As filed with the Securities and Exchange Commission on ________, 1999
Registration No. 333-_____
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
INTELLI-CHECK, INC.
(Name of small business issuer in its charter)
Delaware 7372
(State or other jurisdiction (Primary Standard Industrial
of incorporation or organization) Classification Code No.)
11-3234779
(I.R.S. Employer Identification No.)
Frank Mandelbaum
775 Park Avenue 775 Park Avenue
Huntington, NY 11743-3976 Huntington, NY 11743-3976
(516) 421 - 2011 (516) 421 - 2011
(Name, address and telephone number (Address and telephone number of
of agent for service process) principal executive of offices and
principal place of business)
Copies to:
Arnold N. Bressler, Esq. James Martin Kaplan, Esq.
Milberg Weiss Bershad Hynes & Lerach LLP Tenzer Greenblatt LLP
One Pennsylvania Plaza 405 Lexington Avenue
New York, NY 10119-0165 New York, NY 10174
Tel: (212) 594-5300 Tel: (212) 885-5000
Fax: (212) 868-1229 Fax: (212) 885-5001
Approximate date of proposed sale to the public:
As soon as practicable after the Registration Statement becomes effective.
If any of these 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 number of 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 this Form is a post-effective amendment filed pursuant to Rule
462(d) 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. [ ]
The registrant by this prospectus amends this registration statement on
such date or dates as may be necessary to delay its effective date until the
registrant shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the registration statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
============================================================================================================
Title of Each Class of Securities to Amount Proposed Proposed Amount of
be Registered to be Maximum Maximum Registration
Registered Offering Aggregate Fee (1)
Price Offering Price(1)
per
Security(1)
============================================================================================================
<S> <C> <C> <C> <C>
Common Stock, $.001 par value 1,175,000(2) $7.00 $8,225,000 $2,286.55(2)
- ------------------------------------------------------------------------------------------------------------
Underwriter's Warrants (3) 100,000 $.001 $100 (4)
- ------------------------------------------------------------------------------------------------------------
Common Stock underlying Underwriter's 100,000 $7.70 $770,000 $214.06
Warrants
- ------------------------------------------------------------------------------------------------------------
Total Registration Fee................. $2,500.61
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) of the Securities Act.
(2) Includes 150,000 shares which the underwriter has the option to
purchase to cover over-allotments, if any. Also includes 25,000 shares
being sold by selling stockholders.
(3) Represents warrants to be issued to the Underwriter. Pursuant to Rule
416, there is also being registered hereby such additional
indeterminate number of shares of Common Stock as may become issuable
by reason of the anti-dilution provisions set forth in the
Underwriter's Warrants.
(4) None pursuant to Section 457(g).
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION
DATED _______________, 1999
INTELLI-CHECK, INC.
[GRAPHIC OMITTED]
1,000,000 Shares of Common Stock
$7.00 per share
Intelli-Check, Inc. is offering 1,000,000 shares of our common stock.
We are also registering 25,000 shares of common stock for the benefit of
existing stockholders. Of these 25,000 shares, 15,000 will be issued upon the
exercise of warrants. The shares to be sold by existing stockholders are not
being underwritten and we will not receive any proceeds from the shares sold by
the selling stockholders.
This is our initial public offering and there currently is no public
market for our common stock. Application has been made for quotation of our
common stock on the American Stock Exchange under the symbol "IDN".
At our request, the underwriter has reserved up to 200,000 shares of
the common stock being underwritten for sale at the initial public offering
price to selected officers, directors, employees, consultants, business
associates and other persons.
--------------------
Investing in our common stock involves risks.
See "Risk Factors" beginning on page 5.
--------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
--------------------
Offering Information
Per Share Total
Public offering price: $7.00 $7,000,000
Underwriting discounts
and commissions: $ .63 $ 630,000
Proceeds to Intelli-Check: $6.37 $6,370,000
<PAGE>
We have granted the underwriter a 30-day option to purchase up to an additional
150,000 shares of common stock to cover over-allotments. The underwriter is
offering the shares on a firm commitment basis. The underwriter expects to
deliver the shares of common stock to purchasers on ______________, 1999.
-----------------------
GunnAllen Financial, Inc.
This prospectus is dated _____________, 1999
[PICTURES OF ID-CHECK PRODUCTS TO BE INCLUDED]
<PAGE>
PROSPECTUS SUMMARY
This summary highlights some information from this prospectus. You
should read the following summary together with the more detailed information
and Intelli-Check's financial statements and notes to those statements appearing
in other parts of this prospectus.
INTELLI-CHECK, INC.
Our Business
Intelli-Check was formed in 1994 to develop, manufacture and market an
advanced document verification system to enable a retailer to determine the
customer's age and identity to:
o detect and prevent the use of fraudulent identification for
the purchase of alcohol, tobacco and other age-restricted
products;
o reduce the risk to the retailer of substantial monetary fines,
criminal penalties and license revocation for the sale of
age-restricted products to minors; and
o reduce check cashing, credit card and other types of fraud.
With the cooperation of various governmental agencies, we developed our
initial software product called "ID-Check". The ID-Check terminal, which uses
our patented software, offers convenient and reliable age and document
verification. It accomplishes this by reading, analyzing and displaying the
encoded information contained on driver licenses and most other forms of
accepted government issued identification. We believe that we possess the only
patented technology that provides a complete analysis of the data contained on
these documents. Our ID-Check product is also capable of being upgraded to
accommodate changes made by the governmental issuers of driver licenses and ID
cards. The ID-Check terminal:
o is easy to use, requiring just one quick swipe or scan of the
driver license or ID card by the retailer;
o reduces the guesswork of determining age and validity of ID by
displaying "yes", "no", "expired" or "tampered"; and
o creates a record of transactions as proof that the retailer
has used proper due diligence.
Our Marketing Strategy
After testing a pre-production model of our ID-Check terminal in 68
retail establishments, we have refined our software and recently started
commercial production of a terminal with improved capabilities. We intend to
market our ID-Check terminal, subsequent upgrades and related software
applications to retailers of age-restricted products, including:
o convenience stores;
o bars and night clubs;
o restaurants; and
<PAGE>
o retail beer and liquor establishments.
We believe that these retailers are keenly aware of the seriousness of
the problem of underage drinking and smoking, as illustrated by the following:
o The Office of Drug Control Policy reported that approximately
9.5 million drinkers of alcoholic beverages in 1996 were
between the ages of 12 and 20; and
o Each year merchants illegally sell minors 947 million packs of
cigarettes and 26 million containers of chewing tobacco worth
$1.26 billion.
We intend to directly market and distribute our ID-Check products using
our sales personnel. We will also seek to distribute through other channels such
as independent sales organizations and wholesale alcohol and tobacco
distributors. We also plan to develop and commercially launch additional
products based on our patented technology.
Our Location
Our principal executive offices are located at 775 Park Avenue,
Huntington, New York 11743. Our telephone number is (516) 421-2011. We were
originally incorporated in New York in October 1994. In September 1999, we
changed our state of incorporation to Delaware.
The names "ID-Check", "P-Link", "C-Link", "M-Link", "MAVE", "AIR-Check", and
"CREDIT-Check" are trademarks of Intelli-Check. Each trademark, trade name or
service mark of any other company appearing in this prospectus belongs to its
holder.
- 2 -
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common stock offered by Intelli-Check.................... 1,000,000 shares
Common stock to be outstanding
after this offering.................................... 6,271,152 shares. Our outstanding shares do not
include:
o 100,000 shares reserved for issuance upon
exercise of the underwriter's warrants;
o 710,000 shares reserved for issuance upon
exercise of options granted under our stock
option plans, of which 350,000 are currently
exercisable;
o 690,000 shares reserved for issuance upon
exercise of options available for future
grants under our stock option plans;
o 2,373,100 shares reserved for issuance upon
exercise of non-plan options and warrants, all
of which are currently exercisable; and
o 150,000 shares reserved for issuance in this
offering to cover over-allotments, if any, by
the underwriter.
Directed shares.......................................... 200,000 shares reserved by the underwriter to be
offered at the initial public offering price to
selected officers, directors, employees, consultants,
business associates and other persons.
Use of proceeds.......................................... We intend to use the net proceeds of this offering
for:
o purchase of hardware;
o repayment of indebtedness;
o product development;
o sales and marketing; and
o working capital and general corporate purposes.
Risk factors............................................. Investing in our common stock involves a high degree
of risk and immediate and substantial dilution.
Proposed AMEX symbol..................................... IDN
</TABLE>
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<PAGE>
SUMMARY FINANCIAL INFORMATION
The following summary financial information as of December 31, 1998 and
1997, and for the years ended December 31, 1998 and December 31, 1997 are
derived from our audited financial statements. The summary financial data as of
June 30, 1999 and for the six months ended June 30, 1999 and 1998 are derived
from our unaudited financial statements. The information presented below should
be read together with "Selected Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our financial
statements and related notes included elsewhere in this prospectus.
Statement of Operations Information:
<TABLE>
<CAPTION>
Year Ended December 31 Six Months Ended June 30
---------------------- ------------------------
1997 1998 1998 1999
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Sales $ 16,736 $ 86,354 $ 80,422 $ 221
Cost of goods sold 4,343 22,074 21,615 55
Gross profit 12,393 64,280 58,807 166
Operating expenses 1,579,632 1,506,615 632,393 774,847
Net loss $(1,604,296) $(1,503,814) $ (596,787) $ (775,605)
=========== =========== ========== ==========
Net loss per
common share
Basic and diluted $ (0.39) $ (0.35) $ (0.14) $ (0.15)
=========== =========== ========== ==========
Common shares
used in
Basic and diluted 4,136,885 4,402,552 4,136,885 5,021,152
=========== =========== ========== ==========
</TABLE>
Balance Sheet Information:
December 31, June 30, 1999
1998 (unaudited)
------------ --------------------------------
Actual Pro Forma As Adjusted
------ --------- -----------
Cash $ 159,600 $174,780 $1,224,780 $6,948,260
Working capital
(deficit) (924,666) 265,597 115,597 5,839,097
Total assets 451,303 766,292 1,816,292 7,539,792
Total long-term debt 6,993 13,260 13,260 13,260
Total debt 113,153 31,502 1,231,502 1,231,502
Stockholders'
(deficit) equity (657,570) 591,740 591,740 6,315,240
The pro forma information presented above gives effect to the receipt of
approximately $1,050,000 net proceeds from the issuance of units consisting of
$1,200,000 in secured promissory notes bearing interest at 10.0% and warrants to
purchase common stock issued in August and September 1999. The as adjusted
information presented above also gives effect to the sale of 1,000,000 shares
offered by this prospectus.
- 4 -
<PAGE>
RISK FACTORS
The shares offered by this prospectus are speculative and involve a
high degree of risk. Each prospective investor should carefully consider the
following risk factors before making an investment decision.
Because of our lack of operating history, your basis for evaluating us is
limited.
We have a limited operating history by which you can evaluate our
prospects and future performance. Since we began business in 1994, we have been
engaged primarily in research and development and have had no significant
revenues from sales of our products. You should consider our prospects in light
of the risks, expenses and difficulties frequently encountered in the operation
of a new business that relies on developing technology. You should also consider
our prospects in light of the risks, expenses and difficulties encountered by
businesses in the move from development to commercialization of new products
based on innovative technology.
Because we have experienced losses and expect our expenses to increase, we may
not be able to achieve profitability.
We have incurred operating losses since our inception. We had an
accumulated deficit of approximately $2.3 million at June 30, 1999. We cannot
assure you that our revenues will become significant or that we will ever
achieve profitable operations.
We may not have sufficient capital for our business and we will be required to
seek additional financing to fund our operations.
Our capital requirements have been and will continue to be significant.
The net proceeds of the sale of the shares in this offering, together with our
available cash, are expected to continue to fund our projected operations at
least for the next twelve months. If we were to fail to attain positive cash
flow thereafter, we will be required to seek additional equity or debt financing
to fund the costs of our operations. We cannot assure you that additional
financing will be available to us when needed, on commercially reasonable terms,
or at all. If we are unable to obtain additional financing when needed, we will
be required to curtail our marketing and production plans and possibly cease
operations.
Because our business model is unproven, achieving market acceptance will require
significant efforts and expenditures to create awareness, demand and interest by
potential customers regarding perceived benefits.
We cannot assure you that any of our products will gain market
acceptance or that our product will function to the satisfaction of our
customers. We also do not know whether we will be able to produce our product at
a cost that will be acceptable to potential purchasers. As a result, we may be
required to reduce our prices, which would have an adverse effect on our profit
margins.
We depend on our intellectual property, which may not be fully protected.
Our proprietary technology distinguishes our products from those of our
competitors. We rely on a combination of our patent and trademarks, trade secret
laws and nondisclosure and confidentiality agreements with our employees and
others with whom we do business, to protect our proprietary technology. We
cannot assure you that these measures will provide meaningful protection for our
trade secrets or proprietary technology in the event of any
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<PAGE>
unauthorized use or disclosure. In addition, others may obtain access to or
independently develop technologies or know-how similar to ours.
A third party is seeking to invalidate our patent.
The IdentiScan Company, LLC offers a product that electronically
reads and calculates age from a driver license. In August 1999, IdentiScan filed
a complaint against us which seeks to have the IdentiScan product declared
non-infringing on our patent and seeks to have our patent declared invalid. The
complaint does not seek monetary damages. We believe that our patent, to which
we hold clear title, is valid and fully enforceable. We intend to vigorously
defend it. We also believe IdentiScan's claim of non-infringement is without
merit. However, if our patent were to be declared invalid or if our patent were
to be otherwise limited, we believe it would have an adverse effect on our
business and future success because other companies, including IdentiScan, might
be able to use some or all of the technology covered by our patent to develop
and market products which will directly compete with our products. Furthermore,
if we were required to devote a significant portion of the proceeds of this
offering to defend our patent, we would have less money available for other
purposes.
Third parties may assert infringement claims against us.
We are not aware of any infringement by our products or technology on
the proprietary rights of others. Nevertheless, infringement or invalidity
claims may be asserted against us and we could incur significant expense in
defending them. If any claims or actions are asserted against us, we may be
required to modify our products or seek licenses for these intellectual property
rights. We may not be able to modify our products or obtain licenses on
commercially reasonable terms, in a timely manner or at all. Our failure to do
so could adversely affect our business.
We currently rely on one hardware supplier to provide us with the terminals to
run our ID-Check software. Delays and inconsistencies in the quality of the
terminals could result in lost sales.
If the supplier of our hardware terminals does not meet our delivery
requirements, we may have to seek an alternate supplier. While we believe
alternate suppliers would be available, any delay in securing a new source on
satisfactory terms or within the time frame to meet our sales goals could have a
material adverse effect on our business. Additionally, delays in production or
inconsistencies in quality could result in our failure to fulfill sales orders
and the cancellation of potential orders, which could damage our reputation.
If we are unable to maintain strategic relationships with third parties
marketing our products, our business may be adversely affected.
We intend to use distributors and independent sales organizations as
part of our marketing strategy. If, for any reason, we are unsuccessful in
implementing this strategy or if the other companies do not devote sufficient
resources to promoting our products, our business may suffer.
If governmental agencies were to stop sharing data with us, our business would
be adversely affected.
Currently, a number of states and Canadian provinces which conform to
the guidelines established by standardization bodies cooperate with us by
providing sample driver licenses and identification cards so that we may program
the ID-Check terminal to read and analyze the encoded information found on the
driver licenses and identification cards. We cannot assure you that these
jurisdictions will continue to cooperate
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<PAGE>
with us. If they stop cooperating with us, our ability to market our products
may be severely limited.
If we fail to respond to future technological changes, our products could become
outdated and less attractive to potential customers.
Our success will depend upon our ability to maintain and develop
competitive technologies to continue to enhance our products and introduce new
products in a timely and cost-effective manner. Developing these products may
require substantial time and expense. We cannot assure you that we will be able
to respond quickly, cost-effectively or sufficiently to developments affecting
our market. Our business, financial condition and operating results may be
adversely affected if we are unable to anticipate or respond quickly to any of
these developments.
Potential product defects could subject us to claims from customers.
Products as complex as those we offer and intend to offer may contain
undetected errors or result in failures when first introduced or when new
versions are released. Despite our product testing efforts and testing by
current and potential customers, it is possible that errors will be found in a
new product or enhancement after commencement of commercial shipments. The
occurrence of product defects or errors could result in adverse publicity, delay
in product introduction, diversion of resources to remedy defects, loss of or a
delay in market acceptance or claims by customers against us, or could cause us
to incur additional costs, any of which could adversely affect our business.
We may not be able to compete successfully for market share because some of our
competitors may be better known and may have greater resources.
Some of our competitors may be significantly larger and have
substantially greater capital and management resources than us. We expect that
competition will become intense in the markets targeted by us, and we cannot
assure you that we will compete successfully.
We may not be able to attract and retain the key personnel we need to succeed.
In order to successfully implement our business plan, we need to
attract and retain qualified and experienced managerial, technical and sales
personnel. Competition for the type of qualified individuals that we seek is
intense. We cannot assure you that we will be able to retain existing employees
or that we will be able to attract and retain the qualified personnel we need.
Our success depends on our two most senior officers.
Our success will depend on our two most senior officers, Frank
Mandelbaum, our Chairman of the Board and Chief Executive Officer and Kevin
Messina, our President and Chief Technical Officer. The loss of the services of
either of them could materially and adversely affect us.
Future sales of our common stock by our existing stockholders could have adverse
effects.
Upon consummation of this offering we will have 6,271,152 shares of
common stock outstanding, of which the 1,000,000 shares offered hereby will be
freely tradeable without restriction or further registration under the
Securities Act. Of the remaining 5,271,152, 1,122,000 shares of our common stock
have been held for over two years and are currently
- 7 -
<PAGE>
eligible for sale under Rule 144 of the Securities Act. Additionally, beginning
90 days after the date of this prospectus, 422,105 shares of our common stock
will be eligible for sale under Rule 144. Also, upon the expiration of the
one-year lock-up agreement with the underwriter, 3,358,447 shares of our common
stock will become eligible for sale, in some cases subject to volume
restrictions under Rule 144. In addition, there are 3,873,100 shares subject to
currently outstanding options or warrants or reserved for future issuance. The
market price of our common stock could decline as a result of sales of a large
number of shares of common stock in the market after this offering, or the
perception that these sales may occur. These sales also might make it more
difficult for us to sell equity securities in the future at a time and at a
price that we deem appropriate.
Our stock price could be extremely volatile.
The market price of our common stock may be highly volatile as a result
of factors specific to us or applicable to our market and industry in general.
These factors, include:
o variations in our annual or quarterly financial results or
those of our competitors;
o changes by financial research analysts in their
recommendations or estimates of our earnings;
o conditions in the economy in general or in the information
technology service sector in particular;
o announcements of technological innovations or new products
or services by us or our competitors;
o unfavorable publicity or changes in industry guidelines,
applicable laws and regulations, or their judicial or
administrative interpretations, affecting us or the
information technology service sectors;
o levels of customer satisfaction, including our ability to
retain existing customers and attract new customers; and
o price competition or the introduction of new competitors.
Your investment will be subject to immediate and substantial dilution.
Purchasers of the shares of common stock in this offering will
experience immediate and substantial dilution of $6.01 per share, or 85.9%,
between the net tangible book value per share of common stock after this
offering and the initial public offering price per share.
Our management's broad discretion in the use of the proceeds of this offering
may increase the risk that they will not be used effectively.
We have allocated approximately $923,500, or 16.2%, of the estimated
net proceeds of this offering to working capital and general corporate purposes.
Our management will have broad discretion as to the application of these
proceeds without having to seek your approval.
- 8 -
<PAGE>
Our management has significant control over stockholder matters which may impact
the ability of minority stockholders to have a say in our activities.
After the closing of this offering, our officers and directors will
beneficially own approximately 41.3% of our common stock. If all of the
currently exercisable warrants and the stock options were exercised, the
officers and directors would beneficially own 33.7% of our shares of common
stock. As a result, our officers and directors, acting together, will have the
ability to exercise significant influence over all matters requiring stockholder
approval. The concentration of ownership could delay or prevent a change in
control of Intelli-Check that might be beneficial to other stockholders.
We are subject to anti-takeover provisions.
Provisions of our certificate of incorporation, our by-laws and
Delaware law could make it more difficult for a third party to acquire us, even
if doing so would be beneficial to our stockholders.
We may have Year 2000 problems.
We may discover Year 2000 compliance problems that will require
substantial revisions to our products. Our failure to correct these problems on
a timely basis, should they arise, could result in lost revenues, increased
operating costs and the loss of customers and other business interruptions, any
of which could have a material adverse effect on our business, results of
operations and financial condition.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements based on our
current expectations, assumptions, estimates and projections about Intelli-Check
and our industry. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including all the risks and uncertainties discussed in Risk Factors and
elsewhere in this prospectus. We do not undertake to update publicly any
forward-looking statements for any reason, even if new information becomes
available or other events occur in the future. We believe that our
forward-looking statements are within the meaning of the safe harbor provided by
the Securities Exchange Act of 1934, as amended.
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<PAGE>
USE OF PROCEEDS
The net proceeds to Intelli-Check from the sale of the 1,000,000 shares
of common stock offered by this prospectus are estimated to be $5,723,500,
$6,647,500 if the underwriters' over-allotment option is exercised in full after
deducting the underwriting discount and estimated offering expenses. We will not
receive any portion of the proceeds from the sale of common stock by selling
stockholders.
We expect to use the net proceeds during the twelve months following
the consummation of this offering approximately as follows:
Approximate Approximate
Dollar Percentage of
Amount Net Proceeds
Application of Net Proceeds ------ ------------
- ---------------------------
Purchase of terminals........................ $2,875,000 50.2%
Repayment of indebtedness.................... 1,225,000 21.4%
Product development.......................... 400,000 7.0%
Sales and marketing.......................... 300,000 5.2%
Working capital and general
corporate purposes.......... $ 923,500 16.2%
---------- ------
Total.................................... $5,723,500 100.0%
========== ======
Purchase of Terminals. We intend to use a portion of the proceeds for the
purchase of ID-Check terminals, which we expect to be delivered by the end of
the second quarter of 2000.
Repayment of indebtedness. We intend to repay $1,200,000 principal amount of
secured promissory notes bearing interest at the annual rate of 10%, plus
approximately $25,000 of accrued interest, which will be due on the promissory
notes. The proceeds from the sale of these promissory notes were used for the
purchase of ID-Check terminals and for working capital and general corporate
purposes.
Product development. We intend to continue to enhance the performance and
increase the capability of our ID-Check terminal. We also intend to identify and
develop additional applications for our technology. Costs of product development
include the hiring of additional employees, construction of prototypes and
testing.
Sales and marketing. We expect to hire sales and marketing personnel to
establish a marketing program. We also will be preparing additional marketing
materials and further developing our website.
Working capital and general corporate purposes. We may use a portion of the
proceeds allocated to working capital and general corporate purposes to pay
trade payables incurred from time to time and the salaries of our employees, if
cash flow from operations is insufficient for these purposes.
If the underwriter exercises its over-allotment option in full, we will
realize additional net proceeds of $924,000, all of which will be allocated to
working capital and general corporate purposes.
The foregoing represents our best estimate of the allocation of the net
proceeds of this offering based upon the current status of our business. This
estimate is based on certain assumptions, including the development of our
business in the way we anticipate. If any of our assumptions prove incorrect, we
may find it necessary to reallocate a portion of the
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<PAGE>
proceeds within the above-described categories or use portions of the proceeds
for other purposes. Our estimates may prove to be inaccurate, new programs or
activities may be undertaken which will require considerable additional
expenditures or unforeseen expenses may occur.
Based upon our current plans and assumptions relating to our business
plan, we believe the net proceeds of this offering, combined with other
anticipated available cash resources, will be sufficient to meet our cash
requirements for at least twelve months following the closing of this offering.
If our plans change or our assumptions prove to be inaccurate, we may need to
seek additional financing sooner than currently anticipated or curtail our
operations. We cannot assure you that the proceeds of this offering will be
sufficient to fund our proposed growth or that additional financing will be
available if needed.
Proceeds not immediately required for the purposes described above will
be invested principally in United States government securities, short-term
certificates of deposit, money market funds or other short-term interest bearing
investments.
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<PAGE>
DILUTION
The difference between the initial public offering price per share and
the net tangible book value per share of common stock after this offering
constitutes the dilution to investors in this offering. Net tangible book value
is determined by dividing total tangible assets less total liabilities by the
number of outstanding shares of common stock.
At June 30, 1999, we had a net tangible book value of $515,000, or $.10
per share. After giving effect to the sale of 1,000,000 shares of common stock
offered by Intelli-Check by this prospectus, after deducting estimated
underwriting discounts and expenses of this offering, and the application of the
estimated net proceeds, our adjusted net tangible book value as of June 30, 1999
would have been $6,238,500, or $0.99 per share. This represents an immediate
increase in net tangible book value of $0.89 per share to existing stockholders
and an immediate dilution of $6.01 (85.9%) per share to new investors.
The following table illustrates the dilution to new investors on a per
share basis:
Initial public offering price per share......................... $7.00
Net tangible book value before offering............. 0.10
Increase attributable to new investors and
pro forma adjustments............................. 0.89
-----
Adjusted net tangible book value after the offering............. $0.99
-----
Dilution per share to new investors............................. $6.01
=====
The following table sets forth as of the date of this prospectus, with
respect to our existing stockholders and new investors, a comparison of the
number of shares of common stock we issued, the percentage ownership of those
shares, the total consideration paid, the percentage of total consideration paid
and the average price per share.
Shares Acquired Total Consideration Average
--------------- ------------------- Price per
Number Percent Amount Percent Share
------ ------- ------ ------- -----
Existing stockholders 5,271,152 84% $2,863,638 29% $ .54
New investors........ 1,000,000 16% $7,000,000 71% $7.00
--------- --- ---------- ---
Total................ 6,271,152 100.0% $9,863,638 100.0%
========= ====== ========== ======
The above table assumes no exercise of the underwriter's over-allotment
option. If the underwriter exercises the over-allotment option in full, we
estimate that the new investors will have paid $8,050,000 for the 1,150,000
shares of common stock being offered, representing approximately 73.7% of the
total consideration for 17.9% of the total number of shares of common stock
outstanding. In addition, the above table does not give effect to the shares
issuable upon exercise of outstanding options and warrants.
DIVIDENDS
We have never declared or paid any dividends to the holders of our
common stock and we do not anticipate paying cash dividends in the foreseeable
future. We currently intend to retain all earnings for use in connection with
the expansion of our business and for general corporate purposes. The future
declaration and payment of dividends, if any, will be within the sole discretion
of our board of directors and will depend upon our profitability, financial
condition, cash requirements, future prospects and other factors deemed relevant
by our board of directors. In addition, the payment of cash dividends on our
common stock in the future could be limited by the terms of financing agreements
that we may enter into or by the terms of any preferred stock that may be
authorized and issued.
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<PAGE>
CAPITALIZATION
The following table presents our capitalization as of June 30, 1999 on
an actual basis, adjusted to give effect to pro forma information and adjusted
to give effect to our sale of 1,000,000 shares of common stock offered by us
under this prospectus and the anticipated application of the estimated net
proceeds. The share numbers presented in the following table do not include:
o 150,000 shares of common stock reserved for issuance in this
offering to cover the over-allotment option;
o 972,000 shares of common stock reserved for issuance upon
exercise of outstanding options;
o 1,621,100 shares of common stock reserved for issuance upon
exercise of outstanding warrants;
o 120,000 shares of common stock reserved for issuance upon
exercise of options available for future grant under our stock
option plans.
June 30, 1999
--------------------------------------
Actual Pro Forma As Adjusted
------ --------- -----------
Current portion of
long-term debt $18,242 $18,242 $18,242
======= ======= =======
Long-term debt $13,260 $13,260 $13,260
======= ======= =======
Stockholders' Equity:
Preferred Stock series A, $ 2,500 $ -- $ --
par value $.01 per share,
250,000 authorized, 250,000
issued and outstanding actual,
no shares outstanding
pro forma or as adjusted
Common Stock, par value 5,021 5,271 6,271
$.001 per share, 10,000,000
authorized; 5,021,152 shares
issued and outstanding actual,
5,271,152 shares issued and
outstanding pro forma and
6,271,152 shares issued and
outstanding as adjusted
Additional paid-in capital 2,863,638 2,865,888 8,588,388
Accumulated deficit (2,279,419) (2,279,419) (2,279,419)
----------- ------------ -----------
Total Stockholders' Equity 591,740 591,740 6,315,240
----------- ------------ -----------
Total Capitalization $ 605,000 $ 605,000 $ 6,328,500
=========== ============ ===========
The pro forma and as adjusted number of preferred shares reflect conversion of
250,000 shares of preferred stock into 250,000 shares of common stock which
occurred in July 1999
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<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data as of December 31, 1998 and 1997,
and for the years ended December 31, 1998 and December 31, 1997 are derived from
our audited financial statements. The selected financial data as of June 30,
1999 and for the six months ended June 30, 1999 and 1998 are derived from our
unaudited financial statements. The following selected consolidated financial
date should be read in conjunction with the consolidated financial statements
and notes to these statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
prospectus.
Statement of Operations Information:
Year Ended December 31 Six Months Ended June 30
-------------------------- --------------------------
1997 1998 1998 1999
---- ---- ---- ----
(unaudited)
Sales $ 16,736 $ 86,354 $ 80,422 $ 221
Cost of goods sold 4,343 22,074 21,615 55
Gross profit 12,393 64,280 58,807 166
Operating expenses 1,579,632 1,506,615 632,393 774,847
Net loss $(1,604,296) $(1,503,814) $ (596,787) $ (775,605)
=========== =========== ========== ==========
Net loss per
common share
Basic and diluted $ (0.39) $ (0.35) $ 0.14) $ (0.15)
=========== =========== ========== ==========
Common shares
used in computing
per share amounts
Basic and diluted 4,136,885 4,402,552 4,136,885 5,021,152
=========== =========== ========== ==========
Balance Sheet Information:
December 31,
---------------------
June 30, 1999
1997 1998 (unaudited)
---- ---- -------------
Cash $ 481,770 $ 159,600 $174,780
Working capital
(deficit) (244,467) 924,666 265,597
Total assets 924,781 451,303 766,292
Total long-term debt 359,517 6,993 13,260
Total debt 376,322 113,153 31,502
Stockholders'
(deficit) equity (185,089) (657,570) 591,740
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of our company should be read in conjunction with the financial
statements and the notes to those statements included elsewhere in this
prospectus. This discussion contains forward-looking statements that involve
risks and uncertainties. Please see "Risk Factors."
Overview
Intelli-Check was formed in 1994 to address a growing need for reliable
age and document verification systems to detect fraudulent driver licenses and
other widely accepted forms of government-issued identification documents. We
have emerged from a development stage company to an operating company and we
recently began commercial production of our product. Our sales to date have been
nominal since we have previously produced only a limited pre-production run of
our product for testing and market acceptance. Since inception, we have incurred
significant losses and negative cash flow, and as of June 30, 1999 we had an
accumulated deficit of approximately $2.3 million. We have not achieved
profitability and expect to continue to incur operating losses. We will continue
to fund operating and capital expenditures from available capital until such
time, if any, as we achieve profitability. In view of the rapidly evolving
nature of our business and our limited operating history, we believe that
period-to-period comparisons of revenues and operating results are not
necessarily meaningful and should not be relied upon as indications of future
performance.
Results of Operations
Comparison of the six months ended June 30, 1999 to the six months ended June
30, 1998.
Sales decreased 99.7% from $80,422 for the six months ended June 30,
1998 to $221 recorded for the six months ended June 30, 1999. Sales for the
period ended June 30, 1998 consisted of sales of our initial pre-production run
of ID-Check terminals while the June 30, 1999 period only included sales of
supplies. In the third quarter of 1998, we temporarily withdrew from the
marketplace so that we could devote our resources to expand the capability of
our product by converting our software to operate on programmable terminals.
Operating expenses, which consist of selling, general and
administrative and research and development expenses, increased 17.8% from
$632,393 in the period ended June 30,1998 to $744,847 in the June 30, 1999
period. Selling expenses, which consist primarily of salaries and related costs
for marketing, increased 19% from $79,578 in the period ended June 30, 1998 to
$98,297 in the June 30, 1999 period primarily due to the hiring of a director of
national sales. General and administrative expenses, which consist primarily of
salaries and related costs for general corporate functions, including executive,
finance, accounting, facilities and fees for professional services, increased
15.2% from $473,889 in the June 30, 1998 period to $545,929 in the period ended
June 30, 1999, primarily as a result of increased professional fees. Research
and development expenses, which consist primarily of salaries and related costs
for the development of our products, increased 27.5% from $78,926 in the June
30, 1998 period to $100,621 in the June 30, 1999 period primarily due to the
hiring of additional programmers and outside consultants to enable us to meet
our timetable for the software conversion. The addition of personnel resulted in
higher salaries, benefits, facilities and travel costs. We believe that we
require additional significant investments in development and operating
infrastructure, including the hiring of additional sales and marketing
personnel. Therefore, we expect that expenses will continue to increase for the
foreseeable future as we increase expenditures for advertising, brand promotion,
public relations and other marketing activities. We expect that we will incur
additional general and administrative expenses as we continue to hire personnel
and incur incremental costs related to the growth of the business. Research and
development expenses will also increase as we complete and introduce additional
products based upon our patented ID-Check technology.
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<PAGE>
Interest expense increased from $23,201 in the period ended June 30,
1998 to $30,924 for the period ended June 30, 1999 as a result of interest
expense on increased deferred compensation
We have incurred net losses to date, therefore we have paid nominal
income taxes.
As a result of the factors noted above, our net loss increased from
$596,787 in the period ended June 30, 1998 to $775,605 in the June 30, 1999
period.
Comparison of the year ended December 31, 1998 to the year ended December 31,
1997.
Sales increased 416% from $16,736 for the year ended December 31, 1997
to $86,354 recorded for the year ended December 31, 1998. Revenues for the year
ended December 31, 1997 were lower because we did not receive the first
pre-production ID-Check terminals until October 1997. Thus, sales did not
commence until the last fiscal quarter for the reasons discussed above.
Operating expenses decreased 4.6% from $1,579,632 in the year ended
December 31, 1997 to $1,506,615 in the year ended December 31, 1998. This
decrease was attributable to a decline in research and development expenses
partially offset by higher general and administrative costs and selling
expenses. General and administrative expenses increased 6.9% from $992,375 in
the year ended December 31, 1997 to $1,060,537 in the year ended December
31,1998, primarily as a result of increased professional fees. Selling expenses
increased 12.1% from $124,453 in the year ended December 31, 1997 to $139,470 in
the year ended December 31, 1998 as a result of marketing expenses for the
introduction of ID-Check. Research and development expenses decreased 33.7% from
$462,804 in the year ended December 31, 1997 to $306,608 in the year ended
December 31, 1998 primarily due to the completion in 1997 of our software and
hardware development for the pre-production units.
Interest expense increased from $37,057 in the year ended December 31,
1997 to $61,479 for the year ended December 31, 1998 as a result of interest
expense on increased deferred compensation and borrowings during the year.
As of December 31, 1998, we had a net operating loss carryforward of
$950,568 for financial reporting purposes. At December 31, 1997, we had no
operating loss carry forward due to our status as a subchapter S corporation
under the Internal Revenue Code for the prior periods. Under subchapter S, all
losses were allocated to our stockholders. We have recorded a valuation reserve
equal to the amount of the carryforward due to the uncertain realization of
these tax benefits.
Our net loss decreased from a net loss of $1,604,296 in the year ended
December 31, 1997 to $1,503,814 in the year ended December 31, 1998, primarily
as a result of the increase in sales and the decrease in research and
development expenses.
Liquidity and Capital Resources
Our capital requirements have exceeded our cash flow from operations as
we have been developing our business. At December 31, 1998 we had a working
capital deficit of $924,666. Since inception, we have financed our operations
primarily through private equity and debt financing, issuance of stock for
payables and borrowings from officers. During the year ended December 31, 1997,
we received aggregate net proceeds of $1,917,849 from the private sales of stock
and warrants and issuance of a convertible note payable. During the year ended
December 31, 1998, we received aggregate net proceeds from the private sale of
stock and warrants of $766,000. During the six months ended June 30, 1999 we
received aggregate net proceeds of $719,200 from the private sale of stock and
warrants. In addition, in August and September 1999, we received aggregate net
proceeds of $1,050,000 from the issuance of promissory notes and warrants. We
used the net proceeds primarily for the purchase of terminals, working capital
and general corporate purposes.
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<PAGE>
Cash used in operating activities for the six months ended June 30,
1999 of $663,785 was primarily attributable to the net loss of $775,605 and
deposits on hardware purchases of $198,505 offset by increase in accounts
payable and accrued expenses of $324,894. [Cash used in operating activities for
the six months ended June 30, 1998 of $623,582 was due primarily to net
operating losses of $596,787 and a decrease in accounts payable and accrued
expenses of $38,485.] Cash used in operating activities for the year ended
December 31, 1998 of $1,048,025 resulted primarily from the net loss of
$1,503,814 and the increase in inventory of $122,292, offset by a loss on
disposal of assets of $225,783 and increase in accounts payable and accrued
expenses of $262,172. [Cash used in operating activities for the year ended
December 31, 1997 of $1,164,986 resulted primarily from net losses of $1,604,296
offset by an increase in accounts payable and accrued expenses of $423,651.] The
increase in accounts payable and accrued expenses for both periods is
attributable to our diminished working capital. Cash used in investing
activities was $36,230 for the six months ended June 30, 1999 and $21,449 for
the six months ended June 30, 1998. Cash used in investing activities was
$26,975 for the year ended December 31, 1998 and $246,264 for the year ended
December 31, 1997. Net cash used in investing activities for these periods
consisted primarily of capital expenditures for computer equipment and furniture
and fixtures. Cash provided by financing activities was $715,195 for the six
months ended June 30, 1999 and $240,468 for the six months ended June 30, 1998.
Cash provided by financing activities was $752,830 for the year ended December
31, 1998 and $1,866,540 for the year ended December 31, 1997. Cash provided by
financing activities primarily related to the private sales of common stock,
preferred stock and warrants discussed above.
Because of our limited cash resources, our senior officers deferred the
receipt of their compensation, in whole or in part, prior to June 30, 1999. This
obligation was eliminated through the issuance of stock, warrants and stock
options in the second quarter of 1999. No deferred compensation is currently
outstanding.
We currently anticipate that our available cash resources combined with
the net proceeds from this offering will be sufficient to meet our anticipated
working capital and capital expenditure requirements for at least twelve months
after the closing of this offering. These requirements are expected to include
the purchase of 5,000 terminals to run our patented software, product
development, sales and marketing working capital requirements and other general
corporate purposes. We will also repay debt incurred in August and September
1999. We may need to raise additional funds, however, to respond to business
contingencies which may include the need to: fund more rapid expansion; fund
additional marketing expenditures; develop new markets for our ID-Check
technology, enhance our operating infrastructure; respond to competitive
pressures; or acquire complementary businesses or necessary technologies.
Net Operating Loss Carryforwards
As of December 31, 1998, we had a net operating loss carryforward of
$950,568, which expires beginning in the year 2013. The issuance of equity
securities in the future, together with our recent financings and this offering,
could result in an ownership change and, thus could limit our use of our prior
net operating losses. If we achieve profitable operations, any significant
limitation on the utilization of our net operating losses would have the effect
of increasing our tax liability and reducing net income and available cash
reserves. We are unable to determine the availability of these net operating
losses since this availability is dependent upon profitable operations, which we
have not achieved in prior periods.
Recent Accounting Standards
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, ?Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use? (?SOP 98-1?), which provides
guidance for determining whether computer software is internal-use software and
on accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. SOP 98-1 is effective for fiscal years
beginning
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<PAGE>
after December 31, 1998. We do not expect the adoption of SOP 98-1 to have a
material effect on our financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, and for hedging
activities. SFAS No. 133 was originally to be effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. In July 1999, however, the FASB
issued SFAS No. 137, ?Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133,? which
amends SFAS No. 133 to be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. We currently do not engage or plan to engage in
derivative instruments or hedging activities.
Year 2000 Issues
Many currently installed computer systems and software products are
coded to accept or recognize only two digit entries in the date code field.
These systems and software products may recognize a date using "00" as the year
1900 rather than the year 2000. As a result, computer systems and/or software
used by many companies and governmental agencies may need to be upgraded to
comply with such Year 2000 requirements or risk system failure or
miscalculations causing disruptions of normal business activities.
State of Readiness. We have made a preliminary assessment of the Year
2000 readiness of our information technology systems, including our ID-Check
software, and our non-information technology systems. Our plan consists of:
o quality assurance testing of our internally developed
proprietary software;
o contacting third-party vendors and licensors of material
hardware, software and services;
o contacting vendors of material non-information technology
systems;
o assessment of repair or replacement requirements;
o repair or replacement; and
o implementation.
We have substantially completed a review and assessment of all
proprietary and third party hardware and software and believe that our hardware
and software are substantially Year 2000 compliant. We have made inquiries of a
number of our vendors requesting assurances of their compliance. These third
parties, including our supplier of terminals for the ID-Check software, have
generally advised us that their review of their operating systems indicate that
their operating systems are Year 2000 compliant or will be Year 2000 compliant
in a timely manner.
Costs. To date, we have not incurred any material costs in identifying
or evaluating Year 2000 compliance issues. Most of our expenses have been and
will continue to be related to the operating costs associated with evaluating
Year 2000 compliance matters generally.
Risks. We are not currently aware of any Year 2000 compliance problems
that would have a material adverse effect on our business, results of operations
and financial condition. However, we may discover Year 2000 compliance problems
that will require substantial software revisions or replacement of hardware. Our
failure to fix or replace software or hardware on a timely basis could result in
lost
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<PAGE>
revenues, increased operating costs and the loss of customers and other business
interruptions, any of which could have a material adverse effect on our
business, results of operations and financial condition. Moreover, the failure
to adequately address Year 2000 compliance issues could result in claims of
mismanagement, misrepresentation or breach of contract and related litigation,
which could be costly and time-consuming to defend.
In addition, we cannot assure you that third-party software or hardware
incorporated into our material systems or other systems upon which we rely will
not need to be revised or replaced, which could be time consuming and expensive.
In addition, we cannot assure you that governmental agencies, utility companies,
third-party service providers and others outside of our control will be Year
2000 compliant. The failure by such entities to be Year 2000 compliant could
result in a systemic failure beyond our control. Any of these occurrences could
have a material adverse effect on our business, financial condition and results
of operations. At this time, we do not possess the information necessary to
estimate the potential costs of revisions to or the replacement of software or
hardware that are determined not to be Year 2000 compliant. Although we do not
anticipate that such expenses will be material, such expenses, if higher than
anticipated, could have a material adverse effect on our business, financial
condition and results of operations.
Contingency Plan. As discussed above, we are engaged in an ongoing Year 2000
assessment and have not yet developed any contingency plans. The results of our
Year 2000 simulation testing and the responses received from third-party vendors
and service providers will be taken into account in determining the nature and
extent of any contingency plans.
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<PAGE>
BUSINESS
Introduction
Intelli-Check was formed in 1994 to develop, manufacture and market an
advanced document verification system to enable a retailer to determine the
customer's age and identity to:
o detect and prevent the use of fraudulent identification for
the purchase of alcohol, tobacco and other age-restricted
products;
o reduce the risk to the retailer of substantial monetary fines,
criminal penalties and license revocation for the sale of
age-restricted products to minors; and
o reduce check cashing, credit card and other types of fraud.
In an effort to combat these problems, the federal government and many
states and Canadian provinces have enacted laws requiring businesses that sell
age-restricted products to verify the ID of potential customers to determine if
they are of legal age. These laws impose stringent penalties. In addition, many
states and local governments are setting up undercover "sting" operations to
detect violations.
The product we have designed and developed is based on our patented
ID-Check technology. ID-Check provides businesses with a reliable, simple and
cost-effective way to verify age and reduce the risk of severe penalties for
non-compliance with these laws. We have not manufactured or sold a substantial
number of ID-Check terminals to date. In 1998, we launched a limited
pre-production pilot program by installing an earlier version of our ID-Check
terminal in 68 locations throughout the United States and Canada. Of the 68
installations, 32 are convenience stores, 24 are bars and 12 are in a variety of
other retail establishments. Based on the positive reaction of our customers, we
have begun commercial production of an enhanced ID-Check terminal for more
widespread distribution.
Driver license
The driver license is the most widely used form of government issued
photo identification. We believe the driver license has become a de facto
identification card. In addition to its primary function, the driver license is
used in social services, gun control, check cashing and other applications.
AAMVA guidelines
In response to the ease with which driver licenses and non-driver
identification cards can be altered, tampered with or fraudulently obtained, an
increasing number of states and Canadian provinces have adopted the guidelines
established by the American Association of Motor Vehicle Administrators (AAMVA)
and the American National Standards Institute (ANSI). AAMVA is a U.S. based
international organization that establishes guidelines for motor vehicle
administrators in NAFTA countries. Currently, 34 states and five Canadian
provinces conform with AAMVA guidelines that suggest driver licenses and
non-driver identification cards contain "encoded" information on magnetic
stripes or bar codes, which cannot be accurately read without the necessary
decoding equipment and technology. We expect that in the future substantially
all of the U.S. states and Canadian provinces will implement plans to issue
driver licenses that contain information in electronically readable format
complying with AAMVA guidelines.
Non-driver identification card
Although many people do not have a driver license, jurisdictions that
use AAMVA compliant driver licenses offer other identification cards that
contain encoded information. These identification cards,
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<PAGE>
as well as military ID's and immigration "Green" cards, are fundamentally
identical to driver licenses. Because driver licenses are the most widely used
form of legally acceptable government documentation, we will refer to all these
types of legally acceptable governmental identification documents as "driver
licenses" in this prospectus. Our ID-Check software is equally capable of
performing its function with all of these types of government identification.
Underage Use of Alcohol and Tobacco Products and the Need for Age Verification
Overview
Underage access to age-restricted products, like alcohol and tobacco,
remains a major societal problem, as the following statistics indicate:
o Approximately 10.6 million or 51.2% of high school students in
the United States drink alcoholic beverages at least once
weekly, with 86% purchasing the alcohol themselves;
o The Office of Drug Control Policy reported that approximately
9.5 million drinkers of alcoholic beverages in 1996 were
between the ages of 12 and 20;
o According to the Insurance Institute for Highway Safety, in
1997, 26% of 16-20 year olds fatally injured in motor vehicle
crashes had high blood alcohol concentrations;
o Approximately 3,000 minors begin smoking regularly every day;
o Underage youths can purchase cigarettes successfully 70%-80%
of the time over the counter and 90%-100% of the time through
vending machines; and
o Each year merchants illegally sell minors 947 million packs of
cigarettes and 26 million containers of chewing tobacco worth
$1.26 billion.
To combat these problems, most states have enacted laws which provide for
substantial penalties for businesses that sell tobacco and alcohol to minors.
Regulation of retailers of tobacco products
New federal regulations have been enacted that place a greater burden
on retailers to prevent the sale of tobacco products to minors. Clerks are
required to check the photo ID of anyone who is trying to purchase tobacco
products and appears to be under the age of 27.
Penalties for the sale of tobacco products to minors include:
o state fines of up to $6,000 per violation and/or 1 year in
jail;
o federal fines of up to $10,000 for the fifth violation and
discretionary penalties for any subsequent violations;
o criminal charges against the selling establishment and/or its
employees;
o revocation or suspension of the retailer's tobacco license;
and
o suspension from participation in the state's lottery program.
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<PAGE>
Regulation of retailers of alcoholic beverages
The retailer of alcoholic products who sells to an underage person will
face fines, suspension of its license and the potential outright revocation of
its license to sell alcoholic beverages.
State imposed penalties for the sale of alcohol to minors include:
o fines of up to $10,000 and/or 5 years in jail;
o administrative penalties levied by alcoholic beverage control
agencies ranging from fines of up to $5,000 and a six-month
license suspension;
o criminal charges against owner and/or employees; and
o "dram shop" laws which permit civil lawsuits to be brought
against businesses.
Some statistics concerning enforcement activity
o In June 1999, the State of Washington visited 273 locations to
detect tobacco sale violations. 15.38% of the businesses
visited were found to have sold tobacco products to underage
persons
o During 1997 - 1998, the State of California conducted 291
"Minor Decoy Operations", each consisting of multiple on-site
checks. Of the 6,568 visits to Alcoholic Beverage Control
licensed businesses, 20.63% or 1,355 were found to have sold
alcoholic beverages to the decoy
o The State of California Alcoholic Beverage Control has said
that most of the accusations filed for violations against
alcohol licensees in California are for sales of alcoholic
beverages to minors
o In 1998, the Florida State Department of Highway Safety
reviewed 5,973 fraud cases in Florida and invalidated 19% or
1,143 of the driver licenses inspected.
As a result of these and other law enforcement efforts and regulatory
penalties, we believe retailers that sell alcohol and tobacco, such as liquor
stores, bars and convenience stores, are facing increasing pressure to
accurately verify the age of their customers.
The use of false identification
Fraudulent driver licenses can be easily produced using readily
available, advanced color copiers and other equipment. These false documents are
easily obtainable from a number of locations, such as college campuses, and over
the Internet. Starting with only a fraudulent driver license, an individual, in
addition to buying alcohol and tobacco products while underage, may be able to
create multiple identities, commit fraud, evade law enforcement and engage in
other criminal activities, such as:
o forging checks supported by false identification;
o providing additional identification for the use of stolen
credit cards;
o creating a false identity in order to evade law enforcement; and
o unlawfully obtaining welfare or other government benefits.
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<PAGE>
Given the ease with which identification can be falsified, simply
looking at a driver license may not be sufficient to verify age or identity and
determine whether or not it is fraudulent. Rather, what is needed is a system
which can accurately read the electronically stored information. We believe that
we possess the only patented software application technology that provides an
analysis of all the data contained on these documents by reading and comparing
the information encoded in all of the tracks of the magnetic stripe or bar code
on the driver license.
ID-Check Solution and Benefits
We believe the ID-Check solution is the most advanced, reliable and
effective technology, providing retailers with an easy to use, reliable, and
cost-effective method of age and identity verification. We have received
encoding and encryption formats from each jurisdiction that conforms to AAMVA
guidelines, including military and immigration authorities in the U.S. and
Canada. This information, combined with our patented technology, enables the
ID-Check software to read, decode and process all of the information
electronically stored on driver licenses. As jurisdictions and AAMVA change
their documents and guidelines, we believe our software, together with our
programmable terminal, can be adapted to these changes.
ID-Check terminals do not require a connection to a central data base
to operate. Our terminals have the ability to operate add-on peripherals such as
printers, bar code scanners, modems and other devices, which would enhance the
functionality of the terminals and potentially create the opportunity for sales
of other software products by us.
The ID-Check process is quick, simple and easy to use. After matching
the (driver license) photograph to the person presenting the document for
identification, the clerk or employee simply swipes the driver license through
the ID-Check terminal if the card has a magnetic stripe or scans it if it has a
bar code. The terminal quickly determines if the document:
o has been altered;
o has expired; and
o has a date of birth equal to or greater than the legal age to
purchase either or both alcohol and tobacco products in the
retailer's location.
Then, the terminal will automatically:
o print a record of the transaction including the results on a
roll of paper similar to that used in cash registers, if an
optional printer has been installed;
o save information to the terminal?s own memory to be downloaded
at a later time;
o respond to the user by illuminating an appropriate, easily
recognizable symbol reflecting the results for both alcohol
and tobacco, or in words on the terminal?s screen; and
o send the results to a PC for permanent storage and/or analysis
in conjunction with our related software products.
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<PAGE>
Other currently available age verification products
Unless a device can read, decode and analyze all of the information
electronically stored on a driver license, the user may not obtain accurate and
reliable confirmation that a driver license is valid and has not been altered or
tampered with. We are aware of several companies, including Secure ID LLC and
The IdentiScan Company, LLC, that are currently offering products that
electronically read and calculate age from a driver license. We have tested and
compared some of these products to ID-Check and believe that our product is
superior in quality and functionality. These other products are based on credit
card terminal equipment. Most cannot process bar codes. This is a significant
disadvantage because nearly 22% of the currently issued driver licenses contain
bar codes. This percentage is expected to increase to 35% within the next year.
In addition, most of these other products cannot connect to a PC or use a
printer. Furthermore, these products cannot distinguish between a credit card
and a driver license, thus limiting their effectiveness. We also believe that
some of these products may infringe on our patent.
There are also products being marketed which are essentially electronic
calendars designed to assist the retailer in calculating the age of the person
presenting a driver license. These devices, however, cannot determine whether a
driver license is valid or has been altered.
A small number of laminate verifiers are currently used to determine
the validity of the laminate on a driver license. However, laminate verifiers
are fragile, not reliable and can only be used in one state, New York, which is
currently considering replacing the laminate in its next generation of licenses.
Our Marketing and Distribution Strategy
Our objective is to become the leading developer and distributor of age
and document verification products. To date, we have engaged in limited
marketing efforts primarily through management's participation in trade shows.
We are developing a comprehensive marketing plan to build customer awareness and
develop brand recognition in target markets. Initially, we intend to promote the
advantages and ease of use of the ID-Check terminal through:
o trade publications;
o trade shows;
o conventions and seminars;
o direct mail; and
o our website.
We also intend to seek endorsements from leading companies in the
alcohol and tobacco industries, public interest organizations and trade
associations, which we believe have an interest in discouraging illegal
purchases of age-restricted products.
As we gain market acceptance of the ID-Check terminal, we intend to
commence marketing efforts for subsequent upgrades and related software
applications.
Distribution strategy
In April 1999, we hired a director of national sales. We intend to use
a portion of the proceeds from this offering to prepare additional marketing
materials, hire additional sales and marketing support staff and continue to
develop our marketing strategy.
