SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant [ x ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[x] Preliminary Proxy Statement
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
Photomatrix, Inc.
(Name of Registrant as Specified In its Charter)
Photomatrix, Inc.
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1) or 14a-6(j)(2).
[ ] $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
[ x ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11. ($1,425)
1) Title of each class of securities to which transaction applies:
Common Stock
2) Aggregate number of securities to which transaction applies:
9,500,000
3) Per unit price of other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:1
$.75 per share based on the last trade price of a
share of Photomatrix Common Stock on the
NASDAQ SmallCap Market on March 24, 1998
4) Proposed maximum aggregate value of transaction:
$7,125,000
1 Set forth the amount on which the filing fee is calculated and state how it
was determined.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid: $______
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
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Photomatrix, Inc.
11065 Sorrento Valley Court
San Diego, California 92121
_______________, 1998
Dear Shareholder:
We are pleased to enclose your Notice of Annual Meeting of Shareholders
and Proxy Statement for the Annual Meeting of Shareholders of Photomatrix, Inc.,
a California corporation (the "Company" or "Photomatrix"), to be held on May 26,
1998 at 1:00 p.m. at the Company's corporate headquarters located at 11065
Sorrento Valley Court, San Diego, California 92121.
At the Annual Meeting, you will be asked to approve and adopt an
Agreement and Plan of Merger and Reorganization (the "Merger Agreement")
providing for the merger (the "Merger") of Photomatrix's wholly-owned
subsidiary, Photomatrix Acquisition Inc., a California corporation ("PAI"), and
I-PAC Manufacturing, Inc., a California corporation ("I-PAC"), pursuant to
which, among other things, I-PAC will become a wholly-owned subsidiary of
Photomatrix. You will also be asked to approve three alternative amendments to
the Articles of Incorporation giving the Board of Directors the authorization
and discretion, if necessary, to effect any one of (i) a 2 for 1, (ii) a 3 for
1, or (iii) a 4 for 1 reverse stock split whereby either two, three, or four
outstanding shares of Photomatrix Common Stock will be combined and converted
into one share of Photomatrix Common Stock; to adopt the Photomatrix 1998 Stock
Option Plan whereby 1,500,000 (pre-reverse stock split) shares of Photomatrix
Common Stock will be reserved for issuance to officers, directors and employees
under incentive stock options or non-qualified stock options to be granted by
the Compensation Committee of the Board of Directors; to elect six directors of
the Company; and to ratify the selection of KPMG Peat Marwick LLP as the
Company's independent auditors.
As a result of the Merger, the 8,500 outstanding shares of I-PAC Common
Stock will be exchanged for and represent the right to receive 4,848,000 shares
(adjusted proportionately in the event of the exercise of dissenters' rights) of
Photomatrix Common Stock and possibly additional shares of Photomatrix Common
Stock in the event that I-PAC achieves certain performance milestones during a
twelve month period following the Merger or outstanding options to purchase
Photomatrix Common Stock are exercised. Your shares of Common Stock will not be
changed in the Merger.
The Merger will result in a combination of I-PAC's electronics contract
manufacturing business with the Company's existing operations. The Company's
Board of Directors believes the merger is in the best interests of the Company
and its shareholders, in that the combined enterprise should have substantial
opportunities for growth and should benefit from economies of scale, thereby
increasing the amount and stability of the Company's net cash flow from
operations. The Board recommends that you vote FOR adoption of the Merger
Agreement, as well as the additional proposals described above and in the Proxy
Statement which accompanies this letter.
I encourage you to read this Proxy Statement in its entirety.
Very truly yours,
/s/ Suren G. Dutia
Suren G. Dutia
President, Chief Executive Officer and Chairman
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Photomatrix, Inc.
11065 Sorrento Valley Court
San Diego, California 92121
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 26, 1998
To the Shareholders of PHOTOMATRIX, INC.:
Notice is hereby given that the Annual Meeting of Shareholders of
Photomatrix, Inc., a California corporation (the "Company" or "Photomatrix"),
will be held on May 26, 1998, at 1:00 p.m., local time, at the principal office
of the Company at 11065 Sorrento Valley Court, San Diego, California, for the
following purposes:
1. To approve a proposed merger with I-PAC Manufacturing, Inc.
2. To approve three alternative amendments to the Articles of
Incorporation giving the Board of Directors the authorization and
discretion to effect, on or before May 28, 1998, if necessary, any one
of (i) a 2 for 1, (ii) a 3 for 1, or (iii) a 4 for 1 reverse stock
split whereby either two, three, or four outstanding shares of
Photomatrix Common Stock will be combined and converted into one share
of Photomatrix Common Stock.
3. To elect six directors of the Company.
4. To adopt the Photomatrix 1998 Stock Option Plan whereby 1,500,000
(pre-reverse stock split) shares of Photomatrix Common Stock will be
reserved for issuance to officers, directors and employees of the
Company under incentive stock options or non-qualified stock options to
be granted by the Compensation Committee of the Board of Directors.
5. To ratify the appointment by the Company's Board of Directors of KPMG
Peat Marwick LLP as the independent auditors of the Company for the
1998 fiscal year.
6. To transact such other business as may properly come before the meeting
or any adjournment thereof.
Only shareholders of record at the close of business on April 17, 1998,
are entitled to receive notice of and to vote at the meeting and any adjournment
thereof.
All shareholders are cordially invited to attend the meeting in person.
Regardless of whether you plan to attend the meeting, please sign, date, and
promptly return the enclosed proxy in the accompanying envelope. Shareholders
attending the meeting may vote in person even if they have returned a proxy.
By Order of the Board of Directors
/s/ Roy L. Gayhart
Roy L. Gayhart
Secretary
San Diego, California
_______________, 1998
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PHOTOMATRIX, INC.
11065 Sorrento Valley Court
San Diego, California 92121
(619) 625-4400
----------------------
PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS
- --------------------------------------------------------------------------------
The Board of Directors of Photomatrix, Inc. a California corporation
("Photomatrix" or the "Company"), the executive offices of which are located at
11065 Sorrento Valley Court, San Diego, California 92121 (telephone: (619)
625-4400), hereby solicits your proxy in the form enclosed for use at the Annual
Meeting of Shareholders to be held on May 26, 1998, and any adjournment or
postponement thereof (the "Meeting" or the "Annual Meeting"). This Proxy
Statement is being furnished to the shareholders of Photomatrix in connection
with such solicitation.
At the Meeting, shareholders will be asked to approve a proposal to
approve and adopt an Agreement and Plan of Merger and Reorganization (the
"Merger Agreement") providing for the merger (the "Merger") of Photomatrix's
wholly-owned subsidiary, Photomatrix Acquisition, Inc. ("PAI"), a California
corporation, with and into I-PAC Manufacturing, Inc., a California corporation
("I-PAC"), pursuant to which, among other things, I-PAC will become a
wholly-owned subsidiary of Photomatrix and the 8,500 outstanding shares of I-PAC
Common Stock will be converted into and represent the right to receive 4,848,000
shares (adjusted proportionately in the event of the exercise of dissenters'
rights) of Photomatrix Common Stock and possibly additional shares of
Photomatrix Common Stock if I-PAC achieves certain performance milestones during
a twelve month period following the Merger or outstanding options to purchase
Photomatrix Common Stock are exercised. See " Proposal 1 - The Merger" and the
documents referred to therein.
Shareholders will also be asked to approve three alternative amendments
to the Company's Articles of Incorporation giving the Board of Directors the
authorization and discretion to effect on or before May 28, 1998, if necessary,
any one of (i) a 2 for 1, (ii) a 3 for 1, or (iii) a 4 for 1 reverse stock split
whereby either two, three, or four outstanding shares of Photomatrix Common
Stock will be combined and converted into one share of Photomatrix Common Stock;
to adopt the Photomatrix 1998 Stock Option Plan whereby 1,500,000 (pre-reverse
stock split) shares of Photomatrix Common Stock will be reserved for issuance to
officers, directors and employees of the Company under incentive stock options
or non-qualified stock options to be granted by the Compensation Committee of
the Board of Directors; to elect six directors of the Company; and to ratify the
selection of KPMG Peat Marwick LLP as the Company's independent auditors for
fiscal 1998.
April 17, 1998 has been fixed by the Board of Directors as the record
date for the determination of shareholders entitled to notice of the Meeting.
Only shareholders of record on that date will be entitled to vote at the
Meeting. This Proxy Statement and the enclosed form of proxy are first being
sent to shareholders on or about _______, 1998.
A copy of the Merger Agreement is attached to this Proxy Statement as
Appendix A and is incorporated herein by this reference.
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Certain statements in this Proxy Statement are forward-looking and are
identified by the use of forward-looking words or phrases such as "should,"
"intended," "will be positioned," "expects," "is expected," "are expected,"
"anticipates," "anticipated," and "believes." These forward-looking statements
are based on the Company's current expectations. Because forward-looking
statements involve risks and uncertainties, the Company's actual results could
differ materially from those envisioned in the forward-looking statements. In
addition to factors discussed under "PROPOSAL 1 - THE MERGER" and elsewhere in
this Proxy Statement, among the factors that could cause results to differ
materially from current expectations are: (1) general economic and competitive
conditions in the markets where the Company and I-PAC offer products and
services, (2) changes in the availability or costs of capital, (3) fluctuations
in demand for certain of the Company's or I-PAC's products or services, and (4)
competitive pressure from other products or services.
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VOTING AND PROXIES
Date, Time and Place of the Meeting
The Annual Meeting of Shareholders of Photomatrix will be held on May
26, 1998 at 1:00 p.m., local time, at 11065 Sorrento Valley Court, San Diego,
California 92121. The independent accountants for Photomatrix, KPMG Peat Marwick
LLP, are expected to be present at the Meeting, will have an opportunity to make
a statement if they desire to do so, and are expected to be able to respond to
appropriate questions.
Record Date, Shareholders Entitled to Vote, Quorum
The record date (the "Record Date") for the Meeting has been fixed by
the Board as of the close of business on April 17, 1998. Only shareholders of
record on the Record Date will be entitled to notice of the meeting and any
adjournment or postponement thereof, and only shareholders of record on the
Record Date will be entitled to vote at the Meeting and any adjournment or
postponement thereof. Each share of Common Stock is entitled to one vote on each
matter to be voted on, provided that California law requires that directors be
elected by cumulative voting, with each share having a number of votes equal to
the number of directorships to be filled, if a proper request for cumulative
voting is received from a shareholder prior to the voting.
As of the Record Date, there were 5,083,017 shares of Common Stock
outstanding and entitled to vote. The presence, either in person or by properly
executed proxy, of the holders of a majority of the shares of Common Stock
outstanding and entitled to vote is necessary to constitute a quorum at the
Meeting.
Proxies and Vote Required
All proxies in the enclosed form that are properly executed and
returned will be voted at the Meeting, or any adjournment or postponement
thereof, in accordance with any specifications thereon; or, if no specifications
are made, such proxies will be voted FOR approval of the Merger Agreement, FOR
authorization of a reverse stock split, FOR the nominees proposed by the Board
of Directors, FOR the adoption of the 1998 Photomatrix Stock Option Plan and FOR
the ratification of the selection of auditors. The execution of a proxy will not
affect a shareholder's right to attend the Meeting and vote in person. A proxy
may be revoked by a shareholder who attends the Meeting and gives oral notice of
his or her intention to vote in person; attendance at the meeting will not, by
itself, revoke a proxy. In addition, a shareholder may revoke a proxy at any
time before it is voted by executing a subsequent proxy or by delivering a
written notice to the Secretary of Photomatrix stating that the proxy is
revoked.
Votes cast by proxy or in person will be tabulated by the Inspector of
Elections (the "Inspector") with the assistance of the Company's transfer agent.
The Inspector will also determine whether a quorum is present. In general, the
affirmative vote of a majority of shares present in person or by proxy at a duly
held meeting at which a quorum is present is required under California law for
approval of proposals presented to shareholders. However, California law also
provides that approval of the Merger and the amendment of the Company's Articles
of Incorporation to effect a reverse stock split will each require the
affirmative vote of a majority of the outstanding shares of the Common Stock of
the Company and that, in the election of directors, the candidates receiving the
highest number of affirmative votes of the shares entitled to vote for them, up
to the number of directors to be elected by such shares, are elected. The
Inspector will treat abstentions as shares that are present and entitled to vote
for purposes of determining the presence of a quorum but will not treat
abstentions as votes in favor of approving any matter submitted to shareholders
for a vote. If a broker indicates on the enclosed proxy that it does not have
discretionary authority as to certain shares to vote on a particular matter,
those shares will not be considered present with regard to that matter. The
Company believes that the tabulation procedures to be followed by the Inspector
are consistent with the requirements of California law concerning the voting of
shares and determination of a quorum.
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Solicitation of Proxies
The expenses of printing and mailing this Proxy Statement will be borne
solely by Photomatrix and are estimated to be approximately $10,000. In addition
to the use of the mails, proxies may be solicited by directors and officers and
regular employees of Photomatrix, without additional remuneration, by personal
interviews, telephone, telegraph or otherwise. Photomatrix may also retain
American Stock Transfer & Trust Company to assist it in soliciting proxies.
Photomatrix may also request brokerage firms, nominees, custodians and
fiduciaries to forward proxy materials to beneficial owners of shares of Common
Stock and will provide reimbursement for their reasonable expenses incurred in
doing so.
PROPOSAL 1 -- THE MERGER
General
The following description of the principal terms of the Merger is
subject to and qualified in its entirety by reference to the terms of the Merger
Agreement, a copy of which is included as Appendix A to this Proxy Statement and
is incorporated herein by this reference. Consummation of the Merger is subject
to the condition, among others, that the Merger Agreement be approved by the
shareholders of Photomatrix.
Upon consummation of the Merger, each outstanding share of Common Stock
held by any I-PAC shareholder will be converted into and represent the right to
receive 570.35294 shares (adjusted proportionately in the event of the exercise
of dissenters' rights) of Photomatrix Common Stock (the "Conversion Amount"),
for a total of 4,848,000 shares of Photomatrix Common Stock. Thereafter, I-PAC
will be operated as a wholly-owned subsidiary of Photomatrix. In addition, I-PAC
shareholders will receive additional shares of Photomatrix Common Stock if I-PAC
achieves certain performance milestones during the twelve month period
commencing July 1, 1998 or outstanding options to purchase Photomatrix Common
Stock are exercised. Photomatrix Common Stock is currently listed on the NASDAQ
SmallCap Market. I-PAC is a privately-held company with 4 shareholders, and its
stock is not and has never been listed on any stock exchange.
Photomatrix, Inc. Photomatrix, through its subsidiary Photomatrix
Imaging Corporation, develops, manufactures, sells and services high-speed,
high-performance document and aperture card scanners and related services.
Photomatrix's principal executive office is located at 11065 Sorrento Valley
Court, San Diego, California 92121, and its telephone number is (619) 625-4400.
See "Business of Photomatrix."
I-PAC Manufacturing, Inc. I-PAC is a value added contract manufacturer
of electrical and mechanical assemblies, including complex, multi-layer printed
circuit board assemblies, wire and cable harnesses, molded cables, and complete
system and sub-system assemblies. I-PAC's primary area of specialization is
providing electronic manufacturing services ("EMS") comprised of value added EMS
as well as contract manufacturing. I-PAC's principal executive office is located
at 1958 Kellogg Ave., Carlsbad, California 92009, and its telephone number is
(760) 438-1529. See "Business of I-PAC."
Photomatrix Acquisition, Inc. PAI is a wholly-owned subsidiary of
Photomatrix and has been formed solely for the purpose of facilitating the
Merger Agreement. PAI has no existing business. Its address and telephone number
are the same as those of Photomatrix.
Background of the Merger
In 1996, Photomatrix initiated a search for merger or acquisition
candidates that would (i) expand Photomatrix's manufacturing capability, (2)
provide Photomatrix with a more stable and diversified revenue base, and (3)
enhance Photomatrix' opportunities for growth in the near term. During 1996 and
1997, officers of I-PAC and Photomatrix met at various times to discuss the
possibility of a merger between Photomatrix and I-PAC. These discussions were
very preliminary, however, as I-PAC had on-going concerns regarding the ability
of Photomatrix to improve its margins so as to operate on at least a cash
neutral basis.
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In September 1997, I-PAC and Photomatrix began to explore in more
detail a merger of the two companies with a view to creating a combined entity
that could more aggressively compete in the high-end document and aperture card
scanner market, provide a more stable and diversified revenue base, and more
easily access the working capital needed to expand the combined business. In
these discussions and after visiting the I-PAC offices, management of
Photomatrix came to believe that a merger with I-PAC, with its strong management
team and superior manufacturing expertise, presented a good opportunity for
rapid revenue growth for the combined entity and increased shareholder value.
On October 10, 1997, the Board of Directors of Photomatrix approved the
proposed merger in principle and authorized management to complete negotiations
of a transaction between the parties. A non-binding letter of intent was signed
by I-PAC and Photomatrix on October 29, 1997. During the negotiation of the
letter of intent, the due diligence investigation of the affairs of I-PAC and
the drafting of the Merger Agreement, management of Photomatrix consulted with
its professional and financial advisors. As a result of the due diligence
investigation, Photomatrix determined that the original terms of the letter of
intent should be modified to subject a portion of the Photomatrix Common Stock
issuable to I-PAC shareholders to an earn-out provision. Additional negotiations
resulted in the proposed transaction which is described in this Proxy Statement.
The parties executed the Merger Agreement on March 16, 1998.
Prior Relationships
Mr. Patrick W. Moore, the President and a significant shareholder of
I-PAC, is a member of the Board of Directors of Photomatrix and has served as
such since January of 1991. Photomatrix and I-PAC have not previously had any
business relationship. After the Merger, I-PAC will be operated as a
wholly-owned subsidiary of Photomatrix.
Recommendation of the Board - Business Reasons for Merger
The Board of Directors of Photomatrix (the "Board") recommends approval
of the Merger as being in the best interests of all of the shareholders of
Photomatrix. The recommendation of the Board is the product of the business
judgment of its members, exercised in light of their fiduciary duty to all
shareholders. The material factors considered by the Board in reaching this
decision are set forth below:
1. Management and the Board believe the acquisition of I-PAC will
result in significant improvements in operating results as a consequence of the
elimination of redundant facilities and services and efficiencies arising from
I-PAC's superior manufacturing experience and processes and the anticipated
increased production volume and capabilities of the combined companies.
2. Management and the Board believe the acquisition of I-PAC will
provide Photomatrix with a more stable, diversified, and profitable revenue
base. Photomatrix markets and sells high-end capital equipment, and accordingly
its sales are subject to significant volatility resulting from economic
conditions and changes. Management and the Board believe that the
diversification resulting from the acquisition of I-PAC will stabilize
Photomatrix's cash flow. Additionally, the business of I-PAC generates higher
operating margins than that of Photomatrix, which, as the business of I-PAC is
expanded into new markets, should improve the overall profitability of the
combined companies.
3. Management and the Board believe the structure of the Merger and a
recent decline in the market price of shares of Photomatrix Common Stock enhance
the desirability of the Merger from the perspective of the shareholders of
Photomatrix. Although the Board did not obtain a formal independent valuation of
I-PAC, Photomatrix and I-PAC agreed to use a value of $1.29 per share of
Photomatrix Common Stock in determining the number of shares of Photomatrix
Common Stock that the shareholders of I-PAC will receive in the Merger. This
valuation results in a purchase price of $6,254,000. The closing bid price of a
share of Photomatrix Common Stock at the time the parties signed the Letter of
Intent was $0.40625. As of March 10, 1998, the closing bid price of a share of
Photomatrix Common Stock was $.46875. Fixing the number of shares of Photomatrix
Common Stock to be issued in the Merger has had the effect of preventing
dilution to the Photomatrix shareholders as a consequence of subsequent
reductions in the market price of Photomatrix Common Stock. If the market price
for Photomatrix Common Stock stays below $1.29 per share through the closing of
the Merger, Photomatrix will acquire I-PAC for an effective purchase price less
than that originally negotiated.
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4. Management and the Board believe that the added manufacturing
experience of I-PAC will provide the Company with opportunities to provide
contract manufacturing services to the imaging industry.
5. I-PAC is a licensee of proprietary video transmission software
technology that has on-going development potential and possible application in a
number of markets. I-PAC expects that it will address these markets, which
include commercial and residential security telemedicine, video
teleconferencing, video editing and other related areas, after the Merger.
Additionally, I-PAC is currently negotiating with the licensor to manufacture
products based on this technology for the licensor of the technology. While
there can be no assurance that these efforts will be successful, Management and
the Photomatrix Board believe that the range of opportunities to expand the
business of I-PAC reflect favorably on its overall growth potential.
6. Management and the Board believe that the growth prospects of I-PAC
are strong due to its existing customer base, its growth strategy and the growth
prospects of the contract manufacturing industry.
7. Although the Company has not identified any additional acquisition
candidate, Management and the Board believe the Merger will enhance the ability
of the Company to grow through acquisition. Specifically, the Company believes
the combined entity will be attractive to privately-held technology product
companies where all of the manufacturing requirements can be met by I-PAC at
significant cost reductions and economies of scale and where the owner of the
company are interested in the liquidity offered by a publicly traded stock.
8. The Board has obtained the opinion of Fredericks, Shields & Co. as
to the fairness of the Merger, from a financial point of view, to the
shareholders of Photomatrix.
9. As a result of the merger, the Chairman of the Board and Chief
Executive Officer will be major shareholders of the Company deriving a
significant portion of their compensation from their efforts to increase the
value of the Company. Management and the Board believe that this motivation will
reflect favorably on the growth potential of Photomatrix.
In view of the wide variety of factors considered in connection with
the evaluation of the Merger, the Board did not find it practicable to, and did
not, quantify or otherwise assign relative weights to the specific factors
considered in reaching its decision. However, of primary importance to the Board
was its knowledge of the business and prospects of I-PAC.
The Board of Directors unanimously recommends that the shareholders
vote FOR approval and adoption of the Merger Agreement. Shareholders should note
that Patrick W. Moore has a conflict of interest in recommending this
transaction, in that he is the President and a significant shareholder of I-PAC.
See "The Merger -- Conflict of Interest of Patrick Moore."
IF HOLDERS OF MORE THAN TEN PERCENT OF THE OUTSTANDING SHARES OF
PHOTOMATRIX COMMON STOCK DO NOT VOTE IN FAVOR OF THE MERGER AND EXERCISE THEIR
DISSENTERS' RIGHTS, IT IS LIKELY THAT THE COMPANY'S BOARD OF DIRECTORS WILL
DECIDE TO TERMINATE THE MERGER. If the holders of more than ten percent of the
outstanding shares of Photomatrix Common Stock exercise dissenters' rights, the
Company would be required to expend in excess of $200,000 in cash to purchase
the dissenters' shares following the close of the Merger. The Board of Directors
would probably decide that to make such a large cash outlay to complete the
transaction would not be in the best interests of Photomatrix. In that event,
although the Merger would not be consummated, Photomatrix would nevertheless pay
approximately $150,000 in Merger expenses without obtaining the benefits
thereof. See "The Merger -- Conditions and Terms of the Merger."
Opinion of Fredericks, Shields & Co., LLC
The following description of the opinion of Fredericks, Shields & Co.
("FSC") contains forward-looking information. Without limiting the generality of
the foregoing, the projections and forecasts furnished to FSC were prepared by
the respective managements of Photomatrix and I-PAC. Photomatrix does not
publicly disclose internal management projections of the type provided to FSC in
connection with its analyses of the Merger, and such projections were not
prepared
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with a view toward public disclosure. These projections were based on numerous
variables and assumptions that are inherently uncertain and may be beyond the
control of Management, including, without limitation, factors related to general
economic and competitive conditions and prevailing interest rates. Accordingly,
actual results could vary significantly from those set forth in the opinion.
Photomatrix retained FSC to act as its financial advisor and, in
connection with the Merger, to render an opinion to the Photomatrix Board as to
whether the merger consideration to be paid to the shareholders of I-PAC is
fair, from a financial point of view, to the shareholders of Photomatrix. On
March 16, 1998, FSC rendered its written opinion to the Photomatrix Board that,
as of such date and based upon and subject to certain considerations and
assumptions, the merger consideration to be paid to the shareholders of I-PAC as
specified in the Merger Agreement was fair, from a financial point of view, to
the shareholders of Photomatrix. References herein to the "FSC Opinion" or
similar references refer to the written opinion of FSC dated March 16, 1998. The
full text of the FSC Opinion, which sets forth the assumptions made, matters
considered and scope and limitations of the review undertaken and procedures
followed by FSC in rendering its opinion, is attached to this Proxy Statement as
Appendix B hereto and is incorporated herein by this reference. The following
description of the FSC Opinion is qualified in its entirety by reference to the
full text of the opinion. Photomatrix shareholders are urged to read carefully
the opinion of FSC in its entirety. No limitations were imposed by Photomatrix
on FSC with respect to the investigations made or procedures followed in
rendering its opinion.
In conducting its analysis and arriving at its opinion, FSC reviewed
and analyzed, among other things: (i) the Merger Agreement and the specific
terms of the Merger; (ii) unaudited financial summaries of I-PAC for the years
ended December 31, 1994 and December 31, 1995 and audited financial statements
of I-PAC for the year ended December 31, 1996 and 1997; (iii) certain financial
and operating information regarding the business, operations and prospects of
I-PAC, including forecasts and projections, provided to FSC by the management of
I-PAC; (iv) audited financial statements of Photomatrix for the years ending
March 31, 1995 through March 31, 1997, and unaudited quarterly financial
statements of Photomatrix for the periods ending June 30, 1997, September 30,
1997, and December 31, 1997; (v) certain financial and operating information
regarding the business, operations and prospects of Photomatrix, including
forecasts and projections, provided to FSC by the management of Photomatrix;
(vi) a comparison of the historical and projected financial results and
financial condition of I-PAC with those of other companies and businesses that
FSC deemed relevant; and (vii) a comparison of the financial terms of the Merger
with the financial terms of certain other recent transactions that FSC deemed
relevant. In addition, in arriving at its opinion, FSC also held discussions
with the management of each of I-PAC and Photomatrix as well as concerning their
businesses, operations, assets, financial conditions and prospects, as well as
the prospects of Photomatrix after the Merger has been consummated. FSC also
undertook such other studies, analyses and investigations as it deemed
appropriate.
In arriving at its opinion, although FSC visited certain properties and
facilities of Photomatrix and I-PAC, FSC did not make, obtain or assume any
responsibility for any independent evaluation or appraisal of such properties
and facilities or of the assets and liabilities (contingent or otherwise) of
Photomatrix or I-PAC. FSC assumed and relied upon the accuracy and completeness
of the financial and other information supplied to or otherwise used by it in
arriving at its opinion and did not attempt to verify independently, or
undertake any obligation to verify, such information. FSC further relied upon
the assurances of the managements of I-PAC and Photomatrix that they were not
aware of any facts that would make such information inaccurate or misleading. In
addition, FSC assumed that the forecasts and projections provided to FSC
represented the best currently available estimates and judgment of I-PAC's and
Photomatrix's managements as to the future financial condition and results of
operations of I-PAC and Photomatrix, respectively, and assumed that such
forecasts and projections had been reasonably prepared based on such currently
available estimates and judgments. FSC assumed no responsibility for and
expressed no view as to such forecasts and projections or the assumptions on
which they were based. FSC further assumed, with the consent of Photomatrix,
that the Merger will qualify as a tax-free reorganization within the meaning of
Section 368(a) of the Internal Revenue Code, as amended, and that, for
accounting purposes, the Merger will be accounted for as a purchase. FSC also
assumed that the Merger described in the Merger Agreement would be consummated
on the terms set forth therein, without waiver of any such terms.
FSC also took into account its assessment of general economic, market
and financial conditions and its experience in similar transactions, as well as
its experience in securities valuation in general. FSC noted that its opinion
was necessarily based upon conditions as they currently existed and could be
evaluated on the date of its opinion.
7
<PAGE>
FSC did not express any view as to what the value of Photomatrix's
Common Stock will be when issued to I-PAC shareholders pursuant to the Merger,
or the price at which Photomatrix's Common Stock will trade prior to or
subsequent to the closing of the Merger. FSC's opinion is for the benefit and
use of the Photomatrix Board in its consideration of the Merger. The opinion
does not constitute a recommendation of the Merger over any alternative
transactions that may be available to Photomatrix and does not address the
underlying business decision of the Photomatrix Board to proceed with or effect
the Merger. Furthermore, the opinion does not constitute a recommendation by FSC
to any shareholder to vote in favor of the Merger.
The following is a brief summary of the financial analyses used by FSC
in rendering its opinion. Such summary does not purport to be a complete
description of all of the analyses performed by, or all the factors considered
by, FSC in connection with its opinion.
Analysis of Selected Publicly Traded Companies - Using publicly
available information, FSC compared certain financial information and operating
statistics of I-PAC with similar financial information and operating statistics
of Altron Incorporated, Benchmark Electronics, Inc., Continental Circuits Corp.,
IEC Electronics Corp., Merix Corporation, Plexus Corp., Praegitzer Industries,
Inc., and Sigmatron International, Inc. (collectively to be referred to herein
as the "I-PAC Comparables"). Such information and operating statistics included,
among other things, certain historical profitability margins, certain historical
and projected growth rates, market values of equity, total market capitalization
values and implied multiples of historical and estimated revenues, earnings
before interest, taxes, depreciation and amortization ("EBITDA") and earnings
per share. Among other things, this analysis indicated that the implied
multiples of the I-PAC Comparables were as follows: a) total market
capitalization as a multiple of trailing twelve months revenues ranged from 0.24
x to 1.42x, with a median of 0.77x and an average of 0.80x; b) total market
capitalization as a multiple of trailing twelve months EBITDA ranged from 2.99x
to 9.68x, with a median of 7.66x and an average of 7.16x; c) total market
capitalization as a multiple of estimated calender 1997 earnings per share
ranged from 8.89x to 27.13x, with a median of 17.94x and an average of 18.05x;
and d) total market capitalization as a multiple of estimated 1998 earnings per
share ranged from 7.63x to 18.01x, with a median of 15.48x and an average of
14.02x. All implied financial multiples were based on closing market prices on
February 23, 1998.
Analysis of Selected Acquisitions - FSC reviewed 20 selected merger and
acquisition transaction deemed relevant by FSC. Among other things, FSC analyzed
the purchase price, estimated trailing twelve month revenues, and the estimated
trailing twelve month earnings based on certain public information for each of
the selected acquisitions. This analysis indicated that the implied financial
multiples of the selected acquisitions were as follows: a) total purchase price
as a multiple of the trailing twelve months revenues ranged from 0.23x to 1.80x,
with a median of 0.49x and an average of 0.68x; and b) total purchase price as a
multiple of the trailing twelve months earnings ranged from 8.48x to 73.28x,
with a median of 16.45x and an average of 28.66x.
Pro Forma Merger Analysis - FSC analyzed certain pro forma financial
effects resulting from the Merger, including the impact of the Merger on
Photomatrix' projected earnings per share for calendar year 1998. Based on the
estimates of the respective managements of I-PAC and Photomatrix and the
exchange ratio, and assuming that the Merger will be treated as a purchase for
accounting purposes, the results of the proforma merger analysis suggested that,
without consideration of any potential operating synergies that may result from
the Merger, the Merger will be accretive to Photomatrix's earnings per shares in
the calendar year 1998. The actual results achieved by the combined company
could vary from projected results, and the variations could be material.
FSC believes that its analyses must be considered in the aggregate, and
that selecting portions of its analyses or the factors considered by it without
considering all factors and analyses considered by FSC could create a misleading
view of the processes underlying its opinion. The preparation of a fairness
opinion is a complex process and is not necessarily susceptible to partial
analysis or summary description. In arriving at its opinion, FSC did not
attribute any particular weight to any open analysis or factor considered by it,
but rather made qualitative judgments as to the significance and relevance of
each analysis and factor. In its analyses, FSC made numerous implicit
assumptions about industry and general economic conditions and other matters,
many of which are beyond the control of Photomatrix or I-PAC. Any estimates
contained therein are not necessarily indicative of future results or actual
values, which may be significantly more or less favorable than such estimates.
Estimates of values of companies do not purport to be appraisals or necessarily
reflect the prices at which
8
<PAGE>
companies may actually be sold. Because such estimates are inherently subject to
uncertainty, none of Photomatrix, I-PAC, FSC or any other person assumes
responsibility for their accuracy.
FSC is an investment banking firm engaged in, among other things, the
valuation of businesses and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes.
Pursuant to the terms of an engagement letter, Photomatrix has agreed
to pay FSC an aggregate of $30,000 for services provided to Photomatrix in
connection with the Merger, of which the total represents the fee for rendering
its opinion. Photomatrix also has agreed to reimburse FSC for its out-of-pocket
expenses, including reasonable fees and expenses for its legal counsel, and to
indemnify FSC and certain related parties against certain liabilities, including
liabilities under the federal securities laws, arising out of or in connection
with the services rendered by FSC under its engagement letter. The terms of the
fee arrangement with FSC were negotiated at arm's length between Photomatrix's
management and FSC.
Conditions and Terms of the Merger
The following is a brief summary of the principal terms of the Merger
Agreement and is subject to and qualified in its entirety by reference to the
Merger Agreement, a copy of which is included as Appendix A to this Proxy
Statement.
Photomatrix' shareholders should review the Merger Agreement in its entirety.
Consummation of the Merger. Upon consummation of the Merger, the
outstanding shares of I-PAC Common Stock will be exchanged for 4,848,000 shares
(adjusted proportionately in the event of the exercise of dissenters' rights) of
Photomatrix Common Stock, and thereafter I-PAC will be operated as a
wholly-owned subsidiary of Photomatrix.
Additional Earn-out Shares. In addition to the shares to be issued to
the I-PAC shareholders upon consummation of the Merger, additional shares may be
issued to the I-PAC shareholders if I-PAC meets certain performance criteria
during the 12-month period commencing July 1, 1998 or Photomatrix issues shares
of its Common Stock upon exercise of any of the 907,333 options and warrants to
purchase shares of Photomatrix Common Stock which were outstanding as of March
16, 1998, the date of the Merger Agreement. In the first case, additional shares
of Photomatrix Common Stock would be issued to the I-PAC shareholders in
accordance with the following table, which sets forth the number of additional
Photomatrix shares to be issued at various levels of financial performance by
I-PAC during the 12 month period commencing July 1, 1998 and the various levels
of performance which I-PAC would need to achieve in order to earn the additional
shares. In the second case, the shareholders of I-PAC would receive additional
shares of common stock on a share-for-share basis as, when, and if Photomatrix
issues shares of its common stock upon the exercise of options and warrants
outstanding as of the date of the Merger Agreement.
<TABLE>
Additional
hotomatrix
Shares Alternative 1 Alternative 2
<S> <C> <C> <C>
934,834 Gross Revenues (as defined by the Merger Gross Revenues (as defined by the
Agreement) between $7,000,000 and Merger Agreement)of more than
$7,500,000 and a Gross Profit Margin (as $8,000,000 and Gross Profit (as
defined by the Merger Agreement) of at defined by the Merger Agreement) of
least 31.7% more than $2,275,000
1,403,234 Gross Revenues between $7,500,001 and Gross Revenues of more than
$8,000,000 and Gross Profit Margin of at $8,000,000 and Gross Profit of more
least 31.5% than $2,430,000
</TABLE>
9
<PAGE>
<TABLE>
Additional
Photomatrix
Shares Alternative 1 Alternative 2
<S> <C> <C>
1,871,633 Gross Revenues between $8,000,001 and Gross Revenues of more than
$8,500,000 and Gross Profit Margin of at $8,500,000 and Gross Profit of more
least 31.3% than $2,580,000
2,338,101 Gross Revenues between $8,500,001 and Gross Revenues of more than
$9,000,000 and a Gross Profit Margin of $8,000,000 and Gross Profit of more
at least 31.2% than $2,730,000
2,804,803 Gross Revenues between $9,000,001 and Gross Revenues of more than
$9,500,000 and a Gross Profit Margin of $8,000,000 and Gross Profit of more
at least 31.1% than $2,890,000
3,274,970 Gross Revenues between $9,500,001 and Gross Revenues of more than
$10,000,000 and a Gross Profit Margin of $8,000,000 and Gross Profit of more
at least 31.0% than $3,040,000
3,744,902 Gross Revenues of more than $10,000,001 Gross Revenues of more than
and a Gross Profit Margin of at least $8,000,000 and Gross Profit of more
30.9% than $3,190,000
</TABLE>
In the event that I-PAC satisfies the performance criteria set forth
above and the I-PAC shareholders therefore receive additional shares of
Photomatrix Common Stock, Management of Photomatrix expects that the effects of
the earnout will be increasingly accretive to the earnings per share of the
combined entities as the performance of I-PAC results in the issuance of more
shares to the I-PAC shareholders. The following tables demonstrate the effect of
the earnout at the minimum and maximum levels of performance by I-PAC for
purposes of the earnout formula. The sole purpose of this data is to disclose
the accretive effect of the earnout formula on earnings per share. It is not
intended to be, and should not be interpreted as, a projection of the financial
results of either I-PAC or Photomatrix during the earnout period, and there can
be no assurance that the stated results, or any other results, will be achieved.
In addition, such information has not been examined or compiled by the
independent auditors of either I-PAC or Photomatrix.
The first table sets forth the potential unaudited combined results of
Photomatrix at the lowest level of I-PAC performance which results in the
issuance of earnout shares. With regard to Photomatrix' anticipated results, the
following chart assumes no significant change from the results of the past two
years, other than operating cost reductions either already implemented and in
place and redundant cost reductions (such as facilities related costs and
duplicate operational costs) which should be effected by the Merger.
(000's omitted, except for earnings per share)
<TABLE>
Redundant Projected
I-PAC Photomatrix Cost Savings Combined
(unaudited) (unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue $ 7,000 $ 9,000 $ 16,000
Gross Profit -$ $ 2,219 $ 3,303 $ 257(3) $ 5,779
-% 31.7% 36.7%
Selling, G&A $ (1,202)(1) $(2,759) $ 314(4) $ (3,647)
Interest Expense $ (279)(2) $ (24) -- $ (303)
R&D -- $ (800) $ 36(5) $ (764)
------------ ----------- ----------- ------------
Operating Profit (Loss) $ 738 $ (280) $ 607 $ 1,065
Tax Provision $ (277)(6)
------------
</TABLE>
10
<PAGE>
<TABLE>
Redundant Projected
I-PAC Photomatrix Cost Savings Combined
(unaudited) (unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net Income $ 788
Outstanding Shares:
No options exercised(7) 10,885
All options exercised(8) 12,679
Earnings Per Share:
No options exercised $.07
All options exercised $.06
</TABLE>
The following table sets forth the anticipated combined results of
Photomatrix at the highest level of I-PAC performance identified in the earnout
formula. With regard to Photomatrix' anticipated results, the following chart
assumes no significant change from the results of the past two years, other than
operating cost reductions either already implemented and in place and redundant
cost reductions (such as facilities related costs and duplicate operational
costs) which should be effected by the Merger.
(000's omitted, except for earnings per share)
<TABLE>
Redundant Projected
I-PAC Photomatrix Cost Savings Combined
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue $ 8,000 $ 9,000 $ 17,000
Gross Profit -$ $ 3,190 $ 3,303 $ 257(3) $ 6,750
-% 39.88% 36.7%
Selling, G&A $(1,374)(1) $(2,759) $ 259(4) $ (3,874)
Interest Expense $ (295)(2) $ (24) $ (319)
R&D -- $ (800) $ 36(5) $ (764)
----------- ---------- ---------- ----------
Operating Profit (Loss) $ 1,521 $ (280) $ 626 $ 1,793
Tax Provision (6) $ (587)(6)
-------------
Net Income $ 1,206
============
Outstanding Shares:
No options exercised (7) 13,676
All options exercised (8) 15,490
Earnings Per Share:
No options exercised $ .09
All options exercised $ .08
</TABLE>
(1) I-PAC Selling, G&A costs, as shown, are assumed to be entirely
variable, representing 17.17% of revenues, the same percentage
experienced by I-PAC for the year ended December 31, 1997. Management
does not believe that such costs are completely variable in nature, but
instead are comprised of both fixed and variable costs.
(2) I-PAC Interest Expense, as shown, is comprised of two components:
mortgage related interest expense, which is fixed at approximately
$170,000 per year, and all other interest expense, which is estimated
at 1.56% of revenues, the same percentage experienced by I-PAC for the
year ended December 31, 1997.
(3) Redundant cost savings in Gross Profit are based on facilities costs
totaling $192,000, related to the current Photomatrix location in San
Diego, as well as redundant operating personnel costs, totaling
$65,000, which will be eliminated as result of consolidating the
Photomatrix operations into the existing I-PAC facility.
11
<PAGE>
(4) Redundant cost savings anticipated in Selling, G&A are based on
facilities costs, totaling $122,000, related to the current Photomatrix
location in San Diego, as well as redundant operating personnel costs,
totaling $170,000, which will be eliminated as a result of
consolidating the Photomatrix operations into the existing I-PAC
facility, together with related party costs incurred by I-PAC, totaling
$115,000, which, based on agreements between the parties, will be
eliminated after the close of the Merger. These amounts are offset by
an increase in goodwill amortization of $93,000 per year for lowest
level performance milestone and $148,000 per year for the highest level
of performance milestone (See Note 9).
(5) Redundant cost savings anticipated in R&D are based on facilities
costs, totaling $36,000, related to the current Photomatrix location in
San Diego, which will be eliminated as a result of consolidating the
Photomatrix operations into the existing I-PAC facility.
(6) The anticipated tax provision reflects an estimated 40% tax rate less
approximately $400,000 of annual NOL benefit.
(7) Outstanding shares with no options exercised are comprised of (1) the
exiting 5,083,017 Photomatrix common shares outstanding, (2) the
4,848,000 shares to be exchanged for I-PAC shares at the Effective Time
and (3) the additional shares issuable to I-PAC shareholders as a
result of the achievement of performance milestones.
(8) Outstanding shares with all options exercised are comprised of (1) the
existing 5,083,017 Photomatrix common shares outstanding, (2) the
4,848,000 shares to be exchanged for I-PAC shares at the Effective
Time, (3) the additional shares issuable to I-PAC shareholders as a
result of the achievement of performance milestones, (4) 907,000 common
shares issued as a result of the exercise of currently outstanding
Photomatrix stock options and warrants and (5) 907,000 shares issuable
to I-PAC shareholders under the terms of the Merger Agreement in the
event that the outstanding Photomatrix options are exercised.
(9) Additional goodwill would be recognized as a result of the issuance of
additional shares. Such goodwill would be calculated at the fair value
of stock issued at the time of award. This table assumes a $0.40 per
share value with goodwill amortized over a 20-year period. The table
further assumes that only the 4,848,000 shares constituting the basic
merger consideration and the Earn-Out Shares are issued.
Board and Officer Appointment. The Merger Agreement requires
Photomatrix to appoint Mr. William L. Grivas and Mr. James P. Hill, both major
shareholders of I-PAC, to the Photomatrix Board of Directors. Following the
Merger, Photomatrix anticipates the Board of Directors of Photomatrix will have
seven authorized positions and that the members of Board will be Mr. Hill and
Mr. Grivas, as well as the current members of the Board: Patrick W. Moore (a
major shareholder and the President of I-PAC), Suren G. Dutia, Ira H. Sharp, and
John F. Staley, with one position to be filled in the future. The Merger
Agreement also provides that, effective as of the closing of the Merger, Suren
G. Dutia will resign as the Chairman and Chief Executive Officer of Photomatrix
and retain the title of President of Photomatrix, William L. Grivas will be
appointed the Chairman of the Board of Photomatrix, and Patrick W. Moore will be
appointed the Chief Executive Officer of Photomatrix.
Conversion of Related Party Debt. The Merger Agreement requires that
all but $25,000 of the approximately $448,000 owed by I-PAC to its shareholders
and their affiliates be converted to equity in I-PAC prior to the Effective
Time.
Effective Time of the Merger. If approved by the shareholders, the
Merger will become effective when the Agreement of Merger and certain related
documents are filed in the office of the Secretary of State of the State of
California (the "Effective Time"), which is anticipated to be approximately 30
days after the Meeting, subject to the fulfillment or waiver of all conditions
to the Merger.
Conditions of Merger and Termination. The respective obligations of
each party to effect the Merger are subject to the satisfaction of various
conditions, including: a) the absence of any material adverse change in the
assets, liabilities, personnel, financial conditions or prospects of the
respective companies, b) the approval of the Merger by the respective Boards of
Directors and shareholders of the Company and I-PAC, c) the receipt of all
necessary or appropriate consents, waivers and approvals of third parties, d)
the absence of a significant number of dissenting shareholders, and e) the
continued listing of the Common Stock of Photomatrix on the NASDAQ SmallCap
Market.
The Merger Agreement may be terminated and the Merger abandoned (i) by
the mutual consent of Photomatrix and I-PAC, (ii) by either Photomatrix or I-PAC
if there has been a material breach of any provision of the Merger Agreement
12
<PAGE>
by the other party which is not cured within 5 days after the breaching party
has been notified thereof, (iii) by either Photomatrix or I-PAC if the
conditions to their respective obligations to complete the Merger have not been
completed by June 30, 1998, (iv) by either of Photomatrix or I-PAC if the Merger
has not occurred on or before June 30, 1998, or (v) by Photomatrix if it accepts
a superior unsolicited takeover proposal and pays I-PAC a $250,000 termination
fee.
