<PAGE> 1
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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 2, 1998
REGISTRATION NO. 333-51845
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
(Exact name of Registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 3398 13-3317668
(State or other jurisdiction of (Primary standard industrial (IRS employer
incorporation or organization) classification code number) identification number)
</TABLE>
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399 EXECUTIVE BOULEVARD
ELMSFORD, NEW YORK 10523
(914) 592-2355
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive office)
MORRIS WEISSMAN
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
399 EXECUTIVE BOULEVARD
ELMSFORD, NEW YORK 10523
(914) 592-2355
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPIES TO:
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<S> <C>
WILLIAM F. SCHWITTER, ESQ. KENNETH R. BLACKMAN, ESQ.
PAUL, HASTINGS, JANOFSKY & WALKER LLP FRIED, FRANK, HARRIS, SHRIVER & JACOBSON
399 PARK AVENUE ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10004
(212) 318-6000 (212) 859-8000
</TABLE>
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If 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 HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED JULY 2, 1998
13,636,000 SHARES
AM. BANKNOTE LOGO
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
COMMON STOCK
All of the shares of the Common Stock of American Bank Note Holographics,
Inc. ("ABNH" or the "Company") being offered hereby (the "Offering") are being
sold by American Banknote Corporation ("ABN" or the "Parent"). The Company will
not receive any of the proceeds from the sale of Common Stock being sold by the
Parent. Prior to the Offering, the Company has been a wholly-owned subsidiary of
the Parent. After the Offering, the Parent will not own any of the Common Stock.
See "Description of Capital Stock."
Prior to the Offering, there has been no public market for the Common
Stock. It is anticipated that the initial public offering price will be between
$10.00 and $12.00 per share. See "Underwriting" for a discussion of the factors
to be considered in determining the initial public offering price. The Common
Stock has been approved for listing on the New York Stock Exchange under the
symbol "ABH."
SEE "RISK FACTORS" COMMENCING ON PAGE 5 FOR A DISCUSSION OF MATERIAL RISKS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS OF THE COMMON STOCK OFFERED
HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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==========================================================================================================
Price Underwriting Proceeds to
to Public Discount(1) Parent(2)
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<S> <C> <C> <C>
Per Share.................................. $ $ $
- ----------------------------------------------------------------------------------------------------------
Total(3)................................... $ $ $
==========================================================================================================
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Parent estimated at $900,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 2,045,400 additional shares of Common Stock solely to cover
over-allotments, if any. If the Underwriters exercise the option in full,
the total Price to Public, Underwriting Discount and Proceeds to Parent will
be $ , $ and $ , respectively, and the
Proceeds to the Company will be $ per share and $ in
total. See "Underwriting."
The shares of Common Stock are offered by the Underwriters named herein,
subject to receipt and acceptance by them and subject to their right to reject
any order in whole or in part. It is expected that delivery of the certificates
representing such shares will be made against payment therefor at the offices of
NationsBanc Montgomery Securities LLC, on or about , 1998.
---------------------
NationsBanc Montgomery Securities LLC
Lazard Freres & Co. LLC
Raymond James & Associates, Inc.
Salomon Smith Barney
, 1998
<PAGE> 3
AMERICAN BANK NOTE HOLOGRAPHICS' CLIENTS
[ART]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES
OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
The Company is not currently a reporting company under the Securities
Exchange Act of 1934, as amended. Following this Offering, the Company intends
to furnish its shareholders with annual reports containing financial statements
audited by its independent auditors and make available to them quarterly reports
containing unaudited financial statements for each of the first three quarters
of each fiscal year.
---------------------
Unless stated otherwise, the holography market data included herein are
based on the study prepared by Reconnaissance International and the University
of Colorado. Market share data for the credit card industry included herein are
based on the Nilson report, a payment system industry newsletter (the "Nilson
Report"). This information has not been prepared or verified by the Company or
the Parent.
HOLOGARD(TM) is a trademark of the Company. All rights are reserved. This
Prospectus includes trade names, trademarks and references to intellectual
property owned by other companies, including Bacardi(TM), Chivas Regal(TM),
Diners Club(TM), Discover(TM), Eli Lilly(TM), Entertainment Weekly(TM), IBM(TM),
Intel(TM), Kelloggs(TM), Lotus(TM), MasterCard(TM), Merck(TM), National
Geographic(TM), Playboy(TM), Skybox International(TM), Sony(TM), Sports
Illustrated(TM), TitanSports(TM) and VISA(TM).
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors," and the financial statements and notes
thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, the
information contained in this Prospectus assumes that the Underwriters' over-
allotment option is not exercised. Unless otherwise indicated, all share and per
share amounts appearing in this Prospectus reflect the Company's 1,363.6 for one
Common Stock split. As used herein, the term "Common Stock" refers to the
Company's common stock, par value $.01 per share.
This Prospectus contains statements which constitute "forward-looking
statements." Such statements appear in a number of places in this Prospectus and
include statements regarding the intent, belief or current expectations of the
Company, its directors or its officers primarily with respect to the future
operating performance of the Company. Prospective purchasers of Common Stock are
cautioned that any such forward-looking statements are not guarantees of future
performance and may involve risks and uncertainties, and that actual results may
differ from those in the forward-looking statements as a result of various
factors, many of which are beyond the control of the Company. Important factors
that could cause such differences include general economic and business
conditions, customer demand and ordering patterns, the time and expense required
for research and development of new products, the availability and cost of
materials, actions of competitors, changes in the Company's business strategy
and other factors discussed under "Risk Factors" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
THE COMPANY
American Bank Note Holographics, Inc. ("ABNH" or the "Company") is a world
leader in the origination, production and marketing of mass-produced secure
holograms, based on its significant market share. The Company's holograms are
used primarily for security applications such as counterfeiting protection for
credit and other transaction cards, identification cards and documents of value,
as well as for tamper resistance and authentication of high-value consumer and
industrial products. ABNH's ability to control the diffraction of light
("origination") using proprietary processes in a secure, controlled
manufacturing environment has enabled ABNH to become a market leader in security
holography. ABNH's proprietary products are used by over 125 customers in more
than 25 countries. Customers include VISA, IBM, Intel, Merck and Eli Lilly, as
well as agencies of the United States government and the Chinese government.
Moreover, at present ABNH is the sole supplier of holograms to certain customers
including MasterCard, Discover, Europay and Diners Club. Based on a study of the
holography industry by Reconnaissance International and the University of
Colorado (the "Study"), management estimates that, in 1997, sales in the
security sector of the holography market were approximately $380 million and
represented approximately 62% of total worldwide holography market sales. Also
based on the Study, management believes that ABNH has the largest worldwide
market share in the security sector, with approximately 8%. The Company also
competes selectively in the market for non-secure holograms used in packaging
and promotional applications, including magazine illustrations, trading cards,
promotions, advertising and specialized packaging. In 1997, the Company derived
95% of its sales from security applications and 5% from packaging and
promotional applications.
The Company attributes its leading position in the security sector of the
holography industry to a number of competitive strengths. ABNH was the first
holography company to produce holograms for credit cards and has developed
relationships with MasterCard, VISA, Europay, Discover and Diners Club. Based on
the Study, management estimates that the Company has a 75% share of the
worldwide market for credit card holograms. The Company has one of the largest
production capacities in the industry and recently became the first holography
company to receive International Organization for Standardization ("ISO") 9001
certification (a certification that a business's quality assurance systems for,
among other things, the design, development and production of products meet
guidelines established by the ISO). The Company has two highly secure, certified
production facilities containing a total of 12 origination laboratories, 13 mass
replication lines and extensive security and quality control procedures, and
expects to add 3 additional replication lines in the second half of 1998. In
addition, the Company's emphasis on research and development ("R&D") has
1
<PAGE> 5
enabled the Company to create new technologies and proprietary production
processes and to deliver innovative products to the marketplace. Further, the
Company holds numerous patents and service marks used in its business.
The Study estimates that total sales of holography products, including
those used for security, packaging, and promotional applications, grew at a
compound annual rate of 31.7% per year, from $90 million in 1990 to $617 million
in 1997. The Study bases its findings on 114 survey respondents out of 248
companies surveyed worldwide. The Study also estimates that total sales of
holography products will grow at a compound annual rate of approximately 25%
over the five year period from 1998 through 2002, reaching almost $1.9 billion
in sales by the year 2002. According to the Study, the security sector of the
holography market, in which ABNH primarily competes, is expected to grow at a
compound annual growth rate of approximately 20% over this same time frame.
Factors contributing to the growth of the security sector of the holography
market include consistent annual growth in the worldwide credit card population;
increased use of card-based payment systems as a supplement to checks and cash;
the introduction of holograms as security features on paper currency, tax
stamps, event tickets and other documents of value; and wider adoption of
holograms for tamper resistance and product authentication on high-value
consumer and industrial products.
The Company's objective is to capitalize on its position as a leader in the
holography industry in order to increase profitably its market share. The
Company's business strategy is comprised of the following six principal
components: (i) leverage its leadership position in the security sector of the
holography market; (ii) expand ABNH's security products and services for
licensed products; (iii) grow through strategic acquisitions; (iv) focus on
international expansion; (v) continue the development of holographic technology;
and (vi) continue operating improvements.
The Company currently employs approximately 110 persons, including six
salespeople. In addition, the Company has 25 international sales agents. The
Company maintains hologram manufacturing facilities in Elmsford, New York and
Huntingdon Valley, Pennsylvania, which together provide the Company with
redundant mass production capability.
Upon consummation of the Offering, the Company expects to enter into a
$30.0 million credit facility (the "New Credit Facility") consisting of a $10.0
million revolving credit facility for working capital purposes and a $20.0
million facility for the acquisition of companies in related businesses.
Prior to this Offering, the Company has been a wholly-owned subsidiary of
American Banknote Corporation ("ABN" or the "Parent"). Following this Offering,
ABN will not own any of the Common Stock. The Company is a Delaware corporation
with its principal executive offices located at 399 Executive Boulevard,
Elmsford, New York 10523, telephone number (914) 592-2355.
2
<PAGE> 6
THE OFFERING
Common Stock Offered by the Parent.... 13,636,000 shares
Common Stock Outstanding after the
Offering(1)........................... 13,636,000 shares
Use of Proceeds(2).................... The Company will not receive any of
the proceeds from the sale of Common
Stock by the Parent. Substantially
all of the net proceeds of the
Offering will be used by the Parent
to repay indebtedness. See "Use of
Proceeds."
Dividends............................. The Company intends to retain
earnings for use in its business and,
accordingly, does not expect to pay
cash dividends in the foreseeable
future.
Proposed New York Stock Exchange
Symbol................................ ABH
- ---------------
(1) Excludes an aggregate of 1,363,000 shares reserved for issuance under the
Company's 1998 Stock Incentive Plan, under which options to acquire 915,000
shares of Common Stock are anticipated to be granted concurrently with the
Offering at the initial public offering price. See "Management -- 1998 Stock
Incentive Plan." If the Underwriters' over-allotment option were exercised
in full, an additional 2,045,400 shares of Common Stock would be offered by
the Company, and 15,681,400 shares of Common Stock would be outstanding
after the Offering. See "Underwriting" and "Description of Capital Stock."
(2) If the Underwriters' over-allotment option were exercised in full, the
Company would receive approximately $20.9 million in net proceeds, which
would be used to repay indebtedness, for working capital and other general
corporate purposes, including potential acquisitions.
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. Prospective
purchasers of the Common Stock offered hereby should carefully consider the
factors set forth in "Risk Factors," as well as the other information set forth
in this Prospectus, before making an investment in the Common Stock.
3
<PAGE> 7
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth summary historical financial data as of
March 31, 1998 and for each of the three years in the period ended December 31,
1997 and the three months ended March 31, 1997 and 1998 and summary unaudited
pro forma condensed Statement of Income data for the year ended December 31,
1997 and the three months ended March 31, 1998. The historical financial data
for each of the three years in the period ended December 31, 1997 have been
derived from the Company's audited financial statements included elsewhere
herein. The historical financial data as of March 31, 1998 and for the three
months ended March 31, 1997 and 1998 have been derived from the Company's
unaudited condensed financial statements included elsewhere herein, which in the
opinion of management include all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the information. The
historical Statement of Income data for the three months ended March 31, 1998
are not necessarily indicative of results that may be expected for the entire
year. The unaudited pro forma condensed Statements of Income data for the year
ended December 31, 1997 and for the three months ended March 31, 1998 include
the historical accounts of the Company and give effect to certain expenses which
the Company expects to incur as an independent public company and to certain
non-operating income that the Company will forego. The unaudited pro forma
condensed Statement of Income data are not intended to represent, and are not
indicative of, what the Company's results of operations actually would have been
or to project the Company's results of operations for any future period. The
following information is qualified by reference to, and should be read in
conjunction with, "Capitalization," "Selected Historical and Pro Forma Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Company's audited financial statements and notes thereto,
the unaudited condensed financial statements and notes thereto, and the
unaudited pro forma condensed Statements of Income and notes thereto included
elsewhere herein.
