PROVIDED,
HOWEVER, that the shareholders of the Company (other than Parent) shall not be
deemed to be "Indemnitees."
LEGAL PROCEEDING. "Legal Proceeding" shall mean any action, suit,
litigation, arbitration, proceeding (including any civil, criminal,
administrative, investigative or appellate proceeding), hearing, inquiry, audit,
examination or investigation commenced, brought, conducted or heard by or
before, or otherwise involving, any court or other Governmental Body or any
arbitrator or arbitration panel.
LEGAL REQUIREMENT. "Legal Requirement" shall mean any federal, state,
local, municipal, foreign or other law, statute, constitution, principle of
common law, resolution, ordinance, code, edict, decree, rule, regulation, ruling
or requirement issued, enacted, adopted, promulgated, implemented or otherwise
put into effect by or under the authority of any Governmental Body.
MATERIAL ADVERSE EFFECT. A violation or other matter will be deemed to
have a "Material Adverse Effect" on the Company if such violation or other
matter (considered together with all other matters that would constitute
exceptions to the representations and warranties set forth in the Agreement or
in the Closing Certificate but for the presence of "Material Adverse Effect" or
other materiality qualifications, or any similar qualifications, in such
representations and warranties) would have a material adverse effect on the
Company's business, condition, assets, liabilities, operations, financial
performance or prospects.
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PERSON. "Person" shall mean any individual, Entity or Governmental Body.
PRE-CLOSING PERIOD. "Pre-Closing Period" means the period beginning on the
date of the Agreement through and including the Effective Time.
PROPRIETARY ASSET. "Proprietary Asset" shall mean any: (a) patent, patent
application, trademark (whether registered or unregistered), trademark
application, trade name, fictitious business name, service mark (whether
registered or unregistered), service mark application, copyright (whether
registered or unregistered), copyright application, maskwork, maskwork
application, trade secret, know-how, customer list, franchise, system, computer
software, computer program, invention, design, blueprint, engineering drawing,
proprietary product, technology, proprietary right or other intellectual
property right or intangible asset; or (b) right to use or exploit any of the
foregoing.
REPRESENTATIVES. "Representatives" shall mean officers, directors,
employees, agents, attorneys, accountants, advisors and representatives.
SEC. "SEC" shall mean the United States Securities and Exchange
Commission.
SECURITIES ACT. "Securities Act" shall mean the Securities Act of 1933, as
amended.
SUBCONTRACT. "Subcontract" shall mean any subcontract, basic ordering
agreement, letter subcontract, purchase order, delivery order, change,
arrangement or other commitment of any kind, between the Company and any prime
contractor to either the U.S. Government or a State Government or any
subcontractor with respect to a Government Prime Contract.
TAX. "Tax" shall mean any tax (including any income tax, franchise tax,
capital gains tax, gross receipts tax, value-added tax, surtax, excise tax, ad
valorem tax, transfer tax, stamp tax, sales tax, use tax, property tax, business
tax, withholding tax or payroll tax), levy, assessment, tariff, duty (including
any customs duty), deficiency or fee, and any related charge or amount
(including any fine, penalty or interest), imposed, assessed or collected by or
under the authority of any Governmental Body.
TAX RETURN. "Tax Return" shall mean any return (including any information
return), report, statement, declaration, estimate, schedule, notice,
notification, form, election, certificate or other document or information filed
with or submitted to, or required to be filed with or submitted to, any
Governmental Body in connection with the determination, assessment, collection
or payment of any Tax or in connection with the administration, implementation
or enforcement of or compliance with any Legal Requirement relating to any Tax.
U.S. GOVERNMENT. "U.S. Government" shall mean the United States Government
or any department, agency or instrumentality thereof.
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EXHIBIT B
FORM OF AMENDED AND RESTATED
ARTICLES OF INCORPORATION OF SURVIVING CORPORATION
I.
The name of this corporation is QUANTUM MAGNETICS, INC.
II.
The purpose of this corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
III.
The corporation is authorized to issue only one class of stock, to be
designated Common Stock. The total number of shares of Common Stock presently
authorized is one thousand (1,000), par value one-tenth of one cent ($0.001).
IV.
(a) The liability of the directors of this corporation for monetary
damages shall be eliminated to the fullest extent permissible under California
law.
(b) This corporation is authorized to provide indemnification of agents
(as defined in Section 317 of the California Corporations Code) for breach of
duty to the corporation and its shareholders through bylaw provisions or through
agreements with the agents, or through shareholder resolutions, or otherwise, in
excess of the indemnification otherwise permitted by Section 317 of the
Corporations Code, subject to the limits on such excess indemnification set
forth in Section 204 of the Corporations Code.
(c) Any repeal or modification of this Article shall only be prospective
and shall not affect the rights under this Article in effect at the time of the
alleged occurrence of any act or omission to act giving rise to liability or
indemnification.
AB-1.
<PAGE>
EXHIBIT L
ESCROW AGREEMENT
THIS ESCROW AGREEMENT is entered into as of September __, 1997 (the
"Closing Date"), by and among: INVISION TECHNOLOGIES, INC., a Delaware
corporation ("Parent"); QUANTUM MAGNETICS, INC., a California corporation (the
"Company"); RANDALL R. LUNN, as agent of the former shareholders of the Company
(the "Agent"); and _____________ (the "Escrow Agent").
RECITALS
A. Parent, the Company and QP ACQUISITION CORP., a California corporation
and a wholly owned subsidiary of Parent ("Merger Sub"), have entered into an
Agreement and Plan of Reorganization dated as of September 3, 1997 (the
"Reorganization Agreement"), pursuant to which Merger Sub is merging with and
into the Company in a transaction in which issued and outstanding capital stock
of the Company will be exchanged for shares of Common Stock, $.001 par value, of
Parent ("Parent Common Stock").
B. The Reorganization Agreement contemplates the establishment of an
escrow arrangement to secure the indemnification and other obligations of the
Company under the Reorganization Agreement and various related agreements.
AGREEMENT
The parties to this Escrow Agreement, intending to be legally bound, agree
as follows:
SECTION 1. DEFINED TERMS
Capitalized terms used and not otherwise defined in this Escrow Agreement
shall have the meanings assigned to them in the Reorganization Agreement.
SECTION 2. CONSENT OF THE SHAREHOLDERS OF THE COMPANY
By virtue of the approval by the shareholders of the Company of the
Reorganization Agreement, the shareholders of the Company receiving shares of
Parent Common Stock in the Merger (the "Shareholders") have, without any further
act of any such Shareholder, consented to (i) the establishment of an escrow
(the "Escrow") pursuant to this Agreement to secure the indemnification
obligations of the Company under Section 9 of the Reorganization Agreement, (ii)
the appointment of the Agent as agent for the Shareholders in all respects as
set forth in Section 10.1 of the Reorganization Agreement, (iii) the taking by
the Agent of any and all actions, including the execution by the Agent of any
and all agreements, instruments or other documents, and (iv) all of the other
terms and conditions of this Agreement.
SECTION 3. ESCROW
3.1 SHARES AND STOCK POWERS TO BE PLACED IN ESCROW. Parent shall issue
certificates for the aggregate number of shares of Parent Common Stock issuable
by Parent in the Merger pursuant to clause (B) of each of clause (i), (ii),
(iii) and (iv) of Section 1.5(a) of the Reorganization Agreement (the "Escrow
Shares") in the name of the Escrow Agent evidencing the shares of Parent Common
Stock to be held in escrow in accordance
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with this Escrow Agreement. The Escrow Shares shall be held by the Escrow
Agent in the Escrow in accordance with the provisions of this Escrow
Agreement and shall not be subject to any lien, attachment, trustee process
or any other judicial process of any creditor of any party hereto or the
Shareholders. Parent may from time to time deposit in the Escrow additional
shares of Parent Common Stock pursuant to Sections 1.6 or 1.10 of the
Reorganization Agreement and such shares shall be deemed to have been
deposited in the Escrow at the Effective Time. All such shares shall be
deemed Escrow Shares, and the Persons with rights in respect of such Escrow
Shares shall be deemed Shareholders, for all purposes hereunder.
3.2 INDEMNIFICATION. The Company has agreed in Section 9 of the
Reorganization Agreement that each of the Indemnitees shall be held harmless and
indemnified from and against, and shall be compensated and reimbursed for, any
Damages incurred as set forth in Section 9 of the Reorganization Agreement. The
Company, and the Agent on behalf of the Shareholders, expressly agree that the
Escrow Shares (i) shall be security for such indemnity obligation, subject to
the limitations and in the manner provided for in this Agreement and (ii) are
subject to release to Parent or other Indemnitee upon the terms set forth
herein.
3.3 VOTING OF SHARES. The Shareholders shall be entitled to vote their
respective proportionate amount of Escrow Shares set forth on Exhibit A.
Parent shall give the Agent at least as much notice of meetings of
shareholders as it gives its shareholders generally. The Agent shall
promptly inform each Shareholder of each such meeting and of the matters to
be considered at such meeting. The Agent shall, in accordance with the
instructions received from the Shareholders, direct the Escrow Agent in
writing as to the exercise of voting rights pertaining to the Escrow Shares
as to which such voting instructions have been received, and the Escrow Agent
shall comply with any such written instructions. In the absence of such
instructions, the Escrow Agent shall not vote any of the Escrow Shares. The
Agent shall have no obligation to solicit consents or proxies from the
Shareholders for purposes of any such vote.
3.4 DIVIDENDS, ETC. Any cash, securities or other property distributable
(whether by way of dividend, stock split or otherwise) in respect of or in
exchange for any Escrow Shares shall not be distributed to the Agent or the
Shareholders, but rather shall be deposited by Parent with the Escrow Agent to
be held in the Escrow. At the time any Escrow Shares are required to be
released from the Escrow to any Person pursuant to this Escrow Agreement, any
cash, securities or other property previously distributed in respect of or in
exchange for such Escrow Shares shall be released from the Escrow to such
Person.
3.5 TRANSFERABILITY. The interests of the Agent and the Shareholders in
the Escrow and in the Escrow Shares shall not be assignable or transferable,
other than by operation of law. No transfer of any of such interests by
operation of law shall be recognized or given effect until Parent shall have
received written notice of such transfer.
3.6 FRACTIONAL SHARES. No fractional shares of Parent Common Stock shall
be retained in or released from the Escrow pursuant to this Escrow Agreement.
In connection with any release of Escrow Shares from the Escrow, any Shareholder
who would otherwise be entitled to receive a fraction of a share of Parent
Common Stock (after aggregating all fractional shares of Parent Common Stock
issuable to such shareholder) shall be paid by Parent in cash the dollar amount
(rounded to the nearest whole cent), without interest, determined by multiplying
such fraction by the Designated Parent Stock Price, and such fraction of a share
shall be returned to Parent.
SECTION 4. CLAIM PROCEDURES
4.1 CLAIM NOTICE. If any Indemnitee determines in good faith that there
is or has been a possible breach by the Company of any representation, warranty,
covenant or other provision set forth in the Reorganization Agreement or other
event giving rise to an indemnification obligation under Section 9.2 of the
Reorganization Agreement (collectively, an "Indemnification Event"), and if
Parent shall have consented to such Indemnitee asserting a claim for
indemnification pursuant to Section 9.8 of the Reorganization Agreement and such
Indemnitee wishes to make a claim against the Escrow with respect to such
possible Indemnification Event, then such
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Indemnitee may deliver to each of the Agent and the Escrow Agent a written
notice of such possible Indemnification Event (a "Claim Notice") setting
forth (i) a brief description of the circumstances supporting such
Indemnitee's belief that such possible Indemnification Event exists or has
occurred, and (ii) a non-binding, preliminary estimate of the aggregate
dollar amount of all Damages that have arisen and may arise as a direct or
indirect result of such possible Indemnification Event (such aggregate amount
being referred to as the "Claim Amount").
4.2 RESPONSE NOTICE. Within 15 days after the delivery of a Claim Notice
to the Agent, the Agent shall deliver to the Escrow Agent (with a copy to
Parent) a written notice (the "Response Notice") containing: (i) instructions
to the effect that Escrow Shares having a Fair Market Value (as defined in
Section 6) equal to the entire Claim Amount set forth in such Claim Notice are
to be released from the Escrow to such Indemnitee; OR (ii) instructions to the
effect that Escrow Shares having a Fair Market Value equal to a specified
portion (but not the entire amount) of the Claim Amount set forth in such Claim
Notice are to be released from the Escrow to such Indemnitee, together with a
statement that the remaining portion of such Claim Amount is being disputed; OR
(iii) a statement that the entire Claim Amount set forth in such Claim Notice is
being disputed. If no Response Notice is received by the Escrow Agent from the
Agent within 30 days after the delivery of a Claim Notice to the Agent, then the
Agent shall be deemed to have given instructions to the Escrow Agent that Escrow
Shares having a Fair Market Value equal to the entire Claim Amount set forth in
such Claim Notice are to be released to such Indemnitee from the Escrow.
4.3 RELEASE OF ESCROW SHARES TO INDEMNITEES.
(a) If the Agent gives (or is deemed to have given) instructions that
Escrow Shares having a Fair Market Value equal to the entire Claim Amount set
forth in a Claim Notice are to be released from the Escrow to an Indemnitee,
then the Escrow Agent shall be authorized to transfer to such Indemnitee, from
the Escrow, Escrow Shares having a Fair Market Value equal to such Claim Amount.
(b) If a Response Notice delivered by the Agent in response to a
Claim Notice contains instructions to the effect that Escrow Shares having a
Fair Market Value equal to a specified portion (but not the entire amount) of
the Claim Amount set forth in such Claim Notice are to be released from the
Escrow to an Indemnitee, then (i) the Escrow Agent shall be authorized to
transfer to such Indemnitee, from the Escrow, Escrow Shares having a Fair Market
Value equal to such specified portion of such Claim Amount, and (ii) the
procedures set forth in Section 4.3(c) shall be followed with respect to the
remaining portion of such Claim Amount.
(c) If a Response Notice delivered by the Agent in response to a
Claim Notice contains a statement that all or a portion of the Claim Amount set
forth in such Claim Notice is being disputed (such Claim Amount or the disputed
portion thereof being referred to as the "Disputed Amount"), then,
notwithstanding anything contained in Section 5, the Escrow Agent shall continue
to hold in the Escrow (in addition to any other Escrow Shares permitted to be
retained in the Escrow, whether in connection with any other dispute or
otherwise), Escrow Shares having a Fair Market Value equal to 125% of the
Disputed Amount. Such Escrow Shares shall continue to be held in the Escrow
until such time as (i) the applicable Indemnitee and the Agent execute a
settlement agreement containing instructions regarding the release of such
shares, or (ii) the Escrow Agent receives a copy of a court order containing
instructions to the Escrow Agent regarding the release of such Escrow Shares.
The Escrow Agent shall thereupon release such Escrow Shares from the Escrow in
accordance with the instructions set forth in such settlement agreement or court
order. (The parties acknowledge that it is appropriate to retain more than 100%
of the Claim Amount in the Escrow in recognition of the fact that the Indemnitee
may have underestimated the aggregate amount of the actual and potential Damages
arising from a particular Indemnification Event, and to cover interest on such
Claim Amount in accordance with Section 9.6 of the Reorganization Agreement.)
(d) Notwithstanding anything to the contrary set forth in this
Section 4, the Escrow Agent shall not release to an Indemnitee, and no
Indemnitee shall be entitled to receive, any Escrow Shares in respect of
indemnification obligations under Section 9 of the Reorganization Agreement for
claims not in respect of or relating to Disputes ("Non-Dispute Indemnification
Claims") if the total number of Escrow Shares previously released to Indemnitees
together with the number of Escrow Shares being released to such Indemnitee
collectively in respect
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of Non-Dispute Indemnification Claims shall exceed 77,700 shares; PROVIDED,
HOWEVER, that the Escrow Agent shall be entitled to release, and an
Indemnitee shall be entitled to receive, up to such number of Escrow Shares
in respect of a Non-Dispute Indemnification Claim as shall not cause such
77,700 share aggregate maximum to be exceeded.
SECTION 5. RELEASE OF SHARES TO SHAREHOLDERS
5.1 SHARES TO BE RELEASED. On the date 12 months after the Closing Date
(the "Scheduled Escrow Termination Date"), the Escrow Agent shall release to the
Shareholders from the Escrow all Escrow Shares then held in the Escrow, other
than any Escrow Shares that are to be retained in the Escrow in accordance with
Section 4.3(c). From and after the Scheduled Escrow Termination Date and upon
the resolution of a dispute (and the release of Escrow Shares to Indemnitees in
respect of such dispute, if any) in accordance with Section 4.3(c), Parent shall
release to the Shareholders any Escrow Shares remaining in the Escrow in respect
of such dispute.
5.2 PROCEDURES FOR RELEASING SHARES.
(a) In the event that the Escrow Agent is to release Escrow Shares to
the Shareholders in accordance with Section 5.1, the Escrow Agent shall be
authorized to transfer to each Shareholder, and shall so transfer and release to
each Shareholder, such number of Escrow Shares, subject to Section 3.6, as shall
equal the total number of Escrow Shares to be so transferred and released
multiplied by the fraction (i) having a numerator equal to the number of shares
of Parent Common Stock set forth opposite such Shareholder's name on Exhibit A
hereto and (ii) having a denominator equal to the total number of Escrow Shares
listed on Exhibit A.
(b) Any release of shares to the Shareholders pursuant to Section 5.1
may be effected by mailing a stock certificate to the Shareholders certified
mail, return receipt requested.
SECTION 6. VALUATION OF SHARES HELD IN ESCROW
For purposes of this Escrow Agreement, the "Fair Market Value" of the
Escrow Shares shall be deemed to be equal to the number of Escrow Shares
multiplied by the Designated Parent Stock Price (adjusted as appropriate to
reflect any stock split, reverse stock split, stock dividend or similar
transaction effected by Parent after the Closing Date).
