<PAGE>
As filed with the Securities and Exchange Commission on February 3, 1997
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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AMERICAN CARD TECHNOLOGY, INC.
(Name of Small Business Issuer in its Charter)
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<S> <C> <C>
Delaware 7379 06-1403123
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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1355 Terrell Mill Road
Building 1462, Suite 200
Marietta, Georgia 30067
(770) 951-2284
(Address and Telephone Number of Principal Executive Offices
and Principal Place of Business or Intended Principal Place of Business)
Raymond Findley
1355 Terrell Mill Road
Building 1462, Suite 200
Marietta, Georgia 30067
(770) 951-2284
(Name, Address and Telephone Number of Agent for Service)
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Copies to:
Robert J. Mittman, Esq.
James Martin Kaplan, Esq. Robert J. Mittman, Esq.
Zimet, Haines, Friedman & Kaplan Tenzer Greenblatt LLP
460 Park Avenue The Chrysler Building
New York, New York 10022 405 Lexington Avenue
Telephone No.: (212) 486-1700 New York, New York 10174
Facsimile No.: (212) 223-1151 Telephone No.: (212) 885-5000
Facsimile No.: (212) 885-5001
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Approximate Date of Proposed Sale to the Public: As soon as practicable
after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
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CALCULATION OF REGISTRATION FEE
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Proposed Maximum Proposed Maximum
Title of Each Class of Amount To Offering Price Aggregate Amount of
Securities To Be Registered Be Registered Per Unit (1) Offering Price (1) Registration Fee
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Common Stock,
par value $.001 per share................. 1,725,000(2) $5.00 $8,625,000 $2,613.64
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Redeemable Warrants, each to purchase one
share of Common Stock..................... 1,725,000(3) $ .10 $172,500 $52.27
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Common Stock,
par value $.001 per share(4).............. 1,725,000(5) $5.00 $8,625,000 $2,613.64
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Underwriter's Warrants, each to purchase one
share of Common Stock(6).................. 150,000 $.001 $150 (7)
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Underwriter's Warrants, each to purchase one
warrant(6)................................ 150,000 $.0001 $15 (7)
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Common Stock,
par value $.001 per share(8).............. 150,000 $6.75 $1,012,500 $306.82
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Warrants, each to purchase one share of
Common Stock(9)........................... 150,000 $.135 $20,250 $6.14
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Common Stock,
par value $.001 per share(10)............. 150,000 $8.25 $1,237,500 $375.00
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Total Registration Fee.........................................................................................$5,967.51
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(1) Estimated pursuant to Rule 457(a) under the Securities Act of 1933, as
amended, solely for purposes of calculating the registration fee.
(2) Includes 225,000 shares which the Underwriter has an option to purchase
from the Registrant to cover over-allotments, if any.
(3) Includes 225,000 redeemable warrants which the Underwriter has the option
to purchase from the Registrant to cover over-allotments, if any.
(4) Issuable upon exercise of the redeemable warrants to be sold to the public
hereunder, together with such indeterminate number of shares of Common
Stock as may be issuable by reason of the anti-dilution provisions
contained therein.
(5) Assumes the Underwriter's option to purchase 225,000 additional redeemable
warrants to cover over-allotments, if any, has been exercised.
(6) To be issued by the Company and purchased by the Underwriter upon the
consummation of this offering.
(7) No fee due pursuant to Rule 457(g).
(8) Issuable upon exercise of the Underwriter's Warrants, together with such
indeterminate number of shares of Common Stock as may be issuable by reason
of the anti-dilution provisions contained therein.
(9) Issuable upon exercise of the Underwriter's Warrants.
(10) Issuable upon exercise of the warrants underlying the Underwriter's
Warrants, together with such indeterminate number of shares of Common Stock
as may be issuable by reason of the anti-dilution provisions contained
therein.
<PAGE>
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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AMERICAN CARD TECHNOLOGY, INC.
CROSS REFERENCE SHEET
SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS OF FORM SB-2
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Item in Form SB-2 Caption or Location in Prospectus
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1. Front of Registration Statement and Outside
Front Cover Page of Prospectus............................... Facing Page of Registration Statement; Cross Reference
Sheet; Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus................................................ Inside Front and Outside Back Cover Pages of Prospectus
3. Summary Information and Risk Factors............................ Prospectus Summary; Risk Factors
4. Use of Proceeds................................................. Use of Proceeds
5. Determination of Offering Price................................. Outside Front Cover Page; Risk Factors; Underwriting
6. Dilution........................................................ Risk Factors; Dilution
7. Selling Security Holders........................................ *
8. Plan of Distribution............................................ Outside Front and Outside Back Cover Pages of Prospectus;
Inside Front Cover Page of Prospectus; Underwriting
9. Legal Proceedings............................................... *
10. Directors, Executive Officers, Promoters and
Control Persons.............................................. Management
11. Security Ownership of Certain Beneficial
Owners and Management........................................ Principal Stockholders
12. Description of Securities....................................... Description of Securities
13. Interest of Named Experts and Counsel........................... *
14. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities ................................................. *
15. Organization Within Last Five Years............................. Prospectus Summary; Plan of Operation; Business; Certain
Transactions
16. Description of Business......................................... Prospectus Summary; Business
17. Management's Discussion and Analysis
or Plan of Operations........................................ Plan of Operation
18. Description of Property......................................... Business
19. Certain Relationships and Related
Transactions................................................. Certain Transactions
20. Market for Common Equity and Related
Stockholder Matters.......................................... Outside Front Cover Page of Prospectus; Risk Factors;
Description of Securities; Shares Eligible for Future Sale;
Underwriting
21. Executive Compensation.......................................... Management
22. Financial Statements............................................ Financial Statements
23. Changes In and Disagreements With
Accountants on Accounting and
Financial Disclosure......................................... *
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* Not applicable or answer is negative.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
PRELIMINARY PROSPECTUS DATED FEBRUARY 3, 1997
SUBJECT TO COMPLETION
[LOGO] AMERICAN CARD TECHNOLOGY, INC.
1,500,000 Shares of Common Stock and
Redeemable Warrants to Purchase 1,500,000 Shares of Common Stock
The Company is offering hereby 1,500,000 shares of Common
Stock (the "Common Stock") and redeemable warrants to purchase 1,500,000 shares
of Common Stock (the "Warrants"). The shares of Common Stock and Warrants may be
purchased separately and will be separately transferable immediately upon
issuance. Each Warrant entitles the registered holder thereof to purchase one
share of Common Stock at a price of $5.00, subject to adjustment in certain
circumstances, at any time commencing , 1998, or earlier upon the consent
of the Underwriter, through and including , 2002. The Warrants are
redeemable by the Company, upon the consent of the Underwriter, at a price of
$.10 per Warrant, at any time commencing after the Company has reported its
first four fiscal quarters of financial results following the date of this
Prospectus, upon notice of not less than 30 days, provided that the closing bid
quotation of the Common Stock on all 20 trading days ending on the third day
prior to the day on which the Company gives notice has been at least 150%
(currently $7.50, subject to adjustment) of the then effective exercise price of
the Warrants. In the event the Company's results of operations for the first
four fiscal quarters following the date of this Prospectus reflect, on a
cumulative basis during such four quarters, either revenues of under $5,000,000
or pre-tax operating losses (before interest income and expense, financing
costs, taxes and extraordinary items) in excess of $1,000,000, then the exercise
price of the Warrants shall decrease from $5.00 per share to $4.00 per share.
See "Description of Securities."
Prior to this offering, there has been no public market for
the Common Stock or the Warrants and there can be no assurance that any such
market will develop. It is anticipated that the Common Stock and Warrants will
be quoted on the Nasdaq Small-Cap Market ("Nasdaq") under the symbols "ACRD"
and "ACRDW", respectively. The offering prices of the Common Stock and Warrants,
and the exercise price of the Warrants, were determined pursuant to negotiations
between the Company and the Underwriter and do not necessarily relate to the
Company's book value or any other established criteria of value. For a
discussion of the factors considered in determining the offering prices, see
"Underwriting."
------------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT
AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" COMMENCING
ON PAGE 8 AND "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
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=========================================================================================================================
Price Underwriting Proceeds
to Discounts and to
Public Commissions(1) Company(2)
<S> <C> <C> <C>
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Per Share.................................. $5.00 $.50 $4.50
- -------------------------------------------------------------------------------------------------------------------------
Per Warrant................................ $.10 $.01 $.09
- -------------------------------------------------------------------------------------------------------------------------
Total(3)................................... $7,650,000 $765,000 $6,885,000
=========================================================================================================================
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(1) In addition, the Company has agreed to pay to the Underwriter a 3%
nonaccountable expense allowance, to sell to the Underwriter warrants (the
"Underwriter's Warrants") to purchase 150,000 shares of Common Stock and/or
150,000 Warrants and to retain the Underwriter as a financial consultant.
The Company has also agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses, including the Underwriter's nonaccountable
expense allowance in the amount of $229,500 ($263,925, if the Underwriter's
over-allotment option is exercised in full), estimated at $650,000, payable
by the Company.
(3) The Company has granted the Underwriter an option, exercisable within 45
days from the date of this Prospectus, to purchase up to 225,000 additional
shares of Common Stock and/or 225,000 additional Warrants, on the same terms
as set forth above, solely for the purpose of covering over-allotments, if
any. If the Underwriter's over-allotment option is exercised in full, the
total price to public, underwriting discounts and commissions and proceeds
to company will be $8,797,500, $879,750 and $7,917,750, respectively. See
"Underwriting."
The shares of Common Stock and Warrants are being offered, subject to
prior sale, when, as and if delivered to and accepted by the Underwriter and
subject to the approval of certain legal matters by counsel and to certain other
conditions. The Underwriter reserves the right to withdraw, cancel or modify the
offering and to reject any order in whole or in part. It is expected that
delivery of certificates representing the shares of Common Stock and Warrants
will be made against payment therefor at the offices of the Underwriter, 650
Fifth Avenue, New York, New York 10019, on or about , 1997.
Whale Securities Co., L.P.
The date of this Prospectus is , 1997
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[Photographs]
AVAILABLE INFORMATION
As of the date of this Prospectus, the Company will become subject to
the reporting requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and, in accordance therewith, will file reports, proxy and
information statements and other information with the Securities and Exchange
Commission (the "Commission"). The Company intends to furnish its stockholders
with annual reports containing audited financial statements and such other
periodic reports as the Company deems appropriate or as may be required by law.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE COMMON
STOCK AND WARRANTS AT LEVELS ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information and financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Each prospective investor is urged to
read this Prospectus in its entirety. The statements contained in this
Prospectus which are not historical facts are forward looking statements that
involve risks and uncertainties including, but not limited to, those described
under "Risk Factors." Unless otherwise indicated, all information contained in
this Prospectus, including all share and per share data and information relating
to the number of shares of Common Stock outstanding, (i) gives effect to a
4.06-for-1 stock split effected in January 1996, (ii) gives effect to a
recapitalization effected in December 1996 pursuant to which each outstanding
share of Common Stock, no par value per share, was converted into 2,500 shares
of Common Stock, par value $.001 per share, and (iii) assumes no exercise of the
Underwriter's over-allotment option to purchase 225,000 additional shares of
Common Stock and/or 225,000 additional Warrants. See "Underwriting" and Note 7
of Notes to Financial Statements.
The Company
American Card Technology, Inc. (the "Company"), a development stage
company, was organized to design, develop and market high security, flexible,
multiple application smart card systems. A smart card is a credit card-sized
plastic card containing a microchip that provides the card with memory storage
capabilities in a secure environment and, in advanced versions such as the
Company's, enables the card to perform data processing functions. Smart card
systems are typically used by government agencies or commercial enterprises (the
"system sponsor") to store, access and modify participant or customer (the
"user") information. The Company's proprietary smart card technology and
software enable system sponsors to store data on a user's smart card, and enable
the system sponsor, or a service provider authorized by the system sponsor to
access user information (the "authorized service provider"), to access, read,
input, delete, modify and process such data. The Company designs its smart card
systems to perform functions for various target markets, such as employee
licensing, animal health and registration, frequent patron tracking and various
government applications, depending on the system sponsor's needs. The Company
believes that its smart card systems, which offer the capability to perform
multiple functions on a single card, provide enhanced security and privacy
protection not offered by existing smart cards and position the Company to
capitalize on perceived market opportunities for information systems
incorporating smart card technology.
Smart card technology is currently in wide use in Europe, the Pacific
Rim, Latin America and the Middle East. Worldwide production of smart cards
numbered approximately 482 million units in 1995 and was expected to have
exceeded 729 million units in 1996, according to a microchip manufacturer cited
in Card Technology Today, an industry trade journal. Most smart cards currently
in use are low capacity memory-only phone cards which provide only data storage,
reading and deletion capabilities. More sophisticated smart cards, including the
Company's smart cards, are microprocessor-based and therefore have the ability
not only to store, read and delete data but also to add, modify and process
data. However, the Company believes that most microprocessor-based smart cards
currently in use were designed to perform functions for single purpose
applications only, such as pay television access control, medical or academic
recordkeeping or insurance claim processing. The Company believes that these
smart cards also generally utilize multiple, alternative technologies, such as
microchips, bar codes and magnetic stripes simultaneously, or allow access by
any authorized service provider to all the information included within the card.
Although the use of smart cards is increasing, most cards currently
used in electronic transactions are magnetic stripe cards, such as ordinary
credit cards or automatic teller machine cards. Such cards contain only limited
information such as account numbers and identification information, but cannot
store or update additional information such as current account balances. The
Company believes that its proprietary smart card systems, comprised of smart
cards, read/write devices, other related hardware and system software, offer
certain advantages over magnetic stripe cards and existing smart card systems,
including enhanced security features and multiple function capabilities through
the use of dual card access technology and multiple application layering. The
dual card access technology incorporated in the Company's smart card systems
requires the simultaneous use of both a card issued to a user (a "user card")
and a card issued to an authorized service provider (an "access card") to access
the system. The information on the user's smart card cannot be accessed or
modified unless used in tandem with the
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<PAGE>
authorized service provider's card. For example, a health maintenance
organization ("HMO") could sponsor a system whereby each patient (the user)
enrolled in the HMO would receive a smart card with his or her medical records
stored on the card's microprocessor chip. The HMO would issue access cards to
its member physicians (the authorized service providers) and, when a patient
visits any of these HMO-affiliated physicians, the physician would be able to
update the patient's medical record and history. The dual card access technology
provides enhanced security for the information on the user's card by preventing
unauthorized persons from accessing or modifying such data without the proper
access card.
The Company's smart cards are also uniquely designed to include
multiple application layers, with each layer enabling the performance of
numerous functions when activated by the proper access card. The Company's smart
card systems can provide different sponsors or authorized service providers with
access to different application layers on one user's smart card. Therefore, an
HMO could also store, on the same card that contains a user's medical records,
insurance claim records for access only by the HMO's benefits administrators.
Each application layer contains its own security feature and can only be
accessed or altered by the authorized service provider holding the access card
programmed for that layer. By providing a system sponsor with the ability to add
applications over time, as well as allowing multiple system sponsors to utilize
different layers of the same smart card for different purposes, the Company's
smart card systems will enable the cost per smart card to be allocated among
separate system sponsors or different departments within a single system
sponsor. The Company believes that these features position its smart card
systems as secure, cost-effective solutions for electronic transaction and
information processing.
To date, the Company has developed and installed, on a limited basis,
employee identification and licensing smart card systems for the thoroughbred
racing industry. The Company currently provides to the Birmingham Race Course
and the Oregon Racing Commission smart cards capable of controlling on-site
access and maintaining employee state licensing information. In addition, the
Company has completed a pilot program in New Jersey and Pennsylvania for the
issuance of "equine health passport" smart cards for monitoring the identity,
interstate and intrastate movement and medical records of thoroughbred horses.
The Company is scheduled to commence a similar program in New York in May 1997.
Although the completed program successfully tested the equine health passport
smart card system, such pilot program has not resulted in any system sales to
date. There can be no assurance that any of the Company's pilot programs will
result in system purchases by any potential system sponsor.
The Company's objective is to become a leading provider of smart card
systems to government and commercial system sponsors requiring increasingly
complex, secure and cost-effective information processing systems. The Company
intends to market its products through strategic marketing alliances and
licensing or other arrangements with systems integrators, value added resellers
and other smart card vendors. The Company anticipates that, under certain
circumstances, its smart card products will be bundled with the other party's
products and services to create a complete integrated system that can be
marketed to potential system sponsors. The Company will also seek to provide
complete integrated smart card solutions, on a turnkey basis, to system sponsors
by providing all of the hardware and software elements required to implement the
system.
Since inception, the Company has been engaged principally in
organizational activities, including developing a business plan, hiring
personnel and developing and enhancing its smart card technology and software,
and has only recently commenced the limited marketing of its smart card systems.
The Company has generated limited revenues and incurred significant operating
losses. Therefore, the Company has a limited operating history upon which an
evaluation of its prospects can be made. The Company's prospects must be
considered in light of the risks, uncertainties, expenses, delays and
difficulties associated with the establishment of a new business in the evolving
smart card industry, as well as those risks encountered in the shift from
development to commercialization of new products based on innovative
technologies. There can be no assurance that the Company's smart card systems
will ever gain market acceptance, or that the Company will be able to
successfully implement its marketing strategies, generate meaningful revenues or
ever achieve profitable operations.
The Company was incorporated under the laws of the State of Delaware in
June 1994. Unless otherwise indicated, all references to the Company include
Canadian Smart Card Technology Inc., its majority-owned subsidiary incorporated
under the laws of Ontario, Canada (the "Subsidiary"), which was created to
exploit the Company's technology in Canada. The Company's principal executive
offices are located at 1355 Terrell Mill Road, Building 1462, Suite 200,
Marietta, Georgia 30067 and its telephone number is (770) 951-2284.
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<PAGE>
Recent Financing
In January 1997, the Company consummated a financing (the "Bridge
Financing") pursuant to which it issued to 23 private investors (including
certain officers and directors of the Company) an aggregate of 25 units (the
"Units"), each Unit consisting of (i) an unsecured 9% non-negotiable promissory
note of the Company in the principal amount of $50,000 due on the earlier of the
consummation of this offering or January 16, 1998 (a "Bridge Note"); (ii) 5,000
shares of Common Stock (the "Bridge Shares"); and (iii) warrants (the "Bridge
Warrants") to purchase 25,000 shares of Common Stock at an exercise price of
$4.00 per share (the "Bridge Warrant Shares"), subject to adjustment in certain
circumstances. The purchase price per Unit was $50,000. The Company received
gross proceeds of $1,250,000 from the sale of such Units. After payment of
$125,000 in placement fees to the Underwriter, which acted as placement agent
for the Company with respect to the Bridge Financing, and other offering
expenses of approximately $105,000, the Company received net proceeds of
approximately $1,020,000 in connection with the Bridge Financing. The Company's
sale of 25 Units resulted in the Company's issuance (in connection with the
Bridge Financing) of a total of $1,250,000 principal amount of Bridge Notes,
125,000 Bridge Shares and Bridge Warrants to purchase 625,000 Bridge Warrant
Shares. The Company intends, upon the consummation of this offering, to use a
portion of the proceeds of this offering to repay the entire principal amount of
and accrued interest on the Bridge Notes. See "Use of Proceeds." Additionally,
in January 1997, Harold Rothstein, a director of the Company, made a $35,000
working capital loan to the Company, at an interest rate of 10% per annum (the
"Interim Loan"), which was repaid upon consummation of the Bridge Financing with
a portion of the proceeds thereof. See "Use of Proceeds," "Plan of Operation"
and "Certain Transactions."
The Offering
Securities offered......................1,500,000 shares of Common Stock and
Warrants to purchase 1,500,000 shares
of Common Stock. See "Description of
Securities."
Common Stock to be outstanding
after the offering(1).................4,125,000 shares.
Warrants
Number to be outstanding
after the offering(2).................1,500,000 Warrants.
- ----------------------
(1) Includes 125,000 Bridge Shares issued in connection with the Bridge
Financing. Does not include (i) 1,500,000 shares of Common Stock
reserved for issuance upon exercise of the Warrants; (ii) an aggregate
of 300,000 shares of Common Stock reserved for issuance upon exercise of
the Underwriter's Warrants and the Warrants included therein; (iii)
625,000 shares of Common Stock reserved for issuance upon exercise of
the Bridge Warrants; (iv) 64,000 shares of Common Stock reserved for
issuance upon exercise of stock options intended to be granted, as of
the date of this Prospectus, under the Company's 1996 Stock Option Plan
(the "Stock Option Plan"); (v) 206,000 shares of Common Stock reserved
for issuance upon exercise of options available for future grant under
the Stock Option Plan; (vi) 7,500 shares of Common Stock reserved for
issuance upon exercise of options to be granted, as of the date of this
Prospectus, under the Company's Nonemployee Directors' Stock Option Plan
(the "Directors' Plan"); (vii) 22,500 shares of Common Stock reserved
for issuance upon exercise of options available for future grant under
the Directors' Plan; (viii) 100,000 shares of Common Stock issuable upon
exercise of an option to purchase 100,000 shares of Common Stock granted
to Shreveport Acquisition Corp. ("Shreveport"), a company which is owned
by Lawrence O. Perl, the Company's Chief Executive Officer, Harold
Rothstein and Raymond Roncari, each a director of the Company (the
"Shreveport Option"); and (ix) an indeterminate number of shares of
Common Stock reserved for issuance in the event the Company fails under
certain circumstances to register, or maintain an effective registration
statement with respect to, securities issued in the Bridge Financing.
See "Management - 1996 Stock Option Plan," "- Nonemployee Directors'
Stock Option Plan," "Certain Transactions," "Description of Securities"
and "Underwriting."
(2) Does not include any warrants referred to in clause (ii) and (iii) of
Note 1 above.
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<PAGE>
Exercise terms...........................Exercisable at any time commencing
, 1998 [one year
following the date of this
Prospectus], or earlier upon the
consent of the Underwriter, each to
purchase one share of Common Stock
at a price of $5.00, subject to
adjustment in certain circumstances.
In the event the Company's results
of operations for the first four
fiscal quarters following the date
of this Prospectus reflect, on a
cumulative basis during such four
quarters, either revenues of under
$5,000,000 or pre-tax operating
losses (before interest income and
expense, financing costs, taxes and
extraordinary items) in excess of
$1,000,000, then the exercise price
of the Warrants shall decrease from
$5.00 per share to $4.00 per share.
See "Description of Securities -
Redeemable Warrants."
Expiration date.......................... , 2002 [five years following
the date of this Prospectus].
Redemption...............................Redeemable by the Company, upon the
consent of the Underwriter, at a price
of $.10 per Warrant, at any time
commencing after the Company has
reported its first four fiscal
quarters of financial results
following the date of this
Prospectus, upon notice of not less
than 30 days, provided that the
closing bid quotation of the Common
Stock on all 20 trading days ending
on the third day prior to the day on
which the Company gives notice has
been at least 150% (currently $7.50,
subject to adjustment) of the then
effective exercise price of the
Warrants. See "Description of
Securities - Redeemable Warrants."
Use of Proceeds..........................The Company intends to use the net
proceeds of this offering for repayment
of indebtedness; research and
development; sales and marketing;
repayment of certain outstanding
obligations; and the balance for
working capital and general corporate
purposes. See "Use of Proceeds."
Risk Factors.............................The securities offered hereby are
speculative and involve a high degree
of risk and immediate substantial
dilution and should not be purchased
by investors who cannot afford the loss
of their entire investment. See "Risk
Factors" and "Dilution."
Proposed Nasdaq symbols..................Common Stock - "ACRD".
Warrants - "ACRDW".
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<PAGE>
Summary Financial Information
The summary financial information set forth below is derived from and
should be read in conjunction with the financial statements of the Company,
including the notes thereto, appearing elsewhere in this Prospectus.
Statement of Operations Data:
<TABLE>
<CAPTION>
Period
from June 21,
1994 (inception)
Period from June 21, Year Ended Nine Months to
1994 (inception) to December 31, Ended September 30, September 30,
December 31, 1994 1995 1995 1996 1996
------------------ ----- ---- ---- -----
<S> <C> <C> <C> <C> <C>
Revenues........................... $ -- $73,472 $66,262 $19,989 $93,461
Cost of sales...................... -- 68,621 57,881 11,250 79,871
Write-off of license fee........... -- 148,000 -- 20,000 168,000
Other expenses..................... 434,545 878,461 660,197 918,872 2,231,878
Net loss(1)........................ (434,545) (1,021,610) (651,816) (930,133) (2,386,288)
Net loss per share................. (.16) (.37) (.24) (.34)
Weighted average number of shares
outstanding........................ 2,750,000 2,750,000 2,750,000 2,750,000
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
December 31, 1995 September 30, 1996 (unaudited)
----------------- ---------------------------------------------------------
Actual Pro Forma(2) As Adjusted(2)(3)
------------- ------------- -----------------
<S> <C> <C> <C> <C>
Working capital (deficit)............. $(1,246,660) $(1,864,837) $(294,837) $4,690,163
Total assets.......................... 313,923 358,297 1,838,297 5,753,297
Total liabilities..................... 1,269,328 1,913,585 2,581,085 753,585
Total stockholders' equity (deficit).. (955,405) (1,555,288) (742,788) 4,999,712(4)
</TABLE>
<PAGE>
(1) During the periods presented through June 18, 1996, the Company elected to
be treated as an S corporation for federal income tax purposes and,
accordingly, no provision for income taxes during such periods is reflected
in the Company's financial statements. The Company terminated its status as
an S corporation effective June 18, 1996. See Notes to Financial
Statements.
(2) Gives effect to (i) the consummation of the Bridge Financing in January
1997 and the application of the net proceeds therefrom; (ii) the
conversion, upon the consummation of the Bridge Financing, by The 1994 Perl
Trust Indenture, a trust for the benefit of the family of Lawrence Perl,
the Chief Executive Officer of the Company, Raymond Findley, the President
and Chief Operating Officer of the Company, Raymond Roncari, a director of
the Company, and Harold Rothstein (either individually or through The
Rothstein Family Trust, a trust for the benefit of the family of Mr.
Rothstein), a director of the Company, of loans in the aggregate principal
amount of $550,000 (the "Stockholder Loans") into an aggregate of 110,000
shares of Common Stock of the Company (the "Debt Conversion"); and (iii)
the incurrence by the Company of $230,000 principal amount of bank
indebtedness subsequent to September 30, 1996 (collectively, the "Pro Forma
Adjustments").
(3) Gives effect to the sale of the 1,500,000 shares of Common Stock and
1,500,000 Warrants being offered hereby and the anticipated application of
the estimated net proceeds therefrom, including repayment of the Bridge
Notes. See "Use of Proceeds."
(4) Gives effect to a non-recurring charge of $262,500 representing the
unamortized loan discount and $230,000 of unamortized deferred financing
costs associated with the Bridge Financing which will be recorded when the
Bridge Notes are repaid with a portion of the proceeds of this offering.
See Note 9 of Notes to Financial Statements.
-7-
<PAGE>
RISK FACTORS
The securities being offered hereby are speculative and involve a high
degree of risk, including, but not limited to, those risk factors set forth
below, and should not be purchased by anyone who cannot afford a loss of his
entire investment. Prospective investors, prior to making an investment in the
Company, should carefully consider the following risk factors inherent in and
affecting the business of the Company and this offering.
The discussion in this Prospectus contains forward-looking statements
that involve risks and uncertainties. The Company's actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed in "Risk
Factors," "Plan of Operation" and "Business" as well as those discussed
elsewhere in this Prospectus.
1. Development Stage Company; Limited Operating History. The Company
was organized in June 1994 and is in the development stage. Since inception, the
Company has been engaged principally in organizational activities, including
developing a business plan, hiring personnel and developing and enhancing its
proprietary smart card technology and software, and it has only recently
commenced the limited marketing of its smart card systems. Therefore, the
Company has a limited operating history upon which an evaluation of its
prospects can be made. The Company's prospects must be considered in light of
the risks, uncertainties, expenses, delays and difficulties associated with the
establishment of a new business in the evolving smart card industry, as well as
those risks encountered in the shift from development to commercialization of
new products based on innovative technologies.
See "Plan of Operation."
2. Limited Revenues; Significant and Continuing Losses; Accumulated
Deficit; Explanatory Paragraph in Independent Auditors' Report. The Company has
generated limited revenues to date and does not expect to generate meaningful
revenues in the near future until such time, if ever, as its smart card systems
are successfully commercialized. The Company has incurred significant losses in
each period since its inception resulting in an accumulated deficit at September
30, 1996 of $2,386,288 and losses are continuing through the date of this
Prospectus. Inasmuch as the Company will continue to have a high level of
operating expenses and will be required to make significant up-front
expenditures in connection with both the development of its business and the
commercialization of its smart card systems (including, without limitation,
salaries of executive, technical, marketing and other personnel), the Company
anticipates that it will continue to incur significant and increasing losses for
the foreseeable future until such time, if ever, as the Company is able to
generate sufficient revenues to finance its operations. The Company will also
incur non-recurring charges relating to the Bridge Financing of approximately
$492,500 upon the consummation of this offering. The Company's independent
certified public accountants have included an explanatory paragraph in their
report stating that the Company's dependence on outside financing, lack of
existing commitments from lenders to provide necessary financing, lack of
sufficient working capital and losses since inception raise substantial doubt
about the Company's ability to continue as a going concern. There can be no
assurance that the Company's smart card systems will gain market acceptance, or
that the Company will be able to successfully implement its business strategy,
generate meaningful revenues or achieve profitable operations. See "Plan of
Operation" and Financial Statements.
3. Uncertainty of Proposed Plan of Operation. The success of the
Company's proposed plan of operation will be largely dependent upon market
acceptance of smart cards generally, as well as on the Company's ability to
successfully market its smart card systems by persuading potential system
sponsors of the perceived benefits of its dual card access and multiple
application layering concepts (including the benefits to be derived from
allocating total card program costs among individual application layers within a
card) and to develop and commercialize further applications of its proprietary
technology. In addition, the Company's proposed plan of operation and prospects
will be dependent upon, among other things, the Company's ability to enter into
strategic marketing and licensing or other arrangements on a timely basis and on
favorable terms; establish satisfactory arrangements with sales representatives
and marketing consultants; hire and retain skilled management as well as
-8-
<PAGE>
financial, technical, marketing and other personnel; successfully manage growth
(including monitoring operations, controlling costs and maintaining effective
quality, inventory and service controls); and obtain adequate financing when and
as needed. The Company has limited experience in developing new products based
on innovative technology and there is limited information available concerning
the performance of the Company's technologies or market acceptance of the
Company's products. There can be no assurance that the Company will be able to
successfully implement its plan or that unanticipated expenses or problems or
technical difficulties will not occur which would result in material delays in
its implementation. Moreover, there can be no assurance that the Company will
have sufficient capacity to satisfy any increased demand for its smart card
products and technologies resulting from the Company's implementation of its
plan of operation. See "Plan of Operation" and "Business."
4. New Concept; Uncertainty of Market Acceptance. The smart card
industry in the United States is an emerging business characterized by an
increasing and substantial number of new market entrants that have introduced or
are developing an array of new products and services relating to electronic
transactions and information processing. Each of these entrants is or may be
seeking to position its products and services as the preferred method of
effectuating highly individualized, easy-to-use electronic transaction and
information processing. The success of the smart card industry depends, in large
part, on the ability of market participants to convince governmental
authorities, commercial enterprises and other potential system sponsors to adopt
a smart card system in lieu of existing or alternative systems such as magnetic
stripe card and paper-based systems, thereby changing the way certain
transaction and information processing tasks are accomplished. In addition, due
to the large capital and infrastructure investment made by debit and credit card
issuers and significantly lower costs associated with the use of magnetic stripe
cards, many potential system sponsors may be reluctant to convert to smart card
technology in the near future. Accordingly, there can be no assurance that there
will be significant market opportunities for smart card systems in the United
States or that the acceptance of smart card based systems in other countries
will be sustained. The Company's dual card access and multiple application
layering technologies are new concepts. As such, demand for and market
acceptance of the Company's smart card systems are subject to a high level of
uncertainty. The Company has limited marketing experience and limited financial,
personnel and other resources to undertake extensive marketing activities.
Potential system sponsors of the Company's smart card systems, as well as the
Company's potential strategic partners, must be persuaded that the costs of
adopting and implementing smart card systems, in general, and, in particular, of
adopting and implementing the Company's smart card systems, which incorporate
dual card access technology and multiple application layering, are justified by
the benefits to be derived therefrom. Achieving market acceptance for the
Company's products and services will require significant efforts and
expenditures by the Company to create awareness, demand and interest by
potential system sponsors, strategic partners and others regarding the perceived
benefits of the Company's technologies, including the possible allocation of
costs among different system sponsors and/or departments of one or more system
sponsors. There can be no assurance that the Company's smart card technology
will prove to be economically viable for a sufficient number of sponsors, that
substantial markets will develop, in the United States or elsewhere, for the
Company's smart card systems or that the Company will be able to meet its
current marketing objectives, succeed in positioning its cards and services as a
preferred method of delivering electronic transaction and information processing
or achieve significant market acceptance of its products. See "Business -
Marketing and Sales."
5. Significant Capital Requirements; Working Capital Deficit;
Dependence on Proceeds of this Offering. The Company's capital requirements have
been and will continue to be significant. At September 30, 1996, the Company had
a working capital deficit of $1,864,837 due to, among other things, costs
associated with the development, commercialization and market testing of the
Company's smart card systems, including the development of the Company's initial
pilot programs. The Company has been dependent on the sales of its securities to
private investors (including the Bridge Financing), as well as on capital
contributions and loans from affiliates and certain financial institutions
guaranteed by certain stockholders of the Company. During the period from
inception through the date of this Prospectus, the Company has raised capital in
the aggregate amount of $3,740,000 through such means. The Company is dependent
on and intends to use the proceeds of this offering to continue the
implementation of its proposed plan of operation. The Company anticipates, based
on currently proposed business plans and assumptions relating to its operations
(including assumptions regarding the Company's
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<PAGE>
ability to meet its current marketing objectives and the timing and costs
associated therewith), that the net proceeds of this offering, together with
projected cash flow from operations, will be sufficient to fund the Company's
operations and capital requirements for at least twelve months following the
consummation of this offering. In the event that the Company's plans change, its
assumptions change or prove to be inaccurate or if the proceeds of this offering
prove to be insufficient to fund operations (due to unanticipated expenses,
technical difficulties, problems or otherwise), the Company would be required to
seek additional financing sooner than currently anticipated. There can be no
assurance that the proceeds of this offering will be sufficient to permit the
Company to successfully further develop and commercialize the Company's smart
card technology or that any assumptions relating to the Company's operations
will prove to be accurate. In addition, any implementation of the Company's
business plans subsequent to the twelve month period following this offering may
require proceeds greater than the proceeds of this offering or otherwise
currently available to the Company. The Company has no current arrangements with
respect to, or sources of, additional financing and there can be no assurance
that any such financing will be available to the Company on commercially
reasonable terms, or at all. It is not anticipated that any of the officers,
directors or stockholders of the Company will provide any portion of the
Company's future financing requirements. Any inability to obtain additional
financing when needed will have a material adverse effect on the Company,
including requiring the Company to curtail its activities and possibly causing
the Company to cease its operations. To the extent that the Company finances its
operations through the issuance of additional equity securities, any such
issuance may involve substantial dilution to the Company's then-existing
stockholders. Additionally, to the extent that the Company incurs indebtedness
or issues debt securities, the Company will be subject to all of the risks
associated with incurring substantial indebtedness, including the risks that
interest rates may fluctuate and cash flow may be insufficient to pay principal
and interest on any such indebtedness. See "Use of Proceeds," "Plan of
Operation" and "Certain Transactions."
6. Dependence on Contract with US3, Inc. The Company has entered into a
requirements contract with US3, Inc. ("US3"), a leading manufacturer of smart
cards, pursuant to which the Company has agreed to purchase, and US3 has agreed
to supply, all of the Company's requirements for smart cards at or below certain
specified prices and smart card hardware at prices to be agreed upon from time
to time, subject to certain exceptions. The Company is substantially dependent
on the ability of US3 to provide adequate inventories of quality cards and
microprocessor chips manufactured to the Company's specifications on a timely
basis and on favorable terms. There can be no assurance that US3 will have
sufficient production capacity to satisfy the Company's inventory or scheduling
requirements during any period of sustained demand, or that the Company will not
be subject to the risk of price fluctuations and periodic delays. Although the
Company believes that its relationship with US3 is satisfactory and that
numerous alternative sources for its cards are currently available, the loss of
the services of such manufacturer or substantial price increases proposed by
such manufacturer, in the absence of readily available alternative sources of
supply, could have a material adverse effect on the Company. Failure or delay by
US3 in supplying cards to the Company on favorable terms could also adversely
affect the Company's operating margins and the Company's ability to obtain and
deliver products and services on a timely and competitive basis. Additionally,
the Company will be dependent on US3 or on other third parties for the supply
and manufacture of substantially all of its hardware products, including smart
card read/write devices and printers. Although the Company believes that these
hardware products are available from several manufacturers and distributors,
there can be no assurance that the Company will be able to obtain such products
at competitive prices when needed from time to time. See "Business -
Manufacturing."
7. Limited Marketing Capabilities and Experience; Dependence on
Third-Party Marketing Arrangements. The Company has limited marketing
capabilities, experience and resources. To date, the Company has conducted only
limited marketing activities and has relied primarily on the efforts of its
executive officers in connection with such activities. Although the Company
expects to continue to market smart card systems directly through the Company's
management and employees, including its recently appointed Director of Marketing
and Sales, the Company intends to establish strategic marketing alliances and
licensing or other arrangements with systems integrators, value-added resellers
and other smart card vendors and may also retain the services of sales
representatives and marketing and other consultants. The Company's success will
depend in part on its ability to
-10-
<PAGE>
enter into agreements with such third parties, and on the ability and efforts of
such third parties to successfully market the Company's smart card systems.
Moreover, marketing arrangements with third parties may require financial or
other commitments by the Company. There can be no assurance that the Company
will be able, for financial or other reasons, to enter into third-party
marketing arrangements on commercially acceptable terms, or at all. The failure
of the Company to complete its third-party marketing strategy or the failure of
any such party to develop and sustain a market for the Company's smart cards
could have a material adverse effect on the Company. Although the Company views
third-party marketing arrangements as a major factor in the commercialization of
its smart card systems, there can be no assurance that any strategic partners,
licensees or others would view an arrangement with the Company as significant to
their businesses. See "Business - Marketing and Sales."
8. Competition; Technological Obsolescence. The market for the
Company's smart card systems is characterized by intense competition. The market
is currently dominated by cards utilizing magnetic stripes, and is expected to
be dominated by magnetic stripe cards for the foreseeable future due to the
lower costs of production of such cards and the substantial capital and
infrastructure investments made by debit and credit card issuers in such cards.
The Company also competes with numerous well-established companies, including
Gemplus, Bull CP8 (a unit of Groupe Bull), Schlumberger Industries International
and Solaic, which design, manufacture and/or market smart card systems. Although
the Company believes that its dual card access and multiple application layering
technologies will allow the Company to compete on the basis of enhanced
security, flexibility, scalability, cost-effectiveness and quality, the
Company's smart card systems incorporate new concepts and may be unsuccessful
even if they are superior to those of its competitors. In addition, certain
companies may be developing technologies or products of which the Company is
unaware which may be functionally similar or superior to those developed by the
Company. Most of the Company's competitors and potential competitors possess
substantially greater financial, marketing, personnel and other resources than
the Company and have established reputations relating to the design,
development, manufacture, marketing and service of smart card systems. As the
market for smart card systems grows, new competitors are likely to emerge.
Additional competition could adversely affect the Company's operations. There
can be no assurance that the Company will be able to compete successfully, that
competitors will not develop technologies or products that render the Company's
systems obsolete or less marketable or that the Company will be able to
successfully enhance its products or develop new products when necessary. See
"Business - Competition."
9. Technological Factors. The Company's research and development
efforts are subject to all of the risks inherent in the development of new
products and technology (including unanticipated delays, expenses and
difficulties). There can be no assurance that the Company's products will
satisfactorily perform the functions for which they are designed, that they will
meet applicable price or performance objectives or that unanticipated technical
or other problems will not occur which would result in increased costs or
material delays in the development thereof. Furthermore, software products as
complex as those developed by the Company and incorporated into its smart card
products may contain errors or failures when installed, updated or enhanced.
There can be no assurance that, despite testing by the Company and by current
and potential end users, errors will not be found in new products after the
delivery by the Company, resulting in loss of or delay in market acceptance. See
"Business - Technology Overview" and "- Products."
10. Proprietary Rights. The Company's success will depend on its
ability to obtain patents, protect trade secrets and operate without infringing
on the proprietary rights of others. The Company has applied for a United States
patent with respect to its dual card access technology and methods. The Company
contemplates filing patent applications in selected foreign jurisdictions where
such filings would, in the Company's opinion, provide it with a competitive
advantage. Although the Company believes its patent application contains
patentable claims, there can be no assurance that any patent will be issued.
Moreover, the patent laws of other countries may differ from those of the United
States as to the patentability of the Company's products or technology and the
degree of protection afforded by foreign patents may be different from that in
the United States. The failure by the Company to obtain any patents could have a
material adverse effect on the Company's ability to successfully commercialize
-11-
<PAGE>
its smart card systems. Even if the Company is able to obtain a patent, there
can be no assurance that any such patent will afford the Company commercially
significant protection for its technology. Other companies may independently
develop equivalent or superior technologies or products and may obtain patent or
similar rights with respect to them. The Company is not aware of any
infringement by its technology on the proprietary rights of others and has not
received any notice of claimed infringement. However, the Company has not
conducted any investigation as to possible infringement and there can be no
assurance that third parties will not assert infringement claims against the
Company in connection with its products, that any such assertion of infringement
will not result in litigation, or that the Company would prevail in such
litigation. Moreover, in the event that the Company's technology or proposed
products were deemed to infringe upon the rights of others, the Company would be
required to obtain licenses to utilize such technology. There can be no
assurance that the Company would be able to obtain such licenses in a timely
manner on acceptable terms and conditions, and the failure to do so could have a
material adverse effect on the Company. If the Company were unable to obtain
such licenses, it could encounter significant delays in product market
introductions while it attempted to design around the infringed upon patents or
rights, or could find the development, manufacture or sale of products requiring
such license to be foreclosed. In addition, patent disputes are common in the
smart card and computer industries and there can be no assurance that the
Company will have the financial resources to enforce or defend a patent
infringement or proprietary rights action. The Company has also applied for a
copyright registration of the software used in connection with its dual card
access technology. In addition, the Company has applied for federal trademark
registration of its SMART-ID mark and design. The Company's use of its software,
name and mark may be subject to challenge by others, which, if successful, could
have a material adverse effect on the Company.
The Company also relies on trade secrets and proprietary know-how and
employs various methods to protect the concepts, ideas and documentation
relating to its proprietary technology. However, such methods may not afford the
Company complete protection and there can be no assurance that others will not
independently obtain access to the Company's trade secrets and know-how or
independently develop products or technologies similar to those of the Company.
Furthermore, although the Company has and expects to have confidentiality and
non-competition agreements with its employees and appropriate suppliers and
manufacturers, there can be no assurance that such arrangements will adequately
protect the Company's trade secrets. See "Business - Intellectual Property."
11. Lengthy Sales Cycle; Possible Fluctuations in Operating Results.
The Company's sales cycle is expected to commence at the time a prospective
system sponsor demonstrates an interest in purchasing a smart card system from
the Company or issues a request for a proposal or information or takes similar
action and ends upon the installation of a smart card system for the system
sponsor. The sales cycle will vary by system sponsor and could extend for
periods of up to twelve months or more, depending upon, among other things, the
time required by the system sponsor to complete a pilot test of the Company's
smart card system, make a determination regarding an acquisition thereof and
negotiate payment terms with the Company. The Company's operating results could
vary from period to period as a result of this fluctuation in the length of the
Company's sales cycle and as a result of fluctuations in the purchasing patterns
of potential system sponsors, technological factors, variations in marketing
strategies for different target markets and non-recurring smart card system
sales. See "Plan of Operation - Possible Fluctuations in Operating Results."
12. Risks of Foreign Sales. Although the Company believes that foreign
sales may represent a significant portion of its future revenues, there can be
no assurance that the Company will be able to penetrate foreign markets for
smart cards or that such markets will prove to be viable for sales of the
Company's smart card systems. To the extent that the Company is able to
successfully expand its operations into foreign markets, the Company may become
increasingly subject to risks inherent in foreign sales, including shipping
delays, increased credit risks, trade restrictions (including restrictions on
the export of critical technology), export duties and tariffs, fluctuations in
foreign currencies and international political, regulatory and economic
developments, all of which could have an adverse effect on the Company's results
of operations. The Company does not intend to engage in foreign currency hedging
transactions.
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<PAGE>
13. Possible Dependence on Government Contracts. As part of its
strategy, the Company intends to market its smart card systems to government
agencies in the United States, Canada and abroad. If successful, the Company
will become subject to the special risks involving government contracts,
including delays in funding, lengthy review processes for awarding contracts,
non-renewal, delay, termination at the convenience of the government, reduction
or modification of contracts in the event of changes in the government's
policies or as a result of budgetary constraints and increased or unexpected
costs resulting in losses, any or all of which could have a material adverse
effect on the Company.
The Company will also be required to obtain any potential government
contracts through the competitive bidding process. There can be no assurance
that the Company will be successful in having its bids accepted or, if accepted,
that awarded contracts will generate sufficient revenues to result in profitable
operations. The competitive bidding process is typically lengthy and often
results in the expenditure of financial and other resources in connection with
bids that are not accepted. Additionally, inherent in the competitive bidding
process is the risk that actual performance costs may exceed projected costs
upon which a submitted bid or contract price is based. To the extent that actual
costs exceed projected costs, the Company would incur losses, which would
adversely affect the Company's operating margins and results of operations.
Moreover, in most instances, the Company would be required to post bid and/or
performance bonds in connection with contracts with government agencies. Any
inability by the Company to obtain bonding coverage in sufficient amounts could
have a material adverse effect on the Company. See "Business - Government
Regulation and Industry Standards."
14. Broad Discretion in Application of Proceeds; Allocation of Proceeds
to Pay Certain Obligations, including Indebtedness to Principal Stockholders;
Benefit to Related Parties. Approximately $2,179,000 (35.0%) of the estimated
net proceeds of this offering has been allocated to working capital and general
corporate purposes. Accordingly, the Company's management will have broad
discretion as to the application of such proceeds. In addition, the Company
intends to use approximately $2,315,000 (37.1%) of the estimated net proceeds of
this offering to repay indebtedness (including all the Bridge Notes and $510,000
aggregate principal amount of Stockholder Loans) and satisfy pre-existing
obligations and, therefore, such funds will be unavailable to fund future
growth. Included in the indebtedness to be repaid are the Bridge Notes payable
to Lawrence O. Perl, the Company's Chief Executive Officer, Harold Rothstein and
Raymond Roncari, each a director of the Company, in the principal amounts of
$25,000, $75,000 and $75,000, respectively, and approximately $31,000 payable to
Lawrence Owen Associates, a corporation wholly-owned by Mr. Perl, for use of
office space and related services. In addition, Mr. Rothstein has personally
guaranteed and/or pledged personal assets to secure the Company's indebtedness
to Fleet Bank, The Chase Manhattan Bank and First Southern Bank, and Mr. Roncari
has personally guaranteed all of the Company's indebtedness to The First
National Bank of Suffield; repayment of such indebtedness will, in effect,
release such guarantees or pledges. The Company will also use a portion of the
proceeds of the offering allocated to working capital to pay compensation
(including accrued compensation) of its executive officers (anticipated to be
approximately $435,000 during the twelve months following this offering). See
"Use of Proceeds," "Plan of Operation," "Management" and "Certain Transactions."
15. Dependence on Management and Key Personnel. The success of the
Company will be largely dependent on the personal efforts of Lawrence O. Perl,
its Chief Executive Officer, Raymond Findley, Jr., its President and Chief
Operating Officer, Robert H. Dixon, its Vice President of Technical Operations,
Peter J. Quadagno, its recently appointed Director of Marketing and Sales, and
other key personnel. Although the Company has entered into an employment
agreement with each of Messrs. Perl, Findley, Dixon and Quadagno, the loss of
services of any of Mr. Perl, Mr. Findley, Mr. Dixon or Mr. Quadagno would have a
material adverse effect on the Company's business and prospects. The Company has
obtained "key man" insurance on the life of each of Messrs. Perl and Findley in
the amount of $2,000,000 each. In order to successfully implement and manage its
proposed expansion, the Company will be dependent upon, among other things, its
ability to attract and retain qualified managerial, technical and marketing
personnel with experience in business activities such as those contemplated by
the Company. Competition for qualified personnel is intense and there can be no
assurance that
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<PAGE>
the Company will be able to hire or retain additional personnel. Any inability
to attract and retain qualified personnel would have a material adverse effect
on the Company. See "Management."
16. Control by Management. Upon the consummation of this offering, the
Company's directors and executive officers (or trusts created by or for such
individuals or their families) will beneficially own, in the aggregate,
approximately 55.8% of the outstanding shares of Common Stock (assuming no
exercise of the Warrants or other options). Accordingly, such persons, acting
together, will be in a position to elect the directors, adopt amendments to the
Company's Certificate of Incorporation and By-Laws, approve mergers and other
significant corporate transactions, including a sale of substantially all of the
Company's assets, and otherwise control the Company's affairs. Purchasers of the
shares of Common Stock offered hereby will be minority stockholders, and,
although entitled to vote on matters submitted for a vote of the stockholders,
will not control the outcome of such a vote. See "Management" and "Principal
Stockholders."
17. Possible Adverse Effects of Authorization of Preferred Stock. The
Company's Certificate of Incorporation, as amended (the "Certificate"),
authorizes the Company's Board of Directors to issue up to 1,000,000 shares of a
class of preferred stock, par value $.001 per share (the "Preferred Stock"). The
Certificate authorizes the Board to establish and issue, out of the authorized
but unissued shares of Preferred Stock, "blank check" preferred stock in one or
more series. One or more of such series may be issued at any time or times upon
authorization of the Board. Without further approval of the stockholders, the
Board is authorized to fix the dividend rights and terms, conversion rights,
voting rights, redemption rights and terms, liquidation preferences, and any
other rights, preferences, privileges and restrictions applicable to each new
series of the Preferred Stock. The issuance of new series of Preferred Stock
could, among other results, adversely affect the voting power of the holders of
Common Stock and, under certain circumstances, could make it more difficult for
a third party to gain control of the Company, prevent or substantially delay
such a change of control, discourage bids for the Common Stock at a premium, or
otherwise adversely affect the market price of the Common Stock. Preferred Stock
could, for example, be issued quickly by the Board with terms that are expressly
designed to prevent or substantially delay a change of control of the Company
that could otherwise benefit stockholders or to make removal of management more
difficult. Although the Company has no current plans to issue any Preferred
Stock, there can be no assurance that the Board will not decide to do so in the
future. See "Description of Securities."
18. Immediate and Substantial Dilution. Investors in this offering
will incur immediate and substantial dilution of $3.83 per share (77%) between
the adjusted net tangible book value per share after this offering and the
initial public offering price of $5.00 per share. See "Dilution."
19. Absence of Public Market, Determination of Offering Prices;
Possible Volatility of Market Price of Common Stock and Warrants. Prior to this
offering, there has been no public trading market for the Common Stock or
Warrants. Consequently, the initial public offering price of the Common Stock
and Warrants and the exercise price of the Warrants have been determined by
negotiations between the Company and the Underwriter and are not necessarily
related to the Company's asset value, net worth or other criteria of value.
There can be no assurance that a regular trading market for either the Common
Stock or the Warrants will develop after this offering or that, if developed, it
will be sustained. The market price for the Company's securities following this
offering may be highly volatile, as has been the case with the securities of
other small capitalization companies. Factors such as the Company's financial
results, announcements of developments related to the Company's business and the
introduction of products and product enhancements by the Company or its
competitors may have a significant impact on the market price of the Company's
securities. Additionally, in recent years, the stock market in general, and the
market for securities of small capitalization stocks in particular, have
experienced wide price fluctuations which have often been unrelated to operating
performance of such companies. See "Underwriting."
20. No Dividends. The Company has never paid any cash or other
dividends on its Common Stock. Payment of dividends on the Common Stock is
within the discretion of the Board of Directors of the Company and will depend
upon the Company's earnings, capital requirements and financial condition, and
on any other relevant
-14-
<PAGE>
factors. For the foreseeable future, the Board of Directors intends to retain
future earnings, if any, to finance its business operations and does not
anticipate paying any cash dividends with respect to the Common Stock. In
addition, the payment of cash dividends may be limited or prohibited by the
terms of any future loan agreements or any Preferred Stock that may be issued by
the Company. See "Dividend Policy," "Plan of Operation - Liquidity and Capital
Resources" and "Description of Securities - Preferred Stock."
21. Limitations on Liability of Directors and Officers. The Certificate
includes provisions to eliminate, to the full extent permitted by the Delaware
General Corporation Law (the "DGCL") as in effect from time to time, the
personal liability of directors of the Company for monetary damages under
certain circumstances. The Certificate and the Company's By-Laws (the "By-Laws")
also include provisions to the effect that (subject to certain exceptions) the
Company shall, to the maximum extent permitted from time to time under the law
of the State of Delaware, indemnify, and upon request shall advance expenses to,
any director or officer to the extent that such indemnification and advancement
of expenses is permitted under such law, as it may from time to time be in
effect. As a result of such provisions, stockholders may be unable to recover
damages against the directors and officers of the Company for actions taken by
them which constitute negligence, gross negligence or a violation of their
fiduciary duties. In anticipation of this offering, the Board has authorized and
directed the Company to enter into indemnification agreements with each director
of the Company, pursuant to which the Company would, in general, (i) agree to
indemnify and hold harmless each director to the full extent permitted or
authorized by the DGCL as in effect from time to time and (ii) specify the
various terms and conditions relating to the advancement of expenses in
connection with indemnifiable claims. Each of the provisions described above may
reduce the likelihood of stockholders instituting derivative litigation against
directors and may discourage or deter stockholders from suing directors,
officers, employees and agents of the Company for (among other things) breaches
of their duty of care, even though such an action, if successful, might
otherwise benefit the Company and its stockholders. See "Management - Limitation
of Liability and Indemnification."
22. Adoption of Certain Charter and By-Law Provisions Having
Anti-Takeover Effects. The Certificate and By-Laws contain various provisions
which, under certain circumstances, could make it more difficult for a third
party to gain control of the Company (e.g., by means of a tender offer), prevent
or substantially delay such a change of control, discourage bids for the Common
Stock at a premium, or otherwise adversely affect the market price of the Common
Stock. The Certificate provides (among other things) that the Board will be
classified into three classes of directors, with each class serving a staggered
three-year term. This provision, together with the provision authorizing the
Board to issue one or more series of Preferred Stock, could make it more
difficult for stockholders to effect certain corporate actions that might
facilitate a proposed acquisition of the Company and could have the effect of
delaying or preventing a change of control of the Company. See "Description of
Securities - Antitakeover Provisions."
23. Outstanding Options. As of the date of this Prospectus, the Company
had outstanding options to purchase an aggregate of 171,500 shares of Common
Stock at an exercise price of $5.00 per share. Exercise of any of the foregoing
options will have a dilutive effect on the Company's stockholders. Furthermore,
the terms upon which the Company may be able to obtain additional equity
financing may be adversely affected, since the holders of the options can be
expected to exercise them, if at all, at a time when the Company would, in all
likelihood, be able to obtain any needed capital on terms more favorable to the
Company than those provided in the options. See "Certain Transactions" and
"Management - 1996 Stock Option Plan." and "- Nonemployee Directors' Stock
Option Plan."
24. Shares Eligible for Future Sale; Registration Rights. Upon the
consummation of this offering, the Company will have 4,125,000 shares of Common
Stock outstanding, of which the 1,500,000 shares of Common Stock offered hereby
will be freely tradeable without restriction or further registration under the
Securities Act of 1933, as amended (the "Securities Act"). All of the remaining
2,625,000 shares of Common Stock outstanding are "restricted securities," as
that term is defined under Rule 144 promulgated under the Securities Act, and in
the future may only be sold pursuant to an effective registration statement
under the Securities Act, in compliance with
-15-
<PAGE>
the exemption provisions of Rule 144 or pursuant to another exemption under the
Securities Act. The 2,625,000 restricted shares of Common Stock will become
eligible for sale under Rule 144, subject to certain volume limitations
prescribed by Rule 144 and to the contractual restrictions described below, at
various times commencing 90 days from the date of this Prospectus. The Company
has granted certain demand and "piggyback" registration rights to the holders of
125,000 shares of Common Stock and 625,000 shares of Common Stock underlying the
Bridge Warrants issued in connection with the Bridge Financing. No prediction
can be made as to the effect, if any, that sales of shares of Common Stock or
even the availability of such shares for sale will have on the market prices
prevailing from time to time. All of the Company's officers, directors and
stockholders have agreed not to sell or otherwise dispose of (other than in a
private transfer) any of their shares of Common Stock for a period of 12 months
from the date of this Prospectus without the prior written consent of the
Underwriter (other than in the case of the Bridge Shares and Bridge Warrant
Shares, which cannot be transferred during such period even with the consent of
the Underwriter). However, the possibility that substantial amounts of Common
Stock may be sold in the public market may adversely affect prevailing market
prices for the Common Stock and the Warrants and could impair the Company's
ability to raise capital through the sale of its equity securities. See "Certain
Transactions," "Description of Securities," "Shares Eligible for Future Sale"
and "Underwriting."
25. Possible Inability to Exercise Warrants. The Company intends to
qualify the sale of the Common Stock and the Warrants in a limited number of
states. Although certain exemptions in the securities laws of certain states
might permit Warrants to be transferred to purchasers in states other than those
in which the Warrants were initially qualified, the Company will be prevented
from issuing Common Stock in such other states upon the exercise of the Warrants
unless an exemption from qualification is available or unless the issuance of
Common Stock upon exercise of the Warrants is qualified. The Company may decide
not to seek or may not be able to obtain, qualification of the issuance of such
Common Stock in all of the states in which the ultimate purchasers of the
Warrants reside. In such a case, the Warrants will expire and have no value if
such Warrants cannot be sold. Accordingly, the market for the Warrants may be
limited because of these restrictions. Further, a current prospectus covering
the Common Stock issuable upon exercise of the Warrants must be in effect before
the Company may accept Warrant exercises. There can be no assurance the Company
will be able to have a prospectus in effect when this Prospectus is no longer
current, notwithstanding the Company's commitment to use its best efforts to do
so. See "Description of Securities - Redeemable Warrants."
26. Potential Adverse Effect of Redemption of Warrants. The Warrants
may be redeemed by the Company, upon the consent of the Underwriter, at a price
of $.10 per Warrant, at any time commencing after the Company has reported its
first four fiscal quarters of financial results following the date of this
Prospectus, upon notice of not less than 30 days, provided that the closing bid
quotation of the Common Stock on all 20 trading days ending on the third day
prior to the day on which the Company gives notice has been at least 150%
(currently $7.50, subject to adjustment) of the then effective exercise price of
the Warrants. Redemption of the Warrants could force the holders to exercise the
Warrants and pay the exercise price at a time when it may be disadvantageous for
the holders to do so, to sell the Warrants at the then-current market price when
they might otherwise wish to hold the Warrants, or to accept the redemption
price, which is likely to be substantially less than the market value of the
Warrants at the time of redemption. See "Description of Securities - Redeemable
Warrants."
27. Possible Delisting of Securities from Nasdaq System; Disclosure
Relating to Low-Priced Stocks. It is currently anticipated that the Company's
Common Stock and Warrants will be quoted on the Nasdaq Small-Cap Market
("Nasdaq") upon the completion of this offering. In order to continue to be
listed on Nasdaq, however, the Company must maintain $2,000,000 in total assets,
a $200,000 market value of the public float and $1,000,000 in total capital and
surplus. In addition, continued inclusion requires two market makers and a
minimum bid price of $1.00 per share; provided, however, that if the Company
falls below such minimum bid price, it will remain eligible for continued
inclusion in Nasdaq if the market value of the public float is at least
$1,000,000 and the Company has $2,000,000 in capital and surplus. Nasdaq has
recently proposed new maintenance criteria which, if implemented, would
eliminate the exception to the $1.00 per share minimum bid price and require,
among other things, $2,000,000 in net tangible assets, $1,000,000 market value
of the public float and adherence to certain
-16-
<PAGE>
corporate governance provisions. The failure to meet these maintenance criteria
in the future may result in the delisting of the Company's securities from
Nasdaq, and trading, if any, in the Company's securities would thereafter be
conducted in the non-Nasdaq over-the-counter market. As a result of such
delisting, an investor may find it more difficult to dispose of, or to obtain
accurate quotations as to the market value of, the Company's securities. In
addition, if the Common Stock were to become delisted from trading on Nasdaq and
the trading price of the Common Stock was less than $5.00 per share, trading in
the Common Stock would also be subject to the requirements of certain rules
promulgated under the Exchange Act, which require additional disclosure by
broker-dealers in connection with any trades involving a stock defined as a
penny stock (generally, any non-Nasdaq equity security that has a market price
of less than $5.00 per share, subject to certain exceptions). Such rules require
the delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated therewith, and impose
various sales practice requirements on broker-dealers who sell penny stocks to
persons other than established customers and accredited investors (generally
institutions). For these types of transactions, the broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. The additional
burdens imposed upon broker-dealers by such requirements may discourage
broker-dealers from effecting transactions in the Common Stock and Warrants,
which could severely limit the market liquidity of the Common Stock and Warrants
and the ability of purchasers in this offering to sell the Common Stock and
Warrants in the secondary market.
-17-
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock and Warrants offered hereby are estimated to be approximately $6,235,000
($7,233,325 if the Underwriter's over-allotment option is exercised in full).