Exclusive Dealing. The Merger Agreement provides that neither company
shall, directly or indirectly, (i) solicit, initiate, or encourage, or take any
other action designed or reasonably likely to facilitate, any inquiries or the
making of any proposal which constitutes, or may reasonably be expected to lead
to, a takeover proposal of that company or (ii) participate in any discussions
or negotiations regarding any such proposal, provided that, if the Board of
Directors of Photomatrix determines in good faith, after consultation with
outside counsel, that it is necessary to do so in order to comply with its
fiduciary duties to Photomatrix's shareholders under applicable laws,
Photomatrix may, in response to a takeover proposal concerning Photomatrix which
was not solicited by Photomatrix, (i) furnish information with respect to
Photomatrix to the company making the proposal and (ii) participate in
negotiations regarding such takeover proposal.
Regulatory Requirements. There are no federal or state regulatory
requirements which must be complied with or approvals which must be obtained in
connection with the effectiveness of the Merger Agreement.
Conflict of Interest of Patrick W. Moore
Mr. Moore is a Director of Photomatrix. He is also the President of
I-PAC. Upon consummation of the Merger, Mr. Moore will be entitled to receive
1,616,000 shares of Photomatrix Common Stock in exchange for 2833 1/3 shares of
I-PAC Common Stock owned by him and may receive additional shares of Photomatrix
Common Stock if the financial performance of I-PAC during the 12 months
commencing July 1, 1998 meets certain milestones or if outstanding options or
warrants to acquire Photomatrix Common Stock are exercised. In all discussions
concerning the proposed merger, Mr. Moore has acted solely on behalf of I-PAC
and has abstained from participating as a director of Photomatrix.
Federal Income Tax Consequences
The following summary is a general discussion of certain expected
federal income tax consequences of the Merger to Photomatrix and does not deal
with any aspect of state, local or foreign tax laws. The Merger is intended to
constitute a tax-free reorganization within the meaning of Sections 368(a)(1)(A)
and 368(a)(2)(E) of the Internal Revenue Code of 1986 (the "Code"). Neither
Photomatrix nor I-PAC has sought or will seek a ruling from the Internal Revenue
Service concerning the federal income tax consequences of the Merger. If the
Merger does constitute a reorganization within the meaning of Sections
368(a)(1)(A) and 368(a)(2)(E) of the Code, it should not result in the
recognition of income by Photomatrix or I-PAC. In such case, I-PAC's tax basis
in its assets and liabilities would not be affected by the Merger.
Accounting Treatment of the Merger
The Merger will be accounted for as a purchase of I-PAC by the Company
for accounting and financial reporting purposes. Under the purchase method of
accounting, upon the closing of the Merger, I-PAC's results of operations will
be combined with those of the Company, and I-PAC's assets and liabilities will
be recorded on the Company's books at their respective fair values at the
Effective Time. A determination of the fair value of I-PAC's assets and
liabilities will be made in order to allocate the purchase price among the
assets acquired and the liabilities assumed. The expected excess of the value of
the consideration over the fair value of I-PAC's net assets will be amortized
through charges to earnings over an anticipated period of twenty-years following
the Effective Time. See "Unaudited Pro Forma Combined Financial Statements."
Management Following Merger
The Directors of the Company immediately prior to the Effective Time
will continue to serve as Directors of the Company and will be joined by Mr.
Grivas, who will also assume the responsibilities of Chairman of the Board, and
Mr. Hill. See Proposal 3 - Election of Directors
13
<PAGE>
The executive officers of the Company will be as follows:
William L. Grivas, age 43, Chairman of the Board.
Patrick W. Moore, age 50, Chief Executive Officer.
Suren G. Dutia, age 55, President
Roy L. Gayhart, age 47, Chief Financial Officer
Strategy After Merger
Immediately following the Merger, the Company plans to consolidate its
Photomatrix operation with the I-PAC operation in the facility owned by I-PAC in
Carlsbad, California. Management anticipates that this move will result in cost
reductions as a result of assigning the lease of, or sub-leasing, its facility
in San Diego, as well as streamlining its operations by utilizing the existing
manufacturing resources of I-PAC. The Company anticipates that the cost savings
will arise in such areas as the elimination of redundant functions, production
efficiencies, interest expense reductions, purchasing efficiencies and the
reduction of related party expenses. Management intends to implement an
aggressive cost reduction program immediately following the Merger.
Following the Merger, the Company plans to attempt to establish and
maintain profitability, while aggressively pursuing growth opportunities. This
growth strategy will be targeted upon new acquisitions as well as expansion of
its core customer base.
I-PAC will strive to expand its customer base in the low to medium
volume, high-end commercial and industrial markets through its ongoing sales
efforts. In addition, it will pursue the acquisition of additional contract
manufacturing operations and the expansion of its I-PAC Express operations.
I-PAC Express specializes in quick-turn prototype manufacturing and assembly.
I-PAC Express is intended to be a growth and profit growth center for I-PAC, as
well as an additional marketing tool through which I-PAC may identify and secure
new, full-scale production customers. The ability to migrate a customer's
product from the prototype to the production stage is an important value added
service that I-PAC seeks to provide. I-PAC will also seek to support growth in
its contract manufacturing business by increasing its value added services to
customers by enhancing its engineering and test support functions. Management
believes that the engineering and R&D resources of Photomatrix can improve
I-PAC's ability to provide such services. Management further believes the Merger
will create new opportunities to provide contract manufacturing services to the
imaging industry.
In addition to growth of its contract manufacturing operations, the
Company will pursue the acquisition of technology product companies which, like
Photomatrix, may have their manufacturing requirements met by I-PAC's existing
manufacturing capabilities. This strategy allows the technology company to focus
on engineering and marketing, with I- PAC's achievement of manufacturing
efficiencies improving operating margins. It is anticipated that any such
acquisitions may occur first in the technology and product fields of image and
document capture and digital video capture, storage and transmission.
I-PAC also possesses certain licenses for the development, manufacture
and sale of proprietary video capture, storage and transmission software
technology that has ongoing development potential and application in a wide
range of existing and new markets, including video surveillance, telemedicine,
video editing, video teleconfrencing and various video broadcast applications.
These video compression and storage technologies may enhance Photomatrix's own
product capabilities, as well as enabling new product applications to be
developed by the Company in the fields identified.
Dissenters' Rights
Each holder of Photomatrix Common Stock on the Record Date may, by
complying with Chapter 13 of the General Corporation Law of the State of
California, require Photomatrix to purchase for cash at their fair market value
the shares of Photomatrix Common Stock owned by such shareholder which are
dissenting shares. Fair market value for this purpose is
14
<PAGE>
determined as of the day before the first announcement of the terms of the
Merger, excluding any appreciation or depreciation which may occur as a
consequence of the Merger. The terms of the Merger were first announced on
October 28, 1997, and the closing bid price of Common Stock on that date was
$0.40625.
Photomatrix is required to mail to each shareholder not voting in favor
of the Merger a notice of the approval of the Merger by the holders of Common
Stock within 10 days of the date of such approval, accompanied by certain
information, including a statement of the price determined by Photomatrix to
represent the fair market value of any dissenting shares and a summary of the
procedure to be followed to exercise dissenters' rights. The statement of price
will constitute an offer by Photomatrix to purchase, at the price stated, any
dissenting shares. Within 30 days after the date on which notice of approval of
the Merger by the holders of Common Stock is mailed by Photomatrix, each such
shareholder electing to exercise dissenting shareholder rights must submit to
Photomatrix at its principal office or at the office of any transfer agent
thereof a demand letter and such shareholder's certificates representing any
shares of Common Stock which the shareholder demands that Photomatrix purchase.
Such demand letter is required to state (i) the number of shares of Common Stock
held of record by the shareholder which the shareholder demands that Photomatrix
purchase and (ii) what the shareholder claims to be the fair market value of
those shares as of the day before the announcement of the Merger. Such statement
of fair market value will constitute an offer by the shareholder to sell the
shares at such price.
If Photomatrix and a dissenting holder of Common Stock agree that the
holder's shares are dissenting shares and agree upon the price of the shares,
payment of the agreed price, with interest, shall be made within 30 days after
the amount thereof has been agreed to or within 30 days after any statutory or
contractual conditions to the Merger have been satisfied, whichever is later. If
Photomatrix denies that a holder's shares are dissenting shares, or Photomatrix
and the holder fail to agree upon the fair market value of the shares, then such
holder, within six months after the date on which notice of the approval of the
Merger is mailed to the holder, but not thereafter, may file a complaint in the
Superior Court of the proper county in California seeking a finding as to
whether the holder's shares are dissenting shares or the fair market value of
the shares, or both, or may intervene in any similar action. In such proceeding,
the holder will be entitled to judgment against Photomatrix in the amount of the
fair market value of any dissenting shares, as determined, with interest from
the date of judgment. The costs of the action, including reasonable compensation
to the appraisers, shall be assessed as the court considers equitable, but, if
the appraisal exceeds the price offered by Photomatrix, then Photomatrix shall
pay costs as provided by California law.
Photomatrix may terminate the Merger in the event that holders
representing in excess of ten percent of the outstanding shares of Photomatrix
Common Stock do not vote in favor of the Merger and exercise their dissenter's
rights. IS LIKELY THAT, IF HOLDERS OF MORE THAN TEN PERCENT OF THE OUTSTANDING
SHARES OF PHOTOMATRIX COMMON STOCK DO NOT VOTE IN FAVOR OF THE MERGER AND
EXERCISE THEIR DISSENTERS' RIGHTS, PHOTOMATRIX'S BOARD OF DIRECTORS WILL DECIDE
TO TERMINATE THE . If dissenters hold in excess of ten percent of the
outstanding shares of Photomatrix Common Stock, the Company would be required to
expend in excess of $200,000 in cash to purchase the dissenters' shares
following the close of the Merger. The Board of Directors would probably decide
that such a large cash outlay to complete the transaction would not be in the
best interests of Photomatrix. In the event the Board decides not to complete
the Merger, Photomatrix will nevertheless pay approximately $150,000 in Merger
expenses without receiving the benefits of the Merger.
UNAUDITED PROFORMA COMBINED FINANCIAL STATEMENTS
The Unaudited Pro Forma Combined Financial Information set forth below
is based on the historical financial statements of Photomatrix and I-PAC after
giving effect to the purchase method of accounting and other adjustments
relating to the proposed combination for the periods ended and as of the dates
indicated. The historical financial statements of I-PAC for the year ended
December 31, 1996 and the nine months ended September 30, 1997 have been
combined with the historical financial statements of Photomatrix for the year
ended March 31, 1997 and the nine months ended December 31, 1997 respectively.
The Unaudited Pro Forma Combined Balance Sheet gives effect to the proposed
combination as of December 31, 1997. The Unaudited Pro Forma Combined Statements
of Operations are presented to give effect to the proposed combination as if
each had been consummated on April 1, 1996 for the fiscal year ended March 31,
1997 and the nine months ended December 31, 1997.
15
<PAGE>
The Unaudited Pro Forma Combined Financial Information set forth below
reflects pro forma adjustments that are based upon available information and
certain assumptions that the Company believes are reasonable. In preparing the
Unaudited Pro Forma Combined Financial Information, the Company believes it has
utilized reasonable methods to conform the basis of the presentation. The
Unaudited Pro Forma Combined Financial Information is intended for informational
purposes only and is not necessarily indicative of the future financial position
or results of operations of the Company had the proposed combination described
above occurred on the indicated dates or been in effect for the period
presented.
The Unaudited Pro Forma Combined Financial Information should be read
in conjunction with, and is qualified in its entirety by, the historical
consolidated financial statements of Photomatrix and I-PAC including in each
case, the related notes thereto, included elsewhere, or incorporated by
reference herein, and with other financial information pertaining to the Company
including "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this proxy statement.
16
<PAGE>
PHOTOMATRIX, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
Historical
` -------------------
The Company
Pro Forma Pro Forma
Photomatrix I-PAC Adjustments(5) Combined(3)
----------- ----- -------------- -----------
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents $1,165,000 $17,000 -- $1,182,000
Accounts receivable, net 1,086,000 551,000 -- 1,637,000
Inventories, net 2,915,000 1,063,000 -- 3,978,000
Prepaid expenses and other 159,000 46,000 -- 205,000
Current portion of notes receivable -- 17,000 -- 17,000
Total Current Assets 5,325,000 1,694,000 -- 7,019,000
Notes Receivable, Long Term -- 33,000 -- 33,000
Property and Equipment, Net 912,000 2,507,000 -- 3,419,000
Intangibles and Other Assets, 1,395,000 -- 1,477,000 2,872,000
Other Assets 151,000 72,000 -- 223,000
$7,783,000 $4,306,000 $1,477,000 $13,566,000
Current Liabilities:
Accounts payable $516,000 $575,000 -- $1,091,000
Accrued and other liabilities 634,000 105,000 -- 739,000
Customer deposits 451,000 -- -- 451,000
Current portion of long-term debt 162,000 667,000 -- 829,000
Net liabilities of discontinued 1,238,000 -- -- 1,238,000
operations
Total Current Liabilities 3,001,000 1,347,000 -- 4,348,000
Notes Payable to Related Party 252,000 448,000 ($423,000)(6) 277,000
Other Non-Current Liabilities 101,000 2,472,000 -- 2,573,000
Contingent Liabilities -- -- -- --
Total Liabilities 3,354,000 4,267,000 (423,000) 7,198,000
Shareholders' Equity
Preferred Stock -- -- -- --
Common Stock (1) 19,351,000 8,000 1,931,000 21,290,000
Retained Earnings (Deficit) (15,063,000) 31,000 (31,000)(5) (15,063,000)
Other 141,000 -- -- 141,000
4,429,000 39,000 1,900,000 6,368,000
Total Shareholders' Equity $7,783,000 $4,306,000 $1,477,000 $13,566,000
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
consolidated financial statements.
17
<PAGE>
PHOTOMATRIX, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR FISCAL YEAR ENDED MARCH 31, 1997
<TABLE>
Historical
-------------------------
The Company
Pro Forma Pro Forma
Photomatrix I-PAC Adjustments Combined(3)
--------------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $8,694,000 $5,189,000 -- $13,883,000
Cost of Revenues 6,400,000 4,160,000 -- 10,560,000
Gross Profit 2,294,000 1,029,000 -- 3,323,000
Operating Expenses:
Selling, general and administrative 3,311,000 929,000 74,000(4) 4,314,000
Research and development 807,000 -- -- 807,000
Facility consolidation and relocation 520,000 -- -- 520,000
Total Operating Expenses 4,638,000 929,000 74,000 5,641,000
Operating Income (Loss)(7) (2,344,000) 100,000 (74,000) (2,318,000)
Other Income (Expense), Net 158,000 (84,000) 49,000(6) 123,000
Income (Loss) From Continuing Operations
Before Income taxes (2,186,000) 16,000 (25,000) (2,195,000)
Provision for Income Taxes 104,000 1,000 -- 105,000
Income (Loss) from Continuing Operations ($2,290,000) $15,000 ($25,000) ($2,300,000)
Loss from Continuing Operation per ($0.44) ($0.23)
Common Share, Basic and Diluted(1)(3)
Number of Shares Used in Computation(1) 5,083,000 9,931,000
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
consolidated financial statements.
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<PAGE>
PHOTOMATRIX, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
<TABLE>
Historical
--------------------------
The Company
Pro Forma Pro Forma
Photomatrix I-PAC Adjustments Combined(3)
------------ --------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues $6,076,000 $4,472,000 -- $10,548,000
Cost of Revenues 3,968,000 3,097,000 -- 7,065,000
Gross Profit 2,108,000 1,375,000 -- 3,483,000
Operating Expenses:
Selling, general and administrative 2,376,000 679,000 55,000(4) 3,110,000
Research and development 580,000 -- -- 580,000
Write Off Capitalized Software 366,000 -- -- 366,000
Total Operating Expenses 3,322,000 679,000 55,000 4,056,000
Operating Income (Loss)(7) (1,214,000) 696,000 (55,000) (573,000)
Other Income (Expense), Net 87,000 (88,000) 37,000 36,000
Income (Loss) From Continuing Operations
Before Income Taxes (1,127,000) 608,000 18,000 (537,000)
Provision for Income Taxes(8) -- 6,000 243,000 249,000
Income (Loss) from Continuing Operations ($1,127,000) $602,000 $261,000) ($786,000)
Loss from Continuing Operation per
Common Share, Basic and Diluted(1)(2) ($0.22) ($0.08)
Number of Shares Used in Computation(1) 5,083,000 9,931,000
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
consolidated financial statements.
19
<PAGE>
1) Under the Merger Agreement, Photomatrix will issue to the stockholders
of I-PAC 4,848,000 shares of Photomatrix common stock at the Effective
Time of the Merger. After the end of a twelve month period ending June
30, 1999, up to 3,744,902 additional shares may be issued to I-PAC
shareholders based upon the achievement of certain performance
milestones. In addition, I-PAC shareholders will also be issued one
additional share for each currently outstanding stock option or warrant
that is exercised. The Unaudited Pro Forma Combined Balance Sheets
reflects the issuance of 4,848,000 shares only. The market value of a
share is assumed to be $0.40, the price of the stock prior to the
announcement of the Merger.
2) Loss per share basic and diluted for the period and year presented are
based on weighted-average number of shares outstanding during the year.
In accordance with Statement of Financial Accounting Standards No. 128
(Earnings Per Share), potential dilutive securities were excluded from
the calculation as their effect is antidilutive.
3) The Unaudited Pro Forma Combined Balance Sheet as of December 31, 1997,
reflects both company's balance sheets as of that date. The Unaudited
Pro Forma Combined Statement of Operations for the nine month period
ended December 31, 1997 reflects Photomatrix's results of operations
for the nine months then ended and I-PAC's results of operations for
the nine months ended September 30, 1997. The Unaudited Pro Forma
Combined Statement of Operations for the year ended March 31, 1997
reflects Photomatrix's results of operations for the year then ended
and I-PAC's results of operations for the year ended December 31, 1996.
4) The Unaudited Pro Forma Combined Statement of Operations for the nine
months ended December 31, 1997 and the year ended March 31, 1997,
assumes the Merger occurred as of April 1, 1996 and the resulting
goodwill of $1,477,000 was amortized beginning April 1, 1996 using a
twenty year amortization period.
CALCULATION OF GOODWILL:
Price paid for stock $1,939,000
Fair value of net assets purchased (39,000)
Conversion of I-PAC related party debt to Equity (423,000)
Goodwill recognized $1,477,000
CALCULATION OF AMORTIZATION:
Years to amortize Goodwill 20
Monthly amortization amount $6,154
Amortization expenses for:
12 months ended March 31, 1997 $74,000
9 months ended December 31, 1997 $55,000
5) The Pro Forma Adjustments include adjustments to eliminate I-PAC common
stock and retained earnings.
6) The Unaudited Pro Forma Combined Balance Sheet reflects the conversion
from long term debt to equity of $423,000 of related party debt.
7) The Unaudited Pro Forma Combined Statement of Operations does not
reflect cost savings which have already been implemented at Photomatrix
or are anticipated as a result of eliminating redundant functions and
costs, as follows:
20
<PAGE>
<TABLE>
Description Manufacturing Selling G&A R&D
----------- ------------- ----------- ---
<S> <C> <C> <C>
Cost reduction already implemented (a) $ 100,000 $ 300,000 -
Elimination of Photomatrix facilities costs (b) $ 192,000 $ 122,000 $36,000
Elimination of redundant functions (c) $ 65,000 $ 170,000 -
Reduction of related party expenses (d) - $ 115,000 -
$ 357,000 $ 707,000 $36,000
</TABLE>
a) In January, 1998, Photomatrix made certain cost reductions
as a result of reducing manpower and other expenses in its
manufacturing, sales and administration areas.
b) Under terms of the Merger, Photomatrix operations will be
moved to I-PAC's Carlsbad facility and its current facility will be
sub-leased or assigned.
c) Reflects the elimination of redundant functions and
positions between the companies.
d) The parties have agreed that all future related party
transactions will be subject to review and approval of the audit
committee, and further that certain related party expenses will be
eliminated.
8) Calculated as if I-PAC were a C corporation using an effective tax rate
of 40%
21
<PAGE>
BUSINESS OF PHOTOMATRIX
Overview
Photomatrix, Inc. (the "Company," or "Photomatrix," through its
subsidiary, Photomatrix Imaging Corporation, develops, manufactures, sells and
services high-performance document and aperture-card scanners for legal,
financial, government and commercial enterprises.
Photomatrix now operates in the electronic imaging segment of the
Information and Image Management Industry as a supplier of quality, high-value
electronic image-processing hardware and software products and services. During
the past four years, Photomatrix has evolved from being a computer output
microfilm ("COM") duplicator manufacturer with primarily one major customer to a
document scanner manufacturer with many customers. Over the past four years,
revenue from COM products and services has steadily declined, while scanner
product and services revenue has increased.
Corporate History
Photomatrix was incorporated in California in 1978 under the name
Xscribe Corporation. On July 31, 1996, the Company sold substantially all the
assets and the business of its wholly owned subsidiary, Xscribe Legal Systems,
Inc. In October, 1996, the Company changed its name from Xscribe Corporation to
Photomatrix, Inc. In December, 1996, the Board of Directors of the Company
approved a plan to discontinue the operations of another wholly owned
subsidiary, Lexia Systems, Inc., and is currently in the process of winding down
and closing this operation. The financial position and results of operations of
Xscribe Legal Systems and Lexia Systems, Inc. have been shown in the financial
statements of the Company as discontinued operations. In March, 1997, the
Company consolidated and relocated its United States continuing operations to
11065 Sorrento Valley Court, San Diego. The Company's phone number is (619)
625-4400.
Principal Products
In fiscal year 1998, the Company has derived its consolidated revenue
primarily from sales and service of its Photomatrix document scanners and
aperture card scanners, as more fully described below. Additionally, a portion
of the Company's consolidated revenue was obtained by servicing its discontinued
COM product line.
Document Scanners
Photomatrix offers a line of medium and high-speed paper document
scanners that serve as input devices for image management systems used in office
automation and service bureau environments. All Photomatrix scanners are
constructed for rugged, high volume use, offering higher duty cycles and
reliability than most competitive models.
The complete image capture system among the Photomatrix document
scanner line is the newly introduced Vision Series 9600, a high-speed (up to 200
dual-sided pages per minute at 200 dots per inch [dpi] resolution), rugged,
single or dual-sided, 200 to 400 dpi, automatic-feeding document scanning
system. Vision Series 9600 includes the scanner, a Pentium PC, high-resolution
display, a video interface card, Windows NT application software and Vision
Image Capture Software ("VICS"), which operates in Microsoft Windows NT. VICS
controls the scanning and PC hardware, displays images and manages the workflow
of the image capture process (including indexing, scanning and formatting) and
its customizable workflow features enable users to use VICS as the front-end of
a larger document management software system. Because the Series 9600 scanner,
computer and VICS were designed to work as one tightly-integrated system, this
configuration offers the best efficiency among Photomatrix products. The Series
9600 replaces the Company's earlier generation Series 6000 scanners.
Photomatrix has primarily sold the Vision Series 5000 ("Series 5000"),
a duplex, high-resolution, 5000-element CCD scanner which captures double-sided
documents at speeds in excess of 150 dual sided pages per minute. These rugged,
high-duty-cycle machines differ from the Vision Series 9600 and Vision Series
6000 in that the Series 5000 is not bundled with the Photomatrix image
processing board, compression board, or VICS. Instead, the Series 5000 is plug
compatible with industry-leading interface (processing and compression) boards
from Kofax, Xionics and Seaport Imaging. Because
22
<PAGE>
of this compatibility, Photomatrix sells a higher volume of the Series 5000
scanners. During the fourth quarter of fiscal 1998, the Company will begin
selling the next generation of plug-compatible document scanners, the Series
9000, which features improved ergonomics of the top document stacker output bin,
SCSI capabilities and increased speeds up to 200 dual sided pages per minute.
Aperture Card Scanners
Photomatrix aperture card scanners are used to scan microfilm images of
engineering drawings for storage in a digital format. In addition to crisper
images, the digital format permits users to electronically store, retrieve,
distribute and print engineering documents in a local or enterprise wide
environment. Photomatrix aperture card scanners offer a wide range of
automation, throughput speed and image enhancement features. Photomatrix sells
aperture card scanners primarily to corporate in-house and third-party service
bureaus who scan microfilmed engineering drawings for the end users of those
drawings. Photomatrix also sells a limited number of aperture card scanners
under subcontracts to provide electronic-imaging systems to the Department of
Defense.
Maintenance Services
The Company provides 24-hour service for its installed base through
field engineers in 10 major cities throughout the United States ("US") and in
England. The Company also has relationships with various third party maintenance
organizations, including a nationwide relationship with IBM, to maintain
document scanners, and Kodak, to provide COM duplicator spare parts. Photomatrix
field engineers average 9 years of experience with the Company. Using a
sophisticated system for parts distribution and inventory control, the service
operation offers installation, on-going maintenance and field technical support
for existing and new products.
The Company views maintenance contracts and related revenue as a
significant revenue opportunity and profit center in fiscal year 1999.
Competition
Document Scanners. Photomatrix document scanners utilize a flatbed
vacuum transport technology. Furthermore, Photomatrix competes in the high end
of the industry with Kodak, Bell and Howell, and BancTec where speed, throughput
and duty cycle are important product features. Competition in this segment is
based upon price, image quality, paper handling capabilities, throughput speeds,
ease of use, reliability and quality and speed of maintenance services. Kodak
has utilized its strengths of name recognition, reputation, distribution
channels, good performance, service capabilities, and strong financial capital
base to become the market share leader in this segment. However, Kodak 500 and
900 model scanners, which are comparable to the Company's Vision Series 5000 and
9000 scanners, sell for more than the Photomatrix scanners.
In the document scanner market, the Photomatrix Vision Series 5000,
9000 and 9600 compete favorably against their product counterparts at BancTec
and Kodak. Photomatrix believes that its primary competitive advantage in this
segment of the market is its price-performance relationship, including its
relative speed, image quality, reliability and rugged build. Photomatrix
maintains the leading price-performance ratios in its market segment and retains
this status via not only continually improving on speed and throughput but also
pricing below BancTec's and Kodak's products. All of its primary competitors,
however, have substantially greater resources than Photomatrix for marketing and
distribution and for purchasing and maintaining market share. Photomatrix's
likelihood of increasing its market share may be reduced should Kodak
significantly reduce its prices. Although management expects some general
downward pressure on price in the next two to three years, management does not
expect intense price competition in the foreseeable future. There is no
assurance that the Company will not experience intense price competition or that
it will be able to maintain a competitive position in this market.
Photomatrix has entered into an original equipment manufacturer ("OEM")
contract with Bell & Howell to supply Series 5000 scanners under the Bell &
Howell label. Photomatrix scanners operate at speeds higher than scanners
manufactured by Bell & Howell, and the Company's OEM relationship with Bell &
Howell represents a strategic corporate partnering that is beneficial to both
parties. Management does not view Bell & Howell as a competitor in the high-end
23
<PAGE>
market assuming Photomatrix continually improves the features and speed of
Photomatrix scanners such that they are perpetually superior to Bell & Howell's
product offering and Bell & Howell adequately markets and sells Photomatrix
scanners in large volumes. Management believes Photomatrix has the engineering
talent and resources to succeed at technologically staying ahead of Bell &
Howell thereby, fostering a long-term OEM relationship. In December, 1997,
Photomatrix entered into an addendum to its OEM agreement with Bell & Howell,
whereby Bell & Howell became an exclusive agent, with certain specifically
identified exceptions, to sell Photomatrix peripheral document scanners to
distributors and value-added resellers ("VARs") in the United States and Canada.
As a part of this agreement, Photomatrix received a binding commitment from Bell
& Howell to purchase a minimum quantity of Vision Series 5000 document scanners,
valued at $1.5 million, over a period of seven months, beginning in December,
1997.
Aperture Card Scanners. The market for scanning engineering drawings is
large and growing steadily. According to industry studies, in the US alone, it
is estimated that more than 40,000 companies each have more than 100,000
engineering drawings, with a total estimated value of more than $1.5 trillion.
Companies are dedicating large resources to and establishing significant budgets
for the conversion, storage, distribution and retrieval of these engineering
drawings. Problems with document and revision control, document distribution,
deterioration and loss of documents are pervasive. Aperture cards, which contain
microfilm images of these drawings, have been widely used since World War II to
improve the storage and security of these documents. The need to electronically
manage this data has become critical, as the volume of paper documents continues
to increase, and companies are increasingly seeking methods to increase the
efficiency of storage and retrieval of these documents.
Photomatrix developed much of its technology and related application of
aperture card scanners in the mid 1980's when it introduced its aperture card
scanner product. Photomatrix's primary competitors in the aperture card scanning
market are Wicks & Wilson, a United Kingdom company, Microbox , a German company
and SunRise Imaging, a US-based company. Photomatrix is not able to estimate the
size of this market, but believes that it is currently limited due to the cost
constraints of converting engineering backfiles of aperture cards and the
related systems into electronic storage and retrieval systems. Photomatrix's
products are higher-end products and are priced higher than other currently
marketed products. In the Company's opinion, its aperture card scanner product
offering exceeds the quality and duty-cycle statistics of any of its
competitors.
Marketing and Distribution
Photomatrix markets Series 9600 image capture systems to service
bureaus and high-volume end users through its direct sales force. In contrast,
Photomatrix markets its Series 5000 and 9000 document scanners via indirect
distribution channels, primarily as a consequence of the OEM agreement with Bell
& Howell. In April 1997, Photomatrix entered into a distribution agreement with
IBM. Under the agreement, which contains no minimum requirements, IBM is granted
the right to sell Photomatrix document scanners. To date there have been no
significant sales under the IBM agreement.
Photomatrix distributes its aperture card scanning products primarily
to systems integrators and VARs who package the Photomatrix scanners with other
software and hardware products for sale to end users. Because Photomatrix
aperture card scanners are peripheral products which must be integrated with
other products for end users, Photomatrix maintains close working relationships
with major systems integrators and VARs. Photomatrix relies heavily on the sales
efforts of its systems integrators and VARs to generate sales of aperture card
scanners. Photomatrix also sells, through its direct sales force, aperture card
scanning systems to service bureaus which provide scanning services to
engineering drawing end users.
Photomatrix generally provides a 90-day warranty on its products and
offers, for sale, annual maintenance contracts thereafter. The warranty and
maintenance work is typically provided through Photomatrix field service
employees who are located throughout the United States. Photomatrix also
performs repair services for and supplies replacement parts to Kodak (which
previously sold Photomatrix products under a private-label agreement).
Raw Materials and Manufacturing
Photomatrix manufactures its aperture card scanners and document
scanners at its manufacturing facilities in San Diego, California. Photomatrix's
operations consist of procurement, kit packaging, assembly of circuit boards,
wiring and assembly and quality control testing of all parts, components,
subassemblies and final assemblies of all products.
24
<PAGE>
Photomatrix manufactures some of its own boards, however much of the printed
circuit board ("PCB") manufacture is performed by outside vendors. In
anticipation of the Merger, Photomatrix recently began utilizing I-PAC as its
PCB vendor. The Company expects to realize significant cost savings after the
Effective Time as a result of this change, together with the utilization of
I-PAC's wiring and assembly expertise.
Photomatrix's products incorporate electronic, imaging and mechanical
components purchased from various vendors. The electronic components, including
the computer chips, are generally available from multiple sources. Photomatrix
currently uses Fairchild, Kodak and Sony CCDs in the Photomatrix cameras in its
aperture card and document scanning products. However, other commercially
available CCD cameras could be substituted if necessary. Photomatrix copies,
labels and packages its software products.
Photomatrix's products contain numerous mechanical components that are
machined specially for Photomatrix's products. Photomatrix relies upon several
specific vendors as the sole source of its custom-machined parts. Although many
vendors can provide this machine work, tools and molds needed for this process
are in the possession of (and in some cases, owned by) its machine-shop vendors,
and Photomatrix could experience supply disruption if one of these vendors
failed to meet its supply obligations.
Photomatrix also bundles its aperture card scanners and document
scanners with commercially available personal computers, work stations,
high-resolution monitors, optical disk drives and other compatible peripherals
and with Microsoft Windows and NT, Novell NetWare and other commercially
available software.
Intellectual Property Rights and Licenses
Photomatrix relies upon copyright and trade secret laws to protect its
software and firmware used in its aperture card scanner and document scanner
products. Photomatrix has registered under Federal law design documents for its
document scanner and certain of its product maintenance manuals, operations
manuals and parts catalogues.
Photomatrix holds a perpetual nonexclusive license to use, manufacture,
and distribute aperture card scanners, microfiche scanners, single and double
sided document scanners that scan documents no greater than 12 inches in width
and 24 inches in length and multiformat scanners, provided that the
manufacturer's net invoice price is not less than $7,000 for document scanners
and $10,000 for all scanners, that use certain imaging technology of
Scan-Graphics, Inc., subject to United States Patent No. 4,972,273. Photomatrix
is obligated to pay Scan-Graphics a royalty of 5-1/2 % of Photomatrix's net
sales price for all aperture card scanners manufactured, sold and delivered by
Photomatrix until December 31, 1998. Photomatrix is not obligated to pay any
royalties with respect to document scanners, whole fiche scanners, roll film
scanners and/or multiformat scanners even if the scanners use the patented
technology or any derivative of such technology. If Photomatrix discontinues its
manufacturing of aperture card scanners, then it is obligated to negotiate with
Scan-Graphics to sell Scan-Graphics a nonexclusive right to manufacture and sell
the aperture card scanners.
Photomatrix is a party to a nonexclusive reseller agreement with Image
Machines Corporation for a Windows driver for Photomatrix's aperture card
scanners and for viewing and editing software. Under the reseller agreement,
Photomatrix purchases the software for resale on a per copy basis. The Image
Machines software is not bundled with aperture card scanners sold through PRC or
Intergraph who have developed their own software for use with the scanners.
Photomatrix offers with its scanners a SCSI developers' tool kit for developing
a Photomatrix scanner driver.
Photomatrix also purchases and resells as part of the Series 9600
document scanner a board manufactured by Kodak Image Products that enables the
scanning of bar codes and bundles its Series 9600 document scanner with
Microsoft NT which it purchases on a per copy basis.
Seasonal Business
The second and third quarters of the Company's fiscal year have
typically shown higher revenue volumes than its first and fourth quarters.
25
<PAGE>
Discontinued Operations
The following represents a brief history of the discontinued operations
of Photomatrix:
Sale of Xscribe Legal System, Inc. In July 1996, the Company sold
certain assets and liabilities related to its computer-aided transcription
business to its primary competitor for $2.2 million. The Company retained
certain liabilities.
Lexia Systems, Inc. In October 1993, the Company acquired the North
American Sales Division of International Computers Limited, Inc. ("ICL"), a
developer of groupware (office automation) software and manufacturer of
Unix-based hardware, and formed Lexia Systems, Inc. ("Lexia"). Lexia and ICL
entered into a strategic alliance whereby Lexia was to distribute ICL's
groupware products in the United States and support the domestic installed base
of ICL customers. However, the business partnering efforts between the Company
and ICL and its sister company, Fujitsu ICL Computers Ltd. ("Fujitsu") have
proved to be ineffective primarily because of a difficult working relationship
between ICL, Fujitsu and Lexia, combined with the fact that Lexia did not own
the applicable software or proprietary rights and was not able to control the
marketing or product management of ICL and Fujitsu products. Consequently, in
December, 1996, the Board of Directors of the Company approved a plan to
discontinue Lexia Systems, Inc. before the end of the Company's fiscal year
1998. The Company is currently in process of winding down and closing this
operation. Further, in December 1997, the Company had recorded accounts payable
and unpaid rent due ICL and Fujitsu in the amount of approximately $786,000. The
Company is disputing the value received related to certain of these liabilities
and has been attempting to settle with ICL and Fujitsu at a discount. There is
no assurance that the Company will be successful in resolving these disputed
amounts.
Significant Customers
One customer (Bell & Howell) accounted for 17 percent of the Company's
total revenue for fiscal year 1997 and 23 percent of its revenue for the nine
months ended December 31, 1997. No other customer accounted for more than 10
percent of the Company's total revenue during fiscal years 1997 or 1996. (See
"Additional Risk Factors")
Backlog
The Company generally does not have a material order backlog at any
time because the Company normally fills orders within the delivery schedules
requested by customers (generally within 30 days).
Government Sales
The Company has had no government sales.
Research and Development
During the last three fiscal years, the Company expended $969,000
(fiscal year 1997), $1,018,000 (fiscal year 1996), and $813,000 (fiscal year
1995) on company-sponsored research and development projects, including projects
performed by consultants for the Company and capitalized software development
costs. Management expects that research and development expenditures (including
capitalized software development costs) will total approximately $1 million for
the coming year.
The Company works closely with its customers in an attempt to develop
enhancements and new products in response to customer needs. In fiscal years
1998 and 1997, the Company has been engaged in the development of competitive
enhancements to the Photomatrix line of scanners, including a faster scanner, a
"smart" automatic document feeder, a top loading stacker, and the next
generation of both the Series 6000 document scanner and aperture card scanner
line. There is no assurance that the Company will successfully complete current
or planned development projects or will do so within the time parameters and
budgets established by the Company, and there is no assurance that a market will
develop for any product successfully developed.
26
<PAGE>
Environmental Laws
Compliance with federal, state and local laws enacted for the
protection of the environment have not had a material effect upon the Company's
capital expenditures, earnings or competitive position to date. The Company does
not anticipate that it will have to incur any material expenses in the future in
order to comply with such laws because of the nature of its products and
manufacturing operations.
Employees
At March 6, 1998, the Company had 51 full-time and three part-time
employees, excluding three employees associated with the discontinued Lexia
operation, none of whom are subject to a collective bargaining agreement. The
Company considers its relationship with its employees to be good.
Foreign and Domestic Operations
The Company derived approximately 21.8% of its revenue for the year
ended March 31, 1997, and approximately 20.4% of its revenue for the nine months
ended December 31, 1997, from foreign sales made by Photomatrix, Ltd., a wholly
owed subsidiary located in the United Kingdom.
Property
The Company leases its corporate headquarters located in San Diego,
California. The Company first occupied this facility in March 1997, and it
consists of approximately 23,400 square feet, which houses the Company's
corporate offices and its manufacturing, sales and administrative functions. The
lease expires in September 2002. The Company plans to relocate its corporate
headquarters as soon as possible after the close of the Merger to the I-PAC
facility in Carlsbad, California. The Company believes that it will be able to
sub-lease its facilities or terms at least as favorable as its existing lease
terms. Management anticipates that the writeoff of leasehold improvements will
be nominal.
The Company also leases facilities in Chandler, Arizona and London,
England. These facilities house the Photomatrix product development and
Photomatrix European operations, respectively. The Chandler facility consists of
5,100 square feet, and the lease expires in June 2000. The London facility
consists of 2,400 square feet, and the lease expires in May 2013.
The Company also leases 880 square feet in Herndon, Virginia for its
Lexia operations (which operation has been discontinued). This lease expires in
November 1998.
Legal Proceedings
The Company has been a defendant in three product liability cases
pending in the United States District Court, Eastern District of New York
(Bernhart v. Xscribe et al. (92 Civ. 3931), Galfin v. Xscribe (92 Civ. 2582),
and Hagipadelis v. Xscribe (95 Civ. 1977)). Both Bernhart v. Xscribe and Galfin
v. Xscribe have now been or are in the process of being dismissed. Xscribe has
tendered the Hagipadelis v. Xscribe claim to its insurance carriers, St. Paul
Fire ("St. Paul") and Marine Insurance and Federal Insurance Company
("Federal"). St. Paul has assumed the Company's defense without reservation of
right, and Federal has agreed to share defense costs, subject to a reservation
of rights. The insurance carriers have prevailed in all judgements rendered to
date. It may take several years before this litigation is ultimately resolved.
The Company believes that this remaining case is without merit and further
believes that if any liability results from these claims, the liability
(excluding punitive damages, if any) will be covered by its insurance policies.
The Company is not aware of any other legal proceedings to which it is
a party.
27
<PAGE>
PHOTOMATRIX SELECTED HISTORICAL FINANCIAL DATA
The following selected financial data are derived from unaudited
financial statements for the nine month periods ended December 31, 1997 and 1996
and audited financial statements for the years ended March 31, 1997, 1996, 1995
and 1994. Certain reclassifications have been made to prior year amounts to be
consistent with current year. Discontinued operations were reclassified for all
periods presented, and the remaining operations consist of Photomatrix Imaging
Corp. and Photomatrix, Ltd., which were acquired in fiscal 1994. The historical
financial data for the nine month periods ended December 31, 1997 and 1996 have
not been audited and were derived from the accounting records of the Company. In
the opinion of management, the historical financial data of the Company as of
and for the nine month periods ended December 31, 1997 and 1996 include all
adjusting entries (consisting only of normal recurring adjustments) necessary to
present fairly the information set forth therein. The historical financial data
are not necessarily indicative of the results of operations for any future
period. Furthermore, the results of operations for the nine month period ended
December 31, 1997 should not be regarded as indicative of the results that may
be expected for the full year. The data set forth below should be read in
conjunction with the financial statements and the related notes thereto set
forth in the Company's Annual Report on Form 10-KSB for the year ended March 31,
1997, which is incorporated herein by reference and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," appearing elsewhere
herein.
(000's omitted, except for net income (loss) per share)
<TABLE>
Nine Months
ended December 31,
(unaudited) For the years ended March 31,
1997 1996 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA
Revenue $6,076 $6,871 $8,694 $9,092 $9,712 $9,742
Gross profit percent 34.7% 25.7% 26.3% 32.3% 31.5% 34.8%
Loss from continuing operations $(1.127) $(1,290) $(2,290) $(1,368) $ (791) $ (194)
Net income (loss) $(1,127) $(1,352) $(2,407) $(1,704) $ (133) $1,222
Loss per share from continuing $(0.22) $(0.24) $(0.44) $(0.24) $(0.13) $(0.04)
operations, basic and diluted
Net income (loss) per share, basic and $(0.22) $(0.25) $(0.46) $(0.30) $(0.02) $0.23
diluted
Dividends per share -- -- -- -- -- --
As of December 31, As of March 31,
BALANCE SHEET DATA 1997 1996 1997 1996 1995 1994
Working capital $2,324 $3,313 $2,432 $5,624 $6,991 $7,617
Current ratio 1.77 2.50 1.92 2.96 4.10 5.35
Total assets $7,783 $9,244 $8,565 $12,581 $13,202 $12,844
Total long-term debt and obligations $353 $450 $415 $1,148 $699 $827
</TABLE>
28
<PAGE>
PHOTOMATRIX MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results
of operations should be read in conjunction with the selected financial data and
consolidated financial statements and notes thereto incorporated by reference
herein.
Results of Operations
Following is a comparative discussion by period of the results of
continuing operations for the last three fiscal years ended March 31, 1997, and
the nine month periods ended December 31, 1997 and 1996. The Company believes
that inflation has not had a material effect on its operations to date.
Fiscal year 1997 ended March 31, 1997 compared to fiscal year 1996
ended March 31, 1996
Consolidated revenue for the year ended March 31, 1997 decreased by
$398,000 (4.4 %) to $8,694,000 from $9,092,000 for the year ended March 31,
1996. This decrease was due to a 35.4 % ($803,000) expected decrease in COM
duplicator revenue offset by a 5.9 % ($405,000) increase in scanner product and
service revenue.
Consolidated gross margins for the year ended March 31, 1997 decreased
$639,000 (21.8 %) to $2,294,000 from $2,933,000 and gross margin as a percent of
sales decreased from 32.3 % to 26.4 % in the year ended March 31, 1997 due to
significant price concessions made by the Company in connection with the
establishment of its new OEM relationship with a major document scanner
customer, as well as certain cost inefficiencies caused by the relocation of its
manufacturing operations from Culver City to San Diego, including an inventory
obsolescence write-off of approximately $127,000. Management believes that it
has taken appropriate actions which will enable the Company to realize gross
margins similar to those in fiscal years 1996, 1995 and 1994. There is no
assurance that these margin improvements will be achieved.
Selling, general and administrative ("SG&A") expenses decreased
$281,000 (7.8 %) from $3,592,000 in the prior year to $3,311,000 in the current
year. The net decrease is primarily attributable to cost reductions made both in
the sales and marketing as well as the general and administrative areas of the
Company. As a percent of sales, SG&A decreased from 39.5 % in the prior year to
38.1 % in the current year, primarily due to the cost reduction efforts
implemented during the current year.
Product development expenses increased $322,000 (66.4 %) from $485,000
in the year ended March 31, 1996 to $807,000 in the year ended March 31, 1997.
Product development expenditures that were capitalized because they related to
technologically feasible projects were $108,000 in the current year compared to
$301,000 in the prior year. Total development spending increased $129,000 from
$786,000 in the prior year to $915,000 in the current year primarily because of
increased scanner development activity at Photomatrix, including the development
of new models which feature increased speed (150 and 200 page per minute duplex
models), as well as new options such as a "smart" automatic document feeder, a
top-loading stacker and an NT version of the Company's PICS software.
During the current fiscal year, the Company relocated and consolidated
its operations to San Diego. The cost incurred in connection with this activity
totaled $520,000, and has been shown as a separate line item.
Interest expense decreased $136,000 from $228,000 in the prior year to
$92,000 in the current year. This decrease was due to decreased borrowings under
the Company's credit facility in the current year. Other income increased
$239,000, from $11,000 in 1996 to $250,000 in 1997 as a result of non-recurring
payment from a major customer under a minimum quantity purchase contract.