SECTION 7. FEES AND EXPENSES
7.1 ESCROW AGENT FEES AND EXPENSES. Upon execution of this Escrow
Agreement and initial deposit of the Escrow Shares, an acceptance fee of
$___________ will be payable to the Escrow Agent. This acceptance fee will
cover the first year of the Escrow. Thereafter, an annual administrative fee
will be payable in accordance with the Escrow Agent's fee schedules in effect
from time to time. The Escrow Agent will also be entitled to reimbursement for
extraordinary expenses incurred in performance of its duties hereunder.
7.2 PAYMENT OF ESCROW AGENT. Parent shall pay the fees and expenses of
the Escrow Agent for the services to be rendered by the Escrow Agent hereunder.
Parent shall be entitled to reimbursement of one-half of such fees and expenses
from the Shareholders.
7.3 AGENT'S FEES AND EXPENSES. All reasonable expenses (including
attorneys' fees) incurred by the Agent in connection with the performance of its
duties hereunder shall be reimbursed to the Agent by the Shareholders. Parent
shall not be obligated to reimburse the Agent for any fees charged or expenses
(including attorneys' fees) incurred by the Agent in connection with the Agent's
performance of his duties hereunder. The Agent hereby agrees that he shall not
seek payment or reimbursement of any such fees and expenses, if any, from
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Parent, the Surviving Corporation or the Company, and that the Agent shall
only seek payment or reimbursement of all such fees and expenses from the
Shareholders.
7.4 REIMBURSEMENT PROCEDURES. Upon a notice in writing delivered to the
Escrow Agent by Parent in respect of Section 7.2 or Section 8.2, or by the Agent
in respect of Section 7.3, the Escrow Agent shall transfer, deliver and assign
to the Person delivering the notice, in reimbursement of fees and expenses
pursuant to Section 7.2, Section 7.3 or Section 8.2, such number of Escrow
Shares held in the Escrow Account which have a Fair Market Value equal to the
amount to be reimbursed. Notwithstanding the foregoing, the Agent's right of
reimbursement from the Escrow Shares shall be in all respects subordinate to
rights of Parent in respect of the Escrow Shares. The Escrow Agent shall
transfer shares to the Agent in reimbursement of its expenses only at such time
as Escrow Shares are otherwise distributable pursuant to the terms of this
Agreement to the Shareholders.
SECTION 8. LIMITATION OF ESCROW AGENT'S LIABILITY
8.1 LIMITATION. The Escrow Agent shall incur no liability with respect to
any action taken or suffered by it in reliance upon any notice, direction,
instruction, consent, statement or other documents believed by it to be genuine
and duly authorized, nor for other action or inaction except its own willful
misconduct or negligence. The Escrow Agent shall not be responsible for the
validity or sufficiency of this Agreement. In all questions arising under the
Escrow Agreement, the Escrow Agent may rely on the advice of counsel, and for
anything done, omitted or suffered in good faith by the Escrow Agent based on
such advice the Escrow Agent shall not be liable to anyone. The Escrow Agent
shall not be required to take any action hereunder involving any expense unless
the payment of such expense is made or provided for in a manner reasonably
satisfactory to it.
8.2 INDEMNIFICATION OF ESCROW AGENT. Parent and the Shareholders, jointly
and severally, shall indemnify the Escrow Agent for, and hold it harmless
against, any loss, liability or expense incurred without negligence or willful
misconduct on the part of Escrow Agent, arising out of or in connection with its
carrying out of its duties hereunder. As among themselves, each of (i) Parent
and (ii) the Shareholders shall be liable for one-half (1/2) of such amounts and
Parent shall be entitled to reimbursement from the Escrow Shares of the
Shareholders' share of any such loss, liability or expense.
SECTION 9. SUCCESSOR ESCROW AGENT
In the event the Escrow Agent becomes unavailable or unwilling to continue
in its capacity herewith, the Escrow Agent may resign and be discharged from its
duties or obligations hereunder by giving resignation to the parties to this
Escrow Agreement, specifying not less than 60 days' prior written notice of the
date when such resignation shall take effect. Parent may appoint a successor
Escrow Agent without the consent of the Agent so long as such successor is a
bank with assets of at least $100 million, and may appoint any other successor
Escrow Agent with the consent of the Agent, which consent shall not be
unreasonably withheld. If, within such notice period, Parent provides to the
Escrow Agent written instructions with respect to the appointment of a successor
Escrow Agent and directions for the transfer of any Escrow Shares then held by
the Escrow Agent to such successor, the Escrow Agent shall act in accordance
with such instructions and promptly transfer such Escrow Shares to such
designated successor.
SECTION 10. GENERAL
10.1 ADJUSTMENT OF EXHIBIT A. If and when Parent deposits additional
Escrow Shares with the Escrow Agent, Parent shall revise Exhibit A to reflect
such deposit. In connection therewith, Parent may as appropriate alter the
identity of the Shareholders listed on Exhibit A and the number of Escrow Shares
set forth opposite the appropriate Shareholders' names, including appropriate
adjustments with respect to the incidence of any prior release of shares of
Parent Common Stock to an Indemnitee as permitted in Section 1.6 of the
Reorganization Agreement.
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Parent may deliver any revised Exhibit A in accordance with Section 10.3.
Upon such delivery, any such revised Exhibit A (i) shall be deemed appended
to this Agreement in replacement of the prior Exhibit A and (ii) shall
constitute Exhibit A for all purposes under this Agreement.
10.2 OTHER AGREEMENTS. Nothing in this Escrow Agreement is intended to
limit any of Parent's or any other Indemnitee's rights, or any obligation of the
Company or any Shareholder, under the Reorganization Agreement or under any
other agreement entered into in connection with the transactions contemplated by
the Reorganization Agreement.
10.3 NOTICES. Any notice or other communication required or permitted to
be delivered to any party under this Escrow Agreement shall be in writing and
shall be deemed properly delivered, given and received when delivered (by hand,
by registered mail, by courier or express delivery service or by facsimile) to
the address or facsimile telephone number set forth beneath the name of such
party below (or to such other address or facsimile telephone number as such
party shall have specified in a written notice given to the other parties
hereto):
if to the Escrow Agent:
[Address]
if to Parent:
InVision Technologies, Inc.
3420 E. Third Avenue
Foster City, CA 94404
Attention: Chief Financial Officer
Facsimile: (415) 578-0930
with a copy to:
Robert L. Jones, Esq.
Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306-2155
Facsimile: (415) 857-0663
if to the Agent:
Randall R. Lunn
Techno Venture Management
101 Arch Street
Suite 1950
Boston, MA 02110
Facsimile: (617) 345-9377
10.4 COUNTERPARTS. This Escrow Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
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10.5 HEADINGS. The underlined headings contained in this Escrow Agreement
are for convenience of reference only, shall not be deemed to be a part of this
Escrow Agreement and shall not be referred to in connection with the
construction or interpretation of this Escrow Agreement.
10.6 GOVERNING LAW; VENUE. This Escrow Agreement shall be construed in
accordance with, and governed in all respects by, the internal laws of the State
of California (without giving effect to principles of conflicts of laws). Any
state or federal court in the County of San Mateo in the State of California
shall have exclusive jurisdiction and venue over any dispute arising out of this
Escrow Agreement and the parties hereby consent to the jurisdiction and venue of
such courts.
10.7 SUCCESSORS AND ASSIGNS; PARTIES IN INTEREST.
(a) Subject to Sections 3.5 and 10.7(b), this Escrow Agreement shall
be binding upon: the Company and its successors and assigns (if any); the Agent
and the shareholders of the Company and their respective estates, successors and
assigns (if any); and Parent and its successors and assigns (if any). This
Escrow Agreement shall inure to the benefit of: the Company; the Shareholders;
Parent; the other Indemnitees; and the respective successors (if any) of the
foregoing.
(b) Parent may freely assign any or all of its rights under this
Escrow Agreement, in whole or in part, to any other Person without obtaining the
consent or approval of any other party hereto or of any other Person. None of
the Shareholders, the Agent or the Company shall be permitted to assign any of
his, her or its rights or delegate any of his, her or its obligations under this
Escrow Agreement without Parent's prior written consent.
10.8 WAIVER.
(a) No failure on the part of any Person to exercise any power,
right, privilege or remedy under this Escrow Agreement, and no delay on the part
of any Person in exercising any power, right, privilege or remedy under this
Escrow Agreement, shall operate as a waiver of such power, right, privilege or
remedy; and no single or partial exercise of any such power, right, privilege or
remedy shall preclude any other or further exercise thereof or of any other
power, right, privilege or remedy.
(b) No Person shall be deemed to have waived any claim arising out of
this Escrow Agreement, or any power, right, privilege or remedy under this
Escrow Agreement, unless the waiver of such claim, power, right, privilege or
remedy is expressly set forth in a written instrument duly executed and
delivered on behalf of such Person; and any such waiver shall not be applicable
or have any effect except in the specific instance in which it is given.
10.9 AMENDMENTS. This Escrow Agreement may not be amended, modified,
altered or supplemented other than by means of a written instrument duly
executed and delivered on behalf of Parent, the Agent and the Escrow Agent.
10.10 SEVERABILITY. In the event that any provision of this Escrow
Agreement, or the application of any such provision to any Person or set of
circumstances, shall be determined to be invalid, unlawful, void or
unenforceable to any extent, the remainder of this Escrow Agreement, and the
application of such provision to Persons or circumstances other than those as to
which it is determined to be invalid, unlawful, void or unenforceable, shall not
be impaired or otherwise affected and shall continue to be valid and enforceable
to the fullest extent permitted by law.
10.11 ENTIRE AGREEMENT. This Escrow Agreement and the Reorganization
Agreement and the other agreements contemplated in the Reorganization Agreement
set forth the entire understanding of the parties relating to the subject matter
hereof and thereof and supersede all prior agreements and understandings among
or between any of the parties relating to the subject matter hereof and thereof.
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10.12 CONSTRUCTION.
(a) For purposes of this Escrow Agreement, whenever the context
requires: the singular number shall include the plural, and vice versa; the
masculine gender shall include the feminine and neuter genders; the feminine
gender shall include the masculine and neuter genders; and the neuter gender
shall include the masculine and feminine genders.
(b) The parties hereto agree that any rule of construction to the
effect that ambiguities are to be resolved against the drafting party shall not
be applied in the construction or interpretation of this Escrow Agreement.
(c) As used in this Escrow Agreement, the words "include" and
"including," and variations thereof, shall not be deemed to be terms of
limitation, but rather shall be deemed to be followed by the words "without
limitation."
(d) Except as otherwise indicated, all references in this Escrow
Agreement to "Sections" are intended to refer to Sections of this Escrow
Agreement.
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IN WITNESS WHEREOF, the parties have executed this Escrow Agreement as of
the date first above written.
INVISION TECHNOLOGIES, INC.
a Delaware corporation
By:__________________________________
Name:
Title:
QUANTUM MAGNETICS, INC.
a California corporation
By:___________________________________
Name:
Title:
AGENT:
By:___________________________________
Randall R. Lunn
ESCROW AGENT:
By:___________________________________
Name:
Title:
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EXHIBIT A
SHAREHOLDERS OF THE COMPANY
NUMBER OF
SHAREHOLDER ESCROW SHARES
<PAGE>
APPENDIX B
Article III.F.1 to be amended in its entirety as follows:
1. OPTIONAL CONVERSION. Each share of Series A Preferred, Series B
Preferred, Series C Preferred and Series D Preferred shall be convertible,
without the payment of any additional consideration by the holder thereof and at
the option of the holder thereof, at any time after the date of issuance of such
share (subject to Section D(3)), at the office of the Corporation or any
transfer agent for the Common Stock, into such number of fully paid and
nonassessable shares of Common Stock as is determined (i) in the case of the
Series A Preferred, by dividing $1.50 by the Series A Conversion Price
determined as hereinafter provided, in effect at the time of exercise of the
Conversion Rights, (ii) in the case of the Series B Preferred, by dividing $.75
by the Series B Conversion Price determined as hereinafter provided, in effect
at the time of exercise of the Conversion Rights, (iii) in the case of Series C
Preferred, by dividing $.50 by the Series C Conversion Price determined as
hereinafter provided, in effect at the time of exercise of the Conversion Rights
and (iv) in the case of the Series D Preferred, by dividing $1.10 by the Series
D Conversion Price determined as hereinafter provided, in effect at the time of
the exercise of the Conversion Rights. As of the date of the initial
effectiveness of this sentence, the Series A Conversion Price was $1.2215, the
Series B Conversion Price was $.75, the Series C Conversion Price was $.50 and
the Series D Conversion Price was $1.10. Each such Series A, Series B, Series C
and Series D Conversion Price shall be subject to adjustment, in order to adjust
the number of shares of Common Stock into which the Series A Preferred, Series B
Preferred, Series C Preferred or Series D Preferred is convertible, as
hereinafter provided.
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APPENDIX C
CALIFORNIA DISSENTERS' RIGHTS PROVISIONS
Section 1300. SHAREHOLDER IN SHORT-FORM MERGER; PURCHASE AT FAIR MARKET
VALUE; "DISSENTING SHARES"; "DISSENTING SHAREHOLDER"
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e) or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation in a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value the shares owned by the shareholder which are dissenting
shares as defined in subdivision (b). The fair market value shall be determined
as of the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or depreciation
in consequence of the proposed action, but adjusted for any stock split, reverse
stock split, or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by the
Commissioner of Corporations under subdivision (o) of Section 25100 or (B)
listed on the list of OTC margin stocks issued by the Board of Governors of the
Federal Reserve System, and the notice of meeting of shareholders to act upon
the reorganization summarizes this section and Sections 1301, 1302, 1303 and
1304; provided, however, that this provision does not apply to any shares with
respect to which there exists any restriction on transfer imposed by the
corporation or by any law or regulation; and provided, further, that this
provision does not apply to any class of shares described in subparagraph (A) or
(B) if demands for payment are filed with respect to 5 percent or more of the
outstanding shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted in
favor of the reorganization or, (B) if described in subparagraph (A) or (B) of
paragraph (1) (without regard to the provisos in that paragraph), were voted
against the reorganization, or which were held of record on the effective date
of a short-form merger; provided, however, that subparagraph (A) rather than
subparagraph (B) of this paragraph applies in any case where the approval
required by Section 1201 is sought by written consent rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.
Section 1301. NOTICE TO HOLDER OF DISSENTING SHARES OF REORGANIZATION
APPROVAL; DEMAND FOR PURCHASE OF SHARES; CONTENTS OF DEMAND
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to
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be followed if the shareholder desires to exercise the shareholder's right
under such sections. The statement of price constitutes an offer by the
corporation to purchase at the price stated any dissenting shares as defined
in subdivision (b) of Section 1300, unless they lose their status as
dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
Section 1302. STAMPING OR ENDORSING DISSENTING SHARES
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
Section 1303. DISSENTING SHAREHOLDER ENTITLED TO AGREED PRICE WITH
INTEREST THEREON; WHEN PRICE TO BE PAID
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
Section 1304. ACTION BY DISSENTERS TO DETERMINE WHETHER SHARES ARE
DISSENTING SHARES OR FAIR MARKET VALUE OF DISSENTING SHARES OR BOTH; JOINDER OF
SHAREHOLDERS; CONSOLIDATION OF ACTIONS; DETERMINATION OF ISSUES; APPOINTMENT OF
APPRAISERS
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the
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shareholder, but not thereafter, may file a complaint in the superior court
of the proper county praying the court to determine whether the shares are
dissenting shares or the fair market value of the dissenting shares or both
or may intervene in any action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
Section 1305. DUTY AND REPORT OF APPRAISERS; COURT'S CONFIRMATION OF
REPORT; DETERMINATION OF FAIR MARKET VALUE BY COURT; JUDGMENT, AND PAYMENT;
APPEAL; COSTS OF ACTION
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed by
the court, the appraisers, or a majority of them, shall make and file a report
in the office of the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such evidence as
the court considers relevant. If the court finds the report reasonable, the
court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
Section 1306. PREVENTION OF PAYMENT TO HOLDERS OF DISSENTING SHARES OF
FAIR MARKET VALUE; EFFECT
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
Section 1307. DISPOSITION OF DIVIDENDS UPON DISSENTING SHARES
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
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Section 1308. RIGHTS AND PRIVILEGES OF DISSENTING SHARES; WITHDRAWAL OF
DEMAND FOR PAYMENT
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto.
Section 1309. WHEN DISSENTING SHARES LOSE THEIR STATUS
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
Section 1310. SUSPENSION OF PROCEEDINGS FOR COMPENSATION OR VALUATION
PENDING LITIGATION
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
Section 1311. SHARES TO WHICH CHAPTER INAPPLICABLE
This chapter, except Section 1312, does not apply to classes of shares
whose terms and provisions specifically set forth the amount to be paid in
respect to such shares in the event of a reorganization or merger.
Section 1312. ATTACK ON VALIDITY OF REORGANIZATION OR SHORT-FORM MERGER;
RIGHTS OF SHAREHOLDERS; BURDEN OF PROOF
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
C-4.
<PAGE>
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days'
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
C-5.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 145 of the Delaware General Corporation Law, the
Registrant has broad powers to indemnify its directors and officers against
liabilities they may incur in such capacities, including liabilities under
the Securities Act of 1933, as amended (the "Securities Act"). The
Registrant's Bylaws also provide that the Registrant will indemnify its
directors and executive officers and may indemnify its other officers,
employees and agents to the fullest extent permitted by Delaware law.
The Registrant's Certificate of Incorporation provides for the
elimination of liability for monetary damages for breach of the directors'
fiduciary duty of care to the Registrant and its stockholders. These
provisions do not eliminate the directors' duty of care and, in appropriate
circumstances, equitable remedies such an injunctive or other forms of
non-monetary relief will remain available under Delaware law. In addition,
each director will continue to be subject to liability for breach of the
director's duty of loyalty to the Registrant, for acts or omissions not in
good faith or involving intentional misconduct, for knowing violations of
law, for any transaction from which the director derived an improper personal
benefit, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision does not
affect a director's responsibilities under any other laws, such as the
federal securities laws or state or federal environmental laws.
