SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities and Exchange Act
November 15, 2006
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Date of Report
(Date of earliest event reported)
Reflect Scientific, Inc.
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(Exact name of registrant as specified in its charter)
UTAH 000-31377 87-0642556
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(State or other (Commission File Number) (IRS Employer
jurisdiction of Identification No.)
incorporation)
1270 South 1380 West
Orem, Utah 84058
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(Address of Principal Executive Offices)
(801-226-4100
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(Registrant's Telephone Number)
N/A
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(Former Name or Former Address if changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended
to simultaneously satisfy the filing obligation of the Registrant under any of
the following provisions (see general instruction A.2. below):
[ ] Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14-a-12 under the Exchange Act
(17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
Item 1.01 Entry into a Material Definitive Agreement
(a) Effective as of November 15, 2006, the Registrant ("Reflect," the
"Company," "we," "our," "us" and words of similar import) entered into an
Agreement and Plan of Merger (the "Merger Agreement" and the "Merger") among
Reflect; Image Acquisition Corp., a Georgia corporation and
wholly-owned subsidiary of Reflect ("Merger Subsidiary"); Smithgall &
Associates, Inc., dba Image Labs International, a Georgia corporation ("Image
Labs"); and Brian Smithgall ("Smithgall"), the sole shareholder of Image Labs
(the "Image Labs Shareholder"). Pursuant to the Merger Agreement, the Merger
Subsidiary will merge with and into Image Labs with Image Labs being the
surviving corporation and becoming a wholly-owned subsidiary of Reflect.
Under the Merger Agreement, Reflect will:
1. Issue to the Image Labs Shareholder 525,000 shares of its common
stock that are "restricted securities" as defined in Rule 144, with no
registration rights to have these securities included in a registration
statement filed with the Securities and Exchange Commission.
2. Pay $200,000 to the Image Labs Shareholder.
3. Pay the Image Labs Shareholder a 2.5% Running Earnout Purchase Price
(the "Running EOPP") as a contingent purchase price based upon the gross
revenues earned after closing by Image Lab's "Manufacturing," "Value Added Re-
sales" and "Custom Engineering" business segments (the "PP Business
Segments"), excluded, without qualification, for the purpose of calculating
revenues on which Running EOPP is payable, are any revenues produced by Image
Lab's "Catpro" business segment (the "Catpro Business Segment"). The Running
EOPP shall be paid quarterly within 45 days of the end of each quarter so
long as Reflect owns and operates the PP Business Segments of Image Labs and
in the event of a sale or merger of the PP Business Segments, the Running EOPP
obligation shall remain an integral part of the PP Business Segments. The
Running EOPP shall be paid to the Image Labs Shareholder for the period of his
life by the owner of the PP Business Segments; and (ii) Reflect shall pay
quarterly a 2.5% Performance Contingent Purchase Price (the "Performance CP")
based upon the performance of the PP Business Segments in the prior quarter
provided the PP Business Segments achieve an Earnings Before Interest and
Taxes ("EBIT" as defined in the Merger Agreement) of 10% in the relevant
quarter. Performance CPP shall be paid within 45 days following the quarter
and shall be paid so long as Reflect owns and operates the PP Business
Segments and so long as the Image Labs Shareholder remains an employee of
Reflect. Late payments of Running EOPP or Performance CPP shall bear interest
at the lesser of the prime rate as listed in the Wall Street Journal, Western
Edition plus 6 percentage points or eighteen percent (18%).
4. Execute and deliver an Employment Agreement pursuant to which
Smithgall will become an employee of Image Labs for an initial term of 36
months at a salary of $100,000 per year.