The Company expects to use the net proceeds (assuming no exercise of the
Underwriter's over-allotment option) approximately as follows:
<TABLE>
<CAPTION>
Approximate
Approximate Percentage of
Application of Proceeds Dollar Amount Net Proceeds
- ----------------------- ------------- --------------
<S> <C> <C>
Repayment of indebtedness(1).............................................. $2,090,000 33.5%
Sales and marketing(2).................................................... 1,021,000 16.4
Research and development(3)............................................... 720,000 11.5
Repayment of certain outstanding obligations(4)........................... 225,000 3.6
Working capital and general corporate purposes(5)......................... 2,179,000 35.0
----------- ----
$6,235,000 100.0%
========== ======
</TABLE>
(1) Represents the repayment of (i) the Bridge Notes in the aggregate
principal amount of $1,250,000, plus accrued interest thereon, at a rate
of 9% per annum, of approximately $30,000; (ii) Stockholders Loans in the
aggregate principal amount of $510,000 (interest on which, at a rate of
10% per annum, shall be paid out of cash flow from operations commencing
one year after the consummation of this offering); and (iii) indebtedness
of the Company to its banks in the aggregate principal amount of $300,000,
plus accrued interest thereon, at rates ranging from 8.25% to 8.75% per
annum. The net proceeds from the Bridge Financing were, and are, being
used in connection with the Company's operations, including to fund the
Company's research and development efforts, to fund its sales and
marketing activities, to repay certain outstanding obligations, and for
working capital and general corporate purposes, including pre-offering
expenses in connection with this offering and the repayment, upon the
consummation of the Bridge Financing, of the Interim Loan in the principal
amount of $35,000, plus accrued interest thereon, at a rate of 10% per
annum. Included in the Bridge Notes being repaid is a total of $175,000
(plus related interest) payable to Lawrence O. Perl, the Company's Chief
Executive Officer, Harold Rothstein and Raymond Roncari, each a director
of the Company, in the principal amounts of $25,000, $75,000 and $75,000,
respectively. See "Plan of Operation" and "Certain Transactions."
(2) Consists of salaries of marketing personnel, fees paid to marketing
consultants and anticipated costs and expenses associated with sales
presentations, preparation of marketing materials and attendance at
industry trade shows. See "Business - Marketing and Sales."
(3) Represents a portion of anticipated costs associated with further
enhancement of the Company's proprietary technology as well as development
of system applications and pilot programs for potential system sponsors.
See "Business - Research and Development."
(4) Consists of payment of certain past due obligations of the Company to
attorneys, consultants and an affiliate of Mr. Perl.
(5) Includes amounts for the payment of compensation (including accrued
compensation) to executive officers (which is anticipated to be
approximately $435,000 during the twelve months following this offering),
as well as relocation expenses, rent, professional fees, other operating
expenses, accounts payable and accrued expenses. See "Management."
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<PAGE>
If the Underwriter exercises its over-allotment option in full, the
Company will realize additional net proceeds of approximately $998,325. If the
1,500,000 Warrants offered hereby are exercised, the Company will realize
proceeds relating thereto of approximately $7,500,000 (or $6,000,000 if the
exercise price of the Warrants is decreased to $4.00 per share in accordance
with their terms), before any solicitation fees which may be paid in connection
therewith. Such additional proceeds are expected to be added to the Company's
working capital. See "Underwriting."
The allocation of the net proceeds from this offering set forth above
represents the Company's best estimates based upon its currently proposed plans
and assumptions relating to its operations and certain assumptions regarding
general economic conditions. If any of these factors change, the Company may
find it necessary or advisable to reallocate some of the proceeds within the
above-described categories or to use portions thereof for other purposes. The
Company anticipates, based on currently proposed business plans and assumptions
relating to its operations (including assumptions regarding the Company's
ability to meet its current marketing objectives and the timing and costs
associated therewith), that the net proceeds of this offering, together with
projected cash flow from operations, will be sufficient to fund the Company's
operations and capital requirements for at least twelve months following the
consummation of this offering. In the event that the Company's plans change, its
assumptions change or prove to be inaccurate or if the proceeds of this offering
prove to be insufficient to fund operations (due to unanticipated expenses,
technical difficulties, problems or otherwise), the Company would be required to
seek additional financing sooner than currently anticipated. There can be no
assurance that the proceeds of this offering will be sufficient to permit the
Company to successfully further develop and commercialize the Company's smart
card technology or that any assumptions relating to the Company's operations
will prove to be accurate. In addition, any implementation of the Company's
business plans subsequent to the twelve month period following this offering may
require proceeds greater than the proceeds of this offering or otherwise
currently available to the Company. The Company has no current arrangements with
respect to, or sources of, additional financing and there can be no assurance
that any such financing will be available to the Company on commercially
reasonable terms, or at all. It is not anticipated that any of the officers,
directors or stockholders of the Company will provide any portion of the
Company's future financing requirements. Any inability to obtain additional
financing when needed will have a material adverse effect on the Company,
including requiring the Company to curtail its activities and possibly causing
the Company to cease its operations.
Proceeds not immediately required for the purposes described above will
be invested principally in short-term certificates of deposit, short-term
securities, United States government obligations, money market instruments
and/or other interest-bearing investments.
DIVIDEND POLICY
The Company has never paid any cash or other dividends on its Common
Stock. Payment of dividends on the Common Stock is within the discretion of the
Board of Directors of the Company and will depend upon the Company's earnings,
capital requirements and financial condition, and on any other relevant factors.
For the foreseeable future, the Board of Directors intends to retain future
earnings, if any, to finance its business operations and does not anticipate
paying any cash dividends with respect to the Common Stock. In addition, the
payment of cash dividends may be limited or prohibited by the terms of any
future loan agreements or any Preferred Stock that may be issued by the Company.
See "Plan of Operation - Liquidity and Capital Resources" and "Description of
Securities - Preferred Stock."
-19-
<PAGE>
DILUTION
The difference between the initial public offering price per share of
Common Stock and the adjusted net tangible book value per share of Common Stock
after this offering constitutes the dilution to investors in this offering. Net
tangible book value per share on any given date is determined by dividing the
net tangible book value (total tangible assets less total liabilities) of the
Company on such date by the number of shares of Common Stock outstanding on such
date.
At September 30, 1996, the net tangible book value (deficit) of the
Company was $(1,792,207) or $(.75) per share of Common Stock. After giving
retroactive effect to the Pro Forma Adjustments (see footnote 2 of "Prospectus
Summary - Summary Financial Information"), the pro forma net tangible book value
(deficit) of the Company at September 30, 1996 would have been $(910,085) or
$(.35) per share of Common Stock. After also giving retroactive effect to the
sale of the 1,500,000 shares of Common Stock and 1,500,000 Warrants being
offered hereby and to the receipt and application (including the repayment of
the Bridge Notes, Stockholder Loans and bank indebtedness) of the estimated net
proceeds therefrom (less underwriting discounts and commissions and estimated
expenses of this offering), the adjusted net tangible book value of the Company
at September 30, 1996 would have been approximately $4,832,415, or $1.17 per
share, representing an immediate increase in net tangible book value of $1.52
per share to existing stockholders and an immediate dilution of $3.83 per share
to new investors. The following table illustrates this dilution to new investors
on a per share basis:
<TABLE>
<CAPTION>
<S> <C> <C>
Initial public offering price........................................................... $5.00
Net tangible book value (deficit) before Pro Forma Adjustments...................... $(.75)
Increase attributable to Pro Forma Adjustments...................................... .40
-----
Pro forma net tangible book value (deficit) before offering......................... $(.35)
Increase attributable to new investors.............................................. 1.52
-----
Adjusted pro forma net tangible book value after offering............................... 1.17
-----
Dilution to new investors............................................................... $3.83
=====
</TABLE>
The following table sets forth as of September 30, 1996 a comparison
between the existing stockholders (giving retroactive effect to the Pro Forma
Adjustments), and the new investors in this offering with respect to the number
of shares of Common Stock acquired from the Company, the percentage ownership of
such shares, the total consideration paid, the percentage of total consideration
paid and the average price per share:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
---------------------------- ---------------------------- Price Per
Number Percent Amount Percent Share
---------------------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Existing stockholders.............. 2,625,000 63.6% $1,381,000 15.6% $.53
New investors...................... 1,500,000 36.4% 7,500,000 84.4% $5.00
--------- ----- --------- -----
Total..................... 4,125,000 100.0% $8,881,000 100.0%
========= ====== ========== ======
</TABLE>
The above table assumes no exercise of the Underwriter's over-allotment
option. If the Underwriter's over-allotment option is exercised in full, the new
investors will have paid $8,625,000 for 1,725,000 shares of Common Stock,
representing approximately 86.2% of the total consideration, for 39.7% of the
total number of shares of Common Stock outstanding. The foregoing table also
assumes no exercise of the 1,500,000 Warrants offered hereby or any outstanding
options. See "Management - 1996 Stock Option Plan," "- Nonemployee Directors'
Stock Option Plan," "Certain Transactions" and "Underwriting."
-20-
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) on
an actual basis, (ii) on a pro forma basis to give effect to the Pro Forma
Adjustments, and (iii) as adjusted to give effect to the sale of the shares of
Common Stock and Warrants offered hereby and the application of the estimated
net proceeds therefrom.
<TABLE>
<CAPTION>
September 30, 1996
--------------------------------------------------
Actual Pro Forma As Adjusted
--------------- --------------- --------------
<S> <C> <C> <C>
Notes Payable.............................................. $1,429,955 $1,109,955 $ 300,000
========== ========= =========
Bridge Notes............................................... $ -- $ 987,500(1) $ --
Stockholders' Equity (Deficit)
Preferred Stock, $.001 par value - 1,000,000 shares
authorized; no shares issued and outstanding.......... -- -- --
Common Stock, $.001 par value - 20,000,000 shares
authorized; 2,390,000 shares issued and
outstanding, actual; 2,625,000, pro forma;
4,125,000, as adjusted(2)............................. 2,390 2,625 4,125
Additional paid-in capital............................ 858,610 1,670,875 7,904,375
Stock subscriptions receivable........................ (30,000) (30,000) (30,000)
Accumulated deficit during the
development stage..................................... (2,386,288) (2,386,288) (2,878,788)
----------- ----------- -----------
Total stockholders' equity (deficit).............. (1,555,288) (742,788) 4,999,712
----------- --------- ---------
Total capitalization..................... $(1,555,288) $244,712 $4,999,712
============ ======== ==========
</TABLE>
(1) Net of $262,500 loan discount.
(2) Does not include (i) 1,500,000 shares of Common Stock reserved for
issuance upon exercise of the Warrants; (ii) an aggregate of 300,000
shares of Common Stock reserved for issuance upon exercise of the
Underwriter's Warrants and the Warrants included therein; (iii) 625,000
shares of Common Stock reserved for issuance upon exercise of the Bridge
Warrants; (iv) 64,000 shares of Common Stock reserved for issuance upon
exercise of outstanding stock options intended to be granted, as of the
date of this Prospectus, under the Stock Option Plan; (v) 206,000 shares
of Common Stock reserved for issuance upon exercise of options available
for future grant under the Stock Option Plan; (vi) 7,500 shares of Common
Stock reserved for issuance upon exercise of options to be granted, as of
the date of this Prospectus, under the Directors' Plan; (vii) 22,500
shares of Common Stock reserved for issuance upon exercise of options
available for future grant under the Directors' Plan; (viii) 100,000
shares of Common Stock reserved for issuance upon exercise of the
Shreveport Option; and (ix) an indeterminate number of shares of Common
Stock reserved for issuance in the event the Company fails under certain
circumstances to register, or maintain an effective registration statement
with respect to, securities issued in the Bridge Financing. See
"Management - 1996 Stock Option Plan," "- Nonemployee Directors' Stock
Option Plan," "Certain Transactions," "Description of Securities" and
"Underwriting."
-21-
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data for the period ended December 31,
1994 and the year ended December 31, 1995 and the balance sheet data at December
31, 1995 are derived from, and are qualified by reference to, the Company's
financial statements audited by BDO Seidman, LLP included elsewhere in this
Prospectus. The statement of operations data for the nine-month periods ended
September 30, 1995 and 1996 and the period from inception to September 30, 1996
and the balance sheet data at September 30, 1996 are derived from unaudited
financial statements of the Company included elsewhere in this Prospectus,
which, in the opinion of management, contain all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the Company's
results of operations for such periods and financial condition at such date. The
results of operations for the nine months ended September 30, 1996 are not
necessarily indicative of the results to be expected for the full year or future
periods.
The following data should be read in conjunction with the financial
statements of the Company, including the notes thereto, appearing elsewhere in
the Prospectus.
Statement of Operations Data:
<TABLE>
<CAPTION>
Nine Months Period
Period from June 21, Year Ended Ended September 30, from June 21,
1994 (inception) to December 31, ------------------ 1994 (inception) to
December 31, 1994 1995 1995 1996 September 30, 1996
------------------ ----- ----- ---- ------------------
<S> <C> <C> <C> <C> <C>
Revenues........................... $ -- $73,472 $66,262 $19,989 $93,461
Cost of sales...................... -- 68,621 57,881 11,250 79,871
Write-off of license fee........... -- 148,000 -- 20,000 168,000
Other expenses..................... 434,545 878,461 660,197 918,872 2,231,878
Net loss(1)........................ (434,545) (1,021,610) (651,816) (930,133) (2,386,288)
Net loss per share................. (.16) (.37) (.24) (.34)
Weighted average number of shares
outstanding........................ 2,750,000 2,750,000 2,750,000 2,750,000
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
December 31, 1995 September 30, 1996
---------------- ------------------
<S> <C> <C>
Working capital deficit............. $(1,246,660) $(1,864,837)
Total assets........................ 313,923 358,297
Total liabilities................... 1,269,328 1,913,585
Total stockholders' deficit......... (955,405) (1,555,288)
</TABLE>
(1) During the periods presented through June 18, 1996, the Company elected to
be treated as an S corporation for federal income tax purposes and,
accordingly, no provision for income taxes during such periods is reflected
in the Company's financial statements. The Company terminated its status as
an S corporation effective June 18, 1996. See Notes to Financial
Statements.
-22-
<PAGE>
PLAN OF OPERATION
The Company was organized in June 1994 and is in the development stage.
Since inception, the Company has been engaged principally in organizational
activities, including developing a business plan, hiring personnel and
developing and enhancing its proprietary smart card technology and software, and
has only recently commenced the limited marketing of its smart card systems. To
date, the Company has developed and installed, on a limited basis, employee
identification and licensing smart card systems for the thoroughbred racing
industry. The Company currently provides to the Birmingham Race Course and the
Oregon Racing Commission smart cards capable of controlling on-site access and
maintaining employee state licensing information. In addition, the Company has
completed a pilot program in New Jersey and Pennsylvania for the issuance of
"equine health passport" smart cards for monitoring the identity, interstate and
intrastate movement and medical records of thoroughbred horses. The Company is
scheduled to commence a similar program in New York in May 1997. Although the
completed program successfully tested the equine health passport smart card
system, such pilot program has not resulted in any system sales to date. There
can be no assurance that any of the Company's pilot programs will result in
system purchases by any potential system sponsor.
The Company has generated limited revenues to date and does not expect
to generate meaningful revenues in the near future until such time, if ever, as
its smart card systems are successfully commercialized. The Company has incurred
significant losses in each period since its inception, resulting in an
accumulated deficit at September 30, 1996 of $2,386,288, and losses are
continuing through the date of this Prospectus. Inasmuch as the Company will
continue to have a high level of operating expenses and will be required to make
significant up-front expenditures in connection with both the development of its
business and the commercialization of its smart card systems (including, without
limitation, salaries of executive, technical, marketing and other personnel),
the Company anticipates that it will continue to incur significant and
increasing losses for the foreseeable future until such time, if ever, as the
Company is able to generate sufficient revenues to finance its operations. The
Company will also incur non-recurring charges relating to the Bridge Financing
of approximately $492,500 upon consummation of this offering. The Company's
independent certified public accountants have included an explanatory paragraph
in their report stating that the Company's dependence on outside financing, lack
of existing commitments from lenders to provide necessary financing, lack of
sufficient working capital and losses since inception raise substantial doubt
about the Company's ability to continue as a going concern.
The Company's objective is to become a leading provider of smart card
systems to government and commercial system sponsors requiring increasingly
complex, secure and cost-effective information processing systems. The Company
intends to market its products through strategic marketing alliances and
licensing or other arrangements with systems integrators, value added resellers
and other smart card vendors. The Company anticipates that, under certain
circumstances, its smart card products will be bundled with the other party's
products and services to create a complete integrated system that can be
marketed to potential system sponsors. The Company will also seek to provide
complete smart card solutions, on a turnkey basis, to system sponsors by
providing all of the hardware and software elements required to implement the
system.
The success of the Company's proposed plan of operation will be largely
dependent upon market acceptance of smart cards generally, as well as on the
Company's ability to successfully market its smart card systems by persuading
potential system sponsors of the perceived benefits of its dual card access and
multiple application layering concepts (including the benefits to be derived
from allocating total card program costs among individual application layers
within a card) and to develop and commercialize further applications of its
proprietary technology. In addition, the Company's proposed plan of operation
and prospects will be dependent upon, among other things, the Company's ability
to enter into strategic marketing and licensing or other arrangements on a
timely basis and on favorable terms; establish satisfactory arrangements with
sales representatives and marketing consultants; hire and retain skilled
management as well as financial, technical, marketing and other personnel;
successfully manage
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growth (including monitoring operations, controlling costs and maintaining
effective quality, inventory and service controls); and obtain adequate
financing when and as needed. The Company has limited experience in developing
new products based on innovative technology and there is limited information
available concerning the performance of the Company's technologies or market
acceptance of the Company's products. There can be no assurance that the Company
will be able to successfully implement its plan or that unanticipated expenses
or problems or technical difficulties will not occur which would result in
material delays in its implementation. Moreover, there can be no assurance that
the Company will have sufficient capacity to satisfy any increased demand for
its smart card products and technologies resulting from the Company's
implementation of its plan of operation.
For the period from June 21, 1994 to September 30, 1996, the Company
generated $93,461 in revenues primarily from the sale of its thoroughbred racing
industry employee identification and licensing smart cards in Alabama and
Oregon. For the same period, the Company incurred $2,095,526 of general and
administrative expenses, including research and development. Such expenses
consisted of $427,549 for the period ended December 31, 1994, $841,225 for the
year ended December 31, 1995, and $826,752 for the nine months ended September
30, 1996. In addition, for the year ended December 31, 1995, the Company made
capital expenditures of $32,845 for computers and computer-related equipment.
As of January 30, 1997, the Company had eight full-time employees,
consisting of three executive officers and five employees engaged in
engineering, technical support, product development, marketing and sales,
including the Company's recently appointed Director of Marketing and Sales. The
Company also uses the resources of independent programmers and consultants from
time to time on an as needed basis. The Company anticipates that it will hire
additional sales and technical personnel to continue to implement the Company's
marketing and product development efforts and may engage independent sales
representatives and industry-specific marketing consultants to assist the
Company in marketing the Company's smart card systems to potential system
sponsors. The Company also intends to hire a Chief Financial Officer prior to
the consummation of this offering.
Liquidity and Capital Resources
At September 30, 1996, the Company had cash on hand of $33,006, a
working capital deficit of $1,864,837 and a stockholder's deficit of $1,555,288.
The Company's primary capital requirements will be to fund the Company's
continuing smart card system development and enhancement efforts, its sales and
marketing activities and the Company's working capital. The Company has
historically financed its capital requirements through the issuance of equity
and debt securities, contributions to capital and bank borrowings.
Since the inception of the Company, The 1994 Perl Trust Indenture, a
trust for the benefit of the family of Lawrence Perl, the Chief Executive
Officer of the Company (the "Perl Trust"), Raymond Findley, the Chief Operating
Officer of the Company, Raymond Roncari, a director of the Company, and Harold
Rothstein (both individually and through The Rothstein Family Trust, a trust for
the benefit of Mr. Rothstein (the "Rothstein Trust")), a director of the Company
(each of the foregoing being referred to individually as an "Original
Stockholder"), have made loans to the Company in amounts aggregating $15,177,
$15,177, $688,854 and $840,747, respectively (the "Stockholder Loans"). The
Stockholder Loans bear interest at a rate per annum equal to 10% and are payable
on demand. In March 1995, $250,000 of the then-outstanding principal amount of
the Stockholder Loans of each of Messrs. Rothstein and Roncari was
recharacterized as paid-in capital of the Company (the "Capital Contribution").
Pursuant to an agreement among the Original Stockholders, the Capital
Contribution was allocated equally among the Original Stockholders, in
consideration for which Mr. Findley issued to Mr. Roncari and the Perl Trust
issued to the Rothstein Trust a promissory note in the amount of $125,000 (each,
a "Capital Contribution Note"). Upon the consummation of the Bridge Financing,
$12,675 of the Perl Trust's Stockholder Loans, $12,675 of Mr. Findley's
Stockholder Loans, $223,260 of Mr. Roncari's Stockholder Loans and $301,390 of
Mr. Rothstein's Stockholder Loans were converted into 2,535, 2,535, 44,652 and
60,278 shares of Common Stock, respectively. Mr. Findley and the Perl Trust
subsequently transferred 25,000 shares of Common Stock to Mr. Roncari and the
Rothstein Trust, respectively, in satisfaction of the indebtedness represented
by the Capital Contribution Notes. See "Certain Transactions."
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From March through June of 1995, Joseph D. Basch, the President, Chief
Executive Officer and sole director of the Subsidiary, loaned the Company an
aggregate of $300,000. The loans accrued interest at a rate per annum equal to
10% and were payable on demand. In July 1996, the Company and Mr. Basch entered
into an agreement pursuant to which the then-outstanding principal amount of the
loans, together with accrued interest thereon of approximately $30,000, was
converted into an aggregate of 240,000 shares of Common Stock.
In July, September and November 1996, the Company entered into loan
agreements with The First National Bank of Suffield ("First Suffield") pursuant
to which the Company has borrowed an aggregate of $300,000 as of the date of
this Prospectus. Interest accrues on such borrowings at the prime lending rate
established by First Suffield from time to time and is payable monthly. The
aggregate outstanding principal amount owed by the Company to First Suffield,
together with accrued interest thereon, is payable on July 3, 1997. Mr. Roncari
has personally guaranteed all of the Company's indebtedness to First Suffield.
The loan agreements prohibit the Company, except with the prior consent of First
Suffield, from paying dividends on its stock (other than dividends payable in
stock), merging or consolidating with another company or purchasing or retiring
any of its outstanding stock. The loan agreements also provide that it shall
constitute an event of default thereunder if, among other events, either the
Company or Mr. Roncari shall become insolvent or if First Suffield, in good
faith, deems that it has insufficient security with respect to the loans. See
"Certain Transactions."
From July through October 1996, the Company borrowed $150,000 from
Fleet Bank ("Fleet"). Such amount is payable on demand, but in no event later
than June 27, 1997. Interest accrues on such borrowings at the prime lending
rate established by Fleet from time to time and is payable monthly. The
Company's indebtedness to Fleet is personally guaranteed by Mr. Rothstein, and
is secured by personal assets pledged by Mr. Rothstein in the form of a
certificate of deposit in the amount of $150,000. See "Certain Transactions."
In October 1996, the Company borrowed $100,000 from The Chase Manhattan
Bank ("Chase"). Such amount is payable on demand and bears interest at Chase's
prime rate as in effect from time to time. The Company's indebtedness to Chase
(the "Chase Loan") is secured by personal assets pledged by Mr. Rothstein in the
form of a certificate of deposit in the amount of $105,000. See "Certain
Transactions."
Mr. Rothstein has agreed with the Company that, in the event a demand
is made by Fleet with respect to the Fleet Loan and/or a demand is made by Chase
with respect to the Chase Loan prior to the earlier of the date on which this
offering is consummated and July 1, 1997, he shall either (i) secure replacement
financing to pay the amount so demanded or (ii) personally satisfy the amount
demanded, either through surrender of the collateral previously pledged by him
or through other means satisfactory to Fleet and/or Chase, as the case may be.
In the event Mr. Rothstein elects to personally satisfy the demanded amount, the
Company has agreed to reimburse Mr. Rothstein for the full amount of such
payment on the earlier of the date on which this offering is consummated and
July 1, 1997. See "Certain Transactions."
In December 1996, the Company borrowed $50,000 from First Southern
Bank ("FSB"). Such amount is payable on July 9, 1997 and bears interest at a
rate of 8.75%. The Company's indebtedness to FSB is secured by personal assets
pledged by Mr. Rothstein in the form of a certificate of deposit in the amount
of $50,000. See "Certain Transactions."
In January 1997, Mr. Rothstein provided, for working capital purposes,
the Interim Loan in the principal amount of $35,000, which bore interest at the
rate of 10% per annum. The principal amount of the Interim Loan, plus accrued
interest thereon, was repaid upon the consummation of the Bridge Financing.
In January 1997, pursuant to the Bridge Financing, the Company
completed the sale to 23 private investors (including certain officers and
directors of the Company) of 25 Units, each Unit consisting of (i) an unsecured
9% non-negotiable Bridge Note in the principal amount of $50,000 due on the
earlier of the consummation of this offering or January 16, 1998, (ii) 5,000
Bridge Shares, and (iii) 25,000 Bridge Warrants, each Bridge Warrant
representing the right to purchase one share of Common Stock at an exercise
price of $4.00 per share, subject to
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adjustment in certain circumstances. The purchase price per Unit was $50,000.
The Company received gross proceeds of $1,250,000 from the sale of such Units.
After payment of $125,000 in placement fees to the Underwriter, which acted as
placement agent for the Company with respect to the Bridge Financing, and other
offering expenses of approximately $105,000, the Company received net proceeds
of approximately $1,020,000 in connection with the Bridge Financing. The net
proceeds from the Bridge Financing were, and are, being used in connection with
the Company's operations, including to fund the Company's research and
development efforts, to fund its sales and marketing activities, to repay
certain outstanding obligations, and for working capital and general corporate
purposes, including pre-offering expenses in connection with this offering and
the repayment of the Interim Loan as set forth above.
The Company has obtained a commitment from First Suffield to furnish a
$300,000 revolving credit facility to be made available upon the consummation of
this offering. The commitment provides that such facility would have a term of
366 days and that amounts outstanding thereunder would bear interest at the
bank's floating base rate, with interest payable monthly on outstanding
principal balances. The Company would be required to maintain a minimum checking
account daily balance of $350,000 at such bank. Additionally, all existing loans
from First Suffield to the Company must be paid down to $0 at or prior to the
closing of the loan. There can be no assurance that the revolving credit
facility will be furnished to the Company by such financial institution or any
other lender or, if furnished, as to the timing or terms thereof. If such
facility is obtained by the Company, the Company will borrow the entire amount
available thereunder in order to repay a portion of its then outstanding bank
indebtedness and that the balance of such indebtedness will be paid out of the
proceeds of this offering.
The Company's capital requirements have been and will continue to be
significant. The Company has been dependent on the sales of its securities to
private investors (including the Bridge Financing), as well as on capital
contributions and loans from affiliates and certain financial institutions
guaranteed by certain stockholders of the Company. During the period from
inception through the date of this Prospectus, the Company has raised capital in
the aggregate amount of $3,740,000 through such means. The Company is dependent
on and intends to use the proceeds of this offering to continue the
implementation of its proposed plan of operation. The Company anticipates, based
on currently proposed business plans and assumptions relating to its operations
(including assumptions regarding the Company's ability to meet its current
marketing objectives and the timing and costs associated therewith), that the
proceeds of this offering, together with projected cash flow from operations,
will be sufficient to fund the Company's operations and capital requirements for
at least twelve months following the consummation of this offering. In the event
that the Company's plans change, its assumptions change or prove to be
inaccurate or if the proceeds of this offering prove to be insufficient to fund
operations (due to unanticipated expenses, technical difficulties, problems or
otherwise), the Company would be required to seek additional financing sooner
than currently anticipated. There can be no assurance that the proceeds of this
offering will be sufficient to permit the Company to successfully further
develop and commercialize the Company's smart card technology or that any
assumptions relating to the Company's operations will prove to be accurate. In
addition, any implementation of the Company's business plans subsequent to the
twelve month period following this offering may require proceeds greater than
the proceeds of this offering or otherwise currently available to the Company.
The Company has no current arrangements with respect to, or sources of,
additional financing and there can be no assurance that any such financing will
be available to the Company on commercially reasonable terms, or at all. It is
not anticipated that any of the officers, directors or stockholders of the
Company will provide any portion of the Company's future financing requirements.
Any inability to obtain additional financing when needed will have a material
adverse effect on the Company, including requiring the Company to curtail its
activities and possibly causing the Company to cease its operations. To the
extent that the Company finances its operations through the issuance of
additional equity securities, any such issuance would result in dilution to the
interests of the Company's then-existing stockholders. Additionally, to the
extent that the Company incurs indebtedness or issues debt securities, the
Company will be subject to all of the risks associated with incurring
substantial indebtedness, including the risks that interest rates may fluctuate
and cash flow may be insufficient to pay principal and interest on any such
indebtedness.
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Possible Fluctuations in Operating Results
The Company's sales cycle is expected to commence at the time a
prospective system sponsor demonstrates an interest in purchasing a smart card
system from the Company or issues a request for a proposal or information or
takes similar action and ends upon the installation of a smart card system for
the system sponsor. The sales cycle will vary by system sponsor and could extend
for periods of up to twelve months or more, depending upon, among other things,
the time required by the system sponsor to complete a pilot test of the
Company's smart card system, make a determination regarding an acquisition
thereof and negotiate payment terms with the Company. The Company's operating
results could vary from period to period as a result of this fluctuation in the
length of the Company's sales cycle and as a result of fluctuations in the
purchasing patterns of potential system sponsors, technological factors,
variations in marketing strategies for different target markets and
non-recurring smart card system sales.
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BUSINESS
General
The Company, a development stage company, was organized to design,
develop and market high security, flexible, multiple application smart card
systems. A smart card is a credit card-sized plastic card containing a microchip
that provides the card with memory storage capabilities in a secure environment
and, in advanced versions such as the Company's, enables the card to perform
data processing functions. Smart card systems are typically used by government
agencies or commercial enterprises (the "system sponsor") to store, access and
modify participant or customer (the "user") information. The Company's
proprietary smart card technology and software enable system sponsors to store
data on a user's smart card, and enable the system sponsor, or a service
provider authorized by the system sponsor (the "authorized service provider"),
to access, read, input, delete, modify and process such data. The Company
designs its smart card systems to perform functions for various target markets,
such as employee licensing, animal health and registration, frequent patron
tracking and various government applications, depending on the system sponsor's
needs. The Company believes that its smart card systems, which offer the
capability to perform multiple functions on a single card, provide enhanced
security and privacy protection not offered by existing smart cards and position
the Company to capitalize on perceived market opportunities for information
systems incorporating smart card technology.
Industry Background
Smart card technology was developed in France in the mid 1970s and is
currently in wide use in Europe, the Pacific Rim, Latin America and the Middle
East. Worldwide production of smart cards numbered approximately 482 million
units in 1995 and was expected to have exceeded 729 million units in 1996,
according to a microchip manufacturer cited in Card Technology Today, an
industry trade journal. Most smart cards currently in use are low capacity
memory-only phone cards which provide only data storage, reading and deletion
capabilities. More sophisticated smart cards, including the Company's smart
cards, are microprocessor-based and therefore have the ability not only to
store, read and delete data but also to add, modify and process data. However,
the Company believes that most microprocessor-based smart cards currently in use
were designed to perform functions for single purpose applications only, such as
pay television access control, medical or academic recordkeeping or insurance
claim processing. The Company believes that these smart cards also generally
utilize multiple, alternative technologies such as microchips, bar codes and
magnetic stripes simultaneously, or allow access by any authorized service
provider to all the information included within the card.
Most cards currently used in electronic transactions are magnetic
stripe cards, such as ordinary credit cards or automatic teller machine cards.
Such cards contain only limited information such as account numbers and
identification information, but cannot store or update additional information
such as current account balances. The Company believes that the market for smart
cards in North America remains relatively unexploited due to the large capital
and infrastructure investments made by debit and credit card issuers and the
significantly lower costs associated with the use of magnetic stripe cards.
However, smart cards have recently been introduced in the United States in a
number of venues. For example, a stored value card program designed to
facilitate purchases from participating vendors was used during the 1996 Summer
Olympics. In addition, the National Football League's Jacksonville Jaguars have
installed a smart card system to be used for the purchase of concession items at
football games. The State of Mississippi has proposed a plan to replace food
stamps with a card based system to improve convenience and efficiency, as well
as to decrease fraud. American Express Travel Services, Inc. has also recently
announced a test program in conjunction with American Airlines' ticketless
travel system in which smart cards will be used to help streamline the check-in
process and enhance customer reward programs.
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The Company believes that smart cards offer certain advantages over
magnetic stripe cards including the ability to store pages of information and
update or otherwise utilize data as circumstances require. In addition, while
the data contained on magnetic stripe cards is difficult to secure, smart cards
can be programmed to prevent manipulation of data stored in the card. A smart
card can also be programmed with a non-alterable memory, prohibiting the writing
of new data on top of old data, and can be programmed to utilize public and
private key encryption algorithms to lower the risk of theft of sensitive data.
Furthermore, unlike magnetic stripe cards, most smart cards are extremely
difficult to alter, duplicate or reproduce. The Company believes that the
limitations of magnetic stripe cards will present significant market
opportunities in North America for smart card systems featuring enhanced
security and multiple application layering as electronic transactions, including
government benefits transfers, licensing and frequent patron tracking, become
more complex.
Technology Overview
The Company's proprietary smart card systems incorporate dual card
access technology and multiple application layering. The Company believes that
these components result in certain advantages over magnetic stripe cards and
existing smart card systems, including enhanced security features and multiple
function capabilities. The Company's dual card access technology (analogous to a
dual key system for access to a safe deposit box) requires the simultaneous use
of both a user card and an access card to activate the system. User cards are
issued by a system sponsor (such as an HMO, welfare agency, state motor vehicle
department or retail store) to users such as patients, benefits recipients,
drivers or customers. Access cards are issued by the system sponsor to
authorized service providers affiliated with the particular system sponsor (such
as HMO participating physicians, welfare administrators, police officers and
cashiers). Each user card issued by the system sponsor has stored within it an
individualized database containing user-specific information, which is stored in
a "common pool." The Company's multiple application layering technology allows
an access card to retrieve from this common pool of information only the data
that the access card in use is programmed to access. The data stored on the user
card is then displayed and processed in accordance with the requirements of the
application layer activated by the particular access card in use. This process
increases the potential number of uses of the user card and enables a single
user card to serve multiple system sponsors as well as multiple authorized
service providers within a single system sponsor.
By virtue of the dual access and multiple application layering features
of the Company's technology, a basic set of data carried on a single smart card
can be processed and configured according to the specific requirements of each
of the application layers of the card. As a result, a vast array of information
and electronic documents and reports can be generated for various categories of
system sponsors and authorized service providers, thereby substantially
increasing the potential number of uses for each card in the system. For
example, one user's smart card provided by the Company could generate a medical
history when activated by an HMO-participating physician's access card, an
insurance claim record when activated by the HMO's benefits administrator's
access card, a welfare benefits record when activated by a welfare
administrator's access card, and a driver's license when activated by a police
officer's access card. By providing a system sponsor with the ability to add
applications over time, as well as allowing multiple system sponsors to utilize
different layers of the same smart card, the Company's smart card systems will
enable the cost per smart card to be allocated among separate system sponsors or
different departments within a single system sponsor. The Company believes that
these features position its smart card systems as secure, cost-effective
solutions for electronic transaction and information processing.
Generally, smart cards can incorporate advanced security features,
ranging in sophistication from a password or personal identification number
system to a fingerprint or facial geometry recognition system, which are not
found in magnetic stripe cards. The Company believes that the multiple
application layering feature of its smart card systems provides enhanced
security and privacy protection. Each application layer is separate, with
"firewall"-type safeguards to prevent unauthorized access to data in another
application layer. Moreover, each layer can be programmed with the level of
security appropriate to the sensitivity of the data contained in such layer. In
addition, the Company's system establishes an "audit trail" which will record
specific information regarding each instance in which data is accessed,
including the time, the date and the identity of the person accessing
information.
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The Company's technology also permits easy adaptation and
customization, allowing the Company to provide a smart card system tailored to
the system sponsor's needs. The Company's technology provides system scalability
by allowing a system sponsor, over time, to increase the number of applications
performed by its smart cards, provide additional services or add other system
sponsors. Furthermore, the Company's technology can support a communication
system in which messages and data updates can be sent between the system sponsor
and the authorized service provider and/or user, including messages that render
a card inoperable if no longer valid.
Products
The Company was organized to design, develop and market high security,
flexible, multiple application smart card systems, which are comprised of the
following products:
Smart Cards. The Company currently uses commercially available
microchips containing three kilobytes of EEPROM (electronically
erasable programmable read-only memory), but may elect to utilize other
microchips in the future. The Company arranges for initial entry of
database information on the user cards and authorized access codes on
the access cards to the system sponsor's specifications.
Read/Write Devices. A read/write device is hardware that
provides the data interface between a smart card and the host computer,
allowing data to be transferred between a database and a smart card.
Information can be uploaded and downloaded at any read/write device
within the system. The Company's smart card systems utilize basic,
relatively inexpensive read/write devices because certain functions
that would otherwise be performed by the read/write devices are
performed by the Company's smart card software. In addition, because
the Company's smart cards conform with applicable industry standards,
the cards are compatible with various types of read/write devices
currently in use.
Printers. The Company utilizes smart card printers for
printing images and other information required to be displayed on the
face of the smart cards.
Customized Application Software. Each smart card system
developed by the Company, in order to perform the various applications
included in that system, requires customized application software to be
written relating to the specific tasks to be accomplished. Typically,
such customized application software includes software which performs
certain basic functions, as well as software which performs the
specific functions required by the particular system. The Company has
developed software which performs the basic functions required to be
performed by all of the Company's smart card systems. By virtue of
having developed such software, the Company is able to create the
customized applications required for a particular system more quickly
than if all of the software necessary to implement the system were
required to be developed for each particular application. The Company's
proprietary software has been developed for use on a workstation
personal computer. The software is compatible with Windows 3.x(TM),
Windows 95(TM) and Windows NT(TM).
The Company intends to provide each system sponsor with a customized
configuration of its products based upon the sponsor's specific needs and
constraints, ranging from subsystems comprised of selected components which may
be integrated with products or systems provided by third parties to complete
"turnkey" systems. The Company plans to deliver system stations to facilitate
initial and ongoing operation of each system installed by the Company. An issue
station will issue personalized smart cards, and will be comprised of one or
more personal computers, video cameras for systems requiring photographs on user
cards, read/write devices, card printers and system software. An update station
will implement necessary changes to the Company's smart cards, such as updating
of information or modification of a service provider's ability to access
particular user information, and will be comprised of a personal computer, one
or more read/write devices and system software. One or more display stations
will permit a user or authorized service provider to view information stored on
a user card, and will be
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comprised of a personal computer, notebook computer and/or hand-held display
device, read/write devices and system software. The Company anticipates that a
system sponsor may, under certain circumstances, seek to utilize, or otherwise
procure, its own system station hardware. In such cases, the Company would
expect to aid the system sponsor in integrating such hardware with the smart
card system products provided by the Company.
Pricing. The prices of the Company's products will depend on the system
sponsor's specifications and requirements relating thereto (including the number
and type of application layers per card) and any applicable volume discounts.
However, the Company anticipates that the suggested end-user price generally
will be approximately $8 to $15 per card, and $50 to $500 for read-write
devices. The price of the Company's customized application software will depend
upon various factors, including the nature and complexity of the smart card
products and required system interfaces. The off-the-shelf products comprising
the balance of the components of the smart card systems offered by the Company
(including printers, personal computers, notebook computers and hand-held
display devices) will be offered at then-prevailing market prices.
Warranty and Service. The Company will offer a limited warranty
covering both parts and labor, pursuant to which the Company or its authorized
service representatives will make repairs and replace parts which become
defective due to normal use. The Company does not anticipate that the cost of
servicing its smart card systems will be material. Furthermore, substantially
all component parts of the Company's smart card systems will be covered by
warranties from the suppliers thereof. However, there can be no assurance that
future warranty expenses will not have an adverse effect on the Company.
Smart Card Product Development
The Company believes that there are numerous potential applications for
its smart card systems, including the following:
o Employee Licensing - Licensing and identification of employees
in certain regulated industries, including photo
identification, time and attendance records, specific database
information required by the employer and access control to
secure areas.
o Animal Health and Registration - Tracking of lineage history,
medical information, identification, breed information,
nutritional information, performance data and history of
interstate and intrastate movement of thoroughbred horses and
various other racing and show animals.
o Government Applications - Issuance of citizen photo
identification and government licenses (such as motor vehicle,
professional and weapons licenses) and maintenance and
processing of government entitlement information (including
Medicare, Medicaid and welfare information).
o Frequent Patron Programs and Tracking - Awarding of points,
miles or other credits for retail purchases and tracking of
customer purchases to facilitate more focused target
marketing.
The Company is the assignee of McKinnie Systems, Inc. ("McKinnie") with
respect to an agreement between McKinnie and the Birmingham Racing Commission
("BRC"), pursuant to which agreement the Company has installed an employee
tracking system at the Birmingham Race Course. The agreement provides for the
Company to deliver smart cards and hardware in connection with the licensing and
monitoring of race track personnel and others. Pursuant to the agreement, the
Company has developed a licensing database containing more than 30 categories of
information for each licensee, including name, address, date and place of birth,
height, weight, employer's name, fines, rulings, suspensions and revocations.
The agreement provides for the Company to offer to BRC 3,000 smart cards at an
initial price of $10 per card and to offer the next 10,000 smart cards at a
price of $5 per card. Any additional smart cards purchased by BRC shall be at
the lowest unit price per card sold to any other commission customer of the
Company for smart cards of comparable capacity. To date, the Company has
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provided BRC with approximately 11,200 cards and two read/write devices. The
term of the agreement is five years, subject to early termination upon 30 days
notice to the Company. The Company may not terminate the license before
expiration of the five-year term of the agreement. See "Certain Transactions."
In April 1995, the Company entered into a Licensing and Exclusive
Marketing Agreement with The Association of Racing Commissioners International,
Inc. ("ARCI"), a non-profit corporation representing certain racing commissions
throughout North America, pursuant to which the Company has granted to ARCI the
exclusive marketing and promotion rights to certain user information, identifier
and other smart card technology and related software and hardware for use by
public agencies which oversee and regulate employees in the pari-mutuel
industry. Pursuant to the agreement, any ARCI member which enters into an
agreement with ARCI to implement an employee licensing and identification system
using the Company's smart card system shall be required to purchase from the
Company all smart cards to be issued by such ARCI member. The Company has the
right to terminate the agreement in the event that fewer than 50,000 cards
(including those purchased pursuant to the agreement with BRC described above)
are purchased by ARCI members in any year. The agreement is for a term of five
years, and may be renewed by ARCI for an additional period of five years
provided that at least 250,000 smart cards have been purchased thereunder during
the initial term. In connection with the agreement, an employee licensing system
has been installed in Oregon and, to date, the Company has sold approximately
8,000 smart cards and four read/write devices.
From June 1 to September 1, 1995, the Company conducted a pilot program
at Atlantic City Raceway and Monmouth Park in New Jersey and Philadelphia Park
in Pennsylvania involving the issuance of equine health passport smart cards
that track the identity, movement and medical records of thoroughbred
racehorses. Under this program, data on approximately 500 thoroughbred
racehorses that would otherwise have been provided in paper documents was
entered into smart cards provided by the Company and each track gatekeeper in
the program utilized a reader terminal that interfaced with the cards to
determine whether particular horses were eligible for entry on racetrack
grounds. The pilot was co-sponsored by The Jockey Club Racing Services, Inc.
During the pilot program, the Company issued approximately 500 equine health
passport smart cards. The Company is currently developing enhancements to the
smart card system utilized in the pilot program in order to address certain
operational issues which arose during the program. An equine health passport
program is scheduled to be implemented by the Company in New York in May 1997.
The Company is seeking to extend the program into other states as well as to
develop a similar program for other animals in the United States. There can be
no assurance that the Company's pilot programs will be successful or that, if
successful, such programs will result in system purchases by any potential
system sponsor.
The Company, either alone or in conjunction with strategic partners, is
currently in discussions and negotiations with certain potential system sponsors
regarding possible future smart card projects. The Company is in negotiations
with a company involved in the gaming industry to develop one or more smart card
applications in the area of player tracking and customer service. In addition,
the Company is working with a strategic partner which has been selected to
develop a smart card-based system for the time and attendance management of
individuals employed by a major U.S. city. The Company, through the Subsidiary,
is also pursuing negotiations with an international systems integrator to form a
joint venture for the purpose of securing a contract to develop a smart card
system for the Province of Ontario. In addition, the Company has recently
commenced discussions with a general contractor for trade shows, expositions and
special events to develop a smart card system that would, among other things,
provide exhibitor, vendor and attendee registration and tracking, facilitate
rentals of booth space and related goods and services by exhibitors and permit
credit and debit purchases by exhibitors and attendees. There can be no
assurance that any such projects will be implemented or, if implemented,
generate meaningful revenues.
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<PAGE>
Marketing and Sales
The Company's objective is to become a leading provider of smart card
systems to government and commercial sponsors requiring increasingly complex,
secure and cost-effective information processing systems. Because the Company
believes that there are numerous potential target markets for the Company's
smart card systems, the Company intends to market its products through multiple
channels, including through strategic marketing alliances and licensing or other
arrangements with systems integrators, value added resellers and other smart
card vendors. The Company believes that such arrangements will enable it to have
access to substantial numbers of potential smart card system sponsors, and that
third-party partners can provide knowledge, experience and/or financial
resources appropriate to a specific market opportunity and may enhance the
Company's ability to achieve significant penetration in select markets,
especially in those involving government services. The Company anticipates that,
under certain circumstances, its smart card products will be bundled with the
other party's products and services to create a complete integrated system that
can be marketed to potential system sponsors. The Company will also seek to
provide complete smart card solutions, on a turnkey basis, to system sponsors by
providing all of the hardware and software elements required to implement the
system.
The Company will seek to identify potential sponsors and strategic
partners and attempt to increase the visibility of the Company. The Company
intends to market its smart card systems either directly through the Company's
management and employees or through third parties such as independent sales
representatives and marketing and other consultants. The Company retains
independent sales representatives in the United States and abroad, whose
relationships with the Company are generally governed by a written contract for
a specified term, subject to renewal under certain circumstances, and provides
for a limited exclusive territorial or industry representation, specified fees
or commissions and specified sales targets. The Company may, in the case of
potential system sponsors within certain target industries, sell its systems
through marketing and other consultants with relationships in such industries.
The Company has recently appointed a Director of Marketing and Sales, and may
also retain the services of other personnel, to implement the Company's
marketing efforts.
The Company also plans to market its systems through sales brochures,
direct mailings, advertisements in trade publications and participation in
industry trade shows. The Company intends to utilize a portion of the proceeds
of this offering to expand its marketing and sales activities.
Research and Development
During the period from June 1994 (inception) through December 31, 1994,
the year ended December 31, 1995 and the nine months ended September 30, 1996,
the Company incurred costs related to research and development activities in the
amounts of approximately $99,000, $140,000, and $128,000, respectively. The
Company intends to utilize a portion of the proceeds of this offering for
research and development, including the further enhancement of the Company's
proprietary technology as well as the development of system applications and
pilot programs for potential system sponsors.
Manufacturing
Components for the Company's smart cards, such as microprocessor chips
and plastic cards as well as associated hardware, may be purchased from a number
of qualified electronic parts manufacturers and distributors. The Company has
entered into a requirements contract with US3, Inc. ("US3"), a leading
manufacturer of smart cards, pursuant to which the Company has agreed to
purchase, and US3 has agreed to supply, all of the Company's requirements for
smart cards at or below certain specified prices and smart card hardware at
prices to be agreed upon from time to time; provided, however, that the Company
may purchase smart cards or related hardware from others if US3 is unable to
provide the Company with its requirements at any time or if the Company is able
to obtain smart cards or hardware of higher quality than that of US3 or of
similar quality to that of US3 but at lower prices. The agreement had an initial
term of one year commencing April 1995, was automatically renewed for an
additional one-year period in April 1996 and will continue to be automatically
renewed on an annual basis through April 2000,
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<PAGE>
unless written notice of non-renewal is given by the Company to US3 at least 30
days prior to the end of the applicable renewal term.
Competition
The market for the Company's smart card systems is characterized by
intense competition. The market is currently dominated by cards utilizing
magnetic stripes, and is expected to be dominated by magnetic stripe cards for
the foreseeable future due to the lower costs of production of such cards and
the substantial capital and infrastructure investments made by debit and credit
card issuers in such cards. The Company also competes with numerous
well-established companies, including Gemplus, Bull CP8 (a unit of Groupe Bull),
Schlumberger Industries International and Solaic, which design, manufacture
and/or market smart card systems. Although the Company believes that its dual
card access and multiple application layering technologies will allow the
Company to compete on the basis of enhanced security, flexibility, scalability,
cost-effectiveness and quality, the Company's smart card systems incorporate new
concepts and may be unsuccessful even if they are superior to those of its
competitors. In addition, certain companies may be developing technologies or
products of which the Company is unaware which may be functionally similar or
superior to those developed by the Company. Most of the Company's competitors
and potential competitors possess substantially greater financial, marketing,
personnel and other resources than the Company and have established reputations
relating to the design, development, manufacture, marketing and service of smart
card systems. As the market for smart card systems grows, new competitors are
likely to emerge. Additional competition could adversely affect the Company's
operations. Smart card technology also competes with other electronic
transaction and information processing technologies, including magnetic stripe
cards, bar code cards, laser optical cards and radio frequency contactless
cards, as well as traditional methods of transaction and information processing,
whether effected or recorded on paper or otherwise.
Government Regulation and Industry Standards
In the United States, the Company is not currently subject to direct
regulation other than federal and state regulation applicable to businesses
generally. However, changes in the regulatory environment relating to the smart
card industry could have an adverse effect on the Company's business.
Legislative proposals from federal and state government bodies in the area of
privacy rights could impose additional regulations and obligations upon all
smart card providers. The Company cannot predict the likelihood that any such
legislation will pass, nor the financial impact, if any, that any such
legislation may have. Moreover, the applicability to smart card system sponsors
and service providers of existing laws governing issues such as personal privacy
is uncertain.
The Company believes that its smart card systems are currently in
compliance with the quality assurance standards of ISO-7816, an international
standard promulgated by the International Organization for Standardization, a
worldwide federation of standards bodies from approximately 100 countries. These
standards have been adopted by the European Community and others as their
preferred quality standards. However, as technological advances occur in the
smart card industry, other emerging standards may gain widespread acceptance.
While compliance with applicable and emerging standards is the responsibility of
the Company's suppliers, any failure on the part of the Company's suppliers to
comply with such standards could materially and adversely affect the Company's
sales to various system sponsors and prevent the Company's expansion into
certain markets.
As part of its strategy, the Company intends to market its smart card
systems to government agencies in the United States, Canada and abroad. If
successful, the Company will become subject to the special risks involving
government contracts, including delays in funding, lengthy review processes for
awarding contracts, non-renewal, delay, termination at the convenience of the
government, reduction or modification of contracts in the event of changes in
the government's policies or as a result of budgetary constraints and increased
or unexpected costs resulting in losses.
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<PAGE>
The Company will also be required to obtain any potential government
contracts through the competitive bidding process. The competitive bidding
process is typically lengthy and often results in the expenditure of financial
and other resources in connection with bids that are not accepted. Additionally,
inherent in the competitive bidding process is the risk that actual performance
costs may exceed projected costs upon which a submitted bid or contract price is
based. Moreover, in most instances, the Company would be required to post bid
and/or performance bonds in connection with contracts with government agencies.
To the extent that the Company is able to successfully expand its
operations into foreign markets, the Company may become subject to trade
restrictions (including restrictions on the export of critical technology),
export duties and tariffs and international political and regulatory
developments.
Intellectual Property
The Company's success will depend on its ability to obtain patents,
protect trade secrets and operate without infringing on the proprietary rights
of others. The Company has applied for a United States patent with respect to
its dual card access technology. The Company contemplates filing patent
applications in selected foreign jurisdictions where such filings would, in the
Company's opinion, provide it with a competitive advantage. Although the Company
believes its patent application contains patentable claims, there can be no
assurance that any patent will be issued. Moreover, the patent laws of other
countries may differ from those of the United States as to the patentability of
the Company's products or technology and the degree of protection afforded by
foreign patents may be different from that in the United States. The failure by
the Company to obtain any patents could have a material adverse effect on the
Company's ability to successfully commercialize its smart card systems. Even if
the Company is able to obtain a patent, there can be no assurance that any such
patent will afford the Company commercially significant protection for its
technology. Other companies may independently develop equivalent or superior
technologies or products and may obtain patent or similar rights with respect to
them. The Company is not aware of any infringement by its technology on the
proprietary rights of others and has not received any notice of claimed
infringement. However, the Company has not conducted any investigation as to
possible infringement and there can be no assurance that third parties will not
assert infringement claims against the Company in connection with its products,
that any such assertion of infringement will not result in litigation, or that
the Company would prevail in such litigation. Moreover, in the event that the
Company's technology or proposed products were deemed to infringe upon the
rights of others, the Company would be required to obtain licenses to utilize
such technology. There can be no assurance that the Company would be able to
obtain such licenses in a timely manner on acceptable terms and conditions, and
the failure to do so could have a material adverse effect on the Company. If the
Company were unable to obtain such licenses, it could encounter significant
delays in product market introductions while it attempted to design around the
infringed upon patents or rights, or could find the development, manufacture or
sale of products requiring such license to be foreclosed. In addition, patent
disputes are common in the smart card and computer industries and there can be
no assurance that the Company will have the financial resources to enforce or
defend a patent infringement or proprietary rights action. The Company has also
applied for a copyright registration of the software used in connection with its
dual card access technology. In addition, the Company has applied for federal
trademark registration of its SMART-ID mark and design. The Company's use of its
software, name and mark may be subject to challenge by others, which, if
successful, could have a material adverse effect on the Company.
The Company also relies on trade secrets and proprietary know-how and
employs various methods to protect the concepts, ideas and documentation
relating to its proprietary technology. However, such methods may not afford the
Company complete protection and there can be no assurance that others will not
independently obtain access to the Company's trade secrets and know-how or
independently develop products or technologies similar to those of the Company.
Furthermore, although the Company has and expects to have confidentiality and
non-competition agreements with its employees and appropriate suppliers and
manufacturers, there can be no assurance that such arrangements will adequately
protect the Company's trade secrets.
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<PAGE>
The Company purchases many of the hardware and non-proprietary software
components of its smart card systems through normal electronic and computer
distribution channels. Typically, such components are sold with standardized
license agreements containing non-negotiated terms, conditions and restrictions
established by the manufacturer.
Employees
As of January 30, 1997, the Company had eight full-time employees,
consisting of three executive officers and five employees engaged in
engineering, technical support, product development, marketing and sales,
including its recently appointed Director of Marketing and Sales. The Company
also uses the resources of independent programmers and consultants from time to
time on an as needed basis. The Company anticipates that it will hire additional
sales and technical personnel to continue to implement the Company's marketing
and product development efforts and may engage independent sales representatives
and industry-specific marketing consultants to assist the Company in marketing
the Company's smart card systems to potential system sponsors. The Company also
intends to hire a Chief Financial Officer prior to the consummation of this
offering.
Facilities
The Company leases, pursuant to a sublease, approximately 2,750 square
feet of office space at 1355 Terrell Mill Road, Marietta, Georgia. The sublease
commenced on December 15, 1996 and will continue through January 31, 2000.
Pursuant to the sublease, the Company is required to pay rent of approximately
$2,917 per month, increasing through the term of the sublease to approximately
$3,100 per month. The Company currently leases furniture and fixtures for such
facility at a rate of approximately $378 per month.
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<PAGE>
MANAGEMENT
Directors and Executive Officers
The current directors and executive officers of the Company are as
follows:
<TABLE>
<CAPTION>
Name Age Position
----- --- --------
<S> <C> <C>
Lawrence O. Perl 54 Chief Executive Officer and Director
Raymond Findley, Jr. 48 President, Chief Operating Officer and Director
Robert H. Dixon 36 Vice President of Technical Operations
Harold Rothstein 74 Director
Raymond Roncari 72 Director
Stephen S. Weisglass 67 Director
</TABLE>
Lawrence O. Perl, a co-founder of the Company, has been Chief Executive
Officer and a director of the Company since its inception. From April 1993 to
June 1994, Mr. Perl served as Chief Executive Officer and a director of
McKinnie, a privately-held supplier of computerized management information
systems to the pari-mutuel industry. From September 1984 through March 1993, Mr.
Perl served as a financial consultant for Roncari Industries, Inc., a
privately-held producer of quarry, asphalt and concrete products. In addition,
since August 1977, Mr. Perl has served as President of Lawrence Owen Associates,
Inc., a privately-held hotel and financial consulting firm, and, since 1978, has
been affiliated with other privately-held entities engaged in hotel ownership
and management.
Raymond Findley, Jr., a co-founder of the Company, has been President,
Chief Operating Officer and a director of the Company since its inception. From
June 1990 to May 1994, Mr. Findley served as President and Chief Executive
Officer of Phoenix DataCrypt Systems, Inc., a privately-held designer and
developer of smart card-based technology and business applications. From
September 1988 to April 1990, Mr. Findley was President and Chief Executive
Officer of British Telecom CBP, Inc., a developer and marketer of financial
telecommunications and trading systems.
Robert H. Dixon has been Vice President of Technical Operations of the
Company since July 1994. From September 1987 to July 1994, Mr. Dixon was
employed as software manager of McKinnie and from April 1984 to August 1987 Mr.
Dixon was employed as a sales representative and computer programmer by
Tri-State Lighting, Inc., a privately-held lighting fixture manufacturer.
Harold Rothstein, a co-founder of the Company, has been a director of
the Company since May 1996. In 1967, Mr. Rothstein founded Utility Development
Corporation, a Connecticut-based privately-held general contracting firm which
is primarily engaged in building federally insured multi-family and low-income
housing. Mr. Rothstein has served as the Chief Executive Officer of Utility
Development Corporation since its inception.
Raymond Roncari, a co-founder of the Company, has been a director of
the Company since May 1996. From 1979 to July 1995, Mr. Roncari served as the
President and Chief Executive Officer of Roncari Industries, Inc., and since
July 1995 has served as President and Chief Executive Officer of Tilcon-Roncari,
Inc., a successor-in-interest to Roncari Industries, Inc. Mr. Roncari has also
served as Chairman, President and Chief Executive Officer of Roncari Development
Co., a real estate development company, since 1970 and of Roncari Associates,
Inc., a cargo facilities company, since 1980. In addition, from 1965 to 1985,
Mr. Roncari served as a director and Chairman of the Executive Committee of the
Northern Connecticut National Bank - Windsor Locks.
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<PAGE>
Stephen S. Weisglass became a director of the Company in November 1996.
Since August 1996, Mr. Weisglass has served as Executive Managing Director of
Genesis Merchant Group Securities, a San Francisco investment banking firm. From
1979 to July 1990 and from October 1990 to August 1996, Mr. Weisglass was
affiliated with Ladenburg, Thalmann & Co. Inc. ("Ladenburg"), an investment
banking firm, during which time he served in various positions, including
Managing Director, President, Chairman of the Executive Committee and Vice
Chairman of the Board, as well as Chairman of the Board of Equity Research
Associates, an investment research firm which was a subsidiary of Ladenburg.
During August and September of 1990, Mr. Weisglass was Vice Chairman of the
Underwriter.
Key Employee
Peter J. Quadagno, 50, was appointed Director of Marketing and Sales in
January 1997. From January 1996 through January 1997, Mr. Quadagno served as
principal of Quadagno and Associates, Inc., a consulting firm specializing in
the development and implementation of card-based programs. From June 1994 to
January 1996, he served as Manager, Transitional Services of the Smart Card
Enterprise Division ("SCE") of Electronic Payment Services, Inc., a processor of
debit and credit card transactions and the owner of the MAC regional ATM network
("EPS"). SCE was responsible for the development of an electronic, stored value
card purse application for EPS using smart card technology. From June 1989 to
May 1994, Mr. Quadagno was Vice President, Operations of the Metropolitan
Transportation Authority Card Company, which was created to manage the market
introduction, and product management functions for the New York City Transit
Authority's stored value MetroCard product. From 1987 to June 1989, Mr. Quadagno
was Engagement Manager/Marketing Director for Carmody & Company, a management
consulting firm. From 1984 to 1987, he served as Executive Account Manager - ATM
Vertical Business Unit of NCR Corporation's Financial Systems Division. Prior
thereto, Mr. Quadagno was Assistant Vice President - ATM Project/Debit Card
Product Management with Manufacturers Hanover Trust Company.
Executive officers serve at the discretion of the Board. Directors of
the Company hold office until the expiration of the term for which they are
elected and until their respective successors have been elected and qualified,
or until their prior death, resignation or removal. The Board of Directors is
classified into three classes of directors, with each class serving a staggered
three-year term. Messrs. Findley and Weisglass are Class I directors, Mr.
Roncari is a Class II director, and Messrs. Perl and Rothstein are Class III
directors. The terms of the Class I, Class II and Class III directors will
expire at the annual meetings of stockholders to be held in 1997, 1998 and 1999,
respectively. The Company reimburses the directors for reasonable travel
expenses incurred in connection with their activities on behalf of the Company,
but does not pay its directors any fees for Board participation (although it may
do so in the future). Pursuant to the Nonemployee Directors' Stock Option Plan,
nonemployee directors will automatically be granted each year, on the date of
the Company's annual meeting of stockholders, Non-incentive Options (as
hereinafter defined) to purchase 2,500 shares of Common Stock of the Company at
an exercise price equal to the fair market value thereof on the date of grant.