The Agreement and Plan of Merger and Reorganization filed as Exhibit 2.1
to this Registration Statement provides for indemnification of the Registrant
and its controlling persons for certain liabilities arising under the
Securities Act or otherwise.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following is a list of exhibits filed as a part of this
Registration Statement:
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
2.1* Agreement and Plan of Merger and Reorganization, dated as of
September 3, 1997, among the Registrant, Quantum Magnetics, Inc.
and QP Acquisition Corp.
2.2 Form of Agreement of Merger between Quantum Magnetics, Inc. and QP
Acquisition Corp.
2.3 Form of Escrow Agreement between the Registrant, Quantum Magnetics,
Inc., Randall R. Lunn and the Escrow Agent.
3.1+ Amended and Restated Certificate of Incorporation of the Registrant.
3.2+ Bylaws of Registrant.
4.1 Reference is made to Exhibits 3.1 and 3.2.
5.1 Opinion of Cooley Godward LLP.
8.1*** Tax Opinion of Cooley Godward LLP.
8.2*** Tax Opinion of Branton, Wilson & Muns.
9.1* Form of Voting Agreement executed by and between the Registrant and
each of Techno Venture Management, TVM Techno Venture Enterprises
No. II Limited Partnership, TVM Intertech Limited Partnership, TVM
Eurotech Limited Partnership, TVM Zweite Beteilgung-US Limited
Partnership, TVM Techno Venture Investors No. I Limited
Partnership, Lowell Burnett, Randall Lunn, John C. Downing Trust,
Dale Sheets and Andrew Hibbs.
II-1.
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
10.1+ Technology License Agreement, dated as of September 11, 1990, by and
between the Registrant and Imatron, Inc.
10.2+ Stockholders Agreement for the Formation of the Registrant, dated as
of August 13, 1990, between Imatron and FI.M.A.I and Amendment,
dated as of September 7, 1990, as amended by the Termination
Agreement, dated as of December 9, 1992 among the Registrant,
FI.M.A.I and Imatron.
10.3+ Lease, dated as of May 20, 1992, as amended May 4, 1995, between the
Registrant and BVY Group.
10.4++ Registrant's Equity Incentive Plan, as amended through August 8, 1997.
10.5+ Registrant's 1996 Employee Stock Purchase Plan, dated March 9, 1996.
10.6+ Warrant to Purchase Stock pursuant to the Bridge Loan Financing
Agreement, dated as of December 28, 1995, by and between the
Registrant and Anacondona Partners, L.P.
10.7+ Standby Financing Agreement, dated as of July 26, 1991, by and between
InVision and FI.M.A.I.
10.8** Shareholders Agreement, dated as of April 10, 1997, among the
Registrant, Quantum Magnetics, Inc. and the other parties thereto.
10.10+ Investor Rights Agreement, dated as of December 29, 1995, by and
between the Registrant and Kay's Corporation.
10.12** Lease, dated as of February 11, 1997, between the Registrant and WHLNF
Real Estate L.P.
10.13** Purchase Agreement, dated as of December 24, 1996, between the
Registrant and the U.S. Federal Aviation Administration.
10.15** Stock Purchase Agreement, dated as of November 12, 1996, between the
Registrant and EG&G International, Ltd.
10.16** Stock Purchase Agreement, dated as of December 31, 1996, between the
Registrant and Fredrick L. Roder.
10.16.1** Amendment to Stock Purchase Agreement, dated as of April 3, 1997,
between the Registrant and Fredrick L. Roder.
10.17** Loan and Security Agreement, dated as of February 20, 1997, between
the Registrant and Silicon Valley Bank.
10.18** Revolving Promissory Note, dated February 20, 1997, between the
Registrant and Silicon Valley Bank.
10.19** Export-Import Bank Loan and Security Agreement, dated as of
February 20, 1997, between the Registrant and Silicon Valley Bank.
10.20** Intellectual Property Security Agreement, dated as of February 20,
1997, between the Registrant and Silicon Valley Bank.
10.21** Key Employee Agreement, dated April 21, 1994, between the Registrant
and Curtis P. DiSibio.
10.22** Key Employee Agreement, dated April 22, 1994, between the Registrant
and Sergio Magistri, and amendment thereto, dated October 16, 1995.
10.23** Key Employee Agreement, dated March 1, 1996, between the Registrant
and David M. Pillor.
10.24** Key Employee Agreement, dated April 21, 1994, between the Registrant
and Benno Stebler.
11.1 Statement regarding calculation of net income (loss) per share for
the Registrant.
11.2 Statement regarding calculation of net loss per share for Quantum.
23.1 Consent of Price Waterhouse LLP for the Registrant and Quantum.
23.2 Consent of Cooley Godward LLP. Reference is made to Exhibits 5.1 and
8.1.
23.3 Consent of Branton, Wilson & Muns. Reference is made to Exhibit 8.2.
24.1 Power of Attorney. Reference is made to page II-4.
99.1 Form of Proxy Card for Quantum Shareholders Meeting.
99.2 Quantum Magnetics, Inc. 1994 Qualified and Nonqualified Stock Option
Plan.
___________
(*) Filed as an exhibit to Registrant's Current Report on Form 8-K filed
September 10, 1997 and incorporated by reference herein.
(+) Filed as an exhibit to Registrant's Registration Statement on Form S-1
(No. 333-380) or amendments thereto and incorporated herein by reference.
II-2.
<PAGE>
(++) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1997 and incorporated herein by reference.
(**) Filed as an exhibit to Registrant's Registration Statement on Form S-1
(No. 333-23413) or amendments thereto and incorporated herein by
reference.
(***) To be filed.
(b) Financial schedules are omitted because they are not required, are
not applicable or the information is included in the financial statements or
notes thereto.
ITEM 12. UNDERTAKINGS.
(1) The undersigned registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered hereunder through
use of a prospectus which is a part of this registration statement, by any
person or party who is deemed to be an underwriter within the meaning of Rule
145(c), the issuer undertakes that such reoffering prospectus will contain
the information called for by the applicable registration form with respect
to reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(2) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to
meet the requirements of section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415, will be filed
as a part of an amendment to the registration statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial BONA FIDE offering thereof.
(3) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and
controlling persons of the Registrant pursuant to the provisions described in
Item 14 or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a
director, officer, or controlling person of the Registrant in the successful
defense of any action, suit, or proceeding) is asserted by such director,
officer, or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will governed by
the final adjudication of such issue.
(4) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus
pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day
of receipt of such request, and to send the incorporated documents by first
class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(5) The undersigned registrant hereby undertakes to supply by means of
a post-effective amendment all required information concerning a transaction,
and the company being acquired involved therein, that was not the subject of
and included in the registration statement when it became effective.
II-3.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Foster City, County of San Mateo, State of California, on September 10, 1997.
INVISION TECHNOLOGIES, INC.
By: /s/ Sergio Magistri
-----------------------------------
Sergio Magistri
PRESIDENT, CHIEF EXECUTIVE OFFICER
AND DIRECTOR
(PRINCIPAL EXECUTIVE OFFICER)
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Dr. Sergio Magistri and
Curtis P. DiSibio and each of them, jointly and severally, as his or her true
and lawful attorneys-in-fact and agents, each with full power of substitution
for him or her and in his or her name, place and stead in any and all
capacities, to sign any and all amendments to this Registration Statement,
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto such
attorneys-in-fact and agents full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that each such
attorney-in-fact and agent or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Sergio Magistri President, Chief Executive September 10, 1996
- ------------------------- Officer and Director
Sergio Magistri (Principal Executive Officer)
/s/ Curtis P. DiSibio Senior Vice President and September 10, 1997
- ------------------------- Chief Financial Officer
Curtis P. DiSibio (Principal Financial and
Accounting Officer)
/s/ Douglas P. Boyd Director September 10, 1997
- -------------------------
Douglas P. Boyd
/s/ Giovanni Lanzara Director September 10, 1997
- -------------------------
Giovanni Lanzara
/s/ Bruno Trezza Director September 10, 1997
- -------------------------
Bruno Trezza
II-4.
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
2.1* Agreement and Plan of Merger and Reorganization, dated as of
September 3, 1997, among the Registrant, Quantum Magnetics, Inc.
and QP Acquisition Corp.
2.2 Form of Agreement of Merger between Quantum Magnetics, Inc. and QP
Acquisition Corp.
2.3 Form of Escrow Agreement between the Registrant, Quantum Magnetics,
Inc., Randall R. Lunn and the Escrow Agent.
3.1+ Amended and Restated Certificate of Incorporation of the Registrant.
3.2+ Bylaws of Registrant.
4.1 Reference is made to Exhibits 3.1 and 3.2.
5.1 Opinion of Cooley Godward LLP.
8.1*** Tax Opinion of Cooley Godward LLP.
8.2*** Tax Opinion of Branton, Wilson & Muns.
9.1* Form of Voting Agreement executed by and between the Registrant and
each of Techno Venture Management, TVM Techno Venture Enterprises
No. II Limited Partnership, TVM Intertech Limited Partnership, TVM
Eurotech Limited Partnership, TVM Zweite Beteilgung-US Limited
Partnership, TVM Techno Venture Investors No. I Limited
Partnership, Lowell Burnett, Randall Lunn, John C. Downing Trust,
Dale Sheets and Andrew Hibbs.
10.1+ Technology License Agreement, dated as of September 11, 1990, by and
between the Registrant and Imatron, Inc.
10.2+ Stockholders Agreement for the Formation of the Registrant, dated as
of August 13, 1990, between Imatron and FI.M.A.I and Amendment,
dated as of September 7, 1990, as amended by the Termination
Agreement, dated as of December 9, 1992 among the Registrant,
FI.M.A.I and Imatron.
10.3+ Lease, dated as of May 20, 1992, as amended May 4, 1995, between the
Registrant and BVY Group.
10.4++ Registrant's Equity Incentive Plan, as amended through August 8, 1997.
10.5+ Registrant's 1996 Employee Stock Purchase Plan, dated March 9, 1996.
10.6+ Warrant to Purchase Stock pursuant to the Bridge Loan Financing
Agreement, dated as of December 28, 1995, by and between the
Registrant and Anacondona Partners, L.P.
10.7+ Standby Financing Agreement, dated as of July 26, 1991, by and between
InVision and FI.M.A.I.
10.8** Shareholders Agreement, dated as of April 10, 1997, among the
Registrant, Quantum Magnetics, Inc. and the other parties thereto.
10.10+ Investor Rights Agreement, dated as of December 29, 1995, by and
between the Registrant and Kay's Corporation.
10.12** Lease, dated as of February 11, 1997, between the Registrant and WHLNF
Real Estate L.P.
10.13** Purchase Agreement, dated as of December 24, 1996, between the
Registrant and the U.S. Federal Aviation Administration.
10.15** Stock Purchase Agreement, dated as of November 12, 1996, between the
Registrant and EG&G International, Ltd.
10.16** Stock Purchase Agreement, dated as of December 31, 1996, between the
Registrant and Fredrick L. Roder.
10.16.1** Amendment to Stock Purchase Agreement, dated as of April 3, 1997,
between the Registrant and Fredrick L. Roder.
10.17** Loan and Security Agreement, dated as of February 20, 1997, between
the Registrant and Silicon Valley Bank.
10.18** Revolving Promissory Note, dated February 20, 1997, between the
Registrant and Silicon Valley Bank.
10.19** Export-Import Bank Loan and Security Agreement, dated as of
February 20, 1997, between the Registrant and Silicon Valley Bank.
10.20** Intellectual Property Security Agreement, dated as of February 20,
1997, between the Registrant and Silicon Valley Bank.
10.21** Key Employee Agreement, dated April 21, 1994, between the Registrant
and Curtis P. DiSibio.
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
10.22** Key Employee Agreement, dated April 22, 1994, between the Registrant
and Sergio Magistri, and amendment thereto, dated October 16, 1995.
10.23** Key Employee Agreement, dated March 1, 1996, between the Registrant
and David M. Pillor.
10.24** Key Employee Agreement, dated April 21, 1994, between the Registrant
and Benno Stebler.
11.1 Statement regarding calculation of net income (loss) per share for
the Registrant.
11.2 Statement regarding calculation of net loss per share for Quantum.
23.1 Consent of Price Waterhouse LLP for the Registrant and Quantum.
23.2 Consent of Cooley Godward LLP. Reference is made to Exhibits 5.1 and
8.1.
23.3 Consent of Branton, Wilson & Muns. Reference is made to Exhibit 8.2.
24.1 Power of Attorney. Reference is made to page II-4.
99.1 Form of Proxy Card for Quantum Shareholders Meeting.
99.2 Quantum Magnetics, Inc. 1994 Qualified and Nonqualified Stock Option
Plan.
___________
(*) Filed as an exhibit to Registrant's Current Report on Form 8-K filed
September 10, 1997 and incorporated by reference herein.
(+) Filed as an exhibit to Registrant's Registration Statement on Form S-1
(No. 333-380) or amendments thereto and incorporated herein by reference.
(++) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1997 and incorporated herein by reference.
(**) Filed as an exhibit to Registrant's Registration Statement on Form S-1
(No. 333-23413) or amendments thereto and incorporated herein by
reference.
(***) To be filed.
<PAGE>
AGREEMENT OF MERGER
THIS AGREEMENT OF MERGER, dated as of September [ ], 1997 (the "Merger
Agreement"), is made and entered into by QP Acquisition Corp., a California
corporation ("Merger Sub") and Quantum Magnetics, Inc., a California
corporation ("Quantum" or "Surviving Corporation") (Quantum and Merger Sub
being hereinafter collectively referred to as the "Constituent Corporations").
RECITALS
A. InVision Technologies, Inc., a Delaware corporation ("InVision"),
Quantum and Merger Sub have entered into an Agreement and Plan of Merger and
Reorganization dated September 3, 1997 (the "Reorganization Agreement"),
providing, among other things, for the execution and filing of this Merger
Agreement and the merger of Merger Sub with and into Quantum upon the terms
set forth in the Reorganization Agreement and this Merger Agreement (the
"Merger").
B. InVision, Quantum, Merger Sub, [ ] and Randall R. Lunn have
entered into an Escrow Agreement dated September [ ], 1997 (the "Escrow
Agreement"), providing for the escrow of certain shares issuable in the
Merger.
C. The respective Boards of Directors of each of the Constituent
Corporations deem it advisable and in the best interests of each of such
corporations and their respective shareholders that Merger Sub be merged with
and into Quantum.
D. The shareholders of Quantum have adopted and approved the
Reorganization Agreement and approved the Merger at a meeting of the
shareholders of Quantum (the "Quantum Shareholders Meeting") held on
September [ ], 1997.
AGREEMENT
NOW, THEREFORE, in consideration of the promises and mutual agreements
contained in this Merger Agreement, the Constituent Corporations hereby agree
that Merger Sub shall be merged with and into Quantum in accordance with the
provisions of the laws of the State of California, upon the terms and subject
to the conditions set forth as follows:
1.
<PAGE>
ARTICLE 1
THE MERGER
1.1 FILING. This Merger Agreement, together with the officers'
certificates of each of the Constituent Corporations required by the General
Corporation Law of the State of California (the "California Law"), shall be
filed with the Secretary of State of the State of California at the time
specified in the Reorganization Agreement.
1.2 EFFECTIVENESS. The Merger shall become effective at the time this
Merger Agreement is filed with and accepted by the Secretary of State of the
State of California (the "Effective Time").
1.3 MERGER. At the Effective Time, Merger Sub shall be merged into
Quantum and the separate corporate existence of Merger Sub shall thereupon
cease. Quantum shall be the Surviving Corporation in the Merger and the
separate corporate existence of Quantum, with all of its purposes, objects,
rights, privileges, powers, immunities and franchises, shall continue
unaffected and unimpaired by the Merger.
1.4 FURTHER ACTION. If at any time after the Effective Time any further
action is necessary or desirable to carry out the purposes of this Merger
Agreement or to vest the Surviving Corporation with the full right, title and
possession to all assets, property, rights, privileges, immunities, powers
and franchises of either or both of the Constituent Corporations, the
officers and directors of the Surviving Corporation are fully authorized in
the name of either or both of the Constituent Corporations or otherwise to
take all such action.
ARTICLE 2
CORPORATE GOVERNANCE MATTERS
2.1 ARTICLES. From and after the Effective Time and until thereafter
amended as provided by law, the Articles of Incorporation of the Surviving
Corporation shall hereby be amended and restated in full as set forth in
Exhibit A attached hereto.
ARTICLE 3
MANNER OF CONVERTING SHARES OF THE CONSTITUENT CORPORATIONS
3.1 CONVERSION OF QUANTUM CAPITAL STOCK.
(a) Subject to Sections 3.1(b), 3.3(c) and 3.4, at the Effective
Time, by virtue of the Merger and without any further action on the part of
InVision, Merger Sub, Quantum or any shareholder of Quantum:
2.
<PAGE>
(i) each share of Common Stock, no par value, of Quantum (the
"Quantum Common Stock") outstanding immediately prior to the Effective
Time shall be converted into the right to receive (A) such fraction of
a share of common stock (par value $.001 per share) of InVision
("InVision Common Stock") as is equal to 0.88 multiplied by the
"Applicable Fraction" (as defined in Section 3.1(c)(i)) plus (B) up to
such fraction of a share of InVision Common Stock as is equal to 0.12
multiplied by the Applicable Fraction if and when released, in whole
or in part, from escrow pursuant to the terms of the Escrow Agreement;
(ii) each share of Series A Preferred Stock, no par value, of
Quantum (the "Series A Stock") outstanding immediately prior to the
Effective Time shall be converted into the right to receive (A) such
fraction of a share of InVision Common Stock as is equal to 0.88
multiplied by the "Series A Fraction" (as defined in Section
3.1(c)(ii)) plus (B) up to such fraction of a share of InVision Common
Stock as is equal to 0.12 multiplied by the Series A Fraction if and
when released, in whole or in part, from escrow pursuant to the terms
of the Escrow Agreement;
(iii) each share of Series B Preferred Stock, no par value,
of Quantum (the "Series B Stock") outstanding immediately prior to the
Effective Time shall be converted into the right to receive (A) such
fraction of a share of InVision Common Stock as is equal to 0.88
multiplied by the "Series B Fraction" (as defined in Section
3.1(c)(iv)) plus (B) up to such fraction of a share of InVision Common
Stock as is equal to 0.12 multiplied by the Series B Fraction if and
when released, in whole or in part, from escrow pursuant to the terms
of the Escrow Agreement;
(iv) each share of Series C Preferred Stock, no par value, of
Quantum (the "Series C Stock") outstanding immediately prior to the
Effective Time shall be converted into the right to receive (A) such
fraction of a share of InVision Common Stock as is equal to 0.88
multiplied by the "Series C Fraction" (as defined in Section
3.1(c)(v)) plus (B) up to such fraction of a share of InVision Common
Stock as is equal to 0.12 multiplied by the Series C Fraction if and
when released, in whole or in part, from escrow pursuant to the terms
of the Escrow Agreement;
(v) each share of the common stock, $0.001 par value, of Merger
Sub outstanding immediately prior to the Effective Time shall be
converted into one share of common stock of the Surviving Corporation.