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<PAGE>
Our initial target markets
Our initial target markets for the ID-Check terminal will be retail
establishments. We intend to initially focus our marketing efforts towards:
o convenience stores;
o bars and night clubs;
o restaurants; and
o retail beer and liquor stores.
Independent sales organizations
Management estimates there are thousands of businesses referred to as
independent sales organizations (ISO?s), which specialize in marketing equipment
having a purchase price of under $5,000. We have entered into an agreement with
Northern Leasing Systems, a leading privately-held equipment lease finance
company specializing in this type of equipment, to be our exclusive lease
finance company and the exclusive marketer of our ID-Check product to ISO's. The
agreement automatically renews annually, subject to Northern Leasing having
purchased, either directly or through ISO's, 2,500 terminals by the end of the
first year, 12,000 terminals by the end of the second year and 15,000 terminals
each year thereafter. We believe that the ID-Check terminal is a complementary
product that can be sold or leased to many of the ISO's existing customers.
Distributors of alcohol and tobacco products
Many distributors of alcohol and tobacco products sell related products
and supplies to retail merchants. We believe the ID-Check terminal is a
complementary product and offers a marketing opportunity to these distributors.
Consequently, we are currently seeking to enter into distribution agreements
with distributors of alcohol and tobacco products.
Revenue Sources
We initially intend to generate revenues from the sale or lease of
ID-Check terminals and sale of software upgrade cards.
ID-Check terminals
Our patented ID-Check software will initially be installed in a
self-contained terminal similar to those commonly used as credit card terminals,
which we intend to market to retailers for approximately $2,000 each.
Upgrade cards
Our software will require periodic updates as states that did not
previously conform to AAMVA guidelines begin to store electronically readable
information on their driver licenses and as states adjust or modify the format
of their electronically stored information. We intend to sell upgrade cards
which can be used to instantly upgrade the terminal by simply swiping the
upgrade card through the ID-Check terminal. Because each terminal has a unique
serial number, the upgrade card will only work with that terminal, making
unauthorized copying of these cards valueless. We also intend to develop a
secure way of delivering upgrades through the Internet.
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<PAGE>
The ID-Check guide to US and Canadian ID's
The United States and Canada are moving toward uniformity in their
driver licenses and identification cards. However, some states and provinces
have not yet adopted AAMVA and/or ANSI guidelines. Because of our familiarity
with these government documents, we intend to offer a printed manual to provide
financial institutions, government agencies and retail stores with a method of
verifying document authenticity when documents are presented which do not have
information electronically stored on either a magnetic stripe or bar code. We
intend to market this product directly through our sales personnel.
Additional Target Customers
In addition to retailers of alcohol and tobacco products, others that
could benefit by using the ID-Check terminal include:
o car rental agencies;
o hotels and motels;
o stadiums and arenas;
o firearm merchants;
o gaming establishments;
o movie theaters;
o law enforcement agencies; and
o vending machine manufacturers.
Products in Development
We have begun developing the following products:
MAVE. In April 1998, we built two prototypes of a hand-held portable version
of our ID-Check terminal specifically designed for law enforcement. We have
trademarked this product as MAVE for Mobile Age Verification and Enforcement.
One prototype was loaned to the State of Florida?s Division of Alcoholic
Beverage & Tobacco Control?s Tobacco Pilot Program for Enforcement. In March
1999, we shipped three units to enable the Division to begin a pilot program to
fully evaluate MAVE. After the completion of this offering, we intend to begin
limited commercial production of MAVE.
P-Link. P-Link is a software application designed to replicate the features
of ID-Check using existing hardware (or with minimal additional hardware
components) included in Point-Of-Sale (POS) terminals for multi-lane retailers
such as grocery and mass-retail stores. The POS terminal would halt the purchase
of age-restricted products until a driver license is verified by the P-Link
software application. Once the age-verification process has been completed, the
terminal would block age-restricted products from being totaled into the sale if
the unit shows that the customer is underage. This product is intended to be
marketed directly to manufacturers and integrators of POS terminals to expand
their product capabilities.
C-Link and M-Link. We have developed and distributed two pre-production
Microsoft Windows 95/98/NT compatible software products that work in conjunction
with our ID-Check terminal. These products are called C- Link and M-Link. C-Link
collects the information read by the ID-Check terminal
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<PAGE>
and saves it to a PC hard drive for permanent storage. Once saved, the
information can be searched, analyzed and used to easily generate demographics,
statistics and mailing lists to existing customers. M-Link expands C-Link's
abilities to maintain memberships and customer loyalty programs to encourage
repeat customers. M-Link is intended to be sold separately as a service pack,
which extends the functionality of C-Link's software.
Possible Future Uses for our Technology
We believe that our patented ID-Check technology has applications in a
variety of other areas.
Some examples of potential users for ID-Check technology include:
o Airlines, since FAA regulations require passengers over 18
years old to produce a valid driver license or other form of
legally acceptable picture identification in order to board
any airliner domestically;
o Credit card terminal manufacturers, which could use our
technology to verify that the credit card holder has presented
a valid driver license prior to processing the purchase; and
o Financial services companies,which could use our technology to
verify the validity of a driver license presented in
connection with check cashing, opening a new account or a
mortgage application.
Manufacturing
We have engaged a subsidiary of Welch Allyn, Inc., a leading
privately-held manufacturer of medical equipment and bar code readers and
scanners, to provide a programmable terminal to operate our patented ID-Check
software. We have placed an order for 525 ID-Check terminals, which are expected
to be delivered by the beginning of the fourth quarter of 1999. These terminals
will have most, but not all, of the features of an upgraded version of our
initial product. Most of the net proceeds of the private placement in August and
September 1999 were used to purchase approximately 1,000 units of an upgraded
version of our ID-Check terminal. We expect delivery of these terminals to begin
toward the end of the fourth quarter of 1999, which will enable us to commence
more widespread marketing.
Technical Support and Maintenance
The ID-Check hardware terminals are certified by Underwriters
Laboratory (UL) and its European equivalent (CE) for retail use and are
virtually maintenance-free other than occasional surface cleaning.
Technical support will be provided by us to our customers through:
o our website (E-mail) on the Internet;
o tips and hints on our website; and
o a toll-free number.
Technical support will be provided during normal business hours and a
voice mailbox will be capable of taking messages during non-business hours.
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<PAGE>
Competition
We expect that competition may become intense in the markets addressed
by us. We may compete with a large number of companies, many of which may be
substantially larger and have significantly greater capital and management
resources than we do. We believe that we may have some advantage over potential
competitors because we have been issued one patent and five copyrights on our
software and because of the substantial time that we have spent in developing
our software and hardware and in developing a substantial database of
information relating to the encoded information of each jurisdiction. However,
we cannot assure you that we will be able to compete successfully.
Intellectual Property
In January 1999, we were issued a patent on our ID-Check software
technology. We have also been granted five copyrights in the United States,
which are effective in Canada and 17 other major industrial countries. The
patent covers a specific process relating to ID-Check, including age
verification from a driver license. In addition, the copyright protection covers
software source codes and supporting graphics relating to the operation of
ID-Check and other software products. We have also received several trademarks
relating to our company, its product names, and logos. We cannot assure you as
to the degree of protection which the patent may afford, or that our patent
would be upheld if challenged or that other companies will not develop similar
or superior methods or products outside the protection of the patent issued to
us.
We also rely on proprietary knowledge and employ various methods,
including confidentiality agreements, to protect our software codes, concepts,
ideas and documentation of our proprietary technology. However, these methods
may not afford complete protection and we cannot assure you that others will not
independently develop similar knowledge.
Under an agreement with Mr. Messina, we will pay royalties equal to
0.005% of gross sales from $2,000,000 to $52,000,000 and 0.0025% of gross sales
in excess of $52,000,000.
The IdentiScan Company, LLC offers a product that electronically reads
and calculates age from a driver license. Representatives of IdentiScan had met
with us on several occasions in the past, at their suggestion, to discuss a
merger between the two companies. We declined to proceed with those discussions.
We have informed IdentiScan that we believe its product may infringe on our
patent. In response, in August 1999, IdentiScan filed a complaint against us
which seeks to have the IdentiScan product declared non-infringing on our patent
and seeks to have our patent declared invalid. The complaint does not seek
monetary damages. We believe that our patent, to which we hold clear title, is
valid and fully enforceable. We intend to vigorously defend it. We also believe
IdentiScan's claim of non-infringement is without merit. However, if our patent
were to be declared invalid or if our patent were to be otherwise limited, we
believe it would have an adverse effect on our business and future success
because other companies, including IdentiScan, might be able to use some or all
of the technology covered by our patent to develop and market products which
will directly compete with ID-Check.
We are not aware of any infringement by our products or technology on
the proprietary rights of others. Nevertheless, infringement or invalidity
claims may be asserted against us and we could incur significant expense in
defending them. If any claims or actions are asserted against us, we may be
required to modify our products or seek licenses for these intellectual property
rights. We may not be able to modify our products or obtain licenses on
commercially reasonable terms, in a timely manner or at all. Our failure to do
so could adversely affect our business.
Employees
As of September 17, 1999, we had fourteen full-time employees,
including three who are engaged in executive management, four programmers, three
in sales and marketing and four administrative staff.
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<PAGE>
We believe our relations with our employees are generally good and we have no
collective bargaining agreements with any labor unions.
Facilities
Our executive offices are located in Huntington, New York, where we
occupy approximately 4,200 square feet of leased space pursuant to a lease
expiring on October 31, 2000. Minimum payments under the lease are $78,420 per
year for 1999 and with a maximum increase of no greater than 4% for each
remaining year of the lease.
Legal Proceedings
We are in dispute with our landlord, Huntington Atrium, which brought a
lawsuit against us in 1998 in the District Court, County of Suffolk, State of
New York, relating to our original occupancy date and to determine the party
responsible for improvements to the space. The landlord's claim is for
approximately $177,000 and our counterclaim is for approximately $50,000. While
we believe that we have meritorious defenses to the landlord?s claim, an adverse
decision would not have a material adverse effect on our company.
As discussed above, in August 1999, IdentiScan filed a complaint
against us in the United States District Court for the District of Connecticut
which seeks to have the IdentiScan product declared non-infringing on our patent
and seeks to have our patent declared invalid. The complaint does not seek
monetary damages. We believe that our patent, to which we hold clear title, is
valid and fully enforceable. We intend to vigorously defend it. We also believe
IdentiScan's claim of non-infringement is without merit.
Other than as set forth above, we are not currently involved in any
legal or regulatory proceeding, or arbitration, the outcome of which is expected
to have a material adverse effect on our business.
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<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth the ages of and positions and offices
presently held by each director and executive officer of Intelli-Check:
Name Age Position
- ---- --- --------
Frank Mandelbaum 65 Chairman, Chief Executive Officer and
Director
Kevin Messina 33 President, Chief Technology Officer and
Director
Edwin Winiarz 41 Executive Vice President, Treasurer and
Chief Financial Officer and Director
Paul Cohen 59 Director
Anthony Broderick 56 Director
Evelyn Berezin 74 Director
Charles McQuinn 59 Director
Frank Mandelbaum has served as our Chairman of the Board, Chief
Executive Officer since July 1, 1996. He also served as Chief Financial Officer
until September 1999. From January 1995 through May 1997, Mr. Mandelbaum served
as a consultant providing strategic and financial advice to Pharmerica, Inc.
(formerly Capstone Pharmacy Services, Inc.), a publicly held company. Prior to
January 1995, Mr. Mandelbaum was Chairman of the Board, Chief Executive Officer
and Chief Financial Officer of Pharmerica, Inc. From July 1994 through December
1995, Mr. Mandelbaum served as Director and Chairman of the Audit and
Compensation Committees of Medical Technology Systems, Inc., also a publicly
held company. From November 1991 through January 1995, Mr. Mandelbaum served as
Director of the Council of Nursing Home Suppliers, a Washington, D.C. based
lobbying organization. From 1974 to date, Mr. Mandelbaum has been Chairman of
the Board and President of J.R.D. Sales, Inc., a privately held financial
consulting company.
Kevin Messina, a co-founder of Intelli-Check, was elected President and
appointed as Chief Technology Officer in June 1998. From our company's inception
in October 1994 to June 1998, Mr. Messina served as our Executive Vice
President, Chief Information Officer and Secretary. Prior to October 1994, Mr.
Messina was the founder and President of K.M. Software, which served the banking
and commodities industries. During 1998 and 1999, Mr. Messina was selected to
serve on various industry councils for AAMVA and various committees of ANSI and
the International Standards Organization (ISO). In August 1998, Mr. Messina was
elected to the US delegation representing ANSI, the National Committee for
Information and Technical Standards, the Information Technology Industry
Council, the International Electrotechnical Commission and various other
national bodies that are members of ISO. In November 1998, Mr. Messina was
elected chairperson of the committee which was in charge of recommending
encryption and bar code formats. Since then, ANSI has adopted the recommendation
as the standard for U.S. and Canadian driver licenses and ID cards for the
five-year period ending in 2005.
Edwin Winiarz was elected a director in August 1999 and became Executive
Vice President, Treasurer and Chief Financial Officer on September 7, 1999. From
July 1994 until August 1999, Mr. Winiarz was Treasurer and Chief Financial
Officer of Triangle Service Inc., a privately held national service company.
From November 1990 through July 1994, Mr. Winiarz served as Vice President
Finance/Controller of Pharmerica, Inc. (formerly Capstone Pharmacy Services,
Inc.). From March 1986
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<PAGE>
until November 1990, Mr. Winiarz was a manager with the accounting firm of
Laventhal & Horwath. Mr. Winiarz is a certified public accountant and holds an
MBA in management information systems from Pace University.
Paul Cohen has served as a director of Intelli-Check since November
1996. From December 1990 to present, Mr. Cohen has been the director of
pharmaceuticals for Allou Health and Beauty Care, Inc, a public company. Paul
Cohen is the father of Todd Cohen, our former President.
Anthony Broderick has served as a director of Intelli-Check since November
1996. Mr. Broderick is an independent aviation safety consultant whose clients
include international airlines, aerospace firms, a major aircraft manufacturer,
and governments. From June 1976 to June 1996, when he retired, Mr. Broderick was
Associate Administrator for Regulation and Certification in the Federal Aviation
Administration. Prior to June 1976, Mr. Broderick was employed with the U.S.
Department of Transportation from February 1971. Mr. Broderick has been the
recipient of numerous awards recognizing his distinguished service and
leadership in the field of airline safety.
Evelyn Berezin was elected a director in August 1999. She has been,
since October 1987, an independent management consultant to technology based
companies. From July 1980 to September 1987, Ms. Berezin was President of
Greenhouse Management Company, a venture capital fund dedicated to investment in
early-phase high-technology companies. In September 1969, Ms. Berezin became
President and Chief Executive Officer of Redactron Corporation, a company she
founded which designed, developed and manufactured word processing systems.
Redactron was acquired by Burroughs Corporation in January 1976. From December
1960 to August 1969 as manager of product planning and systems design at North
American Philips, Ms. Berezin designed the first high-speed digital
communications terminal and the first on-line, real-time racetrack parimutuel
system. From April 1957 to November 1960, as manager of logic design at
Teleregister Corporation, she designed the first on-line airline reservation
system. Ms. Berezin holds an AB in Physics from New York University and has held
an Atomic Energy Commission Fellowship. Ms. Berezin is currently a member of the
Board of Directors of Bionova Corp., a publicly held biotechnology company. In
addition, she has served on the boards of a number of other public companies
including Cigna Corp., Datapoint Corp., Koppers Company, Inc. and Genetic
Systems Inc., as well as more than fourteen private technology-based companies.
Charles McQuinn was elected a director in August 1999. He has been,
since 1997, an independent product development marketing consultant to Internet
based companies. In this position, he has been responsible for the development
of four fixed income electronic trading systems for Zions Bank, which target the
markets of dealers, institutions, retail and Bloomberg News Service. Mr. McQuinn
has also served as President of The McQuinn Group, Inc., a system integration
and institutional marketing company, from November 1998 to the present. From
1995 to 1997, Mr. McQuinn was President of DTN West, a fixed income price quote
company with products for banks and governments. From 1990 to 1995, Mr. McQuinn
was President of Bonneville Market Information, an equities price quote company
with products for traders and brokers. From 1985 to 1990, Mr. McQuinn was
President of Bonneville Telecommunications Company, a satellite video and data
company. Prior to 1985, he was with Burroughs Corporation in various product
development/marketing/management positions. Mr. McQuinn holds a BS in marketing
from Ball State University and an MBA in management from Central Michigan
University .
Directors are elected at each annual meeting of stockholders and hold
office until the next annual meeting of stockholders and the election and
qualification of their successors. Executive officers are elected by and serve
at the discretion of the board of directors.
We have agreed, for a period of 36 months from the date of this
prospectus, if so requested by the underwriter, to select a designee of the
underwriter as a non-voting adviser to our board of directors. The underwriter
has not yet exercised its right to designate such a person.
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<PAGE>
Board Committees
The board of directors has established a compensation committee which is
comprised of Mr. Broderick, chairman, Mr. Mandelbaum and Mr. Cohen. The
compensation committee reviews and determines the compensation for all officers
and directors of our company and reviews general policy matters relating to the
compensation and benefits of all employees. The compensation committee also
administers the stock option plans.
The board of directors has established an audit committee which is
comprised of Ms. Berezin, chairman, Mr. McQuinn and Mr. Cohen. The audit
committee recommends to the board of directors the annual engagement of a firm
of independent accountants and reviews with the independent accountants the
scope and results of audits, our internal accounting controls and audit
practices and professional services rendered to us by our independent
accountants.
The board of directors has established a corporate governance committee,
which is comprised of Mr. McQuinn, chairman, Ms. Berezin and Mr. Broderick. The
corporate governance committee reviews our internal policies and procedures.
Director Compensation
Non-employee directors receive a fee of $500 for attending board
meetings and $250 for attendance at such meetings telephonically. They also
receive a fee of $300 for each committee meeting held on a date other than that
of a board meeting and are reimbursed for expenses incurred in connection with
the performance of their respective duties as directors. In August 1999, each
non-employee director, Messrs. Paul Cohen, Broderick and McQuinn and Ms.
Berezin, received a grant of a non-qualified stock option to purchase an
aggregate of 45,000 shares of our common stock upon their election as a director
at an exercise price of $3.00 per share. Of these options, 15,000 are
immediately exercisable and an additional 15,000 will be exercisable on the
succeeding two anniversaries of the date of grant, provided the director is
re-elected. Options granted to non-employee directors are exercisable only
during the non-employee director?s term and automatically expire on the date his
or her service terminates. Messrs. Broderick and Paul Cohen have previously been
granted options to purchase 30,000 shares of common stock exercisable at $3.00
per share. Mr. Cohen also received an option to purchase 50,000 shares of common
stock exercisable at $3.00 per share in connection with a one-year consulting
agreement dated November 1, 1997.
Executive Compensation
The following table sets forth the compensation earned for the three
fiscal years ended December 31, 1998 to Mr. Mandelbaum, our Chairman and Chief
Executive Officer, to Mr. Messina, our President, and to Todd Cohen, our former
President. No other officer of Intelli-Check received compensation during any of
those fiscal years in excess of $100,000.
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<PAGE>
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
------------------- ----------------------
Securities
Underlying
Name And Principal Position Year(s) Salary ($) Options/SARS (#)
- --------------------------- ------- ---------- ----------------
Frank Mandelbaum 1998 150,000 50,000
Chairman & CEO 1997 150,000 --
1996 75,000 --
Kevin Messina 1998 150,000 --
President 1997 150,000 50,000
1996 37,500 --
Todd Cohen 1998 50,000 15,000
Former President 1997 150,000 50,000
1996 37,500 --
The options shown above were granted under the 1998 Stock Option Plan,
are exercisable at $3.00 per share, and generally expire five years after the
date of grant. Mr. Cohen's options expire on August 15, 2000.
Messrs. Mandelbaum and Messina have Employment Agreements expiring
December 31, 2001, which provide for base annual salaries of $225,000, subject
to specified conditions. Because of our limited resources, Messrs. Mandelbaum
and Messina have from time to time agreed to defer the receipt of substantial
portions of their salaries. In May 1999, Mr. Mandelbaum's deferred salary was
reduced by $150,000 by the issuance to him of 75,000 shares of our common stock
and warrants entitling him to purchase an additional 75,000 shares of our common
stock at a price of $3.00 per share at any time prior to May 3, 2001. In May
1999, Mr. Messina's deferred salary was reduced by $10,126 through the issuance
to him of 5,063 shares of our common stock and warrants to purchase 5,063 shares
of our common stock at a purchase price of $3.00 per share at any time prior to
May 3, 2001. As of June 30, 1999, Mr. Mandelbaum's deferred salary was
approximately $375,000, Mr. Messina's deferred salary was approximately $200,000
and Mr. Todd Cohen's deferred salary was approximately $110,000. In June 1999,
Mr. Messina received, in lieu of all deferred salary, options to purchase
207,000 shares of common stock at an exercise price of $3.00 per share. Also in
June, 1999, Mr. Mandelbaum received, in lieu of all deferred salary, options to
purchase 375,000 shares of common stock at an exercise price of $3.00 per share.
Mr. Cohen resigned as President in April 1998. In June 1999, Mr. Cohen
received, in lieu of all deferred salary, options to purchase 110,000 shares of
common stock at an exercise price of $3.00.
All the options granted in exchange for deferred salary expire five
years after the date of grant.
The following table summarizes options granted during the year ended
December 31, 1998 to the named executive officers:
Individual Grants Potential
------------------------------------------------ Realizable
Value at
Number of % of Total Assumed Annual
Securities Options Rates of
Underlying Granted to Stock Price
Options Employees in Exercise Expiration Appreciation for
Name Granted Fiscal Year Price Date Option Term
- ---- ------- ----------- -------- ----------- -----------------
5% 10%
--- ---
Frank
Mandelbaum 50,000 91% $3.00 9/04/03 $41,442 $91,577
These options were granted pursuant to our 1998 Stock Option Plan. The
options granted to Mr. Mandelbaum are fully vested. During the year ended
December 31, 1998, we granted employees other than Mr. Mandelbaum options to
purchase 5,000 shares of common stock under the 1998 Stock Option Plan.
The amounts shown as potential realizable value represent hypothetical
gains that could be achieved for the respective options if exercised at the end
of the option term. The 5% and 10% assumed annual rates of compounded stock
price appreciation are mandated by rules of the Securities and Exchange
Commission and do not represent our estimate or projection of our future common
stock prices. These amounts represent certain assumed rates of appreciation in
the value of our common stock from the fair market value on the date of grant.
Actual gains, if any, on stock option exercises are dependent on the future
performance of the
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<PAGE>
common stock and overall stock market conditions. The amounts reflected in the
table may not necessarily be achieved.
Pursuant to their employment agreements, Messrs. Mandelbaum and Messina
each received a grant in August 1999 of options to purchase 75,000 shares of our
common stock at a purchase price of $3.00 per share. Each of the options become
exercisable with respect to 25,000 shares of our common stock on January 1,
2000, an additional 25,000 shares of our common stock on January 1, 2001, and
the final 25,000 shares of our common stock on January 1, 2002. The options
expire five years from the date of grant.
Employment Agreements
Effective January 1, 1999, Mr. Mandelbaum and Mr. Messina each entered
into a three-year employment agreement with Intelli-Check. Each of the
agreements provides for a base salary of $225,000. However, until such time as
we receive payment for gross sales of at least $1,000,000, the salaries are
capped at $150,000. The agreements also provide for the payment of a bonus if
our sales exceed $2,000,000 in the previous year. The bonus will be in the
amount of $50,000 plus 1% of the amount of sales in excess of $2,000,000 in each
year. In addition, for each fiscal year ending during the term of the employment
agreements, we will grant to each of the executives an option to purchase the
greater of 25,000 shares of our common stock at fair market value on the date of
grant or 10,000 shares of our common stock at fair market value on the date of
grant for each full $250,000 by which pre-tax profits for each year exceeds
pre-tax profits for the prior fiscal year. However, we are not required to grant
options to purchase more than 150,000 shares of our common stock with respect to
any one fiscal year.
If there shall occur a change of control, as defined in the employment
agreement, the employee may terminate his employment at any time and be entitled
to receive a payment equal to 2.99 times his average annual compensation,
including bonuses, during the three years preceding the date of termination,
payable in cash to the extent of three months' salary and the balance in shares
of our common stock based on a valuation of $2.00 per share. Included within the
definition of change of control is the first day on which a majority of the
directors of the company do not consist of individuals recommended by Messrs.
Mandelbaum, Messina and one outside director.
We have entered into a two-year employment agreement with Mr. Winiarz,
which became effective on September 7, 1999. The agreement provides for a base
salary of $125,000. In addition, we granted Mr. Winiarz an option to purchase
50,000 shares of common stock, of which 10,000 options are immediately
exercisable at $5.00 per share, 20,000 options are exercisable on September 7,
2000 at the initial public offering price and 20,000 options become exercisable
at the initial public offering price when all external accounting functions,
except for year-end audit, are being performed internally.
Under the terms of the agreements, each of the executives has the right
to receive his compensation in the form of shares of common stock valued at 50%
of the closing bid price of our shares of common stock as of the date of the
employee's election, which is to be made at the beginning of each quarter. In
addition, each of the employment agreements requires the executive to devote
substantially all his time and efforts to our business and contains
non-competition and nondisclosure covenants of the officer for the term of his
employment and for a period of two years thereafter. Each employment agreement
provides that we may terminate the agreement for cause.
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<PAGE>
Stock Option Plans
1998 Stock Option Plan. Our 1998 Stock Option Plan was adopted by the
Board of Directors and stockholders in June 1998. Up to 400,000 shares of our
common stock have been authorized and reserved for issuance under the plan.
Under the plan, options may be granted in the form of incentive stock options or
non-qualified stock options from time to time to employees, officers, directors
and consultants of Intelli-Check, as determined by the compensation committee of
the board of directors. The compensation committee determines the terms and
conditions of options granted under the plan, including the exercise price. The
plan provides that the committee must establish an exercise price for incentive
stock options that is not less than the fair market value per share at the date
of the grant. However, if incentive stock options are granted to persons owning
more than 10% of the voting stock of Intelli-Check, the plan provides that the
exercise price must not be less than 110% of the fair market value per share at
the date of the grant. Each option must expire within five years of the date of
the grant. There are currently 340,000 immediately exercisable options
outstanding which have been granted under the plan, all of which are exercisable
at $3.00 per share.
1999 Stock Option Plan. Our 1999 Stock Option Plan was adopted by the
Board of Directors and stockholders in August 1999. Up to 1,000,000 shares of
our common stock have been authorized and reserved for issuance under the plan.
Under the plan, options may be granted in the form of incentive stock options or
non-qualified stock options from time to time to employees, officers, directors
and consultants of Intelli-Check, as determined by the compensation committee of
the board of directors. The compensation committee determines the terms and
conditions of options granted under the plan, including the exercise price. The
plan provides that the committee must establish an exercise price for incentive
stock options that is not less than the fair market value per share at the date
of the grant. However, if incentive stock options are granted to persons owning
more than 10% of the voting stock of Intelli-Check, the plan provides that the
exercise price must not be less than 110% of the fair market value per share at
the date of the grant. Each option must expire within five years of the date of
the grant. There are currently 310,000 options outstanding which have been
granted under the plan, 10,000 are immediately exercisable at $5.00 per share.
The other 300,000 are exercisable at prices ranging from $3.00 - $7.00 per
share.
Limitation on Liability and Indemnification Matters
As authorized by the Delaware General Corporation Law, our certificate
of incorporation provides that none of our directors shall be personally liable
to us or our stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability for:
o any breach of the director's duty of loyalty to our company
or its stockholders
o acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law
o unlawful payments of dividends or unlawful stock redemptions
or repurchases
o any transaction from which the director derived an improper
personal benefit
This provision limits our rights and the rights of our stockholders to recover
monetary damages against a director for breach of the fiduciary duty of care
except in the situations described above. This provision does not limit our
rights or the rights of any stockholder to
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<PAGE>
seek injunctive relief or rescission if a director breaches his duty of care. In
addition, our certificate of incorporation provides that if the Delaware General
Corporation Law is amended to further limit the liability of a director, then
the liability of the directors shall be eliminated or limited to the fullest
extent permitted by such amendment. These provisions will not alter the
liability of directors under federal securities laws.
Our certificate of incorporation further provides for the
indemnification of any and all persons who serve as our director, officer,
employee or agent to the fullest extent permitted under the Delaware General
Corporation Law.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons pursuant
to the foregoing provisions, or otherwise, we have been advised that in the
opinion of the SEC such indemnification is against public policy as expressed in
the Securities Act, and is, therefore, unenforceable.
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth, as of the date of this prospectus and
as adjusted to reflect the sale by us of the 1,000,000 shares of common stock
offered under this prospectus, certain information regarding beneficial
ownership of Intelli-Check?s common stock by each person who is known by us to
beneficially own more than 5% of our common stock and each other person for
whose benefit we are registering shares of common stock. The table also
identifies the stock ownership of each of our directors, each of our officers,
and all directors and officers as a group. Except as otherwise indicated, the
stockholders listed in the table have sole voting and investment powers with
respect to the shares indicated.
Unless otherwise indicated, the address for each of the named
individuals is c/o Intelli-Check, Inc., 775 Park Avenue, Huntington, New York
11743.
Shares of common stock which an individual or group has a right to
acquire within 60 days pursuant to the exercise or conversion of options,
warrants or other similar convertible or derivative securities are deemed to be
outstanding for the purpose of computing the percentage ownership of such
individual or group, but are not deemed to be outstanding for the purpose of
computing the percentage ownership of any other person shown in the table.
The applicable percentage of ownership is based on 5,271,152 shares
outstanding as of the date of this prospectus and 6,271,152 shares to be
outstanding upon consummation of this offering, but does not include shares to
be issued if the over-allotment option is exercised.
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<PAGE>
<TABLE>
<CAPTION>
Shares Beneficially
Owned Prior Shares Owned
to Offering After Offering
------------------- Shares --------------
Number Percent
Offered Number Percent ------ -------
- ------- ------ -------
<S> <C> <C>
Selling Stockholders:
Jesup & Lamont Securities Corp. 15,000 * 15,000 - -
Allan Binder 10,000 * 10,000 - -
Executive Officers, Directors &
5% Stockholders:
Frank Mandelbaum 1,297,000 22.2 - 1,297,000 19.0
Kevin Messina 1,392,000 24.8 -- 1,392,000 21.1
Edwin Winiarz 10,000 * -- 10,000 *
Paul Cohen 281,385 5.2 -- 281,385 4.4
Anthony Broderick 45,000 * -- 45,000 *
Evelyn Berezin 15,000 * -- 15,000 *
Charles McQuinn 15,000 * -- 15,000 *
Todd Cohen 1,150,000 21.1 -- 1,150,000 17.8
New York State Science and
Technology Foundation 550,000 10.2 -- 550,000 8.6
All executive officers
and directors
as a group (7 persons) 3,055,385 47.8 -- 3,055,385 41.3
</TABLE>
- ---------------
*Indicates beneficial ownership of less than one percent of the total
outstanding common stock.
The amounts shown for Jesup & Lamont Securities Corp. include the
currently exercisable right to acquire 7,500 units at $2.25 per unit. Each unit
consists of one share and a warrant to acquire an additional share at $3.00 per
share. Jesup & Lamont Securities Corp.'s address is 650 Fifth Avenue, New York,
NY 10019.
Mr. Binder's address is 577 Old Country Road, Dix Hills, NY 11746.
The amounts shown for Mr. Mandelbaum include the right to acquire
425,000 shares pursuant to currently exercisable stock options at $3.00 per
share and 146,000 shares pursuant to currently exercisable warrants at $3.00 per
share. Does not include 50,000 shares held by Mr. Mandelbaum's wife, for which
Mr. Mandelbaum disclaims beneficial ownership.
The amounts shown for Mr. Messina include the right to acquire 257,000
shares pursuant to currently exercisable stock options at $3.00 per share and
75,000 shares pursuant to currently exercisable warrants at $3.00 per share.
The amounts shown for Mr. Winiarz include the right to acquire 10,000
shares pursuant to currently exercisable stock options at $5.00 per share.
The amounts shown for Mr. Paul Cohen include the right to acquire
95,000 shares pursuant to currently exercisable stock options at $3.00 per share
and 40,000 shares pursuant to currently exercisable warrants at $3.00 per share.
Does not include 25,000 shares held by Mr. Cohen's wife and 2,500 shares held by
Mr. Cohen's daughter, for which Mr. Cohen disclaims beneficial ownership.
The amounts shown for Mr. Broderick include the right to acquire 45,000
shares pursuant to currently exercisable stock options at $3.00 per share.
The amounts shown for Ms. Berezin include the right to acquire 15,000
shares pursuant to currently exercisable stock options at $3.00 per share.
The amounts shown for Mr. McQuinn include the right to acquire 15,000
shares pursuant to currently exercisable stock options at $3.00 per share.
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<PAGE>
The amounts shown for Mr. Todd Cohen include the right to acquire
175,000 shares pursuant to currently exercisable stock options at $3.00 per
share. Mr. Cohen's address is 5 Violet Drive, Huntington Station, New York
11746.
The amounts shown for the New York State Science and Technology
Foundation include the right to acquire 100,000 shares pursuant to currently
exercisable warrants at $3.00 per share. The New York State Science and
Technology Foundation's address is 99 Washington Avenue, Albany, NY 12210.
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<PAGE>
CERTAIN TRANSACTIONS
In October 1994, Messrs. Todd Cohen and Kevin Messina co-founded
Intelli-Check and each purchased 975,000 shares of common stock for $975. In
April 1998, Mr. Todd Cohen resigned as an officer of our company for personal
reasons and in August 1999, he completed his term as a director.
In June 1996, Mr. Messina's company, K.M. Software, assigned two
copyrights covering certain software employed by ID-Check and a patent
application covering the ID-Check technology to Intelli-Check for an agreement
to pay $98,151 plus interest. The agreement also gave K.M. Software, or its
successor, the right to reclaim the rights to the copyrights and the patent
under certain specified conditions. In May 1999, the prior agreement was
superseded and in exchange Mr. Messina received 69,937 shares of our common
stock and warrants to purchase 69,937 shares of our common stock, at $3.00 per
share, exercisable at any time prior to May 3, 2001. The May 1999 agreement
provides for the payment by Intelli-Check of royalties equal to 0.005% of gross
sales from $2,000,000 to $52,000,000 and 0.0025% of gross sales in excess of
$52,000,000. Also, in May 1999, Mr. Messina's deferred salary was reduced by
$10,126 through the issuance to him of 5,063 shares of our common stock and
warrants to purchase 5,063 shares of our common stock at a purchase price of
$3.00 per share at any time prior to May 3, 2001. In June 1999, the balance of
Mr. Messina's deferred salary was reduced to zero by the issuance of options to
purchase 207,000 shares of our common stock at a purchase price of $3.00 per
share at any time prior to June 30, 2004.
In June 1996, Frank Mandelbaum, Intelli-Check?s Chief Executive Officer
and Chairman of the Board of Directors, purchased 950,000 shares of common stock
for $50,000. From time to time since then, Mr. Mandelbaum loaned money to
Intelli-Check totaling $142,000. In November 1997, Mr. Mandelbaum converted his
outstanding loans into 71,000 shares of our common stock and warrants to
purchase 71,000 shares of our common stock at $3.00 per share expiring on June
30, 2000. In May 1999, Mr. Mandelbaum's deferred salary was reduced by $150,000
through the issuance to him of 75,000 shares of our common stock and warrants to
purchase 75,000 shares of our common stock at a purchase price of $3.00 per
share at any time prior to May 3, 2001. In June 1999, Mr. Mandelbaum's deferred
salary was reduced to zero by the issuance of options to purchase 375,000 shares
of our common stock at an exercise price of $3.00 per share at any time prior to
June 30, 2004.
In November 1997, one of our directors, Paul Cohen, received an option
to purchase 50,000 shares of common stock exercisable at $3.00 per share in
connection with a one-year consulting agreement. Also in November 1997, Mr.
Cohen's wife purchased 25,000 units consisting of one share of common stock and
one warrant to purchase an additional share of common stock for $3.00 in
connection with one of our private placements. The purchase price was $50,000.
In August 1999, Mr. Cohen purchased one unit in connection with our most recent
private placement. The unit consists of a promissory note having a principal
amount of $50,000, bearing interest at the annual rate of 10% and a warrant to
purchase 2,500 shares of our common stock for $3.00 per share.
In June, 1999, all deferred compensation due to Todd Cohen, our former
President and director, was eliminated by the issuance of options to purchase
110,000 shares of our common stock at an exercise price of $3.00 per share at
any time prior to June 30, 2004.
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<PAGE>
DESCRIPTION OF SECURITIES
Common Stock
Our company is authorized to issue up to 20,000,000 shares of common
stock, $.001 par value. The holders of common stock are entitled to one vote for
each share held of record on each matter submitted to a vote of stockholders.
There is no cumulative voting for election of directors. Subject to the prior
rights of any series of preferred stock which may from time-to-time be
outstanding, holders of common stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor and upon the liquidation, dissolution or winding up of
Intelli-Check, are entitled to share ratably in all assets remaining after
payment of liabilities and payment of accrued dividends and liquidation
preferences on preferred stock, if any. Holders of common stock have no
preemptive rights and have no rights to convert their common stock into any
other securities. The outstanding common stock is, and the common stock to be
outstanding upon completion of this offering will be, validly issued, fully paid
and non-assessable.
Preferred Stock
Intelli-Check is authorized to issue up to 1,000,000 shares of
preferred stock, $.01 par value per share. In January 1998, the New York State
Science and Technology Foundation converted our promissory note in the amount of
$250,000 into 125,000 shares of series A convertible preferred stock. Also in
January, we sold 125,000 shares of preferred stock to the Foundation for
$250,000. The preferred stock was convertible into common stock at any time at
the initial conversion rate of one for one. In July 1999, the Foundation
exercised its conversion rights and received 250,000 shares of common stock in
exchange for its preferred stock.
The Board of Directors may issue additional shares of preferred stock
in the future. The preferred stock may be issued in one or more series, the
terms of which may be determined at the time of issuance by the Board of
Directors, without further action by stockholders, and may include voting rights
(including the right to vote as a series on particular matters), preferences as
to dividends and liquidation, conversion and redemption rights and sinking fund
provisions. Additional rights granted to future holders of preferred stock could
be used to restrict our company?s ability to merge with or sell its assets to a
third party, thereby preserving control by present owners.
Warrants
From time to time in connection with financings used to fund our
development, we have issued warrants to purchase our common stock. As of
September 17, 1999, there were warrants outstanding to purchase 888,500 shares
of our common stock expiring on June 30, 2000 and warrants outstanding to
purchase 892,600 shares of our common stock expiring on various dates up to
August 2002. Each warrant entitles the holder to purchase one share of common
stock for $3.00. If certain circumstances occur, we have the right to redeem the
outstanding warrants at a price of $.01 per warrant on not less than 20 days
written notice if the last sale price of the common stock has averaged at least
$4.50 per share for the 20 consecutive trading days ending at least five days
prior to the date on which notice is given for some of the warrants and $6.00
per share for certain other warrants.
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<PAGE>
Registration Rights
Allan Binder, who holds 10,000 shares of common stock, is entitled to
piggyback registration rights, under the Securities Act, with respect to those
shares. Jesup & Lamont Securities Corp., which holds a warrant to purchase 7,500
units, each of which consists of one share of common stock and an additional
warrant to purchase one share of common stock, is entitled to piggyback
registration rights with respect to those 15,000 shares. These 25,000 shares are
being registered under this prospectus. In connection with this offering, we
have agreed to grant to the underwriter certain demand and piggyback
registration rights in connection with the 100,000 shares of common stock
issuable upon exercise of the underwriter's warrants.
In addition, the holders of warrants to purchase 60,000 shares of our
common stock are entitled to piggyback registration rights and one demand
registration right under specified conditions. The demand registration right is
exercisable at any time from one year to five years after the effective date of
this prospectus by the holders of warrants exercisable into a majority of the
shares. The piggyback registration rights become effective after this offering.
Delaware Anti-Takeover Law
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. That section requires the vote of at least two-thirds of the
outstanding voting stock of a company not owned by an interested stockholder to
approve certain business combinations. Section 203 defines interested
stockholder as any entity or person owning 15% or more of the outstanding voting
stock of the company and any entity or person affiliated with, controlling on
controlled by such entity or person. As a result, this statute may discourage
attempts to acquire Intelli-Check, including attempts that might result in a
premium over the market price for the shares of common stock held by
stockholders.
Our by-laws provide that stockholders must comply with an advance
notice procedure for the nomination of candidates for election as directors as
well as for other stockholder proposals to be considered at annual meetings of
stockholders. In general, notice of intent to nominate a director or raise
matters at annual meetings will have to be received by us. These provisions may
preclude stockholders from bringing matters before an annual meeting of
stockholders or from making nominations for directors.
The authorized but unissued shares of common stock and preferred stock
are available for future issuance without stockholder approval. These additional
shares may be utilized for a variety of corporate purposes, including future
public offerings to raise additional capital, corporate acquisitions and
employee benefit plans. The existence of authorized but unissued shares of
common stock and preferred stock could render more difficult or discourage an
attempt to obtain control of Intelli-Check by means of a proxy contest, tender
offer, merger or otherwise.
Transfer Agent and Warrant Agent
The transfer agent for the common stock and the warrant agent for the
underwriter's warrants is Continental Stock Transfer & Trust Company.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Immediately after the closing of this offering, we will have 6,271,152
shares of common stock issued and outstanding. Of this total, 1,010,000 shares
registered hereby together with 1,122,000 shares previously issued and held for
more than two years will be freely tradeable without restriction or further
registration under the Securities Act, except for any shares purchased by an
"affiliate" of our company (in general, a person who has a controlling position
with regard to the company). Shares held by an affiliate will be subject to the
resale limitations of Rule 144 under the Securities Act.
All of the remaining 4,149,152 shares of common stock currently
outstanding are "restricted securities". These shares will become eligible for
sale at various times beginning 90 days following the date of this prospectus
when 422,105 shares will be eligible to be sold, and the balance of the
restricted shares will become eligible for sale at various times beginning
January 15, 2000, subject to the contractual provisions described below.
In addition, there are 3,873,100 shares subject to currently
outstanding options or warrants, or reserved for future issuance.
In addition, we have granted certain demand and piggyback registration
rights to the underwriter with respect to the shares of common stock issuable
upon exercise of the underwriter's warrants.
Our officers, directors and 5% shareholders have agreed not to sell or
otherwise dispose of any shares of common stock or exercise any registration
rights for a period not to exceed twelve months following the date of this
prospectus without the underwriter's prior written consent.
We cannot predict the effect, if any, that market sales of common stock
or the availability of such shares for sale will have on the market price
prevailing from time to time. Nevertheless, 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 could impair our company's
ability to raise capital through the sale of its equity securities.
UNDERWRITING
GunnAllen Financial, Inc., as underwriter, has agreed, subject to the
terms and conditions contained in the underwriting agreement relating to this
offering, to purchase the 1,000,000 shares of common stock offered by our
company.
The underwriting agreement provides that the obligations of the
underwriter are subject to approval of certain legal matters by counsel and to
various other conditions. The nature of the underwriter's obligations is such
that it is committed to purchase and pay for all of the shares of common stock
if any are purchased.
The underwriter has advised us that it proposes to offer the shares of
common stock to the public at the public offering price set forth on the cover
page of this prospectus. The underwriter may allow certain dealers who are
members of the NASD concessions, not in
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<PAGE>
excess of $. per share, of which not in excess of $. per share may be reallowed
to other dealers who are members of the NASD.
We have granted to the underwriter an option, exercisable not later
than 30 days after the date of this prospectus, to purchase up to 150,000 shares
at the public offering price set forth on the cover page of this prospectus,
less underwriting discounts and commissions. The underwriter may exercise this
option only to cover over-allotments, if any, made in connection with the sale
of the shares of common stock offered by this prospectus. If the underwriter
exercises its over-allotment in full, the total price to the public would be
$8,050,000, the total underwriting discounts and commissions would be $724,500
and the total proceeds (before payment of the expenses of this offering) to our
company would be $7,325,500.
We have agreed to pay to the underwriter a non-accountable expense
allowance equal to 3% of the gross proceeds derived from the sale of the shares
offered by this prospectus, including any securities sold prior to the
underwriter's over-allotment option, $30,000 of which has been paid as of the
date of this prospectus. We have also agreed to pay all expenses in connection
with qualifying the shares offered under the laws of such states as the
underwriter may designate, including expenses of counsel retained for such
purpose by the underwriter. We estimate the expenses of this offering to be
$375,000, or $469,500 if the underwriter's over-allotment option is completely
exercised.
We retained the underwriter as a consultant for the period March 1999
through June 1999. The underwriter received a fee consisting of a warrant to
purchase 50,000 shares of our common stock at an exercise price of $3.00 per
share, expiring March 24, 2002. Under this agreement, the underwriter provided
us general financial advisory services.
The underwriter acted as placement agent for the $1,200,000 private
placement made by us in August and September, 1999 and received a commission of
$120,000 for its services. The underwriter has been appointed as our agent for
the exercise of our outstanding warrants and will receive a fee of 5% of the
exercise price if we redeem the warrants within twelve months of the date of
this prospectus.
At the closing of this offering, we will sell to the underwriter and
its designees, for an aggregate of $100, underwriter's warrants to purchase up
to 100,000 shares of common stock. The underwriter's warrants are exercisable at
any time, in whole or in part, during the four-year period commencing one year
from the date of this prospectus, at an exercise price of $7.70 per share (110%
of the public offering price per share). The underwriter's warrants are only
assignable or transferable to the officers and partners of the underwriter and
members of the selling group for one year following the date of this prospectus.
During the exercise period, the holders of the underwriter's warrants will have
the opportunity to profit from a rise in the market price of the common stock,
which will dilute the interests of our stockholders. We expect that the
underwriter's warrants will be exercised when we would, in all likelihood, be
able to obtain any capital needed on terms more favorable than those provided by
the underwriter's warrant. Any profit realized by the underwriter on the sale of
the underwriter's warrants, the underlying shares of common stock may be deemed
additional underwriting compensation. The underwriter's warrants contain a
cashless exercise provision.
For a period of three years from the date of this prospectus, the
underwriter will have a right of first refusal with respect to any private
placements or underwriting of any future public offerings of our securities.
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<PAGE>
We have agreed that, upon the request of the holders of the majority of
the underwriter's warrants, we will (at our own expense), on one occasion during
the exercise period, register the underwriter's warrants and the shares of
common stock underlying the underwriter's warrants under the Securities Act. We
have also agreed to include the underwriter's warrants and all such underlying
shares of common stock in any appropriate registration statement which is filed
by us under the Securities Act during the five years following the date of this
prospectus.
We have agreed, for a period of three years from the date of this
prospectus, that the underwriter shall have the option to designate one
individual as a non-voting adviser to our board of directors to attend any and
all board and board committee meetings. The underwriter has not yet exercised
and currently does not intend to exercise its right to designate such a person
in the near future.
All of our officers, directors and our 5% stockholders have agreed not
to sell or otherwise dispose any of their shares in the public markets for a
period of twelve months from the date of this prospectus without the
underwriter's prior written consent.
The underwriter has informed us that it does not expect sales of the
securities offered to discretionary accounts to exceed 1% of the shares offered
by this prospectus.
We have agreed to indemnify the underwriter against certain civil
liabilities, including liabilities under the Securities Act.
Before this offering there has been no public market for the common
stock. Accordingly, the initial public offering price of the common stock will
be determined by negotiation between us and the underwriter and may not
necessarily be related to our asset value, net worth or other established
criteria of value. Factors to be considered in determining such price include
our financial condition and prospects, an assessment of our management, market
prices of similar securities of comparable publicly-traded companies, certain
financial and operating information of companies engaged in activities similar
to our business and the general condition of the securities market.
In connection with this offering, the underwriter and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of our common stock.
Such transactions may include stabilization transactions effected in accordance
with Regulation M of the Securities Exchange Act of 1934, pursuant to which such
persons may bid for or purchase common stock for the purpose of pegging, fixing
or maintaining the price of our common stock at a level that is higher than the
market would dictate in the absence of such transactions.
The underwriter may also create a short position for the account of the
underwriter by selling more shares in connection with the offering than they are
committed to purchase from the company, and in such case may purchase common
stock in the open market following the completion of the offering to cover all
or a portion of such short position. The underwriters may also cover all or a
portion of such short position, up to 150,000 shares, by exercising the
over-allotment option described herein.
In addition, the underwriter may also impose a "penalty bid" under
contractual arrangements with the underwriter whereby the underwriter may
reclaim from a dealer
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<PAGE>
participating in the offering, for the account of the underwriter, the selling
concession with respect to shares that are distributed in the offering but
subsequently purchased for the account of the underwriter in the open market.
In general, any of the transactions described above may result in the
maintenance of the price of our common stock at a level above that which might
otherwise prevail in the absence of such transactions. We and the underwriter
make no representation or prediction as to the direction or magnitude of any
effect that such transactions may have on the price of our common stock. In
addition, we and the underwriter make no representation that this underwriter
will engage in such transactions or that such transactions, once commenced, will
not be discontinued without notice.
LEGAL MATTERS
The validity of the securities offered by this prospectus will be
passed upon for our company by Milberg Weiss Bershad Hynes & Lerach LLP, New
York, New York. Tenzer Greenblatt LLP has served as counsel to the underwriter
in connection with this offering.
EXPERTS
The financial statements of our company as of December 31, 1998, and
for the years ended December 31, 1997 and 1998, included in this prospectus and
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said report.
ADDITIONAL INFORMATION
We have filed with the SEC the registration statement on form SB-2
under the Securities Act with respect to the common stock offered by this
prospectus. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the registration
statement and the exhibits filed with it, portions of which have been omitted as
permitted by the rules and regulations of the SEC. For further information with
respect to our company and the securities offered by this prospectus, reference
is made to the registration statement and to the exhibits filed. Statements
contained in this prospectus regarding the content of any contract or other
document referred to are not necessarily complete. In each instance, we refer
you to the copy of such contract or other document filed as an exhibit to the
registration statement, and these statements are qualified in their entirety by
such reference to the contract or document.
The registration statement, including all exhibits, may be inspected
without charge at the principal office of the SEC at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the SEC's regional offices located
at Seven World Trade Center, Suite 1300,New York, New York 10048 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
these materials may also be obtained from the Public Reference Section of the
SEC at 450 Fifth Street, N.W.,Room 1024, Washington, D.C. 20549, upon the
payment of prescribed fees. You may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition,
registration statements and certain other filings made with the SEC through its
Electronic Data Gathering, Analysis and Retrieval systems are publicly available
through the commission's site on the
- 45 -
<PAGE>
World Wide Web located at http://www.sec.gov. The registration statement,
including all exhibits and schedules thereto and amendments thereof, has been
filed with the SEC through the Electronic Data Gathering, Analysis and Retrieval
system.
Upon the closing of this offering, we will become subject to the
reporting requirements of the Securities Exchange Act and in accordance with
these requirements, will file reports, proxy statements and other information
with the SEC. We intend to furnish our stockholders with annual reports
containing audited financial statements and such other periodic reports as we
deem appropriate or as may be required by law.
- 46 -
<PAGE>
<TABLE>
<CAPTION>
INDEX
-----
Page
----
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
FINANCIAL STATEMENTS:
Balance Sheets as of December 31, 1998 and June 30, 1999 (Unaudited) F-3
Statements of Operations for the Years Ended December 31, 1997 and 1998 F-4
and the Six Months Ended June 30, 1998 and 1999 (Unaudited)
Statements of Stockholders' (Deficit) Equity for the Years Ended December 31, 1997
and 1998 and the Six Months Ended June 30, 1999 (Unaudited) F-5
Statements of Cash Flows for the Years Ended December 31, 1997 and 1998 F-6
and the Six Months Ended June 30, 1998 and 1999 (Unaudited)
NOTES TO FINANCIAL STATEMENTS F-7 - F-20
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Intelli-Check, Inc.:
We have audited the accompanying balance sheets of Intelli-Check, Inc. (a
Delaware corporation) as of December 31, 1998, and the related statements of
operations, stockholders' (deficit) equity and cash flows for the two years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Intelli-Check, Inc. as of
December 31, 1998, and the results of its operations and its cash flows for the
two years then ended in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
New York, New York
September 24, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
INTELLI-CHECK, INC.
-------------------
BALANCE SHEETS
--------------
December 31, June 30,
ASSETS 1998 1999
------ ------------ --------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 159,600 $ 174,780
Inventory 16,693 15,894
Deposit -- 198,505
Other current assets 921 37,710
----------- -----------
Total current assets 177,214 426,889
PROPERTY AND EQUIPMENT, net (Note 3) 188,064 224,733
PATENT COSTS, net of accumulated amortization of $25,816 79,845 76,740
as of December 31, 1998 and $28,921 as of June 30, 1999 (unaudited)
OTHER ASSETS 6,180 37,930
----------- -----------
Total assets $ 451,303 $ 766,292
=========== ===========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
----------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 243,351 $ 121,200
Accrued expenses 752,370 21,850
Note payable to related party (Note 5) 98,151 --
Current portion of capital lease obligations 8,008 18,242
----------- -----------
Total current liabilities 1,101,880 161,292
----------- -----------
CAPITAL LEASE OBLIGATIONS (Note 9) 6,993 13,260
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY (DEFICIT):
Series A Convertible Preferred Stock - $.01 par value; 250,000 shares
authorized; 250,000 shares issued and outstanding as of December 31,
1998 and June 30, 1999 (unaudited), respectively
Common stock - $.001 par value; 10,000,000 shares authorized; 4,402,552 2,500 2,500
and 5,021,152 shares issued and outstanding as of December 31, 1998 and
June 30, 1999 (unaudited), respectively 4,402 5,021
Additional paid-in capital 839,342 2,863,638
Accumulated deficit (1,503,814) (2,279,419)
----------- -----------
Total stockholders' (deficit) equity (657,570) 591,740
----------- -----------
Total liabilities and stockholders' (deficit) equity $ 451,303 $ 766,292
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
<TABLE>
<CAPTION>
INTELLI-CHECK, INC.