See "- Nonemployee Directors' Stock Option Plan."
Committees of the Board
Audit Committee. Upon the consummation of this offering, the Company
will establish an Audit Committee of the Board of Directors consisting of at
least two directors who are not employees of the Company. It is currently
anticipated that Messrs. Rothstein and Weisglass will comprise the Audit
Committee. Audit Committee members will meet regularly with the Company's
financial management and independent auditors to review the results of their
examination, the scope of audits and their opinions on the adequacy of internal
controls and quality of financial reporting.
Compensation Committee. Upon the consummation of this offering, the
Company will establish a Compensation Committee of the Board of Directors (the
"Compensation Committee") consisting of at least two directors who are not
employees of the Company. It is currently anticipated that Messrs. Rothstein and
Roncari
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<PAGE>
will comprise the Compensation Committee. The Committee will make
recommendations to the Board of Directors concerning the salaries of all elected
officers. In addition, the Compensation Committee will administer the Company's
Stock Option Plan and determine the amounts of, and the individuals to whom,
awards shall be made thereunder. See "1996 Stock Option Plan."
Executive Committee. Upon the consummation of this offering, the
Company will establish an Executive Committee of the Board of Directors. It is
currently anticipated that Messrs. Perl and Rothstein will comprise the
Executive Committee. The Executive Committee will have all the powers of the
Board (except those specifically reserved under the DGCL to the full Board of
Directors) in the management and direction of the business of the Company.
The Company has agreed, for a period of five years from the date of
this Prospectus, upon the request of the Underwriter, to nominate and use its
best efforts to elect a designee of the Underwriter as a director of the
Company, or, at the Underwriter's option, as a non-voting advisor to the
Company's Board of Directors. All of the Company's officers and directors, as
well as the holders of a majority of the Company's outstanding stock, have
agreed to vote their shares of Common Stock in favor of such designee. The
Underwriter has not yet exercised its right to designate such person.
The Company has obtained "key man" insurance on the life of each of
Messrs. Perl and Findley in the amount of $2 million each.
Executive Compensation
The following table sets forth certain information regarding the
compensation in each of the fiscal years since the Company's inception paid to
the person who served as the Company's Chief Executive Officer during the fiscal
year ended December 31, 1996 and to the other officer of the Company who earned
$100,000 or more during such year (collectively, the "Named Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term Compensation
-----------------------------------
Annual Compensation(1) Awards Payouts
------------------------------------- ----------------------- -------
Other
Annual Restricted All Other
Compen- Stock LTIP Compen-
Name and Principal sation Award(s) Options/ Payouts sation
Position Year Salary ($) Bonus ($) ($) ($) SARs(#) ($) ($)
- ----------------------- ---- ---------- --------- ------- ----- ------- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Lawrence O. Perl 1996 $200,000(1) -- -- -- -- -- --
Chief Executive 1995 192,308 -- -- -- -- -- --
Officer 1994 80,700 -- -- -- -- -- --
Raymond Findley, Jr. 1996 $200,000(1) -- -- -- -- --
President and Chief 1995 192,308 -- -- -- -- -- --
Operating Officer 1994 80,700 -- -- -- -- -- --
</TABLE>
- ---------------------
(1) Does not include $50,000 in accrued but unpaid salary payable to each of
Messrs. Perl and Findley upon consummation of this offering.
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<PAGE>
Employment Agreements
Messrs. Perl, Findley and Dixon. Effective upon consummation of this
offering, the Company and each of Messrs. Perl, Findley and Dixon will enter
into employment agreements with the Company providing for their continued
employment as, respectively, the Company's Chief Executive Officer, President
and Vice President-Technical Operations. Each such agreement will have a term
of two years. The employment agreements with Messrs. Perl and Findley provide
for each to receive an annual base salary of $125,000 during the first year of
the agreement and $150,000 during the second year of the agreement. The
agreement with Mr. Dixon provides for an annual base salary of $85,000 during
the first year of the agreement and $120,000 during the second year of the
agreement. Messrs. Perl and Findley will each also be entitled to receive an
annual bonus for each year during the agreement equal to 50% of the annual base
salary for such year, subject to the Company's having achieved certain
performance objectives. In addition, Messrs. Perl and Findley will each be
entitled to receive $50,000 in accrued but unpaid salary. Pursuant to their
employment agreements, each of Messrs. Perl, Findley and Dixon will also be
entitled to such benefits, including participation in medical and life insurance
plans, as are customarily provided to senior executives of the Company.
The employment agreements with each of Messrs. Perl, Findley and Dixon
provide that, in the event such employee is terminated due to death or
disability, the employee shall be entitled to receive a lump sum severance
payment equal to six months' annual base salary. In addition, if the employee is
terminated without cause, or the Company elects not to extend the employment
agreement or the employee terminates for good reason, including employee's
resignation within one year following a change of control of the Company, the
employee will be entitled to receive a lump sum payment equal to the greater of
(a) one year's annual base salary or (b) the total annual base salary payable
for the balance of the agreement. Messrs. Perl and Findley will also be entitled
to a bonus for the then current term based on the Company's performance as of
the date of termination projected for the balance of the year and prorated to
the date of termination. The employment agreements will also contain provisions
prohibiting each of Messrs. Perl, Findley and Dixon from competing with the
Company during the term of employment. In addition, such restriction shall be
continued for a period of two years following the termination of any such
employee's employment (i) automatically, in the event such employment is
terminated by the Company during the term of the agreement for cause or is
terminated voluntarily by the employee during the term of the agreement other
than for good reason, and (ii) at the option of the Company, in the event such
employment is terminated by the Company during the term of the agreement other
than for cause, is terminated by the employee during the term of the agreement
for good reason or is terminated due to the expiration of the agreement,
provided that, if the Company so elects to continue such restriction, the
Company shall be required to pay the employee an amount equal to two times the
employee's then current annual base salary, less the amount of severance payable
upon termination, payable in monthly installments over the two-year period.
Mr. Quadagno. Effective upon consummation of this offering, the Company
will enter into an employment agreement with Mr. Quadagno providing for his
employment as the Company's Director of Marketing and Sales. The agreement with
Mr. Quadagno will have a term of three years. The agreement provides for Mr.
Quadagno to receive an annual base salary of $110,000 during the first year of
the agreement and $125,000 during the second year of the agreement, and an
annual base salary during the third year of the agreement in an amount, not less
than $125,000, to be determined by the Executive Committee of the Board of
Directors. Mr. Quadagno will also be entitled to receive a bonus of up to
$40,000 in the first year of the agreement, $75,000 in the second year of the
agreement and an amount to be determined by the Executive Committee of the Board
of Directors in the third year of the agreement, in each case subject to the
Company's having achieved certain performance objectives. The agreement also
provides that the Company shall grant to Mr. Quadagno an Incentive Stock Option
(as hereinafter defined) to purchase 20,000 shares of Common Stock, which option
will vest in equal installments over a three-year period following the date of
grant so long as Mr. Quadagno remains employed by the Company. In the event of
Mr. Quadagno's voluntary termination or termination of his employment by the
Company for cause, he shall have no further right to exercise the option. The
agreement further provides that the Company shall reimburse Mr. Quadagno for
reasonable weekly commuting expenses from Philadelphia to the Company's offices
in Georgia, and
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<PAGE>
that he shall be entitled to such benefits, including participation in health
and life insurance plans, as are customarily provided to senior executives of
the Company.
Pursuant to the employment agreement, in the event Mr. Quadagno's
employment is terminated by the Company without cause during the first year of
the agreement, he shall be entitled to receive a lump sum payment equal to one
year of the then current annual base salary. In addition, in the event Mr.
Quadagno's employment is terminated by the Company without cause after the end
of the first year of the agreement or due to his death or disability at any time
during the term of the agreement, he (or his estate) shall be entitled to
receive a lump sum payment equal to six months' annual base salary. The
employment agreement also contains provisions prohibiting Mr. Quadagno from
competing with the Company during the term of his employment and for a period of
two years after the termination thereof.
1996 Stock Option Plan
In order to attract, retain and motivate employees (including
officers), directors, consultants and other persons who perform substantial
services for or on behalf of the Company, the Company has adopted the 1996 Stock
Option Plan (the "Stock Option Plan"). Pursuant to the Stock Option Plan, stock
options covering an aggregate of 270,000 shares of the Company's Common Stock
may be granted to the foregoing persons. Under the Stock Option Plan, "incentive
stock options" ("Incentive Options") within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), may be granted to
employees (including officers), and non-incentive stock options ("Non-incentive
Options") may be granted to any such employee and to other persons (including
directors) who perform substantial services for or on behalf of the Company.
Incentive Options and Non-incentive Options are collectively referred to herein
as "Options."
The Stock Option Plan is administered by the Board of Directors or, at
its discretion, by the Compensation Committee. The Board of Directors or the
Compensation Committee will be vested with complete authority to administer and
interpret the Stock Option Plan, to determine the terms upon which Options may
be granted, to prescribe, amend and rescind such interpretations and
determinations and to grant Options. The Board of Directors or the Compensation
Committee will have the power to terminate or amend the Stock Option Plan from
time to time in such respects as it deems advisable, except that no termination
or amendment shall materially adversely affect any outstanding Option without
the consent of the grantee, and the approval of the Company's stockholders will
be required in respect of any amendment which would (i) change the total number
of shares subject to the Stock Option Plan or (ii) change the designation or
class of employees or other persons eligible to receive Incentive Options or
Non-incentive Options.
The price at which shares covered by an Option may be purchased
pursuant thereto shall be no less than the par value of such shares and no less
than the fair market value of such shares on the date of grant (the "Fair Market
Value"); provided, however, that in the case of Incentive Options, if the
optionee directly or indirectly beneficially owns more than 10% of the total
combined voting power of all of the outstanding voting stock of the Company (a
"10% Holder"), the purchase price shall not be less than 110% of the Fair Market
Value on the date of grant. The Fair Market Value will generally be equal to the
last sale price quoted for shares of Common Stock on Nasdaq on the date of
grant. The purchase price of shares issuable upon exercise of an Option may be
paid in cash or by delivery of shares with a value equal to the exercise price
of the Option. The Company may also loan the purchase price to the optionee, or
guarantee third-party loans to the optionee, on terms and conditions acceptable
to the Board of Directors or the Compensation Committee.
In the event the aggregate fair market value of the shares of Common
Stock (determined at the time the Option is granted) with respect to which
Incentive Options are exercisable for the first time by the optionee during any
calendar year (under all such option plans maintained by the Company) exceeds
$100,000, then only the first $100,000 of such shares so purchased will be
treated as Incentive Options and any excess over $100,000 so purchased shall be
treated as Non-incentive Options. This rule shall be applied by taking Options
into account in the order or sequence in which they were granted.
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The number of shares covered by an Option is subject to adjustment for
stock splits, mergers, consolidations, combinations of shares, reorganizations
and recapitalizations. Options are generally non-transferable except by will or
by the laws of descent and distribution, and in the case of employees, with
certain exceptions, may be exercised only so long as the optionee continues to
be employed by the Company. If the employee dies or becomes disabled, the right
to exercise the Option, to the extent then vested, continues for specified
periods. Options may be exercised within a period not exceeding ten years from
the date of grant, except that the term of any Incentive Options granted to a
10% Holder may not exceed five years from the date of grant. The terms of
Incentive Options are subject to additional restrictions provided by the Stock
Option Plan.
Effective as of the date of this Prospectus, Options to purchase an
aggregate of 64,000 shares of Common Stock will be granted under the Stock
Option Plan, including Options to purchase 20,000 shares to be granted to each
of Peter J. Quadagno and Robert H. Dixon. All of such Options will be
exercisable at the public offering price per share and will vest in equal
installments over a three-year period following the consummation of this
offering.
Nonemployee Directors' Stock Option Plan
In order to attract and retain the services of non-employee members of
the Board of Directors and to provide them with increased motivation and
incentive to exert their best efforts on behalf of the Company by enlarging
their personal stake in the Company, the Company has adopted the Nonemployee
Directors' Stock Option Plan (the "Directors' Plan"). Pursuant to the Directors'
Plan, stock options covering an aggregate of 30,000 shares of the Company's
Common Stock may be granted to such non-employee directors.
Pursuant to the Directors' Plan, each member of the Board of Directors
of the Company who is not an employee of the Company (or a subsidiary) (a
"Non-employee Director") and who is elected or re-elected as a director of the
Company by the stockholders at any annual meeting of stockholders commencing
with the first annual meeting following this offering will receive, as of the
date of each such election or re-election, options to purchase 2,500 shares of
the Company's Common Stock at the fair market value thereof on the date of
grant. In addition, Non-employee Directors will receive options to purchase
2,500 shares of Common Stock upon their initial election or appointment as
director, and all current Non-employee Directors (i.e., Messrs. Rothstein,
Roncari and Weisglass) shall be granted options to purchase 2,500 shares of
Common Stock at an exercise price of $5.00 per share upon the date of this
Prospectus. All options granted under the Directors' Plan are to be
Non-incentive Options.
Limitation of Liability and Indemnification
Section 145 of the DGCL contains provisions entitling the Company's
directors and officers to indemnification from judgments, fines, amounts paid in
settlement, and reasonable expenses (including attorney's fees) as the result of
an action or proceeding in which they may be involved by reason of having been a
director or officer of the Company. In the Certificate, the Company has included
a provision that limits, to the fullest extent now or hereafter permitted by the
DGCL, the personal liability of its directors to the Company or its stockholders
for monetary damages arising from a breach of their fiduciary duties as
directors. Under the DGCL as currently in effect, this provision limits a
director's liability except where such director (i) breaches his duty of loyalty
to the Company or its stockholders, (ii) fails to act in good faith or engages
in intentional misconduct or a knowing violation of law, (iii) authorizes
payment of an unlawful dividend or stock purchase or redemption as provided in
Section 174 of the DGCL, or (iv) obtains an improper personal benefit. This
provision does not prevent the Company or its stockholders from seeking
equitable remedies, such as injunctive relief or rescission. If equitable
remedies are found not be to available to stockholders in any particular case,
stockholders may not have any effective remedy against actions taken by
directors that constitute negligence or gross negligence.
The Certificate and By-Laws also include provisions to the effect that
(subject to certain exceptions) the Company shall, to the maximum extent
permitted from time to time under the law of the State of Delaware, indemnify,
and upon request shall advance expenses to, any director or officer to the
extent that such
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indemnification and advancement of expenses is permitted under such law, as it
may from time to time be in effect. At present, the DGCL provides that, in order
to be entitled to indemnification, an individual must have acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to the
Company's best interests.
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of the date of this
Prospectus and as adjusted to reflect the sale by the Company of 1,500,000
shares of Common Stock offered hereby, based on information obtained from the
persons named below, with respect to the beneficial ownership of shares of
Common Stock by (i) each person who is known by the Company to beneficially own
more than 5% of the outstanding shares of Common Stock, (ii) each director of
the Company and (iii) all of the Company's officers and directors as a group.
<TABLE>
<CAPTION>
Amount and Percentage of Shares
Nature of Beneficially Owned
Name and Address Beneficial ---------------------------------
of Beneficial Owner(1) Ownership(2)(3) Before Offering(3) After Offering
- ---------------------- -------------- ---------------------------------
<S> <C> <C> <C>
Lawrence Perl......................... 495,035(4) 18.8% 12.0%
Raymond Findley....................... 480,035 18.3% 11.6%
Harold Rothstein...................... 635,278(5) 23.8% 15.3%
Raymond Roncari(6).................... 619,652 23.3% 14.9%
Stephen S. Weisglass.................. 102,500 3.9% 2.5%
Joseph Basch.......................... 240,000 9.1% 5.8%
All officers and directors as
a group (six persons)............... 2,352,500 86.5% 55.8%
</TABLE>
- ---------------
(1) The address for each such person is c/o American Card Technology, Inc.,
1355 Terrell Mill Road, Building 1462, Suite 200, Marietta, Georgia 30067.
(2) Unless otherwise indicated, the Company believes that all persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock beneficially owned by them. A person is deemed to be the
beneficial owner of securities that can be acquired by such person within
60 days from the date of this Prospectus upon the exercise of options,
warrants or convertible securities. Each beneficial owner's percentage
ownership is determined by assuming that options, warrants or convertible
securities that are held by such person (but not those held by any other
person) and which are exercisable within 60 days of the date of this
Prospectus have been exercised. Assumes 2,625,000 shares of Common Stock
outstanding prior to this offering and 4,125,000 shares of Common Stock
outstanding immediately after this offering, before any consideration is
given to outstanding options, warrants or convertible securities.
(3) Gives effect to the grant to each of Messrs. Rothstein, Roncari and
Weisglass as of the date of this Prospectus of options to purchase
2,500 shares of Common Stock pursuant to the Directors' Plan.
(4) Includes 480,035 shares held by the Perl Trust, a family trust of which Mr.
Perl is a beneficiary, and 12,500 shares issuable upon exercise of Bridge
Warrants. Does not include shares issuable upon exercise of an option to
purchase 100,000 shares granted to Shreveport Acquisition Corp.
("Shreveport"), a company which is owned by Messrs. Perl, Roncari and
Rothstein (the "Shreveport Option"), which option is not exercisable within
60 days of the date of this Prospectus.
(5) Includes 587,778 shares held by the Rothstein Trust, a family trust for
the benefit of the family of Harold Rothstein, and 37,500 shares
issuable upon exercise of Bridge Warrants. Does not include shares
issuable upon exercise of the Shreveport Option.
(6) Includes 37,500 shares issuable upon exercise of Bridge Warrants. Does
not include shares issuable upon exercise of the Shreveport Option.
Lawrence Perl, Raymond Findley, Harold Rothstein and Raymond Roncari
may be deemed "promoters" of the Company, as such term is defined under the
federal securities laws.
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CERTAIN TRANSACTIONS
Pursuant to an agreement dated as of January 1, 1993, Shreveport, a
corporation founded by Lawrence Perl, the Chief Executive Officer and a director
of the Company, and Raymond Roncari, a director of the Company, and currently
owned by Mr. Perl, Mr. Roncari and Harold Rothstein, a director of the Company,
acquired all of the outstanding stock of McKinnie, a supplier of computerized
management information systems to the pari-mutuel industry, for a purchase price
of $2 million, which was paid $75,000 in cash and $1,925,000 by delivery of a
one-year promissory note which was guaranteed by Mr. Roncari. Concurrently with
such acquisition, McKinnie entered into an agreement (the "McKinnie License
Agreement") with US3 and Phoenix DataCrypt Systems, Inc. ("Phoenix"), a company
of which Raymond Findley, Jr., the Company's President, Chief Operating Officer
and a director, was co-founder, President and Chief Executive Officer. Pursuant
to the McKinnie License Agreement, Phoenix granted to McKinnie an exclusive
license to use, in connection with McKinnie's management information systems,
the smart card technology and computer software owned or licensed by Phoenix
(including technology then licensed by Phoenix) for use in the pari-mutuel
industry and McKinnie agreed to purchase all of its smart card requirements from
Phoenix, a distributor of US3's smart cards.
In May 1994, Mr. Findley severed his relationship with Phoenix in order
to pursue smart card-related business opportunities with Messrs. Perl, Roncari
and Rothstein. In June 1994, Messrs. Findley, Perl, Roncari and Rothstein formed
the Company to develop and market smart card technology and applications. In
order to pursue their business plan, Messrs. Perl, Roncari and Rothstein elected
to divest themselves of control of McKinnie. In July 1994, Shreveport sold a 51%
equity interest in McKinnie to The Jockey Club Racing Services, Inc. ("The
Jockey Club"). In connection therewith, The Jockey Club agreed to cause McKinnie
to transfer to the Company all of McKinnie's rights to any smart card
technology, including certain software technology and all rights under the
McKinnie License Agreement.
In April 1995, the Company, Phoenix and US3 elected to terminate the
McKinnie License Agreement. In addition, the Company granted to McKinnie a right
of first refusal pursuant to which the Company agreed that, in the event it
proposes to grant any rights to sell, market and/or develop any equine-related
applications of any smart card technology developed by the Company, the Company
shall first offer the proposed grant to McKinnie.
In December 1996, the Company issued to Shreveport an option (the
"Shreveport Option") to purchase 100,000 shares of Common Stock at an exercise
price of $5.00 per share. The Shreveport Option is exercisable at any time
during the ten year period commencing 90 days following the consummation of this
offering. The Shreveport Option provides that upon exercise, in lieu of a cash
payment, the option may be exchanged for a number of shares of Common Stock
equal to (a) the total number of shares issuable upon exercise of such option
for cash, minus (b) a number of shares equal to the quotient of (i) the
aggregate exercise price of the exercised portion of the option, divided by (ii)
the then current market price of a share of Common Stock.
In connection with the formation of the Company in June 1994, each of
the Perl Trust, Mr. Roncari, the Rothstein Trust and Mr. Findley (collectively,
the "Original Stockholders") purchased 507,500 shares of Common Stock for a
purchase price of $250. In January 1995, each of the Original Stockholders sold
to Robert Dixon, the Company's Vice President of Technical Operations, 5,000
shares of Common Stock for a purchase price of $1,250.
Since the inception of the Company, the Perl Trust and Messrs. Findley,
Roncari and Rothstein (either individually or through the Rothstein Trust) have
made the Stockholder Loans to the Company in amounts aggregating $15,177,
$15,177, $688,854 and $840,747, respectively. The Stockholder Loans bear
interest at a rate per annum equal to 10% and are payable on demand. In March
1995, $250,000 of the then-outstanding principal amount of the Stockholder Loans
of each of Messrs. Rothstein and Roncari was recharacterized as paid-in capital
of the Company. Pursuant to an agreement among the Original Stockholders, the
aggregate $500,000 Capital Contribution was allocated equally among the Original
Stockholders, in consideration for which Mr. Findley
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issued to Mr. Roncari and the Perl Trust issued to the Rothstein Trust a Capital
Contribution Note in the amount of $125,000. Pursuant to the Debt Conversion
which occurred upon the consummation of the Bridge Financing in January 1997,
$12,675 of the Perl Trust's Stockholder Loans, $12,675 of Mr. Findley's
Stockholder Loans, $223,260 of Mr. Roncari's Stockholder Loans and $301,390 of
Mr. Rothstein's Stockholder Loans were converted into 2,535, 2,535, 44,652 and
60,278 shares of Common Stock, respectively. Mr. Findley and the Perl Trust
subsequently transferred 25,000 shares of Common Stock to Mr. Roncari and the
Rothstein Trust, respectively, in satisfaction of the indebtedness represented
by the Capital Contribution Notes. The Company intends to use a portion of the
proceeds of this offering to repay up to $510,000 of any Stockholder Loans
outstanding upon consummation of this offering, with any interest on the
Stockholder Loans to be paid out of cash flow from operations commencing one
year thereafter.
Pursuant to an agreement dated as of July 1, 1994, the Company agreed
to pay Lawrence Owen Associates, a corporation wholly owned by Mr. Perl, a
monthly fee of $1,000 in consideration for the use of office space in West
Hartford, Connecticut and for accounting and other general and administrative
services. At December 31, 1995 and September 30, 1996, amounts due to Lawrence
Owen Associates from the Company pursuant to such agreement were $18,000 and
$27,000, respectively. This arrangement terminated following consummation of the
Bridge Financing.
From March through June 1995, Joseph D. Basch, the President, Chief
Executive Officer and sole director of the Subsidiary, loaned the Company an
aggregate of $300,000. The loans accrued interest at a rate per annum equal to
10% and were payable on demand. In July 1996, the Company and Mr. Basch entered
into an agreement pursuant to which the then-outstanding principal amount of the
loans, together with accrued interest thereon of approximately $30,000, was
converted into an aggregate of 240,000 shares of Common Stock.
In January 1996, the Company sold 100,000 shares of Common Stock to
Stephen S. Weisglass at a price of $.25 per share. Mr. Weisglass became a
director of the Company in November 1996.
Mr. Rothstein has personally guaranteed all of the Company's
indebtedness to Fleet and has pledged personal assets in the form of a
certificate of deposit in the amount of $150,000 to secure such indebtedness;
Mr. Roncari has personally guaranteed all of the Company's indebtedness to First
Suffield; and Mr. Rothstein has pledged to Chase a certificate of deposit in the
amount of $105,000 to secure the Company's indebtedness to Chase. In addition,
Mr. Rothstein has agreed with the Company that, in the event a demand is made by
Fleet with respect to the Fleet Loan and/or a demand is made by Chase with
respect to the Chase Loan prior to the earlier of the consummation of this
offering and July 1, 1997, he shall either (i) secure replacement financing to
pay the amount so demanded or (ii) personally satisfy the amount demanded,
either through surrender of the collateral previously pledged by him or through
other means satisfactory to Fleet and/or Chase, as the case may be. In the event
Mr. Rothstein elects to personally satisfy the demanded amount, the Company has
agreed to reimburse Mr. Rothstein for the full amount of such payment on the
earlier of the consummation of this offering and July 1, 1997. The Company
intends to use $300,000 of the proceeds of this offering to repay a portion of
its bank indebtedness. See "Plan of Operation - Liquidity and Capital
Resources."
In January 1997, Mr. Rothstein made the Interim Loan in the principal
amount of $35,000, which was used for working capital purposes. The principal
amount thereof, plus accrued interest thereon, at a rate of 10% per annum, was
paid upon the consummation of the Bridge Financing with a portion of the net
proceeds thereof.
In January 1997, in connection with the Bridge Financing, the Company
borrowed from Messrs. Perl, Rothstein and Roncari $175,000 and issued to them
Bridge Notes in such aggregate principal amount, an aggregate of 17,500 Bridge
Shares and 87,500 Bridge Warrants. The Company intends to use approximately
$179,200 of the proceeds of this offering to repay such Bridge Notes (including
estimated interest accrued thereon through and until such repayment date) upon
the consummation of this offering.
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Although the Company believes that the foregoing transactions were on
terms no less favorable to the Company than would have been available from
unaffiliated third parties in arm's length transactions, there can be no
assurance that this is the case. All future transactions and loans between the
Company and its officers, directors and 5% stockholders will be on terms no less
favorable to the Company than could be obtained from independent third parties.
There can be no assurance, however, that future transactions or arrangements
between the Company and its affiliates will be advantageous, that conflicts of
interest will not arise with respect thereto or that if conflicts do arise, they
will be resolved in favor of the Company.
DESCRIPTION OF SECURITIES
General
Upon completion of this offering, the authorized capital stock of the
Company will consist of 20,000,000 shares of Common Stock, $.001 par value per
share, of which 4,125,000 shares will be outstanding, and 1,000,000 shares of
Preferred Stock, $.001 par value per share, of which no shares will be
outstanding. The following description of the securities of the Company and
certain provisions of the Company's Certificate and By-Laws is a summary and is
qualified in its entirety by the provisions of the Certificate and By-Laws as
currently in effect.
Common Stock
Holders of Common Stock are entitled to one vote for each share held on
all matters submitted to a vote of stockholders, including the election of
directors. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election if they choose to do so. The Certificate does not provide
for cumulative voting for the election of directors. Holders of Common Stock
will be entitled to receive ratably such dividends, if any, as may be declared
from time to time by the Board of Directors out of funds legally available
therefor, and will be entitled to receive, pro rata, all assets of the Company
available for distribution to such holders upon liquidation. Holders of Common
Stock have no preemptive, subscription or redemption rights. The rights of the
holders of the Common Stock are subject to any rights that may be fixed for
holders of Preferred Stock, when and if any Preferred Stock is issued. All of
the outstanding shares of Common Stock are fully paid and non-assessable. Upon
issuance, all of the shares of Common Stock offered hereby will be fully paid
and nonassessable.
Preferred Stock
The Company is authorized to issue 1,000,000 shares of Preferred Stock
from time to time in one or more series, which may rank senior to the Common
Stock with respect to payment of dividends and in the event of the liquidation,
dissolution or winding up of the Company. The Board has the power, without
stockholder approval, to issue shares of one or more series of Preferred Stock,
at any time, for such consideration and with such relative rights, privileges,
preferences and other terms as the Board may determine (including, but not
limited to, terms relating to dividend rates, redemption rates, liquidation
preferences and voting, sinking fund and conversion or other rights). The rights
and terms relating to any new series of Preferred Stock could adversely affect
the voting power or other rights of the holders of the Common Stock or could be
utilized, under certain circumstances, as a method of discouraging, delaying or
preventing a change in control of the Company.
Redeemable Warrants
Each Warrant entitles the registered holder thereof to purchase one
share of Common Stock, at a price of $5.00, subject to adjustment in certain
circumstances, at any time commencing , 1998, or earlier upon the consent
of the Underwriter, through and including , 2002.
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The Warrants are redeemable by the Company, upon the consent of the
Underwriter, at a price of $.10 per Warrant, at any time commencing after the
Company has reported its first four fiscal quarters of financial results
following the date of this Prospectus, upon notice of not less than 30 days,
provided that the closing bid quotation of the Common Stock on all 20 trading
days ending on the third day prior to the day on which the Company gives notice
has been at least 150% (currently $7.50, subject to adjustment) of the then
effective exercise price of the Warrants. All warrantholders have exercise
rights until the close of business on the date fixed for redemption.
In the event the Company's results of operations for the first four
fiscal quarters following the date of this Prospectus reflect, on a cumulative
basis during such four quarters, either revenues of under $5,000,000 or pre-tax
operating losses (before interest income and expense, financing costs, taxes and
extraordinary items) in excess of $1,000,000, then the exercise price of the
Warrants shall decrease from $5.00 per share to $4.00 per share.
For purposes of the foregoing provisions, the first of the aforesaid
four fiscal quarters shall be the first quarter the majority of which falls
after the date hereof.
The Warrants will be issued in registered form under a Warrant
Agreement between the Company and American Stock Transfer & Trust Company, as
Warrant Agent. Reference is made to said Warrant Agreement for a complete
description of the terms and conditions therein (the description herein
contained being qualified in its entirety by reference thereto).
The exercise price and number of shares of Common Stock or other
securities issuable on exercise of the Warrants are subject to adjustment in
certain circumstances, including in the event of a stock dividend,
recapitalization, reorganization, merger or consolidation of the Company.
However, such Warrants are not subject to adjustment for issuances of Common
Stock at a price below the exercise price of the Warrants, including the
issuance of shares of Common Stock pursuant to the Stock Option Plan or the
Directors' Plan.
The Warrants may be exercised upon surrender of the Warrant certificate
on or prior to the expiration date at the offices of the Warrant Agent, with the
exercise form on the reverse side of the certificate completed and executed as
indicated, accompanied by full payment of the exercise price (by certified check
payable to the Company) to the Warrant Agent for the number of Warrants being
exercised. The warrantholders do not have the rights or privileges of holders of
Common Stock.
No Warrant will be exercisable unless at the time of exercise the
Company has filed a current registration statement with the Commission covering
the shares of Common Stock issuable upon exercise of such Warrant and such
shares have been registered or qualified or deemed to be exempt under the
securities laws of the state of residence of the holder of such Warrant. The
Company will use its best efforts to have all such shares so registered or
qualified on or before the first possible exercise date and to maintain a
current prospectus relating thereto until the expiration of the Warrants,
subject to the terms of the Warrant Agreement. While it is the Company's
intention to do so, there can be no assurance that it will be able to do so.
No fractional shares will be issued upon exercise of the Warrants.
However, if a warrantholder exercises all Warrants then owned of record by him,
the Company will pay to such warrantholder, in lieu of the issuance of any
fractional shares which is otherwise issuable, an amount in cash based on the
market value of the Common Stock on the last trading day prior to the exercise
date.
Bridge Warrants
The Bridge Warrants will be exercisable until January 16, 2002 at a
price of $4.00 per Bridge Warrant Share, subject to adjustment. The Bridge
Warrants provide that, upon exercise, in lieu of a cash payment, the Bridge
Warrants to be exercised may be exchanged for a number of Bridge Warrant Shares
equal to (a) the total
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number of Bridge Warrant Shares issuable upon exercise of such Bridge Warrants
for cash minus (b) a number of Bridge Warrant Shares equal to the quotient of
(i) the aggregate exercise price of the exercised Bridge Warrants, divided by
(ii) the then current market price of a share of the Company's Common Stock.
The Bridge Warrants are redeemable by the Company, upon the consent of
the Underwriter at any time commencing on January 16, 1999, upon notice of not
less than 30 days, at a price of $.10 per Bridge Warrant, provided that the
closing bid quotation of the Common Stock on all 20 trading days ending on the
third day prior to the date on which the Company gives notice has been at least
150% (currently $6.00, subject to adjustment) of the then effective exercise
price of the Bridge Warrants. The Bridge Warrants will be exercisable until the
close of business on the date fixed for redemption.
Registration Rights
In connection with this offering, in addition to the registration
obligations with respect to the shares of Common Stock issuable upon exercise of
the Warrants, the Company has agreed to grant to the Underwriter certain demands
and "piggyback" registration rights in connection with the 300,000 shares of
Common Stock issuable upon exercise of the Underwriter's Warrants and the
Warrants included therein. See "Underwriting".
The Company has also agreed to include the Bridge Shares and the Bridge
Warrant Shares in a registration statement (the "Post-IPO Registration
Statement") which the Company will prepare and file and use its best efforts to
have declared effective by the Commission so as to permit the public trading of
the Bridge Shares and Bridge Warrant Shares pursuant thereto commencing 15
months following the date of this Prospectus. Notwithstanding the foregoing, the
holders of the Registrable Securities (as defined below) have agreed not to sell
any of such securities until twelve months following the date of this
Prospectus.
If the Post-IPO Registration Statement is not declared effective by the
Commission within 15 months following the date of this Prospectus, then the
Company shall issue to each holder of the Registrable Securities, on the first
day of each month that the Post-IPO Registration Statement continues not to have
been declared effective by the Commission beginning on the first day of the 16th
month following the date of this Prospectus, such number of additional shares of
Common Stock and additional warrants (identical to the Bridge Warrants) as is
equal to 10% of the number of Bridge Shares and Bridge Warrants, respectively,
held by such holder. The Bridge Shares, Bridge Warrant Shares and such
additional shares and shares underlying such additional warrants are referred to
herein as the "Registrable Securities."
Once the Post-IPO Registration Statement relating to the Registrable
Securities is declared effective, the Company has agreed to use its best efforts
to keep it effective until the earlier of (i) the date that all of the
Registrable Securities have been sold pursuant to the Post-IPO Registration
Statement and (ii) the date that the holders of the Registrable Securities
receive an opinion of counsel that the full amount of such securities may be
freely sold by such holders without registration under the Securities Act (the
"Registration Period"). If the Company fails to keep the Post-IPO Registration
Statement continuously effective during the Registration Period and fails, upon
the request of holders of at least 51% of the unsold Registrable Securities, to
update the Post-IPO Registration Statement or file a new registration statement
covering such unsold securities within 90 days of its receipt of such request,
then the Company shall issue to each holder of the Registrable Securities
remaining unsold, on one occasion only, such number of additional shares of
Common Stock and additional warrants (identical to the warrants included in the
unsold Registrable Securities) as is equal to one-quarter of the number of
shares and warrants, respectively, comprising the unsold Registrable Securities
held by such holder. The Company shall be obligated to cause the Registrable
Securities and such additional shares and warrants (and shares underlying such
additional warrants) to be registered promptly under the Securities Act, subject
to the terms of a registration rights agreement entered into in connection with
the Bridge Financing.
The Company shall bear all fees and expenses incurred in the
preparation and filing of the Post-IPO Registration Statement.
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Antitakeover Provisions of Delaware Law
The Company is a Delaware corporation and thus subject to Section 203
of the DGCL ("Section 203"), which is generally viewed as an anti-takeover
statute. In general, Section 203 prohibits a publicly traded Delaware
corporation from engaging in any "business combination" (as defined) with any
"interested stockholder" (as defined) for a period of three years following the
date that such stockholder became an interested stockholder, unless: (i) prior
to such time, the board of directors of the corporation approved either the
business combination or the transaction which resulted in the stockholder
becoming an interested stockholder; (ii) upon consummation of the transaction
which resulted in the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned (a) by persons
who are directors and also officers and (b) by employee stock plans in which
employee participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer;
or (iii) at or subsequent to such time, the business combination is approved by
the board of directors and authorized at an annual or special meeting of the
stockholders, and not by written consent, by the affirmative vote of at least
662/3% of the outstanding voting stock which is not owned by the interested
stockholder.
In general, Section 203 defines a "business combination" to include:
(i) any merger or consolidation involving the corporation and the interested
stockholder; (ii) any sale, transfer, pledge or other disposition involving the
interested stockholder of 10% or more of the assets of the corporation; (iii)
(subject to certain exceptions) any transaction which results in the issuance or
transfer by the corporation of any stock of the corporation to the interested
stockholder; (iv) any transaction involving the corporation which has the effect
of increasing the proportionate share of the stock of any class or series of the
corporation beneficially owned by the interested stockholder; or (v) the receipt
by the interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an "interested stockholder" as (a) any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation or (b) any entity or person affiliated with or controlling or
controlled by such entity or person.
The existence of Section 203 would be expected to have the effect of
discouraging takeover attempts involving the Company, including attempts that
might result in a premium over the market price of the Common Stock (if it is
then publicly traded).
Transfer Agent and Registrar
The Company's Transfer Agent, Warrant Agent and Registrar is American
Stock Transfer & Trust Company, 40 Wall Street, New York, New York 10005.
Reports to Stockholders
The Company intends to file, prior to the date of this Prospectus, an
application with the Commission to register the Common Stock and Warrants under
the provisions of Section 12(g) of the Exchange Act. The Company has agreed with
the Underwriter that the Company will use its best efforts to continue to
maintain such registration. Such registration will require the Company to comply
with periodic reporting, proxy solicitation and certain other requirements of
the Exchange Act.
-49-
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this offering, the Company will have 4,125,000
shares of Common Stock outstanding, of which the 1,500,000 shares of Common
Stock offered hereby by the Company will be freely tradeable without restriction
or further registration under the Securities Act, except for any shares
purchased by an affiliate of the Company (in general, a person who has a control
relationship with the Company), which shares will be subject to the resale
limitations of Rule 144 under the Securities Act. All of the remaining 2,625,000
shares of Common Stock are deemed to be "restricted securities," as that term is
defined under Rule 144 promulgated under the Securities Act, and in the future
may only be sold pursuant to a registration statement under the Securities Act,
in compliance with the exemption provisions of Rule 144 or pursuant to another
exemption under the Securities Act. The 2,625,000 restricted shares of Common
Stock will become eligible for sale under Rule 144, subject to the volume
limitations prescribed by Rule 144 and to the contractual restrictions described
below, at various times commencing 90 days from the date of this Prospectus.
In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company (or persons whose shares are aggregated), who has owned restricted
shares of Common Stock beneficially for at least two years is entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of 1% of the total number of outstanding shares of the same class or, if
the shares of Common Stock are quoted on Nasdaq, the average weekly trading
volume during the four calendar weeks preceding the sale. A person who has not
been an affiliate of the Company for at least the three months immediately
preceding the sale and who has beneficially owned shares of Common Stock for at
least three years is entitled to sell such shares under Rule 144 without regard
to any of the limitations described above.
All of the Company's officers, directors and stockholders have agreed
not to sell or otherwise dispose of (other than in a private transfer) any of
their shares of Common Stock for a period of 12 months from the date of this
Prospectus without the prior written consent of the Underwriter (other than in
the case of the Bridge Shares and Bridge Warrant Shares, which cannot be
transferred during such period even with the consent of the Underwriter).
The Company has granted the Underwriter demand and "piggyback"
registration rights with respect to the Underwriter's Warrants and the shares of
Common Stock and Warrants underlying the Underwriter's Warrants. The Company has
also granted certain demand and "piggyback" registration rights to the holders
of 125,000 shares of Common Stock and 625,000 shares of Common Stock underlying
the Bridge Warrants issued in connection with the Bridge Financing.
Under Rule 701 of the Securities Act, persons who purchase shares upon
exercise of options granted prior to the date of this Prospectus are entitled to
sell such shares after the 90th day following the date of this Prospectus in
reliance on Rule 144, without having to comply with the holding period
requirements of Rule 144 and, in case of non-affiliates, without having to
comply with the public information, volume limitation or notice provisions of
Rule 144. Affiliates are subject to all Rule 144 restrictions after this 90-day
period, but without a holding period.
Prior to this offering, there has been no market for the shares of
Common Stock or Warrants and no prediction can be made as to the effect, if any,
that market sales of shares of Common Stock or the availability of such
securities for sale will have on the market prices prevailing from time to time.
Nevertheless, the possibility that substantial amounts of shares of Common Stock
may be sold in the public market may adversely affect prevailing market prices
for the Common Stock and the Warrants and could impair the Company's ability to
raise capital through the sale of its equity securities.
-50-
<PAGE>
UNDERWRITING
Whale Securities Co., L.P. (the "Underwriter") has agreed, subject to
the terms and conditions contained in the Underwriting Agreement, to purchase
1,500,000 shares of Common Stock and 1,500,000 Warrants from the Company. The
Underwriter is committed to purchase and pay for all of the Common Stock and
Warrants offered hereby if any of such securities are purchased. The shares of
Common Stock and Warrants are being offered by the Underwriter subject to prior
sale, when, as and if delivered to and accepted by the Underwriter and subject
to approval of certain legal matters by counsel and to certain other conditions.
The Underwriter has advised the Company that it proposes to offer the
Common Stock and Warrants to the public at the public offering prices set forth
on the cover page of this Prospectus. The Underwriter may allow to certain
dealers who are members of the National Association of Securities Dealers, Inc.
(the "NASD") concessions, not in excess of $ per share of Common Stock and
$ per Warrant, of which not in excess of $ per share of Common Stock
and $ per Warrant may be reallowed to other dealers who are members of the
NASD.
The Company has granted to the Underwriter an option, exercisable for
45 days from the date of this Prospectus, to purchase up to 225,000 additional
shares of Common Stock and/or 225,000 additional Warrants at the respective
public offering prices set forth on the cover page of this Prospectus, less the
underwriting discounts and commissions. The Underwriter may exercise this option
in whole or, from time to time, in part, solely for the purpose of covering
overallotments, if any, made in connection with the sale of the shares of Common
Stock and/or Warrants offered hereby.
The Company has agreed to pay to the Underwriter a nonaccountable
expense allowance of 3% of the gross proceeds of this offering, of which $50,000
has been paid as of the date of this Prospectus. The Company has also agreed to
pay all expenses in connection with qualifying the shares of Common Stock and
Warrants offered hereby for sale under the laws of such states as the
Underwriter may designate, including expenses of counsel retained for such
purpose by the Underwriter.
The Company has agreed to sell to the Underwriter and its designees,
for an aggregate of $165, warrants (the "Underwriter's Warrants") to purchase up
to 150,000 shares of Common Stock at an exercise price of $6.75 per share (135%
of the public offering price per share) and/or up to 150,000 Warrants (each to
purchase one share of Common Stock at $8.25 per share) at an exercise price of
$.135 per Warrant (135% of the initial public offering price per Warrant). The
Underwriter's Warrants may not be sold, transferred, assigned or hypothecated
for one year from the date of this Prospectus, except to the officers and
partners of the Underwriter or members of the selling group, and are exercisable
during the four-year period commencing one year from the date of this Prospectus
(the "Warrant Exercise Term"). During the Warrant Exercise Term, the holders of
the Underwriter's Warrants are given, at nominal cost, the opportunity to profit
from a rise in the market price of the Common Stock. To the extent that the
Underwriter's Warrants are exercised, dilution to the interests of the Company's
stockholders will occur. Further, the terms upon which the Company will be able
to obtain additional equity capital may be adversely affected since the holders
of the Underwriter's Warrants can be expected to exercise them at a time when
the Company would, in all likelihood, be able to obtain any needed capital on
terms more favorable to the Company than those provided in the Underwriter's
Warrants. Any profit realized by the Underwriter on the sale of the
Underwriter's Warrants, the underlying shares of Common Stock or the underlying
Warrants, or the shares of Common Stock issuable upon any exercise of such
underlying Warrants may be deemed additional underwriting compensation.
Subject to certain limitations and exclusions, the Company has agreed,
at the request of the holders of a majority of the Underwriter's Warrants, at
the Company's expense, to register the Underwriter's Warrants, the shares of
Common Stock and warrants underlying the Underwriter's Warrants, and the shares
of Common Stock issuable upon exercise of the underlying Warrants under the
Securities Act on one occasion during the Warrant
-51-
<PAGE>
Exercise Term and to include such Underwriter's Warrants and such underlying
securities in any appropriate registration statement which is filed by the
Company during the seven years following the date of this Prospectus.
The Company has agreed, in connection with the exercise of the Warrants
pursuant to solicitation (commencing one year from the date of this Prospectus),
to pay to the Underwriter for bona fide services provided a fee of 5% of the
exercise price for each Warrant exercised, provided, however, that the
Underwriter will not be entitled to receive such compensation in Warrant
exercise transactions in which (i) the market price of Common Stock at the time
of exercise is lower than the exercise price of the Warrants; (ii) the Warrants
are held in any discretionary account; (iii) disclosure of compensation
arrangements is not made, in addition to the disclosure provided in this
Prospectus, in documents provided to holders of the Warrants at the time of
exercise; (iv) the holder of the Warrants has not confirmed in writing that the
Underwriter solicited such exercise; or (v) the solicitation of exercise of the
Warrants was in violation of Rule 10b-6 promulgated under the Exchange Act. In
addition to soliciting, either orally or in writing, the exercise of the
Warrants, such bona fide services may also include disseminating information,
either orally or in writing, to the holders of the Warrants about the Company or
the market for the Company's securities, and assisting in the processing of the
exercise of Warrants.
The Underwriter acted as placement agent in connection with the Bridge
Financing and received $125,000 (representing 10% of the purchase price of the
Units) and a non-accountable expense allowance of $25,000.
The Company has agreed, for a period of five years from the date of
this Prospectus, upon the request of the Underwriter, to nominate and use its
best efforts to elect a designee of the Underwriter as a director of the
Company, or, at the Underwriter's option, as a non-voting advisor to the
Company's Board of Directors. All of the Company's officers and directors, as
well as the holders of a majority of the Company's outstanding stock, have
agreed to vote their shares of Common Stock in favor of such designee. The
Underwriter has not yet exercised its right to designate such a person.
In addition, the Company has agreed to enter into a consulting
agreement to retain the Underwriter as a financial consultant for a period of
two years following the consummation of this offering at an annual fee of
$30,000, the entire $60,000 payable in full, in advance. The consulting
agreement will not require the consultant to devote a specific amount of time to
the performance of its duties thereunder. It is anticipated that these
consulting services will be provided by principals of the Underwriter and/or
members of the Underwriter's corporate finance department who, however, have not
been designated as of the date hereof. In the event that the Underwriter
originates a financing, merger, acquisition, joint venture or other transaction
to which the Company is a party, the Underwriter will be entitled to receive a
finder's fee in consideration for origination of such transaction.
The Company has agreed to indemnify the Underwriter against certain
civil liabilities, including liabilities under the Securities Act.
All of the Company's officers, directors and stockholders have agreed
not to sell or otherwise dispose of (other than in a private transfer) any of
their shares of Common Stock for a period of 12 months from the date of this
Prospectus without the prior written consent of the Underwriter (other than in
the case of the Bridge Shares and Bridge Warrant Shares, which cannot be
transferred during such period even with the consent of the Underwriter).
The Underwriter has informed the Company that it does not expect sales
made to discretionary accounts to exceed 1% of the securities offered hereby.
-52-
<PAGE>
Prior to this offering, there has been no public trading market for the
Common Stock or the Warrants. Consequently, the initial public offering prices
of the Common Stock and Warrants and the exercise price of the Warrants have
been determined by negotiations between the Company and the Underwriter. Among
the factors considered in determining the initial public offering prices and the
exercise price of the Warrants were the Company's financial condition and
prospects, management, market prices of similar securities of comparable
publicly-traded companies, certain financial and operating information of
companies engaged in activities similar to those of the Company and the general
condition of the securities markets.
LEGAL MATTERS
The validity of the Common Stock and Warrants offered hereby will be
passed upon for the Company by Zimet, Haines, Friedman & Kaplan, New York, New
York. Certain legal matters in connection with this offering will be passed upon
for the Underwriter by Tenzer Greenblatt LLP, New York, New York.
EXPERTS
The financial statements included in this Prospectus have been audited
by BDO Seidman, LLP, independent certified public accountants, to the extent and
for the periods set forth in their report (which contains an explanatory
paragraph regarding uncertainties about the Company continuing as a going
concern) appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of said firm as experts in auditing and
accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C. 20549, a Registration Statement on Form SB-2, including
amendments thereto, under the Securities Act with respect to the securities
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules filed
therewith. For further information with respect to the Company and the Common
Stock offered hereby, reference is made such Registration Statement, exhibits
and schedules. Statements contained in this Prospectus as to the contents of any
contract or other document referred to are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement of which this Prospectus forms
a part, each such statement being qualified in all respects by such reference.
The Registration Statement, and the exhibits and schedules thereto, may be
inspected without charge at the public reference facilities maintained by the
Securities and Exchange Commission in Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the following regional offices of the Commission:
13th Floor, Seven World Trade Center, New York, New York 10048 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such material can be obtained form the Public Reference Section of the
Commission, Washington, D.C. at prescribed rates. The Commission also maintains
a Web site at http://www.sec.gov that contains reports, proxy and information
statements. Such reports and other information may also be inspected at NASDAQ,
1735 K Street, N.W., Washington, D.C. 20006.
-53-
<PAGE>
American Card Technology, Inc.
(a development stage company)
Contents
================================================================================
Report of independent certified public accountants F-2
Financial statements:
Balance sheets F-3
Statements of operations F-4
Statements of stockholders' deficit F-5
Statements of cash flows F-6 - F-7
Summary of significant accounting policies F-8 - F-11
Notes to financial statements F-12 - F-16
F-1
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors
American Card Technology, Inc.
We have audited the accompanying balance sheet of American Card Technology, Inc.
(a development stage company) as of December 31, 1995, and the related
statements of operations, stockholders' deficit and cash flows for the period
from June 21, 1994 (inception) to December 31, 1994 and the year ended December
31, 1995. 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 American Card Technology, Inc.
as of December 31, 1995, and the results of its operations and its cash flows
for the period from June 21, 1994 (inception) to December 31, 1994 and the year
ended December 31, 1995 in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company's dependence on outside financing, lack of existing
commitments from lenders to provide necessary financing, lack of sufficient
working capital, and losses since inception raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans concerning
these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
BDO Seidman, LLP
New York, New York
August 1, 1996, except for Note 6
which is as of December 11, 1996
F-2
<PAGE>
American Card Technology, Inc.
(a development stage company)
Balance Sheets
<TABLE>
<CAPTION>
===============================================================================================================================
December 31, September 30,
1995 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(unaudited)
Assets
Current:
Cash $ 10,643 $ 33,006
Inventory 1,250 8,092
Prepaid expenses and other current assets 10,775 7,650
- ---------------------------------------------------------------------------------------------------------------------------
Total current assets 22,668 48,748
Equipment, net of accumulated depreciation of $11,808 and
$28,562 46,677 47,887
Other assets:
Deferred license fee 148,000 -
Software development costs 94,608 167,297
Deferred financing costs - 69,622
Other 1,970 24,743
- ---------------------------------------------------------------------------------------------------------------------------
$ 313,923 $ 358,297
===========================================================================================================================
Liabilities and Stockholders' Deficit
Current:
Accounts payable $ 76,645 $ 259,380
Accrued interest expense 43,788 103,228
Other accrued expenses 29,871 121,022
Notes payable to banks (Note 2) - 370,000
Notes payable to stockholders and affiliate (Note 3) 971,024 1,059,955
Other payable (Note 4) 148,000 -
- ---------------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,269,328 1,913,585
- ---------------------------------------------------------------------------------------------------------------------------
Commitment and contingency (Notes 1 and 6)
Stockholders' deficit (Note 7):
Preferred stock, $.001 par value - shares authorized 1,000,000;
none issued - -
Common stock, $.001 par value - shares authorized
20,000,000; issued and outstanding 2,030,000 at
December 31, 1995 and 2,390,000 at September 30, 1996 2,030 2,390
Additional paid-in capital 498,970 858,610
Stock subscriptions receivable (250) (30,000)
Accumulated deficit during the development stage (1,456,155) (2,386,288)
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' deficit (955,405) (1,555,288)
- ---------------------------------------------------------------------------------------------------------------------------
$ 313,923 $ 358,297
===========================================================================================================================
See accompanying summary of significant accounting policies
and notes to financial statements.
</TABLE>
F-3
<PAGE>
American Card Technology, Inc.
(a development stage company)
Statements of Operations
<TABLE>
<CAPTION>
====================================================================================================================================
Period from Period from
June 21, 1994 Nine months ended June 21, 1994
(inception) to Year ended September 30, (inception) to
December 31, December 31, ------------------------------- September 30,
1994 1995 1995 1996 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenues $ - $ 73,472 $ 66,262 $ 19,989 $ 93,461
Cost of sales - 68,621 57,881 11,250 79,871
- ------------------------------------------------------------------------------------------------------------------------------------
Gross profit - 4,851 8,381 8,739 13,590
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses:
General and administrative 427,549 841,225 636,494 826,752 2,095,526
Write-off of license fee (Note 4) - 148,000 - 20,000 168,000
Interest (Notes 2 and 3) 6,996 37,236 23,703 92,120 136,352
- ------------------------------------------------------------------------------------------------------------------------------------
434,545 1,026,461 660,197 938,872 2,399,878
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss $ (434,545) $(1,021,610) $(651,816) $(930,133) $(2,386,288)
====================================================================================================================================
Pro forma loss per share $ (.16) $ (.37) $ (.24) $ (.34)
====================================================================================================================================
Weighted average shares 2,750,000 2,750,000 2,750,000 2,750,000
====================================================================================================================================
See accompanying summary of significant accounting policies
and notes to financial statements.
</TABLE>
F-4
<PAGE>
American Card Technology, Inc.
(a development stage company)
Statements of Stockholders' Deficit
<TABLE>
<CAPTION>
====================================================================================================================================
Period from June 21, 1994 (inception) to September 30, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock Additional Stock
------------------------------- paid-in subscription Accumulated
Shares Amount capital receivable deficit Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of shares to
founders 2,030,000 $2,030 $ (1,030) $ (250) $ - $ 750
Net loss - - - - (434,545) (434,545)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1994 2,030,000 2,030 (1,030) (250) (434,545) (433,795)
Capital contribution
(conversion of loan) - - 500,000 - - 500,000
Net loss - - - - (1,021,610) (1,021,610)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1995 2,030,000 2,030 498,970 (250) (1,456,155) (955,405)
Period ended
September 30, 1996
(unaudited) -
Issuance of shares 120,000 120 29,880 (30,000) - -
Issuance of shares for
debt 240,000 240 329,760 - - 330,000
Net loss - - - - (930,133) (930,133)
Receipt of stock
subscriptions - - - 250 - 250
- ------------------------------------------------------------------------------------------------------------------------------------
Balance,
September 30, 1996
(unaudited) 2,390,000 $2,390 $858,610 $(30,000) $(2,386,288) $(1,555,288)
====================================================================================================================================
See accompanying summary of significant accounting policies
and notes to financial statements.
</TABLE>
F-5
<PAGE>
American Card Technology, Inc.
(a development stage company)
Statements of Cash Flows
<TABLE>
<CAPTION>
====================================================================================================================================
Period from Period from
June 21, 1994 Nine months ended June 21, 1994
(inception) to Year ended September 30, (inception) to
December 31, December 31, --------------------------------- September 30,
1994 1995 1995 1996 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (434,545) $(1,021,610) $(651,816) $(930,133) $(2,386,288)
- -----------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation - 11,808 8,468 16,754 28,562
Issuance of debt for services
rendered 72,774 - - - 72,774
Changes in assets and liabilities:
(Increase) decrease in assets:
Inventory - (1,250) (554) (6,842) (8,092)
Prepaid expenses and other
current assets (4,769) (6,006) (8,548) 3,125 (7,650)
Other assets - (1,970) (1,970) (22,773) (24,743)
Increase in liabilities:
Accounts and other
payable 26,984 49,661 85,826 182,735 259,380
Accrued expenses 40,481 33,178 14,079 180,591 254,250
- -----------------------------------------------------------------------------------------------------------------------------------
Total
adjustments 135,470 85,421 97,301 353,590 574,481
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in
operating
activities (299,075) (936,189) (554,515) (576,543) (1,811,807)
- -----------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
See accompanying summary of significant accounting policies
and notes to financial statements.
</TABLE>
F-6
<PAGE>
American Card Technology, Inc.
(a development stage company)
Statements of Cash Flows
<TABLE>
<CAPTION>
====================================================================================================================================
Period from Period from
June 21, 1994 Nine months ended June 21, 1994
(inception) to Year ended September 30, (inception) to
December 31, December 31, --------------------------------- September 30,
1994 1995 1995 1996 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from investing activities:
Capital expenditures $ (25,640) $ (32,845) $ (30,256) $(17,964) $ (76,449)
Software development costs - (94,608) (364,553) (72,689) (167,297)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing
activities (25,640) (127,453) (394,809) (90,653) (243,746)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of common stock 750 - - 250 1,000
Deferred financing costs - - - (69,622) (69,622)
Borrowing on lines of credit - - - 370,000 370,000
Proceeds from the issuance of notes to
stockholders 357,250 1,041,000 939,000 388,931 1,787,181
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing
activities 358,000 1,041,000 939,000 689,559 2,088,559
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 33,285 (22,642) (10,324) 22,363 33,006
Cash, beginning of period - 33,285 33,285 10,643 -
- ------------------------------------------------------------------------------------------------------------------------------------
Cash, end of period $ 33,285 $ 10,643 $ 22,961 $ 33,006 $ 33,006
====================================================================================================================================
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ - $ - $ - $ - $ -
- -----------------------------------------------------------------------------------------------------------------------------------
Income taxes $ - $ - $ - $ - $ -
====================================================================================================================================
Supplemental noncash investing and
financing information:
Loans totaling $500,000 were converted into capital contributions in 1995.
Notes receivable for $250 were obtained in 1994 and $30,000 in 1996 in connection with the issuance of common stock.
Loans payable of $300,000 and accrued interest of $30,000 were extinguished in 1996 with the issuance of common stock.
====================================================================================================================================
See accompanying summary of significant accounting policies
and notes to financial statements.
</TABLE>
F-7
<PAGE>
American Card Technology, Inc.
(a development stage company)
Summary of Significant Accounting Policies
(Information as of September 30, 1996 and for the periods
ended September 30, 1995 and 1996 is unaudited)
================================================================================
Organization and Business The financial statements include the
accounts of American Card Technology,
Inc. (a development stage company) (the
"Company") and its majority-owned
Canadian subsidiary, which was formed in
June 1996 and whose results of
operations have been immaterial through
September 30, 1996. All significant
intercompany accounts and transactions
have been eliminated in consolidation.
The Company, a Delaware corporation, was
incorporated on June 21, 1994 to design,
develop and market high security,
flexible multiple application smart card
systems.
The Company is in the development stage
and its activities to date have been
limited to organizational activities
including developing a business plan,
hiring personnel and developing and
enhancing its proprietary smart card
technology and software, and it has only
recently commenced the limited marketing
of its smart card systems. Revenues to
date have been immaterial.
Certain stock splits were effected in
1996 (see Note 7) and reflected
retroactively in these financial
statements.
Use of Estimates In preparing the financial statements in
conformity with generally accepted
accounting principles, management is
required to make estimates and
assumptions that affect the reported
amounts of assets and liabilities and
disclosure of contingent assets and
liabilities at the date of the financial
statements and the reported amounts of
revenues and expenses during the
reported period. Actual results could
differ from those estimates.
Fair Value of Financial The carrying amounts of cash, accounts
Instruments payable and accrued expenses approximate
fair value because of the short-term
nature of these items. It was not
considered practical to determine the
current fair value of the notes payable
to stockholders and affiliate.
F-8
<PAGE>
American Card Technology, Inc.
(a development stage company)
Summary of Significant Accounting Policies
(Information as of September 30, 1996 and for the periods
ended September 30, 1995 and 1996 is unaudited)
================================================================================
Equipment Equipment is stated at cost, less
accumulated depreciation. Depreciation
is computed over the estimated useful
lives (3 to 5 years) of the assets using
declining balance methods.
Income Taxes The Company was an S corporation
and, accordingly, income or losses were
not subject to corporate income taxes,
rather the amounts of taxable income or
loss were passed through to its
stockholders.
In connection with the formation of a
Canadian subsidiary in June 1996, the
Company became a C corporation. No taxes
resulted from this change in tax status.
Deferred tax assets and/or liabilities
are recorded for the expected future tax
consequences of temporary differences
between the tax basis and financial
reporting basis of assets and
liabilities. At September 30, 1996,
deferred tax assets, relating primarily
to start-up costs deferred for tax
purposes, have been offset by a
valuation reserve since the utilization
of this amount cannot be determined.
Software Development Software development costs for products
Costs and certain product enhancements are
capitalized subsequent to the
establishment of their technological
feasibility (as defined in Statement of
Financial Accounting Standards No. 86)
based upon the existence of working
models of the products which are ready
for initial customer testing. Costs
incurred prior to such technological
feasibility or subsequent to a product's
general release to customers are
expensed as incurred. During 1995, the
technological feasibility of the
Company's basic products was established
and the Company incurred and capitalized
costs totaling $94,608 in 1995 and
$72,689 in 1996. Amortization of these
costs will commence when the products
are marketed and sold.
Research and development expense,
charged to operations and included in
general and administrative expenses in
1994 and 1995 and the nine months ended
September 30, 1995 and 1996,
approximated $99,000, $140,000, $105,000
and $128,000, respectively.
F-9
<PAGE>
American Card Technology, Inc.