(b) Each share of Quantum Common Stock, Series A Stock, Series B
Stock, Series C Stock outstanding immediately prior to the Effective Time and
owned by InVision and each share of Series D Preferred stock, no par value, of
Quantum ("Series D Stock") outstanding
3.
<PAGE>
immediately prior to the Effective Time, all of which are owned by InVision,
shall automatically be canceled and no conversion shall be made in respect
thereof.
(c) For purposes of this Merger Agreement:
(i) The "Applicable Fraction" shall be the fraction: (A) having
a numerator equal to the amount determined by subtracting (1) the
"Aggregate Liquidation Preference" (as defined in Section 3.1(c)(vi))
from (2) the amount determined by multiplying (i) 777,000 by (ii) the
Designated InVision Stock Price (as defined in Section 3.1(c)(viii));
and (B) having a denominator equal to the amount determined by
multiplying (1) the "Adjusted Fully Diluted Quantum Share Amount" (as
defined in Section 3.1(c)(vii)) by (2) the "Designated InVision Stock
Price" (as defined in Section 3.1(c)(viii));
(ii) The "Series A Fraction" means the sum of: (A) the fraction
determined by dividing (1) $1.50 (representing the liquidation
preference of each share of Series A Stock under Quantum's Articles of
Incorporation) by (2) the "Designated InVision Stock Price" (as
defined in Section 3.1(c)(viii)); and (B) the fraction determined by
multiplying (1) the "Series A Conversion Rate" (as defined in Section
3.1(c)(iii)) by (2) the "Applicable Fraction" (as defined in Section
3.1(c)(i));
(iii) The "Series A Conversion Rate" shall be the fraction
determined by dividing (1) the total number of shares of Common Stock
issuable upon the conversion of all shares of Series A Stock
outstanding immediately prior to the Effective Time by (2) the total
number of shares of Series A Stock outstanding immediately prior to
the Effective Time.
(iv) The "Series B Fraction" means the fraction determined by
dividing (A) $0.75 (representing the liquidation preference of each
share of Series B Stock under Quantum's Articles of Incorporation) by
(B) the "Designated InVision Stock Price" (as defined in Section
3.1(c)(viii));
(v) The "Series C Fraction" means the sum of: (A) the fraction
determined by dividing (1) $1.00 (representing the liquidation
preference of each share of Series C Stock under Quantum's Articles of
Incorporation) by (2) the "Designated InVision Stock Price" (as
defined in Section 3.1(c)(viii)); and (B) the "Applicable Fraction"
(as defined in Section 3.1(c)(i));
(vi) The "Aggregate Liquidation Preference" shall be the amount
equal to the sum of: (A) $1.50 (representing the liquidation
preference of each share of Series A Stock under Quantum's Articles of
Incorporation) multiplied by the number of shares of Series A Stock
outstanding immediately prior to the Effective Time; (B) $0.75
(representing the liquidation preference of each share of Series B
Stock under Quantum's Articles of Incorporation) multiplied by the
number of
4.
<PAGE>
shares of Series B Stock outstanding immediately prior to
the Effective Time; and (C) $1.00 (representing the liquidation
preference of each share of Series C Stock under Quantum's Articles of
Incorporation) multiplied by the number of shares of Series C Stock
outstanding immediately prior to the Effective Time;
(vii) The "Adjusted Fully Diluted Quantum Share Amount"
shall be the sum of: (A) the number of shares resulting from the
subtraction of (1) the number of shares of Quantum Common Stock
outstanding immediately prior to the Effective Time and held by
InVision from (2) the aggregate number of shares of Quantum Common
Stock outstanding immediately prior to the Effective Time (including
any such shares that are subject to a repurchase option or risk of
forfeiture under any restricted stock purchase agreement or other
agreement); (B) the aggregate number of shares of Quantum Common Stock
issuable upon conversion of all of the Series A Stock and Series C
Stock collectively outstanding immediately prior to the Effective
Time and not held by InVision; and (C) the aggregate number of
shares of Quantum Common Stock purchasable under or otherwise
subject to all Quantum Options (as defined in Section 3.1(c)(ix))
outstanding immediately prior to the Effective Time (including all
shares of Quantum Common Stock that may ultimately be purchased under
Quantum Options that are unvested or are otherwise not then
exercisable);
(viii) The "Designated InVision Stock Price" shall be the
average of the closing sale prices of a share of InVision Common Stock
as reported on the Nasdaq National Market for each of the sixty (60)
consecutive trading days ending (and including) the third trading day
prior to Quantum Shareholders Meeting, weighted in accordance with the
number of shares of Parent Common Stock traded on each such trading
day; and
(ix) "Quantum Option" shall mean any stock option that is then
outstanding under Quantum's 1994 Qualified and Nonqualified Stock
Option Plan, whether vested or unvested.
(d) If any shares of Quantum Common Stock outstanding immediately
prior to the Effective Time are unvested or are subject to a repurchase
option, risk of forfeiture or other condition under any applicable restricted
stock purchase agreement or other agreement with Quantum, then the shares of
InVision Common Stock issued in exchange for such shares of Quantum Common
Stock will also be unvested and subject to the same repurchase option, risk
of forfeiture or other condition, and the certificates representing such
shares of InVision Common Stock may accordingly be marked with appropriate
legends.
(e) All calculations made pursuant to this Section 3.1 shall be
calculated to the nearest fifth decimal place, with five millionths rounded
up to the nearest one-hundred-thousandth.
5.
<PAGE>
3.2 CLOSING OF QUANTUM'S TRANSFER BOOKS. At the Effective Time, holders
of certificates representing shares of Quantum's capital stock that were
outstanding immediately prior to the Effective Time shall cease to have any
rights as shareholders of Quantum, and the stock transfer books of Quantum
shall be closed with respect to all shares of such capital stock outstanding
immediately prior to the Effective Time. No further transfer of any such
shares of Quantum's capital stock shall be made on such stock transfer books
after the Effective Time. If, after the Effective Time, a valid certificate
previously representing any of such shares of Quantum's capital stock (a
"Quantum Stock Certificate") is presented to the Surviving Corporation or
InVision, such Quantum Stock Certificate shall be canceled and shall be
exchanged as provided in Section 3.3.
3.3 EXCHANGE OF CERTIFICATES.
(a) At or as soon as practicable after the Effective Time, InVision
will send to the holders of Quantum Stock Certificates (i) a letter of
transmittal in customary form and containing such provisions as InVision may
reasonably specify, and (ii) instructions for use in effecting the surrender
of Quantum Stock Certificates in exchange for certificates representing
InVision Common Stock. Upon surrender of a Quantum Stock Certificate to
InVision for exchange, together with a duly executed letter of transmittal
and such other documents as may be reasonably required by InVision, the
holder of such Quantum Stock Certificate shall be entitled to receive in
exchange therefor a certificate representing the number of whole shares of
InVision Common Stock that such holder has the right to receive pursuant to
the provisions of this Section 3, and Quantum Stock Certificate so
surrendered shall be canceled. Until surrendered as contemplated by this
Section 3.3, each Quantum Stock Certificate shall be deemed, from and after
the Effective Time, to represent only the right to receive upon such
surrender a certificate representing shares of InVision Common Stock (and
cash in lieu of any fractional share of InVision Common Stock) as
contemplated by this Section 3. If any Quantum Stock Certificate shall have
been lost, stolen or destroyed, InVision may, in its discretion and as a
condition precedent to the issuance of any certificate representing InVision
Common Stock, require the owner of such lost, stolen or destroyed Quantum
Stock Certificate to provide an appropriate affidavit and to deliver a bond
(in such sum as InVision may reasonably direct) as indemnity against any
claim that may be made against InVision or the Surviving Corporation with
respect to such Quantum Stock Certificate.
(b) No dividends or other distributions declared or made with
respect to InVision Common Stock with a record date after the Effective Time
shall be paid to the holder of any unsurrendered Quantum Stock Certificate
with respect to the shares of InVision Common Stock represented thereby, and
no cash payment in lieu of any fractional share shall be paid to any such
holder, until such holder surrenders such Quantum Stock Certificate in
accordance with this Section 3.3 (at which time such holder shall be entitled
to receive all such dividends and distributions and such cash payment).
(c) No fractional shares of InVision Common Stock shall be issued
in connection with the Merger, and no certificates for any such fractional
shares shall be issued. In lieu of such fractional shares, any holder of
capital stock of Quantum who would otherwise
6.
<PAGE>
be entitled to receive a fraction of a share of InVision Common Stock (after
aggregating all fractional shares of InVision Common Stock issuable to such
holder) shall, upon surrender of such holder's Quantum Stock Certificate(s),
be paid in cash the dollar amount (rounded to the nearest whole cent),
without interest, determined by multiplying such fraction by the Designated
InVision Stock Price.
(d) InVision and the Surviving Corporation shall be entitled to
deduct and withhold from any consideration payable or otherwise deliverable
to any holder or former holder of capital stock of Quantum pursuant to this
Merger Agreement such amounts as InVision or the Surviving Corporation may be
required to deduct or withhold therefrom under the Code or under any
provision of state, local or foreign tax law. To the extent such amounts are
so deducted or withheld, such amounts shall be treated for all purposes under
this Merger Agreement as having been paid to the Person to whom such amounts
would otherwise have been paid.
(e) Neither InVision nor the Surviving Corporation shall be liable
to any holder or former holder of capital stock of Quantum for any shares of
InVision Common Stock (or dividends or distributions with respect thereto),
or for any cash amounts, delivered to any public official pursuant to any
applicable abandoned property, escheat or similar law.
3.4 DISSENTING SHARES.
(a) Notwithstanding anything to the contrary contained in this
Merger Agreement, any shares of capital stock of Quantum that, as of the
Effective Time, are or may become "dissenting shares" within the meaning of
Section 1300(b) of the California Corporations Code shall not be converted
into or represent the right to receive InVision Common Stock in accordance
with Section 3.1 (or cash in lieu of fractional shares in accordance with
Section 3.3(c)), and the holder or holders of such shares shall be entitled
only to such rights as may be granted to such holder or holders in Chapter 13
of the California Law; PROVIDED, HOWEVER, that if the status of any such
shares as "dissenting shares" shall not be perfected, or if any such shares
shall lose their status as "dissenting shares," then, as of the later of the
Effective Time or the time of the failure to perfect such status or the loss
of such status, such shares shall automatically be converted into and shall
represent only the right to receive (upon the surrender of the certificate or
certificates representing such shares) InVision Common Stock in accordance
with Section 3.1 (and cash in lieu of fractional shares in accordance with
Section 3.3(c)).
(b) Quantum shall give InVision (i) prompt notice of any written
demand received by Quantum prior to the Effective Time to require Quantum to
purchase shares of capital stock of Quantum pursuant to Chapter 13 of the
California Law and of any other demand, notice or instrument delivered to
Quantum prior to the Effective Time pursuant to the California Law, and (ii)
the opportunity to participate in all negotiations and proceedings with
respect to any such demand, notice or instrument. Quantum shall not make any
payment or settlement offer prior to the Effective Time with respect to any
such demand unless InVision shall have consented in writing to such payment
or settlement offer.
7.
<PAGE>
ARTICLE 4
TERMINATION AND AMENDMENT
4.1 TERMINATION. Notwithstanding the approval of this Merger Agreement
by the shareholders of Merger Sub and Quantum, this Merger Agreement shall
terminate forthwith in the event that the Reorganization Agreement shall be
terminated as therein provided.
4.2 AMENDMENT. This Merger Agreement may be amended by the parties
hereto at any time before or after approval hereof by the shareholders of
either Merger Sub or Quantum, but, after any such approval, no amendment
shall be made which without the further approval of such shareholders would
(i) have a material adverse effect on the shareholders of either Merger Sub
or Quantum, (ii) change any of the principal terms of the Merger Agreement,
or (iii) change any term of the Articles of Incorporation of the Surviving
Corporation. This Merger Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
ARTICLE 5
MISCELLANEOUS
5.1 HEADINGS. The underlined headings contained in this Merger
Agreement are for convenience of reference only, shall not be deemed to be a
part of this Merger Agreement and shall not be referred to in connection with
the construction or interpretation of this Merger Agreement.
5.2 COUNTERPARTS. This Merger Agreement may be executed in several
counterparts, each of which shall constitute an original and all of which,
when taken together, shall constitute one agreement.
5.3 GOVERNING LAW. This Merger Agreement shall be construed in
accordance with, and governed in all respects by, the internal laws of the
State of California (without giving effect to principles of conflicts of
laws).
5.4 CONSTRUCTION.
(a) For purposes of this Merger Agreement, whenever the context
requires: the singular number shall include the plural, and vice versa.
(b) The parties hereto agree that any rule of construction to the
effect that ambiguities are to be resolved against the drafting party shall
not be applied in the construction or interpretation of this Merger Agreement.
8.
<PAGE>
(c) As used in this Merger Agreement, the words "include" and
"including," and variations thereof, shall not be deemed to be terms of
limitation, but rather shall be deemed to be followed by the words "without
limitation."
(d) Except as otherwise indicated, all references in this Merger
Agreement to "Sections" and "Exhibits" are intended to refer to Sections of
this Merger Agreement and Exhibits to this Merger Agreement.
9.
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Merger Agreement as
of the date first written above.
QP Acquisition Corp., Quantum Magnetics, Inc.,
a California corporation a California corporation
By: ______________________ By: _______________________
Its President Its President
10.
<PAGE>
EXHIBIT A
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
QUANTUM MAGNETICS, INC.
I.
The name of this corporation is QUANTUM MAGNETICS, INC.
II.
The purpose of this corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General
Corporation Law of California other than the banking business, the trust
company business or the practice of a profession permitted to be incorporated
by the California Corporations Code.
III.
The corporation is authorized to issue only one class of stock, to be
designated Common Stock. The total number of shares of Common Stock
presently authorized is one thousand (1,000), par value one-tenth of one cent
($0.001).
IV.
(a) The liability of the directors of this corporation for monetary
damages shall be eliminated to the fullest extent permissible under
California law.
(b) This corporation is authorized to provide indemnification of agents
(as defined in Section 317 of the California Corporations Code) for breach of
duty to the corporation and its shareholders through bylaw provisions or
through agreements with the agents, or through shareholder resolutions, or
otherwise, in excess of the indemnification otherwise permitted by Section
317 of the Corporations Code, subject to the limits on such excess
indemnification set forth in Section 204 of the Corporations Code.
(c) Any repeal or modification of this Article shall only be prospective
and shall not affect the rights under this Article in effect at the time of
the alleged occurrence of any act or omission to act giving rise to liability
or indemnification.
1.
<PAGE>
Quantum Magnetics, Inc.
(Surviving Corporation)
OFFICERS' CERTIFICATE
Lowell J. Burnett and Dale Sheets hereby certify that:
1. They are the Chairman of the Board and Secretary, respectively, of
Quantum Magnetics, Inc., a California corporation (the "Corporation").
2. The Agreement of Merger to which this Certificate is attached (the
"Merger Agreement") has been duly approved by the Board of Directors
of the Corporation.
3. The Corporation has two classes of stock outstanding, designated
"Common Stock" and "Preferred Stock," respectively, of which 3,992,959
shares of Common Stock and 4,462,893 shares of Preferred Stock were
outstanding and entitled to vote on the merger. The Preferred Stock
outstanding and entitled to vote on the merger is divided into series,
comprised of 1,666,669 shares of Series A Preferred Stock, 711,340
shares of Series B Preferred Stock, 1,643,556 shares of Series C
Preferred Stock and 441,328 shares of Series D Preferred Stock.
4. The principal terms of the Merger Agreement were approved by the
Corporation by a vote of a number of shares of each class which
equaled or exceeded the vote required. The vote required was (i) a
majority of the outstanding shares of the Common Stock entitled to
vote, (ii) a majority of the outstanding shares of Series A Preferred
Stock entitled to vote, (iii) a majority of the outstanding shares of
Series B Preferred Stock entitled to vote, (iv) a majority of the
outstanding shares of Series C Preferred Stock entitled to vote, (v)
a majority of the outstanding shares of Series D Preferred Stock
entitled to vote, and (vi) 2/3 of the votes represented by the shares
of Series A Preferred Stock and Series C Preferred Stock entitled to
vote, voting together as a single class.
Each of the undersigned declares under penalty of perjury that the
matters set out in the foregoing Certificate are true of his own knowledge.
Executed at San Diego, California on September [___], 1997.
___________________________________________
Lowell J. Burnett, Chairman of the Board
___________________________________________
Dale Sheets, Secretary
1.
<PAGE>
QP Acquisition Corp.
(Disappearing Corporation)
OFFICERS' CERTIFICATE
Sergio Magistri and Curtis P. DiSibio hereby certify that:
1. They are President and Secretary, respectively, of QP Acquisition
Corp., a California corporation (the "Corporation").
2. The Agreement of Merger to which this Certificate is attached (the
"Merger Agreement") has been duly approved by the Board of Directors
of the Corporation.
3. The Corporation has one class of stock outstanding, designated "Common
Stock," of which 100 shares were outstanding and entitled to vote on
the merger.
4. The principal terms of the Merger Agreement were approved by the
Corporation by a vote of a number of shares which equaled or exceeded
the vote required. The vote required was greater than 50% of the
outstanding shares of Common Stock.