-------------------
STATEMENTS OF OPERATIONS
------------------------
For the Years Ended For the Six Months Ended
December 31 June 30
-------------------------- --------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
SALES $ 16,736 $ 86,354 $ 80,422 $ 221
COST OF GOODS SOLD 4,343 22,074 21,615 55
----------- ----------- ----------- -----------
Gross profit 12,393 64,280 58,807 166
OPERATING EXPENSES:
Selling 124,453 139,470 79,578 98,297
General and administrative 992,375 1,060,537 473,889 545,929
Research and development 462,804 306,608 78,926 100,621
----------- ----------- ----------- -----------
Loss from operations (1,567,239) (1,442,335) (573,586) (744,681)
OTHER INCOME (EXPENSES):
Interest expense (37,057) (61,479) (23,201) (30,924)
----------- ----------- ----------- -----------
(1,604,296) (1,503,814) (596,787) (775,605)
INCOME TAX BENEFIT (Note 2) -- -- -- --
----------- ----------- ----------- -----------
Net loss $(1,604,296) $(1,503,814) $ (596,787) $ (775,605)
=========== =========== =========== ===========
PER SHARE INFORMATION:
Net loss per common share-
Basic and diluted $ (0.39) $ (0.35) $ (0.14) $ (0.15)
=========== =========== =========== ===========
Common shares used in computing per share
amounts-Basic and diluted 4,136,885 4,402,552 4,136,885 5,021,152
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
INTELLI-CHECK, INC.
-------------------
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
--------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 AND THE
------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
------------------------------------------
<TABLE>
<CAPTION>
Series A l
Common Stock Preferred Stock Additional
----------------------- --------------------- Paid-in Accumulated
Shares Amount Shares Amount Deficit Total
--------- -------- -------- --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1997 3,251,385 $ 3,251 -- $ -- $ 374,226 $ (626,119) $ (248,642)
Issuance of common
stock 885,500 886 -- -- 1,666,963 -- 1,667,849
Net loss -- -- -- -- -- (1,604,296) (1,604,296)
----------- ----------- ------- -------- ----------- ----------- -----------
BALANCE, December 31, 1997 4,136,885 4,137 -- -- 2,041,189 (2,230,415) (185,089)
Conversion from S -- -- -- --
Corporation to C
Corporation (2,230,415) 2,230,415 --
Conversion of debt
into Series A
Preferred Stock -- -- 125,000 1,250 248,750 -- 250,000
Issuance of Series A -- -- 125,000 1,250 248,750 -- 250,000
Preferred Stock
Common stock issued
for employee
compensation 7,667 7 -- -- 15,326 -- 15,333
Issuance of common
stock in private
placement 258,000 258 -- -- 515,742 -- 516,000
Net loss -- -- -- -- -- (1,503,814) (1,503,814)
----------- ----------- ------- -------- ----------- ----------- ----------
BALANCE, December 31, 1998 4,402,552 4,402 250,000 2,500 839,342 (1,503,814) (657,570)
Issuance of common
stock in private
placements 274,600 275 -- -- 548,925 -- 549,200
Exercise of warrant 100,000 100 -- -- 199,900 -- 200,000
Issuance of common
stock for note
payable and interest 69,937 70 -- -- 139,804 -- 139,874
Issuance of common
stock for deferred
salary 80,063 80 -- -- 160,046 -- 160,126
Issuance of common
stock for settlements
and accounts payable 94,000 94 -- -- 275,621 -- 275,715
Issuance of stock
options for deferred -- -- -- -- 700,000 -- 700,000
salary
Net loss (unaudited) -- -- -- -- -- (775,605) (775,605)
----------- ----------- ------- -------- ----------- ----------- -----------
BALANCE, June 30, 1999
(unaudited) 5,021,152 $ 5,021 250,000 $ 2,500 $ 2,863,638 $(2,279,419) $ 591,740
=========== =========== ======= ======== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
INTELLI-CHECK, INC.
-------------------
STATEMENTS OF CASH FLOWS
------------------------
For the Years Ended For the Six Months
December 31 Ended June 30
-------------------------- --------------------------
1997 1998 1998 1999
----------- ------------ ----------- ------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net loss $(1,604,296) $ (1,503,814) $ (596,787) $ (775,605)
Adjustments to reconcile net loss to net cash used in
operating activities-
Depreciation and amortization 38,096 70,183 27,827 23,171
Loss on disposal of assets -- 225,783 -- --
Noncash compensation -- 15,333 -- --
Changes in assets and liabilities-
(Increase) in accounts receivable -- -- (20,790) --
(Increase) decrease in inventory (24,116) (122,292) 5,768 799
(Increase) in other current assets -- (921) (6,646) (6,789)
(Increase) in deposit -- -- -- (198,505)
Decrease (increase) in other assets 1,679 5,531 5,531 (31,750)
Increase (decrease) in accounts payable and
accrued expenses 423,651 262,172 (38,485) 324,894
----------- ------------ ----------- ------------
Net cash used in operating activities (1,164,986) (1,048,025) (623,582) (663,785)
----------- ------------ ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (246,264) (26,975) (21,449) (36,230)
----------- ------------ ----------- ------------
Net cash (used in) investing activities (246,264) (26,975) (21,449) (36,230)
----------- ------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 1,667,849 516,000 -- 719,200
Proceeds from issuance of preferred stock -- 250,000 250,000 --
Repayment of capital lease obligations -- (13,170) (9,532) (4,004)
(Repayments of) proceeds from notes payable 250,000 -- -- (1)
(Repayments of) stockholder loans (88,809) -- -- --
Decrease in deferred financing costs 37,500 -- -- --
----------- ------------ ----------- ------------
Net cash provided by financing activities 1,866,540 752,830 240,468 715,195
----------- ------------ ----------- ------------
Net increase (decrease) in cash 455,290 (322,170) (404,563) 15,180
CASH, beginning of period 26,480 481,770 481,770 159,600
----------- ------------ ----------- ------------
CASH, end of period $ 481,770 $ 159,600 $ 77,207 $ 174,780
=========== ============ =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 30,800 $ 14,603 $ 7,000 $ 10,000
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Conversion of debt to preferred stock -- 250,000 250,000 --
Common stock issued to satisfy debt and notes payable 142,000 -- -- 139,874
Common stock issued to satisfy deferred salary -- -- -- 160,126
Common stock issued for settlements and accounts payable -- -- -- 275,715
Stock options issued to satisfy deferred salary -- -- -- 700,000
Capital lease obligations incurred 28,171 -- -- 20,505
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
INTELLI-CHECK, INC.
-------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
1. NATURE OF BUSINESS
------------------
Intelli-Check, Inc. (the "Company") was incorporated in New York in October 1994
to develop, manufacture and market an advanced document verification system to
enable a retailer to determine their customer's age and identity. The system may
be used to detect and prevent the use of fraudulent identification for the
purchase of alcohol, tobacco and other age-restricted products; to reduce the
risk to the retailer of substantial monetary fines, criminal penalties and
license revocation for the sale of age-restricted products to minors; and to
reduce check cashing, credit card and other types of fraud.
The Company has developed and patented the innovative software technology that
is included in the advanced document verification system terminal called the
"ID-Check." The ID-Check terminal, in which the Company's patented software is
loaded, was designed to offer convenient and reliable age and document
verification. The ID-Check reads, analyzes and displays the encoded information
contained on driver licenses and most other forms of accepted government issued
identification. In addition, the ID-Check product is capable of being upgraded
to accommodate changes made by the governmental issuers of driver licenses and
ID cards. The ID-Check terminal requires a quick swipe of the driver license or
ID card by the retailer; displays a "yes", "no", "expired" or "tampered"; and
creates a record of transactions as proof that the retailer has used proper due
diligence.
During the fourth quarter of 1997, the Company commenced its principal
operations by realizing sales of pre-production prototypes of ID-Check. The
Company has completed its refinement of its software and has placed its initial
order for 525 units of its ID-Check terminal under a supplier agreement with a
third party (Note 10).
Through December 31, 1998, the Company has incurred significant cumulative
losses and has a net capital deficiency as of December 31, 1998. In addition,
the Company's liquidity requirements have been and will continue to be
significant. Management has developed a detailed plan and has taken certain
actions in order to generate the funding necessary for the Company's operations,
including: (1) a plan for marketing and sales of the Company's product, ID-Check
(see above); (2) issuance of additional capital and debt (Note 10); (3) hiring
and retaining key employees (Notes 9 and 10); and (4) effective cost control.
2. SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-7
<PAGE>
Revenue Recognition
- -------------------
Revenue on sales of the Company's product is recognized upon shipment to the
customer.
Inventory
- ---------
Inventory is stated at the lower of cost or market and cost is determined using
the first-in, first-out method. Inventory is comprised of finished goods.
Long-Lived Assets
- -----------------
The Company's policy is to record long-lived assets at cost, amortizing these
costs over the expected useful life of the related assets, in accordance with
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." These assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amounts of the assets may not be
reasonable. Furthermore, these assets are evaluated for continuing value and
proper useful lives by comparison to undiscounted expected future cash flow
projections.
Property and Equipment
- ----------------------
Property and equipment are recorded at cost. All fixed assets are depreciated
over their estimated useful lives ranging from three to seven years using the
straight-line basis. Equipment held under capital leases is amortized utilizing
the straight-line method over the lesser of the term of the lease or estimated
useful life of the asset in accordance with SFAS No. 13, "Accounting for
Leases."
Patent Costs
- ------------
Patent costs, primarily consisting of legal costs, are amortized over a period
of 17 years.
Capitalized Software Development Costs
- --------------------------------------
SFAS No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased
or Otherwise Marketed," specifies that costs incurred internally in creating a
computer software product shall be charged to expense when incurred as research
and development until technological feasibility has been established for the
product. Software production costs for computer software that is to be used as
an integral part of a product or process shall not be capitalized until both (a)
technological feasibility has been established for the software and (b) all
research and development activities for the other components of the product or
process have been completed. During the fourth quarter of 1997, the Company
completed both (a) and (b), as described above; however, no capitalized costs
were incurred or recorded during the remainder of 1997 or 1998.
F-8
<PAGE>
Income Taxes
- ------------
Prior to 1998, the Company had elected to be treated as a Subchapter S
Corporation for federal and state income tax purposes and, as a result, the
losses of the Company were passed through directly to the shareholders. The
Company did, however, remain liable for New York State Subchapter S income
taxes. During 1998, the Company's tax status changed from an S Corporation to a
C Corporation as a result of the issuance of the Series A Convertible Preferred
Stock on January 8, 1998 (Note 6).
The Company accounts for income taxes under SFAS No. 109, "Accounting for Income
Taxes." Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and net operating loss carryforwards. Deferred tax assets
and liabilities are measured using expected tax rates in effect for the year in
which those temporary differences are expected to be recovered or settled. The
Company has recorded a full valuation allowance for its deferred tax assets as
of December 31, 1998, due to the uncertainty of the realizability of those
assets.
Fair Value of Financial Instruments
- -----------------------------------
The carrying amounts of cash, accounts receivable and accounts payable
approximate fair value due to the short-term maturity of these instruments. The
carrying amounts of capital lease obligations, including current portions,
approximate fair value.
Business Concentrations and Credit Risk
- ---------------------------------------
Financial instruments, which subject the Company to concentrations of credit
risk, consist primarily of cash. The Company maintains cash with only one
financial institution. The Company performs periodic evaluations of the relative
credit standing of this institution. The Company has had limited sales of
prototypes to a number of clients which are concentrated in the United States.
The Company performs ongoing credit evaluations, generally does not require
collateral, and establishes an allowance for doubtful accounts based upon
factors surrounding the credit risk of customers, historical trends and other
information. There were no customers that accounted for greater than 10% of
sales for the years ended December 31, 1997 and 1998, and in addition, no
customer accounted for greater than 10% of accounts receivable as of December
31, 1998.
Net Income (Loss) Per Common Share
- ----------------------------------
The Company computes net income (loss) per common share in accordance with SFAS
No. 128, "Earnings Per Share". Under the provisions of SFAS No. 128, basic net
income (loss) per common share ("Basic EPS") is computed by dividing net income
(loss) by the weighted average number of common shares outstanding. Diluted net
income (loss) per common share ("Diluted EPS") is computed by dividing net
income (loss) by the weighted average number of common shares and dilutive
common share equivalents then outstanding. SFAS No. 128 requires the
presentation of both Basic EPS and Diluted EPS on the face of the statements of
operations.
F-9
<PAGE>
Diluted EPS for the years ended December 31, 1997 and 1998 and for the six
months ended June 30, 1998 and 1999, does not include the impact of stock
options then outstanding, as the effect of their inclusion would be
antidilutive.
Stock-Based Compensation
- ------------------------
In 1998, the Company adopted the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," by continuing to apply the provisions of Accounting
Principles Board No. 25, "Accounting for Stock Issued to Employees," ("APB No.
25") while providing the necessary pro forma disclosures as if the fair value
method had been applied.
Research and Development Costs
- ------------------------------
Research and development costs are charged to expense as incurred.
Unaudited Interim Consolidated Financial Statements
- ---------------------------------------------------
The unaudited consolidated financial information included herein for the six
months ended June 30, 1998 and 1999, have been prepared in accordance with
generally accepted accounting principles for interim financial statements. In
the opinion of the Company, these unaudited financial statements, reflect all
adjustments necessary, consisting of normal recurring adjustments, for a fair
presentation of such data on a basis consistent with that of the audited data
presented herein. The results of operations for interim periods are not
necessarily indicative of the results expected for a full year.
Comprehensive Income
- --------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income." This statement establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. The Company adopted this statement in 1998. The adoption of this
statement did not have an impact on the Company's financial condition or results
of operations. Accordingly, the Company's comprehensive net loss is equal to its
net loss for the years ended December 31, 1997 and 1998 and for the six months
ended June 30, 1998 and 1999.
Segment Information
- -------------------
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." This statement establishes standards for
the way the public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. The Company adopted this statement in 1998. In
the initial year of application, comparative information for earlier years must
be restated. Management has determined that it does not have any separately
reportable business segments.
F-10
<PAGE>
Costs of Computer Software Developed or Obtained for Internal Use
- -----------------------------------------------------------------
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"), which provides guidance
for determining whether computer software is internal-use software and guidance
on accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. SOP 98-1 is effective for fiscal years
beginning after December 31, 1998. The adoption of SOP 98-1 did not have a
material effect on the Company's financial statements.
Recently Issued Accounting Standards
- ------------------------------------
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards of
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities.
In July 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133," which amends SFAS No. 133 to be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. The Company does not
currently engage in derivative activity and does not expect the adoption of this
standard to have a material effect on the Company's results of operations,
financial position or cash flows.
Reclassifications
- -----------------
Certain prior year amounts have been reclassified to conform to the current year
presentation.
3. PROPERTY AND EQUIPMENT
----------------------
Property and equipment are comprised of the following:
December 31, June 30,
1998 1999
------------ -----------
(Unaudited)
Computer equipment $103,676 $157,382
Furniture and fixtures 95,443 97,778
Leasehold improvements 63,820 63,822
Office equipment 8,440 9,132
-------- --------
271,379 328,114
Less- Accumulated depreciation 83,315 103,381
-------- --------
$188,064 $224,733
======== ========
Depreciation expense for the years ended December 31, 1997 and 1998 amounted to
$20,066 and $36,982, respectively, and for the six months ended June 30, 1998
and 1999 amounted to $19,690 and $20,066, respectively, unaudited.
F-11
<PAGE>
4. ACCRUED EXPENSES
----------------
Accrued expenses are comprised of the following:
December 31, June 30,
1998 1999
------------ -----------
(Unaudited)
Payroll $629,272 $ 7,270
Interest 82,738 5,454
Other 40,360 9,126
-------- --------
$752,370 $ 21,850
======== ========
5. NOTE PAYABLE TO RELATED PARTY
-----------------------------
As of December 31, 1998, the Company was indebted to the President of the
Company under a note payable agreement in the amount of $98,151, which
represented the principal of the note. The note bore interest at 8% and during
1998, the due date was extended to the sooner of June 1999 or the receipt of the
proceeds from a stock offering through either a Private Placement or an Initial
Public Offering ("IPO") that exceeds $3,000,000. Accrued interest on the note
was included in accrued expenses in the accompanying balance sheets. The note
payable and all accrued interest were repaid subsequent to December 31, 1998
(Note 10).
6. CONVERTIBLE SECURED DEMAND NOTE
-------------------------------
In January 1997, the Company entered into a Note Purchase Agreement with the New
York State Science and Technology Foundation (the "Foundation") pursuant to
which the Company issued a Convertible Promissory Note in the amount of $250,000
and the Foundation agreed to invest an additional $250,000 through the purchase
of 125,000 shares of Series A Convertible Preferred Stock based upon the Company
raising a certain amount of additional capital. The Note bore interest at 8% per
annum and was converted into 125,000 shares of Series A Convertible Preferred
Stock in January 1998. In addition, the Foundation purchased an additional
125,000 shares of Series A Convertible Preferred Stock for $250,000 in cash,
upon the closing of a private placement of the Company's common stock in January
1998. The Series A Convertible Preferred Stock is convertible into the Company's
common shares on a one-for-one basis (Note 8).
7. INCOME TAXES
------------
No provision for U.S. federal or state income taxes has been recorded for the
years ended December 31, 1997 and 1998 and for the six months ended June 30,
1998 and 1999 (unaudited) as the Company has incurred an operating loss.
F-12
<PAGE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets for federal and state income taxes are as
follows:
December 31, June 30,
1998 1999
------------ -----------
Deferred tax assets, net: (unaudited)
Net operating loss carryforwards $380,000 $680,000
Depreciation (12,000) (20,000)
Other (10,000) (16,000)
Less- Valuation allowance 358,000 644,000
Deferred tax assets, net -- --
======== ========
Realization of deferred tax assets is dependent upon future earnings, if any.
The Company has recorded a full valuation allowance against its deferred tax
assets since management believes that it is more likely than not that these
assets will be realized. No income tax benefit has been recorded for all periods
presented because of the valuation allowance.
As of December 31, 1998 and June 30, 1999 (unaudited), the Company had net
operating loss carryforwards (NOL's) for federal income tax purposes of
approximately $950,000 and $1,700,000 (unaudited), respectively. There can be no
assurance that the Company will realize the benefit of the NOL's. The federal
NOL's are available to offset future taxable income and expire from 2009 through
2019 if not utilized. Under Section 382 of the Internal Revenue Code, these
NOL's may be limited due to ownership changes.
In January 1998, as a result of the issuance of Series A Convertible Preferred
Stock, the Company's S Corporation status was terminated and the Company began
operations as a C Corporation. Accordingly, the Company became subject to
federal and state income taxes and the retained deficit of the Company was
transferred to additional paid-in capital.
If the Company operated as a C corporation since January 1997, the pro forma
income tax benefit would have been approximately $642,000 (unaudited), offset by
a full valuation allowance. No pro forma adjustments are required for the year
ended December 31, 1998 and the six months ended June 30, 1998 (unaudited) as
the Company was operating as a C Corporation for the majority of each period and
the adjustment would be immaterial.
8. STOCKHOLDERS' EQUITY
--------------------
Series A Convertible Preferred Stock
- ------------------------------------
In January 1997, the Board of Directors authorized the creation of a class of
Series A Convertible Preferred Stock with a par value of $.01. The Series A
Convertible Preferred Stock is convertible into an equal number of common shares
at the holder's option, subject to adjustment for anti-dilution. The holders of
Series A Convertible Preferred Stock are entitled to receive dividends as and if
declared by the Board of Directors. In the event of liquidation or dissolution
of the Company, the holders of Series A Convertible Preferred Stock are entitled
to receive all accrued dividends, if applicable, plus the liquidation price of
$1.00 per share (See Note 10).
F-13
<PAGE>
Common Stock and Warrants
- -------------------------
In May 1997, the Company completed a private placement of stock and received
proceeds of $630,000 for 315,000 units, which consist of one share of common
stock and one warrant to purchase an additional share of common stock for $3.00,
expiring two years from the date of the closing. At any time following the
completion of an IPO of its securities, the Company may, under certain
circumstances, including, but not limited to, having an effective registration
statement covering the resale of the common stock underlying the warrants,
redeem the warrants at a price of $.01 per warrant on not less than 20 days
written notice if the last sale price of the common stock has averaged at least
$4.50 per share for the 20 consecutive trading days ending at least five days
prior to the date on which notice is given. Of the amount raised, $75,000
represented payments from a Director of the Company for 37,500 units of the
Company's private placement.
In May 1997, in connection with the private placement discussed above, the
Company issued warrants to the placement agent to purchase 7,500 units
consisting of one share of common stock for $2.25 per share, with an attached
warrant to purchase an additional share of common stock at $3.00 per share
expiring in June 2000. The placement agent is entitled to piggyback registration
rights with regards to the underlying common shares under the warrant agreement.
The Company allocated the net proceeds from the sale of the units to the
common stock and to the warrants issued.
In November 1997, the Company completed an additional private placement of stock
and received proceeds of $1,117,000 for 558,500 units, consisting of one share
of the Company's common stock and one warrant to purchase an additional share of
common stock for $3.00, under the same terms as the warrants issued in the May
1997 private placement. Of this amount, $85,000 was received from certain family
members of existing shareholders of the Company for 42,500 units.
In connection with the second private placement, the Company's Chief Executive
Officer converted indebtedness of $142,000 from the Company into a subscription
of 71,000 units.
The Company recorded the proceeds from both private placements that occurred
during 1997, net of approximately $79,000 in issuance expenses.
In 1998, the Company sold 258,000 shares of common stock at $2.00 per share for
total proceeds of $516,000. The Company completed two additional private
placements of common stock subsequent to December 31, 1998 (Note 9).
In the opinion of management, all warrants have been issued with an exercise
price that is equal or above the fair market value of the Company's Common Stock
on the date of grant.
F-14
<PAGE>
Stock Options
- -------------
In order to retain and attract qualified personnel necessary for the success of
the Company, the Company adopted a Stock Option Plan (the "1998 Stock Option
Plan") covering up to 400,000 of the Company's common shares, pursuant to which
officers, directors, key employees and consultants to the Company are eligible
to receive incentive stock options and nonqualified stock options. The
Compensation Committee of the Board of Directors administers the 1998 Stock
Option Plan and determines the terms and conditions of options granted,
including the exercise price. The 1998 Stock Option Plan provides that all stock
options will expire within ten years of the date of grant. Incentive stock
options granted under the 1998 Stock Option Plan must be granted at an exercise
price that is not less than the fair market value per share at the date of grant
and the exercise price must not be less than 110% of the fair market value per
share at the date of grant for grants to persons owning more than 10% of the
voting stock of the Company. The 1998 Stock Option Plan also entitles
nonemployee directors to receive grants of non-qualified stock options as
approved by the Board of Directors.
Pursuant to the 1998 Stock Option Plan, the Company had granted in 1997, 50,000
stock options to each of three members of the Board of Directors, of which all
are exercisable at $3.00 per share and all expire within 5 years from the date
of grant. One of the directors had declined to stand for re-election to the
Board. In connection with this decision in 1999, the Company extended the date
of expiration of the former director's stock options until August 15, 2000. The
Company did not record a charge for the adjustment to the terms of the stock
options, as the amount was immaterial.
Had compensation for the 1998 Stock Option Plan been determined consistent with
the provisions of SFAS No.123, the effect on the Company's net loss and basic
and diluted loss per share would have been changed to the following pro forma
amounts:
<TABLE>
<CAPTION>
Six Months Six Months
Year Ended Year Ended Ended June 30, Ended June 30,
December 31, December 31, 1998 1999
1997 1998 (unaudited) (unaudited)
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss, as reported $ (1,604,296) $ (1,503,814) $ (596,787) $ (775,605)
Net loss, pro forma (1,665,496) (1,537,814) (612,087) (1,014,285)
Basic and diluted loss per share,
as reported (0.39) (0.35) (0.14) (0.15)
Basic and diluted loss per
share, pro forma (0.40) (0.35) (0.15) (0.20)
</TABLE>
F-15
<PAGE>
Stock option activity under the 1998 Stock Option Plan during the periods
indicated is as follows:
Weighted
Options Average
Granted Exercise Price
------- --------------
Options outstanding at January 1, 1997 -- $ --
Granted 180,000 3.00
Canceled -- --
------- --------
Outstanding at December 31, 1997 180,000 3.00
Granted 100,000 3.00
Canceled -- --
------- --------
Outstanding at December 31, 1998 280,000 3.00
Granted 702,000 3.00
Canceled -- --
Outstanding at June 30, 1999 (unaudited) 982,000 $ 3.00
======= ========
The fair market value of each option grant has been estimated on the date of
grant using the Black-Scholes option pricing model based upon expected option
lives of 5 years; risk free interest rate of 5.00%; expected volatility of 0%
and a dividend yield of 0%.
The weighted-average remaining life of the options outstanding at December 31,
1998 and June 30, 1998 is 3.82 years and 4.66 years (unaudited), respectively,
and the weighted-average fair value of the options outstanding at December 31,
1998 and June 30, 1999 is $0.34 and $0.34 (unaudited), respectively.
On November 1, 1997, the Company entered into a one-year consulting agreement
with a member of the Board of Directors, who is not an employee, the
compensation for which was the issuance of options to purchase 50,000 shares of
Common Stock at $3.00 per share. The Company determined the value of the options
to be immaterial under the Black-Scholes Option Pricing Model.
In the opinion of management, all stock options have been issued with an
exercise price that is equal or above the fair market value of the Company's
Common Stock on the date of grant.
9. COMMITMENTS AND CONTINGENCIES
-----------------------------
Operating Leases
- ----------------
The Company has entered into various leases for office equipment and office
space expiring through October 2000. Future minimum lease payments under these
lease agreements are as follows:
Year ending December 31:
1999 $ 74,280
2000 77,251
-----------
$ 151,531
F-16
<PAGE>
Capital Lease Obligations
- -------------------------
The Company leases computer equipment under several capital leases expiring in
2000. The asset and liability are recorded at the lower of the present value of
minimum lease payments or the fair market value of the assets.
Future minimum payments under the lease agreements are as follows:
Year ending December 31:
1999 $ 8,941
2000 7,620
--------
Total minimum lease payments 16,561
Less- Amount representing interest 1,560
--------
Present value of net minimum lease
payments $ 15,001
========
Royalty and Licensee Agreements
- -------------------------------
In January 1996, the Company entered into an agreement with a third party. The
agreement states that if the Company has sales exceeding $500,000 to certain
customers as specified within the agreement, the Company must pay between 2 to
4% of gross revenues as a royalty to the third party. In addition, if the
Company is sold to a prospective purchaser, as defined, the third party will
receive a fee ranging from 4 to 5% of the purchase price. The fee will be
determined based upon such purchase price. As each of the aforementioned events
had not occurred, no royalties were due as of December 31, 1998. The Company
settled this agreement subsequent to December 31, 1998 (Note 10).
During 1997, the third party filed a lawsuit against the Company in the New York
State Supreme Court in Suffolk County, claiming that the Company had breached
the agreement entered into in January 1996 by failing to pay the third party
certain fees and/or royalties to which the third party believes he was entitled
in connection with sales of products of the Company to certain designated
parties.
The Company stipulated with the third party the dismissal of the action
subsequent to December 31, 1998 (Note 10).
The Company previously entered into an royalty agreement with the
President of the Company during 1996 to license certain software. The agreement
stipulated, among other provisions, that the President would receive royalties
equal to a percentage of the Company's gross sales. As of December 31, 1998, no
amounts have been earned under this agreement. This agreement was terminated in
May 1999 and superceded by a new agreement. (Note 10).
F-17
<PAGE>
Employment Agreement
- --------------------
On July 1, 1996, the Company entered into a one-year employment contract with
its Chairman and Chief Executive Officer. Each party has agreed to defer the
payment until such time as the Company has significant sales of its product.
Under the terms of the agreement, the Company had extended the employment
agreement one-month for each month of salary not paid. As of December 31, 1998,
no amounts had been paid to the Chairman and Chief Executive Officer. The
agreement was replaced with a new employment agreement in January 1999 (Note
10).
Supplier Agreement
- ------------------
In December 1996, the Company signed an exclusive supplier agreement with
Hazeltine Corporation ("Hazeltine"). The agreement specifies that the Company
would make total payments of $499,563 for the design and production of one
hundred pre-production prototypes. In addition, Hazeltine agreed to manufacture
ID-Check products, for a price determined by the terms of the agreement, for an
initial term of five years from the end of the calendar year in which
Hazeltine's sales of ID-Check products to the Company first achieve a rate of
not less than 100,000 units per year. The Company terminated said agreement
subsequent to December 31, 1998 (Note 10).
10. SUBSEQUENT EVENTS
-----------------
Employment Agreements
- ---------------------
On January 1, 1999, the Company entered into three-year employment contracts
with both its Chairman and Chief Executive Officer and its President. Each of
the agreements provides for a base salary of $225,000 and the payment of a bonus
if the Company's sales exceed $2,000,000 in the previous year. The bonus will be
in the amount of $50,000 plus 1% of the amount of sales in excess of $2,000,000
in each year. In addition, for each fiscal year ending during the term of the
employment agreements, the Company will grant to each of the executives an
option to purchase the greater of 25,000 shares of our common stock at fair
market value on the date of grant or 10,000 shares of our common stock at fair
market value on the date of grant for each full $250,000 by which pre-tax
profits for each year exceeds pre-tax profits for the prior fiscal year.
However, the Company is not required to grant options to purchase more than
150,000 shares of our common stock with respect to any one fiscal year.
In July 1999, the Company entered into a two-year employment agreement with its
new Chief Financial Officer, which became effective on September 7, 1999. The
agreement provides for a base salary of $125,000. In addition, the Company
granted the Chief Financial Officer an option to purchase 50,000 shares of
common stock, of which 10,000 options are immediately exercisable at $5.00 per
share, 20,000 options are exercisable on September 7, 2000 at the initial public
offering price and 20,000 options become exercisable at the initial public
offering price when all external accounting functions, except for year-end
audit, are being performed internally.
F-18
<PAGE>
Private Placement of Common Stock
- ---------------------------------
In January 1999, the Company completed a private placement of stock, which
originally commenced in 1998. During January 1999, the Company sold 15,000
units, consisting of one share of the Company's common stock and one warrant to
purchase an additional share of common stock at $3.00, expiring two years from
the date of closing. The Company received total proceeds of $30,000 in January
1999. The Company allocated the net proceeds from the sale of the units
to the common stock and to the warrant.
In March 1999, the Company commenced an additional private placement and sold
259,600 units, consisting of one share of common stock and one warrant to
purchase an additional share of common stock at $3.00, expiring two years from
the date of closing. The Company received total proceeds of $489,200 prior to
June 30, 1999 and the remaining balance of $30,000 in August 1999. The Company
allocated the net proceeds from the sale of the units to the common stock
and to the warrant.
In the opinion of management, all of the above warrants have been issued with an
exercise price that is equal or above the fair market value of the Company's
Common Stock on the date of grant.
Warrants
- --------
In February 1999, the Company extended the expiration dates for the warrants
issued on May 26, 1997 and November 30, 1997 until June 30, 2000. The Company
did not record a charge for the adjustment to the terms of the warrants, as the
amount was immaterial.
In March 1999, the Company issued warrants to GunnAllen Financial, Inc. to
purchase 50,000 shares of common stock at an exercise price of $3.00 per share
expiring March 24, 2002. The warrants were issued in connection with a
consulting service agreement and in the opinion of management have been issued
with an exercise price that is equal or above the fair market value of the
Company's Common Stock on the date of grant. The Company did not record a charge
for the issuance to the terms of the warrants, as the amount was immaterial. In
the opinion of management, the exercise price of the warrant was equal or above
the fair market value of the Company's Common Stock on the date of the grant.
In April 1999, the Company adjusted the exercise price of a warrant to purchase
common stock of the Company issued to the Foundation, in a previous common stock
private placement, from $3.00 to $2.00. The adjustment was contingent upon the
Foundation exercising the warrants within thirty days of the adjustment. The
Company did not record a charge for the adjustment to the terms of the warrants,
as the amount was immaterial as the exercise price of the warrant was equal or
above the fair market value of the Company's Common Stock on the date of the
adjustment. The Foundation exercised this warrant in May 1999 at the adjusted
exercise price and the Company received total proceeds of $200,000. In addition,
the Foundation received a new warrant to purchase 100,000 shares of the
Company's common stock at an exercise price of $3.00 per share expiring in May
2001. In the opinion of management, the new warrant has been issued with an
exercise price that is equal or above the fair market value of the Company's
Common Stock on the date of grant.
F-19
<PAGE>
Repayment of Note Payable
- -------------------------
In connection with an agreement executed in May 1999, which superceded
a prior license agreement, the Company repaid an outstanding loan of $98,151 and
accrued interest of $41,724 to the President of the Company. The Company paid
$1.00 in cash and issued 69,937 units, consisting of one share of the Company's
common stock and one warrant to purchase an additional share of common stock at
$3.00, expiring in May 2001. In addition, under the agreement, the Company is
licensing certain software from the President and has agreed to pay the
executive royalties equal to .005% on gross sales from $2,000,000 to $52,000,000
and .0025% on gross sales in excess of $52,000,000.
Conversion of Deferred Salary
- -----------------------------
In May 1999, the Chairman and Chief Executive Officer converted $150,000 in
deferred salary into 75,000 units, consisting of one share of the Company's
common stock and one warrant to purchase an additional share of common stock at
$3.00, expiring in May 2001. In addition, the Company's President converted
$10,126 in deferred salary into 5,063 units, consisting of one share of the
Company's common stock and one warrant to purchase an additional share of common
stock at $3.00, expiring in May 2001.
In June 1999, the Chairman and Chief Executive officer converted approximately
$380,000 in deferred salary and interest into 375,000 options to purchase a
share of common stock at $3.00, expiring in June 2004. In addition, the
Company's President converted approximately $210,000 in deferred salary and
interest into 207,000 options to purchase a share of common stock at $3.00,
expiring in June 2004. Furthermore, the Company's former President converted
approximately $110,000 in deferred salary and interest into 110,000 options to
purchase a share of common stock at $3.00, expiring in June 2004.
Settlement Agreements
- ---------------------
In connection with an outstanding lawsuit, the Company stipulated with the
plaintiff to the dismissal of the action, which had been pending since January
1997 in the New York State Supreme Court, Suffolk County, on February 22, 1999.
In exchange for the plaintiff's dismissal of his claims against the Company and
execution of a release of all claims against the Company, the Company has agreed
to dismiss its counterclaim against the plaintiff and execute a reciprocal
release for him. The settlement does not provide for any repayment from the
Company to the plaintiff or from the plaintiff to the Company.
In May 1999, the Company and the third party agreed to terminate the royalty
agreement pursuant to a Settlement Agreement. Under the Settlement Agreement,
the Company issued 10,000 shares of common stock, valued at $2.00 per share with
piggyback registration rights, to the third party in exchange for the
termination of the royalty agreement. The Company recorded a charge of $20,000
in the accompanying statement of operations for the six months ended June 30,
1999 (unaudited). The Company has no further liability to the third party.
In June 1999, the Company and Hazeltine (succeeded by Marconi Aerospace Systems,
Inc.) entered into an agreement to terminate the Exclusive Supplier Agreement.
Under the terms of the termination agreement, Hazeltine will return all units of
the Company's ID-Check in its possession as well as all samples, designs,
drawings, software, molds and any other item related to the ID-Check. The
Company issued 75,000 shares of common stock to Hazeltine in order to satisfy
outstanding payables of approximately $220,000 due Hazeltine, which was included
in accounts payable in the accompanying December 31, 1998 balance sheet.
F-20
<PAGE>
Common Stock Issued for Services
- --------------------------------
In June 1999, the Company issued 9,000 shares of common stock to a third party
for professional services rendered on behalf of the Company. The shares were
valued at $4.00 per share, and accordingly, the Company recorded a charge of
$36,000 in the accompanying statement of operations for the six months ended
June 30, 1999 (unaudited).
Supplier Agreement
- ------------------
In June 1999, the Company entered into a new supplier agreement with Welch
Allyn, Inc., and the Company immediately executed its first order with Welch
Allyn, Inc., for the purchase of 525 units of its newly designed product.
Conversion of Preferred Stock
- -----------------------------
In July 1999, the Foundation converted 250,000 shares of Series A Convertible
Preferred Stock into 250,000 shares of common stock.
Secured Promissory Notes
- ------------------------
In August and September 1999, the Company placed $1,200,000 of secured
promissory notes with interest at 10% for net proceeds of $1,050,000. The notes
have warrants attached to purchase 2,500 shares of common stock for each
principal amount of $50,000, at $3.00 per share. The warrants expire in August
2002 and can be redeemed by the Company at $.01 per warrant at any time the
Company's common stock has an average market price of $6.00 per share for a
period of twenty consecutive trading days. The fair value of the warrants was
deemed to be immaterial. The notes mature at the earlier of July 31, 2000 or the
date at which the Company receives gross proceeds from a public offering of its
securities of at least $6,000,000.
1999 Stock Option Plan
- ----------------------
In August 1999, the Company adopted the 1999 Stock Option Plan (the "1999 Stock
Option Plan") covering up to 1,000,000 of the Company's common shares, pursuant
to which officers, directors, key employees and consultants to the Company are
eligible to receive incentive stock options and nonqualified stock options. The
Compensation Committee of the Board of Directors administers the 1999 Stock
Option Plan and determines the terms and conditions of options granted,
including the exercise price. The 1999 Stock Option Plan provides that all stock
options will expire within ten years of the date of grant. Incentive stock
options granted under the 1999 Stock Option Plan must be granted at an exercise
price that is not less than the fair market value per share at the date of grant
and the exercise price must not be less than 110% of the fair market value per
share at the date of grant for grants to persons owning more than 10% of the
voting stock of the Company. The 1999 Stock Option Plan also entitles
nonemployee directors to receive grants of non-qualified stock options as
approved by the Board of Directors.
F-21
<PAGE>
Initial Public Offering
- -----------------------
The Company has entered into a letter of intent for an initial public offering
of its common stock. The offering contemplates the sale of 1,000,000 shares of
common stock at an offering price of $7.00 per share before underwriting
commissions and offering expenses.
F-22
<PAGE>
We have not authorized any dealer, salesperson or any other person to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information. This prospectus does not offer to sell
or buy any shares in any jurisdiction where it is unlawful.
TABLE OF CONTENTS
Page
Prospectus Summary.................... #
Risk Factors.......................... #
Forward-Looking Statements............ #
Use of Proceeds........................ #
Dilution.............................. #
Dividends............................. #
Capitalization........................ #
Selected Financial Data............... #
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations........................... #
Business.............................. #
Management............................ #
Certain Transactions.................. #
Principal and Selling
Stockholders......................... #
Description of Securities............. #
Shares Eligible for
Future Sale.......................... #
Underwriting.......................... #
Legal Matters......................... #
Experts............................... #
Additional Information................ #
Index to the Company's
Financial Statements................ F-1
Until __________, 1999, all dealers effecting transactions in the
registered securities, whether or not participating in this offering, may be
required to deliver a prospectus. This is in addition to the dealers' obligation
to deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
<PAGE>
1,000,000 Shares
INTELLI-CHECK, INC.
Common Stock
-----------------
Prospectus
-----------------
GunnAllen Financial, Inc.
_______________, 1999
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Intelli-Check's Certificate of Incorporation limits the liability of
directors to the maximum extent permitted by Delaware General Corporation Law.
Delaware law provides that the directors of a corporation will not be personally
liable to such corporation or its stockholders for monetary damages for breach
of their fiduciary duties as directors, except for liability (i) for any breach
of their 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) for unlawful payments of dividends or unlawful
stock repurchases or redemptions as provided in Section 174 of the Delaware
General Corporation Law; or (iv) for any transaction from which the director
derives an improper personal benefit. Intelli-Check's By-laws provide that the
Company shall indemnify its directors and officers under certain circumstances,
including those circumstances in which indemnification would otherwise be
discretionary, and the Company is required to advance expenses to its officers
and directors as incurred in connection with proceedings against them for which
they may be indemnified.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than the
underwriting discount and the underwriter's non-accountable expense allowance,
payable by the Registrant in connection with the sale of common stock being
registered. All amounts are estimates except the SEC registration fee and the
American Stock Exchange filing fees.
AMOUNT
SEC registration fee.................................................$ 2,500
NASD filing fee....................................................... 1,500
American Stock Exchange listing fee.................................. 42,500
Blue sky fees and expenses (including legal fees).................... 10,000
Transfer agent fees.................................................. 5,000
Printing............................................................. 75,000
Legal fees and expenses.............................................. 150,000
Accounting fees and expenses..........................................100,000
Miscellaneous..........................................................50,000
Total...........................................................$436,500
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In the past three years, the Company made the following sales of
unregistered securities pursuant to exemptions from the registration
requirements of the Securities Act of 1933, as amended (the Securities Act).
II-1
<PAGE>
In September 1996, certain family members of existing shareholders
purchased 87,500 shares of our common stock for $175,000.
In October 1996, we satisfied $82,770 of borrowings by the issuance of
41,385 shares of our common stock and approximately $45,000 in payables by the
issuance of 22,500 shares of our common stock.
In December 1996 and January 1997, our Chief Executive Officer made
loans totalling $142,000 with interest at 10% with maturity in 90 days. He
subsequently extended the notes on several occasions.
In January 1997, we entered into a Note Purchase Agreement with the New
York State Science and Technology Foundation pursuant to which we issued a
Convertible Promissory Note in the amount of $250,000. The Foundation also
agreed to invest an additional $250,000 through the purchase of 125,000 shares
of Series A convertible preferred stock based upon our raising a certain amount
of additional capital. The note bore interest at 8% per annum. Under the
agreement we could either prepay the note, without penalty, or upon raising an
additional $750,000 in capital, convert the note into 125,000 shares of Series A
convertible preferred stock.
In February 1997, we issued 12,000 shares of our common stock in
satisfaction of $24,000 in accounts payable.
In May 1997 and June 1997, we sold 315,000 units consisting of one
share of common stock and one warrant to acquire an additional share at $3.00
per share originally set to expire in June 1999 in a private placement with
respect to which Jesup & Lamont Securities Corp. acted as placement agent. The
placement agent received a commission of $45,500 and a non-accountable expense
allowance of $20,000 in connection with the private placement. Net proceeds to
us were $550,849. Of the amount raised, $75,000 represented payment from one of
our directors for 37,500 units. Our company also issued to the placement agent
non-redeemable warrants to purchase 7,500 units for $2.25 per unit, which
includes one share of common stock and an attached warrant to purchase an
additional share of common stock at $3.00 per share.
In November 1997, we sold in a private placement a total of 558,500
units consisting of one share of common stock and one warrant to acquire an
additional share at $3.00 per share originally set to expire in November 1999.
Our company received net proceeds of $1,117,000 from this offering. Also in this
offering, we issued to Frank Mandelbaum 71,000 shares of our common stock and
warrants to purchase 71,000 shares of our common stock at an exercise price of
$3.00 per share in exchange for Mr. Mandelbaum's forgiveness of his loan to us
of $142,000.
In January 1998, we redeemed the convertible promissory note held by
the New York State Science and Technology Foundation for 125,000 shares of
Series A convertible preferred stock and in addition they purchased an
additional 125,000 shares of Series A convertible stock for $250,000.
In July 1998, we commenced a private placement of 500,000 units at
$6.00 per unit. These units consisted of two shares of common stock at $3.00 per
share and one warrant to acquire an additional share at $5.00 per share expiring
two years from the date of the closing. In connection with this offering, the
company sold 31,000 units and received proceeds of $186,000. Due to market
conditions prevailing at that time for raising capital, we rescinded the
II-2
<PAGE>
offering and all the subscribers agreed to re-subscribe under the terms of the
September 1998 offering.
In September 1998, we commenced a private placement of 1,000,000 units
at $2.00 per unit. These units consisted of one share of common stock and one
warrant to acquire an additional share at $3.00 per share. The offering was
extended to January 17, 1999. We sold 273,000 units and received $546,000 as a
result of the offering, of which $30,000 was received in January 1999. The New
York State Science and Technology Foundation subscribed to 100,000 units for
$200,000 in this offering.
In February 1999, we extended the expiration date for the warrants
issued in May 1997, June 1997 and November 1997 until June 30, 2000.
In March 1999, we commenced a private placement and sold 259,600 units
at $2.00 per unit. These units consisted of one share of common stock and one
warrant to acquire an additional share at $3.00 per share. We received $489,200
as a result of the offering prior to June 30, 1999 and $30,000 in August, 1999.
In March 1999, we issued warrants to GunnAllen Financial Inc. to
purchase 50,000 shares of our common stock at an exercise price of $3.00 per
share expiring March 24, 2002. These warrants were issued in payment of the fee
under a consulting agreement.
In April 1999, we adjusted the exercise price of warrants issued to New
York Science and Technology Foundation to purchase 100,000 shares of our common
stock from $3.00 to $2.00 if exercised within 30 days of the adjustment. In May
1999, the Foundation exercised such warrant and we issued 100,000 shares of our
common stock and a new warrant to purchase 100,000 shares of our common stock at
an exercise price of $3.00, which expires in May, 2001.
In May 1999, we issued 10,000 shares of our common stock to a third
party in exchange for the termination of a royalty agreement as part of the
settlement of a lawsuit.
In May 1999, we issued to Mr. Mandelbaum 75,000 shares of our common
stock and warrants to purchase 75,000 shares at an exercise price of $3.00 per
share and we issued to Mr. Messina 5,063 shares of our common stock and warrants
to purchase 5,063 shares at an exercise price of $3.00 per share. These
issuances were due to reductions in deferred compensation. In addition, we
issued to Mr. Messina 69,937 shares of our common stock and warrants to purchase
69,937 shares of our common stock at an exercise price of $3.00 per share in
exchange for the termination of Mr. Messina's reversion rights for certain
software.
In June 1999, we agreed to terminate the supplier agreement we had with
Hazeltine (formerly Marconi Aerospace Systems, Inc.), for which we issued 75,000
shares of our common stock to Hazeltine in payment of outstanding invoices
totalling $220,000, and we received all units of ID-Check which had been
manufactured, all samples, designs, drawings, software, molds and any other item
related to ID-Check.
In June 1999, all remaining deferred compensation and interest due to
Frank Mandelbaum, Kevin Messina and Todd Cohen was eliminated by the issuance of
options to purchase 375,000, 207,000 and 110,000 shares, respectively, of our
common stock.
II-3
<PAGE>
In June 1999, we issued 9,000 shares of our common stock to Blanchfield
King Kober, our former accountants in payment of accounting fees totalling
$36,000.
In August and September 1999 we placed $1,200,000 of secured promissory
notes with interest at 10%. These notes have warrants attached to purchase 2,500
shares for each principal amount of $50,000 at $3.00 per share expiring in
August 2002 of securities by us and can be redeemed by us at $.01 per warrant at
any time that our stock has a public market price of $6.00 per share for 20
consecutive days. The notes mature on the sooner of July 31, 2000 or the date
that we receive gross proceeds from a public offering of our securities of
$6,000,000.
The sales and issuances of the preferred stock, common stock and
warrants described above were deemed to be exempt from registration under the
Securities Act in reliance upon Section 4(2) and Regulation 506 thereof as
transactions not involving a public offering. The Registrant made a
determination that each of the purchasers was a sophisticated investor. The
purchasers in such private offerings represented their intention to acquire the
securities for investment only and not with a view to the distribution thereof.
Appropriate legends were affixed to the stock certificates and warrants issued
in such transactions. All purchasers had adequate access to sufficient
information about the Registrant to make an informed investment decision.
ITEM 27. EXHIBITS
NUMBER DESCRIPTION
1 Form of Underwriting Agreement*
3.1 Certificate of Incorporation of the Company*
3.2 By-laws of the Company*
4.1 Specimen Stock Certificate**
4.2 Form of Underwriter's Warrant Agreement*
5 Opinion of Milberg Weiss Bershad Hynes & Lerach LLP**
10.1 1998 Stock Option Plan*
10.2 Employment Agreement between Frank Mandelbaum and the Company,
dated as of January 1, 1999*
10.3 Employment Agreement between Kevin Messina and the Company,
dated as of January 1, 1999*
10.4 Employment Agreement between Edwin Winiarz and the Company, dated as of
July 21, 1999* 10.5 Agreement of Lease between the Company and The
Huntington Atrium, dated as of October
25, 1996*
10.6 1999 Stock Option Plan*
10.7 Development and Supply Agreement between the Company and Welch
Allyn Data Collection Inc., dated July 9, 1999***
10.8 Agreement between the Company and Northern Leasing Systems Inc.,
dated as of August 13, 1999*
21 List of Subsidiaries*
23(1) Consent of Milberg Weiss Bershad Hynes & Lerach LLP (included in
Exhibit 5)
23(2) Consent of Arthur Andersen LLP* 24 Power of Attorney contained in, and
incorporated herein by reference to the signature
pages of this registration statement
27 Financial Data Schedule*
II-4
<PAGE>
* Filed herewith
** To be supplied by amendment
*** Filed herewith in redacted form pursuant to Rule 406 under the Securities
Act. Filed separately in unredacted form subject to a request for
confidential treatment under Rule 406.
ITEM 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the 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 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 undersigned Registrant hereby undertakes:
(1) That it will file, during any period in which in offers or
sells securities, a post-effective amendment to this
registration statement to:
(i) Include any prospectus required by section 10(a)(3)
of the Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental
change in the information in the registration
statement; and
(iii) Include any additional or changed material
information on the plan of distribution.
(2) That for determining liability under the Securities Act, it
will treat each 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 offer.
(3) To file a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the
Offering.
(4) To provide to the underwriter at the closing specified in the
Underwriting Agreement certificates in such denomination and
registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
(5) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of prospectus
II-5
<PAGE>
filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared
effective.
(6) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
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 authorized this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York, on September 24, 1999.
INTELLI-CHECK, INC.
By /s/ Frank Mandelbaum
--------------------------
Frank Mandelbaum, Chairman
and Chief Executive Officer
We, the undersigned directors and/or officers of Intelli-Check, Inc.
(the "Company"), hereby severally constitute and appoint Frank Mandelbaum,
Chairman and Chief Executive Officer, Kevin Messina, President and Chief
Technology Officer, and Edwin Winiarz, Executive Vice President, Treasurer and
Chief Financial Officer, and each of them individually, with full powers of
substitution and resubstitution, our true and lawful attorneys, with full powers
to them and each of them to sign for us, in our names and in the capacities
indicated below, the Registration Statement on Form SB-2 filed with the
Securities and Exchange Commission, and any and all amendments to said
Registration Statement (including post-effective amendments), and any
registration statement filed pursuant to Rule 462(b) under the Securities Act of
1933, as amended, in connection with the registration under the Securities
Action of 1933, as amended, of equity securities of the Company, and to file or
cause to be filed the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys, and each of them full power and authority to do and perform each
and every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as each of them might or could
do in person, and hereby ratifying and confirming all that said attorneys, and
each of them, or their substitute or substitutes, shall do or cause to be done
by virtue of this Power of Attorney.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities indicated below:
Dated: September 24, 1999
/s/ Frank Mandelbaum
--------------------------
Frank Mandelbaum, Chairman,
Chief Executive Officer and Director
II-6
<PAGE>
Dated: September 24, 1999
/s/Kevin Messina
----------------------------
Kevin Messina, President,
Chief Technology Officer and
Director
Dated: September 24, 1999
/s/Edwin Winiarz
----------------------------
Edwin Winiarz, Executive
Vice President, Treasurer,
Chief Financial Officer and
Director
Dated: September 24, 1999
/s/Paul Cohen
------------------------
Paul Cohen, Director
Dated: September 24, 1999
/s/Charles McQuinn
----------------------------
Anthony Broderick, Director
Dated: September 24, 1999
________________________
Evelyn Berezin, Director
Dated: September 24, 1999
_________________________
Charles McQuinn, Director
II-7
Ex. 1
INTELLI-CHECK, INC.
UNDERWRITING AGREEMENT
1,000,000 Shares of Common Stock
(Par Value $.001 Per Share)
New York, New York
September , 1999
GunnAllen Financial, Inc.
1715 Westshore Blvd - Suite 775
Tampa, Florida 33607
Dear Sirs:
Intelli-Check, Inc., a Delaware corporation (the "Company"),
proposes to issue and sell to GunnAllen Financial, Inc. (the "Underwriter")
pursuant to this Underwriting Agreement (the "Agreement") One Million
(1,000,000) Firm Shares of Common Stock of the Company, par value $.001 per
share, and to grant to the Underwriter the option referred to in Section 2(b)
hereof to purchase all or any part of an additional One Hundred and Fifty
Thousand (150,000) Option Shares or such other number as may be permitted
thereunder, for the purpose of covering over-allotments. It is understood that
the Underwriter proposes to offer the Shares to be purchased hereunder to the
public upon the terms and conditions set forth in the Registration Statement (as
hereinafter defined) after the Registration Statement becomes effective. As used
in this Agreement, the term "Common Stock" shall mean the authorized capital
stock of the Company, par value $.001 per share; the term "Firm Shares" shall
mean the 1,000,000 shares of Common Stock to be issued and sold to the
Underwriter at the First Closing Date referred to in Section 2(a) hereof; the
term "Option Shares" shall mean such of the additional 150,000 shares of Common
Stock as are purchased pursuant to the option referred to in Section 2(b)
hereof; and the term "Shares" shall mean the Firm Shares and the Option Shares
collectively. The Company will also issue and sell to the Underwriter, for its
own account and the accounts of its designees for an aggregate price of $100.00,
warrants (the "Underwriter's Warrants") to purchase up to an aggregate of
100,000 shares of Common Stock (the"Warrant Shares") at an exercise price of
$7.70 per share, which sale will be consummated in accordance with the terms and
conditions of the form of Underwriter's Warrant substantially in the form of
Exhibit 4.2 to the Registration Statement.