(a development stage company)
Summary of Significant Accounting Policies
(Information as of September 30, 1996 and for the periods
ended September 30, 1995 and 1996 is unaudited)
================================================================================
Deferred Financing Costs Costs associated with the financing
described in Note 1 have been deferred
and will be amortized, commencing in
January 1997, over the life of the debt.
Interim Financial The financial statements as of September
Information 30, 1996 and for the nine months ended
September 30, 1996 and 1995 are
unaudited but include all adjustments
(consisting of normal recurring
adjustments) that the Company considers
necessary for a fair presentation of its
financial position, results of
operations and cash flows for the
interim periods. Results for the interim
period ended September 30, 1996 are not
necessarily indicative of results for
the entire year.
Pro forma Loss Per Share Pro forma loss per share is computed
based upon the weighted average number
of shares of common stock and common
stock equivalents outstanding, as
adjusted for the effects of applying
Securities and Exchange Commission Staff
Accounting Bulletin ("SAB") No. 83,
using the treasury stock method.
Pursuant to SAB No. 83, common stock
issued by the Company at prices less
than the initial public offering price
during the twelve months preceding the
initial filing of the registration
statement of which these financial
statements form a part, together with
the number of shares of common stock
subject to options and warrants issued
during such period having exercise
prices below the initial public offering
price, have been treated as outstanding
for all periods presented. The shares
and warrants issued in January 1997
(see Note 9) havebeen included in the
calculation.
Supplemental pro forma loss per share is
$(.34) and $(.29) for the year ended
December 31, 1995 and nine months ended
September 30, 1996, respectively.
Supplemental pro forma loss per share is
computed by dividing net loss (as
adjusted by approximately $37,000 for
the year ended December 31, 1995 and
$83,000 for the nine months ended
September 30, 1996, the amount of
interest expense on debt repaid with the
proceeds of the January 1997 private
placement (see Note 9) and the
conversion of debt to equity (see Note
7)), by the weighted average number of
shares that would have been outstanding
(2,912,000) including the shares to be
sold in connection with the Company's
initial public offering to fund debt
repayments.
F-10
<PAGE>
American Card Technology, Inc.
(a development stage company)
Summary of Significant Accounting Policies
(Information as of September 30, 1996 and for the periods
ended September 30, 1995 and 1996 is unaudited)
================================================================================
Historical loss per share data is not
considered meaningful and, therefore,
not presented.
Recent Accounting SFAS No. 121 - In March 1995, the
Standards Financial Accounting Standards Board
issued Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed
of", which requires that certain
long-lived assets be reviewed for
impairment whenever events or changes in
circumstances indicate that the carrying
amount may not be recoverable. The
adoption of this pronouncement in 1996
did not have a significant effect on the
Company's financial statements.
SFAS No. 123 - In October 1995, the
Financial Accounting Standards Board
issued SFAS No. 123, "Accounting for
Stock-Based Compensation", which allows
the choice of either the intrinsic value
method or the fair value method of
accounting for employee stock options.
The Company has selected the option to
continue the use of the current
intrinsic value method in 1996.
F-11
<PAGE>
American Card Technology, Inc.
(a development stage company)
Notes to Financial Statements
(Information as of September 30, 1996 and for the periods
ended September 30, 1995 and 1996 is unaudited)
================================================================================
1. Basis of Presentation The accompanying financial statements
have been prepared assuming the Company
will continue as a going concern. This
basis of accounting contemplates the
recovery of the Company's assets and the
satisfaction of its liabilities in the
normal course of operations. Since
inception, the Company has been involved
in organizational activities. The
Company's ultimate ability to attain
profitable operations is dependent upon
obtaining additional financing adequate
to complete its development activities,
and to achieve a level of sales adequate
to support its cost structure. Through
December 31, 1995, the Company has
incurred losses totaling $1,456,000 and
at December 31, 1995 has a deficiency in
working capital of $1,247,000. These
circumstances raise substantial doubt
about the Company's ability to continue
as a going concern. The financial
statements do not include any
adjustments that might result from the
outcome of this uncertainty.
The Company has entered into a letter of
intent with an underwriter for a private
placement of debt and equity securities
and a subsequent initial public offering
of equity securities. In January 1997,
the private placement was consummated
(see Note 9) and the Company received
net proceeds of $1,020,000. Certain debt
was converted to equity upon
consummation of the private placement
(see Note 7). If the Company is not
successful in consummating the proposed
initial public offering, the Company
intends to fund future development
activities by obtaining additional funds
from investors. However, there can be no
assurance that the Company will be
successful in consummating its plans, or
that such plans, if consummated, will
enable the Company to attain profitable
operations or continue as a going
concern.
2. Lines of Credit At September 30, 1996, the Company had
lines of credit with banks having an
aggregate borrowing availability of
$450,000, expiring in July 1997, with
outstanding borrowings of $370,000.
Subsequent to September 30, 1996, the
balance of the lines was borrowed. The
loans bear interest at the respective
banks' prime interest rates. Borrowings
of $150,000 under the lines of credit
are secured by certificates of deposit
of one of the Company's stockholders
held by the banks. Another stockholder
has guaranteed the balance of the loans.
F-12
<PAGE>
American Card Technology, Inc.
(a development stage company)
Notes to Financial Statements
(Information as of September 30, 1996 and for the periods
ended September 30, 1995 and 1996 is unaudited)
================================================================================
Subsequent to September 30, 1996, the
Company borrowed $150,000 from banks.
The amounts are payable on demand, bear
interest at prime interest rate and are
secured by certificates of deposit of
one of the Company's stockholders.
In January 1997, the Company obtained a
commitment for a new line of credit
facility for $300,000 with one of the
existing banks. The loan will bear
interest at 8.75% and the Company will
be required to maintain a minimum daily
checking account balance of $350,000. No
amounts have been borrowed to date.
3. Notes Payable to Notes payable to stockholders total
Stockholders and $675,024 at December 31, 1995 and
Affiliate $1,059,955 at September 30, 1996, bear
interest at 10% per annum (5.63% in
1995) and are payable on demand. These
notes have been used to finance
operations. Notes totaling $500,000 were
converted to capital in 1995. Loans
totaling $550,000 were converted to
equity in January 1997 and the balance
of the loans will be repaid from the
proceeds of the proposed initial public
offering (see Notes 7 and 9).
Notes payable to an affiliate total
$296,000 at December 31, 1995 and $-0-
at September 30, 1996, bear interest at
10% per annum (6.97% in 1995) and were
payable on demand (see Note 7).
Interest expense to stockholders and
affiliate totaled $6,996 and $37,236 for
the periods ended December 31, 1994 and
1995, respectively, and $23,703 and
$89,939 for the periods ended September
30, 1995 and 1996, respectively.
4. Other Payable In 1995, the Company acquired a license
for certain technology rights. The total
cost was $296,000; $148,000 of which was
paid upon signing the agreement and
$148,000 which was payable in various
amounts through December 31, 1996. The
Company has paid $20,000 under the
agreement through September 30, 1996.
The recoverability of this fee was in
question and, in 1996, the Company
determined that it would not utilize the
technology acquired in this license and
terminated the agreement and future
obligations thereunder. The licensor
agreed on December 2, 1996 to waive all
future obligations, including the
$128,000 remaining balance of the
license fee.
F-13
<PAGE>
American Card Technology, Inc.
(a development stage company)
Notes to Financial Statements
(Information as of September 30, 1996 and for the periods
ended September 30, 1995 and 1996 is unaudited)
================================================================================
In 1995, the Company wrote off the
portion of the license fee paid in cash
($148,000) and recorded an asset and
liability for the remaining balance due
under the agreement. In 1996, the asset
was written off and the liability was
reduced by $128,000. The balance
($20,000) was expensed.
5. Related Party In addition to the notes payable to
Transactions stockholders and an affiliate (see Note
3), the Company has an agreement to pay
a fee of $1,000 per month to a company
owned by the Company's chief executive
officer (who is a major stockholder).
The agreement covers accounting and
various other general and administrative
services performed for the Company. The
agreement commenced July 1, 1994 and
concluded in January 1997 upon
consummation of the private placement.
At December 31, 1995 and September 30,
1996, $18,000 and $27,000, respectively,
are payable to this affiliate for these
services.
6. Commitment The Company rents office space in
Atlanta, Georgia. The lease was
originally to cover a period through
2000; however, in 1996, the lease was
changed to a month-to-month lease.
Commencing December 1996, the Company
entered into a new lease which provides
for annual rent of approximately $36,000
through January 31, 2000.
Rent charged to operations was $200 and
$15,582 in 1994 and 1995, respectively.
7. Stockholders' Deficit The Company's founders capitalized the
Company in 1994 with $1,000. Certain
stockholders either individually or
through trusts have loaned funds to the
Company since its incorporation. In
1995, loans totaling $500,000 were
converted to capital. In connection with
the consummation in January 1997 of the
private placement for the financing,
loans totaling $550,000 were converted
to 110,000 shares of common stock ($5
per share).
In January 1996, the Company sold
120,000 shares of stock for notes
totaling $30,000. The notes bear
interest at 8% per annum and are payable
on July 1, 1997.
F-14
<PAGE>
American Card Technology, Inc.
(a development stage company)
Notes to Financial Statements
(Information as of September 30, 1996 and for the periods
ended September 30, 1995 and 1996 is unaudited)
================================================================================
In July 1996, the Company issued 240,000
shares of common stock to retire the
$300,000 note payable to an affiliate and
related accrued interest of $30,000
($1.375 per share) (see Note 3).
On January 2, 1996, the Company effected
a split of its common stock of
4.06-for-1. On December 11, 1996, the
Company (i) increased its authorized
shares of common stock from 1,500 to
20,000,000, (ii) authorized 1,000,000
shares of preferred stock to be issued at
the discretion of the Board of Directors,
(iii) changed the common stock from no
par value to $.001 par value, and (iv)
effected a split of its common stock of
2,500-for-1. All share amounts have been
retroactively adjusted to reflect the
stock splits.
8. Major Customers The Company's sales are to two customers
and Supplier for all periods presented.
The Company has a contract with a
supplier to provide all of the Company's
requirements for smart cards and smart
card hardware. The loss of this contract
or substantial price increases could
materially, adversely affect the Company.
Failure or delay by such manufacturer in
supplying cards to the Company on
favorable terms could also adversely
affect the Company.
9. Subsequent Events (a) The Company plans to enter into
employment agreements with three of
its executive officers and one
additional employee, effective upon
the consummation of the planned
initial public offering. The
agreements are for two or three year
terms and provide for aggregate
minimum annual salaries of $445,000
in the first year, $545,000 in the
second year, and $125,000 in the
third year, plus bonuses. Under
certain conditions, including death
or disability of the individual, or
change in control of the Company,
certain additional amounts may be
payable to the individuals.
(b) In December 1996, the Company
granted options to acquire 100,000
shares of its common stock to an
affiliate. The options have an
exercise price of $5 a share and a
10 year term.
F-15
<PAGE>
American Card Technology, Inc.
(a development stage company)
Notes to Financial Statements
(Information as of September 30, 1996 and for the periods
ended September 30, 1995 and 1996 is unaudited)
================================================================================
(c) In December 1996, the Company
adopted stock option plans for its
employees and directors. The
aggregate number of shares
authorized under these plans is
300,000. No options have been
granted to date.
(d) In January 1997, the Company
received $1,020,000, net of costs of
$230,000, through a private
placement of 25 units (the "Units"),
at a cost of $50,000 per Unit. Each
Unit consisted of: (i) an unsecured
nonnegotiable promissory note in the
principal amount of $50,000 bearing
interest at the rate of 9% per annum,
payable semi-annually in arrears, and
maturing on the earlier date to
occur of: (a) the first anniversary
of the initial closing (the "Initial
Bridge Closing") of such bridge
financing; and (b) the consummation
of an initial public offering of the
Company's securities registered with
the Securities and Exchange
Commission pursuant to the
Securities Act of 1933, as amended;
(ii) 5,000 shares of the common stock
of the Company; and (iii) warrants
exercisable until the fifth
anniversary of the Initial Bridge
Closing to purchase 25,000 shares
of Common Stock (the "Bridge Warrant
Shares") at an exercise price of
$4.00 per Bridge Warrant Share,
subject to adjustment in certain
circumstances. At the time of the
financing, notes payable to
stockholders totaling $550,000 (see
Note 3) were converted into 110,000
shares of the Company's common
stock.
F-16
<PAGE>
===============================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representations not contained in this Prospectus and,
if given or made, such information or representations must not be relied upon as
having been authorized by the Company or the Underwriter. This Prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any
security other than the securities offered by this Prospectus, or an offer to
sell or a solicitation of an offer to buy any security by any person in any
jurisdiction in which such offer or solicitation would be unlawful. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, imply that the information in this Prospectus is correct as of
any time subsequent to the date of this Prospectus.
---------------
TABLE OF CONTENTS
Page
----
Prospectus Summary.......................................................3
Risk Factors.............................................................8
Use of Proceeds.........................................................18
Dividend Policy.........................................................19
Dilution ...............................................................20
Capitalization..........................................................21
Selected Financial Data.................................................22
Plan of Operation.......................................................23
Business ...............................................................28
Management..............................................................37
Principal Stockholders..................................................43
Certain Transactions....................................................44
Description of Securities...............................................46
Shares Eligible for Future Sale.........................................50
Underwriting............................................................51
Legal Matters...........................................................53
Experts.................................................................53
Additional Information..................................................53
Index to Financial Statements..........................................F-1
---------------
Until __________, 1997 (25 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
===============================================================================
<PAGE>
===============================================================================
AMERICAN CARD TECHNOLOGY, INC.
1,500,000 Shares of Common Stock
and
Redeemable Warrants to Purchase
1,500,000 shares of Common Stock
---------------
PROSPECTUS
---------------
Whale Securities Co., L.P.
, 1997
===============================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Section 102(b)(7) of the Delaware General Corporation Law ("Delaware Law")
permits a provision in the certificate of incorporation of each corporation
organized thereunder eliminating or limiting, with certain exceptions, the
personal liability of a director to the corporation or its stockholders for
monetary damages for certain breaches of fiduciary duty as a director. The
Certificate of Incorporation of the Registrant eliminates the personal liability
of directors to the fullest extent permitted by Delaware Law.
Section 145 of Delaware Law ("Section 145"), in summary, empowers a Delaware
corporation, within certain limitations, to indemnify its officers, directors,
employees and agents against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by them in
connection with any nonderivative suit or proceeding, if they acted in good
faith and in a manner they reasonably believed to be in or not opposed to the
best interest of the corporation, and, with respect to a criminal action or
proceeding, had no reasonable cause to believe their conduct was unlawful.
With respect to derivative actions, Section 145 permits a corporation to
indemnify its officers, directors, employees and agents against expenses
(including attorneys' fees) actually and reasonably incurred in connection with
the defense or settlement of such action or suit, provided such person meets the
standard of conduct described in the preceding paragraph, except that no
indemnification is permitted in respect of any claim where such person has been
found liable to the corporation, unless the Court of Chancery or the court in
which such action or suit was brought approves such indemnification and
determines that such person is fairly and reasonably entitled to be indemnified.
Reference is made to Article V of the First Amended and Restated Certificate
of Incorporation, and Article VII of the By-Laws, as amended, of the Registrant
for the provisions which the Registrant has adopted relating to indemnification
of officers, directors, employees and agents.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been informed that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
Reference is also made to Section 7 of the Underwriting Agreement filed as
Exhibit 1.1 to this Registration Statement.
In addition to the foregoing, the Registrant maintains a directors and
officers liability insurance policy insuring directors and officers of the
Registrant against certain liabilities.
II-1
<PAGE>
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, in connection with the sale of the
Common Stock and Warrants being registered. All amounts are estimated, except
the SEC registration fee, the NASD filing fee and the Nasdaq listing fee.
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee.......................................................$ $5,968
NASD filing fee............................................................. 2,469
Nasdaq listing fee.......................................................... 10,000
Boston Stock Exchange listing fee........................................... *
Underwriter's non-accountable expense allowance ............................ 229,500**
Underwriter's consulting fee................................................ 60,000
Legal fees and expenses..................................................... *
Blue Sky expenses and legal fees............................................ *
Printing and engraving expenses............................................. *
Registrar and transfer agent
fees and expenses......................................................... *
Accounting fees and expenses................................................ *
Miscellaneous fees and expenses............................................. *
-----
TOTAL.............................................................. $650,000
========
</TABLE>
- -------------------
* To be filed by amendment.
** Assumes no exercise of the Underwriter's over-allotment option.
Item 26. Recent Sales of Unregistered Securities
Since its inception in June 1994, the Registrant has issued securities
without registration under the Securities Act of 1933, as amended (the
"Securities Act"), in the following transactions (in each case giving
retroactive effect to all subsequent stock splits):
The Registrant issued an aggregate of 2,030,000 shares of Common Stock
in June 1994 to its four founders for a purchase price of $250. In January 1996,
the Registrant sold 100,000 shares of Common Stock at a price of $.25 per share
to a private investor who subsequently became a director at the Company in
November 1996. In January 1996, the Registrant sold to a second private investor
20,000 shares of common stock at a price of $.25 per share.
In July 1996, loans to the Registrant in the aggregate principal amount
of $300,000 (plus interest) made by the President, Chief Executive Officer and
sole director of a subsidiary of the Registrant were converted, pursuant to an
agreement between the Company and such individual, into an aggregate of 240,000
shares of Common Stock.
In December 1996, the Registrant issued to an entity owned by certain
affiliates and directors of the Registrant an option to purchase 100,000 shares
of Common Stock at an exercise price of $5.00 per share.
In January 1997, the Registrant issued 25 Units, with each Unit
consisting of 5,000 shares of Common Stock, warrants to purchase 25,000 shares
of Common Stock and a promissory note in the principal amount of $50,000. The
Units were purchased by 23 accredited investors (including certain officers and
directors of the Registrant) in a private placement (the "Bridge Financing").
II-2
<PAGE>
In connection with the Bridge Financing, in January 1997, loans in an
aggregate principal amount of $550,000 by the founders of the Registrant were
converted into an aggregate of 110,000 shares of Common Stock.
The sales and issuances of the securities described above were deemed
to be exempt from registration under the Securities Act in reliance upon Section
4(2) thereof as transactions not involving a public offering and/or pursuant to
regulations promulgated under the Securities Act.
Item 27. Exhibits
The following exhibits are filed as part of this registration
statement:
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- ---------- -----------------------
<S> <C>
1.1 Form of Underwriting Agreement between Registrant and Whale Securities Co., L.P.
3.1 First Amended and Restated Certificate of Incorporation of Registrant.
3.2 By-Laws of Registrant.
4.1 Form of Certificate for Common Stock.*
4.2 Form of Public Warrant Agreement between the Registrant, American Stock Transfer & Trust
Company and Whale Securities Co., L.P.
4.3 Form of Public Warrant Certificate.*
4.4 Form of Underwriter's Warrant Agreement.
5.1 Opinion of Zimet, Haines, Friedman & Kaplan.*
10.1 Form of loan agreement to be entered into by the Registrant and The First National Bank of
Suffield.*
10.2 Sublease dated as of November 4, 1996 between Wilson & Associates International, Inc. and the
Registrant re Atlanta office space.*
10.3 Option Agreement between the Registrant and Shreveport Acquisition Corp.
10.4 Form of Employment Agreement between the Registrant and Lawrence O. Perl.
10.5 Form of Employment Agreement between the Registrant and Raymond Findley, Jr.
10.6 Form of Employment Agreement between the Registrant and Robert H. Dixon.
10.7 Form of Employment Agreement between the Registrant and Peter J. Quadagno.
10.8 1996 Stock Option Plan.
10.9 Form of stock option agreement in respect of 1996 Stock Option Plan.*
10.10 Nonemployee Directors' Stock Option Plan.
</TABLE>
II-3
<PAGE>
10.11 Form of stock option agreement in respect of Nonemployee
Directors' Stock Option Plan.*
23.1 Consent of Zimet, Haines, Friedman & Kaplan (included in its
opinion to be filed as Exhibit 5.1).
23.2 Consent of BDO Seidman, LLP.
24.1 Power of Attorney (see page II-6)
27.0 Financial Data Schedule
- ------------------
* To be filed by amendment.
Item 28. Undertakings.
The undersigned Registrant hereby undertakes to:
(1) file, during any period in which it offers of sells securities, a
post-effective amendment to this Registration Statement to:
(i) include any prospectus required by Section 10(a)(3)
of the Act,
(ii) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information set
forth in the Registration Statement, and
(iii) include any additional or changed material information
on the plan of distribution;
(2) for determining liability under the Act, treat such post-effective
amendment as a new registration statement of the securities offered, and the
offering of the securities at that time to be the initial bona fide offering;
and
(3) file a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
The Registrant has agreed to indemnify the Underwriter and its
officers, directors, partners, employees, agents and controlling persons as to
any losses, claims, damages, expenses or liabilities arising out of any untrue
statement or omission of a material fact contained in the registration
statement. The Underwriter has agreed to indemnify the Registrant and its
directors, officers and controlling persons as to any losses, claims, damages,
expenses or liabilities arising out of any untrue statement or omission in the
registration statement based on information relating to the Underwriter
furnished by it for use in connection with the registration statement.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit
II-4
<PAGE>
to a court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
The Registrant hereby undertakes to provide to the Underwriter at the
closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and has authorized this Registration
Statement to be signed on its behalf by the undersigned in Marietta, Georgia on
February 3, 1997.
AMERICAN CARD TECHNOLOGY, INC.
By /s/ Raymond Findley, Jr.
Raymond Findley, Jr.
President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Lawrence O. Perl and Raymond Findley,
Jr., and each of them, as his true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments, including
post-effective amendments, to this Registration Statement, and to file the same,
with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, or his or their
substitute or substitutes may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement on Form SB-2 has been signed below by the following
persons in the capacities and on the dates stated:
<TABLE>
<CAPTION>
Name Title Date
- ---- ---- ----
<S> <C> <C>
/s/ Lawrence O. Perl Chief Executive Office February 3, 1997
- ------------------------ and Director
Lawrence O. Perl (Principal Executive Officer,
Principal Financial Officer and
Principal Accounting Officer)
.
/s/ Raymond Findley, Jr President, Chief Operating February 3, 1997
- ------------------------ Officer and Director
Raymond Findley, Jr.
/s/ Harold Rothstein Director February 3, 1997
- ------------------------
Harold Rothstein
/s/ Raymond Roncari Director February 3, 1997
- ------------------------
Raymond Roncari
/s/ Stephen S. Weisglass Director February 3, 1997
- ------------------------
Stephen S. Weisglass
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- ---------- -----------------------
<S> <C>
1.1 Form of Underwriting Agreement between Registrant and Whale Securities Co., L.P.
3.1 First Amended and Restated Certificate of Incorporation of Registrant.
3.2 By-Laws of Registrant.
4.1 Form of Certificate for Common Stock.*
4.2 Form of Public Warrant Agreement between the Registrant, American Stock Transfer & Trust
Company and Whale Securities Co., L.P.
4.3 Form of Public Warrant Certificate.*
4.4 Form of Underwriter's Warrant Agreement.
5.1 Opinion of Zimet, Haines, Friedman & Kaplan.*
10.1 Form of loan agreement to be entered into by the Registrant and The First National Bank of
Suffield.*
10.2 Sublease dated as of November 4, 1996 between Wilson & Associates International, Inc. and the
Registrant re Atlanta office space.*
10.3 Option Agreement between the Registrant and Shreveport Acquisition Corp.
10.4 Form of Employment Agreement between the Registrant and Lawrence O. Perl.
10.5 Form of Employment Agreement between the Registrant and Raymond Findley, Jr.
10.6 Form of Employment Agreement between the Registrant and Robert H. Dixon.
10.7 Form of Employment Agreement between the Registrant and Peter J. Quadagno.
10.8 1996 Stock Option Plan.
10.9 Form of stock option agreement in respect of 1996 Stock Option Plan.*
10.10 Nonemployee Directors' Stock Option Plan.
10.11 Form of stock option agreement in respect of Nonemployee
Directors' Stock Option Plan.*
23.1 Consent of Zimet, Haines, Friedman & Kaplan (included in its
opinion to be filed as Exhibit 5.1).
23.2 Consent of BDO Seidman, LLP.
24.1 Power of Attorney (see page II-6)
27.0 Financial Data Schedule
</TABLE>
- ------------------
* To be filed by amendment.
<PAGE>
AMERICAN CARD TECHNOLOGY, INC.
1,500,000 Shares of Common Stock
(Par Value $.001 Per Share)
and
Warrants to Purchase 1,500,000 Shares of Common Stock
UNDERWRITING AGREEMENT
_______________, 1997
Whale Securities Co., L.P.
650 Fifth Avenue
New York, New York 10019
Ladies and Gentlemen:
American Card Technology, Inc., a Delaware corporation (the
"Company"), proposes to issue and sell to Whale Securities Co., L.P. (the
"Underwriter") an aggregate of 1,500,000 shares of common stock of the Company,
par value $.001 per share (the "Offered Shares"), which Offered Shares are
presently authorized but unissued shares of the common stock, par value $.001
per share (individually, a "Common Share" and collectively the "Common Shares"),
of the Company, and 1,500,000 Common Share purchase warrants (the "Offered
Warrants"), entitling the holder of each Offered Warrant to purchase, during the
four (4) year period commencing _________, 1998, one Common Share, at an
exercise price of Five Dollars ($5.00) (subject to adjustment in certain
circumstances). The Company shall have the right, upon the consent of the
Underwriter, to call each Offered Warrant for redemption upon not less than
thirty (30) days' written notice at any time commencing after the Company has
reported its first four fiscal quarters (the first of such four quarters shall
be the first quarter, the majority of which is subsequent to the Effective Date
(as hereafter defined)) of financial results following the Effective Date (as
hereinafter defined) at a redemption price of Ten Cents ($.10) per Offered
Warrant, upon the prior written consent of the Underwriter; provided, that the
closing bid quotation of the Common Stock has been at least 150% (currently
$7.50, subject to adjustment) of the then effective exercise price of the
Warrants on all twenty (20) of the trading days ending on the third day prior to
the day on which the Company gives notice. In addition, the Underwriter, in
order to cover over-allotments in the sale of the Offered Shares and/or
<PAGE>
Offered Warrants, may purchase up to an aggregate of 225,000 Common Shares (the
"Optional Shares") and/or 225,000 Common Share purchase warrants (the "Optional
Warrants") entitling the holder of each Optional Warrant to purchase one Common
Share on the same terms as the Offered Warrants. The Offered Shares and the
Optional Shares are hereinafter sometimes collectively referred to as the
"Shares"; and the Offered Warrants and the Optional Warrants are hereinafter
sometimes collectively referred to as the "Warrants." The Warrants will be
issued pursuant to a Warrant Agreement (the "Warrant Agreement") to be dated as
of the Closing Date (as hereinafter defined) by and among the Company, the
Underwriter and American Stock Transfer & Trust Company, as warrant agent (the
"Warrant Agent").
The Company also proposes to issue and sell to the
Underwriter, for its own account and the accounts of its designees, warrants
(the "Underwriter's Warrants") to purchase up to an aggregate of 150,000 Common
Shares (collectively, the "Underlying Shares") and/or 150,000 warrants, similar
but not identical to, the Warrants (collectively, the "Underlying Warrants"),
which sale will be consummated in accordance with the terms and conditions of
the form of Underwriter's Warrant Agreement filed as an exhibit to the
Registration Statement (as hereinafter defined). The Underlying Shares, the
Common Shares issuable upon exercise of the Warrants and the Common Shares
issuable upon exercise of the Underlying Warrants are hereinafter sometimes
referred to as the "Warrant Shares". The Shares, the Warrants, the Underwriter's
Warrants, the Underlying Warrants and the Warrant Shares (collectively, the
"Securities") are more fully described in the Registration Statement and the
Prospectus, as defined below.
The Company hereby confirms its agreement with the Underwriter
as follows:
1. Purchase and Sale of Offered Shares and Offered Warrants.
On the basis of the representations and warranties herein contained, but subject
to the terms and conditions herein set forth, the Company hereby agrees to sell
the Offered Shares and Offered Warrants to the Underwriter, and the Underwriter
agrees to purchase the Offered Shares and Offered Warrants from the Company, at
a purchase price of $4.50 per Offered Share and $.09 per Offered Warrant. The
Underwriter plans to offer the Offered Shares and Offered Warrants to the public
at a public offering price of $5.00 per Offered Share and $.10 per Offered
Warrant.
2. Payment and Delivery.
(a) Payment for the Offered Shares and Offered
Warrants will be made to the Company by wire transfer or certified or official
bank check or checks payable to its order
-2-
<PAGE>
in New York Clearing House funds, at the offices of the Underwriter, 650 Fifth
Avenue, New York, New York 10019, against delivery of the Offered Shares and
Offered Warrants to the Underwriter. Such payment and delivery will be made at
, New York City time, on the third business day following the Effective
Date (the fourth business day following the Effective Date in the event that
trading of the Offered Shares and Offered Warrants commences on the day
following the Effective Date), the date and time of such payment and delivery
being herein called the "Closing Date." The certificates representing the
Offered Shares and Offered Warrants to be delivered will be in such
denominations and registered in such names as the Underwriter may request not
less than two full business days prior to the Closing Date, and will be made
available to the Underwriter for inspection, checking and packaging at the
office of the Company's transfer agent or correspondent in New York City,
American Stock Transfer & Trust Company, 40 Wall Street, New York, New York
10005 not less than one full business day prior to the Closing Date.
(b) On the Closing Date, the Company will sell
the Underwriter's Warrants to the Underwriter or to the Underwriter's designees,
limited to officers and partners of the Underwriter and/or members of the
selling group and/or their officers, directors or partners (collectively, the
"Underwriter's Designees"). The Underwriter's Warrants will be in the form of,
and in accordance with, the provisions of the Underwriter's Warrant Agreement
attached as an exhibit to the Registration Statement. The aggregate purchase
price for the Underwriter's Warrants is $165. The Underwriter's Warrants will be
restricted from sale, transfer, assignment or hypothecation for a period of one
(1) year from the Effective Date, except to the Underwriter's Designees. Payment
for the Underwriter's Warrants will be made to the Company by check or checks
payable to its order on the Closing Date against delivery of the certificates
representing the Underwriter's Warrants. The certificates representing the
Underwriter's Warrants will be in such denominations and such names as the
Underwriter may request prior to the Closing Date.
3. Option to Purchase Optional Shares and/or Optional
Warrants.
(a) For the purposes of covering any over-
allotments in connection with the distribution and sale of the Offered Shares
and Offered Warrants as contemplated by the Prospectus, the Underwriter is
hereby granted an option to purchase all or any part of the Optional Shares
and/or Optional Warrants from the Company. The purchase price to be paid for the
Optional Shares and Optional Warrants will be the same price per Optional Share
and Optional Warrant as the price per Offered Share or Offered Warrant, as the
case may be, set forth in Section 1 hereof. The option granted hereby may be
exercised by
-3-
<PAGE>
the Underwriter as to all or any part of the Optional Shares and/or the Optional
Warrants at any time within 45 days after the Effective Date. The Underwriter
will not be under any obligation to purchase any Optional Shares or Optional
Warrants prior to the exercise of such option.
(b) The option granted hereby may be exercised by the
Underwriter by giving oral notice to the Company, which must be confirmed by a
letter, telex or telegraph setting forth the number of Optional Shares and
Optional Warrants to be purchased, the date and time for delivery of and payment
for the Optional Shares and Optional Warrants to be purchased and stating that
the Optional Shares and Optional Warrants referred to therein are to be used for
the purpose of covering over-allotments in connection with the distribution and
sale of the Offered Shares and Offered Warrants. If such notice is given prior
to the Closing Date, the date set forth therein for such delivery and payment
will not be earlier than either two full business days thereafter or the Closing
Date, whichever occurs later. If such notice is given on or after the Closing
Date, the date set forth therein for such delivery and payment will not be
earlier than two full business days thereafter. In either event, the date so set
forth will not be more than 15 full business days after the date of such notice.
The date and time set forth in such notice is herein called the "Option Closing
Date." Upon exercise of such option, the Company will become obligated to convey
to the Underwriter, and, subject to the terms and conditions set forth in
Section 3(d) hereof, the Underwriter will become obligated to purchase, the
number of Optional Shares and Optional Warrants specified in such notice.
(c) Payment for any Optional Shares and Optional
Warrants purchased will be made to the Company by wire transfer or certified or
official bank check or checks payable to its order in New York Clearing House
funds, at the office of the Underwriter, against delivery of the Optional Shares
and Optional Warrants purchased to the Underwriter. The certificates
representing the Optional Shares and Optional Warrants to be delivered will be
in such denominations and registered in such names as the Underwriter requests
not less than two full business days prior to the Option Closing Date, and will
be made available to the Underwriter for inspection, checking and packaging at
the aforesaid office of the Company's transfer agent or correspondent not less
than one full business day prior to the Option Closing Date.
(d) The obligation of the Underwriter to purchase and
pay for any of the Optional Shares or Optional Warrants is subject to the
accuracy and completeness (as of the date hereof and as of the Option Closing
Date) of and compliance in all material respects with the representations and
warranties of the Company herein, to the accuracy and completeness of the
statements of the Company or its officers made in any certificate
-4-
<PAGE>
or other document to be delivered by the Company pursuant to this Agreement, to
the performance in all material respects by the Company of its obligations
hereunder, to the satisfaction by the Company of the conditions, as of the date
hereof and as of the Option Closing Date, set forth in Section 3(b) hereof, and
to the delivery to the Underwriter of opinions, certificates and letters dated
the Option Closing Date substantially similar in scope to those specified in
Section 5, 6(b), (c), (d) and (e) hereof, but with each reference to "Offered
Shares," "Offered Warrants" and "Closing Date" to be, respectively, to the
Optional Shares, Optional Warrants and the Option Closing Date.
4. Representations and Warranties of the Company.
The Company represents and warrants to, and agrees with, the
Underwriter that:
(a) The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware,
with full power and authority, corporate and other, to own or lease, as the case
may be, and operate its properties, whether tangible or intangible, and to
conduct its business as described in the Registration Statement and to execute,
deliver and perform this Agreement, the Warrant Agreement and the Under-
writer's Warrant Agreement and to consummate the transactions contemplated
hereby and thereby. The Company has no subsidiaries other than Canadian Smart
Card Technology, Inc. (the "Subsidiary"). The Subsidiary is a corporation duly
organized, validly existing and in good standing under the laws of the Province
of Ontario, Canada, with full power and authority, corporate and other, to own
or lease, as the case may be, and operate its properties, whether tangible or
intangible, and to conduct its business as described in the Registration
Statement. Each of the Company and the Subsidiary is duly qualified to do
business as a foreign corporation and is in good standing in all jurisdictions
wherein such qualification is necessary and failure so to qualify could have a
material adverse effect on the financial condition, results of operations,
business or properties of the Company and the Subsidiary taken as a whole. The
Subsidiary is not required to be extra-provincially registered in any
jurisdiction in Canada in order to own or lease, as the case may be, and operate
its properties and to conduct its business as described in the Prospectus.
The Company owns 85% of the issued and outstanding
shares of capital stock of the Subsidiary, free and clear of any security
interests, liens, encumbrances, claims and charges, and all of such shares have
been duly authorized and validly issued and are fully paid and nonassessable.
There are no options or warrants for the purchase of, or other rights to
purchase, or outstanding securities convertible into or exchangeable for, any
capital stock or other securities of the Subsidiary.
-5-
<PAGE>
(b) This Agreement has been duly executed and
delivered by the Company and constitutes the valid and binding obligation of the
Company, and each of the Warrant Agreement, the Underwriter's Warrant Agreement
and the Consulting Agreement described in Section 5(r) hereof (the "Consulting
Agreement"), when executed and delivered by the Company on the Closing Date,
will be the valid and binding obligations of the Company, enforceable against
the Company in accordance with their respective terms. The execution, delivery
and performance of this Agreement, the Consulting Agreement, the Warrant
Agreement and the Underwriter's Warrant Agreement by the Company, the
consummation by the Company of the transactions herein and therein contemplated
and the compliance by the Company with the terms of this Agreement, the
Consulting Agreement, the Warrant Agreement and the Underwriter's Warrant
Agreement have been duly authorized by all necessary corporate action and do not
and will not, with or without the giving of notice or the lapse of time, or
both, (i) result in any violation of the Certificate of Incorporation, Articles
of the Corporation or By-Laws, as the case may be, of the Company or the
Subsidiary; (ii) result in a breach of or conflict with any of the terms or
provisions of, or constitute a default under, or result in the modification or
termination of, or result in the creation or imposition of any lien, security
interest, charge or encumbrance upon any of the properties or assets of the
Company or the Subsidiary pursuant to any indenture, mortgage, note, contract,
commitment or other agreement or instrument to which the Company or the
Subsidiary is a party or by which the Company or the Subsidiary or any of their
respective properties or assets are or may be bound or affected; (iii) violate
any existing applicable law, rule, regulation, judgment, order or decree of any
governmental agency or court, domestic or foreign, having jurisdiction over the
Company or the Subsidiary or any of their respective properties or businesses;
or (iv) have any effect on any permit, certification, registration, approval,
consent, order, license, franchise or other authorization (collectively,
"Permits") necessary for the Company or the Subsidiary to own or lease and
operate their respective properties and to conduct their respective businesses
or the ability of the Company to make use thereof.
(c) No Permits of any court or governmental
agency or body, other than under the Securities Act of 1933, as amended (the
"Act"), the Regulations (as hereinafter defined) and applicable state securities
or Blue Sky laws, are required for (i) the valid authorization, issuance, sale
and delivery of the Shares and Warrants to the Underwriter, or (ii) the
consummation by the Company of the transactions contemplated by this Agreement,
the Consulting Agreement, the Warrant Agreement or the Underwriter's Warrant
Agreement.
(d) The conditions for use of a registration
statement on Form SB-2 set forth in the General Instructions to
-6-
<PAGE>
Form SB-2 have been satisfied with respect to the Company, the transactions
contemplated herein and in the Registration Statement. The Company has prepared
in conformity with the requirements of the Act and the rules and regulations
(the "Regulations") of the Securities and Exchange Commission (the "Commission")
and filed with the Commission a registration statement (File No. 333- ) on Form
SB-2 and has filed one or more amendments thereto, covering the registration of
the Securities under the Act, including the related preliminary prospectus or
preliminary prospectuses (each thereof being herein called a "Preliminary
Prospectus") and a proposed final prospectus. Each Preliminary Prospectus was
endorsed with the legend required by Item 501(a)(5) of Regulation S-B of the
Regulations and, if applicable, Rule 430A of the Regulations. Such registration
statement including any documents incorporated by reference therein and all
financial schedules and exhibits thereto, as amended at the time it becomes
effective, and the final prospectus included therein are herein, respectively,
called the "Registration Statement" and the "Prospectus," except that, (i) if
the prospectus filed by the Company pursuant to Rule 424(b) of the Regulations
differs from the Prospectus, the term "Prospectus" will also include the
prospectus filed pursuant to Rule 424(b), and (ii) if the Registration Statement
is amended or such Prospectus is supplemented after the date the Registration
Statement is declared effective by the Commission (the "Effective Date") and
prior to the Option Closing Date, the terms "Registration Statement" and
"Prospectus" shall include the Registration Statement as amended or
supplemented.
(e) Neither the Commission nor, to the best of
the Company's knowledge, any state regulatory authority has issued any order
preventing or suspending the use of any Preliminary Prospectus or has instituted
or, to the best of the Company's knowledge, threatened to institute any
proceedings with respect to such an order.
(f) The Registration Statement when it becomes
effective, the Prospectus (and any amendment or supplement thereto) when it is
filed with the Commission pursuant to Rule 424(b), and both documents as of the
Closing Date and the Option Closing Date, referred to below, will contain all
statements which are required to be stated therein in accordance with the Act
and the Regulations and will in all material respects conform to the
requirements of the Act and the Regulations, and neither the Registration
Statement nor the Prospectus, nor any amendment or supplement thereto, on such
dates, will contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, except that this representation and warranty does not apply to
statements or omissions made in reliance upon and in conformity with information
furnished in writing to
-7-
<PAGE>
the Company in connection with the Registration Statement or Prospectus or any
amendment or supplement thereto by the Underwriter expressly for use therein.
(g) The Company had at the date or dates
indicated in the Prospectus a duly authorized and outstanding capitalization as
set forth in the Registration Statement and the Prospectus. Based on the
assumptions stated in the Registration Statement and the Prospectus, the Company
will have on the Closing Date the adjusted stock capitalization set forth
therein. Except as set forth in the Registration Statement or the Prospectus, on
the Effective Date and on the Closing Date, there will be no options to
purchase, warrants or other rights to subscribe for, or any securities or
obligations convertible into, or any contracts or commitments to issue or sell
shares of the Company's capital stock or any such warrants, convertible
securities or obligations. Except as set forth in the Prospectus, no holders of
any of the Company's securities has any rights, "demand," "piggyback" or
otherwise, to have such securities registered under the Act.
(h) The descriptions in the Registration State-
ment and the Prospectus of contracts and other documents are accurate and
present fairly the information required to be disclosed, and there are no
contracts or other documents required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement under the Act or the Regulations which have not been so described or
filed as required.
(i) BDO Seidman, LLP, the accountants who have
certified certain of the financial statements filed and to be filed with the
Commission as part of the Registration Statement and the Prospectus, are
independent public accountants within the meaning of the Act and Regulations.
The financial statements and schedules and the notes thereto filed as part of
the Registration Statement and included in the Prospectus are complete, correct
and present fairly the financial position of the Company as of the dates
thereof, and the results of operations and changes in financial position of the
Company for the periods indicated therein, all in conformity with generally
accepted accounting principles applied on a consistent basis throughout the
periods involved except as otherwise stated in the Registration Statement and
the Prospectus. The selected financial data set forth in the Registration
Statement and the Prospectus present fairly the information shown therein and
have been compiled on a basis consistent with that of the audited and unaudited
financial statements included in the Registration Statement and the Prospectus.
(j) The Company and the Subsidiary have filed
with the appropriate federal, state and local governmental agen-
-8-
<PAGE>
cies, and all appropriate foreign countries and political subdivisions thereof,
all tax returns, including franchise tax returns, which are required to be filed
or has duly obtained extensions of time for the filing thereof and has paid all
taxes shown on such returns and all assessments received by it to the extent
that the same have become due; and the provisions for income taxes payable, if
any, shown on the financial statements filed with or as part of the Registration
Statement are sufficient for all accrued and unpaid foreign and domestic taxes,
whether or not disputed, and for all periods to and including the dates of such
financial statements. Except as disclosed in writing to the Underwriter, neither
the Company nor the Subsidiary have executed or filed with any taxing authority,
foreign or domestic, any agreement extending the period for assessment or
collection of any income taxes and is not a party to any pending action or
proceeding by any foreign or domestic governmental agency for assessment or
collection of taxes; and no claims for assessment or collection of taxes have
been asserted against the Company or the Subsidiary.
(k) The outstanding Common Shares and outstanding
options and warrants to purchase Common Shares have been duly authorized and
validly issued. The outstanding Common Shares are fully paid and nonassessable.
The outstanding options and warrants to purchase Common Shares constitute the
valid and binding obligations of the Company, enforceable in accordance with
their terms. None of the outstanding Common Shares or options or warrants to
purchase Common Shares has been issued in violation of the preemptive rights of
any shareholder of the Company. None of the holders of the outstanding Common
Shares is subject to personal liability solely by reason of being such a holder.
The offers and sales of the outstanding Common Shares and outstanding options
and warrants to purchase Common Shares were at all relevant times either
registered under the Act and the applicable state securities or Blue Sky laws or
exempt from such registration requirements. The authorized Common Shares and
outstanding options and warrants to purchase Common Shares conform to the
descriptions thereof contained in the Registration Statement and Prospectus.
Except as set forth in the Registration Statement and the Prospectus, on the
Effective Date and the Closing Date, there will be no outstanding options or
warrants for the purchase of, or other outstanding rights to purchase, Common
Shares or securities convertible into Common Shares.
(l) No securities of the Company have been sold by
the Company or by or on behalf of, or for the benefit of, any person or persons
controlling, controlled by, or under common control with the Company within the
three years prior to the date hereof, except as disclosed in the Registration
Statement.
(m) The issuance and sale of the Shares and the
Warrant Shares have been duly authorized and, when the Shares and
-9-
<PAGE>
the Warrant Shares have been issued and duly delivered against payment therefor
as contemplated by this Agreement, the Underwriter's Warrant Agreement or the
Warrant Agreement, as the case may be, the Shares and the Warrant Shares will be
validly issued, fully paid and nonassessable. The holders of the Securities will
not be subject to personal liability solely by reason of being such holders and
none of the Securities will be subject to preemptive rights of any shareholder
of the Company.
(n) The issuance and sale of the Warrants, the
Underwriter's Warrants and the Underlying Warrants have been duly authorized
and, when issued, paid for and delivered pursuant to the terms of this
Agreement, the Underwriter's Warrant Agreement or the Warrant Agreement, as the
case may be, the Warrants, the Underwriter's Warrants and the Underlying
Warrants will constitute valid and binding obligations of the Company,
enforceable as to the Company in accordance with their terms. The Warrant Shares
have been duly reserved for issuance upon exercise of the Warrants, the
Underwriter's Warrants and the Underlying Warrants in accordance with the
provisions of the Warrant Agreement and the Underwriter's Warrant Agreement. The
Warrants, Underwriter's Warrants and Underlying Warrants will conform to the
descriptions thereof contained in the Registration Statement and the Prospectus.
(o) Neither the Company nor the Subsidiary is in
violation of, or in default under, (i) any term or provision of its Certificate
of Incorporation, Articles of the Corporation or By-Laws, as the case may be;
(ii) any material term or provision or any financial covenants of any indenture,
mortgage, contract, commitment or other agreement or instrument to which it is a
party or by which it or any of its property or business is or may be bound or
affected; or (iii) any existing applicable law, rule, regulation, judgment,
order or decree of any governmental agency or court, domestic or foreign, having
jurisdiction over the Company or the Subsidiary or any of the Company's or the
Subsidiary's respective properties or businesses. Each of the Company and the
Subsidiary owns, possesses or has obtained all governmental and other (including
those obtainable from third parties) Permits necessary to own or lease, as the
case may be, and to operate its properties, whether tangible or intangible, and
to conduct any of the business or operations of the Company and the Subsidiary
as presently conducted, and all such Permits are outstanding and in good
standing, and there are no proceedings pending or, to the best of the Company's
knowledge, threatened (nor, to the best of the Company's knowledge, is there any
basis therefor), which seeking to cancel, terminate or limit such Permits.
(p) Except as set forth in the Prospectus, there are
no claims, actions, suits, proceedings, arbitrations, investigations or
inquiries before any governmental agency, court or
-10-
<PAGE>
tribunal, domestic or foreign, or before any private arbitration tribunal,
pending, or, to the best of the Company's knowledge, threatened against the
Company or the Subsidiary or involving the Company's or the Subsidiary's
properties or businesses which, if determined adversely to the Company or the
Subsidiary, would, individually or in the aggregate, result in any material
adverse change in the financial position, shareholders' equity, results of
operations, properties, business, management or affairs or business prospects of
the Company or the Subsidiary or which question the validity of the capital
stock of the Company or this Agreement or of any action taken or to be taken by
the Company pursuant to, or in connection with, this Agreement; nor, to the best
of the Company's knowledge, is there any basis for any such claim, action, suit,
proceeding, arbitration, investigation or inquiry. There are no outstanding
orders, judgments or decrees of any court, governmental agency or other tribunal
naming the Company or the Subsidiary and enjoining the Company from taking, or
requiring the Company or the Subsidiary to take, any action, or to which the
Company, or the Company's or the Subsidiary's properties or businesses, is bound
or subject.
(q) Neither the Company nor any of its affiliates has
incurred any liability for any finder's fees or similar payments in connection
with the transactions herein contemplated.
(r) Each of the Company and the Subsidiary owns or
possesses adequate and enforceable rights to use all patents, patent
applications, trademarks, service marks, copyrights, rights, trade secrets,
confidential information, processes and formulations used or proposed to be used
in the conduct of their businesses as described in the Prospectus (collectively
the "Intangibles"); except as disclosed in the Prospectus, to the best of the
Company's knowledge, neither the Company nor the Subsidiary has infringed nor is
not infringing upon the rights of others with respect to the Intangibles; and
neither the Company nor the Subsidiary has received any notice of conflict with
the asserted rights of others with respect to the Intangibles which could,
singly or in the aggregate, materially adversely affect their businesses as
presently conducted or the prospects, financial condition or results of
operations of the Company or the Subsidiary, and the Company knows of no basis
therefor; and, to the best of the Company's knowledge, no others have infringed
upon the Intangibles of the Company or the Subsidiary.
(s) Since the respective dates as of which
information is given in the Registration Statement and the Prospectus and the
Company's latest financial statements, neither the Company nor the Subsidiary
has incurred any material liability or obligation, direct or contingent, or
entered into any material transaction, whether or not incurred in the ordinary
course of business, and has not sustained any material loss or interference with
its business from fire, storm, explosion, flood
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or other casualty, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree; and since the
respective dates as of which information is given in the Registration Statement
and the Prospectus, there have not been, and prior to the Closing Date referred
to below there will not be, any changes in the capital stock or any material
increases in the long-term debt of the Company or any material adverse change in
or affecting the general affairs, management, financial condition, shareholders'
equity, results of operations or prospects of the Company or the Subsidiary,
otherwise than as set forth or contemplated in the Prospectus.
(t) Neither the Company nor the Subsidiary owns any
real property. The Company and the Subsidiary each have good title to all
personal property (tangible and intangible) owned by it, free and clear of all
security interests, charges, mortgages, liens, encumbrances and defects, except
such as are described in the Registration Statement and Prospectus or such as do
not materially affect the value or transferability of such property and do not
interfere with the use of such property made, or proposed to be made, by the
Company or the Subsidiary. The leases, licenses or other contracts or
instruments under which the Company or the Subsidiary leases, holds or is
entitled to use any property, real or personal, are valid, subsisting and
enforceable only with such exceptions as are not material and do not interfere
with the use of such property made, or proposed to be made, by the Company or
the Subsidiary, and all rentals, royalties or other payments accruing thereunder
which became due prior to the date of this Agreement have been duly paid, and
neither the Company nor the Subsidiary, nor, to the best of the Company's
knowledge, any other party is in default thereunder and, to the best of the
Company's knowledge, no event has occurred which, with the passage of time or
the giving of notice, or both, would constitute a default thereunder. Neither
the Company nor the Subsidiary has received notice of any violation of any
applicable law, ordinance, regulation, order or requirement relating to its
owned or leased properties. Each of the Company and the Subsidiary have
adequately insured its properties against loss or damage by fire or other
casualty and maintains, in adequate amounts, such other insurance as is usually
maintained by companies engaged in the same or similar businesses located in its
geographic area.
(u) Each contract or other instrument (however
characterized or described) to which the Company or the Subsidiary is a party or
by which their properties or businesses is or may be bound or affected and to
which reference is made in the Prospectus has been duly and validly executed, is
in full force and effect in all material respects and is enforceable against the
parties thereto in accordance with its terms, and none of such contracts or
instruments has been assigned by the Company or the Subsidiary, and neither the
Company nor the
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Subsidiary, nor, to the best of the Company's knowledge, any other party, is in
default thereunder and, to the best of the Company's knowledge, no event has
occurred which, with the lapse of time or the giving of notice, or both, would
constitute a default thereunder.
None of the material provisions of such contracts
or instruments violates any existing applicable law, rule, regulation, judgment,
order or decree of any governmental agency or court having jurisdiction over the
Company or the Subsidiary or any of their respective assets or businesses.
(v) The employment, consulting, confidentiality and
non-competition agreements between the Company and between the Subsidiary and
their respective officers, employees and consultants, described in the
Registration Statement, are binding and enforceable obligations upon the
respective parties thereto in accordance with their respective terms, except as
such enforceability may be limited by applicable bankruptcy, insolvency,
moratorium or other similar laws or arrangements affecting creditors' rights
generally and subject to principles of equity.
(w) Except as set forth in the Prospectus, the
Company has no employee benefit plans (including, without limitation, profit
sharing and welfare benefit plans) or deferred compensation arrangements that
are subject to the provisions of the Employee Retirement Income Security Act of
1974.
(x) To the best of the Company's knowledge, no labor
problem exists with any of the Company's or the Subsidiary's employees or is
imminent which could adversely affect the Company or the Subsidiary.
(y) The Company has not, directly or indirectly, at
any time (i) made any contributions to any candidate for political office, or
failed to disclose fully any such contribution in violation of law or (ii) made
any payment to any state, federal or foreign governmental officer or official,
or other person charged with similar public or quasi-public duties, other than
payments or contributions required or allowed by applicable law. The Company's
internal accounting controls and procedures are sufficient to cause the Company
to comply in all material respects with the Foreign Corrupt Practices Act of
1977, as amended.
(z) The Shares and Warrants have been approved for
listing on the Nasdaq SmallCap Market of the National Association of Securities
Dealers, Inc. ("Nasdaq").
(aa) The Company's response to the Corporate Review
Memorandum of Tenzer Greenblatt LLP, counsel to the Underwriter ("Underwriter's
Counsel") dated January 13, 1997, is
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true, completed and accurate in all material respects as of the
date hereof.
Any certificate signed by an officer of the
Company or the Subsidiary and delivered to the Underwriter or to Underwriter's
Counsel shall be deemed to be a representation and warranty by the Company to
the Underwriter as to the matters covered thereby.
5. Certain Covenants of the Company. The Company
covenants with the Underwriter as follows:
(a) The Company will not at any time, whether before
the Effective Date or thereafter during such period as the Prospectus is
required by law to be delivered in connection with the sales of the Shares and
Warrants by the Underwriter or a dealer, file or publish any amendment or
supplement to the Registration Statement or Prospectus of which the Underwriter
has not been previously advised and furnished a copy, or to which the
Underwriter shall object in writing.
(b) The Company will use its best efforts to cause
the Registration Statement to become effective and will advise the Underwriter
immediately, and, if requested by the Underwriter, confirm such advice in
writing, (i) when the Registration Statement, or any post-effective amendment to
the Registration Statement or any supplemented Prospectus is filed with the
Commission; (ii) of the receipt of any comments from the Commission; (iii) of
any request of the Commission for amendment or supplementation of the
Registration Statement or Prospectus or for additional information; and (iv) of
the issuance by the Commission of any stop order suspending the effectiveness of
the Registration Statement or of any order preventing or suspending the use of
any Preliminary Prospectus, or of the suspension of the qualification of the
Shares and/or the Warrants for offering or sale in any jurisdiction, or of the
initiation of any proceedings for any of such purposes. The Company will use its
best efforts to prevent the issuance of any such stop order or of any order
preventing or suspending such use and to obtain as soon as possible the lifting
thereof, if any such order is issued.
(c) The Company will deliver to the Underwriter,
without charge, from time to time until the Effective Date, as many copies of
each Preliminary Prospectus as the Underwriter may reasonably request, and the
Company hereby consents to the use of such copies for purposes permitted by the
Act. The Company will deliver to the Underwriter, without charge, as soon as the
Registration Statement becomes effective, and thereafter from time to time as
requested, such number of copies of the Prospectus (as supplemented, if the
Company makes any supplements to the Prospectus) as the Underwriter may
reasonably request. The Company has furnished or will furnish to the Underwriter
two signed
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copies of the Registration Statement as originally filed and of all amendments
thereto, whether filed before or after the Registration Statement becomes
effective, two copies of all exhibits filed therewith and two signed copies of
all consents and certificates of experts.
(d) The Company will comply with the Act, the
Regulations, the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations thereunder so as to permit the continuance
of sales of and dealings in the Offered Shares and Offered Warrants, in any
Optional Shares and Optional Warrants which may be issued and sold, and in the
Warrant Shares underlying such Warrants. If, at any time when a prospectus
relating to any of the Securities is required to be delivered under the Act, any
event occurs as a result of which the Registration Statement and Prospectus as
then amended or supplemented would include an untrue statement of a material
fact or omit to state a material fact necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading, or if
it shall be necessary to amend or supplement the Registration Statement and
Prospectus to comply with the Act or the regulations thereunder, the Company
will promptly file with the Commission, subject to Section 5(a) hereof, an
amendment or supplement which will correct such statement or omission or which
will effect such compliance.
(e) The Company will furnish such proper informa-
tion as may be required and otherwise cooperate in qualifying the Securities for
offering and sale under the securities or Blue Sky laws relating to the offering
in such jurisdictions as the Underwriter may reasonably designate, provided that
no such qualification will be required in any jurisdiction where, solely as a
result thereof, the Company would be subject to service of general process or to
taxation or qualification as a foreign corporation doing business in such
jurisdiction.
(f) The Company will make generally available to its
security holders, in the manner specified in Rule 158(b) under the Act, and
deliver to the Underwriter and Underwriter's Counsel as soon as practicable and
in any event not later than 45 days after the end of its fiscal quarter in which
the first anniversary date of the effective date of the Registration Statement
occurs, an earning statement meeting the requirements of Rule 158(a) under the
Act covering a period of at least 12 consecutive months beginning after the
effective date of the Registration Statement.
(g) For a period of five years from the Effective
Date, the Company will deliver to the Underwriter and to Underwriter's Counsel
on a timely basis (i) a copy of each report or document, including, without
limitation, reports on Forms 8-K, 10-KSB (or 10-K), 10-QSB (or 10-Q) and 10-C
and exhibits thereto,
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<PAGE>
filed or furnished to the Commission, any securities exchange or the National
Association of Securities Dealers, Inc. (the " NASD") on the date each such
report or document is so filed or furnished; (ii) as soon as practicable, copies
of any reports or communications (financial or other) of the Company mailed to
its security holders; (iii) as soon as practicable, a copy of any Schedule 13D,
13G, 14D-1 or 13E-3 received or prepared by the Company from time to time; (iv)
monthly statements setting forth such information regarding the Company's
results of operations and financial position (including balance sheet, profit
and loss statements and data regarding outstanding purchase orders) as is
regularly prepared by management of the Company; and (v) such additional
information concerning the business and financial condition of the Company as
the Underwriter may from time to time reasonably request and which can be
prepared or obtained by the Company without unreasonable effort or expense. The
Company will furnish to its shareholders annual reports containing audited
financial statements and such other periodic reports as it may determine to be
appropriate or as may be required by law.
(h) Neither the Company nor any person that con-
trols, is controlled by or is under common control with the Company will take
any action designed to or which might be reasonably expected to cause or result
in the stabilization or manipulation of the price of the Common Shares or
Warrants.
(i) If the transactions contemplated by this
Agreement are consummated, the Underwriter shall retain the $50,000 previously
paid to it, and the Company will pay or cause to be paid the following: all
costs and expenses incident to the performance of the obligations of the Company
under this Agreement, including, but not limited to, the fees and expenses of
accountants and counsel for the Company; the preparation, printing, mailing and
filing of the Registration Statement (including financial statements and
exhibits), Preliminary Prospectuses and the Prospectus, and any amendments or
supplements thereto; the printing and mailing of the Selected Dealer Agreement;
the issuance and delivery of the Shares and Warrants to the Underwriter; all
taxes, if any, on the issuance of the Shares and Warrants; the fees, expenses
and other costs of qualifying the Shares and Warrants for sale under the Blue
Sky or securities laws of those states in which the Shares and Warrants are to
be offered or sold, including the fees and disbursements of Underwriter's
Counsel in connection therewith, and including those of such local counsel as
may have been retained for such purpose; the cost of printing and mailing the
"Blue Sky Survey;" and the costs, expenses and filing fees incident to securing
any required review by the NASD and either the Boston Stock Exchange or Pacific
Stock Exchange; the cost of furnishing to the Underwriter copies of the
Registration Statement, Preliminary Prospectuses and the Prospectus as herein
provided; the costs of placing "tombstone advertisements" in any publications
which may be
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selected by the Underwriter (up to an aggregate maximum of $10,000); and all
other costs and expenses incident to the performance of the Company's
obligations hereunder which are not otherwise specifically provided for in this
Section 5(i).
In addition, at the Closing Date or the Option
Closing Date, as the case may be, the Underwriter will deduct from the payment
for the Offered Shares and Offered Warrants or any Optional Shares and/or
Optional Warrants purchased three percent (3%) of the gross proceeds of the
offering (less the sum of $50,000 previously paid to the Underwriter), as
payment for the Underwriter's nonaccountable expense allowance relating to the
transactions contemplated hereby, which amount will include the fees and
expenses of Underwriter's Counsel (other than the fees and expenses of
Underwriter's Counsel relating to Blue Sky qualifications and registrations,
which, as provided for above, shall be in addition to the three percent (3%)
nonaccountable expense allowance and shall be payable directly by the Company to
Underwriter's Counsel on or prior to the Closing Date).
(j) If the Company decides not to proceed with the
transactions contemplated by this Agreement for any reason at a time when the
Underwriter is ready, willing and able to proceed with the transactions
contemplated by this Agreement on the terms set forth herein, or if the
Underwriter decides not to proceed with such transactions because of a breach by
the Company of its representations, warranties, or covenants in this letter or
in the Underwriting Agreement or as a result of material adverse changes in the
affairs of the Company, the Company will be obligated to reimburse the
Underwriter for its accountable expenses up to the sum of Seventy Five Thousand
Dollars ($75,000), inclusive of $50,000 previously paid to the Underwriter. If
the transactions contemplated by this Agreement are aborted or terminated for
any other reason the Company will only be obligated to reimburse the Underwriter
for its accountable expenses up to the sum of Fifty Thousand Dollars ($50,000),
inclusive of $50,000 previously paid to the Underwriter. In addition, if the
Company elects not to proceed with the transactions contemplated by this
Agreement for any reason at a time when the Underwriter is ready, willing and
able to proceed with the transactions contemplated by this Agreement on the
terms set forth herein and subsequently consummates any public offering, private
placement, merger, acquisition of securities, joint venture or other similar
transaction within twelve (12) months following the Company's election not to
proceed, then the Underwriter shall have the right to act as an investment
banker for the Company in connection with such transaction and to receive a fee
in connection therewith equal to five percent (5%) of the consideration paid or
received in such transaction.