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA THREE MONTHS
YEAR ENDED YEAR ENDED THREE MONTHS ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
--------------------------- ------------ ------------------- ------------
1995 1996 1997 1997 1997 1998 1998
------- ------- ------- ------------ -------- -------- ------------
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STATEMENT OF INCOME DATA:
Sales................... $27,865 $28,649 $30,915 $30,915 $ 5,241 $ 7,035 $ 7,035
Costs and expenses:
Costs of goods
sold............... 13,787 15,034 11,912 11,912 2,629 2,438 2,438
Selling and
administrative..... 4,576 4,711 6,001 6,851 1,310 1,256 1,469
Depreciation and
amortization....... 1,203 1,141 1,136 1,136 293 292 292
------- ------- ------- ------- ------- ------- -------
Total costs and
expenses........ 19,566 20,886 19,049 19,899 4,232 3,986 4,199
------- ------- ------- ------- ------- ------- -------
Operating income........ 8,299 7,763 11,866 11,016 1,009 3,049 2,836
Net income.............. $ 5,054 $ 4,820 $ 7,539 $ 6,846 $ 657 $ 1,793 $ 1,620
Net income per share.... $ 0.37 $ 0.35 $ 0.55 $ 0.50 $ 0.05 $ 0.13 $ 0.12
Weighted average shares
outstanding.......... 13,636 13,636 13,636 13,636 13,636 13,636 13,636
</TABLE>
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MARCH 31,
1998
ACTUAL AND AS
ADJUSTED(1)
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BALANCE SHEET DATA:
Working capital........................................... $ 9,550
Total assets.............................................. 32,112
Total debt................................................ 4,987
Stockholders' equity...................................... 21,946
</TABLE>
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(1) The balance sheet data shown as of March 31, 1998 as adjusted for the
Offering will be the same as the actual balance sheet data as of March 31,
1998. See "Capitalization."
4
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RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should consider carefully the following
risk factors, as well as the other information set forth in this Prospectus,
before purchasing the shares of Common Stock offered hereby.
DEPENDENCE ON CERTAIN CUSTOMERS
The Company is currently dependent on certain credit card companies for a
substantial portion of its business, including MasterCard and manufacturers of
VISA brand credit cards, which accounted for 44% and 24% of the Company's total
sales in 1997, respectively. The Company provides holograms to MasterCard
pursuant to an agreement which expires in February 2001, subject to automatic
renewal if not terminated by either party. The Company does not have long term
purchase contracts with its other card customers and supplies holograms to them
pursuant to purchase orders. Currently, the Company is one of two companies
authorized to manufacture and sell VISA brand holograms to manufacturers of VISA
brand credit cards. If either MasterCard or VISA were to terminate its
respective relationship with the Company, there would be a material adverse
effect on the Company's business, financial condition or results of operations.
See "Business -- Sales and Marketing."
RELIANCE ON KEY PERSONNEL
The Company's success depends to a significant extent on the continued
services of its key executive officers and other senior management personnel.
The Company expects to enter into employment agreements with its Chief Executive
Officer, President, Vice President -- Operations and Vice President -- Finance.
The Company believes that its future success will depend in large part on its
ability to attract and retain highly skilled and qualified personnel and to
expand, train and manage its employee base. If the Company is unable to retain
the services of its key personnel, there could be a material adverse effect on
the Company's business, financial condition or results of operations. See
"Management -- Employment Agreements."
TECHNOLOGICAL CHANGE AND NEW PRODUCT DEVELOPMENT
A number of technologically driven processes are involved in creating the
Company's products. The creation of the Company's products involves the use of
lasers, computers, special foils, embossing equipment, chemicals, tools and
dyes. The Company's ability to maintain or improve its competitive position will
be dependent on its ability to maintain and develop its technology. In the event
that one or more of the Company's competitors develop similar or better
materials or processes and the Company were not able similarly to improve its
materials and processes, there could be a material adverse effect on the
Company's business, financial condition or results of operations. Additionally,
a number of the Company's customers pay for research and development in
connection with certain projects or orders, which payments represented
approximately 65% of the Company's research and development efforts in 1997. If
the terms of these arrangements were to change or if, through competition or
reduced funding from customers, the Company were forced to increase
significantly its expenditures on R&D, there could be a material adverse effect
on the Company's business, financial condition or results of operations. See
"Business -- Competition" and "-- Research and Development."
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's future operating results are likely to fluctuate
substantially from quarter to quarter. The degree of fluctuation will depend on
a number of factors, including the timing and level of sales, any change in the
pricing of the Company's products and the mix of products sold. Because a
significant portion of the Company's business is expected to be derived from
orders placed by a limited number of large customers, variations in the timing
of such orders could cause significant fluctuations in the Company's operating
results. Other factors that may result in fluctuations in operating results
include the timing of new product announcements and the introduction of new
products and new technologies by the Company or its competitors, delays in
research and development of new products, increased research and development
5
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expenses, availability and cost of materials from its suppliers and competitive
pricing pressures. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Unaudited Quarterly Operating Results."
COMPETITION
The holography industry is highly competitive, with approximately 50
companies in the security sector. Competition is based on a number of factors,
such as technology, price, product quality and customer service. In addition, an
increased use of non-holographic methods or devices in place of the Company's
products could reduce demand for the Company's products. A number of competitors
are larger or are divisions of larger companies, and have greater financial
resources, than the Company. Based on the Study, management believes the
Company's two largest competitors in the security sector have a market share of
approximately 6% and 4%, respectively. Competition in the security sector of the
holography market and from non-holographic producers could have a material
adverse effect on the Company's business, financial condition or results of
operations. See "Business -- Competition."
ABILITY TO CONTINUE SALES GROWTH
The Study estimates that the holography industry as a whole (including the
security, packaging and promotion sectors) has grown significantly from 1991 to
1997. There can be no assurance, however, that the holography industry
generally, or the sectors within that industry, including transaction cards,
security devices, documents of value, product authentication or other security
applications, will continue historical rates of growth. The failure to maintain
such growth rates could have a material adverse effect on the Company's
business, financial condition or results of operations.
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS
The Company intends to seek to acquire businesses to increase its customer
base and manufacturing and distribution capabilities. Such acquisitions would
expose the Company to the risks associated with the assimilation of new
operations, sites and personnel, the diversion of resources from the Company's
existing business and technologies, the inability to generate sales to offset
associated acquisition costs, the maintenance of uniform standards, controls and
procedures and the impairment of relationships with employees and customers as a
result of any integration of new management personnel. The Company's acquisition
strategy may also result in the incurrence of additional expense in connection
with investigating potential acquisitions, the issuance of dilutive equity
securities, the incurrence or assumption of debt and charges for amortization of
acquired intangible assets. The Company's failure to address such risks
successfully could have a material adverse effect on the Company's business,
financial condition or results of operations.
INTELLECTUAL PROPERTY PROTECTION
The Company utilizes a combination of patents, trade secrets and
confidentiality agreements, as well as restricted access and other forms of
intellectual property protection, to safeguard certain of its proprietary
technology and processes. The Company also holds certain trademarks with respect
to certain products and services. There can be no assurance, however, as to the
degree of protection offered by any of the Company's patents or as to the
likelihood that patents will be issued for any of the Company's pending
applications. There also can be no assurance that the Company will be able to
maintain the confidentiality of its trade secrets or that its confidentiality
agreements will provide meaningful protection of the Company's trade secrets or
other proprietary information. See "Business -- Trademarks and Patents."
PRODUCT LIABILITY
A portion of the Company's business consists of providing tamper-apparent
seals to pharmaceutical companies. The nature of such business could expose the
Company to product liability claims. Although the Company maintains insurance
against such an occurrence, there can be no assurance that such insurance would
be available to cover any such claim or available in amounts sufficient to cover
all potential liabilities. As a result, product liability claims could have a
material adverse effect on the Company's business, financial condition or
results of operations.
6
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EXPORT SALES
In 1997, 18% of the Company's sales were derived from customers outside the
United States. International sales are subject to risks, including United States
and international regulatory requirements and policy changes, political and
economic instability, difficulties in accounts receivable collection, currency
fluctuation, tariffs and other barriers, difficulty in attracting, retaining and
managing international representatives and potentially adverse tax consequences.
There can be no assurance that any of these factors will not have a material
adverse effect on the Company's business, financial condition or results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- ABNH Strategy."
ENVIRONMENTAL REGULATION
The Company's operations are subject to federal, state and local
environmental laws and regulations. The Company believes that it is currently in
material compliance with applicable laws and regulations. To the extent future
laws and regulations are adopted or interpretations of existing laws and
regulations change, new requirements may be imposed on the Company's future
activities or may create liability retroactively. Failure to comply with
applicable rules and regulations could subject the Company to monetary damages
and injunctive action, which could have a material adverse effect on the
Company's business, financial condition or results of operations.
IMMEDIATE AND SUBSTANTIAL DILUTION; ABSENCE OF DIVIDENDS
The initial public offering price per share of the Common Stock will exceed
the net tangible book value per share of Common Stock. Accordingly, the
purchasers of the Common Stock offered hereby will experience immediate and
substantial dilution in their investment. See "Dilution." The Company intends to
retain all earnings, if any, for use in the Company's business and does not
anticipate paying cash dividends in the foreseeable future. Further, the
declaration of dividends on the Common Stock will depend, among other things,
upon future earnings, the operating and financial condition of the Company, its
capital requirements and general business conditions.
NEW STATUS AS INDEPENDENT ENTITY
Prior to the Offering, the Company was a wholly-owned subsidiary of ABN,
and the Company has depended on ABN for certain financial and administrative
support. Upon completion of the Offering, the Company will be responsible for
its own corporate and administrative services, including treasury functions, tax
planning and compliance financial reporting, risk management, human resources
and legal services. It is anticipated that ABN may continue to provide certain
services to the Company for a limited time after the Offering as described in
"Certain Relationships and Related Transactions -- Transitional Services
Agreement." After the consummation of the Offering, the Company is expected to
incur certain expenses that are not reflected in its historical results of
operations and to forego certain non-operating income that has been included in
such results. The net effect of those items in 1997 would have been to reduce
net income by approximately $693,000. Further, the inability of the Company's
management to manage the Company effectively and efficiently as a stand alone
company could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Selected Historical and Pro
Forma Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and "Unaudited Pro Forma Condensed
Statements of Income."
NO PRIOR PUBLIC MARKET
Prior to the Offering, there has been no public market for the Common Stock
and there can be no assurance that an active public market will develop or be
sustained after the Offering or that the initial public
7
<PAGE> 11
offering price corresponds to the price at which the Common Stock will trade in
the public market subsequent to the Offering. The initial public offering price
for the Common Stock will be determined by negotiations among the Company, ABN
and the representatives of the Underwriters. After completion of the Offering,
the market price of the Common Stock will be subject to fluctuations in response
to various factors and events, including, among others, the liquidity of the
market for the Common Stock, variations in the Company's operating results,
regulatory or other changes (both domestic and international) affecting the
holography industry generally or the Company specifically, announcements of
business developments by the Company or its competitors, changes in operating
results and changes in general market conditions.
POTENTIAL ISSUANCE OF PREFERRED STOCK
The Company's Certificate of Incorporation permits the issuance of up to
5,000,000 shares of Preferred Stock and permits the Board of Directors to fix
the rights, preferences, privileges and restrictions of such shares without any
further vote or action by the Company's stockholders. Although the Company has
no current plans to issue shares of Preferred Stock, the potential issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company, may discourage bids for the Common Stock at a
premium over the market price of the Common Stock and may adversely affect the
market price of, and the voting and other rights of the holders of, the Common
Stock.
YEAR 2000 RISK
The Year 2000 issue involves the risk that computer systems using two-digit
date fields will fail to recognize properly the Year 2000, resulting in computer
system failures for businesses, government agencies, service providers, vendors
and customers. The Company has initiated discussions with its key suppliers and
customers to determine whether they have any Year 2000 issues which could impact
the Company. The Company anticipates that certain of its software will require
replacement or modification in connection with the Year 2000 issue. Estimates of
the costs of the Company's Year 2000 program are based on assumptions, including
the continued availability of certain resources, the ability to correct all
relevant applications and third party modification plans. There is no guarantee
that the estimates will be achieved, and actual costs could differ materially
from those anticipated. Additionally, there can be no assurance that the failure
of the Company or third parties to address adequately their respective Year 2000
issues will not have a material adverse effect on the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
8
<PAGE> 12
USE OF PROCEEDS
The net proceeds to the Parent from the sale of 13,636,000 shares of Common
Stock offered hereby (net of underwriting discounts and commissions and
estimated offering expenses) are estimated to be $138.6 million assuming an
initial public offering price of $11.00 per share. The Company will not receive
any of the proceeds from the sale of Common Stock by the Parent. If the
Underwriters' over-allotment option were exercised in full, the Company would
receive approximately $20.9 million assuming an initial public offering price of
$11.00 per share (net of underwriting discounts and commissions).
The Parent will use the net proceeds it receives to repay indebtedness on
its 10 3/8% Senior Notes due 2002 and for general corporate purposes. If the
Underwriters' over-allotment option is exercised, the Company intends to use the
net proceeds therefrom to repay borrowings under the Revolving Credit Facility
(as defined herein) (or, if refinanced under the New Credit Facility (as defined
herein), the New Credit Facility), for working capital and other general
corporate purposes, including potential acquisitions. The Revolving Credit
Facility matures on October 31, 1998 and its interest rate is variable and is
based on certain market rates. At March 31, 1998, the applicable interest rate
was 9% per annum. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
DIVIDEND POLICY
The Company currently intends to retain any future earnings for use in its
business. Accordingly, the Company does not expect to pay cash dividends in the
foreseeable future.
9
<PAGE> 13
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Company
as of March 31, 1998 and as adjusted for the Offering and to reflect the
cancellation immediately prior to the Offering of amounts due from Parent and
affiliates. This table should be read in conjunction with the Company's
financial statements and notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1998 1998
---------------------- ----------------------
ACTUAL AS ADJUSTED
---------------------- ----------------------
(IN THOUSANDS)
<S> <C> <C>
Revolving Credit Facility(1)........................... $ 4,987 $ 4,987
Stockholders' equity:
Common stock, par value $.01 per share, authorized
30,000,000 shares; 13,636,000 shares issued and
outstanding....................................... 136 136
Additional paid-in capital........................... 11,627 11,627
Retained earnings.................................... 42,808 10,183
Due from Parent and affiliates....................... (32,625) 0
-------- --------
Total stockholders' equity................... 21,946 21,946
-------- --------
Total capitalization.................... $ 26,933 $ 26,933
======== ========
</TABLE>
- ---------------
(1) Upon consummation of the Offering, the Revolving Credit Facility will be
replaced by the New Credit Facility. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
10
<PAGE> 14
DILUTION
Dilution is the amount by which the initial public offering price paid by
the purchasers of the shares of Common Stock will exceed the net tangible book
value per share of Common Stock after the Offering. The net tangible book value
per share of Common Stock is determined by subtracting the total liabilities of
the Company from the total carrying value of the tangible assets of the Company
and dividing the difference by the number of shares of Common Stock deemed to be
outstanding on the date of which such carrying value is determined.