5. The vote of the shareholders of InVision Technologies, Inc., the
parent of the Corporation, which parent corporation is issuing equity
securities to the shareholders of Quantum Magnetics, Inc. pursuant to
the Merger Agreement, was not required.
Each of the undersigned declares under penalty of perjury that the
matters set out in the foregoing Certificate are true of his own knowledge.
Executed at Foster City, California on September [___], 1997.
______________________________
Sergio Magistri, President
______________________________
Curtis P. DiSibio, Secretary
1.
<PAGE>
EXHIBIT 2.3
ESCROW AGREEMENT
THIS ESCROW AGREEMENT is entered into as of September __, 1997 (the
"Closing Date"), by and among: INVISION TECHNOLOGIES, INC., a Delaware
corporation ("Parent"); QUANTUM MAGNETICS, INC., a California corporation (the
"Company"); RANDALL R. LUNN, as agent of the former shareholders of the Company
(the "Agent"); and _____________ (the "Escrow Agent").
RECITALS
A. Parent, the Company and QP ACQUISITION CORP., a California corporation
and a wholly owned subsidiary of Parent ("Merger Sub"), have entered into an
Agreement and Plan of Reorganization dated as of September 3, 1997 (the
"Reorganization Agreement"), pursuant to which Merger Sub is merging with and
into the Company in a transaction in which issued and outstanding capital stock
of the Company will be exchanged for shares of Common Stock, $.001 par value, of
Parent ("Parent Common Stock").
B. The Reorganization Agreement contemplates the establishment of an
escrow arrangement to secure the indemnification and other obligations of the
Company under the Reorganization Agreement and various related agreements.
AGREEMENT
The parties to this Escrow Agreement, intending to be legally bound, agree
as follows:
SECTION 1. DEFINED TERMS
Capitalized terms used and not otherwise defined in this Escrow Agreement
shall have the meanings assigned to them in the Reorganization Agreement.
SECTION 2. CONSENT OF THE SHAREHOLDERS OF THE COMPANY
By virtue of the approval by the shareholders of the Company of the
Reorganization Agreement, the shareholders of the Company receiving shares of
Parent Common Stock in the Merger (the "Shareholders") have, without any further
act of any such Shareholder, consented to (i) the establishment of an escrow
(the "Escrow") pursuant to this Agreement to secure the indemnification
obligations of the Company under Section 9 of the Reorganization Agreement, (ii)
the appointment of the Agent as agent for the Shareholders in all respects as
set forth in Section 10.1 of the Reorganization Agreement, (iii) the taking by
the Agent of any and all
1.
<PAGE>
actions, including the execution by the Agent of any and all agreements,
instruments or other documents, and (iv) all of the other terms and conditions
of this Agreement.
SECTION 3. ESCROW
3.1 SHARES AND STOCK POWERS TO BE PLACED IN ESCROW. Parent shall issue
certificates for the aggregate number of shares of Parent Common Stock issuable
by Parent in the Merger pursuant to clause (B) of each of clause (i), (ii),
(iii) and (iv) of Section 1.5(a) of the Reorganization Agreement (the "Escrow
Shares") in the name of the Escrow Agent evidencing the shares of Parent Common
Stock to be held in escrow in accordance with this Escrow Agreement. The Escrow
Shares shall be held by the Escrow Agent in the Escrow in accordance with the
provisions of this Escrow Agreement and shall not be subject to any lien,
attachment, trustee process or any other judicial process of any creditor of any
party hereto or the Shareholders. Parent may from time to time deposit in the
Escrow additional shares of Parent Common Stock pursuant to Sections 1.6 or 1.10
of the Reorganization Agreement and such shares shall be deemed to have been
deposited in the Escrow at the Effective Time. All such shares shall be deemed
Escrow Shares, and the Persons with rights in respect of such Escrow Shares
shall be deemed Shareholders, for all purposes hereunder.
3.2 INDEMNIFICATION. The Company has agreed in Section 9 of the
Reorganization Agreement that each of the Indemnitees shall be held harmless and
indemnified from and against, and shall be compensated and reimbursed for, any
Damages incurred as set forth in Section 9 of the Reorganization Agreement. The
Company, and the Agent on behalf of the Shareholders, expressly agree that the
Escrow Shares (i) shall be security for such indemnity obligation, subject to
the limitations and in the manner provided for in this Agreement and (ii) are
subject to release to Parent or other Indemnitee upon the terms set forth
herein.
3.3 VOTING OF SHARES. The Shareholders shall be entitled to vote their
respective proportionate amount of Escrow Shares set forth on Exhibit A. Parent
shall give the Agent at least as much notice of meetings of shareholders as it
gives its shareholders generally. The Agent shall promptly inform each
Shareholder of each such meeting and of the matters to be considered at such
meeting. The Agent shall, in accordance with the instructions received from the
Shareholders, direct the Escrow Agent in writing as to the exercise of voting
rights pertaining to the Escrow Shares as to which such voting instructions have
been received, and the Escrow Agent shall comply with any such written
instructions. In the absence of such instructions, the Escrow Agent shall not
vote any of the Escrow Shares. The Agent shall have no obligation to solicit
consents or proxies from the Shareholders for purposes of any such vote.
3.4 DIVIDENDS, ETC. Any cash, securities or other property distributable
(whether by way of dividend, stock split or otherwise) in respect of or in
exchange for any Escrow Shares shall not be distributed to the Agent or the
Shareholders, but rather shall be deposited by Parent with the Escrow Agent to
be held in the Escrow. At the time any Escrow Shares are required to be
released from the Escrow to any Person pursuant to this Escrow Agreement, any
cash, securities or other property previously distributed in respect of or in
exchange for such Escrow Shares shall be released from the Escrow to such
Person.
2.
<PAGE>
3.5 TRANSFERABILITY. The interests of the Agent and the Shareholders in
the Escrow and in the Escrow Shares shall not be assignable or transferable,
other than by operation of law. No transfer of any of such interests by
operation of law shall be recognized or given effect until Parent shall have
received written notice of such transfer.
3.6 FRACTIONAL SHARES. No fractional shares of Parent Common Stock shall
be retained in or released from the Escrow pursuant to this Escrow Agreement.
In connection with any release of Escrow Shares from the Escrow, any Shareholder
who would otherwise be entitled to receive a fraction of a share of Parent
Common Stock (after aggregating all fractional shares of Parent Common Stock
issuable to such shareholder) shall be paid by Parent in cash the dollar amount
(rounded to the nearest whole cent), without interest, determined by multiplying
such fraction by the Designated Parent Stock Price, and such fraction of a share
shall be returned to Parent.
SECTION 4. CLAIM PROCEDURES
4.1 CLAIM NOTICE. If any Indemnitee determines in good faith that there
is or has been a possible breach by the Company of any representation, warranty,
covenant or other provision set forth in the Reorganization Agreement or other
event giving rise to an indemnification obligation under Section 9.2 of the
Reorganization Agreement (collectively, an "Indemnification Event"), and if
Parent shall have consented to such Indemnitee asserting a claim for
indemnification pursuant to Section 9.8 of the Reorganization Agreement and such
Indemnitee wishes to make a claim against the Escrow with respect to such
possible Indemnification Event, then such Indemnitee may deliver to each of the
Agent and the Escrow Agent a written notice of such possible Indemnification
Event (a "Claim Notice") setting forth (i) a brief description of the
circumstances supporting such Indemnitee's belief that such possible
Indemnification Event exists or has occurred, and (ii) a non-binding,
preliminary estimate of the aggregate dollar amount of all Damages that have
arisen and may arise as a direct or indirect result of such possible
Indemnification Event (such aggregate amount being referred to as the "Claim
Amount").
4.2 RESPONSE NOTICE. Within 15 days after the delivery of a Claim Notice
to the Agent, the Agent shall deliver to the Escrow Agent (with a copy to
Parent) a written notice (the "Response Notice") containing: (i) instructions
to the effect that Escrow Shares having a Fair Market Value (as defined in
Section 6) equal to the entire Claim Amount set forth in such Claim Notice are
to be released from the Escrow to such Indemnitee; OR (ii) instructions to the
effect that Escrow Shares having a Fair Market Value equal to a specified
portion (but not the entire amount) of the Claim Amount set forth in such Claim
Notice are to be released from the Escrow to such Indemnitee, together with a
statement that the remaining portion of such Claim Amount is being disputed; OR
(iii) a statement that the entire Claim Amount set forth in such Claim Notice is
being disputed. If no Response Notice is received by the Escrow Agent from the
Agent within 30 days after the delivery of a Claim Notice to the Agent, then the
Agent shall be deemed to have given instructions to the Escrow Agent that Escrow
Shares having a Fair Market Value equal to the entire Claim Amount set forth in
such Claim Notice are to be released to such Indemnitee from the Escrow.
3.
<PAGE>
4.3 RELEASE OF ESCROW SHARES TO INDEMNITEES.
(a) If the Agent gives (or is deemed to have given) instructions that
Escrow Shares having a Fair Market Value equal to the entire Claim Amount set
forth in a Claim Notice are to be released from the Escrow to an Indemnitee,
then the Escrow Agent shall be authorized to transfer to such Indemnitee, from
the Escrow, Escrow Shares having a Fair Market Value equal to such Claim Amount.
(b) If a Response Notice delivered by the Agent in response to a
Claim Notice contains instructions to the effect that Escrow Shares having a
Fair Market Value equal to a specified portion (but not the entire amount) of
the Claim Amount set forth in such Claim Notice are to be released from the
Escrow to an Indemnitee, then (i) the Escrow Agent shall be authorized to
transfer to such Indemnitee, from the Escrow, Escrow Shares having a Fair Market
Value equal to such specified portion of such Claim Amount, and (ii) the
procedures set forth in Section 4.3(c) shall be followed with respect to the
remaining portion of such Claim Amount.
(c) If a Response Notice delivered by the Agent in response to a
Claim Notice contains a statement that all or a portion of the Claim Amount set
forth in such Claim Notice is being disputed (such Claim Amount or the disputed
portion thereof being referred to as the "Disputed Amount"), then,
notwithstanding anything contained in Section 5, the Escrow Agent shall continue
to hold in the Escrow (in addition to any other Escrow Shares permitted to be
retained in the Escrow, whether in connection with any other dispute or
otherwise), Escrow Shares having a Fair Market Value equal to 125% of the
Disputed Amount. Such Escrow Shares shall continue to be held in the Escrow
until such time as (i) the applicable Indemnitee and the Agent execute a
settlement agreement containing instructions regarding the release of such
shares, or (ii) the Escrow Agent receives a copy of a court order containing
instructions to the Escrow Agent regarding the release of such Escrow Shares.
The Escrow Agent shall thereupon release such Escrow Shares from the Escrow in
accordance with the instructions set forth in such settlement agreement or court
order. (The parties acknowledge that it is appropriate to retain more than 100%
of the Claim Amount in the Escrow in recognition of the fact that the Indemnitee
may have underestimated the aggregate amount of the actual and potential Damages
arising from a particular Indemnification Event, and to cover interest on such
Claim Amount in accordance with Section 9.6 of the Reorganization Agreement.)
(d) Notwithstanding anything to the contrary set forth in this
Section 4, the Escrow Agent shall not release to an Indemnitee, and no
Indemnitee shall be entitled to receive, any Escrow Shares in respect of
indemnification obligations under Section 9 of the Reorganization Agreement for
claims not in respect of or relating to Disputes ("Non-Dispute Indemnification
Claims") if the total number of Escrow Shares previously released to Indemnitees
together with the number of Escrow Shares being released to such Indemnitee
collectively in respect of Non-Dispute Indemnification Claims shall exceed
77,700 shares; PROVIDED, HOWEVER, that the Escrow Agent shall be entitled to
release, and an Indemnitee shall be entitled to receive, up to such number of
Escrow Shares in respect of a Non-Dispute Indemnification Claim as shall not
cause such 77,700 share aggregate maximum to be exceeded.
4.
<PAGE>
SECTION 5. RELEASE OF SHARES TO SHAREHOLDERS
5.1 SHARES TO BE RELEASED. On the date 12 months after the Closing Date
(the "Scheduled Escrow Termination Date"), the Escrow Agent shall release to the
Shareholders from the Escrow all Escrow Shares then held in the Escrow, other
than any Escrow Shares that are to be retained in the Escrow in accordance with
Section 4.3(c). From and after the Scheduled Escrow Termination Date and upon
the resolution of a dispute (and the release of Escrow Shares to Indemnitees in
respect of such dispute, if any) in accordance with Section 4.3(c), Parent shall
release to the Shareholders any Escrow Shares remaining in the Escrow in respect
of such dispute.
5.2 PROCEDURES FOR RELEASING SHARES.
(a) In the event that the Escrow Agent is to release Escrow Shares to
the Shareholders in accordance with Section 5.1, the Escrow Agent shall be
authorized to transfer to each Shareholder, and shall so transfer and release to
each Shareholder, such number of Escrow Shares, subject to Section 3.6, as shall
equal the total number of Escrow Shares to be so transferred and released
multiplied by the fraction (i) having a numerator equal to the number of shares
of Parent Common Stock set forth opposite such Shareholder's name on Exhibit A
hereto and (ii) having a denominator equal to the total number of Escrow Shares
listed on Exhibit A.
(b) Any release of shares to the Shareholders pursuant to Section 5.1
may be effected by mailing a stock certificate to the Shareholders certified
mail, return receipt requested.
SECTION 6. VALUATION OF SHARES HELD IN ESCROW
For purposes of this Escrow Agreement, the "Fair Market Value" of the
Escrow Shares shall be deemed to be equal to the number of Escrow Shares
multiplied by the Designated Parent Stock Price (adjusted as appropriate to
reflect any stock split, reverse stock split, stock dividend or similar
transaction effected by Parent after the Closing Date).
SECTION 7. FEES AND EXPENSES
7.1 ESCROW AGENT FEES AND EXPENSES. Upon execution of this Escrow
Agreement and initial deposit of the Escrow Shares, an acceptance fee of
$___________ will be payable to the Escrow Agent. This acceptance fee will
cover the first year of the Escrow. Thereafter, an annual administrative fee
will be payable in accordance with the Escrow Agent's fee schedules in effect
from time to time. The Escrow Agent will also be entitled to reimbursement for
extraordinary expenses incurred in performance of its duties hereunder.
7.2 PAYMENT OF ESCROW AGENT. Parent shall pay the fees and expenses of
the Escrow Agent for the services to be rendered by the Escrow Agent hereunder.
Parent shall be entitled to reimbursement of one-half of such fees and expenses
from the Shareholders.
5.
<PAGE>
7.3 AGENT'S FEES AND EXPENSES. All reasonable expenses (including
attorneys' fees) incurred by the Agent in connection with the performance of its
duties hereunder shall be reimbursed to the Agent by the Shareholders. Parent
shall not be obligated to reimburse the Agent for any fees charged or expenses
(including attorneys' fees) incurred by the Agent in connection with the Agent's
performance of his duties hereunder. The Agent hereby agrees that he shall not
seek payment or reimbursement of any such fees and expenses, if any, from
Parent, the Surviving Corporation or the Company, and that the Agent shall only
seek payment or reimbursement of all such fees and expenses from the
Shareholders.
7.4 REIMBURSEMENT PROCEDURES. Upon a notice in writing delivered to the
Escrow Agent by Parent in respect of Section 7.2 or Section 8.2, or by the Agent
in respect of Section 7.3, the Escrow Agent shall transfer, deliver and assign
to the Person delivering the notice, in reimbursement of fees and expenses
pursuant to Section 7.2, Section 7.3 or Section 8.2, such number of Escrow
Shares held in the Escrow Account which have a Fair Market Value equal to the
amount to be reimbursed. Notwithstanding the foregoing, the Agent's right of
reimbursement from the Escrow Shares shall be in all respects subordinate to
rights of Parent in respect of the Escrow Shares. The Escrow Agent shall
transfer shares to the Agent in reimbursement of its expenses only at such time
as Escrow Shares are otherwise distributable pursuant to the terms of this
Agreement to the Shareholders.
SECTION 8. LIMITATION OF ESCROW AGENT'S LIABILITY
8.1 LIMITATION. The Escrow Agent shall incur no liability with respect to
any action taken or suffered by it in reliance upon any notice, direction,
instruction, consent, statement or other documents believed by it to be genuine
and duly authorized, nor for other action or inaction except its own willful
misconduct or negligence. The Escrow Agent shall not be responsible for the
validity or sufficiency of this Agreement. In all questions arising under the
Escrow Agreement, the Escrow Agent may rely on the advice of counsel, and for
anything done, omitted or suffered in good faith by the Escrow Agent based on
such advice the Escrow Agent shall not be liable to anyone. The Escrow Agent
shall not be required to take any action hereunder involving any expense unless
the payment of such expense is made or provided for in a manner reasonably
satisfactory to it.
8.2 INDEMNIFICATION OF ESCROW AGENT. Parent and the Shareholders, jointly
and severally, shall indemnify the Escrow Agent for, and hold it harmless
against, any loss, liability or expense incurred without negligence or willful
misconduct on the part of Escrow Agent, arising out of or in connection with its
carrying out of its duties hereunder. As among themselves, each of (i) Parent
and (ii) the Shareholders shall be liable for one-half (1/2) of such amounts and
Parent shall be entitled to reimbursement from the Escrow Shares of the
Shareholders' share of any such loss, liability or expense.
6.
<PAGE>
SECTION 9. SUCCESSOR ESCROW AGENT
In the event the Escrow Agent becomes unavailable or unwilling to continue
in its capacity herewith, the Escrow Agent may resign and be discharged from its
duties or obligations hereunder by giving resignation to the parties to this
Escrow Agreement, specifying not less than 60 days' prior written notice of the
date when such resignation shall take effect. Parent may appoint a successor
Escrow Agent without the consent of the Agent so long as such successor is a
bank with assets of at least $100 million, and may appoint any other successor
Escrow Agent with the consent of the Agent, which consent shall not be
unreasonably withheld. If, within such notice period, Parent provides to the
Escrow Agent written instructions with respect to the appointment of a successor
Escrow Agent and directions for the transfer of any Escrow Shares then held by
the Escrow Agent to such successor, the Escrow Agent shall act in accordance
with such instructions and promptly transfer such Escrow Shares to such
designated successor.