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(k) The Company intends to apply the net proceeds
from the sale of the Shares and Warrants for the purposes set forth in the
Prospectus. No portion of the net proceeds from the sale of the Shares and
Warrants will be used to repay any indebtedness other than as described in the
Registration Statement. The Company will file with the Commission all required
reports on Form S-R in accordance with the provisions of Rule 463 promulgated
under the Act and will provide a copy of each such report to the Underwriter and
its counsel.
(l) During the period of twelve (12) months from the
date hereof, (i) neither the Company nor any of the Company's officers,
directors or securityholders will offer for sale or sell or otherwise dispose
of, directly or indirectly, any securities of the Company, in any manner
whatsoever, whether pursuant to Rule 144 of the Regulations or otherwise,
excluding (a) securities issued and/or sold (1) in connection with the
overallotment option, (2) pursuant to the exercise of currently outstanding
options and warrants and (3) in connection with the Company's merger with or
into, or acquisition of, an unaffiliated company at the then fair market value
of the securities, and (b) private transfers; provided that, in the case of (a)
(2), (a) (3) and (b), the entities or persons acquiring such securities acquire
them subject to the twelve (12) month "lock-up" provision referred to herein and
agree to be bound by such provision; and (ii) no holder of registration rights
relating to any securities of the Company will exercise any such registration
rights, in either case, without the prior written consent of the Underwriter.
(m) The Company will not file any registration
statement relating to the offer or sale of any of the Company's securities,
including any registration statement on Form S-8, during the twelve (12) months
from the Effective Date, without the Underwriter's prior written consent.
(n) The Company maintains and will continue to
maintain a system of internal accounting controls sufficient to provide
reasonable assurances that: (i) transactions are executed in accordance with
management's general or specific authorization; (ii) transactions are recorded
as necessary in order to permit preparation of financial statements in
accordance with generally accepted accounting principles and to maintain
accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(o) The Company will use its best efforts to maintain
the listing of the Shares and Warrants on Nasdaq and, if so qualified, list the
Shares and Warrants and maintain such
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listing for as long as so qualified, on the Nasdaq National
Market.
(p) The Company will, concurrently with the Effective
Date, register the class of equity securities of which the Shares are a part
under Section 12(g) of the Exchange Act and the Company will maintain such
registration for a minimum of five (5) years from the Effective Date.
(q) The Underwriter and its successors will have the
right to designate a nominee for election, at its or their option, either as a
member of or a non-voting advisor to the Board of Directors of the Company, and
the Company will use its best efforts to cause such nominee to be elected and
continued in office as a director of the Company or as such advisor until the
expiration of five (5) years from the Effective Date. Each of the Company's
current officers, directors and shareholders agrees to vote all of the Common
Shares owned by such person or entity so as to elect and continue in office such
nominee of the Underwriter. Following the election of such nominee as a director
or advisor, such person shall receive no more or less compensation than is paid
to other non-officer directors of the Company for attendance at meetings of the
Board of Directors of the Company and shall be entitled to receive reimbursement
for all reasonable costs incurred in attending such meetings including, but not
limited to, food, lodging and transportation. The Company agrees to indemnify
and hold such director or advisor harmless, to the maximum extent permitted by
law, against any and all claims, actions, awards and judgments arising out of
his service as a director or advisor and, in the event the Company maintains a
liability insurance policy affording coverage for the acts of its officers and
directors, to include such director or advisor as an insured under such policy.
The rights and benefits of such indemnification and the benefits of such
insurance shall, to the extent possible, extend to the Underwriter insofar as it
may be or may be alleged to be responsible for such director or advisor.
If the Underwriter does not exercise its
option to designate a member of or advisor to the Company's Board of Directors,
the Underwriter shall nonetheless have the right to send a representative (who
need not be the same individual from meeting to meeting) to observe each meeting
of the Board of Directors. The Company agrees to give the Underwriter notice of
each such meeting and to provide the Underwriter with an agenda and minutes of
the meeting no later than it gives such notice and provides such items to the
directors.
(r) The Company agrees to employ the Underwriter or a
designee of the Underwriter as a financial consultant on a non-exclusive basis
for a period of two (2) years from the Closing Date, pursuant to a separate
written consulting agreement
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between the Company and the Underwriter and/or such designee (the "Consulting
Agreement"), at an annual rate of Thirty Thousand Dollars ($30,000) (exclusive
of any accountable out-of-pocket expenses), payable in full, in advance on the
Closing Date. In addition, the Consulting Agreement shall provide that the
Company will pay the Underwriter a finder's fee in the event that the
Underwriter originates a merger, acquisition, joint venture or other transaction
to which the Company is a party. The Company further agrees to deliver a duly
and validly executed copy of said Consulting Agreement, in form and substance
acceptable to the Underwriter, on the Closing Date.
(s) Subject to the provisions of applicable law, the
Underwriter shall be entitled to receive a warrant solicitation fee of five
percent (5%) of the aggregate exercise price of the Warrants for each Warrant
exercised during the period commencing one year after the Effective Date;
provided, however, that the Underwriter will not be entitled to receive such
compensation in Warrant exercise transactions in which (i) the market price of
the Common Shares at the time of exercise is lower than the exercise price of
the Warrants; (ii) the Warrants are held in any discretionary account; (iii)
disclosure of compensation arrangements is not made in the Registration
Statement and in documents provided to holders of Warrants at the time of
exercise; (iv) the holder thereof has not confirmed in writing that the
Underwriter solicited the exercise of the Warrants; or (v) the solicitation or
exercise of the Warrants was in violation of Rule 10b-6 promulgated under the
Exchange Act.
(t) The Company shall retain a transfer agent for the
Common Shares and Warrants, reasonably acceptable to the Underwriter, for a
period of five (5) years from the Effective Date. In addition, for a period of
five (5) years from the Effective Date, the Company, at its own expense, shall
cause such transfer agent to provide the Underwriter with copies of the
Company's daily transfer sheets, and, when requested by the Underwriter, a
current list of the Company's securityholders, including a list of the
beneficial owners of securities held by a depository trust company and other
nominees.
(u) The Company hereby agrees, at its sole cost and
expense, to supply and deliver to the Underwriter and Underwriter's Counsel,
within a reasonable period from the date hereof, four bound volumes, including
the Registration Statement, as amended or supplemented, all exhibits to the
Registration Statement, the Prospectus and all other underwriting documents.
(v) The Company shall, as of the date hereof, have
applied for listing in Standard & Poor's Corporation Records Service (including
annual report information) or Moody's Industrial Manual (Moody's OTC Industrial
Manual not being sufficient for these purposes) and shall use its best efforts
to
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have the Company listed in such manual and shall maintain such listing for a
period of five (5) years from the Effective Date.
(w) For a period of five (5) years from the Effective
Date, the Company shall provide the Underwriter, on a not less than annual
basis, with internal forecasts setting forth projected results of operations for
each quarterly and annual period in the two (2) fiscal years following the
respective dates of such forecasts. Such forecasts shall be provided to the
Underwriter more frequently than annually if prepared more frequently by
management, and revised forecasts shall be prepared and provided to the
Underwriter when required to reflect more current information, revised
assumptions or actual results that differ materially from those set forth in the
forecasts.
(x) For a period of five (5) years from the Effective
Date, or until such earlier time as the Common Shares and Warrants are listed on
the New York Stock Exchange or the American Stock Exchange, the Company shall
cause its legal counsel to provide the Underwriter with a list, to be updated at
least annually, of those states in which the Common Shares and Warrants may be
traded in non-issuer transactions under the Blue Sky laws of the 50 states.
(y) For a period of five (5) years from the Effective
Date, the Company shall continue to retain BDO Seidman, LLP (or such other
nationally recognized accounting firm as is acceptable to the Underwriter) as
the Company's independent public accountants.
(z) For a period of five (5) years from the Effective
Date, the Company, at its expense, shall cause its then independent certified
public accountants, as described in Section 5(x) above, to review (but not
audit) the Company's financial statements for each of the first three fiscal
quarters prior to the announcement of quarterly financial information, the
filing of the Company's 10-Q (or 10-QSB) quarterly report (or other equivalent
report) and the mailing of quarterly financial information to shareholders.
(aa) So long as any Warrants are outstanding, the
Company shall use its best efforts to cause post-effective amendments to the
Registration Statement to become effective in compliance with the Act as shall
be necessary to enable the sale of the Common Shares underlying the Warrants and
cause a copy of each Prospectus, as then amended, to be delivered to each holder
of record of a Warrant as they request and as otherwise required by law and, to
furnish to the Underwriter and dealers as many copies of each such Prospectus as
the Underwriter or dealer may reasonably request. In addition, for so long as
any Warrant is outstanding, the Company will promptly notify the Underwriter of
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any material change in the financial condition, business, results
of operations or properties of the Company.
(ab) For a period of twenty-five (25) days from the
Effective Date, the Company will not issue press releases or engage in any other
publicity without the Underwriter's prior written consent, other than normal and
customary releases issued in the ordinary course of the Company's business or
those releases required by law.
(ac) The Company will not increase or authorize an
increase in the cash compensation of its five (5) most highly paid employees
greater than those increases provided in their employment agreements in effect
as of the Effective Date and disclosed in the Registration Statement for a
period of three (3) years from the Effective Date, without the prior written
consent of the Underwriter.
(ad) For a period of five (5) years from the
Effective Date, the Company will promptly submit to the Underwriter copies of
accountant's management reports and similar correspondence between the Company's
accountants and the Company.
(ae) For a period of three (3) years from the
Effective Date, the Company will not offer or sell any of its securities
pursuant to Regulation S promulgated under the Act without the prior written
consent of the Underwriter.
(af) For a period of five (5) years from the
Effective Date, the Company will provide to the Underwriter ten day's written
notice prior to any issuance by the Company or its subsidiaries of any equity
securities or securities exchangeable for or convertible into equity securities
of the Company, except for (i) shares of Common Stock issuable upon exercise of
currently outstanding options and warrants or conversion of currently
outstanding convertible securities and (ii) options (and shares issuable upon
exercise of such options) available for future grant pursuant to any stock
option plan in effect on the Effective Date and the issuance of shares of Common
Stock upon the exercise of such options.
(ag) For a period of three (3) years from the
Effective Date, the Company will retain a financial public relations firm
reasonably acceptable to the Underwriter.
(ah) For a period of three (3) years from the
Effective Date, the Company will cause its Board of Directors to meet, either in
person or telephonically, a minimum of four (4) times per year and will hold a
shareholder's meeting at least once per annum.
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6. Conditions of the Underwriter's Obligation to Purchase the
Offered Shares and Offered Warrants from the Company. The obligation of the
Underwriter to purchase and pay for the Offered Shares and Offered Warrants
which it has agreed to purchase from the Company is subject (as of the date
hereof and the Closing Date) to the accuracy of and compliance in all material
respects with the representations and warranties of the Company herein, to the
accuracy of the statements of the Company or its officers made pursuant hereto,
to the performance in all material respects by the Company of its obligations
hereunder, and to the following additional conditions:
(a) The Registration Statement will have become
effective not later than .M., New York City time, on the day following the date
of this Agreement, or at such later time or on such later date as the
Underwriter may agree to in writing; prior to the Closing Date, no stop order
suspending the effectiveness of the Registration Statement will have been issued
and no proceedings for that purpose will have been initiated or will be pending
or, to the best of the Underwriter's or the Company's knowledge, will be
contemplated by the Commission; and any request on the part of the Commission
for additional information will have been complied with to the satisfaction of
Underwriter's Counsel.
(b) At the time that this Agreement is executed and
at the Closing Date, there will have been delivered to the Underwriter a signed
opinion of Zimet, Haines, Friedman & Kaplan, counsel for the Company ("Company
Counsel"), dated as of the date hereof or the Closing Date, as the case may be
(and any other opinions of counsel referred to in such opinion of Company
Counsel or relied upon by Company Counsel in rendering their opinion),
reasonably satisfactory to Underwriter's Counsel, to the effect that:
(i) The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, with full power and authority, corporate and other, and with all
Permits necessary to own or lease, as the case may be, and operate its
properties, whether tangible or intangible, and to conduct its business as
described in the Registration Statement. To the best of Company Counsel's
knowledge, the Company has no subsidiaries other than Canadian Smart Card
Technology, Inc. The Subsidiary is a corporation duly organized, validly
existing and in good standing under the laws of the Province of Ontario, Canada,
with full power and authority, corporate and other, and with all Permits
necessary to own or lease, as the case may be, and operate its properties,
whether tangible or intangible, and to conduct its business as described in the
Registration Statement. Each of the Company and the Subsidiary is duly qualified
to do business as a foreign corporation and is in good standing in all
jurisdictions wherein
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such qualification is necessary and failure so to qualify could have a material
adverse effect on the financial condition, results of operations, business or
properties of the Company or the Subsidiary. The Company owns 85% of the issued
and outstanding shares of capital stock of the Subsidiary, free and clear of any
security interests, liens, encumbrances, claims and charges, and all of such
shares have been duly authorized and validly issued and are fully paid and
nonassessable.
(ii) The Company has full power and
authority, corporate and other, to execute, deliver and perform this Agreement,
the Consulting Agreement, the Warrant Agreement and the Underwriter's Warrant
Agreement and to consummate the transactions contemplated hereby and thereby.
The execution, delivery and performance of this Agreement, the Consulting
Agreement, the Warrant Agreement and the Underwriter's Warrant Agreement by the
Company, the consummation by the Company of the transactions herein and therein
contemplated and the compliance by the Company with the terms of this Agreement,
the Consulting Agreement, the Warrant Agreement and the Underwriter's Warrant
Agreement have been duly authorized by all necessary corporate action, and this
Agreement [Note: for Closing Date opinion add: and each of the Consulting
Agreement, the Warrant Agreement and the Underwriter's Warrant Agreement] has
been duly executed and delivered by the Company. This Agreement is (assuming for
the purposes of this opinion that it is valid and binding upon the other party
thereto), and each of the Warrant Agreement, the Underwriter's Warrant Agreement
and the Consulting Agreement, when executed and delivered by the Company on the
Closing Date, will be, valid and binding obligations of the Company, enforceable
in accordance with their respective terms, subject, as to enforcement of
remedies, to applicable bankruptcy, insolvency, reorganization, moratorium and
other laws affecting the rights of creditors generally and the discretion of
courts in granting equitable remedies and except that enforceability of the
indemnification provisions set forth in Section 7 hereof and the contribution
provisions set forth in Section 8 hereof may be limited by the federal
securities laws or public policy underlying such laws.
(iii) The execution, delivery and perfor-
mance of this Agreement, the Consulting Agreement, the Warrant Agreement and the
Underwriter's Warrant Agreement by the Company, the consummation by the Company
of the transactions herein and therein contemplated and the compliance by the
Company with the terms of this Agreement, the Consulting Agreement, the Warrant
Agreement and the Underwriter's Warrant Agreement do not, and will not, with or
without the giving of notice or the lapse of time, or both, (A) result in a
violation of the Certificate of Incorporation, Articles of the Corporation or
By-Laws, as the case may be, of the Company, (B) result in a breach of or
conflict with any terms or provisions of, or constitute a default
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under, or result in the modification or termination of, or result in the
creation or imposition of any lien, security interest, charge or encumbrance
upon any of the properties or assets of the Company pursuant to any indenture,
mortgage, note, contract, commitment or other material agreement or instrument
to which the Company is a party or by which the Company or the Subsidiary or any
of the Company's or the Subsidiary's properties or assets are or may be bound or
affected; (C) violate any existing applicable law, rule, regulation, judgment,
order or decree of any governmental agency or court, domestic or foreign, having
jurisdiction over the Company or the Subsidiary or any of the Company's or the
Subsidiary's properties or business; or (D) have any effect on any Permit
necessary for the Company to own or lease and operate its properties or conduct
its business or the ability of the Company or the Subsidiary to make use
thereof.
(iv) To the best of Company Counsel's
knowledge, no Permits of any court or governmental agency or body (other than
under the Act, the Regulations and applicable state securities or Blue Sky laws)
are required for the valid authorization, issuance, sale and delivery of the
Shares and Warrants or the Underwriter's Warrants to the Underwriter, and the
consummation by the Company of the transactions contemplated by this Agreement,
the Consulting Agreement, the Warrant Agreement or the Underwriter's Warrant
Agreement.
(v) The Registration Statement has
become effective under the Act; to the best of Company Counsel's knowledge, no
stop order suspending the effectiveness of the Registration Statement has been
issued, and no proceedings for that purpose have been instituted or are pending,
threatened or contemplated under the Act or applicable state securities laws.
(vi) The Registration Statement and the
Prospectus, as of the Effective Date, and each amendment or supplement thereto
as of its effective or issue date (except for the financial statements and other
financial data included therein or omitted therefrom, as to which Company
Counsel need not express an opinion) comply as to form in all material respects
with the requirements of the Act and Regulations and the conditions for use of a
registration statement on Form SB-2 have been satisfied by the Company.
(vii) The descriptions in the
Registration Statement and the Prospectus of statutes, regulations, government
classifications, contracts and other documents (including opinions of such
counsel); and the response to Item 13 of Form SB-2 have been reviewed by Company
Counsel, and, based upon such review, are accurate in all material respects and
present fairly the information required to be disclosed, and there are no
material statutes, regulations or government classifications, or, to the best of
Company Counsel's
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knowledge, material contracts or documents, of a character required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement, which are not so described or filed as
required.
None of the material provisions of the
contracts or instruments described above violates any existing applicable law,
rule, regulation, judgment, order or decree of any governmental agency or court
having jurisdiction over the Company or any of its assets or business. The
Company is not in default under any contract or agreement material to its
business or under any promissory note or other evidence of indebtedness for
borrowed funds.
(viii) The outstanding Common Shares and
outstanding options and warrants to purchase Common Shares have been duly
authorized and validly issued. The outstanding Common Shares are fully paid and
nonassessable. The outstanding options and warrants to purchase Common Shares
constitute the valid and binding obligations of the Company, enforceable in
accordance with their terms. None of the outstanding Common Shares or options or
warrants to purchase Common Shares has been issued in violation of the
preemptive rights of any shareholder of the Company. None of the holders of the
outstanding Common Shares is subject to personal liability solely by reason of
being such a holder. The offers and sales of the outstanding Common Shares and
outstanding options and warrants to purchase Common Shares were at all relevant
times either registered under the Act and the applicable state securities or
Blue Sky laws or exempt from such registration requirements. The authorized
Common Shares and outstanding options and warrants to purchase Common Shares
conform to the descriptions thereof contained in the Registration Statement and
Prospectus. To the best of Company Counsel's knowledge, except as set forth in
the Prospectus, no holders of any of the Company's securities has any rights,
"demand", "piggyback" or otherwise, to have such securities registered under the
Act.
(ix) The issuance and sale of the Shares
and the Warrant Shares have been duly authorized and, when the Shares and the
Warrant Shares have been issued and duly delivered against payment therefor as
contemplated by this Agreement, the Underwriter's Warrant Agreement or the
Warrant Agreement, as the case may be, the Shares and the Warrant Shares will be
validly issued, fully paid and nonassessable, and the holders thereof will not
be subject to personal liability solely by reason of being such holders. Neither
the Shares nor the Warrant Shares are subject to preemptive rights of any
shareholder of the Company. The certificates representing the Securities are in
proper legal form.
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(x) The issuance and sale of the War-
rants, the Underwriter's Warrants and the Underlying Warrants have been duly
authorized and, when paid for, issued and delivered pursuant to the terms of
this Agreement, the Underwriter's Warrant Agreement and the Warrant Agreement,
as the case may be, the Warrants, the Underwriter's Warrants and the Underlying
Warrants will constitute the valid and binding obligations of the Company,
enforceable in accordance with their terms, to issue and sell the Warrant Shares
and/or Underlying Warrants. The Warrant Shares have been duly reserved for
issuance upon exercise of the Underwriter's Warrants and the Warrants in
accordance with the provisions of the Underwriter's Warrant Agreement and the
Warrant Agreement, as the case may be. The Warrants, Underwriter's Warrants and
Underlying Warrants conform to the descriptions thereof contained in the
Registration Statement and Prospectus.
(xi) Upon delivery of the Offered Shares
and Offered Warrants to the Underwriter against payment therefor as provided in
this Agreement, the Underwriter (assuming it is a bona fide purchaser within the
meaning of the Uniform Commercial Code) will acquire good title to the Offered
Shares and Offered Warrants, free and clear of all liens, encumbrances,
equities, security interests and claims.
(xii) Assuming that the Underwriter
exercises the over-allotment option to purchase any of the Optional Shares and
Offered Warrants and makes payment therefor in accordance with the terms of this
Agreement, upon delivery of the Optional Shares and Optional Warrants so
purchased to the Underwriter hereunder, the Underwriter (assuming it is a bona
fide purchaser within the meaning of the Uniform Commercial Code) will acquire
good title to such Optional Shares and Optional Warrants, free and clear of any
liens, encumbrances, equities, security interests and claims.
(xiii) To the best of Company Counsel's
knowledge, there are no claims, actions, suits, proceedings, arbitrations,
investigations or inquiries before any governmental agency, court or tribunal,
foreign or domestic, or before any private arbitration tribunal, pending or
threatened against the Company, or involving its properties or business, other
than as described in the Prospectus, such description being accurate, and other
than litigation incident to the kind of business conducted by the Company which,
individually and in the aggregate, is not material.
(xiv) The Company owns or possesses
adequate and enforceable rights to use all patents, patent applications,
trademarks, service marks, copyrights, rights, trade secrets, confidential
information, processes and formulations used or proposed to be used in the
conduct of its
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business as described in the Prospectus (collectively the "Intangibles"); to the
best of Company Counsel's knowledge, the Company has not infringed and is not
infringing upon the rights of others with respect to the Intangibles; and, to
the best of Company Counsel's knowledge, neither the Company has received any
notice that it has or may have infringed, is infringing upon or is conflicting
with the asserted rights of others with respect to the Intangibles which might,
singly or in the aggregate, materially adversely affect its business, results of
operations or financial condition and such counsel is not aware of any licenses
with respect to the Intangibles which are required to be obtained by the
Company. The opinions described in this Section 6(b)(xiv) may be given by
Company Counsel in reliance on the opinion of an attorney, reasonably acceptable
to Underwriter's Counsel, practicing in the patent area.
(xv) Company Counsel has participated in
reviews and discussions in connection with the preparation of the Registration
Statement and the Prospectus, and in the course of such reviews and discussions
and such other investigation as Company Counsel deemed necessary, no facts came
to its attention which lead it to believe that (A) the Registration Statement
(except as to the financial statements and other financial data contained
therein, as to which Company Counsel need not express an opinion), on the
Effective Date, contained any untrue statement of a material fact required to be
stated therein or omitted to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, or that (B) the
Prospectus (except as to the financial statements and other financial data
contained therein, as to which Company Counsel need not express an opinion)
contains any untrue statement of a material fact or omits to state any material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
In rendering its opinion pursuant to this
Section 6(b), Company Counsel may rely upon the certificates of government
officials and officers of the Company as to matters of fact, provided that
Company Counsel shall state that they have no reason to believe, and do not
believe, that they are not justified in relying upon such opinions or such
certificates of government officials and officers of the Company as to matters
of fact, as the case may be.
The opinion letter delivered pursuant to
this Section 6(b) shall state that any opinion given therein qualified by the
phrase "to the best of our knowledge" is being given by Company Counsel after
due investigation of the matters therein discussed.
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<PAGE>
(c) At the Closing Date, there will have been
delivered to the Underwriter a signed opinion of Underwriter's Counsel, dated as
of the Closing Date, to the effect that the opinions delivered pursuant to
Section 6(b) hereof appear on their face to be appropriately responsive to the
requirements of this Agreement, except to the extent waived by the Underwriter,
specifying the same, and with respect to such related matters as the Underwriter
may require.
(d) At the Closing Date (i) the Registration
Statement and the Prospectus and any amendments or supplements thereto will
contain all material statements which are required to be stated therein in
accordance with the Act and the Regulations and will conform in all material
respects to the requirements of the Act and the Regulations, and neither the
Registration Statement nor the Prospectus nor any amendment or supplement
thereto will contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; (ii) since the respective dates as of which information is given
in the Registration Statement and the Prospectus, there will not have been any
material adverse change in the financial condition, results of operations or
general affairs of the Company from that set forth or contemplated in the
Registration Statement and the Prospectus, except changes which the Registration
Statement and the Prospectus indicate might occur after the Effective Date;
(iii) since the respective dates as of which information is given in the
Registration Statement and the Prospectus, there shall have been no material
transaction, contract or agreement entered into by the Company, other than in
the ordinary course of business, which would be required to be set forth in the
Registration Statement and the Prospectus, other than as set forth therein; and
(iv) no action, suit or proceeding at law or in equity will be pending or, to
the best of the Company's knowledge, threatened against the Company which is
required to be set forth in the Registration Statement and the Prospectus, other
than as set forth therein, and no proceedings will be pending or, to the best of
the Company's knowledge, threatened against the Company before or by any
federal, state or other commission, board or administrative agency wherein an
unfavorable decision, ruling or finding would materially adversely affect the
business, property, financial condition or results of operations of the Company,
other than as set forth in the Registration Statement and the Prospectus. At the
Closing Date, there will be delivered to the Underwriter a certificate signed by
the Chairman of the Board or the President or a Vice President of the Company,
dated the Closing Date, evidencing compliance with the provisions of this
Section 6(d) and stating that the representations and warranties of the Company
set forth in Section 4 hereof were accurate and complete in all material
respects when made on the date hereof and are accurate and complete in all
material respects on the Closing
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Date as if then made; that the Company has performed all covenants and complied
with all conditions required by this Agreement to be performed or complied with
by the Company prior to or as of the Closing Date; and that, as of the Closing
Date, no stop order suspending the effectiveness of the Registration Statement
has been issued and no proceedings for that purpose have been initiated or, to
the best of his knowledge, are contemplated or threatened. In addition, the
Underwriter will have received such other and further certificates of officers
of the Company as the Underwriter or Underwriter's Counsel may reasonably
request.
(e) At the time that this Agreement is executed
and at the Closing Date, the Underwriter will have received a signed letter from
BDO Seidman, LLP, dated the date such letter is to be received by the
Underwriter and addressed to it, confirming that it is a firm of independent
public accountants within the meaning of the Act and Regulations and stating
that: (i) insofar as reported on by them, in their opinion, the financial
statements of the Company included in the Prospectus comply as to form in all
material respects with the applicable accounting requirements of the Act and the
applicable Regulations; (ii) on the basis of procedures and inquiries (not
constituting an examination in accordance with generally accepted auditing
standards) consisting of a reading of the unaudited interim financial statements
of the Company, if any, appearing in the Registration Statement and the
Prospectus and the latest available unaudited interim financial statements of
the Company, if more recent than that appearing in the Registration Statement
and Prospectus, inquiries of officers of the Company responsible for financial
and accounting matters as to the transactions and events subsequent to the date
of the latest audited financial statements of the Company, and a reading of the
minutes of meetings of the shareholders, the Board of Directors of the Company
and any committees of the Board of Directors, as set forth in the minute books
of the Company, nothing has come to their attention which, in their judgment,
would indicate that (A) during the period from the date of the latest financial
statements of the Company appearing in the Registration Statement and Prospectus
to a specified date not more than three business days prior to the date of such
letter, there have been any decreases in net current assets or net assets as
compared with amounts shown in such financial statements or decreases in net
sales or decreases [increases] in total or per share net income [loss] compared
with the corresponding period in the preceding year or any change in the
capitalization or long-term debt of the Company, except in all cases as set
forth in or contemplated by the Registration Statement and the Prospectus, and
(B) the unaudited interim financial statements of the Company, if any, appearing
in the Registration Statement and the Prospectus, do not comply as to form in
all material respects with the applicable accounting requirements of the Act and
the Regulations or are not fairly
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<PAGE>
presented in conformity with generally accepted accounting principles and
practices on a basis substantially consistent with the audited financial
statements included in the Registration Statement or the Prospectus; and (iii)
they have compared specific dollar amounts, numbers of shares, numerical data,
percentages of revenues and earnings, and other financial information pertaining
to the Company set forth in the Prospectus (with respect to all dollar amounts,
numbers of shares, percentages and other financial information contained in the
Prospectus, to the extent that such amounts, numbers, percentages and
information may be derived from the general accounting records of the Company,
and excluding any questions requiring an interpretation by legal counsel) with
the results obtained from the application of specified readings, inquiries and
other appropriate procedures (which procedures do not constitute an examination
in accordance with generally accepted auditing standards) set forth in the
letter, and found them to be in agreement.
(f) There shall have been duly tendered to the
Underwriter certificates representing the Offered Shares and the Offered
Warrants to be sold on the Closing Date.
(g) The NASD shall have indicated that it has no
objection to the underwriting arrangements pertaining to the sale
of the Shares and Warrants by the Underwriter.
(h) No action shall have been taken by the
Commission or the NASD the effect of which would make it improper, at any time
prior to the Closing Date or the Option Closing Date, as the case may be, for
any member firm of the NASD to execute transactions (as principal or as agent)
in the Shares or Warrants, and no proceedings for the purpose of taking such
action shall have been instituted or shall be pending, or, to the best of the
Underwriter's or the Company's knowledge, shall be contemplated by the
Commission or the NASD. The Company represents at the date hereof, and shall
represent as of the Closing Date or Option Closing Date, as the case may be,
that it has no knowledge that any such action is in fact contemplated by the
Commission or the NASD.
(i) The Company meets the current and any
existing and proposed criteria for inclusion of the Shares and
Warrants in Nasdaq.
(j) All proceedings taken at or prior to the
Closing Date or the Option Closing Date, as the case may be, in connection with
the authorization, issuance and sale of the Shares or Warrants shall be
reasonably satisfactory in form and substance to the Underwriter and to
Underwriter's Counsel, and such counsel shall have been furnished with all such
documents, certificates and opinions as they may request for the purpose of
enabling them to pass upon the matters referred to in Section
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6(c) hereof and in order to evidence the accuracy and completeness of any of the
representations, warranties or statements of the Company, the performance of any
covenants of the Company, or the compliance by the Company with any of the
conditions herein contained.
(k) As of the date hereof, the Company will have
delivered to the Underwriter the written undertakings of its officers, directors
and security holders and/or registration rights holders, as the case may be, to
the effect of the matters set forth in Sections 5(l) and (q).
If any of the conditions specified in this Section
6 have not been fulfilled, this Agreement may be terminated by the Underwriter
on notice to the Company.
7. Indemnification.
(a) The Company agrees to indemnify and hold
harmless the Underwriter, each officer, director, partner, employee and agent of
the Underwriter, and each person, if any, who controls the Underwriter within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, from
and against any and all losses, claims, damages, expenses or liabilities, joint
or several (and actions in respect thereof), to which they or any of them may
become subject under the Act or under any other statute or at common law or
otherwise, and, except as hereinafter provided, will reimburse the Underwriter
and each such person, if any, for any legal or other expenses reasonably
incurred by them or any of them in connection with investigating or defending
any actions, whether or not resulting in any liability, insofar as such losses,
claims, damages, expenses, liabilities or actions arise out of or are based upon
any untrue statement or alleged untrue statement of a material fact contained
(i) in the Registration Statement, in any Preliminary Prospectus or in the
Prospectus (or the Registration Statement or Prospectus as from time to time
amended or supplemented) or (ii) in any application or other document executed
by the Company, or based upon written information furnished by or on behalf of
the Company, filed in any jurisdiction in order to qualify the Shares and
Warrants under the securities laws thereof (hereinafter "application"), or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary in order to make the
statements therein not misleading, in light of the circumstances under which
they were made, unless such untrue statement or omission was made in such
Registration Statement, Preliminary Prospectus, Prospectus or application in
reliance upon and in conformity with information furnished in writing to the
Company in connection therewith by the Underwriter or any such person through
the Underwriter expressly for use therein; provided, however, that the indemnity
agreement contained in this Section 7(a) with
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respect to any Preliminary Prospectus will not inure to the benefit of the
Underwriter (or to the benefit of any other person that may be indemnified
pursuant to this Section 7(a)) if (A) the person asserting any such losses,
claims, damages, expenses or liabilities purchased the Shares and/or Warrants
which are the subject thereof from the Underwriter or other indemnified person;
(B) the Underwriter or other indemnified person failed to send or give a copy of
the Prospectus to such person at or prior to the written confirmation of the
sale of such Shares and/or Warrants to such person; and (C) the Prospectus did
not contain any untrue statement or alleged untrue statement or omission or
alleged omission giving rise to such cause, claim, damage, expense or liability.
(b) The Underwriter agrees to indemnify and hold
harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, from and against any and all losses, claims, damages, expenses or
liabilities, joint or several (and actions in respect thereof), to which they or
any of them may become subject under the Act or under any other statute or at
common law or otherwise, and, except as hereinafter provided, will reimburse the
Company and each such director, officer or controlling person for any legal or
other expenses reasonably incurred by them or any of them in connection with
investigating or defending any actions, whether or not resulting in any
liability, insofar as such losses, claims, damages, expenses, liabilities or
actions arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained (i) in the Registration Statement, in any
Preliminary Prospectus or in the Prospectus (or the Registration Statement or
Prospectus as from time to time amended or supplemented) or (ii) in any
application (including any application for registration of the Shares and
Warrants under state securities or Blue Sky laws), or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary in order to make the statements therein not
misleading, in light of the circumstances under which they were made, but only
insofar as any such statement or omission was made in reliance upon and in
conformity with information furnished in writing to the Company in connection
therewith by the Underwriter expressly for use therein.
(c) Promptly after receipt of notice of the
commencement of any action in respect of which indemnity may be sought against
any indemnifying party under this Section 7, the indemnified party will notify
the indemnifying party in writing of the commencement thereof, and the
indemnifying party will, subject to the provisions hereinafter stated, assume
the defense of such action (including the employment of counsel satisfactory to
the indemnified party and the payment of expenses) insofar as such action
relates to an alleged liability in respect of which indemnity may be sought
against the indemnifying party. After notice from the indemnifying party of its
election to assume the
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defense of such claim or action, the indemnifying party shall no longer be
liable to the indemnified party under this Section 7 for any legal or other
expenses subsequently incurred by the indemnified party in connection with the
defense thereof other than reasonable costs of investigation; provided, however,
that if, in the reasonable judgment of the indemnified party or parties, it is
advisable for the indemnified party or parties to be represented by separate
counsel, the indemnified party or parties shall have the right to employ a
single counsel to represent the indemnified parties who may be subject to
liability arising out of any claim in respect of which indemnity may be sought
by the indemnified parties thereof against the indemnifying party, in which
event the fees and expenses of such separate counsel shall be borne by the
indemnifying party. Any party against whom indemnification may be sought under
this Section 7 shall not be liable to indemnify any person that might otherwise
be indemnified pursuant hereto for any settlement of any action effected without
such indemnifying party's consent, which consent shall not be unreasonably
withheld.
8. Contribution. To provide for just and equitable
contribution, if (i) an indemnified party makes a claim for indemnification
pursuant to Section 7 hereof (subject to the limitations thereof) and it is
finally determined, by a judgment, order or decree not subject to further
appeal, that such claim for indemnification may not be enforced, even though
this Agreement expressly provides for indemnification in such case; or (ii) any
indemnified or indemnifying party seeks contribution under the Act, the Exchange
Act, or otherwise, then the Company (including, for this purpose, any
contribution made by or on behalf of any director of the Company, any officer of
the Company who signed the Registration Statement and any controlling person of
the Company) as one entity and the Underwriter (including, for this purpose, any
contribution by or on behalf of each person, if any, who controls the
Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act and each officer, director, partner, employee and agent of the
Underwriter) as a second entity, shall contribute to the losses, liabilities,
claims, damages and expenses whatsoever to which any of them may be subject, so
that the Underwriter is responsible for the proportion thereof equal to the
percentage which the underwriting discount per Share and per Warrant set forth
on the cover page of the Prospectus represents of the initial public offering
price per Share and per Warrant set forth on the cover page of the Prospectus
and the Company is responsible for the remaining portion; provided, however,
that if applicable law does not permit such allocation, then, if applicable law
permits, other relevant equitable considerations such as the relative fault of
the Company and the Underwriter in connection with the facts which resulted in
such losses, liabilities, claims, damages and expenses shall also be considered.
The relative fault, in the case of an untrue statement, alleged untrue
statement, omission or alleged omission, shall be determined by, among other
things, whether such statement, alleged statement, omission or alleged omission
relates to information supplied by the Company
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or by the Underwriter, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement, alleged
statement, omission or alleged omission. The Company and the Underwriter agree
that it would be unjust and inequitable if the respective obligations of the
Company and the Underwriter for contribution were determined by pro rata or per
capita allocation of the aggregate losses, liabilities, claims, damages and
expenses or by any other method of allocation that does not reflect the
equitable considerations referred to in this Section 8. No person guilty of a
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
will be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. For purposes of this Section 8, each person, if
any, who controls the Underwriter within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act and each officer, director, partner, employee
and agent of the Under-writer will have the same rights to contribution as the
Underwriter, and each person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, each
officer of the Company who has signed the Registration Statement and each
director of the Company will have the same rights to contribution as the
Company, subject in each case to the provisions of this Section 8. Anything in
this Section 8 to the contrary notwithstanding, no party will be liable for
contribution with respect to the settlement of any claim or action effected
without its written consent. This Section 8 is intended to supersede, to the
extent permitted by law, any right to contribution under the Act or the Exchange
Act or otherwise available.
9. Survival of Indemnities, Contribution, Warranties and
Representations. The respective indemnity and contribution agreements of the
Company and the Underwriter contained in Sections 7 and 8 hereof, and the
representations and warranties of the Company contained herein shall remain
operative and in full force and effect, regardless of any termination or
cancellation of this Agreement or any investigation made by or on behalf of the
Underwriter, the Company or any of its directors and officers, or any
controlling person referred to in said Sections, and shall survive the delivery
of, and payment for, the Shares and the Warrants.
10. Termination of Agreement.
(a) The Company, by written or telegraphic notice to
the Underwriter, or the Underwriter, by written or telegraphic notice to the
Company, may terminate this Agreement prior to the earlier of (i) 11:00 A.M.,
New York City time, on the first full business day after the Effective Date; or
(ii) the time when the Underwriter, after the Registration Statement becomes
effective, releases the Offered Shares and Offered Warrants for public offering.
The time when the Underwriter "releases the Offered Shares and Offered Warrants
for public offering" for the purposes of this Section 10 means the time when the
Underwriter releases
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<PAGE>
for publication the first newspaper advertisement, which is subsequently
published, relating to the Offered Shares and Offered Warrants, or the time when
the Underwriter releases for delivery to members of a selling group copies of
the Prospectus and an offering letter or an offering telegram relating to the
Offered Shares and Offered Warrants, whichever will first occur.
(b) This Agreement, including without limitation, the
obligation to purchase the Offered Shares and the Offered Warrants and the
obligation to purchase the Optional Shares and/or Optional Warrants after
exercise of the option referred to in Section 3 hereof, are subject to
termination in the absolute discretion of the Underwriter, by notice given to
the Company prior to delivery of and payment for all the Offered Shares and
Offered Warrants or such Optional Shares and Optional Warrants, as the case may
be, if, prior to such time, any of the following shall have occurred: (i) the
Company withdraws the Registration Statement from the Commission or the Company
does not or cannot expeditiously proceed with the public offering; (ii) the
representations and warranties in Section 4 hereof are not materially correct or
cannot be complied with; (iii) trading in securities generally on the New York
Stock Exchange or the American Stock Exchange will have been suspended; (iv)
limited or minimum prices will have been established on either such Exchange;
(v) a banking moratorium will have been declared either by federal or New York
State authorities; (vi) any other restrictions on transactions in securities
materially affecting the free market for securities or the payment for such
securities, including the Offered Shares and Offered Warrants or the Optional
Shares and Optional Warrants, will be established by either of such Exchanges,
by the Commission, by any other federal or state agency, by action of the
Congress or by Executive Order; (vii) trading in any securities of the Company
shall have been suspended or halted by any national securities exchange, the
NASD or the Commission; (viii) there has been a materially adverse change in the
condition (financial or otherwise), prospects or obligations of the Company;
(ix) the Company will have sustained a material loss, whether or not insured, by
reason of fire, flood, accident or other calamity; (x) any action has been taken
by the government of the United States or any department or agency thereof
which, in the judgment of the Underwriter, has had a material adverse effect
upon the market or potential market for securities in general; or (xi) the
market for securities in general or political, financial or economic conditions
will have so materially adversely changed that, in the judgment of the
Underwriter, it will be impracticable to offer for sale, or to enforce contracts
made by the Underwriter for the resale of, the Offered Shares and Offered
Warrants or the Optional Shares and Offered Warrants, as the case may be.
(c) If this Agreement is terminated pursuant to
Section 6 hereof or this Section 10 or if the purchases provided for herein are
not consummated because any condition of the Underwriter's obligations hereunder
is not satisfied or because of any refusal, inability or failure on the part of
the Company
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<PAGE>
to comply with any of the terms or to fulfill any of the conditions of this
Agreement, or if for any reason the Company shall be unable to or does not
perform all of its obligations under this Agreement, the Company will not be
liable to the Underwriter for damages on account of loss of anticipated profits
arising out of the transactions covered by this Agreement, but the Company will
remain liable to the extent provided in Sections 5(j), 7, 8 and 9 of this
Agreement.
11. Information Furnished by the Underwriter to the Company.
It is hereby acknowledged and agreed by the parties hereto that for the purposes
of this Agreement, including, without limitation, Sections 4(f), 7(a), 7(b) and
8 hereof, the only information given by the Underwriter to the Company for use
in the Prospectus are the statements set forth in the last sentence of the last
paragraph on the cover page, the statement appearing in the last paragraph on
page __ with respect to stabilizing the market price of Shares and Warrants, the
information in the __ paragraph on page __ with respect to concessions and
reallowances, and the information in the ___ paragraph on page ___ with respect
to the determination of the public offering price, as such information appears
in any Preliminary Prospectus and in the Prospectus.
12. Notices and Governing Law. All communications hereunder
will be in writing and, except as otherwise provided, will be delivered at, or
mailed by certified mail, return receipt requested, or telegraphed to, the
following addresses: if to the Underwriter, to 650 Fifth Avenue, New York, New
York 10019 with a copy to Tenzer, Greenblatt LLP, Attention: Robert J. Mittman,
Esq., 405 Lexington Avenue, New York, New York 10174; if to the Company,
addressed to it at 1355 Terrell Mill Road, Building 1462, Suite 200, Marietta,
Georgia 30067 with a copy to Zimet, Haines, Friedman & Kaplan, Attention: James
M. Kaplan, Esq., 460 Park Avenue, New York, New York 10022.
This Agreement shall be deemed to have been made
and delivered in New York City and shall be governed as to validity,
interpretation, construction, effect and in all other respects by the internal
laws of the State of New York. The Company (1) agrees that any legal suit,
action or proceeding arising out of or relating to this Agreement shall be
instituted exclusively in New York State Supreme Court, County of New York, or
in the United States District Court for the Southern District of New York, (2)
waives any objection which the Company may have now or hereafter to the venue of
any such suit, action or proceeding, and (3) irrevocably consents to the
jurisdiction of the New York State Supreme Court, County of New York, and the
United States District Court for the Southern District of New York in any such
suit, action or proceeding. The Company further agrees to accept and acknowledge
service of any and all process which may be served in any such suit, action or
proceeding in the New York State Supreme Court, County of New York, or in the
United States District Court for the Southern District of New York and agrees
that service of process upon the Company mailed
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<PAGE>
by certified mail to the Company's address shall be deemed in every respect
effective service of process upon the Company, in any such suit, action or
proceeding.
13. Parties in Interest. This Agreement is made solely for the
benefit of the Underwriter, the Company and, to the extent expressed, any person
controlling the Company or the Underwriter, each officer, director, partner,
employee and agent of the Underwriter, the directors of the Company, its
officers who have signed the Registration Statement, and their respective
executors, administrators, successors and assigns, and, no other person will
acquire or have any right under or by virtue of this Agreement. The term
"successors and assigns" will not include any purchaser of the Shares or
Warrants from the Underwriter, as such purchaser.
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<PAGE>
If the foregoing is in accordance with your understanding of
our agreement, kindly sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement between the Company and the
Underwriter in accordance with its terms.
Very truly yours,
AMERICAN CARD TECHNOLOGY, INC.
By:_______________________
Name:
Title:
Confirmed and accepted in
New York, N.Y., as of the
date first above written:
WHALE SECURITIES CO., L.P.
By: Whale Securities Corp.
General Partner
By:
------------------------------
Name:
Title:
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<PAGE>
FIRST AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
AMERICAN CARD TECHNOLOGY, INC.
AMERICAN CARD TECHNOLOGY, INC., (the "Corporation"), a corporation
organized under the laws of the State of Delaware, hereby amends and restates
its Certificate of Incorporation, which was originally filed with the Secretary
of State of Delaware on June 21, 1994, so that the same shall read, in its
entirety, as follows:
ARTICLE I. NAME
(a) The name of the Corporation is AMERICAN CARD TECHNOLOGY, INC.
(b) The address, including street, number, city, and county, of the
registered office of the Corporation in the State of Delaware is Corporation
Trust Center, 1209 Orange Street, City of Wilmington, County of New Castle; and
the name of the registered agent of the Corporation in the State of Delaware at
such address is The Corporation Trust Company.
ARTICLE II. PURPOSE
The nature of the business and the purposes to be conducted and
promoted by the Corporation shall be to conduct any lawful business, to promote
any lawful purpose, and to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of the State of
Delaware.
ARTICLE III. CAPITAL STOCK
(a) The total number of shares of all classes of stock which the
Corporation has authority to issue is Twenty-One Million (21,000,000),
consisting of Twenty Million (20,000,000) shares of Common Stock, par value
$.001 per share (the "Common Stock"), and One Million (1,000,000) shares of
Preferred Stock, par value $.001 per share (the "Preferred Stock"). The voting
powers, designations, preferences and relative, participating, optional or other
rights, if any, and the qualifications, limitations or restrictions, if any, of
the Preferred Stock, in one or more series, shall be fixed by one or more
resolutions providing for the issue of such stock adopted by the Corporation's
board of directors, in accordance with the provisions of Section 151 of the
General Corporation Law of the State of Delaware, as the same may be amended and
supplemented (the "Delaware GCL"), and the board of directors is expressly
vested with authority to adopt one or more such resolutions. No shareholder
shall be entitled as of right to purchase or subscribe for any unissued shares
of the Corporation, whether now or hereafter authorized or whether of a class
now existing or of a class hereafter created, or to purchase or subscribe for
any bonds, certificates of indebtedness, debentures, or other obligations
convertible into shares of the Corporation.
<PAGE>
ARTICLE IV. DIRECTORS
(a) The number of directors of the Corporation shall be established
pursuant to the by-laws of the Corporation, provided that the number of
directors may not be fewer than three (3) unless the Corporation has fewer than
three (3) stockholders, in which case the number of directors may not be fewer
than the number of stockholders. The board of directors is authorized to make,
alter or repeal the by-laws of the Corporation.
(b) Directors shall be divided into three classes of directors, each
class containing an equal number of directors. During the initial term,
directors in the first class shall be elected for a one-year term, directors in
the second class shall be elected for a two-year term, and directors in the
third class shall be elected for a three-year term. At each subsequent annual
meeting, each class of directors standing for election shall be elected for a
term of three years.
(c) No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware GCL, or (iv) for any
transaction from which the director derived any improper personal benefit.
(d) All elections of directors may be by written ballot or by voice
vote, as determined by the board of directors prior to any such election, or by
written consent of stockholders pursuant to Section 228 of the Delaware GCL.
ARTICLE V. INDEMNIFICATION
(a) The Corporation shall, to the fullest extent permitted by Section
145 of the Delaware GCL, indemnify any and all directors and officers from and
against any and all of the expenses, liabilities, or other matters referred to
in or covered by said section, and the indemnification provided for herein shall
not be deemed exclusive of any other rights to which those indemnified may be
entitled under any by-law, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, and shall continue as to a
person who has ceased to be a director or officer and shall inure to the benefit
of the heirs, executors, and administrators of such a person. The right to
indemnification conferred in this paragraph shall be a contract right and shall
include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its final disposition; provided,
however, that, if the Delaware GCL requires the payment of such expenses
incurred by a director or officer in his or her capacity as a director or
officer in advance of the final disposition of a proceeding, such payment shall
be made only upon delivery to the Corporation of an undertaking, by or on behalf
of such director or officer, to repay all amounts so advanced if it shall
ultimately be determined that such director or officer is not entitled to be
indemnified under this paragraph or otherwise.
ARTICLE VI. PERPETUAL EXISTENCE
The Corporation is to have perpetual existence.
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<PAGE>
ARTICLE VII. COMPROMISE OR ARRANGEMENT
Whenever a compromise or arrangement is proposed between the
Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of the Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for the Corporation under the
provisions of section 291 of Title 8 of the Delaware Code or on the application
of trustees in dissolution or of any receiver or receivers appointed for the
Corporation under the provisions of section 279 of Title 8 of the Delaware Code
order a meeting of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of the Corporation, as the case may be, to
be summoned in such matter as the said court directs. If a majority in number
representing three-fourths in value of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of the Corporation, as the
case may be, agree to any compromise or arrangement and to any reorganization of
the Corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of the Corporation, as the case may be, and also on the
Corporation.
ARTICLE VIII. AMENDMENTS AND REPEAL
The Corporation reserves the right to amend, alter, change, or repeal
any provision contained in this First Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by the laws of the
State of Delaware, and all rights herein conferred are granted subject to this
reservation.
I, RAYMOND FINDLEY, JR., do hereby certify that I am President of the
Corporation and that the First Amended and Restated Certificate of Incorporation
of the Corporation has been duly adopted by the written consent of the directors
in accordance with the provisions of Sections 141(f), 242 and 245 of the General
Corporation Law of Delaware, as amended.
IN WITNESS WHEREOF, AMERICAN CARD TECHNOLOGY, INC., has caused this
certificate to be signed by its President as of this 11th day of December, 1996.
AMERICAN CARD TECHNOLOGY, INC.
By /s/ Raymond Findley, Jr.
-------------------------
Raymond Findley, Jr.
Its President
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<PAGE>
Exhibit 3.2
AMERICAN CARD TECHNOLOGY, INC.
B Y L A W S
ARTICLE I
OFFICES
Section 1. The registered office shall be in the City of
Wilmington, County of New Castle, State of Delaware.
Section 2. The corporation may also have offices at such other
places both within and without the State of Delaware as the board of directors
may from time to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. All meetings of the stockholders for the election
of directors shall be held at such place either within or without the State of
Delaware as shall be designated from time to time by the board of directors and
stated in the notice of the meeting. Meetings of stockholders for any other
purpose may be held at such time and place, within or without the State of
Delaware, as shall be stated in the notice of the meeting or in a duly executed
waiver of notice thereof.
Section 2. Annual meetings of stockholders shall be held at
such date and time as shall be designated from time to time by the board of
directors and stated in the notice of the meeting, at which they shall elect by
a plurality vote a board of directors, and transact such other business as may
properly be brought before the meeting.
Section 3. Written notice of the annual meeting stating the
place, date and hour of the meeting shall be given to each stockholder entitled
to vote at such meeting not less than 10 nor more than sixty days before the
date of the meeting.
Section 4. The officer who has charge of the stock ledger of
the corporation shall prepare and make, at least ten days before every meeting
of stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
Section 5. Special meetings of the stockholders, for any
purpose or purposes, unless otherwise prescribed by statute or by the
certificate of incorporation, may be called by the president and shall be called
by the president or secretary at the request in writing of a majority of the
board of directors, or at the request in writing of stockholders owning a
majority in amount of the entire
<PAGE>
capital stock of the corporation issued and outstanding and entitled to vote.
Such request shall state the purpose or purposes of the proposed meeting.
Section 6. Written notice of a special meeting stating the
place, date and hour of the meeting and the purpose or purposes for which the
meeting is called, shall be given not less than ten nor more than sixty days
before the date of the meeting, to each stockholder entitled to vote at such
meeting.
Section 7. Business transacted at any special meeting of
stockholders shall be limited to the purposes stated in the notice.
Section 8. The holders of a majority of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented any business may be
transacted which might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
Section 9. When a quorum is present at any meeting, the vote
of the holders of a majority of the stock having voting power present in person
or represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes or of
the certificate of incorporation, a different vote is required in which case
such express provision shall govern and control the decision of such question.
Section 10. Unless otherwise provided in the certificate of
incorporation each stockholder shall at every meeting of the stockholders be
entitled to one vote in person or by proxy for each share of the capital stock
having voting power held by such stockholder, but no proxy shall be voted on
after three years from its date, unless the proxy provides for a longer period.
Section 11. Unless otherwise provided in the certificate of
incorporation, any action required to be taken at any annual or special meeting
of stockholders of the corporation, or any action which may be taken at any
annual or special meeting of such stockholders, may be taken without a meeting,
without prior notice and without a vote, if a consent in writing, setting forth
the action so taken, shall be signed by the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted. Prompt notice of the taking of the corporate action
without a meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
2
<PAGE>
ARTICLE III
DIRECTORS
Section 1. The number of directors of the Corporation shall be
established pursuant to the by-laws of the Corporation, provided that the number
of directors may not be fewer than three (3) unless the Corporation has fewer
than three (3) stockholders, in which case the number of directors may not be
fewer than the number of stockholders. The board of directors is authorized to
make, alter or repeal the by-laws of the Corporation.
Section 2. Directors shall be divided into three classes of
directors, each class containing an equal number of directors. During the
initial term, directors in the first class shall be elected for a one-year term,
directors in the second class shall be elected for a two-year term, and
directors in the third class shall be elected for a three-year term. At each
subsequent annual meeting, each class of directors standing for election shall
be elected for a term of three years.
Section 3. Vacancies and newly created directorships resulting
from any increase in the authorized number of directors may be filled by a
majority of the directors then in office, though less than a quorum, or by a
sole remaining director, and the directors so chosen shall hold office until the
next annual election and until their successors are duly elected and shall
qualify, unless sooner displaced. If there are no directors in office, then an
election of directors may be held in the manner provided by statute. If, at the
time of filling any vacancy or any newly created directorship, the directors
then in office shall constitute less than a majority of the whole board (as
constituted immediately prior to any such increase), the Court of Chancery may,
upon application of any stockholder or stockholders holding at least ten percent
of the total number of the shares at the time outstanding having the right to
vote for such directors, summarily order an election to be held to fill any such
vacancies or newly created directorships, or to replace the directors chosen by
the directors then in office.
Section 4. The business of the corporation shall be managed by
or under the direction of its board of directors which may exercise all such
powers of the corporation and do all such lawful acts and things as are not by
statute or by the certificate of incorporation or by these by-laws directed or
required to be exercised or done by the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
Section 4. The board of directors of the corporation may hold
meetings, both regular and special, either within or without the State of
Delaware.
Section 5. The first meeting of each newly elected board of
directors shall be held at such time and place as shall be fixed by the vote of
the stockholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present. In the event of the failure of the
stockholders to fix the time or place of such first meeting of the newly elected
board of directors, or in the event such meeting is not held at the time and
place so fixed by the stockholders, the meeting may be held at such time and
place as shall be specified in a notice given as hereinafter provided for
special meetings of the board of directors, or as shall be specified in a
written waiver signed by all of the directors.
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<PAGE>
Section 6. Regular meetings of the board of directors may be
held without notice at such time and at such place as shall from time to time be
determined by the board.
Section 7. Special meetings of the board may be called by the
president on two days' notice to each director, either personally or by mail or
by telegram; special meetings shall be called by the president or secretary in
like manner and on like notice on the written request of two directors unless
the board consists of only one director; in which case special meetings shall be
called by the president or secretary in like manner and on like notice on the
written request of the sole director.
Section 8. At all meetings of the board two directors shall
constitute a quorum for the transaction of business and the act of a majority of
the directors present at any meeting at which there is a quorum shall be the act
of the board of directors, except as may be otherwise specifically provided by
statute or by the certificate of incorporation. If a quorum shall not be present
at any meeting of the board of directors the directors present thereat may
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present.
Section 9. Unless otherwise restricted by the certificate of
incorporation or these by-laws, any action required or permitted to be taken at
any meeting of the board of directors or of any committee thereof may be taken
without a meeting, if all members of the board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the board or committee.
Section 10. Unless otherwise restricted by the certificate of
incorporation or these by-laws, members of the board of directors, or any
committee designated by the board of directors, may participate in a meeting of
the board of directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
COMMITTEES OF DIRECTORS
Section 11. The board of directors may, by resolution passed
by a majority of the whole board, designate one or more committees, each
committee to consist of one or more of the directors of the corporation. The
board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee.
In the absence or disqualification of a member of a committee,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the board of directors to act at the meeting in the place of
any such absent or disqualified member.
Any such committee, to the extent provided in the resolution
of the board of directors, shall have and may exercise all the powers and
authority of the board of directors in the management of the business and
affairs of the corporation, and may authorize the seal of the corporation to be
affixed to all papers which may require it; but no such committee shall have the
power or authority in reference to amending the certificate of incorporation,
adopting an agreement of merger or consolidation, recommending to the
stockholders the sale, lease or exchange of all or substantially all
4
<PAGE>
of the corporation's property and assets, recommending to the stockholders a
dissolution of the corporation or a revocation of a dissolution, or amending the
by-laws of the corporation; and, unless the resolution or the certificate of
incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend or to authorize the issuance of stock or to
adopt a certificate of ownership and merger. Such committee or committees shall
have such name or names as may be determined from time to time by resolution
adopted by the board of directors.
Section 12. Each committee shall keep regular minutes of its
meetings and report the same to the board of directors when required.
COMPENSATION OF DIRECTORS
Section 13. Unless otherwise restricted by the certificate of
incorporation or these by-laws, the board of directors shall have the authority
to fix the compensation of directors. The directors may be paid their expenses,
if any, of attendance at each meeting of the board of directors and may be paid
a fixed sum for attendance at each meeting of the board of directors or a stated
salary as director. No such payment shall preclude any director from serving the
corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
REMOVAL OF DIRECTORS
Section 14. Unless otherwise restricted by the certificate of
incorporation or by law, any director or the entire board of directors may be
removed, with or without cause, by the holders of a majority of shares entitled
to vote at an election of directors.
ARTICLE IV
NOTICES
Section 1. Whenever, under the provisions of the statutes or
of the certificate of incorporation or of these by-laws, notice is required to
be given to any director or stockholder, it shall not be construed to mean
personal notice, but such notice may be given in writing, by mail, addressed to
such director or stockholder, at his address as it appears on the records of the
corporation, with postage thereon prepaid, and such notice shall be deemed to be
given at the time when the same shall be deposited in the United States mail.
Notice to directors may also be given by telegram.
Section 2. Whenever any notice is required to be given under
the provisions of the statutes or of the certificate of incorporation or of
these by-laws, a waiver thereof in writing, signed by the person or persons
entitled to said notice, whether before or after the time stated therein, shall
be deemed equivalent thereto.
ARTICLE V
OFFICERS
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Section 1. The officers of the corporation shall be chosen by
the board of directors and shall be a president and a secretary. The board of
directors may also choose a chief executive officer, one or more vice
presidents, one or more assistant secretaries, a treasurer, and one or more
assistant treasurers. Any number of offices may be held by the same person,
unless the certificate of incorporation or these by-laws otherwise provide.
Section 2. The board of directors at its first meeting after
each annual meeting of stockholders shall choose a president and a secretary and
such other officers as the board of directors so elect.
Section 3. The board of directors may appoint such other
officers and agents as it shall deem necessary who shall hold their offices for
such terms and shall exercise such powers and perform such duties as shall be
determined from time to time by the board.
Section 4. The salaries of all officers and agents of the
corporation shall be fixed by the board of directors.
Section 5. The officers of the corporation shall hold office
until their successors are chosen and qualify. Any officer elected or appointed
by the board of directors may be removed at any time by the affirmative vote of
a majority of the board of directors. Any vacancy occurring in any office of the
corporation shall be filled by the board of directors.
THE PRESIDENT
Section 6. The president shall, subject to the board of
directors, have general charge of the business of the corporation. He shall keep
the board of directors fully informed of and shall freely consult them
concerning the business of the corporation and shall see that all orders and
resolutions of the board of directors are carried into effect. In the absence of
the chief executive officer or in the event of his inability or refusal to act,
the president shall preside over meetings of the stockholders and the board of
directors.
Section 7. He shall execute bonds, mortgages and other
contracts requiring a seal, under the seal of the corporation, except where
required or permitted by law to be otherwise signed and executed and except
where the signing and execution thereof shall be expressly delegated by the
board of directors to some other officer or agent of the corporation.
THE CHIEF EXECUTIVE OFFICER
Section 8. The chief executive officer shall preside at all
meetings of the stockholders and the board of directors, shall advise the
president in the general and active management of the business of the
corporation and shall consult with the president to see that all orders and
resolutions of the board of directors are carried into effect.
THE VICE-PRESIDENTS
Section 9. In the absence of the president or in the event of
his inability or refusal to act, the vice-president (or in the event there be
more than one vice-president, the vice-presidents in the order designated by the
directors, or in the absence of any designation, then in the order of their
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<PAGE>
election) shall perform the duties of the president, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
president. The vice-presidents shall perform such other duties and have such
other powers as the board of directors may from time to time prescribe.
THE SECRETARY AND ASSISTANT SECRETARY
Section 10. The secretary shall attend all meetings of the
board of directors and all meetings of the stockholders and record all the
proceedings of the meetings of the corporation and of the board of directors in
a book to be kept for that purpose and shall perform like duties for the
standing committees when required. He shall give, or cause to be given, notice
of all meetings of the stockholders and special meetings of the board of
directors, and shall perform such other duties as may be prescribed by the board
of directors or president, under whose supervision he shall be. He shall have
custody of the corporate seal of the corporation and he, or an assistant
secretary, shall have authority to affix the same to any instrument requiring it
and when so affixed, it may be attested by his signature or by the signature of
such assistant secretary. The board of directors may give general authority to
any other officer to affix the seal of the corporation and to attest the
affixing by his signature.