5. Execute and deliver an Employment Agreement pursuant to which Eric
Pierson will become an employee of Image Labs for an initial term of 36 months
at a salary of $120,000 per year. In addition, Mr. Pierson will be paid a
signing bonus in the form of 500,000 shares of Reflect's common stock that are
"restricted securities" with no registration rights to have these securities
included in a registration statement filed with the Securities and Exchange
Commission, and the sum of $37,500 payable in cash within 30 days of the
closing of the Merger Agreement or following receipt of funding, whichever
occurs later. Mr. Pierson will also be paid a 2% running royalty on gross
revenues, payable in cash; and (ii) 5.0% of the Catpro Division of Image Labs
EBIT payable in Reflect common stock at $2.00 per share or the current market
price, whichever is greater, all being "restricted securities" without
registration rights. The aforementioned payments shall be paid so long as
Reflect owns and operates the Catpro Business Segment of Image Labs and shall
be paid quarterly within 45 days following the close of the quarter and
requires that the Catpro Business Segment is profitable. The royalty payments
shall be paid and reconciled on the following basis; providing the business
achieves an EBIT (Earnings before interest and taxes) of 10% or greater for
the quarter the 2% royalty shall be paid on gross revenues recorded during
that quarter. If during any given quarter the EBIT does not achieve the
minimum threshold of 10%, no royalty shall be paid. However, if at year end
the average EBIT (which shall be calculated as the sum of the quarterly EBIT's
divided by four) is 10% or greater then royalties shall be payable for gross
revenues recorded during the entire year and any outstanding balance shall be
paid within 45 days.
As a condition to the closing of the Merger Agreement, Reflect shall
have raised approximately $1,000,000 in funding prior to December 31, 2006, or
such later date as the parties shall agree in writing, to support the Catpro
Business Segment owned by Image Labs and to be operated as a separate division
within Image Labs as a wholly-owned subsidiary of Reflect.
Reflect's Board of Directors unanimously approved the Merger and
related agreements. During the course of its deliberations regarding the
Merger, the Board of Directors considered a number of factors relevant to the
Merger, such as Image Labs's business history, financial condition and
intellectual property, the terms of the Merger, and historical information
concerning Image Labs's business, financial performance and condition,
operations, technology, management and competitive position; and also
considered a number of the Company's key needs, including, but not limited to:
* Reflect's desire to expand its services offerings, either through
internal development or by licensing or acquiring complimentary or new
technologies; and
* its desire to attract and retain talented technical personnel
to compliment these new developments or technologies.
Reflect's Board of Directors also assessed the value of the Merger
to its shareholders in light of various factors and potential benefits of the
Merger, including:
* the current intrinsic value of the combined companies;
* strategic and financial advantages to the combined businesses that may
result from the Merger, such as potential improvements in their ability
to access financial markets and acquisition purposes;
* potential for future appreciation of Reflect's common stock;
* potential risks associated with the Merger; and
* the long-term interests of Reflect and its shareholders;
* information concerning the business prospects and potential operations
and financial condition of Reflect and Image Labs, both individually
and on a combined basis;
* the terms of the Merger Agreement, including that the Merger will likely
qualify as a tax free reorganization to Reflect for federal income
tax purposes;
* projected relative ownership interests of Reflect's shareholders and
Image Labs shareholders in Reflect immediately following the Merger;
* the likelihood that the Merger would be consummated; and
* Reflect's desire to find an attractive candidate for a reorganization or
merger that would be beneficial to it and its shareholders and provide
products that current clients and customers would be interested in
purchasing, as well as others.
A copy of the Merger Agreement accompanies this Current Report, which, by
this reference, is incorporated herein; the foregoing summary is modified in
its entirety by such reference. See Item 9.01, Exhibit 2.1.
Item 7.01 Regulation FD Disclosure
See Exhibit 99.1, Press Release dated November 15, 2006, a copy of which
is attached hereto and incorporated herein by reference.
Item 9.01 Financial Statements and Exhibits.
(c)(i) Registrant's Exhibits:
Attached:
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2.1 Agreement and Plan of Merger
99.1 Press Release
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this Current Report to be signed on its
behalf by the undersigned hereunto duly authorized.
REFLECT SCIENTIFIC, INC.
Date: 11/15/06 /s/Kim Boyce
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Kim Boyce
President and Director