SECTION 10. GENERAL
10.1 ADJUSTMENT OF EXHIBIT A. If and when Parent deposits additional
Escrow Shares with the Escrow Agent, Parent shall revise Exhibit A to reflect
such deposit. In connection therewith, Parent may as appropriate alter the
identity of the Shareholders listed on Exhibit A and the number of Escrow Shares
set forth opposite the appropriate Shareholders' names, including appropriate
adjustments with respect to the incidence of any prior release of shares of
Parent Common Stock to an Indemnitee as permitted in Section 1.6 of the
Reorganization Agreement. Parent may deliver any revised Exhibit A in
accordance with Section 10.3. Upon such delivery, any such revised Exhibit A
(i) shall be deemed appended to this Agreement in replacement of the prior
Exhibit A and (ii) shall constitute Exhibit A for all purposes under this
Agreement.
10.2 OTHER AGREEMENTS. Nothing in this Escrow Agreement is intended to
limit any of Parent's or any other Indemnitee's rights, or any obligation of the
Company or any Shareholder, under the Reorganization Agreement or under any
other agreement entered into in connection with the transactions contemplated by
the Reorganization Agreement.
10.3 NOTICES. Any notice or other communication required or permitted to
be delivered to any party under this Escrow Agreement shall be in writing and
shall be deemed properly delivered, given and received when delivered (by hand,
by registered mail, by courier or express delivery service or by facsimile) to
the address or facsimile telephone number set forth beneath the name of such
party below (or to such other address or facsimile telephone number as such
party shall have specified in a written notice given to the other parties
hereto):
7.
<PAGE>
if to the Escrow Agent:
[Address]
if to Parent:
InVision Technologies, Inc.
3420 E. Third Avenue
Foster City, CA 94404
Attention: Chief Financial Officer
Facsimile: (415) 578-0930
with a copy to:
Robert L. Jones, Esq.
Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306-2155
Facsimile: (415) 857-0663
if to the Agent:
Randall R. Lunn
Techno Venture Management
101 Arch Street
Suite 1950
Boston, MA 02110
Facsimile: (617) 345-9377
10.4 COUNTERPARTS. This Escrow Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
10.5 HEADINGS. The underlined headings contained in this Escrow Agreement
are for convenience of reference only, shall not be deemed to be a part of this
Escrow Agreement and shall not be referred to in connection with the
construction or interpretation of this Escrow Agreement.
10.6 GOVERNING LAW; VENUE. This Escrow Agreement shall be construed in
accordance with, and governed in all respects by, the internal laws of the State
of California (without giving effect to principles of conflicts of laws). Any
state or federal court in the County of San Mateo in the State of California
shall have exclusive jurisdiction and venue over
8.
<PAGE>
any dispute arising out of this Escrow Agreement and the parties hereby consent
to the jurisdiction and venue of such courts.
10.7 SUCCESSORS AND ASSIGNS; PARTIES IN INTEREST.
(a) Subject to Sections 3.5 and 10.7(b), this Escrow Agreement shall
be binding upon: the Company and its successors and assigns (if any); the Agent
and the shareholders of the Company and their respective estates, successors and
assigns (if any); and Parent and its successors and assigns (if any). This
Escrow Agreement shall inure to the benefit of: the Company; the Shareholders;
Parent; the other Indemnitees; and the respective successors (if any) of the
foregoing.
(b) Parent may freely assign any or all of its rights under this
Escrow Agreement, in whole or in part, to any other Person without obtaining the
consent or approval of any other party hereto or of any other Person. None of
the Shareholders, the Agent or the Company shall be permitted to assign any of
his, her or its rights or delegate any of his, her or its obligations under this
Escrow Agreement without Parent's prior written consent.
10.8 WAIVER.
(a) No failure on the part of any Person to exercise any power,
right, privilege or remedy under this Escrow Agreement, and no delay on the part
of any Person in exercising any power, right, privilege or remedy under this
Escrow Agreement, shall operate as a waiver of such power, right, privilege or
remedy; and no single or partial exercise of any such power, right, privilege or
remedy shall preclude any other or further exercise thereof or of any other
power, right, privilege or remedy.
(b) No Person shall be deemed to have waived any claim arising out of
this Escrow Agreement, or any power, right, privilege or remedy under this
Escrow Agreement, unless the waiver of such claim, power, right, privilege or
remedy is expressly set forth in a written instrument duly executed and
delivered on behalf of such Person; and any such waiver shall not be applicable
or have any effect except in the specific instance in which it is given.
10.9 AMENDMENTS. This Escrow Agreement may not be amended, modified,
altered or supplemented other than by means of a written instrument duly
executed and delivered on behalf of Parent, the Agent and the Escrow Agent.
10.10 SEVERABILITY. In the event that any provision of this Escrow
Agreement, or the application of any such provision to any Person or set of
circumstances, shall be determined to be invalid, unlawful, void or
unenforceable to any extent, the remainder of this Escrow Agreement, and the
application of such provision to Persons or circumstances other than those as to
which it is determined to be invalid, unlawful, void or unenforceable, shall not
be impaired or otherwise affected and shall continue to be valid and enforceable
to the fullest extent permitted by law.
9.
<PAGE>
10.11 ENTIRE AGREEMENT. This Escrow Agreement and the Reorganization
Agreement and the other agreements contemplated in the Reorganization Agreement
set forth the entire understanding of the parties relating to the subject matter
hereof and thereof and supersede all prior agreements and understandings among
or between any of the parties relating to the subject matter hereof and thereof.
10.12 CONSTRUCTION.
(a) For purposes of this Escrow Agreement, whenever the context
requires: the singular number shall include the plural, and vice versa; the
masculine gender shall include the feminine and neuter genders; the feminine
gender shall include the masculine and neuter genders; and the neuter gender
shall include the masculine and feminine genders.
(b) The parties hereto agree that any rule of construction to the
effect that ambiguities are to be resolved against the drafting party shall not
be applied in the construction or interpretation of this Escrow Agreement.
(c) As used in this Escrow Agreement, the words "include" and
"including," and variations thereof, shall not be deemed to be terms of
limitation, but rather shall be deemed to be followed by the words "without
limitation."
(d) Except as otherwise indicated, all references in this Escrow
Agreement to "Sections" are intended to refer to Sections of this Escrow
Agreement.
10.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Escrow Agreement as of
the date first above written.
INVISION TECHNOLOGIES, INC.
a Delaware corporation
By:
-------------------------------------
Name:
Title:
QUANTUM MAGNETICS, INC.
a California corporation
By:
-------------------------------------
Name:
Title:
AGENT:
By:
-------------------------------------
Randall R. Lunn
ESCROW AGENT:
By:
-------------------------------------
Name:
Title:
11.
<PAGE>
EXHIBIT A
SHAREHOLDERS OF THE COMPANY
NUMBER OF
SHAREHOLDER ESCROW SHARES
<PAGE>
[COOLEY GODWARD LLP LETTERHEAD]
ROBERT L. JONES
650 843-5034
[email protected]
September 9, 1997
InVision Technologies, Inc.
3420 East 3rd Avenue
Foster City, CA 94404-1101
Ladies and Gentlemen:
You have requested our opinion with respect to certain matters in connection
with the filing by InVision Technologies, Inc. (the "Company") of a
Registration Statement on Form S-4 (the "Registration Statement") with the
Securities and Exchange Commission covering the offering of 777,000 shares of
the Company's Common Stock (the "Shares"), with a par value of $0.001,
pursuant to the Agreement and Plan of Merger and Reorganization (the
"Agreement") by and between the Company, QP Acquisition Corp. and Quantum
Magnetics, Inc.
In connection with this opinion, we have examined the Registration Statement,
the Company's Certificate of Incorporation and Bylaws, as amended, and such
other documents, records, certificates, memoranda and other instruments as we
deem necessary as a basis for this opinion. We have assumed the genuineness
and authenticity of all documents submitted to us as originals, the
conformity to originals of all documents submitted to us as copies thereof,
and the due execution and delivery of all documents where due execution and
delivery are a prerequisite to the effectiveness thereof.
On the basis of the foregoing, and in reliance thereon, we are of the opinion
that the Shares, when sold and issued in accordance with the Agreement and
the Registration Statement, will be validly issued, fully paid, and
nonassessable.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and to the reference to our firm under the caption "Legal Matters"
in the Prospectus included in the Registration Statement.
Very truly yours,
COOLEY GODWARD LLP
/s/ Robert L. Jones
Robert L. Jones
<PAGE>
EXHIBIT 11.1
INVISION TECHNOLOGIES, INC.
STATEMENT REGARDING CALCULATION OF NET INCOME (LOSS) PER SHARE(1)(2)
(In thousand, except per share data)
Year Ended Six Months Ended
December 31, June 30,
--------------------- -------------------
1995 1996 1996 1997
--------- --------- --------- -------
Net income (loss) $ (3,292) $ (3,572) $ (2,045) $ 2,216
--------- --------- --------- -------
--------- --------- --------- -------
Weighted average shares
outstanding:
Common Stock 90 5,820 2,828 9,676
Common Stock issuable upon
exercise of options and
warrants 838 280 600 1,054
Convertible Preferred Stock 5,714 2,042 4,071 -
--------- --------- --------- -------
Weighted average shares
outstanding 6,642 8,142 7,499 10,730
--------- --------- --------- -------
--------- --------- --------- -------
Net income (loss) per share $ (0.50) $ (0.44) $ (0.27) $ 0.21
--------- --------- --------- -------
--------- --------- --------- -------
____________________________
(1) This exhibit should be read in conjunction with Note 2 of Notes to
Consolidated Financial Statements of InVision.
(2) Share and per share data adjusted to reflect the 1-for-11 reverse stock
split which occurred in March 1996 and the 2-for-1 stock split which
occurred February 7, 1997.
<PAGE>
EXHIBIT 11.2
QUANTUM MAGNETICS, INC.
STATEMENT REGARDING CALCULATION OF NET LOSS PER SHARE(1)(2)
(In thousands, except per share data)
Year Ended Nine Months Ended
September 30, June 30,
--------------------- --------------------
1995 1996 1996 1997
--------- --------- --------- ---------
Net loss $ (1,275) $ (2,813) $ (1,989) $ (1,035)
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average shares
outstanding:
Common Stock 2,332 2,826 2,815 3,308
--------- --------- --------- ---------
--------- --------- --------- ---------
Net loss per share $ (0.55) $ (1.00) $ (0.71) $ (0.31)
--------- --------- --------- ---------
--------- --------- --------- ---------
__________________________
(1) This exhibit should be read in conjunction with Note 3 of Notes of
Consolidated Financial Statements of Quantum.
(2) Common stock equivalents have been omitted from the calculation due to
their anti-dilutive effect upon net loss per share.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Proxy Statement/Prospectus
constituting part of this Registration Statement on Form S-4 of our report
dated February 20, 1997, except as to Note 13 (Secondary Offering of Common
Stock and Merger Agreement), which is as of September 3, 1997, relating to the
consolidated financial statements of InVision Technologies, Inc., which
appears in such Proxy Statement/Prospectus, and of our report dated August 22,
1997, except as to Note 15 (Merger Agreement), which is as of September 3,
1997, relating to the consolidated financial statements of Quantum Magnetics,
Inc., which appears in such Proxy Statement/Prospectus. We also consent to
the reference to us under the headings "InVision Selected Consolidated
Financial Data," "Quantum Selected Consolidated Financial Data" and "Experts"
in such Proxy Statement/Prospectus. However, it should be noted that Price
Waterhouse LLP has not prepared or certified such "InVision Selected
Consolidated Financial Data" or "Quantum Selected Consolidated Financial Data."
PRICE WATERHOUSE LLP
San Jose, California
September 10, 1997
<PAGE>
PROXY
QUANTUM MAGNETICS, INC.
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
The undersigned hereby appoints Sergio Magistri and Curtis P. DiSibio,
or either of them, each with power of substitution and revocation thereof, to
represent the undersigned at the Special Meeting of Shareholders of Quantum
Magnetics, Inc. (the "Company") to be held at 10:00 a.m. on Monday, September
29, 1997 at the offices of the Company located at 7742 Kenamar Court, San
Diego, California 92121-2425, and at any adjournments or postponements
thereof, and to vote the number of shares the undersigned would be entitled
to vote if personally present as directed on the reverse side of this proxy.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE
COMPANY AND WILL BE VOTED AS DIRECTED ON THE REVERSE SIDE OF THIS PROXY. IN
THE ABSENCE OF DIRECTION, THIS PROXY WILL BE VOTED FOR THE APPROVAL AND
ADOPTION OF THE AGREEMENT AND PLAN OF MERGER AND REORGANIZATION, FOR THE
APPROVAL OF THE MERGER AND FOR THE AMENDMENT OF THE COMPANY'S ARTICLES OF
INCORPORATION AS DESCRIBED FURTHER IN THE ACCOMPANYING PROXY
STATEMENT/PROSPECTUS.
In their discretion, the proxy holders named above are authorized to
vote upon such other business as may properly come before the meeting and any
adjournment thereof. The Board of Directors recommends a vote FOR the
approval and adoption of the Agreement and Plan of Merger and Reorganization,
FOR the approval of the Merger and FOR the adoption of the amendment to the
Company's Articles of Incorporation. The undersigned hereby acknowledges
receipt of: (a) the Notice of Special Meeting of Shareholders of the Company;
and (b) the accompanying Proxy Statement/Prospectus.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
SEE REVERSE SIDE
1.
<PAGE>
/X/ Please mark votes as in this example.
1. Approve and Adopt the Agreement and Plan of Merger and
Reorganization and approve the Merger, as described further in
the accompanying Proxy Statement/Prospectus. (The Board
recommends a vote "FOR" the approval and adoption of the
Agreement and Plan of Merger and Reorganization and "FOR" the
approval of the Merger.)
FOR AGAINST ABSTAIN
/ / / / / /
2. Approve and Adopt the Amendment to the Company's Articles of
Incorporation, as described further in the accompanying Proxy
Statement/Prospectus. (The Board recommends a vote "FOR" the
approval and adoption of the Amendment to the Company's
Articles of Incorporation.)
FOR AGAINST ABSTAIN
/ / / / / /
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT / /
Please sign exactly as your name(s) appear(s) on your stock certificate. If
shares of stock stand of record in the names of two or more persons or in the
name of husband and wife, whether as joint tenants or otherwise, both or all
of such persons should sign the proxy. If shares of stock are held of record
by a corporation, the proxy should be executed by the president or vice
president and the secretary or assistant secretary. Executors,
administrators or other fiduciaries who execute the above proxy for a
deceased stockholder should give their full title. Please date the proxy.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, YOU ARE URGED TO
SIGN AND PROMPTLY MAIL THIS PROXY IN THE RETURN ENVELOPE PROVIDED SO THAT
YOUR SHARES MAY BE REPRESENTED AT THE MEETING.
Signature: ______________________________ Date:___________________
Signature: ______________________________ Date:___________________
2.
<PAGE>
QUANTUM MAGNETICS, INC.