At March 31, 1998, the Company had a net tangible book value of
approximately $13,243,000, or $0.97 per share, which is unchanged when adjusted
for the sale by the Parent of 13,636,000 shares of the Company's Common Stock.
Purchasers of Common Stock in the Offering will experience immediate dilution in
net tangible book value of $10.03 per share (based on an assumed initial
offering price of $11.00). The following table illustrates this per share
dilution:
<TABLE>
<S> <C>
Assumed initial public offering price per share............. $11.00
Net tangible book value per share before, and as adjusted
for, the Offering...................................... 0.97
------
Dilution per share to new investors......................... $10.03
======
</TABLE>
11
<PAGE> 15
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth selected historical financial data as of
December 31, 1993, 1994, 1995, 1996 and 1997 and March 31, 1998, and for each of
the five years in the period ended December 31, 1997 and the three months ended
March 31, 1997 and 1998 and selected unaudited pro forma condensed Statement of
Income data for the year ended December 31, 1997 and the three months ended
March 31, 1998. The selected historical financial data as of December 31, 1996
and 1997 and for each of the three years in the period ended December 31, 1997
have been derived from the Company's audited financial statements included
elsewhere herein. The selected historical financial data as of March 31, 1998
and for the three months ended March 31, 1997 and 1998 have been derived from
the Company's unaudited condensed financial statements included elsewhere
herein, which in the opinion of management include all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of the
information. The selected historical Statement of Income data for the three
months ended March 31, 1998 are not necessarily indicative of results that may
be expected for the entire year. The unaudited pro forma condensed Statements of
Income data for the year ended December 31, 1997 and for the three months ended
March 31, 1998 include the historical accounts of the Company and give effect to
certain expenses which the Company expects to incur as an independent public
company and to certain non-operating income that the Company will forego. The
unaudited pro forma condensed Statement of Income data are not intended to
represent, and are not indicative of, what the Company's results of operations
actually would have been or to project the Company's results of operations for
any future period. The following information is qualified by reference to, and
should be read in conjunction with, "Capitalization," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the Company's
audited financial statements and notes thereto, the unaudited condensed
financial statements and notes thereto, and the unaudited pro forma condensed
Statements of Income and notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA THREE MONTHS
YEAR ENDED THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31, ENDED MARCH 31, MARCH 31,
----------------------------------------------- ------------ ----------------- ------------
1993 1994 1995 1996 1997 1997 1997 1998 1998
------- ------- ------- ------- ------- ------------ ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Sales....................... $24,611 $21,960 $27,865 $28,649 $30,915 $30,915 $ 5,241 $ 7,035 $ 7,035
Costs and expenses:
Cost of goods sold........ 12,979 14,141 13,787 15,034 11,912 11,912 2,629 2,438 2,438
Selling and
administrative.......... 5,806 4,673 4,576 4,711 6,001 6,851 1,310 1,256 1,469
Depreciation and
amortization............ 882 1,066 1,203 1,141 1,136 1,136 293 292 292
------- ------- ------- ------- ------- ------- ------- ------- -------
Total costs and
expenses.............. 19,667 19,880 19,566 20,886 19,049 19,899 4,232 3,986 4,199
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income............ 4,944 2,080 8,299 7,763 11,866 11,016 1,009 3,049 2,836
Other income................ 153 244 113 196 821 821 33 34 34
Interest, net............... 305 305 305 305 146 (159) 76 (29) (105)
------- ------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes..................... 5,402 2,629 8,717 8,264 12,833 11,678 1,118 3,054 2,765
Income taxes................ 2,282 1,223 3,663 3,444 5,294 4,832 461 1,261 1,145
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income.................. $ 3,120 $ 1,406 $ 5,054 $ 4,820 $ 7,539 $ 6,846 $ 657 $ 1,793 $ 1,620
======= ======= ======= ======= ======= ======= ======= ======= =======
Net income per share........ $ 0.23 $ 0.10 $ 0.37 $ 0.35 $ 0.55 $ 0.50 $ 0.05 $ 0.13 $ 0.12
======= ======= ======= ======= ======= ======= ======= ======= =======
Weighted average shares
outstanding............... 13,636 13,636 13,636 13,636 13,636 13,636 13,636 13,636 13,636
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT
----------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
------- ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............. $15,363 $10,704 $11,486 $10,504 $17,301 $ 9,550
Total assets................ 41,109 30,135 29,172 28,357 35,818 32,112
Total debt.................. 0 0 0 0 674 4,987
Total stockholder's
equity.................... 37,940 26,791 25,730 23,507 29,782 21,946
</TABLE>
12
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
financial statements and notes thereto included elsewhere in this Prospectus.
The Company is a wholly-owned subsidiary of the Parent. As a wholly-owned
subsidiary, the Company has historically received from the Parent certain
corporate and administrative services, including treasury functions, tax
planning and compliance, financial reporting, risk management, human resources
and legal services. Except for a transition period immediately following the
completion of the Offering, these activities will be performed by the Company
itself in the future. The financial position and results of operations of the
Company set forth herein may differ from the results that may have been achieved
had the Company operated as an independent entity. In the ordinary course of
business, the Company makes intercompany advances to the Parent to service the
Parent's debt obligations and for general corporate purposes. This practice will
continue until consummation of the Offering and will be discontinued after such
time.
OVERVIEW
The Company is a world leader in the origination, production and marketing
of mass-produced secure holograms, based on its significant market share. In the
early 1980's, the Company began marketing its secure holograms for use on credit
cards and, as a result, helped to create and expand the security sector of the
holography market. The Company also competes selectively in the market for
non-secure holograms used in commercial (packaging and promotional)
applications, including magazine illustrations, trading cards, promotions,
advertising and specialized packaging. The Company's sales of holograms for
security applications generally carry higher gross margins than sales for
packaging and promotional applications. The Company's products are used by over
125 customers in more than 25 countries.
The Company's sales are derived from the sale of its security and
commercial holograms. In 1997, the Company derived 95% of its sales from
security applications and 5% from commercial applications. In the security
sector, the Company has benefited from the increased use of transaction cards as
forms of payment, as well as card issuers' expansion into debit cards, smart
cards and stored-value cards. As competition for card users within the
transaction card area intensifies, transaction cards are frequently replaced.
This frequent card replacement, along with the growing popularity of loyalty
(frequent buyer) and other affinity credit card programs and promotions, has led
to growth in the transaction card population. Certain credit card companies, as
part of addressing their Year 2000 concerns, have issued and continue to issue
cards with expiration dates in 1998 or 1999 rather than in the year 2000 or
later. Management believes that as these companies replace cards that might
otherwise have been issued with expiration dates in the year 2000 or later,
there may be a temporary increase in credit card issuances which may have a
beneficial impact on the Company's sales. There can be no assurance that any
such beneficial impact will occur, and the amount, if any, of any such impact
cannot be predicted.
The use of product authentication holograms is driven by concerns regarding
counterfeiting, piracy and other infractions that can result in lost sales, lost
goodwill and product liability claims. Companies in various industries have
utilized holograms as authentication devices to reduce potential losses. Also,
concerns over counterfeiting and copying have led to an increased use of
holograms on documents of value, including currency, passports, business
cheques, gift certificates, vouchers, certificates of deposit, stamps (postage
and revenue), tickets and other financial instruments.
The Company generally manufactures holograms in response to a specific
customer order and only manufactures finished good inventories in cases where
the Company believes a recurring pattern of customer orders has been established
for a specific product. Holograms are sold under purchase orders and contracts
with customers. Sales of holograms are generally recognized upon shipment of
products; however, pursuant to terms of the Company's agreement with certain
customers, completed items are sometimes stored in an on-site secured facility
at the Company's premises and, in those instances, sales are recognized when the
goods are completed and transferred to the secured facility.
13
<PAGE> 17
During 1997, international sales accounted for 18% of total sales. The
Company expects its international sales to increase in the future. All of the
Company's international sales are presently denominated in U.S. dollars.
Cost of goods sold includes raw materials such as nickel, foils, films and
adhesives; labor costs; manufacturing overhead; and hologram origination costs
(which represents costs of a unique consumable master hologram that is made to
customer specifications and is an integral part of the production process). As a
result, costs of sales are affected by product mix, manufacturing yields, costs
of hologram originations and changes in the cost of raw materials and labor.
Selling and administrative expenses primarily consist of salaries, benefits
and commissions for the Company's corporate, sales, marketing and administrative
personnel; marketing and advertising expenses for the Company's services and
products.
Sales may fluctuate from quarter to quarter due to changes in customers'
ordering patterns. Customers do not typically provide ABNH with precise
forecasts of future order quantities. Quarterly demand for holograms may be
influenced materially by customers' promotions, inventory replenishment, card
expiration patterns, delivery schedules and other factors which may be difficult
for ABNH to anticipate.
As an independent public company, ABNH expects to incur certain expenses
which are not reflected in its historical results of operations, and to forego
certain non-operating income that has been reflected in such results. These
expenses are for shareholder communications and other costs associated with
public ownership, presently estimated to be $850,000 annually. In addition, ABNH
will no longer receive interest income from loans to the Parent, which amounted
to $305,000 in 1997. Had the Company's 1997 results of operations been affected
by the above items, net income would have been reduced by approximately $693,000
or $0.05 per share.
For tax periods prior to the consummation of the Offering, the Company was
included in the ABN consolidated group for purposes of filing consolidated
federal income and in certain instances consolidated state tax returns. In
accordance with a tax allocation agreement with ABN, historically the Company
made payments to ABN based on the amount which would have been payable as income
taxes if consolidated returns had not been filed. Following the consummation of
the Offering, the Company will no longer be a part of the ABN consolidated group
for federal and state income tax purposes. Because the federal and state income
taxes were determined on a separate company basis, management believes that the
basis on which federal and state income taxes will be determined for the Company
following the Offering will not be materially different from the basis on which
such taxes have been computed under the tax allocation agreement.
14
<PAGE> 18
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
operating information expressed as a percentage of sales.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS THREE MONTHS
------------------------ ENDED MARCH 31, ENDED MARCH 31,
1995 1996 1997 1997 1998
------ ------ ------ --------------- ---------------
<S> <C> <C> <C> <C> <C>
Sales................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of goods sold.................... 49.5 52.5 38.5 50.1 34.7
Selling and administrative............ 16.4 16.4 19.4 25.0 17.9
Depreciation and amortization......... 4.3 4.0 3.7 5.6 4.1
----- ----- ----- ----- -----
Operating income........................ 29.8 27.1 38.4 19.3 43.3
Other income............................ 0.4 0.6 2.6 0.6 0.5
Interest, net........................... 1.1 1.1 0.5 1.4 (0.4)
----- ----- ----- ----- -----
Income before income taxes.............. 31.3 28.8 41.5 21.3 43.4
Net income.............................. 18.1% 16.8% 24.4% 12.5% 25.5%
</TABLE>
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 TO THREE MONTHS ENDED MARCH 31,
1997
Sales. Sales increased by $1.8 million, or 34.2%, from $5.2 million for
the three months ended March 31, 1997 to $7.0 million for the three months ended
March 31, 1998. The increase in sales was due primarily to increased sales
volume of transaction cards and product authentication holograms. The increase
in transaction card hologram volumes was due to the growth in loyalty programs,
competition among financial institutions resulting in increased multi-card
issuance and the increased use of automated teller machine and debit cards. The
increase in product authentication hologram sales volume was due to higher
demand for this product and new product authentication customers.
Cost of Goods Sold. Cost of goods sold decreased by $0.2 million, from
$2.6 million for the three months ended March 31, 1997 to $2.4 million for the
three months ended March 31, 1998. As a percentage of sales, cost of goods sold
decreased from 50.1% in the three months ended March 31, 1997 to 34.7% for the
same period in 1998. This decrease reflects the Company's focus on controlling
costs, improving production yields and the higher margins earned on security
holograms.
Selling and Administrative. Selling and administrative expenses remained
approximately the same in both periods on higher sales. As a percentage of
sales, selling and administrative expenses decreased from 25.0% for the three
months ended March 31, 1997 to 17.9% for the three months ended March 31, 1998.
This decrease in selling and administrative expenses as a percentage of sales
was due primarily to the increased sales in 1998.
Depreciation and Amortization. Depreciation and amortization remained
relatively unchanged.
Other Income. Other income remained relatively unchanged.
Interest, Net. Interest, net decreased by $0.1 million principally due to
interest expense on the Revolving Credit Facility (as defined) for the three
months ended March 31, 1998.
Income Taxes. Income taxes are based on an estimated annual effective tax
rate in both periods of approximately 41.3%. The rate is computed based on the
taxes that would have been paid had the Company operated on a stand alone basis.
Income taxes increased by $0.8 million, from $0.5 million for the three months
ended March 31, 1997 to $1.3 million for the three months ended March 31, 1998,
as a result of higher taxable income due to the factors described above.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996
Sales. Sales increased by $2.3 million, or 7.9%, from $28.6 million in
1996 to $30.9 million in 1997. The increase in sales was due primarily to an
increase in sales volume of security holograms, including a $6.9
15
<PAGE> 19
million order from a major customer which was received and completed in December
1997 and which goods were transferred to the Company's on-site secured facility.