1. Representations and Warranties. The Company represents and warrants
to, and agrees with, the Underwriter:
(a) The conditions for use of a registration statement on Form SB-2
have been satisfied with respect to the Company, the transactions contemplated
herein and in the
<PAGE>
Registration Statement (defined below). A Registration Statement on Form SB-2
(File No. 333-_______), including a preliminary form of Prospectus (the
"Registration Statement"), relating to the offering of the Shares, the
Underwriter's Warrants and the Warrant Shares (all of which collectively are
referred to as the "Securities") has been prepared by the Company in conformity
with the requirements of the Securities Act of 1933, as amended (the "Act"), and
the rules and regulations (the"Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") promulgated pursuant to the Act, and said
Registration Statement has been filed with the Commission under the Act. One or
more amendments to said Registration Statement has or have, as the case may be,
been similarly prepared and filed with the Commission 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"). Each Preliminary Prospectus was endorsed with the legend required
by Item 501(a) of Regulation S-B and, if applicable, Rule 430A of the Rules and
Regulations. The Company has prepared and proposes to file on or prior to the
effective date of said Registration Statement an additional amendment thereto
which will include the final Prospectus. The Company will not, so long as any
portion of the Underwriter's Warrants remains outstanding and exercisable, file
any amendment to the Registration Statement or any amendment or supplement to
the Preliminary Prospectus or the Prospectus (as those terms are defined below)
unless the Company has given reasonable and prior notice thereof to the
Underwriter and counsel for the Underwriter and neither shall have reasonably
objected within a reasonable period of time prior to the filing thereof. As used
in this Agreement and unless the context indicates otherwise, the term
"Registration Statement" refers to and means said Registration Statement,
including any documents incorporated by reference therein, all exhibits,
financial statements and schedules and the Prospectus included therein, as
finally amended and revised on or prior to the effective date (the "Effective
Date") of said Registration Statement. The term "Preliminary Prospectus" refers
to and means any prospectus filed with the Commission and included in said
Registration Statement before it becomes effective, and the term "Prospectus"
refers to and means the Prospectus included in the Registration Statement,
except that (i) if the prospectus first filed by the Company pursuant to Rule
424(b) of the Rules and Regulations shall differ from the Prospectus, the term
"Prospectus" shall refer to the prospectus filed pursuant to Rule 424 (b) and
(ii) if the Registration Statement is amended or such Prospectus is supplemented
after the Effective Date and prior to the Option Closing Date (as defined in
Section 2), then the terms "Registration Statement" and "Prospectus" shall
include such documents as so amended or supplemented. The terms used herein
shall have the same meaning as in the Prospectus unless the context hereof
otherwise requires.
(b) Neither the Commission nor, to the best of the Company's
knowledge after due investigation, any state regulatory authority has issued an
order preventing or suspending the use of any Preliminary Prospectus nor has the
Commission or any such authority instituted or, to the best of the Company's
knowledge, threatened to institute any proceedings with respect to such an
order.
(c) The Registration Statement when it becomes effective, the
Prospectus (and any amendments or supplements thereto) when it is filed with the
Commission pursuant to Rule 424(b), and both documents as of First Closing Date
and the Option Closing
- 2 -
<PAGE>
Date referred to below, will contain all statements which are required to be
stated therein in accordance with the Act and the Rules and Regulations and will
conform in all material respects to the requirements of the Act and the Rules
and Regulations, and at such times 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 not misleading in
light of the circumstances in which they were made, except that the
representations and warranties in this Section 1(c) do not apply to statements
or omissions made in the Registration Statement or Prospectus made in reliance
upon and in conformity with information furnished in writing to the Company in
connection with the Registration Statement or Prospectus or any amendment or
supplement thereto by the Underwriter, expressly for use therein.
(d) The Company has been duly incorporated and is now, and at
the Closing Dates will be, validly existing and in good standing as a
corporation under the laws of the State of Delaware, and has full power and
authority, corporate and other, to own or lease, as the case may be, its
properties, whether tangible or intangible, and conduct its business as
presently conducted and as described in, or contemplated by, the Registration
Statement and to execute, deliver and perform this Agreement and the
Underwriter's Warrant Agreement and to consummate the transactions contemplated
hereby and thereby. The Company is duly qualified to do business and is in good
standing as a foreign corporation in all jurisdictions in which the nature of
the business transacted by it or the character or location of its properties, in
each case taken as a whole, makes such qualification necessary, except where the
failure to so qualify would not have a material adverse effect upon the
financial condition, results of operations, business or properties of the
Company, taken as a whole. The Company holds, or will hold by the First Closing
Date, all licenses, certificates and permits from state, federal or other
regulatory authorities necessary for the conduct of its business as presently
conducted and as described in or contemplated by the Registration Statement and
is in material compliance with all laws and regulations and all orders and
decrees applicable to it or to such business or assets, and there are no
proceedings pending or, to the knowledge of the Company, threatened, seeking to
cancel, terminate or limit such licenses, approvals or permits. The Company does
not own, directly or indirectly, any capital stock of or other equity interest
in any corporation, partnership or other legal entity whatsoever.
(e) The financial statements of the Company, including the
schedules and related notes 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 respective
periods indicated therein. Such financial statements have been prepared in
accordance with generally accepted accounting principles consistently applied
throughout the periods involved, except as otherwise stated in the Registration
Statement and the Prospectus, and all adjustments necessary for a fair
presentation of results for such periods have been made. 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.
- 3 -
<PAGE>
(f) The accounting firm of Arthur Andersen LLP, who has
certified certain of the financial statements filed and to be filed with the
Commission as part of the Registration Statement, are independent public
accountants within the meaning of the Act and the Rules and Regulations.
(g) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus and the Company's
latest financial statements, (i) the Company has not incurred any material
liability or obligation, direct or contingent, or entered into any material
transactions whether or not incurred in the ordinary course of business; (ii)
the Company has not sustained any material loss or interference with its
business from fire, storm, explosion, flood or other casualty (whether or not
such loss is insured against), or from any labor dispute or court or
governmental action, order or decree; (iii) since the respective dates as of
which information is given in the Registration Statement and Prospectus, there
have not been, and through and including the First Closing Date referred to
below, there will not be, any changes in the capital stock or any material
increases in the long-term debt or other securities of the Company or any
material adverse change in the condition (financial or other), business,
operations, income, net worth or properties of the Company; and (iv) the Company
has not paid or declared any dividend or other distribution on its Common Stock
or its other securities or redeemed or repurchased any of its Common Stock or
other securities.
(h) This Agreement and compliance by the Company with the
terms thereof, has been duly and validly authorized by all necessary corporate
action and has been duly executed and delivered by the Company and constitutes
the valid and binding obligations of the Company enforceable in accordance with
its terms, except to the extent enforceability may be limited by any bankruptcy,
insolvency, reorganization, fraudulent conveyance, moratorium or similar laws
affecting creditors' rights generally and, to the extent that the remedy of
specific performance and injunction or other forms of equitable relief may be
subject to equitable defenses and the discretion of the court before which any
proceeding therefor may be brought. The Underwriter's Warrant Agreement (as
defined in Section 2(d) below) and compliance by the Company with the terms
thereof, have been duly and validly authorized by all necessary corporate action
and upon execution and delivery will be duly executed and delivered by the
Company and will constitute the valid and binding obligations of the Company
enforceable in accordance with their respective terms, except to the extent
enforceability may be limited by any bankruptcy, insolvency, reorganization,
fraudulent conveyance, moratorium or similar laws affecting creditors' rights
generally and to the extent that the remedy of specific performance and
injunction or other forms of equitable relief may be subject to equitable
defenses and the discretion of the court before which any proceeding therefor
may be brought. The Company is not presently in violation of or in default under
this Agreement and the Underwriter's Warrant Agreement and the execution,
delivery and performance by the Company of this Agreement and the Underwriter's
Warrant Agreement and the consummation of the transactions herein and therein
contemplated, will not, with or without the giving of notice or the lapse of
time or both, (i) result in a breach of or constitute default under any of the
terms, conditions or provisions of the Certificate of incorporation or by-laws,
each as amended, of the Company; (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 the creation or imposition of any lien,
security
- 4 -
<PAGE>
interest, charge or encumbrance upon any property or asset of the Company
pursuant to any material note, indenture, mortgage, deed of trust, contract,
commitment or other agreement or instrument to which the Company is a party or
by which the Company or any of its respective properties or assets may be bound
or affected; (iii) violate any existing law, order, rule, regulation, writ,
injunction or decree of any government, governmental instrumentality, agency,
body or court, domestic or foreign, having jurisdiction over the Company or any
of its properties or businesses; or (iv) have any effect on any permit,
certification, registration, approval, consent, order license, franchise or
other authorization (collectively, the "Permits") necessary for the Company to
own or lease and operate its properties and to conduct its business or the
ability to make use thereof.
(i) To the Company's knowledge no Permits of any government or
governmental instrumentality, agency, body or court other than under the Act,
the blue sky or securities laws of any state or the rules of the National
Association of Securities Dealers, Inc. ("NASD") (including approval of
underwriting compensation and listing of the Common Stock on The Nasdaq Stock
Market) are required (i) for the valid authorization, issuance, sale and
delivery of the shares to the Underwriter, and (ii) the consummation by the
Company of the transactions contemplated by this Agreement and the Underwriter's
Warrant Agreement.
(j) Except as disclosed in the Prospectus there is neither
pending nor, to the best of knowledge of the Company after due investigation,
threatened, against the Company any claim, action, suit, or proceeding at law or
in equity, arbitration (or circumstances that may give rise to the same),
investigation or inquiry to which the Company or any of its respective officers,
directors or shareholders is a party or involving the Company's properties or
businesses before or by any court, arbitration tribunal or governmental
instrumentality, agency, or body, which, if determined adversely to the Company,
would individually or in the aggregate result in any material adverse change in
the condition (financial or other), business, management of affairs or business
prospects, results of operations, income, shareholders' equity, net worth or
properties or which question the validity of the capital stock of the Company or
prevent consummation of the transactions contemplated hereby; nor are there any
such actions, suits or proceedings against the Company related to consumer
protection, distribution, rental and sales, or environmental matters or matters
related to discrimination on the basis of age, sex, religion or race; and no
labor disturbance by the employees of the Company exists or to the knowledge of
the Company is imminent which might be expected to materially adversely affect
the conduct of the business, property, operations, financial condition or
earnings of the Company, taken as a whole.
(k) There is no contract or other document which is required
by the Act or by the Rules and Regulations to be described in the Registration
Statement or the Prospectus or to be filed as an exhibit to the Registration
Statement which has not been so described or filed as required and each contract
or document which has been described in the Registration Statement has been
described accurately and presents fairly the information required to be
described and each such contract or document which is filed as an exhibit to the
Registration Statement is and shall be in full force and effect at the Closing
Date or shall have been terminated in accordance with its terms or as set forth
in the Registration Statement and
- 5 -
<PAGE>
Prospectus, and no party to any such contract has given notice to the Company of
the cancellation of or, to the knowledge of the Company, shall have threatened
to cancel, any such contract, and except as described in the Prospectus, the
Company is not in default thereunder.
(l) The Company does not own any real property. The Company
has good title to all of its personal property (tangible and intangible) and
assets, including any licenses, trademarks and copyrights, described in the
Registration Statement as owned by it, free and clear of all security interests,
liens, charges, mortgages, encumbrances and restrictions other than such as are
not materially significant in relation to the business of the Company and other
than as described in the Registration Statement and Prospectus. The leases,
subleases and licenses under which the Company is entitled to lease, hold or use
any real or personal property 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, and all rentals, royalties
or other payments accruing thereunder which become due prior to the date of this
Agreement have been duly paid and neither the Company nor, to the Company's best
knowledge after due investigation, any other party is in default in respect of
any of the terms or provisions of any such leases, subleases and licenses, and
no claim of any sort has been asserted by anyone adverse to the rights of the
Company under any such leases, subleases or licenses affecting or questioning
the rights of the Company to the continued use or enjoyment of the rights and
property covered thereby. The Company has not received notice of any violation
of any applicable law, ordinance, regulation, order or requirement relating to
its owned or leased properties. The Company owns or leases all such properties
as are necessary to its operations as now conducted and as proposed to be
conducted as set forth in the Prospectus.
(m) The Company has filed with the appropriate federal, state
and local governmental agencies, and all appropriate foreign countries and
political subdivisions thereof, all tax returns, including franchise tax
returns, which are required to be filed or have duly obtained extensions of time
for the filing thereof and have paid all taxes shown on such returns and all
assessments received by them 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 consolidated financial
statements. Except as disclosed in writing to the Underwriter, neither the
Company nor any Subsidiary has 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 any Subsidiary.
(n) The Company maintains insurance, which is in full force
and effect, including but not limited to personal injury and product liability
insurance, insurance covering all personal property owned or leased by the
Company against theft, damage, destruction, acts of vandalism and all other
risks customarily insured against. The Company maintains insurance in amounts as
are usually maintained by companies engaged in the same or similar businesses
located in their geographic area. The Company is not aware of any facts or
circumstances which
- 6 -
<PAGE>
would require it to notify its insurers of any claim of which notice has not
been made or will not be made in a timely manner. To the best knowledge of the
Company, there are no facts or circumstances under any existing insurance policy
or surety bond which would relieve any insurer of its obligation to satisfy in
full any existing valid claim of the Company under such policy or bond.
(o) The Company owns or otherwise possesses adequate,
enforceable and unrestricted rights to use all patents, patent rights,
inventions, trademarks, service marks, trade names and copyrights, rights, trade
secrets, confidential information, processes and formulations (including all
other unpatented and/or unpatentable proprietary or confidential information,
systems or procedures), inventions, designs, works of authorship, computer
programs and technical data and information used or proposed to be used in the
conduct of its business as described in the Prospectus (collectively, the
"Intangibles"). The Company has not infringed nor is it infringing upon the
rights of others with respect to the Intangibles and the Company has not
received any notice that it has or may have infringed or is infringing on the
rights of others with respect to the intangibles. The Company has not 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
its business as presently conducted or the prospects, financial condition or
results of operations of the Company, and the Company knows of no basis
therefor. To the best of the Company's knowledge, no others have infringed upon
the Intangibles of the Company. Except as disclosed in the Prospectus, the
Company is not obligated or under any liability whatsoever to make any payment
by way of royalties, fees or otherwise to any owner or licensee of, or other
claimant to, the Intangibles with respect to the use thereof or in connection
with the conduct of its business or otherwise. The Company has taken reasonable
security measures to protect the secrecy, confidentiality and value of all its
Intangibles in all material aspects.
(p) Neither the Company nor any of its affiliates has incurred
any liability for, nor is there is any outstanding claim for services in the
nature of, a finder's fee or similar fee in connection with the transactions
herein contemplated.
(q) No officer or director of the Company, or any affiliate
(as such term is defined in Rule 405 promulgated under the Rules and
Regulations) of any such officer or director, has taken, and each officer or
director has agreed that he will not take, directly or indirectly, any action
designed to constitute or which has constituted or which might reasonably be
expected to cause or result in the stabilization of the price of the Common
Stock or a violation of Regulation M of the Rules and Regulations or in a
manipulation of the price of any security issued by the Company.
(r) Except as disclosed in or contemplated by the Prospectus,
no officer, director or stockholder of the Company, or any "affiliate" or
"associate" (as these terms are defined in Rule 405 promulgated under the Rules
and Regulations) of any of the foregoing persons or entities has or has had
during the past three years, either directly or indirectly, (i) an interest in
any person or entity which (A) furnishes or sells products which are furnished
or sold or are proposed to be furnished or sold by the Company, or (B) purchases
from or sells or
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<PAGE>
furnishes to the Company any goods or services, or (ii) a beneficial interest in
any contract or agreement to which the Company is a party or by which it may be
bound or affected. There are no existing agreements, arrangements, or
transactions, between or among the Company and any officer, director of the
Company, or any partner, affiliate or associate of any of the foregoing persons
or entities which are required to be described in the Registration Statement and
which are not so described.
(s) The minute books of the Company have been made available
to the Underwriter and contain a complete summary of all meetings and actions of
the directors and stockholders of the Company since the time of its
incorporation, and reflect all transactions referred to in such minutes
accurately in all respects.
(t) No labor problem exists with any of the Company's
employees or is imminent, nor is the Company aware of any bankruptcy, labor
disturbance or other event affecting any of its principal suppliers or
customers, which could materially adversely affect the condition, financial or
otherwise, prospects, business or results of operation of the Company.
(u) The Securities and the other securities of the Company
conform to all statements in relation thereto in the Registration Statement; the
authorized, issued and outstanding shares of Common Stock are set forth in the
Prospectus under the caption "Capitalization"; the outstanding shares of Common
Stock have been duly authorized and validly issued and are fully paid and
non-assessable; the outstanding options and warrants to purchase Common Stock
have been duly authorized and validly issued and constitute the valid and
binding obligations of the Company, enforceable in accordance with their terms;
the holders of the outstanding Common Stock are not subject to personal
liability for obligations of the Company solely by reason of being stockholders;
and none of such outstanding shares of Common Stock or warrants or options to
purchase Common Stock were issued in violation of the pre-emptive rights of any
stockholder of the Company. The offers and sales of the outstanding Common Stock
and outstanding options and warrants to purchase Common Stock 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.
Except as forth in the Registration Statement and Prospectus, on the Effective
Date and on the Closing Dates there will be no outstanding options or warrants
for the purchase of, or other outstanding rights to purchase or acquire, Common
Stock or securities convertible or exchangeable into Common Stock. Except as set
forth in the Prospectus, no holder of any securities of the Company has any
rights, "demand", "piggyback" or otherwise to have such securities registered
under the Act.
(v) The issuance and sale of the Shares have been duly
authorized and, upon delivery against payment therefor as contemplated by this
Agreement, the Shares will be validly issued, fully paid and non-assessable, and
the holders thereof will not be subject to personal liability solely by reason
of being such holders. The Shares will not be subject to pre-emptive rights of
any stockholder of the Company.
(w) The issuance and sale of the Underwriter's Warrants has
been duly authorized and when issued and delivered in accordance with the terms
hereof and the
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<PAGE>
Underwriter's Warrant Agreement, shall constitute the valid and binding
obligations of the Company enforceable in accordance with their terms. The
issuance and sale of the Warrant Shares have been duly authorized, and, when
duly delivered against payment therefor as contemplated by the Underwriter's
Warrant Agreement, such Warrant Shares will be validly issued, fully paid and
non-assessable, and will conform to the description thereof contained in the
Prospectus. Holders of Warrant Shares issuable upon the exercise of the
Underwriter's Warrants will not be subject to personal liability solely by
reason of being such holders. Neither the Underwriter's Warrants nor the Warrant
Shares issuable upon exercise thereof will be subject to pre-emptive rights of
any stockholder of the Company. The Company has reserved a sufficient number of
shares of Common Stock from its authorized but unissued Common Stock for
issuance upon exercise of the Underwriter's Warrants in accordance with the
provisions of the Underwriter's Warrant Agreement. The Underwriter's Warrants
conform to the descriptions thereof contained in the Registration Statement and
the Prospectus.
(x) During the period of twelve (12) months from the Effective
Date hereof (the "Lock-Up Period") neither the Company nor any of its officers,
directors or 5% stockholders 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 without
the prior written consent of the Underwriter; provided, however, (A) each
Stockholder, to the extent permitted by law, may sell his securities in a
private transaction during the Lock-Up Period so long as the acquirer of the
securities at the time of acquisition enters into a written agreement with
Underwriter to be bound by the terms of the seller's Lock-Up Agreement, and (B)
each such person desiring to sell securities during the two-year period
commencing on termination of said Lock-Up Period shall sell his securities
through the Underwriter if the price and terms of execution offered by the
Underwriter are at least as favorable as may be obtained from other brokerage
firms. The Lock-up Agreements also provide that (i) in the event that any of the
sellers desire to sell their shares during any period commencing two-years after
expiration of the lock-up period pursuant to Rule 144, then the seller shall
sell the shares through the Underwriter as long as the terms of such sale are at
least as favorable as may be obtained from other brokerage firms and (ii) such
seller waives all registration rights for a period of 12 months following the
Effective Date.
(y) Neither the Company nor any officer, director or other
agent of the Company has, acting on behalf of the Company, at any time (i) made
any contributions to any candidate for political office in violation of law, or
failed to disclose fully any such contributions in violation of law, (ii) made
any payment to any state, Federal or foreign governmental officer or official,
or any other person charged with similar public or quasi-public duties, other
than payments required or allowed by applicable law or (iii) made any payment of
funds of the Company or received or retained any funds in violation of any law,
rule or regulation and under circumstances requiring the disclosure of such
payment, receipt or retention of funds in the Prospectus. 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.
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<PAGE>
(z) The Company is not an "Investment Company" or a company
"controlled" by an "investment Company," within the meaning of the Investment
Company Act of 1940, as amended.
(aa) 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.
(ab) The employment, consulting, confidentiality and
non-competition agreements between the Company and its officers, employees and
consultants, described in the Registration Statement are binding and enforceable
obligations upon the respective parties thereto in accordance with their terms,
except to the extent enforceability may be limited by any applicable bankruptcy,
insolvency, reorganization, fraudulent conveyance, moratorium or similar laws
affecting creditors' rights generally and to the extent that the remedy of
specific performance and injunction or other forms of equitable relief may be
subject to equitable defenses and the discretion of the court before which any
proceeding therefor may be brought.
(ac) 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.
(ad) Except as set forth in the Properties there are no voting
or other stockholder agreements between the Company and any stockholders of the
Company or between or by and among any stockholders of the Company.
(ae) The Company has filed a registration statement on Form
8-A with respect to its Common Stock under Section 12(b) of the Securities
Exchange Act of 1934, as amended (the"1934 Act") and such registration statement
has been declared effective by the SEC. The Company has filed a listing
application with respect to its Common Stock with the American Stock Exchange,
Inc. ("AMEX") and such listing application has been accepted by the AMEX,
subject to official notice of issuance.
(af) The Company is in compliance with all federal, state,
local, and foreign laws and regulations respecting employment and employment
practices, terms and conditions of employment and wages and hours. There are no
pending investigations involving the Company, by the U.S. Department of Labor or
any other governmental agency responsible for the enforcement of such federal,
state, local, or foreign laws and regulations. There is no unfair labor practice
charge or complaint against either the Company pending before the National Labor
Relations Board or any strike, picketing, boycott, dispute, slowdown or stoppage
pending or, to the Company's best knowledge, threatened against or involving the
Company [or any predecessor entity,] and none has ever occurred. No
representation question exists respecting the employees of the Company, and no
collective bargaining agreement or modification thereof is currently being
negotiated by the Company. No grievance or arbitration proceeding is pending
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<PAGE>
under any expired or existing collective bargaining agreements of the Company.
No labor dispute with the employees of the Company or the Subsidiaries exists,
or, is imminent.
(ag) The Shares have been approved for listing on the AMEX.
(ah) The software and hardware operated by the Company are
capable of providing or are being adapted to provide uninterrupted millennium
functionality to record, store, process and present calendar dates falling on or
after January 1, 2000 and date-dependent data in substantially the same manner
and with the same functionality as such software records, stores, processes and
presents such calendar dates and date-dependent data as of the date hereof,
except as would not have a material adverse effect on the Company.
(ai) The Company has provided to Tenzer Greenblatt LLP,
counsel to the Underwriter ("Underwriter's Counsel"), all agreements,
certificates, correspondence and other items, documents and information
requested by such counsel's Corporate Review Memorandum dated ________, 1999.
(aj) Any certificate signed by an officer of the Company in
his capacity as such and delivered to the Underwriter or Underwriter's Counsel
shall be deemed a representation and warranty by the Company to the Underwriter
as to the matters covered thereby.
(ak) The Company is and has been doing business in material
compliance with all authorizations, approvals, orders, licenses, certificates,
franchises and permits and all federal, state, and local laws, rules and
regulations; and the Company has not received any notice of proceedings relating
to the revocation or modification of any such authorization, approval, order,
license, certificate, franchise, or permit which, singly or in the aggregate, if
the subject of an unfavorable decision, ruling or finding, would materially
adversely affect the business operations, condition, financial or otherwise, or
the earnings, business affairs, position, prospects, value, operation,
properties, business or results of operations of the Company, taken as a whole.
2. Purchase, Delivery and Sale of the Shares and the Underwriter's
Warrants.
(a) Subject to the terms and conditions of this Agreement, and
on the basis of the representations, warranties, and agreements herein
contained, the Company hereby agrees to sell the Firm Shares to the Underwriter,
and the Underwriter agrees to purchase the Firm Shares from the Company at a net
purchase price of $6.37 per share (net of commissions).
On the First Closing Date, as hereinafter defined, definitive
certificates in negotiable form for the Firm Shares will be delivered by the
Company to the Underwriter against payment of the purchase price by the
Underwriter by wire transfer or certified or official bank check or checks in
New York Clearing House funds, payable to the order of the Company.
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<PAGE>
Delivery of the Firm Shares against payment therefor shall
take place at the offices of the Underwriter, at 10:00 a.m., local New York
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 Firm
Shares commences on the day following the Effective Date) such time and date of
payment and delivery for the Firm Shares being herein called the "First Closing
Date."
(b) For the purposes of covering any overallotments in
connection with the distribution and sale of the Firm Shares as contemplated by
the Prospectus, the Underwriter is hereby granted an option to purchase all or
any part of the Optional Shares from the Company. The purchase price to be paid
for the Optional Shares will be the same price per Optional Share as the price
per Firm Share set forth in Section 2(a) hereof. The option granted hereby may
be exercised by the Underwriter as to all or any part of the Optional Shares at
any time within 45 days after the Effective Date. The Underwriter will not be
under any obligation to purchase any Optional Shares prior to the exercise of
such option.
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 to be purchased, the
date and time for delivery of and payment for the Optional Shares to be
purchased and stating that the Optional Shares referred to therein are to be
used for the purpose of covering over-allotments in connection with the
distribution and sale of the Firm Shares. If such notice is given prior to the
First 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 First
Closing Date, whichever occurs later. If such notice is given on or after the
First 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, through the Underwriter's
delivery of the aforementioned notice, the Company will become obligated to
convey to the Underwriter, and, subject to the terms and conditions set forth in
this Section 2(b) hereof, the Underwriter will become obligated to purchase, the
number of Optional Shares specified in such notice.
Payment for any Optional Shares 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 purchased to the Underwriter.
The obligation of the Underwriter to purchase and pay for any
of the Optional Shares 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 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
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<PAGE>
of the date hereof and as of the Option Closing Date, set forth in this Section
2(b), 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 8(d), (e) and (f) hereof, but with each reference to "Firm
Shares" and "First Closing Date" to be, respectively, to the Optional Shares and
the Option Closing Date.
(c) The Company will make the certificates for the Shares to
be purchased by the Underwriter hereunder available to the Underwriter for
inspection, checking and packaging at the office of the Company's transfer agent
or correspondent in New York City, Continental Stock Transfer and Trust Company,
_______________, New York, 1000__, not less than one full business day prior to
the First Closing Date and the Option Closing Date, as the case may be (both of
which are collectively referred to herein as the "Closing Dates"). The
certificates representing the shares shall be in such names and denominations as
the Underwriter may request at least two full business days prior to the
respective Closing Dates. In the event that the Underwriter determines to
utilize the Depository Trust Company ("DTC") the parties will use their best
efforts to make the offering of the Shares DTC eligible and to comply with the
procedures thereof.
(d) On the First 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, members of the selling
group and/or their officers 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 attached as an
exhibit to the Registration Statement. The aggregate purchase price for the
Underwriter's Warrants is One Hundred Dollars ($100.00). 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 First 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.
The information set forth on the cover page concerning the
Underwriter and under the caption "Underwriting"or otherwise specifically
relating to the Underwriter in any Preliminary Prospectus or in the final
Prospectus relating to the Shares proposed to be filed by the Company (insofar
as such information relates to the Underwriter) as heretofore filed and as
presently proposed to be amended constitutes the only information furnished by
the Underwriter to the Company for inclusion therein, and the Underwriter
represent and warrant to the Company that the statements made therein are
correct and do not include any untrue statement of a material fact or omit to
state a 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.
3. Public Offering by the Underwriter. The Underwriter agrees
to cause the Shares to be offered to the public initially at the price and under
the terms set forth in the
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<PAGE>
Prospectus as soon, on or after the effective date of this Agreement, as the
Underwriter deems advisable, but no more than five (5) full business days after
such effective date. The Underwriter may allow such concessions and discounts
upon sales to other dealers as set forth in the Prospectus. The Underwriter
agrees to notify the Company in writing when the offering is first made and when
it is completed. After the completion of the initial public offering, the public
offering price, the concessions and the reallowance may be changed by the
Underwriter.
4. Agreements of the Company. The Company covenants and agrees
with the Underwriter that:
(a) The Company will use its best efforts to cause the
Registration Statement to become effective as promptly as possible, and will not
at any time, whether before or after the Effective Date, file any amendment or
supplement to the Registration Statement, (i) which shall not have been
previously submitted to, and approved by, the Underwriter or counsel for the
Underwriter a reasonable time prior to the filing thereof, (ii) to which the
Underwriter or counsel for the Underwriter shall have reasonably objected in
writing as not being in compliance with the Act or the Rules and Regulations or
(iii) which is not in compliance with the Act or the Rules and Regulations.
(b) The Company will notify the Underwriter, promptly after it
shall have received notice of the effectiveness of the Registration Statement or
any amendment or supplement thereto, of the receipt of any comments of the
Commission with respect thereto, of the time when the Registration Statement or
any post-effective amendment thereto has become effective or any supplement to
the Prospectus has been filed.
(c) The Company will advise the Underwriter promptly of any
request of the Commission for an amendment or supplement to the Registration
Statement or the Prospectus, or for any additional information, or of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement, or of any judgment, order, injunction or decree
preventing or suspending the use of any Preliminary Prospectus or the
Prospectus, or of the institution of any proceedings for any of such purposes,
of which it has knowledge, and will use its best efforts to prevent the issuance
of any stop order, and, if issued, to obtain as promptly as possible the lifting
thereof.
(d) If at any time when a Prospectus relating to the
Securities is required to be delivered under the Act, any event shall have
occurred as a result of which, in the opinion of counsel for the Company or
counsel for the Underwriter, the Prospectus, as then amended or supplemented,
includes an untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading, or
if it is necessary at any time to amend the Prospectus to comply with the Act,
the Company will notify the Underwriter promptly and prepare and file with the
Commission an appropriate amendment or supplement in accordance with Section 10
of the Act, each such amendment or supplement to be satisfactory to counsel for
the Underwriter, and the Company will furnish to the Underwriter
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<PAGE>
copies of such amendment or supplement as soon as available and in such
quantities as the Underwriter may reasonably request.
(e) Within the time during which the Prospectus is required to
be delivered under the Act, or pursuant to the undertakings of the Company in
the Registration Statement, the Company will comply, at its own expense, with
all requirements imposed upon it by the Act, the Rules and Regulations, the 1934
Act or the rules and regulations of the Commission promulgated under the 1934
Act, each as now or hereafter amended or supplemented, and by any order of the
Commission so far as necessary to permit the continuance of sales of, or
dealings in, the Shares.
(f) The Company will furnish to the Underwriter, without
charge, a signed copy of the Registration Statement and of any amendment or
supplement thereto which has been filed prior to the date of this Agreement,
together with two (2) copies of each exhibit filed therewith, and five (5)
conformed copies of such Registration Statement and as many amendments thereto
(unsigned and exclusive of exhibits) as the Underwriter may reasonably request.
The signed copies of the Registration Statement so furnished to the Underwriter
will include signed copies of any and all consents and reports of the
independent public auditors as to the financial statements included in the
Registration Statement and Prospectus, and signed copies of any and all consents
and certificates of any other person whose profession gives authority to
statements made by them and who are named in the Registration Statement or
Prospectus as having prepared, certified or reviewed any parts thereof.
(g) The Company will deliver to the Underwriter, without
charge, (i) prior to the Effective Date, copies of each Preliminary Prospectus
filed with the Commission bearing in red ink the statement required by Item 501
of Regulation S-B of the Rules and Regulations; (ii) on and from time to time
after the Effective Date, copies of the Prospectus; and (iii) as soon as they
are available, and from time to time thereafter, copies of each amended or
supplemented Prospectus, and the number of copies to be delivered in each such
case will be such as the Underwriter may reasonably request. The Company has
consented and hereby consents to the use of each Preliminary Prospectus for the
purposes permitted by the Act and the Rules and Regulations. The Company
authorizes the Underwriter and dealers to use the Prospectus in connection with
the sale of the Shares and the Warrant Shares, for such period as, in the
opinion of counsel for the Underwriter, delivery of the Prospectus is required
to comply with the applicable provisions of the Act and the Rules and
Regulations.
(h) The Company will take such action as may be necessary to
qualify the Shares for offer and sale under the blue sky or securities laws of
such states or other jurisdictions as is required and as the Underwriter or
counsel for the Underwriter may designate (provided that such states or
jurisdictions do not require the Company to qualify as a foreign corporation or
to file a general consent to service of process) and to continue such
qualifications in effect so long as may be required for the purposes of the
distribution of the Shares. In each state or jurisdiction where the Company
shall qualify the Shares as above provided, the Company will prepare and file
such statements or reports as may be required by the laws of such state or
jurisdiction, and the Underwriter shall, upon the written request of the
Company, supply
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<PAGE>
the Company with all information known to the Underwriter and required to be
included in such statements or reports.
(i) During the period of two years from the Effective Date,
the Company, at its expense, shall furnish the Underwriter with (i) copies of
each annual report of the Company; (ii) as soon as practicable and in any event
not later than ninety (90) days after the end of the Company's fiscal year, a
financial report of the Company, which will include a balance sheet as of the
end of such fiscal year, a statement of operations, a statement of stockholders'
equity (deficit) and a statement of cash flows covering such fiscal year, such
report being in reasonable detail and audited by independent public auditors;
(iii) for each fiscal quarter of the Company other than the last fiscal quarter
in any fiscal year, as soon as practicable and in any event not later than
forty-five (45) days after the end of each fiscal quarter, a financial report of
the Company, which will include a balance sheet as of the end of such fiscal
quarter, a statement of operations, a statement of stockholders' equity
(deficit) and a statement of cash flows covering such fiscal quarter, together
with notes thereto, for such fiscal quarter and for the fiscal year to date,
setting forth in each case in comparative form the corresponding figures for the
preceding year, such report being in reasonable detail and to fairly present the
financial condition of the Company at the date thereof and the results of
operations for the period then ending and to have been prepared in accordance
with generally accepted accounting principles consistently applied, except for
normal year end adjustments; (iv) a copy of any Schedule 13D, 13G, 14D-1, 13E-3
or 13E4 received or filed by the Company from time to time; (v) a copy of each
report or document, including, without limitation, reports on Form 8-K, 10-K (or
10-KSB), 10-Q or 10-QSB and exhibits thereto, filed or furnished by the Company
pursuant to the 1934 Act to the Commission, any Securities Exchange or the NASD
on the date each such report or document is so filed or furnished; and (vi) such
additional information concerning the business and financial condition of the
Company as the Underwriter may from time to time reasonably request.
(j) For a period of three (3) years from the First Closing
Date, the Company shall continue to retain Arthur Andersen LLP (or such other
nationally recognized accounting firm acceptable to the Underwriter) as the
Company's independent certified public accountants, and shall not change such
accountants without the Underwriter's prior written consent. For a period of
five years from the First Closing Date, the Company shall promptly submit to the
Underwriter copies of all accountants' management reports and similar
correspondence between the Company and its independent public accountants.
(k) For a period of five (5) years from the First Closing
Date, the Company, at its expense, shall cause its then independent certified
public accountants, as described in Section 4(j) 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 stockholders.
(l) As soon as practicable, but in any event not later than 45
days after the end of the 12-month period beginning on the day after the end of
the fiscal quarter of the
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<PAGE>
Company during which the effective date of the Registration Statement occurs (90
days in the event that the end of such fiscal quarter is the end of the
Company's fiscal year), the Company will make generally available to its
security holders in accordance with Section 11 (a) of the Act an earnings
statement of the Company meeting the requirements of Rule 158(a) under the Act
covering a period of at least 12 months beginning after the Effective Date, and
advise the Underwriter that such statement has been so made available.
(m) The Company will apply the net proceeds ("Proceeds") it
realizes from the sale of the Shares in the manner set forth under the caption
"Use of Proceeds" in the Prospectus. The Company will provide on a monthly basis
a report from its Chief Financial Officer which report shall indicate the use of
the proceeds for such monthly period and the Company's expenses and revenues.
(n) The Company, on the First Closing Date, will sell to the
Underwriter the Underwriter's Warrants (to be divided in such amounts as
determined by the Underwriter) according to the terms specified in Section 2(d)
hereof. The Company has reserved and shall continue to reserve a sufficient
number of shares of Common Stock for issuance upon exercise of the Underwriter's
Warrants.
(o) For the period of three (3) years following the Effective
Date, the Underwriter and its successors will have the right to designate a
nominee for election, at its or their option, as a non-voting advisor to the
Board of Directors of the Company and the Company agrees to use its best efforts
to elect to its Board of Directors and continue in office such nominee as an
advisor to the Board of Directors. Such advisor shall be entitled to the same
cash compensation and reimbursement of expenses as the Company affords its
directors who are not also officers or employees of the Company and to receive
all copies of all notices and other documents distributed to the members of the
Company's Board of Directors (including, but not limited to, any unanimous
consents prepared and advance notices of all proposed Board actions or
consents), as if such advisor were a member of the Company's Board of Directors.
The Company agrees to indemnify and hold such advisor harmless against any and
all claims, actions, awards and judgments arising out of his service and in the
event the Company maintains a liability insurance policy affording coverage for
the acts of its officers and directors, to include such advisor as an insured
under such policy. In the event the Company does not have a liability insurance
policy in effect on the Effective Date, the Company agrees to use its best
efforts to obtain, as promptly as practicable but in any event not later than
thirty (30) days following the Effective Date, such a policy in an amount not
less than twenty-five (25%) of the gross proceeds of this offering. The rights
and benefits of such indemnification and the benefits of such insurance shall,
to the extent possible, extend to the Underwriter in so far as it may be, or be
alleged to be, responsible for such designee. During such three (3) year period,
the Company will cause its Board of Directors to meet, either in person or
telephonically, at least four (4) times per year.
(p) For a period of years from the Effective Date, the Company
agrees that it will maintain insurance in full force and effect of the types and
in the amounts which are customary for similarly situated companies, including
but not limited to, personal
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injury and product liability insurance and insurance covering all personal
property owned or leased by the Company against theft, damage, destruction, acts
of vandalism and all other risks customarily insured against.
(q) During the course of the distribution of the Shares, the
Company will not take, directly or indirectly, any action designed to or which
might, in the future, reasonably be expected to cause or result in stabilization
or manipulation of the price of the Shares. During the so-called "quiet period"
in which delivery of a Prospectus is required, if applicable, the Company will
not issue press releases or engage in any other publicity without the
Underwriter's prior written consent.
(r) The Company will use its best efforts, at its cost and
expense, to take all necessary and appropriate action to maintain the listing of
the Shares on the AMEX or on the NASDAQ automated quotation system and maintain
such listing for as long as the Shares are so qualified.
(s) The Company shall, as of the date hereof, have filed an
application for listing in Standard & Poor's Corporation records Service
(including annual report information) or Moody's Industrial Manual and shall use
its best efforts to have the Company listed in such manual and shall maintain
such listing for a period of five (5) years from the Effective Date.
(t) The Company has filed with the Commission a registration
statement on Form 8-A and will, concurrently with the Effective Date, register
the class of equity securities of which the Shares are a part under Section
12(b) or 12(g) of the 1934 Act. The Company will maintain its registration under
the 1934 Act in effect for a period of five (5) years from the Effective Date.
(u) The Company will at all times, from the First Closing Date
until at least three (3) years from such date, maintain in full force, or cause
to be maintained in full force, from an insurer rated "A" or better (General
Policyholders Rating) in the most recent edition of "Best Life Reports", term
life insurance in the amount of at least $1,000,000 on the life of Frank
Mandelbaum. Such policy shall be owned by the Company and all benefits
thereunder shall be payable to the Company.
(v) On the Closing Dates, all transfer or other taxes (other
than income taxes) which are required to be paid in connection with the sale and
transfer of the Shares will have been fully paid by the Company and all laws
imposing such taxes will have been fully complied with.
(w) For a period of __ months commencing on the Effecting
Date, except with the prior written consent of the Underwriter, the Company will
not issue or sell, directly or indirectly, any shares of its capital stock, or
sell or grant options, or warrants or rights to purchase any shares of its
capital stock, except pursuant to (i) this Agreement, (ii) the
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Underwriter's Warrants and (iii) warrants and options of the Company heretofore
issued and described in the Prospectus.
(x) 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____(__)months following the
Effective Date without Underwriter's prior written consent.
(y) The Company shall retain a transfer agent for the Shares,
reasonably acceptable to the Underwriter, for a period of three (3) years from
the Effective Date, and will not, during such period change its transfer agent
for the Common Stock without the prior written consent of the Underwriter. In
addition, for a period of two (2) years from the Effective Date, the Company, at
its own expense, shall cause such transfer agent to provide to the Underwriter
on a monthly basis copies of the Company's daily stock transfer sheets;
provided, however, that any confidential information relating thereto which is
hereafter provided to the Underwriter pursuant to the terms of this Agreement
shall be kept confidential by it. In addition, for a period of two (2) years
from the Effective Date, the Company, at its own expense, shall cause Depository
Trust Company to provide to the Underwriter as frequently as may be required by
it a copy of a security position listing with respect to the Common Stock.
(z) Subsequent to the dates as of which information is given
in the Registration Statement and Prospectus and prior to the Closing Dates,
except as disclosed in or contemplated by the Registration Statement and
Prospectus, (i) the Company will not have incurred any liabilities or
obligations, direct or contingent, or entered into any material transactions
other than in the ordinary course of business; (ii) there shall not have been
any change in the capital stock, funded debt (other than regular repayments of
principal and interest on existing indebtedness) or other securities of the
Company, any adverse change in the condition (financial or other), business,
operations, prospects, income, net worth or properties, including any loss or
damage to the properties of the Company (whether or not such loss is insured
against), which could adversely affect the condition (financial or other),
business, operations, prospects income, net worth or properties of the Company
and the Subsidiaries, taken as a whole; and (iii) the Company shall not have
paid or declared any dividend or other distribution on its Common Stock or its
other securities or redeemed or repurchased any of its Common Stock or other
securities.
(aa) For the period of two (2) years following the Effective
Date, the Company shall not redeem any of its securities, and shall not pay any
dividends or make any other cash distribution in respect of its securities in
excess of the amount of the Company's current or retained earnings derived after
the Effective Date without obtaining the Underwriter's prior written consent.
The Underwriter shall either approve or disapprove such contemplated redemption
of securities or dividend payment or distribution within five (5) business days
from the date it receives written notice of the Company's proposal with respect
thereto; a failure of the Underwriter to respond within the five (5) business
day period shall be deemed approval of the transaction.
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(ab) The Company will not, for a period of three (3) years
from the Effective Date of the Registration Statement, increase or authorize an
increase in the compensation of its five most highly paid employees greater than
those increases provided for in their employment agreements with the Company in
effect as of the Effective Date and disclosed in the Registration Statement,
without the prior written consent of the Underwriter.
(ac) 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.
(ad) For a period of five (5) years from the First Closing
Date, management of the Company shall provide the Board of Directors, on an
annual basis, with an internal budget for the next fiscal year, which budget
must be approved by the Board of Directors.
(ae) Prior to the Effective Date and for a period of three (3)
years thereafter, the Company shall retain a financial public relations firm
reasonably acceptable to the Underwriter.
(af) Except as set forth under the caption "Use of Proceeds"
in the Prospectus or otherwise consented to by the Underwriter, no proceeds from
the sale of the Shares will be used to pay outstanding loans from officers,
directors or shareholders or to pay any accrued salaries or bonuses to any
current or former employees or consultants or any affiliates thereof or to pay
off any other outstanding debt other than as described in the Prospectus.
(ag) The Company agrees that for so long as the Common Stock
is registered under the 1934 Act, the Company will hold an annual meeting of
stockholders for the election of directors and will provide the Company's
stockholders with the audited financial statements of the Company as of the end
of the fiscal year just completed prior thereto. Such financial statements shall
be those required by applicable rules under the 1934 Act and shall be included
in an annual report pursuant to the requirements thereof.
(ah) The Company shall provide the Underwriter, at the First
Closing Date and at least annually thereafter, until the earlier of such time as
the Common Stock is listed on the New York Stock Exchange or American Stock
Exchange or quoted on NASDAQ/NMS or five years after the First Closing Date,
with a list setting forth those states in which the Common Stock may be traded
in non-issuer transactions under the blue sky laws of the 50 states.
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<PAGE>
(ai) For a period of three (3) years from the Effective Date,
the Company shall not issue any shares of its Preferred Stock without the prior
written approval of the Underwriter. From the second anniversary of the
Effective Date through the fifth anniversary of the Effective Date, the Company
shall not issue any shares of its Preferred Stock without the unanimous consent
of its Board of Directors.
(aj) For a period of three (3) years from the Effective Date,
the Company will not offer or sell any of its securities (i) pursuant to
Regulation S, or similar regulation, promulgated under the Act or (ii) at a
discount to market or in a discounted transaction, without the prior written
consent of the Underwriter, other than the issuance of Common Stock upon
exercise of options and warrants outstanding on the First Closing Date and
described in the Prospectus.
5. Indemnification.
(a) The Company agrees to indemnify and hold harmless the
Underwriter and each person, if any, who controls the Underwriter within the
meaning of the Act against any losses, claims, damages, expenses or liabilities,
joint or several (which shall, for all purposes of this Agreement, include, but
not be limited to, all costs of defense and investigation and all reasonable
attorney's fees), to which the Underwriter or any such controlling person may
become subject, under the Act or otherwise, but only as such losses, claims,
damages or liabilities (or action in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, 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 to make the statements therein not misleading;
provided, however, that the Company will not be liable in any such case (i) to
the extent that any such loss, claim, damages or liability arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in the Registration Statement, any Preliminary Prospectus
or the Prospectus or any amendment or supplement thereto, in reliance upon, and
in conformity with, written information furnished to the Company by the
Underwriter specifically for use in the preparation thereof; (ii) if the
Underwriter failed to deliver a Prospectus to the claimant seeking damages from
the Company or (iii) if a material misstatement or omission was corrected by the
Company in an amended or supplemented Prospectus and the Underwriter failed to
deliver such amended or supplemented Prospectus to the claimant seeking damages
from the Company. The information set forth on the cover page concerning the
Underwriter and under the caption "Underwriting" or otherwise specifically
relating to the Underwriter in the Registration Statement shall be deemed to
have been furnished to the Company by the Underwriter for purposes hereof. This
indemnity will be in addition to any liability which the Company may otherwise
have.
(b) The Underwriter agrees that it will indemnify and hold
harmless the Company, each of its directors, each nominee (if any) for director
named in the Prospectus, each of its officers who has signed the Registration
Statement, and each person, if any, who controls the Company within the meaning
of the Act, against any losses, claims, damages,
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<PAGE>
expenses or liabilities (which shall, for all purposes of this Agreement,
include, but not be limited to, all costs of defense and investigation and all
attorney's fees), joint or several, to which the Company or any such director,
nominee, officer or controlling person may become subject under the Act or
otherwise, but only as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, but in each case
only to the extent that such untrue statement or alleged untrue statement or
omission or alleged omission was made in the Registration Statement, any
Preliminary Prospectus or the Prospectus or such amendment or supplement thereto
in reliance upon and in conformity with written information furnished to the
Company by the Underwriter specifically for use in the preparation thereof,
provided, however, that the obligation of each Underwriter to indemnify the
Company (including any controlling person, director or officer thereof) shall
(i) only relate to any untrue statement or alleged untrue statement or any
omission or alleged omission which applies to such Underwriter and (ii) be
limited in amount to the net proceeds received by the Company from such
Underwriter. The information set forth on the cover page concerning the
Underwriter and under the caption "Underwriting" or otherwise specifically
relating to the Underwriter in the Registration Statement shall be deemed to
have been furnished to the Company by the Underwriter for purposes hereof. This
indemnity will be in addition to any liability which the Underwriter may
otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section 5 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 5, notify the indemnifying party of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve the
indemnifying party from any liability which it may have to any indemnified party
otherwise than solely pursuant to this Section 5. In case any such action is
brought against any indemnified party, which notifies the indemnifying party of
the commencement thereof, the indemnifying party will be entitled to participate
in, and, to the extent that it may choose, jointly with any other indemnifying
party similarly notified, reasonably assume the defense thereof. Subject to the
provisions herein stated and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
Section 5 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation, unless the indemnifying party shall have a default
judgment entered against it or shall settle such action without the consent of
the indemnified party. The indemnified party shall have the right to employ one
separate counsel in any such action and to participate in the defense thereof,
but the fees and expenses of such counsel shall not be at the expense of the
indemnifying party if the indemnifying party has assumed the defense of the
action with counsel reasonably satisfactory to the indemnified party; provided
that the fees and expenses of such counsel shall be at the expense of the
indemnifying party if (i) the employment of such counsel has been specifically
authorized in writing by the indemnifying party, (ii) the named parties to such
action (including
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<PAGE>
any impleaded parties) include both the indemnified and the indemnifying party
and the indemnified party shall have been advised by such counsel that there may
be one or more legal defenses available to the indemnifying party different from
or in conflict with any legal defenses which may be available to the indemnified
party (in which case the indemnifying party shall not have the right to assume
the defense of such action on behalf of the indemnified party, it being
understood, however, that the indemnifying party shall, in connection with any
one such action or separate but substantially similar or related actions in the
same jurisdiction arising out of the same general allegations or circumstances,
be liable only for the reasonable fees and expenses of one separate firm of
attorneys for the indemnified party, which firm shall be designated in writing
by the indemnified party), or (iii) the professional competence of the counsel
to be employed by the indemnifying party is not reasonably acceptable to the
indemnified party. No settlement of any action against an indemnified party
shall be made without the prior written consent of the indemnified party, which
consent shall not be unreasonably withheld. The indemnifying party shall not be
liable to indemnify the indemnified party for any settlement of any action
effected without the indemnifying party's prior written consent to any such
settlement, which consent shall not be unreasonably withheld.
6. Contribution. In order to provide for just and equitable
contribution under the Act in any case in which (i) the Underwriter makes a
claim for indemnification pursuant to Section 5 hereof but it is judicially
determined (by the entry of a final judgment or decree by a court of competent
jurisdiction and the expiration of time to appeal or denial of the last right of
appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that the express provisions of Section 5 provide for
indemnification in such case, or (ii) contribution under the Act may be required
on the part of the Underwriter, then the Company and the Underwriter shall
contribute to the aggregate losses, claims, damages or liabilities to which they
may be subject (which shall, for all purposes of this Agreement, include, but
not be limited to, all costs of defense and investigation and all attorneys'
fees) in either such case (after contribution from others) in such proportions
such that the Underwriter shall be responsible in the aggregate for that portion
of such losses, claims, damages or liabilities determined by multiplying the
total amount of such losses, claims, damages or liabilities by the difference
between the public offering price of the Shares and the purchase price of the
Shares to such Underwriter and dividing the product by the public offering price
of the Shares, and the Company shall be responsible for that portion of such
losses, claims, damages or liabilities determined by multiplying the total
amount of such losses, claims, damages or liabilities by the purchase price of
the Shares to the Underwriter and dividing the product thereof by the public
offering price of the Shares. No person guilty of a fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who is not guilty of such fraudulent
misrepresentation. The foregoing contribution agreement shall in no way affect
the contribution liabilities of any persons having liability under Section 11 of
the Act other than the Company and the Underwriter. As used in this Section 6,
the term "Underwriter" includes any person who controls the Underwriter within
the meaning of Section 15 of the Act. If the full amount of the contribution
specified in this Section 6 is not permitted by law, then the Underwriter shall
be entitled to contribution from the Company, its officers, directors and
controlling persons to the fullest extent permitted by law. Any party entitled
to contribution will, promptly after receipt of notice of commencement of any
action, suit or proceeding against
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<PAGE>
such party in respect to which a claim for contribution may be made against
another party or parties under this Section 6, notify such party or parties from
whom contribution may be sought, but the omission so to notify such party or
parties shall not relieve the party or parties from whom contribution may be
sought from any obligation it or they may have hereunder or otherwise than under
this Section 6, or to the extent that such party or parties were not adversely
affected by such omission. The contribution agreement set forth above shall be
in addition to any liabilities which any indemnifying party may have at common
law or otherwise.
7. Survival of Agreements etc. All statements contained in any
schedule, exhibit or other instrument delivered by or on behalf of the parties
hereto, or in connection with the transactions contemplated by this Agreement,
shall be deemed to be representations and warranties hereunder. Notwithstanding
any investigations made by or on behalf of the parties to this Agreement, all
representations, warranties, indemnities and agreements made by the parties to
this Agreement or pursuant hereto shall remain in full force and effect and will
survive delivery of and the payment for the Shares, for a period of three years
from the date hereof, except that, if a party hereto has actual knowledge at the
time of the Closing Dates of facts which would constitute a breach of the
representations and warranties contained herein, such breaches shall be waived
by such party if such party consummates the transactions contemplated by this
Agreement.