The Company's provisions for income taxes were $104,000 and $7,000 in
the years ended March 31, 1997 and 1996, respectively. These amounts are
substantially different from provisions calculated using the statutory rates
because of the Company's inability to recognize the effects of net operating
losses and related carry-forwards. The current year provision reflects an
increase in the Company's valuation allowance relating to the deferred tax
asset.
29
<PAGE>
The decreases in revenue and gross margin, and the increased product
development and relocation expenses, offset slightly by the reduction in SG&A
costs and interest expense and the increase in other income, resulted in a loss
from continuing operations of $2,290,000 ($0.44 per share) for the year ended
March 31, 1997. This compares to the loss from continuing operations of
$1,368,000 ($0.24 per share) for the year ended March 31, 1996.
During the current year, the Company sold its court reporting business
(Xscribe Legal Systems, Inc.) and discontinued Lexia Systems, Inc., as more
fully described in Note 2 of the Consolidated Financial Statements contained
elsewhere herein. Including the loss from discontinued operations of $336,000 in
the prior year and $251,000 in the current year, less gain of $134,000 from the
sale of Xscribe Legal Systems, the net loss increased from $1,704,000 ($0.30 per
share) in the year ended March 31, 1996 to $2,407,000 ($0.46 per share) in the
year ended March 31, 1997.
Fiscal year 1996 ended March 31, 1996 compared to fiscal year 1995
ended March 31, 1995
Consolidated revenue for the year ended March 31, 1996 decreased
$620,000 (6.4%) to $9,092,000 in the year ended March 31, 1996 from $9,712,000
in the year ended March 31, 1995. This decrease was due to a 42.7% ($1,694,000)
expected decrease in COM duplicator revenue, somewhat offset by an 18.7%
($1,074,000) increase in scanner product and service revenue.
Consolidated gross margins for the year ended March 31, 1996 decreased
$124,000 (4.1%) to $2,933,000 in the year ended March 31, 1996 from $3,057,000
in the year ended March 31, 1995. Gross margin as a percent of sales remained
relatively constant at about 32%.
Selling, general and administrative expenses increased $336,000 (10.3%)
from $3,256,000 in the year ended March 31, 1995 to $3,592,000 in the year ended
March 31, 1996. The net increase includes a $426,000 increase at Photomatrix to
develop its sales and marketing channels for scanners offset by $90,000 of cost
reductions at the corporate headquarters. As a percent of sales, SG&A increased
from 33.5% in the year ended March 31, 1995 to 39.6% in the year ended March 31,
1996, primarily due to the decreased revenue in the fiscal year ended March 31,
1996.
Product development expenses increased $56,000 (13.1%) from $429,000 in
the year ended March 31, 1995 to $485,000 in the year ended March 31, 1996.
Product development expenditures that were capitalized because they related to
technologically feasible projects were $301,000 in the year ended March 31, 1996
compared to $336,000 in the year ended March 31, 1995. Total development
spending increased $94,000 from $692,000 in the year ended March 31, 1995 to
$786,000 in the year ended March 31, 1996 primarily because of increased scanner
development activity at Photomatrix.
Other income (expense), which consists primarily of interest expense,
increased $76,000 from $141,000 in the year ended March 31, 1995 to $217,000 in
the year ended March 31, 1996. This increase was due to increased borrowings
under the Company's credit facility, primarily used to finance increased
inventory levels.
The Company's provisions for income taxes were $7,000 and $22,000 in
the years ended March 31, 1996 and 1995, respectively. These amounts are
substantially different from provisions calculated using the statutory rates
because of the Company's inability to recognize the effects of net operating
losses and related carry-forwards, net of valuation allowances.
The decreases in revenue and gross margin, and the increased product
development and interest expenses, and SG&A costs, resulted in a loss from
continuing operations of $1,368,000 ($0.24 per share) for the year ended March
31, 1996. This compares to a loss from continuing operations of $791,000 ($0.13
per share) for the year ended March 31, 1995.
In the year ended March 31, 1997, the Company sold its court reporting
business (Xscribe Legal Systems, Inc.) and discontinued Lexia Systems, Inc., as
more fully described in Note 2 of the Consolidated Financial Statements
contained elsewhere herein. Including the income (loss) from discontinued
operations of $658,000 and ($336,000) in the years ending March 31, 1995 and
1996, respectively, the net loss increased from ($133,000) ($0.02 per share) in
the year ended March 31, 1995 to ($1,704,000) ($0.30 per share) in the year
ended March 31, 1996.
30
<PAGE>
Nine months ended December 31, 1997 compared to the nine months ended
December 31, 1996
For the nine months ended December 31, 1997, consolidated revenues
decreased $795,000 or 11.6% to $6,076,000 from $6,871,000 for the nine months
ended December 31, 1996, primarily as a consequence of poor results in the third
quarter. Equipment and software revenue decreased $947,000 or 17.5% to
$4,463,000 from $5,410,000 for the nine months ended December 31, 1996. Service
revenue increased $152,000 or 10.4% to $1,613,000 from $1,461,000 for the prior
nine months ended December 31, 1996.
For the nine months ended December 31, 1997, consolidated gross margin
increased $344,000 or 19.5% to $2,108,000 from $1,764,000 for the nine months
ended December 31, 1996. As a percent of revenues gross margin increased 35.0%
to 34.7% from 25.7%. Equipment and software gross margin increased 23.9% to
28.5% from 23.0%, this improvement resulting from the effects of both a
continuing favorable product mix and a reduction in costs associated with
production efficiencies. Service gross margin increased 45.9% to 51.8% from
35.5%, resulting primarily from decreases in service costs, principally labor
and labor-related costs and taxes.
For the nine months ended December 31, 1997, selling, general and
administrative expenses ("SG&A") decreased $309,000 or 11.5% to $2,376,000 from
$2,685,000 for the nine months ended December 31, 1996. As a percent of revenue,
SG&A, remained constant at 39.1%. The Company is further reducing costs as a
result of the lower level of sales in the third quarter, uncertainties in the
market segment in which Photomatrix sells its aperture card and document
scanners and the restructuring of its sales and marketing department as a result
of the new OEM arrangement with Bell & Howell. As a result of the actions taken,
the Company expects cost reductions to exceed $400,000 on an annual basis.
For the nine months ended December 31, 1997, research and development
expenses increased by $18,000 or 3.2% to $580,000 from $562,000 for the nine
months ended December 31, 1996. As a percentage of revenue, research and
development expenses increased 16.8% to 9.6% from 8.2%. Total product
development spending increased $28,000 to $664,000 from $636,000. Expenditures
for new product development that were considered to be technologically feasible,
and as such were capitalized, increased $10,000 to $84,000 from $74,000.
The Company recorded a write-off of certain capitalized software costs
during the quarter ended December 31, 1997 in the amount of $366,000.
Other income of $87,000 in the nine months ended December 31, 1997,
compares to other income of $193,000 in the nine months ended December 31, 1996,
a decrease of $106,000. This decrease primarily reflects the sale of a trademark
for $100,000 in the current period compared to a one-time settlement payment of
$250,000 from a major customer in the prior period.
There was no provision for income taxes booked in either the nine
months ended December 31, 1997 or the nine months ended December 31, 1996.
The net effect of the increases in gross margin and research and
development, decreases in SG&A and other income plus the write off of
capitalized software resulted in a net loss from continuing operations for the
nine months ended December 31, 1997 of $1,127,000 or $(0.22) per share. This
compares to a net loss from continuing operations of $1,290,000 or $(0.24) per
share for the nine months ended December 31, 1996. There was no income from
discontinued operations in the current period compared to a loss of $62,000 or
$(0.01) per share in the nine months ended December 31, 1996. The net loss in
the current period of $1,127,000 or $(0.22) per share compares to a loss of
$1,352,000 or $(0.25) in the prior nine month period.
Recent and Future Sources of and Demands on
Liquidity and Capital Resources
For the nine months ended December 31, 1997, the Company's loss before
taxes, depreciation and amortization and the write-off of certain capitalized
software costs was $73,000. During this period the Company's primary sources of
liquidity were a reduction of accounts receivable ($516,000), an increase in
accrued and other liabilities ($44,000), retirement of capital assets ($38,000),
cash flows provided by discontinued operations ($848,000), and cash reserves.
31
<PAGE>
During the same period the primary uses of cash were to increase inventories
($395,000), increase prepaid expenses ($10,000), reduce accounts payable
($328,000), reduce customer deposits ($162,000), reduce notes payable ($113,000)
and reduce other assets and liabilities ($7,000). As a result of these sources
and uses of liquidity during the nine months ended December 31, 1997 the
Company's cash balance increased $353,000 or 43.5%, from $812,000 to $1,165,000.
The Company has a $750,000 line of credit with its bank. This line of
credit accrues interest on outstanding borrowings at the bank's prime rate plus
2% per annum. Under the terms of the line of credit agreement, total borrowings
are limited to the lesser of $750,000 or 70% of eligible accounts receivable (as
defined under the agreement). The Company is required to (1) maintain a minimum
tangible net worth of $2,800,000, (2) maintain a ratio of total liabilities to
tangible net worth of not greater than 1.1 to 1.0, (3) maintain working capital
of $1,750,000 and (4) maintain a current ratio of 1.7 to 1.0. The line of credit
expires in September 1998. As of December 31, 1997, the Company had no
outstanding borrowings against this line of credit and was in compliance with
all of its requirements.
As of December 31, 1997, the Company was obligated under a series of
notes payable totaling $414,000. These notes bear interest at a rate of 8% per
annum and mature in April 2000. Interest and principal payments totaling $16,000
are due monthly. As of December 31, 1997, all payments under these obligations
were current.
The Company's assured sources of future short-term liquidity are its
cash balance of $1,165,000 as of December 31, 1997 and the full amount of its
line of credit of $750,000.
The Company currently is obligated to pay approximately $20,000 per
month in lease payments. Aside from these commitments, the Company has not made
any material capital commitments.
The Company is continuing to concentrate on increasing sales and
improving gross margins. If it is successful in this regard, it should have
sufficient liquidity to fund its operations during the next twelve months. In
the event that the proposed Merger is accomplished, although no assurance can be
given, the Company expects the effect on liquidity to be positive, and therefore
no additional capital will be required to fund operations.
In March 1997 the Financial Accounting Standards Board issued SFAS 128,
EARNINGS PER SHARE, effective for periods ending after December 15, 1997. SFAS
128 requires the presentation of "basic" earnings per share, which excludes the
dilutive effect of all common stock equivalents. Presentation of "diluted"
earnings per share, which reflects the dilutive effects of all common stock
equivalents, is required. The diluted presentation is similar to the current
presentation of fully diluted earnings per share, but uses the average market
price of the stock during the period. For the nine months ended December 31,
1997 and 1996 the Company had losses from continuing operations and thus only
basic earnings per share is presented, as the effect of common stock equivalents
is antidilutive to the calculation of diluted earnings per share.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
As of March 6, 1998, Lorne House Trust was the only shareholder known
by the Company to be the beneficial owner of more than five percent of its
outstanding Common Stock. As of that date, Lorne House Trust was the beneficial
owner of 1,054,002 shares, representing 20.74 percent of the Company's
outstanding stock. These shares are beneficially owned by Lorne House Trust as
trustee of the Bulldog Trust and the Pitkin Trust, irrevocable trusts
established by Sam Wyly and Charles J. Wyly, Jr., respectively. The record
holders are Tensas, Ltd. and Roaring Creek, Ltd., which are corporations wholly-
owned by such trusts. Sam Wyly and Charles J. Wyly, Jr. disclaim beneficial
ownership of these shares. The address of Lorne House Trust is Lorne House,
Castle Town, Isle of Man, British Isles.
32
<PAGE>
DESCRIPTION OF SECURITIES
General
Photomatrix is authorized to issue 30,000,000 shares of Common Stock
and 3,173,000 shares of Preferred Stock. After the closing of the Merger,
9,931,000 shares of Common Stock will be issued and outstanding (assuming no
exercise of outstanding options and warrants and no exercise of dissenters'
rights, and before issuing any Earn-Out Shares). No shares of Preferred Stock
are outstanding or will be outstanding after the closing of the Merger.
California Law and Certain Charter and Bylaw Provisions
The Bylaws provide that the number of directors of Photomatrix shall
consists of not less than three nor more than seven with the exact number to be
determined by a vote of a majority of the shareholders or the Board. The Board
has currently fixed the number at seven. Any vacancies on the Board may be
filled for the unexpired portion of the term by a majority vote of the remaining
directors.
Common Stock
Photomatrix is authorized to issue 30,000,000 shares of Common Stock of
which 5,083,017 shares are currently outstanding. Each share of Common Stock
entitles the holder thereof to one vote on all matters submitted to a vote of
the shareholders, except that the holders have cumulative voting rights for the
election of directors. The holders of Common Stock do not have preemptive rights
or rights to convert their Common Stock into other securities. Holders of Common
Stock are entitled to receive ratably such dividends as may be declared by the
Board of Directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of Photomatrix, holders of the Common
Stock have the right to a ratable portion of the assets remaining after payment
of liabilities. All shares of Common Stock outstanding and to be outstanding
upon completion of this offering are and will be fully paid and non-assessable.
Warrants
In addition to options issued under its Employee Stock Option Plans,
Photomatrix has issued outstanding warrants, expiring in August, 2002, to
acquire 75,000 of the Company's common shares at an exercise price of $0.44 per
share. The Company has also issued other options, expiring in December, 2003, to
acquire 33,333 of its common shares at an exercise price of $0.42 per share.
MARKET PRICES OF PHOTOMATRIX COMMON STOCK
Photomatrix, Inc. is traded on the NASDAQ Small Cap Market under the
symbol PHRX. On March 6, 1998, there were 5,083,017 shares outstanding and there
were approximately 1,000 shareholders of record. Following is information
regarding Photomatrix, Inc. Common Stock market prices:
<TABLE>
Fiscal Year 1998 Fiscal Year 1997 Fiscal Year 1996
Fiscal Quarter ended Low Bid High Bid Low Bid High Bid Low Bid High Bid
<S> <C> <C> <C> <C> <C> <C>
June 30 5/16 5/8 11/16 1-7/16 7/8 1-1/2
September 30 9/32 9/16 17/32 1-1/16 13/16 1-1/2
December 31 1/4 29/32 3/8 13/16 3/4 1-1/16
March 31 13/32 5/8 3/8 15/16 9/16 1-3/64
</TABLE>
The Company has not paid a cash dividend on its common stock, and it is
not anticipated that the Company will pay any dividends in the foreseeable
future.
33
<PAGE>
BUSINESS OF I-PAC
General Business and Overview
I-PAC is a custom contract manufacturer of electrical and mechanical
assemblies, including complex, multi-layer printed circuit board assemblies,
wire and cable harnesses, molded cables, and complete system and subsystem
assemblies. I-PAC specializes in providing value added electronic manufacturing
services in connection with the manufacture of surface mount and hybrid printed
circuit boards used in high value industrial and commercial products which
require an exceptionally high level of quality control, a critical emphasis on
delivery schedules, and intensive customer support.
All of I-PAC's printed circuit boards are designed by the customer and
manufactured to its specifications. Using computer controlled manufacturing and
test machinery and equipment, I-PAC provides manufacturing services employing
surface mount technology ("SMT") and pin-through-hole ("PTH") interconnection
technologies. I-PAC offers a wide range of manufacturing and management
services, either on a turnkey or consignment basis, including material
procurement and control, manufacturing and test engineering support, and quality
assurance. I-PAC's strategy is to develop long-term manufacturing relationships
with established and emerging original equipment manufacturers ("OEMs").
Corporate History
I-PAC was organized under the laws of the State of California in 1990.
In January 1997, I-PAC purchased the facility it had been leasing, a 40,000
square foot, two story concrete building located in Carlsbad, California.
In February 1997, I-PAC acquired I-PAC Express Assembly, Inc. ("I-PAC
Express"). I-PAC Express is a custom contract manufacturer specializing in quick
turn printed circuit board prototypes incorporating surface mount and hybrid
technologies. It is located in Santa Ana, California. I-PAC Express supports
prototyping requirements for new electronic products during their design phase,
allowing those products to then migrate to the main I-PAC facility when
production quantities are required. I-PAC intends to open additional I-PAC
Express locations in Southern California.
I-PAC's facilities are located at 1958 Kellogg Avenue, Carlsbad,
California 92009. Its phone number is (760) 438-1529.
Contract Electronics Manufacturing Industry
Overview
The contract electronics manufacturing industry provides the program
management, technical and administrative support, and manufacturing expertise
required to take a product from the early design and prototype stages through
volume production and distribution. Over the past two decades electronic systems
have become smaller, lighter and more reliable, while demands for performance at
lower costs have increased. The use of a contract manufacturer allows an OEM to
avoid large capital investments in plant, equipment and staff and to concentrate
instead on the areas of its greatest strength:
innovation, design and marketing.
OEMs use contract manufacturers to:
Reduce Production Costs. Contract manufacturers generally are
able to manufacture specialized products at a lower cost than OEMs
because of efficiencies associated with specialization and higher
production volumes.
Accelerate Time to Market. Rapid technological advances and
shorter product life cycles require OEMs to reduce the time required to
bring a product to market. Delays in bringing a product to market can
result in obsolescence of the product before or shortly after it
becomes available. By providing an established infrastructure and
manufacturing expertise, contract manufacturers can help OEMs shorten
their product introduction cycles.
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Access Advanced Manufacturing Capabilities. As electronic
products have become smaller and more technologically advanced,
manufacturing processes have become more automated and complex, making
it more difficult for OEMs to maintain the manufacturing expertise
required to remain competitive. Using contract manufacturers affords
OEMs access to advanced manufacturing technology and processes.
Improve Manufacturing Quality. Because of their focus on their
specialized area of expertise, contract manufacturers generally can
provide services of higher quality than OEMs can provide in-house.
Focus Resources. In the rapidly changing, increasingly
competitive electronics industry, most OEMs must focus their attention
and resources properly. The use of contract manufacturers enables OEMs
to focus on their core competencies.
Reduce Investment. As the electronics industry has become more
technologically advanced, manufacturing requirements have resulted in
increased investments in inventory, equipment, labor and
infrastructure. Contract manufacturers enable OEMs to achieve high
technological capabilities at a lower capital investment level than
required for internal manufacturing.
Improve Inventory Management and Purchasing Power. The
experience of contract manufacturers in inventory procurement and
management can reduce OEM production and inventory costs.
Industry Size
According to the Institute for Interconnecting and Packaging
Electronics Circuits ("IPC"), the U.S. market for contract electronics
manufacturing services was approximately $36 billion in 1996 and was growing at
an annual rate of approximately 25%. The domestic contract electronics
manufacturing market includes passive components ($15 billion), actual assembly
($13 billion), PCBs ($7.2 billion) and flexible circuits ($0.7 billion).
Printed Circuit Boards
PCBs are the basic platform used in virtually all advanced electronic
equipment to direct, sequence and control electronic signals between
semiconductor devices (such as microprocessors, memory chips and logic devices)
and passive components (such as resistors and capacitors). PCBs consist of one
or more layers of circuitry laminated into rigid insulating material composed of
fiberglass epoxy. Multilayer PCBs provide a three dimensional system with
electronic signals traveling along horizontal planes of multiple layers of
circuitry patterns as well as along the vertical plane through plated holes or
vias.
SMT is an assembly process which allows the placement of a large number
of components in a dense array directly on both sides of a PCB. SMT is a recent
advance over the more mature PTH technology, which permits electronic components
to be attached to only one side of a PCB by inserting the component into holes
drilled through the board. The SMT process allows OEMs to use advanced
circuitry, while at the same time permitting the placement of a greater number
of components on a PCB without having to increase the size of the board. By
allowing increasingly complex circuits to be packaged with the components in
closer proximity to each other, SMT enhances circuit processing speed and board
and system performance.
Lead times for PCBs generally fall into two categories, "quick-turn"
and "standard." Quick-turn lead times range from one to 15 days for prototype
and pre-production quantities. Standard lead times typically run from six to
twelve weeks and are generally associated with larger volumes.
According to the IPC, the U.S. market for PCBs was estimated at
approximately $7.2 billion in 1996, an increase of 10% from 1995. Also according
to the IPC, Multilayer PCBs, the fastest growing segment (14% growth from 1995
to 1996) accounted for approximately 74% of all PCBs shipped in 1996. Despite
its large size, the PCB market is fragmented. In 1996, only eight of
approximately 700 independent PCB manufacturers had annual sales in excess of
$100 million.
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System and Sub-System Assembly
According to the IPC, the United States value-added contract
manufacturing market was approximately $13 billion in 1996 and is growing at a
rate of approximately 20% per year. I-PAC believes that OEMs are increasingly
relying upon independent contract manufacturers for the manufacture of complex
electronic interconnect products rather than on in-house production.
Business Strategy
In response to these industry trends, I-PAC has positioned itself as a
specialist in the manufacture of complex, multi-layer PCBs, wire and cable
harnesses, molded cables, and complete system and subsystem assemblies including
value added electronic manufacturing services. I-PAC's strategy is to emphasize
its experience with surface mount and hybrid printed circuit boards used in high
value industrial and commercial products which require an exceptionally high
level of quality, a critical emphasis on delivery schedules, and intensive
customer support. Further, its strategy includes the following elements:
Establish and Maintain Long-Term Relationships. One of I-PAC's
primary objectives is to pursue opportunities whereby it becomes an
integral part of an OEM's manufacturing operations. In this regard,
I-PAC strives to work closely with its customers in all phases of
design and production in an attempt to establish itself as the sole or
primary source for its customers' specialized manufacturing
requirements. I-PAC believes that this effort to develop close,
reliable, long-term relationships builds customer loyalty that is
difficult for competitors to overcome. I-PAC specifically targets
turnkey manufacturing opportunities because such business offers
increased profit margin, greater control over all variables of the
manufacturing process and greater reliance upon I-PAC by the OEM
associated with the turnkey operation.
Target and Maintain Balance Among Selected OEM Industries and
Customers. I-PAC markets its services to industries and customers that
have strict quality control standards for their products and that have
service-intensive manufacturing requirements. I-PAC focuses on complex
assemblies in low and medium volumes for commercial and industrial
customers. I-PAC has not been, and does not intend to become, a
manufacturer of high volume PCB assemblies for personal computers or
other consumer-related products, which typically have relatively low
margins. I-PAC instead focuses on a variety of industries that produce
products that generally have longer life cycles, higher engineering
content, higher customer margins, more stable demand and less price
pressure.
Provide Comprehensive and Reliable Manufacturing Services.
I-PAC believes that its ability to attract and retain customers depends
on its ability to offer a broad range of specialized services. I-PAC
provides its customers with services ranging from prototype production
to the manufacture of PCB assemblies, material procurement and
management, post-production testing, and final product assembly. I-PAC
also strives to provide the highest level of reliability in connection
with these services and has an ongoing program of investing in
sophisticated machinery and equipment to enable it to achieve this
objective on a continuing basis. I-PAC's ability to provide
electrical-mechanical assembly, wire and cable assembly and harnessing,
molded cable processing and other related services allows it to offer a
broader range of value added services to its customers than is
typically offered by a PCB assembly manufacturer.
Pursue Opportunities for Growth. Although it has not currently
identified any candidate for acquisition, I-PAC is committed to
pursuing opportunities to increase the scope of its operations through
acquisition. Its strategy is to attempt to acquire privately-held
technology product companies where the manufacturing requirements can
be met by I-PAC at significant cost reductions and economies of scale.
In addition, I-PAC intends to attempt to increase its contract
manufacturing business through growth of its customer base, acquisition
of other contract manufacturers and expansion of its I-PAC Express
operations to additional locations.
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Maintain Flexibility. Many of I-PAC's customers are leaders in
their respective industries. As such, these customers often require
that their products be routinely reengineered. I-PAC has organized its
operations so that it can respond rapidly to design changes and provide
value added services where needed.
Services Provided by I-PAC
I-PAC manufactures over 200 different assemblies which are incorporated
in over 60 different products. I-PAC provides contract manufacturing services
primarily with regard to advanced industrial and commercial products in the
industrial controls, process control equipment, commercial broadcast, video and
instrumentation markets.
During the year ended December 31, 1997, I-PAC provided contract
services to more than 30 different customers, including ITT, Lockheed Martin,
Disney, Hughes JVC, Coyote Technologies, Sanyo, Schumacher, Standard
Communications, Triconex (a Siebe company) and Palomar Products. I-PAC's
services can be categorized as follows:
Prototype Manufacture. Through its wholly-owned subsidiary,
I-PAC Express, I-PAC offers quick-turn, PCB prototype manufacturing
capabilities, incorporating SMT and hybrid technologies. I-PAC Express
supports new OEM products in their design phase and then migrates these
products to I-PAC's main manufacturing facility when production
quantities are required.
Product Manufacture. I-PAC manufactures electronic products
and assemblies for use in a variety of industries and applications. Its
manufacturing operations include product assembly, testing, and
assembly into final product housings. While I-PAC has automated various
aspects of many processes, the assembly of components into electronic
products is a labor intensive process generally requiring a high degree
of precision and dexterity, together with multiple quality control
steps prior to shipment. In addition to PCB assembly, I-PAC
manufactures various interconnect products, including molded cables.
Product Testing. The increasingly complex design and assembly
techniques of products manufactured by I-PAC, as well as the
reliability demanded by its customers, has required I-PAC to engage
extensive testing of its products. These tests include in-circuit
component measurement testing, manufacturing defect analysis, and
functional tests.
Value Added Services. I-PAC provides value added electronic
manufacturing services to enhance the quality and reduce the cost of
OEM products. I-PAC primarily solicits high engineering content OEM
products and offers close working relationships with its customers and
flexibility to meet customer engineering needs.
Manufacturing and Supplies
The principal materials used by I-PAC in the manufacture of its
products are electronic components such as memory chips, microprocessing units,
integrated circuits, resistors, capacitors, transformers, switches, connectors,
wire and related items purchased as stock items from a variety of manufacturers
and distributors. While I-PAC purchases most of these materials from outside
sources, I-PAC is not dependent upon a single source of supply for any materials
essential to its business. I-PAC has generally been able to obtain adequate
supplies of such materials, and no shortage of such materials is currently
anticipated. However, notwithstanding the foregoing, there can be no assurance
that I-PAC will continue to be able to procure such components in the future
without material delay or other restrictions.
I-PAC is ISO 9002 compliant and expects to receive formal ISO
certification in 1998.
Marketing
Senior management of I-PAC and a manufacturers' representative
organization owned by the shareholders of I-PAC are currently primarily
responsible for marketing I-PAC's services. The manufacturers' representative
organization receives variable commissions based on orders received by I-PAC. As
part of its marketing strategy, I-PAC attempts to work closely
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with its customers in all phases of design and production in an attempt to
establish itself as the sole or primary source for its customers' specialized
manufacturing requirements. I-PAC believes that this effort to develop close,
reliable, long-term relationships builds customer loyalty that is difficult for
competitors to overcome. As a result, I-PAC is continually striving to develop
new negotiated business with existing customers. I-PAC also expects that I-PAC
Express will assist in marketing the services of I-PAC, in that customers of the
quick turn prototyping services of I-PAC Express may turn to I-PAC for
manufacturing services when production quantities of the products prototyped by
I-PAC Express are required.
Competition
The contract manufacturing industry is highly fragmented and is
characterized by intense competition. The contract manufacturing services
provided by I-PAC are available from many independent sources as well as the
in-house manufacturing capabilities of current and potential customers of I-PAC.
Many of I-PAC's competitors and potential competitors are significantly larger
and have significantly more capital, direct buying power and management
resources than I-PAC. Management believes that the principal competitive factors
in its targeted markets are flexible value added services, product quality and
reliability, flexibility and timeliness in responding to design and schedule
changes, reliability in meeting product delivery schedules, pricing and
geographical location. I-PAC believes that it competes favorably with respect to
these factors. However, I-PAC also expects that competition in its markets will
continue to be intense, and there can be no assurance that I-PAC will compete
successfully.
Licenses
I-PAC has acquired licenses for the manufacture, marketing and sale of
proprietary video capture, storage and transmission software technology that has
on-going development potential and possible application in a wide range of
existing and new markets. The ongoing development is not capital intensive, in
that the technology can be applied to products in different markets without
significant modification. Following the Merger, I-PAC plans to begin entering
new markets, possibly including telemedicine, video editing, video
teleconferencing, video surveillance and various broadcast markets.
Seasonality
I-PAC has historically experienced its strongest sales volume in the
first and second quarters of each calendar year, but its business is not
considered seasonal. It is, however, subject to the business cycles that impact
its customers.
Backlog
As of December 31, 1997, I-PAC's backlog was $700,000, compared to
$1,500,000 as of December 31, 1996. I-PAC defines backlog as hard copy purchase
orders for which I-PAC has firm delivery dates within the next twelve months.
Employees
As of December 31, 1997, I-PAC had approximately 70 full-time
employees, of which 4 were engaged in program management, 48 were engaged in
manufacturing and the remainder were engaged in management, engineering or
administration, and 2 part-time employees. None of its employees is represented
by a labor union. I-PAC believes its relations with its employees are
satisfactory.
Property
I-PAC maintains its executive offices and manufacturing facilities in a
40,000 square foot, two story concrete building located at 1958 Kellogg Ave.,
Carlsbad, California. I-PAC owns these facilities.
I-PAC Express leases a 5,000 square foot facility located at 1415 East
McFadden Avenue, Santa Ana, California. The lease for this facility provides for
annual rent of $22,600 and expires in April 2000.
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Government Regulation
I-PAC's operations are subject to certain federal, state and local
regulatory requirements related to environmental, waste management, health and
safety matters. While there can be no assurance that material costs and
liabilities will not be incurred or that past or future operations will not
result in exposure to claims of injury by employees or the public, I-PAC
management believes that its business is operated in substantial compliance with
such regulations.
I-PAC periodically generates and temporarily handles limited amounts of
materials that are considered hazardous wastes under applicable law. The Company
contracts for the off-site disposal of these materials and has implemented a
waste management program to address related regulatory issues.
Legal Proceedings
There are no material pending legal proceedings to which I-PAC or any
of its subsidiaries is a party or of which any of their properties is the
subject. I-PAC is not aware of any such proceedings known to be contemplated by
governmental authorities.
Related Party Transactions
The shareholders of I-PAC currently own interests in several entities
with which I-PAC does business. Evergreen Investments (Evergreen), a company
owned by Mr. Moore and Mr. Grivas, provides management and legal services to I-
PAC. I-PAC incurred expenses of approximately $205,500 and $235,600 for services
provided by Evergreen for the years ended December 31, 1997 and 1996,
respectively. For the year ended December 31, 1997, I-PAC purchased
approximately $6,600 of merchandise from MGS Interconnect ("MGS"), a company
owned by Mr. Moore and Mr. Grivas. During 1996, I-PAC subcontracted out $57,400
of sub-assembly and other production work to MGS. I-PAC also recorded sales to
MGS of approximately $47,900 and $88,100 for the years ended December 31, 1997
and 1996, respectively. During 1997 and 1996, I-PAC incurred expenses of
approximately $136,700 and $147,000, respectively, for commissions to MGM Tech
Rep ("MGM"), an outside sales representative firm owned primarily by the three
stockholders of I-PAC. I-PAC received approximately $4,600 of rental income from
MGM for the year ended December 31, 1997. I-PAC also incurred expenses of
approximately $28,400 and $39,900 for legal services provided by a law firm in
which Mr. Hill is a partner, for the years ended December 31, 1997 and 1996,
respectively. In addition, I-PAC also incurred expenses of approximately $27,500
and $39,700 for general business consulting services provided by Mr. Hill for
the years ended December 31, 1997 and 1996, respectively. Following the Merger,
any related party transactions will be reviewed and approved by the Audit
Committee of Photomatrix' Board of Directors.
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I-PAC SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth certain selected consolidated financial
data for I-PAC and should be read in conjunction with the consolidated financial
statements of I-PAC and the notes thereto included elsewhere in this Proxy
Statement.
(000's omitted, except per share data)
For the Year Ended
December 3,
1997 1996
Income Statement Data
Net Revenues $5,442 $ 5,189
Gross Profit % 29.8% 19.8%
Earnings Before Taxes from Continuing Operations $ 442 $ 16
Taxes $ 6 $ 1
Earnings from Continuing $ 436 $ 15
Operations
Earnings Per Share from $51.35 $ 1.80
Continuing Operations
Net Earnings (Loss) Per Share $51.35 $(32.64)
As of December 31,
1997 1996
Balance Sheet Data
Net Working Capital $ 347 $ 75
Total Assets $ 4,306 $ 1,872
Long-Term Debt $ 2,920 $ 784
Shareholders' Equity (Deficit) $ 39 $ (397)
I-PAC MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
I-PAC Management's discussion and analysis of financial condition and
results of operations should be read in conjunction with the selected financial
data and consolidated financial statements and notes that are to be included
elsewhere herein.
Results of Operations
The following is a comparative discussion by period of the results of
I-PAC continuing operations for the last two fiscal years ended December 31,
1997. I-PAC believes that inflation has not had a material effect on its
operations to date.
For the year ended December 31, 1997, revenues increased $253,000 or
4.9% to $5,442,000 from $5,189,000 for the year ended December 31, 1996. The
increase was primarily related to revenues of I-PAC Express Assembly, a
wholly-owned subsidiary acquired in February 1997. This revenue growth was less
than projected due to the influence of the downturn in the Asian marketplace
upon several of I-PAC's customers and sale of one of I-PAC's customers.
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For the year ended December 31, 1997, consolidated gross margin
increased $592,000 or 57.5% to $1,621,000 from $1,029,000 for the year ended
December 31, 1996. As a percent of revenue, gross margin increased 50.2%, to
29.8% from 19.8% due primarily to I-PAC focusing its sales efforts on customers
with higher engineering content and complexity in their products resulting in
higher value-added margins. This marketplace, primarily high-end commercial and
industrial products, places a premium on quality and on-time delivery, with such
product requirements.
For the year ended December 31, 1997, selling, general and
administrative expenses ("SG&A") increased $119,000 or 12.8% to $1,048,000 from
$929,000 for the year ended December 31, 1996. As a percent of revenue, SG&A
increased 7.6% to 19.3% from 17.9% due primarily to the acquisition of I-PAC
Express Assembly. Acquired by I-PAC in February of 1997, this start-up
subsidiary required substantial administrative and sales support to accelerate
its business potential and to install I-PAC's manufacturing systems and
protocols.
For the year ended December 31, 1997, interest and other expenses
increased $46,000 or 54.8% to $130,000 from $84,000 for the year ended December
31, 1996. This increase was the result of an increase in other income of
$158,000 offset by an increase in interest expense of $204,000. The increase in
other income was due to the sublease of a portion of I-PAC's newly acquired
facility coupled with debt forgiveness resulting from settlements in I-PAC's
favor. The increase in interest expense was due primarily to mortgage interest
payments resulting from I-PAC's purchase of a 40,000 square foot facility in
Carlsbad, California in January of 1997. This facility houses I-PAC
Manufacturing.
The net effect of the increase in gross margin offset by the increases
in SG&A, other expenses and provision for income tax resulted in income from
continuing operations for the year ended December 31, 1997 of $436,000, compared
to income from continuing operations for the year ended December 31, 1996 of
$15,000.
For the year ended December 31, 1997, I-PAC realized neither a loss
from discontinued operations nor a loss on the disposal of discontinued
operations. These were improvements over the loss from discontinued operations
in the amount of $179,000 and the loss from the disposal of discontinued
operations in the amount of $113,000 for the year ended December 31, 1996. This
improvement resulted from the sale of I-PAC's interest in a subsidiary, CCS-West
and its phase out of its CATV service and repair business.
Recent And Future Sources of and Demands on
Liquidity And Capital Resources
For the year ended December 31, 1997, I-PAC's net income before
depreciation and gain on the disposition of property and equipment was $545,000.
During the same period, its primary sources of liquidity were a reduction in
inventories ($27,000), an increase in accrued compensation and payroll taxes
($11,000), proceeds from the sale of property and equipment ($4,000), proceeds
from borrowings ($326,000) and cash reserves. During the same period, the
primary uses of liquidity were an increase in accounts receivable ($166,000), an
increase in prepaid expenses ($19,000), an increase in other assets ($25,000), a
decrease in accounts payable and accrued expenses ($257,000), a decrease in
accrued costs of discontinued operations ($113,000), purchase of property and
equipment ($242,000), and repayments against notes ($90,000). As a result of
these sources and uses of liquidity, I-PAC's cash balance increased $1,000 or
6.3%, from $16,000 to $17,000.
As of December 31, 1997, I-PAC was obligated under a series of notes
payable totaling $3,586,000. These notes include a revolving line of credit
which has a total lending limit of $700,000 and note with a bank in the amount
of $75,000. The line and the note require I-PAC to maintain certain financial
covenants and include as collateral the assets of I-PAC and is secured by
continuing guarantees executed by its stockholders. Interest is payable at prime
plus 1.5%. The outstanding balance on this line and note as of December 31, 1997
was $598,000. This loan and note expire on June 30, 1998.
I-PAC has issued two notes in the aggregate amount of $2,061,000, which
have as collateral trust deeds against I-PAC's property in Carlsbad, California.
The repayment of these notes is guaranteed by certain stockholders of I-PAC
and/or the Small Business Administration.
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The Company has issued a number of equipment notes in the aggregate
amount of $253,000 with interest rates varying between 10% and 26.6% and with
the final payments due between February of 2000 and March of 2005. Equipment is
the collateral for these notes.
I-PAC also has a number of notes payable to related parties in the
amount of $448,000 with interest at prime plus 2% and guaranteed by
stockholders. Under the Merger Agreement all but approximately $25,000 of
related party debt will be converted to equity prior to the close.
The Company also has a non-interest bearing liability in the amount of
$227,000, the proceeds of which were used primarily for the purchase of
manufacturing equipment. The repayment of this liability can be made solely from
a withholding of 40% of the non-material component of any sales made by I-PAC to
the note holder through April of 1998. As of February 28, 1998 there have been
no orders received by the Company from the note holder. Any unpaid balance on
the due date will be canceled and the security interest released.
The Company's sources of future short-term liquidity are the remaining
balance on its line of credit in the amount of $177,000 and its cash balance of
$17,000.
The Company is continuing to concentrate on increasing sales and
improving gross margins. If it is successful, it should have sufficient
liquidity to fund its operations during the next twelve months.
PROPOSAL 2 -- AUTHORIZATION OF POSSIBLE REVERSE STOCK SPLIT
On August 22, 1997, the Securities and Exchange Commission approved new
listing standards for companies listed on The NASDAQ Stock Market. These new
requirements became effective on February 23, 1998. As of March 6, 1998,
Photomatrix was in compliance with all of the new requirements, except for the
minimum bid price of its Common Stock. Under the new SmallCap Market listing
maintenance requirements, the minimum bid price of the Company's Common Stock
must be at least $1.00 per share. As of March 6, 1998, the Company's highest bid
price over the previous thirty days was $0.59375 per share.
NASDAQ has advised Photomatrix that it has ninety days (ending May 28,
1998) to cure this deficiency (the "Cure Period") or be de-listed from the
NASDAQ SmallCap Stock Market. The deficiency will be cured as a result of the
Company's Common Stock meeting the minimum bid requirement for 10 consecutive
trading days during the Cure Period. Notwithstanding the fact that the Company
believes that the Merger provides investors with new data which supports a stock
price in excess of $1.00 per share, it is possible that the market will not
reflect such a valuation and that a reverse stock split will be necessary to
increase the likelihood that the Common Stock of the Company will trade at a
price higher than $1.00 per share and that the Company will therefore be in
compliance with the new NASDAQ rules and thereby avoid de-listing.
The Board of Directors of the Company has recommended that the
shareholders approve three alternative amendments to the Articles of
Incorporation of the Company in the form of Exhibits C-1, C-2 and C-3 attached
hereto (the "Amendments") that would enable the Board of Directors to authorize,
if necessary, either a 2 for 1, 3 for 1 or 4 for 1 reverse stock split (the
"Alternatives"). The Board's sole criteria in determining whether to effect any
of these Alternatives will be the minimum bid price of Photomatrix Common Stock
during the Cure Period. There can be no assurance that the reverse stock split
will accomplish the objectives stated herein.
The Board of Directors recommends approval of the alternative
Amendments, with the Board being given the discretion to choose which one, if
any, of these three proposals are adopted, primarily because the Board of
Directors will be able to assess at a time more proximate to the possible
implementation date which of the three proposals is most likely to accomplish
the Company's objectives of increasing the minimum bid price of its Common Stock
to more than $1.00 per share, taking into account the then current market price
of the Common Stock, trading volumes, market conditions, the possible reaction
of the market to a reverse stock split and other factors.
At its regular meeting on February 12, 1998, the Board of Directors
unanimously approved submitting the Amendments to the shareholders for approval.
Under California law, a reverse stock split can only be effected by amending the
Articles of Incorporation. The shareholders must approve an amendment to the
Articles of Incorporation in order for the
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amendment to become effective, and the shareholders must approve each of the
Amendments in order to give the Board of Directors discretion to adopt any of
the three Amendments.
An Amendment to the Articles of Incorporation to Effect a 2 for 1 Reverse
Stock Split
As of February 12, 1998, 5,083,017 shares of Common Stock were issued
and outstanding. If the 2 for 1 reverse stock split is effected, every two
outstanding shares of Common Stock will be combined and converted automatically
into one new share of the Common Stock. In lieu of issuing fractional shares,
the Company will pay in cash the fair value of the fractional shares as defined
below. No shareholder of record as of March 31, 1998, held fewer than two shares
of Common Stock, so the Company does not expect that the reverse stock split
will result in a material change in the number of shareholders. Each
shareholder's percentage ownership of Common Stock will not be altered, except
for the effect of the elimination of fractional shares. The Company estimates
that it will cost less than $3,000 to pay for fractional shares. The number of
authorized shares will not be changed by the Amendment.
An Amendment to the Articles of Incorporation to Effect a 3 for 1 Reverse
Stock Split
As of February 12, 1998, 5,083,017 shares of Common Stock were issued
and outstanding. If the 3 for 1 reverse stock split is effected, every three
outstanding shares of Common Stock will be combined and converted automatically
into one new share of the Common Stock. In lieu of issuing fractional shares,
the Company will pay in cash the fair value of the fractional shares as defined
below. No shareholder of record as of March 31, 1998, held fewer than three
shares of Common Stock, so the Company does not expect that the reverse stock
split will result in a material change in the number of shareholders. Each
shareholder's percentage ownership of Common Stock will not be altered, except
for the effect of the elimination of fractional shares. The Company estimates
that it will cost less than $3,000 to pay for fractional shares. The number of
authorized shares will not be changed by the Amendment.
An Amendment to the Articles of Incorporation to Effect a 4 for 1 Reverse
Stock Split
As of February 12, 1998, 5,083,017 shares of Common Stock were issued
and outstanding. If the 4 for 1 reverse stock split is effected, every four
outstanding shares of Common Stock will be combined and converted automatically
into one new share of the Common Stock. In lieu of issuing fractional shares,
the Company will pay in cash the fair value of the fractional shares as defined
below. No shareholder of record as of March 31, 1998, held fewer than four
shares of Common Stock, so the Company does not expect that the reverse stock
split will result in a material change in the number of shareholders. Each
shareholder's percentage ownership of Common Stock will not be altered, except
for the effect of the elimination of fractional shares. The Company estimates
that it will cost less than $3,000 to pay for fractional shares. The number of
authorized shares will not be changed by the Amendment.
Determination of Fair Value for Fractional Shares for and Mechanics of Reverse
Stock Split
The fair value of the Shares will be determined by the mean between the
bid and asked price for the Common Stock as quoted by the NASDAQ System as of
the close of trading on the date the Amendment is filed unless the Board
determines that the mean is not a reflection of the fair value of the fractional
shares as required by California law and determines that another value such as
the bid or the ask, or the last traded price, is the fair value of such shares.
Shareholders, automatically without filing a claim, will receive cash
payment for the fractional shares as soon as practicable after the Amendment is
filed and the value of such shares is determined. Shareholders will not be
required to exchange their existing stock certificates for new stock
certificates, but shareholders desiring to do so may surrender existing stock
certificates to the Company's transfer agent. The reverse stock split will not
affect the voting or other rights of the Common Stock.
Tax Consequences of Reverse Stock Split
Shareholders will not incur federal or state income tax liability as a
result of the reverse stock split, except that shareholders who receive cash
from the sale of fractional shares may realize a taxable gain or loss to the
extent the cash exceeds or is less than their basis in the fractional shares
sold.
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Principal Reasons for Each of the Proposed Amendments
On August 22, 1997, the Securities and Exchange Commission approved new
listing standards for companies listed on The NASDAQ Stock Market. These new
requirements became effective on February 23, 1998. The new financial
requirements for continued listing on the NASDAQ SmallCap Market include minimum
requirements for (a) net tangible assets, market capitalization or net income,
(b) public float, (c) market value of public float, (d) bid price, (e) market
makers, (f) the number of round lot shareholders, and (g) corporate governance.
As of March 6, 1998, Photomatrix was in compliance with all the new
requirements, except for minimum bid price.
The Board has recommended each of the 2 for 1, 3 for 1 and 4 for 1
reverse stock splits because the Board believes that, if a reverse stock split
is enacted, it should result in the minimum bid price per share of Photomatrix
Common Stock being increased to at least $1.00 per share. Alternative proposals
are presented to the shareholders because the Board will require flexibility to
assess the then current trading price of the Company's Common Stock, trading
volumes, possible market reaction to a reverse stock split and other factors at
the time the reverse stock split is to be enacted so that it can select the
reverse stock split that the Board believes is most likely to achieve its
desired objective while minimizing the potential disadvantages of a reverse
stock split.