Section 11. The assistant secretary, or if there be more than
one, the assistant secretaries in the order determined by the board of directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the secretary or in the event of his inability or
refusal to act, perform the duties and exercise the powers of the secretary and
shall perform such other duties and have such other powers as the board of
directors may from time to time prescribe.
THE TREASURER AND ASSISTANT TREASURERS
Section 12. The treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the corporation in such depositories as may be designated by the board of
directors.
Section 13. He shall disburse the funds of the corporation as
may be ordered by the board of directors, taking proper vouchers for such
disbursements, and shall render to the president and the board of directors, at
its regular meetings, or when the board of directors so re quires, an account of
all his transactions as treasurer and of the financial condition of the
corporation.
Section 14. If required by the board of directors, he shall
give the corporation a bond (which shall be renewed every six years) in such sum
and with such surety or sureties as shall be satisfactory to the board of
directors for the faithful performance of the duties of his office and for the
restoration to the corporation, in case of his death, resignation, retirement or
removal from office, of all books, papers, vouchers, money and other property of
whatever kind in his possession or under his control belonging to the
corporation.
Section 15. The assistant treasurer, or if there shall be more
than one, the assistant treasurers in the order determined by the board of
directors (or if there be no such determination, then in the order of their
election) shall, in the absence of the treasurer or in the event of his
inability or refusal to act, perform the duties and exercise the powers of the
treasurer and shall perform such other duties and have such other powers as the
board of directors may from time to time prescribe.
7
<PAGE>
ARTICLE VI
CERTIFICATES FOR SHARES
Section 1. The shares of the corporation shall be represented
by a certificate or shall be uncertificated. Certificates shall be signed by, or
in the name of the corporation by, the chairman or vice-chairman of the board of
directors, or the president or a vice-president, and by the treasurer or an
assistant treasurer, or the secretary or an assistant secretary of the
corporation.
Upon the face or back of each stock certificate issued to
represent any partly paid shares, or upon the books and records of the
corporation in the case of uncertificated partly paid shares, shall be set forth
the total amount of the consideration to be paid therefor and the amount paid
thereon shall be stated.
Section 2. Any of or all the signatures on a certificate may
be facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the corporation with the same effect as if he were
such officer, transfer agent or registrar at the date of issue.
LOST CERTIFICATES
Section 3. The board of directors may direct a new certificate
or certificates or uncertificated shares to be issued in place of any
certificate or certificates theretofore issued by the corporation alleged to
have been lost, stolen or destroyed, upon the making of an affidavit of that
fact by the person claiming the certificate of stock to be lost, stolen or
destroyed. When authorizing such issue of a new certificate or certificates or
uncertificated shares, the board of directors may, in its discretion and as a
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed certificate or certificates, or his legal representative, to
advertise the same in such manner as it shall require and/or to give the
corporation a bond in such sum as it may direct as indemnity against any claim
that may be made against the corporation with respect to the certificate alleged
to have been lost, stolen or destroyed.
TRANSFER OF STOCK
Section 4. Upon surrender to the corporation or the transfer
agent of the corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books. Upon receipt of proper transfer instructions from
the registered owner of uncertificated shares such uncertificated shares shall
be cancelled and issuance of new equivalent uncertificated shares or
certificated shares shall be made to the person entitled thereto and the
transaction shall be recorded upon the books of the corporation.
FIXING RECORD DATE
Section 5. In order that the corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or
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<PAGE>
other distribution or allotment of any rights, or entitled to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the board of directors may fix, in advance,
a record date, which shall not be more than sixty nor less than ten days before
the date of such meeting, nor more than sixty days prior to any other action. A
determination of stock holders of record entitled to notice of or to vote at a
meeting of stock holders shall apply to any adjournment of the meeting provided,
however, that the board of directors may fix a new record date for the adjourned
meeting.
REGISTERED STOCKHOLDERS
Section 6. The corporation shall be entitled to recognize the
exclusive right of a person registered on its books as the owner of shares to
receive dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
Section 1. Dividends upon the capital stock of the
corporation, subject to the provisions of the certificate of incorporation, if
any, may be declared by the board of directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property, or in
shares of the capital stock, subject to the provisions of the certificate of
incorporation.
Section 2. Before payment of any dividend, there may be set
aside out of any funds of the corporation available for dividends such sum or
sums as the directors from time to time, in their absolute discretion, think
proper as a reserve or reserves to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the corporation, or
for such other purpose as the directors shall think conducive to the interest of
the corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
ANNUAL STATEMENT
Section 3. The board of directors shall present at each annual
meeting, and at any special meeting of the stockholders when called for by vote
of the stockholders, a full and clear statement of the business and condition of
the corporation.
CHECKS
Section 4. All checks or demands for money and notes of the
corporation shall be signed by such officer or officers or such other person or
persons as the board of directors may from time to time designate.
FISCAL YEAR
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Section 5. The fiscal year of the corporation shall be fixed
by resolution of the board of directors.
SEAL
Section 6. The corporate seal shall have inscribed thereon the
name of the corporation, the year of its organization and the word "Delaware".
The seal may be used by causing it or a facsimile thereof to be impressed or
affixed or reproduced or otherwise.
INDEMNIFICATION
Section 7. The Corporation shall, to the fullest extent
permitted by Section 145 of the Delaware GCL, indemnify any and all directors
and officers from and against any and all of the expenses, liabilities, or other
matters referred to in or covered by said section, and the indemnification
provided for herein shall not be deemed exclusive of any other rights to which
those indemnified may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director or
officer and shall inure to the benefit of the heirs, executors, and
administrators of such a person. The right to indemnification conferred in this
paragraph shall be a contract right and shall include the right to be paid by
the Corporation the expenses incurred in defending any such proceeding in
advance of its final disposition; provided, however, that, if the Delaware GCL
requires the payment of such expenses incurred by a director or officer in his
or her capacity as a director or officer in advance of the final disposition of
a proceeding, such payment shall be made only upon delivery to the Corporation
of an undertaking, by or on behalf of such director or officer, to repay all
amounts so advanced if it shall ultimately be determined that such director or
officer is not entitled to be indemnified under this paragraph or otherwise.
ARTICLE VIII
AMENDMENTS
Section 1. These by-laws may be altered, amended or repealed
or new by-laws may be adopted by the stockholders or by the board of directors,
when such power is conferred upon the board of directors by the certificate of
incorporation at any regular meeting of the stockholders or of the board of
directors or at any special meeting of the stockholders or of the board of
directors if notice of such alteration, amendment, repeal or adoption of new
by-laws be contained in the notice of such special meeting. If the power to
adopt, amend or repeal by-laws is conferred upon the board of directors by the
certificate of incorporation it shall not divest or limit the power of the
stockholders to adopt, amend or repeal by-laws.
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AMERICAN CARD TECHNOLOGY, INC.
a Delaware corporation
and
AMERICAN STOCK TRANSFER & TRUST COMPANY
Warrant Agent
and
WHALE SECURITIES CO., L.P.
Underwriter
WARRANT AGREEMENT
<PAGE>
Table of Contents
Section Page
1 Appointment of Warrant Agent ................... 1
2 Form of Warrant ............................... 2
3 Countersignature and Registration .............. 3
4 Transfers and Exchanges ........................ 3
5 Exercise of Warrants; Payment of Warrant
Solicitation Fee ............................ 4
6 Payment of Taxes ............................... 8
7 Mutilated or Missing Warrants .................. 9
8 Reservation of Common Stock .................... 9
9 Warrant Price; Adjustments ..................... 11
10 Fractional Interest ............................ 18
11 Notices to Warrantholders ...................... 18
12 Disposition of Proceeds on Exercise of
Warrants ....................................... 20
13 Redemption of Warrants ......................... 21
14 Merger or Consolidation or Change of Name
of Warrant Agent ............................... 21
15 Duties of Warrant Agent ........................ 22
16 Change of Warrant Agent ........................ 26
17 Identity of Transfer Agent ..................... 27
18 Notices ........................................ 27
19 Supplements and Amendments ..................... 29
20 New York Contract .............................. 29
21 Benefits of this Agreement ..................... 30
22 Successors ..................................... 30
Exhibit A - Form of Warrant ....................
<PAGE>
WARRANT AGENT AGREEMENT dated as of _______________, 1997, by
and among American Card Technology, Inc., a Delaware corporation (the
"Company"), Whale Securities Co., L.P. (the "Underwriter") and American Stock
Transfer & Trust Company, as warrant agent (hereinafter called the "Warrant
Agent").
WHEREAS, the Company proposes to issue and sell to the public
up to 1,725,000 shares of the common stock of the Company, par value $.001 per
share (hereinafter, together with the stock of any other class to which such
shares may hereafter have been changed, called "Common Stock"), and up to
1,725,000 Common Stock Purchase Warrants (the "Warrants");
WHEREAS, each Warrant will entitle the holder to purchase one
share of Common Stock;
WHEREAS, the Company desires the Warrant Agent to act on
behalf of the Company, and the Warrant Agent is willing to so act, in connection
with the issuance, registration, transfer, exchange and exercise of the
Warrants;
NOW, THEREFORE, in consideration of the premises and the
mutual agreements herein set forth, the parties hereto agree as follows:
Section 1. Appointment of Warrant Agent. The Company hereby
appoints the Warrant Agent to act as Warrant Agent for the Company in accordance
with the instructions hereinafter set forth in this Agreement, and the Warrant
Agent hereby accepts such appointment.
Section 2. Form of Warrant. The text of the Warrants
and of the form of election to purchase Common Stock to be print-
<PAGE>
ed on the reverse thereof shall be substantially as set forth in Exhibit A
attached hereto. Each Warrant shall entitle the registered holder thereof to
purchase one share of Common Stock at a purchase price of Five Dollars ($5.00),
at any time from ___________, 1998 (or earlier upon the consent of the
Underwriter) until 5:00 p.m. Eastern time, on __________, 2002 (the "Warrant
Exercise Period"). The warrant price and the number of shares of Common Stock
issuable upon exercise of the Warrants are subject to adjustment upon the
occurrence of certain events, all as hereinafter provided. The Warrants shall be
executed on behalf of the Company by the manual or facsimile signature of the
present or any future Chief Executive Officer, President or Vice President of
the Company, attested to by the manual or facsimile signature of the present or
any future Secretary or Assistant Secretary of the Company.
Warrants shall be dated as of the issuance by the Warrant
Agent either upon initial issuance or upon transfer or exchange.
In the event the aforesaid expiration dates of the Warrants
fall on a Saturday or Sunday, or on a legal holiday on which the New York Stock
Exchange is closed, then the Warrants shall expire at 5:00 p.m. Eastern time on
the next succeeding business day.
Section 3. Countersignature and Registration. The Warrant
Agent shall maintain books for the transfer and registration of the Warrants.
Upon the initial issuance of the Warrants,
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<PAGE>
the Warrant Agent shall issue and register the Warrants in the names of the
respective holders thereof. The Warrants shall be countersigned manually or by
facsimile by the Warrant Agent (or by any successor to the Warrant Agent then
acting as warrant agent under this Agreement) and shall not be valid for any
purpose unless so countersigned. Warrants may, however, be so countersigned by
the Warrant Agent (or by its successor as Warrant Agent) and be delivered by the
Warrant Agent, notwithstanding that the persons whose manual or facsimile
signatures appear thereon as proper officers of the Company shall have ceased to
be such officers at the time of such countersignature or delivery.
Section 4. Transfers and Exchanges. The Warrant Agent shall
transfer, from time to time, any outstanding Warrants upon the books to be
maintained by the Warrant Agent for that purpose, upon surrender thereof for
transfer properly endorsed or accompanied by appropriate instructions for
transfer. Upon any such transfer, a new Warrant shall be issued to the
transferee and the surrendered Warrant shall be cancelled by the Warrant Agent.
Warrants so cancelled shall be delivered by the Warrant Agent to the Company
from time to time upon request. Warrants may be exchanged at the option of the
holder thereof, when surrendered at the office of the Warrant Agent, for another
Warrant, or other Warrants of different denominations of like tenor and
representing in the aggregate the right to purchase a like number of shares of
Common Stock.
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<PAGE>
Section 5. Exercise of Warrants; Payment of Warrant
Solicitation Fee.
(a) Subject to the provisions of this
Agreement, each registered holder of Warrants shall have the right, which may be
exercised commencing at the opening of business on the first day of the Warrant
Exercise Period, to purchase from the Company (and the Company shall issue and
sell to such registered holder of Warrants) the number of fully paid and
non-assessable shares of Common Stock specified in such Warrants upon surrender
of such Warrants to the Company at the office of the Warrant Agent, with the
form of election to purchase on the reverse thereof duly filled in and signed,
and upon payment to the Company of the warrant price, determined in accordance
with the provisions of Sections 9 and 10 of this Agreement, for the number of
shares of Common Stock in respect of which such Warrants are then exercised.
Payment of such warrant price shall be made in cash or by certified check or
bank draft to the order of the Company. Subject to Section 6, upon such
surrender of Warrants and payment of the warrant price, the Company shall issue
and cause to be delivered with all reasonable dispatch to or upon the written
order of the registered holder of such Warrants and in such name or names as
such registered holder may designate, a certificate or certificates for the
number of full shares of Common Stock so purchased upon the exercise of such
Warrants. Such certificate or certificates shall be deemed to have been issued,
and any person so designated to be named
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<PAGE>
therein shall be deemed to have become a holder of record of such shares of
Common Stock, as of the date of the surrender of such Warrants and payment of
the warrant price as aforesaid. The rights of purchase represented by the
Warrants shall be exercisable, at the election of the registered holders
thereof, either as an entirety or from time to time for a portion of the shares
specified therein and, in the event that any Warrant is exercised in respect of
less than all of the shares of Common Stock specified therein at any time prior
to the date of expiration of the Warrants, a new Warrant or Warrants will be
issued to the registered holder for the remaining number of shares of Common
Stock specified in the Warrant so surrendered, and the Warrant Agent is hereby
irrevocably authorized to countersign and to deliver the required new Warrants
pursuant to the provisions of this Section and of Section 3 of this Agreement
and the Company, whenever requested by the Warrant Agent, will supply the
Warrant Agent with Warrants duly executed on behalf of the Company for such
purpose. Anything in the foregoing to the contrary notwithstanding, no Warrant
will be exercisable unless at the time of exercise the Company has filed with
the Securities and Exchange Commission a registration statement under the
Securities Act of 1933, as amended (the "Act"), covering the shares of Common
Stock issuable upon exercise of such Warrant and such shares have been so
registered or qualified or deemed to be exempt under the securities laws of the
state of residence of the holder of such Warrant. The Company shall use its best
efforts
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<PAGE>
to have all shares so registered or qualified on or before the date on which the
Warrants become exercisable.
(b) If at the time of exercise of any
Warrant after ________, 1998 (i) the market price of the Company's Common Stock
is equal to or greater than the then purchase price of the Warrant, (ii) the
exercise of the Warrant is solicited by the Underwriter at such time while the
Underwriter is a member of the National Association of Securities Dealers, Inc.
("NASD"), (iii) the Warrant is not held in a discretionary account, (iv)
disclosure of the compensation arrangement is made in documents provided to the
holders of the Warrants; and (v) the solicitation of the exercise of the Warrant
is not in violation of Rule 10b-6 (as such rule or any successor rule may be in
effect as of such time of exercise) promulgated under the Securities Exchange
Act of 1934, then the Underwriter shall be entitled to receive from the Company
upon exercise of each of the Warrant(s) so exercised a fee of five percent (5%)
of the aggregate price of the Warrants so exercised (the "Exercise Fee"). The
procedures for payment of the warrant solicitation fee are set forth in Section
5(c) below.
(c) (i) Within five (5) days of the last day of each month
commencing with _______, 1998, the Warrant Agent will notify the Underwriter of
each Warrant Certificate which has been properly completed for exercise by
holders of Warrants during the last month. The Company and Warrant Agent shall
determine, in their sole and absolute discretion, whether a
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<PAGE>
Warrant Certificate has been properly completed. The Warrant Agent will provide
the Underwriter with such information, in connection with the exercise of each
Warrant, as the Underwriter shall reasonably request.
(ii) The Company hereby authorizes and
instructs the Warrant Agent to deliver to the Underwriter the Exercise Fee
promptly after receipt by the Warrant Agent from the Company of a check payable
to the order of the Underwriter in the amount of the Exercise Fee. In the event
that an Exercise Fee is paid to the Underwriter with respect to a Warrant which
the Company or the Warrant agent determines is not properly completed for
exercise or in respect of which the Underwriter is not entitled to an Exercise
Fee, the Underwriter will promptly return such Exercise Fee to the Warrant Agent
which shall forthwith return such fee to the Company.
The Underwriter and the Company may at any time, after
____________, 1998, and during business hours, examine the records of the
Warrant Agent, including its ledger of original Warrant certificates returned to
the Warrant Agent upon exercise of Warrants. Notwithstanding any provision to
the contrary, the provisions of paragraphs 5(b) and 5(c) may not be modified,
amended or deleted without the prior written consent of the Underwriter.
Section 6. Payment of Taxes. The Company will pay any
documentary stamp taxes attributable to the initial issuance of
Common Stock issuable upon the exercise of Warrants; provided,
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<PAGE>
however, that the Company shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issue or delivery of any
certificates of shares of Common Stock in a name other than that of the
registered holder of Warrants in respect of which such shares are issued, and in
such case neither the Company nor the Warrant Agent shall be required to issue
or deliver any certificate for shares of Common Stock or any Warrant until the
person requesting the same has paid to the Company the amount of such tax or has
established to the Company's satisfaction that such tax has been paid.
Section 7. Mutilated or Missing Warrants. In case any of the
Warrants shall be mutilated, lost, stolen or destroyed, the Company may, in its
discretion, issue and the Warrant Agent shall countersign and deliver in
exchange and substitution for and upon cancellation of the mutilated Warrant, or
in lieu of and in substitution for the Warrant lost, stolen or destroyed, a new
Warrant of like tenor and representing an equivalent right or interest, but only
upon receipt of evidence satisfactory to the Company and the Warrant Agent of
such loss, theft or destruction and, in case of a lost, stolen or destroyed
Warrant, indemnity, if requested, also satisfactory to them. Applicants for such
substitute Warrants shall also comply with such other reasonable regulations and
pay such reasonable charges as the Company or the Warrant Agent may prescribe.
Section 8. Reservation of Common Stock. There have
been reserved, and the Company shall at all times keep reserved,
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<PAGE>
out of the authorized and unissued shares of Common Stock, a number of shares of
Common Stock sufficient to provide for the exercise of the rights of purchase
represented by the Warrants, and the transfer agent for the shares of Common
Stock and every subsequent transfer agent for any shares of the Company's Common
Stock issuable upon the exercise of any of the rights of purchase aforesaid are
irrevocably authorized and directed at all times to reserve such number of
authorized and unissued shares of Common Stock as shall be required for such
purpose. The Company agrees that all shares of Common Stock issued upon exercise
of the Warrants shall be, at the time of delivery of the certificates of such
shares, validly issued and outstanding, fully paid and non-assessable and listed
on any national securities exchange upon which the other shares of Common Stock
are then listed. So long as any unexpired Warrants remain outstanding, the
Company will file such post-effective amendments to the registration statement
(Form SB-2, Registration No. 333-________) (the "Registration Statement") filed
pursuant to the Act with respect to the Warrants (or other appropriate
registration statements or post-effective amendment or supplements) as may be
necessary to permit it to deliver to each person exercising a Warrant, a
prospectus meeting the requirements of Section 10(a)(3) of the Act and otherwise
complying therewith, and will deliver such a prospectus to each such person. To
the extent that during any period it is not reasonably likely that the Warrants
will be exercised, due to market price or otherwise, the Company need not file
such a post-
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<PAGE>
effective amendment during such period. The Company will keep a copy of this
Agreement on file with the transfer agent for the shares of Common Stock and
with every subsequent transfer agent for any shares of the Company's Common
Stock issuable upon the exercise of the rights of purchase represented by the
Warrants. The Warrant Agent is irrevocably authorized to requisition from time
to time from such transfer agent stock certificates required to honor
outstanding Warrants. The Company will supply such transfer agent with duly
executed stock certificates for that purpose. All Warrants surrendered in the
exercise of the rights thereby evidenced shall be cancelled by the Warrant Agent
and shall thereafter be delivered to the Company, and such cancelled Warrants
shall constitute sufficient evidence of the number of shares of Common Stock
which have been issued upon the exercise of such Warrants. Promptly after the
date of expiration of the Warrants, the Warrant Agent shall certify to the
Company the total aggregate amount of Warrants then outstanding, and thereafter
no shares of Common Stock shall be subject to reservation in respect of such
Warrants which shall have expired.
Section 9. Warrant Price; Adjustments.
(a) The warrant price at which Common Stock shall
be purchasable upon the exercise of the Warrants shall be $5.00 per share or
after adjustment, as provided in this Section, shall be such price as so
adjusted (the "Warrant Price").
(b) In the event the Company's results of
operations for the first four (4) fiscal quarters following the
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<PAGE>
Effective Date (it being understood that the first of such four quarters shall
be the first quarter the majority of which is subsequent to the Effective Date)
reflect, on a cumulative basis during such four (4) quarters, either (i)
revenues of less than Five Million Dollars ($5,000,000) or (ii) pre-tax
operating losses (before interest income and expense, financing costs, taxes and
extraordinary items) in excess of One Million Dollars ($1,000,000), in each case
as determined in accordance with generally accepted accounting principles, then
the Warrant Price of the Public Warrants shall decrease to an amount equal to
80% of the Warrant Price in effect immediately prior to such event.
(c) The Warrant Price shall also be subject to
adjustment from time to time as follows:
(i) In case the Company shall at any time
after the date hereof pay a dividend in shares of Common Stock or make a
distribution in shares of Common Stock, then upon such dividend or distribution
the Warrant Price in effect immediately prior to such dividend or distribution
shall forthwith be reduced to a price determined by dividing:
(A) an amount equal to the total
number of shares of Common Stock outstanding immediately prior to such dividend
or distribution multiplied by the Warrant Price in effect immediately prior to
such dividend or distribution, by
(B) the total number of shares of
Common Stock outstanding immediately after such issuance or sale.
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<PAGE>
For the purposes of any computation to be
made in accordance with the provisions of this Section 9(c)(i), the following
provisions shall be applicable: Common Stock issuable by way of dividend or
other distribution on any stock of the Company shall be deemed to have been
issued immediately after the opening of business on the date following the date
fixed for the determination of stockholders entitled to receive such dividend or
other distribution.
(ii) In case the Company shall at any time
subdivide or combine the outstanding Common Stock, the Warrant Price shall
forthwith be proportionately decreased in the case of subdivision or increased
in the case of combination to the nearest one cent. Any such adjustment shall
become effective at the time such subdivision or combination shall become
effective.
(iii) Within a reasonable time after the
close of each quarterly fiscal period of the Company during which the Warrant
Price has been adjusted as herein provided, the Company shall:
(A) file with the Warrant Agent a
certificate signed by the Chief Executive Officer, President or Vice President
of the Company and by the Treasurer or Assistant Treasurer or the Secretary or
an Assistant Secretary of the Company, showing in detail the facts requiring all
such adjustments occurring during such period and the Warrant Price after each
such adjustment; and
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(B) the Warrant Agent shall have no
duty with respect to any such certificate filed with it except to keep the same
on file and available for inspection by holders of Warrants during reasonable
business hours, and the Warrant Agent may conclusively rely upon the latest
certificate furnished to it hereunder. The Warrant Agent shall not at any time
be under any duty or responsibility to any holder of a Warrant to determine
whether any facts exist which may require any adjustment of the Warrant Price,
or with respect to the nature or extent of any adjustment of the Warrant Price
when made, or with respect to the method employed in making any such adjustment,
or with respect to the nature or extent of the property or securities
deliverable hereunder. In the absence of a certificate having been furnished,
the Warrant Agent may conclusively rely upon the provisions of the Warrants with
respect to the Common Stock deliverable upon the exercise of the Warrants and
the applicable Warrant Price thereof.
(iv) Notwithstanding anything
contained herein to the contrary, no adjustment of the Warrant Price shall be
made if the amount of such adjustment shall be less than $.05, but in such case
any adjustment that would otherwise be required then to be made shall be carried
forward and shall be made at the time and together with the next subsequent
adjustment which, together with any adjustment so carried forward, shall amount
to not less than $.02.
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(v) In the event that the number of outstanding
shares of Common Stock is increased by a stock dividend payable in Common Stock
or by a subdivision of the outstanding Common Stock, then, from and after the
time at which the adjusted Warrant Price becomes effective pursuant to
Subsection (c) of this Section by reason of such dividend or subdivision, the
number of shares of Common Stock issuable upon the exercise of each Warrant
shall be increased in proportion to such increase in outstanding shares. In the
event that the number of shares of Common Stock outstanding is decreased by a
combination of the outstanding Common Stock, then, from and after the time at
which the adjusted Warrant Price becomes effective pursuant to this Section 9(c)
by reason of such combination, the number of shares of Common Stock issuable
upon the exercise of each Warrant shall be decreased in proportion to such
decrease in the outstanding shares of Common Stock.
(vi) In case of any reorganization or
reclassification of the outstanding Common Stock (other than a change in par
value, or from par value to no par value, or as a result of a subdivision or
combination), or in case of any consolidation of the Company with, or merger of
the Company into, another corporation (other than a consolidation or merger in
which the Company is the continuing corporation and which does not result in any
reclassification of the outstanding Common Stock), or in case of any sale or
conveyance to another corporation of the property of the Company as an entirety
or substantially as an entirety, the
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<PAGE>
holder of each Warrant then outstanding shall thereafter have the right to
purchase the kind and amount of shares of Common Stock and other securities and
property receivable upon such reorganization, reclassification, consolidation,
merger, sale or conveyance by a holder of the number of shares of Common Stock
which the holder of such Warrant shall then be entitled to purchase; such
adjustments shall apply with respect to all such changes occurring between the
date of this Warrant Agreement and the date of exercise of such Warrant.
(vii) Subject to the provisions of this Section
9, in case the Company shall, at any time prior to the exercise of the Warrants,
make any distribution of its assets to holders of its Common Stock as a
liquidating or a partial liquidating dividend, then the holder of Warrants who
exercises its Warrants after the record date for the determination of those
holders of Common Stock entitled to such distribution of assets as a liquidating
or partial liquidating dividend shall be entitled to receive for the Warrant
Price per Warrant, in addition to each share of Common Stock, the amount of such
distribution (or, at the option of the Company, a sum equal to the value of any
such assets at the time of such distribution as determined by the Board of
Directors of the Company in good faith), which would have been payable to such
holder had he been the holder of record of the Common Stock receivable upon
exercise of its Warrant on the record date for the determination of those
entitled to such distribution.
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<PAGE>
(viii) In case of the dissolution, liquidation or
winding up of the Company, all rights under the Warrants shall terminate on a
date fixed by the Company, such date to be no earlier than ten (10) days prior
to the effectiveness of such dissolution, liquidation or winding up and not
later than five (5) days prior to such effectiveness. Notice of such termination
of purchase rights shall be given to the last registered holder of the Warrants,
as the same shall appear on the books of the Company maintained by the Warrant
Agent, by registered mail at least thirty (30) days prior to such termination
date.
(ix) In case the Company shall, at any time prior
to the expiration of the Warrants and prior to the exercise thereof, offer to
the holders of its Common Stock any rights to subscribe for additional shares of
any class of the Company, then the Company shall give written notice thereof to
the last registered holder thereof not less than thirty (30) days prior to the
date on which the books of the Company are closed or a record date is fixed for
the determination of the stockholders entitled to such subscription rights. Such
notice shall specify the date as to which the books shall be closed or record
date fixed with respect to such offer of subscription and the right of the
holder thereof to participate in such offer of subscription shall terminate if
the Warrant shall not be exercised on or before the date of such closing of the
books or such record date.
(x) Any adjustment pursuant to the aforesaid provisions of this
Section 9 shall be made on the basis of the
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number of shares of Common Stock which the holder thereof would have been
entitled to acquire by the exercise of the Warrant immediately prior to the
event giving rise to such adjustment.
(xi) Irrespective of any adjustments in the
Warrant Price or the number or kind of shares purchasable upon exercise of the
Warrants, Warrants previously or thereafter issued may continue to express the
same price and number and kind of shares as are stated in the similar Warrants
initially issuable pursuant to this Warrant Agreement.
(xii) The Company may retain a firm of
independent public accountants (who may be any such firm regularly employed by
the Company) to make any computation required under this Section 9, and any
certificate setting forth such computation signed by such firm shall be
conclusive evidence of the correctness of any computation made under this
Section 9.
(xiii) If at any time, as a result of an
adjustment made pursuant to Section 9(c)(vi) above, the holders of a Warrant or
Warrants shall become entitled to purchase any securities other than shares of
Common Stock, thereafter the number of such securities so purchasable upon
exercise of each Warrant and the Warrant Price for such shares shall be subject
to adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Common Stock contained in
Sections 9(c)(ii) through (v).
Section 10. Fractional Interest. The Warrants may
only be exercised to purchase full shares of Common Stock and the
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Company shall not be required to issue fractions of shares of Common Stock on
the exercise of Warrants. However, if a Warrant holder exercises all Warrants
then owned of record by it and such exercise would result in the issuance of a
fractional share, the Company will pay to such Warrant holder, in lieu of the
issuance of any fractional share otherwise issuable, an amount of cash based on
the market value of the Common Stock of the Company on the last trading day
prior to the exercise date.
Section 11. Notices to Warrantholders.
(a) Upon any adjustment of the Warrant Price and
the number of shares of Common Stock issuable upon exercise of a Warrant, then
and in each such case the Company shall promptly give written notice thereof to
the Underwriter and the Warrant Agent, which notice shall state the Warrant
Price resulting from such adjustment and the increase or decrease, if any, in
the number of shares purchasable at such price upon the exercise of a Warrant,
setting forth in reasonable detail the method of calculation and the facts upon
which such calculation is based. The Company shall also promptly mail such
notice to the holders of the Warrants at their addresses appearing in the
Warrant register. Failure to give or mail such notice, or any defect therein,
shall not affect the validity of the adjustments.
(b) In case at any time:
(i) the Company shall pay dividends payable
in stock upon its Common Stock or make any distribution (other
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<PAGE>
than regular cash dividends) to the holders of its Common Stock;
or
(ii) the Company shall offer for
subscription pro rata to the holders of its Common Stock any additional shares
of stock of any class or other rights; or
(iii) there shall be any capital
reorganization or reclassification of the capital stock of the Company, or
consolidation or merger of the Company with, or sale or substantially all of its
assets to, another corporation; or
(iv) there shall be a voluntary or
involuntary dissolution, liquidation or winding up of the Company; then in any
one or more of such cases, the Company shall give written notice in the manner
set forth in Section 11(a) of the date on which (A) a record shall be taken for
such dividend, distribution or subscription rights, or (B) such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up shall take place, as the case may be. Such notice shall also specify
the date as of which the holders of Common Stock of record shall participate in
such dividend, distribution or subscription rights, or shall be entitled to
exchange their Common Stock for securities or other property deliverable upon
such reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up as the case may be. Such notice shall be given at
least thirty (30) days prior to the action in question and not less than thirty
(30) days prior to the record date in respect thereof. Failure to give such
notice,
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or any defect therein, shall not affect the legality or validity of any of the
matters set forth in this Section 11(b).
(c) The Company shall cause copies of all financial statements
and reports, proxy statements and other documents that are sent to its
stockholders to be sent by first-class mail, postage prepaid, on the date of
mailing to such stockholders, to each registered holder of Warrants at his
address appearing in the warrant register as of the record date for the
determination of the stockholders entitled to such documents.
Section 12. Disposition of Proceeds on Exercise of
Warrants.
(i) The Warrant Agent shall promptly forward to the Company all
monies received by the Warrant Agent for the purchase of shares of Common Stock
through the exercise of such Warrants; provided, however, that the Warrant Agent
may retain an amount equal to the Exercise Fee, if any, until the Company has
satisfied its obligations under Section 5(c)(ii).
(ii) The Warrant Agent shall keep copies of this Agreement
available for inspection by holders of Warrants during normal business hours.
Section 13. Redemption of Warrants. The Warrants are
redeemable by the Company upon the consent of the Underwriter, in whole or in
part, on not less than thirty (30) days' prior written notice at a redemption
price of $.10 per Warrant at any time commencing after the Company has reported
its first four (4) fiscal quarters of financial results following the Effective
Date
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<PAGE>
(it being understood that the first of such four quarters shall be the first
quarter the majority of which is subsequent to the Effective Date); provided
that (i) the closing bid quotation of the Common Stock on all twenty (20)
trading days ending on the third day prior to the day on which the Company gives
notice of redemption has been at least 150% of the then effective exercise price
of the Warrants (the "Target Redemption Price") and (ii) the Warrants are
currently exercisable. The redemption notice shall be mailed to the holders of
the Warrants at their addresses appearing in the Warrant register. Holders of
the Warrants will have exercise rights until the close of business on the date
fixed for redemption.
Section 14. Merger or Consolidation or Change of Name of
Warrant Agent. Any corporation or company which may succeed to the corporate
trust business of the Warrant Agent by any merger or consolidation or otherwise
shall be the successor to the Warrant Agent hereunder without the execution or
filing of any paper or any further act on the part of any of the parties hereto,
provided that such corporation would be eligible to serve as a successor Warrant
Agent under the provisions of Section 16 of this Agreement. In case at the time
such successor to the Warrant Agent shall succeed to the agency created by this
Agreement, any of the Warrants shall have been countersigned but not delivered,
any such successor to the Warrant Agent may adopt the countersignature of the
original Warrant Agent and deliver such Warrants so countersigned.
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In case at any time the name of the Warrant Agent shall be
changed and at such time any of the Warrants shall have been countersigned but
not delivered, the Warrant Agent may adopt the countersignature under its prior
name and deliver Warrants so countersigned. In all such cases such Warrants
shall have the full force provided in the Warrants and in the Agreement.
Section 15. Duties of Warrant Agent. The Warrant Agent
undertakes the duties and obligations imposed by this Agreement upon the
following terms and conditions, by all of which the Company and the holders of
Warrants, by their acceptance thereof, shall be bound:
(a) The statements of fact and recitals contained
herein and in the Warrants shall be taken as statements of the Company, and the
Warrant Agent assumes no responsibility for the correctness of any of the same
except such as describe the Warrant Agent or action taken or to be taken by it.
The Warrant Agent assumes no responsibility with respect to the distribution of
the Warrants except as herein expressly provided.
(b) The Warrant Agent shall not be responsible for
any failure of the Company to comply with any of the covenants in this Agreement
or in the Warrants to be complied with by the Company.
(c) The Warrant Agent may consult at any time with
counsel satisfactory to it (who may be counsel for the Company) and the Warrant
Agent shall incur no liability or responsibility to the Company or to any holder
of any Warrant in
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<PAGE>
respect of any action taken, suffered or omitted by it hereunder in good faith
and in accordance with the opinion or the advice of such counsel.
(d) The Warrant Agent shall incur no liability or
responsibility to the Company or to any holder of any Warrant for any action
taken in reliance on any notice, resolution, waiver, consent, order, certificate
or other instrument believed by it to be genuine and to have been signed, sent
or presented by the proper party or parties.
(e) The Company agrees to pay to the Warrant Agent
reasonable compensation for all services rendered by the Warrant Agent in the
execution of this Agreement, to reimburse the Warrant Agent for all expenses,
taxes and governmental charges and other charges incurred by the Warrant Agent
in the execution of this Agreement and to indemnify the Warrant Agent and save
it harmless against any and all liabilities, including judgments, costs and
reasonable counsel fees, for anything done or omitted by the Warrant Agent in
the execution of this Agreement except as a result of the Warrant Agent's
negligence, willful misconduct or bad faith.
(f) The Warrant Agent shall be under no obligation
to institute any action, suit or legal proceeding or to take any other action
likely to involve expenses unless the Company or one or more registered holders
of Warrants shall furnish the Warrant Agent with reasonable security and
indemnity for any costs and expenses which may be incurred, but this provision
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<PAGE>
shall not affect the power of the Warrant Agent to take such action as the
Warrant Agent may consider proper, whether with or without any such security or
indemnity. All rights of action under this Agreement or under any of the
Warrants may be enforced by the Warrant Agent without the possession of any of
the Warrants or the production thereof at any trial or other proceeding, and any
such action, suit or proceeding instituted by the Warrant Agent shall be brought
in its name as Warrant Agent, and any recovery of judgment shall be for the
ratable benefit of the registered holders of the Warrants, as their respective
rights and interests may appear.
(g) The Warrant Agent and any stockholder, director,
officer, partner or employee of the Warrant Agent may buy, sell or deal in any
of the Warrants or other securities of the Company or become pecuniarily
interested in any transaction in which the Company may be interested, or
contract with or lend money to or otherwise act as fully and freely as though it
were not the Warrant Agent under this Agreement. Nothing herein shall preclude
the Warrant Agent from acting in any other capacity for the Company or for any
other legal entity.
(h) The Warrant Agent shall act hereunder solely as
agent and its duties shall be determined solely by the provi- sions hereof.
(i) The Warrant Agent may execute and exercise any of
the rights or powers hereby vested in it or perform any duty hereunder either
itself or by or through its attorneys,
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<PAGE>
agents or employees, and the Warrant Agent shall not be answerable or
accountable for any such attorneys, agents or employees or for any loss to the
Company resulting from such neglect or misconduct, provided reasonable care had
been exercised in the selection and continued employment thereof.
(j) Any request, direction, election, order or
demand of the Company shall be sufficiently evidenced by an instrument signed in
the name of the Company by its Chief Executive Officer, President or a Vice
President or its Secretary or an Assistant Secretary or its Treasurer or an
Assistant Treasurer (unless other evidence in respect thereof be herein
specifically prescribed); and any resolution of the Board of Directors may be
evidenced to the Warrant Agent by a copy thereof certified by the Secretary or
an Assistant Secretary of the Company.
Section 16. Change of Warrant Agent. The Warrant Agent may
resign and be discharged from its duties under this Agreement by giving to the
Company notice in writing, and to the holders of the Warrants notice by mailing
such notice to the holders at their addresses appearing on the Warrant register,
of such resignation, specifying a date when such resignation shall take effect.
The Warrant Agent may be removed by like notice to the Warrant Agent from the
Company and the like mailing of notice to the holders of the Warrants. If the
Warrant Agent shall resign or be removed or shall otherwise become incapable of
acting, the Company shall appoint a successor to the Warrant Agent. If
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<PAGE>
the Company shall fail to make such appointment within a period of thirty (30)
days after such removal or after it has been notified in writing of such
resignation or incapacity by the resigning or incapacitated Warrant Agent or
after the Company has received such notice from a registered holder of a Warrant
(who shall, with such notice, submit his Warrant for inspection by the Company),
then the registered holder of any Warrant may apply to any court of competent
jurisdiction for the appointment of a successor to the Warrant Agent. Any
successor Warrant Agent, whether appointed by the Company or by such a court,
shall be a bank or trust company, in good standing, incorporated under New York
or federal law. After appointment, the successor Warrant Agent shall be vested
with the same powers, rights, duties and responsibilities as if it had been
originally named as Warrant Agent without further act or deed and the former
Warrant Agent shall deliver and transfer to the successor Warrant Agent all
cancelled Warrants, records and property at the time held by it hereunder, and
execute and deliver any further assurance or conveyance necessary for the
purpose. Failure to file or mail any notice provided for in this Section,
however, or any defect therein, shall not affect the validity of the resignation
or removal of the Warrant Agent or the appointment of the successor Warrant
Agent, as the case may be.
Section 17. Identity of Transfer Agent. Forthwith
upon the appointment of any transfer agent for the shares of
Common Stock or of any subsequent transfer agent for the shares
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<PAGE>
of Common Stock or other shares of the Company's Common Stock issuable upon the
exercise of the rights of purchase represented by the Warrants, the Company will
file with the Warrant Agent a statement setting forth the name and address of
such transfer agent.
Section 18. Notices. Any notice pursuant to this Agreement to
be given by the Warrant Agent, or by the registered holder of any Warrant to the
Company, shall be sufficiently given if sent by first-class mail, postage
prepaid, addressed (until another is filed in writing by the Company with the
Warrant Agent) as follows:
American Card Technology, Inc.
1355 Terrell Mill Road
Building 1462, Suite 200
Marietta, Georgia 30067
Attention: Raymond Findley
and a copy thereof to:
Zimet, Haines, Friedman & Kaplan
460 Park Avenue
New York, New York 10022
Attention: James M. Kaplan, Esq.
Any notice pursuant to this Agreement to be given by the
Company or by the registered holder of any Warrant to the Warrant Agent shall be
sufficiently given if sent by first-class mail, postage prepaid, addressed
(until another address is filed in writing by the Warrant Agent with the
Company) as follows:
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
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Attention: Susan Silber
Any notice pursuant to this Agreement to be given by the
Warrant Agent or by the Company to the Underwriter shall be sufficiently given
if sent by first-class mail, postage prepaid, addressed (until another address
if filed in writing with the Warrant agent) as follows:
Whale Securities Co., L.P.
650 Fifth Avenue
New York, New York 10019
Attention: William G. Walters
and a copy thereof to:
Tenzer Greenblatt LLP
405 Lexington Avenue
New York, New York 10174
Attention: Robert J. Mittman, Esq.
Section 19. Supplements and Amendments. The Company and the
Warrant Agent may from time to time supplement or amend this Agreement in order
to cure any ambiguity or to correct or supplement any provision contained herein
which may be defective or inconsistent with any other provision herein, or to
make any other provisions in regard to matters or questions arising hereunder
which the Company and the Warrant Agent may deem necessary or desirable and
which shall not be inconsistent with the provisions of the Warrants and which
shall not adversely affect the interest of the holders of Warrants.
Section 20. New York Contract. This Agreement and
each Warrant issued hereunder shall be deemed to be a contract
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made under the laws of the State of New York and shall be construed in
accordance with the laws of New York applicable to agreements to be performed
wholly within New York.
Section 21. Benefits of this Agreement. Nothing in this
Agreement shall be construed to give to any person or corporation other than the
Company, the Warrant Agent and the registered holders of the Warrants any legal
or equitable right, remedy or claim under this Agreement; but this Agreement
shall be for the sole and exclusive benefit of the Company, the Warrant Agent
and the registered holders of the Warrants.
Section 22. Successors. All the covenants and provisions of
this Agreement by or for the benefit of the Company, the Warrant Agent or the
Underwriter shall bind and inure to the benefit of their respective successors
and assigns hereunder.
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IN WITNESS WHEREOF, the parties have entered into this
Agreement on the date first above written.
AMERICAN CARD TECHNOLOGY, INC.
By:
----------------------------------------
AMERICAN STOCK TRANSFER & TRUST COMPANY
By:
----------------------------------------
WHALE SECURITIES CO., L.P.
By: Whale Securities Corp.,
General Partner
By:
----------------------------------------
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WARRANT AGREEMENT dated as of __________, 1997 between
American Card Technology, Inc., a Delaware corporation (the "Company"), and
Whale Securities Co., L.P. (hereinafter referred to as the "Underwriter").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue to the Underwriter
150,000 warrants (the "Warrants") to purchase up to 150,000 (as such number may
be adjusted from time to time pursuant to Article 8 of this Warrant Agreement)
shares (the "Shares") of the common stock, par value $.001 per share, of the
Company (the "Common Stock") and up to 150,000 (as such number may be adjusted
from time to time pursuant to Article 8 of this Warrant Agreement) Common Stock
purchase warrants (the "Underlying Warrants"); and
WHEREAS, the Underwriter has agreed, pursuant to the
underwriting agreement (the "Underwriting Agreement") dated _____________, 1997
between the Underwriter and the Company, to act as the underwriter in connection
with the Company's proposed public offering (the "Public Offering") of 1,500,000
shares of Common Stock (the "Public Shares") at an initial public offering price
of $5.00 per Public Share and 1,500,000 warrants (the "Public Warrants") at an
initial public offering price of $.10 per Public Warrant; and
WHEREAS, the Warrants issued pursuant to this Agreement are
being issued by the Company to the Underwriter or to its designees who are
officers and partners of the Underwriter or to members of the selling group
participating in the distribution of the Public Shares and Public Warrants to
the public in the Public
<PAGE>
Offering and/or their respective directors, officers or partners (collectively,
the "Designees"), in consideration for, and as part of the Underwriter's
compensation in connection with, the Underwriter acting as the Underwriter
pursuant to the Underwriting Agreement;
NOW, THEREFORE, in consideration of the premises, the payment
by the Underwriter or its designees to the Company of One Hundred Thirty-Two
Dollars ($165.00), the agreements herein set forth and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
1. Grant. The Underwriter and/or the Designees are hereby
granted the right to purchase, at any time until 5:00 P.M., New York City time,
on _________, 2002 (the "Warrant Exercise Term"), up to 150,000 fully-paid and
non-assessable Shares at an initial exercise price (subject to adjustment as
provided in Article 6 hereof) of $6.75 per Share and up to 150,000 Underlying
Warrants at an initial exercise price (subject to adjustment as provided in
Article 6 hereof) of $.135 per Underlying Warrant. The Underlying Warrants are
each exercisable to purchase one fully-paid and non-assessable share of Common
Stock (collectively, the "Underlying Warrant Shares") at a price of $8.25 per
Underlying Warrant Shares. The Underlying Warrants are exercisable at any time
commencing _________, 1998 until 5:00 P.M., Eastern time on ________, 2002. The
Holder (defined hereafter) may purchase, upon exercise of the Warrants, either
all or part of the Shares or all or part of the Underlying Warrants or all or
part of both. The Shares and, except as
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<PAGE>
provided in Article 13 hereof, the Underlying Warrants are in all respects
identical to the Public Shares and Public Warrants, respectively, being sold to
the public pursuant to the terms and provisions of the Underwriting Agreement.
2. Warrant Certificates. The warrant certificates delivered
and to be delivered pursuant to this Agreement (the "Warrant Certificates")
shall be, for the Warrants exercisable for the purchase of Underlying Shares, in
the form set forth in Exhibit A attached hereto and made a part hereof, and, for
the Warrants exercisable for the purchase of Underlying Warrants, in the form of
Exhibit B attached hereto and made a part hereof, each with such appropriate
insertions, omissions, substitutions and other variations as required or
permitted by this Agreement.
3. Exercise of Warrants.
3.1. Cash Exercise. The Warrants initially are
exercisable at a price of $6.75 per Share purchased and $.135 per Underlying
Warrant purchased, payable in cash or by check to the order of the Company, or
any combination thereof, subject to adjustment as provided in Article 8 hereof.
Upon surrender of the Warrant Certificate(s) with the annexed Form of Election
to Purchase duly executed, together with payment of the Exercise Price (as
hereinafter defined) for the Shares and Underlying Warrants purchased, at the
Company's principal offices in Georgia (currently located at 1355 Terrell Mill
Road, Building 1462, Suite 200, Marietta, Georgia 30067) the registered holder
of a Warrant Certificate ("Holder" or "Holders") shall be entitled to receive a
certificate or certificates for the Shares so purchased and/or a certificate or
certificates for the Underlying Warrants
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<PAGE>
so purchased. The purchase rights represented by each Warrant Certificate are
exercisable at the option of the Holder thereof, in whole or in part (but not as
to fractional Shares or fractional Underlying Warrants). In the case of the
purchase of less than all Shares or Underlying Warrants purchasable under any
Warrant Certificate, the Company shall cancel said Warrant Certificate upon the
surrender thereof and shall execute and deliver a new Warrant Certificate of
like tenor for the balance of the Shares or Underlying Warrants purchasable
thereunder.
3.2. Cashless Exercise. At any time during the
Warrant Exercise Term, the Holder may, at the Holder's option, exchange, in
whole or in part, the Warrants represented by such Holder's Warrant Certificate
which are exercisable for the purchase of Shares (a "Warrant Exchange"), into
the number of Shares determined in accordance with this Section 3.2, by
surrendering such Warrant Certificate at the principal office of the Company or
at the office of its transfer agent, accompanied by a notice stating such
Holder's intent to effect such exchange, the number of Warrants to be so
exchanged and the date on which the Holder requests that such Warrant Exchange
occur (the "Notice of Exchange"). The Warrant Exchange shall take place on the
date specified in the Notice of Exchange or, if later, the date the Notice of
Exchange is received by the Company (the "Exchange Date"). Certificates for the
Shares issuable upon such Warrant Exchange and, if applicable, a new Warrant
Certificate of like tenor representing the Warrants which were subject to the
surrendered Warrant Certificate and not included in the Warrant Exchange, shall
be issued as of the Exchange Date and delivered
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<PAGE>
to the Holder within three (3) days following the Exchange Date. In connection
with any Warrant Exchange, the Holder shall be entitled to subscribe for and
acquire (i) the number of Shares (rounded to the next highest integer) which
would, but for such Warrant Exchange, than be issuable pursuant to the
provisions of Section 3.1 above upon the exercise of the Warrants specified by
the Holder in its Notice of Exchange (the "Total Share Number") less (ii) the
number of Shares equal to the quotient obtained by dividing (a) the product of
the Total Share Number and the existing Exercise Price per Share (as hereinafter
defined) by (b) the Market Price (as hereinafter defined) of a Public Share on
the day preceding the Warrant Exchange. "Market Price" at any date shall be
deemed to be the last reported sale price, or, in case no such reported sales
takes place on such day, the average of the last reported sale prices for the
last three (3) trading days, in either case as officially reported by the
principal securities exchange on which the Common Stock is listed or admitted to
trading or as reported on the Nasdaq National Market, or, if the Common Stock is
not listed or admitted to trading on any national securities exchange or quoted
in the Nasdaq National Market, the closing bid price as furnished by (i) the
National Association of Securities Dealers, Inc. (the "NASD") through the Nasdaq
Stock Market Inc. ("NASDAQ") or (ii) a similar organization if NASDAQ is no
longer reporting such information.
4. Issuance of Certificates.
Upon the exercise of the Warrants, the issuance of
certificates for the Shares purchased and certificates for the Underlying
Warrants purchased, and upon the exercise of the
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Underlying Warrants, the issuance of certificates for the Underlying Warrant
Shares purchased, shall be made forthwith (and in any event within three (3)
business days thereafter) without charge to the Holder thereof including,
without limitation, any tax which may be payable in respect of the issuance
thereof, and such certificates shall (subject to the provisions of Article 5
hereof) be issued in the name of, or in such names as may be directed by, the
Holder thereof; provided, however, that the Company shall not be required to pay
any tax which may be payable in respect of any transfer involved in the issuance
and delivery of any such certificates in a name other than that of the Holder
and the Company shall not be required to issue or deliver such certificates
unless or until the person or persons requesting the issuance thereof shall have
paid to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid.
The Warrant Certificates and the certificates representing the
Shares and the Underlying Warrants shall be executed on behalf of the Company by
the manual or facsimile signature of the present or any future Chairman or Vice
Chairman of the Board of Directors or Chief Executive Officer, President or Vice
President of the Company under its corporate seal reproduced thereon, attested
to by the manual or facsimile signature of the present or any future Secretary
or Assistant Secretary of the Company. Warrant Certificates and certificates
representing the Underlying Warrants shall be dated the date of execution by the
Company upon initial issuance, division, exchange, substitution or transfer.
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Upon exercise, in part or in whole, of the Warrants,
certificates representing the Shares and the Underlying Warrants purchased, and
upon exercise, in whole or in part, of the Underlying Warrants, certificates
representing the Underlying Warrant Shares purchased (collectively, the "Warrant
Securities"), shall bear a legend substantially similar to the following:
"The securities represented by this certificate and the other
securities issuable upon exercise thereof have not been
registered for purposes of public distribution under the
Securities Act of 1933, as amended (the "Act"), and may not be
offered or sold except (i) pursuant to an effective
registration statement under the Act, (ii) to the extent
applicable, pursuant to Rule 144 under the Act (or any similar
rule under such Act relating to the disposition of
securities), or (iii) upon the delivery by the holder to the
Company of an opinion of counsel, reasonably satisfactory to
counsel to the Company, stating that an exemption from
registration under such Act is available."
5. Restriction on Transfer of Warrants.
The Holder of a Warrant Certificate, by the Holder's
acceptance thereof, covenants and agrees that the Warrants are being acquired as
an investment and not with a view to the distribution thereof, and that the
Warrants may not be sold, transferred, assigned, hypothecated or otherwise
disposed of, in whole or in part, for a period of one (1) year from the date
hereof, except to the Underwriter or to the Designees.
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6. Price.
6.1. Initial and Adjusted Exercise Price. The initial
exercise price of each Warrant shall be $6.75 per Share and $.135 per Underlying
Warrant. The adjusted exercise price per Share and the adjusted exercise price
per Underlying Warrant shall be the prices which shall result from time to time
from any and all adjustments of the initial exercise price per Share or per
Underlying Warrant, as the case may be, in accordance with the provisions of
Article 8 hereof.
6.2. Exercise Price. The term "Exercise Price" herein
shall mean the initial exercise price or the adjusted exercise price, depending
upon the context.
7. Registration Rights.
7.1. Registration Under the Securities Act of 1933.
None of the Warrants, the Shares, the Underlying Warrants, or the Underlying
Warrant Shares have been registered for purposes of public distribution under
the Securities Act of 1933, as amended (the "Act").
7.2. Registrable Securities. As used herein the term
"Registrable Security" means each of the Warrants, the Shares, the Underlying
Warrants, the Underlying Warrant Shares and any shares of Common Stock issued
upon any stock split or stock dividend in respect of such Shares or Underlying
Warrant Shares; provided, however, that with respect to any particular
Registrable Security, such security shall cease to be a Registrable Security
when, as of the date of determination, (i) it has been effectively registered
under the Act and disposed of pursuant thereto, (ii) registration under the Act
is no longer
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required for subsequent public distribution of such security, or (iii) it has
ceased to be outstanding. The term "Registrable Securities" means any and/or all
of the securities falling within the foregoing definition of a "Registrable
Security." In the event of any merger, reorganization, consolidation,
recapitalization or other change in corporate structure affecting the Common
Stock, such adjustment shall be made in the definition of "Registrable Security"
as is appropriate in order to prevent any dilution or enlargement of the rights
granted pursuant to this Article 7.
7.3. Piggyback Registration. If, at any time during
the seven years following the effective date of the Public Offering, the Company
proposes to prepare and file one or more post-effective amendments to the
registration statement filed in connection with the Public Offering or any new
registration statement or post-effective amendments thereto covering equity or
debt securities of the Company, or any such securities of the Company held by
its shareholders (in any such case, other than in connection with a merger,
acquisition or pursuant to Form S-8 or successor form) (for purposes of this
Article 7, collectively, the "Registration Statement"), it will give written
notice of its intention to do so by registered mail ("Notice"), at least thirty
(30) business days prior to the filing of each such Registration Statement, to
all holders of the Registrable Securities. Upon the written request of such a
holder (a "Requesting Holder"), made within twenty (20) business days after
receipt of the Notice, that the Company include any of the Requesting Holder's
Registrable Securities in the proposed Registration Statement,
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the Company shall, as to each such Requesting Holder, use its best efforts to
effect the registration under the Act of the Registrable Securities which it has
been so requested to register ("Piggyback Registration"), at the Company's sole
cost and expense and at no cost or expense to the Requesting Holders (except as
provided in Section 7.5(b) hereof).
Notwithstanding the provisions of this Section 7.3, the Company
shall have the right at any time after it shall have given written notice
pursuant to this Section 7.3 (irrespective of whether any written request for
inclusion of Registrable Securities shall have already been made) to elect not
to file any such proposed Registration Statement, or to withdraw the same after
the filing but prior to the effective date thereof.
7.4. Demand Registration.
(a) At any time during the Warrant Exercise
Term, any "Majority Holder" (as such term is defined in Section 7.4(d) below) of
the Registrable Securities shall have the right (which right is in addition to
the piggyback registration rights provided for under Section 7.3 hereof),
exercisable by written notice to the Company (the "Demand Registration
Request"), to have the Company prepare and file with the Securities and Exchange
Commission (the "Commission") on one occasion, at the sole expense of the
Company (except as provided in Section 7.5(b) hereof), a Registration Statement
and such other documents, including a prospectus, as may be necessary (in the
opinion of both counsel for the Company and counsel for such Majority Holder) in
order to comply with the provisions of the Act, so as to permit a public
offering and sale of the Registrable
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Securities by the holders thereof. The Company shall use its best efforts to
cause the Registration Statement to become effective under the Act, so as to
permit a public offering and sale of the Registrable Securities by the holders
thereof. Once effective, the Company will use its best efforts to maintain the
effectiveness of the Registration Statement until the earlier of (i) the date
that all of the Registrable Securities have been sold or (ii) the date the
holders thereof receive an opinion of counsel to the Company that all of the
Registrable Securities may be freely traded without registration under the Act,
under Rule 144(k) promulgated under the Act or otherwise.
(b) The Company covenants and agrees to give
written notice of any Demand Registration Request to all holders of the
Registrable Securities within ten (10) business days from the date of the
Company's receipt of any such Demand Registration Request. After receiving
notice from the Company as provided in this Section 7.4(b), holders of
Registrable Securities may request the Company to include their Registrable
Securities in the Registration Statement to be filed pursuant to Section 7.4(a)
hereof by notifying the Company of their decision to have such securities
included within ten (10) days of their receipt of the Company's notice.
(c) In addition to the registration rights
provided for under Section 7.3 hereof and subsection (a) of this Section 7.4, at
any time during the Warrant Exercise Term, any Majority Holder (as defined below
in Section 7.4(d)) of Registrable Securities shall have the right, exercisable
by written request to the Company, to have the Company prepare and
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file with the Commission, on one occasion in respect of all holders of
Registrable Securities, a Registration Statement so as to permit a public
offering and sale of such Registrable Securities until the earlier of (i) the
date that all of the Registrable Securities have been sold or (ii) the date the
holders thereof receive an opinion of ocunsel to the Company that all of the
Registrable Securities may be freely traded without registration under the Act,
under Rule 144(k) promulgated under the Act or otherwise; provided, however,
that all costs incident thereto shall be at the expense of the holders of the
Registrable Securities included in such Registration Statement. If a Majority
Holder shall give notice to the Company at any time of its or their desire to
exercise the registration right granted pursuant to this Section 7.4(c), then
within ten (10) days after the Company's receipt of such notice, the Company
shall give notice to the other holders of Registrable Securities advising them
that the Company is proceeding with such registration and offering to include
therein the Registrable Securities of such holders, provided they furnish the
Company with such appropriate information in connection therewith as the Company
shall reasonably request in writing.
(d) The term "Majority Holder" as used in
Section 7.4 hereof shall mean any holder or any combination of holders of
Registrable Securities, if included in such holders' Registrable Securities are
that aggregate number of shares of Common Stock (including Shares already
issued, Shares issuable pursuant to the exercise of outstanding Warrants,
Underlying Warrant Shares already issued and Underlying Warrant Shares
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issuable pursuant to the exercise of outstanding Underlying Warrants) as would
constitute a majority of the aggregate number of shares of Common Stock
(including Shares already issued, Shares issuable pursuant to the exercise of
outstanding Warrants, Underlying Warrant Shares already issued and Underlying
Warrant Shares issuable pursuant to the exercise of outstanding Underlying
Warrants) included in all the Registrable Securities.
7.5. Covenants of the Company With Respect to Registration.
The Company covenants and agrees as follows:
(a) In connection with any registration under
Section 7.4 hereof, the Company shall file the Registration Statement as
expeditiously as possible, but in any event no later than twenty (20) days
following receipt of any demand therefor, shall use its best efforts to have any
such Registration Statement declared effective at the earliest possible time,
and shall furnish each holder of Registrable Securities such number of
prospectuses as shall reasonably be requested.
(b) The Company shall pay all costs, fees and
expenses (other than underwriting fees, discounts and nonaccountable expense
allowance applicable to the Registrable Securities and fees and expenses of
counsel retained by the holders of Registrable Securities) in connection with
all Registration Statements filed pursuant to Sections 7.3 and 7.4(a) hereof
including, without limitation, the Company's legal and accounting fees, printing
expenses, and blue sky fees and expenses.
(c) The Company will take all necessary
action which may be required in qualifying or registering the
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Registrable Securities included in the Registration Statement, for offering and
sale under the securities or blue sky laws of such states as are reasonably
requested by the holders of such securities.
(d) The Company shall indemnify any holder of
the Registrable Securities to be sold pursuant to any Registration Statement and
any underwriter or person deemed to be an underwriter under the Act and each
person, if any, who controls such holder or underwriter or person deemed to be
an underwriter within the meaning of Section 15 of the Act or Section 20(a) of
the Securities Exchange Act of 1934, as amended ("Exchange Act"), against all
loss, claim, damage, expense or liability (including all expenses reasonably
incurred in investigating, preparing or defending against any claim whatsoever)
to which any of them may become subject under the Act, the Exchange Act or
otherwise, arising from such registration statement to the same extent and with
the same effect as the provisions pursuant to which the Company has agreed to
indemnify the Underwriter as set forth in Section 7 of the Underwriting
Agreement and to provide for just and equitable contribution as set forth in
Section 8 of the Underwriting Agreement.
(e) Any holder of Registrable Securities to
be sold pursuant to a registration statement, and such holder's successors and
assigns, shall severally, and not jointly, indemnify, the Company, its officers
and directors and each person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act,
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against all loss, claim, damage or expense or liability (including all expenses
reasonably incurred in investigating, preparing or defending against any claim
whatsoever) to which they may become subject under the Act, the Exchange Act or
otherwise, arising from information furnished by or on behalf of such holder, or
such holder's successors or assigns, for specific inclusion in such Registration
Statement to the same extent and with the same effect as the provisions pursuant
to which the Underwriter has agreed to indemnify the Company as set forth in
Section 7 of the Underwriting Agreement and to provide for just and equitable
contribution as set forth in Section 8 of the Underwriting Agreement.