The Company believes that this order may have been in response to increases in
prices charged by the customer which took effect in January 1998, the customer's
desire to establish a European distribution facility and the Year 2000 issue
discussed under "Overview" above. The increase in security hologram volumes was
due to the growth in transaction card loyalty programs, competition among
financial institutions resulting in increased multi-card issuance, the increased
use of automated teller machine and debit cards and new product authentication
customers. This increase was partially offset by a decrease in commercial
hologram sales which reflects the Company's strategy to focus on the more
profitable security sector of the holography market.
Cost of Goods Sold. Cost of goods sold decreased by $3.1 million, from
$15.0 million in 1996 to $11.9 million in 1997. As a percentage of sales, cost
of goods sold decreased from 52.5% in 1996 to 38.5% in 1997. This decrease
reflects the Company's focus on controlling costs, improving production yields
and a shift in product mix toward security holograms.
Selling and Administrative. Selling and administrative expenses increased
by $1.3 million, from $4.7 million in 1996 to $6.0 million in 1997. As a
percentage of sales, selling and administrative expenses increased from 16.4% in
1996 to 19.4% in 1997. This increase in selling and administrative expenses was
due primarily to a bad debt charge of $800,000 associated with a product
development project. In addition, approximately $300,000 of expenses were
incurred in connection with the Company's ISO 9001 certification.
Depreciation and Amortization. Depreciation and amortization remained
relatively unchanged from 1996 to 1997. As a percentage of sales, depreciation
and amortization decreased from 4.0% in 1996 to 3.7% in 1997.
Other Income. Other income increased by $625,000, from $196,000 in 1996 to
$821,000 in 1997. This increase in other income was primarily due to increased
use of ABNH patents subject to royalties and a change in the estimate of 1996
royalties resulting from information not reported by the licensee until 1997.
Interest, Net. Interest, net, decreased by $159,000 from $305,000 in 1996
to $146,000 in 1997 as a result of interest expense on the Revolving Credit
Facility. Interest income in both years represents interest on a note due from
the Parent.
Income Taxes. Income taxes are based on taxes that would have been paid
had the Company operated on a stand alone basis. Income taxes increased by $1.9
million, from $3.4 million in 1996 to $5.3 million in 1997, as a result of
higher taxable income due to the factors described above.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995
Sales. Sales increased by $784,000, or 2.8%, from $27.9 million in 1995 to
$28.6 million in 1996. The increase in sales was due primarily to an increase in
sales volume of commercial holograms to several large trading card customers
that initiated promotional programs. This increase was partially offset by a
decrease in sales volume of security holograms to certain Asian customers.
Cost of Goods Sold. Cost of goods sold increased by $1.2 million, from
$13.8 million in 1995 to $15.0 million in 1996. As a percentage of sales, cost
of goods sold increased from 49.5% in 1995 to 52.5% in 1996. The increase in
cost of goods sold was primarily due to development and origination costs
incurred for new commercial and security laminate applications. Increases in
development costs and a shift in product mix also contributed to the increase.
Selling and Administrative. Selling and administrative expenses increased
by $135,000, from $4.6 million in 1995 to $4.7 million in 1996. As a percentage
of sales, selling and administrative expenses remained constant at 16.4%. This
increase in selling and administrative expenses was primarily due to
management's decision to expand its R&D department in order to focus on
applications of security holograms. Selling and administrative expenses in 1995
included a $400,000 write-off of a computer software application.
16
<PAGE> 20
Depreciation and Amortization. Depreciation and amortization decreased by
$62,000 from $1.2 million in 1995 to $1.1 million in 1996. As a percentage of
sales, depreciation and amortization decreased from 4.3% in 1995 to 4.0% in
1996.
Other Income. Other income increased by $83,000 from $113,000 in 1995 to
$196,000 in 1996.
Interest, Net. Interest, net, represents interest income on a note due
from the Parent, and was the same in 1995 and 1996.
Income Taxes. Income taxes are based on taxes that would have been paid
had the Company operated on a stand alone basis. Income taxes decreased by
$219,000 from $3.6 million in 1995 to $3.4 million in 1996 as a result of lower
taxable income due to the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had $252,000 in cash and cash equivalents
and working capital of $9.6 million. In January 1996, the Company, together with
the Parent, entered into a $20.0 million revolving credit facility (the
"Revolving Credit Facility") for general working capital and letters of credit
purposes. At March 31, 1998, the combined companies had approximately $13.9
million of availability under the Revolving Credit Facility before reductions
for $4.2 million of outstanding letters of credit and $8.1 million of
outstanding borrowings. On a stand alone basis, the Company had $5.6 million of
availability under the Revolving Credit Facility before reductions for
outstanding borrowings of $5.0 million.
Upon consummation of the Offering, the Company expects to enter into a
$30.0 million credit facility (the "New Credit Facility") with The Chase
Manhattan Bank ("Chase") which will replace the Revolving Credit Facility. The
New Credit Facility will consist of a $10.0 million senior revolving credit
facility for working capital purposes and a $20.0 million facility for the
acquisition of companies in related businesses. Upon consummation of the
Offering, the Company will refinance its then outstanding borrowings under the
Revolving Credit Facility (approximately $5.0 million at March 31, 1998) by
borrowing an equal amount under the New Credit Facility. The New Credit Facility
will be secured by a first priority security interest in substantially all of
the assets of the Company and a commitment to pledge the capital stock of any
future subsidiaries.
The Company's ability to borrow under the revolving credit portion of the
New Credit Facility will be limited by its Borrowing Base (as defined therein).
Such Borrowing Base will be a fixed percentage of eligible accounts receivable
plus a fixed percentage of eligible raw material inventory. Additionally, the
Company must make monthly interest payments under the New Credit Facility, at a
floating rate equal to either Chase's Alternate Base Rate (as defined therein)
or LIBOR plus, in each case, a margin as determined in accordance with the
agreement for the New Credit Facility (the "Agreement").
Under the New Credit Facility, the Company will pay an arrangement fee of
1.0% of the New Credit Facility and an upfront fee of 0.5% of the New Credit
Facility. The Company will also pay a commitment fee of 0.5% per annum on the
average daily unused amount of the New Credit Facility. The latest maturity date
of all the loans under the New Credit Facility will be the date that is 72
months after the closing of the Agreement. The New Credit Facility will contain
certain covenants which will restrict the Company's ability to, among other
things, (i) incur additional indebtedness, (ii) incur certain liens and
encumbrances, (iii) make investments in other persons, (iv) guaranty the
indebtedness of other persons, (v) sell or dispose of its assets, (vi) incur any
rental or lease commitments, (vii) materially alter the nature of its business,
(viii) pay or declare dividends and (ix) make capital expenditures.
Prior to the Offering, cash accounts for the Company have been controlled
on a centralized basis by the Parent and, accordingly, cash receipts and
disbursements have been received or made through the Parent and are recorded as
due from Parent and affiliates. Subsequent to the Offering, the Company will
maintain its own centralized cash management system. In the ordinary course of
business, cash has been provided to the Parent by way of intercompany advances
to service its debt obligations and for general corporate purposes. This
practice will continue until consummation of the Offering and will then be
discontinued after such time. Upon consummation of the Offering, these
intercompany advances (approximately $32.6 million at March 31,
17
<PAGE> 21
1998) will be cancelled and forgiven, and the Company will have a minimal amount
of cash and cash equivalents on hand at that time. See "Certain Relationships
and Related Transactions".
The Company's issued and outstanding Common Stock is pledged as security
for the Parent's 10 3/8% Senior Notes due 2002 ($126.5 million principal
amount). The Company and each of the Parent's direct and indirect domestic
operating subsidiaries have, jointly and severally, fully and unconditionally
guaranteed, on a senior subordinated basis, the Parent's 11 1/4% Senior
Subordinated Notes due 2007 ($95.0 million principal amount). Immediately upon
consummation of the Offering, the Company will be released from its obligations
under the Parent's debt instruments.
For the three months ended March 31, 1998, the Company's operating
activities provided cash flow of $5.4 million compared to $1.3 million of cash
flow provided by operating activities in the same period in 1997, primarily due
to collection of accounts receivable, partially offset by an increase in
inventories.
Investing activities for the three months ended March 31, 1998 and 1997
used cash flows of $132,000 and $122,000, respectively for capital expenditures.
Financing activities for the three months ended March 31, 1998 and 1997
used cash flows of $5.3 million and $0.6 million, respectively. The activity in
1998 and 1997 was principally comprised of net advances to the Parent and
affiliated subsidiaries and, in 1998, included $4.3 million of borrowings under
the Revolving Credit Facility.
For the year ended December 31, 1997, the Company's operating activities
provided cash flow of $1.2 million compared to $4.3 million and $6.1 million of
cash flow provided by operating activities in 1996 and 1995, respectively. The
decrease in cash flows was primarily due to timing of deliveries and the
collection of receivables. The Company does not expect accounts receivable to
remain at the December 31, 1997 levels. Accordingly, the Company believes that
cash flows from operations during 1998 will benefit from a reduction in accounts
receivable levels.
Investing activities for the years ended December 31, 1997, 1996 and 1995
used cash flows of $461,000, $390,000, and $255,000, respectively. These
activities primarily reflected capital expenditures for the respective years.
The Company anticipates that capital expenditures in 1998 and 1999 will be
approximately $1.0 million and $1.5 million, respectively. These amounts include
approximately $400,000 in each of 1998 and 1999 that management estimates will
be required for maintenance, with the balance relating to capital expenditures
required to increase capacity. The Company expects to add three additional
replication lines in the second half of 1998 in order to address certain
capacity constraints experienced in the fourth quarter of 1997 which resulted in
the use of subcontractors for a significant portion of sales in that quarter.
Such capital commitments include amounts that may be financed through capital
leases and other financing arrangements. The portion of capital commitments not
financed through such leases and arrangements are likely to be financed with
cash resources.
Financing activities for the years ended December 31, 1997, 1996 and 1995
used cash flows of $590,000, $7.0 million and $6.1 million, respectively. The
activity in 1997, 1996 and 1995 was comprised principally of advances to the
Parent and affiliated subsidiaries and, in 1997, included $674,000 of borrowings
under the Revolving Credit Facility.
The Company believes that cash flows from operations, together with cash
balances and availability of funds under the New Credit Facility, will be
sufficient to meet working capital needs, service debt and fund capital
expenditures for the next twelve months.
18
<PAGE> 22
UNAUDITED QUARTERLY OPERATING RESULTS
The following tables set forth certain unaudited financial information for
each of the quarters in 1997 and the first quarter of 1998. In management's
opinion, this unaudited quarterly information has been prepared on the same
basis as the audited financial statements and includes all necessary
adjustments, consisting only of normal recurring adjustments, that management
considers necessary for a fair presentation of the unaudited quarterly results.
The Company believes that quarter-to-quarter comparisons of its financial
results are not necessarily meaningful and should not be relied upon as an
indication of future performance.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1997 1997 1997 1997 1998
--------- -------- ------------- ------------ ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Sales............................ $5,241 $6,296 $ 8,104 $11,274 $7,035
Costs and expenses:
Cost of goods sold............ 2,629 2,591 2,617 4,075 2,438
Selling and administrative.... 1,310 1,103 1,448 2,140 1,256
Depreciation and
amortization................ 293 288 288 267 292
------ ------ ------- ------- ------
Total costs and
expenses............... 4,232 3,982 4,353 6,482 3,986
------ ------ ------- ------- ------
Operating income................. 1,009 2,314 3,751 4,792 3,049
Other income..................... 33 30 89 669 34
Interest, net.................... 76 76 33 (39) (29)
------ ------ ------- ------- ------
Income before income taxes....... 1,118 2,420 3,873 5,422 3,054
Net income....................... $ 657 $1,422 $ 2,275 $ 3,185 $1,793
Net income per share............. $ 0.05 $ 0.10 $ 0.17 $ 0.23 $ 0.13
Weighted average shares
outstanding................... 13,636 13,636 13,636 13,636 13,636
PERCENTAGE OF SALES:
Sales............................ 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of goods sold............ 50.1 41.1 32.3 36.1 34.7
Selling and administrative.... 25.0 17.5 17.9 19.0 17.9
Depreciation and
amortization................ 5.6 4.6 3.5 2.4 4.1
------ ------ ------- ------- ------
Total costs and
expenses............... 80.7 63.2 53.7 57.5 56.7
Operating Income................. 19.3 36.8 46.3 42.5 43.3
Other income..................... 0.6 0.5 1.1 5.9 0.5
Interest, net.................... 1.4 1.1 0.4 (0.3) (0.4)
------ ------ ------- ------- ------
Income before income taxes....... 21.3 38.4 47.8 48.1 43.4
Net income....................... 12.5% 22.6% 28.1% 28.3% 25.5%
</TABLE>
The Company's future operating results are likely to fluctuate
substantially from quarter to quarter. The degree of fluctuation will depend on
a number of factors, including the timing and level of sales, any change in the
pricing of the Company's products, or the mix of products sold. Because a
significant portion of the Company's business is expected to be derived from
orders placed by a limited number of large customers, variations in the timing
of such orders could cause significant fluctuations in the Company's operating
results. Customers do not typically provide ABNH with precise forecasts of
future order quantities. Quarterly demand for holograms may be influenced
materially by customers' promotions, inventory replenishment, card expiration
patterns, delivery schedules and other factors which may be difficult for ABNH
to anticipate. In particular, promotions in advance of the holiday season have
in the past resulted in higher sales of credit cards in the third and fourth
quarters. Other factors that may result in fluctuations in operating results
include the timing of new product announcements and the introduction of new
products and new technologies by the Company or its competitors, delays in R&D
of new products, increased R&D expenses, availability and cost of materials from
the Company's suppliers, competitive pricing pressures and financing costs.
19
<PAGE> 23
YEAR 2000 ISSUE
The Year 2000 issue involves the risk that computer systems using two-digit
date fields will fail to recognize properly the Year 2000, resulting in computer
system failures for businesses, government agencies, service providers, vendors
and customers. The Company has formed a task force of employees from various
departments within the Company to assess the Company's level of preparedness for
Year 2000 issues. The task force is in the process of performing its review. The
Company has initiated discussions with its key suppliers and customers to
determine whether they have any Year 2000 issues which could impact the Company.