8. Conditions of Underwriter's Obligations. The obligations of
the Underwriter hereunder will be subject (as of the date of this Agreement and
as of the Closing Dates) to the accuracy of and compliance in all material
respects with the representations, warranties and agreements 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 obligation hereunder, and to the following additional conditions:
(a) The Registration Statement shall have become effective not
later than 10:00 a.m., New York City time, on the day following this Agreement,
or at such later time or on such later date as shall be consented to in writing
by the Underwriter; prior to the First Closing date, no stop order suspending
the effectiveness of the Registration Statement shall have been issued and no
proceeding for that purpose shall have been initiated or be pending or, to the
knowledge of the Company or the Underwriter, contemplated or threatened by the
Commission; and any request by the Commission for additional information to be
included in the Registration Statement or the Prospectus or otherwise shall have
been complied with to the satisfaction of counsel for the Underwriter, and
qualification under the securities laws of such states as the Underwriter may
designate of the issue and sale of the Shares upon the terms and conditions
herein set forth or contemplated and containing no provision unacceptable to the
Underwriter shall have been secured; and no stop order shall be in effect
denying or suspending effectiveness of such qualifications, nor shall any stop
order proceedings with respect thereto be instituted or pending or threatened
under such laws. If the Company has elected to rely upon Rule 430A of the Rules
and Regulations, the price of the Shares and any price-related information
previously omitted from the effective Registration Statement pursuant to such
Rule 430A shall have been transmitted to the Commission for filing pursuant to
Rule 424(b) of the Rules and Regulations within the prescribed time period, and
prior to the First Closing Date the
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Company shall have provided evidence satisfactory to the Underwriter of such
timely filing, or a post-effective amendment providing such information shall
have been promptly filed and declared effective in accordance with the
requirements of Rule 430A of the Rules and Regulations.
(b) No amendment to the Registration Statement, any
Preliminary Prospectus or the Prospectus to which the Underwriter or counsel for
the Underwriter shall have objected, after having received reasonable notice of
a proposal to file the same, shall have been filed.
(c) The Underwriter shall not have discovered and disclosed to
the Company prior to the respective Closing Dates that the Registration
Statement or the Prospectus, or any amendment or supplement thereto, contains an
untrue statement of fact which, in the reasonable opinion of counsel for the
Underwriter, is material, or omits to state a fact which, in the opinion of such
counsel, is material and is required to be stated therein or is necessary to
make the statements therein not misleading.
(d) The Underwriter shall have received from Arthur Andersen
LLP, two signed certificates or letters, one dated and delivered on the
Effective Date and one dated and delivered on the First Closing Date, in form
and substance satisfactory to the Underwriter, stating that:
(i) they are independent certified public accountants with
respect to the Company within the meaning of the Act and the Rules and
Regulations, and no disclosure under Item 13 of the Registration Statement is
required insofar as it relates to them;
(ii) the financial statements included in the Registration
Statement and the Prospectus were examined by them and, in their opinion, comply
as to form in all material respects with the applicable requirements of the Act,
the Rules and Regulations and instructions of the Commission with respect to
Registration Statements on Form SB-2 and that the Underwriter may rely upon the
opinion of such firm with respect to the financial statements and supporting
schedules included in the Registration Statement;
(iii) on the basis of inquiries and procedures conducted by
them (not constituting an examination in accordance with generally accepted
auditing standards), including a reading of the latest available unaudited
interim financial statements or other financial information of the Company (with
an indication of the date of the latest available unaudited interim financial
statements), inquiries of officers of the Company who have responsibility for
financial and accounting matters, reviews of minutes of all meetings of the
shareholders, the Board of Directors and any committees of the Board of
Directors of the Company, as set forth in the minute books of the Company, and
other specified inquiries and procedures, nothing has come to their attention as
a result of the foregoing inquiries and procedures that causes them to believe
that:
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<PAGE>
(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 (3) business days prior to the date of
such letter, there has been any decreases in net current assets or net assets,
change in the Common Stock or other securities of the Company (except as
specifically disclosed in such certificates or letters), any decreases in
shareholders equity or working capital or any increases in net current
liabilities, net liabilities or long-term debt, in each case as compared with
amounts shown in such financial statements; and any decrease in revenues or in
the total or per share amounts of income before extraordinary items or net
income or loss, or any other material change in each case as compared with the
corresponding period in the preceding year or any change in the capitalization
or long term debt of the Company, except in each case for increases, changes or
decreases which the Prospectus discloses have occurred or will or may occur.
(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 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.
(iv) On the basis of certain procedures specified by the
Underwriter and described in their letter, they have compared specific dollar
amounts, numbers of shares, percentages of revenue and earnings and other
information (to the extent they are contained in or derived from the accounting
records of the Company, and excluding any questions of legal interpretations)
included in the Registration Statement and Prospectus with the accounting
records and other appropriate data of the Company and have found them to be in
agreement.
(e) At the time this Agreement is executed and at the First
closing Date, the Underwriter shall have received from Milberg Weiss Bershad
Hynes & Lerach LLP counsel for the Company ("Company Counsel"), a signed opinion
dated as of the date hereof and the First Closing Date, as the case may be,
reasonably satisfactory to the Underwriter's Counsel, in the form and substance
of Exhibit A annexed hereto.
(f) The Underwriter shall have received a certificate, dated
and delivered as of the date of the First Closing Date, of the Chief Executive
Officer and Secretary of the Company stating that:
(i) The Company and such officers have complied with all the
agreements and satisfied all the conditions on their respective part to be
performed or satisfied hereunder at or prior to such date, including but not
limited to the agreements and covenants of the Company set forth in Section
hereof.
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<PAGE>
(ii) 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, contemplated or threatened under the Act.
(iii) Such officers have carefully examined the Registration
Statement and the Prospectus and any supplement or amendment thereto, each of
which contains all statements required to be stated therein or necessary to make
the statements therein not misleading and does not contain any untrue statement
of a material fact, and since the Effective Date there has occurred no event
required to be set forth in the amended or supplemented Prospectus which has not
been set forth.
(iv) As of the date of such certificate, the representations
and warranties contained in Section 1 hereof are true and correct as if such
representations and warranties were made in their entirety on the date of such
certificate, and the Company has complied with all its agreements herein
contained as of the date hereof and certifying as to the matters referred to in
Sections __ (h) and (i).
(v) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus, and except as
contemplated in the Prospectus, the Company has not incurred any material
liabilities or obligations, direct or contingent (other than in the ordinary
course of business), or entered into any material transactions and there has not
been any change in the Common Stock or funded debt of the Company or any
material adverse change in the condition (financial or other), business,
operations, income, net worth, properties or prospects of the Company and its
Subsidiaries, taken as a whole, except for such changes as are contemplated by,
or disclosed in the Prospectus.
(vi) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, the
Company shall have not sustained any material loss of or damage to its
properties, whether or not insured, and since such respective dates, no
dividends or distributions whatever shall have been declared or paid, or both,
on or with respect to any security (except interest in respect of loans) of the
Company.
(vii) Neither the Company nor any of its officers or
affiliates shall have taken, and the Company, its officers and affiliates will
not take, directly or indirectly, any action designed to, or which might
reasonably be expected to, cause or result in the stabilization or manipulation
of the price of the Company's securities to facilitate the sale or resale of the
Shares.
(viii) No action, suit or proceeding, at law or in equity,
which may (A) result in the imposition of damages or penalties against, or
payments by, the Company in excess of $25,000 or (B) adversely affect the
operation of the Company's business shall be pending or, to the knowledge of
such officers, threatened against the Company, or affecting any of its
properties, before or by any commission, board or other administrative agency,
except as otherwise set forth in the Registration Statement.
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<PAGE>
(ix) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, the
Company shall not have lost any significant customers or been advised that it
may lose any such significant customers.
(g) On the First Closing Date, the Company shall not be a party to, or
be involved in, any arbitration, litigation (except as set forth in the
Registration Statement) or governmental proceeding, which is then pending, or,
to the knowledge of the Company, threatened, of a character which might
materially and adversely affect the Company or be required to be disclosed in
the Registration Statement.
(h) Subsequent to the respective date as of which information is given
in the Registration Statement and the Prospectus, the Company shall not have
sustained any loss on account of fire, flood, accident, or other calamity,
whether or not covered by insurance, which, in the sole judgment of the
Underwriter materially adversely affects the business of the Company.
(i) All of the certificates representing the Shares shall have been
tendered for delivery in accordance with the terms and provisions of this
Agreement.
(j) The Underwriter shall have received the Lock-Up Agreements referred
to in paragraph (x) of Section 1 hereof.
(k) At each of the Closing Dates, (i) the representations and
warranties of the Company contained in this Agreement shall be true and correct
with the same effect as if made on and as of the Closing Dates and the Company
shall have performed, in all material respects, all its obligations due to be
performed prior thereto; (ii) the Registration Statement and the Prospectus and
any amendment or supplement thereto shall contain all statements which are
required to be stated therein in accordance with the Act and the Rules and
Regulations and conform in all material respects to the requirements thereof,
and neither the Registration Statement nor the Prospectus nor any amendment or
supplement thereto shall 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 not misleading; (iii) there shall have been, since the
date as of which information is given, no material adverse change in the
condition, business, operations, properties, business prospects, securities,
long-term or short-term debt or general affairs of the Company from that set
forth in the Registration Statement or the Prospectus, except changes which the
Registration Statement and the Prospectus indicate will occur after the
Effective Date and prior to such Closing Date, and the Company shall not have
incurred any material liabilities or obligations, direct or contingent, or
entered into any material transaction, contract or agreement not in the ordinary
course of business other than as referred to in the Registration Statement and
the Prospectus; and (iv) except as set forth in the Prospectus, no action, suit
or proceeding, at law or in equity, shall be pending or threatened against the
Company which might be required to be set forth in the Registration Statement,
and no proceedings shall be pending or threatened against the Company before or
by any commission, board or administrative agency in the United States or
elsewhere, wherein an unfavorable
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<PAGE>
decision, ruling or finding might materially adversely affect the condition,
business, operations, properties, prospects or general affairs of the Company.
(l) The NASD shall have indicated that it has no objection to the
underwriting arrangements pertaining to the sale of the Shares by the
Underwriter.
(m) 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, 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.
(n) The Company meets the current and any existing and proposed
criteria for inclusion of the Shares on AMEX.
(o) 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 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 this
Section 8 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.
(p) Upon exercise of the option provided for in Section 2(b) hereof,
the obligations of the Underwriter to purchase and pay for the Option Shares
will be subject to the following additional conditions:
(i) The Registration Statement shall remain effective at the Option
Closing Date, and no stop order suspending the effectiveness thereof shall have
been issued and no proceedings for that purpose shall have been instituted or
shall be pending, or, to the knowledge of the Underwriter or the Company, shall
be contemplated by the Commission, and any request on the part of the Commission
for additional information shall have been complied with to the satisfaction of
counsel for the Underwriter.
(ii) At the Option Closing Date there shall have been delivered to the
Underwriter the signed opinion of Company Counsel, in form and substance
reasonably satisfactory to counsel for the Underwriter, which opinion shall be
substantially the same in scope and substance as the opinions furnished to the
Underwriter by Company Counsel at the date hereof and at First Closing Date
pursuant to Section 8 (e).
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<PAGE>
(iii) At the Option Closing Date there shall have been delivered to the
Underwriter a certificate of the Chief Executive Officer and the Secretary of
the Company dated the Option Closing Date, in form and substance satisfactory to
counsel for the Underwriter, substantially the same in scope and substance as
the certificates furnished to the Underwriter at the First Closing Date pursuant
to Section 8 (f).
(iv) At the Option Closing Date there shall have been delivered to the
Underwriter a certificate or letter in form and substance satisfactory to the
Underwriter from Arthur Andersen LLP, dated the Option Closing Date and
addressed to the Underwriter, confirming the information in its certificate or
letter referred to in Section 8(d) hereof and stating that nothing has come to
their attention during the period from the ending date of their review referred
to in said certificate or letter to a date not more than three (3) business days
prior to the Option Closing Date which would require any change in said
certificate or letter if it were required to be dated the Option Closing Date.
(v) All proceedings taken at or prior to the Option Closing Date in
connection with the sale and transfer of the Option Shares shall be satisfactory
in form and substance to the Underwriter, and the Underwriter and counsel for
the Underwriter, shall have been furnished with all such documents,
certificates, affidavits and opinions as the Underwriter and counsel for the
Underwriter may reasonably request in connection with this transaction in order
to evidence the accuracy and completeness of any of the representations,
warranties or statements of the Company or its compliance with any of the
covenants or conditions contained herein.
(q) The Company shall have issued the Underwriter's Warrants.
The opinions and certificates mentioned above or elsewhere in
this Agreement will be deemed to be in compliance with the provisions hereof
only if they are reasonably satisfactory to the Underwriter and to counsel for
the Underwriter.
Any certificate signed by an officer of the Company delivered
to the Underwriters or to counsel for the Underwriter, will be deemed a
representation and warranty by the Company to the Underwriter as to the
statements made therein.
9. Effective Date. This Agreement will become effective no
later than 10:00 a.m. on the first business day following the date on which the
Registration Statement becomes effective; provided, however, this Agreement will
become effective at such later time after the Registration Statement becomes
effective as the Underwriter may determine on and by notice to the Company or by
release of any of the Shares for sale to the public or by any other action
constituting a commencement of the public offering. For the purposes of this
Section 9, the Shares will be deemed to be so released upon the release for
publication of any newspaper advertisement relating to the Shares or upon the
release by the Underwriter of telegrams offering the Shares for sale to
securities dealers, whichever may occur first. The term "business day" shall
mean a calendar day other than a Saturday, Sunday or holiday. Notwithstanding
anything
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<PAGE>
herein to the contrary, the provisions of this Section and of Sections 5, 6,10
and 11 hereof will, however, be effective upon the execution of this Agreement.
10. Termination. This Agreement may be terminated by the
Underwriter, in its absolute discretion, by notice to the Company (i) at any
time before this Agreement becomes effective in accordance with Section 9
hereof; (ii) if, prior to the First Closing Date or the Option Closing Date, as
the case may be, the Company shall have failed or refused to fully comply with
any of the provisions of this Agreement on its part to be performed prior
thereto, or if any of the agreements, conditions, covenants, representations or
warranties of the Company herein contained are not correct or shall not have
been performed or fulfilled within the times specified; (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 or maximum ranges for prices for securities
shall have been required on the over-the-counter market by the NASD; (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, 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) the Company will have sustained a material loss, whether or not
insured, by reason of fire, flood, accident or other calamity; (viii) any action
has been taken by the Government of the United States or any department or
agency thereof which, in the sole judgment of the Underwriter, has had a
material adverse effect upon the general market for securities; (ix) if, prior
to the First Closing Date or the Option Closing Date, as the case may be, a
there shall have occurred the outbreak of any war or any other event or calamity
which, in the sole judgment of the Underwriter, materially disrupts the
financial markets of the United States; (x) if, prior to the First Closing Date
or the Option Closing Date, as the case may be, the general market for
securities or political, legal or financial conditions should deteriorate so
materially from that in effect on the date of this Agreement that, in the sole
judgment of the Underwriter, it becomes impracticable for the Underwriter to
commence or proceed with the public offering of the Shares and with the payment
for or acceptance thereof; (xi) if trading of any securities of the Company
shall have been suspended, halted or delisted on any exchange or in any
over-the- counter market or by the Commission; or (xii) if, prior to the First
Closing Date or the Option Closing Date, as the case may be, any materially
adverse change shall have occurred in the sole judgment of the Underwriter,
since the date as of which information is given in the Registration Statement
and the Prospectus, in the financial condition, business, prospects, operations,
properties or obligations of the Company. Notwithstanding any contrary provision
contained in this Agreement, any election hereunder or any termination of this
Agreement, and whether or not this Agreement is otherwise carried out, the
provisions of Section 6, 7 and 11 shall not be in any way affected by such
election or termination or failure to carry out the terms of this Agreement or
any part hereof.
11. Expenses.
(a) Whether or not the offering is consummated, the Company will pay
all costs and expenses incident to the performance of the obligations of the
Company hereunder,
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<PAGE>
including without limiting the generality of the foregoing, (i) the preparation,
printing, filing, and copying of the Registration Statement, Prospectus, this
Agreement, the Selected Dealer Agreement, and other underwriting documents, if
any, and any drafts, amendments or supplements thereto, including the cost of
all copies thereof supplied to the Underwriter in such quantities as reasonably
requested by the Underwriter and the costs of mailing Prospectuses to offerees
and purchasers of the Shares; (ii) the printing, engraving, issuance and
delivery of certificates representing the Shares, including any transfer or
other taxes payable thereon; (iii) the registration or qualification of the
Shares under state securities or "blue sky" laws, in accordance with the
provisions of Section 11(c) below and the cost of printing and mailing the "blue
sky Survey"; (iv) all reasonable fees and expenses of the Company's counsel and
accountants; (v) all NASD filing fees in connection with the offering; (vi) all
costs and expenses of any listing of the Shares on NASDAQ the or any other stock
exchange or in Standard and Poor's Corporation Reports or any other securities
manuals; (vii) all costs and expenses of four (4) bound volumes provided to the
Underwriter of all documents, paper exhibits, correspondence and records forming
the materials included in the offering; (viii) the cost of "tombstone"
advertisements to be placed in one or more daily or weekly periodicals as the
Underwriter may request (up to a maximum of $10,000); (ix) all expenses (up to a
maximum of $5,000) incurred in connection with presentation of a "due diligence"
meeting in New York City; (x) the cost of printing and mailing the Selected
Dealer Agreement and (xi) all other costs and expenses incurred or to be
incurred by the Company in connection with the transactions contemplated by this
Agreement. The obligations of the Company under this subsection (a) shall
survive any termination or cancellation of this Agreement.
(b) In addition to the Company's responsibility for payment of the
foregoing expenses, the Company shall pay to the Underwriter a non-accountable
expense allowance equal to three percent (3%) of the gross proceeds of the
offering, including in such amount the proceeds from the exercise of the
Underwriter's over-allotment option. The non-accountable expense allowance due
shall be paid at the First Closing Date and any Option Closing Date, as
applicable. The Underwriter hereby acknowledges prior receipt from the Company
of $30,000, which amount shall be applied to the non-accountable expense
allowance due when and if the offering is closed. If the offering is not
consummated because the Underwriter elects to terminate this Agreement in
accordance with Section 10 hereof, then the Company shall reimburse the
Underwriter in full for its actual out-of-pocket expenses (including, without
limitation, the fees and disbursements of its counsel) inclusive of the $30,000
previously paid on account. If the Company decides not to proceed with the
offering for any reason, and subsequently engages in any public offering,
private placement, merger, acquisition, joint venture or corporate
reorganization with any entity within 12 months after the Company notifies the
Underwriter of its decision not to proceed, the Underwriter shall be entitled to
receive from the Company a cash fee equal to three percent (3%) of the
consideration paid or received by the Company in connection with such
transaction.
(c) The Underwriter shall determine in which states or jurisdictions
the Shares shall be registered or qualified for sale. Immediately prior to the
Effective Date, counsel for the Company shall advise the Underwriter in writing
of all states in which the offering has been registered or qualified for sale or
has been canceled, withdrawn or denied and the number
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<PAGE>
of Shares registered or qualified for sale in each such state. The Company shall
be responsible for the cost of state registration or qualification, including
the filing fees (which filing fees are payable to Underwriter's counsel in
advance of such filings) and the legal fees and disbursements of Underwriter's
counsel in connection with obtaining such registration or qualification;
12. Notices. Any notice hereunder shall be in writing, unless
otherwise expressly provided herein, and if to the respective persons indicated,
will be sufficient if mailed by certified mail, return receipt requested,
postage prepaid, or hand delivered, and confirmed in writing or by telecopier,
addressed as respectively indicated or to such other address as will be
indicated by a written notice similarly given, to the following persons:
(a) If to the Underwriter - addressed to (i) GunnAllen
Financial Inc., 1715 Westshore Blvd. Suite 775, Tampa, Florida 33607, Attn:
Howard Davis, with a copy to Tenzer Greenblatt LLP, 405 Lexington Avenue, New
York, New York 10174, Attention: James Kaplan, Esq.
(b) If to the Company - addressed to Intelli-Check, Inc., 775
Park Avenue, Suite 340, Huntington, New York 11743, Attention: Frank Mandelbaum,
Chairman, with a copy to Milberg Weiss Bershad Hynes & Lerach LLP, One
Pennsylvania Plaza, New York, New York 10119, Attention: Arnold Bressler, Esq.
Notice shall be deemed delivered upon receipt.
13. Successors. This Agreement will inure to the benefit of and be
binding upon the Underwriter and the Company and their respective successors and
assigns. Nothing expressed or mentioned in this Agreement is intended, or will
be construed, to give any person, corporation or other entity other than the
persons, corporations and other entities mentioned in the preceding sentence any
legal or equitable right, remedy, or claim under or in respect to this Agreement
or any provisions herein contained, this Agreement and all conditions and
provisions hereof being intended to be and being for the sole and exclusive
benefit of such persons and for the benefit of no other persons; except that the
representations, warranties and indemnities of the Company contained in this
Agreement will also be for the benefit of the directors and officers of the
Underwriter and any person or persons who control any of the Underwriter within
the meaning of Section 15 of the Act, and except that the indemnities of the
Underwriter will also be for the benefit of the directors and officers of the
Company and any person or persons who control the Company within the meaning of
Section 15 of the Act. No purchaser of any of the Shares from the Underwriter
will be deemed a successor or assign solely because of such purchase.
14. Finders and Holders of First Refusal Rights.
(a) The Company hereby represents and warrants to the
Underwriter that it has not paid any compensation for services as a finder in
connection with any prior financing of the Company during the twelve-month
period immediately preceding the date hereof and that no person is entitled,
directly or indirectly, to compensation for services as a finder in
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<PAGE>
connection with the proposed transactions. The Company further represents and
warrants that other than as set forth below on subsection (c), no person holds a
right of first refusal or similar right in connection with the proposed
offering, and the Company hereby agrees to indemnify and hold harmless the
Underwriter, its respective officers, directors, agents and each person, if any,
who controls such Underwriter within the meaning of Section 15 of the Act, from
and against any loss, liability, claim, damage or expense whatsoever arising out
of a claim by an alleged finder or alleged holder of a right of first refusal or
similar right in connection with the proposed offering, insofar as such loss,
liability, claim, damage or expense arises out of any action or alleged action
of the Company.
(b) The Underwriter hereby represents and warrants to the
Company that no person is entitled, directly or indirectly, to compensation for
services as a finder in connection with the proposed transactions contemplated
by this Agreement; and of the Underwriter hereby agrees, severally and not
jointly, to indemnify and hold harmless the Company, its officers, directors and
agents, from and against any loss, liability, claim, damage or expense
whatsoever arising out of a claim by an alleged finder in connection with the
proposed offering, insofar as such loss, liability, claim, damage or expense
arises out of any action or alleged action of such Underwriter.
(c) For the three year period from the Effective Date the
Underwriter shall have a right of first refusal with respect to the placement of
any private offering or the underwriting of any public offering of debt or
equity securities of the Company.
15. Applicable Law. This Agreement shall be a 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 applicable to contracts made
and to be performed entirely within such State. 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 procedure. Each of the Company and the Underwriter further
agrees to accept and acknowledge service of any and all process which may be
served in any suit, action or proceeding in the New York State Supreme Court,
County of New York and the United States District Court for the Southern
District of New York, and agrees that service of process upon the Company mailed
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. In the event of litigation between the parties arising hereunder,
the prevailing party shall be entitled to costs and reasonable attorney's fees.
16. Headings. The headings in this Agreement are for purposes of
reference only and shall not limit or otherwise affect any of the terms or
provisions hereof.
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<PAGE>
17. Counterparts. This Agreement may be executed in any number
of counterparts which, taken together, shall constitute one and the same
instrument.
18. Entire Agreement. This Agreement sets forth the entire
agreement and understanding between the Underwriter and the Company with respect
to the subject matter hereof, and supersedes all prior agreements, arrangements
and understandings, written or oral, between them.
19. Terminology. All personal pronouns used in this Agreement,
whether used in the masculine, feminine or neuter gender, shall include all
other genders and the singular shall include the plural, and vice versa.
If the foregoing correctly sets forth our understanding,
please indicate the Underwriter's acceptance thereof, as of the day and year
first above written, in the spaces provided below for that purpose, whereupon
this letter with the Underwriter's acceptance shall constitute a binding
agreement among us.
Very truly yours,
INTELLI-CHECK, INC.
By:___________________________________
Name: Frank Mandelbaum
Title: Chairman
Confirmed and accepted on the
day and year first above written.
GUNNALLEN FINANCIAL INC.
By:_________________________________
Name:
Title:
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<PAGE>
EXHIBIT A
(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. The Company is qualified to do business as a foreign corporation and
is in good standing in all jurisdictions wherein such qualifications is
necessary and failure to so qualify could have a material adverse effect on the
financial condition, results of operation, business or properties of the
Company.
The Company has no subsidiaries. To the best of Company
Counsel's knowledge, the Company has no equity interests in any other entity.
(ii) The Company has full power and authority, corporate and
other, to execute, deliver and perform the Underwriting Agreement and the
Underwriter's Warrant Agreement and to consummate the transactions contemplated
thereby. The execution, delivery and performance of the Underwriting Agreement
and the Underwriter's Warrant Agreement by the Company, the consummation by the
Company of the transactions therein contemplated and the compliance by the
Company with the terms of the Underwriting Agreement and the Underwriter's
Warrant Agreement have been duly authorized by all necessary corporate action,
and the Underwriting Agreement has been duly executed and delivered by the
Company. The Underwriting Agreement is and, when executed and delivered by the
Company on the Closing Date, the Underwriter's Warrant Agreement 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 and contribution
provisions set forth in the Underwriting Agreement and the Underwriter's Warrant
Agreement may be limited by the federal securities laws or public policy
underlying such laws.
(iii) The execution, delivery and performance of the
Underwriting Agreement and the Underwriter's Warrant Agreement by the Company,
the consummation by the Company of the transactions therein contemplated and the
compliance by the Company with the terms of the Underwriting 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 or By-Laws, each as amended, of the Company, (B)
result in a breach of or conflict with any 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 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 any of the Company'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, or self regulatory organization,
including, without limitation, the NASD,
<PAGE>
NYSE and AMEX, having jurisdiction over the Company or any of the Company's
properties or business; or (D) have any effect on any Permit necessary for the
Company to own or lease, as the case may be, and operate its properties or
conduct its businesses or the ability of the Company to make use thereof.
(iv) 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 or the Underwriter's Warrants to the Underwriter, and the
consummation by the Company of the transactions contemplated by the Agreement or
the Underwriter's Warrant Agreement.
(v) The Registration Statement has become effective under the
Act; 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 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, domestic or
foreign, or self regulatory organization, including, without limitation, the
NASD, NYSE and AMEX, having jurisdiction over the Company or any of its assets
or businesses, including, without limitation, those promulgated by the
Commission and comparable state and local regulatory authorities.
(viii) The outstanding Common Stock and outstanding options
and warrants to purchase Common Stock have been duly authorized and validly
issued. The outstanding Common Stock are fully paid and nonassessable. The
outstanding options and warrants to purchase Common Stock constitute the valid
and binding obligations of the Company, enforceable in accordance with their
terms. None of the outstanding Common Stock
<PAGE>
or options or warrants to purchase Common Stock has been issued in violation of
the preemptive rights of any stockholder of the Company. None of the holders of
the outstanding Common Stock is subject to personal liability solely by reason
of being such a holder. The offers and sales of the outstanding Common Stock and
outstanding options and warrants to purchase Common Stock 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 Stock and outstanding options and warrants to purchase Common Stock
conform to the descriptions thereof contained in the Registration Statement and
Prospectus. 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 have been duly
authorized and, when the Shares have been issued and duly delivered against
payment therefor as contemplated by the Underwriting Agreement, the 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. The
Shares are not subject to preemptive rights of any stockholder of the Company.
The certificates representing the Shares are in proper legal form.
(x) The issuance and sale of the Warrant Shares issuable upon
exercise of the Underwriter's Warrants have been duly authorized and, when such
Warrant Shares have been duly delivered against payment therefor, as
contemplated by the Underwriter's Warrant Agreement, such Warrant Shares will be
validly issued, fully paid and nonassessable. Holders of Warrant Shares issuable
upon exercise of the Underwriter's Warrants will not be subject to personal
liability solely by reason of being such holders. Neither the Underwriter's
Warrants nor the Warrant Shares issuable upon exercise thereof will be subject
to preemptive rights of any stockholder of the Company. The Company has reserved
a sufficient number of Common Stock from its authorized, but unissued Common
Stock for issuance upon exercise of the Underwriter's Warrants in accordance
with the provisions of the Underwriter's Warrant Agreement. The Underwriter's
Warrants conform to the descriptions thereof in the Registration Statement and
Prospectus.
(xi) Upon delivery of the Firm Shares to the Underwriter
against payment therefor as provided in the Underwriting Agreement, the
Underwriter (assuming it is a bona fide purchaser within the meaning of the
Uniform Commercial Code) will acquire good title to the Firm Shares, 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 makes payment
therefor in accordance with the terms of the Underwriting Agreement, upon
delivery of the Optional Shares 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, free and clear
of any liens, encumbrances, equities, security interests and claims.
<PAGE>
(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 the Company's properties or businesses, 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 business as
described in the Prospectus (collectively the "Intangibles"); to the best of
Company Counsel's knowledge, the Company has not infringed nor is infringing
with the rights of others with respect to the Intangibles; and, to the best of
Company Counsel's knowledge, the Company has not 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 other than
those licenses which the Company has obtained. 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.
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. Each counsel giving an opinion must give the opinion set
forth in this paragraph as to such subject matter of its opinion.
EX-3.1
CERTIFICATE OF INCORPORATION
OF
INTELLI-CHECK, INC.
The undersigned, a natural person, for the purpose of organizing a
corporation for conducting the business and promoting the purposes hereinafter
stated, under the provisions and subject to the requirements of the laws of the
State of Delaware (particularly Chapter 1, Title 8 of the Delaware Code and the
acts amendatory thereof and supplemental thereto, and known, identified, and
referred to as the "General Corporation Law of the State of Delaware"), hereby
certifies that:
FIRST: The name of the corporation (hereinafter called the
"corporation") is INTELLI-CHECK, INC.
SECOND: The address, including street, number, city, and county, of the
registered office of the corporation in the State of Delaware is 1013 Centre
Road, Wilmington, Delaware 19805, County of New Castle; and the name of the
registered agent of the corporation in the State of Delaware at such address is
Corporation Services Company.
THIRD: The purpose of 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.
FOURTH: The total number of shares of common stock which the
corporation shall have authority to issue is Twenty Million (20,000,000), $.001
par value. The total number of shares of preferred stock which the corporation
shall have authority to issue is One Million (1,000,000), $.01 par value. The
Board of Directors of the Company (the "Board") shall have the right to
authorize, by resolution of the Board adopted in accordance with the by-laws of
the Company, the issuance of the preferred shares of stock and, in connection
therewith, to (a) cause such shares to be issued in series; (b) the annual rate
of dividends payable with respect to the Preferred Shares of series thereof; (c)
the amounts payable upon redemption of the Preferred Shares; (the amounts
payable upon liquidation or dissolution of the Company; (e) provisions as to
voting, if any; and (f) such other rights, powers and preferences as the Board
shall determine.
FIFTH: The corporation is to have perpetual existence.
SIXTH: Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
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 this corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this 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 this 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 this corporation, as the case may
be, to be summoned in such manner 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 this
corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this corporation as 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 this corporation, as the case may be,
and also on this corporation.
<PAGE>
SEVENTH: For the management of the business and for the conduct of the
affairs of the corporation, and in further definition, limitation, and
regulation of the powers of the corporation and of its directors and of its
stockholders or any class thereof, as the case may be, it is further provided:
1. The management of the business and the conduct of the affairs
of the corporation shall be vested in its Board of Directors.
The number of directors which shall constitute the whole Board
of Directors shall be fixed by, or in the manner provided in,
the Bylaws.
2. After the original or other Bylaws of the corporation have
been adopted, amended, or repealed, as the case may be, in
accordance with the provisions of Section 109 of the General
Corporation Law of the State of Delaware, and, after the
corporation has received any payment for any of its stock, the
power to adopt, amend, or repeal the Bylaws of the corporation
may be exercised by the Board of Directors of the corporation.
3. Whenever the corporation shall be authorized to issue more
than one class of stock, no outstanding share of any class of
stock which is denied voting power under the provisions of the
certificate of incorporation shall entitle the holder thereof
to the right to vote at any meeting of stockholders except as
the provisions of paragraph (2) of subsection (b) of Section
242 of the General Corporation Law of the State of Delaware
shall otherwise require; provided, that no share of any such
class which is otherwise denied voting power shall entitle the
holder thereof to vote upon the increase or decrease in the
number of authorized shares of said class.
EIGHTH: The personal liability of the directors of the corporation is
hereby eliminated to the fullest extent permitted by the provisions of paragraph
(7) of subsection (b) of Section 102 of the General Corporation Law of the State
of Delaware, as the same may be amended and supplemented.
NINTH: The corporation shall, to the fullest extent permitted by the
provisions of Section 145 of the General Corporation Law of the State of
Delaware, as the same may be amended and supplemented, indemnify any and all
persons whom it shall have power to indemnify under said section 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 Bylaw, 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, officer, employee, or agent and shall
insure to the benefit of the heirs, executors, and administrators of such a
person.
TENTH: From time to time any of the provisions of this certificate of
incorporation may be amended, altered, or repealed, and other provisions
authorized by the laws of the State of Delaware at the time in force may be
added or inserted in the manner and at the time prescribed by said laws, and all
rights at any time conferred upon the stockholders of the corporation by this
certificate of incorporation are granted subject to the provisions of this
Article TENTH.
IN WITNESS WHEREOF, I have hereunto set my hand the 17th day of August,
1999.
/S/ Diane Phillips
---------------------------
Diane Phillips
- 2 -
Ex. 3.2
Adopted August 17, 1999
BY-LAWS
of
INTELLI-CHECK, INC.
ARTICLE I. General.
1.01 Interpretation; Governing Instruments. Terms used and not defined
in these By-Laws shall have the meanings set forth in, and shall be interpreted
in accordance with, the General Corporation Law ("GCL") and other applicable
statutes and the Corporation's certificate of incorporation (collectively the
"governing instruments") as from time to time in effect. Whether or not so
stated, these By-Laws are subject to such governing instruments, and in the
event of any conflict or inconsistency the provisions of the governing
instruments shall control.
1.02 Registered Office. The registered office shall be established and
maintained at the office of the United States Corporation Company, in the City
of Dover, in the County of Kent, in the State of Delaware, and said corporation
shall be the registered agent of the Corporation.
1.03 Other Offices; Business Activities. The Corporation may have such
other offices and conduct its business activities at such other locations within
or without the State of Delaware, as the board determines.
ARTICLE II. Stockholders.
2.01 Annual Meeting. The annual stockholders meeting for the election of
directors and the transaction of other business shall be held annually during
the fifth full month following the end of the Corporation's fiscal year or on
such other date and time as the board may fix.
2.02 Special Meeting. Special stockholders meetings may be called by the
board or chief executive officer and shall be called by the chief executive
officer, the president, any vice president or the secretary upon written
request, stating the purpose(s) of the meeting, either by any director or by the
holders of not less than a majority of the outstanding shares entitled to vote.
Only such business may be transacted at a special meeting as relates to the
purpose(s) set forth in the notice of meeting.
2.03 Place of Meeting. Stockholders meetings shall be held at such
place, within or without the State of Delaware, as may be
<PAGE>
fixed by the board or, if not so fixed, at the registered office of the
Corporation in the State of Delaware. Attendance at any meeting in person or by
proxy shall constitute a waiver of notice, except when the person or proxy
attends the meeting for the express purpose of objecting, at the beginning of
the meeting, to the transaction of any business because the meeting is not
lawfully called or convened.
2.04 Notice of Meetings; Waiver. Written notice of each stockholders
meeting shall be given, personally or by mail, not less than ten nor more than
sixty days before the meeting date to each stockholder entitled to vote at the
meeting at his address appearing on the record of stockholders or, if he shall
have filed with the secretary a written request that notices be mailed to some
other address, at such other address. Each notice shall state the place, date
and time of the meeting and, unless an annual meeting, shall indicate that it is
being issued by or at the direction of the person(s) calling the meeting. Notice
of a special meeting shall also state the purpose(s) for which called. Notice of
an adjourned meeting shall be unnecessary unless otherwise required by the
governing instruments.
2.05 Quorum. Subject to the governing instruments, the holders of one
third of the shares entitled to vote shall constitute a quorum for the
transaction of any business. When a specified item of business must be voted on
by a class or series, voting as a class, however, the holders of a majority of
the shares of such class or series shall constitute a quorum. Despite the
absence of a quorum the stockholders present may by majority vote adjourn a
meeting without further notice unless otherwise required by the governing
instruments.
2.06 Voting; Proxies. Subject to the governing instruments:
2.06(a) Stockholders of record shall be entitled to one vote for each
share held. Any corporate action shall be authorized by a majority of the
votes cast by holders entitled to vote, unless otherwise required by law .
2.06(b) Any stockholder may vote in person or by proxy signed by him or
his attorney-in-fact. No proxy shall be valid after the expiration of eleven
months from its date unless it otherwise provides.
2.07 Action Without Meeting. Subject to the governing instruments, any
stockholder action may be taken without a meeting if a consent in writing,
setting forth the action so taken, shall be signed by the holders of outstanding
shares 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.
3.01 Authority; Number; Election; Qualification; Term. Subject to the
governing instruments, the Corporation's business shall be managed under the
direction of the board which shall consist of no less than five (5) nor more
than nine (9) directors. Directors shall be elected at each annual stockholders
meeting, shall be at least eighteen (18) years old, but need not be
stockholders, and shall hold office until the next annual stockholders meeting
and the election and qualification of their respective successors.
3.02 Annual, Regular and Special Meetings; Place. The annual board
meeting for the election of officers and the transaction of other business shall
be held without notice immediately following and at the same place as the annual
stockholders meeting or, if a quorum is not present or the board otherwise
determines, as promptly as practicable thereafter. Regular board meetings for
the transaction of all business may be held without notice at such times and
places as the board determines. Special board meetings may be called by the
chairman of the board, the president or a majority of the directors. Except as
provided above, board meetings shall be held at such place, within or without
the State of Delaware, as the board determines or, if not so determined, at the
principal office of the Corporation.
3.03 Notice of Meetings; Waiver; Adjournment. Notice of the time and
place of each deferred annual and of each special board meeting shall be given
the directors by mail not less than three, or personally or by telephone,
telegram or telecopier not less than one day prior to the meeting. Notice of any
meeting need not specify its purpose(s). Notice need not be given to any
director who submits a signed waiver of notice before, at or after the meeting
or who attends the meeting without protesting, prior to or at its commencement,
lack of notice to him. Whether or not a quorum is present, a majority of the
directors present may adjourn any meeting without notice to directors not
present unless the meeting is adjourned for more than 48 hours.
3.04 Quorum; Actions by Board. Subject to the governing instruments:
3.04(a) Except as otherwise provided in these By-Laws, a majority of the
entire board shall constitute a quorum for the transaction of business and the
vote of a majority of the directors present at the taking of the vote, if a
quorum is then present, shall be the act of the board. Directors may neither be
present nor vote by proxy.
3.04(b) Any action by the board or any committee may be taken without a
meeting if all directors or committee members consent in writing to the adoption
of a resolution authorizing the action.
- 3 -
<PAGE>
The resolution and consent shall be filed with the board or committee minutes.
3.04(c) Any one or more directors or committee members may participate
in a board or committee meeting by means of a conference telephone or similar
communications equipment allowing all persons participating to hear each other
at the same time. Participation by such means shall constitute presence in
person at a meeting.
3.05 Resignation; Removal; Vacancies. Subject to the governing
instruments:
3.05(a) A director may resign at any time. Any or all directors may be
removed at any time for or without cause by stockholder vote and for cause by
the board.
3.05(b) Board vacancies occurring for any reason, including vacancies
resulting from an increase in the number of directors, but excluding vacancies
resulting from the removal of directors without cause, may be filled by board
vote or, if the number of directors then in office is less than a quorum, by
vote of a majority of the directors then in office. Vacancies occurring for any
reason may also be filled by stockholders.
3.06 Compensation. Directors shall receive such compensation as the
board determines for, and shall be reimbursed for reasonable expenses incurred
in the performance of, their services to the Corporation as directors and in
other capacities.
3.07 Committees. The board, by resolution adopted by a majority of the
entire board, may designate an executive and other committees, each consisting
of at least three directors, to serve at the board's pleasure. The board, but
not any committee, may fill committee vacancies and may designate alternative
committee members to replace absent members at any committee meetings. Except as
otherwise provided in any designating resolution, the executive committee shall
have all the authority of the board, and other committees shall have such
authority as the board determines. The provisions of Sections 3.02, 3.03 and
3.04 of these By-Laws relating to the holding of meetings, notice, waiver,
adjournment, quorum and board action shall apply to committees unless the board
otherwise determines. The board may adopt additional rules of procedure for any
committee not inconsistent with these By-Laws or may delegate this authority to
any committee.
ARTICLE IV. Officers.
4.01 Positions; Election; Term; Removal. The executive officers of the
Corporation shall be a chairman of the board (if the board so determines), a
president, one or more vice presidents (with such designations and rankings as
the board may fix), a secretary and a treasurer, each of whom shall be elected
or
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<PAGE>
appointed annually by the board. Officers other than the chairman need not be
directors. Any two or more offices may be held by the same person except the
offices of president and secretary provided that if the Corporation has only one
stockholder, such stockholder, or, if permitted by applicable law, such
stockholder's designee, may hold all or any combination of offices. Officers
shall serve at the board's pleasure until the next annual board meeting and the
election of their respective successors. The board may at any time remove any
officer with or without cause and may fill any vacancies among the officers
however occurring. The board may also appoint, or may delegate to any executive
officer the appointment of, subordinate and assistant offices with such titles
and duties as the board or such officer determines.
4.02 Chief Executive Officer; Additional Powers and Duties of Other
Officers.
4.02(a) The Corporation's chief executive officer shall be the chairman.
Subject to the board's overall authority, the chief executive officer shall have
general control and supervision of the Corporation's business and affairs and
such other powers and duties consistent with these By-Laws as are customarily
possessed by corporate chief executive officers and as the board assigns.
4.02(b) Subject to the board's overall authority, each other officer
shall have such powers and duties in addition to those specifically provided in
these By-Laws as are customarily possessed by like corporate officers holding
the same position and as the board or chief executive officer assigns.
4.03 Chairman of the Board. The chairman shall preside at all board and
stockholder meetings.
4.04 President. The president shall have such powers and duties, as the
board or the chief executive officer, if so authorized by the board, assigns.
Unless and until the board otherwise determines, in the event of the absence or
inability to act of the chairman, or if there be no chairman, the president
shall have the powers and duties of the chairman.
4.05 Vice Presidents. Each vice president shall have such further title
and such powers and duties as the board or the chief executive officer, if so
authorized by the board, assigns. Unless and until the board otherwise
determines, in the event of the absence or inability to act of the president, or
if there be no president, the ranking vice president shall have the powers and
duties of the president.
4.06 Secretary. The secretary shall give all meeting and other required
corporate notices except as otherwise provided in these By-Laws; shall attend
and keep minutes of all board and stockholder proceedings; shall have charge of
and maintain the
- 5 -
<PAGE>
corporate stock books and records (unless the Corporation has a transfer agent
or registrar) and such other corporate records as the board directs; and shall
keep the corporate seal and, when duly authorized, shall affix such seal to all
necessary corporate instruments.
4.07 Treasurer. The treasurer shall be the Corporation's chief financial
officer and, unless another officer or employee is so designated by the board,
its chief accounting officer, shall have custody of its funds and securities and
shall maintain its financial books and records.
4.08 Compensation. The board shall fix the compensation, if any, of all
officers who are directors and may fix, or delegate to the chief executive
officer authority to fix, the compensation of other officers.
ARTICLE V. Shares and Transfer.
5.01 Certificates. Shares of the Corporation shall be represented by
certificates in such form consistent with the governing instruments as the board
approves, shall be signed by the chairman, president or any vice president and
the secretary or treasurer, or any assistant secretary or assistant treasurer,
and shall be sealed with the corporate seal or its facsimile. Officers
signatures may be facsimile if the certificate is signed by a transfer agent or
registered by a registrar other than the Corporation or its employee.
Certificates may be used although the officer who has signed, or whose facsimile
signature has been used, is no longer such officer. If the Corporation is
authorized to issue shares of more than one class, certificates shall contain
the statements required by statute.
5.02 Transfer Agents; Registrars. The board may appoint one or more
transfer agents and/or registrars, the duties of which may be combined, and
prescribe their duties.
5.03 Transfers; Lost Certificates. Subject to the governing instruments
and compliance with such additional requirements as the board may establish:
5.03(a) Shares shall be transferable only on the Corporation's books by
the holders or their duly authorized attorneys or legal representatives upon
surrender of certificates properly endorsed.
5.03(b) Replacements for certificates alleged to have been lost or
destroyed may be issued upon delivery of such proof of loss and/or bond with or
without surety, or other security, sufficient to indemnify the Corporation as
the board determines.
5.04 Record Date. The board may fix in advance a record date for the
determination of stockholders entitled to notice of or to vote at any
stockholders meeting, or to express consent to or
- 6 -
<PAGE>
dissent from any proposal without a meeting, or for the purpose of determining
stockholders entitled to receive any dividend, distribution or allotment of
rights, or for the purpose of any other action. The record date shall not be
more than sixty nor less than ten days prior to the meeting date nor more than
sixty days prior to any other action.
ARTICLE VI. Indemnification of Directors, Officers, Employees and Agents. Any
person made or threatened to be made a party to an action or proceeding, whether
it be civil or criminal, by reason of the fact that he, his testator or
intestate, then is or was a director, officer, employee or agent of the
Corporation, or then serves or has served any other corporation in any capacity
at the request of the Corporation, shall be indemnified by the Corporation
against reasonable expenses, judgments, fines and amounts actually and
necessarily incurred in connection with the defense of such action or proceeding
or in connection with an appeal therein, to the fullest extent permissible by
the laws of the State of Delaware. Such right of indemnification shall not be
deemed exclusive of any other right to which such person may be entitled.
ARTICLE VII. Miscellaneous.
1. Seal. The corporate seal shall be in such form as the board may
approve.
7.02 Fiscal Year. The board may establish and change the Corporation's
fiscal year. Until the board acts, the fiscal year shall end on December 31 in
each year.
7.03 Shares in Other Corporations. Shares in other corporations held by
the Corporation may be represented and voted by the chief executive officer or
any person designated by him unless the board otherwise directs.
7.04 By-Law Amendments; Stockholder Agreements. Subject to the governing
instruments:
7.04(a) By-Laws may be adopted, amended or repealed either by the
stockholders at the time entitled to vote in the election of directors or by the
board (provided that any change by the board in the number of directors requires
the vote of a majority of the entire board). Any By-Law adopted by the board may
be amended or repealed by the stockholders entitled to vote thereon. If the
board adopts, amends or repeals any By-Law regulating an impending election of
directors, the notice of the next stockholders meeting for the election of
directors shall set forth such By-Law and a concise statement of the changes
made.
7.04(b) Any written agreement among all of the stockholders of the
Corporation holding votes sufficient to modify, amend or repeal
- 7 -
<PAGE>
any By-Law, whether expressly or by interpretation or implication and whether or
not the Corporation is a party thereto, shall be given full force and effect in
accordance with its terms as a stockholders amendment under subsection 7.04(a)
above provided a copy of such written agreement is delivered to the Corporation
and that prompt notice of any such modification, amendment or repeal effected by
any such written agreement to which fewer than all the stockholders of the
Corporation are party is given to those stockholders who are not party thereto.
EX-3.2
EMPLOYMENT
AGREEMENT
AGREEMENT made as of the 21st day of July, 1999 between INTELLI-CHECK,
INC. ("Company"), a New York Corporation having an office at 775 Park Avenue,
Suite 340, Huntington, NY 11743 and EDWIN WINIARZ ("Employee"), residing at 57
Hofstra Drive, Plainview, NY 11803
WHEREAS, Company and Employee wish to enter into an Employment
Agreement pursuant to which Employee will serve as Executive Vice President,
Chief Financial Officer and Treasurer of the Company.
NOW, THEREFORE, in consideration of the respective agreements
hereinafter set forth, the parties agree as follows:
Article I
Employment
1.01 Term. Company hereby employs Employee, and Employee hereby accepts
employment with Company (including also employment by, and in
connection with the business activities of any of Company's
affiliates, subsidiaries and related corporations), in the
position and with the duties hereinafter set forth, for a period
(the "term") commencing on September 7, 1999 and ending September
6, 2001 subject, however, to earlier termination in accordance
with the provisions of this Agreement. This Agreement shall
automatically renew except if the Employer gives Employee 90 days
written notice before the completion of the initial term of this
Agreement.
Article II
Duties
2.01 General. Employee shall be the Executive Vice President, Chief
Financial Officer and Treasurer of the Company and shall perform
such executive duties as may from time to time be assigned to him
by Company's Board of Directors. If so elected or appointed,
Employee shall also serve without additional compensation as a
director and/or officer of the Company or any of its subsidiaries.
However, the Employee recognizes and agrees that the Board may
elect to amend the position and/or duties assigned to Employee.
Such amendment of position and/or duties shall be commensurate
with that of a Senior Executive Vice President with no reduction
in Fixed Salary, benefits or incentives.
2.02 Performance. During the term of his employment, Employee shall
devote substantially all his business time, best efforts and
attention to the business, operations and affairs of Company and
the performance of his duties hereunder provided, however, that
during the term of his employment, Employee may work for a
non-competitive Company so long as he devotes substantially all of
his business time, best efforts and attention to the business
operations and affairs of the Company and the performance of his
duties hereunder.
Page 1 of 9
<PAGE>
2.03 Employee's Representations. Employee represents and warrants to
and agrees with Company that:
(a) Neither the execution nor performance by Employee of this
Agreement is prohibited by or constitutes or will constitute,
directly or indirectly, a breach or violation of, or will be
adversely affected by, any written or other agreement to which
Employee is or has been a party or by which he is bound.
(b) Neither Employee nor any business or entity in which he has any
interest or from which he receives any payments has, directly or
indirectly, any interest of any kind in or is entitled to receive,
and neither Employee nor any such business or entity shall accept,
from any person, firm, corporation or other entity doing business
with Company any payments of any kind on account of any services
performed by Employee during the term of his employment.
Article III
Compensation and Related Matters
3.01(a) Fixed Salary. As compensation for Employee's services Company
shall pay Employee a salary of $125,000 per annum (the "Fixed
Salary").
3.01(b) The Employee shall have the right at his election, to receive
compensation in the form of the Company's restricted Common Stock.
Such Stock shall be valued at fifty percent (50%) of the closing
bid price of the Company's Common Stock as quoted on NASDAQ/NMS
(or other established exchange) as of the date of the Employee's
election. Such election may be for all or part of the Employee's
Compensation. At the beginning of each quarter, Employee shall
give the Company notice of his election to exercise his option to
receive restricted Common Stock in lieu of cash compensation.
3.01(c) Fixed Salary Adjustment. The fixed salary may not be decreased
hereunder during the term of this agreement, but may be increased
upon review by and within the sole discretion of the Company's
Board of Directors.
3.02 Expenses. Company shall pay or reimburse Employee for all
reasonable travel, hotel, entertainment and other business
expenses incurred in the performance of Employee's duties upon
submission of appropriate vouchers and other supporting data
therefore.
3.03 Stock Options. The Company will grant to the Employee an option to
purchase 50,000 shares of the Company's Common Stock to be vested
as follows. 10,000 at $5.00 per share on signing of Employment
Agreement, 20,000 at proposed initial public offering price
("IPO") at first anniversary of Employment and 20,000 options at
IPO price upon all external accounting functions, except for year
end audit being done internally.
3.04 Benefits. Employee shall be entitled to (i) participate in all
general pension, profit-sharing, life, medical, disability and
other insurance and employee benefit plans and programs at any
time in effect for executive employees of Company, provided,
Page 2 of 9
<PAGE>
however, that nothing herein shall obligate Company to establish
or maintain any employee benefit plan or program, whether of the
type referred to in this clause (i) or otherwise, and (ii) three
(3) weeks vacation during each twelve month period of employment
at mutually agreeable times. Employee shall be entitled to the use
of a Company vehicle, however, Employee may elect to provide his
own vehicle and if such election is made, Company agrees to pay
Employee One Thousand Dollars ($1,000) per month to cover cost of
the vehicle, insurance, repairs and other expenses, pertaining
thereto.
Article IV
Termination for Cause; Disability; Death
4.01 For Cause. Company shall have the right to terminate the
employment of Employee hereunder at any time for Cause (as
hereinafter defined) without prior notice (except as otherwise
hereinafter provided). For purposes of this Agreement "Cause"
shall mean and include the occurrence of any of the following acts
or events by or relating to the Employee: (i) any material
misrepresentation by Employee in this Agreement; (ii) any material
breach of any obligations of Employee under this Agreement which
remains uncured for more than twenty (20) days after written
notice thereof by Company to Employee or if the default is such
that it cannot be cured within such 20-day period, upon said
breach; (iii) habitual insobriety or substance abuse of Employee
while performing his duties hereunder; (iv) theft of embezzlement
from Company or any other material acts of dishonesty; (v)
repeated insubordination respecting reasonable orders or
directions of Company's Board of Directors; (vi) conviction of a
crime (other than traffic violations and minor misdemeanors) or
(vii) if Employee becomes the subject of any order, judgment, or
decree, not subsequently reversed, suspended or vacated, of any
court of competent jurisdiction, permanently or temporarily
enjoining him from, or otherwise limiting, engaging in any
activity in connection with the purchase or sale of any security
or commodity or in connection with any violation of Federal or
state securities laws or Federal commodities. In the event of
termination for Cause, Employee's fixed salary shall terminate as
of the effective date of termination of employment.
4.02 Without Cause. Company may not terminate the employment of
Employee, except for Cause not withstanding Article IV; Section
4.01 of Company's by-laws.