(f) Nothing contained in this Agreement shall
be construed as requiring any holder to exercise the Warrants or the Underlying
Warrants held by such holder prior to the initial filing of any registration
statement or the effectiveness thereof.
(g) If the Company shall fail to comply with
the provisions of this Article 7, the Company shall, in addition to any other
equitable or other relief available to the holders of Registrable Securities, be
liable for any or all incidental, special and consequential damages sustained by
the holders of Registrable Securities, requesting registration of their
Registrable Securities.
(h) The Company shall not permit the
inclusion of any securities other than the Registrable Securities to be included
in any Registration Statement filed pursuant to Section 7.4 hereof, without the
prior written consent of the
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Majority Holders, which consent shall not be unreasonably withheld.
(i) The Company shall promptly deliver copies
of all correspondence between the Commission and the Company, its counsel or
auditors and all memoranda relating to discussions with the Commission or its
staff with respect to the Registration Statement to each holder of Registrable
Securities included for such registration in such Registration Statement
pursuant to Section 7.3 hereof or Section 7.4 hereof requesting such
correspondence and memoranda and to the managing underwriter, if any, of the
offering in connection with which such Holder's Registrable Securities are being
registered and shall permit each holder of Registrable Securities and such
underwriter to do such reasonable investigation, upon reasonable advance notice,
with respect to information contained in or omitted from the Registration
Statement as it deems reasonably necessary to comply with applicable securities
laws or rules of the NASD. Such investigation shall include access to books,
records and properties and opportunities to discuss the business of the Company
with its officers and independent auditors, all to such reasonable extent and at
such reasonable times and as often as any such holder of Registrable Securities
or underwriter shall reasonably request.
8. Adjustments of Exercise Price and Number of Securities.
The following adjustments apply to the Exercise Price of the Warrants with
respect to the Shares and the number of Shares purchasable upon exercise of the
Warrants. In the event the Exercise Price per Share and/or the number of Shares
so
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purchasable is adjusted, then the Exercise Price of the Warrants relating to the
Underlying Warrants and the number of Underlying Warrants purchasable thereunder
shall be adjusted in the same proportion.
8.1. Computation of Adjusted Price. In case the Company shall
at any time after the date hereof pay a dividend in shares of Common Stock or
make a distribution in shares of Common Stock, then upon such dividend or
distribution the Exercise Price in effect immediately prior to such dividend or
distribution shall forthwith be reduced to a price determined by dividing:
(a) an amount equal to the total number of shares of
Common Stock outstanding immediately prior to such dividend or distribution
multiplied by the Exercise Price in effect immediately prior to such dividend or
distribution, by
(b) the total number of shares of Common Stock
outstanding immediately after such issuance or sale.
For the purposes of any computation to be made in
accordance with the provisions of this Section 8.1, the Common Stock issuable by
way of dividend or other distribution on any stock of the Company shall be
deemed to have been issued immediately after the opening of business on the date
following the date fixed for the determination of stockholders entitled to
receive such dividend or other distribution.
8.2. Subdivision and Combination. In case the Company shall
at any time subdivide or combine the outstanding shares of Common Stock, the
Exercise Price shall forthwith be proportionately decreased in the case of
subdivision or increased in the case of combination.
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8.3. Adjustment in Number of Securities. Upon each adjustment
of the Exercise Price pursuant to the provisions of this Article 8, the number
of Shares issuable upon the exercise of each Warrant shall be adjusted to the
nearest full number by multiplying a number equal to the Exercise Price in
effect immediately prior to such adjustment by the number of Shares issuable
upon exercise of the Warrants immediately prior to such adjustment and dividing
the product so obtained by the adjusted Exercise Price. Notwithstanding the
foregoing, in the case of adjustments to the exercise price of the Warrants with
respect to the Underlying Warrants and/or the number of Underlying Warrants
purchasable upon exercise of the Warrants, if an event occurs that results in an
adjustment of the number and/or price of the shares of Common Stock issuable
upon exercise of the Public Warrants pursuant to Section 9 of the Warrant
Agreement by and among the Company, the Underwriter and American Stock Transfer
& Trust Company dated as of ___________, 1997 ("Public Warrant Agreement"),
resulting in automatic adjustment in the number and/or price of the Underlying
Warrant Shares issuable upon exercise of the Underlying Warrants pursuant to
Section 8.6 hereof, then the adjustment provided for in this Section 8.3 shall
not, in such instance, result in any further adjustment in the aggregate number
of shares of Common Stock ultimately issuable upon exercise of the Underlying
Warrants.
8.4. Reclassification, Consolidation, Merger, etc. In case of
any reclassification or change of the outstanding shares of Common Stock (other
than a change in par value to no par value, or from no par value to par value,
or as a result of a
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subdivision or combination), or in the case of any consolidation of the Company
with, or merger of the Company into, another corporation (other than a
consolidation or merger in which the Company is the surviving corporation and
which does not result in any reclassification or change of the outstanding
shares of Common Stock, except a change as a result of a subdivision or
combination of such shares or a change in par value, as aforesaid), or in the
case of a sale or conveyance to another corporation of the property of the
Company as an entirety, the Holders shall thereafter have the right to purchase
the kind and number of shares of stock and other securities and property
receivable upon such reclassification, change, consolidation, merger, sale or
conveyance as if the Holders were the owners of both the Shares and the
Underlying Warrant Shares immediately prior to any such events, at a price equal
to the product of (x) the number of shares of Common Stock issuable upon
exercise of the Holders' Warrants and the Underlying Warrants and (y) the
exercise prices for the Warrants and the Underlying Warrants in effect
immediately prior to the record date for such reclassification, change,
consolidation, merger, sale or conveyance as if such Holders had exercised the
Warrants and the Underlying Warrants.
8.5. Determination of Outstanding Common Shares. The number
of Common Shares at any one time outstanding shall include the aggregate number
of shares issued and the aggregate number of shares issuable upon the exercise
of options, rights, warrants and upon the conversion or exchange of convertible
or exchangeable securities.
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8.6. Adjustment of Underlying Warrants' Exercise Price and
Securities Issuable Upon Exercise of Underlying Warrants. With respect to any of
the Underlying Warrants, whether or not the Warrants have been exercised and
whether or not the Warrants are issued and outstanding, the exercise price for,
and the number of, Underlying Warrant Shares issuable upon exercise of the
Underlying Warrants shall automatically be proportionately adjusted in
accordance with Section 9 of the Public Warrant Agreement, upon the occurrence
of any of the events described therein. Thereafter, until the next such
adjustment or until otherwise adjusted in accordance with this Section 8, the
Underlying Warrants shall be exercisable at such adjusted exercise price and for
such adjusted number of Underlying Warrant Shares.
8.7. Dividends and Other Distributions with Respect to
Outstanding Securities. In the event that the Company shall at any time prior to
the exercise of all Warrants make any distribution of its assets to holders of
its Common Stock as a liquidating or a partial liquidating dividend, then the
holder of Warrants who exercises its Warrants after the record date for the
determination of those holders of Common Stock entitled to such distribution of
assets as a liquidating or partial liquidating dividend shall be entitled to
receive for the Warrant Price per Warrant, in addition to each share of Common
Stock, the amount of such distribution (or, at the option of the Company, a sum
equal to the value of any such assets at the time of such distribution as
determined by the Board of Directors of the Company in good faith) which would
have been payable to such holder had he been
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the holder of record of the Common Stock receivable upon exercise of his Warrant
on the record date for the determination of those entitled to such distribution.
At the time of any such dividend or distribution, the Company shall make
appropriate reserves to ensure the timely performance of the provisions of this
Subsection 8.7.
8.8. Subscription Rights for Shares of Common Stock or Other
Securities. In the case that the Company or an affiliate of the Company shall at
any time after the date hereof and prior to the exercise of all the Warrants
issue any rights, warrants or options to subscribe for shares of Common Stock or
any other securities of the Company or of such affiliate to all the shareholders
of the Company, the Holders of unexercised Warrants on the record date set by
the Company or such affiliate in connection with such issuance of rights,
warrants or options shall be entitled, in addition to the shares of Common Stock
or other securities receivable upon the exercise of the Warrants, to receive
such rights, warrants or options shall be entitled, in addition to the shares of
Common Stock or other securities receivable upon the exercise of the Warrants,
to receive such rights at the time such rights, warrants or options that such
Holders would have been entitled to receive had they been, on such record date,
the holders of record of the number of whole shares of Common Stock then
issuable upon exercise of their outstanding Warrants (assuming for purposes of
this Section 8.8), that the exercise of the Warrants is permissible immediately
upon issuance).
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9. Exchange and Replacement of Warrant Certificates.
Each Warrant Certificate is exchangeable without expense,
upon the surrender thereof by the registered Holder at the principal executive
office of the Company, for a new Warrant Certificate of like tenor and date
representing in the aggregate the right to purchase the same number of
securities in such denominations as shall be designated by the Holder thereof at
the time of such surrender.
Upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of any Warrant
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to it, and reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation of
the Warrant Certificate, if mutilated, the Company will make and deliver a new
Warrant Certificate of like tenor, in lieu thereof.
10. Elimination of Fractional Interests.
The Company shall not be required to issue certificates
representing fractions of Shares or fractions of Underlying Warrants upon the
exercise of the Warrants, nor shall it be required to issue scrip or pay cash in
lieu of fractional interests, it being the intent of the parties that all
fractional interests shall be eliminated by rounding any fraction up to the
nearest whole number of Shares and Underlying Warrants.
11. Reservation and Listing of Securities.
The Company shall at all times reserve and keep available out
of its authorized shares of Common Stock, solely for the purpose of issuance
upon the exercise of the Warrants and
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the Underlying Warrants, such number of shares of Common Stock as shall be
issuable upon the exercise thereof. The Company covenants and agrees that, upon
exercise of the Warrants and payment of the Exercise Price therefor, all Shares
issuable upon such exercise shall be duly and validly issued, fully paid,
non-assessable and not subject to the preemptive rights of any shareholder. The
Company further covenants and agrees that upon exercise of the Underlying
Warrants and payment of the respective Underlying Warrant exercise price
therefor, all Underlying Warrant Shares issuable upon such exercise shall be
duly and validly issued, fully paid, non-assessable and not subject to the
preemptive rights of any shareholder. As long as the Warrants shall be
outstanding, the Company shall use its best efforts to cause all shares of
Common Stock issuable upon the exercise of the Warrants and the Underlying
Warrants and all Underlying Warrants to be listed on or quoted by NASDAQ or
listed on such national securities exchange, in the event the Common Stock is
listed on a national securities exchange.
12. Notices to Warrant Holders.
Nothing contained in this Agreement shall be construed as
conferring upon the Holder or Holders the right to vote or to consent or to
receive notice as a shareholder in respect of any meetings of shareholders for
the election of directors or any other matter, or as having any rights
whatsoever as a shareholder of the Company. If, however, at any time prior to
the expiration of the Warrants and their exercise, any of the following events
shall occur:
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(a) the Company shall take a record of the holders
of its shares of Common Stock for the purpose of entitling
them to receive a dividend or distribution payable otherwise
than in cash, or a cash dividend or distribution payable
otherwise than out of current or retained earnings, as
indicated by the accounting treatment of such dividend or
distribution on the books of the Company; or
(b) the Company shall offer to all the holders of
its Common Stock any additional shares of capital stock of the
Company or securities convertible into or exchangeable for
shares of capital stock of the Company, or any option, right
or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the
Company (other than in connection with a consolidation or
merger) or a sale of all or substantially all of its property,
assets and business as an entirety shall be proposed; or
(d) reclassification or change of the
outstanding shares of Common Stock (other than a change in par
value to no par value, or from no par value to par value, or
as a result of a subdivision or combination), consolidation of
the Company with, or merger of the Company into, another
corporation (other than a consolidation or merger in which the
Company is the surviving corporation and which does not result
in any reclassification or change of the outstanding shares of
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Common Stock, except a change as a result of a subdivision or
combination of such shares or a change in par value, as
aforesaid), or a sale or conveyance to another corporation of
the property of the Company as an entirety is proposed; or
(e) The Company or an affiliate of the
Company shall propose to issue any rights to subscribe for
shares of Common Stock or any other securities of the Company
or of such affiliate to all the shareholders of the Company;
then, in any one or more of said events, the Company shall give written notice
to the Holder or Holders of such event at least fifteen (15) days prior to the
date fixed as a record date or the date of closing the transfer books for the
determination of the shareholders entitled to such dividend, distribution,
convertible or exchangeable securities or subscription rights, options or
warrants, or entitled to vote on such proposed dissolution, liquidation, winding
up or sale. Such notice shall specify such record date or the date of closing
the transfer books, as the case may be. Failure to give such notice or any
defect therein shall not affect the validity of any action taken in connection
with the declaration or payment of any such dividend or distribution, or the
issuance of any convertible or exchangeable securities or subscription rights,
options or warrants, or any proposed dissolution, liquidation, winding up or
sale.
13. Underlying Warrants.
The form of the certificates representing the Underlying
Warrants (and the form of election to purchase shares
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of Common Stock upon the exercise of the Underlying Warrants and the form of
assignment printed on the reverse thereof) shall be substantially as set forth
in Exhibit "A" to the Public Warrant Agreement; provided, however, (i) each
Underlying Warrant issuable upon exercise of the Warrants shall evidence the
right to initially purchase one fully paid and non-assessable share of Common
Stock in respect of the Underlying Warrant at an initial purchase price of $8.25
per share at any time commencing _______, 1998 (or such earlier date on which
the Underwriter consents to the exercise of the Public Warrants) until
__________, 2002 and (ii) the Target Redemption Price (as defined in the Public
Warrant Agreement) of the Underlying Warrants is 150% of the then effective
exercise price of the Underlying Warrants. As set forth in Section 8.5 of this
Agreement, the exercise price of the Underlying Warrants and the number of
shares of Common Stock issuable upon the exercise of the Underlying Warrants are
subject to adjustment, whether or not the Warrants have been exercised and the
Underlying Warrants have been issued, in the manner and upon the occurrence of
the events set forth in Section 9 of the Public Warrant Agreement, which is
hereby incorporated herein by reference and made a part hereof as if set forth
in its entirety herein. Subject to the provisions of this Agreement and upon
issuance of the Underlying Warrants, each registered holder of such Underlying
Warrants shall have the right to purchase from the Company (and the Company
shall issue to such registered holders) up to the number of fully paid and
non-assessable Underlying Warrant Shares (subject to adjustment as provided
herein and in the Public Warrant Agreement), free and clear of
-26-
<PAGE>
all preemptive rights of shareholders, provided that such registered holder
complies, in connection with the exercise of such holders' Underlying Warrants,
with the terms governing exercise of the Public Warrants set forth in the Public
Warrant Agreement, and pays the applicable exercise price, determined in
accordance with the terms of the Public Warrant Agreement. Upon exercise of the
Underlying Warrants, the Company shall forthwith issue to the registered holder
of any such Underlying Warrants, in such holder's name or in such name as may be
directed by such holder, certificates for the number of Underlying Warrant
Shares so purchased. The Underlying Warrants shall be transferable in the manner
provided in the Public Warrant Agreement, and upon any such transfer, a new
Underlying Warrant shall be issued promptly to the transferee. The Company
covenants to, and agrees with, each Holder that without the prior written
consent of all the Holders, the Public Warrant Agreement will not be modified,
amended, cancelled, altered or superseded, and that the Company will send to
each Holder, irrespective of whether or not the Warrants have been exercised,
any and all notices required by the Public Warrant Agreement to be sent to
holders of the Public Warrants.
14. Notices.
All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made when
delivered, or mailed by registered or certified mail, return receipt requested:
-27-
<PAGE>
(a) If to a registered Holder of the Warrants, to
the address of such Holder as shown on the books of the
Company; or
(b) If to the Company, to the address set forth in
Section 3 of this Agreement or to such other address as the
Company may designate by notice to the Holders.
15. Supplements and Amendments.
The Company and the Underwriter may from time to time
supplement or amend this Agreement without the approval of any Holders of the
Warrants and/or Warrant Securities in order to cure any ambiguity, to correct or
supplement any provision contained herein which may be defective or inconsistent
with any provisions herein, or to make any other provisions in regard to matters
or questions arising hereunder which the Company and the Underwriter may deem
necessary or desirable and which the Company and the Underwriter deem not to
adversely affect the interests of the Holders of Warrant Certificates.
16. Successors.
All the covenants and provisions of this Agreement by or for
the benefit of the Company and the Holders inure to the benefit of their
respective successors and assigns hereunder.
17. Termination.
This Agreement shall terminate at the close of business on
_________, 2005. Notwithstanding the foregoing, this Agreement will terminate on
any earlier date when all Warrants and Underlying Warrants have been exercised
and all Warrant Securities have been resold to the public; provided, however,
that the provisions of Section 7 shall survive any termination
-28-
<PAGE>
pursuant to this Section 17 until the close of business on
__________, 2008.
18. Governing Law.
This Agreement and each Warrant Certificate issued hereunder
shall be deemed to be a contract made under the laws of the State of New York
and for all purposes shall be construed in accordance with the laws of said
State.
19. Benefits of This Agreement.
Nothing in this Agreement shall be construed to give to any
person or corporation other than the Company and the Underwriter and any other
registered holder or holders of the Warrant Certificates or Warrant Securities
any legal or equitable right, remedy or claim under this Agreement; and this
Agreement shall be for the sole and exclusive benefit of the Company and the
Underwriter and any other holder or holders of the Warrant Certificates or
Warrant Securities.
20. Counterparts.
This Agreement may be executed in any number of counterparts
and each of such counterparts shall for all purposes be deemed to be an
original, and such counterparts shall together constitute but one and the same
instrument.
-29-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, as of the day and year first above written.
[SEAL] AMERICAN CARD TECHNOLOGY, INC.
By:_________________________________
Name:
Title:
Attest:
___________________________
WHALE SECURITIES CO., L.P.
By: Whale Securities Corp.,
General Partner
By:________________________________
Name:
Title:
-30-
<PAGE>
EXHIBIT A
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR SOLD EXCEPT (i) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE,
PURSUANT TO RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING
TO THE DISPOSITION OF SECURITIES), OR (iii) UPON THE DELIVERY BY THE HOLDER TO
THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THE
COMPANY, STATING THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS
AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:00 P.M., NEW YORK TIME, _______, 2002
No. W- _______ Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that ________
_____________________________ or registered assigns, is the registered holder of
__________ Warrants to purchase, at any time until 5:00 P.M. New York City time
on _______, 2002 ("Expiration Date"), up to _______ fully-paid and
non-assessable shares (the "Shares") of the common stock, par value $.001 per
share (the "Common Stock"), of American Card Technology, Inc., a Delaware
corporation (the "Company"), at an initial exercise price, subject to adjustment
in certain events (the "Exercise Price"), of $6.75 per Share, upon surrender of
this Warrant Certificate and payment of the Exercise Price at an office or
agency of the Company, but subject to the conditions set forth herein and in the
warrant agreement dated as of _______, 1997 between the Company and Whale
Securities Co., L.P. (the "Warrant Agreement"). Payment of the Exercise Price
may be made in cash, or by certified or official bank check in New York Clearing
House funds payable to the order of the Company, or any combination thereof.
No Warrant may be exercised after 5:00 P.M., New York City
time, on the Expiration Date, at which time all Warrants evidenced hereby,
unless exercised prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of
a duly authorized issue of Warrants issued pursuant to the Warrant Agreement,
which Warrant Agreement is hereby incorporated by reference in and made a part
of this instrument and is hereby referred to in a description of the rights,
limitation of rights, obligations, duties and immunities thereunder of the
<PAGE>
Company and the holders (the words "holders" or "holder" meaning the registered
holders or registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of
certain events, the Exercise Price and the type and/or number of the Company's
securities issuable thereupon may, subject to certain conditions, be adjusted.
In such event, the Company will, at the request of the holder, issue a new
Warrant Certificate evidencing the adjustment in the Exercise Price and the
number and/or type of securities issuable upon the exercise of the Warrants;
provided, however, that the failure of the Company to issue such new Warrant
Certificates shall not in any way change, alter, or otherwise impair, the rights
of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this
Warrant Certificate at an office or agency of the Company, a new Warrant
Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrants shall be issued to the transferee(s) in
exchange for this Warrant Certificate, subject to the limitations provided
herein and in the Warrant Agreement, without any charge except for any tax, or
other governmental charge imposed in connection therewith.
Upon the exercise of less than all of the Warrants evidenced
by this Certificate, the Company shall forthwith issue to the holder hereof a
new Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof
as the absolute owner(s) of this Warrant Certificate (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
of any exercise hereof, and of any distribution to the holder(s) hereof, and for
all other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined
in the Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.
Dated: _______, 1997 AMERICAN CARD TECHNOLOGY, INC.
[SEAL] By:__________________________
Name:
Title:
Attest:
_____________________________
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the
right, represented by this Warrant Certificate, to purchase _________ Shares of
Common Stock and herewith tenders in payment for such securities, cash or a
certified or official bank check payable in New York Clearing House Funds to the
order of American Card Technology, Inc. in the amount of $________, all in
accordance with the terms hereof. The undersigned requests that a certificate
for such securities be registered in the name of_____________________________
________________, whose address is ___________________, and that such
Certificate be delivered to__________________________, whose address is
_____________.
Dated: Signature:_______________________
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant Certificate.)
________________________________
________________________________
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED ______________________________________
hereby sells, assigns and transfers unto _____________________________________
______________________________________________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint _______________, Attorney, to
transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.
Dated: Signature:_______________________
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant Certificate.)
________________________________
________________________________
(Insert Social Security or Other
Identifying Number of Assignee)
<PAGE>
EXHIBIT B
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR SOLD EXCEPT (i) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE,
PURSUANT TO RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING
TO THE DISPOSITION OF SECURITIES), OR (iii) UPON THE DELIVERY BY THE HOLDER TO
THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THE
COMPANY, STATING THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS
AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE AN ANY TIME COMMENCING _________, 1998
UNTIL 5:00 P.M., NEW YORK TIME, _______, 2002
No. W- _________ Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that _____________
____________________, or registered assigns, is the registered holder of
___________________________ (_______) Warrants to purchase, at any time until
5:00 P.M. New York City time on _______, 2002 ("Expiration Date"), an aggregate
of up to ___________________________ (_______) common stock purchase warrants,
each common stock purchase warrant entitling the holder thereof to purchase one
share of common stock, par value $.001 per share (collectively, the "Underlying
Warrants"), of American Card Technology, Inc., a Delaware corporation (the
"Company"), at an initial exercise price, subject to adjustment in certain
events (the "Exercise Price"), of $.135 per Underlying Warrant, upon surrender
of this Warrant Certificate and payment of the Exercise Price at an office or
agency of the Company, but subject to the conditions set forth herein and in the
warrant agreement dated as of _______, 1997 between the Company and Whale
Securities Co., L.P. (the "Warrant Agreement"). Payment of the Exercise Price
may be made in cash, or by certified or official bank check in New York Clearing
House funds payable to the order of the Company, or any combination thereof.
The Underlying Warrants issuable upon exercise of the Warrants
will be exercisable at any time from _______, 1998 (or such earlier date on
which the Underwriter consents to the exercise of the Public Warrants (as
defined in the Public Warrant Agreement which is hereinafter defined)) until
5:00 P.M. Eastern time _______, 2002 each Underlying Warrant entitling the
holder thereof to purchase one fully-paid and non-assessable share of common
stock of the Company, at an initial exercise price, subject to adjustment in
certain events, of $8.25 per share. The Underlying Warrants are issuable
pursuant to the terms and
<PAGE>
provisions of a certain agreement dated as of _______, 1997 by and among the
Company, Whale Securities Co., L.P. and American Stock Transfer & Trust Company
(the "Public Warrant Agreement"). The Public Warrant Agreement is hereby
incorporated by reference in and made a part of this instrument and is hereby
referred to (except as otherwise provided in the Warrant Agreement) for a
description of the rights, limitations of rights, manner of exercise,
anti-dilution provisions and other provisions with respect to the Underlying
Warrants.
No Warrant may be exercised after 5:00 P.M., New York City
time, on the Expiration Date, at which time all Warrants evidenced hereby,
unless exercised prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of
a duly authorized issue of Warrants issued pursuant to the Warrant Agreement,
which Warrant Agreement is hereby incorporated by reference in and made a part
of this instrument and is hereby referred to in a description of the rights,
limitation of rights, obligations, duties and immunities thereunder of the
Company and the holders (the words "holders" or "holder" meaning the registered
holders or registered holder) of the Warrants.
The Warrant Agreement provides that, upon the occurrence of
certain events, the Exercise Price and the type and/or number of the Company's
securities issuable thereupon may, subject to certain conditions, be adjusted.
In such event, the Company will, at the request of the holder, issue a new
Warrant Certificate evidencing the adjustment in the Exercise Price and the
number and/or type of securities issuable upon the exercise of the Warrants;
provided, however, that the failure of the Company to issue such new Warrant
Certificates shall not in any way change, alter, or otherwise impair the rights
of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this
Warrant Certificate at an office or agency of the Company, a new Warrant
Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrants shall be issued to the transferee(s) in
exchange for this Warrant Certificate, subject to the limitations provided
herein and in the Warrant Agreement, without any charge except for any tax or
other governmental charge imposed in connection therewith.
Upon the exercise of less than all of the Warrants evidenced
by this Certificate, the Company shall forthwith issue to the holder hereof a
new Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof
as the absolute owner(s) of this Warrant Certificate (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
of any exercise hereof, and of any distribution to the holder(s) hereof, and for
all other purposes, and the Company shall not be affected by any notice to the
contrary.
<PAGE>
All terms used in this Warrant Certificate which are defined
in the Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.
Dated: _______, 1997 AMERICAN CARD TECHNOLOGY, INC.
[SEAL] By:__________________________
Name:
Title:
Attest:
___________________________
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the
right, represented by this Warrant Certificate, to purchase _________ Underlying
Warrants and herewith tenders, in payment for such securities, cash or a
certified or official bank check payable in New York Clearing House Funds to the
order of American Card Technology, Inc. in the amount of $ ____________, all in
accordance with the terms hereof. The undersigned requests that a certificate
for such securities be registered in the name of _____________________________,
whose address is _______________________, and that such Certificate be delivered
to ____________________________, whose address is _____________.
Dated: Signature:_______________________
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant Certificate.)
________________________________
________________________________
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder desires to transfer
the Warrant Certificate.)
FOR VALUE RECEIVED __________________________________ hereby
sells, assigns and transfers unto _______________________________________
______________________________________________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint _______________, Attorney, to
transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.
Dated: Signature:_______________________
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant Certificate.)
________________________________
________________________________
(Insert Social Security or Other
Identifying Number of Assignee)
<PAGE>
Exhibit 10.3
OPTION AGREEMENT
STOCK OPTION NOT UNDER A PLAN
AMERICAN CARD TECHNOLOGY, INC., a Delaware corporation (the "Company"),
and SHREVEPORT ACQUISITION CORP., a Connecticut corporation (the "Optionee"), DO
HEREBY AGREE as follows:
1. Grant. The Company grants to the Optionee an option (the "Option")
to purchase 100,000 shares (the "Shares") of the Company's Common Stock, par
value $.001 per share ("Common Stock") at the purchase price of $5.00 a share
(the "Exercise Price"). The date of grant of the Option is December ___, 1996
(the "Date of Grant"). The grant is not made pursuant to any of the Company's
stock option plans.
2. Purchase of Shares. The Company shall not be obligated to issue or
deliver any Shares upon exercise of the Option if to do so would violate the
Securities Act of 1933, as amended (the "Securities Act"), or any state
securities law. Unless a registration statement with respect to the Shares to be
purchased upon exercise of the Option is in effect under the Securities Act and
any applicable state securities law, the Optionee's right to purchase such
Shares shall be subject to the condition that the Company shall have received
such assurance as it may reasonably request that such purchase will be in
accordance with an applicable exemption from the registration requirements of
each such law. The Company shall have no obligation to file any such
registration statement or to take any other action required or permitted by any
such law. However, the Company shall give the Optionee and its counsel access to
such information as may reasonably be requested to enable such counsel to
express an opinion as to the availability of an exemption from such registration
requirements.
3. Sale of Shares. The Optionee shall not be entitled to transfer the
Shares except pursuant to (i) an effective registration statement under the
Securities Act, or (ii) if there is no registration statement in effect,
pursuant to a specific exemption from registration under the Securities Act.
Prior to offering or selling the Shares upon claim of exemption, the Optionee
shall obtain a written opinion from counsel reasonably satisfactory to the
Company to the effect that such exemption is available and that registration of
the Shares with the Securities and Exchange Commission is not required, or shall
deliver a "no-action" letter from the Securities and Exchange Commission with
respect to the proposed sale, transfer or distribution of the Shares.
4. Terms of Exercise. This Option may be exercised, in whole or in
part, commencing on the earlier of (i) that date which is three (3) months after
the closing of the Company's initial public offering or (ii) January 1, 1998.
Notwithstanding the foregoing, the Optionee agrees not to sell, pledge,
hypothecate, encumber, or otherwise dispose of the Shares for a period of twelve
(12) months following the effective date of the Company's initial public
offering, subject to earlier release at the discretion of the underwriter of
such initial public offering.
<PAGE>
5. Expiration of Option. This Option is not exercisable after the
expiration of ten years from the Date of Grant.
6. Exercise and Payment. The Option shall be exercised by delivery to
the Company at its principal executive office (Attention: Richard J. Shea, Jr.,
Secretary) of (i) a signed written notice of exercise setting forth the number
of Shares to be purchased and (ii) payment in full of the option price for the
Shares to be purchased. The option price to be paid upon the exercise of this
Option may be made by either of the following methods:
(a) payment in cash in the full amount of the option price; or
(b) in lieu of cash payment, at any time until the expiration of this
Option, the holder of this Option ("Holder") may, at its option, exchange the
Option represented by this Option Agreement, in whole or in part (an "Option
Exchange"), into the number of Shares determined in accordance with this
paragraph 6(b), by surrendering this Option Agreement at the principal office of
the Company accompanied by a notice stating such Holder's intent to effect such
exchange, the number of Shares to be exchanged, and the date on which the Holder
requests that such Option Exchange occur (the "Notice of Exchange"). The Option
Exchange shall take place on the date specified in the Notice of Exchange or, if
later, the date the Notice of Exchange is received by the Company (the "Exchange
Date"). Certificates for the Shares issuable upon such Option Exchange and, if
applicable, a new Option Agreement (a "Remainder Option Agreement") of like
tenor evidencing the Shares which were subject to the surrendered Option
Agreement and not included in the Option Exchange, shall be issued as of the
Exchange Date and delivered to the Holder within three (3) business days
following the Exchange Date. In connection with any Option Exchange, the
Holder's Option Agreement shall represent the right to subscribe for and acquire
(I) the number of Shares (rounded to the next highest integer) equal to (A) the
number of Shares specified by the Holder in its Notice of Exchange (the "Total
Share Number") less (B) the number of Shares equal to the quotient obtained by
dividing (i) the product of the Total Share Number and the existing Exercise
Price per Share by (ii) the current Market Price (as hereinafter defined) of a
Share of Common Stock, and (II) a Remainder Option Agreement, if applicable.
"Market Price" at any date shall be deemed to be the average of the
last reported sale price, or, in case no such reported sale takes place on such
day, the average of the last reported sale prices for the last three (3) trading
days, in either case as officially reported by the principal securities exchange
on which the Common Stock is listed or admitted to trading or as reported in the
NASDAQ National Market System, or, if the Common Stock is not listed or admitted
to trading on any national securities exchange or quoted on the NASDAQ National
Market System, the closing bid price as furnished by the National Association of
Securities Dealers, Inc. through NASDAQ or similar organization if NASDAQ is no
longer reporting such information, or if the Common Stock is not quoted on
NASDAQ, as determined in good faith by resolution of the Board of Directors of
the Company, based on the best information available to it for the day
immediately preceding the Exchange Date, the day of the Exchange Date, and the
day immediately after the Exchange Date.
7. Rights. The Optionee shall not, by reason of the granting to it of
this Option, have or thereby acquire any rights of a shareholder of the Company
with respect to any Shares covered by this Option unless and until a certificate
for such Shares shall have been issued and delivered to it.
2
<PAGE>
8. Adjustment and Substitution of Shares. If a dividend or other
distribution shall be declared upon the Common Stock payable in shares of the
Common Stock, the number of shares of the Common Stock then subject to the
Option may be adjusted by adding thereto the number of shares which would have
been distributable thereon if such shares had been outstanding on the date fixed
for determining the shareholders entitled to receive such stock dividend or
distribution.
If the outstanding shares of the Common Stock shall be changed
into or exchangeable for a different number or kind of shares of stock or other
securities of the Company or another corporation, whether through
reorganization, reclassification, recapitalization, stock split-up, combination
of shares, merger or consolidation, then there shall be substituted for each
share of the Common Stock then subject to the Option the number and kind of
shares of stock or other securities into which each outstanding share of the
Common Stock shall be so changed or for which each such share shall be
exchangeable.
In case of any adjustment or substitution as provided for in
this paragraph 8, the aggregate option price for all shares subject to the
Option prior to such adjustment or substitution shall be the aggregate option
price for all shares of stock or other securities (including any fraction) to
which such shares shall have been adjusted or which shall have been substituted
for such shares. The adjusted price for each share or other security shall be
carried to at least three decimal places with the last decimal place rounded
upward to the nearest whole number.
No adjustment or substitution provided for in this paragraph 8
shall require the Company to issue or sell a fraction of a share or other
security. Accordingly, all fractions of a share or other security which result
from any such adjustment or substitution shall be eliminated and not carried
forward to any subsequent adjustment or substitution.
All references in this Agreement to Shares shall, where the
context so requires, be deemed to be references to such Shares as adjusted
pursuant to this paragraph 8.
9. Amendment. This Agreement may be amended unilaterally by the Company
in order to comply with federal and state laws regulating options and the
issuance and sale of the Company's securities.
10. Interpretation. Any question which shall arise under or in any way
relate to the interpretation or construction of this Option Agreement shall be
resolved by the Board, and its decision shall be final, binding and conclusive
for all purposes.
WITNESS, the signatures of an authorized officer of the Optionee and an
authorized officer of the Company as of the _____ day of December, 1996.
3
<PAGE>
Signed, Sealed, and Delivered
in the Presence of: AMERICAN CARD TECHNOLOGY, INC.
______________________________ By: _____________________________
Its
______________________________
SHREVEPORT ACQUISITION CORP.
______________________________ By: ______________________________
Its
______________________________
4
<PAGE>
Exhibit 10.4
EMPLOYMENT AGREEMENT
AGREEMENT made as of the _____ day of _________________________, 1997
[date of IPO Closing] by and between AMERICAN CARD TECHNOLOGY, INC., a Delaware
corporation (the "Company"), and LAWRENCE O. PERL of West Hartford, Connecticut
(the "Employee").
W I T N E S S E T H :
WHEREAS, Employee is employed by the Company as its Chief Executive
Officer, and as a condition of closing on an initial public offering of the
Company's common stock through Whale Securities L.P., Employee and the Company
have required that this Employment Agreement be entered into;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants set forth herein, the parties hereto agree as follows:
(1) Duties and Extent of Services
(a) The Company shall employ the Employee, and the Employee
shall be employed by the Company, as its Chief Executive Officer. The Employee
shall perform such duties as are assigned or delegated to him by the Board of
Directors of the Company (the "Board"). Without limiting the generality of the
foregoing, the Employee shall, in conjunction with the President, be responsible
for the management of the overall business and operations of the Company,
subject to the supervision of the Board.
(b) The Employee shall devote substantially all of his
business time, attention and energies to the business of the Company and the
performance of his responsibilities and duties and shall carry out such
responsibilities and duties diligently and to the best of his abilities. The
Employee recognizes that the Company is entering into this Agreement because of
the Employee's expertise, skills, and talents and his agreement to devote all of
such expertise, skills, and talents to the tasks assigned him pursuant to this
Agreement. The Employee agrees that he shall not engage in any other business
activities of any kind which would give rise to a conflict of interest for the
Employee with respect to his duties and obligations to the Company.
(c) The Company agrees to nominate Employee to serve as a
director of the Company during the Term (as hereafter defined) and to use its
reasonable efforts to cause Employee to be elected a director and be retained as
a director throughout the Term. Notwithstanding the foregoing, in the event that
Employee should at any time during the Term not be a director, Employee shall be
entitled to notice of all director meetings in the same manner as if he were a
director and shall have the right to attend all director meetings.
<PAGE>
(2) Term. Subject to the termination rights set forth in
paragraph 4 hereof, the term (the "Term") of this Agreement shall begin on the
date on which an initial public offering of the Company's Common Stock is closed
(the "IPO Date") and shall continue until the date which is two (2) years after
the IPO Date.
(3) Compensation; Benefits. In consideration of the Employee's
rendering of services pursuant to this Agreement, Employee shall be entitled to
the following compensation and benefits:
(a) Employee shall be paid a base annual salary of (A) One
Hundred Twenty-Five Thousand and 00/100 Dollars ($125,000.00) during the first
year of the Term, and (B) One Hundred Fifty Thousand and 00/100 Dollars
($150,000.00) during the second year of the Term, payable in equal bi-weekly
installments in arrears.
(b) In addition, the Company shall pay the Employee an annual
bonus (the "Bonus") for each year of the Term equal to fifty percent (50%) of
the base annual salary for each such year if the Company has achieved the
following performance objectives:
(i) During the first year of the Term, gross
sales of Smart Cards (net of returns) equal or exceed $3.4 million and the
pre-tax net operating loss does not exceed $1.0 million.
(ii) During the second year of the Term, gross
sales of Smart Cards (net of returns) equal or exceed $31 million and the
pre-tax net operating income equals or exceeds $15 million.
The Bonus shall be payable by the Company within sixty (60) days after
completion of the one (1) year period for which it is determined.
(c) As additional consideration for the Employee's rendering
of services pursuant to this Agreement, the Company may grant to the Employee an
option to purchase common stock of the Company in such amounts and at such
exercise prices as may be determined by the Compensation Committee.
(d) The Company shall reimburse the Employee for reasonable
out-of-pocket expenses incurred in connection with the business of the Company.
(e) During the term of this Agreement, the Employee shall be
entitled to paid vacation time of four (4) weeks during each calendar year.
(f) The Employee shall be entitled to such fringe benefits,
including, but not limited to, participation in medical, dental, and life
insurance plans, as are customarily provided to the senior executives of the
Company as determined by the Board of Directors of the Company and as provided
by the terms of the applicable benefit plans.
(g) In addition to the foregoing, the Company shall pay to
Employee on the IPO Date, Fifty Thousand and 00/100 Dollars ($50,000.00) in
accrued but unpaid salary of Employee for services rendered prior to the IPO
Date.
(2)
<PAGE>
(4) Termination; Severance
(a) Either the Company or Employee may terminate Employee's
employment under this Agreement unilaterally at any time for any reason or for
no reason by giving the other party sixty (60) days' advance notice of the
intention to terminate.
(b) In addition to the termination rights in paragraph 4(a),
the Company shall have the right to terminate the Employee's employment under
this Agreement immediately at any time for Cause. For purposes hereof, Cause is
defined to be:
(i) Employee engages in deliberate misconduct
or engages in conduct which brings public obloquy upon the Company;
(ii) Employee repeatedly fails (A) to perform
his obligations hereunder, or (B) to follow reasonable directions of the Board
of Directors of the Company;
(iii) Employee is convicted of, or pleads nolo
contendere to, any crime or offense other than a misdemeanor;
(iv) Employee is repeatedly intoxicated by
alcohol or drugs during the performance of his duties; or
(v) Employee breaches this Agreement in any
material way, and such breach is not cured or corrected with due diligence by
Employee after written notice of such breach from the Company.
(c) Employee's employment shall also terminate immediately in
the event of the death or disability of the Employee. For purposes hereof,
"disability" of the Employee shall occur on the date on which a reasonable, good
faith determination is made by the Board that, by reason of the physical or
mental condition of the Employee, it is reasonably probable that the Employee
will be unable to perform his duties under this Agreement for a period of at
least one hundred eighty (180) days following the date of the Board's
determination;
(d) In the event of termination of Employee's employment prior
to the end of the Term, Employee shall be entitled to a lump sum severance
payment payable on the date of termination as follows:
(i) In the event the Employee's employment is
terminated due to Employee's death or disability, the Employee or Employee's
estate shall be entitled to a payment equal to the sum of:
(A) six (6) months of the then current
base annual salary (including accrued portions),
(B) any accrued salary which has not
been paid, and
(3)
<PAGE>
(C) any expense reimbursements due and
owing to him at the time of such termination.
(ii) If the Employee's employment is terminated
by the Company without Cause pursuant to paragraph 4(a), or Employee terminates
his employment for Good Reason (as hereafter defined), the Employee shall be
entitled to a payment equal to the sum of:
(A) the greater of (I) one (1) year of
the then current base annual salary, or (II) the total base annual salary which
would be payable for the balance of the Term, and
(B) a pro rata portion of what the Bonus
for the then current term would be if sales and income performance for the year
through such date of termination annualized out for the year would have resulted
in a Bonus for such year, and
(C) any accrued salary which has not
been paid, and
(D) any expense reimbursements due and
owing to him at the time of such termination.
(iii) In the event that Employee's employment is
terminated by the Company for Cause or is terminated by Employee voluntarily
prior to the end of the Term other than for Good Reason, Employee shall not be
entitled to any severance payment.
(e) For purposes hereof:
(i) "Good Reason" is defined to mean:
(A) the Board substantially diminishing
Employee's responsibilities and activities as set forth herein; or
(B) the Board taking action in material
breach of this Agreement; or
(C) requiring the Employee to relocate
to anywhere other than the metropolitan Miami or the metropolitan Atlanta areas;
or
(D) the voluntary resignation of
Employee at any time within sixty (60) days after a Change in Control (as
hereinafter defined).
(ii) "Change of Control" shall mean any
transaction or series of transactions (including, without limitation, a tender
offer, merger or
(4)
<PAGE>
consolidation) the result of which is that any "person" or "group" (within the
meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934,
as amended), other than the Employee, Raymond Findley, Jr., Raymond Roncari, and
Harold Rothstein, or trusts for the benefit of any of the foregoing or their
respective families, and any "person" or "group" solicited by any of such
persons:
(A) becomes the beneficial owner of more
than 50% of the total aggregate voting power of all classes of the voting stock
of the Company and/or warrants or options to acquire such voting stock,
calculated on a fully diluted basis; or
(B) acquires all or substantially all of
the assets of the Company.
(f) Upon termination or expiration of the term of this
Agreement, the Employee shall promptly return to the Company any Company
property in his possession or under his control, including, but not limited to,
documents, equipment, disks, tapes and keys.
(g) Termination of this Agreement shall have no effect on the
rights and obligations of the parties pursuant to paragraph 5 hereof.
(5) Confidential Information; Covenant Not to Compete
(a) The Employee acknowledges that the Company's business is
conducted in world-wide markets and that, in the course of performing his
responsibilities and duties pursuant to this Agreement, he will obtain knowledge
of, information relating to, and will develop at the Company's expense,
Confidential Information (as hereinafter defined) which, if disclosed to
competitors of the Company, would cause substantial injury to the Company. The
Employee therefore acknowledges the Company's legitimate need to prevent
disclosure and use of Confidential Information and that, but for the covenants
of the Employee set forth in this Paragraph 5, the Company would not be willing
to enter into this Agreement.
(b) The Employee agrees that he shall not, at any time during
or after the term of his employment by the Company, disclose to any person, firm
or corporation, or use for any purpose other than in connection with the
performance of his responsibilities and duties under this Agreement, any
proprietary information or other confidential information relating to the
business of the Company, including, but not limited to, technology, know-how,
trade secrets, techniques, client or customer lists, details of client or
customer contracts or relationships, pricing policies, operational methods, or
marketing plans or strategies (collectively, "Confidential Information"). The
Employee agrees that upon expiration or termination of his employment by the
Company he shall promptly return to the Company all property of the Company,
including, but not limited to, all Confidential Information and all documents,
recordings and other materials describing, evidencing or otherwise relating to
Confidential Information. Employee acknowledges that any and all intellectual
property related to the business of the Company is the property of the Company
and Employee has no rights therein.
(c) The Employee agrees that during the term of his employment
by the Company, he will not, directly or indirectly, own, operate, manage, join,
control or
(5)
<PAGE>
participate in the ownership, management, operation or control of, or
be employed by, render aid or advice to, or otherwise be associated with, any
person, firm, corporation or other organization that is engaged anywhere in the
world in the business of developing, manufacturing, marketing, selling, or
distributing Smart Cards or Smart Card related systems (the "NonCompete
Covenant").
(d) In the event that Employee's employment is terminated by
the Company for Cause or is terminated by Employee voluntarily prior to the end
of the Term other than for Good Reason, Employee shall be bound to the
Non-Compete Covenant for a period of two (2) years following the date of his
employment termination.
(e) (i) In the event that Employee's employment is
terminated due to expiration of the Term, due to termination by the Company
during the Term other than for Cause, or due to voluntary termination by
Employee for Good Reason, then the Company shall have the option to bind
Employee to the NonCompete Covenant for two years after the termination of his
employment by electing to do so and agreeing to pay to Employee the NonCompete
Consideration (as hereafter defined) in equal monthly installments over the two
year period. To make such election, the Company shall give Employee notice of
such election (which shall include an agreement to pay the NonCompete
Consideration) by no later than the Election Date (as hereafter defined).
Failure to give such notice by the Election Date shall be deemed an election by
the Company to not bind Employee to the NonCompete Covenant for the two year
period following employment termination. In the event that the Company shall
default in its payment of any installment of the NonCompete Consideration,
Employee shall be relieved from the NonCompete Covenant, in addition to any
other rights and remedies which Employee may have.
(ii) For purposes hereof, the NonCompete
Consideration is the amount equal to (A) two times the current base annual
salary being paid to Employee on the day prior to the date of termination, less
(B) the amount of any lump sum severance payment to which Employee is entitled
under paragraph 4(d) hereof.
(iii) For purposes hereof, the "Election Date" is:
(A) if employment termination is due to
expiration of the Term, such date is the date which is three (3) months prior to
the date on which the Term expires;
(B) if employment termination is due to
termination by the Company during the Term other than for Cause, or due to
voluntary termination by Employee for Good Reason, such date is the date which
is ten (10) days after the Company or Employee, as the case may be, gives notice
of such termination.
(f) Employee agrees that during the term of his employment by
the Company and for a period of two (2) years immediately following the
termination of his employment for any reason, Employee will not directly or
indirectly, for himself or on behalf of, or in conjunction with any other
person, persons, company, partnership, corporation or business entity, hire or
employ any current employees or personnel of the Company or induce or entice any
such person to leave the employ of the Company without the prior written consent
of the Company.
(6)
<PAGE>
(g) Reference to the Company as used in this paragraph 5 shall
include any subsidiary or affiliate or successor in interest to the Company or
any such subsidiary or affiliate.
(h) If the Employee breaches, or threatens to commit a breach
of, any of the provisions of paragraph 5 hereof (the "Restrictive Covenants"),
the Company shall have the right and remedy to have the Restrictive Covenants
specifically enforced by any court of competent jurisdiction, including but not
limited to the right to entry against the Employee of restraining orders and
injunctions (preliminary, mandatory, temporary and permanent) against
violations, threatened or actual, and whether or not continuing, of any of the
Restrictive Covenants, it being acknowledged and agreed by the Employee that any
breach or threatened breach of any of the Restrictive Covenants would cause
irreparable and continuing injury to the Company and that money damages would
not provide an adequate remedy to the Company. The foregoing right and remedy
shall be in addition to, and not in lieu of, any other rights and remedies
available to the Company at law or in equity.
(i) The Employee acknowledges and agrees that the Restrictive
Covenants are reasonable and valid in geographic and temporal scope and in all
other respects. The Company and the Employee further acknowledge and agree that
if any court determines that any of the Restrictive Covenants, or any part
thereof, is invalid or unenforceable for any reason, that it is clearly the
intent of the parties that the remainder of the Restrictive Covenants and parts
thereof shall not thereby be affected and shall be given full effect, without
regard to the invalid portions. No provision herein shall be dependent upon the
validity of any other provision.
(6) Miscellaneous
(a) All notices sent pursuant to this Agreement shall be in
writing, and shall be deemed duly given if delivered personally or sent by
certified mail, return receipt requested, to the parties at their last known
addresses.
(b) This Agreement is governed by and is to be enforced
according to the laws of the State of Georgia and shall not be modified or any
provision waived unless in writing signed by the parties. The waiver by either
party of a breach of any provision of this Agreement by the other party shall
not operate as or be construed as a waiver of any subsequent breach.
(c) Notwithstanding any provision contained in this Agreement
to the contrary, the Employee's obligations set forth in paragraph 5 hereof
shall survive the expiration or termination of this Agreement or the Employee's
employment by the Company for any reason, except as otherwise specifically set
forth herein.
(d) This Agreement is the entire agreement of the parties and
expressly supersedes all previous agreements, expressions or discussions between
the parties or any affiliate of the parties.
(7)
<PAGE>
(e) This Agreement shall be binding upon the parties and their
heirs, executors, administrators, successors, and assigns. Notwithstanding the
foregoing, this Agreement is entered into by the Company in consideration of the
personal expertise and skills of the Employee and, accordingly, the Employee may
not assign or delegate any obligation, right, or interest contained in this
Agreement. The Employee acknowledges and agrees that the Company's rights
hereunder may be assigned by the Company to any person or entity, and in the
event of such assignment, the Employee agrees that the Employees shall continue
to be bound by the covenants set forth herein and such assignee shall thereafter
be deemed the "Company" hereunder.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
WITNESSES:
______________________________
______________________________
Lawrence O. Perl
______________________________
(signatures continued next page)
AMERICAN CARD TECHNOLOGY, INC.
______________________________
By ______________________________
Raymond Findley, Jr.
______________________________ Its President
(8)
<PAGE>
Exhibit 10.5
EMPLOYMENT AGREEMENT
AGREEMENT made as of the ___ day of __________, 1997 [date of IPO
Closing] by and between AMERICAN CARD TECHNOLOGY, INC., a Delaware corporation
(the "Company"), and RAYMOND FINDLEY, JR. , of Marietta, Georgia (the
"Employee").
W I T N E S E T H :
WHEREAS, Employee is employed by the Company as its President, and as a
condition of closing on an initial public offering of the Company's common stock
through Whale Securities L.P., Employee and the Company have required that this
Employment Agreement be entered into;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants set forth herein, the parties hereto agree as follows:
(1) Duties and Extent of Services
(a) The Company shall employ the Employee, and the Employee
shall be employed by the Company, as its President. The Employee shall perform
such duties as are assigned or delegated to him by the Board of Directors of the
Company (the "Board"). Without limiting the generality of the foregoing, the
Employee shall, in conjunction with the Chief Executive Officer, be responsible
for the management of the overall business and operations of the Company,
subject to the supervision of the Board.
(b) The Employee shall devote substantially all of his
business time, attention and energies to the business of the Company and the
performance of his responsibilities and duties and shall carry out such
responsibilities and duties diligently and to the best of his abilities. The
Employee recognizes that the Company is entering into this Agreement because of
the Employee's expertise, skills, and talents and his agreement to devote all of
such expertise, skills, and talents to the tasks assigned him pursuant to this
Agreement. The Employee agrees that he shall not engage in any other business
activities of any kind which would give rise to a conflict of interest for the
Employee with respect to his duties and obligations to the Company.
(c) The Company agrees to nominate Employee to serve as a
director of the Company during the Term (as hereafter defined) and to use its
reasonable efforts to cause Employee to be elected a director and be retained as
a director throughout the Term. Notwithstanding the foregoing, in the event that
Employee should at any time during the Term not be a director, Employee shall be
entitled to notice of all director meetings in the same manner as if he were a
director and shall have the right to attend all director meetings.
(2) Term. Subject to the termination rights set forth in paragraph 4
hereof, the term (the "Term") of this Agreement shall begin on the date on which
an initial public offering of the Company's Common Stock is closed (the "IPO
Date") and shall continue until the date which is two (2) years after the IPO
Date.
<PAGE>
(3) Compensation; Benefits. In consideration of the Employee's
rendering of services pursuant to this Agreement, Employee shall be entitled to
the following compensation and benefits:
(a) Employee shall be paid a base annual salary of (A) One
Hundred Twenty-Five Thousand and 00/100 Dollars ($125,000.00) during the first
year of the Term, and (B) One Hundred Fifty Thousand and 00/100 Dollars
($150,000.00) during the second year of the Term, payable in equal bi-weekly
installments in arrears.
(b) In addition, the Company shall pay the Employee an annual
bonus (the "Bonus") for each year of the Term equal to fifty percent (50%) of
the base annual salary for each such year if the Company has achieved the
following performance objectives:
(i) During the first year of the Term, gross
sales of Smart Cards (net of returns) equal or exceed $3.4 million and the
pre-tax net operating loss does not exceed $1.0 million.
(ii) During the second year of the Term, gross
sales of Smart Cards (net of returns) equal or exceed $31 million and the
pre-tax net operating income equals or exceeds $15 million.
The Bonus shall be payable by the Company within sixty (60) days after
completion of the one (1) year period for which it is determined.
(c) As additional consideration for the Employee's rendering
of services pursuant to this Agreement, the Company may grant to the Employee an
option to purchase common stock of the Company in such amounts and at such
exercise prices as may be determined by the Compensation Committee.
(d) The Company shall reimburse the Employee for reasonable
out-of-pocket expenses incurred in connection with the business of the Company.
(e) During the term of this Agreement, the Employee shall be
entitled to paid vacation time of four (4) weeks during each calendar year.
(f) The Employee shall be entitled to such fringe benefits,
including, but not limited to, participation in medical, dental, and life
insurance plans, as are customarily provided to the senior executives of the
Company as determined by the Board of Directors of the Company and as provided
by the terms of the applicable benefit plans.
(g) In addition to the foregoing, the Company shall pay to
Employee on the IPO Date, Fifty Thousand and 00/100 Dollars ($50,000.00) in
accrued but unpaid salary of Employee for services rendered prior to the IPO
Date.
2
<PAGE>
(4) Termination; Severance
(a) Either the Company or Employee may terminate Employee's
employment under this Agreement unilaterally at any time for any reason or for
no reason by giving the other party sixty (60) days' advance notice of the
intention to terminate.
(b) In addition to the termination rights in paragraph 4(a),
the Company shall have the right to terminate the Employee's employment under
this Agreement immediately at any time for Cause. For purposes hereof, Cause is
defined to be:
(i) Employee engages in deliberate misconduct or
engages in conduct which brings public obloquy upon the Company;
(ii) Employee repeatedly fails (A) to perform his
obligations hereunder, or (B) to follow reasonable directions of the Board of
Directors of the Company;
(iii) Employee is convicted of, or pleads nolo
contendere to, any crime or offense other than a misdemeanor;
(iv) Employee is repeatedly intoxicated by
alcohol or drugs during the performance of his duties; or
(v) Employee breaches this Agreement in any
material way, and such breach is not cured or corrected with due diligence by
Employee after written notice of such breach from the Company.
(c) Employee's employment shall also terminate immediately in
the event of the death or disability of the Employee. For purposes hereof,
"disability" of the Employee shall occur on the date on which a reasonable, good
faith determination is made by the Board that, by reason of the physical or
mental condition of the Employee, it is reasonably probable that the Employee
will be unable to perform his duties under this Agreement for a period of at
least one hundred eighty (180) days following the date of the Board's
determination;
(d) In the event of termination of Employee's employment prior
to the end of the Term, Employee shall be entitled to a lump sum severance
payment payable on the date of termination as follows:
(i) In the event the Employee's employment is
terminated due to Employee's death or disability, the Employee or Employee's
estate shall be entitled to a payment equal to the sum of:
(A) six (6) months of the then current
base annual salary (including accrued portions),
(B) any accrued salary which has not
been paid, and
3
<PAGE>
(C) any expense reimbursements due and
owing to him at the time of such termination.
(ii) If the Employee's employment is terminated
by the Company without Cause pursuant to paragraph 4(a), or Employee terminates
his employment for Good Reason (as hereafter defined), the Employee shall be
entitled to a payment equal to the sum of:
(A) the greater of (I) one (1) year of
the then current base annual salary, or (II) the total base annual salary which
would be payable for the balance of the Term, and
(B) a pro rata portion of what the Bonus
for the then current term would be if sales and income performance for the year
through such date of termination annualized out for the year would have resulted
in a Bonus for such year, and
(C) any accrued salary which has not
been paid, and
(D) any expense reimbursements due and
owing to him at the time of such termination.
(iii) In the event that Employee's employment is
terminated by the Company for Cause or is terminated by Employee voluntarily
prior to the end of the Term other than for Good Reason, Employee shall not be
entitled to any severance payment.
(e) For purposes hereof:
(i) "Good Reason" is defined to mean:
(A) the Board substantially diminishing
Employee's responsibilities and activities as set forth herein; or
(B) the Board taking action in material
breach of this Agreement; or
(C) requiring the Employee to relocate
to anywhere other than the metropolitan Atlanta area; or
(D) the voluntary resignation of
Employee at any time within sixty (60) days after a Change in Control (as
hereinafter defined).
(ii) "Change of Control" shall mean any
transaction or series of transactions (including, without limitation, a tender
offer, merger or consolidation) the result of which is that any "person" or
"group" (within the meaning of
4
<PAGE>
Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended),
other than the Employee, Lawrence O. Perl, Raymond Roncari, and Harold
Rothstein, or trusts for the benefit of any of the foregoing or their respective
families, and any "person" or "group" solicited by any of such persons:
(A) becomes the beneficial owner of more
than 50% of the total aggregate voting power of all classes of the voting stock
of the Company and/or warrants or options to acquire such voting stock,
calculated on a fully diluted basis; or
(B) acquires all or substantially all of
the assets of the Company.
(f) Upon termination or expiration of the term of this
Agreement, the Employee shall promptly return to the Company any Company
property in his possession or under his control, including, but not limited to,
documents, equipment, disks, tapes and keys.
(g) Termination of this Agreement shall have no effect on the
rights and obligations of the parties pursuant to paragraph 5 hereof.
(5) Confidential Information; Covenant Not to Compete
(a) The Employee acknowledges that the Company's business is
conducted in world-wide markets and that, in the course of performing his
responsibilities and duties pursuant to this Agreement, he will obtain knowledge
of, information relating to, and will develop at the Company's expense,
Confidential Information (as hereinafter defined) which, if disclosed to
competitors of the Company, would cause substantial injury to the Company. The
Employee therefore acknowledges the Company's legitimate need to prevent
disclosure and use of Confidential Information and that, but for the covenants
of the Employee set forth in this Paragraph 5, the Company would not be willing
to enter into this Agreement.
(b) The Employee agrees that he shall not, at any time during
or after the term of his employment by the Company, disclose to any person, firm
or corporation, or use for any purpose other than in connection with the
performance of his responsibilities and duties under this Agreement, any
proprietary information or other confidential information relating to the
business of the Company, including, but not limited to, technology, know-how,
trade secrets, techniques, client or customer lists, details of client or
customer contracts or relationships, pricing policies, operational methods, or
marketing plans or strategies (collectively, "Confidential Information"). The
Employee agrees that upon expiration or termination of his employment by the
Company he shall promptly return to the Company all property of the Company,
including, but not limited to, all Confidential Information and all documents,
recordings and other materials describing, evidencing or otherwise relating to
Confidential Information. Employee acknowledges that any and all intellectual
property related to the business of the Company is the property of the Company
and Employee has no rights therein.
(c) The Employee agrees that during the term of his employment
by the Company, he will not, directly or indirectly, own, operate, manage, join,
control or participate in the ownership, management, operation or control of, or
be employed by, render
5
<PAGE>
aid or advice to, or otherwise be associated with, any person, firm, corporation
or other organization that is engaged anywhere in the world in the business of
developing, manufacturing, marketing, selling, or distributing Smart Cards or
Smart Card related systems (the "NonCompete Covenant").
(d) In the event that Employee's employment is terminated by
the Company for Cause or is terminated by Employee voluntarily prior to the end
of the Term other than for Good Reason, Employee shall be bound to the
Non-Compete Covenant for a period of two (2) years following the date of his
employment termination.
(e) (i) In the event that Employee's employment is terminated
due to expiration of the Term, due to termination by the Company during the Term
other than for Cause, or due to voluntary termination by Employee for Good
Reason, then the Company shall have the option to bind Employee to the
NonCompete Covenant for two years after the termination of his employment by
electing to do so and agreeing to pay to Employee the NonCompete Consideration
(as hereafter defined) in equal monthly installments over the two year period.
To make such election, the Company shall give Employee notice of such election
(which shall include an agreement to pay the NonCompete Consideration) by no
later than the Election Date (as hereafter defined). Failure to give such notice
by the Election Date shall be deemed an election by the Company to not bind
Employee to the NonCompete Covenant for the two year period following employment
termination. In the event that the Company shall default in its payment of any
installment of the NonCompete Consideration, Employee shall be relieved from the
NonCompete Covenant, in addition to any other rights and remedies which Employee
may have.
(ii) For purposes hereof, the NonCompete
Consideration is the amount equal to (A) two times the current base annual
salary being paid to Employee on the day prior to the date of termination, less
(B) the amount of any lump sum severance payment to which Employee is entitled
under paragraph 4(d) hereof.
(iii) For purposes hereof, the "Election Date" is:
(A) if employment termination is due to
expiration of the Term, such date is the date which is three (3) months prior to
the date on which the Term expires;
(B) if employment termination is due to
termination by the Company during the Term other than for Cause, or due to
voluntary termination by Employee for Good Reason, such date is the date which
is ten (10) days after the Company or Employee, as the case may be, gives notice
of such termination.