The Company anticipates that certain of its software will require
replacement or modification in connection with the Year 2000 issue. The Company
believes it has allocated adequate resources for this purpose and that its Year
2000 date conversion program can be successfully completed on a timely basis.
The Company estimates that its costs related to addressing the Year 2000 issue
will be less than $300,000. Estimates of the related costs are based on
assumptions, including the continued availability of certain resources, the
ability to correct all relevant applications and third party modification plans.
There is no guarantee that the estimates will be achieved, and actual costs
could differ materially from those anticipated.
BACKLOG
As of December 31, 1996 and 1997, the Company had a backlog of $5.0 million
and $2.3 million, respectively. As of March 31, 1997 and 1998, the Company had a
backlog of $1.9 million and $1.3 million, respectively. The Company includes in
its backlog all sales specified in signed contracts and purchase orders to the
extent that the Company contemplates recognition of the related sales within one
year. There can be no assurance that the contracts included in backlog will
actually generate the specified sales or that the actual sales will be generated
within the one year period. The amount of backlog at the end of any fiscal year
is not necessarily indicative of sales for the following year because most of
the Company's sales, including sole source arrangements, are based upon the
customer's total requirements rather than the specified amount at the end of the
year.
IMPACT OF INFLATION
In recent years, inflation has not had a significant impact on the
Company's historical operations. There can be no assurance that inflation will
not adversely affect the Company's operations in the future, particularly in
emerging markets where inflationary conditions tend to be more prevalent.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The AICPA Accounting Standards Executive Committee Issued Statement of
Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities," was
issued in April 1998 and is effective for fiscal periods beginning after
December 15, 1998. SOP 98-5 provides guidance on the financial reporting of
start-up costs and organization costs. It requires costs of start-up activities
and organization costs to be expensed as incurred. The Company is evaluating the
effect of the pronouncement.
20
<PAGE> 24
BUSINESS
ABNH is a world leader in the origination, production and marketing of
mass-produced secure holograms based on its significant market share. The
Company's holograms are used primarily for security applications such as
counterfeiting protection for credit and other transaction cards, identification
cards and documents of value, as well as for tamper resistance and
authentication of high-value consumer and industrial products. ABNH's ability to
control the diffraction of light ("origination") using proprietary processes in
a secure, controlled manufacturing environment has enabled ABNH to become a
market leader in security holography. ABNH's proprietary products are used by
over 125 customers in more than 25 countries. Customers include VISA, IBM,
Intel, Merck and Eli Lilly, as well as agencies of the United States government
and the Chinese government. Moreover, at present, ABNH is the sole supplier of
holograms to certain customers including MasterCard, Discover, Europay and
Diners Club. Based on the Study, management estimates, that in 1997, sales in
the security sector of the holography market were approximately $380 million and
represented approximately 62% of the total worldwide holography market sales.
Also based on the Study, management believes that ABNH has the largest worldwide
market share in the security sector, with approximately 8%. The Company also
competes selectively in the market for non-secure holograms used in packaging
and promotional applications, including magazine illustrations, trading cards,
promotions, advertising and specialized packaging. In 1997, the Company derived
95% of its sales from security applications and 5% from packaging and
promotional applications.
The Company attributes its leading position in the security sector of the
holography industry to a number of competitive strengths. ABNH was the first
holography company to produce holograms for credit cards, and has developed
relationships with MasterCard, VISA, Europay, Discover and Diners Club. Based on
the Study, management estimates that the Company has a 75% share of the
worldwide market for credit card holograms. The Company has one of the largest
production capacities in the industry and recently became the first holography
company to receive ISO 9001 certification (a certification that a business's
quality assurance systems for, among other things, the design, development and
production of products meet guidelines established by the ISO). The Company has
two highly secure, certified production facilities containing a total of 12
origination laboratories, 13 mass replication lines and extensive security and
quality control procedures and expects to add 3 additional replication lines in
the second half of 1998. In addition, the Company's emphasis on R&D has enabled
the Company to create new technologies and proprietary production processes and
to deliver innovative products to the marketplace. Further, the Company holds
numerous patents and service marks used in its business.
INDUSTRY OVERVIEW
A hologram is a laser-generated, three-dimensional reproduction of an
object, produced on a two-dimensional surface. A hologram controls the
diffraction of light at pre-determined angles to create specific visual imagery.
When a hologram is viewed from different angles, features such as depth and
movement, unseen in normal two-dimensional photographs, are seen by the viewer.
Holograms can also include information which is visible only with the aid of
special devices.
The Study estimates that total sales of holography products, including
those used for security, packaging, and promotional applications, grew at a
compound annual rate of 31.7% per year, from $90 million in 1990 to $617 million
in 1997. The Study bases its findings on 114 survey respondents out of 248
companies surveyed worldwide. The Study also estimates that total sales of
holography products will grow at a compound annual rate of approximately 25%
over the five year period from 1998 through 2002, reaching almost $1.9 billion
in sales by the year 2002.
The holography market is divided into three main sectors: security,
promotion and packaging.
SECURITY
Based on the Study, management estimates that, in 1997, there were
approximately 50 companies in the security sector of the holography market, with
total sales in the security sector of approximately $380 million. According to
the Study, the security sector of the holography market is expected to grow at a
compound
21
<PAGE> 25
annual rate of over 20% over the five year period from 1998 through 2002. The
Company believes that the limited competition, high potential growth rate and
barriers to entry make the security sector more attractive than other sectors of
the holography market.
The Study estimates that the security sector of the holography market,
consisting of credit and other transaction cards, product authentication and
documents of value, represented approximately 62% of overall industry sales for
1997. Holography, combining art and science, allows each customer to develop its
own unique hologram with which to identify and protect its product. The secure
hologram can also be used to store covertly certain data, which are only machine
readable, about the particular products shipped or purchased. Holograms provide
three major benefits as security devices:
- The three-dimensional imagery, combined with various proprietary
hidden and visible security features, makes exact duplication and
replication of holograms on a mass-production basis virtually
impossible and presents obstacles to counterfeiting.
- The unique visual aspects of a hologram are easily recognizable,
making authentication of products and documents possible by both
experts and laymen without special machinery, equipment or training.
- The adhesives used to affix the hologram permanently to a product or a
document may be specially designed to cause the holograms to destruct
upon removal or after efforts to tamper with the product.
Pricing in the security sector of the holography market is based on
performance, quality and control. This pricing also reflects the complexity of
holograms used as security/authentication devices to reduce losses of sensitive
products and documents. Additionally, the Company believes the technological
sophistication of the production processes creates a barrier to marketplace
entry for potential competitors.
The security sector of the holography market consists of:
Transaction Cards. In the early 1980's, ABNH began marketing its
secure holograms for use on credit cards and, as a result, helped to create
and expand the security sector of the holography market. Since that time,
the use of holograms on credit cards and other transaction cards has
continued to grow. The most common examples of secure holograms are the
distinctive MasterCard "micro globes" and VISA "dove" found on their
various credit and transaction cards. In recent years, consumers demanding
fast, convenient and secure methods of payment have increasingly
supplemented traditional payment systems such as checks and cash with
card-based payments, such as debit, credit and charge cards. According to
the Nilson Report, electronic payments using credit, debit, electronic
benefits transfer and prepaid cards increased from approximately 15% of all
United States consumer purchases in 1990 to approximately 23% in 1996, and
are projected to account for approximately 31% and 40% of transactions by
2000 and 2005, respectively. Increased transaction card use has led to the
development and success of new markets for transaction products, such as
health cards, transportation cards, identification cards, telephone cards,
secure credentials and drivers' licenses.
Product Authentication. The use of product authentication holograms
is driven by concerns regarding counterfeiting, piracy, pilfering and other
infractions that can result in lost sales, lost goodwill and product
liability claims. Holograms have gained increasing acceptance as
authentication devices in, among others, the electronics, pharmaceutical,
licensed consumer products industries (e.g., clothing, sporting goods and
software) and in high value consumer and industrial products (e.g., laser
printers, electronic components, videocassettes and compact discs). Other
industries evaluating holograms for use as authentication devices include
aerospace and toy manufacturing. Product authentication holograms are
either machine or hand-applied to individual products. A holographic label
that is tampered with becomes permanently damaged, leaving a visible
footprint on the product. Customers distinguish hologram providers in the
product authentication sector of the holography market on the basis of
security features offered, secure production control capabilities and
price/benefit concerns.
22
<PAGE> 26
Documents of Value. Concerns over counterfeiting and copying have led
to an increased use of holograms on documents of value, including currency,
passports, business cheques, gift certificates, vouchers, certificates of
deposit, stamps (postage and revenue), tickets and other financial
instruments. There are over a dozen countries, including Bulgaria, Kuwait
and Poland, using holograms on their currencies, and management expects
that use of holograms by foreign countries will increase in the future. For
example, the European Union is expected to utilize holography on several
denominations of the Euro when issued.
PROMOTION
According to the Study, the promotion sector of the holography market
represented approximately 17% of overall industry sales in 1997. Promotional
holography is used for "short run," low-end products, including greeting cards
and decorative clothing, and for certain advertising. The manufacturing
processes utilized for the creation of promotional holograms are not as complex,
secure or proprietary as those used in creating security holograms. Competition
is based primarily on price, turn-around time, design and reliability. There are
over 100 companies competing in the promotion sector of the holography market.
The Study indicates this sector is expected to grow at a compound annual rate of
7% over the five year period from 1998 through 2002.
PACKAGING
According to the Study, sales in the packaging sector of the holography
market accounted for approximately 21% of overall industry sales in 1997. These
lower-margin, commodity-type holograms are generally used on consumer product
packaging solely for their eye-catching appeal, including packaging for candy,
beer, toothpaste, soft-drinks and other consumer products. The manufacturing
processes utilized for the creation of packaging holograms are not as complex,
secure or proprietary as those used in creating security holograms. Customers
distinguish between suppliers primarily based upon price and production
capacity. There are over 150 competitors in this sector. According to the Study,
the packaging sector is expected to grow at a compound annual rate of over 42%
over the five year period from 1998 through 2002.
ABNH STRATEGY
The Company's objective is to capitalize on its position as a leader in the
holography industry in order to profitably increase its market share. The
Company's business strategy is comprised of the following six principal
components:
Leverage Leadership Position in Security Sector of the Holography
Market. The Company's strategy is to maintain and expand its leading market
position in the security sector of the holography market in the following
manner:
Maintain Leadership in Transaction Cards. The Company holds a
leadership position in this area as a result of its relationships with
companies such as MasterCard, VISA, Europay, Diners Club and Discover.
Management believes this leadership role ideally positions the Company to
benefit from present growth in the transaction card area. ABNH manufactures
laminates that are incorporated onto identification and access cards. The
governments of Colombia and China, as well as the United States military,
among other customers, currently utilize this product. The Company expects
continued growth in this area as more governments and government agencies
incorporate holography into their card-based identification products.
Grow Product Authentication Area. The Company seeks to expand its
position in the product authentication area by increasing its presence in
industries that have experienced a high degree of counterfeiting such as
the apparel, electronics and licensed consumer products industries. For
example, in late 1997 the Company developed a new program, HOLOGARD(TM), to
deliver security services together with its secure holograms. The services
are delivered through a strategic alliance with an international
investigative agency and include monthly reports describing grey market
activity, counterfeit detection, labor compliance to assure that no child
or exploited labor is utilized in the customer's manufacturing, and
cooperation with law enforcement officials for the prosecution of criminals
who participate in such
23
<PAGE> 27
illegal activities. ABNH is presently the only hologram manufacturer to
offer these services. To date, sales under the HOLOGARD program have not
been material. Additionally, the Company has targeted the microprocessor,
pharmaceutical, aerospace, and spirits markets as industries in need of the
security and accountability that the Company's products offer.
Promote Acceptance of Holograms on Documents of Value. Working with
international banking authorities, banknote paper manufacturers and
security printers as well as the Company's international sales agents, ABNH
is promoting the use of holograms as security devices on documents of
value. Documents of value that use holograms include currencies, passports,
stamps (postage and revenue), checks, gift certificates and food vouchers.
The Company is already a producer of holograms for the currencies of
Bulgaria and Swaziland, and is attempting to have holograms accepted as
security features on several other currencies.
Expand ABNH's Security Products and Services for Licensed Products. ABNH
markets its products to licensors in various industries that rely on the Company
to produce holograms and certify the number of holograms distributed to licensee
manufacturers. ABNH monitors the distribution of the holograms to customers'
licensees under controlled circumstances. ABNH reports to the licensor the
number of holograms shipped to licensees, allowing the licensor to compare this
number to the amount of product reported shipped by the licensee. This provides
a mechanism for the customer to audit royalty reports and otherwise maintain the
integrity of marketing channels. Customers include Titan Sports (World Wrestling
Federation), Playboy licensed products, Sony PlayStation and DC Comics/Batman
licensed products.
Grow through Strategic Acquisitions. With approximately 50 smaller
companies engaged in some form of security holography, ABNH intends to focus on
acquiring companies that provide access to new customers, geographic markets or
technologies. Historically, ABNH has been limited by restrictive covenants
associated with debt issued by the Parent and associated capital needs of the
Parent.
Focus on International Expansion. The Company intends to utilize its
network of 25 international sales agents, as well as recruit new agents where
the Company does not currently have a presence, in order to expand its customer
base. Additionally, the Company recently added a sales executive to cover
specific regions in the growing Latin American market. As part of the overall
plan to expand internationally, the Company may expand its manufacturing
capabilities by forming joint ventures with companies in selected regions,
including Europe and Asia.