Possible Disadvantages
If any of the three proposed reverse stock splits is enacted, there is
no assurance that the reverse stock split will achieve the intended objective or
that the minimum bid price of the Common Stock will not decline in post reverse
stock split trading. The market price of stock is determined by a number of
factors, some of which may be adversely affected by a reverse stock split.
The reverse stock split may result in a shareholder owning an odd lot
of Common Stock. Shareholders may incur higher transactional costs to trade an
odd lot of Common Stock than the shareholder would incur to trade a round lot.
Shareholders should consult with their brokers concerning such transactional
costs. Generally, an odd lot is fewer than 100 shares and a round lot is 100
shares. The Company does not sponsor and does not presently intend to sponsor
any program for trading odd lots of the Common Stock or for the Company
purchasing odd lots.
Vote Required for each of the Three Amendments to Effect the 2 for 1, 3 for 1
and 4 for 1 Reverse Stock Split
Approval of the Amendments requires the affirmative vote of the holders
of a majority of the outstanding shares of the Company's Common Stock. The Board
of Directors can only effect an Amendment approved by the shareholders. A vote
against the Amendments will have no impact on the rights of the shareholders in
the event the Amendments are approved by the shareholders and by the Board of
Directors. Shareholders are not entitled to "dissenters' rights" or any other
similar rights under California law if they oppose a reverse stock split and the
Amendments.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE
FOR THE AMENDMENT TO THE ARTICLES OF INCORPORATION
PROPOSAL 3 -- ELECTION OF DIRECTORS
The Bylaws of the Company provide that the Company's Board of Directors
is to consist of from four to seven members and currently authorize a Board
consisting of four members. It is the intention of the Board that, if the Merger
is approved by the shareholders and closes, then the Bylaws will be amended to
provide for a Board of seven members.
The Board has proposed that six directors be elected at the Annual
Meeting, four to serve from the date of their election and two to serve from the
date the Board is expanded following the Merger and, in either case, to hold
office until the next Annual Meeting of Shareholders and until their respective
successors are elected and qualified.
Should any of the nominees decline or be unable to serve as a director,
the persons authorized in the proxy to vote on your behalf will vote with full
discretion in accordance with their best judgment. The Company knows of no
reason why
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any nominee listed below would not be available for election, or, if elected,
would not be willing or able to serve. If additional persons are nominated for
election as directors, the proxy holders intend to vote all proxies received by
them according to cumulative voting rules to assure the election of as many of
the nominees listed below as possible. In such event, the specific nominees for
whom votes are cumulated will be determined by the proxy holders.
Nominees to Hold Office from the Date of the Meeting
Mr. PATRICK W. MOORE has been a Director of the Company since January
1991. Mr. Moore, has been the President of I-PAC since 1990. He has significant
business experience in both the private and public sectors. Mr. Moore has served
on the National Commission on Employment Policy, committees of the National
Academy of Sciences, and as the national president of various trade
organizations based in Washington, D.C. From 1981 to 1986 Mr. Moore served as
President of the San Diego Private Industry Council and as Executive Director of
the San Diego Regional Employment and Training Consortium. Mr. Moore is 50 years
of age.
Mr. SUREN G. DUTIA has been a Director and has served as the President
and Chief Executive Officer of the Company since January 1989. He was elected to
be the Chairman of the Board of the Company in September 1990. He also serves as
the Chief Executive Officer of each of Photomatrix's subsidiaries. Prior to
January 1989, Mr. Dutia was associated from 1981 to December 1988 with Dynatech
Corporation, a diversified high-technology company headquartered in Burlington,
Massachusetts. From 1986 to 1988, Mr. Dutia was a Division Manager and Vice
President. Mr. Dutia was responsible for several subsidiaries, including one
operating subsidiary for which he acted as President. He directed
turn-around/divestiture activities for Dynatech and handled investor relations.
Mr. Dutia is 55 years of age.
Mr. IRA H. SHARP has been a Director of the Company since January 1990.
Mr. Sharp has been the owner, Chief Executive Officer and General Counsel of
Alderson Reporting Company, Inc., a court-reporting and litigation-support
services firm in Washington, D.C. since 1984. Mr. Sharp also served in the same
capacities for Alderson from 1977 until 1983. During the period of his absence
from Alderson, Mr. Sharp was a lawyer in private practice. Mr. Sharp is 54 years
of age.
Mr. JOHN F. STALEY has been a Director of the Company since January
1989. From 1972 to the present, Mr. Staley has been a partner in Staley, Jobson
and Wetherell, a law firm Mr. Staley founded, located in Pleasanton, California.
Mr. Staley was also the founder and a director of Lab Sales of California and
P.M. America, which were corporations involved in the manufacturing, sale and
distribution of blood-analyzing machines and which were sold to Dynatech
Corporation in 1982. From 1982 to the present, Mr. Staley has been a co-founder
of the Bank of Livermore, California. Mr. Staley is 53 years of age.
Nominees to Take Office Upon the Merger and Expansion of the Board
Mr. WILLIAM L. GRIVAS, has served as the Chief Executive Officer of
I-PAC since 1990. Prior to that time, Mr. Grivas was the sole owner of Southwest
General Industries (SGI), a $25 million per year contract manufacturer which he
founded in the 1970's. After selling SGI to SCI Manufacturing, Inc., a Fortune
500 firm and the world's largest contract manufacturer, Mr. Grivas joined with
Mr. Moore and Mr. Hill to found I-PAC in 1990. Mr. Grivas served in the Marine
Corps as a Drill Instructor and a special weapons expert, with extensive
training in electronic and radar technologies. Mr.
Grivas is 43 years of age.
Mr. JAMES P. HILL is, and for at least the last five years has been, a
partner specializing in bankruptcy law, commercial law, and civil litigation in
the San Diego law firm of Sullivan, Hill, Lewin, Rez, Engel & LaBazzo. Mr. Hill
was a Director of the San Diego Bankruptcy Forum from 1991 through 1994 and the
Chairman of the Commercial Law Section of the San Diego County Bar Association
from 1985 through 1987. Mr. Hill is 45 years of age.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE
FOR THE NOMINEES LISTED ABOVE.
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COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS
During fiscal year 1997, there were eight meetings of the Board of
Directors. All of the Company's Directors attended at least 75 percent of all
meetings of the Board of Directors and other committees of the Board on which
such directors served during fiscal year 1997.
The standing committees of the Board of Directors of the Company are
the Compensation Committee, the Nominating Committee, and the Audit Committee.
The principal duties of the Compensation Committee are to determine and
review all compensation of Directors, officers, and employees of the Company, to
administer and manage the Company's incentive compensation plans, to determine
grants of stock options under Company plans, and to report to the Board of
Directors of the Company. Current members of the Compensation Committee are
Messrs. Moore, Sharp and Staley. The Compensation Committee met four times
during fiscal year 1997.
The Nominating Committee's principal duties are to nominate persons to
serve on the Board of Directors of the Company and to report to the Board. The
members of the Nominating Committee are Messrs. Dutia, Sharp and Staley. The
Nominating Committee does not solicit or consider nominations from shareholders.
The Nominating Committee met once during fiscal year 1997.
The principal duties of the Audit Committee are to advise and assist
the Board of Directors in evaluating the performance of the Company's
independent auditors, including the scope and adequacy of the auditor's
examination, and to review with the auditors the accuracy and completeness of
the Company's financial statements and procedures. The members of the Audit
Committee are Messrs. Moore, Sharp and Staley, none of whom are officers or
employees of the Company. The Audit Committee met once during fiscal year 1997.
DIRECTOR COMPENSATION
Directors who are also officers or employees of the Company or its
subsidiaries receive no additional compensation for their services as directors.
In fiscal year 1997, Directors who are not employees of the Company were paid an
annual fee of $4,000 plus $250 for each Board or Committee meeting attended. In
addition, Directors are reimbursed for reasonable travel expenses incurred in
attending meetings.
In July 1997 the Compensation Committee offered, and each outside Board
member accepted, the opportunity to cancel certain options previously granted
and to replace those options with a new option covering a like number of shares
at a lower exercise price. The new exercise price is $0.37 per share (which
equaled the market price on the date of grant) and the exercise prices of the
canceled options were $0.88 per share. The new options vest 50% one year after
the date of grant and 100% after two years. 396,667 options, (166,667 for Mr.
Dutia, 73,333 for Mr. Moore, 76,667 for Mr. Sharp, and 80,000 for Mr. Staley)
were repriced. The Compensation Committee took this action because the Company
wished to provide appropriate incentives in order to retain these valuable Board
members.
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STOCK OWNERSHIP BY DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the
ownership of Photomatrix common stock by Directors and Executive Officers:
<TABLE>
Shares of Common Stock Percent of Shares of
Beneficially Owned Common Stock Outstanding
Name of Beneficial Owner or Group as of February 12, 1998(1) as of February 12, 1998(1)
<S> <C> <C>
Suren G. Dutia, President, CEO and 144,833(2) 2.85%
Chairman of the Board
Patrick W. Moore, Director 5,000 *
Roy L. Gayhart, Chief Financial 20,000 *
Officer, Secretary
Ira H. Sharp, Director 5,000 *
John F. Staley, Director 5,000 *
All directors and executive officers as a 179,833 3.54%
group(2)
</TABLE>
(1) Includes and reflects the ownership by the named director or officer of
shares of Common Stock subject to options exercisable within 60 days of
March 26, 1998.
(2) Includes options to purchase 100,000 shares.
* Less than 1%
EXECUTIVE COMPENSATION
Summary of Cash and Certain Other Compensation
The following table shows, for the most recent three fiscal years, the
cash compensation paid by the Company, as well as all other compensation paid or
accrued for those years, to the Chief Executive Officer as of March 31, 1997. No
other executive officer of the Company earned annual salary and bonus in excess
of $100,000 during fiscal 1997.
Summary Compensation Table
<TABLE>
Long-Term
Compensation
Name and Fiscal Annual Compensation Stock
Principal Position Year Salary Bonus Other(1) Option Shares
<S> <C> <C> <C> <C> <C>
Suren G. Dutia, 1997 $154,400 $30,000 $15,000 --
President and Chief 1996 $165,000 -- $13,900 191,667
Executive Officer 1995 $163,300 $10,000 $15,200 100,000
</TABLE>
(1) Includes Company matching contributions to the Photomatrix Savings and
Investment Plan ($4,800, $4,400, and $4,300, for 1997, 1996 and 1995,
respectively) and medical premiums ($10,200, $9,500, and $10,900 for
1997, 1996 and 1995, respectively).
Employment Agreements. Mr. Dutia and Mr. Roy Gayhart, Chief Financial
Officer and Secretary of the Company, are employed under employment agreements
that expire on July 31, 1999 and April 30, 1999, respectively. If either Mr.
Dutia's or Mr. Gayhart's employment is terminated by the Company without cause,
then each will be entitled to receive his base salary and health insurance
benefits for the remainder of the term of his agreement.
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<PAGE>
Officers Severance Policy. In 1988, the Company's Board of Directors
adopted an Officers Severance Policy that was modified in November 1990 and
February 1997. Under the policy, Mr. Dutia is to receive twelve weeks'
compensation upon termination of employment by the Company in addition to any
amounts payable for the remaining term of his employment agreement. Mr. Gayhart
is to receive eight weeks' compensation upon the termination of his employment
by the Company in addition to any amounts payable for the remaining term of his
employment agreement. Mr. Charles Frady, Controller and Assistant Treasurer, is
to receive eight weeks' compensation upon termination of employment by the
Company.
Stock Option Grants
There were no options granted to officers in fiscal 1997.
Aggregated Stock Option Exercises and Fiscal Year-End Stock Option Value Table
The following table sets forth certain information regarding the number
and value of specified unexercised options held by the Chief Executive Officer
and the Company's other executive officer as of March 31, 1997:
Value of Unexercised
In-the-Money
Number of Unexercised Options(1) Options(2)
Name Exercisable Unexercisable Exercisable Unexercisable
Suren G. Dutia 100,000 166,667 $59,870 $0
(1) No options were exercised in fiscal year 1997.
(2) The value is calculated as the total market value of stock subject to
the options on July 18, 1996 ($.37 per share), less the total of the
option exercise prices.
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Ten Year Option Repricing Table
In July 1997 the Compensation Committee offered to reprice a portion of
the option shares previously granted to Mr. Dutia which had an original exercise
price in excess of the market value of the Company's common stock at that time.
This offer was made in conjunction with identical offers to most employees. The
following table sets forth the specified information concerning all options
repriced for all executive officers of the Company for the period August 1987
(initial public offering) through July 1997.
<TABLE>
Length of
Number of Original
Shares Market Price Option Term
Underlying of Stock at Exercise Price Remaining at
Options Time of at Time of New Exercise Date of
Name Date Repriced Repricing Repricing Price Repricing
<S> <C> <C> <C> <C> <C>
S. Dutia, CEO November 1990 200,000 $0.18 $3.75 $0.18 8 years
S. Dutia, CEO June 1995 25,000 $1.25 $4.13 $1.69 9 years
S. Dutia, CEO November 1995 166,667 $0.88 $1.31- $0.88 6-9 years
$2.91
S. Dutia, CEO July 1997 166,667 $0.37 $ 0.88 $ 0.37 4-7 years
B. Myers, CFO November 1995 100,000 $0.18 $1.50- $0.18 8 years
$3.48
B. Myers, CFO June 1995 16,667 $1.25 $4.13 $1.69 9 years
B. Myers, CFO November 1995 116,667 $0.88 $1.31- $0.88 6-9 years
$2.91
</TABLE>
Report on Stock Option Repricing
In connection with the July 1997 option repricing, the Compensation
Committee issued the following report:
While the Committee believes that the Company's Stock Option Plans have
been instrumental in attracting and retaining quality executive officers,
employees and Directors, the incentive feature of such program may become lost
when options are granted at fair market value and subsequently the market price
of the Company's common stock falls substantially below the exercise price of
stock options granted under such program. In 1997, the market price for the
Company's common stock fell substantially. As a result of the drop in market
price of the common stock, the optionees have exercise prices substantially
higher than the current market value, and therefore hold options which are out
of the money. After careful consideration of the relevant factors, including (1)
the decline in the market price of the common stock, (2) the reasons for the
decline in the market price of the common stock, (3) the large percentage of the
Company's employees and Directors holding out of the money options, and (4) the
importance of equity incentive to the Company's overall compensation program for
executive officers and employees at all levels and Directors, the Committee
approved the cancellation of the existing options and the reissue of said
options pursuant to the Company's Stock Option Plans.
COMPENSATION COMMITTEE
Ira H. Sharp
Patrick Moore
John F. Staley
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors, officers and persons who own more than ten percent of the
Company's common stock, to file reports of ownership and changes in ownership of
securities with the Securities and Exchange Commission and to furnish to the
Company copies of all Section 16(a) forms
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<PAGE>
they file. Based solely on its review of copies of such forms received by it, or
written representations from reporting persons that no Forms 5 were required for
those persons, the Company believes that during fiscal year 1997, all filings
required by its directors, officers and greater than 10 percent beneficial
owners were timely filed.
PROPOSAL 4 -- ADOPTION OF PHOTOMATRIX 1998 STOCK OPTION PLAN
The Board of Directors has unanimously adopted, subject to shareholder
approval, the Photomatrix, Inc. 1998 Stock Option Plan ("1998 Plan") that
authorizes the grant of incentive and nonqualified stock options covering an
aggregate of 1,500,000 (pre-reverse stock split) shares of Common Stock to
officers, directors and employees of the Company and its subsidiaries. The
affirmative vote of a majority of the outstanding shares is required to approve
the 1998 Plan. As of March 6, 1998, the market value of the 1,500,000 shares of
Common Stock reserved for issuance under options to be awarded under the 1998
Plan was approximately $703,125.
The following summary describes the principal features of the 1998
Plan. This summary is qualified in its entirety by reference to the specific
provisions of the 1998 Plan, the full text of which is enclosed herewith as
Appendix C. Additional copies of the Plan document are available to shareholders
upon request to the Company.
Purposes of the Plan
The purposes of the 1998 Plan are to encourage stock ownership by
officers, directors and employees of the Company and its subsidiaries, to
provide an incentive for such recipients of options to improve the profits of
the Company and its subsidiaries, and to assist the Company and its subsidiaries
in attracting, retaining and motivating the recipients of options by providing
them with an opportunity to participate in the Company's growth through stock
ownership. The Board of Directors of the Company approved the 1998 Plan, in
part, because there are an insufficient number of shares reserved for future
option grants under the 1994 and 1992 Plans, given the Company's anticipated
acquisition of I-PAC and the consequent expansion in the number of employees of
the Company and its subsidiaries. Further, under terms of the Merger, Messrs.
Grivas and Moore are entitled to receive options to purchase common stock with
the equivalent valuation of $75,000 annually (calculated by the product of the
number of shares of Common Stock underlying the option times 120 percent of the
fair value of the stock), with the option price set at 20% above the fair market
value (trading price) of the common stock at the time of grant.
Available Options
The 1998 Plan authorizes the grant of incentive and nonqualified stock
options covering an aggregate of 1,500,000 (pre-reverse stock split) shares of
Common Stock (subject to adjustment in the event of stock dividends, stock
splits and certain other corporate events). If the proposed 2 for 1 reverse
stock split is approved and effected, 750,000 shares of Common Stock shall be
reserved for issuance under the 1998 Plan. If the proposed 3 for 1 reverse stock
split is approved and effected, 500,000 shares of Common Stock will be reserved
for issuance under the 1998 Plan. If the proposed 4 for 1 reverse stock split is
approved and effected, 375,000 shares of Common Stock will be reserved for
issuance under the 1998 Plan.
Term of the Plan
The 1998 Plan was effective, subject to shareholder approval, upon
approval by the Board of Directors and will continue in effect until ten years
following the date it was approved by the Board. The Board of Directors may
suspend or terminate the Plan, but not outstanding options, at any time.
Eligible Persons
Any employee, officer or director of the Company and its subsidiary
corporations is eligible to participate in the 1998 Plan and be granted
incentive stock options or nonqualified options.
Plan Administration
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<PAGE>
The Compensation Committee of the Board of Directors ("Committee") or,
in the absence of such a committee, the Board of Directors, shall administer the
1998 Plan. The Committee has the authority to (i) determine who receives stock
options, (ii) determine when options are granted, (iii) determine, not
inconsistent with the 1998 Plan, the terms and conditions of the options,
including when the options become exercisable or vested, (iv) determine whether
employees receive incentive or nonqualified options, and (v) interpret the
provision of the 1998 Plan and the options granted under the 1998 Plan.
Because members of the Compensation Committee are eligible to
participate in the 1998 Plan, the members have an interest in the approval of
the 1998 Plan and in the administration of the 1998 Plan.
Option Terms
The Committee may award either incentive stock options or nonqualified
options to eligible employees. Currently, the Company has a net operating loss
carry forward for federal income tax purposes so the Committee is likely to
award incentive stock options to employees.
The exercise price of a stock option may not be less than 100% of the
fair market value per share on the date of grant. The 1998 Plan defines fair
market value as the mean between the bid and asked price of the Common Stock as
quoted on NASDAQ. The exercise price is payable in full at the time of exercise,
in cash or, in the discretion of the Committee, by the delivery of outstanding
shares of Common Stock already owned by the option holder or by sale of the
shares subject to the option.
The Committee also determines the schedule pursuant to which options
become exercisable. Except with respect to options granted to officers or
directors of the Company, options granted to eligible participants must become
exercisable or vest at a rate of at least 20% per year during the five years
following the grant. Continuous service during the vesting period is the only
condition to vesting. In the event of a dissolution or liquidation of the
Company or a reorganization, merger or consolidation of the Company, if the
Company is not the surviving company, unvested options will automatically become
exercisable. The Committee can also accelerate the vesting of the options in the
case of certain similar events.
Options granted under the 1998 Plan may expire no later than 10 years
from the date of the grant. If an employee terminates his employment for any
reason other than death or permanent disability or a director ends his service
on the Board for any reason other than death of permanent disability, his vested
options expire within three months of the termination. In the case of death or
permanent disability, the vested options expire within six months of employment
termination or cessation of service on the Board. Any unvested options expire as
of termination of employment or cessation of service on the Board for any
reason.
Options granted under the 1998 Plan are not transferable or alienable
in any manner, whether voluntarily or involuntarily, other than by will or the
laws of descent and distribution, and may be exercised during the lifetime of
the holder only by the holder.
Amendments to the 1998 Plan
The Board may amend, suspend, alter or terminate the 1998 Plan at any
time; provided, however, that any amendment of the 1998 Plan that requires
shareholder approval, such as any increase in the number of shares available for
issuance under the Plan (except pursuant to provisions of the Plan relating to
adjustments upon the occurrence of certain events such as stock splits) or that
materially changes the class of persons who are eligible to receive incentive
stock options, shall be subject to the approval of a majority of the Company's
shareholders.
Federal Income Tax Consequences
The following discussion is only intended as a general summary of the
federal income tax consequences of the grant and exercise of incentive and
nonqualified stock options under the 1998 Plan. This discussion is based upon
the present Internal Revenue Code of 1986, as amended ("Code"), and the
regulations promulgated thereunder, all of which are subject to change or
interpretation by Congress, the Treasury Department and the courts. Participants
in the 1998 Plan may also
51
<PAGE>
be responsible for other federal state and local income and other taxes and
should consult with their own personal tax advisor before engaging in any
transaction with respect to options.
The tax consequences of a stock option to the option holder and to the
Company differ depending on whether the option is an incentive stock option as
defined in Section 422 of the Code or a nonqualified option. The Company
generally will be allowed a deduction for compensation expense upon the exercise
of a nonqualified option subject to certain reporting requirements and the
provisions of Section 162(m) of the Code. The compensation must also constitute
an ordinary and necessary business expense. The deduction is equal to the
compensation income realized by the option holder. In contrast, unless the
holder of an incentive stock option makes a "disqualifying disposition" of such
shares, the Company is not allowed a deduction with respect to the exercise or
grant of an incentive stock option.
Incentive Stock Options. Certain options granted under the 1998 Plan
may be intended to be "incentive stock options" as defined in Section 422 of the
Code. In general, holders of incentive stock options are not taxed at the time
of the grant of the option or at the time of the exercise of the option unless
the option holder disposes of the stock acquired upon the exercise of the option
within two years from the date of the option grant or one year from the exercise
date of the option ("disqualifying disposition"). However, the option holder may
incur liability for alternative minimum tax upon the exercise of the option
because the excess of the fair market value of stock at exercise over the
exercise price is an item of adjustment to income. Upon the option holder's sale
of stock acquired upon the exercise of the option which is not a disqualifying
disposition, the excess of the amount realized on the sale over the exercise
price will be taxed to the holder as long-term capital gain or loss. Subject to
certain exceptions, capital gain attributable to stock held more than 18 months
will be taxed to individuals at 20% and 28% if held at least one year but less
than 18 months.
If an option holder makes a disqualifying disposition, the portion of
the gain equal to the fair market value of the stock as of the date the option
was exercised (or, if lower, the proceeds of the sale) and the option exercise
price will be taxed to the holder as ordinary compensation income in the year of
the disposition and the Company will receive a deduction in the same amount
subject to certain reporting requirements and the provisions of Section 162(m)
of the Code. Any gain in excess of the ordinary income will be taxed as short or
long-term capital gain depending upon the holding period.
If the Committee permits the exercise of options with shares of Common
Stock, the tax consequences will be the same except as described below.
Pursuant to Section 424 of the Code and proposed Treasury Regulations,
the use of Common Stock that was previously acquired pursuant to an option plan
to pay the exercise price for an option under the 1998 Plan will be treated as a
taxable disposition of the old shares if the holding period requirements under
Section 422 of the Code applicable to the old shares have not been satisfied at
the time of the exchange. As a result, an option holder could receive
compensation income equal to the excess of the fair market value on the date of
exercise of the old shares over the exercise price of the new shares. However,
the option holder would not realize capital gain on any appreciation since the
date of acquisition of the old shares. The option holder's basis in the new
shares acquired would be the option holder's basis in the old shares plus any
compensation income realized upon the exchange of the old shares.
Nonqualified Options. Any options granted under the 1998 Plan that are
not "incentive stock options" as defined in Section 422 of the Code are
"nonqualified" or nonstatutory options. In general, the grant of a nonqualified
option does not result in the imposition of any federal income tax on the option
holder, regardless of whether the exercise price is higher or lower than fair
market value at the time of the grant. The exercise of a nonqualified option
causes the option holder to realize compensation income, taxable as ordinary
income, equal to the excess of the fair market value at the time of exercise
over the exercise price paid for the shares. This income is not an item of tax
preference for alternative minimum tax purposes. The option holder generally is
taxed on the income in the year of exercise. As a condition to exercising an
option under the 1998 Plan, the option holder must make an arrangement with the
Company with respect to the withholding of any federal, state or local taxes or
foreign taxes required to be withheld with respect to the exercise of the
options.
Upon the option holder's sale of stock acquired upon the option
exercise, the option holder will be taxed, as long or short-term capital gain or
loss, on the difference between the exercise price plus the compensation income
realized by the option holder and the amount realized on the sale.
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<PAGE>
Vote Required
Adoption of the 1998 Plan requires the affirmative vote of the holders
of a majority of the outstanding shares of the Company's Common Stock.
THE BOARD OF DIRECTORS RECOMMENDS THAT
YOU VOTE FOR THE ADOPTION OF THE 1998 PLAN.
PROPOSAL 5 -- RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
Photomatrix's Board of Directors, upon recommendation of the Audit
Committee, has selected the firm of KPMG Peat Marwick LLP as Photomatrix's
independent auditors for the fiscal year 1998. This nationally known firm has
served as the Company's independent auditors since 1991 and has no direct or
indirect financial interest in the Company.
Although not legally required to do so, the Board is submitting the
selection of KPMG Peat Marwick LLP for ratification by the shareholders at the
Annual Meeting. In the absence of instructions to the contrary, the shares
represented by the proxy delivered to the Board of Directors will be voted in
favor of ratification of this appointment.
A representative of KPMG Peat Marwick LLP is expected to be present at
the Annual Meeting and will be available to respond to appropriate questions and
to make such statements as he or she may desire.
THE BOARD OF DIRECTORS RECOMMENDS THAT
YOU VOTE FOR THE RATIFICATION OF THE APPOINTMENT
OF THE INDEPENDENT AUDITORS.
INCORPORATION BY REFERENCE
This Proxy Statement incorporates certain documents by reference which
are not presented herein or delivered herewith. These documents are available
upon request from the Office of the Corporate Secretary, Photomatrix, Inc. 11065
Sorrento Valley Court, San Diego, CA 91601, telephone number (619) 625-4400. In
order to ensure timely delivery of these documents, any request should be made
by May 8, 1998.
Photomatrix hereby undertakes to provide by first-class mail within one
business day of the receipt of such request, without charge, to each person,
including any beneficial owner, to whom a copy of this Proxy Statement has been
delivered, upon the written or oral request of any such person, a copy of any
and all of the documents referred to below which have been or may be
incorporated by reference herein, other than exhibits to such documents, unless
such exhibits are specifically incorporated by reference herein. Requests for
such documents should be directed to the office indicated above.
The following documents, which have been filed with the Securities and
Exchange Commission (the "Commission") pursuant to the Securities Exchange Act
of 1934 (the "Exchange Act") are incorporated by reference herein:
Photomatrix's Annual Report on Form 10-KSB, filed on June 30, 1997;
Photomatrix's Quarterly Reports on Form 10-QSB for the three,
six month, and nine month periods ended June 30, 1997, and
September 30, 1997, and December 31, 1997; and.
Any and all other reports filed by Photomatrix pursuant to
Section 13(a) or 15(d) since March 31, 1997.
53
<PAGE>
The information relating to Photomatrix contained in this Proxy
Statement does not purport to be complete and should be read together with the
information in the documents incorporated by reference.
All documents filed by Photomatrix pursuant to the Exchange Act after
the date hereof and prior to the date of the Meeting shall be deemed to be
incorporated by reference herein and to be a part hereof from the date of filing
of such documents. All information appearing in this Proxy Statement is
qualified in its entirety by the information and financial statements (including
notes thereto) appearing in the documents incorporated by reference herein. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Proxy Statement to the extent that a statement contained herein or in any
other subsequently filed document which is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Proxy Statement.
ANNUAL REPORT
The Annual Report of the Company for the 1997 Fiscal Year, which
incorporates the Company's Report on Form 10-KSB for the year ended March 31,
1997, including audited financial statements for such fiscal year, is being
mailed with this proxy statement to shareholders of record on April 17, 1998.
FINANCIAL STATEMENTS
The audited consolidated balance sheets of I-PAC as of December 31,
1997 and December 31, 1996, and the statements of operations and retained
earnings and cash flows for the years then ended are part of this Proxy
Statement commencing on page F-1. The audited consolidated balance sheets of
Photomatrix as of March 31, 1997 and March 31, 1996, and the consolidated
statements of operations, shareholders' equity, and cash flows for the years
ended March 31, 1997, 1996, and 1995, are set forth in the Report of Photomatrix
on Form 10-KSB for the year ended March 31, 1997, included in the Photomatrix
Annual Report, a copy of which is enclosed in this Proxy Statement. The
unaudited consolidated balance sheet of Photomatrix as of December 31, 1997, and
the consolidated statements of operations for the three and nine month periods
then ended, are set forth in the Report of Photomatrix on Form 10-QSB for the
quarterly period ended December 31, 1997, a copy of which is enclosed with this
Proxy Statement. The foregoing audited and unaudited financial statements of
Photomatrix are incorporated herein by this reference.
SHAREHOLDER PROPOSALS
Proposals of shareholders submitted pursuant to Rule 14n-8 of the Securities and
Exchange Commission for the proxy statement for the Annual Meeting of
Shareholders to be held _______________ must be received by the Company at its
principal executive offices not later than _____________, 1998. Such proposals
should be submitted in writing to the Secretary of the Company, Photomatrix
Inc., 11065 Sorrento Valley Court, San Diego, California 92121, who will submit
them to the Board of Directors for its consideration.
OTHER BUSINESS
Photomatrix knows of no other business to be submitted to the meeting.
If any other business properly comes before the meeting or any adjournment
thereof, the persons named as proxy holders on the enclosed proxy card intend to
vote the shares represented in accordance with their best judgment in the
interest of the Company.
ROY L GAYHART
Secretary
___________, 1998
San Diego, California
54
<PAGE>
I-PAC MANUFACTURING, INC.
Financial Statements
Years Ended December 31, 1997 and 1996
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
I-PAC Manufacturing, Inc.
San Diego, California
We have audited the accompanying balance sheets of I-PAC Manufacturing,
Inc. as of December 31, 1997 and 1996, and the related statements of operations
and retained earnings, and cash flows for the years then ended. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of I-PAC Manufacturing,
Inc. as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
January 31, 1998
San Diego, California
F-2
<PAGE>
I-PAC MANUFACTURING, INC.
Balance Sheets
December 31, 1997 and 1996
<TABLE>
ASSETS
1997 1996
<S> <C> <C>
Current Assets:
Cash $ 17,151 $ 15,616
Receivables 551,473 385,865
Inventories 1,062,692 1,131,332
Prepaid expenses 45,972 27,105
Current portion of notes receivable 16,667 -0-
Total current assets 1,693,955 1,559,918
Notes receivable, less current portion 33,333 -0-
Property and equipment, net 2,506,834 277,944
Other assets 71,587 34,083
Total assets $4,305,709 $1,871,945
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 597,669 $ 421,450
Accounts payable and accrued expenses 574,944 832,135
Accrued compensation and payroll taxes 105,258 94,691
Current portion of long-term debt 69,083 23,402
Accrued cost-discontinued operations -0- 113,394
Total current liabilities 1,346,954 1,485,072
Long-term debt, less current portion 2,245,074 230,389
Notes payable to related party 267,366 146,606
Notes payable to stockholders 180,457 180,457
Other long-term liability 226,790 226,790
Total liabilities 4,266,641 2,269,314
Stockholders' Equity:
Common stock - no par value; 1,000,000
shares authorized;
8,500 shares issued and outstanding 8,500 8,500
Retained earnings (deficit) 30,568 (405,869)
Total stockholders' equity (deficit) 39,068 (397,369)
Total liabilities and stockholders' equity $ 4,305,709 $ 1,871,945
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
I-PAC MANUFACTURING, INC.
Statements of Operations and Retained Earnings
Years Ended December 31, 1997 and 1996
<TABLE>
1997 1996
<S> <C> <C>
Sales, net $ 5,441,786 $ 5,188,948
Cost of sales 3,821,249 4,160,025
Gross profit 1,620,537 1,028,923
Selling, general and administrative expenses 1,048,321 928,737
Income from operations 572,216 100,186
Other income (expense):
Other income and expense, net 173,684 16,195
Interest expense (303,863) (100,271)
Income from continuing operating before
provision for income taxes 442,037 16,110
Provision for income taxes 5,600 800
Income from continuing operations 436,437 15,310
Discontinued operations (Note 3):
Loss from discontinued operations (less applicable
income taxes of $-0-) -0- (179,348)
Loss on disposal of discontinued operations during
phase-out period (less applicable income taxes of $-0-) -0- (113,394)
Net income (loss) 436,437 (277,432)
Retained deficit, beginning of year (405,869) (128,437)
Retained earnings (deficit), end of year $ 30,568 $ (405,869)
Basic earnings per share:
Income from continuing operations $ 51.35 $ 1.80
Loss from discontinued operations -0- (21.10)
Loss on disposal of discontinued operations -0- (13.34)
Net income (loss) per share $ 51.35 $ (32.64)
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
I-PAC MANUFACTURING, INC.
Statements of Cash Flows
Years Ended December 31, 1997 and 1996
<TABLE>
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 5,282,995 $ 5,681,214
Cash paid to suppliers and employees (5,033,634) (5,915,884)
Interest paid (303,863) (100,271)
Income taxes paid (800) (7,233)
Other income (expense), net 58,503 (13,805)
Net cash provided by (used in) operating activities 3,201 (355,979)
Cash flows from investing activities:
Purchase of property and equipment (242,262) (51,659)
Proceeds from sale of property and equipment 4,022 -0-
Net cash used in investing activities (238,240) (51,659)
Cash flows from financing activities:
Net borrowings on notes payable 176,219 421,450
Principal payments under long-term debt (60,405) (18,959)
Borrowing from related party 150,000 -0-
Principal payments under related party debt (29,240) -0-
Net cash provided by financing activities 236,574 402,491
Net increase (decrease) in cash 1,535 (5,147)
Cash, beginning of year 15,616 20,763
Cash, end of year $ 17,151 $ 15,616
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
I-PAC MANUFACTURING, INC.
Statements of Cash Flows
(Continued)
Years Ended December 31, 1997 and 1996
Increase (Decrease) in Cash
<TABLE>
1997 1996
<S> <C> <C>
Reconciliation of net income (loss) to net cash provided by
(used in) operating activities:
Net income (loss) $ 436,437 $ (277,432)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 110,826 77,423
Gain on disposition of property and equipment (1,787) -0-
(Increase) decrease in:
Receivables (165,608) 154,723
Inventories 27,143 (366,654)
Prepaid expenses (18,867) (14,859)
Other assets (24,925) (32,779)
Increase (decrease) in:
Accounts payable and accrued expenses (257,191) 25,035
Accrued compensation and payroll taxes 10,567 (34,830)
Accrued cost-discontinued operations (113,394) 113,394
Net cash provided by (used in) operating activities $ 3,201 $ (355,979)
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
In 1996, the Company acquired $76,263 of assets under capital leases.
In 1997, the Company:
Sold inventory and equipment for a note receivable of $50,000.
Incurred long-term debt of $2,111,230 to finance the purchase
of real property.
Incurred long-term debt of $9,541 to finance the purchase of a vehicle.
See accompanying notes to financial statements.
F-6
<PAGE>
I-PAC MANUFACTURING, INC.
Notes to Financial Statements
Years Ended December 31, 1997 and 1996
Note 1. THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES
I-PAC Manufacturing, Inc. (the Company) manufactures custom electronic
and electrical mechanical assemblies, including Printed Circuit Board
(PCB) assemblies, electrical interconnect products and subassemblies in
Carlsbad, California. Its customers, primarily located in the United
States, are major OEM's (original equipment manufacture), to which it
also provides valued-added engineering services. The Company generated
approximately 68% of its 1997 sales from four customers. These four
customers accounted for 24%, 17%, 16% and 11%, respectively, of 1997
sales revenue and approximately $390,000 of receivables at December 31,
1997. The Company grants unsecured credit to its customers.
Principles of Consolidation
The financial statements for 1997 include the accounts of the Company
and its wholly owned subsidiary, Express Assembly Corp. (Express)
purchased as of February 17, 1997 (Note 2). All significant
intercompany accounts and transactions have been eliminated upon
consolidation.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Inventory
Inventory is stated primarily at the lower of average cost or market.
Property and Equipment
Property and equipment, including renewals and betterments, are
recorded at cost and are depreciated using straight-line and
accelerated methods over estimated useful lives of 5 to 40 years.
Repairs and maintenance are charged to expense as incurred.
F-7
<PAGE>
I-PAC MANUFACTURING, INC.
Notes to Financial Statements
(Continued)
Years Ended December 31, 1997 and 1996
Note 1. THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES
(continued)
Revenue Recognition
Sales revenue and corresponding expense, cost of sales, are recognized
when the product is shipped to the customer.
Income Taxes
The stockholders have elected to have the Company taxed as a subchapter
S corporation under Section 1362 of the Internal Revenue Code which
provides that, in lieu of federal corporate income taxes, the
stockholders will recognize the Company's taxable revenue and
deductible expenses on their tax return. For California state purposes
a corporate tax is imposed on S corporations at the rate of 1.5% of
taxable income with a minimum of $800.
Note 2. ACQUISITION
On February 17, 1997, the Company acquired Express in a business
combination accounted for as a purchase. Express is primarily engaged
in quick turn prototype assembly and low volume value added
manufacturing. The results of operations of Express are included in the
accompanying financial statements since the date of acquisition. The
total cost of the acquisition was $31,119 which exceeded the fair value
of the net assets of Express by $14,671. The excess is being amortized
on the straight- line method over five years.
Note 3. DISCONTINUED OPERATIONS
At December 31, 1996, the Company's management approved a plan to sell
its 50% interest in Cable Converter Services - West LLC to the other
50% owner and discontinue its related operations of servicing and
repairing cable television equipment. The operations for servicing and
repairing cable television equipment are classified as discontinued
operations in the financial statements.
F-8
<PAGE>
I-PAC MANUFACTURING, INC.
Notes to Financial Statements
(Continued)
Years Ended December 31, 1997 and 1996
Revenues received from discontinued operations were $35,534 and
$347,130 for the years ended December 31, 1997 and 1996, respectively.
The Company has recorded a loss from discontinued operations of
$113,394 for estimated operations through February 28, 1997, the date
of sale. The Company sold related equipment and inventory at net book
value and recorded a note receivable of $50,000, due February 28, 2000.
The note receivable is
Note 3. DISCONTINUED OPERATIONS (continued)
expected to be satisfied by payments and/or credits allowed in
connection with certain future purchases by the Company from the
debtor. In addition, the Company has a purchase commitment of $60,000
expiring February 28, 1999.
Note 4. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
1997 1996
Receivable
Trade receivables $ 589,244 $ 430,452
Less allowance for doubtful accounts (37,771) (44,587)
$ 551,473 $ 385,865
Inventories
Raw materials $ 1,001,983 $ 983,125
Work-in-process 175,709 301,207
1,177,692 1,284,332
Less reserve for obsolescence (115,000) (153,000)
$ 1,062,692 $ 1,131,332
F-9
<PAGE>
I-PAC MANUFACTURING, INC.
Notes to Financial Statements
(Continued)
Years Ended December 31, 1997 and 1996
Note 4. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS (continued)
1997 1996
Property and equipment, net
Land $ 338,110 $ -0-
Building 1,908,453 -0-
Machinery and equipment 444,273 506,734
Equipment 76,263 76,264
Vehicles 18,610 11,408
Building improvements 26,765 21,069
2,812,474 615,475
Less accumulated depreciation and
amortization (305,640) (337,531)
$ 2,506,834 $ 277,944
Other income and expense, net
Rental income $ 112,860 $ -0-
Other income and expense, net 60,824 16,195
$ 173,684 $ 16,195
Rental income is primarily from a month-to-month lease of a portion of
the Company's facilities for $7,500 per month.
The Company incurred rent expense of $33,000 and $183,700 for the years
ended December 31, 1997 and 1996, respectively.
F-10
<PAGE>
I-PAC MANUFACTURING, INC.
Notes to Financial Statements
(Continued)
Years Ended December 31, 1997 and 1996
Note 5. NOTES PAYABLE
1997 1996
At December 31, 1997, the Company has a
business loan agreement with a bank
expiring in June 30, 1998, which provides
for a revolving line of credit with a
maximum indebtedness of $700,000.
Interest is payable monthly at prime
plus 1.5% (effective rate of 10% at
December 31, 1997). The Company is
required to maintain certain financial
covenants. The borrowing is collatera-
lized by the assets of the Company and
secured by continuing guarantees executed
by its stockholders. $ 522,669 $ -0-
At December 31, 1997, the Company has a
note payable to a bank for $75,000;
interest payable monthly at prime plus
1.5% (effective rate of 10% at December
31, 1997); due on demand or on June 30,
1998. This note is cross-collateralized
with the revolving line of credit business
loan payable to bank. 75,000 -0-
At December 31, 1996, the Company had a
business loan agreement with a bank which
expired in January 1997. It provided for
a revolving line of credit with a maximum
indebtedness of $425,000. Interest was
payable monthly at prime plus 1.5%. -0- 421,450
$ 597,669 $ 421,450
F-11
<PAGE>
I-PAC MANUFACTURING, INC.
Notes to Financial Statements
(Continued)
Years Ended December 31, 1997 and 1996
Note 6. LONG-TERM DEBT
<TABLE>
1997 1996
<S> <C> <C>
Note payable to bank in monthly installments of
$12,909 including interest at prime plus 1%,
subject to change every five years (effective
rate of 9.25% at 12/31/97); through January 2022;
collateralized by a first trust deed on the
Company's land and building. The Company is
required to maintain certain financial covenants.
The note is guaranteed by certain stockholders.
Certain notes payable to related parties (Note 7)
have been subordinated to this note. $1,477,406 $ -0-
Note payable to finance company in monthly
installments of $5,604 including interest at
7.569% and fees of $793; through March 2017;
collateralized by a second trust deed on the
Company's land and building; guaranteed by the
Small Business Administration; guaranteed by
stockholders. 583,897 -0-
Note payable to bank in monthly installments
of $2,812 including interest at the prime
plus 2.5%, (effective rate of 11% at
December 31, 1997) through March 2005;
collateralized by equipment. 167,898 181,829
Note payable to company in monthly installments
of $1,071 including interest at 18.20%;
through May 2001; collateralized by
equipment. 31,971 38,827
Note payable to company in monthly installments
of $996 including interest at 26.6%;
through June 2001; collateralized by
equipment. 28,340 31,193
</TABLE>
F-12
<PAGE>
Note 6. LONG-TERM DEBT (continued)
<TABLE>
1997 1996
<S> <C> <C>
Note payable to an individual in monthly
installments of $694 plus interest at 10%;
through January 2000. Guaranteed by a
stockholder. 17,361 -0-
Note payable to bank in monthly installments
of $327 including interest 14.25%; through
February 2000; collateralized by a vehicle. 7,284 -0-
Other -0- 1,942
2,314,157 253,791
Less current portion 69,083 23,402
$2,245,074 $ 230,389
</TABLE>
Principal payments on long-term debt for years ending December 31 are
due as follows:
Notes Payable Related Parties
Related
Long-term Party Stockholders
Total Debt (Note 7) (Note 7)
1998 $ 69,083 $ 69,083 $ -0- $ -0-
1999 212,125 81,889 130,236
2000 78,106 78,106
2001 73,726 73,726
2002 68,395 68,395
Thereafter 2,260,545 1,942,958 137,130 180,457
$2,761,980 $2,314,157 $ 267,366 $ 180,457
F-13
<PAGE>
Note 7. NOTES PAYABLE TO RELATED PARTIES
<TABLE>
1997 1996
<S> <C> <C>
Notes Payable to Company Related by Ownership
Notes payable to company; interest at prime
plus 2% payable monthly; due on demand;
collateralized by a security agreement,
stock pledge agreements and guarantees by
stockholders; subordinated to bank loan
(Note 6); classified as long-term due to
subordination to note payable to bank. $ 137,130 $ 146,606
Note payable to company; in monthly installments
of $3,242 through January 1998 and $129,293.37
due February 21, 1998, including interest at
prime plus 2%; subsequent to December 31, 1997,
the payment date was extended to July 31, 1999;
collateralized by a security agreement and
guaranteed by stockholders 130,236 -0-
$ 267,366 $ 146,606
Notes Payable to Stockholders
Prime plus 2% (effective rate of 10.5% at
December 31, 1997) payable monthly; due on
demand; subordinated to bank loan (Note 6);
classified as long-term due to subordination
to note payable to bank. $ 180,457 $ 180,457
</TABLE>
Interest expense on notes payable to related parties was $37,885 and
$34,658 for the years ended December 31, 1997 and 1996, respectively.
Under the terms on the nonbinding letter of intent to merge (Note 11),
all notes payable to related parties will be converted into equity upon
completion of the merger.