4.03 Disability. If Employee, by reason of illness, mental or physical
incapacity or other disability, is unable to perform his regular
duties hereunder (as may be determined by the Board of Directors),
Company shall continue to pay half of Employee's salary for the
balance of the term of this Agreement, provided, however, in the
event Employee recovers from any such illness, mental or physical
incapacity or other disability (as may be determined by an
independent physician to which Employee shall make himself
available for examination at the reasonable request of the Board
of Directors), Employee shall immediately resume his regular
duties hereunder. Any payments to Employee under any disability
insurance or plan maintained by Company shall be applied against
and shall reduce the amount of the salary payable by Company under
this Agreement. If at any time during the year the Employee has
suffered a complete and total disability, defined as the inability
to perform his/her duties from any location, then the provisions
of paragraph 3.03 shall be pro-rated so
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<PAGE>
as not to provide for incentive compensation for the period of
complete and total disability.
4.04 Death. In the event of Employee's death, Company shall continue to
pay half of the Employee's Fixed Salary for the balance of the
term of this Agreement to Employee's surviving spouse, provided,
however, that, if Company is the beneficiary of life insurance on
Employee's life, it shall use the proceeds of such insurance
promptly upon the receipt thereof to prepay (in inverse order to
maturity), half of the Fixed Salary remaining to be paid
discounted to present value using an assumed interest rate of 8%
per annum. Company shall have the right (but not the obligation)
to obtain a life insurance policy on Employee's life. The proceeds
of any such life insurance policy shall be payable to Company.
Employee shall cooperate with Company and use his best efforts in
all respects and regard to obtaining a life insurance policy,
including, without limitation, undergoing a physical examination
upon reasonable request.
Article V
Confidential Information; Non-Competition
5.01 Confidential Information. Employee shall not, at any time during
or following termination or expiration of the term of this
Agreement, directly or indirectly, disclose, publish or divulge to
any person (except in the regular course of Company's business),
or appropriate, use or cause, permit or induce any person to
appropriate or use, any proprietary, secret or confidential
information of Company including, without limitation, knowledge or
information relating to its trade secrets, business methods, the
names or requirements of customers or the prices, credit or other
terms extended to its customers, all of which Employee agrees are
and will be of great value to Company and shall at all times be
kept confidential. Upon termination or expiration of this
Agreement, Employee shall promptly deliver or return to Company
all materials of a proprietary, secret or confidential nature
relating to Company together with any other property of Company
which may have theretofore been delivered to or may be in
possession of Employee.
5.02 Non-Competition. During the term of this Agreement and for a
period of two years after the sooner of the expiration date of
this Agreement or the date when Employee ceases to be employed by
Company as a result of either a voluntary termination of his
employment or a termination for cause, Employee shall not, within
the United States, its territories and/or, possessions and
countries in which the Company does business, without the prior
written consent of Company in each instance , directly or
indirectly, in any manner or capacity, whether for himself or any
other person and whether as proprietor, principal, owner,
shareholder, partner, investor, director, officer, employee,
representative, distributor consultant, independent contractor or
otherwise engage or have any interest in any entity which is
engaged in any business or activity then conducted or engaged in
by Company. The two-year period referred to in the preceding
sentence shall be reduced by two months for each full
Page 4 of 9
<PAGE>
year that elapses after the commencement date of this Agreement.
Notwithstanding the foregoing, however, Employee may at any time
own in the aggregate as a passive (but not active) investment not
more than 5% of the stock or other equity interest of any
publicly-traded entity which engages in a business competitive
with Company.
5.03 Reasonableness. Employee agrees that each of the provisions of
this Section 5 is reasonable and necessary for the protection of
Company; that each such provision is and is intended to be
divisible; that if any such provision (including any sentence,
clause or part) shall be held contrary to law or invalid or
unenforceable in any respect in any jurisdiction, or as to any one
or more periods of time, areas of business activities, or any part
thereof, the remaining provisions shall not be affected but shall
remain in full force and effect as to the other and remaining
parts; and that any invalid or unenforceable provision shall be
deemed, without further action on the part of the parties hereto,
modified, amended and limited to the extent necessary to render
the same valid and enforceable in such jurisdiction. Employee
further recognizes and agrees that any violation of any of his
agreements in this Section 5 would cause such damage or injury to
Company as would be irreparable and the exact amount of which
would be impossible to ascertain and that, for such reason, among
others, Company shall be entitled, as a matter of course, to
injunctive relief from any court of competent jurisdiction
restraining any further violation. Such right to injunctive relief
shall be cumulative and in addition to, and not in limitation of,
all other rights and remedies which Company may possess.
5.04 Survival. The provisions of this Section 5 shall survive the
expiration or termination of this Agreement for any reason.
Article VI
Miscellaneous
6.01 Notices. All notices under this Agreement shall be in writing and
shall be deemed to have been duly given if personally delivered
against receipt or if mailed by first class registered or
certified mail, return receipt requested, addressed to Company and
to Employee at their respective addresses set forth on the first
page of this Agreement, or to such other person or address as may
be designated by like notice hereunder. Any such notice shall be
deemed to have been given on the day delivered, if personally
delivered, or on the third day after the date of mailing if
mailed.
6.02 Parties in Interest. This Agreement shall be binding upon and
inure to the benefit of and be enforceable by the parties hereto
and their respective heirs, legal representatives, successors and,
in the case of the Company, assigns, but no other person shall
acquire or have any rights under or by virtue of this Agreement,
and the obligations of Employee under this Agreement may not be
assigned or delegated.
6.03 Governing Law; Severability. This Agreement shall be governed by
and construed and enforced in accordance with the laws and
decisions of the State of New York applicable to contracts made
and to be performed therein without giving effect to the
principles of conflict of laws. In addition to the provisions of
5.03 above, the invalidity or unenforceability of any other
provision of this Agreement, or the application thereof to any
person or circumstance, in any jurisdiction shall in no way
impair,
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<PAGE>
affect or prejudice the balance of this Agreement, which shall
remain in full force and effect, or the application thereof to
other persons and circumstances.
6.04 Entire Agreement; Modification; Waiver; Interpretation. This
Agreement contains the entire agreement and understanding between
the parties with respect to the subject matter hereof and
supersedes all prior negotiations and oral understandings, if any.
Neither this Agreement nor any of its provisions may be modified,
amended, waived, discharged or terminated, in whole or in part,
except in writing signed by the party to be charged. No waiver of
any such provision or any breach of or default under this
Agreement shall be deemed or shall constitute a waiver of any
other provision, breach or default. All pronouns and words used in
this Agreement shall be read in the appropriate number and gender,
the masculine, feminine and neuter shall be interpreted
interchangeably and the singular shall include the plural and vice
versa, as the circumstances may require.
6.05 Indemnification. Employee shall indemnify and hold Company free
and harmless from and against and shall reimburse it for any and
all claims, liabilities, damages, losses, judgments, costs and
expenses (including reasonable counsel fees and other reasonable
out-of-pocket expenses) arising out of or resulting from any
breach or default of any of his representations, warranties and
agreements in this Agreement. Company shall indemnify and hold
Employee free and harmless from and against and shall reimburse
him for any and all claims, liabilities, damages, losses,
judgments, costs and expenses (including reasonable counsel fees
and other reasonable out-of-pocket expenses) arising out of or
resulting from any breach or default of any of its
representations, warranties and agreements in this Agreement.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date
first above written.
INTELLI-CHECK, INC.
By___________________________
Frank Mandelbaum, Chairman
___________________________
Edwin Winiarz
Page 6 of 9
<PAGE>
EXHIBIT A
STOCK OPTION AGREEMEMT
Intelli-Check, Inc., a New York corporation (the "Company"), as of
the______day of _____, 1998 hereby grants to______________________("Optionee"),
residing at__________________ in consideration of services and advice rendered
by Optionee to the Company, the irrevocable right and option ("Option") to
purchase all or part of an aggregate of_______________shares ("Shares") of the
Company's common stock, par value $.01 per share ("Common Stock"), on the terms
and conditions hereinafter set forth:
1. Purchase Price. The purchase price for the Shares shall be $ per share
subject to adjustment as provided in Paragraph 5 below.
2. Term of Option: Exercise.
(a) Subject to earlier termination pursuant hereto, the Option shall
terminate five (5) years from the date hereof. The Option shall be
exercisable in full on the date hereof.
(b) The Option shall be exercised by fifteen (15) days' written notice
to the Secretary or Treasurer of the Company at its then principal
office. The notice shall specify the number of Shares as to which
the Option is being exercised and shall be accompanied by payment
in full of the purchase price for such Shares. The option price
shall be payable in United States dollars, and may be paid in cash
or by certified check on a United States bank or by other means
acceptable to the Company. In no event shall the Company be
required to issue any Shares (i) until counsel for the Company
determines that the Company has complied with all applicable
securities exchange or the National Association of Security
Dealers Automated Quotation System on which the Common Stock may
then be listed, and (ii) unless Optionee reimburses the Company
for any tax withholding required and supplies the Company with
such information and data as the Company may deem necessary.
(c) Optionee shall not, by virtue of the granting of the Option, be
entitled to any rights of a shareholder in the Company and shall
not be considered a record holder of any Shares purchased by
Optionee until the date on which Optionee shall actually be
recorded as the holder of such Shares upon the stock records of
the Company. The Company shall not be required to issue any
fractional Share upon exercise of the Option and shall not be
required to pay to Optionee the cash equivalent of any fractional
Share interest.
3. Restrictions on Transfer and Termination.
(a) No option shall be transferred by Optionee otherwise than by will
or by the laws of descent and distribution. During the lifetime of
Optionee the Option shall be exercisable only by Optionee or by
Optionee's legal representative.
(b) In the event of the termination of Optionee's employment by the
Company at any time for any reason (excluding disability or
death), the Option and all rights thereunder shall be exercisable
by Optionee at any time within three (3) months thereafter, but
not later than the termination date of the Option. Notwithstanding
the foregoing, in the event Optionee is permanently and totally
disabled (within the meaning of Section 105(d) (4), or any
successor section, of the Internal Revenue Code), Optionee's
Option and all rights thereunder shall be exercisable by Optionee
(or Optionee's legal representative) at any time within six (6)
months of Optionee's termination of employment, but not later than
the termination date of the Option.
(c) If Optionee shall die while in the employ of the Company, the
Option may be exercised by Optionee's designated beneficiary or
beneficiaries (or if none have been effectively designated, by
Optionee's executor, administrator or the person to whom
Optionee's
Page 7 of 9
<PAGE>
rights under the Option shall pass by Optionee's will or by the
laws of descent and distribution) at any time within six (6)
months after the date of Optionee's death, but not later than the
termination date of the Option.
(d) This Option is granted pursuant to an Employment Agreement between
Company and Optionee dated which Employment Agreement governs
Optionee's rights and obligations as an employee including,
without limitation, Company's right to terminate Optionee's
employment under certain circumstances, and nothing in this
Agreement shall confer upon Optionee any additional rights with
respect to the terms and conditions of Optionee's employment.
4 Securities Act Matters.
(a) Optionee represents that Shares issued upon any exercise of the
Option will be acquired for Optionee's own account for investment
only and not with a view to the distribution thereof within the
meaning of the Federal Securities Act of 1933, as amended
(hereinafter, together with the rules and regulations thereunder,
collectively referred to as the "Act"), and that Optionee does not
intend to divide Optionee's participation with others or transfer
or otherwise dispose of all or any Shares except as below set
forth. As herein used the terms "transfer" and "dispose" mean and
include, without limitation, any sale, offer for sale, assignment,
gift, pledge or other disposition or attempted disposition.
(b) Optionee understands that in the opinion of the Securities and
Exchange Commission ("SEC") Shares must be held by Optionee for an
indefinite period unless subsequently registered under the Act or
unless an exemption from registration thereunder is available;
that, under Rule 144 of the Act, after one or more years from the
date of payment for and issuance of the shares, certain public
sales thereof (which may be limited as to the number of Shares)
may be made in accordance with the subject to the terms,
conditions and restrictions of Rule 144, but only if certain
reporting and other requirements thereunder have been complied
with; and that should Rule 144 be inapplicable, registration or
the availability of an exemption under the Act will be necessary
in order to permit public distribution of any Shares. Optionee
also understands that the Company is and will be under no
obligation to register the Shares or to comply with any exemption
under the Act.
(c) Optionee shall not at any time transfer or dispose of any Shares
except pursuant to either (i) a registration statement under the
Act which registration statement has become effective as to the
Shares being sold or (ii) a specific exemption from registration
under the Act, but only after Optionee has first obtained either a
"no-action" letter from the SEC, following full and adequate
disclosure of all facts relating to such proposed transfer, or a
favorable opinion from or acceptable to counsel to the Company
that the proposed transfer or other disposition complies with and
is not in violation of the Act or any applicable state "blue sky"
or securities laws.
5. Anti-Dilution Provisions.
(a) Subject to the provisions of Paragraph 5(b) below, if at any time
or from time to time prior to expiration of the Option there shall
occur any change in the outstanding Common Stock of the Company by
reason of any stock dividend, stock split, combination or exchange
of shares, merger, consolidation, recapitalization,
reorganization, liquidation or the like, then and as often as the
same shall occur, the kind and number of Shares subject to the
Option, or the purchase price per share, or both, shall be
adjusted by the Board of Directors of the Company ("Board") in
such manner as it may deem appropriate and equitable, the
determination of which Board shall be binding and conclusive.
Failure of the Board to provide for any such adjustment shall be
conclusive evidence that no adjustment is required.
(b) The Board shall have the right to engage a firm of independent
certified public accountants, which may be the Company's regular
auditors, to make any computation
Page 8 of 9
<PAGE>
provided for in this Section, and a certificate of that firm
showing the required adjustment shall be conclusive and binding.
6. Notices. All notices and other communications required or permitted under
this Agreement shall be in writing and shall be given either by (i)
personal delivery or regular mail, in each case against receipt, or (ii)
first class registered or certified mail, return receipt requested. Any
such communication shall be deemed to have been given (i) on the date of
receipt in the cases referred to in clause (i) of the preceding sentence
and (ii) on the second day after the date of mailing in the cases referred
to in clause (ii) of the preceding sentence. All such communications to the
Company shall be addressed to it, to the attention of its Secretary or
Treasurer, at its then principal office and to Optionee at the address set
forth above or such other address as may be designated by like notice
hereunder.
7. Miscellaneous. This Agreement cannot be changed except in writing signed by
the party to be charged. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York applicable to
agreements made and to be performed exclusively in New York. The Option has
been granted pursuant to the Company's 1998 Stock Option Plan. This
Agreement is in all respects subject to the terms and conditions of said
Plan. The Option granted hereunder is intended to be a Non-Qualified Stock
Option. Optionee acknowledges that Optionee is not holding any other stock
options granted by the Company. Optionee shall execute this Agreement and
return it to the Company within thirty (30) days after the mailing or
delivery by the Company of this Agreement. If Optionee shall fail to
execute and return this Agreement to the Company within said thirty (30)
day period, the Option shall automatically terminate. The section headings
in this Agreement are solely for convenience of reference and shall not
affect its meaning or interpretation.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.
INTELLI-CHECK, INC.
By:_________________
Optionee:
____________________
Name
Ex. 4.2
WARRANT AGREEMENT dated as of _____, 1999 between
Intelli-Check, Inc., a Delaware corporation (the "Company"), and GunnAllen
Financial, Inc. ("the Underwriter").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue to the Underwriter
warrants ("Warrants") to purchase up to an aggregate of 100,000 shares (the
"Shares") of common stock of the Company, par value $.001 per share (the "Common
Stock"); and
WHEREAS, the Underwriter has agreed pursuant to the
underwriting agreement (the "Underwriting Agreement") dated _____, 1999 between
the Underwriter and the Company, to act as the underwriter in connection with
the Company's proposed public offering (the "Public Offering") of 1,000,000
shares of Common Stock at an initial public offering price of $7.00 per share of
Common Stock, plus up to an additional 150,000 shares pursuant to the
Underwriter's over-allotment option; and
WHEREAS, the Warrants issued pursuant to this Agreement are
being issued by the Company to the Underwriter or officers or partners of the
Underwriter and members of the selling group (the "Selling Group") and/or their
officers or partners, in consideration for, and as part of the Underwriter's
compensation in connection with, the Underwriters acting as the underwriters
pursuant to the Underwriting Agreement;
NOW, THEREFORE, in consideration of the foregoing premises,
the payment by the Underwriter to the Company of an aggregate of One Hundred
Dollars ($100.00), 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 its designees who are
officers or partners of the Underwriter or members of the Selling Group in
connection with the Public Offering, are hereby granted the right to purchase,
at any time from _____, 2000 until 5:00 P.M., New York City time, on _____, 2004
(the "Warrant Exercise Term"), up to an aggregate of 100,000 Shares at an
initial exercise price (subject to adjustment as provided in Article 8 hereof)
of $ _____ per Share [ _____% of the public offering price of the Shares].
2. Warrant Certificates. The warrant certificates (the Warrant
Certificates") delivered and to be delivered pursuant to this Agreement shall be
in the form set forth as Exhibit A attached hereto and made a part hereof, with
such appropriate insertions, omissions, substitutions and other variations as
required or permitted by this Agreement.
<PAGE>
3. Exercise of Warrants.
3.1 Cash Exercise. The Warrants initially are exercisable at a
price of $ ______________ per Share, payable in cash or by check to the order of
the Company, or any combination of cash or check, subject to adjustment as
provided in Article 8 hereof. Upon surrender of the Warrant Certificate with the
annexed Form of Election to Purchase duly executed, together with payment of the
Exercise Price (as hereinafter defined) for the Shares purchased at the
Company's principal offices, currently located at 775 Park Avenue, Suite 340,
Huntington, New York 11743, the registered holder of a Warrant Certificate
("Holder" or "Holders") shall be entitled to receive a certificate or
certificates for the Shares so purchased. The purchase rights represented by
each Warrant Certificate are exercisable at the option of the Holder hereof, in
whole or in part (but not as to fractional shares of the Common Stock). In the
case of the purchase of less than all the Shares 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 purchasable thereunder.
3.2 Cashless Exercise. At any time during the Warrant Exercise
Term, the Holder may, at its option, exchange this Warrant, in whole or in part
(a "Warrant Exchange"), into the number of Shares determined in accordance with
this Section 3.2, by surrendering this Warrant at the principal office of the
Company or at the office of its transfer agent, accompanied by a notice stating
(i) such Holder's intent to effect such exchange, (ii) the number of Shares to
be exchanged and (iii) 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 of like tenor evidencing the balance of the Shares
remaining subject to this Warrant, shall be issued as of the Exchange Date and
delivered to the Holder within five (5) business days following the Exchange
Date. In connection with any Warrant Exchange, this Warrant shall represent the
right to subscribe for and acquire the number of Shares (rounded to the next
highest integer) equal to (i) the number of Shares specified by the Holder in
its Notice of Exchange (the "Total Number") less (ii) the number of Shares equal
to the quotient obtained by dividing (A) the product of the Total Number and the
existing Exercise Price (as hereinafter defined) by (B) the current market value
of a share of Common Stock. For purposes of this Section 3.2, the term "current
market value" shall mean the (i) last reported sale price on the last trading
day or, in case no such reported sale takes place on such day, the average last
reported sale price 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 by the Nasdaq National Market or
SmallCap Market (referred to hereinafter as "NASDAQ") if the Common Stock is not
listed or admitted to trading on any national securities exchange but is listed
or quoted upon NASDAQ, or (ii) if the Common Stock is not traded on a national
securities exchange or NASDAQ, the closing bid price on the last trading day,
or, in case no such reported bid takes place on such day, the average closing
bid price for the last three (3) trading days, as furnished by NASDAQ or similar
organization if NASDAQ is no longer reporting such information, or (iii) if the
Common Stock is not listed upon a principal exchange or quoted on NASDAQ, but
quotes for the Common Stock are
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<PAGE>
available in the OTC Bulletin Board or "pink sheets" the closing bid price on
the last trading day, or, in case no such bid takes place on such day, the
average closing bid price for the last three (3) trading days as furnished on
the OTC Bulletin Board or (iv) in the event the Common Stock is not traded upon
a principal exchange and not listed on NASDAQ and quotes are not available on
the OTC Bulletin Board, the price as determined in good faith by resolution of
the Board of Directors of the Company, based on the best information available
to it.
4. Issuance of Certificates.
4.1 Issuance. Upon the exercise of the Warrants, the issuance
of certificates for the Shares shall be made forthwith (and in any event within
five (5) 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.
4.2 Form of Certificates. The Warrant Certificates and
certificates representing the Shares 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 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 shall be dated the date of
execution by the Company upon initial issuance, division, exchange, substitution
or transfer. The Warrant Certificates and, upon exercise of the Warrants, in
part or in whole, certificates representing the Shares shall bear a legend
substantially similar to the following:
"The securities represented by this certificate 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 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 its 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 officers, directors or
partners of
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<PAGE>
the Underwriter or to any member of the Selling Group participating in the
distribution to the public of the Common Stock and/or their respective officers
or partners.
In connection with the transfer or exercise of Warrants, the
purchaser and Holder agree to execute any documents which may be reasonably
required by counsel to the Company to comply with the provisions of the Act and
applicable state securities laws.
6. Price.
6.1 Initial and Adjusted Exercise Price. The initial exercise
price of each Warrant shall be $11.55 per Share. The adjusted exercise price
shall be the price which shall result from time to time from any and all
adjustments of the initial exercise price 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. The
Warrants and the Shares have not 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 Shares and any shares of Common Stock
issued upon any stock split or stock dividend in respect of such 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 required for
the immediate public distribution of all or any portion 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 five
years following the date of this Agreement, 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 (other
than pursuant to a Form S-4 or pursuant to a Form S-8 or comparable forms) (for
purposes of this Article 7, collectively, a "Registration Statement") , it will
give written notice of its intention to do so by registered mail ("Notice"), at
least thirty (30) days prior to the filing of each such Registration Statement,
to all holders of the Registrable Securities. Upon the written request of
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<PAGE>
such a holder (a "Requesting Holder"), made within twenty (20) days after
receipt of the Notice, that the Company include any of the Requesting Holder's
Registrable Securities in the proposed Registration Statement, 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 (other than
underwriting discounts and commissions applicable to the sale of such
Registrable Securities and the fees and disbursements, if any, of counsel or any
advisor to the Requesting Holders), provided that, if such Registration
Statement relates to an underwritten public offering and the managing
underwriter advises the Company and the Requesting Holders that the number of
Registrable Securities which can be included in such offering must be limited,
the Requesting Holders will agree to reduce the number of Registrable Securities
included in such Registration Statement on a pro rata basis with any other
selling security holder on whose behalf other securities of the Company may be
included therein for registration.
7.4 Demand Registration
(a) At any time during the Warrant Exercise Term, any "Demand
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, 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 Demand Holder), in order to comply with the provisions of the Act, so as to
permit a public offering and sale of the Registrable Securities by the holders
thereof, provided, however, that the Company shall not be required to effect
such registration if, in the opinion of counsel for the Company, all of such
Registrable Securities can be sold publicly, pursuant to Rule 144 or otherwise,
without registration under the Act. Notwithstanding the provisions of this
Section 7.4, the Company shall have the right at any time after it shall have
given written notice pursuant to this Section 7.4 (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.
(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) 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.
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<PAGE>
[(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 Demand 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 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 for nine (9) consecutive months; provided, however, that
all costs incident thereto shall be at the expense of the holders of the
Registrable Securities included in such Registration Statement; and, provided
further, that the Company shall not be required to effect such registration if,
in the opinion of counsel for the Company, all of such Registrable Securities
can be sold publicly, pursuant to Rule 144 or otherwise, without registration
under the Act; and, provided, further, that GunnAllen (and/or any person who may
acquire Warrants and/or Registrable Securities from GunnAllen or transferees of
GunnAllen) shall not be entitled to exercise any registration right pursuant to
this Section 7.4(c) without the prior written consent of Starr. If a Demand
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. Notwithstanding contained herein shall
require the Company to undergo an audit of its financial statements other than
in the ordinary course of business.]
(d) The term "Demand Holder" as used in this Section 7.4 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 (including Shares already issued and Shares issuable pursuant to the
exercise of outstanding Warrants) as would constitute [50%] or more of the
aggregate number of Shares (including Shares already issued and Shares issuable
pursuant to the exercise of outstanding Warrants) included in all of the
Registrable Securities, but in any event not less than [10,000] Shares.
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 no event later than thirty (30) days following receipt of any
demand therefor (unless delayed by the failure of a holder of Registrable
Securities to promptly furnish such information necessary to complete such
registration statement), 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 in
connection with all Registration Statements filed pursuant to Sections 7.3 and
7.4(a) hereof (excluding any underwriting discounts and commissions which may be
incurred in connection
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<PAGE>
with the sale of any Registrable Securities and fees of counsel or any advisor
to the Holders of Registrable Securities) including, without limitation, the
Company's legal and accounting fees, printing expenses, and blue sky fees and
expenses. [The holders of Registrable Securities included in any Registration
Statement filed pursuant to Section 7.4(c) hereof will pay all costs, fees and
expenses in connection with such Registration Statement, including their own
legal fees and expenses, if any.]
(c) The Company will take all reasonably necessary action
which may be required in qualifying or registering the Registrable Securities
included in a 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, provided that the Company shall not be obligated to execute or
file any general consent to service of process or to qualify as a foreign
corporation to do business under the laws of any such jurisdiction.
(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
Underwriters contained in Section 5 of the Underwriting Agreement and to provide
for just and equitable contribution as set forth in Section 6 of the
Underwriting Agreement.
(e) Any holder of Registrable Securities to be sold pursuant
to a Registration Statement, and its 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, 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 in writing by or on behalf of such holder, or its
successors or assigns, for specific inclusion in such Registration Statement to
the same extent and with the same effect as the provisions contained in Section
5 of the Underwriting Agreement pursuant to which the Underwriters have agreed
to indemnify the Company and to provide for just and equitable contribution as
set forth in Section 6 of the Underwriting Agreement.
(f) Nothing contained in this Agreement shall be construed as
requiring any Holder to exercise his Warrants prior to the initial filing of any
Registration Statement or the effectiveness thereof.
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<PAGE>
(g) The Company shall deliver promptly to each holder of
Registrable Securities participating in the offering 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 and permit each holder of Registrable
Securities and underwriters to do such 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 National Association of Securities
Dealers, Inc. ("NASD"); provided that each such holder of Registrable Securities
agrees not to disclose such information without the prior consent of the
Company. 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.
(h) If required by the underwriter in connection with an
underwritten offering which includes Registrable Securities pursuant to Article
7, the Company shall enter into an underwriting agreement with one or more
underwriters selected for such underwriting, such agreement shall contain such
representations, warranties and covenants by the Company and such other terms as
are customarily contained in agreements of that type used by the underwriters.
If required by the underwriter, the holders of Registrable Securities shall be
parties to any underwriting agreement relating to an underwritten sale of their
Registrable Securities and may, at their option, require that any or all the
representations and warranties of the Company to or for the benefit of such
underwriters shall, to the extent that they may be applicable, also be made to
and for the benefit of such holders of Registrable Securities. Such holders of
Registrable Securities shall not be required to make any representations or
warranties to or agreements with the Company or the underwriters except as they
may relate to such holders of Registrable Securities and their intended methods
of distribution.
8. Adjustments of Exercise Price and Number of Shares.
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 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
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<PAGE>
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.
8.3 Adjustment in Number of Shares. 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 Share, 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.
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 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 the shares of Common Stock
underlying the Warrants immediately prior to any such events at a price equal to
the product of (x) the number of shares issuable upon exercise of the Warrants
and (y) the Exercise Price 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.
8.5 Determination of Outstanding Shares of Common Stock. The
number of shares of Common Stock at any one time outstanding shall include the
aggregate number of shares issued or issuable upon the exercise of options,
rights, warrants and upon the conversion or exchange of convertible or
exchangeable securities (excluding shares issuable upon the exercise of options
and warrants outstanding on the date hereof).
8.6 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 declare a dividend (other than a dividend
consisting solely of shares of Common Stock or a cash dividend or distribution
payable out of current or retained earnings) or otherwise distribute to its
shareholders any monies, assets, property, rights, evidences of indebtedness,
securities (other than shares of Common Stock), whether issued by the Company or
by another person or entity, or any other thing of value, the Holder or Holders
of the unexercised Warrants shall thereafter
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<PAGE>
be entitled, in addition to the shares of Common Stock or other securities
receivable upon the exercise thereof, to receive, upon the exercise of such
Warrants, the same monies, property, assets, rights, evidences of indebtedness,
securities or any other thing of value that they would have been entitled to
receive at the time of such dividend or 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 Section 8.6.
8.7 Subscription Rights for Shares of Common Stock or Other
Securities. In the case 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 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 the unexercised Warrants 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 are distributed to the
other shareholders of the Company.
9. Exchange and Replacement of Warrant Certificates.
9.1 Exchange. Each Warrant Certificate is exchangeable without
expense, upon the surrender hereof 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
Shares in such denominations as shall be designated by the Holder thereof at the
time of such surrender.
9.2 Replacement. 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 Warrants, 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 of Common Stock
and shall not 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 of Common Stock.
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, 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 thereof, all shares of Common Stock 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
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<PAGE>
exercise of the Warrants to be listed on or quoted by the exchange upon which
the Company's Common Stock is then listed or quoted.
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:
(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;
then, in any one or more of said events, the Company shall give written notice
of such event at least twenty (20) 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 of 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. Notices. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made when
delivered, telecopied or mailed by registered or certified mail, return receipt
requested:
(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.
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<PAGE>
14. 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 Warrant Certificates 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.
15. 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.
16. Termination. This Agreement shall terminate at the close of
business on _____, 2006. Notwithstanding the foregoing, this Agreement will
terminate on any earlier date when all Warrants have been exercised and all the
Shares issuable upon exercise of the Warrants have been resold to the public;
provided, however, that the provisions of Section [7.5] shall survive such
termination until the close of business on _____, 2009.
17. 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 with respect to contracts made and to be wholly performed in said State
and for all purposes shall be construed in accordance with the laws of said
State. The Company, the Underwriter and any other registered holder or holders
agree of the Warrant Certificates (1) agree 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) waive
any objection which the they may have now or hereafter to the venue of any such
suit, action or proceeding, and (3) irrevocably consent 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
procedure. The Company, the Underwriters and any other registered holder or
holders of the Warrant Certificates, Warrants or the Shares further agree to
accept and acknowledge service of any and all process which may be served in any
suit, action or proceeding in the New York State Supreme Court, County of New
York and the United States District Court for the Southern District of New York,
and agree that service of process upon them mailed by certified mail to their
respective addresses shall be deemed in every respect effective service of
process upon them in any such suit, action or proceeding. In the event of
litigation between the parties arising hereunder, the prevailing party shall be
entitled to costs and reasonable attorney's fees.
18. 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, Warrants or the Shares, 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 Underwriters and any other holder or
holders of the Warrant Certificates, Warrants or the Shares.
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<PAGE>
19. 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.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, as of the day and year first above written.
[SEAL] INTELLI-CHEK, INC.
By:_________________________________
Name: Frank Mandelbaum
Title: Chairman
Attest:
__________________________________
Name:
Title:
GUNNALLEN FINANCIAL, INC.
By:__________________________________
Name:
Title:
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<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, ____________, 2004
No. W- ________ Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that ________________ or
registered assigns is the registered holder of _______ Warrants to purchase, at
any time from ______________, 2000 until 5:00 P.M. New York City time on
_________________, 2004 ("Expiration Date") up to _______ shares ("Shares") of
fully-paid and nonassessable common stock, par value $.01 per share ("Common
Stock"), of Intelli-Check, Inc., a Delaware corporation (the "Company"), at the
initial exercise price, subject to adjustment in certain events (the "Exercise
Price"), of $ __ 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 ,
1999 ("Warrant Agreement") between the Company and GunnAllen Financial, Inc.
_____ 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 of cash or check, or in accordance with Section 3.2
of the Warrant Agreement.
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
<PAGE>
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/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.
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.
Dated: __________________, 1999 INTELLI-CHECK, INC.
By:_________________________________
Name:
Title:
Attest:
____________________________________
Name:
Title:
[SEAL]
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<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the
right, represented by this Warrant Certificate, to purchase Shares and herewith
tenders in payment for such Shares cash or a certified or official bank check
payable in New York Clearing House Funds to the order of _____________________
in the amount of $_______ all in accordance with the terms hereof. The
undersigned requests that a certificate for such Shares be registered in the
name of ____________________, whose address is _____________________ and that
such Certificate be delivered to whose address is ___________________________.
[ ] The Undersigned hereby elects to exercise of the Warrants
held by it in accordance with Section 3.2 of the Warrant Agreement dated _____,
1999.
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 Holder)
EX-10.1
Intelli-Check, Inc.
1998 Stock Option Plan
1. Purposes of the Plan. The purposes of this 1998 Stock Option Plan are
to attract and retain the best available personnel for positions of
responsibility within the Company, to provide additional incentive to
Employees, Directors, Consultants and other Independent Contractors of
the Company, and to promote the success of the Company's business
through the grant of options to purchase shares of the Company's Common
Stock. Options granted hereunder may be either Incentive Stock or
Non-Statutory Stock Options, at the discretion of the Board. The type
of options granted shall be reflected in the terms of written Stock
Option agreements. The Company intends that the Plan meet the
requirements of Rule 16b-3 under the Exchange Act and that the
transactions of the type specified in subparagraphs (c) to (f)
inclusive of Rule 16b-3 by officers and directors of the Company
pursuant to the Plan will be exempt from the operation of Section 16(b)
of the Exchange Act. Further, the Plan is intended to satisfy the
performance-based exception to the limitation on the Company's tax
deductions imposed by Section 162(m) of the Code. In all cases, the
terms, provisions, conditions and limitations of the Plan shall be
construed and interpreted consistent with the Company's intent as
stated in this Section 1.
2. Definitions. As used herein, the following definitions shall apply:
a. "Board" shall mean the Board of Directors of the Company or, when
appropriate, the Committee administering the Plan, if one has been
appointed.
b. "Code" shall mean the Internal Revenue Code of 1986, as amended, and the
rules and regulations promulgated thereunder.
c. "Common Stock" shall mean the common stock of the Company described in the
Company's Certificate of Incorporation, as amended.
d. "Company" shall mean Intelli-Check, Inc., a New York corporation, and shall
include any parent or subsidiary corporation of the Company as defined in
Sections 425 (e) and (f), respectively, of the Code.
e. "Committee" shall mean the Compensation Committee composed of two or more
directors who are Non-Employee Directors and Outside Directors and who
shall be elected by and shall serve at the pleasure of the Board and shall
be responsible for administering the Plan in accordance with paragraph (a)
of Section 4 of the Plan.
f. "Employee" shall mean key employees, including salaried officers and
directors and other key individuals employed by the Company. The payment of
a director's fee by the Company shall not be sufficient to constitute
"employment" by the Company.
g. "Exchange Act" shall mean the Securities and Exchange Act of 1934, as
amended.
h. "Fair Market Value" shall mean, with respect to the date a given Option is
granted or exercised, the value of the Common Stock determined by the Board
in such manner as it may deem equitable for Plan purposes but, in the case
of an Incentive Stock Option, no less than is required by applicable laws
or regulations; provided, however, that where there is a public market for
the Common Stock, the Fair Market Value per Share shall be the mean of the
bid and asked prices of the Common
<PAGE>
Stock on the date of grant, as reported in the Wall Street Journal (or, if
not so reported, as otherwise reported in the National Association of
Securities Dealers Automated Quotation System) or, in the event the Common
Stock is listed on the New York Stock Exchange or the NASDAQ Stock Market,
the American Stock Exchange, the NASDAQ/National Market System the Fair
Market Value per Share shall be the closing price on such exchange on the
date of grant of the Option, as reported in the Wall Street Journal.
This Section will apply after the Company has successfully completed an
initial public offering.
i. "Incentive Stock Option" shall mean an Option which is intended to qualify
as an incentive stock option within the meaning of Section 422 of the Code.
j. "Non-Employee Director" shall mean a non-employee director as defined in
Rule 16b-3.
k. "Non-statutory Stock Option" shall mean an Option, which is not an
Incentive Stock Option.
l. "Option" shall mean a stock option granted under the Plan.
m. "Optioned Stock" shall mean the Common Stock subject to an Option.
n. "Optionee" shall mean an Employee of the Company who has been granted one
or more Options.
o. "Outside Director" shall mean an outside director as defined in Section
162(m) of the Code or rules and regulations promulgated thereunder.
p. "Parent" shall mean a "parent corporation," whether now or hereafter
existing, as defined in Section 425(e) of the Code.
q. "Plan" shall mean this 1998 Stock Option Plan.
r. "Share" shall mean a share of the Common Stock, as adjusted in accordance
with Section 11 of the Plan.
s. "Stock Option Agreement" shall mean the written agreement between the
company and the Optionee relating to the grant of an Option.
t. "Subsidiary" shall mean a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 425(f) of the Code.
u. "Tax Date" shall mean the date an Optionee is required to pay the Company
an amount with respect to tax withholding obligations in connection with
the exercise of an option.
3. Common Stock Subject to the Plan. Subject to the provisions of Section 11 of
the Plan, the maximum aggregate number of the shares which may be optioned and
sold under the Plan is Four Hundred Thousand (400,000) Shares of Common Stock.
The Shares may be authorized, but unissued, or previously issued Shares acquired
by the Company and held in treasury.
If an Option should expire or become unexercisable for any reason without having
been exercised in full, the unpurchased Shares covered by such Option shall,
unless the Plan shall have been terminated, be available for future grants of
Options. The maximum number of Shares that may be subject to options granted
under the Plan to any
<PAGE>
individual in any calendar year shall not exceed 50,000 Shares and the method of
counting such Shares shall conform to any requirements applicable to
performance-based compensation under Section 162(m) of the Code or the rules and
regulations promulgated thereunder.
4. Administration of the Plan
(a) Procedure.
(i) The Plan shall be administered by the Board in accordance with
Rule 16b-3 under the Exchange Act ("Rule 16b-3"); provided,
however, that the Board may appoint a Committee to administer the
Plan at any time or from time to time, and provide further, that
if the Board is not "disinterested" within the meaning of Rule
16b-3, the Plan shall be administered by a Committee in
accordance with Rule 16b-3.
(ii) Once appointed, the Committee shall continue to serve until
otherwise directed by the Board. From time to time the Board may
increase the size of the Committee and appoint additional members
thereof, remove members (with or without cause), appoint new
members in substitution therefor, and fill vacancies however
caused; provided, however, that at no time may any person serve
on the Committee if that person's membership would cause the
Committee not to satisfy the "disinterested administration"
requirements of Rule 16b-3.
(b) Powers of the Board. Subject to the provisions of the Plan, the
Board shall have the authority, in its discretion: (i) to grant
Incentive Stock Options and Nonstatutory Stock Options; (ii) to
determine, upon review of relevant information and in accordance with
Section 2 of the Plan, the Fair Market Value of the Common Stock;
(iii) to determine the exercise price per Share of Options to be
granted, which exercise price shall be determined in accordance with
Section 8(a) of the Plan; (iv) to determine the Employees to whom,
and the time or times at which, Options shall be granted and the
number of Shares to be represented by each Option; (v) to interpret
the Plan; (vi) to prescribe, amend and rescind rules and regulations
relating to the Plan; (vii) to determine the terms and provisions of
each Option granted including, without limitation, the terms of
exercise (including the period of exercisability) or forfeiture of
Options granted hereunder upon termination of the employment of an
Employee; (viii) to accelerate or defer (with the consent of the
Optionee) the exercise date of any Option; (ix) to authorize any
person to execute on behalf of the Company any instrument required to
effectuate the grant of an Option previously granted by the Board;
(x) to accept or reject the election made by an Optionee pursuant to
Section 17 of the Plan; and (xi) to make all other determinations
deemed necessary or advisable for the administration of the Plan.
(c) Effects of Board's Decision. All decisions, determinations and
interpretations of the Board shall be final and binding on all
Optionees and any other holders of any Options granted under the
Plan.
(d) Inability of Committee to Act. In the event that for any reason
the Committee is unable to act or if the Committee at the time of any
grant, award or
<PAGE>
other acquisition under the Plan of options or Shares does not consist of
two or more Non-Employee Directors, than any such grant, award or other
acquisition may be approved or ratified in any other manner contemplated by
subparagraph (d) of Rule 16b-3.
5. Eligibility.
(a) Consistent with the Plan's purposes, Options may be granted only
to Employees, Directors, Consultants and other Independent Contractors
of the Company as determined by the Board. An Employee who has been
granted an Option may, if he is otherwise eligible, be granted an
additional Option or Options. Incentive Stock Options may be granted
only to those Employees who meet the requirements applicable under
Section 422 of the Code.
(b) Unless otherwise provided in the applicable Stock Option
Agreement, all Options granted to the Employees of the Company under
the Plan will be subject to forfeiture until such time as the Optionee
has been continuously employed by the Company for one year after the
date of the grant of the Options, and may not be exercised prior to
such time. At such time as the Optionee has been continuously employed
by the Company for one year, the foregoing restriction shall lapse and
the Optionee may exercise the Options at any time otherwise consistent
with the Plan.
(c) With respect to Incentive Stock Options, the aggregate Fair
Market Value (determined at the time the Incentive Stock Option is
granted) of the Common Stock with respect to which Incentive Stock
Options are exercisable for the first time by the employee during any
calendar year (under all employee benefit plans of the Company) shall
not exceed One Hundred Thousand Dollars ($100,000).
6. Stockholder Approval and Effective Dates. The Plan became effective upon
approval of the Board. No Option may be granted under the Plan after June 25,
2008 (ten years from the effective date of the Plan); provided, however that the
Plan and all outstanding Options shall remain in effect until such Options have
expired or until such Options are canceled.
7. Term of Option. Unless otherwise provided in the Stock Option Agreement, the
term of each Option shall be five (5) years from the date of grant thereof. In
no case shall the term of any Option exceed ten (10) years from the date of
grant thereof. Notwithstanding the above, in the case of an Incentive Stock
Option granted to an Employee who, at the time the Incentive Stock Option is
granted, owns ten percent (10%) or more of the Common Stock as such amount is
calculated under Section 422(b)(6) of the Code ("Ten Percent Stockholder"), the
term of the Incentive Stock Option shall be five (5) years from the date of
grant thereof or such shorter time as may be provided in the Stock Option
Agreement. If an option granted to the Company's chief executive officer or to
any of the Company's other four most highly compensated officers is intended to
qualify as "performance-based" compensation under Section 162(m) of the Code,
the exercise price of such option shall not be less than 100% of the Fair Market
Value of a Share on the date such option is granted.
<PAGE>
8. Exercise Price and Payment.
(a) Exercise Price. The per Share exercise price for Shares to be issued
pursuant to exercise of an Option shall be determined by the Board,
but in the case of an Incentive Stock Option shall be no less than
one hundred percent (100%) of the Fair Market Value per Share on the
date of grant, and in the case of Nonstatutory Stock Option shall be
no less than eighty-five percent (85%) of the Fair Market Value per
Share on the date of the grant. Notwithstanding the foregoing, in
the case of an Incentive Stock Option granted to an Employee who, at
the time of the grant of such Incentive Stock Option, is a Ten
Percent Stockholder, the per Share exercise price shall be no less
than one hundred ten percent (110%) of the Fair Market Value per
Share on the date of grant.
(b) Payment. The price of an exercised Option and the Employee's portion
of any taxes attributable to the delivery of Common Stock under the
Plan, or portion thereof, shall be paid:
(i) In United States dollars in cash or by check, bank draft or
money order payable to the order of the Company; or
(ii) At the discretion of the Board, through the delivery of shares
of Common Stock with an aggregate Fair Market Value equal to
the option price and without holding taxes, if any; or
(iii) At the election of the Optionee pursuant to Section 17 and
with consent of the Board pursuant to Section 4(b)(x), by the
Company's retention of such number of shares of Common Stock
subject to the exercised Option which have an aggregate Fair
Market Value on the exercise date equal to the Employee's
portion of the Company's aggregate federal, state, local, and
foreign tax withholding and FICA and FUTA obligations with
respect to income generated by the exercise of the Option by
Optionee; or
(iv) By a combination of (i), (ii) and (iii) above.
The Board shall determine acceptable methods for tendering Common Stock as
payment upon exercise of an Option and may impose such limitations and
prohibitions on the use of Common Stock to Exercise an Option as it deems
appropriate.
9. Exercise of an Option.
(a) Procedure for Exercise; Rights as a Stockholder. Any Option granted
hereunder shall be exercisable at such times and under such
conditions as determined by the Board, including performance
criteria with respect to the Company and/or the Optionee, and as
shall be permissible under the terms of the Plan. Unless otherwise
determined by the Board at the time of grant, an Option may be
exercised in whole or in part. An Option may not be exercised for a
fraction of a Share.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the
terms of the Option by the person entitled to exercise the Option
and full payment for the
<PAGE>
Shares with respect to which the Option is exercised has been
received by the Company. Full payment may, as authorized by the
Board, consist of any consideration and method of payment allowable
under Section 8(b) of the Plan. Until the issuance (as evidenced by
the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company) of the stock certificate
evidencing such Shares, no right to vote or receive dividends or any
other rights as a stockholder shall exist with respect to the
Optioned Stock, notwithstanding the exercise of the Option. No
adjustment will be made for a dividend or other right for which the
record date is prior to the date the stock certificate is issued,
except as provided in Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares which thereafter may be available, both for
purposes of the Plan and for sale under the Option, by the number of
Shares to which the Option is exercised.
(b) Termination of Status as an Employee. Unless otherwise provided in
the applicable Stock Option Agreement, if an Employee's employment
by the Company is terminated for cause, then any Option held by the
Employee shall be immediately canceled upon termination of
employment and the Employee shall have no further rights with
respect to such Option. Unless otherwise provided in the Stock
Option Agreement, if an Employee's employment by the Company is
terminated for reasons other than cause, and does not occur due to
death or disability, then the Employee may, with the consent of the
Board, for ninety (90) days after he ceases to be an Employee of the
Company, exercise his Option to the extent that he was entitled to
exercise it at the date of such termination. For the purposes of
this plan only, a non-Employee Director is deemed to be an Employee.
To the extent that he was not entitled to exercise the Option at the
date of such termination, or if he does not exercise such Option
(which he was entitled to exercise) within the time specified herein
or in the applicable Stock Option Agreement, the Option shall
terminate.
(c) Disability. Unless otherwise provided in the applicable Stock Option
Agreement, notwithstanding the provisions of Section 9(b) above, in
the event an Employee is unable to continue his employment with the
Company as a result of his permanent and total disability (as
defined in Section 22(e)(3) of the Code), he may, but only within
twelve (12) months from the date of termination, exercise his Option
to the extent he was entitled to exercise at the date of such
termination. To the extent that he was not entitled to exercise the
Option at the date of such termination, or if he does not exercise
such Option (which he was entitled to exercise) within the time
specified herein or in the applicable Stock Option Agreement, the
Option shall terminate.
(d) Death. Unless otherwise provided in the Stock Option Agreement, if
an Employee dies during the term of the Option and is at the time of
his death
<PAGE>
an Employee of the Company who shall have been in continuous status
as an Employee since the date of grant of the Option, the Option may
be exercised at any time within twelve (12) months following the
date of death (or such other period of time as is determined by the
Board) by the Employee's estate or by a person who acquired the
right to exercise the Option by bequest or inheritance, but only to
the extent that an Employee was entitled to exercise the Option on
the date of death. To the extent the Employee was not entitled to
exercise the Option on the date of death, or if the Employee's
estate, or person who acquired the right to exercise the Option by
bequest or inheritance, does not exercise such Option (which he was
entitled to exercise) within the time specified herein or in the
applicable Stock Option Agreement, the Option shall terminate.
10. Non-Transferability of Options. An Option may not be sold, pledged,
assigned, hypothecated, transferred or disposed of in any manner other than by
will or by the laws of descent or distribution, or pursuant to a "qualified
domestic relations order" under the Code and ERISA, and may be exercised, during
the lifetime of the Optionee, only by the Optionee.
11. Adjustments Upon Changes in Capitalization of Merger. Subject to any
required action by the stockholders of the Company, the number of shares of
Common Stock covered by each outstanding Option, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options have yet been granted or which have been returned to the Plan
upon cancellation or expiration of an Option, as well as the price per share of
Common Stock covered by each such outstanding Option, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration". Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding, and conclusive.
Except as expressly provided herein, no issuance by the company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect and no adjustment by reason thereof, shall be made with respect to
the number or price of shares of Common Stock subject to an Option.
In the event of the proposed dissolution or liquidation of the Company, the
Option will terminate immediately prior to the consummation of such proposed
action, unless otherwise provided by the Board. The Board may, in the exercise
of its sole discretion in such instances, declare that any Option shall
terminate as of a date fixed by the Board and give each Optionee the right to
exercise his Option as to all or any part of the Optioned Stock, including
Shares as to which the Option would not otherwise be exercisable. In the event
of a proposed sale of all or substantially all of the assets of the Company, or
the merger of the Company with or into another corporation, the Option
<PAGE>
shall be assumed or an equivalent Option shall be substituted by such successor
corporation or a parent or subsidiary of such successor corporation, unless the
Board determines, in the exercise of its sole discretion and in lieu of such
assumption or substitution, that an Optionee shall have the right to exercise
the Option as to all of the Optioned Stock, including Shares as to which the
Option would not otherwise be exercisable. If the Board makes an Option fully
exercisable in lieu of assumption or substitution in the event of a merger of
sale of assets, the Board shall notify the Optionee that the Option shall be
fully exercisable for a period of sixty (60) days from the date of such notice
(but not later than the expiration of the term of the Option under the Option
Agreement), and the Option will terminate upon the expiration of such period.
12. Time of Granting Options. The date of grant of an Option shall, for all
purposes, be the date on which the Board makes the determination granting such
Option. Notice of the determination shall be given to each Employee to whom an
Option is so granted within a reasonable time after the date of such grant.
13. Amendment and Termination of the Plan.
(a) Amendment and Termination. The board may amend from time to time or
terminate the Plan in such respects as the Board may deem advisable;
provided, however, that the following revisions or amendments shall
require approval of the Stockholders of the Company, to the extent
required by law, rule, or regulation:
(i) Any material increase in the number of Shares subject to the
Plan, other than in connection with an adjustment under
Section 11 of the Plan;
(ii) Any material change in the designation of the Employees
eligible to be granted Options; or
(iii) Any material increase in the benefits accruing to participants
under the Plan.
(b) Effect of Amendment or Termination. Any such amendment or
termination of the Plan shall not affect Options already granted and
such Options shall remain in full force and effect as if this Plan
had not been amended or terminated, unless mutually agreed otherwise
between the Optionee and the Board, which agreement must be in
writing and signed by the Optionee and the Company.
14. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant to
the exercise of an Option unless the exercise of such Option and the issuance
and delivery of such Shares pursuant thereto shall comply with all relevant
provisions of law, including, without limitation, the Securities Act of 1933, as
amended, the Exchange Act, the rules and regulations promulgated thereunder, and
the requirements of any stock exchange upon which the Shares may then be listed,
and shall be further subject to the approval of counsel for the Company with
respect to such compliance.
As a condition to the exercise of an Option, the Company may require the person
exercising such Option to represent and warrant at the time of any such exercise
that
<PAGE>
the Shares are being purchased only for investment and without any present
intention to sell or distribute such Shares if, in the option of counsel for the
company, such a representation is required by any aforementioned relevant
provisions of law.
Inability of the Company to obtain authority from any regulatory body having
jurisdiction, which authority is deemed by the Company's counsel to be necessary
to the lawful issuance and sale of any Shares hereunder, shall relieve the
Company of any liability in respect of the failure to issue or sell such Shares
as to which such requisite authority shall not have been obtained.
In the case of an Incentive Stock Option, any Optionee who disposes of Shares of
Common Stock acquired upon the exercise of an Option by sale or exchange (a)
either within two (2) years after the date of the grant of the Option under
which the Common Stock was acquired or (b) within one (1) year after the
acquisition of such Shares of Common Stock shall notify the Company of such
disposition and of the amount realized upon such disposition.
15. Reservation of Shares. The Company will at times reserve and keep available
such number of Shares as shall be sufficient to satisfy the requirements of the
Plan.
16. Option Agreement. Options shall be evidenced by Stock Option Agreements in
such form as the Board shall approve.
17. Withholding Taxes. Subject to Section 4(b)(x) of the Plan and prior to the
Tax Date, the Optionee may make an irrevocable election to have the Company
withhold from those Shares that would otherwise be received upon the exercise of
any Option, a number of Shares having Fair Market Value equal to the minimum
amount necessary to satisfy the Company's federal, state, local and foreign tax
withholding obligations and FICA and FUTA obligations with respect to the
exercise of such Option by the Optionee.
An Optionee who is also an officer of the Company must take the above described
election:
(a) at least six months after the date of grant of the Option (except in
the event of death or disability); and
(b) either:
(i) six months prior to the Tax Date, or
(ii) prior to the Tax Date and during the period beginning on the
third business day following the date the Company releases its
quarterly or annual statement of sales and earnings and ending
on the twelfth business day following such date.
18. Miscellaneous Provisions.
(a) Plan Expense. Any expense of administering this Plan shall be borne
by the Company.
(b) Use of Exercise Proceeds. The payment received from the Optionees
from the exercise of Options shall be used for the general corporate
purposes of the Company.
<PAGE>
(c) Construction of Plan. The place of administration of the Plan shall
be in the State of New York, and the validity, construction,
interpretation, administration and effect of the Plan and of its
rules and regulations, and rights relating to the Plan, shall be
determined in accordance with the laws of the State of New York
without regard to conflict of law principles and, where applicable,
in accordance with the Code.
(d) Taxes. The Company shall be entitled if necessary or desirable to
pay or withhold the amount of any tax attributed to the delivery of
Common Stock under the Plan from other amounts payable to the
Employee after giving the person entitled to receive such Common
Stock notice as far in advance as practical, and the Company may
defer making delivery of such Common Stock if any such tax may be
pending unless and until indemnified to its satisfaction.