Continue the Development of Holographic Technology. ABNH seeks to stay at
the forefront of optical development in order to originate holograms more
efficiently and further distinguish its products in the marketplace. Continued
emphasis on research and development is expected to enable the Company to create
new technologies and to introduce new products to the marketplace. Currently,
the Company is seeking to develop new ways to increase the information stored on
a hologram and to deliver higher resolution (dots per inch) than is currently
available in the security sector of the holography market. The Company's ability
to incorporate machine-readable features should be enhanced through the use of
higher resolution.
Continue Operating Improvements. ABNH plans to continue to acquire capital
assets and develop technology to improve productivity and quality and to reduce
product lead times. The Company also plans to continue its program of integrated
yield management. To date, the Company has made progress in improving yields and
reducing costs by refining material requirements and enhancing relationships
with its suppliers. Additionally, the Company plans to expand its internal use
of statistical process control tools to increase the efficiencies of the
manufacturing processes.
24
<PAGE> 28
PRODUCTS AND USES
PRODUCTS
ABNH's secure holography products can be grouped into three categories: hot
stamp foils, pressure-sensitive labels and laminates.
Hot Stamp Foils. These holograms are designed for permanent application to
paper (e.g., currency) and plastic (e.g., transaction cards) through the
application of heat and pressure to the hologram. The Company uses specific heat
activated adhesives to ensure even bonding of the hologram to the substrate, and
the exposed side of the hologram is treated with protective coatings to ensure
durability and wear resistance. ABNH's transaction card hot stamp foil also
possesses a degree of flexibility that allows a hologram to be embossed over the
transaction card without cracking or flaking. In addition, the hot stamp foil
has been engineered to record permanently embossed transaction card numbers, so
that fraudulent attempts to change the account number on the card are apparent.
Pressure Sensitive Labels. These labels are designed to be applied using
pressure by hand or by machine to create a permanent bond to the intended
substrate. The Company has developed proprietary and patent pending features
that make tampering apparent. If removed, the label leaves a distinctive mark or
pattern and the removed material is unusable.
Laminates. Laminates are used primarily in identification products. The
Company has patented its method of making the hologram visible at specific
angles and invisible at other pre-determined angles. The Company's see-through,
demetallized product also protects the information on the identification
document (card, passport or paper credential) from alteration. Any attempt to
alter the hologram will cause it to disintegrate. Fully metallized laminates are
used on products such as hang tags for apparel, "full face" transaction cards
and magazine covers. Adhesives for laminates can be formulated for application
through both heat and pressure as well as pressure only, depending upon the
customer's specific requirements.
USES
ABNH designs and mass produces different types of holograms for a variety
of uses and customers.
<TABLE>
<CAPTION>
PACKAGING/
SECURITY PROMOTION
---------------------------------------------------------------- --------------------
CARD PRODUCT
TYPE OF PRODUCT PRODUCTS AUTHENTICATION DOCUMENTS OF VALUE
- --------------- ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Hot Stamp Foils MasterCard Chivas Regal Bulgaria National Geographic
VISA Lotus (currency) Kelloggs
Europay Swaziland Sports Illustrated
Discover (currency)
Diners Club Thailand (postage
stamp)
Venezuela
(revenue
stamp)
Pressure IBM U.S. Postal Entertainment Weekly
Sensitive Intel Service National Geographic
Labels Merck (space station
Eli Lilly stamp and
Playboy envelope)
Sony
TitanSports
(World
Wrestling
Federation)
Laminates U.S. Military TitanSports Bacardi
(I.D.'s) Jaks Jeans National Geographic
China (I.D.'s) Skybox International
Colombia (I.D.'s) (trading cards)
</TABLE>
25
<PAGE> 29
PRODUCTION PROCESS
ABNH's production process is integrated to handle virtually all aspects of
production, including raw materials sourcing, processing, finishing, packaging
and storage. The Company believes that this integration enables it to control
quality, costs and inventory and to match its output levels and product mix to
incoming orders efficiently. From time to time, the Company subcontracts certain
production functions to third parties under strict specifications,
accountability and control. The production process consists of the following
four steps:
Design
The first step of the mass-production process is the design of the
hologram. In the Company's art department, ABNH's experienced personnel work
with the customer to develop a conceptual design that is both aesthetically
pleasing and incorporates multiple security features.
Origination
After the design has been completed, various laser-ready components
(magnetic floppy disc, three dimensional sculpture, flat art, etc., referred to
as "information") are delivered to one of the Company's 12 origination studios.
The conversion from information to hologram is based on ABNH's ability to
record light in an organized format. Coherent light, which is delivered by a
laser, is best understood as light which has one wavelength of the visible
spectrum and possesses a high degree of organization. The coherent light is
split into two beams (the object beam and the reference beam) directed toward
photo-resist treated glass. The object beam is interfered with by the
information before continuing its travel toward the photo-resist treated glass.
The reference beam is not interfered with and travels directly toward the
photo-resist treated glass.
The object beam then interferes with the reference beam, creating an
interference pattern which is recorded on the light sensitive photo-resist
glass. After developing the photo-resist glass, the film is re-illuminated
approximating the original angle(s) of the reference beam. The resulting
interference pattern within the film reflects some of the light, striking it
into a re-creation of the pattern of light which originally came from the object
beam, due to a property of light called diffraction. The reflected light, now
organized, and containing all information that the object beam once carried,
allows the viewer to see all of the information in three dimensions, true color
or other desired effect.
There are less complex methods of creating a hologram origination than the
process described above. However, only the above process produces the clarity,
depth perception, movement and mass replication properties capable of producing
billions of holograms without measurable variance. The Company believes that
these are essential components of secure holograms. The Company believes that
its largest competitors in the security sector may use similar processes.
Plate Making
Once the originating process is completed, a plate is created in order to
permit mass production. The "one-on" image is "step and repeated" to a
pre-determined size with multiple identical images recorded on a photo-resist
glass. The glass is then converted to a production plate in an electrolytic
process where nickel is grown on the surface of the glass. Nickel is used
because its molecular nature allows for an exact transfer of the origination to
the production plate. The Company believes that its proprietary plate making
process is an important component of its ability to mass produce its secure
holograms.
The electrolytic process creates different "generations" of plates prior to
the production phase. Each generation, identical to the last, creates a more
wear resistant plate for use in a mass production environment, thereby extending
the useful life of the plate. The production plate will have varying degrees of
hardness, depending upon the requirements of the customer.
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<PAGE> 30
Mass Production
No two customers employ the same custom origination or the same
manufacturing specification. Manufacturing specifications are determined in
collaboration with the customer. The Company and the customer enter into
production planning where drawings and overall specifications are written and
distributed to the various production departments.
The Company employs two methods of mass-production of holograms. Hard
embossing transfers images to an aluminum foil/polyester substrate through heat
and pressure. The holographic plate actually forces ridges and grooves into the
foil, which in turn diffract light.
The other method of production is In-Situ Polymeric Replication. Using this
method, a polymer is transferred to a substrate (polyester, polypropylene, etc.)
which is then put in contact with the holographic plate so that holographic
imagery is transferred. The material is then metallized in a vacuum deposition
process.
Finishing for both methods includes application of adhesive, and/or control
numbering and cutting to delivered sizes. The completed hologram is then applied
to the customer's intended product.
RESEARCH AND DEVELOPMENT
ABNH regards its R&D efforts as integral to maintaining its competitive
position in the areas of origination, replication and mass production of
holograms. ABNH's research facilities, based in Elmsford, New York, employ six
dedicated personnel. In connection with purchasing holograms, ABNH's customers,
including both private companies and certain agencies of the United States
government, have paid for a portion of the Company's R&D efforts in producing
various products. The R&D effort is also responsible for both product
development and manufacturing support.
The following table provides brief summaries of the credentials of ABNH's
senior R&D staff.
<TABLE>
<CAPTION>
YEARS
WITH
NAME/TITLE DEGREE PREVIOUS EXPERIENCE ABNH
- ---------- ------ ------------------- -----
<S> <C> <C> <C>
LILY O'BOYLE Masters Degree, University of Ms. O'Boyle began her career as 14
Director of Research Delaware, 1981 an origination lab technician
and has held various positions
in production and research with
ABNH. Ms. O'Boyle is the
inventor on numerous ABNH
patents.
ANH NGUYEN Ph.D., University of Akron, Before joining ABNH, Dr. Nguyen 6
Research Chemist/Materials 1980 held positions with Dow
Scientist Chemical Form Physics and Napp
Systems in various research and
development functions.
DER KUAN KANG Ph.D., Tokyo Institute of Dr. Kang's prior positions 3
Optical Research Physicist Technology, 1991 include Toppan Printing Co., in
research for the period from
1991 to 1995, and various
engineering and research
positions in Taiwan.
</TABLE>
PRODUCT DEVELOPMENT
Over the past several years, members of the Company's R&D staff have
developed a number of new products, including a tamper-apparent label and a
tamper-apparent heat seal laminate for use in identification card and passport
products. The Company is seeking to develop new ways to deliver higher
resolution beyond what is currently available in the security sector of the
holography market. Additionally, the development of machine-readable holograms
has been a priority for the R&D department. The proliferation of machine-
27
<PAGE> 31
readable technology will enable holographic products to be compatible with
optical bar code technology for a variety of applications, including both simple
product validation or authentication and more sophisticated uses.
MANUFACTURING SUPPORT
The R&D department assists the manufacturing department in addressing
various process and quality issues. The Company's R&D staff has also been
involved in several manufacturing process improvements, including the discovery
of a means to increase significantly the lifetime of nickel plate shims and the
development of an automated plate layout program that has reduced layout time
from two weeks to less than one day.
MANUFACTURING FACILITIES
ABNH maintains secure hologram manufacturing facilities in Elmsford, New
York and Huntingdon Valley, Pennsylvania. These facilities provide the Company
with redundant mass production capability. The Company currently has 13 mass
replication lines and expects to add 3 additional lines in the second half of
1998. Both the Elmsford and Huntingdon Valley facilities have a high level of
security and are certified by, among others, MasterCard, VISA, Europay and
certain agencies of the federal government (including the Department of State,
the Department of Defense as well as certain security agencies). Such
certification involves a series of tests of physical plant security, inventory
tracking and employee screening. The Company believes that its existing
facilities are adequate to meet its current requirements and that additional
suitable space will be available as needed.
The Company's 57,200 square foot facility at Elmsford, New York serves as
the Company's headquarters, origination center and the manufacturing site for
the mass production of numerous holographic products. Supporting the mass
replication capabilities are 12 fully-equipped, proprietary laser laboratories.
The Company's 30,000 square foot facility at Huntingdon Valley,
Pennsylvania is dedicated to the mass production of security holograms. In 1997,
this plant manufactured and distributed over 600 million holograms to the
Company's customers, including MasterCard, VISA and Europay.
Both facilities are monitored for security 24 hours a day, seven days a
week. The Director of Security is responsible for the physical security of both
facilities, access and egress, monitoring employee integrity, and safeguarding
of machinery, materials, work-in-process and finished product until shipping.
The security department identifies personnel to accompany all inter-plant
shipments, witnesses material destruction and supervises the transfer of
shipments to armored carriers.
Each facility is equipped with full perimeter alarms enhanced by window
glass break sensors, internal motion detectors and closed circuit video
monitoring of security sensitive areas. The Elmsford facility is equipped with
card access for all inter-departmental access and activity. Uniformed security
personnel are on-site at all times for the Huntingdon Valley facility and during
all non-working hours in the Elmsford facility.
All electroformed plates and masters are completely accounted for, recorded
and kept on file by a system that utilizes an audit trail inscribed into the
master plate. All waste material is controlled and either pulverized in one of
the manufacturing facilities or incinerated under the direction and observation
of security personnel. All prospective employees undergo extensive background
checks and pre-employment physicals which include reviewing past employment,
credit history and criminal records and testing for alcohol or illegal drug use.
SALES AND MARKETING
In 1997, ABNH provided holographic products to over 125 customers in more
than 25 countries. The Company is the exclusive supplier of holograms to
MasterCard pursuant to a five-year agreement that extends until February 2001.
The agreement provides for automatic two-year renewal periods if not terminated
by either party. In 1997, MasterCard accounted for approximately 44% of sales of
the Company. The Company is one of only two authorized manufacturers of VISA
holograms for sale to approved manufacturers of VISA cards, which in 1997
accounted for 24% of sales of the Company. In addition, the Company is the only
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<PAGE> 32
hologram supplier approved by Diners Club, Discover and Europay. See "Risk
Factors -- Dependence on Certain Customers."
ABNH currently employs six full-time, incentive-compensated salespeople and
two sales service personnel. ABNH also utilizes 25 incentive-based international
sales agents and manufacturer representatives around the world.
All pricing decisions are made centrally by ABNH's operating executives.
The Company focuses certain of its marketing efforts on trade shows such as
Expopak, the International Holographics Manufacturers Association trade show,
the International Card Manufacturers Association trade show and the Card
Tech/SecurTech trade show. In the future, the Company intends to participate in
brand protection/packaging trade shows, both domestically and internationally.
The Company maintains a customer support center that is staffed by three
technical support representatives whose responsibility is to act as a liaison
for the customer through all phases from design through implementation. Working
with ABNH's chemists and engineering staff, the technical support
representatives advise the customers on various matters including adhesives,
application machinery, substrate chemistry, and physical attributes.
Additionally, ABNH provides immediate technical field support when necessary and
has, from time to time, sent support personnel to customers in international
locations.
COMPETITION
The holography industry is highly competitive and highly fragmented, with
approximately 50 companies in the security sector. A number of the Company's
competitors are larger or are divisions of larger companies, and have greater
financial resources, than the Company. In the holography industry, competition
is generally based on technology, price, product quality and customer service.
The Company also competes with other non-holographic methods or devices. The
Company believes its leading position in the security sector of the holography
market is attributable to its years of technical expertise and experience in the
mass production of secure holograms, as well as its reputation for secure
facilities and inventory control systems.