F-14
<PAGE>
Note 8. OTHER LONG-TERM LIABILITY
Liability of $226,790 due to a company; non-interest bearing; due April
1998; collateralized by equipment; subordinated to bank loan; to be
repaid at a rate of 40% of the non-material component of any sales made
to the lender. No sales orders have been received from the lender as of
January 31, 1998. Any unpaid balance on the due date will be canceled
and the security interest released. In the opinion of management no
sales orders are anticipated through the due date of this liability.
Note 9. RELATED PARTY TRANSACTIONS
Evergreen Investments (Evergreen), a company owned by two officers and
primary stockholders of the Company, provides management and legal
services to the Company. The Company incurred expenses of approximately
$205,500 and $235,600 for services provided by Evergreen for the years
ended December 31, 1997 and 1996, respectively. During this period, the
two officers and primary stockholders did not receive a salary or
employee benefits directly from the Company. As of December 31, 1997
and 1996, approximately $49,000 and $5,900, respectively, due to
Evergreen was included in accounts payable. Under terms of the
nonbinding letter of intent (Note 11), these officers will become
officers of Photomatrix, Inc. and each will receive compensation as set
by the Board of Directors with an initial annual salary of $125,000. In
connection with this employment, subsequent to the close of the merger,
Evergreen will no longer provide management services to the Company.
For the year ended December 31, 1997, the Company purchased
approximately $6,600 of merchandise from MGS Interconnect (MGS), a
company owned by two primary stockholders of the Company. During 1996,
the Company subcontracted out $57,400 of sub-assembly and other
production work to MGS. The Company also recorded sales to
F-15
<PAGE>
I-PAC MANUFACTURING, INC.
Notes to Financial Statements
(Continued)
Years Ended December 31, 1997 and 1996
MGS of approximately $47,900 and $88,100 for the years ended December
31, 1997 and 1996, respectively.
Included in receivables at December 31, 1997 and 1996 are $41,373 and
$74,181, respectively, of accounts receivable due from related parties.
Note 9. RELATED PARTY TRANSACTIONS (continued)
During 1997 and 1996, the Company incurred expenses of approximately
$136,700 and $147,100, respectively, for commissions to MGM Tech Rep
(MGM), an outside sales representative firm owned primarily by the
three stockholders of the Company. In addition, at December 31, 1997,
prepaid expenses include approximately $42,200 of commissions advanced
to MGM. The Company received approximately $4,600 of rental income from
MGM for the year ended December 31, 1997.
The Company also incurred expenses of approximately $28,400 and $39,900
for legal services provided by a law firm in which a primary
stockholder and officer of the Company is a partner, for the years
ended December 31, 1997 and 1996, respectively. In addition, the
Company also incurred expenses of approximately $27,500 and $39,700 for
general business consulting services provided by this officer for the
years ended December 31, 1997 and 1996, respectively. During this
period, this officer did not receive a salary or employee benefits
directly from the Company.
Note 10. INCOME TAXES
The components of the provision for income taxes are as follows:
1997 1996
State S corporation franchise tax $ 5,600 $ 800
Deferred income tax -0- -0-
$ 5,600 $ 800
F-16
<PAGE>
I-PAC MANUFACTURING, INC.
Notes to Financial Statements
(Continued)
Years Ended December 31, 1997 and 1996
Note 11. CONTINGENCIES
During October 1997, the Company executed a nonbinding letter of intent
to merge with a publicly traded company (Photomatrix, Inc.). Under the
terms of the nonbinding letter of intent if either party terminates the
merger negotiations without the written consent of the other, the party
causing the termination will pay the other party $100,000.
Note 12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments are as
follows:
1997 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
Assets:
Cash $ 17,151 $ 17,151 $ 15,616 $ 15,616
Note receivable including
current portion 50,000 50,000
Liabilities:
Notes payable 597,669 597,669 421,450 421,450
Long-term debt including
current portion 2,314,157 2,355,993 253,791 253,791
Notes payable to related
party 267,366 267,366 146,606 146,606
Notes payable to stock-
holder 180,457 180,457 180,457 180,457
Other long-term liability 226,790 -0- 226,790 226,790
The fair value of the note receivable is not determinable because a
quoted market price is not available and the cost of obtaining an
independent valuation is excessive.
F-17
<PAGE>
I-PAC MANUFACTURING, INC.
Notes to Financial Statements
(Continued)
Years Ended December 31, 1997 and 1996
The fair value of long-term debt, including current portion, is
estimated using interest rates currently available for long-term debt
with similar terms and remaining maturities. The fair value of notes
payable, notes payable to related party and notes payable to
stockholders approximates carrying value given the variable interest
rates provided in the notes.
The fair value of the other long-term liability is estimated based on
the expected cancellation in April 1998.
It is not practicable to estimate the fair value of guarantees on
behalf of the Company (Notes 5 and 6), however, the Company does not
expect to require payments on its behalf with respect to these
guarantees.
F-18
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
entered into as of March 16, 1998, by and among PHOTOMATRIX, INC., a California
corporation ("Photomatrix"); Photomatrix's wholly-owned subsidiary, PHOTOMATRIX
ACQUISITION, INC., a California corporation ("Merger Corp."); and I-PAC
MANUFACTURING, INC., a California corporation ("I-PAC").
W I T N E S S E T H:
WHEREAS, I-PAC is engaged in the business of custom contract
manufacturing of electrical and electrical mechanical products (the "I-PAC
Business").
WHEREAS, Photomatrix is engaged in the business of manufacturing and
selling high performance document scanners and aperture card scanners (the
"Photomatrix Business") and desires to acquire I-PAC through a tax-free merger
of Merger Corp. into I-PAC pursuant to Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code").
WHEREAS, the parties intend that this Agreement constitute a "plan of
reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(c) of the
Income Tax Regulations.
NOW, THEREFORE, in consideration of the recitals and of their
respective covenants, representations, warranties and agreements herein
contained, and intending to be legally bound hereby, the parties hereto agree as
follows:
ARTICLE I
CERTAIN DEFINITIONS
"Closing" has the meaning set forth in Section 2.2 below.
"Closing Date" has the meaning set forth in Section 2.2 below.
"I-PAC Share" means a share of the voting common stock of I-PAC.
"Photomatrix Share" means a share of the common voting stock of
Photomatrix.
"Effective Time" means 12:01 a.m. on the date as of which the Merger of
Merger Corp. with and into I-PAC, is effective which, for purposes of this
Agreement, is intended to be, and may be used interchangeably with, the Closing
Date.
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"Knowledge" and the phrase "to the best knowledge" mean actual
knowledge, information and belief following such reasonable investigation and
review as a reasonably prudent corporation would conduct or commission in light
of the prevailing facts and circumstances.
"Merger" means the merger of Merger Corp. with and into I-PAC.
"Surviving Corporation" or "I-PAC" means I-PAC.
"Tax" means any federal, state, local and foreign income, gross
receipts, capital stock, profits, franchise, sales, stamp, occupation,
employment, unemployment, disability, withholding security, worker's
compensation, use, occupancy, transfer, value added, exercise, property (whether
real, personal or mixed) and other taxes and assessments (including interests
and penalties).
ARTICLE II
THE MERGER AND RELATED TRANSACTIONS
2.1 The Merger. Subject to the terms and conditions of this
Agreement, Merger Corp. will merge with and into I-PAC at the Effective Time.
I-PAC shall be the corporation surviving the Merger (the "Surviving
Corporation"). The terms of the Merger will be as set forth herein and in the
Merger Agreement in the form attached hereto as Exhibit 1.
2.2 The Closing. A Closing of the Merger and related transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of Luce, Forward, Hamilton & Scripps LLP, 600 West Broadway, Suite 2600, San
Diego, California 92101, on or about June 8, 1998 or such other time and place
as is mutually agreeable to the parties and following the satisfaction or waiver
of all other conditions to the obligations of the parties to consummate the
Merger and related transactions contemplated hereby (the "Closing Date").
2.3 Actions at the Closing. At the Closing, (i) I-PAC will deliver
to Photomatrix the various certificates, instruments, and documents referred to
in Article VI below; (ii) Photomatrix and Merger Corp. will deliver to I-PAC the
various certificates, instruments and documents referred to in Article VII
below; and (iii) Merger Corp. and Photomatrix will file the Merger Agreement,
together with the Officers' Certificates required pursuant to Section 1103 of
the California Corporations Code (the "CCC"), with the Secretary of State of the
State of California (the "Secretary of State") in the form of Exhibit 2 hereto.
2.4 Effect of Merger.
2.4.1 General. The Merger shall become effective at the time the
Agreement of Merger is filed with the Secretary of State or at such later time
as may be stated in the Agreement of Merger. The Merger shall have the effect
set forth in Section 1107 of the CCC. The Surviving Corporation may, at any time
after the Effective Time, take any action (including executing and
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delivering any document) in the name and on behalf of such entity or the entity
with which it merged in order to carry out and effectuate the transactions
contemplated by this Agreement.
2.4.2 Conversion of I-PAC Shares. At the Effective Time, each I-PAC
Share then issued and outstanding shall, by virtue of the Merger and without any
action on the part of the holder thereof, be converted into and represent the
right to receive 570.3529411 (adjusted proportionately to reflect any stock
split, reverse stock split or recapitalization of Photomatrix or any exercise of
dissenters' rights on or prior to the Closing Date) Photomatrix Shares
(collectively, the "Merger Consideration") and each share of Merger Corp. common
stock shall, by virtue of the Merger and without any action on the part of the
holder thereof, be converted into and represent the right to receive one I-PAC
Share. The Merger Consideration will be proportionately adjusted in the event of
any stock split or combination of the outstanding Photomatrix Shares or the
I-PAC Shares occurring, or any stock dividend payable to holders of Photomatrix
Shares or I-PAC Shares the record date of which is, prior to the Effective Time.
2.5 Exchange of I-PAC Shares.
2.5.1 At the Closing, Photomatrix shall make available for exchange
or conversion for the benefit of the holders of I-PAC Shares such number of
Photomatrix Shares as shall be issuable and such amount of cash as may be
payable in lieu of fractional Photomatrix Shares as Merger Consideration in
connection with the Merger.
2.5.2 Prior to the Closing, Photomatrix shall deliver to each
holder of record (other than Photomatrix, I-PAC or any wholly-owned subsidiary
of either of them) ("I-PAC Shareholder") of a certificate or certificates which
immediately prior to the Effective Time represents outstanding I-PAC Shares (the
"Certificates") a shareholder's representation and transmittal letter, in a form
attached hereto as Exhibit 3 ("Shareholder's Representation and Transmittal
Letter").
2.5.3 Upon surrender of the Certificates for cancellation to
Photomatrix, together with the Shareholder's Representation and Transmittal
Letters, duly executed, all to occur at the Closing, Photomatrix shall deliver
to the holders of each such Certificate that number of Photomatrix Shares equal
to (i) the number of I-PAC Shares represented by such Certificate times
570.3529411 plus any cash payable in lieu of fractional shares otherwise
issuable to the holders of each such Certificate.
2.5.4 In the event of a transfer of ownership of I-PAC Shares which
is not registered in the transfer records of I-PAC, it shall be a condition to
the issuance of Photomatrix Shares that each Certificate so surrendered shall be
properly endorsed or be otherwise in proper form for transfer and that such
transferee shall (a) pay to Photomatrix any transfer or other taxes required or
(b) establish to the satisfaction of Photomatrix that such tax has been paid or
is not payable. All Photomatrix Shares and cash in lieu of fractional shares
issued and paid upon the surrender for exchange of I-PAC Shares in accordance
with this Agreement shall be deemed to have been issued in full satisfaction of
all rights pertaining to such I-PAC Shares.
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2.5.5 No certificates or scrip representing fractional Photomatrix
Shares shall be issued upon the surrender for exchange of Certificates; no
dividend or distribution of Photomatrix shall relate to any fractional share;
and such fractional share interests shall not entitle the owner thereof to vote
or otherwise exercise any rights as a shareholder of Photomatrix. In lieu of any
fractional share, Photomatrix shall pay to each holder of I-PAC Shares who
otherwise would be entitled to receive a fractional Photomatrix Share an amount
of cash (without interest) determined by multiplying (a) the average bid price
of a share of Photomatrix Common Stock during the ten (10) trading days
immediately preceding the Closing Date by (b) the fraction of a share to which
such holder would otherwise be entitled.
2.5.6 In the event any Certificate shall have been lost, stolen or
destroyed, Photomatrix shall issue in exchange for such lost, stolen or
destroyed Certificate, upon the making of an affidavit of that fact by the
holder thereof, such Photomatrix Shares and cash in lieu of fractional shares,
if any, as may be required pursuant hereto; provided, however, that Photomatrix
may, in its discretion and as a condition precedent to the issuance thereof,
require the owner of such lost, stolen or destroyed Certificate to deliver a
bond in such reasonable sum as it may direct as indemnity against any claim that
may be made against Photomatrix, Merger Corp., I-PAC, or any other party with
respect to the Certificate alleged to have been lost, stolen or destroyed.
2.6 Appointment to Photomatrix Board of Directors. Effective at the
Closing, the directors of Photomatrix shall be Suren G. Dutia, Ira H. Sharp,
John F. Staley, William L. Grivas, Patrick W. Moore and James P. Hill. The
authorized number of directors shall be seven, and there shall be one vacancy on
the Board.
2.7 Appointment of Photomatrix Officers. Effective at the Closing, and
subject and pursuant to Section 312(b) of the California General Corporation
Law, Suren Dutia shall resign as the Chairman and Chief Executive Officer of
Photomatrix and retain the title of President of Photomatrix, William L. Grivas
shall be appointed the Chairman of the Board of Photomatrix, Patrick W. Moore
shall be appointed the Chief Executive Officer of Photomatrix, and Roy L.
Gayhart shall serve as the Chief Financial Officer and Secretary of Photomatrix.
The Bylaws of Photomatrix will be amended in a manner in conformance with
existing employment agreements and acceptable to I- PAC to accommodate the
foregoing offices.
2.8 Possible Issuance of Additional Shares. In addition to the
Photomatrix Shares to be issued pursuant to Sections 2.4.2, 2.5.1, and 2.5.3 of
this Agreement, within ninety (90) days following the completion of the Earnout
Period, as that term is defined below, Photomatrix shall deliver to the I-PAC
Shareholders, allocated among them in proportion to their ownership of I-PAC
Shares as of the Closing Date, additional Photomatrix Shares determined in
accordance with the following schedule:
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Additional
Photomatrix
Shares Alternative 1 Alternative 2
934,834 Gross Revenues between Gross Revenues of more than
$7,000,000 and $7,500,000 and a $8,000,000 and Gross Profit of
Gross Profit Margin of at least more than $2,275,000
31.7%
1,403,234 Gross Revenues between Gross Revenues of more than
$7,500,001 and $8,000,000 and $8,000,000 and Gross Profit of
Gross Profit Margin of at least more than $2,430,000
31.5%
1,871,633 Gross Revenues between Gross Revenues of more than
$8,000,001 and $8,500,000 and $8,500,000 and Gross Profit of
Gross Profit Margin of at least more than $2,580,000
31.3%
2,338,101 Gross Revenues between Gross Revenues of more than
$8,500,001 and $9,000,000 and a $8,000,000 and Gross Profit of
Gross Profit Margin of at least more than $2,730,000
31.2%
2,804,803 Gross Revenues between Gross Revenues of more than
$9,000,001 and $9,500,000 and a $8,000,000 and Gross Profit of
Gross Profit Margin of at least more than $2,890,000
31.1%
3,274,970 Gross Revenues between Gross Revenues of more than
$9,500,0001 and $10,000,000 and $8,000,000 and Gross Profit of
a Gross Profit Margin of at more than $3,040,000
least31.0%
3,744,902 Gross Revenues of more than Gross Revenues of more than
$10,000,000 and a Gross Profit $8,000,000 and Gross Profit of
Margin of at least 30.9% more than $3,190,000
No additional Photomatrix Shares shall be issued if I-PAC generates Gross
Revenues of less than $7,000,000 during the Earnout Period. In no event shall
Photomatrix be required to issue more than 3,744,902 additional Photomatrix
Shares pursuant to this Section 2.8, provided that the foregoing numbers of
shares shall be adjusted to reflect any stock split, reverse stock split, or
recapitalization of Photomatrix. For purposes of this Section 2.8, (i) the
Earnout Period shall be the twelve months commencing with July 1, 1998, (ii)
I-PAC Gross Revenues, Gross Profit, and Gross Profit Margin shall be determined
as set forth in Exhibit 4 to this Agreement, and (iii) such determination shall
be
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based in part on a physical inventory of I-PAC as of the beginning and the end
of the Earnout Period. The determination of I-PAC Gross Revenues, Gross Profit,
and Gross Profit Margin during the Earnout Period shall be made initially by the
Audit Committee of the Photomatrix Board of Directors. If the Audit Committee
and the I-PAC Shareholders are unable to agree on the amount of I-PAC Gross
Revenues, Gross Profit, and Gross Profit Margin during the Earnout Period, the
matter shall be referred to the independent auditors of Photomatrix, whose
conclusion shall be final and binding on the parties.
2.9 Issuance of Additional Shares upon the Exercise of Outstanding
Options and Warrants. Options and warrants to purchase 907,333 shares of
Photomatrix Common Stock are outstanding as of the date of this Agreement, and
additional options may be issued prior to the Closing Date (collectively, the
"Outstanding Options"). If after the date of this Agreement Outstanding Options
are exercised, then an equivalent number of additional Photomatrix Shares shall
be issued to the I-PAC Shareholders, allocated among them in proportion to their
ownership of I- PAC Shares as of the Closing Date. Such issuances of additional
Photomatrix Shares shall occur on the Closing Date as to issuances of option
shares which occur on or before the Closing and concurrently with any issuances
of option shares which occur after the Closing Date until all of the Outstanding
Options have been exercised, have expired, or have been canceled.
ARTICLE III
REPRESENTATIONS, WARRANTIES AND COVENANTS
OF I-PAC AND THE SHAREHOLDERS
Representations of I-PAC . Except as set forth in the I-PAC Disclosure
Memorandum to be prepared, delivered and have the legal effect as provided in
Section 6.4 hereof, I-PAC represents and warrants to Photomatrix and Merger
Corp. and agrees as follows:
3.1 Existence; Good Standing; Corporate Authority and Authorization.
3.1.1 I-PAC. I-PAC is a corporation duly organized, validly
existing and in good standing under the laws of the State of California. I-PAC
is qualified to do business and is in good standing in all other jurisdictions
in which the character or location of the properties owned or leased by it or
the nature of the business conducted by it makes such qualification necessary
and where the failure to so qualify would have a material adverse effect upon
I-PAC. Set forth in the I-PAC Disclosure Memorandum, is a list of each
jurisdiction in which I-PAC is qualified to do business as a foreign
corporation. I-PAC has full corporate power to own its property and to carry on
its business as now being conducted. I-PAC has full corporate power and
authority to enter into and perform its obligations under this Agreement and
under each other instrument and document executed and delivered by I-PAC
pursuant hereto or in connection herewith and to take all actions required of it
to consummate the Merger.
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3.1.2 Subsidiaries. The I-PAC Disclosure Memorandum sets forth the
following information regarding each subsidiary of I-PAC ("I-PAC Subsidiary"
and, hereinafter "I- PAC" shall refer to both I-PAC and any I-PAC Subsidiaries):
(i) the name of the corporation; (ii) the state of incorporation; (iii)
authorized capitalization; and (iv) issued and outstanding capital stock and
other securities (including debt securities). Each I-PAC Subsidiary is duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation or other organization and has full corporate
power and authority to own, lease or otherwise hold its assets and properties
and to carry on its business as it is now conducted. Each I-PAC Subsidiary is
duly qualified or licensed to do business and is in good standing as a foreign
corporation or other business entity in all of the jurisdictions in which such
I-PAC Subsidiary owns or leases any real property or conducts any business, so
as to require such qualification or licensing, except for instances where the
failure to so qualify would not have material adverse effect on the business or
financial condition of such I-PAC Subsidiary. All of the outstanding shares of
capital stock or other voting interests of each I-PAC Subsidiary are validly
issued and outstanding, fully paid and nonassessable and owned by I-PAC or
another I-PAC Subsidiary free of any claims, liens, charges or encumbrances of
any nature whatsoever. Except as reflected in the I-PAC Balance Sheet, no I-PAC
Subsidiary has issued a promissory note or any other evidence of indebtedness or
otherwise incurred indebtedness.
3.2 No Legal Bar; Conflicts; Enforceability. Neither the execution and
delivery of this Agreement, or any other instrument or document executed and
delivered by I-PAC pursuant hereto or in connection herewith, nor the
consummation of the transactions contemplated hereby or thereby (i) violates or
conflicts with any provision of the articles of incorporation or by-laws of
I-PAC or any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge or other restriction or requirement of any
government, governmental agency or court to which I-PAC is subject, (ii) creates
in any party a right of acceleration, termination, modification or cancellation
under any I-PAC Material Contract (as defined in Section 3.12 below) or any
other instrument by which any of the properties or assets of I-PAC may be
subject, bound or affected, or (iii) requires any notice or constitutes a breach
or default under any I-PAC Material Contract. Except for the filing of
appropriate certificates to effect the Merger, no authorization, consent or
approval of any public body or authority is necessary for the validity or
enforceability of the transactions contemplated by this Agreement. All necessary
approvals of the parties under any I-PAC Material Contract or of any other
person required to permit I-PAC to perform its obligations in connection with
consummation of the transactions contemplated in this Agreement have been
obtained by I-PAC or will be obtained by I-PAC on or before the Closing Date.
I-PAC is not a party to any contract or subject to any legal restriction or
requirement that would prevent or restrict complete fulfillment of all of the
terms and conditions of this Agreement. I-PAC has taken all necessary corporate
actions to authorize and approve the execution, delivery and performance of this
Agreement and the Merger (other than obtaining the approval of the I-PAC
Shareholders). This Agreement constitutes a legal, valid and binding obligation
of I-PAC, enforceable against I-PAC in accordance with its terms.
3.3 Capital Stock and Exclusive Dealing. I-PAC (not including the I-PAC
Subsidiaries) has an authorized capitalization consisting of one million
(1,000,000) shares of voting common stock, of which eight thousand five hundred
(8,500) shares are issued and are outstanding.
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All such outstanding shares have been duly authorized, are validly issued, and
are fully paid and nonassessable. There are no other shares of stock of I-PAC
issued and outstanding. There are no outstanding options, warrants, rights,
preemptive rights, calls, commitments, conversion rights, rights of exchange,
plans or other agreements of any character providing for the purchase, issuance
or sale of any shares of the capital stock of I-PAC, except as contemplated by
this Agreement. None of the outstanding I-PAC Shares have been issued in
violation of any preemptive right or agreement, commitment or obligation binding
on I-PAC or any of the I-PAC Shareholders or any applicable securities laws.
3.4 Restrictive Documents. I-PAC is not subject to, or a party to, any
charter, bylaw, mortgage, lien, lease, license, permit, agreement, contract, or
instrument, or any law, rule, ordinance, regulation, order, judgment or decree,
or any other restriction or requirement of any kind or character, which
materially adversely affects I-PAC or which would prevent the consummation of
the transactions contemplated by this Agreement or the continued operation of
I-PAC after the date hereof or the Closing Date on substantially the same basis
as it has heretofore been operated or which would restrict its ability to
acquire any property or conduct business in any area.
3.5 Financial Statements and No Material Changes. I-PAC has heretofore
furnished Photomatrix with the consolidated balance sheets of I-PAC as of
December 31, 1996 and 1997 and the related consolidated statements of income,
shareholders' equity and changes in financial position for the years ended
December 31, 1996 and 1997. The balance sheets of I-PAC as of the dates
mentioned above are hereinafter collectively referred to as the "I-PAC Balance
Sheets" and are in the form attached hereto as Exhibit 5. All such financial
statements and all other financial statements of I-PAC, including the footnotes
thereto, except as indicated therein, have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods indicated. The I-PAC Balance Sheets fairly present the financial
condition of I-PAC at the dates thereof, and the related statements of income,
shareholders' equity and changes in financial position fairly present the
results of the operations of I-PAC and the changes in its financial position for
the periods indicated. Since December 31, 1997 (the "Balance Sheet Date") there
has been no material adverse change in the assets, liabilities, business,
financial condition, or results of operations of I- PAC, whether as a result of
any legislative or regulatory change, revocation of any license or rights to do
business, litigation, administrative action, fire, explosion, accident,
casualty, labor trouble, flood, drought, riot, storm, condemnation or act of God
or otherwise and no fact or condition exists or is contemplated by I-PAC or, to
the best knowledge of I-PAC, threatened which might cause such a change in the
future.
3.6 Absence of Undisclosed Liabilities. Except as set forth in the
I-PAC Balance Sheets, I-PAC does not have any outstanding claims against it,
liabilities or indebtedness, contingent or otherwise, other than (i) liabilities
not of a character or amount required to be shown, accrued or escrowed against
on the I-PAC Balance Sheets under generally accepted accounting principles and
(ii) liabilities incurred subsequent to the Balance Sheet Date in the ordinary
course of business, consistent with past practices. I-PAC does not know and has
no reason to know of any basis for the assertion against I-PAC of any material
claim, charge, or other liability of any nature not fully
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reflected or reserved against in the I-PAC Balance Sheets or expressly disclosed
in this Agreement, including the I-PAC Disclosure Memorandum. The adjusted tax
basis and the fair market value of the assets of I-PAC exceed the liabilities of
I-PAC as of the date hereof and will exceed the liabilities of I-PAC as of the
Closing Date.
3.7 No Changes Prior to Closing Date. Since January 1, 1998, I-PAC has
not: (i) incurred any liability or obligation of any nature (whether accrued,
absolute, contingent or otherwise), except in the ordinary course of business,
(ii) permitted any assets to be subjected to any mortgage, pledge, lien,
security interest, encumbrance, restriction or charge of any kind, except in the
ordinary course of business, (iii) sold, transferred or otherwise disposed of
any assets, except in the ordinary course of business, (iv) made any capital
expenditure or commitment therefor, except in the ordinary course of business,
(v) declared or paid any dividend or made any distribution on any shares of
capital stock or redeemed, purchased or otherwise acquired any shares of capital
stock or any option, warrant or other right to purchase or acquire any such
shares, (vi) made any bonus payments or profit sharing distributions or payments
of any kind, (vii) increased its indebtedness for borrowed money, except current
borrowings from banks in the ordinary course of business, or made any loan to
any employee, director, shareholder or other person or entity, (viii) written
off as uncollectible any notes or accounts receivable, except write-offs in the
ordinary course of business charged to applicable reserves, none of which
individually or in the aggregate exceeds $25,000, (ix) granted any increase in
the rate of wages, salaries, bonuses or other remuneration to any executive
employee or, except in the ordinary course of business, to any other employee,
(x) cancelled or waived any claims or rights of substantial value, (xi) made any
change in any method of business accounting (other than revocation of its S
Corporation status and a change of its fiscal year end to March 31) or entered
into any transaction, except in the usual and ordinary manner and in the
ordinary course of business, (xii) changed the ownership of its shares of stock
or its capital structures (whether by the issuance, redemption or transfer of
shares) in contemplation of effecting the Merger, (xiii) retired, purchased,
redeemed or reacquired any shares of common stock, (xiv) paid any management
fees, rent, compensation or other fees or expenses to any I-PAC Shareholder or
any of their affiliates in an amount inconsistent with past practices, or (xv)
agreed, whether or not in writing, to do any of the foregoing.
3.8 Books and Records. The minute books of I-PAC, as made available to
Photomatrix and its representatives, contain accurate records of all official
meetings of and official corporate actions or written consents by the
shareholders and Board of Directors of I-PAC. The records, systems, controls,
data or information recorded, stored, maintained, operated or otherwise wholly
or partly dependent upon or held by any means (including any electronic,
mechanical or photographic process, whether computerized or not and including
all means of access thereto and therefrom) of I- PAC are under the exclusive
ownership and direct control of I-PAC.
3.9 Title to Properties; Encumbrances. Except for properties and assets
reflected in the Balance Sheets or acquired since the Balance Sheet Date which
have been sold or otherwise disposed of in the ordinary course of business,
I-PAC has good, valid and merchantable title to (a) all its properties and
assets (personal, tangible and intangible), and (b) all the properties and
assets
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purchased since the Balance Sheet Date; in each case, each such property is
subject to no encumbrance, lien, charge or other restriction of any kind or
character, except for liens for current taxes, assessments or governmental
charges or levies on property not yet due and not delinquent and liens
consisting of zoning or planning restrictions, easements and other restrictions
or limitations on the use of real property or irregularities in title thereto
which are set forth in the I-PAC Disclosure Memorandum and which do not
materially detract from the value of, or impair the use of, or otherwise impair
the marketability or title of such property.
3.10 Real Property and Leases. The I-PAC Disclosure Memorandum contains
an accurate and complete list of all real property which is used in the business
operations of I-PAC and/or owned in whole or in part by I-PAC and includes the
name of the record title holder thereof and a list of all indebtedness secured
by a lien, mortgage or deed of trust thereon. I-PAC has good and marketable
title in fee simple to all the real property specified as owned by it in the
I-PAC Disclosure Memorandum (or required to be set forth in the I-PAC Disclosure
Memorandum), free and clear of all encumbrances, liens, charges or other
restrictions of any kind or character, except for those of the nature referred
to in the I-PAC Disclosure Memorandum. All of the buildings, structures and
appurtenances situated on the real property listed in the I-PAC Disclosure
Memorandum (or required to be set forth in the I-PAC Disclosure Memorandum) are
in good operating condition and in a state of good maintenance and repair, are
adequate and suitable for the purposes for which they are presently being used
and have adequate rights of ingress and egress for operation of the business
being operated on such property. None of such buildings, structures or
appurtenances (or any equipment therein), nor the operation or maintenance
thereof, violate any restrictive covenant or any provision of any federal, state
or local law, ordinance, rule or regulation, or encroaches on any property owned
by others. Except as set forth in the I-PAC Disclosure Memorandum, no
condemnation proceeding is pending or threatened which would preclude or impair
the use of any such property by I-PAC for the purposes for which it is currently
used.
The I-PAC Disclosure Memorandum contains an accurate and complete list
and description (including the location of an executed copy thereof) of the
terms of all leases to which I-PAC is a party as lessee. Each lease set forth in
the I-PAC Disclosure Memorandum (or required to be set forth in the I-PAC
Disclosure Memorandum) is in full force and effect; all rents and additional
rents due to date on each such lease have been paid; in each case, the lessee
has been in peaceable possession since the commencement of the original term of
such lease and is not in default thereunder and no waiver, indulgence or
postponement of the lessee's obligations thereunder has been granted by the
lessor; and there exists no event of default or event, occurrence, condition or
act (including the Merger) which, with the giving of notice, the lapse of time
or the happening of any further event or condition, would become a default under
such lease (other than payments not yet due which would become a default if not
paid when due). I-PAC has not knowingly violated or been given notice of
violation of any of the terms or conditions under any such lease, and to the
best knowledge of I-PAC all of the covenants to be performed by any other party
under all such leases have been fully performed.
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3.11 Fixed Assets. The I-PAC Disclosure Memorandum sets forth a list
and location of I-PAC's material items of machinery, equipment, furniture,
fixtures, tools, signs, and other items of tangible personal property (excluding
inventory) which are owned by I-PAC and used in or useful or pertain to I-PAC's
business or the operation thereof, whether or not reflected on the books of, or
in the possession of, I-PAC and whether or not presently in use (collectively,
the "Fixed Assets"). For purposes of this Section 3.11 only, "material" shall
mean any item having a value of at least $1,000.
3.12 Material Contracts. The I-PAC Disclosure Memorandum contains a
list of all Contracts (as defined below) of the following types to which I-PAC
is a party as of the date of this Agreement: (a) each contract of employment of
any officer, employee or consultant or with any labor union or association and
any bonus, deferred compensation, pension, profit sharing, stock option,
employee stock purchase, retirement or other employee benefit plan; (b) each
agreement, indenture or other instrument which contains restrictions with
respect to the payment of dividends or any other distribution in respect of its
capital stock; (c) each contract or series of related contracts involving
payments either individually or in the aggregate in excess of $20,000 in or
pursuant to which any person who is or was an officer, director, stockholder or
employee of I-PAC has a material interest; (d) each contract relating to the
borrowing or lending of money or the guarantee of any obligations for borrowed
money or otherwise, excluding endorsements made for purposes of collection in
the ordinary course of business; (e) each contract continuing for a period of
more than one year from its date and involving payments in excess of $20,000 in
any year or $40,000 in the aggregate; (f) each contract for charitable
contributions in excess of $1,000; (g) each contract for the sale and/or
installation of any equipment where the purchase price for such equipment is not
less than $15,000, and each contract for equipment maintenance involving total
payments of not less than $25,000, including each contract for the sale and/or
installation of any equipment where such sale and/or installation has been
completed, but as to which I-PAC has any continuing obligation, contingent or
otherwise; (h) each contract for capital expenditures or for the purchase of
materials, supplies, equipment or services involving payments in excess of
$20,000; (i) each license or royalty agreement (other than standard software
manufacturer's licenses included in packaged software); (j) each distribution,
dealer, reseller, manufacturer's representative, sales agency or franchise
agreement; (k) each contract relating to advertising, promotion or public
relations not terminable without penalty by I-PAC on 30 days or less notice; (l)
each contract with any government agency or instrumentality; (m) each management
service, consulting or any other similar type of contract; (n) each option to
purchase any of I-PAC's assets, properties or rights; (o) each agreement under
which price discounts have been granted to customers other than in the ordinary
course of business; (p) each contract with respect to the discharge or removal
of effluent, hazardous wastes or pollutants of any nature; (q) each contract
containing covenants not to compete in any business or geographical area or not
to use or disclose any information in the possession of I-PAC; (r) all contracts
for the leasing or rental of real or personal property; (s) any agreement
imposing liability for consequential damages, penalties for late payment or
non-performance or containing a liquidated damages provision; and (t) any
contract not made in the ordinary course of business. "Contract" shall mean any
contract, lease, commitment, sales order, purchase order, agreement, indenture,
mortgage, franchise, note, bond, lien, instrument, plan, permit or license.
I-PAC has delivered to Photomatrix true and correct copies of each Contract
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required to be listed in the I-PAC Disclosure Memorandum under this Section 3.12
and a written description of each material oral arrangement so listed
(collectively, the "I-PAC Material Contracts"). As of the date of this
Agreement, all I-PAC Material Contracts are, and as of the Effective Time will
be, valid, enforceable in accordance with their terms and in full force and
effect, and, to the knowledge of I-PAC, I-PAC is not, and as of the Effective
Time I-PAC will not be, in default thereunder. As of the date of this Agreement,
I-PAC has not received notice that any party to any I-PAC Material Contract
intends to cancel or terminate such contract.
3.13 Litigation. There is no action, suit or proceeding at law or in
equity by any person or entity, or any arbitration or any administrative or
other proceeding by or before, or, to the best knowledge of I-PAC, any
investigation by, any governmental or other instrumentality or agency, pending,
or to the best knowledge of I-PAC, threatened, against or affecting I-PAC or any
of its properties or rights which could materially and adversely affect the
right or ability of I-PAC to carry on its business as now conducted, or which
could materially and adversely affect the financial condition or properties of
I-PAC. I-PAC does not know of any valid basis for any such action, suit,
arbitration, proceeding or investigation. I-PAC is not subject to any judgment,
order or decree entered in any lawsuit or proceeding which may have an adverse
effect on any of its operations, business practices, or properties or on its
ability to acquire any property or conduct business in any area.
3.14 Taxes. I-PAC has filed, will file or has caused to be filed,
within the times and within the manner prescribed by law, all Tax returns and
all other Tax reports and declarations which are required to be filed by, or
with respect to, I-PAC. Such returns, reports and declarations accurately
reflect I-PAC's liability for Taxes for the periods covered thereby. The Taxes
payable by, or due from, I-PAC have been fully paid or adequately disclosed and
fully provided for in its books and financial statements. No examination, audit
or inquiry of any Tax return of I-PAC is currently in progress, and I-PAC has
not received notice of intent to commence any inquiry, audit or examination of
any such Tax return from any taxing authority. There are no outstanding
agreements or waivers extending the statutory period of limitations applicable
to any Tax return of I-PAC. The properties of I-PAC are not encumbered by Tax
liens, other than liens for Taxes not yet delinquent. The State of California
has audited certain of I-PAC's sales tax returns, and no additional funds are
due with respect to such returns. I-PAC has not received or been threatened with
a claim for assessment, proposed assessment, or collection of any Tax, nor does
I-PAC have any knowledge as to a possible basis for any such claim. I-PAC has
not granted any powers of attorney or other authorizations to any persons to
represent I-PAC with respect to any Tax. I-PAC has not been included in any
unitized, affiliated, combined or other consolidated Tax returns, reports or
declarations, and I-PAC is not and has not been a party to any Tax-sharing
agreement or similar arrangement regulating the allocation of Taxes and payments
between itself and any person or entity. No consent, agreement or other
undertaking has been filed by I-PAC to have the provisions of Section 341(f) of
the Code apply. I-PAC has not agreed to make, nor is it required to make, any
adjustment under Section 481(a) of the Code by reason of a change in accounting
method or otherwise. I-PAC has disclosed on its federal income tax returns all
positions taken therein that could
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give rise to a substantial understatement of federal income Tax within the
meaning of Code Section 6662.
3.15 Permits. Set forth in the I-PAC Disclosure Memorandum is a
complete and accurate list of all material permits, licenses, approvals,
franchises, notices, and other authorizations issued by governmental entities or
other regulatory authorities, federal, state or local (collectively the
"Permits") held by I-PAC. The Permits are all the permits required for the
conduct of the I-PAC Business. Each Permit is in full force and effect; I-PAC
has not engaged in any activity which would cause or permit revocation or
suspension of any such Permit; and no action or proceeding looking to or
contemplating the revocation or suspension of any such Permit is pending or, to
I-PAC's knowledge, threatened. There are no existing defaults or events of
default or events or states of fact which with notice or the lapse of time or
both would constitute a default by I-PAC under any such Permit. I-PAC has no
knowledge of any default or claimed or purported or alleged default or state of
facts which with notice or the lapse of time or both would constitute a default
on the part of any other party in the performance of any obligation to be
performed or paid by any other party under any Permit. The consummation of the
transactions contemplated hereby will in no way affect the continuation,
validity or effectiveness of the Permits. Neither I-PAC nor its facility nor any
of its assets is required to be specially licensed by, nor is it subject to
specific regulation of, any governmental or regulatory body by reason of the
conduct of the business of I-PAC.
3.16 Insurance. The I-PAC Disclosure Memorandum contains a complete and
accurate list of insurance policies which I-PAC maintains with respect to its
business, properties or employees. All such policies are in full force and
effect, and there currently exists no right of termination with regard to any
such policy as a result of any default on the part of I-PAC. Such policies, with
respect to their amounts and types of coverage, are believed by I-PAC to be
adequate to insure against material risks to which I-PAC and its property and
assets are normally exposed in the operation of its business. Since the Balance
Sheet Date, there has not been any material adverse change in I-PAC's
relationship with its insurers or in the premiums payable pursuant to such
policies.
3.17 Product Warranty. Each product manufactured, sold, leased,
licensed or delivered by I-PAC conforms with all applicable contractual
commitments and express and implied warranties. I-PAC has no liability and, to
the best knowledge of I-PAC, there is no basis for any present or future action,
suit, proceeding, hearing, investigation, charge, complaint, claim, or demand
which may give rise to any liability for replacement or repair thereof or other
damages in connection therewith, subject only to any reserve for product
warranty claims set forth in the I-PAC Balance Sheets. No product manufactured,
sold, leased, or delivered by I-PAC is subject to any guaranty, warranty, or
other indemnity beyond the applicable standard terms and conditions of sale or
lease, all of which are reproduced and described in detail in the I-PAC
Disclosure Memorandum. Copies of the standard terms and conditions of sale or
lease for I-PAC, containing applicable guaranty, warranty, and indemnity
provisions, have been provided to Photomatrix by I-PAC.
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3.18 Intellectual Property.
3.18.1 All domestic and foreign patents, patent applications,
copyrighted works, copyright applications and registrations, trade secrets,
trademarks, service marks, inventions, manufacturing and design processes,
hardware designs, programming processes, software and other information, and
know-how (if any) that are used by, owned by or licensed to I-PAC (collectively,
the "I-PAC Intellectual Property") are listed in the I-PAC Disclosure Memorandum
which indicates, with respect to each such item, the nature of I-PAC's interest
therein and the expiration date thereof or the date on which I-PAC's interest
therein terminates. Registered copyrights, patents, trademarks and service marks
that are owned by or licensed to I-PAC have been duly registered in, filed in or
issued by, as the case may be, the United States Patent and Trademark Office,
the United States Register of Copyrights or the corresponding offices of other
countries identified in the I-PAC Disclosure Memorandum, and have been properly
maintained and renewed in accordance with all applicable provisions of law and
administrative regulations in the United States and each such country. The I-PAC
Intellectual Property is the only intellectual property used in or otherwise
necessary to operate the I-PAC Business as it is currently conducted.
3.18.2 Use of the I-PAC Intellectual Property and any other
intellectual property used by I-PAC in its business does not require the consent
of any other person, and the same are freely transferable (except as otherwise
provided by law) and are owned exclusively by I-PAC, free and clear of any
attachments, liens, encumbrances or adverse claims; and, to the best knowledge
of I-PAC, neither its present nor contemplated activities or products infringe,
misappropriate, dilute, impair or constitute unfair competition with respect to
any patent, trade name, trademark, service mark, copyright, trade secret or
other proprietary rights of others.
3.18.3 No other person has an interest in or right or license to
use, or the right to license others to use the I-PAC Intellectual Property.
There are no claims or demands of any other person pertaining thereto, and no
proceedings have been instituted, are pending or, to the best knowledge of
I-PAC, threatened that challenge the rights of I-PAC in respect thereof, and
I-PAC does not know of any fact that could be the basis of any such claim. I-PAC
is not aware of any infringement of any of the I-PAC Intellectual Property by
others, nor is any of the I-PAC Intellectual Property subject to any outstanding
order, decree, judgment, stipulation, settlement, lien, charge, encumbrance or
attachment. No claim or demand has been made and no proceeding has been filed
or, to the best knowledge of I-PAC, is threatened to be filed charging I-PAC
with infringement of any patent, trade name, trademark, service mark, copyright
or trade secret, and I-PAC does not know of any facts which could be the basis
of any such claims. There are no royalties, honoraria, fees or other payments
payable by I-PAC to any person with respect to any of the I-PAC Intellectual
Property.
3.18.4 There are no payments that are required to be made by I-PAC
for the use of the I-PAC Intellectual Property. I-PAC is not using or in any way
making any unlawful or wrongful use of any confidential information or
intellectual property of any third party, including without limitation any
former employer of any present or past employee of I-PAC or of any of I- PAC's
predecessors. I-PAC is not a party to any non-competition or confidentiality
agreement related to the business of I-PAC with any party other than
Photomatrix.
3.19 Compliance With Laws. I-PAC is in compliance with all applicable
laws, regulations, orders, judgments and decrees of each and every jurisdiction
in which it is doing business, including applicable federal laws and
regulations, the violation of which would have a material adverse effect on its
operations.
3.20 Inventory. The inventory as reflected on the I-PAC Balance Sheets
or acquired thereafter has been acquired and maintained in the ordinary course
of business, is of good and merchantable quality, consists substantially of a
quality, quantity, and condition usable, leasable or saleable in the ordinary
course of business within a period of one (1) year from the Closing Date, and is
not subject to any write down or write off for obsolescence or otherwise under
generally accepted accounting principles. The I-PAC Balance Sheets contain
adequate reserves for obsolete or slow moving inventory. I-PAC is not under any
liability or obligation with respect to the return of inventory in the
possession of any third party.
3.21 Accounts Receivable. The accounts receivable of I-PAC as reflected
in the I-PAC Balance Sheets are, to the extent uncollected on the date of this
Agreement, valid and existing and fully collectible through the use of ordinary
collection procedures (net of reserves set forth in such financial statements,
which reserves were adequate and in an amount consistent with I-PAC's historical
accounting policies), represent monies due for goods sold and delivered or
services rendered, and are subject to no refunds, discounts, rebates or other
adjustments (except discounts for prompt payment given in the ordinary course of
business) and to no defenses, rights of setoff, assignments, restrictions,
encumbrances or conditions enforceable by third parties. I-PAC has never
factored any of its accounts receivable.
3.22 Employment Relations. I-PAC is (i) in compliance with all federal,
state or other applicable laws respecting employment and employment practices,
terms and conditions of employment, wages and hours, equal employment
opportunity, nondiscrimination, occupational safety and health, and the payment
of social security and similar taxes and, to the best knowledge of I-PAC, has
not and is not engaged in any unfair labor practice; (ii) no unfair or unlawful
labor practice complaint against I-PAC is pending before the National Labor
Relations Board or any other governmental agency or commission; (iii) there is
no labor strike, dispute, slowdown or stoppage actually pending or, to the best
knowledge of I-PAC, threatened against or involving I-PAC; (iv) no
representation question exists respecting the employees of I-PAC; (v) no
grievance which might have a material adverse effect on the condition of I-PAC
or the conduct of its business exists, no arbitration proceeding arising out of
or under any collective bargaining agreement is pending, and no claim therefor
has been asserted; (vi) no collective bargaining agreement is currently being
negotiated by I-PAC; (vii) I-PAC has not experienced any material labor
difficulty; and (viii) no "plant closing" or "mass layoff" within the meaning of
the Worker Adjustment and Retraining Notification Act has occurred with respect
to I-PAC. There has not been, and, to the best knowledge of I-PAC, there will
not be, any change in relations with employees of I-PAC as a result of the
transactions contemplated
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by this Agreement. There exist no employment, consulting, severance or
indemnification agreements between I-PAC and any director, officer, employee or
agent of I-PAC or any other agreement that would give any person or entity the
right to receive any payment from I-PAC as a result of the Merger. There exists
no contract or arrangement which would limit in any way I-PAC's right to
discharge any employee of I-PAC following the Closing or which would entitle any
such discharged employee to receive compensation from I-PAC on account of such
discharge.