(e) Indemnification. In addition to such other rights of indemnification
as they may have as members of the Board, the members of the Board
shall be indemnified by the Company against all costs and expenses
reasonably incurred by them in connection with any action, suit or
proceeding to which they or any of them may be party by reason of
any action taken or failure to act under or in connection with the
Plan or any Option, and against all amounts paid by them in
settlement thereof (provided such settlement is approved by
independent legal counsel selected by the Company) or paid by them
in satisfaction of a judgement in any such action, suite or
proceeding, except a judgement based upon a finding of bad faith;
provided that upon the institution of any such action, suite or
proceeding a Board member shall, in writing, give the Company notice
thereof and an opportunity, at its own expense, to handle and defend
the same before such Board member undertakes to handle and defend it
on her or his own behalf.
(f) Gender. For purposes of this Plan, words used in the masculine
gender shall include the female and neuter, and the singular shall
include the plural and vice versa, as appropriate.
(g) No Employment Agreement. The Plan shall not confer upon any Optionee
any right with respect to continuation of employment with the
Company, nor shall it interfere in any way with his right or the
Company's right to terminate his employment at any time.
EX-10.2
EMPLOYMENT
AGREEMENT
AGREEMENT made as of the 1st day of January, 1999 between
INTELLI-CHECK, INC. ("Company"), a New York Corporation having an office at 775
Park Avenue, Suite 340, Huntington, NY 11743 and FRANK MANDELBAUM ("Employee"),
residing at 400 East 84th Street, New York, NY 10028.
WHEREAS, Employee is currently employed as Chairman-CEO pursuant to an
Employment Agreement dated June 24, 1996 and which currently expires on October
31, 1999.
WHEREAS, Company and Employee wish to enter into a new Employment
Agreement pursuant to which Employee will continue as Chairman-CEO of the
Company.
NOW, THEREFORE, in consideration of the respective agreements
hereinafter set forth, the parties agree as follows:
Article I
Employment
1.01 Term. Company hereby employs Employee, and Employee hereby accepts
employment with Company (including also employment by, and in
connection with the business activities of any of Company's
affiliates, subsidiaries and related corporations), in the
position and with the duties hereinafter set forth, for a period
(the "term") commencing on January 1, 1999 and ending December 31,
2001 subject, however, to earlier termination in accordance with
the provisions of this Agreement.
Article II
Duties
2.01 General. Employee shall be the Chief Executive Officer of the
Company and shall perform such executive duties as may from time
to time be assigned to him by Company's Board of Directors. If so
elected or appointed, Employee shall also serve without additional
compensation as a director and/or officer of the Company or any of
its subsidiaries. However, the Employee recognizes and agrees that
the Board may elect to amend the position and/or duties assigned
to Employee. Such amendment of position and/or duties shall be
commensurate with that of a Senior Executive Vice President with
no reduction in Fixed Salary, benefits or incentives.
2.02 Performance. During the term of his employment, Employee shall
devote substantially all his business time, best efforts and
attention to the business, operations and affairs of Company and
the performance of his duties hereunder provided, however, that
during the term of his employment, Employee may work for a
non-competitive Company so long as he devotes substantially all of
his business
Page 1 of 12
<PAGE>
time, best efforts and attention to the business operations and
affairs of the Company and the performance of his duties
hereunder.
2.03 Employee's Representations. Employee represents and warrants to
and agrees with Company that:
(a) Neither the execution nor performance by Employee of this
Agreement is prohibited by or constitutes or will constitute,
directly or indirectly, a breach or violation of, or will be
adversely affected by, any written or other agreement to which
Employee is or has been a party or by which he is bound.
(b) Neither Employee nor any business or entity in which he has any
interest or from which he receives any payments has, directly or
indirectly, any interest of any kind in or is entitled to receive,
and neither Employee nor any such business or entity shall accept,
from any person, firm, corporation or other entity doing business
with Company any payments of any kind on account of any services
performed by Employee during the term of his employment.
Article III
Compensation and Related Matters
3.01(a) Fixed Salary. As compensation for Employee's services Company
shall pay Employee a salary of $225,000 per annum (the "Fixed
Salary"). At each anniversary of this contract, the Fixed Salary
shall be augmented by a bonus of $50,000 if gross sales of Company
products have reached $2,000,000 for the previous year, plus 1% of
the amount of gross sales in excess of $2,000,000 for that year.
It is further agreed that no salary increase above $150,000 shall
occur until such time as the Company receives payment for gross
sales of at least $1,000,000.
3.01(b) The Employee shall have the right at his election, to receive
compensation in the form of the Company's restricted Common Stock.
Such Stock shall be valued at fifty percent (50%) of the closing
bid price of the Company's Common Stock as quoted on NASDAQ/NMS
(or other established exchange) as of the date of the Employee's
election. Such election may be for all or part of the Employee's
Compensation. At the beginning of each quarter, Employee shall
give the Company notice of his election to exercise his option to
receive restricted Common Stock in lieu of cash compensation.
3.01(c) Fixed Salary Adjustment. The fixed salary may not be decreased
hereunder during the term of this agreement, but may be increased
upon review by and within the sole discretion of the Company's
Board of Directors.
3.01(d) Bonus. Employee shall be entitled to receive bonus compensation in
an amount as approved by the Company's Board of Directors based
upon performance criteria as may be established by the
Compensation Committee from time to time. Such bonuses may be in
the form of cash or the Company's restricted stock.
3.02 Expenses. Company shall pay or reimburse Employee for all
reasonable travel, hotel, entertainment and other business
expenses incurred in the performance of
Page 2 of 12
<PAGE>
Employee's duties upon submission of appropriate vouchers and
other supporting data therefore.
3.03 Stock Options. For each fiscal year ending during the term of this
Agreement, Company will grant Employee an option to purchase the
greater of (i) 25,000 of Company's common shares at Fair Market
Value (as hereinafter defined) on the date of grant or (ii) 10,000
of Company's common shares at Fair Market Value on the date of
grant for each full $250,000 by which Pre-Tax Profits for each
fiscal year (commencing with the fiscal year ending December 31,
1999) exceeds Pre-Tax Profits for the prior fiscal year, provided,
however, that in no event shall Employee be granted options
hereunder to purchase more than 150,000 of Company's common shares
with respect to any one fiscal year. The stock options
contemplated hereby shall be granted at or concurrently with a
meeting of the Board of Directors first following the end of the
fiscal year when audited financial statements of the Company's
results of operations for the prior fiscal year are made
available. If there shall not be sufficient common shares
available for the grant of stock options to Employee pursuant to
Company's 1998 Stock Option Plan (or a later Stock Option Plan
approved by Company's shareholders) for any fiscal year ending
during the term of this Agreement, Company shall, at the Annual
Meeting of Shareholders first following the end of such fiscal
year, submit to its shareholders for approval a stock option plan
to authorize the issuance of at least that number of common shares
necessary to grant Employee's stock options for such fiscal year
as contemplated hereby. In the event Company's shareholders do not
approve such a stock option plan, then Employee shall receive only
a pro-rata share of stock options from options, if any, available
for grant from prior years' plans which were approved by Company's
shareholders after 1998. The pro-rata share shall be determined by
dividing the number of shares available for grant by the number of
Employees eligible for grants under employment agreements with the
Company. In the event of termination of employment, Employee's
right to receive stock options hereunder shall terminate as of the
effective date of such termination. Employee shall enter into a
stock option agreement with Company, substantially in the form of
Exhibit A attached hereto, each time options are granted to
Employee hereunder. For purposes of this Agreement, the term "Fair
Market Value" shall mean the mean between dealer closing "bid" and
"ask" on the last day on which Company's common shares were traded
immediately preceding the date such options are granted, as
reported by the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"), or NASDAQ's successor.
3.04 Benefits. Employee shall be entitled to (i) participate in all
general pension, profit-sharing, life, medical, disability and
other insurance and employee benefit plans and programs at any
time in effect for executive employees of Company, provided,
however, that nothing herein shall obligate Company to establish
or maintain any employee benefit plan or program, whether of the
type referred to in this clause (i) or otherwise, and (ii) four
(4) weeks vacation during each twelve month period of employment
at mutually agreeable times. Employee shall be entitled to the use
of a Company vehicle, however, Employee may elect to provide his
own vehicle and if such election is made, Company agrees to pay
Employee One Thousand Two Hundred and Fifty Dollars ($1,250) per
month to cover cost of the vehicle, insurance, repairs and other
expenses, pertaining thereto.
Page 3 of 12
<PAGE>
Article IV
Termination for Cause; Disability; Death
4.01 For Cause. Company shall have the right to terminate the
employment of Employee hereunder at any time for Cause (as
hereinafter defined) without prior notice (except as otherwise
hereinafter provided). For purposes of this Agreement "Cause"
shall mean and include the occurrence of any of the following acts
or events by or relating to the Employee: (i) any material
misrepresentation by Employee in this Agreement; (ii) any material
breach of any obligations of Employee under this Agreement which
remains uncured for more than twenty (20) days after written
notice thereof by Company to Employee or if the default is such
that it cannot be cured within such 20-day period, upon said
breach; (iii) habitual insobriety or substance abuse of Employee
while performing his duties hereunder; (iv) theft of embezzlement
from Company or any other material acts of dishonesty; (v)
repeated insubordination respecting reasonable orders or
directions of Company's Board of Directors; (vi) conviction of a
crime (other than traffic violations and minor misdemeanors) or
(vii) if Employee becomes the subject of any order, judgment, or
decree, not subsequently reversed, suspended or vacated, of any
court of competent jurisdiction, permanently or temporarily
enjoining him from, or otherwise limiting, engaging in any
activity in connection with the purchase or sale of any security
or commodity or in connection with any violation of Federal or
state securities laws or Federal commodities. In the event of
termination for Cause, Employee's fixed salary shall terminate as
of the effective date of termination of employment.
4.02 Without Cause. Company may not terminate the employment of
Employee, except for Cause not withstanding Article IV; Section
4.01 of Company's by-laws.
4.03 Disability. If Employee, by reason of illness, mental or physical
incapacity or other disability, is unable to perform his regular
duties hereunder (as may be determined by the Board of Directors),
Company shall continue to pay half of Employee's salary for the
balance of the term of this Agreement, provided, however, in the
event Employee recovers from any such illness, mental or physical
incapacity or other disability (as may be determined by an
independent physician to which Employee shall make himself
available for examination at the reasonable request of the Board
of Directors), Employee shall immediately resume his regular
duties hereunder. Any payments to Employee under any disability
insurance or plan maintained by Company shall be applied against
and shall reduce the amount of the salary payable by Company under
this Agreement. If at any time during the year the Employee has
suffered a complete and total disability, defined as the inability
to perform his/her duties from any location, then the provisions
of paragraph 3.03 shall be pro-rated so as not to provide for
incentive compensation for the period of complete and total
disability.
4.04 Death. In the event of Employee's death, Company shall continue to
pay half of the Employee's Fixed Salary for the balance of the
term of this Agreement to Employee's surviving spouse, provided,
however, that, if Company is the beneficiary of life insurance on
Employee's life, it shall use the proceeds of such insurance
promptly upon the receipt thereof to prepay (in inverse order to
maturity), half of the
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<PAGE>
Fixed Salary remaining to be paid discounted to present value
using an assumed interest rate of 8% per annum. Company shall have
the right (but not the obligation) to obtain a life insurance
policy on Employee's life. The proceeds of any such life insurance
policy shall be payable to Company. Employee shall cooperate with
Company and use his best efforts in all respects and regard to
obtaining a life insurance policy, including, without limitation,
undergoing a physical examination upon reasonable request.
4.05 Change of Control. If during the term of this Agreement, there
shall occur a Change of Control, Employee may terminate his
employment hereunder for Good Reason (as in hereinafter defined)
at any time during the term of this Agreement in which case he
shall be entitled to receive a payment equal to 2.99 times
Employee's average annual compensation paid by Company (including
bonuses, if any) during the three years preceding the date of
termination (the "Severance Payment"), provided, however, that
such Severance Payment shall be reduced if and only to the extent
necessary to avoid the imposition of an excise tax on such
Severance Payment under Section 4999 of the Internal Revenue Code
of 1986, as amended. The Severance Payment shall be payable to
Employee on the date of termination as follows:
(i) an amount equal to three months Fixed Salary at the
rate prevailing on the date of termination, provided,
however, that such amount shall be reduced if three
times such amount would cause Company to be in
default of any of its convenants to any of its
lenders, in which event the amount payable to
Employee shall be reduced so that three times such
amount would not cause such default; and
(ii) the balance remaining after the payment set forth in
(i) above shall be paid by Company by issuing to
Employee that number of its unregistered common
shares as shall equal the balance divided by $2.00.
For purposes of this Agreement, a "Change of Control" shall be
deemed to have occurred on the first day on which a majority of
the Directors of Company do not consist of individuals recommended
by Employee, Kevin Messina and one outside Director of the Company
is sold.
For purposes of this Agreement, "Good Reason: shall mean any of
the following (without Employee's express prior written consent):
(a) The assignment to Employee by Company of duties inconsistent
with Employee's then positions, duties, responsibilities,
titles or offices or any reduction in his duties or
responsibilities or any removal of Employee from or any
failure to re-elect Employee to any of such positions, except
in connection with the termination of Employee's employment
for Cause, or disability (as described in Section 4.03 herein)
or as a result of Employee's death or by termination of
employment by Employee other than for Good Reason, however,
nothing herein prevents the current Board from exercising its
right to elect officers.
(b) A relocation of Company's principal executive offices to a
location greater than 50 miles from the current operating
address of the Company or the Company
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<PAGE>
requiring Employee to be based anywhere other than the
location at which Employee on the date hereof performs
Employee's duties, except for required travel on Company's
business to an extent substantially consistent with Employee's
business travel obligations on the date hereof or any adverse
change in the office assignment or secretarial and other
support accorded to Employee on the date hereof;
(c) A failure by Company to continue in effect any benefit or
compensation plan (including any pension, profit-sharing,
bonus, life, medical, disability and other insurance and
employee benefit plans and programs) in which Employee is then
participating or plans providing Employee with substantially
similar benefits or the taking of any action by Company which
would adversely affect Employee's participation in or reduce
Employee's benefits under any of such plans;
(d) The taking of any action by Company which would deprive
Employee of any material fringe benefit enjoyed by Employee on
the date hereof;
(e) The failure by Company to obtain the specific assumption of
this Agreement by any successor or assign of Company or any
person acquiring substantially all of Company's assets;
(f) Any material breach by Company of any provision of the
Agreement.
4.06 Registration of Common Shares. Employee shall have the right to
require Company to file one registration statement for, or
otherwise register, all and not less than all of the common shares
received pursuant to Section 4.05 (ii) provided that he notifies
Company of his desire to have these shares registered herein
within 45 days of the end of the Company's fiscal year. Company
agrees to use its best efforts to register these shares at its own
cost and expense. Employee recognizes that Company may include
these shares together with other shares in any registration
statement.
Article V
Confidential Information; Non-Competition
5.01 Confidential Information. Employee shall not, at any time during
or following termination or expiration of the term of this
Agreement, directly or indirectly, disclose, publish or divulge to
any person (except in the regular course of Company's business),
or appropriate, use or cause, permit or induce any person to
appropriate or use, any proprietary, secret or confidential
information of Company including, without limitation, knowledge or
information relating to its trade secrets, business methods, the
names or requirements of customers or the prices, credit or other
terms extended to its customers, all of which Employee agrees are
and will be of great value to Company and shall at all times be
kept confidential. Upon termination or expiration of this
Agreement, Employee shall promptly deliver or return to Company
all materials of a proprietary, secret or confidential nature
relating to Company together with any other property of Company
which may have theretofore been delivered to or may be in
possession of Employee.
Page 6 of 12
<PAGE>
5.02 Non-Competition. During the term of this Agreement and for a
period of two years after the sooner of the expiration date of
this Agreement or the date when Employee ceases to be employed by
Company as a result of either a voluntary termination of his
employment or a termination for cause, Employee shall not, within
the United States, its territories and/or, possessions and
countries in which the Company does business, without the prior
written consent of Company in each instance , directly or
indirectly, in any manner or capacity, whether for himself or any
other person and whether as proprietor, principal, owner,
shareholder, partner, investor, director, officer, employee,
representative, distributor consultant, independent contractor or
otherwise engage or have any interest in any entity which is
engaged in any business or activity then conducted or engaged in
by Company. The two-year period referred to in the preceding
sentence shall be reduced by two months for each full year that
elapses after the commencement date of this Agreement.
Notwithstanding the foregoing, however, Employee may at any time
own in the aggregate as a passive (but not active) investment not
more than 5% of the stock or other equity interest of any
publicly-traded entity which engages in a business competitive
with Company.
5.03 Reasonableness. Employee agrees that each of the provisions of
this Section 5 is reasonable and necessary for the protection of
Company; that each such provision is and is intended to be
divisible; that if any such provision (including any sentence,
clause or part) shall be held contrary to law or invalid or
unenforceable in any respect in any jurisdiction, or as to any one
or more periods of time, areas of business activities, or any part
thereof, the remaining provisions shall not be affected but shall
remain in full force and effect as to the other and remaining
parts; and that any invalid or unenforceable provision shall be
deemed, without further action on the part of the parties hereto,
modified, amended and limited to the extent necessary to render
the same valid and enforceable in such jurisdiction. Employee
further recognizes and agrees that any violation of any of his
agreements in this Section 5 would cause such damage or injury to
Company as would be irreparable and the exact amount of which
would be impossible to ascertain and that, for such reason, among
others, Company shall be entitled, as a matter of course, to
injunctive relief from any court of competent jurisdiction
restraining any further violation. Such right to injunctive relief
shall be cumulative and in addition to, and not in limitation of,
all other rights and remedies which Company may possess.
5.04 Survival. The provisions of this Section 5 shall survive the
expiration or termination of this Agreement for any reason.
Article VI
Miscellaneous
6.01 Notices. All notices under this Agreement shall be in writing and
shall be deemed to have been duly given if personally delivered
against receipt or if mailed by first class registered or
certified mail, return receipt requested, addressed to Company
Page 7 of 12
<PAGE>
and to Employee at their respective addresses set forth on the
first page of this Agreement, or to such other person or address
as may be designated by like notice hereunder. Any such notice
shall be deemed to have been given on the day delivered, if
personally delivered, or on the third day after the date of
mailing if mailed.
6.02 Parties in Interest. This Agreement shall be binding upon and
inure to the benefit of and be enforceable by the parties hereto
and their respective heirs, legal representatives, successors and,
in the case of the Company, assigns, but no other person shall
acquire or have any rights under or by virtue of this Agreement,
and the obligations of Employee under this Agreement may not be
assigned or delegated.
6.03 Governing Law; Severability. This Agreement shall be governed by
and construed and enforced in accordance with the laws and
decisions of the State of New York applicable to contracts made
and to be performed therein without giving effect to the
principles of conflict of laws. In addition to the provisions of
5.03 above, the invalidity or unenforceability of any other
provision of this Agreement, or the application thereof to any
person or circumstance, in any jurisdiction shall in no way
impair, affect or prejudice the balance of this Agreement, which
shall remain in full force and effect, or the application thereof
to other persons and circumstances.
6.04 Entire Agreement; Modification; Waiver; Interpretation. This
Agreement contains the entire agreement and understanding between
the parties with respect to the subject matter hereof and
supersedes all prior negotiations and oral understandings, if any.
Neither this Agreement nor any of its provisions may be modified,
amended, waived, discharged or terminated, in whole or in part,
except in writing signed by the party to be charged. No waiver of
any such provision or any breach of or default under this
Agreement shall be deemed or shall constitute a waiver of any
other provision, breach or default. All pronouns and words used in
this Agreement shall be read in the appropriate number and gender,
the masculine, feminine and neuter shall be interpreted
interchangeably and the singular shall include the plural and vice
versa, as the circumstances may require.
6.05 Indemnification. Employee shall indemnify and hold Company free
and harmless from and against and shall reimburse it for any and
all claims, liabilities, damages, losses, judgments, costs and
expenses (including reasonable counsel fees and other reasonable
out-of-pocket expenses) arising out of or resulting from any
breach or default of any of his representations, warranties and
agreements in this Agreement. Company shall indemnify and hold
Employee free and harmless from and against and shall reimburse
him for any and all claims, liabilities, damages, losses,
judgments, costs and expenses (including reasonable counsel fees
and other reasonable out-of-pocket expenses) arising out of or
resulting from any breach or default of any of its
representations, warranties and agreements in this Agreement.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date
first above written.
INTELLI-CHECK, INC.
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<PAGE>
By____________________________
Kevin M. Messina, President
____________________________
Frank Mandelbaum
Page 9 of 12
<PAGE>
EXHIBIT A
STOCK OPTION AGREEMEMT
Intelli-Check, Inc., a New York corporation (the "Company"), as of
the____day of ____________, 1998 hereby grants
to_________________________("Optionee"), residing at in consideration of
services and advice rendered by Optionee to the Company, the irrevocable right
and option ("Option") to purchase all or part of an aggregate
of__________________shares ("Shares") of the Company's common stock, par value
$.01 per share ("Common Stock"), on the terms and conditions hereinafter set
forth:
1. Purchase Price. The purchase price for the Shares shall be
$_____________per share subject to adjustment as provided in Paragraph 5
below.
2. Term of Option: Exercise.
(a) Subject to earlier termination pursuant hereto, the Option shall
terminate five (5) years from the date hereof. The Option shall be
exercisable in full on the date hereof.
(b) The Option shall be exercised by fifteen (15) days' written notice
to the Secretary or Treasurer of the Company at its then principal
office. The notice shall specify the number of Shares as to which
the Option is being exercised and shall be accompanied by payment
in full of the purchase price for such Shares. The option price
shall be payable in United States dollars, and may be paid in cash
or by certified check on a United States bank or by other means
acceptable to the Company. In no event shall the Company be
required to issue any Shares (i) until counsel for the Company
determines that the Company has complied with all applicable
securities exchange or the National Association of Security
Dealers Automated Quotation System on which the Common Stock may
then be listed, and (ii) unless Optionee reimburses the Company
for any tax withholding required and supplies the Company with
such information and data as the Company may deem necessary.
(c) Optionee shall not, by virtue of the granting of the Option, be
entitled to any rights of a shareholder in the Company and shall
not be considered a record holder of any Shares purchased by
Optionee until the date on which Optionee shall actually be
recorded as the holder of such Shares upon the stock records of
the Company. The Company shall not be required to issue any
fractional Share upon exercise of the Option and shall not be
required to pay to Optionee the cash equivalent of any fractional
Share interest.
3. Restrictions on Transfer and Termination.
(a) No option shall be transferred by Optionee otherwise than by will
or by the laws of descent and distribution. During the lifetime of
Optionee the Option shall be exercisable only by Optionee or by
Optionee's legal representative.
(b) In the event of the termination of Optionee's employment by the
Company at any time for any reason (excluding disability or
death), the Option and all rights thereunder shall be exercisable
by Optionee at any time within three (3) months thereafter, but
not later than the termination date of the Option. Notwithstanding
the foregoing, in the event Optionee is permanently and totally
disabled (within the meaning of Section 105(d) (4), or any
successor section, of the Internal Revenue Code), Optionee's
Option and all rights thereunder shall be exercisable by Optionee
(or Optionee's legal representative) at any time within six (6)
months of Optionee's termination of employment, but not later than
the termination date of the Option.
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<PAGE>
(c) If Optionee shall die while in the employ of the Company, the
Option may be exercised by Optionee's designated beneficiary or
beneficiaries (or if none have been effectively designated, by
Optionee's executor, administrator or the person to whom
Optionee's rights under the Option shall pass by Optionee's will
or by the laws of descent and distribution) at any time within six
(6) months after the date of Optionee's death, but not later than
the termination date of the Option.
(d) This Option is granted pursuant to an Employment Agreement between
Company and Optionee dated which Employment Agreement governs
Optionee's rights and obligations as an employee including,
without limitation, Company's right to terminate Optionee's
employment under certain circumstances, and nothing in this
Agreement shall confer upon Optionee any additional rights with
respect to the terms and conditions of Optionee's employment.
4 Securities Act Matters.
(a) Optionee represents that Shares issued upon any exercise of the
Option will be acquired for Optionee's own account for investment
only and not with a view to the distribution thereof within the
meaning of the Federal Securities Act of 1933, as amended
(hereinafter, together with the rules and regulations thereunder,
collectively referred to as the "Act"), and that Optionee does not
intend to divide Optionee's participation with others or transfer
or otherwise dispose of all or any Shares except as below set
forth. As herein used the terms "transfer" and "dispose" mean and
include, without limitation, any sale, offer for sale, assignment,
gift, pledge or other disposition or attempted disposition.
(b) Optionee understands that in the opinion of the Securities and
Exchange Commission ("SEC") Shares must be held by Optionee for an
indefinite period unless subsequently registered under the Act or
unless an exemption from registration thereunder is available;
that, under Rule 144 of the Act, after one or more years from the
date of payment for and issuance of the shares, certain public
sales thereof (which may be limited as to the number of Shares)
may be made in accordance with the subject to the terms,
conditions and restrictions of Rule 144, but only if certain
reporting and other requirements thereunder have been complied
with; and that should Rule 144 be inapplicable, registration or
the availability of an exemption under the Act will be necessary
in order to permit public distribution of any Shares. Optionee
also understands that the Company is and will be under no
obligation to register the Shares or to comply with any exemption
under the Act.
(c) Optionee shall not at any time transfer or dispose of any Shares
except pursuant to either (i) a registration statement under the
Act which registration statement has become effective as to the
Shares being sold or (ii) a specific exemption from registration
under the Act, but only after Optionee has first obtained either a
"no-action" letter from the SEC, following full and adequate
disclosure of all facts relating to such proposed transfer, or a
favorable opinion from or acceptable to counsel to the Company
that the proposed transfer or other disposition complies with and
is not in violation of the Act or any applicable state "blue sky"
or securities laws.
5. Anti-Dilution Provisions.
(a) Subject to the provisions of Paragraph 5(b) below, if at any time
or from time to time prior to expiration of the Option there shall
occur any change in the outstanding Common Stock of the Company by
reason of any stock dividend, stock split, combination or exchange
of shares, merger, consolidation, recapitalization,
reorganization, liquidation or the like, then and as often as the
same shall occur, the kind and number of Shares subject to the
Option, or the purchase price per share, or both, shall be
adjusted by the Board of Directors of the Company ("Board") in
such
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<PAGE>
manner as it may deem appropriate and equitable, the determination
of which Board shall be binding and conclusive. Failure of the
Board to provide for any such adjustment shall be conclusive
evidence that no adjustment is required.
(b) The Board shall have the right to engage a firm of independent
certified public accountants, which may be the Company's regular
auditors, to make any computation provided for in this Section,
and a certificate of that firm showing the required adjustment
shall be conclusive and binding.
6. Notices. All notices and other communications required or permitted under
this Agreement shall be in writing and shall be given either by (i)
personal delivery or regular mail, in each case against receipt, or (ii)
first class registered or certified mail, return receipt requested. Any
such communication shall be deemed to have been given (i) on the date of
receipt in the cases referred to in clause (i) of the preceding sentence
and (ii) on the second day after the date of mailing in the cases referred
to in clause (ii) of the preceding sentence. All such communications to the
Company shall be addressed to it, to the attention of its Secretary or
Treasurer, at its then principal office and to Optionee at the address set
forth above or such other address as may be designated by like notice
hereunder.
7. Miscellaneous. This Agreement cannot be changed except in writing signed by
the party to be charged. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York applicable to
agreements made and to be performed exclusively in New York. The Option has
been granted pursuant to the Company's 1998 Stock Option Plan. This
Agreement is in all respects subject to the terms and conditions of said
Plan. The Option granted hereunder is intended to be a Non-Qualified Stock
Option. Optionee acknowledges that Optionee is not holding any other stock
options granted by the Company. Optionee shall execute this Agreement and
return it to the Company within thirty (30) days after the mailing or
delivery by the Company of this Agreement. If Optionee shall fail to
execute and return this Agreement to the Company within said thirty (30)
day period, the Option shall automatically terminate. The section headings
in this Agreement are solely for convenience of reference and shall not
affect its meaning or interpretation.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.
INTELLI-CHECK, INC.
By:_________________________
Optionee:
____________________________
Name
EX-10.3
EMPLOYMENT
AGREEMENT
AGREEMENT made as of the 1st day of January, 1999 between
INTELLI-CHECK, INC. ("Company"), a New York Corporation having an office at 775
Park Avenue, Suite 340, Huntington, NY 11743 and KEVIN M. MESSINA ("Employee"),
residing at 48 State Place, Huntington, NY 11743.
WHEREAS, Employee has been serving as the Company's President. Company
and Employee wish to enter into a new Employment Agreement pursuant to which
Employee will remain as President of the Company.
NOW, THEREFORE, in consideration of the respective agreements
hereinafter set forth, the parties agree as follows:
Article I
Employment
1.01 Term. Company hereby employs Employee, and Employee hereby accepts
employment with Company (including also employment by, and in
connection with the business activities of any of Company's
affiliates, subsidiaries and related corporations), in the
position and with the duties hereinafter set forth, for a period
(the "term") commencing on January 1, 1999 and ending December 31,
2001 subject, however, to earlier termination in accordance with
the provisions of this Agreement.
Article II
Duties
2.01 General. Employee shall be the President of the Company and shall
perform such executive duties as may from time to time be assigned
to him by Company's Board of Directors. If so elected or
appointed, Employee shall also serve without additional
compensation as a director and/or officer of the Company or any of
its subsidiaries. However, the Employee recognizes and agrees that
the Board may elect to amend the position and/or duties assigned
to Employee. Such amendment of position and/or duties shall be
commensurate with that of a Senior Executive Vice President with
no reduction in Fixed Salary, benefits or incentives.
2.02 Performance. During the term of his employment, Employee shall
devote substantially all his business time, best efforts and
attention to the business, operations and affairs of Company and
the performance of his duties hereunder provided, however, that
during the term of his employment, Employee may work for a
non-competitive Company so long as he devotes substantially all of
his business time, best efforts and attention to the business
operations and affairs of the Company and the performance of his
duties hereunder.
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<PAGE>
2.03 Employee's Representations. Employee represents and warrants to
and agrees with Company that:
(a) Neither the execution nor performance by Employee of this
Agreement is prohibited by or constitutes or will constitute,
directly or indirectly, a breach or violation of, or will be
adversely affected by, any written or other agreement to which
Employee is or has been a party or by which he is bound.
(b) Neither Employee nor any business or entity in which he has any
interest or from which he receives any payments has, directly or
indirectly, any interest of any kind in or is entitled to receive,
and neither Employee nor any such business or entity shall accept,
from any person, firm, corporation or other entity doing business
with Company any payments of any kind on account of any services
performed by Employee during the term of his employment.
Article III
Compensation and Related Matters
3.01(a) Fixed Salary. As compensation for Employee's services Company
shall pay Employee a salary of $225,000 per annum (the "Fixed
Salary"). At each anniversary of this contract, the Fixed Salary
shall be augmented by a bonus of $50,000 if gross sales of Company
products have reached $2,000,000 for the previous year, plus 1% of
the amount of gross sales in excess of $2,000,000 for that year.
It is further agreed that no salary increase above $150,000 shall
occur until such time as the Company receives payment for gross
sales of at least $1,000,000.
3.01(b) The Employee shall have the right at his election, to receive
compensation in the form of the Company's restricted Common Stock.
Such Stock shall be valued at fifty percent (50%) of the closing
bid price of the Company's Common Stock as quoted on NASDAQ/NMS
(or other established exchange) as of the date of the Employee's
election. Such election may be for all or part of the Employee's
Compensation. At the beginning of each quarter, Employee shall
give the Company notice of his election to exercise his option to
receive restricted Common Stock in lieu of cash compensation.
3.01(c) Fixed Salary Adjustment. The fixed salary may not be decreased
hereunder during the term of this agreement, but may be increased
upon review by and within the sole discretion of the Company's
Board of Directors.
3.01(d) Bonus. Employee shall be entitled to receive bonus compensation in
an amount as approved by the Company's Board of Directors based
upon performance criteria as may be established by the
Compensation Committee from time to time. Such bonuses may be in
the form of cash or the Company's restricted stock.
3.02 Expenses. Company shall pay or reimburse Employee for all
reasonable travel, hotel, entertainment and other business
expenses incurred in the performance of
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Employee's duties upon submission of appropriate vouchers and
other supporting data therefore.
3.03 Stock Options. For each fiscal year ending during the term of this
Agreement, Company will grant Employee an option to purchase the
greater of (i) 25,000 of Company's common shares at Fair Market
Value (as hereinafter defined) on the date of grant or (ii) 10,000
of Company's common shares at Fair Market Value on the date of
grant for each full $250,000 by which Pre-Tax Profits for each
fiscal year (commencing with the fiscal year ending December 31,
1999) exceeds Pre-Tax Profits for the prior fiscal year, provided,
however, that in no event shall Employee be granted options
hereunder to purchase more than 150,000 of Company's common shares
with respect to any one fiscal year. The stock options
contemplated hereby shall be granted at or concurrently with a
meeting of the Board of Directors first following the end of the
fiscal year when audited financial statements of the Company's
results of operations for the prior fiscal year are made
available. If there shall not be sufficient common shares
available for the grant of stock options to Employee pursuant to
Company's 1998 Stock Option Plan (or a later Stock Option Plan
approved by Company's shareholders) for any fiscal year ending
during the term of this Agreement, Company shall, at the Annual
Meeting of Shareholders first following the end of such fiscal
year, submit to its shareholders for approval a stock option plan
to authorize the issuance of at least that number of common shares
necessary to grant Employee's stock options for such fiscal year
as contemplated hereby. In the event Company's shareholders do not
approve such a stock option plan, then Employee shall receive only
a pro-rata share of stock options from options, if any, available
for grant from prior years' plans which were approved by Company's
shareholders after 1998. The pro-rata share shall be determined by
dividing the number of shares available for grant by the number of
Employees eligible for grants under employment agreements with the
Company. In the event of termination of employment, Employee's
right to receive stock options hereunder shall terminate as of the
effective date of such termination. Employee shall enter into a
stock option agreement with Company, substantially in the form of
Exhibit A attached hereto, each time options are granted to
Employee hereunder. For purposes of this Agreement, the term "Fair
Market Value" shall mean the mean between dealer closing "bid" and
"ask" on the last day on which Company's common shares were traded
immediately preceding the date such options are granted, as
reported by the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"), or NASDAQ's successor.
3.04 Benefits. Employee shall be entitled to (i) participate in all
general pension, profit-sharing, life, medical, disability and
other insurance and employee benefit plans and programs at any
time in effect for executive employees of Company, provided,
however, that nothing herein shall obligate Company to establish
or maintain any employee benefit plan or program, whether of the
type referred to in this clause (i) or otherwise, and (ii) four
(4) weeks vacation during each twelve month period of employment
at mutually agreeable times. Employee shall be entitled to the use
of a Company vehicle, however, Employee may elect to provide his
own vehicle and if such election is made, Company agrees to pay
Employee One Thousand Two Hundred and Fifty Dollars ($1,250) per
month to cover cost of the vehicle, insurance, repairs and other
expenses, pertaining thereto.
Page 3 of 12
<PAGE>
Article IV
Termination for Cause; Disability; Death
4.01 For Cause. Company shall have the right to terminate the
employment of Employee hereunder at any time for Cause (as
hereinafter defined) without prior notice (except as otherwise
hereinafter provided). For purposes of this Agreement "Cause"
shall mean and include the occurrence of any of the following acts
or events by or relating to the Employee: (i) any material
misrepresentation by Employee in this Agreement; (ii) any material
breach of any obligations of Employee under this Agreement which
remains uncured for more than twenty (20) days after written
notice thereof by Company to Employee or if the default is such
that it cannot be cured within such 20-day period, upon said
breach; (iii) habitual insobriety or substance abuse of Employee
while performing his duties hereunder; (iv) theft of embezzlement
from Company or any other material acts of dishonesty; (v)
repeated insubordination respecting reasonable orders or
directions of Company's Board of Directors; (vi) conviction of a
crime (other than traffic violations and minor misdemeanors) or
(vii) if Employee becomes the subject of any order, judgment, or
decree, not subsequently reversed, suspended or vacated, of any
court of competent jurisdiction, permanently or temporarily
enjoining him from, or otherwise limiting, engaging in any
activity in connection with the purchase or sale of any security
or commodity or in connection with any violation of Federal or
state securities laws or Federal commodities. In the event of
termination for Cause, Employee's fixed salary shall terminate as
of the effective date of termination of employment.
4.02 Without Cause. Company may not terminate the employment of
Employee, except for Cause not withstanding Article IV; Section
4.01 of Company's by-laws.
4.03 Disability. If Employee, by reason of illness, mental or physical
incapacity or other disability, is unable to perform his regular
duties hereunder (as may be determined by the Board of Directors),
Company shall continue to pay half of Employee's salary for the
balance of the term of this Agreement, provided, however, in the
event Employee recovers from any such illness, mental or physical
incapacity or other disability (as may be determined by an
independent physician to which Employee shall make himself
available for examination at the reasonable request of the Board
of Directors), Employee shall immediately resume his regular
duties hereunder. Any payments to Employee under any disability
insurance or plan maintained by Company shall be applied against
and shall reduce the amount of the salary payable by Company under
this Agreement. If at any time during the year the Employee has
suffered a complete and total disability, defined as the inability
to perform his/her duties from any location, then the provisions
of paragraph 3.03 shall be pro-rated so as not to provide for
incentive compensation for the period of complete and total
disability.
4.04 Death. In the event of Employee's death, Company shall continue to
pay half of the Employee's Fixed Salary for the balance of the
term of this Agreement to Employee's surviving Mother, provided,
however, that, if Company is the beneficiary of life insurance on
Employee's life, it shall use the proceeds of such insurance
promptly upon the receipt thereof to prepay (in inverse order to
maturity), half of the Fixed Salary remaining to be paid
discounted to present value using an assumed
Page 4 of 12
<PAGE>
interest rate of 8% per annum. Company shall have the right (but
not the obligation) to obtain a life insurance policy on
Employee's life. The proceeds of any such life insurance policy
shall be payable to Company. Employee shall cooperate with Company
and use his best efforts in all respects and regard to obtaining a
life insurance policy, including, without limitation, undergoing a
physical examination upon reasonable request.
4.05 Change of Control. If during the term of this Agreement, there
shall occur a Change of Control, Employee may terminate his
employment hereunder for Good Reason (as in hereinafter defined)
at any time during the term of this Agreement in which case he
shall be entitled to receive a payment equal to 2.99 times
Employee's average annual compensation paid by Company (including
bonuses, if any) during the three years preceding the date of
termination (the "Severance Payment"), provided, however, that
such Severance Payment shall be reduced if and only to the extent
necessary to avoid the imposition of an excise tax on such
Severance Payment under Section 4999 of the Internal Revenue Code
of 1986, as amended. The Severance Payment shall be payable to
Employee on the date of termination as follows:
(i) an amount equal to three months Fixed Salary at the
rate prevailing on the date of termination, provided,
however, that such amount shall be reduced if three
times such amount would cause Company to be in
default of any of its convenants to any of its
lenders, in which event the amount payable to
Employee shall be reduced so that three times such
amount would not cause such default; and
(ii) the balance remaining after the payment set forth in
(i) above shall be paid by Company by issuing to
Employee that number of its unregistered common
shares as shall equal balance divided by $2.00.
For purposes of this Agreement, a "Change of Control" shall be
deemed to have occurred on the first day on which a majority of
the Directors of Company do not consist of individuals recommended
by Employee, Frank Mandelbaum and one outside Director or if the
Company is sold.
For purposes of this Agreement, "Good Reason: shall mean any of
the following (without Employee's express prior written consent):
(a) The assignment to Employee by Company of duties inconsistent
with Employee's then positions, duties, responsibilities,
titles or offices or any reduction in his duties or
responsibilities or any removal of Employee from or any
failure to re-elect Employee to any of such positions, except
in connection with the termination of Employee's employment
for Cause, or disability (as described in Section 4.03 herein)
or as a result of Employee's death or by termination of
employment by Employee other than for Good Reason, however,
nothing herein prevents the current Board from exercising its
right to elect officers.
(b) A relocation of Company's principal executive offices to a
location greater than 50 miles of the current operating
address of the Company or Company's requiring Employee to be
based anywhere other than the location at which
Page 5 of 12
<PAGE>
Employee on the date hereof performs Employee's duties, except
for required travel on Company's business to an extent
substantially consistent with Employee's business travel
obligations on the date hereof or any adverse change in the
office assignment or secretarial and other support accorded to
Employee on the date hereof;
(c) A failure by Company to continue in effect any benefit or
compensation plan (including any pension, profit-sharing,
bonus, life, medical, disability and other insurance and
employee benefit plans and programs) in which Employee is then
participating or plans providing Employee with substantially
similar benefits or the taking of any action by Company which
would adversely affect Employee's participation in or reduce
Employee's benefits under any of such plans;
(d) The taking of any action by Company which would deprive
Employee of any material fringe benefit enjoyed by Employee on
the date hereof;
(e) The failure by Company to obtain the specific assumption of
this Agreement by any successor or assign of Company or any
person acquiring substantially all of Company's assets;
(f) Any material breach by Company of any provision of the
Agreement.
4.06 Registration of Common Shares. Employee shall have the right to
require Company to file one registration statement for, or
otherwise register, all and not less than all of the common shares
received pursuant to Section 4.05 (ii) provided that he notifies
Company of his desire to have these shares registered herein
within 45 days of the end of the Company's fiscal year. Company
agrees to use its best efforts to register these shares at its own
cost and expense. Employee recognizes that Company may include
these shares together with other shares in any registration
statement.
Article V
Confidential Information; Non-Competition
5.01 Confidential Information. Employee shall not, at any time during
or following termination or expiration of the term of this
Agreement, directly or indirectly, disclose, publish or divulge to
any person (except in the regular course of Company's business),
or appropriate, use or cause, permit or induce any person to
appropriate or use, any proprietary, secret or confidential
information of Company including, without limitation, knowledge or
information relating to its trade secrets, business methods, the
names or requirements of customers or the prices, credit or other
terms extended to its customers, all of which Employee agrees are
and will be of great value to Company and shall at all times be
kept confidential. Upon termination or expiration of this
Agreement, Employee shall promptly deliver or return to Company
all materials of a proprietary, secret or confidential nature
relating to Company together with any other property of Company
which may have theretofore been delivered to or may be in
possession of Employee.
5.02 Non-Competition. During the term of this Agreement and for a
period of two years after the sooner of the expiration date of
this Agreement or the date when Employee
Page 6 of 12
<PAGE>
ceases to be employed by Company as a result of either a voluntary
termination of his employment or a termination for cause, Employee
shall not, within the United States, its territories and/or,
possessions and countries in which the Company does business,
without the prior written consent of Company in each instance ,
directly or indirectly, in any manner or capacity, whether for
himself or any other person and whether as proprietor, principal,
owner, shareholder, partner, investor, director, officer,
employee, representative, distributor consultant, independent
contractor or otherwise engage or have any interest in any entity
which is engaged in any business or activity then conducted or
engaged in by Company. The two-year period referred to in the
preceding sentence shall be reduced by two months for each full
year that elapses after the commencement date of this Agreement.
Notwithstanding the foregoing, however, Employee may at any time
own in the aggregate as a passive (but not active) investment not
more than 5% of the stock or other equity interest of any
publicly-traded entity which engages in a business competitive
with Company.
5.03 Reasonableness. Employee agrees that each of the provisions of
this Section 5 is reasonable and necessary for the protection of
Company; that each such provision is and is intended to be
divisible; that if any such provision (including any sentence,
clause or part) shall be held contrary to law or invalid or
unenforceable in any respect in any jurisdiction, or as to any one
or more periods of time, areas of business activities, or any part
thereof, the remaining provisions shall not be affected but shall
remain in full force and effect as to the other and remaining
parts; and that any invalid or unenforceable provision shall be
deemed, without further action on the part of the parties hereto,
modified, amended and limited to the extent necessary to render
the same valid and enforceable in such jurisdiction. Employee
further recognizes and agrees that any violation of any of his
agreements in this Section 5 would cause such damage or injury to
Company as would be irreparable and the exact amount of which
would be impossible to ascertain and that, for such reason, among
others, Company shall be entitled, as a matter of course, to
injunctive relief from any court of competent jurisdiction
restraining any further violation. Such right to injunctive relief
shall be cumulative and in addition to, and not in limitation of,
all other rights and remedies which Company may possess.
5.04 Survival. The provisions of this Section 5 shall survive the
expiration or termination of this Agreement for any reason.
Article VI
Miscellaneous
6.01 Notices. All notices under this Agreement shall be in writing and
shall be deemed to have been duly given if personally delivered
against receipt or if mailed by first class registered or
certified mail, return receipt requested, addressed to Company and
to Employee at their respective addresses set forth on the first
page of this Agreement, or to such other person or address as may
be designated by like notice
Page 7 of 12
<PAGE>
hereunder. Any such notice shall be deemed to have been given on
the day delivered, if personally delivered, or on the third day
after the date of mailing if mailed.
6.02 Parties in Interest. This Agreement shall be binding upon and
inure to the benefit of and be enforceable by the parties hereto
and their respective heirs, legal representatives, successors and,
in the case of the Company, assigns, but no other person shall
acquire or have any rights under or by virtue of this Agreement,
and the obligations of Employee under this Agreement may not be
assigned or delegated.
6.03 Governing Law; Severability. This Agreement shall be governed by
and construed and enforced in accordance with the laws and
decisions of the State of New York applicable to contracts made
and to be performed therein without giving effect to the
principles of conflict of laws. In addition to the provisions of
5.03 above, the invalidity or unenforceability of any other
provision of this Agreement, or the application thereof to any
person or circumstance, in any jurisdiction shall in no way
impair, affect or prejudice the balance of this Agreement, which
shall remain in full force and effect, or the application thereof
to other persons and circumstances.
6.04 Entire Agreement; Modification; Waiver; Interpretation. This
Agreement contains the entire agreement and understanding between
the parties with respect to the subject matter hereof and
supersedes all prior negotiations and oral understandings, if any.
Neither this Agreement nor any of its provisions may be modified,
amended, waived, discharged or terminated, in whole or in part,
except in writing signed by the party to be charged. No waiver of
any such provision or any breach of or default under this
Agreement shall be deemed or shall constitute a waiver of any
other provision, breach or default. All pronouns and words used in
this Agreement shall be read in the appropriate number and gender,
the masculine, feminine and neuter shall be interpreted
interchangeably and the singular shall include the plural and vice
versa, as the circumstances may require.
6.05 Indemnification. Employee shall indemnify and hold Company free
and harmless from and against and shall reimburse it for any and
all claims, liabilities, damages, losses, judgments, costs and
expenses (including reasonable counsel fees and other reasonable
out-of-pocket expenses) arising out of or resulting from any
breach or default of any of his representations, warranties and
agreements in this Agreement. Company shall indemnify and hold
Employee free and harmless from and against and shall reimburse
him for any and all claims, liabilities, damages, losses,
judgments, costs and expenses (including reasonable counsel fees
and other reasonable out-of-pocket expenses) arising out of or
resulting from any breach or default of any of its
representations, warranties and agreements in this Agreement.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date
first above written.
INTELLI-CHECK, INC.
Page 8 of 12
<PAGE>
By__________________________
Frank Mandelbaum, CEO
__________________________
Kevin M. Messina
Page 9 of 12
<PAGE>
EXHIBIT A
STOCK OPTION AGREEMEMT
Intelli-Check, Inc., a New York corporation (the "Company"), as of
the_____day of _____________, 1998 hereby grants
to______________________("Optionee"), residing at________________________ in
consideration of services and advice rendered by Optionee to the Company, the
irrevocable right and option ("Option") to purchase all or part of an aggregate
of_____________________shares ("Shares") of the Company's common stock, par
value $.01 per share ("Common Stock"), on the terms and conditions hereinafter
set forth:
1. Purchase Price. The purchase price for the Shares shall be $____________per
share subject to adjustment as provided in Paragraph 5 below.
2. Term of Option: Exercise.
(a) Subject to earlier termination pursuant hereto, the Option shall
terminate five (5) years from the date hereof. The Option shall be
exercisable in full on the date hereof.
(b) The Option shall be exercised by fifteen (15) days' written notice
to the Secretary or Treasurer of the Company at its then principal
office. The notice shall specify the number of Shares as to which
the Option is being exercised and shall be accompanied by payment
in full of the purchase price for such Shares. The option price
shall be payable in United States dollars, and may be paid in cash
or by certified check on a United States bank or by other means
acceptable to the Company. In no event shall the Company be
required to issue any Shares (i) until counsel for the Company
determines that the Company has complied with all applicable
securities exchange or the National Association of Security
Dealers Automated Quotation System on which the Common Stock may
then be listed, and (ii) unless Optionee reimburses the Company
for any tax withholding required and supplies the Company with
such information and data as the Company may deem necessary.
(c) Optionee shall not, by virtue of the granting of the Option, be
entitled to any rights of a shareholder in the Company and shall
not be considered a record holder of any Shares purchased by
Optionee until the date on which Optionee shall actually be
recorded as the holder of such Shares upon the stock records of
the Company. The Company shall not be required to issue any
fractional Share upon exercise of the Option and shall not be
required to pay to Optionee the cash equivalent of any fractional
Share interest.
3. Restrictions on Transfer and Termination.
(a) No option shall be transferred by Optionee otherwise than by will
or by the laws of descent and distribution. During the lifetime of
Optionee the Option shall be exercisable only by Optionee or by
Optionee's legal representative.
(b) In the event of the termination of Optionee's employment by the
Company at any time for any reason (excluding disability or
death), the Option and all rights thereunder shall be exercisable
by Optionee at any time within three (3) months thereafter, but
not later than the termination date of the Option. Notwithstanding
the foregoing, in the event Optionee is permanently and totally
disabled (within the meaning of Section 105(d) (4), or any
successor section, of the Internal Revenue Code), Optionee's
Option and all rights thereunder shall be exercisable by Optionee
(or Optionee's legal representative) at any time within six (6)
months of Optionee's termination of employment, but not later than
the termination date of the Option.
Page 10 of 12
<PAGE>
(c) If Optionee shall die while in the employ of the Company, the
Option may be exercised by Optionee's designated beneficiary or
beneficiaries (or if none have been effectively designated, by
Optionee's executor, administrator or the person to whom
Optionee's rights under the Option shall pass by Optionee's will
or by the laws of descent and distribution) at any time within six
(6) months after the date of Optionee's death, but not later than
the termination date of the Option.
(d) This Option is granted pursuant to an Employment Agreement between
Company and Optionee dated which Employment Agreement governs
Optionee's rights and obligations as an employee including,
without limitation, Company's right to terminate Optionee's
employment under certain circumstances, and nothing in this
Agreement shall confer upon Optionee any additional rights with
respect to the terms and conditions of Optionee's employment.
4 Securities Act Matters.
(a) Optionee represents that Shares issued upon any exercise of the
Option will be acquired for Optionee's own account for investment
only and not with a view to the distribution thereof within the
meaning of the Federal Securities Act of 1933, as amended
(hereinafter, together with the rules and regulations thereunder,
collectively referred to as the "Act"), and that Optionee does not
intend to divide Optionee's participation with others or transfer
or otherwise dispose of all or any Shares except as below set
forth. As herein used the terms "transfer" and "dispose" mean and
include, without limitation, any sale, offer for sale, assignment,
gift, pledge or other disposition or attempted disposition.
(b) Optionee understands that in the opinion of the Securities and
Exchange Commission ("SEC") Shares must be held by Optionee for an
indefinite period unless subsequently registered under the Act or
unless an exemption from registration thereunder is available;
that, under Rule 144 under the Act, after two or three years from
the date of payment for and issuance of the hares, certain public
sales thereof (which may be limited as to the number of Shares)
may be made in accordance with the subject to the terms,
conditions and restrictions of Rule 144, but only if certain
reporting and other requirements thereunder have been complied
with; and that should Rule 144 be inapplicable, registration or
the availability of an exemption under the Act will be necessary
in order to permit public distribution of any Shares. Optionee
also understands that the Company is and will be under no
obligation to register the Shares or to comply with any exemption
under the Act.
(c) Optionee shall not at any time transfer or dispose of any Shares
except pursuant to either (i) a registration statement under the
Act which registration statement has become effective as to the
Shares being sold or (ii) a specific exemption from registration
under the Act, but only after Optionee has first obtained either a
"no-action" letter from the SEC, following full and adequate
disclosure of all facts relating to such proposed transfer, or a
favorable opinion from or acceptable to counsel to the Company
that the proposed transfer or other disposition complies with and
is not in violation of the Act or any applicable state "blue sky"
or securities laws.
5. Anti-Dilution Provisions.
(a) Subject to the provisions of Paragraph 5(b) below, if at any time
or from time to time prior to expiration of the Option there shall
occur any change in the outstanding Common Stock of the Company by
reason of any stock dividend, stock split, combination or exchange
of shares, merger, consolidation, recapitalization,
reorganization, liquidation or the like, then and as often as the
same shall occur, the kind and number of Shares subject to the
Option, or the purchase price per share, or both, shall be
adjusted by the Board of Directors of the Company ("Board") in
such
Page 11 of 12
<PAGE>
manner as it may deem appropriate and equitable, the determination
of which Board shall be binding and conclusive. Failure of the
Board to provide for any such adjustment shall be conclusive
evidence that no adjustment is required.
(b) The Board shall have the right to engage a firm of independent
certified public accountants, which may be the Company's regular
auditors, to make any computation provided for in this Section,
and a certificate of that firm showing the required adjustment
shall be conclusive and binding.