TRADEMARKS AND PATENTS
The Company utilizes a combination of patents, trade secrets and
confidentiality agreements, as well as restricted access and other forms of
intellectual property protection, to safeguard certain of its proprietary
technology and processes. The Company also holds certain trademarks with respect
to certain products and services. The Company's sales are not materially
dependent upon its portfolio of patents and trademarks. Although the Company
believes that its patents and trademarks have value and the Company has, from
time to time, chosen to enforce its patents against others whom the Company
believes are infringing, the Company believes that its future success will
depend primarily on the innovation, technical expertise, production and
marketing abilities of its personnel. There can be no assurance as to the degree
of protection offered by the Company's patents, the success of any of the
Company's enforcement actions or the likelihood that patents will be issued for
pending applications.
Competitors in the United States and foreign countries may have applied for
or obtained, or may in the future apply for and obtain, patents that will
prevent, limit or interfere with the Company's ability to make and sell some of
its products.
EMPLOYEES
As of March 31, 1998, the Company employed approximately 110 persons, of
which 65 are covered by collective bargaining agreements. The Company considers
its relations with its employees to be good.
LEGAL PROCEEDINGS
On February 14, 1997, James Rigby, Trustee in Bankruptcy for Holosonics,
Inc., Holotron Corp., Meadows Games, Inc. and Fire Diamond, Inc. commenced an
adversary proceeding in the United States Bankruptcy Court for the Western
District of Washington at Seattle against International Banknote Company,
29
<PAGE> 33
Inc., American Banknote Company and ABNH. The complaint alleges that the
defendants are indebted to the bankruptcy estate for royalty payments under a
1981 license and that the Company is liable for unpaid royalties for 1990 in the
amount of $226,322, for 1991 in the amount of $853,582 and through July 1992 in
the amount of $568,762, plus attorney's fees and interest on unpaid amounts.
The plaintiff claims that pursuant to the 1981 arrangements, the Company is
required to pay royalties through July 1992 of 5% on sales of holographic
products using the patents covered by the license agreement for the origination
of holographic images. The Company denies all liability in the case on several
grounds, including that two of the three patents at issue expired on or before
September 30, 1991 and any obligation to pay royalties terminated with the
expiration of those patents and that the one remaining patent which expired in
July 1992 had been held invalid in part and not infringed as to its other parts
in prior litigation in the United States District Court for the Northern
District of California, which binds the plaintiff and bars the Trustee from
asserting claims against the Company. In addition, the Company claims that it
utilizes processes differently from those of the licensed patents and that at
the time the license agreement was executed by the Trustee, the debtors did not
own the patents and the license is therefore invalid and cannot be enforced.
The Company currently and from time to time is involved in litigation
incidental to the conduct of its business, but the Company is not a party to any
lawsuit or proceeding which, in the opinion of the Company, is likely to have a
material adverse effect on the Company.
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<PAGE> 34
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the persons
who are expected to be the directors and executive officers of the Company prior
to the Offering. All directors hold office until the next annual meeting of
shareholders or until their successors have been elected and qualified. Officers
are appointed by the Board of Directors and serve at the discretion of the
Board.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Morris Weissman....................... 56 Chairman of the Board and Chief
Executive Officer
Joshua C. Cantor...................... 38 President and Director
Richard P. Macchiarulo................ 36 Vice President -- Finance
Jeffrey N. Dugal...................... 41 Vice President -- Operations
</TABLE>
MORRIS WEISSMAN, CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER: Morris
Weissman has been Chairman of the Board and Chief Executive Officer of the
Company since 1990. He is also the Chairman of the Board and Chief Executive of
ABN, and serves as a trustee of the Jackie Robinson Foundation and the Business
Council for the United Nations. Mr. Weissman concentrates on financing matters,
strategy, joint ventures and acquisitions, as well as working with certain of
the Company's international sales agents. It is expected that Mr. Weissman will
devote approximately 20% of his time to ABNH.
JOSHUA C. CANTOR, PRESIDENT AND DIRECTOR: Joshua C. Cantor has been
President of the Company since May 1997 and a director since May 1998, and is
responsible for all day-to-day operations of the Company. Prior to that, Mr.
Cantor was Executive Vice President and General Manager of the Company from
November 1995 to May 1997. Before joining ABNH, Mr. Cantor was Executive Vice
President -- Worldwide Sales of ABN from 1994 to 1995, and Senior Vice
President -- Commercial Sales of ABN from 1992 to 1994.
RICHARD P. MACCHIARULO, CPA, VICE PRESIDENT -- FINANCE: Richard P.
Macchiarulo has been Vice President -- Finance of the Company since June 1997.
Prior to that, Mr. Macchiarulo served as Director of Financial Reporting and
Budgets for ABN from April 1988 to June 1997. He is a member of the American
Institute of Certified Public Accountants and the New York State Society of
Certified Public Accountants.
JEFFREY N. DUGAL, VICE PRESIDENT -- OPERATIONS: Jeffrey N. Dugal has been
Vice President -- Operations of the Company since July 1997. Prior to that, Mr.
Dugal was the operations manager for a division of Illinois Tool Works from 1994
to 1997. Prior to that, he was director of manufacturing for Midwest Film
Corporation from 1991 to 1994. Mr. Dugal earned a B.S. in Mechanical Engineering
from the Massachusetts Institute of Technology.
It is anticipated that prior to or concurrently with the consummation of
the Offering, Stephen A. Benton, C. Gerald Goldsmith and Jeffrey S. Silverman
will be elected as independent directors. Certain officers of the Parent
currently serve as directors and executive officers of the Company, and will
resign prior to or concurrently with the consummation of the Offering.
STEPHEN A. BENTON: Mr. Benton, age 56, is a Professor of Media Arts and
Sciences at the Massachusetts Institute of Technology, where he has been a
faculty member since 1982. He is a fellow of the Optical Society of America and
the Society for Imaging Science and Technology.
C. GERALD GOLDSMITH: Mr. Goldsmith, age 69, has been an independent
investor and financial advisor for over 20 years. He is a director of ABN,
Innkeepers USA Trust, Meditrust Corporation, Nine West Group, Inc., Plymouth
Rubber Company, Inc. and Palm Beach National Bank & Trust Company. He is also
Chairman of the Intracoastal Health Foundation.
JEFFREY S. SILVERMAN: Mr. Silverman, age 52, has been an independent
investor and financial advisor since 1997. He had been Chief Executive Officer
of PLY GEM Industries, Inc., a building products supplier, since 1983 and was
its Chairman of the Board from 1986 to 1997. Since 1997, he has been the Chief
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<PAGE> 35
Executive Officer and Chairman of LTS Capital Partners, LLC, an investment
company. Mr. Silverman is a director of Catalina Lighting, Inc. and Reelco, Inc.
BOARD OF DIRECTORS
Compensation Committee Interlocks and Insider Participation
Mr. Weissman and one independent director will serve as members of the
Company's Compensation Committee. Prior to the Offering, the Company did not
have a Compensation Committee and compensation decisions were made primarily by
Mr. Weissman.
Audit Committee
The independent directors will serve as the Company's Audit Committee.
Non-Employee Director Compensation
Each member of the Board of Directors who is not an officer or an owner or
the representative of an owner of more than 5% of the outstanding Common Stock
will receive compensation of $1,500 per meeting for serving on the Board of
Directors. The Company also will reimburse Directors for any expenses incurred
in attending meetings of the Board of Directors and the committees thereof. Upon
their election to the Board of Directors or the closing of the Offering
(whichever is later), each non-employee Board member will be granted options to
purchase 15,000 shares of the Common Stock. Such options will be exercisable at
the fair market value of the Common Stock at the date of grant. These options
will become vested and exercisable for up to 33% of the total optioned shares
upon the first anniversary of the grant of the options and for an additional 33%
of the total optioned shares upon each succeeding anniversary until the option
is fully exercisable at the end of the third year.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
Compensation of Named Executive Officers. The following table provides
certain summary information for the twelve months ended December 31, 1997
concerning compensation paid or accrued by the Company to, or on behalf of, the
Company's Chief Executive Officer and President (the "Named Executive
Officers"). None of the Company's other executive officers earned salary and
bonus in excess of $100,000 during such period.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------
OTHER
ANNUAL
SALARY BONUS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)
- --------------------------- ---- -------- -------- ------------
<S> <C> <C> <C> <C>
Morris Weissman, Chairman of the Board and
Chief Executive Officer...................... 1997 $ 0 $ 0 $0
Joshua C. Cantor, President.................... 1997 250,000 25,000 0
</TABLE>
Option Grants, Exercises and Fiscal Year-end Values. No stock options were
granted, exercised or outstanding during the fiscal year ended December 31,
1997.
1998 STOCK INCENTIVE PLAN
The Company's Board of Directors intends to adopt the 1998 Stock Incentive
Plan (the "1998 Plan") for the purpose of granting "incentive stock options" in
accordance with Sections 421 and 422 of the Internal Revenue Code of 1986, as
amended, to the Company's officers and employees. The Board of Directors has
discretionary authority, subject to certain restrictions, to administer the 1998
Plan, including, but not limited to, determining the individuals to whom, the
times at which and the exercise price for which options will be granted. The
total number of shares reserved for issuance under the 1998 Plan will be an
amount equal to 10% of the Company's outstanding shares of Common Stock;
provided, that in the event that any outstanding option expires or is terminated
prior to the end of the period during which options may be granted under the
1998 Plan, the shares of Common Stock allocable to the unexercised portion of
such option may again be subject in whole or in part to any option granted under
the 1998 Plan. Of the initial amount of 1,363,000 shares reserved for issuance
under the 1998 Plan, it is anticipated that options for approximately 915,000
will
32
<PAGE> 36
be issued following the Offering. The exercise price of options granted under
the 1998 Plan may not be less than 100% of the fair market value (or not less
than 110% of the fair market value of the shares of Common Stock as to any
individual who, at the time the option is granted, owned more than 10% of the
total combined voting power of all classes of stock of the Company) of the
Common Stock on the date such option was granted. Options granted under the 1998
Plan generally are not assignable or transferable by the option holders. Options
granted under the 1998 Plan typically either will become vested and exercisable
for up to 33 1/3% of the total optioned shares upon each succeeding anniversary
(until the option is fully exercisable at the end of the third year) or, if
immediately vested, will be exercisable for restricted shares of Common Stock
with restrictions lapsing with respect to 33 1/3% of such shares upon each
succeeding anniversary (until all restrictions expire at the end of the third
year). Generally, the unexercised portion of any option automatically terminates
upon the termination of the optionee's employment with the Company; provided,
however, that the Board of Directors upon recommendation of the Committee may
provide that an option may be exercised at any time within 90 days from the date
his employment with the Company terminates (1 year in the event such termination
is the result of the optionee's permanent disability or death); provided,
further, that any extension shall not extend beyond the expiration of the
option. Upon the sale, merger or liquidation of the Company, outstanding options
may be exercised immediately prior to the consummation of such a transaction,
whether or not vested as of such date of consummation.
The Company intends to file a registration statement on Form S-8 under the
Securities Act of 1933, as amended (the "Securities Act") to register all shares
of Common Stock issuable under the 1998 Plan. Such a registration statement is
expected to be filed on or shortly after the closing date of the Offering and
will be effective upon filing.
DEFINED CONTRIBUTION PLAN
The Company has established a profit sharing plan (the "401(k) Plan") under
Section 401(k) of the Internal Revenue Code of 1986, as amended, for all
eligible employees. Under the 401(k) Plan, all employees generally are permitted
to defer compensation up to a maximum of 20% of their income. However, "highly
compensated employees" (currently, meaning employees who earn over $80,000
annually) will be limited to a lower percentage imposed by applicable tax
regulations. The 401(k) Plan provides for a contribution by the Company equal to
1% of a participant's compensation, as well as a discretionary profit-sharing
employer contribution. The Company's contributions are fully vested after three
years of service by an employee.
CONTINUED PARTICIPATION IN ABN PLAN
Certain employees of the Company will retain their right to benefits under
ABN's defined benefit retirement plan, but will not be eligible for any
additional benefits. No contributions are currently required in order to provide
those benefits. Pursuant to the Employee Benefits Allocation Agreement described
under "Certain Relationships and Related Transactions," if contributions should
be required in the future, including any contribution necessary to fully fund
plan benefits on termination of the plan, the amount of such contributions will
be paid by ABN.
EMPLOYMENT AGREEMENTS
Following the Offering, the Company intends to enter into employment
agreements with each of the Named Executive Officers and certain other officers
of the Company. Such employment agreements will prohibit each of the respective
officers from competing with the Company for a period of one year after
termination of employment.
Mr. Weissman will be a party to an employment agreement with the Company
pursuant to which he will serve as Chief Executive Officer of the Company. Under
the terms of Mr. Weissman's employment agreement, he will be entitled to receive
an annual base salary of $1. The agreement will provide that Mr. Weissman may
receive an annual bonus based on certain performance measures of the Company,
including return on equity, operating income and net income, payable at the
discretion of the Board of Directors or the Compensation Committee. The bonus
may be paid in stock options, restricted stock or cash. Pursuant to the
employment agreement, Mr. Weissman will be granted stock options under the 1998
Plan to purchase up to 400,000 shares of the Common Stock at an exercise price
equal to the initial public offering price. Subsequent grants of options to Mr.
Weissman during the term of the employment agreement will be at the discretion
of
33
<PAGE> 37
the Board of Directors or the Compensation Committee. Mr. Weissman's employment
agreement will be effective following the Offering, and will terminate on
December 31, 2000, subject to automatic renewal at the end of the term for an
additional period of two years, unless the Company gives written notice at least
six months prior to the end of the term of its election to terminate such
employment at the end of such term (hereinafter, a "Non-Renewal"). In the event
that Mr. Weissman's employment with the Company is involuntarily terminated
following a merger, acquisition or other similar event involving the Company,
the agreement will provide that the Company pay Mr. Weissman a severance payment
of $1,000,000.