1994 QUALIFIED AND NONQUALIFIED OPTION PLAN
(EFFECTIVE DECEMBER 9, 1994)
<PAGE>
TABLE OF CONTENTS
PAGE
1. PURPOSE . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . 1
(a) "BOARD". . . . . . . . . . . . . . . . . . . . . . . 1
(b) "CODE" . . . . . . . . . . . . . . . . . . . . . . . 1
(c) "COMMITTEE". . . . . . . . . . . . . . . . . . . . . 1
(d) "COMMON STOCK" . . . . . . . . . . . . . . . . . . . 1
(e) "CORPORATION". . . . . . . . . . . . . . . . . . . . 1
(f) "EMPLOYEE" . . . . . . . . . . . . . . . . . . . . . 1
(g) "EXCHANGE ACT" . . . . . . . . . . . . . . . . . . . 1
(h) "EXERCISE PRICE" . . . . . . . . . . . . . . . . . . 1
(i) "FAIR MARKET VALUE". . . . . . . . . . . . . . . . . 2
(j) "INCENTIVE STOCK OPTION" . . . . . . . . . . . . . . 2
(k) "NON-QUALIFIED STOCK OPTION" . . . . . . . . . . . . 2
(l) "OPTION" . . . . . . . . . . . . . . . . . . . . . . 2
(m) "OPTION AGREEMENT" . . . . . . . . . . . . . . . . . 2
(n) "PARTICIPANT". . . . . . . . . . . . . . . . . . . . 2
(o) "PLAN" . . . . . . . . . . . . . . . . . . . . . . . 2
(p) "PLAN YEAR". . . . . . . . . . . . . . . . . . . . . 2
(q) "PURCHASE PRICE" . . . . . . . . . . . . . . . . . . 2
(r) "PYRAMIDING" . . . . . . . . . . . . . . . . . . . . 3
(s) "SHARE". . . . . . . . . . . . . . . . . . . . . . . 3
(t) "SUBSIDIARY" . . . . . . . . . . . . . . . . . . . . 3
(u) "TEN PERCENT STOCKHOLDER". . . . . . . . . . . . . . 3
(v) "VEST" . . . . . . . . . . . . . . . . . . . . . . . 3
(w) "VOTING POWER" . . . . . . . . . . . . . . . . . . . 4
3. EFFECTIVE DATE. . . . . . . . . . . . . . . . . . . . . . 4
4. ADMINISTRATION. . . . . . . . . . . . . . . . . . . . . . 4
(a) Administration by the Board or the Committee . . . . 4
(b) Composition of the Committee . . . . . . . . . . . . 4
(c) Powers of the Committee. . . . . . . . . . . . . . . 6
(d) Committee's Interpretation of the Plan . . . . . . . 6
(e) Board's Determination of Fair Market Value . . . . . 7
5. ELIGIBILITY FOR PARTICIPATION; ELIGIBILITY FOR INCENTIVE
STOCK OPTIONS . . . . . . . . . . . . . . . . . . . . . . 7
i
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
6. SHARES OF STOCK OF THE CORPORATION. . . . . . . . . . . . 7
(a) Shares Subject to This Plan. . . . . . . . . . . . . 7
(b) Adjustment of Shares . . . . . . . . . . . . . . . . 7
(c) Options Not to Exceed Shares Available . . . . . . . 8
7. TERMS AND CONDITIONS OF OPTIONS . . . . . . . . . . . . . 8
(a) Option Agreements. . . . . . . . . . . . . . . . . . 8
(b) Number of Shares Covered by an Option. . . . . . . . 8
(c) Exercise of Options. . . . . . . . . . . . . . . . . 9
(d) Vesting of Options . . . . . . . . . . . . . . . . . 9
(e) Term and Expiration of Options . . . . . . . . . . . 9
(f) Exercise Price . . . . . . . . . . . . . . . . . . . 10
(g) Medium and Time of Payment of Purchase Price . . . . 10
(h) Nontransferability of Options. . . . . . . . . . . . 11
(i) Termination of Employee, Director or Consultant
Status for any Reason Other Than Death or
Disability . . . . . . . . . . . . . . . . . . . . . 11
(j) Death of Participant . . . . . . . . . . . . . . . . 12
(k) Disability of Participant. . . . . . . . . . . . . . 12
(l) Rights as a Stockholder. . . . . . . . . . . . . . . 13
(m) Modification, Extension, and Renewal of Options. . . 13
(n) Other Provisions . . . . . . . . . . . . . . . . . . 14
(o) No Disqualification of Incentive Stock Options . . . 14
(p) Limitation on Incentive Stock Options. . . . . . . . 14
8. TERM OF PLAN. . . . . . . . . . . . . . . . . . . . . . . 14
9. ADJUSTMENTS UPON CHANGES IN STOCK . . . . . . . . . . . . 15
10. SECURITIES LAW REQUIREMENTS . . . . . . . . . . . . . . . 15
(a) Legality of Issuance . . . . . . . . . . . . . . . . 15
(b) Restrictions on Transfer; Representations of
Participant; Legends . . . . . . . . . . . . . . . . 16
(c) Registration or Qualification of Securities. . . . . 17
11. CORPORATION'S RIGHTS WITH RESPECT TO SHARES ACQUIRED
PURSUANT TO OPTIONS . . . . . . . . . . . . . . . . . . . 17
12. AMENDMENT OF THE PLAN . . . . . . . . . . . . . . . . . . 18
13. PAYMENT FOR SHARE PURCHASES . . . . . . . . . . . . . . . 19
ii
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
14. APPLICATION OF FUNDS. . . . . . . . . . . . . . . . . . . 20
15. PRIVILEGES OF STOCK OWNERSHIP . . . . . . . . . . . . . . 20
16. TRANSFERABILITY . . . . . . . . . . . . . . . . . . . . . 21
17. APPROVAL OF SHAREHOLDERS. . . . . . . . . . . . . . . . . 21
18. WITHHOLDING OF TAXES. . . . . . . . . . . . . . . . . . . 21
(a) General. . . . . . . . . . . . . . . . . . . . . . . 21
(b) Stock Withholding. . . . . . . . . . . . . . . . . . 22
19. INFORMATION TO PARTICIPANTS . . . . . . . . . . . . . . . 23
20. RIGHTS AS AN EMPLOYEE . . . . . . . . . . . . . . . . . . 24
21. INSPECTION OF RECORDS . . . . . . . . . . . . . . . . . . 24
iii
<PAGE>
QUANTUM MAGNETICS, INC.
1994 QUALIFIED AND NONQUALIFIED OPTION PLAN
1. PURPOSE.
This Plan is intended to provide employees and directors of Quantum
Magnetics, Inc. ("Corporation") and independent contractors and consultants
rendering services to the Corporation with an opportunity to acquire an
ownership interest in the Corporation, and to attract and retain key
personnel in the Corporation's employ.
2. DEFINITIONS.
(a) "BOARD" shall mean the Board of Directors of the Corporation.
(b) "CODE" shall mean the Internal Revenue Code of 1986, as amended.
(c) "COMMITTEE" shall mean the committee appointed by the Board in
accordance with Section 4(b) to administer the Plan.
(d) "COMMON STOCK" shall mean the voting common stock of the
Corporation.
(e) "CORPORATION" shall mean Quantum Magnetics, Inc.
(f) "EMPLOYEE" shall mean any individual who is employed, within the
meaning of Section 3401 of the Code and the regulations thereunder, by the
Corporation or any Subsidiary. The Committee shall be responsible for
determining when an Employee's period of employment is deemed to be continued
during an approved leave of absence.
(g) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.
(h) "EXERCISE PRICE" shall mean the price per Share at which an Option
may be exercised, as determined by the Committee and as specified in the
Participant's Option Agreement.
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(i) "FAIR MARKET VALUE" shall mean, as of any date, the fair market
value of the Common Stock of the Corporation determined by the Board pursuant
to Rule 260.140.50 of Title 10 of the California Code of Regulations.
(j) "INCENTIVE STOCK OPTION" shall mean an Option of the type which is
described in Section 422(b) of the Code.
(k) "NON-QUALIFIED STOCK OPTION" shall mean an Option which is not of
the type described in Section 422(b) or 423(b) of the Code.
(l) "OPTION" shall mean an option which is granted pursuant to the Plan
to purchase Shares of Common Stock, whether granted as an Incentive Stock
Option or as a Non-qualified Stock Option.
(m) "OPTION AGREEMENT" shall mean, with respect to each Option, the
signed written agreement between the Corporation and the Participant setting
forth the terms and conditions of the Option.
(n) "PARTICIPANT" shall mean any individual to whom an Option has been
granted or issued under the Plan.
(o) "PLAN" shall mean this Quantum Magnetics, Inc. 1994 Qualified and
Nonqualified Stock Option Plan, as amended. The Plan is effective December
9, 1994.
(p) "PLAN YEAR" shall mean the 12 consecutive month period coinciding
with the Corporation's fiscal year.
(q) "PURCHASE PRICE" shall mean, at any specified time, the Exercise
Price per Share times the number of Options being exercised.
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(r) "PYRAMIDING" shall mean a Participant's payment of the Exercise
Price during the exercise of an Option by exchanging a Share or Share(s) of
Common Stock that said Participant had acquired pursuant to the exercise of
another Option during the preceding six months.
(s) "SHARE" shall mean one authorized share of Common Stock.
(t) "SUBSIDIARY" shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations beginning with the
Corporation if, at the time of granting an Option, each of the corporations
(other than the last corporation in the unbroken chain) owns stock possessing
50% or more of the Voting Power in one of the other corporations in such
chain.
(u) "TEN PERCENT STOCKHOLDER" shall mean any person who owns stock of
the Corporation possessing more than 10% of the combined Voting Power of all
classes of outstanding stock of the Corporation. For purposes of determining
whether a person is a Ten Percent Stockholder: (i) a person shall be
considered as owner of stock that is owned, directly, by or for his or her
brothers or sisters, spouse, ancestors, and lineal descendants; (ii) stock
owned, directly or indirectly, by or for a corporation, partnership, estate
or trust shall stock owned, directly or indirectly, by or for a corporation,
partnership, estate or trust shall be considered as being owned
proportionally by or for its shareholders, partners or beneficiaries,
respectively; (iii) the term "outstanding stock" shall include all shares of
stock actually issued and outstanding, but shall not include any shares of
stock subject to stock options.
(v) "VEST" OR "VESTING" shall mean shall mean the event or act prior to
which an Option, in whole or in part, is not exercisable, and subsequent to
which an Option, in whole or in part, becomes exercisable for the first time.
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(w) "VOTING POWER" shall mean the total combined rights to cast votes
at elections for members of a corporation's board of directors.
3. EFFECTIVE DATE.
The Plan was adopted by the Corporation effective December 9, 1994,
subject to the approval of the Corporation's shareholders in accordance with
Section 18.
4. ADMINISTRATION.
(a) ADMINISTRATION BY THE BOARD OR THE COMMITTEE.
The Board may administer the Plan or appoint a Committee to
administer the Plan. If no Committee has been appointed or is currently
constituted, the Board shall have the powers and authority otherwise
delegated to the Committee in this Plan document and all acts to be performed
by the Committee under this Plan shall be performed by the Board. In any
event, the Board shall have the authority to determine the Fair Market Value
of the Common Stock in accordance with Section 4(e).
(b) COMPOSITION OF THE COMMITTEE.
(i) If appointed by the Board, the Committee shall consist of not
less than two members, who may also be members of the Board. Each Committee
member shall serve until the member resigns, dies or is removed by the Board,
whichever is the first event to occur. The Board may, from time to time,
increase the size of the Committee, fill vacancies however caused, remove
members with or without cause, and disband the Committee and thereafter
directly administer the Plan. The Board shall designate one member as
Chairman of the Committee. The Committee shall hold meetings at such times
and places as it may determine. For a Committee meeting, if the Committee
has two or three members, all must be present to constitute a quorum, and if
the Committee has four or more members, a majority of the
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Committee plus one member shall constitute a quorum. Acts by a majority of
the members present at a meeting at which a quorum is present and acts
approved in writing by all the members of the Committee shall constitute
valid acts of the Committee.
(ii) Members of the Committee who are either eligible for Options
or have been granted an Option may vote on any matters affecting the
administration of the Plan or the grant of any Option pursuant to the Plan.
However, no such member shall act upon the granting of an Option to himself
or herself (unless such grant is part of a plan under which Options are to be
granted to a classification of Employees). In the event of cases such as
those described in the preceding sentence, such member shall be counted in
determining the existence of a quorum at a meeting of the Committee but shall
be excluded in determining the number of directors voting or taking written
action with respect to an Option granted to such member.
(iii) If the Corporation registers any class of equity security
pursuant to Section 13 of the Exchange Act, from the effective date of such
registration until six months after the termination of such registration, the
Plan shall be administered by a Committee which shall consist of not less
than three members, who may also be members of the Board. During such
period, the Committee shall be comprised of individuals who:
(A) Shall be ineligible to participate in the Plan and in any
plan sponsored by the Corporation which provides for the grant of stock of
the Corporation; and
(B) Shall have been ineligible to participate in the Plan and
any such other plan for a one-year period prior to the time such individual
becomes a member of the Committee. The Board may from time to time designate
individuals as ineligible to participate in the Plan for such one-year period
in order to become eligible to be a member of the Committee.
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(c) POWERS OF THE COMMITTEE.
On behalf of the Corporation and subject to the provisions of the
Plan, the Committee shall have the authority and discretion to:
(i) Prescribe, amend and rescind rules and regulations relating
to the Plan;
(ii) Select Participants to receive Options;
(iii) Determine the form and terms of Options;
(iv) Determine the number of Shares or other consideration
subject to Options;
(v) Determine whether Options will be granted singly, in
combination or in tandem with, in replacement of, or as alternatives to,
other Options under the Plan or any other incentive or compensation plan of
the Corporation;
(vi) Construe and interpret the Plan, any Option Agreement and
any other agreement or document executed pursuant to the Plan;
(vii) Correct any defect or omission, or reconcile any
inconsistency in the Plan, any Option or any Option Agreement;
(viii) Determine whether an Option has been earned and/or
Vested;
(ix) Authorize any person to execute on behalf of the
Corporation any instrument required to effectuate the grant of an Option as
made by the Committee;
(x) Make all other determinations deemed necessary or advisable
for the administration of the Plan
(d) COMMITTEE'S INTERPRETATION OF THE PLAN.
The Committee's interpretation and construction of any provision of
the Plan, of any Option granted under the Plan, or of any Option Agreement
shall be final and binding on all parties claiming an interest in an Option
granted or issued under the Plan. No member of
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the Committee nor any director shall be liable for any action or
determination made in good faith with respect to the Plan.
(e) BOARD'S DETERMINATION OF FAIR MARKET VALUE.
The Board shall have the authority to determine, as of any date,
the fair market value of the Common Stock of the Corporation pursuant to Rule
260.140.50 of Title 10 of the California Code of Regulations.
5. ELIGIBILITY FOR PARTICIPATION; ELIGIBILITY FOR INCENTIVE STOCK
OPTIONS.
All Employees, directors, consultants, and independent contractors of
the Corporation shall be eligible to become a Participant, subject to the
limitation that any person who is not an Employee share not be eligible to
receive Incentive Stock Options. The Committee's determination of an
individual's eligibility for Participation shall be final. The Committee
shall, in its sole discretion, select Participants from among the eligible
persons described in this Section 5. A Participant may be granted more than
one Option under the Plan.
6. SHARES OF STOCK OF THE CORPORATION.
(a) SHARES SUBJECT TO THIS PLAN.
Stock with respect to which Options are granted or issued under
this Plan shall be authorized but unissued or reacquired Shares of the
Corporation's Common Stock. The aggregate number of Shares which may be
issued under this Plan shall not exceed 1,000,000 (one million), subject to
adjustment under Section 9.
(b) ADJUSTMENT OF SHARES.
In the event of an adjustment described in Section 9, then (i) the
number of Shares reserved for issuance under the Plan, (ii) the Exercise
Prices of and number of Shares subject to outstanding Options, and (iii) any
other factor pertaining to outstanding Options shall be duly
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and proportionately adjusted, subject to any required action by the Board or
the shareholders of the Corporation and compliance with applicable securities
laws; provided, however, that fractions of a Share shall not be issued but
shall either be paid in cash at Fair Market Value or shall be rounded up to
the nearest Share, as determined by the Committee; and provided, further,
that the Exercise Price of any Option may not be decreased to below the par
value, if any, of the Shares.
(c) OPTIONS NOT TO EXCEED SHARES AVAILABLE.
The number of Shares subject to Options which have been granted
under this Plan at any time during the Plan Term shall not exceed the number
of Shares authorized for issuance under the Plan. The number of Shares
subject to an Option which expires, is cancelled, is forfeited or is
terminated for any reason, shall again be available for issuance under the
Plan. Any Shares the Corporation reacquires pursuant to Section 11 shall
also again be available for issuance under this Plan.
7. TERMS AND CONDITIONS OF OPTIONS.
(a) OPTION AGREEMENTS.
Each Option shall be evidenced by a written Option Agreement which
shall set forth the terms and conditions pertaining to such Option, provided
that all such terms shall be subject to and consistent with this Plan.
(b) NUMBER OF SHARES COVERED BY AN OPTION.
Each Option Agreement shall state the number of Shares for which
the Option is exercisable, subject to adjustment of such Shares pursuant to
Section 9.
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(c) EXERCISE OF OPTIONS.
A Participant may exercise an Option only on or after the date on
which the Option Vests, as provided Section 7(d) below, and only on or before
the date on which the Option lapses, as provided in Section 7(e) below.
(d) VESTING OF OPTIONS.
Each Option Agreement shall include a schedule ("Vesting Schedule")
describing the event or act upon which an Option shall Vest, in whole or
partially, with respect to all or a portion of the Shares covered by such
Option. The Vesting Schedule shall not impose upon the Corporation any
obligation to retain the Participant in its employ for any period. In all
cases, an Option shall Vest at the rate of at least 20% per year over 5 years
from the date the Option is granted.
(e) TERM AND EXPIRATION OF OPTIONS.
A Participant may exercise an Option to purchase Shares only on or
before the date on which the term of the Option expires. The term of an
Option shall expire on the first to occur of the following events:
(i) The tenth anniversary of the date the Option was granted
(substituting "fifth anniversary" for "tenth anniversary" for an Incentive
Stock Option granted to a Ten Percent Stockholder);
(ii) The date determined under Section 7(i) for a Participant who
ceases to be an Employee, director, independent contractor, or consultant of
the Corporation for any reason, other than by reason of death or total and
permanent disability;
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(iii) The date determined under Section 7(j) for a Participant
who ceases to be an Employee, director, independent contractor, or consultant
of the Corporation by reason of the Participant's death;
(iv) The date determined under Section 7(k) for a Participant who
ceases to be an Employee, director, independent contractor, or consultant of
the Corporation by reason of the Participant's total and permanent
disability, within the meaning of Section 22(e)(3) of the Code;
(v) On the effective date of a transaction described in Section
9(b); or
(vi) The expiration date specified in the Option's Option
Agreement.
(f) EXERCISE PRICE.
Each Option Agreement shall state the Exercise Price for the Shares
to which the Option pertains, subject to conditions that the Exercise Price
of an Incentive Stock Option or a Nonstatutory Option shall not be less than
100% or 85%, respectively, of the Fair Market Value of the Shares on the date
the Option is granted (substituting "110%" for "100% or 85%, respectively"
for any Option granted to a Ten Percent Stockholder).
(g) MEDIUM AND TIME OF PAYMENT OF PURCHASE PRICE.
A Participant exercising an Option shall pay the Purchase Price of
the Shares to which such exercise pertains in full in cash (in U.S. dollars)
as a condition of such exercise, unless the Committee in its discretion
allows the Participant to pay the Purchase Price in a manner allowed under
Section 14, so long as the sum of cash so paid and such other consideration
equals the Purchase Price. The sequential exercise of an Option through
Pyramiding is specifically allowable under the Plan, subject to the consent
of the Committee at its discretion.
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(h) NONTRANSFERABILITY OF OPTIONS.
An Option granted to a Participant shall, during the lifetime of
the Participant, be exercisable only by the Participant or the Participant's
conservator or other legal representative and shall not be assignable or
transferable. In the event of the Participant's death, the Option is
transferable by the Participant only by will or the laws of descent and
distribution.
(i) TERMINATION OF EMPLOYEE, DIRECTOR OR CONSULTANT STATUS FOR ANY
REASON OTHER THAN DEATH OR DISABILITY.
(i) For purposes of this Section 7(i), Employee, Director or
consultant status will be treated as continuing intact while the Participant
is an active Employee, Director or consultant or is on military leave, sick
leave or other bona fide leave of absence, as determined by the Board in its
discretion. The preceding sentence notwithstanding, for determinations
pertaining to Incentive Stock Options, Employee status shall be deemed to
terminate on the date that a Participant is no longer eligible to receive an
Incentive Stock Option pursuant to Section 5, unless the Participant's
reemployment rights are guaranteed by statute or contract.