3.23 Employee Benefit Plans.
3.23.1 List of Plans. Set forth in the I-PAC Disclosure Memorandum
is an accurate and complete list of all employee benefit plans ("I-PAC Employee
Benefit Plans") within the meaning of Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), whether or not any such I-PAC
Employee Benefit Plans are otherwise exempt from the provisions of ERISA,
established, maintained or contributed to by I-PAC (including, for this purpose
all employers (whether or not incorporated) which by reason of common control
are treated together with I-PAC as a single employer within the meaning of
Section 414 of the Code).
3.23.2 Status of Plans. I-PAC does not maintain or contribute to
any I-PAC Employee Benefit Plan subject to ERISA which is not in substantial
compliance with ERISA, or which has incurred any accumulated funding deficiency
within the meaning of Section 412 or 418B of ERISA, or which has applied for or
obtained a waiver from the Internal Revenue Service of any minimum funding
requirement under Section 412 of the Code. I-PAC has not incurred any liability
to the Pension Benefit Guaranty Corporation ("PBGC") in connection with any
I-PAC Employee Benefit Plan or ceased operations at any facility or withdrawn
from any such Plan in a manner which could subject it to liability under Section
4062(f), 4063 or 4064 of ERISA. I-PAC does not know of any facts or
circumstances which might give rise to any liability to the PBGC under Title IV
of ERISA or which could reasonably be anticipated to result in any claims being
made against I-PAC or Photomatrix by the PBGC. I-PAC has not incurred any
withdrawal liability (including any contingent or secondary withdrawal
liability) within the meaning of Sections 4201 and 4202 of ERISA, to any
Employee Benefit Plan which is a multi-employer Plan (as defined in Section 4001
of ERISA), and no event has occurred, and there exists no condition or set of
circumstances, which presents a material risk of the occurrence of any
withdrawal from or the partition, termination, reorganization or insolvency of
any multi-employer Plan which could result in any liability on the part of I-PAC
to a multi-employer Plan.
3.23.3 Contributions. Full payment has been made of all amounts
which I-PAC is required, under applicable law or under any I-PAC Employee
Benefit Plan or any agreement relating to any I-PAC Employee Benefit Plan to
which I-PAC is a party, to have paid as contributions thereto for or with
respect to the most recent fiscal year of such I-PAC Employee Benefit Plan ended
prior to the date hereof. I-PAC has made adequate provisions for reserves to
meet contributions that have not been made because they are not yet due under
the terms of any I-PAC Employee Benefit Plan or related agreements . All
payments and contributions to any such Employment Benefit Plan have been finally
determined and paid for the period ended December 31, 1997. No contributions
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have been made to any I-PAC Employee Benefit Plan for the period subsequent to
December 31, 1997.
3.23.4 Tax Qualification. To the best knowledge of I-PAC, each
I-PAC Employee Benefit Plan intended to be qualified under Section 401(a) of the
Internal Revenue Code has been determined to be so qualified by the Internal
Revenue Service and nothing has occurred since the date of the last such
determination which resulted or is likely to result in the revocation of such
determination.
3.23.5 Transactions. No reportable event (as defined in Section
4043 of ERISA) has occurred with respect to any I-PAC Employee Benefit Plan, and
I-PAC has not engaged in any transaction with respect to any I-PAC Employee
Benefit Plan which would subject it to a tax, penalty or liability for
prohibited transactions under ERISA or the Code, nor have any of its directors,
officers or employees, to the extent they or any of them are fiduciaries with
respect to such plans, materially breached any of their responsibilities or
obligations imposed upon fiduciaries under Title I of ERISA or which would
result in any claim being made under or by or on behalf of any such plans by any
party with standing to make such claim.
3.23.6 Other Plans. I-PAC does not presently maintain any employee
benefit plans or any other pension, welfare or retirement benefit plans other
than those listed in the I-PAC Disclosure Memorandum.
3.23.7 Documents. I-PAC and the Shareholders have delivered or
caused to be delivered to Photomatrix and its counsel true and complete copies
of (i) all I-PAC Employee Benefit Plans as in effect on the date of this
Agreement, together with all amendments thereto which will become effective at a
later date, as well as the latest Internal Revenue Service determination letter
obtained with respect to any such I-PAC Employee Benefit Plan qualified under
Section 401 or 501 of the Code and (ii) Form 5500 with respect to each such Plan
for each of the last two fiscal years, and will provide when completed Form 5500
for the most recently completed fiscal year for each I- PAC Employee Benefit
Plan required to file such form.
3.24 Environmental Laws and Regulations. The I-PAC Disclosure
Memorandum sets forth all information relating to the following items: (a) the
nature and, if material, quantities of any hazardous substances (as defined
below) generated, transported or disposed of by I-PAC during the past five years
(other than raw material awaiting manufacturing, work-in process or finished
goods or through the sale of products in the ordinary course of business),
together with a description of the location of each such activity, and (b) a
summary of the nature and, if material, quantities of any hazardous substances
that have been disposed of or found at any site or facility owned or operated
presently or at any previous time by I-PAC (other than raw material awaiting
manufacturing, work-in-process or finished goods or through the sale of products
in the ordinary course of business). I-PAC's existing and prior uses of all real
property leased or owned by I-PAC complies and has at all times during their
occupancy complied with, and I-PAC is not in violation of, and has not violated,
in connection with the ownership, lease, occupancy, use, maintenance, or
operation of such property
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or the conduct of its business, any applicable federal, state, county or local
statutes, laws, regulations, rules, ordinances, codes, licenses or permits
relating in any way to the protection of the environment, including, without
limitation, the Clean Air Act, the Federal Water Pollution Control Act of 1972,
the Resource Conservation and Recovery Act of 1976 ("RCRA"), the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), the
Toxic Substances Control Act, any analogous state laws, and any amendments or
extensions of the foregoing and the regulations promulgated thereunder
(collectively, the "Environmental Laws"). I-PAC has not received any notice of
any work, repairs, construction or capital expenditures required by the
Environmental Laws with respect to any of its properties or its businesses. None
of I-PAC's leased or owned properties is contaminated by or contains any
hazardous substance. No claim, action, suit or proceeding is pending or, to
I-PAC's knowledge, threatened against I-PAC, before any court or other
governmental authority or arbitration tribunal, relating to hazardous
substances, pollution or the environment, and there is no outstanding judgment,
order, writ, injunction, decree or award against or affecting I-PAC or its
assets with respect to the same. There has never been, and there is not
presently occurring, any release of any hazardous substance on or from any of
I-PAC's leased or owned properties, I-PAC has not received any notice from any
government agency or private or public entity advising I-PAC that it is
responsible for response costs with respect to a release, a threatened release
or clean up of chemicals produced by, or resulting from, any business,
commercial, or industrial activities, operations, or processes, including, but
not limited to, hazardous substances, and I-PAC has not received any information
requests under CERCLA from any government agency. There are no facts or
circumstances which I-PAC reasonably expect could form the basis for the
assertion of any Claim (as defined below) against I-PAC relating to
environmental matters including, but not limited to, any Claim arising from past
or present environmental practices asserted under the Environmental Laws, which
I-PAC believes might have a material adverse effect on the business, results of
operations, financial condition or prospects of I-PAC taken as a whole.
As used herein, "hazardous substances(s)" include any pollutants,
contaminants, dangerous substances, toxic substances, solid waste, hazardous
wastes, hazardous materials, or hazardous substances as defined in or pursuant
to RCRA or CERCLA, or any other federal, state or local environmental law,
ordinance, rule or regulation, except that, for purposes of this Agreement,
"petroleum" (including crude oil or any fraction thereof) shall be deemed a
"hazardous substance." "Release" and "disposal" shall have the same meanings as
defined in CERCLA and RCRA. "Claim" shall mean any and all claims, demands,
causes of actions, suits, proceedings, administrative proceedings, losses,
judgments, attorneys' fees, and any other expenses incurred, assessed or
sustained by or against I-PAC.
3.25 Interests in Clients, Suppliers, Etc. Neither I-PAC nor any
officer or director of I-PAC owns or possesses, directly or indirectly, any
financial or proprietary interest in, or is a director, officer or employee of,
any corporation, limited liability company, partnership, association, trust,
joint venture or other business entity which is engaged in the same or similar
business as I-PAC, or is a competitor or potential competitor of I-PAC.
Ownership of securities of a company whose securities are registered under the
Securities Exchange Act of 1934, not in excess of 5% of any class of such
securities, shall not be deemed to be a financial interest for purposes of this
Section 3.25.
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3.26 Customers, Distributors and Sales Representatives. The I-PAC
Disclosure Memorandum sets forth the names and addresses of all customers to
which, and sales representatives and distributors through which, I-PAC has sold
or distributed in excess of $250,000 of its products or services during either
of the last two fiscal years of I-PAC. During such period and through the date
hereof, no such customer, distributor or sales representative has canceled or
otherwise terminated its relationship with I-PAC or decreased materially its
usage or purchase of the products or services of I-PAC, except for changes in
customer relationships that have occurred in the ordinary course of business the
aggregate value of which has not exceeded $1,250,000. To the knowledge of I-PAC,
no such customer, sales representative or distributor has any plan or intention
to terminate, cancel or otherwise modify its relationship with I-PAC in a manner
that would be adverse to I-PAC.
3.27 Bank Accounts, Powers of Attorney and Compensation of Employees.
The I- PAC Disclosure Memorandum contains an accurate and complete list showing
(a) the name and address of each bank in which I-PAC has an account or safe
deposit box, the number of any such account or any such box, the names of all
persons authorized to draw thereon or to have access thereto and the current
balances maintained in all such accounts, (b) the names of all persons, if any,
holding powers of attorney from I-PAC and a summary statement of the terms
thereof, and (c) the names of all persons whose compensation from I-PAC for the
last fiscal year of I-PAC exceed an annualized rate of Fifty Thousand and No/100
Dollars ($50,000.00), together with a statement of the full amount paid or
payable to each such person for services rendered during such fiscal year.
3.28 Disclosure. The representations, warranties and covenants made by
I-PAC in this Agreement, the financial statements referred to in Section 3.5
above (including the footnotes thereto), and any attached schedule, exhibit or
certificate delivered in accordance with the terms hereof, taken as a whole, do
not contain any untrue statement of a material fact, or omit any statement of a
material fact necessary in order to make the statements contained herein or
therein not misleading. There is no fact known to I-PAC which materially and
adversely affects the businesses, prospects or financial condition of I-PAC, its
properties or assets, which has not been disclosed and set forth in this
Agreement.
3.29 Broker's or Finder's Fees. No agent, broker, person or firm acting
on behalf of I-PAC is, or will be, entitled to any commission or broker's or
finder's fees from any of the parties hereto, or from any person controlling,
controlled by or under common control with any of the parties hereto, in
connection with any of the transactions contemplated herein.
3.30 Certain Conditions for Accounting and Tax Treatment. There is no
plan or intention on the part of the I-PAC Shareholders to sell, exchange, or
otherwise dispose of a number of Photomatrix Shares received in the transaction
that would reduce the I-PAC Shareholders' ownership of Photomatrix Common Stock
to a number of shares having a value, as of the Closing Date, of less than fifty
percent (50%) of the value of all of the formerly outstanding Shares of I-PAC as
of the Closing Date. For purposes of this representation, I-PAC Shares exchanged
for cash or
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other property, surrendered by dissenters or exchanged for cash in lieu of
fractional shares of Photomatrix stock will be treated as outstanding I-PAC
Shares on the Closing Date. Moreover, I-PAC Shares and Photomatrix Shares held
by I-PAC Shareholders and otherwise sold, redeemed, or disposed of prior or
subsequent to the transaction will be considered in making this representation.
Following the Closing Date, I-PAC will hold at least ninety percent (90%) of the
fair market value of its net assets and at least seventy percent (70%) of the
fair market value of its gross assets held immediately prior to the Closing
Date. For purposes of this representation, amounts paid by I-PAC to dissenters,
amounts paid by I-PAC to shareholders who receive cash or other property,
amounts used by I-PAC to pay reorganization expenses, and all redemptions and
distributions (except for regular normal dividends) made by I-PAC will be
included as assets of I-PAC immediately prior to the Closing Date. I-PAC has no
plan or intention to issue additional shares of its stock that would result in
Photomatrix losing control of I-PAC within the meaning of section 368(c)(1) of
the Code. I-PAC and the I-PAC Shareholders will pay their respective expenses,
if any, incurred in connection with the transaction. In the transaction, I-PAC
Shares representing control of I-PAC, as defined in Section 368(c)(1) of the
Code, will be exchanged solely for Photomatrix Shares. For purposes of this
representation, I-PAC Shares exchanged for cash or other property originating
with Photomatrix will be treated as outstanding I-PAC Shares on the Closing
Date. On the Closing Date, I-PAC will not have outstanding any warrants,
options, convertible securities, or any other type of right pursuant to which
any person could acquire stock in I-PAC, that, if exercised or converted, would
affect Photomatrix's acquisition or retention of control of I-PAC as defined in
Section 368(c)(1) of the Code. I-PAC is not an investment company as defined in
section 368(a)(2)(f)(iii) and (iv) of the Code.
3.31 Cooperation. From and after the date of this Agreement, I-PAC and
its officers, directors, accountants, attorneys, agents and other
representatives will cooperate fully with Photomatrix (i) in the preparation of
all statements and reports contemplated by this Agreement and required pursuant
to the registration and other requirements provided in the 1933 Act and the 1934
Act, and (ii) to facilitate the consummation of the transactions provided for
herein, all in accordance with federal and state regulatory requirements.
ARTICLE IV
REPRESENTATIONS, WARRANTIES AND COVENANTS
OF PHOTOMATRIX AND THE SHAREHOLDERS
Representations of Photomatrix . Except as set forth in the Photomatrix
Disclosure Memorandum to be prepared, delivered and have the legal effect as
provided in Section 7.5 hereof, Photomatrix represents and warrants to I-PAC and
Merger Corp. and agrees as follows:
4.1 Existence; Good Standing; Corporate Authority and Authorization.
4.1.1 Photomatrix. Photomatrix is a corporation duly organized,
validly existing and in good standing under the laws of the State of California.
Photomatrix is qualified to do
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business and is in good standing in all other jurisdictions in which the
character or location of the properties owned or leased by it or the nature of
the business conducted by it makes such qualification necessary and where the
failure to so qualify would have a material adverse effect upon Photomatrix. Set
forth in the Photomatrix Disclosure Memorandum, is a list of each jurisdiction
in which Photomatrix is qualified to do business as a foreign corporation.
Photomatrix has full corporate power to own its property and to carry on its
business as now being conducted. Photomatrix has full corporate power and
authority to enter into and perform its obligations under this Agreement and
under each other instrument and document executed and delivered by Photomatrix
pursuant hereto or in connection herewith and to take all actions required of it
to consummate the Merger.
4.1.2 Subsidiaries. The Photomatrix Disclosure Memorandum sets
forth the following information regarding each subsidiary of Photomatrix
("Photomatrix Subsidiary" and, hereinafter "Photomatrix" shall refer to both
Photomatrix and any Photomatrix Subsidiaries): (i) the name of the corporation;
(ii) the state of incorporation; (iii) authorized capitalization; and (iv)
issued and outstanding capital stock and other securities (including debt
securities). Each Photomatrix Subsidiary is duly organized, validly existing and
in good standing under the laws of the jurisdiction of its incorporation or
other organization and has full corporate power and authority to own, lease or
otherwise hold its assets and properties and to carry on its business as it is
now conducted. Each Photomatrix Subsidiary is duly qualified or licensed to do
business and is in good standing as a foreign corporation or other business
entity in all of the jurisdictions in which such Photomatrix Subsidiary owns or
leases any real property or conducts any business, so as to require such
qualification or licensing, except for instances where the failure to so qualify
would not have a material adverse effect on the business or financial condition
of such Photomatrix Subsidiary. All of the outstanding shares of capital stock
or other voting interests of each Photomatrix Subsidiary are validly issued and
outstanding, fully paid and nonassessable and owned by Photomatrix or another
Subsidiary free of any claims, liens, charges or encumbrances of any nature
whatsoever. No Photomatrix Subsidiary has issued a promissory note or any other
evidence of indebtedness or otherwise incurred indebtedness, except for
indebtedness reflected in the Photomatrix Balance Sheets (as hereinafter
defined).
4.2 No Legal Bar; Conflicts; Enforceability. Neither the execution and
delivery of this Agreement, or any other instrument or document executed and
delivered by Photomatrix pursuant hereto or in connection herewith, nor the
consummation of the transactions contemplated hereby or thereby (i) violates or
conflicts with any provision of the articles of incorporation or by-laws of
Photomatrix or any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge or other restriction of any government,
governmental agency or court to which Photomatrix is subject, (ii) creates in
any party a right of acceleration, termination, modification or cancellation,
under any Photomatrix Material Contract (as defined in Section 4.12 below) or
any other instrument by which any of the properties or assets of Photomatrix may
be subject, bound or affected, or (iii) requires any notice or constitutes a
breach or default under any Photomatrix Material Contract. Except for the filing
of appropriate certificates to effect the Merger, no authorization, consent or
approval of any public body or authority is necessary for the validity or
enforceability of
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the transactions contemplated by this Agreement. All necessary approvals of the
parties under any Photomatrix Material Contracts or any other person required to
permit Photomatrix to perform its obligations in connection with the
consummation of the transactions contemplated in this Agreement have been, or
the best efforts of Photomatrix will be expended by Photomatrix so that such
approvals will be, obtained by Photomatrix on or before the Closing Date.
Photomatrix is not a party to any contract or subject to any other legal
restriction that would prevent or restrict complete fulfillment of all of the
terms and conditions of this Agreement or compliance with any of its obligations
under it. Photomatrix has taken all necessary corporate actions to authorize and
approve the execution, delivery and performance of this Agreement and the Merger
(other than obtaining the approval of the Photomatrix Shareholders). This
Agreement constitutes a legal, valid and binding obligation of Photomatrix,
enforceable against Photomatrix in accordance with its terms.
4.3 Capital Stock and Exclusive Dealing. Photomatrix (not including the
Photomatrix Subsidiaries) has an authorized capitalization consisting of
30,000,000 shares of voting common stock, of which 5,083,017 shares are issued
and outstanding, and 3,173,000 shares of preferred stock, none of which are
outstanding. All such outstanding common shares have been duly authorized, are
validly issued, and are fully paid and nonassessable. There are no other shares
of stock of Photomatrix issued and outstanding. There are no outstanding
options, warrants, rights, preemptive rights, calls, commitments, conversion
rights, rights of exchange, plans or other agreements of any character providing
for the purchase, issuance or sale of any shares of the capital stock of
Photomatrix, except as contemplated by this Agreement and except for 907,333
currently outstanding options and warrants (the "Photomatrix Options") to
purchase shares of Photomatrix Common Stock. None of the outstanding Photomatrix
Shares have been issued in violation of any preemptive right or agreement,
commitment or obligation binding on Photomatrix or any of the Photomatrix
Shareholders or any applicable securities laws.
4.4 Restrictive Documents. Photomatrix is not subject to, or a party
to, any charter, bylaw, mortgage, lien, lease, license, permit, agreement,
contract, or instrument, or any law, rule, ordinance, regulation, order,
judgment or decree, or any other restriction or requirement of any kind or
character, which materially adversely affects Photomatrix or which would prevent
the consummation of the transactions contemplated by this Agreement or the
continued operation of Photomatrix after the date hereof or the Closing Date on
substantially the same basis as it has heretofore been operated or which would
restrict its ability to acquire any property or conduct business in any area.
4.5 Financial Statements and No Material Changes. Photomatrix has
heretofore furnished I-PAC with the consolidated balance sheets of Photomatrix
as of March 31, 1996 and 1997 and December 31, 1997 and the related consolidated
statements of income, shareholders' equity and changes in financial position for
the years ended March 31, 1996 and 1997 and the nine (9) month period ended
December 31, 1997. The balance sheets of Photomatrix as of the dates mentioned
above are hereinafter collectively referred to as the "Photomatrix Balance
Sheets" and are in the form attached hereto as Exhibit 6. All such financial
statements and all other financial statements of Photomatrix, including the
footnotes thereto, except as indicated therein, have been prepared in
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accordance with generally accepted accounting principles consistently applied
throughout the periods indicated, provided that interim financial statements are
subject to year-end adjustments and the omission of footnotes included in
audited financial statements. The Photomatrix Balance Sheets fairly present the
financial condition of Photomatrix at the dates thereof, and the related
statements of income, shareholders' equity and changes in financial position
fairly present the results of the operations of Photomatrix and the changes in
the financial position for the periods indicated. Since the Balance Sheet Date,
there has been no material adverse change in the assets, liabilities, business,
financial condition, or results of operations of Photomatrix, whether as a
result of any legislative or regulatory change, revocation of any license or
rights to do business, litigation, administrative action, fire, explosion,
accident, casualty, labor trouble, flood, drought, riot, storm, condemnation or
act of God or otherwise and no fact or condition exists or is contemplated by
Photomatrix or, to the best knowledge of Photomatrix, threatened which might
cause such a change in the future.
4.6 Absence of Undisclosed Liabilities. Except as set forth in the
Photomatrix Balance Sheets, Photomatrix does not have any outstanding claims
against it, liabilities or indebtedness, contingent or otherwise, other than (i)
liabilities not of a character or amount required to be shown, accrued or
escrowed against on the Photomatrix Balance Sheets under generally accepted
accounting principles and (ii) liabilities incurred subsequent to the Balance
Sheet Date in the ordinary course of business, consistent with past practices.
Photomatrix does not know and has no reason to know of any basis for the
assertion against Photomatrix of any material claim, charge, or other liability
of any nature not fully reflected or reserved against in the Photomatrix Balance
Sheets or expressly disclosed in this Agreement, including the Photomatrix
Disclosure Memorandum. The adjusted tax basis and the fair market value of the
assets of Photomatrix exceed the liabilities of Photomatrix as of the date
hereof and will exceed the liabilities of Photomatrix as of the Closing Date.
4.7 No Changes Prior to Closing Date. Since January 1, 1998,
Photomatrix has not: (i) incurred any liability or obligation of any nature
(whether accrued, absolute, contingent or otherwise), except in the ordinary
course of business, (ii) permitted any assets to be subjected to any mortgage,
pledge, lien, security interest, encumbrance, restriction or charge of any kind,
except in the ordinary course of business, (iii) sold, transferred or otherwise
disposed of any assets, except in the ordinary course of business, (iv) made any
capital expenditure or commitment therefor, except in the ordinary course of
business, (v) declared or paid any dividend or made any distribution on any
shares of capital stock, or redeemed, purchased or otherwise acquired any shares
of capital stock or any option, warrant or other right to purchase or acquire
any such shares, (vi) made any bonus payments or profit sharing distributions or
payments of any kind, (vii) increased its indebtedness for borrowed money,
except current borrowings from banks in the ordinary course of business, or made
any loan to any employee, director, shareholder or other person or entity,
(viii) written off as uncollectible any notes or accounts receivable, except
write-offs in the ordinary course of business charged to applicable reserves,
none of which individually or in the aggregate exceeds $25,000, (ix) granted any
increase in the rate of wages, salaries, bonuses or other remuneration to any
executive employee or, except in the ordinary course of business, to any other
employee, (x) cancelled or waived any claims or rights of substantial value,
(xi) made any change in any method of business accounting or entered into any
transaction, except in the usual and ordinary manner and in the ordinary course
of business,
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(xii) changed the ownership of its shares of stock or its capital structures
(whether by the issuance, redemption or transfer of shares) in contemplation of
effecting the Merger, (xiii) retired, purchased, redeemed or reacquired any
shares of common stock, (xiv) paid any management fees, rent, compensation or
other fees or expenses to any Photomatrix Shareholder or any of their affiliates
in an amount inconsistent with past practices, or (xv) agreed, whether or not in
writing, to do any of the foregoing.
4.8 Books and Records. The minute books of Photomatrix, as made
available to I-PAC and its representatives, contain accurate records of all
official meetings of and official corporate actions or written consents by the
shareholders and Board of Directors of Photomatrix. The records, systems,
controls, data or information recorded, stored, maintained, operated or
otherwise wholly or partly dependent upon or held by any means (including any
electronic, mechanical or photographic process, whether computerized or not and
including all means of access thereto and therefrom) of Photomatrix are under
the exclusive ownership and direct control of Photomatrix.
4.9 Title to Properties; Encumbrances. Except for properties and assets
reflected in the Balance Sheets or acquired since the Balance Sheet Date which
have been sold or otherwise disposed of in the ordinary course of business,
Photomatrix has good, valid and merchantable title to (a) all its properties and
assets (personal, tangible and intangible), and (b) all the properties and
assets purchased since the Balance Sheet Date; in each case, each such property
is subject to no encumbrance, lien, charge or other restriction of any kind or
character, except for liens for current taxes, assessments or governmental
charges or levies on property not yet due and not delinquent and liens
consisting of zoning or planning restrictions, easements and other restrictions
or limitations on the use of real property or irregularities in title thereto
which are set forth in the Photomatrix Disclosure Memorandum and which do not
materially detract from the value of, or impair the use of, or otherwise impair
the marketability or title of such property.
4.10 Real Property and Leases. The Photomatrix Disclosure Memorandum
contains an accurate and complete list of all real property which is used in the
business operations of Photomatrix and/or owned in whole or in part by
Photomatrix and includes the name of the record title holder thereof and a list
of all indebtedness secured by a lien, mortgage or deed of trust thereon.
Photomatrix has good and marketable title in fee simple to all the real property
specified as owned by it in the Photomatrix Disclosure Memorandum (or required
to be set forth in the Photomatrix Disclosure Memorandum), free and clear of all
encumbrances, liens, charges or other restrictions of any kind or character,
except for those of the nature referred to in the Photomatrix Disclosure
Memorandum. All of the buildings, structures and appurtenances situated on the
real property listed in the Photomatrix Disclosure Memorandum (or required to be
set forth in the Photomatrix Disclosure Memorandum) are in good operating
condition and in a state of good maintenance and repair, are adequate and
suitable for the purposes for which they are presently being used and have
adequate rights of ingress and egress for operation of the business being
operated on such property. None of such buildings, structures or appurtenances
(or any equipment therein), nor the operation or maintenance thereof, violate
any restrictive covenant or any provision of any federal, state or local law,
ordinance, rule or regulation, or encroaches on any property owned by others.
Except as set
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forth in the Photomatrix Disclosure Memorandum, no condemnation proceeding is
pending or threatened which would preclude or impair the use of any such
property by Photomatrix for the purposes for which it is currently used.
The Photomatrix Disclosure Memorandum contains an accurate and complete
list and description (including the location of an executed copy thereof) of the
terms of all leases to which Photomatrix is a party as lessee. Each lease set
forth in the Photomatrix Disclosure Memorandum (or required to be set forth in
the Photomatrix Disclosure Memorandum) is in full force and effect; all rents
and additional rents due to date on each such lease have been paid; in each
case, the lessee has been in peaceable possession since the commencement of the
original term of such lease and is not in default thereunder and no waiver,
indulgence or postponement of the lessee's obligations thereunder has been
granted by the lessor; and there exists no event of default or event,
occurrence, condition or act (including the Merger) which, with the giving of
notice, the lapse of time or the happening of any further event or condition,
would become a default under such lease (other than payments not yet due which
would become a default if not paid when due). Photomatrix has not knowingly
violated or been given notice of violation of any of the terms or conditions
under any such lease, and to the best knowledge of Photomatrix all of the
covenants to be performed by any other party under all such leases have been
fully performed.
4.11 Fixed Assets. The Photomatrix Disclosure Memorandum sets forth a
list and location of Photomatrix's material items of machinery, equipment,
furniture, fixtures, tools, signs, and other items of tangible personal property
(excluding inventory) which are owned by Photomatrix and used in or useful or
pertain to Photomatrix's business or the operation thereof, whether or not
reflected on the books of, or in the possession of, Photomatrix and whether or
not presently in use (collectively, the "Fixed Assets"). For purposes of this
Section 4.11 only, "material" shall mean any item having a value of at least
$1,000.
4.12 Material Contracts. The Photomatrix Disclosure Memorandum contains
a list of all Contracts (as defined below) of the following types to which
Photomatrix is a party as of the date of this Agreement a party: (a) each
contract of employment of any officer, employee or consultant or with any labor
union or association and any bonus, deferred compensation, pension, profit
sharing, stock option, employee stock purchase, retirement or other employee
benefit plan; (b) each agreement, indenture or other instrument which contains
restrictions with respect to the payment of dividends or any other distribution
in respect of its capital stock; (c) each contract or series of related
contracts involving payments either individually or in the aggregate in excess
of $20,000 in or pursuant to which any person who is or was an officer,
director, stockholder or employee of Photomatrix has a material interest; (d)
each contract relating to the borrowing or lending of money or the guarantee of
any obligations for borrowed money or otherwise, excluding endorsements made for
purposes of collection in the ordinary course of business; (e) each contract
continuing for a period of more than one year from its date and involving
payments in excess of $20,000 in any year or $40,000 in the aggregate; (f) each
contract for charitable contributions in excess of $1,000; (g) each contract for
the sale and/or installation of any equipment where the purchase price for such
equipment is not less than $15,000, and each contract for equipment
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maintenance involving total payments of not less than $25,000, including each
contract for the sale and/or installation of any equipment where such sale
and/or installation has been completed, but as to which Photomatrix has any
continuing obligation, contingent or otherwise; (h) each contract for capital
expenditures or for the purchase of materials, supplies, equipment or services
involving payments in excess of $20,000; (i) each license or royalty agreement
(other than standard software manufacturer's licenses included in packaged
software); (j) each distribution, dealer, reseller, manufacturer's
representative, sales agency or franchise agreement; (k) each contract relating
to advertising, promotion or public relations not terminable without penalty by
Photomatrix on 30 days or less notice; (l) each contract with any government
agency or instrumentality; (m) each management service, consulting or any other
similar type of contract; (n) each option to purchase any of Photomatrix's
assets, properties or rights; (o) each agreement under which price discounts
have been granted to customers other than in the ordinary course of business;
(p) each contract with respect to the discharge or removal of effluent,
hazardous wastes or pollutants of any nature; (q) each contract containing
covenants not to compete in any business or geographical area or not to use or
disclose any information in the possession of Photomatrix; (r) all contracts for
the leasing or rental of real or personal property; (s) any agreement imposing
liability for consequential damages, penalties for late payment or
non-performance or containing a liquidated damages provision; and (t) any
contract not made in the ordinary course of business. Photomatrix has delivered
to I-PAC true and correct copies of each Contract required to be listed in the
Photomatrix Disclosure Memorandum under this Section 4.12 and a written
description of each material oral arrangement so listed (collectively, the
"Photomatrix Material Contracts"). As of the date of this Agreement, all
Photomatrix Material Contracts are, and as of the Effective Time will be, valid,
enforceable in accordance with their terms and in full force and effect, and, to
the knowledge of Photomatrix, Photomatrix is not, and as of the Effective Time
Photomatrix will not be, in default thereunder. As of the date of this
Agreement, Photomatrix has not received notice that any party to any Photomatrix
Material Contract intends to cancel or terminate such contract.
4.13 Litigation. There is no action, suit or proceeding at law or in
equity by any person or entity, or any arbitration or any administrative or
other proceeding by or before, or, to the best knowledge of Photomatrix, any
investigation by, any governmental or other instrumentality or agency, pending,
or to the best knowledge of Photomatrix, threatened, against or affecting
Photomatrix or any of its properties or rights which could materially and
adversely affect the right or ability of Photomatrix to carry on its business as
now conducted, or which could materially and adversely affect the financial
condition or properties of Photomatrix. Photomatrix does not know of any valid
basis for any such action, suit, arbitration, proceeding or investigation.
Photomatrix is not subject to any judgment, order or decree entered in any
lawsuit or proceeding which may have an adverse effect on any of its operations,
business practices, or properties or on its ability to acquire any property or
conduct business in any area.
4.14 Taxes. Photomatrix has filed, will file or has caused to be filed,
within the times and within the manner prescribed by law, all Tax returns and
all other Tax reports and declarations which are required to be filed by, or
with respect to, Photomatrix. Such returns, reports and declarations accurately
reflect Photomatrix's liability for Taxes for the periods covered thereby. The
Taxes
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payable by, or due from, Photomatrix have been fully paid or adequately
disclosed and fully provided for in its books and financial statements. No
examination, audit or inquiry of any Tax return of Photomatrix is currently in
progress, and Photomatrix has not received notice of intent to commence any
inquiry, audit or examination of any such Tax return from any taxing authority.
There are no outstanding agreements or waivers extending the statutory period of
limitations applicable to any Tax return of Photomatrix. The properties of
Photomatrix are not encumbered by Tax liens, other than liens for Taxes not yet
delinquent. The State of California has audited all of Photomatrix's sales tax
returns, and no additional funds are due with respect to such returns.
Photomatrix has not received or been threatened with a claim for assessment,
proposed assessment, or collection of any Tax, nor does Photomatrix have any
knowledge as to a possible basis for any such claim. Photomatrix has not granted
any powers of attorney or other authorizations to any persons to represent
Photomatrix with respect to any Tax. Photomatrix has not been included in any
unitized, affiliated, combined or other consolidated Tax returns, reports or
declarations, and Photomatrix is not and has not been a party to any Tax-sharing
agreement or similar arrangement regulating the allocation of Taxes and payments
between itself and any person or entity. No consent, agreement or other
undertaking has been filed by Photomatrix to have the provisions of Section
341(f) of the Code apply. Photomatrix has not agreed to make, nor is it required
to make, any adjustment under Section 481(a) of the Code by reason of a change
in accounting method or otherwise. Photomatrix has disclosed on its federal
income Tax Returns all positions taken therein that could give rise to a
substantial understatement of federal income Tax within the meaning of Code
Section 6662.
4.15 Permits. Set forth in the Photomatrix Disclosure Memorandum is a
complete and accurate list of all Permits held by Photomatrix. The Permits are
all the permits required for the conduct of the Photomatrix Business. Each
Permit is in full force and effect; Photomatrix has not engaged in any activity
which would cause or permit revocation or suspension of any such Permit; and no
action or proceeding looking to or contemplating the revocation or suspension of
any such Permit is pending or, to Photomatrix's knowledge, threatened. There are
no existing defaults or events of default or events or states of fact which with
notice or the lapse of time or both would constitute a default by Photomatrix
under any such Permit. Photomatrix has no knowledge of any default or claimed or
purported or alleged default or state of facts which with notice or the lapse of
time or both would constitute a default on the part of any other party in the
performance of any obligation to be performed or paid by any other party under
any Permit. The consummation of the transactions contemplated hereby will in no
way affect the continuation, validity or effectiveness of the Permits. Neither
Photomatrix nor its facility nor any of its assets is required to be specially
licensed by, nor is it subject to specific regulation of, any governmental or
regulatory body by reason of the conduct of the business of Photomatrix.
4.16 Insurance. The Photomatrix Disclosure Memorandum contains a
complete and accurate list of insurance policies which Photomatrix maintains
with respect to its business, properties or employees. All such policies are in
full force and effect, and there currently exists no right of termination with
regard to any such policy as a result of any default on the part of Photomatrix.
Such policies, with respect to their amounts and types of coverage, are believed
by Photomatrix to be adequate to insure against material risks to which
Photomatrix and its property and assets are
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normally exposed in the operation of its business. Since the Balance Sheet Date,
there has not been any material adverse change in Photomatrix's relationship
with its insurers or in the premiums payable pursuant to such policies.
4.17 Product Warranty. Each product manufactured, sold, leased,
licensed or delivered by Photomatrix conforms with all applicable contractual
commitments and all express and implied warranties. Photomatrix has no liability
and, to the best knowledge of Photomatrix, there is no basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand which may give rise to any liability for replacement or repair
thereof or other damages in connection therewith, subject only to any reserve
for product warranty claims set forth in the Photomatrix Balance Sheets. No
product manufactured, sold, leased, or delivered by Photomatrix is subject to
any guaranty, warranty, or other indemnity beyond the applicable standard terms
and conditions of sale or lease, all of which are reproduced and described in
detail in the Photomatrix Disclosure Memorandum. Copies of the standard terms
and conditions of sale or lease for Photomatrix, containing applicable guaranty,
warranty, and indemnity provisions, have been provided to I-PAC by Photomatrix.
4.18 Intellectual Property.
4.18.1 All domestic and foreign patents, patent applications,
copyrighted works, copyright applications and registrations, trade secrets,
trademarks, service marks, inventions, manufacturing and design processes,
hardware designs, programming processes, software and other information, and
know-how (if any) that are used by, owned by or licensed to Photomatrix
(collectively, the "Photomatrix Intellectual Property") are listed in the
Photomatrix Disclosure Memorandum which indicates, with respect to each such
item, the nature of Photomatrix's interest therein and the expiration date
thereof or the date on which Photomatrix's interest therein terminates.
Registered copyrights, patents, trademarks and service marks that are owned by
or licensed to Photomatrix have been duly registered in, filed in or issued by,
as the case may be, the United States Patent and Trademark Office, the United
States Register of Copyrights or the corresponding offices of other countries
identified in the Photomatrix Disclosure Memorandum, and have been properly
maintained and renewed in accordance with all applicable provisions of law and
administrative regulations in the United States and each such country. The
Intellectual Property is the only intellectual property used in or otherwise
necessary to operate the Photomatrix Business as it is currently conducted.
4.18.2 Use of the Photomatrix Intellectual Property and any other
intellectual property used by Photomatrix in its business does not require the
consent of any other person, and the same are freely transferable (except as
otherwise provided by law) and are owned exclusively by Photomatrix, free and
clear of any attachments, liens, encumbrances or adverse claims; and, to the
best knowledge of Photomatrix, neither its present nor contemplated activities
or products infringe, misappropriate, dilute, impair or constitute unfair
competition with respect to any patent, trade name, trademark, service mark,
copyright, trade secret or other proprietary rights of others.
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4.18.3 No other person has an interest in or right or license to
use, or the right to license others to use the Photomatrix Intellectual
Property. There are no claims or demands of any other person pertaining thereto,
and no proceedings have been instituted, are pending or, to the best knowledge
of Photomatrix, threatened that challenge the rights of Photomatrix in respect
thereof, and Photomatrix does not know of any fact that could be the basis of
any such claim. Photomatrix is not aware of any infringement of any of the
Photomatrix Intellectual Property by others, nor is any of the Photomatrix
Intellectual Property subject to any outstanding order, decree, judgment,
stipulation, settlement, lien, charge, encumbrance or attachment. No claim or
demand has been made and no proceeding has been filed or, to the best knowledge
of Photomatrix, is threatened to be filed charging Photomatrix with infringement
of any patent, trade name, trademark, service mark, copyright or trade secret,
and Photomatrix does not know of any facts which could be the basis of any such
claims. There are no royalties, honoraria, fees or other payments payable by
Photomatrix to any person with respect to any of the Photomatrix Intellectual
Property.
4.18.4 There are no payments that are required to be made by
Photomatrix for the use of the Photomatrix Intellectual Property. Photomatrix is
not using or in any way making any unlawful or wrongful use of any confidential
information or intellectual property of any third party, including without
limitation any former employer of any present or past employee of Photomatrix or
of any of Photomatrix's predecessors. Photomatrix is not a party to any
non-competition or confidentiality agreement related to the business of
Photomatrix with any party other than I-PAC.
4.19 Compliance With Laws. Photomatrix is in compliance with all
applicable laws, regulations, orders, judgments and decrees of each and every
jurisdiction in which it is doing business, including applicable federal laws
and regulations, the violation of which would have a material adverse effect on
its operations.
4.20 Inventory. The inventory as reflected on the Photomatrix Balance
Sheets or acquired thereafter has been acquired and maintained in the ordinary
course of business, is of good and merchantable quality, consists substantially
of a quality, quantity, and condition usable, leasable or saleable in the
ordinary course of business within a period of one (1) year from the Closing
Date, and is not subject to any write down or write off for obsolescence or
otherwise under generally accepted accounting principles. The Photomatrix
Balance Sheets contain adequate reserves for slow moving or obsolete inventory.
Photomatrix is not under any liability or obligation with respect to the return
of inventory in the possession of any third party.
4.21 Accounts Receivable. The accounts receivable of Photomatrix as
reflected in the Photomatrix Balance Sheets are, to the extent uncollected on
the date of this Agreement, valid and existing and fully collectible through the
use of ordinary collection procedures (net of reserves set forth in such
financial statements as at such dates, which reserves were adequate and in an
amount consistent with Photomatrix's historical accounting policies), represent
monies due for goods sold and delivered or services rendered, and are subject to
no refunds, discounts, rebates or other adjustments (except discounts for prompt
payment given in the ordinary course of business) and to no defenses,
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rights of setoff, assignments, restrictions, encumbrances or conditions
enforceable by third parties. Photomatrix has never factored any of its accounts
receivable.
4.22 Employment Relations. Photomatrix is (i) in compliance with all
federal, state or other applicable laws respecting employment and employment
practices, terms and conditions of employment, wages and hours, equal employment
opportunity, nondiscrimination, occupational safety and health, and the payment
of social security and similar taxes and, to the best knowledge of Photomatrix,
has not and is not engaged in any unfair labor practice; (ii) no unfair or
unlawful labor practice complaint against Photomatrix is pending before the
National Labor Relations Board or any other governmental agency or commission;
(iii) there is no labor strike, dispute, slowdown or stoppage actually pending
or, to the best knowledge of Photomatrix, threatened against or involving
Photomatrix; (iv) no representation question exists respecting the employees of
Photomatrix; (v) no grievance which might have a material adverse effect on the
condition of Photomatrix or the conduct of its business exists, no arbitration
proceeding arising out of or under any collective bargaining agreement is
pending, and no claim therefor has been asserted; (vi) no collective bargaining
agreement is currently being negotiated by Photomatrix; (vii) Photomatrix has
not experienced any material labor difficulty; and (viii) no "plant closing" or
"mass layoff" within the meaning of the Worker Adjustment and Retraining
Notification Act has occurred with respect to Photomatrix. There has not been,
and, to the best knowledge of Photomatrix, there will not be, any change in
relations with employees of Photomatrix as a result of the transactions
contemplated by this Agreement. There exist no employment, consulting, severance
or indemnification agreements between Photomatrix and any director, officer,
employee or agent of Photomatrix or any other agreement that would give any
person or entity the right to receive any payment from Photomatrix as a result
of the Merger. There exists no contract or arrangement which would limit in any
way Photomatrix's right to discharge any employee of Photomatrix following the
Closing or which would entitle any such discharged employee to receive
compensation from Photomatrix on account of such discharge.
4.23 Employee Benefit Plans.
4.23.1 List of Plans. Set forth in the Photomatrix Disclosure
Memorandum is an accurate and complete list of all employee benefit plans
("Photomatrix Employee Benefit Plans") within the meaning of Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), whether
or not any such Photomatrix Employee Benefit Plans are otherwise exempt from the
provisions of ERISA, established, maintained or contributed to by Photomatrix
(including, for this purpose all employers (whether or not incorporated) which
by reason of common control are treated together with Photomatrix as a single
employer within the meaning of Section 414 of the Code).
4.23.2 Status of Plans. Photomatrix does not maintain or contribute
to any Photomatrix Employee Benefit Plan subject to ERISA which is not in
substantial compliance with ERISA, or which has incurred any accumulated funding
deficiency within the meaning of Section 412 or 418B of ERISA, or which has
applied for or obtained a waiver from the Internal Revenue Service of any
minimum funding requirement under Section 412 of the Code. Photomatrix has not
incurred
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any liability to the Pension Benefit Guaranty Corporation ("PBGC") in connection
with any Photomatrix Employee Benefit Plan or ceased operations at any facility
or withdrawn from any such Plan in a manner which could subject it to liability
under Section 4062(f), 4063 or 4064 of ERISA. Photomatrix does not know of any
facts or circumstances which might give rise to any liability to the PBGC under
Title IV of ERISA or which could reasonably be anticipated to result in any
claims being made against Photomatrix or I-PAC by the PBGC. Photomatrix has not
incurred any withdrawal liability (including any contingent or secondary
withdrawal liability) within the meaning of Sections 4201 and 4202 of ERISA, to
any Photomatrix Employee Benefit Plan which is a multi-employer Plan (as defined
in Section 4001 of ERISA), and no event has occurred, and there exists no
condition or set of circumstances, which presents a material risk of the
occurrence of any withdrawal from or the partition, termination, reorganization
or insolvency of any multi-employer Plan which could result in any liability on
the part of Photomatrix to a multi-employer Plan.
4.23.3 Contributions. Full payment has been made of all amounts
which Photomatrix is required, under applicable law or under any Photomatrix
Employee Benefit Plan or any agreement relating to any Photomatrix Employee
Benefit Plan to which Photomatrix is a party, to have paid as contributions
thereto for or with respect to the most recent fiscal year of such Photomatrix
Employee Benefit Plan ended prior to the date hereof. Photomatrix has made
adequate provisions for reserves to meet contributions that have not been made
because they are not yet due under the terms of any Photomatrix Employee Benefit
Plan or related agreements . All payments and contributions to any such
Photomatrix Employment Benefit Plan have been finally determined and paid for
the period ended December 31, 1997. No contributions have been made to any
Photomatrix Employee Benefit Plan for the period subsequent to December 31,
1997.