(f) Employee agrees that during the term of his employment by
the Company and for a period of two (2) years immediately following the
termination of his employment for any reason, Employee will not directly or
indirectly, for himself or on behalf of, or in conjunction with any other
person, persons, company, partnership, corporation or business entity, hire or
employ any current employees or personnel of the Company or induce or entice any
such person to leave the employ of the Company without the prior written consent
of the Company.
6
<PAGE>
(g) Reference to the Company as used in this paragraph 5 shall
include any subsidiary or affiliate or successor in interest to the Company or
any such subsidiary or affiliate.
(h) If the Employee breaches, or threatens to commit a breach
of, any of the provisions of paragraph 5 hereof (the "Restrictive Covenants"),
the Company shall have the right and remedy to have the Restrictive Covenants
specifically enforced by any court of competent jurisdiction, including but not
limited to the right to entry against the Employee of restraining orders and
injunctions (preliminary, mandatory, temporary and permanent) against
violations, threatened or actual, and whether or not continuing, of any of the
Restrictive Covenants, it being acknowledged and agreed by the Employee that any
breach or threatened breach of any of the Restrictive Covenants would cause
irreparable and continuing injury to the Company and that money damages would
not provide an adequate remedy to the Company. The foregoing right and remedy
shall be in addition to, and not in lieu of, any other rights and remedies
available to the Company at law or in equity.
(i) The Employee acknowledges and agrees that the Restrictive
Covenants are reasonable and valid in geographic and temporal scope and in all
other respects. The Company and the Employee further acknowledge and agree that
if any court determines that any of the Restrictive Covenants, or any part
thereof, is invalid or unenforceable for any reason, that it is clearly the
intent of the parties that the remainder of the Restrictive Covenants and parts
thereof shall not thereby be affected and shall be given full effect, without
regard to the invalid portions. No provision herein shall be dependent upon the
validity of any other provision.
(6) Miscellaneous
(a) All notices sent pursuant to this Agreement shall be in
writing, and shall be deemed duly given if delivered personally or sent by
certified mail, return receipt requested, to the parties at their last known
addresses.
(b) This Agreement is governed by and is to be enforced
according to the laws of the State of Georgia and shall not be modified or any
provision waived unless in writing signed by the parties. The waiver by either
party of a breach of any provision of this Agreement by the other party shall
not operate as or be construed as a waiver of any subsequent breach.
(c) Notwithstanding any provision contained in this Agreement
to the contrary, the Employee's obligations set forth in paragraph 5 hereof
shall survive the expiration or termination of this Agreement or the Employee's
employment by the Company for any reason, except as otherwise specifically set
forth herein.
(d) This Agreement is the entire agreement of the parties and
expressly supersedes all previous agreements, expressions or discussions between
the parties or any affiliate of the parties.
7
<PAGE>
(e) This Agreement shall be binding upon the parties and their
heirs, executors, administrators, successors, and assigns. Notwithstanding the
foregoing, this Agreement is entered into by the Company in consideration of the
personal expertise and skills of the Employee and, accordingly, the Employee may
not assign or delegate any obligation, right, or interest contained in this
Agreement. The Employee acknowledges and agrees that the Company's rights
hereunder may be assigned by the Company to any person or entity, and in the
event of such assignment, the Employee agrees that the Employees shall continue
to be bound by the covenants set forth herein and such assignee shall thereafter
be deemed the "Company" hereunder.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
WITNESSES:
______________________________
______________________________
Raymond Findley, Jr.
______________________________
AMERICAN CARD TECHNOLOGY, INC.
______________________________
By ___________________________
Lawrence O. Perl
______________________________ Its Chief Executive Officer
8
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT made as of the _____ day of ______________, 1997 [date of IPO
Closing] by and between AMERICAN CARD TECHNOLOGY, INC., a Delaware corporation
(the "Company"), and ROBERT DIXON of Marietta, Georgia (the "Employee").
W I T N E S S E T H :
WHEREAS, Employee is employed by the Company as its Vice President, and
as a condition of closing on an initial public offering of the Company's common
stock through Whale Securities L.P., Employee and the Company have required that
this Employment Agreement be entered into.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants set forth herein, the parties hereto agree as follows:
(1) Duties and Extent of Services
(a) The Company shall employ the Employee, and the Employee shall
be employed by the Company, as its Vice President-Technical Operations. The
Employee shall perform such duties as are assigned or delegated to him by the
President, the Chief Executive Officer, or the Board of Directors of the Company
(the "Board"). Without limiting the generality of the foregoing, the Employee
shall be responsible for the management of the technical operations of the
Company, subject to the supervision of the President, the Chief Executive
Officer, or the Board.
(b) The Employee shall devote substantially all of his business
time, attention and energies to the business of the Company and the performance
of his responsibilities and duties and shall carry out such responsibilities and
duties diligently and to the best of his abilities. The Employee recognizes that
the Company is entering into this Agreement because of the Employee's expertise,
skills, and talents and his agreement to devote all of such expertise, skills,
and talents to the tasks assigned him pursuant to this Agreement. The Employee
agrees that he shall not engage in any other business activities of any kind
which would give rise to a conflict of interest for the Employee with respect to
his duties and obligations to the Company.
(2) Term
(a) Subject to the termination rights set forth in paragraph 4
hereof, the term (the "Term") of this Agreement shall begin on the date on which
an initial public offering of the Company's Common Stock is closed (the "IPO
Date") and shall continue until the date which is two (2) years after the IPO
Date.
<PAGE>
(3) Compensation; Benefits. In consideration of the Employee's
rendering of services pursuant to this Agreement, Employee shall be entitled to
the following compensation and benefits:
(a) Employee shall be paid a base annual salary of (A) Eighty-Five
Thousand and 00/100 Dollars ($85,000.00) during the first year of the Initial
Term Date, and (B) One Hundred Twenty Thousand and 00/100 Dollars ($120,000.00)
during the second year of the Initial Term, payable in equal bi-weekly
installments in arrears.
(b) The Company shall reimburse the Employee for reasonable
out-of-pocket expenses incurred in connection with the business of the Company.
(c) During the term of this Agreement, the Employee shall be
entitled to paid vacation time of four (4) weeks during each calendar year.
(d) The Employee shall be entitled to such fringe benefits,
including, but not limited to, participation in medical, dental, and life
insurance plans, as are customarily provided to the senior executives of the
Company as determined by the Board of Directors of the Company and as provided
by the terms of the applicable benefit plans.
(4) Termination; Severance
(a) Either the Company or Employee may terminate Employee's
employment under this Agreement unilaterally at any time for any reason or for
no reason by giving the other party sixty (60) days' advance notice of the
intention to terminate.
(b) In addition to the termination rights in paragraph 4(a), the
Company shall have the right to terminate the Employee's employment under this
Agreement immediately at any time for Cause. For purposes hereof, Cause is
defined to be:
(i) Employee engages in deliberate misconduct or engages in
conduct which brings public obloquy upon the Company;
(ii) Employee repeatedly fails (A) to perform his obligations
hereunder, or (B) to follow reasonable directions of the Board of Directors of
the Company;
(iii) Employee is convicted of, or pleads nolo contendere to,
any crime or offense other than a misdemeanor;
(iv) Employee is repeatedly intoxicated by alcohol or drugs
during the performance of his duties; or
(v) Employee breaches this Agreement in any material way, and
such breach is not cured or corrected with due diligence by Employee after
written notice of such breach from the Company.
(c) Employee's employment shall also terminate immediately in the
event of the death or disability of the Employee. For purposes hereof,
"disability" of the Employee shall occur on the date on which a reasonable, good
faith determination is made by the Board that,
(2)
<PAGE>
by reason of the physical or mental condition of the Employee, it is reasonably
probable that the Employee will be unable to perform his duties under this
Agreement for a period of at least one hundred eighty (180) days following the
date of the Board's determination;
(d) In the event of termination of Employee's employment prior to
the end of the Term, Employee shall be entitled to a lump sum severance payment
payable on the date of termination as follows:
(i) In the event the Employee's employment is terminated due to
Employee's death or disability, the Employee or Employee's estate shall be
entitled to a payment equal to the sum of:
(A) six (6) months of the then current base annual salary
(including accrued portions),
(B) any accrued salary which has not been paid, and
(C) any expense reimbursements due and owing to him at the
time of such termination.
(ii) If the Employee's employment is terminated by the Company
without Cause pursuant to paragraph 4(a), or Employee terminates his employment
for Good Reason (as hereafter defined), the Employee shall be entitled to a
payment equal to the sum of:
(A) the greater of (I) one (1) year of the then current
base annual salary, or (II) the total base annual salary which would be payable
for the balance of the Term, and
(B) any accrued salary which has not been paid, and
(C) any expense reimbursements due and owing to him at the
time of such termination.
(iii) In the event that Employee's employment is terminated by
the Company for Cause or is terminated by Employee voluntarily prior to the end
of the Term other than for Good Reason, Employee shall not be entitled to any
severance payment.
(e) For purposes hereof:
(i) "Good Reason" is defined to mean:
(A) the Board substantially diminishing Employee's
responsibilities and activities as set forth herein; or
(B) the Board taking action in material breach of this
Agreement; or
(C) requiring the Employee to relocate to anywhere other
than the metropolitan Atlanta area; or
(3)
<PAGE>
(D) the voluntary resignation of Employee at any time
within sixty (60) days after a Change in Control (as hereinafter defined).
(ii) "Change of Control" shall mean any transaction or series of
transactions (including, without limitation, a tender offer, merger or
consolidation) the result of which is that any "person" or "group" (within the
meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934,
as amended), other than Lawrence Perl, Raymond Findley, Jr., Raymond Roncari,
and Harold Rothstein, or trusts for the benefit of any of the foregoing or their
respective families, and any "person" or "group" solicited by any of such
persons:
(A) becomes the beneficial owner of more than 50% of the
total aggregate voting power of all classes of the voting stock of the Company
and/or warrants or options to acquire such voting stock, calculated on a fully
diluted basis; or
(B) acquires all or substantially all of the assets of the
Company.
(f) Upon termination or expiration of the term of this Agreement,
the Employee shall promptly return to the Company any Company property in his
possession or under his control, including, but not limited to, documents,
equipment, disks, tapes and keys.
(g) Termination of this Agreement shall have no effect on the rights
and obligations of the parties pursuant to paragraph 5 hereof.
(5) Confidential Information; Covenant Not to Compete
(a) The Employee acknowledges that the Company's business is
conducted in world-wide markets and that, in the course of performing his
responsibilities and duties pursuant to this Agreement, he will obtain knowledge
of, information relating to, and will develop at the Company's expense,
Confidential Information (as hereinafter defined) which, if disclosed to
competitors of the Company, would cause substantial injury to the Company. The
Employee therefore acknowledges the Company's legitimate need to prevent
disclosure and use of Confidential Information and that, but for the covenants
of the Employee set forth in this Paragraph 5, the Company would not be willing
to enter into this Agreement.
(b) The Employee agrees that he shall not, at any time during or
after the term of his employment by the Company, disclose to any person, firm or
corporation, or use for any purpose other than in connection with the
performance of his responsibilities and duties under this Agreement, any
proprietary information or other confidential information relating to the
business of the Company, including, but not limited to, technology, know-how,
trade secrets, techniques, client or customer lists, details of client or
customer contracts or relationships, pricing policies, operational methods, or
marketing plans or strategies (collectively, "Confidential Information"). The
Employee agrees that upon expiration or termination of his employment by the
Company he shall promptly return to the Company all property of the Company,
including, but not limited to, all Confidential Information and all documents,
recordings and other materials describing, evidencing or otherwise relating to
Confidential Information. Employee acknowledges that any and all intellectual
property related to the business of the Company is the property of the Company
and Employee has no rights therein.
(c) The Employee agrees that during the term of his employment by
the Company, he will not, directly or indirectly, own, operate, manage, join,
control or participate in the ownership, management, operation or control of, or
be employed by, render aid or advice to, or otherwise be associated with, any
person, firm, corporation or other organization that is engaged in the
(4)
<PAGE>
United States and/or Canada in the business of developing, manufacturing,
marketing, selling, or distributing Smart Cards or Smart Card related systems
(the "NonCompete Covenant").
(d) In the event that Employee's employment is terminated by the
Company for Cause or is terminated by Employee voluntarily prior to the end of
the Term other than for Good Reason, Employee shall be bound to the Non-Compete
Covenant for a period of two (2) years following the date of his employment
termination.
(e) (i) In the event that Employee's employment is terminated due to
expiration of the Term, due to termination by the Company during the Term other
than for Cause, or due to voluntary termination by Employee for Good Reason,
then the Company shall have the option to bind Employee to the NonCompete
Covenant for two years after the termination of his employment by electing to do
so and agreeing to pay to Employee the NonCompete Consideration (as hereafter
defined) in equal monthly installments over the two year period. To make such
election, the Company shall give Employee notice of such election (which shall
include an agreement to pay the NonCompete Consideration) by no later than the
Election Date (as hereafter defined). Failure to give such notice by the
Election Date shall be deemed an election by the Company to not bind Employee to
the NonCompete Covenant for the two year period following employment
termination. In the event that the Company shall default in its payment of any
installment of the NonCompete Consideration, Employee shall be relieved from the
NonCompete Covenant, in addition to any other rights and remedies which Employee
may have.
(ii) For purposes hereof, the NonCompete Consideration is the
amount equal to (A) two times the current base annual salary being paid to
Employee on the day prior to the date of termination, less (B) the amount of any
lump sum severance payment to which Employee is entitled under paragraph 4(d)
hereof.
(iii) For purposes hereof, the "Election Date" is:
(A) if employment termination is due to expiration of the
Term, such date is the date which is three (3) months prior to the date on which
the Term expires;
(B) if employment termination is due to termination by the
Company during the Term other than for Cause, or due to voluntary termination by
Employee for Good Reason, such date is the date which is ten (10) days after the
Company or Employee, as the case may be, gives notice of such termination.
(f) Employee agrees that during the term of his employment by the
Company and for a period of two (2) years immediately following the termination
of his employment for any reason, Employee will not directly or indirectly, for
himself or on behalf of, or in conjunction with any other person, persons,
company, partnership, corporation or business entity, hire or employ any current
employees or personnel of the Company or induce or entice any such person to
leave the employ of the Company without the prior written consent of the
Company.
(g) Reference to the Company as used in this paragraph 5 shall
include any subsidiary or affiliate or successor in interest to the Company or
any such subsidiary or affiliate.
(h) If the Employee breaches, or threatens to commit a breach of,
any of the provisions of paragraph 5 hereof (the "Restrictive Covenants"), the
Company shall have the right and
(5)
<PAGE>
remedy to have the Restrictive Covenants specifically enforced by any court of
competent jurisdiction, including but not limited to the right to entry against
the Employee of restraining orders and injunctions (preliminary, mandatory,
temporary and permanent) against violations, threatened or actual, and whether
or not continuing, of any of the Restrictive Covenants, it being acknowledged
and agreed by the Employee that any breach or threatened breach of any of the
Restrictive Covenants would cause irreparable and continuing injury to the
Company and that money damages would not provide an adequate remedy to the
Company. The foregoing right and remedy shall be in addition to, and not in lieu
of, any other rights and remedies available to the Company at law or in equity.
(i) The Employee acknowledges and agrees that the Restrictive
Covenants are reasonable and valid in geographic and temporal scope and in all
other respects. The Company and the Employee further acknowledge and agree that
if any court determines that any of the Restrictive Covenants, or any part
thereof, is invalid or unenforceable for any reason, that it is clearly the
intent of the parties that the remainder of the Restrictive Covenants and parts
thereof shall not thereby be affected and shall be given full effect, without
regard to the invalid portions. No provision herein shall be dependent upon the
validity of any other provision.
(6) Miscellaneous
(a) All notices sent pursuant to this Agreement shall be in writing,
and shall be deemed duly given if delivered personally or sent by certified
mail, return receipt requested, to the parties at their last known addresses.
(b) This Agreement is governed by and is to be enforced according to
the laws of the State of Georgia and shall not be modified or any provision
waived unless in writing signed by the parties. The waiver by either party of a
breach of any provision of this Agreement by the other party shall not operate
as or be construed as a waiver of any subsequent breach.
(c) Notwithstanding any provision contained in this Agreement to the
contrary, the Employee's obligations set forth in paragraph 5 hereof shall
survive the expiration or termination of this Agreement or the Employee's
employment by the Company for any reason.
(d) This Agreement is the entire agreement of the parties and
expressly supersedes all previous agreements, expressions or discussions between
the parties or any affiliate of the parties.
(e) This Agreement shall be binding upon the parties and their
heirs, executors, administrators, successors, and assigns. Notwithstanding the
foregoing, this Agreement is entered into by the Company in consideration of the
personal expertise and skills of the Employee and, accordingly, the Employee may
not assign or delegate any obligation, right, or interest contained in this
Agreement. The Employee acknowledges and agrees that the Company's rights
hereunder may be assigned by the Company to any person or entity, and in the
event of such assignment, the Employee agrees that the Employees shall continue
to be bound by the covenants set forth herein and such assignee shall thereafter
be deemed the "Company" hereunder.
(6)
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
WITNESSES:
- ------------------------------
-------------------------------------
Robert Dixon
- ------------------------------
AMERICAN CARD TECHNOLOGY, INC.
- ------------------------------
By___________________________________
Raymond Findley, Jr.
______________________________ Its President
(7)
<PAGE>
Exhibit 10.7
EMPLOYMENT AGREEMENT
AGREEMENT made as of the _____ day of ______________, 1997 by and
between AMERICAN CARD TECHNOLOGY, INC., a Delaware corporation (the "Company"),
and PETER J. QUADAGNO of West Chester, Pennsylvania (the "Employee").
W I T N E S S E T H :
WHEREAS, Employee is employed by the Company as its Director of
Marketing and Sales, and as a condition of closing on an initial public offering
of the Company's common stock through Whale Securities L.P., Employee and the
Company have required that this Employment Agreement be entered into.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants set forth herein, the parties hereto agree as follows:
(1) Duties and Extent of Services
(a) The Company shall employ the Employee, and the Employee
shall be employed by the Company, as its Director of Marketing and Sales. The
Employee shall perform such duties as are assigned or delegated to him by the
President, the Chief Executive Officer, or the Board of Directors of the Company
(the "Board"). Without limiting the generality of the foregoing, the Employee
shall be responsible for market planning, business development, and control over
direct and indirect sales distribution channels for the Company, subject to the
supervision of the President, the Chief Executive Officer, or the Board.
(b) The Employee shall devote substantially all of his
business time, attention and energies to the business of the Company and the
performance of his responsibilities and duties and shall carry out such
responsibilities and duties diligently and to the best of his abilities. The
Employee recognizes that the Company is entering into this Agreement because of
the Employee's expertise, skills, and talents and his agreement to devote all of
such expertise, skills, and talents to the tasks assigned him pursuant to this
Agreement. The Employee agrees that he shall not engage in any other business
activities of any kind which would give rise to a conflict of interest for the
Employee with respect to his duties and obligations to the Company.
(2) Term. Subject to the termination rights set forth in paragraph 4
hereof, the term (the "Term") of this Agreement shall begin on the date on which
an initial public offering of the Company's Common Stock is closed (the "IPO
Date") and shall continue until the date which is three (3) years after the IPO
Date.
(3) Compensation; Benefits. In consideration of the Employee's
rendering of services pursuant to this Agreement, Employee shall be entitled to
the following compensation and benefits:
(1)
<PAGE>
(a) Employee shall be paid a base annual salary of (A) One
Hundred Ten Thousand and 00/100 Dollars ($110,000.00) during the first year of
the Term, (B) One Hundred Twenty-Five Thousand and 00/100 Dollars ($125,000.00)
during the second year of the Term, and (C) an amount to be determined by the
Executive Committee of the Board during the third year of the Term, but in any
event, such amount shall not be less than One Hundred Twenty-Five Thousand and
00/100 Dollars ($125,000.00), payable in equal bi-weekly installments in
arrears.
(b) In addition, the Company shall pay the Employee an annual
bonus (the "Bonus") for each year of the Term if the Company has achieved the
following performance objectives as set forth below:
(i) During the first year of the Term, if gross sales
of Smart Cards (net of returns) ("Gross Sales") equal or exceed $5.0 million,
the Bonus shall be $10,000.00. For every additional $1.0 million in Gross Sales
during the first year of the Term, the Bonus shall increase by $5,000.00 up to a
maximum aggregate Bonus during the first year of the Term of $40,000.00.
(ii) During the second year of the Term, if Gross
Sales equal or exceed $31 million, the Bonus shall be $75,000.00.
(iii) The Bonus and the performance objectives to be
achieved during the third year of the Term shall be established by the Executive
Committee of the Board.
The Bonus shall be payable by the Company within sixty (60) days after
completion of the one (1) year period for which it is determined.
(c) As additional consideration for the Employee's rendering
of services pursuant to this Agreement, the Company shall grant to the Employee
an Incentive Stock Option to purchase 20,000 shares of common stock of the
Company (the "Option") at such exercise prices as may be determined by the
Compensation Committee and subject to the terms and conditions of the Company's
1996 Stock Option Plan, a copy of which Employee acknowledges having received.
Notwithstanding anything contained herein or therein to the contrary, the
Employee's right to purchase the shares covered by the Option shall be subject
to the following:
(i) The Option shall only become exercisable as
follows:
(A) 6,667 of the option shares become
exercisable after the one year anniversary of employment;
(B) 6,667 of the option shares become
exercisable after the second anniversary; and
(C) the final 6,666 of the option shares
becomes exercisable after the third anniversary of employment.
(ii) If the Employee is terminated for Cause (as
hereinafter defined) or voluntarily terminates his employment hereunder, the
Employee shall have no further rights to exercise the Option, in whole or in
part.
(2)
<PAGE>
(iii) During the first year of the Term, if the
Employee is terminated by the Company for no reason pursuant to paragraph 4(a)
hereof or in the event of death or disability at any time, the aggregate number
of shares covered by the Option shall be reduced to 6,667.
(iv) After the first full year of the Term, if the
Employee is terminated by the Company for no reason pursuant to paragraph 4(a)
hereof or in the event of death or disability at any time, the aggregate number
of shares covered by the Option shall be adjusted by multiplying 20,000 by a
fraction, the numerator of which equals the number of days that the Employee was
employed by the Company and the denominator of which equals 1,095.
(d) The Company shall reimburse the Employee for (i)
reasonable weekly commuting expenses from Philadelphia, Pennsylvania to Atlanta,
Georgia and reasonable weekly lodging expenses in Georgia, both subject to the
Company's approval and (ii) reasonable out-of-pocket expenses incurred in
connection with the business of the Company.
(e) During the term of this Agreement, the Employee shall be
entitled to paid vacation time of four (4) weeks during each calendar year at
such times as are mutually acceptable to the Employee and the Company.
(f) The Employee shall be entitled to such fringe benefits,
including, but not limited to, participation in medical, dental, and life
insurance plans, as are customarily provided to the senior executives of the
Company as determined by the Board of Directors of the Company and as provided
by the terms of the applicable benefit plans.
(4) Termination; Severance
(a) Either the Company or Employee may terminate Employee's
employment under this Agreement unilaterally at any time for any reason or for
no reason by giving the other party sixty (60) days' advance notice of the
intention to terminate.
(b) In addition to the termination rights in paragraph 4(a),
the Company shall have the right to terminate the Employee's employment under
this Agreement immediately at any time for Cause. For purposes hereof, Cause is
defined to be:
(i) Employee engages in deliberate misconduct or
engages in conduct which brings public obloquy upon the Company;
(ii) Employee repeatedly fails (A) to perform his
obligations hereunder, or (B) to follow reasonable directions of the Board of
Directors of the Company;
(iii) Employee is convicted of, or pleads nolo
contendere to, any crime or offense other than a misdemeanor;
(iv) Employee is repeatedly intoxicated by alcohol or
drugs during the performance of his duties; or
(3)
<PAGE>
(v) Employee breaches this Agreement in any material
way, and such breach is not cured or corrected with due diligence by Employee
after written notice of such breach from the Company.
(c) Employee's employment shall also terminate immediately in
the event of the death or disability of the Employee. For purposes hereof,
"disability" of the Employee shall occur on the date on which a reasonable, good
faith determination is made by the Board that, by reason of the physical or
mental condition of the Employee, it is reasonably probable that the Employee
will be unable to perform his duties under this Agreement for a period of at
least one hundred eighty (180) days following the date of the Board's
determination;
(d) In the event of termination of Employee's employment or in
the event of death or disability prior to the end of the Term, Employee shall be
entitled to a lump sum severance payment payable on the date of termination as
follows:
(i) If the Employee's employment is terminated by the
Company without Cause pursuant to paragraph 4(a) during the first year of the
Term, the Employee shall be entitled to a payment equal to the sum of:
(A) one (1) year of the then current base
annual salary, and
(B) any accrued salary which has not been
paid, and
(C) any expense reimbursements due and owing
to him at the time of such termination.
(ii) In the event the Employee's employment is
terminated without Cause pursuant to paragraph 4(a) at any time after the end of
the first year of the Term or due to the Employee's death or disability at any
time during the Term, the Employee or Employee's estate shall be entitled to a
payment equal to the sum of:
(A) six (6) months of the then current base
annual salary (including accrued portions),
(B) any accrued salary which has not been
paid, and
(C) any expense reimbursements due and owing
to him at the time of such termination.
(iii) In the event that the Employee's employment is
terminated by the Company for Cause or is terminated by the Employee voluntarily
prior to the end of the Term, the Employee shall not be entitled to any
severance payment.
(e) Upon termination or expiration of the term of this
Agreement, the Employee shall promptly return to the Company any Company
property in his possession or under his control, including, but not limited to,
documents, equipment, disks, tapes and keys.
(4)
<PAGE>
(f) Termination of this Agreement shall have no effect on the
rights and obligations of the parties pursuant to paragraph 5 hereof.
(5) Employee Representations. The Employee hereby represents and
warrants to the Company that the performance of the Employee's obligations
pursuant to this Agreement and the Employee's compliance with the terms of this
Agreement will not conflict with or result in a breach of any terms, conditions,
or provisions of, or constitute a default under, any other agreements,
including, without limitation, any noncompete, non-piracy, consulting, or
employment agreements, and that the Employee is not subject to any restrictive
covenants which would interfere with the performance of the Employee's
obligations hereunder.
(6) Confidential Information; Covenant Not to Compete
(a) The Employee acknowledges that the Company's business is
conducted in world-wide markets and that, in the course of performing his
responsibilities and duties pursuant to this Agreement, he will obtain knowledge
of, information relating to, and will develop at the Company's expense,
Confidential Information (as hereinafter defined) which, if disclosed to
competitors of the Company, would cause substantial injury to the Company. The
Employee therefore acknowledges the Company's legitimate need to prevent
disclosure and use of Confidential Information and that, but for the covenants
of the Employee set forth in this Paragraph 5, the Company would not be willing
to enter into this Agreement.
(b) The Employee agrees that he shall not, at any time during
or after the term of his employment by the Company, disclose to any person, firm
or corporation, or use for any purpose other than in connection with the
performance of his responsibilities and duties under this Agreement, any
proprietary information or other confidential information relating to the
business of the Company, including, but not limited to, technology, know-how,
trade secrets, techniques, client or customer lists, details of client or
customer contracts or relationships, pricing policies, operational methods, or
marketing plans or strategies (collectively, "Confidential Information"). The
Employee agrees that upon expiration or termination of his employment by the
Company he shall promptly return to the Company all property of the Company,
including, but not limited to, all Confidential Information and all documents,
recordings and other materials describing, evidencing or otherwise relating to
Confidential Information. Employee acknowledges that any and all intellectual
property related to the business of the Company is the property of the Company
and Employee has no rights therein.
(c) The Employee agrees that during the term of his employment
by the Company, and for a period of two (2) years thereafter (the "Restricted
Period"), he will not, directly or indirectly, own, operate, manage, join,
control or participate in the ownership, management, operation or control of, or
be employed by, render aid or advice to, or otherwise be associated with, any
person, firm, corporation or other organization that is engaged in the United
States and/or Canada in the business of developing, manufacturing, marketing,
selling, or distributing any Smart Card Related Systems which are competitive
with any developed or prospective Smart Card Related Systems which are actually
being marketed by the Company at any time during the Restricted Period. For the
purposes of this Section, Smart Card Related Systems shall be defined as any
system or application employing technology, incorporating, using or otherwise
related to Smart Cards (the "NonCompete Covenant").
(5)
<PAGE>
(d) Employee agrees that during the term of his employment by
the Company and for a period of two (2) years immediately following the
termination of his employment for any reason, Employee will not directly or
indirectly, for himself or on behalf of, or in conjunction with any other
person, persons, company, partnership, corporation or business entity, hire or
employ any current employees or personnel of the Company or induce or entice any
such person to leave the employ of the Company without the prior written consent
of the Company.
(e) Reference to the Company as used in this paragraph 5 shall
include any subsidiary or affiliate or successor in interest to the Company or
any such subsidiary or affiliate.
(f) If the Employee breaches, or threatens to commit a breach
of, any of the provisions of paragraph 5 hereof (the "Restrictive Covenants"),
the Company shall have the right and remedy to have the Restrictive Covenants
specifically enforced by any court of competent jurisdiction, including but not
limited to the right to entry against the Employee of restraining orders and
injunctions (preliminary, mandatory, temporary and permanent) against
violations, threatened or actual, and whether or not continuing, of any of the
Restrictive Covenants, it being acknowledged and agreed by the Employee that any
breach or threatened breach of any of the Restrictive Covenants would cause
irreparable and continuing injury to the Company and that money damages would
not provide an adequate remedy to the Company. The foregoing right and remedy
shall be in addition to, and not in lieu of, any other rights and remedies
available to the Company at law or in equity.
(g) The Employee acknowledges and agrees that the Restrictive
Covenants are reasonable and valid in geographic and temporal scope and in all
other respects. The Company and the Employee further acknowledge and agree that
if any court determines that any of the Restrictive Covenants, or any part
thereof, is invalid or unenforceable for any reason, that it is clearly the
intent of the parties that the remainder of the Restrictive Covenants and parts
thereof shall not thereby be affected and shall be given full effect, without
regard to the invalid portions. No provision herein shall be dependent upon the
validity of any other provision.
(7) Miscellaneous
(a) All notices sent pursuant to this Agreement shall be in
writing, and shall be deemed duly given if delivered personally or sent by
certified mail, return receipt requested, to the parties at their last known
addresses.
(b) This Agreement is governed by and is to be enforced
according to the laws of the State of Georgia and shall not be modified or any
provision waived unless in writing signed by the parties. The waiver by either
party of a breach of any provision of this Agreement by the other party shall
not operate as or be construed as a waiver of any subsequent breach.
(c) Notwithstanding any provision contained in this Agreement
to the contrary, the Employee's obligations set forth in paragraph 5 hereof
shall survive the expiration or termination of this Agreement or the Employee's
employment by the Company for any reason.
(d) This Agreement is the entire agreement of the parties and
expressly supersedes all previous agreements, expressions or discussions between
the parties or any affiliate of the parties.
(6)
<PAGE>
(e) This Agreement shall be binding upon the parties and their
heirs, executors, administrators, successors, and assigns. Notwithstanding the
foregoing, this Agreement is entered into by the Company in consideration of the
personal expertise and skills of the Employee and, accordingly, the Employee may
not assign or delegate any obligation, right, or interest contained in this
Agreement. The Employee acknowledges and agrees that the Company's rights
hereunder may be assigned by the Company to any person or entity, and in the
event of such assignment, the Employee agrees that the Employees shall continue
to be bound by the covenants set forth herein and such assignee shall thereafter
be deemed the "Company" hereunder.
(7)
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
WITNESSES:
- ------------------------------
------------------------------
Peter J. Quadagno
- ------------------------------
AMERICAN CARD TECHNOLOGY, INC.
- ------------------------------
By
----------------------------
Raymond Findley, Jr.
- ------------------------------ Its President
(8)
<PAGE>
Exhibit 10.8
AMERICAN CARD TECHNOLOGY, INC.
1996 STOCK OPTION PLAN
(1) Establishment. There is hereby established the American Card
Technology, Inc. 1996 Stock Option Plan (the "Plan"), pursuant to which
employees (including officers), directors, consultants, and other persons who
perform substantial services for or on behalf of American Card Technology,
Inc. (the "Company"), any subsidiaries of the Company and certain other entities
may be granted options to purchase shares of common stock of the Company, par
value $.001 per share ("Common Stock"), and thereby share in the future growth
of the business. The subsidiaries of the Company included in this Plan (the
"Subsidiaries") shall be any subsidiary of the Company as defined in Section 424
of the Internal Revenue Code of 1986, as amended (the "Code").
(2) Status of Options. The options which may be granted pursuant to
this Plan will constitute either incentive stock options within the meaning of
Section 422 of the Code ("Incentive Stock Options") or options which are not
Incentive Stock Options ("Non-Incentive Stock Options"). Incentive Stock Options
and Non-Incentive Stock Options shall be collectively referred to herein as
"Options."
(3) Eligibility. All employees (including officers, whether or not they
are members of the Board of Directors) of the Company or any of its Subsidiaries
who are employed at the time of the adoption of this Plan or thereafter, any
directors of the Company, and any consultants and other persons who perform
substantial services for or on behalf of the Company, any of its Subsidiaries or
affiliates, or any entity in which the Company has an interest (collectively,
the "Grantees") shall be eligible to be granted Non-Incentive Stock Options
under this Plan. All employees (including officers, whether or not they are
members of the Board of Directors) of the Company or any of its Subsidiaries who
are employed at the time of adoption of this Plan or thereafter shall be
eligible to be granted Incentive Stock Options under this Plan.
(4) Number of Shares Covered by Options; No Preemptive Rights. The
total number of shares which may be issued and sold pursuant to Options granted
under this Plan shall be 270,000 shares of Common Stock (or the number and kind
of shares of stock or other securities which, in accordance with paragraph 9 of
this Plan, shall be substituted for such shares of Common Stock or to which said
shares shall be adjusted; hereinafter, all references to shares of Common Stock
are deemed to be references to said shares or shares so adjusted). The issuance
of shares upon exercise of an Option shall be free from any preemptive or
preferential right of subscription or purchase on the part of any shareholder.
If any outstanding Option granted under this Plan expires or is terminated, for
any reason, the shares of Common Stock subject to the unexercised portion of the
Option will again be available for Options issued under this Plan.
(5) Administration
<PAGE>
(a) This Plan shall be administered by the committee (the
"Committee") referred to in paragraph (b) of this paragraph 5. Subject to the
express provisions of this Plan, the Committee shall have complete authority, in
its discretion, to interpret this Plan, to prescribe, amend, and rescind rules
and regulations relating to it, to determine the terms and provisions of the
respective option agreements(which need not be identical), to determine the
Grantees to whom, and the times and the prices at which, Options shall be
granted, the option periods, the number of shares of the Common Stock to be
subject to each Option and whether each Option shall be an Incentive Stock
Option or a Non-Incentive Stock Option, and to make all other determinations
necessary or advisable for the administration of the Plan. Each Option shall be
clearly identified at the time of grant as to its status. In making such
determinations, the Committee may take into account the nature of the services
rendered by the respective Grantees, their present and potential contributions
to the success of the Company, and such other factors as the Committee, in its
discretion, shall deem relevant. Nothing contained in this Plan shall be deemed
to give any Grantee any right to be granted an Option to purchase shares of
Common Stock except to the extent and upon such terms and conditions as may be
determined by the Committee. The Committee's determination on all of the matters
referred to in this paragraph 5 shall be conclusive.
(b) The Committee shall consist of from two (2) to five (5)
individuals who are members of the Board of Directors. Each member of the
Committee shall be a person who, at the time of his appointment to, and at all
times during his service as a member of, the Committee is a "Non-Employee
Director" as that term is then defined under Regulation 16b-3 promulgated under
the Securities Exchange Act of 1934, as amended, or any successor statute or
regulation regarding the same subject matter. The Committee shall be appointed
by the Board of Directors, which may at any time, and from time to time, remove
any member of the Committee, with or without cause, appoint additional members
to the Committee, and fill vacancies, however caused, in the Committee. A
majority of the members of the Committee shall constitute a quorum and all
determinations of the Committee shall be made by a majority of such quorum. Any
decision or determination of the Committee reduced to writing and signed by all
of the members of the Committee shall be fully as effective as if it had been
made at a meeting duly called and held.
(c) The Committee may at its election provide in any option
agreement covering the grant of Options under this Plan that, upon the exercise
of such Options, the Company will loan to the holder thereof such amount as
shall equal the purchase price of the shares of Common Stock issuable upon such
exercise, such loan to be on terms and conditions deemed appropriate by the
Committee.
(d) Notwithstanding any provision hereof to the contrary, the
Committee shall have sole and exclusive authority with respect to the grant of
Options to directors.
(6) Terms of Incentive Stock Options. Each Incentive Stock Option
granted under this Plan shall be evidenced by an Incentive Stock Option
Agreement which shall be executed by the Company and by the person to whom such
Incentive Stock Option is granted, and shall be subject to the following terms
and conditions:
(2)
<PAGE>
(a) The price at which shares of Common Stock covered by each
Incentive Stock Option may be purchased pursuant thereto shall be determined in
each case on the date of grant by the Committee, but shall be an amount not less
than the par value of such shares and not less than the fair market value of
such shares on the date of grant. For purposes of this paragraph and paragraph
7, the fair market value of shares of Common Stock on any day shall be (i) in
the event the Common Stock is not publicly traded, the fair market value on such
day as determined in good faith by the Committee or (ii) in the event the Common
Stock is publicly traded, the last sale price of a share of Common Stock as
reported by the principal quotation service on which the Common Stock is listed,
if available, or, if last sale prices are not reported with respect to the
Common Stock, the mean of the high bid and low asked prices of a shares of
Common Stock as reported by such principal quotation service, or, if there is no
such report by such quotation service for such day, such fair market value shall
be the average of (i) the last sale price (or, if last sale prices are not
reported with respect to the Common Stock, the mean of the high bid and low
asked prices) on the day next preceding such day for which there was a report
and (ii) the last sale price (or, if last sale prices are not reported with
respect to the Common Stock, the mean of the high bid and low asked prices) on
the day next succeeding such day for which there was a report, or as otherwise
determined by the Committee in its discretion pursuant to any reasonable method
contemplated by Section 422 of the Code and any regulations issued pursuant to
that Section.
(b) The option price of the shares to be purchased pursuant to
each Incentive Stock Option shall be paid in full in cash, or by delivery (i.e.,
surrender) of shares of Common Stock of the Company then owned by the Grantee,
at the time of the exercise of the Incentive Stock Option. Shares of Common
Stock so delivered will be valued on the day of delivery for the purpose of
determining the extent to which the option price has been paid thereby, in the
same manner as provided for the purchase price of Incentive Stock Options as set
forth in paragraph (a) of this paragraph 6, or as otherwise determined by the
Committee, in its discretion, pursuant to any reasonable method contemplated by
Section 422 of the Code and any regulations issued pursuant to that Section.
(c) Each Incentive Stock Option Agreement shall provide that
such Incentive Stock Option may be exercised by the Grantee, in such parts and
at such times as may be specified in such Agreement, within a period not
exceeding ten years after the date on which the Incentive Stock Option is
granted (hereinafter called the "Incentive Stock Option Period") and, in any
event, only during the continuance of the employee's employment by the Company
or any of its Subsidiaries or during the period of three months after the
termination of such employment to the extent that the right to exercise such
Incentive Stock Option had accrued at the date of such termination; provided,
however, that if Incentive Stock Options as to 100 or more shares are held by a
Grantee, then such Incentive Stock Options may not be exercised for less than
100 shares at any one time, and if Incentive Stock Options for less than 100
shares are held by a Grantee, then Incentive Stock Options for all such shares
must be exercised at one time; and provided, further, that if the Grantee, while
still employed by the Company or any of its Subsidiaries, shall die within the
Incentive Stock Option Period, the Incentive Stock Option may be exercised, to
the extent specified in the Incentive Stock Option Agreement, and as herein
provided, but only prior to the first to occur of:
(i) the expiration of the period of one year after
the date of the Grantee's death, or
(3)
<PAGE>
(ii) the expiration of the Incentive Stock Option
Period,
by the person or persons entitled to do so under the Grantee's will, or, if the
Grantee shall fail to make testamentary disposition of said Incentive Stock
Option, or shall die intestate, by the Grantee's legal representative or
representatives.
(d) Each Incentive Stock Option granted under this Plan shall
by its terms be non-transferable by the Grantee except by will or by the laws of
descent and distribution, and each Incentive Stock Option shall by its terms be
exercisable during the Grantee's lifetime only by him.
(e) Notwithstanding the foregoing, if an Incentive Stock
Option is granted to a person at any time when such person owns, within the
meaning of Section 424(d) of the Code, more than 10% of the total combined
voting power of all classes or stock of the employer corporation (or a parent or
subsidiary of such corporation within the meaning of Section 424 of the Code),
the price at which each share of Common Stock covered by such Incentive Stock
Option may be purchased pursuant to such Incentive Stock Option shall not be
less than 110% of the fair market value (determined as in paragraph (a) of this
paragraph 6) of the shares of Common Stock at the time the Incentive Stock
Option is granted, and such Incentive Stock Option must be exercised within a
period specified in the Incentive Stock Option Agreement which does not exceed
five years after the date on which such Incentive Stock Option is granted.
(f) The Incentive Stock Option Agreement entered into pursuant
hereto may contain such other terms, provisions, and conditions not inconsistent
herewith as shall be determined by the Committee, including, without limitation,
provisions (i) requiring the giving of satisfactory assurances by the Grantee
that the shares are purchased for investment and not with a view to resale in
connection with a distribution of such shares, and will not be transferred in
violation of applicable securities laws, (ii) restricting the transferability of
such shares during a specified period, and (iii) requiring the resale of such
shares to the Company at the option price if the employment of the employee
terminates prior to a specified time. In addition, the Committee, in its
discretion, may afford to holders of Incentive Stock Options granted under this
Plan the right to require the Company to cause to be registered under the
Securities Act of 1933, as amended, for public sale by the holders thereof,
shares of Common Stock subject to such Incentive Stock Options upon such terms
and subject to such conditions as the Committee may determine to be appropriate.
(g) In the discretion of the Committee, a single Stock Option
Agreement may include both Incentive Stock Options and Non-Incentive Stock
Options, or those Options may be included in separate stock option agreements.
(7) Terms of Non-Incentive Stock Options. Each Non-Incentive Stock
Option granted under this Plan shall be evidenced by a Non-Incentive Stock
Option Agreement which shall be executed by the Company and by the person to
whom such Non-Incentive Stock Option is granted, and shall be subject to the
following terms and conditions:
(4)
<PAGE>
(a) The price at which shares of Common Stock covered by each
Non-Incentive Stock Option may be purchased pursuant thereto shall be an amount
not less than the par value of such shares and not less than the fair market
value of such shares on the date of grant.
(b) Each Non-Incentive Stock Option Agreement shall provide
that such Non-Incentive Stock Option may be exercised by the Grantee, in such
parts and at such times as may be specified in such Agreement, within a period
of up to and including ten years after the date on which the Non-Incentive Stock
Option is granted.
(c) Each Non-Incentive Stock Option granted under this Plan
shall by its terms be non-transferable by the optionee except by will or by the
laws of descent and distribution, and each Non-Incentive Stock Option shall by
its terms be exercisable during the Grantee's lifetime only by him.
(d) The Non-Incentive Stock Option Agreement entered into
pursuant hereto may contain such other terms, provisions, and conditions not
inconsistent herewith as shall be determined by the Committee, in its sole
discretion, including, without limitation, the terms, provisions, and conditions
set forth in paragraph 6(f) with respect to Incentive Stock Option Agreements.
(8) Limit on Option Amount. Notwithstanding any provision contained
herein, the aggregate fair market value (determined under paragraph 6(a) as of
the time Incentive Stock Options are granted) of the shares of Common Stock with
respect to which Incentive Stock Options are first exercisable by any employee
during any calendar year (under all stock option plans of the employee's
employer corporation and its parent and subsidiary corporation within the
meaning of Section 424 of the Code) shall not exceed $100,000. If an Incentive
Stock Option exceeds this $100,000 limitation, the portion of such Option which
is exercisable for shares of Common Stock in excess of the $100,000 limitation
shall be treated as a Non-Incentive Stock Option. The limit in this paragraph
shall not apply to Options which are designated as Non-Incentive Stock Options,
and, except as otherwise provided herein, there shall be no limit on the amount
of such Options which may be first exercisable in any year.
(9) (a) Adjustment of Number of Shares. In the event that a dividend
shall be declared upon the shares of Common Stock payable in shares of Common
Stock, the number of shares of Common Stock then subject to any Option granted
hereunder, and the number of shares reserved for issuance pursuant to this Plan
but not yet covered by an Option, shall be adjusted by adding to each of such
shares the number of shares which would be distributable thereon if such share
had been outstanding on the date fixed for determining the shareholders entitled
to receive such stock dividend. In the event that the outstanding shares of
Common Stock shall be changed into or exchanged for a different number or kind
of shares of stock or other securities of the Company or of another corporation,
whether through reorganization, recapitalization, stock split-up, combination of
shares, merger, or consolidation, then there shall be substituted for each share
of Common Stock subject to any such Option and for each share of Common Stock
reserved for issuance pursuant to the Plan but not yet covered by an Option, the
number and kind of shares of stock or other securities into which each
outstanding share of Common Stock shall be so changed or for which each such
share shall be exchanged; provided, however, that in the event that such change
or exchange results from a
(5)
<PAGE>
merger or consolidation, and in the judgment of the Committee such substitution
cannot be effected or would be inappropriate, or if the Company shall sell all
or substantially all of its assets, the Company shall use reasonable efforts to
effect some other adjustment of each then outstanding Option which the
Committee, in its sole discretion, shall deem equitable. In the event that there
shall be any change, other than as specified above in this paragraph 9(a), in
the number or kind of outstanding shares of Common Stock or of any stock or
other securities into which such shares of Common Stock shall have been changed
or for which they shall have been exchanged, then, if the Committee shall
determine that such change equitably requires an adjustment in the number or
kind of shares theretofore reserved for issuance pursuant to the Plan but not
yet covered by an Option and of the shares then subject to an Option or Options,
such adjustment shall be made by the Committee and shall be effective and
binding for all purposes of this Plan and of each stock option agreement.
Notwithstanding the foregoing, if any adjustment in the number of shares which
may be issued and sold pursuant to Options is required by the Code or
regulations issued pursuant thereto to be approved by the shareholders in order
to enable the Company to issue Incentive Stock Options pursuant to this Plan,
then no such adjustment shall be made without the approval of the shareholders.
In the case of any such substitution or adjustment as provided for in this
paragraph 9(a), the option price in each stock option agreement for each share
covered thereby prior to such substitution or adjustment will be the total
option price for all shares of stock or other securities which shall have been
substituted for each such share or to which such share shall have been adjusted
pursuant to this paragraph 9. No adjustment or substitution provided for in this
paragraph 9 shall require the Company, in any stock option agreement, to sell a
fractional share, and the total substitution or adjustment with respect to each
stock option agreement shall be limited accordingly. Notwithstanding the
foregoing, in the case of Incentive Stock Options, if the effect of the
adjustments or substitution is to cause the Incentive Stock Option to fail to
continue to qualify as an Incentive Stock Option or to cause a modification,
extension, or renewal of such Incentive Stock Option within the meaning of
Section 424 of the Code, the Board of Directors shall use reasonable efforts to
effect such other adjustment of each then outstanding option as the Board of
Directors, in its sole discretion, shall deem equitable.
(b) In the event that the Company shall effect a distribution,
other than a normal and customary cash dividend, upon shares of Common Stock,
the Committee may, in order to prevent significant diminution in the value of
Options as a result of any such distribution, take such measures as it deems
fair and equitable, including, without limitation, the adjustment of the option
price per share for shares not issued and sold hereunder prior to the record
date for said distribution.
(10) Amendments. This Plan may be terminated or amended from time to
time by vote of the Committee; provided, however, that no such termination or
amendment shall materially adversely affect or impair any then outstanding
Option without the consent of the Grantee thereof and no amendment which shall
(i) change the total number of shares which may be issued and sold pursuant to
Options granted under this Plan, or (ii) change the designation or class of
employees or other persons eligible to receive Incentive Options or
Non-Incentive Options, shall be effective without the approval of the
shareholders. Notwithstanding the foregoing, the Plan may be amended by the
Committee to incorporate any amendments made to the Code or regulations
promulgated thereunder which the Committee deems to be necessary or desirable to
preserve (i) incentive stock option status for outstanding Incentive Stock
Options and the ability to issue Incentive Stock Options pursuant to this Plan,
(6)
<PAGE>
and (ii) the deductibility by the Company pursuant to Section 162(m) of the Code
of amounts taxed to Plan participants as ordinary compensation income.
(11) Effective Date and Termination. This Plan shall become effective
on the date its adoption is approved by the shareholders of the Company. Except
to the extent necessary to govern outstanding Options, this Plan shall terminate
on, and no additional Options shall be granted after, ten years from the date
the Plan is adopted, or ten years from the date the Plan is approved by the
shareholders, whichever is earlier.
(7)
<PAGE>
Exhibit 10.10
AMERICAN CARD TECHNOLOGY, INC.
1996 NONEMPLOYEE DIRECTORS' STOCK OPTION PLAN
(1) Establishment. There is hereby established the American Card
Technology, Inc. 1996 Nonemployee Directors' Stock Option Plan (the
"Directors' Plan") pursuant to which certain directors of American Card
Technology, Inc. (the "Corporation") may be granted options to purchase shares
of common stock, par value $.001 per share ("Common Stock"), and thereby share
in the future growth of the business. The purpose of the Directors' Plan is to
attract and retain the services of non-employee members of the Board of
Directors and to provide them with increased motivation and incentive to exert
their best efforts on behalf of the Corporation by enlarging their personal
stake in the Corporation.
(2) Status of Options. The options to be issued pursuant to this
Directors' Plan ("Options") shall not constitute incentive stock options within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code").
(3) Eligibility. All directors of the Corporation who are not employees
of the Corporation or any of its subsidiaries (collectively, the "Participants")
shall be eligible to be granted Options under this Directors' Plan.
(4) Number of Shares Covered by Options; No Preemptive Rights. The
total number of shares which may be issued and sold pursuant to Options granted
under this Directors' Plan shall be 30,000 shares of Common Stock (or the number
and kind of shares of stock or other securities which, in accordance with
paragraph 8 of this Directors' Plan, shall be substituted for such shares of
Common Stock or to which said shares shall be adjusted; hereinafter, all
references to shares of Common Stock are deemed to be references to said shares
or shares so adjusted). The issuance of shares upon exercise of an Option shall
be free from any preemptive or preferential right of subscription or purchase on
the part of any stockholder. If any outstanding Option granted under this
Directors' Plan is terminated for any reason, the shares of Common Stock subject
to the unexercised portion of the Option will again be available for Options
issued under this Directors' Plan.
(5) Administration
(a) The Directors' Plan shall be administered by a committee
consisting of from two (2) to five (5) individuals who are members of the Board.
The Committee shall be appointed by the Board, which may at any time, and from
time to time, remove any member of the Committee, with or without cause, appoint
additional members to the Committee and fill vacancies, however caused, in the
Committee. A majority of the members of the Committee shall constitute a quorum
and all determinations of the committee shall be made by a majority of such
quorum. Any decision or determination of the Committee reduced to writing and
signed by all of the members of the Committee shall be fully as effective as if
it had been made at a meeting duly called and held. A Participant may receive
Options under this Directors' Plan whether or not such Participant also serves
as a member of the Committee.
<PAGE>
(b) Options shall be automatically granted to Participants in
accordance with paragraph 6 hereof and shall be issued upon the terms and
conditions set forth in paragraph 7 hereof. Accordingly, the persons to whom
Options shall be granted, the number of shares subject thereto, and the material
terms and conditions governing the Options, will not be subject to the
discretion of the Committee. However, if any questions of interpretation of this
Directors' Plan or of any Options issued hereunder shall arise, they shall be
determined by the Committee and such determination shall be final and binding
upon all persons having an interest in the Directors' Plan.
(6) Non-Discretionary Grants. Subject to approval of the Plan by the
stockholders of the Corporation, Options shall be automatically granted to
Participants as follows:
(a) an Option to purchase 2,500 shares of Common Stock will be
granted to each Participant on the effective date of the Corporation's
registration statement on Form SB-2 relating to an initial public offering of
the Company's Common Stock (the "IPO");
(b) an Option to purchase 2,500 shares of Common Stock will be
granted to each Participant who was not granted Options pursuant to paragraph
6(a) herein upon their initial election or appointment as a director of the
Corporation; and
(c) an additional Option to purchase 2,500 shares of Common
Stock will be granted to each Participant at each Annual Meeting of the Board
immediately following the Annual Meeting of Stockholders in each year,
commencing with the first Annual Meeting following the consummation of the IPO,
during the term of this Directors' Plan. If the number of shares remaining in
the Directors' Plan on any such date is insufficient to grant each Participant
an Option to purchase 2,500 shares of Common Stock, each Participant will
automatically receive an Option to purchase a number of shares of Common Stock
to be determined by dividing the total number of shares remaining in this
Directors' Plan by the number of Participants at that time and, if necessary,
rounding down to the nearest whole number of shares.
(7) Terms and Conditions of Options; Stock Option Agreements. Each
Option granted pursuant to this Directors' Plan shall be evidenced by a written
agreement between the participant and the Corporation which shall contain the
following terms:
(a) Option Price. The exercise price of each Director's Option
shall be one hundred percent (100%) of the fair market value of the shares
subject to such Option on the date of grant. For purposes of this paragraph, the
fair market value of the shares of Common Stock on any day shall be (i) in the
event the Common Stock is not publicly traded, the fair market value on such day
as determined in good faith by the Committee or (ii) in the event the Common
Stock is publicly traded, the last sale price of a share of Common Stock as
reported by the principal quotation service on which the Common Stock is listed,
if available, or, if last sale prices are not reported with respect to the
Common Stock, the mean of the high bid and low asked prices of a share of Common
Stock as reported by such principal quotation service, or, if there is no such
report by such quotation service for such day, such fair market value shall be
the average of (i) the last sale price (or, if last sale prices are not reported
with respect to the Common Stock, the mean of the high bid and low asked prices)
on the day next
(2)
<PAGE>
preceding such day for which there was a report and (ii) the last sale price
(or, if last sale prices are not reported with respect to the Common Stock, the
mean of the high bid and low asked prices) on the day next succeeding such day
for which there was a report, or as otherwise determined by the Committee in its
discretion pursuant to any reasonable method contemplated by Section 422 of the
Code and any regulations issued pursuant to that Section.
(b) Medium and Time of Payment. The exercise price of the
shares to be purchased pursuant to an Option shall be paid (i) in full in cash
or by check, (ii) by delivery of shares of Common Stock of the Corporation then
owned by the Participant with a fair market value at the time of the exercise of
the Option equal to the exercise price, or (iii) by a combination of (i) and
(ii).
(c) Term and Exercise of Options. The term of each Option
shall commence on the date it is granted and, unless sooner terminated as set
forth herein, shall expire ten (10) years after its date of grant unless
extended as set forth herein. In the event a Participant shall cease to be a
director of the Corporation for any reason other than death or disability, the
Option shall terminate on the earlier to occur of (i) the later of ninety (90)
days after the date of termination of service or six (6) months and ten (10)
days after such Participant's last purchase or sale of shares of Common Stock
prior to his termination of service as a director, or (ii) the expiration date
of the Option. If the Participant shall die or become disabled within the
meaning of Section 22(e)(3) of the Code while still serving as a director or
prior to the termination of the Option in accordance with the preceding
sentence, the Option shall terminate on the first anniversary of the
Participant's death or disability, as the case may be. In the event of the
Participant's death, the Option may be exercised by the person or persons
entitled to do so under the Participant's will or, if the Participant shall fail
to make testamentary disposition of the Option, or shall die intestate, by the
Participant's legal representative.
(d) Transferability. Each Option shall be non-transferable by
the Participant except by will or by the laws of descent and distribution or
pursuant to a qualified domestic relations order, and shall be exercisable only
by the Participant.
(e) Investment Purpose. Each Participant shall represent and
warrant that he is acquiring the Option and, in the event the Option is
exercised, the shares of Common Stock issuable thereunder, for investment, for
his own account and not with a view to the distribution thereof, and that he
will not offer or sell the shares unless a registration statement under the
Securities Act of 1933, as amended (the "Securities Act"), and any applicable
state securities law is in effect, or unless counsel satisfactory to the
Corporation renders a reasoned opinion that the proposed sale is exempt from the
registration requirements of the Securities Act and such state securities act.
The Corporation shall not be obligated to issue or deliver any shares upon
exercise of an Option if to do so would violate the Securities Act or any state
securities law, and the Corporation shall have no obligation to file any
registration statement or take any other action required or permitted by any
such law.
(8) Adjustment of Number of Shares
(a) In the event that a dividend shall be declared upon the
shares of Common Stock payable in shares of Common Stock, the number of shares
of Common Stock
(3)
<PAGE>
then subject to any Option granted hereunder, and the number of shares reserved
for issuance pursuant to this Directors' Plan but not yet covered by an Option,
shall be adjusted by adding to each of such shares the number of shares which
would be distributable thereon if such shares had been outstanding on the date
fixed for determining the stockholders entitled to receive such stock dividend.
In the event that the outstanding shares of Common Stock shall be changed into
or exchanged for a different number or kind of shares of stock or other
securities of the Corporation or of another corporation, whether through
reorganization, recapitalization, stock split-up, combination of shares, merger,
or consolidation, then there shall be substituted for each share of Common Stock
subject to any such Option and for each share of Common Stock reserved for
issuance pursuant to this Directors' Plan but not yet covered by an Option, the
number and kind of shares of stock or other securities into which each
outstanding share of Common Stock shall be so changed or for which each such
share shall be exchanged; provided, however, that in the event that such change
or exchange results from a merger or consolidation, and in the judgment of the
Committee such substitution cannot be effected or would be inappropriate, or if
the Company shall sell all or substantially all of its assets, the Company shall
use reasonable efforts to effect some other adjustment of each then outstanding
Option which the Committee, in its sole discretion, shall deem equitable. In the
event that there shall be any change, other than as specified above in this
paragraph 8(a), in the number or kind of outstanding shares of Common Stock or
of any stock or other securities into which such shares of Common Stock shall
have been changed or for which they shall have been exchanged, then, if the
Committee shall determine that such change equitably requires an adjustment in
the number or kind of shares theretofore reserved for issuance pursuant to the
Directors' Plan but not yet covered by an Option and of the shares then subject
to an Option or Options, such adjustment shall be made by the Committee and
shall be effective and binding for all purposes of this Directors' Plan and of
each stock option agreement. In the case of any such substitution or adjustment
as provided for in this paragraph, the option price in each stock option
agreement for each share covered thereby prior to such substitution or
adjustment will be the total option price for all shares of stock or other
securities which shall have been substituted for each such share or to which
such share shall have been adjusted pursuant to this paragraph 8. No adjustment
or substitution provided for in this paragraph shall require the Corporation, in
any stock option agreement, to sell a fractional share; and the total
substitution or adjustment with respect to each stock option agreement shall be
limited accordingly.
(b) In the event that the Corporation shall effect a
distribution, other than a normal and customary cash dividend, upon shares of
Common Stock, the Committee may, in order to prevent significant diminution in
the value of options as a result of any such distribution, take such measures as
it deems fair and equitable, including, without limitation, the adjustment of
the Option Price per share for Shares not issued and sold hereunder prior to the
record date for said distribution.
(9) Effective Date and Term of Plan. This Directors' Plan shall become
effective as of the date of its adoption by the stockholders of the Corporation.
Except to the extent necessary to govern outstanding Options issued, this
Directors' Plan shall terminate on, and no additional Options shall be granted
after, the tenth anniversary of its effective date unless earlier terminated by
the Board of Directors in accordance with paragraph 10 hereof.
(10) Amendment of the Plan. This Directors' Plan may be terminated or
amended from time to time by vote of the Committee; provided, however, that no
such
(4)
<PAGE>
termination or amendment shall materially adversely affect or impair any then
outstanding Directors' Option without the consent of the Participant. The
approval of the Corporation's stockholders is required in respect of any
amendment which would (i) increase the maximum number of shares subject to this
Directors' Plan; or (ii) change the designation of the Participants eligible to
receive Options under this Directors' Plan.
(5)
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
American Card Technology, Inc.
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form SB-2 of our report dated August 1, 1996, except
for Note 6 which is as of December 11, 1996, relating to the financial
statements of American Card Technology, Inc., which is contained in that
Prospectus. Our report contains an explanatory paragraph regarding uncertainties
as to the Company's ability to continue as a going concern.
We also consent to the reference to us under the captions "Selected
Financial Data" and "Experts" in the Prospectus.
/s/ BDO Seidman, LLP
New York, New York
January 31, 1997
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<ARTICLE> 5
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<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 SEP-30-1996
<CASH> 10,643 33,006
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 1,250 8,092
<CURRENT-ASSETS> 22,668 48,748
<PP&E> 58,485 76,449
<DEPRECIATION> 11,808 28,562
<TOTAL-ASSETS> 313,923 358,297
<CURRENT-LIABILITIES> 1,269,328 1,913,585
<BONDS> 0 0
0 0
0 0
<COMMON> 2,030 2,390
<OTHER-SE> (957,435) (1,557,678)
<TOTAL-LIABILITY-AND-EQUITY> 313,923 358,297
<SALES> 73,472 19,989
<TOTAL-REVENUES> 73,472 19,989
<CGS> 68,621 11,250
<TOTAL-COSTS> 68,621 11,250
<OTHER-EXPENSES> 989,225 846,752
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 37,236 92,120
<INCOME-PRETAX> 0 0
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,021,610) (930,133)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,021,610) (930,133)
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