(ii) If a Participant ceases to be an Employee, Director or
consultant for any reason other than death or total and permanent disability
(as defined in Section 7(k)), then: (A) any of the Participant's Options
which are not Vested at the time that the Participant ceases to be an
Employee, Director or consultant shall be forfeited; and (B) any of the
Participant's Options which are Vested at the time that Participant ceases to
be an Employee, Director or consultant shall expire at 12:00 Midnight on the
30th day following the date that the Participant ceases to be an Employee,
Director or consultant subject to Section 7(e) and to the following sentence.
Pursuant to Section 7(m), the Board may, in its sole discretion, grant an
extension of the expiration period in order to favor a Participant provided
that such extension: (A) shall
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be made in writing and shall provide that any unexercised Option shall expire
at 12:00 Midnight on the last day of such extension; and (B) shall provide
that any unexercised Incentive Stock Option shall expire prior to or at 12:00
Midnight on the 90th day that the Participant ceases to be an Employee.
(j) DEATH OF PARTICIPANT.
If a Participant dies while an Employee, Director or consultant,
any Option granted to the Participant may be exercised, to the extent it was
vested on the date of the Participant's death, at any time within 6 months
after the Participant's death (but not beyond the date that such Option would
have expired pursuant to Section 7(e) had the Participant's death not
occurred) by the executors or administrators of the Participant's estate or
by any persons who have acquired the Option directly from the Participant by
will or the laws of descent and distribution. Pursuant to Section 7(m), the
Board may, in its sole discretion, grant an extension of the expiration
period in order to favor a Participant. Such extension shall be made in
writing and shall provide that any unexercised Option shall expire at 12:00
Midnight on the last day of such extension.
(k) DISABILITY OF PARTICIPANT.
If a Participant ceases to be an Employee, Director or consultant
as a consequence of becoming totally and permanently disabled (within the
meaning of Section 22(e)(3) of the Code), any Option granted to the
Participant may be exercised, to the extent it was vested on the date that
the Participant ceased to be an Employee, Director or consultant, at any time
within 6 months after the date that the Participant ceased to be an Employee,
Director or consultant (but not beyond the date that such Option would have
expired pursuant to 7(e) had the Participant's total and permanent disability
not occurred), by the Participant or the Participant's conservator
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or other legal representative. Pursuant to Section 7(m), the Board may, its
sole discretion, grant an extension of the expiration period in order to
favor a Participant, provided that the Option whose expiration period is
extended is not an Incentive Stock Option. Such extension shall be made in
writing and shall provide that any unexercised Option shall expire at 12:00
Midnight on the last day of such extension.
(l) RIGHTS AS A STOCKHOLDER.
A Participant, or an allowable transferee of a Participant, shall
have no rights as a stockholder of the Corporation with respect to any Shares
for which an Option is exercisable until the date a stock certificate for
such Shares is issued to the Participant. No adjustment shall be made for
dividends (ordinary or extraordinary or whether in currency, securities, or
other property), distributions, or other rights for which the record date is
prior to the date such stock certificate is issued, except as provided in
Section 9.
(m) MODIFICATION, EXTENSION, AND RENEWAL OF OPTIONS.
Within the limitations of the Plan, the Committee may in its
discretion modify, extend or renew any outstanding Option or accept the
cancellation of outstanding Options for the granting of a new Option in
substitution therefor. Notwithstanding the preceding sentence, no
modification of an Option shall: (A) without the consent of the Participant,
alter or impair any rights or obligations under any Option previously
granted; or (B) exceed or otherwise violate any limitation set forth in this
Section 7.
(n) OTHER PROVISIONS.
An Option Agreement may contain such other provisions as the
Committee in its discretion deems advisable which are not inconsistent with
the terms of the Plan, including but not limited to:
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(i) restrictions on the exercise of the Option;
(ii) submission by the Participant of such forms and documents as
the Committee may require; and/or
(iii) procedures to facilitate the broker-assisted exercise of
the Option.
(o) NO DISQUALIFICATION OF INCENTIVE STOCK OPTIONS.
Notwithstanding any other provision of the Plan, the Plan shall not
be interpreted, amended or altered, nor shall any discretion or authority
granted under the Plan be exercised, so as to disqualify the Plan under
Section 422 of the Code or, without the consent of the Participant affected,
disqualify any Incentive Stock Option under Section 422 of the Code.
(p) LIMITATION ON INCENTIVE STOCK OPTIONS.
The aggregate Fair Market Value (determined with respect to each
Incentive Stock Option as of such Incentive Stock Option's date of grant) of
all Shares with respect to which a Participant's Incentive Stock Options
become Vested during any calendar year (under the Plan and under other
incentive stock option plans of the Corporation, if any) shall not exceed
$100,000.
8. TERM OF PLAN.
Options may be granted pursuant to the Plan through the period ending on
December 8, 2004. All Options which are outstanding on such date shall
remain in effect until they are exercised or expire by their terms.
9. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or subject
to any Option (through merger, consolidation, reorganization,
recapitalization, stock dividend, dividend in property other than cash, stock
split, liquidating dividend, combination of shares, exchange of
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shares, change in corporate structure or otherwise), the Plan and outstanding
Options will be appropriately adjusted in the class(es) and maximum number of
shares subject to the Plan and the class(es) and number of shares and price
per share of stock subject to outstanding Options.
(b) In the event of: (1) a merger or consolidation in which the
Corporation is not the surviving corporation or (2) a reverse merger in which
the Corporation is the surviving corporation but the shares of the
Corporation's common stock outstanding immediately preceding the merger are
converted by virtue of the merger into other property, whether in the form of
securities, cash or otherwise then to the extent permitted by applicable law:
(i) any surviving corporation shall assume any Options outstanding under the
Plan or shall substitute similar Options for those outstanding under the
Plan, or (ii) such Options shall continue in full force and effect. In the
event any surviving corporation refuses to assume or continue such Options,
or to substitute similar options for those outstanding under the Plan, then
such Options shall be terminated if not exercised prior to such event. In the
event of a dissolution or liquidation of the Corporation, any Options
outstanding under the Plan shall terminate if not exercised prior to such
event.
10. SECURITIES LAW REQUIREMENTS.
(a) LEGALITY OF ISSUANCE.
No Share shall be issued upon the exercise of any Option unless and
until the Committee has determined that:
(i) The Corporation and the Participant have taken all actions
required to register the Shares under the Securities Act of 1933, as amended
(the "Act"), or to perfect an exemption from registration requirements of the
Act, or to determine that the registration requirements of the Act do not
apply to such exercise;
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(ii) Any applicable listing requirement of any stock exchange on
which the Share is listed has been satisfied; and
(iii) Any other applicable provision of state, federal or
foreign law has been satisfied.
(b) RESTRICTIONS ON TRANSFER; REPRESENTATIONS OF PARTICIPANT;
LEGENDS.
Regardless of whether the offering and sale of Shares under the
Plan have been registered under the Act or has been registered or qualified
under the securities laws of any state, the Corporation may impose
restrictions upon the sale, pledge, or other transfer of such Shares
(including the placement of appropriate legends on stock certificates) if, in
the judgment of the Corporation and its counsel, such restrictions are
necessary or desirable to achieve compliance with the provisions of the Act,
the securities laws of any state, or any other law. If the offering and/or
sale of Shares under the Plan is not registered under the Act and the
Corporation determines that the registration requirements of the Act apply
but an exemption is available which requires an investment representation or
other representation, the Participant shall be required, as a condition to
acquiring such Shares, to represent that such Shares are being acquired for
investment, and not with a view to the sale or distribution thereof, except
in compliance with the Act, and to make such other representations as are
deemed necessary, or appropriate by the Corporation and its counsel. Stock
certificates evidencing Shares acquired pursuant to an unregistered
transaction to which the Act applies shall bear a restrictive legend
substantially in the following form and such other restrictive legends as are
required or deemed advisable under the Plan or the provisions of any
applicable law:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 ("ACT"). THEY MAY NOT BE
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TRANSFERRED, SOLD OR OFFERED FOR SALE UNLESS A
REGISTRATION STATEMENT UNDER THE ACT IS IN EFFECT AS TO
SUCH TRANSFER OR IN THE OPINION OF COUNSEL FOR THE ISSUER
EITHER SUCH REGISTRATION IS UNNECESSARY IN ORDER FOR SUCH
TRANSFER TO COMPLY WITH THE ACT OR THE REGISTRATION
PROVISIONS OF THE ACT DO NOT APPLY TO SUCH PROPOSED
TRANSFER.
The Corporation shall also place legends on stock certificates representing
its rights under Section 11. Any determination by the Corporation and its
counsel in connection with any of the matters set forth in this Section 10
shall be conclusive and binding on all persons.
(c) REGISTRATION OR QUALIFICATION OF SECURITIES.
The Corporation may, but shall not be obligated to, register or
qualify the offering or sale of Shares under the Act or any other applicable
law.
11. CORPORATION'S RIGHTS WITH RESPECT TO SHARES ACQUIRED PURSUANT
TO OPTIONS.
The Corporation shall have the same rights with respect to a Share
acquired pursuant to the exercise of an Option as it has with respect to any
Share of the same class of Shares pursuant to the Corporation's by-laws (as
amended), which are incorporated herein by reference. Such rights may
include (without limit) the Corporation's right of first refusal over a Share
in the event that a Participant wishes to sell or otherwise dispose of such
Share.
12. AMENDMENT OF THE PLAN.
The Committee may, from time to time, terminate, suspend or discontinue
the Plan, in whole or in part, or revise or amend it in any respect
whatsoever including, but not limited to,
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the adoption of any amendment deemed necessary or advisable to qualify the
Options under rules and regulations promulgated by the Securities and
Exchange Commission with respect to Employees who are subject to the
provisions of Section 16 of the Exchange Act, or to correct any defect or
supply any omission or reconcile any inconsistency in the Plan or in any
Option granted under the Plan, with or without approval of the shareholders
of the Corporation, but if any such action is taken without the approval of
the Corporation's shareholders, no such revision or amendment shall:
(a) increase the number of Shares subject to the Plan, other than any
increase pursuant to Section 9;
(b) change the designation of the class of persons eligible to receive
Options;
(c) permit any individual while a member of the Committee to be
eligible to receive and hold an Option granted or issued under the Plan under
terms that violate Section 4(b)(iii);
(d) withdraw administration of the Plan from the Committee;
(e) increase the maximum duration of an Option;
(f) change the manner of determining the Exercise Price of an Option;
or
(g) amend this Section 13 to defeat its purpose.
No amendment, termination or modification of the Plan shall, without the
consent of the Participant, affect any Option previously granted.
13. PAYMENT FOR SHARE PURCHASES.
Payment of the Purchase Price for any Shares purchased pursuant to the
Plan may be made cash (in U.S. dollars) or, where expressly approved for the
Participant by the Committee and where permitted by law:
(a) By check;
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(b) By cancellation of indebtedness of the Corporation to the
Participant;
(c) By surrender of Shares that either: (A) have been owned by
Participant for more than six (6) months (unless the Committee permits a
Participant to exercise an Option by Pyramiding, in which event the six
months holding period shall not apply) and have been paid for within the
meaning of SEC Rule 144 (and, if such shares were purchased from the
Corporation by use of a promissory note, such note has been fully paid with
respect to such Shares); or (B) were obtained by Participant in the public
market;
(d) By tender of a full recourse promissory note having such terms as
may be approved by the Committee and bearing interest at a rate sufficient to
avoid imputation of income under Sections 483 and 1274 of the Code; provided,
however, that Participants who are not Employees shall not be entitled to
purchase Shares with a promissory note unless the note is adequately secured
by collateral other than the Shares; provided, further, that the portion of
the Purchase Price equal to the par value of the Shares, if any, must be paid
in cash;
(e) By waiver of compensation due or accrued to Participant for
services rendered;
(f) With respect only to purchases upon exercise of an Option, and
provided that a public market for the Corporation's stock exists:
(i) Through a "same day sale" commitment from Participant and a
broker-dealer that is a member of the National Association of Securities
Dealers (an "NASD dealer") whereby Participant irrevocably elects to exercise
the Option and to sell a portion of the Shares so purchased to pay for the
Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt
of such Shares to forward the Exercise Price directly to the Corporation; or
(ii) Through a "margin" commitment from Participant and an NASD
Dealer whereby Participant irrevocably elects to exercise the Option and to
pledge the Shares so
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purchased to the NASD Dealer in a margin account as security for a loan from
the NASD Dealer in the amount of the Exercise Price, and whereby the NASD
Dealer irrevocably commits upon receipt of such Shares to forward the
Exercise Price directly to the Corporation; or
(iii) By any combination of the foregoing.
14. APPLICATION OF FUNDS.
The proceeds received by the Corporation from the sale of Common Stock
pursuant to the exercise of an Option shall be used for general corporate
purposes.
15. PRIVILEGES OF STOCK OWNERSHIP.
No Participant shall have any of the rights of a shareholder with
respect to any Shares until the date stock certificates for such Shares are
issued to the Participant. After certificates are issued to the Participant,
the Participant shall be a shareholder and have all the rights of a
shareholder with respect to such Shares, including the right to vote and
receive all dividends or other distributions made or paid with respect to
such Shares. The preceding sentence notwithstanding, a Participant who,
pursuant to Section 12, exercises a non-Vested Option and receives Shares of
restricted stock shall have no right to receive dividends or distributions
received and no voting rights with respect to such Shares.
16. TRANSFERABILITY.
Options granted under the Plan, and any interest therein, shall not be
transferable or assignable by Participant, and may not be made subject to
execution, attachment or similar process, otherwise than by will or by the
laws of descent and distribution or as consistent with the specific Plan and
Option Agreement provisions relating thereto. During the lifetime of the
Participant an Option may be exercisable only by the Participant, and any
elections with respect to any Option may be made only by the Participant.
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17. APPROVAL OF SHAREHOLDERS.
The Plan shall be subject to approval by the affirmative vote of the
holders of a majority of all classes of the outstanding shares present and
entitled to vote at the first annual meeting of shareholders of the
Corporation adopting the Plan following the adoption of the Plan, and in no
event later than November 1, 1995. Prior to such approval, Options may be
granted but may not be exercised or settled. Pursuant to Section 13, certain
amendments shall also be subject to approval by the Corporation's
shareholders.
18. WITHHOLDING OF TAXES.
(a) GENERAL.
Whenever Shares are to be issued under the Plan, the Corporation
may require the Participant to remit to the Corporation an amount sufficient
to satisfy federal, state and local withholding tax requirements prior to the
delivery of any certificate or certificates for such Shares. Whenever, under
the Plan, payments in satisfaction of Options are to be made in cash, such
payment shall be net of an amount sufficient to satisfy federal, state, and
local withholding tax requirements.
(b) STOCK WITHHOLDING.
When, under applicable tax laws, a Participant incurs tax liability
in connection with the exercise of any Option that is subject to tax
withholding and the Participant is obligated to pay the Corporation the
amount required to be withheld, the Committee may at its sole discretion
allow the Participant to satisfy the minimum withholding tax obligation by
electing to have the Corporation withhold from the Shares to be issued the
specific number of Shares having a Fair Market Value equal to the minimum
amount required to be withheld, determined on the date that the amount of tax
to be withheld is to be determined (the "Tax Date"). All
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elections by a Participant to have Shares withheld for this purpose shall be
made in writing in a form acceptable to the Committee and shall be subject to
the following restrictions:
(i) The election must be made on or prior to the applicable Tax
Date;
(ii) Once made, then except as provided below, the election shall
be irrevocable as to the particular Shares as to which the election is made;
(iii) All elections shall be subject to the consent or disapproval
of the Committee;
(iv) In the event that the Tax Date is deferred until six (6)
months after the delivery of Shares under Section 83(b) of the Code, the
Participant shall receive the full number of Shares with respect to which the
exercise occurs, but such Participant shall be unconditionally obligated to
tender back to the Corporation the proper number of Shares on the Tax Date;
and
(v) If the Participant is an "insider" and of the Corporation is
subject to Section 16(b) of the Exchange Act:
(A) the election may not be made within six (6) months of the
date of grant of the Option, except as otherwise permitted by SEC Rule
16b-3(e) under the Exchange Act; and
(B) either:
(I) the election to use stock withholding must be
irrevocably made at least six (6) months prior to the Tax Date (although such
election may be revoked at any time at least six (6) months prior to the Tax
Date); or
(II) the exercise of the Option or election to use stock
withholding must be made in the ten day period beginning on the third day
following the release of the Corporation's quarterly or annual summary
statement of sales or earnings.
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19. INFORMATION TO PARTICIPANTS.
Within a reasonable time after the last day of each Plan Year, the
Committee shall furnish to each Participant a statement setting forth the
Participant's total number of Shares subject to Options, the date such
Options were granted, the Fair Market Value of such Options as of the grant
or issuance date, and such other information as the Committee shall deem
advisable to furnish. At least annually, Participants who hold Shares and/or
Options under this Plan shall receive the following financial statements of
the Corporation: a balance sheet as of the end of the most recently completed
fiscal year of the Corporation and statements of operations for each of the
three consecutive fiscal years ending on the date of the balance sheet. Such
financial statements will be prepared in accordance with generally accepted
accounting principles, but will be unaudited unless audited financial
statements are otherwise available.
20. RIGHTS AS AN EMPLOYEE.
The Plan shall not be construed to give any individual the fight to
remain in the employ of the Corporation (or a Subsidiary) or to affect the
right of the Corporation (or such Subsidiary) to terminate such individual's
employment at any time, with or without cause. The grant of an Option shall
not entitle the Participant to, or disqualify the Participant from,
participation in the grant of any other Option under the Plan or
participation in any other plan maintained by the Corporation.
21. INSPECTION OF RECORDS.
Copies of the Plan, records reflecting each Participant's Options and
any other documents and records which a Participant is entitled by law to
inspect shall be open to inspection by the Participant and his or her duly
authorized representative at the office of the Corporation at any reasonable
business hour upon reasonable advance notice from the Participant.
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