4.23.4 Tax Qualification. To the best knowledge of Photomatrix,
each Photomatrix Employee Benefit Plan intended to be qualified under Section
401(a) of the Internal Revenue Code has been determined to be so qualified by
the Internal Revenue Service and nothing has occurred since the date of the last
such determination which resulted or is likely to result in the revocation of
such determination.
4.23.5 Transactions. No reportable event (as defined in Section
4043 of ERISA) has occurred with respect to any Photomatrix Employee Benefit
Plan, and Photomatrix has not engaged in any transaction with respect to any
Photomatrix Employee Benefit Plan which would subject it to a tax, penalty or
liability for prohibited transactions under ERISA or the Code, nor have any of
its directors, officers or employees, to the extent they or any of them are
fiduciaries with respect to such plans, materially breached any of their
responsibilities or obligations imposed upon fiduciaries under Title I of ERISA
or which would result in any claim being made under or by or on behalf of any
such plans by any party with standing to make such claim.
4.23.6 Other Plans. Photomatrix does not presently maintain any
employee benefit plans or any other pension, welfare or retirement benefit plans
other than those listed in the Photomatrix Disclosure Memorandum.
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4.23.7 Documents. Photomatrix and the Shareholders have delivered
or caused to be delivered to I-PAC and its counsel true and complete copies of
(i) all Photomatrix Employee Benefit Plans as in effect on the date of this
Agreement, together with all amendments thereto which will become effective at a
later date, as well as the latest Internal Revenue Service determination letter
obtained with respect to any such Photomatrix Employee Benefit Plan qualified
under Section 401 or 501 of the Code and (ii) Form 5500 with respect to each
such Plan for each of the last two fiscal years, and will provide when completed
Form 5500 for the most recently completed fiscal year for each Photomatrix
Employee Benefit Plan required to file such form.
4.24 Environmental Laws and Regulations. The Photomatrix Disclosure
Memorandum sets forth all information relating to the following items: (a) the
nature and, if material, quantities of any hazardous substances (as defined
below) generated, transported or disposed of by Photomatrix during the past five
years (other than raw material awaiting manufacturing, work-in process or
finished goods or through the sale of products in the ordinary course of
business), together with a description of the location of each such activity,
and (b) a summary of the nature and, if material, quantities of any hazardous
substances that have been disposed of or found at any site or facility owned or
operated presently or at any previous time by Photomatrix (other than raw
material awaiting manufacturing, work-in-process or finished goods or through
the sale of products in the ordinary course of business). Photomatrix's existing
and prior uses of all real property leased or owned by Photomatrix complies and
has at all times during their occupancy complied with, and Photomatrix is not in
violation of, and has not violated, in connection with the ownership, lease,
occupancy, use, maintenance, or operation of such property or the conduct of its
business, any Environmental Laws. Photomatrix has not received any notice of any
work, repairs, construction or capital expenditures required by the
Environmental Laws with respect to any of its properties or its businesses. None
of Photomatrix's leased or owned properties is contaminated by or contains any
hazardous substance. No claim, action, suit or proceeding is pending or, to
Photomatrix's knowledge, threatened against Photomatrix, before any court or
other governmental authority or arbitration tribunal, relating to hazardous
substances, pollution or the environment, and there is no outstanding judgment,
order, writ, injunction, decree or award against or affecting Photomatrix or its
assets with respect to the same. There has never been, and there is not
presently occurring, any release of any hazardous substance on or from any of
Photomatrix's leased or owned properties, Photomatrix has not received any
notice from any government agency or private or public entity advising
Photomatrix that it is responsible for response costs with respect to a release,
a threatened release or clean up of chemicals produced by, or resulting from,
any business, commercial, or industrial activities, operations, or processes,
including, but not limited to, hazardous substances, and Photomatrix has not
received any information requests under CERCLA from any government agency. There
are no facts or circumstances which Photomatrix reasonably expect could form the
basis for the assertion of any Claim (as defined below) against Photomatrix
relating to environmental matters including, but not limited to, any Claim
arising from past or present environmental practices asserted under the
Environmental Laws, which Photomatrix believes might have a material adverse
effect on the business, results of operations, financial condition or prospects
of Photomatrix taken as a whole.
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As used herein, "hazardous substances(s)" include any pollutants,
contaminants, dangerous substances, toxic substances, solid waste, hazardous
wastes, hazardous materials, or hazardous substances as defined in or pursuant
to RCRA or CERCLA, or any other federal, state or local environmental law,
ordinance, rule or regulation, except that, for purposes of this Agreement,
"petroleum" (including crude oil or any fraction thereof) shall be deemed a
"hazardous substance." "Release" and "disposal" shall have the same meanings as
defined in CERCLA and RCRA. "Claim" shall mean any and all claims, demands,
causes of actions, suits, proceedings, administrative proceedings, losses,
judgments, attorneys' fees, and any other expenses incurred, assessed or
sustained by or against Photomatrix.
4.25 Interests in Clients, Suppliers, Etc. Neither Photomatrix nor any
officer or director of Photomatrix owns or possesses, directly or indirectly,
any financial or proprietary interest in, or is a director, officer or employee
of, any corporation, limited liability company, partnership, association, trust,
joint venture or other business entity which is engaged in the same or similar
business as Photomatrix, or is a competitor or potential competitor of
Photomatrix. Ownership of securities of a company whose securities are
registered under the Securities Exchange Act of 1934, not in excess of 5% of any
class of such securities, shall not be deemed to be a financial interest for
purposes of this Section 4.25.
4.26 Customers, Distributors and Sales Representatives. The Photomatrix
Disclosure Memorandum sets forth the names and addresses of all customers to
which, and representatives and distributors through which, Photomatrix has sold
or distributed in excess of $250,000 of its products or services during either
of the last two fiscal years of Photomatrix. During such period and through the
date hereof, no such customer, distributor or sales representative has canceled
or otherwise terminated its relationship with Photomatrix or decreased
materially its usage or purchase of the products or services of Photomatrix,
except for changes in customer relationships that have occurred in the ordinary
course of business the aggregate value of which has not exceeded $1,250,000. To
the knowledge of Photomatrix, no such customer, sales representative or
distributor has any plan or intention to terminate, cancel or otherwise modify
its relationship with Photomatrix in a manner that would be adverse to
Photomatrix.
4.27 Bank Accounts, Powers of Attorney and Compensation of Employees.
The Photomatrix Disclosure Memorandum contains an accurate and complete list
showing (a) the name and address of each bank in which Photomatrix has an
account or safe deposit box, the number of any such account or any such box, the
names of all persons authorized to draw thereon or to have access thereto and
the current balances maintained in all such accounts, (b) the names of all
persons, if any, holding powers of attorney from Photomatrix and a summary
statement of the terms thereof, and (c) the names of all persons whose
compensation from Photomatrix for the last fiscal year of Photomatrix exceed an
annualized rate of Fifty Thousand and No/100 Dollars ($50,000.00), together with
a statement of the full amount paid or payable to each such person for services
rendered during such fiscal year.
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4.28 Disclosure. The representations, warranties and covenants made by
Photomatrix in this Agreement, the financial statements referred to in Section
4.5 above (including the footnotes thereto), and any attached schedule, exhibit
or certificate delivered in accordance with the terms hereof, taken as a whole,
do not contain any untrue statement of a material fact, or omit any statement of
a material fact necessary in order to make the statements contained herein or
therein not misleading. There is no fact known to Photomatrix which materially
and adversely affects the businesses, prospects or financial condition of
Photomatrix, its properties or assets, which has not been disclosed and set
forth in this Agreement.
4.29 Broker's or Finder's Fees. No agent, broker, person or firm acting
on behalf of Photomatrix is, or will be, entitled to any commission or broker's
or finder's fees from any of the parties hereto, or from any person controlling,
controlled by or under common control with any of the parties hereto, in
connection with any of the transactions contemplated herein.
4.30 Certain Conditions for Accounting and Tax Treatment. Prior to the
Closing Date, Photomatrix will be in control of Merger Corp. within the meaning
of Section 368(c)(1) of the Code. Photomatrix has no plan or intention to
reacquire any Photomatrix Shares issued in the transaction. Photomatrix has no
plan or intention to liquidate I-PAC; to merge I-PAC with or into another
corporation; to sell or otherwise dispose of the stock of I-PAC; or to cause
I-PAC to sell or otherwise dispose of any of its assets, except for dispositions
made in the ordinary course of business. Merger Corp. will have no liabilities
assumed by I-PAC, and will not transfer to I-PAC any assets subject to
liabilities, in the transaction. Following the Closing Date, I-PAC will continue
its historic business or use a significant portion of its historic business
assets in a business. Photomatrix and Merger Corp. will pay their respective
expenses, if any, incurred in connection with the transaction. In the
transaction, I-PAC Shares representing control of I-PAC, as defined in Section
368(c)(1) of the Code, will be exchanged solely for Photomatrix Shares. For
purposes of this representation, I- PAC Shares exchanged for cash or other
property originating with Photomatrix will be treated as outstanding I-PAC
Shares on the Closing Date. Photomatrix does not own, nor has it owned during
the past five years, any I-PAC Shares. Photomatrix and Merger Corp. are not
investment companies as defined in Section 368(a)(2)(F)(iii) and (iv) of the
Internal Revenue Code.
4.31 Cooperation. From and after the date of this Agreement,
Photomatrix and its officers, directors, accountants, attorneys, agents and
other representatives will cooperate fully with I-PAC (i) in the preparation of
all statements and reports contemplated by this Agreement and required pursuant
to the registration and other requirements provided in the 1933 Act and the 1934
Act, and (ii) to facilitate the consummation of the transactions provided for
herein, all in accordance with federal and state regulatory requirements.
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ARTICLE V
CONDUCT OF BUSINESS
5.1 Conduct of Business of I-PAC. I-PAC represents, warrants and agrees
that, during the period from the date hereof to the Closing Date, I-PAC shall
conduct its business operations according to the ordinary and usual course of
business and use its best effort to preserve intact its business organization,
keep available the services of its officers and employees, and maintain
satisfactory relationships with its customers, vendors, licensors, suppliers,
distributors, clients and others having business relationships with I-PAC.
Notwithstanding such agreements, pending the Closing Date and except as may be
first approved by Photomatrix or as is otherwise permitted or required by this
Agreement, I-PAC and the I-PAC Shareholders will cause (a) I-PAC's articles of
incorporation and by-laws to be maintained in their form as of the date of this
Agreement, (b) the compensation payable to each of William L. Grivas and Patrick
W. Moore to not exceed $10,417 per month (exclusive of distributions permitted
by paragraph (f)), and the compensation payable or to become payable by I-PAC,
in the aggregate, to any person being paid Fifty Thousand and No/100 Dollars
($50,000.00) per year or more on the Balance Sheet Date to be maintained at no
more than its existing levels as of such date, (c) I-PAC to refrain from making
any bonus (cash, stock or otherwise), pension, retirement or insurance payment
(other than regularly scheduled payments in the ordinary course consistent with
past practice) or arrangement to or with any such persons except those that may
have been approved by Photomatrix or those that are subject to and in accordance
with the provisions of this Agreement, (d) I-PAC to refrain from entering into
any contract, commitment or purchase, except contracts or purchases in the
ordinary course of business or involving a commitment by either party to such
contract or purchase of less than $10,000 in the aggregate, (e) I-PAC to refrain
from making any change affecting any of their bank, safe deposit or power of
attorney arrangements, (f) I-PAC to refrain from granting dividends or making
distributions to I-PAC Shareholders (other than a distribution or compensation
which does not exceed the amount of federal and state income tax payable by the
I-PAC Shareholders on income allocated to them by I-PAC during 1997), (g) I-PAC
to refrain from engaging in related party transactions without the prior written
consent of Photomatrix, provided that prior to the Closing Date I-PAC may
continue to pay interest which accrues on related party debt, management fees
payable to Evergreen Investments (which management fees shall be in lieu of the
compensation allowable under paragraph (b) and which shall be in conformance
with bank covenants of I-PAC as of the Closing Date), a retainer fee in
conformance with past practice to the law firm of Sullivan, Hill, Lewin, Rez,
Engel & LaBazzo, sales commissions to MGM TechRep in conformance with past
practice, and fees to Evergreen Investments and/or MedTech Industries for the
assignment or sublicense of the ASL License, which fees shall not exceed the
license fee paid by those entities to ASL in accordance with the ASL License
Agreement, (h) I-PAC to refrain from incurring any additional debt, other than
trade debt incurred in the ordinary course of business and debt incurred
pursuant to standard working capital lines of credit, and (i) I-PAC to refrain
from revising its historical payment practices regarding current liabilities.
During the period from the Balance Sheet Date to the Closing Date, I-PAC shall
confer on a regular and frequent basis with one or more designated
representatives of Photomatrix to report material operational matters and to
report the general status of ongoing business operations
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of I-PAC. I-PAC shall notify Photomatrix of any unexpected emergency or other
change in the normal course of its business or in the operation of its
properties and of any governmental complaints, investigations or hearings (or
communications indicating that the same may be contemplated), or adjudicatory
proceedings (including lawsuits, arbitrations or mediations), involving I-PAC,
and to keep Photomatrix fully informed of such events and permit its
representatives prompt access to all materials prepared in connection therewith.
Notwithstanding the foregoing, prior to the Closing Date, and without increasing
the total number of outstanding shares of I-PAC capital stock, (i) I-PAC shall
convert to equity in I-PAC all existing loans and other indebtedness for
borrowed money (which shall not include expense reimbursements and accrued
compensation) owed by I-PAC to one or more of the I-PAC Shareholders or their
affiliates (other than loans not exceeding $25,000 in the aggregate, which loans
may be repaid in cash) and (ii) through transfers, issuances and redemptions of
I-PAC stock or other means, the I-PAC Shareholders and their affiliates may
adjust their respective ownership interests in I-PAC and one or more additional
persons may become I-PAC Shareholders.
5.2 Conduct of Business of Photomatrix. Photomatrix represents,
warrants and agrees that during the period from the date hereof to the Closing
Date, Photomatrix conduct its business operations according to the ordinary and
usual course of business and use its best effort to preserve intact its business
organization, keep available the services of its officers and employees, and
maintain satisfactory relationships with its customers, vendors, licensors,
suppliers, distributors, clients and others having business relationships with
Photomatrix. Notwithstanding such agreements, pending the Closing Date and
except as may be first approved by I-PAC or as is otherwise permitted or
required by this Agreement, Photomatrix and the Photomatrix Shareholders will
cause (a) Photomatrix's articles of incorporation and by-laws to be maintained
in their form as of the date of this Agreement, (b) the compensation payable or
to become payable by Photomatrix, in the aggregate, to any person being paid
Fifty Thousand and No/100 Dollars ($50,000.00) per year or more on the Balance
Sheet Date to be maintained at no more than their existing levels as of such
date, (c) Photomatrix to refrain from making any bonus (cash, stock or
otherwise), pension, retirement or insurance payment (other than regularly
scheduled payments in the ordinary course consistent with past practice) or
arrangement to or with any such persons in excess of $2,500 to any one
individual or $100,000 in the aggregate, except those that may have been
approved by I-PAC or those that are subject to and in accordance with the
provisions of this Agreement, (d) Photomatrix to refrain from entering into any
contract, commitment or purchase, including contracts of employment, except
contracts or purchases in the ordinary course of business or involving a
commitment by either party to such contract or purchase of less than $10,000 in
the aggregate, (e) Photomatrix to refrain from making any change affecting any
of their bank, safe deposit or power of attorney arrangements, and (f)
Photomatrix to refrain from granting dividends or making distributions to
Photomatrix Shareholders, (g) Photomatrix to refrain from engaging in related
party transactions without the prior written consent of I-PAC, (h) Photomatrix
to refrain from incurring any additional debt other than pursuant to standard
working capital lines of credit; (i) Photomatrix to refrain from revising its
historical payment practices of its current liabilities; and (j) Photomatrix to
refrain from issuing shares of its capital stock or other equity securities
other than pursuant to the exercise of Outstanding Options. During the period
from the Balance Sheet Date to the Closing Date, Photomatrix shall cause
Photomatrix to, confer on a regular and frequent basis with one or more
designated
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representatives of I-PAC to report material operational matters and to report
the general status of ongoing business operations of Photomatrix. Photomatrix
shall notify I-PAC of any unexpected emergency or other change in the normal
course of its business or in the operation of its properties and of any
governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated), adjudicatory proceedings
(including lawsuits, arbitrations or mediations), involving Photomatrix, and to
keep I-PAC fully informed of such events and permit its representatives prompt
access to all materials prepared in connection therewith.
5.3 I-PAC No Solicitation.
5.3.1 I-PAC shall, and shall direct and use reasonable efforts to
cause its officers, directors, employees, representatives and agents to,
immediately cease any discussions or negotiations with any parties that may be
ongoing with respect to an I-PAC Takeover Proposal (as hereinafter defined).
I-PAC shall not, nor shall it permit any of its subsidiaries to, nor shall it
authorize or permit any of its officers, directors or employees or any
investment banker, financial advisor, attorney, accountant or other
representative retained by it or any of its subsidiaries to, directly or
indirectly, (i) solicit, initiate or encourage (including by way of furnishing
information), or take any other action designed or reasonably likely to
facilitate, any inquiries or the making of any proposal which constitutes, or
may reasonably be expected to lead to, any I-PAC Takeover Proposal or (ii)
participate in any discussions or negotiations regarding any I-PAC Takeover
Proposal. For purposes of this Agreement, an "I-PAC Takeover Proposal" means any
inquiry, proposal or offer from any person relating to any direct or indirect
acquisition or purchase of 50% or more of the assets of I-PAC and its
subsidiaries or 50% or more of any class of equity securities of I-PAC or any of
its subsidiaries, any tender offer or exchange offer that if consummated would
result in any person beneficially owning 50% or more of any class of equity
securities of I-PAC or any of its subsidiaries, any merger, consolidation, share
exchange, business combination, recapitalization, liquidation, dissolution or
similar transaction involving I-PAC or any of its subsidiaries, other than the
transactions contemplated by this Agreement, or any other transaction the
consummation of which could reasonably be expected to impede, interfere with,
prevent or materially delay the Merger or which would reasonably be expected to
dilute materially the benefits to Photomatrix the transactions contemplated by
this Agreement.
5.3.2 Neither the Board of Directors of I-PAC nor any committee
thereof shall (i) withdraw or modify, or propose publicly to withdraw or modify,
in a manner adverse to I-PAC, the approval or recommendation by such Board of
Directors or such committee of the Merger, (ii) approve or recommend, or propose
publicly to approve or recommend, any I-PAC Takeover Proposal or (iii) cause
I-PAC to enter into any letter of intent, agreement in principle, acquisition
agreement or other similar agreement related to any I-PAC Takeover Proposal.
5.4 Photomatrix No Solicitation.
5.4.1 Photomatrix shall, and shall direct and use reasonable
efforts to cause its officers, directors, employees, representatives and agents
to, immediately cease any discussions or
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negotiations with any parties that may be ongoing with respect to a Photomatrix
Takeover Proposal (as hereinafter defined). Photomatrix shall not authorize or
permit any of its officers, directors or employees or any investment banker,
financial advisor, attorney, accountant or other representative retained by it
to, directly or indirectly, (i) solicit, initiate or encourage (including by way
of furnishing information), or take any other action designed or reasonably
likely to facilitate, any inquiries or the making of any proposal which
constitutes, or may reasonably be expected to lead to, any Photomatrix Takeover
Proposal or (ii) participate in any discussions or negotiations regarding any
Photomatrix Takeover Proposal; provided, however, that if, at any time prior to
the Effective Time, the Board of Directors of Photomatrix determines in good
faith, after consultation with outside counsel, that it is necessary to do so in
order to comply with its fiduciary duties to Photomatrix's shareholders under
applicable laws, Photomatrix may, in response to a Photomatrix Takeover Proposal
which was not solicited subsequent to the date hereof, and subject to compliance
with Section 5.4.3, (i) furnish information with respect to Photomatrix to any
person pursuant to a customary confidentiality agreement (as determined by
Photomatrix after consultation with its outside counsel) and (ii) participate in
negotiations regarding such Photomatrix Takeover Proposal. For purposes of this
Agreement, a "Photomatrix Takeover Proposal" means any inquiry, proposal or
offer from any person relating to any direct or indirect acquisition or purchase
of 50% or more of the assets of Photomatrix or more of any class of equity
securities of Photomatrix, any tender offer or exchange offer that if
consummated would result in any person beneficially owning 50% or more of any
class of equity securities of Photomatrix, any merger, consolidation, share
exchange, business combination, recapitalization, liquidation, dissolution or
similar transaction involving Photomatrix, other than the transactions
contemplated by this Agreement, or any other transaction the consummation of
which could reasonably be expected to impede, interfere with, prevent or
materially delay the Merger or which would reasonably be expected to dilute
materially the benefits to I-PAC of the transactions contemplated by this
Agreement.
5.4.2 Except as set forth in this Section 5.4, neither the Board of
Directors of Photomatrix nor any committee thereof shall (i) withdraw or modify,
or propose publicly to withdraw or modify, in a manner adverse to I-PAC, the
approval or recommendation by such Board of Directors or such committee of the
Merger, (ii) approve or recommend, or propose publicly to approve or recommend,
any Photomatrix Takeover Proposal or (iii) cause Photomatrix to enter into any
letter of intent, agreement in principle, acquisition agreement or other similar
agreement (each, a "Photomatrix Acquisition Agreement") related to any
Photomatrix Takeover Proposal. Notwithstanding the foregoing, in the event that
prior to the Effective Time the Board of Directors of Photomatrix determines in
good faith, after consultation with outside counsel, that it is necessary to do
so in order to comply with its fiduciary duties to Photomatrix's shareholders
under applicable laws, the Board of Directors of Photomatrix may (subject to
this and the following sentences) (x) withdraw or modify its approval or
recommendation of the Merger or (y) approve or recommend a Photomatrix Superior
Proposal (as defined below) or terminate this Agreement (and concurrently with
or after such termination, if it so chooses, cause Photomatrix to enter into any
Photomatrix Acquisition Agreement with respect to any Photomatrix Superior
Proposal), but in each of the cases set forth in this clause (y), only at a time
that is after the tenth business day following I-PAC's receipt of written notice
advising I-PAC that the Board of Directors of Photomatrix has received a
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Photomatrix Superior Proposal, specifying the material terms and conditions of
such Photomatrix Superior Proposal and identifying the person making such
Photomatrix Superior Proposal. For purposes of this Agreement, a "Photomatrix
Superior Proposal" means any bona fide proposal made by a third party to
acquire, directly or indirectly, for consideration consisting of cash and/or
securities, more than 50% of the combined voting power of the shares of
Photomatrix Capital Stock then outstanding or all or substantially all the
assets of Photomatrix and otherwise on terms which the Board of Directors of
Photomatrix determines in its good faith judgment (based on the advice of an
outside financial advisor) to be materially more favorable to Photomatrix's
shareholders than the Merger and for which financing, to the extent required, is
then committed or which, in the good faith judgment of the Board of Directors of
Photomatrix, is reasonably capable of being financed by such third party.
5.4.3 In addition to the obligations of Photomatrix set forth in
paragraphs 5.4.1 and 5.4.2 of this Section 5.4, Photomatrix shall immediately
advise I-PAC orally and in writing of any request for information or of any
Photomatrix Takeover Proposal, the material terms and conditions of such request
or Photomatrix Takeover Proposal and the identity of the person making such
request or Photomatrix Takeover Proposal. Photomatrix will keep I-PAC fully
informed of the status and details (including amendments or proposed amendments)
of any such request or Photomatrix Takeover Proposal.
5.4.4 Nothing contained in this Section 5.4 shall prohibit
Photomatrix from taking and disclosing to its shareholders a position
contemplated by Rule 14e-2(a) promulgated under the Exchange Act or from making
any disclosure to Photomatrix's shareholders if, in the good faith judgment of
the Board of Directors of Photomatrix, after consultation with outside counsel,
failure so to disclose would be inconsistent with its fiduciary duties to
Photomatrix's shareholders under applicable laws; provided, however, neither
Photomatrix nor its Board of Directors nor any committee thereof shall, except
as permitted by Section 5.4.2, withdraw or modify, or propose publicly to
withdraw or modify, its position with respect to the Merger or approve or
recommend, or propose publicly to approve or recommend, a Photomatrix Takeover
Proposal.
5.5 No Stock Transactions. I-PAC shall (i) obtain an undertaking from
each shareholder of I-PAC, which shall identify Photomatrix as a third party
beneficiary of such undertaking, to the effect that, between the date of this
Agreement and the Effective Time, there are no sales or purchases of shares of
Photomatrix Common Stock by or at the direction of any such shareholder and (ii)
exercise its best efforts to ensure that no person or entity which has received
material non-public information concerning Photomatrix from any officer,
director, employee, shareholder or affiliate of I-PAC purchases or sells shares
of Photomatrix common stock while in the possession of such information.
5.6 Review.
5.6.1 Review of I-PAC. Prior to the Closing Date, Photomatrix may
directly and through its representatives make such investigation of the assets
and business of I-PAC (including,
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without limitation, investigation of its title to property and the condition of
its property and equipment, and the confirmation of its cash, inventories,
accounts receivable and liabilities) as Photomatrix deems necessary or
advisable. Photomatrix and its representatives shall have, at reasonable times
after the date of execution hereof, full access to the premises and to all the
books and records of I-PAC, and I-PAC shall cause to be furnished to Photomatrix
such financial and operating data and other information with respect to the
business and properties of I-PAC as Photomatrix shall from time to time
reasonably request.
5.6.2 Review of Photomatrix. Prior to the Closing Date, I-PAC may
directly and through its representatives make such investigation of the assets
and business of Photomatrix (including, without limitation, investigation of its
title to property and the condition of its property and equipment, and the
confirmation of its cash, inventories, accounts receivable and liabilities) as
I-PAC deems necessary or advisable. I-PAC and its representatives shall have, at
reasonable times after the date of execution hereof, full access to the premises
and to all the books and records of Photomatrix, and Photomatrix shall cause to
be furnished to I-PAC such financial and operating data and other information
with respect to the business and properties of Photomatrix as I-PAC shall from
time to time reasonably request.
5.7 Best Efforts. Subject to the terms and conditions herein provided,
each of I-PAC and Photomatrix shall cooperate and use their respective best
efforts to take, or cause to be taken, all appropriate action, and to make, or
cause to be made, all filings necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Agreement, including, without limitation, their respective
best efforts to obtain, prior to the Closing Date, all licenses, permits,
consents, approvals, authorizations, qualifications and orders of governmental
authorities and parties to contracts with I-PAC and Photomatrix as are necessary
for consummation of the transactions contemplated by this Agreement and to
fulfill the conditions to the Merger and to rectify any event or circumstance
which could impede consummation of the transactions contemplated by this
Agreement; provided, however, that no loan agreement or contract shall be
required to be amended or modified so as to be more burdensome to I-PAC or
Photomatrix, as appropriate, in order to obtain any such consent, approval or
authorization without first obtaining the written approval of Photomatrix.
5.8 Fulfillment of Agreement. Each party hereto shall deliver or cause
to be delivered on the Closing Date, and thereafter at such other times and
places as shall be reasonably agreed upon, such additional instruments as any
other party hereto may reasonably request for the purpose of consummating and
carrying out this Agreement and its terms, conditions and requirements.
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ARTICLE VI
CONDITIONS TO OBLIGATIONS OF PHOTOMATRIX
Conditions to Obligations of Photomatrix. The obligations of
Photomatrix and Merger Corp. to consummate the Merger and other transactions
described herein on the Closing Date are subject to satisfaction of the
following conditions.
6.1 Opinion of I-PAC's Counsel: Certificate of I-PAC . I-PAC shall have
furnished Photomatrix with a favorable opinion, dated the Closing Date, of
Sullivan, Hill, Lewin, Rez, Engel & LaBazzo and Certificates of I-PAC in form
and substance reasonably satisfactory to Photomatrix and its counsel.
6.2 Good Standing and Tax Certificates. I-PAC shall have delivered to
Photomatrix (a) copies of I-PAC's articles of incorporation, including all
amendments thereto, certified by the Secretary of State or other appropriate
official of the State of California, (b) certificates from the Secretary of
State or other appropriate official of the State of California to the effect
that I-PAC is in good standing or existing in such jurisdiction and listing all
charter documents of I-PAC on file, (c) a certificate from the Secretary of
State or other appropriate official in each state in which I-PAC is qualified to
do business to the effect that I-PAC is in good standing in such state and (d)
certificates as to the tax status of I-PAC in the State of California and each
state in which I-PAC is qualified to do business.
6.3 No Material Adverse Change. Since the I-PAC Balance Sheet Date
there shall have been no material adverse change in the assets or liabilities,
the business or financial condition, the results of operations, or prospects of
I-PAC, whether as a result of any legislative or regulatory change, revocation
of any license or rights to do business, fire, explosion, accident, casualty,
labor trouble, flood, drought, riot, storm, condemnation or act of God or
otherwise, other than any such change caused by the effect of transactions
contemplated by this Agreement, and I-PAC shall have delivered to Photomatrix a
certificate, dated the Closing Date, to such effect.
6.4 Truth of Representations and Warranties. The representations and
warranties of I-PAC contained in this Agreement or in any Exhibit or the I-PAC
Disclosure Memorandum, each of which shall be an integral part of this Agreement
and incorporated herein by this reference, shall be true and correct in all
material respects as of the date of this Agreement and as of the Closing Date
(as though made on and as of the Closing Date) except (i) to the extent such
representations and warranties are by their express provisions made as of a
specified date and (ii) for the effect of transactions contemplated by this
Agreement, and I-PAC shall have delivered to Photomatrix on the Closing Date a
certificate, dated the Closing Date, to such effect.
6.5 Performance of Agreements. Each and all of the agreements of I-PAC
to be performed on or before the Closing Date pursuant to the terms hereof shall
have been duly performed
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in all material respects, and I-PAC shall have delivered to Photomatrix a
certificate, dated the Closing Date, to such effect.
6.6 Proceedings. All proceedings to be taken in connection with the
transactions contemplated by this Agreement, and all documents incident thereto,
shall be reasonably satisfactory in form and substance to Photomatrix and its
counsel.
6.7 No Litigation Threatened. No action or proceeding shall have been
instituted or, to the best knowledge of I-PAC, shall have been threatened before
a court or other government body or by any public authority to restrain or
prohibit any of the transactions contemplated hereby. I-PAC shall have delivered
to Photomatrix a certificate, dated the Closing Date, to such effect.
6.8 Governmental Approvals. All governmental and other consents and
approvals, if any, necessary to permit the consummation of the transactions
contemplated by this Agreement shall have been received by I-PAC and
Photomatrix.
6.9 Employment Agreements. Patrick W. Moore and William L. Grivas shall
have entered into employment agreements with Photomatrix, and Suren G. Dutia
shall have entered into a First Amendment to Executive EmploymentAgreement, in
the forms attached hereto as Exhibits 7, 8, and 9, respectively ("Employment
Agreements").
6.10 NonCompetition Agreement. Patrick W. Moore and William L. Grivas
shall have entered into noncompetition agreements with Photomatrix in the forms
attached hereto as Exhibits 10 and 11, respectively ("NonCompetition
Agreements").
6.11 Registration Rights Agreements. The shareholders of I-PAC shall
have entered into Registration Rights Agreements with Photomatrix in the form
attached hereto as Exhibit 12 ("Registration Rights Agreement").
6.12 I-PAC Shareholder's Representation and Transmittal Letters. Each
of the I- PAC Shareholders shall have entered into and delivered a Shareholder's
Representation and Transmittal Letter to Photomatrix.
6.13 ASL License Agreement. Certain license agreements with Alpha
Systems Lab, Inc. ("ASL") are currently owned by MedTech Industries ("MedTech")
and Evergreen Investments ("Evergreen"), related parties of I-PAC. MedTech's
license agreement provides for the right to use ASL's technology in the medical
services industry. Evergreen's license grants sales and marketing rights for the
ASL technology. Both agreements are subject to thirty day cancellation by ASL.
These licenses and any other licenses owned by any I-PAC related parties shall
be transferred to I-PAC prior to the close.
6.14 Photomatrix Shareholder and Board of Director Approval. The
members of the Board of Directors of Photomatrix and the Photomatrix
Shareholders shall have approved the
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Merger. Holders of no more than ten percent (10%) of the outstanding shares of
Photomatrix Common Stock shall have exercised dissenter's rights as provided
under Chapter 13 of the CCC.
6.15 I-PAC Shareholder Approval. The I-PAC Shareholders shall have
approved the Merger and the Agreement in accordance with Chapter 12 of the CCC.
6.16 Fairness Opinion. Photomatrix shall have received a fairness
opinion from Frederick, Shields & Company certifying that Photomatrix is paying
a fair price for I-PAC.
6.17 S Corp. Status and Fiscal Year-End. I-PAC shall have revoked its S
Corp. election effective as of January 1, 1998, and shall have changed its
fiscal year-end to March 31.
ARTICLE VII
CONDITIONS TO I-PAC'S OBLIGATIONS
Conditions to I-PAC's Obligations. The obligations of I-PAC to
consummate the Merger and other transactions described herein on the Closing
Date are subject to satisfaction of the following conditions.
7.1 Opinion of Counsel for Photomatrix. Photomatrix shall have
furnished the I-PAC Shareholders with a favorable opinion, dated the Closing
Date, of Luce, Forward, Hamilton & Scripps LLP and Certificates of Photomatrix
in form and substance reasonably satisfactory to I-PAC and its counsel.
7.2 Good Standing Certificate. Photomatrix shall have delivered to
I-PAC (a) copies of the articles of incorporation, including all amendments
thereto, certified by the Secretary of State or other appropriate official of
the State of California, of Photomatrix and Merger Corp. (b) certificates from
the Secretary of State or other appropriate official of the State of California
to the effect that Photomatrix and Merger Corp. are in good standing or existing
in such jurisdiction and listing all charter documents of Photomatrix and Merger
Corp on file, (c) a certificate from the Secretary of State or other appropriate
official in each state in which Photomatrix or Merger Corp. is qualified to do
business to the effect that such corporation is in good standing in such state
and (d) certificates as to the tax status of each of Photomatrix and Merger
Corp. in the State of California and each state in which such corporation is
qualified to do business.
7.3 No Material Adverse Change. Since the Photomatrix Balance Sheet
Date there shall have been no material adverse change in the assets or
liabilities, the business or financial condition, the results of operations, or
prospects of Photomatrix, whether as a result of any legislative or regulatory
change, revocation of any license or rights to do business, fire, explosion,
accident, casualty, labor trouble, flood, drought, riot, storm, condemnation or
act of God or otherwise, other
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than any such change caused by the effect of transactions contemplated by this
Agreement, and Photomatrix shall have delivered to I-PAC a certificate, dated
the Closing Date, to such effect.
7.4 Tax Certificate of Merger Corp. Prior to or simultaneous with the
Closing, Merger Corp. shall file or cause to be filed a certificate of
satisfaction of the Franchise Tax Board evidencing the fact that all taxes
imposed by said Franchise Tax Board have been paid or secured.
7.5 Truth of Representations and Warranties. The representations and
warranties of Photomatrix contained in this Agreement or in any Exhibit or the
Photomatrix Disclosure Memorandum, each of which shall be an integral part of
this Agreement and incorporated herein by this reference, shall be true and
correct in all material respects as of the date of this Agreement and as of the
Closing Date (as though made on and as of the Closing Date) except (i) to the
extent such representations and warranties are by their express provisions made
as of a specified date and (ii) for the effect of transactions contemplated by
this Agreement, and Photomatrix shall have delivered to I-PAC on the Closing
Date a certificate, dated the Closing Date, to such effect.
7.6 Performance of Agreements. Each and all of the agreements of
Photomatrix and Merger Corp. to be performed on or before the Closing Date
pursuant to the terms hereof shall have been duly performed in all material
respects, and Photomatrix shall have delivered to the Shareholders a
certificate, dated the Closing Date, to such effect.
7.7 No Litigation Threatened. No action or proceeding shall have been
instituted or, to the best knowledge of Photomatrix, shall have been threatened
before a court or other government body or by any public authority to restrain
or prohibit any of the transactions contemplated hereby. Photomatrix shall have
delivered to I-PAC a certificate, dated the Closing Date, to such effect.
7.8 Governmental Approvals. All governmental and other consents and
approvals, if any, necessary to permit the consummation of the transactions
contemplated by this Agreement shall have been received by Photomatrix and
I-PAC.
7.9 Employment Agreements. Photomatrix shall have entered into the
Employment Agreements.
7.10 NonCompetition Agreements. Photomatrix shall have entered into the
NonCompetition Agreements.
7.11 Registration Rights Agreements. Photomatrix shall have entered
into the Registration Rights Agreements.
7.12 Photomatrix Shareholder and Board of Director Approval. The
members of the Board of Directors of Photomatrix and the Photomatrix
Shareholders shall have approved the Merger. Holders of no more than ten percent
(10%) of the outstanding shares of Photomatrix Common Stock shall have exercised
dissenter's rights as provided under Chapter 13 of the CCC.
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7.13 Market for Photomatrix Stock. The Common Stock of Photomatrix
shall not be delisted from, and such stock shall not be suspended from trading
on, the NASDAQ Small Cap Market.
ARTICLE VIII
SURVIVAL OF REPRESENTATIONS AND
WARRANTIES; INDEMNITY
8.1 I-PAC Bound. This Article is intended to provide recourse by
Photomatrix following consummation of the Merger in the event of any breach by
I-PAC of the representations, warranties, covenants and agreements of I-PAC
contained in this Agreement.
8.2 Survival of Representations, Warranties and Indemnities. The
representations, warranties and indemnities of the parties hereto included or
provided herein, or in the Disclosure Memoranda or any exhibit or certificate or
other document delivered pursuant hereto, shall survive the Closing Date for a
period of six months.
8.3 Scope of Indemnification, Liabilities and Obligations. The
liabilities and obligations of I-PAC and the I-PAC Shareholders hereunder shall
be limited to the Photomatrix Shares received in the Merger and shall be limited
as to claims asserted pursuant to a Notice of Claim made by an Indemnitee
(defined below) on or prior to the date that is two years after the Closing
Date; provided, however, that the Indemnitee (defined below) shall not be
indemnified and held harmless hereunder from Losses (defined below) unless and
until Losses (defined below) exceed in the aggregate $100,000, in which event
the Indemnitee shall be indemnified and held harmless hereunder in full for the
entire aggregate amount of all Losses.
8.4 Representations, Warranties, Covenants and Agreements. The parties
hereto agree that all representations, warranties, covenants and agreements made
in this Agreement or in any exhibit, document, instrument or certificate
delivered pursuant hereto shall be deemed to have been made at and as of the
date of the Agreement and at and as of the Closing Date. The parties hereto also
agree that, notwithstanding any right of any party under the Agreement to
investigate fully the affairs of the other parties hereto, and notwithstanding
any knowledge of facts determined or determinable by any party pursuant to such
an investigation, each party has the right to rely fully upon the
representations, warranties, covenants and agreements of the other parties
contained in this Agreement and upon the accuracy of the Disclosure Memoranda
and any document, instrument, exhibit or certificate given or delivered pursuant
to this Agreement.
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8.5 Indemnification.
8.5.1 Subject to and to the extent provided in Section 8.3 hereof,
the I-PAC Shareholders shall indemnify defend and hold harmless Photomatrix,
Surviving Corporation, their directors and officers and each person, if any, who
is affiliate of or controls Photomatrix as of the date hereof within the meaning
of the Securities Act of 1933, as amended, (collectively, the "Indemnitee")
against, and to hold the Indemnitee harmless from, any and all damages, losses,
claims, liabilities, charges, suits, penalties, costs and expenses, including
court costs, attorneys' fees and expenses and other costs of collection
(collectively "Loss" or "Losses"), which the Indemnitee may sustain, or to which
the Indemnitee may be subjected, arising out of or attributable to any
misrepresentation or breach of warranty by I-PAC in, or any breach or default by
I-PAC of or under any of the covenants, agreements or other provisions of, the
Agreement, including the I-PAC Disclosure Memorandum, or any documents,
instruments, exhibits or certificates delivered by or on behalf of I-PAC
pursuant to the Agreement.
8.6 Notice and Resolution of Claims -- Opportunity to Defend.
8.6.1 If at any time an Indemnitee shall claim indemnification from
the I-PAC Shareholders for any Loss or, in the reasonable judgment of
Indemnitee, for what, in the future, may result in Loss due to the filing, at or
before the time of such claim, of an action, claim or suit with an arbitrator,
mediator, court or other governmental entity ("Anticipated Loss"), then
Indemnitee shall send written notice of the same (a "Notice of Claim") to James
P. Hill ("the I-PAC Shareholder Representative"). A Notice of Claim shall
specify the basis for such claim and shall be supported by relevant information
and documentation with respect thereto and the total amount claimed.
8.6.2 If the I-PAC Shareholder Representative shall object to such
action, proceeding or claim, they shall give written notice of such objection (a
"Notice of Objection") to the Indemnitee within 30 days after receipt by the
I-PAC Shareholder Representative of the Notice of Claim sent to the I-PAC
Shareholder Representative. If the I-PAC Shareholder Representative does not
give a Notice of Objection within 30 days of such receipt, or shall have agreed
to pay such claim in whole or in part within such 30-day period, the I-PAC
Shareholders shall thereupon be liable for the payment of such claim. Within ten
days of any such agreement to pay, the I-PAC Shareholders shall pay Photomatrix
the amount of the Loss.
8.6.3 In the event that the I-PAC Shareholder Representative shall
have timely given a Notice of Objection in whole or in part to any Notice of
Claim, during the 30-day period following the date that the I-PAC Shareholder
Representative mailed the Notice of Objection to the Indemnitee, the I-PAC
Shareholder Representative and the Indemnitee shall privately attempt to resolve
or compromise the claim. If the parties resolve or compromise the claim within
such 30-day period, the I-PAC Shareholders within ten days shall satisfy the
claim, if required.
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8.6.4 If an indemnification claim has been made for an Anticipated
Loss, the parties may agree to postpone resolution until the time when the
incurrence of such Anticipated Loss shall have occurred or passed.
8.6.5 If the I-PAC Shareholders and the Indemnitee shall have
failed to resolve or compromise or agree to postpone resolution of the claim
within the period of 30 days from the date the I-PAC Shareholder Representative
shall have mailed the Notice of Objection, then the claim shall be settled by
arbitration in California, as determined by the three arbitrators referred to in
Section 8.6.5.1 below, in accordance with the rules of the American Arbitration
Association and the procedures set forth below.
8.6.5.1 Each of (i) Photomatrix and (ii) the I-PAC Shareholder
Representative shall appoint one arbitrator, and the two arbitrators so
appointed shall then together appoint a third arbitrator ("neutral arbitrator")
from a list of persons supplied by the American Arbitration Association in San
Diego. If one party shall fail to appoint the arbitrator to be appointed by it
within 14 days of the end of the 60-day period provided for in Section 8.6.3
above, the arbitrator appointed by the other party shall select from a list of
persons supplied by the American Arbitration Association a person who shall
serve as the single neutral arbitrator for purposes of the arbitration. If each
party shall have appointed one arbitrator; but such designees cannot agree on
the person to act as the neutral arbitrator within a period of 14 days after the
appointment of the second arbitrator, then either party may apply to the
American Arbitration Association in San Diego which shall appoint a neutral
arbitrator. As used hereafter the term "arbitrator" shall include the singular
and the plural as applicable. The arbitrator shall conduct the arbitration with
all reasonable dispatch in accordance with the rules of the American Arbitration
Association, provided, however, that the parties to such arbitration shall take
such action and execute such instruments as shall be necessary to cause the
California Rules of Civil Procedure pertaining to pre-trial discovery to be
applicable in respect of such proceeding. The arbitrator shall render a written
award (the "Award") which shall be delivered to the Indemnitee and the I-PAC
Shareholder Representative. An Award hereunder may be used as a basis for the
entry of judgment in any jurisdiction. In the event the parties have submitted
an Anticipated Loss indemnification claim to arbitration under this Section
8.6.5.1, then the arbitrator may, in its sole discretion, postpone resolution of
the claim until the time which it has determined, in its sole discretion, to be
the time when such Anticipated Loss shall have occurred or passed has been
reached.
8.6.5.2 Prior to making the Award, the arbitrator shall direct
Photomatrix and the I-PAC Shareholder Representative to submit statements
describing any element of Loss or Anticipated Loss as to which indemnification
is claimed hereunder that is attributable to attorneys' fees, disbursements, and
any similar costs incident to such Loss or Anticipated Loss, supported by
affidavits showing that such costs actually have been or are likely to be
incurred, and all such attorneys' fees, disbursements and other costs shall be
apportioned as determined by the arbitrator. All fees of the arbitrator and
administrative expenses of the American Arbitration Association shall be treated
as costs for purposes of this Article. As a part of each Award made pursuant to
this Agreement, the arbitrator may allow interest thereon (other than on the
portion of
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the Award representing attorneys' fees, disbursements and costs) from the date
of the Loss or the date the Anticipated Loss becomes a Loss to the date of
payment at the rate of 10% per annum.