6. Notices. All notices and other communications required or permitted under
this Agreement shall be in writing and shall be given either by (i)
personal delivery or regular mail, in each case against receipt, or (ii)
first class registered or certified mail, return receipt requested. Any
such communication shall be deemed to have been given (i) on the date of
receipt in the cases referred to in clause (i) of the preceding sentence
and (ii) on the second day after the date of mailing in the cases referred
to in clause (ii) of the preceding sentence. All such communications to the
Company shall be addressed to it, to the attention of its Secretary or
Treasurer, at its then principal office and to Optionee at the address set
forth above or such other address as may be designated by like notice
hereunder.
7. Miscellaneous. This Agreement cannot be changed except in writing signed by
the party to be charged. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York applicable to
agreements made and to be performed exclusively in New York. The Option has
been granted pursuant to the Company's 1998 Stock Option Plan. This
Agreement is in all respects subject to the terms and conditions of said
Plan. The Option granted hereunder is intended to be a Non-Qualified Stock
Option. Optionee acknowledges that Optionee is not holding any other stock
options granted by the Company. Optionee shall execute this Agreement and
return it to the Company within thirty (30) days after the mailing or
delivery by the Company of this Agreement. If Optionee shall fail to
execute and return this Agreement to the Company within said thirty (30)
day period, the Option shall automatically terminate. The section headings
in this Agreement are solely for convenience of reference and shall not
affect its meaning or interpretation.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.
INTELLI-CHECK, INC.
By:______________________
Optionee:
_________________________
Name
Page 12 of 12
EX-10.6
Intelli-Check, Inc.
1999 Stock Option Plan
1. Purposes of the Plan. The purposes of this 1999 Stock Option Plan are to
attract and retain the best available personnel for positions of
responsibility within the Company, to provide additional incentive to
Employees, Directors, Consultants and other Independent Contractors of the
Company, and to promote the success of the Company's business through the
grant of options to purchase shares of the Company's Common Stock. Options
granted hereunder may be either Incentive Stock or Non-Statutory Stock
Options, at the discretion of the Board. The type of options granted shall
be reflected in the terms of written Stock Option agreements. The Company
intends that the Plan meet the requirements of Rule 16b-3 under the
Exchange Act and that the transactions of the type specified in
subparagraphs (c) to (f) inclusive of Rule 16b-3 by officers and directors
of the Company pursuant to the Plan will be exempt from the operation of
Section 16(b) of the Exchange Act. Further, the Plan is intended to
satisfy the performance-based exception to the limitation on the Company's
tax deductions imposed by Section 162(m) of the Code. In all cases, the
terms, provisions, conditions and limitations of the Plan shall be
construed and interpreted consistent with the Company's intent as stated
in this Section 1.
2. Definitions. As used herein, the following definitions shall apply:
a. "Board" shall mean the Board of Directors of the Company or, when
appropriate, the Committee administering the Plan, if one has been
appointed.
b. "Code" shall mean the Internal Revenue Code of 1986, as amended, and the
rules and regulations promulgated thereunder.
c. "Common Stock" shall mean the common stock of the Company described in the
Company's Certificate of Incorporation, as amended.
d. "Company" shall mean Intelli-Check, Inc., a New York corporation, and shall
include any parent or subsidiary corporation of the Company as defined in
Sections 425 (e) and (f), respectively, of the Code.
e. "Committee" shall mean the Compensation Committee composed of two or more
directors who are Non-Employee Directors and Outside Directors and who shall
be elected by and shall serve at the pleasure of the Board and shall be
responsible for administering the Plan in accordance with paragraph (a) of
Section 4 of the Plan.
f. "Employee" shall mean key employees, including salaried officers and
directors and other key individuals employed by the Company. The payment of
a director's fee by the Company shall not be sufficient to constitute
"employment" by the Company.
g. "Exchange Act" shall mean the Securities and Exchange Act of 1934, as
amended.
h. "Fair Market Value" shall mean, with respect to the date a given Option is
granted or exercised, the value of the Common Stock determined by the Board
in such manner as it may deem equitable for Plan purposes but, in the case
of an Incentive Stock Option, no less than is required by applicable laws or
regulations; provided, however, that where there is a public market for the
Common
<PAGE>
Stock, the Fair Market Value per Share shall be the mean of the bid and
asked prices of the Common Stock on the date of grant, as reported in the
Wall Street Journal (or, if not so reported, as otherwise reported in the
National Association of Securities Dealers Automated Quotation System) or,
in the event the Common Stock is listed on the New York Stock Exchange or
the NASDAQ Stock Market, the American Stock Exchange, the NASDAQ/National
Market System the Fair Market Value per Share shall be the closing price on
such exchange on the date of grant of the Option, as reported in the Wall
Street Journal.
This Section will apply after the Company has successfully completed an
initial public offering.
i. "Incentive Stock Option" shall mean an Option which is intended to qualify
as an incentive stock option within the meaning of Section 422 of the Code.
j. "Non-Employee Director" shall mean a non-employee director as defined in
Rule 16b-3.
k. "Non-statutory Stock Option" shall mean an Option, which is not an Incentive
Stock Option.
l. "Option" shall mean a stock option granted under the Plan.
m. "Optioned Stock" shall mean the Common Stock subject to an Option.
n. "Optionee" shall mean an Employee of the Company who has been granted one or
more Options.
o. "Outside Director" shall mean an outside director as defined in Section
162(m) of the Code or rules and regulations promulgated thereunder.
p. "Parent" shall mean a "parent corporation," whether now or hereafter
existing, as defined in Section 425(e) of the Code.
q. "Plan" shall mean this 1998 Stock Option Plan.
r. "Share" shall mean a share of the Common Stock, as adjusted in accordance
with Section 11 of the Plan.
s. "Stock Option Agreement" shall mean the written agreement between the
company and the Optionee relating to the grant of an Option.
t. "Subsidiary" shall mean a "subsidiary corporation," whether now or hereafter
existing, as defined in Section 425(f) of the Code.
u. "Tax Date" shall mean the date an Optionee is required to pay the Company an
amount with respect to tax withholding obligations in connection with the
exercise of an option.
3. Common Stock Subject to the Plan. Subject to the provisions of Section 11 of
the Plan, the maximum aggregate number of the shares which may be optioned and
sold under the Plan is [One Million (1,000,000)] Shares of Common Stock. The
Shares may be authorized, but unissued, or previously issued Shares acquired by
the Company and held in treasury.
If an Option should expire or become unexercisable for any reason without having
been exercised in full, the unpurchased Shares covered by such Option shall,
unless the Plan shall have been terminated, be available for future grants of
Options. The maximum number of Shares that may be subject to options granted
under the Plan to any
<PAGE>
individual in any calendar year shall not exceed 50,000 Shares and the method of
counting such Shares shall conform to any requirements applicable to
performance-based compensation under Section 162(m) of the Code or the rules and
regulations promulgated thereunder.
4. Administration of the Plan
(a) Procedure.
(i) The Plan shall be administered by the Board in accordance with
Rule 16b-3 under the Exchange Act ("Rule 16b-3"); provided,
however, that the Board may appoint a Committee to administer
the Plan at any time or from time to time, and provide
further, that if the Board is not "disinterested" within the
meaning of Rule 16b-3, the Plan shall be administered by a
Committee in accordance with Rule 16b-3.
(ii) Once appointed, the Committee shall continue to serve until
otherwise directed by the Board. From time to time the Board
may increase the size of the Committee and appoint additional
members thereof, remove members (with or without cause),
appoint new members in substitution therefor, and fill
vacancies however caused; provided, however, that at no time
may any person serve on the Committee if that person's
membership would cause the Committee not to satisfy the
"disinterested administration" requirements of Rule 16b-3.
(b) Powers of the Board. Subject to the provisions of the Plan, the
Board shall have the authority, in its discretion: (i) to grant
Incentive Stock Options and Nonstatutory Stock Options; (ii) to
determine, upon review of relevant information and in accordance
with Section 2 of the Plan, the Fair Market Value of the Common
Stock; (iii) to determine the exercise price per Share of Options to
be granted, which exercise price shall be determined in accordance
with Section 8(a) of the Plan; (iv) to determine the Employees to
whom, and the time or times at which, Options shall be granted and
the number of Shares to be represented by each Option; (v) to
interpret the Plan; (vi) to prescribe, amend and rescind rules and
regulations relating to the Plan; (vii) to determine the terms and
provisions of each Option granted including, without limitation, the
terms of exercise (including the period of exercisability) or
forfeiture of Options granted hereunder upon termination of the
employment of an Employee; (viii) to accelerate or defer (with the
consent of the Optionee) the exercise date of any Option; (ix) to
authorize any person to execute on behalf of the Company any
instrument required to effectuate the grant of an Option previously
granted by the Board; (x) to accept or reject the election made by
an Optionee pursuant to Section 17 of the Plan; and (xi) to make all
other determinations deemed necessary or advisable for the
administration of the Plan.
(c) Effects of Board's Decision. All decisions, determinations and
interpretations of the Board shall be final and binding on all
Optionees and any other holders of any Options granted under the
Plan.
(d) Inability of Committee to Act. In the event that for any reason the
Committee is unable to act or if the Committee at the time of any
grant, award or
<PAGE>
other acquisition under the Plan of options or Shares does not
consist of two or more Non-Employee Directors, than any such grant,
award or other acquisition may be approved or ratified in any other
manner contemplated by subparagraph (d) of Rule 16b-3.
5. Eligibility.
(a) Consistent with the Plan's purposes, Options may be granted only to
Employees, Directors, Consultants and other Independent Contractors of
the Company as determined by the Board. An Employee who has been
granted an Option may, if he is otherwise eligible, be granted an
additional Option or Options. Incentive Stock Options may be granted
only to those Employees who meet the requirements applicable under
Section 422 of the Code.
(b) Unless otherwise provided in the applicable Stock Option Agreement,
all Options granted to the Employees of the Company under the Plan
will be subject to forfeiture until such time as the Optionee has been
continuously employed by the Company for one year after the date of
the grant of the Options, and may not be exercised prior to such time.
At such time as the Optionee has been continuously employed by the
Company for one year, the foregoing restriction shall lapse and the
Optionee may exercise the Options at any time otherwise consistent
with the Plan.
(c) With respect to Incentive Stock Options, the aggregate Fair Market
Value (determined at the time the Incentive Stock Option is granted)
of the Common Stock with respect to which Incentive Stock Options are
exercisable for the first time by the employee during any calendar
year (under all employee benefit plans of the Company) shall not
exceed One Hundred Thousand Dollars ($100,000).
6. Stockholder Approval and Effective Dates. The Plan became effective upon
approval of the Board. No Option may be granted under the Plan after July 31,
2009 (ten years from the effective date of the Plan); provided, however that the
Plan and all outstanding Options shall remain in effect until such Options have
expired or until such Options are canceled.
7. Term of Option. Unless otherwise provided in the Stock Option Agreement, the
term of each Option shall be five (5) years from the date of grant thereof. In
no case shall the term of any Option exceed ten (10) years from the date of
grant thereof. Notwithstanding the above, in the case of an Incentive Stock
Option granted to an Employee who, at the time the Incentive Stock Option is
granted, owns ten percent (10%) or more of the Common Stock as such amount is
calculated under Section 422(b)(6) of the Code ("Ten Percent Stockholder"), the
term of the Incentive Stock Option shall be five (5) years from the date of
grant thereof or such shorter time as may be provided in the Stock Option
Agreement. If an option granted to the Company's chief executive officer or to
any of the Company's other four most highly compensated officers is intended to
qualify as "performance-based" compensation under Section 162(m) of the Code,
the exercise price of such option shall not be less than 100% of the Fair Market
Value of a Share on the date such option is granted.
<PAGE>
8. Exercise Price and Payment.
(a) Exercise Price. The per Share exercise price for Shares to be issued
pursuant to exercise of an Option shall be determined by the Board,
but in the case of an Incentive Stock Option shall be no less than
one hundred percent (100%) of the Fair Market Value per Share on the
date of grant, and in the case of Nonstatutory Stock Option shall be
no less than eighty-five percent (85%) of the Fair Market Value per
Share on the date of the grant. Notwithstanding the foregoing, in
the case of an Incentive Stock Option granted to an Employee who, at
the time of the grant of such Incentive Stock Option, is a Ten
Percent Stockholder, the per Share exercise price shall be no less
than one hundred ten percent (110%) of the Fair Market Value per
Share on the date of grant.
(b) Payment. The price of an exercised Option and the Employee's portion
of any taxes attributable to the delivery of Common Stock under the
Plan, or portion thereof, shall be paid:
(i) In United States dollars in cash or by check, bank draft or
money order payable to the order of the Company; or
(ii) At the discretion of the Board, through the delivery of shares
of Common Stock with an aggregate Fair Market Value equal to
the option price and without holding taxes, if any; or
(iii) At the election of the Optionee pursuant to Section 17 and
with consent of the Board pursuant to Section 4(b)(x), by the
Company's retention of such number of shares of Common Stock
subject to the exercised Option which have an aggregate Fair
Market Value on the exercise date equal to the Employee's
portion of the Company's aggregate federal, state, local, and
foreign tax withholding and FICA and FUTA obligations with
respect to income generated by the exercise of the Option by
Optionee; or
(iv) By a combination of (i), (ii) and (iii) above.
The Board shall determine acceptable methods for tendering Common Stock as
payment upon exercise of an Option and may impose such limitations and
prohibitions on the use of Common Stock to Exercise an Option as it deems
appropriate.
9. Exercise of an Option.
(a) Procedure for Exercise; Rights as a Stockholder. Any Option granted
hereunder shall be exercisable at such times and under such
conditions as determined by the Board, including performance
criteria with respect to the Company and/or the Optionee, and as
shall be permissible under the terms of the Plan. Unless otherwise
determined by the Board at the time of grant, an Option may be
exercised in whole or in part. An Option may not be exercised for a
fraction of a Share.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the
terms of the Option by the person entitled to exercise the Option
and full payment for the
<PAGE>
Shares with respect to which the Option is exercised has been
received by the Company. Full payment may, as authorized by the
Board, consist of any consideration and method of payment allowable
under Section 8(b) of the Plan. Until the issuance (as evidenced by
the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company) of the stock certificate
evidencing such Shares, no right to vote or receive dividends or any
other rights as a stockholder shall exist with respect to the
Optioned Stock, notwithstanding the exercise of the Option. No
adjustment will be made for a dividend or other right for which the
record date is prior to the date the stock certificate is issued,
except as provided in Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares which thereafter may be available, both for
purposes of the Plan and for sale under the Option, by the number of
Shares to which the Option is exercised.
(b) Termination of Status as an Employee. Unless otherwise provided in
the applicable Stock Option Agreement, if an Employee's employment
by the Company is terminated for cause, then any Option held by the
Employee shall be immediately canceled upon termination of
employment and the Employee shall have no further rights with
respect to such Option. Unless otherwise provided in the Stock
Option Agreement, if an Employee's employment by the Company is
terminated for reasons other than cause, and does not occur due to
death or disability, then the Employee may, with the consent of the
Board, for ninety (90) days after he ceases to be an Employee of the
Company, exercise his Option to the extent that he was entitled to
exercise it at the date of such termination. For the purposes of
this plan only, a non-Employee Director is deemed to be an Employee.
To the extent that he was not entitled to exercise the Option at the
date of such termination, or if he does not exercise such Option
(which he was entitled to exercise) within the time specified herein
or in the applicable Stock Option Agreement, the Option shall
terminate.
(c) Disability. Unless otherwise provided in the applicable Stock Option
Agreement, notwithstanding the provisions of Section 9(b) above, in
the event an Employee is unable to continue his employment with the
Company as a result of his permanent and total disability (as
defined in Section 22(e)(3) of the Code), he may, but only within
twelve (12) months from the date of termination, exercise his Option
to the extent he was entitled to exercise at the date of such
termination. To the extent that he was not entitled to exercise the
Option at the date of such termination, or if he does not exercise
such Option (which he was entitled to exercise) within the time
specified herein or in the applicable Stock Option Agreement, the
Option shall terminate.
(d) Death. Unless otherwise provided in the Stock Option Agreement, if
an Employee dies during the term of the Option and is at the time of
his death
<PAGE>
an Employee of the Company who shall have been in continuous status
as an Employee since the date of grant of the Option, the Option may
be exercised at any time within twelve (12) months following the
date of death (or such other period of time as is determined by the
Board) by the Employee's estate or by a person who acquired the
right to exercise the Option by bequest or inheritance, but only to
the extent that an Employee was entitled to exercise the Option on
the date of death. To the extent the Employee was not entitled to
exercise the Option on the date of death, or if the Employee's
estate, or person who acquired the right to exercise the Option by
bequest or inheritance, does not exercise such Option (which he was
entitled to exercise) within the time specified herein or in the
applicable Stock Option Agreement, the Option shall terminate.
10. Non-Transferability of Options. An Option may not be sold, pledged,
assigned, hypothecated, transferred or disposed of in any manner other than by
will or by the laws of descent or distribution, or pursuant to a "qualified
domestic relations order" under the Code and ERISA, and may be exercised, during
the lifetime of the Optionee, only by the Optionee.
11. Adjustments Upon Changes in Capitalization of Merger. Subject to any
required action by the stockholders of the Company, the number of shares of
Common Stock covered by each outstanding Option, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options have yet been granted or which have been returned to the Plan
upon cancellation or expiration of an Option, as well as the price per share of
Common Stock covered by each such outstanding Option, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration". Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding, and conclusive.
Except as expressly provided herein, no issuance by the company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect and no adjustment by reason thereof, shall be made with respect to
the number or price of shares of Common Stock subject to an Option.
In the event of the proposed dissolution or liquidation of the Company, the
Option will terminate immediately prior to the consummation of such proposed
action, unless otherwise provided by the Board. The Board may, in the exercise
of its sole discretion in such instances, declare that any Option shall
terminate as of a date fixed by the Board and give each Optionee the right to
exercise his Option as to all or any part of the Optioned Stock, including
Shares as to which the Option would not otherwise be exercisable. In the event
of a proposed sale of all or substantially all of the assets of the Company, or
the merger of the Company with or into another corporation, the Option
<PAGE>
shall be assumed or an equivalent Option shall be substituted by such successor
corporation or a parent or subsidiary of such successor corporation, unless the
Board determines, in the exercise of its sole discretion and in lieu of such
assumption or substitution, that an Optionee shall have the right to exercise
the Option as to all of the Optioned Stock, including Shares as to which the
Option would not otherwise be exercisable. If the Board makes an Option fully
exercisable in lieu of assumption or substitution in the event of a merger of
sale of assets, the Board shall notify the Optionee that the Option shall be
fully exercisable for a period of sixty (60) days from the date of such notice
(but not later than the expiration of the term of the Option under the Option
Agreement), and the Option will terminate upon the expiration of such period.
12. Time of Granting Options. The date of grant of an Option shall, for all
purposes, be the date on which the Board makes the determination granting such
Option. Notice of the determination shall be given to each Employee to whom an
Option is so granted within a reasonable time after the date of such grant.
13. Amendment and Termination of the Plan.
(a) Amendment and Termination. The board may amend from time to time or
terminate the Plan in such respects as the Board may deem advisable;
provided, however, that the following revisions or amendments shall
require approval of the Stockholders of the Company, to the extent
required by law, rule, or regulation:
(i) Any material increase in the number of Shares subject to the
Plan, other than in connection with an adjustment under
Section 11 of the Plan;
(ii) Any material change in the designation of the Employees
eligible to be granted Options; or
(iii) Any material increase in the benefits accruing to participants
under the Plan.
(b) Effect of Amendment or Termination. Any such amendment or
termination of the Plan shall not affect Options already granted and
such Options shall remain in full force and effect as if this Plan
had not been amended or terminated, unless mutually agreed otherwise
between the Optionee and the Board, which agreement must be in
writing and signed by the Optionee and the Company.
14. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant to
the exercise of an Option unless the exercise of such Option and the issuance
and delivery of such Shares pursuant thereto shall comply with all relevant
provisions of law, including, without limitation, the Securities Act of 1933, as
amended, the Exchange Act, the rules and regulations promulgated thereunder, and
the requirements of any stock exchange upon which the Shares may then be listed,
and shall be further subject to the approval of counsel for the Company with
respect to such compliance.
As a condition to the exercise of an Option, the Company may require the person
exercising such Option to represent and warrant at the time of any such exercise
that
<PAGE>
the Shares are being purchased only for investment and without any present
intention to sell or distribute such Shares if, in the option of counsel for the
company, such a representation is required by any aforementioned relevant
provisions of law.
Inability of the Company to obtain authority from any regulatory body having
jurisdiction, which authority is deemed by the Company's counsel to be necessary
to the lawful issuance and sale of any Shares hereunder, shall relieve the
Company of any liability in respect of the failure to issue or sell such Shares
as to which such requisite authority shall not have been obtained.
In the case of an Incentive Stock Option, any Optionee who disposes of Shares of
Common Stock acquired upon the exercise of an Option by sale or exchange (a)
either within two (2) years after the date of the grant of the Option under
which the Common Stock was acquired or (b) within one (1) year after the
acquisition of such Shares of Common Stock shall notify the Company of such
disposition and of the amount realized upon such disposition.
15. Reservation of Shares. The Company will at times reserve and keep available
such number of Shares as shall be sufficient to satisfy the requirements of the
Plan.
16. Option Agreement. Options shall be evidenced by Stock Option Agreements in
such form as the Board shall approve.
17. Withholding Taxes. Subject to Section 4(b)(x) of the Plan and prior to the
Tax Date, the Optionee may make an irrevocable election to have the Company
withhold from those Shares that would otherwise be received upon the exercise of
any Option, a number of Shares having Fair Market Value equal to the minimum
amount necessary to satisfy the Company's federal, state, local and foreign tax
withholding obligations and FICA and FUTA obligations with respect to the
exercise of such Option by the Optionee.
An Optionee who is also an officer of the Company must take the above described
election:
(a) at least six months after the date of grant of the Option (except in
the event of death or disability); and
(b) either:
(i) six months prior to the Tax Date, or
(ii) prior to the Tax Date and during the period beginning on the
third business day following the date the Company releases its
quarterly or annual statement of sales and earnings and ending
on the twelfth business day following such date.
18. Miscellaneous Provisions.
(a) Plan Expense. Any expense of administering this Plan shall be borne
by the Company.
(b) Use of Exercise Proceeds. The payment received from the Optionees
from the exercise of Options shall be used for the general corporate
purposes of the Company.
<PAGE>
(c) Construction of Plan. The place of administration of the Plan shall
be in the State of New York, and the validity, construction,
interpretation, administration and effect of the Plan and of its
rules and regulations, and rights relating to the Plan, shall be
determined in accordance with the laws of the State of New York
without regard to conflict of law principles and, where applicable,
in accordance with the Code.
(d) Taxes. The Company shall be entitled if necessary or desirable to
pay or withhold the amount of any tax attributed to the delivery of
Common Stock under the Plan from other amounts payable to the
Employee after giving the person entitled to receive such Common
Stock notice as far in advance as practical, and the Company may
defer making delivery of such Common Stock if any such tax may be
pending unless and until indemnified to its satisfaction.
(e) Indemnification. In addition to such other rights of indemnification
as they may have as members of the Board, the members of the Board
shall be indemnified by the Company against all costs and expenses
reasonably incurred by them in connection with any action, suit or
proceeding to which they or any of them may be party by reason of
any action taken or failure to act under or in connection with the
Plan or any Option, and against all amounts paid by them in
settlement thereof (provided such settlement is approved by
independent legal counsel selected by the Company) or paid by them
in satisfaction of a judgement in any such action, suite or
proceeding, except a judgement based upon a finding of bad faith;
provided that upon the institution of any such action, suite or
proceeding a Board member shall, in writing, give the Company notice
thereof and an opportunity, at its own expense, to handle and defend
the same before such Board member undertakes to handle and defend it
on her or his own behalf.
(f) Gender. For purposes of this Plan, words used in the masculine
gender shall include the female and neuter, and the singular shall
include the plural and vice versa, as appropriate.
(g) No Employment Agreement. The Plan shall not confer upon any Optionee
any right with respect to continuation of employment with the
Company, nor shall it interfere in any way with his right or the
Company's right to terminate his employment at any time.
EX-10.7
DEVELOPMENT AND SUPPLY AGREEMENT
THIS AGREEMENT is made as of July 9, 1999 by Welch Allyn Data
Collection, Inc, a subsidiary of Welch Allyn, Inc. having a place of business at
4619 Jordan Road, Skaneateles Falls, NY 13153, and any subsidiaries ("WADC") and
INTELLI-CHECK, INC., a New York Corporation, having its place of business at 775
Park Avenue, Suite 340, Huntington, NY 11743 ("ICI")
WHEREAS, ICI is a developer of age and identification verification
software and electronic products.
WHEREAS, WADC is a manufacturer of electronic products having
substantial experience and expertise in the manufacture of such products.
WHEREAS, ICI desires to contract with WADC for the manufacture
of its age and identification verification products;
WHEREAS, ICI and WADC further agree to provide a basis for requesting
proposals, bids and for ICI placing orders with WADC.
NOW, THEREFORE, in light of and in consideration of the mutual
covenants contained herein, ICI and SUPPLIER hereby agree as follows:
A. Definitions.
1. "Age Verification Marketplace" shall mean age verification
applications involving electronic products and/or software whose
functionality for the validation of age for compliance with laws
in the sale of age restricted products or services, including, but
not limited to sales of Alcohol, Tobacco, Lottery, Movie Tickets,
Gun Control and Pharmaceuticals.
2. "Age Verification Units" shall mean WADC's ST1400 as modified for
ICI pursuant to this Agreement and the agreed upon specifications.
3. "Background Technology" shall mean any and all information,
system, process, specification, software, or other materials of a
proprietary or confidential nature owned or controlled by a Party
prior to the signing of this letter or hereafter owned or
controlled by a Party which relates to or is used in the design,
development, testing, evaluation or manufacture of the Age
Verification Units and which is not included as Developed
Technology.
4. "Developed Technology" shall mean any and all information, system,
process, specification, software, or other materials of a
proprietary or confidential nature pertaining to the Age
Verification Units and any prototypes that are developed or
conceived after the signing of this letter pursuant to the course
of the project.
5. "NDA" shall mean the Proprietary Information and Exchange
Agreement between the parties dated December 9, 1997 as amended
February 12, 1999.
6. "Unique Material" shall mean those items listed in Schedule 1
which is attached and incorporated by reference and any volume
based commitments made by WADC based upon ICI's orders.
<PAGE>
B. Phases of the Project.
1. Phase 0.
ICI shall pay WADC $* for non-recurring engineering ("NRE") as defined
in Schedule 2, to develop Age Verification Units in accordance
with the attached Phase 0 specification as defined in Schedule 4.
ICI shall place a non-cancelable purchase order for a minimum of
1,000 Age Verification Units, at a unit cost of $* with an
immediate release of 500 said units.
If ICI places an order for 5,000 Phase 1 Age Verification
Units, with an immediate release of no less than 1,000 Phase
1 Age Verification Units, prior to the delivery of the 500th
Phase 0 Age Verification Unit, then the remaining balance of
the Phase 0 Purchase Order would be immediately cancelled
with no further obligation to ICI.
b. ICI will place a non-cancelable purchase order for 25
prototype Age Verification Units at cost of $* per unit to
be delivered no later than July 23, 1999.
c. Payment terms for Phase 0 Age Verification Units are 50% of
the unit cost in advance, with the balance due 30 days after
the date of invoice, which shall be the date of shipment by
WADC. WADC acknowledges that it has received a check from
ICI dated June 18, 1999, in the amount of $* upon deposit by
WADC, said amount shall cover payment of the NRE and advance
payment amounts described in Sections B1a and B1b.
2. Phase 1.
a. Upon receipt of a purchase order from ICI for Phase 1 Age
Verification Units, WA will schedule Phase 1 development
work in the attached Phase 1 specification as defined in
Schedule 5, and deliver a specific time line to ICI.
b. NRE for Phase 1 shall be $*.
c. ICI shall pay 30% of the NRE in advance, with the balance
to be paid at agreed upon milestones.
NRE paid in Phase 1 of the project would be recouped by ICI on a
per unit basis, as follows:
$* credited to ICI on the first 5,000 Age
Verification Units purchased after
commencement of Phase 1
$* on the next 5,000 Age Verification Units
purchased by ICI.
e. Minimum orders shall be 5,000 units per order
with a minimum shipment release quantity of 500
unit per release. Payment terms shall be
determined by agreement of the parties at the
time of order placement for Phase 1. Prices net
of the credit described in Section B2d are set
forth in the following Table:
Unit Price
Quantity Unit Price (Net of Credit)
* REDACTED PURSUANT TO RULE 406 UNDER THE SECURITIES ACT. FILED SEPARATELY
IN UNREDACTED FORM SUBJECT TO A REQUEST FOR CONFIDENTIAL INFORMATION UNDER
RULE 406.
<PAGE>
f. In the event of a cancellation by ICI of any Phase 1
purchase order, or in the event WADC accumulates more than a
120-day supply of any Unique Material, or in the event of
termination of this Agreement (except for breach by WADC),
ICI agrees to remit payment to WADC for said Unique
Materials and for any work in progress at the time of
termination within 30 days of the date of invoice by WADC.
During the term of this Agreement, and contingent upon ICI
purchasing the minimum quantities of Age Verification Units
set forth in this Section, WADC agrees that it will not
market, sell, manufacture, or distribute products which have
age verification functionality for the Age Verification
Marketplace as its primary function, and WADC shall not add
age verification as a feature to its ST-1400. WADC further
agrees that it will not provide age verification products to
Welch Allyn, Inc. for the Age Verification Marketplace. The
minimum quantities are as follows:
<PAGE>
For the one-year period commencing on first shipment
of Phase 1 Age Verification Units, the minimum
purchase requirement is 5,000 Age Verification
Units.
For the succeeding year, the minimum purchase
requirement is 7,500 Age Verification Units.
If ICI purchases a greater number of Age Verification Units
than the minimum required number during a given year, then
any excess units purchased in a given year shall be counted
toward the minimum number of Age Verification Units required
to be purchased in the subsequent year. If ICI fails to meet
any minimum purchase requirement, then WADC shall have no
obligations under this Section.
h. The parties will meet every 6-months to review each party's
performance hereunder for the previous 6-months.
Changes.
ICI may at any time, by written notice, request changes in the
specifications for the Age Verification Units. The process to be used
for changes is as follows:
1. ICI requests change in sufficient detail to allow WADC to
understand the cost and/or schedule impacts of requested
change.
2. WADC responds to request for change by providing a written
quotation to ICI communicating the impact of the requested
change.
3. Upon receipt of ICI's written confirmation of acceptance of
the quotation, WADC will act on the change request.
If any such change causes an increase or decrease in the cost of, or
the time required for, the performance of any part of the work under an
existing order, whether or not modified by any such change, an
equitable adjustment shall be made in the price or delivery schedule,
or both, and the order modified in writing accordingly.
D. Limitations.
If WADC desires to add age verification as a feature to one of its
other products, then WADC agrees to provide ICI with 90-days prior
written notice of its intent to add such feature. WADC
<PAGE>
further agrees that it will not give ICI any such notice during the
first 90-days after delivery of the 500 released Phase 0 Age
Verification Units to ICI. In no event however, shall supplier be
entitled to utilize any Intellectual Property of ICI, which exists or
has been previously provided or obtained by Supplier.
E. Intellectual Property Rights.
1. All Background Technology shall remain the exclusive property of
the Party from whom such Background Technology is derived.
2. Any Developed Technology that is developed solely by one party
shall remain the sole property of the developing party. All rights to
sell products using such solely owned Developed Technology remain with
the developing party. Developed Technology of WADC is listed in
Schedule 3 as Generic Improvements to the ST-1400.
3. Developed Technology that is customized for ICI is listed in
Schedule 2 as Customizations. ICI shall have the exclusive rights to
purchase, use and sell said Customizations. In addition, upon payment
of all NRE described in this Agreement, ICI shall own any tooling for
the Customizations. Once ICI has paid for and accepted delivery of the
12,500 Age Verification Units described in B2, then ICI shall have the
right, at its option, to give WADC 30 days notice that it desires to
remove said tooling. Upon the expiration of such notice, WADC shall
permit removal of such tooling at ICI's expense.
4. There is currently no jointly Developed Technology.
Indemnity Against Claims.
The parties shall each be responsible for all damages resulting from
its own negligence and shall maintain liability insurance coverage that
will indemnify itself and the other party for any losses resulting from
its negligence.
Infringement Indemnification.
ICI agrees to indemnify and hold harmless WADC from and against any
claim, liability, loss, damage, cost or expense (including reasonable
attorneys' fees), made by any third party that the use or sale of any
Age Verification Unit constitutes an infringement of any US patent,
copyright or other intellectual property right. ICI will assume the
defense of any action or suit against WADC relating thereto provided
that:
<PAGE>
WADCpromptly notifies ICI of the commencement of any action
or suit, or threats thereof, and furnishes ICI with copies
of all documents in WADC's possession relating thereto
The manner in which such action or suit shall be handled or
otherwise disposed shall be at ICI's sole discretion
WADCagrees not to take any action or incur any cost with
respect to such claim or proceeding without ICI's
direction, unless ICI fails to respond to such claim or
proceeding, or any part thereof, in a timely manner,
thereby jeopardizing WADC.
Warranty.
WADC warrants the Age Verification Units to be functional and free from
manufacturing defects at the time of delivery. WADC warrants that it
will replace or repair, at its option, any Age Verification Unit that
fails to perform according to its published specifications during a
<PAGE>
period of one (1) year from the date of end-user registration, but not
longer than 24-months after shipment by WADC to ICI.
The warranty does not apply if, in the sole opinion of WADC,
the Age Verification Unit has been damaged by accident, misuse,
neglect, improper shipping and handling. The warranty is valid only if
the Age Verification Unit has not been tampered with, disassembled, or
serviced by any party unauthorized by WADC as a repair facility.
No Age Verification Units will be accepted by WADC without a
Return Materials Authorization, which may be obtained by contacting
WADC.
IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR ANY LOSS, INCONVENIENCE
OR DAMAGE WHETHER DIRECT, INCIDENTAL, CONSEQUENTIAL OR OTHERWISE.
Confidentiality.
The parties agree that the term of the NDA shall be extended to
coincide with the term of this Agreement, and that all obligations of
confidentiality are set forth therein. In addition, WADC may use, if
required, ICI Confidential Information, as defined in the NDA, for the
purpose of developing and manufacturing Age Verification Units for ICI.
J. Term and Termination.
1. Subject to being terminated as provided below, this Agreement
shall be valid for an initial term of two (2) years, and will be
automatically renewed for additional one (1) year periods, unless
either party terminates this Agreement by giving written notice to
the other as follows:
a. The other party fails to perform or satisfy any of the
conditions, covenants or obligations of this Agreement and
such failure continues for more than thirty (30) days after
written notice of the failure is given; or
b. The other party files or has filed against it, a petition
seeking relief under any bankruptcy, insolvency,
reorganization, moratorium, liquidation or other similar law
affecting creditors' rights; or
c. Upon 90 days written notice prior to the end of the term or
any automatic extension thereof.
Termination of this Agreement, for any reason, shall not relieve either
party hereto of any obligations arising prior to said termination.
All copies of information that constitutes Confidential Information
pursuant to Section I hereto and has been disclosed by either
party hereunder, that are in the hands of or control of the other
party, shall be returned to the owner within ten (10) days of the
effective date of such termination. Those copies that cannot be
returned to the owner shall be erased, eliminated, or otherwise
destroyed, and a certification thereof shall be delivered upon
request of the owner.
1.
Licensing (Right of First Refusal). If WADC ceases to manufacture the ST-1400 or
any updated version thereof, then WADC agrees that ICI shall have a right of
first refusal to license and/or purchase the rights needed for ICI to make or
have made the ST-1400 or the latest updated version thereof.
<PAGE>
Entire Agreement. This Agreement, and the NDA are the entire understanding
between the parties. Except for the NDA, this Agreement supersedes any prior
written or oral agreements or understandings and can only be amended by written
agreement of the parties. If there is any conflict between this Agreement and
the terms of any purchase order or quotation, then this Agreement shall control.
No additions, modifications, or deletions to this Agreement shall be binding
unless signed by both parties.
<PAGE>
Facsimile Signature. If this Agreement is transmitted by facsimile, the signed
facsimile version of this, as received, shall constitute the original, and shall
be binding on the parties as if it were manually signed. The parties agree that
they may treat and rely upon any signed facsimile version hereof as the signed
original.
Understood and Agreed to:
Intelli-Check, Inc. Welch Allyn Data Collection, Inc.
By:______________________________ By:__________________________________
Frank Mandelbaum Kevin R. Jost
CEO President/COO
Date:_____________________ Date:________________________
<PAGE>
Schedule 1*
(Unique Items Listing)
<PAGE>
Schedule 2
(NRE Outline)
$* Non-recurring engineering, tooling, documentation conversion, editing
and setup charges to produce the Phase 0 Age Verification Unit.
Non-recurring Engineering Charges
*
Production Tooling Charges
*
<PAGE>
Schedule 3
Developed Technology
Generic Improvements to WADC ST-1400
*
Customizations
<PAGE>
Schedule 4
(WA Phase 0 Specification No XXXXX)
<PAGE>
Schedule 5
(WA Phase 1 Specification No XXXXX)
EX-10.8
AGREEMENT
THIS AGREEMENT is entered into this day of August, 1999 by and between
NORTHERN LEASING SYSTEMS, INC. ("NLSI"), a New York corporation, and
INTELLI-CHECK, INC. ("ICI"), a New York corporation.
WHEREAS, the parties wish to make certain agreements regarding
distributorship rights of ICI's products as more fully set forth below;
NOW, THEREFORE, in consideration of the mutual covenants herein contained
and other valuable consideration, the receipt of which are hereby acknowledged,
the parties hereby agree as follows:
1. Distributorship Rights. ICI hereby grants to NLSI the exclusive right to
distribute, market, lease and sell ICI's current and future products based upon
its ID-Check technology ("ID-Check Products") through the independent sales
organization ("ISO") market in the entire United States and its Territories
("Approved Market Area"). As used in this Agreement the terms "independent sales
organization" and "ISO" shall mean any person, corporation, organization or
entity that markets credit card processing equipment or whose primary business
is marketing equipment using equipment lease financing. ICI will not be required
to distribute through NLSI or its affiliated ISO's ID-Check Products sold to
integrators of POS/cash register systems.
<PAGE>
2. Term; Termination.
2.1 Initial Term. The initial term of this Agreement shall begin on the
date on which ICI begins production (the "Production Commencement Date") of
ID-Check Products, which are available for sale or lease through ISO's or NLSI.
The Production Commencement Date shall be confirmed in writing by the parties to
this Agreement.
2.2 Automatic Renewal of Term. The term of this Agreement shall continue
and shall be automatically renewed thereafter if NLSI shall have purchased,
either directly or through ISO's, the following minimums of ID-Check Products
for sale or lease during the time period specified:
Minimum Number of
Time Period Units to be purchased
----------- ---------------------
By the end of the first year
after the Production Commencement Date 2,500
By the end of the second year
after the Production Commencement Date 12,000
Thereafter, a new one-year term shall commence and each year thereafter the term
shall be automatically renewed for an additional one year period provided that
NLSI shall have purchased, either directly or through ISO's, a minimum of
fifteen thousand (15,000) ID-Check Products for sale or lease during the
previous year. For purposes of the minimums established by this Section, upgrade
cards shall not be included in ID-Check Products.
2.3 Termination. In the event NLSI fails to satisfy the
- 2 -
<PAGE>
purchase requirements set forth in Section 2.2, ICI may review its relationship
with NLSI and terminate that aspect of this Agreement that relates to NLSI's
exclusive distributorship, upon 30 days written notice to NLSI. It is understood
and agreed that, in consideration of NLSI introducing ICI to the ISO's, the
provisions of Sections 3.1 and 5 relating to NLSI acting as exclusive lease
finance source of ICI shall continue, even if its exclusive distributorship
rights are terminated. It is further understood and agreed that ICI will provide
such training for the ISO's as NLSI shall reasonably require and shall provide
marketing and sales support, as well as sufficient production to enable NLSI to
meet the purchase requirements set forth in Section 2.2 hereof. In the event ICI
shall fail to comply with the preceding sentence, the purchase requirements of
Section 2.2 hereof will not be applicable. Furthermore, in the event ICI fails
to fulfill orders placed by NLSI or the ISO's, such orders shall be counted
toward the purchase requirements set forth in Section 2.2 hereof.
2.4 Bankruptcy. ICI may terminate this Agreement immediately: (i) upon the
commencement by NLSI of any voluntary proceeding under any bankruptcy,
insolvency or similar law, (ii) upon the commencement of any involuntary
proceeding against NLSI under any such law, in the event such proceeding shall
not be dismissed within 90 days of the commencement thereof, (iii) upon the
appointment of a receiver, liquidator, assignee, trustee or similar official of
NLSI, or any substantial part of its assets,
- 3 -
<PAGE>
or (iv) in the event NLSI makes a general assignment for the benefit of
creditors or admits in writing to a court of competent jurisdiction its
inability to pay debts as they mature.
3. ICI Obligations.
3.1 Referrals.
3.1.1 ICI agrees that in the event any ISO in the Approved Market Area
contacts ICI in connection with purchasing or leasing ID-Check Products, ICI
shall refer such ISO to NLSI. ICI shall not sell ID-Check Products directly to
an ISO without NLSI's consent nor will ICI refer such ISO to any other lease
finance company.
3.1.2 ICI acknowledges the importance of equipment lease financing to its
marketing strategy for ID-Check Products and agrees to promote the use of
equipment lease financing to its customers and other distributors. ICI agrees to
recommend NLSI to ICI's customers and other distributors in the Approved Market
Area interested in using such financing for ID-Check Products. ICI shall not
recommend any other lease finance company to its customers and other
distributors.
3.1.3 It is understood and agreed that NLSI shall have complete discretion
to decline to enter into any lease finance arrangement with any customer or
distributor, including a customer or distributor referred to it by ICI.
3.2 Pricing. ICI agrees that it will sell ID-Check Products to NLSI and
the ISO's at prices no higher than the lowest price ICI sells such ID-Check
Products to other
- 4 -
<PAGE>
distributors. NLSI or the ISO shall be responsible for any shipping charges for
ID-Check Products purchased from ICI.
3.3 Sales Literature. ICI will furnish NLSI, without charge, a reasonable
supply of price lists, sales literature, books, catalogs, and the like, as ICI
may prepare for national distribution and shall also provide NLSI with technical
and sales assistance to assist NLSI in effectively carrying out its activities
under this Agreement.
3.4 Fulfillment. ICI shall use reasonable efforts to fulfill all orders
issued by NLSI and the ISO's.
4. Representations.
4.1 Independent Contractors. NLSI and ICI agree that in all matters they
are and shall be acting as independent contractors. Neither NLSI nor ICI is, and
shall not hold itself out as, an agent, employee, partner or joint venturer of
the other.
4.2 Non-Compete. At all times during the term of this Agreement, and for a
period of one (1) year following the termination of this Agreement by NLSI, NLSI
agrees that it will not, directly or indirectly, sell, represent or solicit
orders for products, which are in ICI's reasonable opinion, competitive with the
ID-Check Products, within the Approved Market Area, provided, however, that the
foregoing shall not be deemed to prohibit NLSI from financing equipment leases
of competing products.
5. Excess Funding Factor. In the event that (a) ICI refers or
- 5 -
<PAGE>
recommends a customer to NLSI, and (b) ICI quotes to such customer a "Funding
Factor" which is higher than the Funding Factor then in use by NLSI for
equivalent leases and (c) such customer enters into a lease agreement with NLSI
with such higher Funding Factor, NLSI shall pay to ICI the difference between
the amounts collected from such customer pursuant to the higher Funding Factor
and the amounts which would have been collected pursuant to the Funding Factor
generally in effect when the lease was made. It is understood that the foregoing
shall not apply to any lease under which the lessee shall be in default.
6. Scope and Limitation of Rights and Authority.
6.1 No Licenses. No rights to manufacture any of ICI's products including
ID-Check Products or to duplicate software or firmware are granted by this
Agreement. Moreover, no licenses are granted for use of ICI's patents,
trademarks, trade secrets, know-how and the like. ICI will permit NLSI to use
such confidential information as is necessary for NLSI's performance under this
Agreement.
6.2 Resale Prices. All resales of the ID-Check Products by NLSI shall be
strictly for the account of NLSI at prices which NLSI shall establish on its
own, not in combination with ICI or any competitor of ICI or NLSI.
7. Trademark and Warranty.
7.1 Limited License. In connection with the sale, promotion or advertising
of the ID-Check Products, NLSI shall use the name and model number designated by
ICI for each ID-Check
- 6 -
<PAGE>
Product. NLSI shall not in any way alter ICI's labels or other identifying marks
on its ID-Check Products. NLSI further agrees not to use the word Intelli-Check
or any other of ICI's name or trademarks or any name or trademarks similar
thereto, without the expressed written permission of ICI except as hereinafter
provided. ICI hereby grants to NLSI a non-exclusive, non-transferable license
solely during the term of this Agreement to use ICI's trademarks, service marks,
trade name or other symbols, all without alteration and only in connection with
NLSI's promotion and sale of the ID-Check Products and in NLSI's advertising and
promotional materials related thereto.
7.2 Infringement. NLSI agrees to inform ICI of any infringement or
imitation of ICI's trademarks, service marks, trade names or other symbols, or
the use of any trademark, service mark, trade name or other symbol that is
confusingly similar to ICI's of which NLSI becomes aware. If ICI, in its sole
discretion decides to undertake any legal proceeding or action to protect or
enforce its trademarks, service marks, trade names or other symbols, NLSI shall
render any assistance reasonably requested by ICI.
7.3 Warranty. ICI's only warranty obligation with respect to ID-Check
Products sold by NLSI shall be as set forth in ICI's standard printed warranty
as applicable to the particular ID-Check Product (the "Express Product
Warranty"). Any Express Product Warranty shall commence from the date of
shipment from NLSI. The Express Product Warranty shall be subject to the
- 7 -
<PAGE>
following additional limitations and disclaimers of warranties:
(i) Any Express Product Warranty shall become null and void if the
ID-Check Products are used other than under normal conditions, not
properly serviced, or used other than in accordance with relevant
instructions, design and data issued by ICI or NLSI. The ISO's shall be
liable for providing sufficient instruction and demonstrating the proper
use of the ID-Check Products to its customers so that the ID-Check
Products are capable of being used properly in compliance with
instructions and good business practice. The ISO's shall ensure that the
ID-Check Products are sold with all necessary documentation.
(ii) ICI's sole obligation under any Express Product Warranty given
in connection with the ID-Check Products sold hereunder shall be limited
to the repair or replacement (at ICI's option) of the ID-Check Products or
parts thereof which proves not to conform to such warranty, and ICI shall
have forty-five (45) days to make such repair or replacement after its
receipt of notice and proof of such non-conformity.
NLSI shall use its best efforts to make the ISO's aware of ICI's
aforesaid limitations and disclaimers of warranties.
7.4 Disclaimer. EXCEPT FOR THE EXPRESS PRODUCT WARRANTY DESCRIBED IN
SECTION 7.3, ICI MAKES NO WARRANTY, REPRESENTATION
- 8 -
<PAGE>
OR GUARANTY, EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER, INCLUDING BUT NOT
LIMITED TO, ANY WARRANTY OF SUITABILITY FOR A PARTICULAR PURPOSE, OR
MERCHANTABILITY. IN NO EVENT SHALL ICI BE LIABLE FOR CONSEQUENTIAL OR SPECIAL
DAMAGES, INCLUDING BUT NOT LIMITED TO LOST PROFITS.
8. No Offset. NLSI shall not have the right to set off or withhold any amounts
due to ICI hereunder arising out of, or based upon, any counterclaim, breach of
contract, tort or other action against ICI.
9. Cure Period. If NLSI shall have received an ID-Check Product that is
defective, in any way, or of a quantity less than the quantity ordered, NLSI
shall notify ICI within thirty (30) days after receipt of such ID-Check Product
or shall have been deemed to have waived its right to bring a claim for any such
defect or deficiency.
10. Merchandising Program. NLSI shall not use any advertising or promotional
materials, which are not provided by the ICI with respect to the ID-Check
Products without the prior approval of ICI. NLSI shall not make any
representation with respect to the ID-Check Products nor behave in any manner,
which could be deemed to be an implied representation or warranty, unless such
representation is explicitly contained in the Express Product Warranty.
11. Rescheduling, Cancellation or Reconfiguration. Orders which have been
accepted by ICI may be canceled, rescheduled or reconfigured by NLSI or the ISO
subject to the following:
- 9 -
<PAGE>
Days Remaining Rescheduling or
Until Scheduled Cancellation Reconfiguration
Ship Terms Terms
- ---- ----- -----
0-30 days Rescheduling for No reconfiguration
30 days. No permitted
cancellation
permitted.
31-60 days 25% of purchase $100 shall be paid
price shall be by NLSI to
paid to ICI by ICI per order
NLSI for can- change.
cellation.
61 plus days No Charge No Charge
12. Risk of Loss. NLSI or the ISO, as the case may be, shall accept all risk of
loss or damage to ID-Check Products from the time of delivery of such ID-Check
Products F.O.B. ICI's plant of manufacture.
13. Force majeure. Neither ICI nor the NLSI shall be liable for any loss,
damage, penalty or in any other way because of any delay in or failure of
performance hereunder (or failure to give notice of any such delay) due to force
majeure. Any pending delivery schedule under an order or release shall be
considered extended by a period of time equal to the time lost because of any
delay excusable under this section. Should such inability to perform continue
for more than 90 days on the part of one party, the other party may at its
discretion terminate, without liability, such order or release.
14. Indemnity against Claims. Each of the parties hereto shall indemnify and
hold the other party harmless from and against, and shall defend the other party
against, any and all liabilities,
- 10 -
<PAGE>
claims, causes of action, suits, costs, expenses (including reasonable
attorneys' fees), and damages of every kind for injury to or death of any person
or entity and for damage to or loss of property, arising out of or attributed,
directly or indirectly, to any breach of this Agreement.
15. Confidentiality. Each of the parties hereto agrees that it will not disclose
or use at any time either during or subsequent to the term of this Agreement
confidential business information of the other party. Such confidential
information shall include all information, know-how, advice, data and other
technical and business information received in connection with this Agreement,
including, but not be limited to, customer lists, contracts, trade secrets,
trade practices, pricing formulas and policies, sales training development and
marketing techniques and manufacturing techniques, processes and methods.
16. Notices. All notices, requests, demands and other communications required or
permitted under this Agreement shall be in writing and shall be deemed to have
been duly given if personally delivered or if mailed by first class registered
or certified mail return receipt requested, or by first class mail if received,
addressed to the parties at their respective addresses set forth on the
signature page hereof or at such other address as such party may designate by
written notice to the other.
17. Assignment; Parties in Interest.
17.1 This Agreement may not be assigned without the prior
- 11 -
<PAGE>
written consent of the other, provided, however, that such consent shall not be
required for an assignment of this Agreement by either party (i) to an affiliate
or subsidiary of such party or (ii) in connection with a sale of substantially
all its assets, provided, however, that such assignee shall agree to be bound by
the terms and conditions hereof.
17.2 This Agreement shall be binding upon, and shall inure to the benefit of and
be enforceable by, the parties hereto and their respective legal
representatives, successors and permitted assigns, but no other person shall
acquire or have any rights under this Agreement.
18. Entire Agreement; Modification; Waiver. This Agreement constitutes the
entire agreement among the parties with respect to the subject matter hereof and
supersedes all prior agreements and understandings between them or any of them
as to such subject matter. Neither this Agreement nor any provisions hereof may
be modified, amended, waived, discharged or terminated, in whole or in part,
except in writing signed by the party to be charged. Any party may extend the
time for or waive performance of any obligation of any other party or compliance
by any other party with any of the provisions of this Agreement. No waiver of
any such provision or of any breach of or default under this Agreement shall be
deemed or shall constitute a waiver of any other provision, breach or default,
nor shall any such waiver constitute a continuing waiver.
19. Governing Law. This Agreement shall be governed and construed
- 12 -
<PAGE>
and enforced in accordance with the laws of the State of New York applicable to
contracts made and to be performed exclusively in that State without giving
effect to the principles of conflict of laws.
20. Headings; Counterparts. The section headings in this Agreement are for
reference purposes only and shall not define, limit or affect the meaning or
interpretation of this Agreement. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
NORTHERN LEASING SYSTEMS, INC.
By_______________________________
Jay Cohen, President
Address: 132 West 31st Street
14th Floor
New York, New York 10001
INTELLI-CHECK, INC.
By_______________________________
Frank Mandelbaum, Chairman
Address: 775 Park Avenue
Suite No. 340
Huntington, New York 11743
List Of Subsidiaries: None
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated September 24, 1999 for Intelli-Check, Inc. included in or made a part of
this registration statement.
ARTHUR ANDERSEN LLP
New York, New York
September 24, 1999
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<PERIOD-TYPE> 12-Mos 6-Mos
<FISCAL-YEAR-END> Dec-31-1998 Dec-31-1999
<PERIOD-START> Jan-01-1998 Jan-01-1999
<PERIOD-END> Dec-31-1998 Jun-30-1999
<CASH> 159600 174780
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 16693 15894
<CURRENT-ASSETS> 177214 426889
<PP&E> 271379 328114
<DEPRECIATION> 83315 103381
<TOTAL-ASSETS> 451303 766292
<CURRENT-LIABILITIES> 110880 161292
<BONDS> 0 0
0 0
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<COMMON> 4402 5021
<OTHER-SE> (664472) 584219
<TOTAL-LIABILITY-AND-EQUITY> 451303 766292
<SALES> 86354 221
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<CGS> 22074 55
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<OTHER-EXPENSES> 1506615 744847
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 61479 30924
<INCOME-PRETAX> (1503814) (775605)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1503814) (775605)
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<EXTRAORDINARY> 0 0
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