8.6.5.3 The Award shall be a conclusive determination of the
matter and shall be binding upon the Indemnitee and the I-PAC Shareholders, and
shall not be contested by any of them. In the event that the arbitrator shall
determine that the Indemnitee shall be entitled to any indemnification by reason
of its claim for attorneys' fees or interest as above provided (a "Profit Escrow
Fee Award"), an executed copy of the Fee Award setting forth the amount of the
indemnification shall be delivered to the Indemnitee and the I-PAC Shareholders.
When the time for filing an application for correction of the Fee Award or
filing a petition to vacate or correct the Fee Award has passed (or immediately
if such rights are waived by the parties before or after the Fee Award) then the
I-PAC Shareholders shall be liable for the payment of such claim. The Fee Award
shall be satisfied in the same manner as an undisputed claim in such amount
(including the arbitrator's fee) would be satisfied under Section 8.6.2 of this
Agreement.
8.6.5.4 If a matter claimed to be subject to indemnification
involves a third-party claim which has not yet been determined, the arbitrator
may in his discretion make a separate determination solely as to whether the
third-party claim is one for which indemnification may be had or may defer a
determination as to whether indemnification may be had pending the further
development of information as to the nature of the third-party claim. If the
arbitrator determines that the third-party claim is not subject to
indemnification, he shall set forth the basis of his decision in detail, which
decision shall be deemed to be an "Award" hereunder.
8.6.5.5 Promptly after the assertion by any third party of any
claim against the Indemnitee that, in the judgment of the Indemnitee may result
in the incurrence by the Indemnitee of Loss for which the Indemnitee would be
entitled to indemnification, the Indemnitee shall deliver to the I-PAC
Shareholder Representative a Notice of Anticipated Loss describing in reasonable
detail such claim and the I-PAC Shareholders may, at their option, assume the
defense of the Indemnitee against such claim (including the employment of
counsel, who shall be counsel satisfactory to the Indemnitee), and the payment
of expenses. The Indemnitee shall have the right to employ separate counsel in
any such action or claim and to participate in the defense or contest thereof,
but the fees and expenses of such counsel shall not be at the expense of the
I-PAC Shareholders unless (i) the I-PAC Shareholders shall have failed to assume
the defense of such claim, within a reasonable time after having been notified
by the Indemnitee of the existence of such claim as provided in the preceding
sentence, (ii) the employment of such counsel has been specifically authorized
by the I-PAC Shareholders or (iii) the named parties to any such action
(including any impleaded parties) include both the Indemnitee and one or more of
the I-PAC Shareholders and the Indemnitee shall have been advised in writing by
such counsel that there may be one or more legal defenses available to it which
are different from or additional to those available to the I-PAC Shareholders
(it being understood, however, that the I-PAC Shareholders shall not, in
connection with any one such action or separate but substantially similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the fees and expenses of more than
one separate firm of attorneys for the Indemnitee).
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ARTICLE IX
TERMINATION
9.1 Termination Events. This Agreement may, by notice given prior to or
at the Closing, be terminated:
9.1.1 by either Photomatrix or I-PAC if a material Breach of any
provision of this Agreement has been committed by the other party and such
Breach has not been waived or cured within fifteen (15) days after the breaching
party has been notified thereof:
9.1.2 by Photomatrix if any of the conditions in Article VI have
not been satisfied as of June 30, 1998 or if satisfaction of such a condition is
or becomes impossible (other than through the failure of Photomatrix to comply
with its obligations under this Agreement) and Photomatrix has not waived such
condition on or before June 30, 1998; or
9.1.3 by I-PAC, if any of the conditions in Article VII not been
satisfied as of June 30, 1998 or if satisfaction of such a condition is or
becomes impossible (other than through the failure of I-PAC to comply with their
obligations under this Agreement) and I-PAC has not waived such condition on or
before June 30, 1998;
9.1.4 by mutual consent of Photomatrix and I-PAC; or
9.1.5 by either Photomatrix or I-PAC if the Closing has not
occurred (other than through the failure of any party seeking to terminate this
Agreement to comply fully with its obligations under this Agreement) on or
before June 30, 1998 or such later date as the parties may agree upon.
9.1.6 by Photomatrix pursuant to Section 5.4.2.
9.2 Effect of Termination. Each party's right of termination under
Section 9.1 is in addition to any other rights it may have under this Agreement
or otherwise, and the exercise of such right of termination will not be an
election of remedies. If this Agreement is terminated pursuant to Section 9.1,
all further obligations of the parties under this Agreement will terminate,
except as provided in this Section 9.2 and except that the obligations in
Sections 9.3, 10.1, 10.2, 10.3, 10.7 and 10.8 will survive; provided, however,
that if this Agreement is terminated by a party because of a breach of the
Agreement by the other party or because one or more of the conditions to the
terminating party's obligations under this Agreement is not satisfied as a
result of the other party's failure to comply with its obligations under this
Agreement, the terminating party's right to pursue all legal remedies will
survive such termination unimpaired. In the event that this Agreement is
terminated by Photomatrix pursuant to Section 9.1.6, then Photomatrix shall
promptly, but in no event later than five days after the date of such
termination, pay I-PAC a fee equal to $250,000 (the
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"Termination Fee"), payable by wire transfer of same day funds. Photomatrix
acknowledges that the agreements contained in this Section 9.2 are an integral
part of the transactions contemplated by this Agreement and that, without these
agreements, I-PAC would not enter into this Agreement; accordingly, if
Photomatrix fails to promptly pay the amount due pursuant to this Section 9.2
and, in order to obtain such payment, I-PAC commences an arbitration which
results in a judgment against Photomatrix for the Termination Fee, Photomatrix
shall also pay to I-PAC its costs and expenses (including reasonable attorneys'
fees) in connection with such arbitration, together with interest on the amount
of the Termination Fee at the prime rate of Citibank N.A. in effect on the date
such payment was required to be made.
9.3 Return of Documents in Event of Termination. In the event of the
termination of this Agreement for any reason, Photomatrix and I-PAC will deliver
to the other party all documents, work papers and other material obtained from
it relating to the transactions contemplated hereby, whether so obtained before
or after execution hereof, and will take all practicable steps to have any
information so obtained kept confidential. Unless and until the transactions
contemplated hereby are consummated, the parties shall both hold confidential
all information and copies of documents and records obtained in the course of
such investigation or heretofore in connection with the transactions
contemplated hereby and shall not use or disclose such information, documents,
and records to any person, except as may be required by applicable law or stock
exchange rules and to its professional advisors.
ARTICLE X
MISCELLANEOUS
10.1 Professional Expenses. I-PAC and Photomatrix (on behalf of it and
Merger Corp.) shall each pay all of their own professional expenses relating to
negotiating, drafting and closing the transactions contemplated by this
Agreement, including, without limitation, the fees and expenses of their
respective counsel, financial advisers and accountants.
10.2 Governing Law. The interpretation and construction of this
Agreement and all matters relating hereto shall be governed by the laws of the
State of California.
10.3 Arbitration. For any and all controversies or claims (other than
those to be expressly resolved pursuant to Article VIII or Section 9.1) arising
out of, resulting from or in any way related to this Agreement or any
transactions provided for or contemplated herein, or the breach thereof, other
than a claim for injunctive relief, or a claim for specific performance prior to
the Closing Date, shall be settled by arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association ("the AAA")
in effect at the time demand for arbitration is made by any party hereto.
Notwithstanding any rule of the AAA to the contrary, any dispute submitted to
arbitration pursuant to the terms of this Section 10.3 shall be submitted to a
single arbitrator mutually appointed by the parties hereto. In the event that
the parties hereto cannot agree on a single arbitrator, then the dispute shall
be submitted to a panel of three arbitrators selected in accordance
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with the rules of the AAA. Arbitration shall occur in San Diego, California, or
such other location as is unanimously agreed by the parties hereto. The award
made by all or a majority of the arbitrators shall be final and binding, and
judgment with respect thereto may be entered in any court of law having
competent jurisdiction. The prevailing party in any such arbitration shall be
entitled to recover from, and have paid by, the other party thereto all fees and
disbursements of such arbitration, as well as its reasonable attorneys' fees,
costs and expenses, including both pre and post award interest.
10.4 "Person" Defined. "Person" shall mean and include an individual, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization and a government or other department or agency thereof.
10.5 Gender. Unless the context otherwise requires a different meaning,
words of a masculine gender shall be deemed and construed to include correlative
words of the feminine and neuter genders, words importing the singular number
shall include the plural number, and vice versa, and the terms "hereof,"
"hereby," "hereto," "hereunder," "herein," and similar terms mean this
Agreement.
10.6 Captions. The Article and Section captions used herein are for
reference purposes only, and shall not in any way affect the meaning or
interpretation of this Agreement.
10.7 Publicity. Except as otherwise required by law, or as may be
mutually consented and agreed to, none of the parties hereto shall issue any
press release or make any other public statement, in each case relating to or in
connection with or arising out of this Agreement or the matters contained
herein, without obtaining the prior approval of both Photomatrix and I-PAC to
the contents and the manner of presentation and publication thereof, provided,
however, Photomatrix shall have the right to make a public announcement of the
execution of this Agreement and a disclosure of the basic terms and conditions
of this Agreement if advised to do so by its legal counsel in connection with
the reporting and disclosure obligations of Photomatrix under the federal
securities laws and/or the NASDAQ Bulletin Board.
10.8 Notices. Any notice or other communications required or permitted
hereunder shall be sufficiently given if delivered in person or sent by express
mail or by registered or certified mail, postage prepaid, or by facsimile
transmission, receipt confirmed, addressed as follows:
(i) If to Photomatrix, Merger Corp. or,
following the Merger, I-PAC:
Photomatrix, Inc.
11065 Sorrento Valley Court
San Diego, CA 92121
Facsimile: (619) 457-8016
Attention: Suren Dutia
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With a copy to:
Otto E. Sorensen, Esquire
Luce, Forward, Hamilton & Scripps LLP
600 West Broadway, Suite 2600
San Diego, California 92101
(619) 236-1414
Facsimile: (619) 232-8311
(ii) If to I-PAC or, after Merger,
the I-PAC Shareholder :
I-PAC Manufacturing, Inc.
1958 Kellogg Ave.
Carlsbad, California 92009
Facsimile: (760) 438-5517
Attention: Patrick W. Moore
With a copy to:
Sullivan, Hill, Lewin, Rez, Engel & LaBazzo
550 West C Street, Suite 1500
San Diego, California 92101
Facsimile: (619) 231-4372
Attention: James P. Hill
or such other address as shall be furnished in writing by any such party, and
such notice or communication shall be deemed to have been given as of the date
so delivered, sent or mailed.
10.9 Parties in Interest. This Agreement may not be transferred,
assigned, pledged or hypothecated by any party hereto, other than by operation
of law. This Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective heirs, executors, administrators,
successors and assigns.
10.10 Counterparts. This Agreement may be executed in one or more
counterparts, all of which taken together shall constitute one instrument.
10.11 Entire Agreement. This Agreement, including the other documents
referred to herein which form a part hereof, contains the entire understanding
of the parties hereto with respect to the subject matter contained herein and
therein. This Agreement supersedes all prior agreements and understandings among
the parties with respect to such subject matter.
10.12 Amendments. This Agreement may not be changed orally, but only by
an agreement in writing signed by Photomatrix and I-PAC.
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10.13 Severability. In case any provision in this Agreement shall be
held invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions hereof will not in any way be
affected or impaired thereby.
10.14 Third Party Beneficiaries. Each party hereto intends that this
Agreement shall not benefit or create any right or cause of action in or on
behalf of any person other than the parties hereto; provided, however, that
Sections 2.6 and 2.7 are intended for the benefit of the I-PAC Shareholders, the
I-PAC Shareholders and the Surviving Corporation Indemnified Parties,
respectively.
10.15 Rules of Construction. The normal rules of construction which
require the terms of an agreement to be construed most strictly against the
drafter of such agreement are hereby waived since each party has been
represented by counsel in the drafting and negotiation of this Agreement.
IN WITNESS WHEREOF, each of the parties herein below stated has
executed this Agreement as of the date and year first above written.
PHOTOMATRIX:
PHOTOMATRIX, INC., a California corporation
By:
President
By:
Secretary
MERGER CORP.:
PHOTOMATRIX ACQUISITION, INC.
By:
President
By:
Secretary
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<PAGE>
I-PAC:
I-PAC MANUFACTURING, INC., a California
corporation
By:
President
By:
Secretary
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<PAGE>
AGREEMENT AND PLAN OF MERGER
AND REORGANIZATION
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I CERTAIN DEFINITIONS...............................................1
ARTICLE II THE MERGER AND RELATED TRANSACTIONS...............................2
2.1 The Merger........................................................2
2.2 The Closing.......................................................2
2.3 Actions at the Closing............................................2
2.4 Effect of Merger..................................................2
2.4.1 General...................................................2
2.4.2 Conversion of I-PAC Shares................................3
2.5 Exchange of I-PAC Shares..........................................3
2.6 Appointment to Photomatrix Board of Directors.....................4
2.7 Appointment of Photomatrix Officers...............................4
2.8 Possible Issuance of Additional Shares............................4
2.9 Issuance of Additional Shares upon the Exercise of
Outstanding Options and Warrants..................................6
ARTICLE III REPRESENTATIONS, WARRANTIES AND COVENANTS
OF I-PAC AND THE SHAREHOLDERS.....................................6
3.1 Existence; Good Standing; Corporate Authority and Authorization...6
3.1.1 I-PAC.....................................................6
3.1.2 Subsidiaries..............................................7
3.2 No Legal Bar; Conflicts; Enforceability...........................7
3.3 Capital Stock and Exclusive Dealing...............................7
3.4 Restrictive Documents.............................................8
3.5 Financial Statements and No Material Changes......................8
3.6 Absence of Undisclosed Liabilities................................8
3.7 No Changes Prior to Closing Date..................................9
3.8 Books and Records.................................................9
3.9 Title to Properties; Encumbrances.................................9
3.10 Real Property and Leases.........................................10
3.11 Fixed Assets.....................................................11
3.12 Material Contracts...............................................11
3.13 Litigation.......................................................12
3.14 Taxes............................................................12
3.15 Permits..........................................................13
3.16 Insurance........................................................13
3.17 Product Warranty.................................................13
3.18 Intellectual Property............................................14
3.19 Compliance With Laws.............................................15
3.20 Inventory........................................................15
(i)
<PAGE>
Page
3.21 Accounts Receivable..............................................15
3.22 Employment Relations.............................................15
3.23 Employee Benefit Plans...........................................16
3.23.1 List of Plans...........................................16
3.23.2 Status of Plans.........................................16
3.23.3 Contributions...........................................16
3.23.4 Tax Qualification.......................................17
3.23.5 Transactions............................................17
3.23.6 Other Plans.............................................17
3.23.7 Documents...............................................17
3.24 Environmental Laws and Regulations...............................17
3.25 Interests in Clients, Suppliers, Etc.............................18
3.26 Customers, Distributors and Sales Representatives................19
3.27 Bank Accounts, Powers of Attorney and Compensation of Employees..19
3.28 Disclosure.......................................................19
3.29 Broker's or Finder's Fees........................................19
3.30 Certain Conditions for Accounting and Tax Treatment..............19
3.31 Cooperation......................................................20
ARTICLE IV REPRESENTATIONS, WARRANTIES AND COVENANTS
OF PHOTOMATRIX AND THE SHAREHOLDERS..............................20
4.1 Existence; Good Standing; Corporate Authority and Authorization..20
4.1.1 Photomatrix...............................................20
4.1.2 Subsidiaries..............................................21
4.2 No Legal Bar; Conflicts; Enforceability..........................21
4.3 Capital Stock and Exclusive Dealing..............................22
4.4 Restrictive Documents............................................22
4.5 Financial Statements and No Material Changes.....................22
4.6 Absence of Undisclosed Liabilities...............................23
4.7 No Changes Prior to Closing Date.................................23
4.8 Books and Records................................................24
4.9 Title to Properties; Encumbrances................................24
4.10 Real Property and Leases.........................................24
4.11 Fixed Assets.....................................................25
4.12 Material Contracts...............................................25
4.13 Litigation.......................................................26
4.14 Taxes............................................................26
4.15 Permits..........................................................27
4.16 Insurance........................................................27
4.17 Product Warranty.................................................28
4.18 Intellectual Property............................................28
4.19 Compliance With Laws.............................................29
(ii)
<PAGE>
Page
4.20 Inventory........................................................29
4.21 Accounts Receivable..............................................29
4.22 Employment Relations.............................................30
4.23 Employee Benefit Plans...........................................30
4.23.1 List of Plans............................................30
4.23.2 Status of Plans..........................................30
4.23.3 Contributions............................................31
4.23.4 Tax Qualification........................................31
4.23.5 Transactions.............................................31
4.23.6 Other Plans..............................................31
4.23.7 Documents................................................32
4.24 Environmental Laws and Regulations...............................32
4.25 Interests in Clients, Suppliers, Etc.............................33
4.26 Customers, Distributors and Sales Representatives................33
4.27 Bank Accounts, Powers of Attorney and Compensation of Employees..33
4.28 Disclosure.......................................................34
4.29 Broker's or Finder's Fees........................................34
4.30 Certain Conditions for Accounting and Tax Treatment..............34
4.31 Cooperation......................................................34
ARTICLE V CONDUCT OF BUSINESS..............................................35
5.1 Conduct of Business of I-PAC.....................................35
5.2 Conduct of Business of Photomatrix...............................36
5.3 I-PAC No Solicitation............................................37
5.4 Photomatrix No Solicitation......................................37
5.5 No Stock Transactions............................................39
5.6 Review...........................................................39
5.6.1 Review of I-PAC...........................................39
5.6.2 Review of Photomatrix.....................................40
5.7 Best Efforts.....................................................40
5.8 Fulfillment of Agreement.........................................40
ARTICLE VI CONDITIONS TO OBLIGATIONS OF PHOTOMATRIX.........................41
6.1 Opinion of I-PAC's Counsel: Certificate of I-PAC ...............41
6.2 Good Standing and Tax Certificates...............................41
6.3 No Material Adverse Change.......................................41
6.4 Truth of Representations and Warranties..........................41
6.5 Performance of Agreements........................................41
6.6 Proceedings......................................................42
6.7 No Litigation Threatened.........................................42
6.8 Governmental Approvals...........................................42
6.9 Employment Agreements............................................42
(iii)
<PAGE>
Page
6.10 NonCompetition Agreement.........................................42
6.11 Registration Rights Agreements...................................42
6.12 I-PAC Shareholder's Representation and Transmittal Letters.......42
6.13 ASL License Agreement............................................42
6.14 Photomatrix Shareholder and Board of Director Approval...........42
6.15 I-PAC Shareholder Approval.......................................43
6.16 Fairness Opinion.................................................43
6.17 S Corp. Status and Fiscal Year-End...............................43
ARTICLE VII CONDITIONS TO I-PAC'S OBLIGATIONS................................43
7.1 Opinion of Counsel for Photomatrix...............................43
7.2 Good Standing Certificate........................................43
7.3 No Material Adverse Change.......................................43
7.4 Tax Certificate of Merger Corp...................................44
7.5 Truth of Representations and Warranties..........................44
7.6 Performance of Agreements........................................44
7.7 No Litigation Threatened.........................................44
7.8 Governmental Approvals...........................................44
7.9 Employment Agreements............................................44
7.10 NonCompetition Agreements........................................44
7.11 Registration Rights Agreements...................................44
7.12 Photomatrix Shareholder and Board of Director Approval...........44
7.13 Market for Photomatrix Stock.....................................45
ARTICLE VIII SURVIVAL OF REPRESENTATIONS AND
WARRANTIES; INDEMNITY............................................45
8.1 I-PAC Bound......................................................45
8.2 Survival of Representations, Warranties and Indemnities..........45
8.3 Scope of Indemnification, Liabilities and Obligations............45
8.4 Representations, Warranties, Covenants and Agreements............45
8.5 Indemnification..................................................46
8.6 Notice and Resolution of Claims-- Opportunity to Defend..........46
ARTICLE IX TERMINATION......................................................49
9.1 Termination Events...............................................49
9.2 Effect of Termination............................................49
9.3 Return of Documents in Event of Termination......................50
ARTICLE X MISCELLANEOUS....................................................50
10.1 Professional Expenses............................................50
10.2 Governing Law....................................................50
10.3 Arbitration......................................................50
(iv)
<PAGE>
Page
10.4 "Person" Defined.................................................51
10.5 Gender...........................................................51
10.6 Captions.........................................................51
10.7 Publicity........................................................51
10.8 Notices..........................................................51
10.9 Parties in Interest..............................................52
10.10 Counterparts.....................................................52
10.11 Entire Agreement.................................................52
10.12 Amendments.......................................................52
10.13 Severability.....................................................53
10.14 Third Party Beneficiaries........................................53
10.15 Rules of Construction............................................53
Exhibits
Exhibit 1: Agreement of Merger
Exhibit 2: Officers' Certificates
Exhibit 3: Representation and Transmittal Letter
Exhibit 4: Determination of I-PAC Gross Revenues, Gross Profit,
and Gross Margin
Exhibit 5: I-PAC Balance Sheets
Exhibit 6: Photomatrix Balance Sheets
Exhibit 7: Moore Executive Employment Agreement
Exhibit 8: Grivas Executive Employment Agreement
Exhibit 9: Amendment No. 1 to Dutia Executive Employment Agreement
Exhibit 10: Moore Covenant Not to Compete
Exhibit 11: Grivas Covenant Not to Compete
Exhibit 12: Registration Rights Agreement
(v)
<PAGE>
APPENDIX B
March 16, 1998
Board of Directors
Photomatrix, Inc.
11065 Sorrento Valley Court
San Diego, CA 92121
Attn: Mr. Suren G. Dutia
Gentlemen:
Photomatrix, Inc. ("Photomatrix") retained Fredericks, Shields & Co., LLC
("FSC") to express our opinion, as to the fairness, from a financial point of
view, to the shareholders of Photomatrix of the consideration to be paid to
I-PAC Manufacturing, Inc. ("I-PAC") for all the outstanding shares of I-PAC. The
Agreement and Plan of Merger and Reorganization (the "Agreement") calls for
Photomatrix to issue 4,848,000 shares of its common stock at closing in exchange
for all of the outstanding shares of I-PAC, with the possible issuance of up to
3,744,677 additional Photomatrix common shares within ninety (90) days of the
completion of the Earnout Period, the exact number of shares to be determined in
accordance with the schedule contained in Section 2.8 "Possible Issuance of
Additional Shares" of the Agreement.
FSC, as an integral part of our business, is continually engaged in the
valuation of both privately held and publicly traded businesses and their
securities in connection with mergers and acquisitions, divestitures, equity and
debt capital formation, recapitalizations, and other objectives.
In conducting our investigation and arriving at our opinion, we have reviewed
the Agreement and have taken into account such accepted financial procedures and
considerations as we deemed relevant. We have reviewed audited financial
statements of Photomatrix for the periods ending March 31, 1995 through March
31, 1997, as well as unaudited quarterly financial statements of Photomatrix for
the periods ending June 30, 1997, September 30, 1997, and December 31, 1997;
unaudited financial statements of I-PAC for the periods ending December 31, 1994
and December 31, 1995, nine-month unaudited financial statements of I-PAC for
the period ending September 30, 1997, and audited financial statements of I-PAC
for the periods ending December 31, 1996 and December 31, 1997. We have reviewed
management projections for Photomatrix and I-PAC for the period ending December
1998. We have visited Photomatrix and I-PAC's facilities, met with management,
and discussed the current business and future prospects of Photomatrix and
I-PAC. We have analyzed financial information regarding comparable public
companies, and consideration paid in other merger and acquisition transactions
that we consider to be comparable. We reviewed material discussing the economic
outlook and the outlook for the contract electronic manufacturing industry, and
other material as we deemed appropriate.
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In rendering our opinion, we have assumed, without independent verification, the
accuracy and completeness of the financial and other information and
representations which have been provided to us by Photomatrix and I-PAC or which
are publicly available.
Based on our analysis of the factors deemed relevant, it is our opinion that the
issuance of 4,848,000 shares of Photomatrix common stock at closing in exchange
for all of the outstanding shares of I-PAC, with the possible issuance of up to
3,744,677 additional Photomatrix common shares within ninety (90) days of the
completion of the Earnout Period, is fair, from a financial point of view, to
the shareholders of Photomatrix.
Very truly yours,
FREDERICKS, SHIELDS & CO., LLC
B-2
<PAGE>
APPENDIX C
PHOTOMATRIX, INC.
1998 STOCK OPTION PLAN
1. PURPOSE. This Stock Option Plan (the "Plan") is intended to serve as
an incentive to, and to encourage stock ownership by, certain eligible
participants rendering services to PHOTOMATRIX, INC., a California corporation
(the "Corporation"), and certain affiliates as set forth below, so that they may
acquire or increase their proprietary interest in the Corporation.
2. ADMINISTRATION.
2.1 Committee. The Plan shall be administered by the Board of
Directors of the Corporation (the "Board of Directors") or a compensation
committee of two or more members appointed by the Board of Directors (the
"Committee") who are Non-Employee Directors as defined in Rule 16b-3 promulgated
under Section 16 of the Securities Exchange Act of 1934 and an outside director
as defined in Treasury Regulation ss. 1.162-27(e)(3). The Committee shall select
one of its members as Chairman and shall appoint a Secretary, who need not be a
member of the Committee. The Committee shall hold meetings at such times and
places as it may determine and minutes of such meetings shall be recorded. Acts
by a majority of the Committee in a meeting at which a quorum is present and
acts approved in writing by a majority of the members of the Committee shall be
valid acts of the Committee.
2.2 Term. If the Board of Directors selects a Committee, the
members of the Committee shall serve on the Committee for the period of time
determined by the Board of Directors and shall be subject to removal by the
Board of Directors at any time. The Board of Directors may terminate the
function of the Committee at any time and resume all powers and authority
previously delegated to the Committee.
2.3 Authority. The Committee shall have sole discretion and
authority to grant options under the Plan to eligible participants rendering
services to the Corporation or any "parent" or "subsidiary" of the Corporation
("Parent or Subsidiary"), as defined in Section 424 of the Internal Revenue Code
of 1986, as amended (the "Code"), at such times, under such terms and in such
amounts as it may decide. For purposes of this Plan and any Stock Option
Agreement (as defined below), the term "Corporation" shall include any Parent or
Subsidiary, if applicable. Subject to the express provisions of the Plan, the
Committee shall have complete authority to interpret the Plan, to prescribe,
amend and rescind the rules and regulations relating to the Plan, to determine
the details and provisions of any Stock Option Agreement, to accelerate any
options granted under the Plan and to make all other determinations necessary or
advisable for the administration of the Plan.
2.4 Type of Option. The Committee shall have full authority and
discretion to determine, and shall specify, whether the eligible individual will
be granted options intended to qualify as incentive options under Section 422 of
the Code ("Incentive Options") or options which are not
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<PAGE>
intended to qualify under Section 422 of the Code ("Non-Qualified Options");
provided, however, that Incentive Options shall only be granted to employees of
the Corporation, or a Parent or Subsidiary thereof, and shall be subject to the
special limitations set forth herein attributable to Incentive Options.
2.5 Interpretation. The interpretation and construction by the
Committee of any provisions of the Plan or of any option granted under the Plan
shall be final and binding on all parties having an interest in this Plan or any
option granted hereunder. No member of the Committee shall be liable for any
action or determination made in good faith with respect to the Plan or any
option granted under the Plan.
3. ELIGIBILITY.
3.1 General. All directors, officers and employees of the
Corporation, or any Parent or Subsidiary, relative to the Corporation's, or any
Parent's or Subsidiaries', management, operation or development shall be
eligible to receive options under the Plan. The selection of recipients of
options shall be within the sole and absolute discretion of the Committee. No
person shall be granted an Incentive Option under this Plan unless such person
is an employee of the Corporation, or a Parent or Subsidiary, on the date of
grant. No employee shall be granted more than 150,000 options in any one year
period.
3.2 Termination of Eligibility.
3.2.1 If an optionee ceases to be employed by the Corporation,
or its Parent or Subsidiary, or is no longer an officer or member of the Board
of Directors of the Corporation, or its Parent or Subsidiary for any reason
(other than for "cause," as hereinafter defined, or such optionee's death), any
option granted hereunder to such optionee shall expire three months after the
date the occurrence giving rise to such termination of eligibility (or 1 year in
the event an optionee is "disabled," as defined in Section 22(e)(3) of the Code)
or upon the date it expires by its terms, whichever is earlier. Any option that
has not vested in the optionee as of the date of such termination shall
immediately expire and shall be null and void. The Committee shall, in its sole
and absolute discretion, decide, utilizing the provisions set forth in Treasury
Regulations ss.1.421-7 (h), whether an authorized leave of absence or absence
for military or governmental service, or absence for any other reason, shall
constitute termination of eligibility for purposes of this Section.
3.2.2 If an optionee ceases to be employed by the Corporation,
or its Parent or Subsidiary, or is no longer an officer or member of the Board
of Directors of the Corporation, or its Parent or Subsidiary and such
termination is as a result of "cause," as hereinafter defined, then all options
granted hereunder to such optionee shall expire on the date of the occurrence
giving rise to such termination of eligibility or upon the date it expires by
its terms, whichever is earlier, and such optionee shall have no rights with
respect to any unexercised options. For purposes of this Plan, "cause" shall
mean an optionee's personal dishonesty, misconduct, breach of fiduciary duty,
incompetence, intentional failure to perform stated obligations, willful
violation of any law, rule,
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<PAGE>
regulation or final cease and desist order, or any material breach of any
provision of this Plan, any Stock Option Agreement or any employment agreement.
3.3 Death of Optionee and Transfer of Option. In the event an
optionee shall die, an option may be exercised (subject to the condition that no
option shall be exercisable after its expiration and only to the extent that the
optionee's right to exercise such option had accrued at the time of the
optionee's death) at any time within six months after the optionee's death by
the executors or administrators of the optionee or by any person or persons who
shall have acquired the option directly from the optionee by bequest or
inheritance. Any option that has not vested in the optionee as of the date of
death or termination of employment, whichever is earlier, shall immediately
expire and shall be null and void. No option shall be transferable by the
optionee other than by will or the laws of intestate succession.
3.4 Limitation on Options. No person shall be granted any Incentive
Option to the extent that the aggregate fair market value of the Stock (as
defined below) to which such options are exercisable for the first time by the
optionee during any calendar year (under all plans of the Corporation as
determined under Section 422(d) of the Code) exceeds $100,000.
4. IDENTIFICATION OF STOCK. The Stock, as defined herein, subject to
the options shall be shares of the Corporation's authorized but unissued or
acquired or reacquired common stock (the "Stock"). The aggregate number of
shares subject to outstanding options shall not exceed 1,500,000 shares of Stock
(subject to adjustment as provided in Section 6). Notwithstanding the above, at
no time shall the total number of shares of Stock issuable upon exercise of all
outstanding options and the total number of shares of Stock provided for under
any stock bonus or similar plan of the Corporation exceed 30% as calculated in
accordance with the conditions and exclusions of ss.260.140.45 of Title 10,
California Code of Regulations, based on the shares of the issuer which are
outstanding at the time the calculation is made. If any option granted hereunder
shall expire or terminate for any reason without having been exercised in full,
the unpurchased shares subject thereto shall again be available for purposes of
this Plan.
5. TERMS AND CONDITIONS OF OPTIONS. Any option granted pursuant to the
Plan shall be evidenced by an agreement ("Stock Option Agreement") in such form
as the Committee shall from time to time determine, which agreement shall comply
with and be subject to the following terms and conditions:
5.1 Number of Shares. Each option shall state the number of shares
of Stock to which it pertains.
5.2 Option Exercise Price. Each option shall state the option
exercise price, which shall be determined by the Committee; provided, however,
that (i) the exercise price of any Incentive Option shall not be less than the
fair market value of the Stock, as determined by the Committee, on the date of
grant of such option, (ii) the exercise price of any option granted to a person
who owns more than 10% of the total combined voting power of all classes of the
Corporation's stock, as
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<PAGE>
determined for purposes of Section 422 of the Code, shall not be less than 120%
of the fair market value of the Stock, as determined by the Committee, on the
date of grant of such option, and (iii) the exercise price of any Non-Qualified
Option shall not be less than 100% of the fair market value of the Stock, as
determined by the Committee, on the date of grant of such option.
5.3 Term of Option. The term of an option granted hereunder shall
be determined by the Committee at the time of grant, but shall not exceed ten
years from the date of the grant. The term of any Incentive Option granted to an
employee who owns more than 10% of the total combined voting power of all
classes of the Corporation's stock, as determined for purposes of Section 422 of
the Code, shall in no event exceed five years from the date of grant. All
options shall be subject to early termination as set forth in this Plan. In no
event shall any option be exercisable after the expiration of its term.
5.4 Method of Exercise. An option shall be exercised by written
notice to the Corporation by the optionee (or successor in the event of death).
Such written notice shall state the number of shares with respect to which the
option is being exercised and designate a time, during normal business hours of
the Corporation, for the delivery thereof ("Exercise Date"), which time shall be
at least 30 days after the giving of such notice unless an earlier date shall
have been mutually agreed upon. At the time specified in the written notice, the
Corporation shall deliver to the optionee at the principal office of the
Corporation, or such other appropriate place as may be determined by the
Committee, a certificate or certificates for such shares. Notwithstanding the
foregoing, the Corporation may postpone delivery of any certificate or
certificates after notice of exercise for such reasonable period as may be
required to comply with any applicable listing requirements of any securities
exchange. In the event an option shall be exercisable by any person other than
the optionee, the required notice under this Section shall be accompanied by
appropriate proof of the right of such person to exercise the option.
5.5 Medium and Time of Payment. The option exercise price shall be
payable in full on or before the option Exercise Date in any one of the
following alternative forms:
5.5.1 Full payment in cash or certified bank or cashier's
check;
5.5.2 Full payment in shares of Stock having a fair market
value on the Exercise Date in the amount equal to the option exercise price;
5.5.3 A combination of the consideration set forth in Sections
5.5.1 and 5.5.2 equal to the option exercise price; or
5.5.4 Any other method of payment complying with the
provisions of Section 422 of the Code with respect to Incentive Options,
including, but not limited to, the delivery by optionee of an irrevocable
direction to a securities broker approved by the Corporation to sell the Stock
and to deliver all or part of the sales proceeds to the Corporation in payment
of all or part of the exercise price and any withholding taxes, provided that
the terms of payment are established by
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the Committee at the time of grant and any other method of payment established
by the Committee with respect to Non-Qualified Options.
5.6 Fair Market Value. The fair market value of a share of Stock on
any relevant date shall be determined in accordance with the following
provisions:
5.6.1 If the Stock at the time is neither listed nor admitted
to trading on any stock exchange nor traded in the over-the-counter market, then
the fair market value shall be determined by the Committee after taking into
account such factors as the Committee shall deem appropriate.
5.6.2 If the Stock is not at the time listed or admitted to
trading on any stock exchange but is traded in the over-the-counter market, the
fair market value shall be the mean between the highest bid and lowest asked
prices (or, if such information is available, the closing selling price) of one
share of Stock on the date in question in the over-the-counter market, as such
prices are reported by the National Association of Securities Dealers through
its NASDAQ system or any successor system. If there are no reported bid and
asked prices (or closing selling price) for the Stock on the date in question,
then the mean between the highest bid price and lowest asked price (or the
closing selling price) on the last preceding date for which such quotations
exist shall be determinative of fair market value.
5.6.3 If the Stock is at the time listed or admitted to
trading on any stock exchange, then the fair market value shall be the closing
selling price of one share of Stock on the date in question on the stock
exchange determined by the Committee to be the primary market for the Stock, as
such price is officially quoted in the composite tape of transactions on such
exchange. If there is no reported sale of Stock on such exchange on the date in
question, then the fair market value shall be the closing selling price on the
exchange on the last preceding date for which such quotation exists.
5.7 Right to Exercise. Except with respect to options granted to
officers or directors of the Corporation, options granted pursuant to this Plan
shall be exercisable or "vest" at the rate of at least 20% per year over the
5-year period beginning on the date the option is granted. Options granted to
officers and directors shall become exercisable or "vest," subject to reasonable
conditions, at any time during any period established by the Corporation.
5.8 Rights as a Shareholder. An optionee or successor shall have no
rights as a shareholder with respect to any Stock underlying any option until
the date of the issuance to such optionee of a certificate for such Stock. No
adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property) or distributions or other rights for which
the record date is prior to the date such Stock certificate is issued, except as
provided in Section 6.
5.9 Modification, Extension and Renewal of Options. Subject to the
terms and conditions of the Plan, the Committee may modify, extend or renew
outstanding options granted
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<PAGE>
under the Plan, or accept the surrender of outstanding options (to the extent
not exercised) and authorize the granting of new options in substitution
therefor.
5.10 Other Provisions. The Stock Option Agreements shall contain
such other provisions, including without limitation, restrictions or conditions
upon the exercise of options, as the Committee shall deem advisable.
6. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.
6.1 Subdivision or Consolidation. Subject to any required action by
shareholders of the Corporation, the number of shares of Stock covered by each
outstanding option, and the exercise price thereof, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Stock of
the Corporation resulting from a subdivision or consolidation of shares,
including, but not limited to, a stock split, reverse stock split,
recapitalization, continuation or reclassification, or the payment of a stock
dividend (but only on the Stock) or any other increase or decrease in the number
of such shares effected without receipt of consideration by the Corporation. Any
fraction of a share subject to option that would otherwise result from an
adjustment pursuant to this Section shall be rounded downward to the next full
number of shares without other compensation or consideration to the holder of
such option.
6.2 Capital Transactions. Upon a sale or exchange of all or
substantially all of the assets of the Corporation, a merger or consolidation in
which the Corporation is not the surviving corporation, a merger, reorganization
or consolidation in which the Corporation is the surviving corporation and
shareholders of the Corporation exchange their stock for securities or property,
a liquidation of the Corporation or similar transaction as determined by the
Committee ("Capital Transaction"), this Plan and each option issued under this
Plan, whether vested or unvested, shall terminate immediately prior to such
Capital Transaction; provided, however, that subject to terms approved by the
Committee, all optionees will have the right, during the 30 days prior to such
Capital Transaction, to exercise all vested options. Notwithstanding the
foregoing, in the event there is a Capital Transaction, all options granted
under this Plan shall vest 30 days prior to such Capital Transaction. The
Committee may, but shall not be obligated to, (i) accelerate the vesting of any
option or (ii) apply the foregoing provisions, including but not limited to,
termination of this Plan and any options granted pursuant to the Plan, in the
event there is a sale of 50% or more of the stock of the Corporation in any two
(2) year period or a transaction similar to a Captial Transaction.
6.3 Adjustments. To the extent that the foregoing adjustments
relate to stock or securities of the Corporation, such adjustments shall be made
by the Committee, whose determination in that respect shall be final, binding
and conclusive.
6.4 Ability to Adjust. The grant of an option pursuant to the Plan
shall not affect in any way the right or power of the Corporation to make
adjustments, reclassifications, reorganizations or changes of its capital or
business structure or to merge, consolidate, dissolve, liquidate, sell or
transfer all or any part of its business or assets.
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<PAGE>
6.5 Notice of Adjustment. Whenever the Corporation shall take any
action resulting in any adjustment provided for in this Section, the Corporation
shall forthwith deliver notice of such action to each optionee, which notice
shall set forth the number of shares subject to the option and the exercise
price thereof resulting from such adjustment.
6.6 Limitation on Adjustments. Any adjustment, assumption or
substitution of an Incentive Option shall comply with Section 425 of the Code,
if applicable.
7. NONASSIGNABILITY. Options granted under this Plan may not be sold,
pledged, assigned or transferred in any manner other than by will or by the laws
of intestate succession, and may be exercised during the lifetime of an optionee
only by such optionee. Any transfer by the optionee of any option granted under
this Plan in violation of this Section shall void such option and any Stock
Option Agreement entered into by the optionee and the Corporation regarding such
transferred option shall be void and have no further force or effect. No option
shall be pledged or hypothecated in any way, nor shall any option be subject to
execution, attachment or similar process.
8. NO RIGHT OF EMPLOYMENT. Neither the grant nor exercise of any option
nor anything in this Plan shall impose upon the Corporation or any other
corporation any obligation to employ or continue to employ any optionee. The
right of the Corporation and any other corporation to terminate any employee
shall not be diminished or affected because an option has been granted to such
employee.
9. TERM OF PLAN. This Plan is effective on the date the Plan is adopted
by the Board of Directors and options may be granted pursuant to the Plan from
time to time within a period of ten (10) years from such date, or the date of
any required shareholder approval required under the Plan, if earlier.
Termination of the Plan shall not affect any option theretofore granted.
10. AMENDMENT OF THE PLAN. The Board of Directors of the Corporation
may, subject to any required shareholder approval, suspend, discontinue or
terminate the Plan, or revise or amend it in any respect whatsoever, including,
but not limited to, any changes required pursuant to any state securities rules
or regulations, with respect to any shares of Stock at that time not subject to
options.
11. APPLICATION OF FUNDS. The proceeds received by the Corporation from
the sale of Stock pursuant to options may be used for general corporate
purposes.
12. RESERVATION OF SHARES. The Corporation, during the term of this
Plan, shall at all times reserve and keep available such number of shares of
Stock as shall be sufficient to satisfy the requirements of the Plan.
13. NO OBLIGATION TO EXERCISE OPTION. The granting of an option shall
not impose any obligation upon the optionee to exercise such option.
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<PAGE>
14. APPROVAL OF BOARD OF DIRECTORS AND SHAREHOLDERS. The Plan shall not
take effect until approved by the Board of Directors of the Corporation. This
Plan shall be approved by a vote of the shareholders within 12 months from the
date of approval by the Board of Directors. In the event such shareholder vote
is not obtained, all options granted hereunder, whether vested or unvested,
shall be null and void. Further, any stock acquired pursuant to the exercise of
any options under this Agreement may not count for purposes of determining
whether shareholder approval has been obtained.
15. WITHHOLDING TAXES. Notwithstanding anything else to the contrary in
this Plan or any Stock Option Agreement, the exercise of any option shall be
conditioned upon payment by such optionee in cash, or other provisions
satisfactory to the Committee, of all local, state, federal or other withholding
taxes applicable, in the Committee's judgment, to the exercise or to later
disposition of shares acquired upon exercise of an option (including any
repurchase of an option or the Stock).
16. PARACHUTE PAYMENTS. Any outstanding option under the Plan may not
be accelerated to the extent any such acceleration of such option would, when
added to the present value of other payments in the nature of compensation which
becomes due and payable to the optionee would result in the payment to such
optionee of an excess parachute payment under Section 280G of the Code. The
existence of any such excess parachute payment shall be determined in the sole
and absolute discretion of the Committee.
17. SECURITIES LAWS COMPLIANCE. Notwithstanding anything contained
herein, the Corporation shall not be obligated to grant any option under this
Plan or to sell, issue or effect any transfer of any Stock unless such grant,
sale, issuance or transfer is at such time effectively (i) registered or exempt
from registration under the Act and (ii) qualified or exempt from qualification
under the California Corporate Securities Law of 1968 and any other applicable
state securities laws. As a condition to exercise of any option, each optionee
shall make such representations as may be deemed appropriate by counsel to the
Corporation for the Corporation to use any available exemption from registration
under the Act or any applicable state securities law.
18. NOTICES. Any notice to be given under the terms of the Plan shall
be addressed to the Corporation in care of its Secretary at its principal
office, and any notice to be given to an
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<PAGE>
optionee shall be addressed to such optionee at the address maintained by the
Corporation for such person or at such other address as the optionee may specify
in writing to the Corporation.
As adopted by the Board of Directors as of February , 1998.
PHOTOMATRIX, INC., a California corporation
By:
Roy L. Gayhart,
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<PAGE>
Photomatrix, Inc.
For Annual Meeting of Shareholders - May 26, 1998
The undersigned hereby appoints Suren Dutia and Roy Gayhart, and each
of them, proxies, each with full power of substitution, for and in the name of
the undersigned at the Annual Meeting of Shareholders of Photomatrix, Inc. to be
held at the 11065 Sorrento Valley Court, San Diego, California 92121, on May 26,
1998 at 1:00 p.m. and at any and all postponement and adjournments thereof, to
vote all shares of Common Stock which the undersigned is entitled to vote, as
specified below.
PROPOSAL 1
|_| FOR the Merger |_| AGAINST the Merger |_| ABSTAIN
Agreement Agreement
PROPOSAL 2
|_| FOR the Authorization |_| AGAINST the |_| ABSTAIN
of a Reverse Stock Split Authorization of
a Reverse Split
PROPOSAL 3
|_| FOR the Election of |_| AGAINST the Election |_| ABSTAIN
Directors of Directors
PROPOSAL 4
|_| FOR the Adoption of |_| AGAINST the Adoption |_| ABSTAIN
1998 Stock Option Plan of 1998 Stock Option
Plan
PROPOSAL 5
|_| FOR the Appointment |_| AGAINST the |_| ABSTAIN
of Independent Auditors Appointment of
Independent Auditors
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
UNLESS OTHERWISE MARKED, THIS PROXY WILL BE VOTED FOR THE ABOVE PROPOSAL
(Please Sign and Date the Proxy on Reverse Side)
<PAGE>
DATED: _____________________, 1998
(Signature)
(Signature)
Sign exactly as name
appears hereon. Give your
full title if signing in
other than individual
capacity. All joint owners
should sign.
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<PERIOD-START> JAN-1-1997
<PERIOD-END> DEC-31-1997
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