Mr. Cantor will be a party to an employment agreement with the Company
pursuant to which he will serve as President of the Company. Under the terms of
Mr. Cantor's employment agreement, he will be entitled to receive an annual base
salary of $250,000. At the discretion of the Board of Directors, such base
salary will be increased by not less than 6% during each year of the term of the
employment agreement. The employment agreement will provide that Mr. Cantor may
receive a bonus of up to $250,000 per annum at the discretion of the Board of
Directors or the Compensation Committee. Pursuant to the employment agreement,
Mr. Cantor will be granted stock options under the 1998 Plan to purchase up to
200,000 shares of the Common Stock at an exercise price equal to the initial
public offering price. Subsequent grants during the term of the employment
agreement will be at the discretion of the Board of Directors or the
Compensation Committee. Mr. Cantor's employment agreement will be effective
following the Offering, and will terminate on December 31, 2000, with an
automatic renewal provision of two years, subject to Non-Renewal. In the event
that Mr. Cantor's employment with the Company is involuntarily terminated
following a merger, acquisition or other similar event involving the Company,
the agreement will provide that the Company pay Mr. Cantor a severance payment
of $500,000.
Mr. Macchiarulo will be a party to an employment agreement with the Company
pursuant to which he will serve as Vice President -- Finance of the Company.
Under the terms of Mr. Macchiarulo's employment agreement, he will be entitled
to receive an annual base salary of $110,000. At the discretion of the Board of
Directors, such base salary will be increased by not less than 6% during each
year of the term of the employment agreement. The employment agreement will
provide that Mr. Macchiarulo may receive a bonus of up to $60,000 per annum at
the discretion of the Board of Directors or the Compensation Committee. Pursuant
to the employment agreement, Mr. Macchiarulo will be granted stock options under
the 1998 Plan to purchase up to 40,000 shares of the Company's Common Stock at
an exercise price equal to the initial public offering price. Subsequent grants
during the term of the employment agreement will be at the discretion of the
Board of Directors or the Compensation Committee. Mr. Macchiarulo's employment
agreement will be effective following the Offering, and will terminate on
December 2000, subject to automatic renewal at the end of the term for an
additional period of two years, subject to Non-Renewal. In the event that Mr.
Macchiarulo's employment with the Company is involuntarily terminated following
a merger, acquisition or other similar event involving the Company, the
agreement will provide that the Company pay Mr. Macchiarulo a severance payment
of $220,000.
Jeffrey Dugal will be party to an employment agreement with the Company
pursuant to which he will serve as Vice President -- Operations of the Company.
Under the terms of Mr. Dugal's employment agreement, he will be entitled to
receive an annual base salary of $120,750. At the discretion of the board of
directors, such base salary will be increased by not less than 6% during each
year of the term of the employment agreement. The employment agreement will
provide that Mr. Dugal may receive a bonus of up to $60,000 per annum, at the
discretion of the Board of Directors or the Compensation Committee. Pursuant to
the employment agreement, Mr. Dugal will be granted stock options under the 1998
Plan to purchase up to 40,000 shares of the Company's Common Stock at an
exercise price equal to the initial public offering price. Subsequent grants
during the term of the employment agreement will be at the discretion of the
Board of Directors or the Compensation Committee. Mr. Dugal's employment
agreement will be effective following the Offering, and will terminate on
December 31, 2000, subject to automatic renewal at the end of the term for an
additional two years, subject to Non-Renewal. In the event that Mr. Dugal's
employment with the Company is involuntarily terminated following a merger,
acquisition or other similar event involving the Company, the agreement will
provide that the Company pay Mr. Dugal a severance payment of $240,000.
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<PAGE> 38
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to the Offering, the Company was a wholly-owned subsidiary of ABN.
ABN will not own any of the Common Stock following the Offering. Cash accounts
for the Company have been controlled on a centralized basis by ABN and,
accordingly, cash receipts and disbursements have been received or made through
ABN and are recorded as due from Parent and affiliates. Subsequent to the
Offering, the Company will maintain its own centralized cash management system.
In the ordinary course of business, cash is provided to the Parent by way
of intercompany advances to service its debt obligations and for general
corporate purposes. This practice will continue until consummation of the
Offering and will be discontinued after such time. Upon consummation of the
Offering, such advances will be cancelled and forgiven. The amount of such
advances in the year ended December 31, 1997 was $2.9 million and in the three
months ended March 31, 1998 was $9.9 million.
In connection with the Offering, the Company and ABN will enter into a
number of agreements for the purpose of ensuring an orderly transition period
and defining their ongoing relationships following the Offering. Additional or
modified agreements, arrangements and transactions may be entered into by the
Company and ABN following the consummation of the Offering.
Any future agreements, arrangements and transactions between the Company
and ABN will be determined through negotiation between the Company and ABN and
will not be on terms less favorable to the Company than can reasonably be
obtained in arms-length transactions with independent third parties. The terms
will be approved by a majority of the Company's independent directors or will be
consistent with policies approved by such independent directors.
Set forth below are summaries of arrangements, transactions and agreements
between the Company and ABN. Copies of such agreements are included as exhibits
to the Company's Registration Statement on Form S-1, of which this Prospectus is
a part, and the following discussions with respect to such agreements are
qualified in their entireties by reference to the agreements as filed with the
Securities and Exchange Commission (the "Commission").
SEPARATION AGREEMENT
The Company and ABN expect to enter into a separation agreement (the
"Separation Agreement") which will include cross-indemnification provisions and
be effective upon the closing of the Offering. The Separation Agreement will
provide that (i) the Company generally will indemnify ABN (including its
officers, directors, employees and affiliates) against substantially all costs,
liabilities and expenses relating to the conduct by the Company of its business
before or after closing of the Offering, and the Offering, including as a result
of guarantees by ABN of any obligations of the Company, (ii) ABN will indemnify
the Company against substantially all costs, liabilities and expenses relating
to the business of ABN, including as a result of guarantees by the Company of
any obligations of ABN, (iii) the Company will owe (without markup or markdown)
ABN after the consummation of the Offering for any goods or services purchased
from or through ABN prior to consummation but not paid for prior to such
consummation, (iv) in connection with the Offering, ABN will cause its lenders
to release any guaranty or obligation by the Company relating to ABN's debt, all
liens on the Company's assets and the Common Stock to be sold by ABN pursuant to
the Offering, and (v) immediately prior to the consummation of the Offering, the
Company will have a nominal amount of unrestricted cash and prior to the closing
date ABN shall be entitled to all unrestricted cash on hand, and (vi) until the
first anniversary of the consummation of the Offering, the Company will not
solicit any employee of ABN (including any officer, director or affiliate) to
become an employee of the Company and ABN (including its officers, directors,
employees or affiliates) will not solicit any employee of the Company to become
an employee of ABN (including its officers, directors, employees or affiliates).
However, neither the Company nor ABN (including its officers, directors,
employees or affiliates) will have any duty to refrain from (i) engaging in the
same or similar activities or lines of business as one another, (ii) doing
business with any potential or actual supplier or customer of one another, or
(iii) engaging in, or refraining from, any other activities relating to any of
the potential or actual suppliers or customers of one another.
35
<PAGE> 39
Upon consummation of the Offering, the Company will no longer qualify to be
a member of the ABN consolidated group for purposes of filing federal, state or
local income tax returns. Under the Separation Agreement, ABN will indemnify and
hold harmless the Company for all federal, foreign, state and local franchise,
income, sales, use, transfer and other tax liabilities or obligations, including
interest and penalties ("Taxes"), attributable to ABN consolidated group
activities (other than activities of the Company) for all periods (whether
before or after the closing of the Offering). Similarly, the Company will
indemnify and hold harmless ABN for all Taxes attributable to activities of the
Company for all periods after the closing of the Offering. The Separation
Agreement also provides for certain other matters relating to Taxes of ABN and
the Company, including the obligation of the Company to assign to ABN all
refunds of Taxes for which ABN indemnifies the Company.
LICENSE AGREEMENT
The Company and ABN expect to enter into a cross-license agreement (the
"License Agreement"), effective upon the closing of the Offering, pursuant to
which the Company will continue to have the right to use of the "American Bank
Note" name in connection with its current business and any other business
conducted by the Company within the holography industry for an annual fee of $1
per year. The one-year term commencing on the Closing Date will be automatically
renewed for consecutive one-year periods at the end of each term. Also, the
Company and ABN will grant to each other (including subsidiaries in the case of
ABN) perpetual royalty-free licenses for any patents, trademarks or other
proprietary technology used by the other in its respective business. The Company
will agree in the License Agreement not to use the name "American Bank Note" in
connection with any company, business, enterprise or venture outside of the
holography industry, and not to sub-license the name to third parties.
TRANSITIONAL SERVICES AGREEMENT
The Company and ABN expect to enter into a transitional services agreement
(the "Transitional Services Agreement") effective concurrently with the Offering
under which ABN agrees to provide or cause to be provided to the Company certain
specified corporate and administrative services for a transitional period after
the Offering, including tax planning and compliance, financial reporting, risk
management, human resources and legal and related services (the "Services"). The
Transitional Services Agreement provides that the Services will be provided in
exchange for fees which will be no greater than the Parent's costs for such
Services. The period for which ABN will provide the Services will be for one
year. The Company shall indemnify ABN (including its officers, directors,
employees and affiliates) from any and all claims, losses, demands and actions
arising out of the Services to be performed by ABN.
EMPLOYEE BENEFITS ALLOCATION AGREEMENT
The Company and ABN expect to enter into an employee benefits allocation
agreement (the "Employee Benefits Allocation Agreement"), effective upon the
closing of the Offering, to govern the allocation of responsibilities and costs
regarding employee benefit plans and related matters following the Offering. The
Employee Benefits Allocation Agreement provides that the Company shall establish
new benefit and insurance plans for its employees following the Offering, and
will cooperate with ABN with respect to certain shared responsibilities during
the transitional period following the Offering. ABN will be solely responsible
for any contributions that may be required following the Offering with respect
to service prior thereto for employees of the Company who were covered under
ABN's defined benefit retirement plan.
36
<PAGE> 40
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth as of June 5, 1998, and as adjusted to give
effect to the sale of Common Stock offered hereby, certain information regarding
beneficial ownership of the Company's Common Stock by (i) each person who is
known to the Company to be the beneficial owner of more than 5% of the
outstanding shares of Common Stock, (ii) each director, (iii) each of the Named
Executive Officers and (iv) all directors and executive officers as a group. All
persons listed have sole voting and investment power with respect to their
shares unless otherwise indicated. Prior to the Offering, the Company was a
wholly-owned subsidiary of ABN. ABN is selling all of its shares of Common Stock
in the Offering.
<TABLE>
<CAPTION>
PRIOR TO OFFERING(1) AFTER OFFERING(1)
----------------------- --------------------
NAME NUMBER PERCENTAGE NUMBER PERCENTAGE
- ---- ---------- ---------- ------- ----------
<S> <C> <C> <C> <C>
American Banknote Corporation(2)................... 13,636,000 100% -- 0.0%
Morris Weissman(3)................................. -- 400,000 2.8%
Joshua C. Cantor(3)................................ -- 200,000 1.4%
Richard P. Macchiarulo(3).......................... -- 40,000 *
Jeffrey N. Dugal(3)................................ -- 40,000 *
All executives and officers and directors as a
group (4 persons)(3)............................. -- 680,000 4.7%
</TABLE>
- ---------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Commission, and includes general voting power and/or investment power with
respect to securities. Shares of Common Stock subject to options currently
exercisable or exercisable within 60 days of the date hereof ("Currently
Exercisable Options") are deemed outstanding for computing the percentage
beneficially owned by the person holding such options.
(2) The address of American Banknote Corporation is 200 Park Avenue, New York,
New York 10166.
(3) Represents shares issuable pursuant to Currently Exercisable Options. The
Currently Exercisable Options are subject to certain restrictions contained
in the 1998 Plan (as defined herein). See "Management -- Stock Incentive
Plan." Excludes 2,757,096 shares, of which 873,501 represent ABN options and
warrants exercisable within 60 days, and 46,873 shares of ABN beneficially
owned by Mr. Weissman and Mr. Cantor, respectively.
37
<PAGE> 41
DESCRIPTION OF CAPITAL STOCK
The following summary description of the capital stock of the Company is
qualified by reference to the ABNH Certificate of Incorporation (the
"Certificate") and Bylaws. The Certificate and By-laws are filed as exhibits to
the Registration Statement of which this Prospectus is a part.
The Company's authorized capital stock currently consists of 30,000,000
Shares of Common Stock, $.01 par value, and 5,000,000 shares of Preferred Stock,
$.01 par value per share (the "Preferred Stock").
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote for each share
held of record on matters to be voted on by the holders of Common Stock and do
not have cumulative voting rights. Accordingly, the holders of a majority of the
shares of Common Stock entitled to vote in any election of directors may elect
all of the directors standing for election. Holders of shares of Common Stock
are entitled to receive dividends when, as and if declared by the Board of
Directors, subject to any preferential dividend rights of outstanding Preferred
Stock. Upon the liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to share ratably in the assets of the
Company legally available for distribution to its shareholders, subject to the
prior rights of any outstanding Preferred Stock. Holders of Common Stock have no
preemptive, subscription, redemption or conversion rights. All of the issued and
outstanding shares of Common Stock are, and all shares of Common Stock to be
sold in this Offering are, or will be, duly authorized, validly issued, fully
paid and nonassessable. The rights, preferences and privileges of holders of
Common Stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of Preferred Stock which the Company may
designate and issue in the future.
PREFERRED STOCK
The Board of Directors of the Company is authorized to issue, by resolution
and without any action by stockholders, up to 5,000,000 shares of Preferred
Stock and may establish the designations, dividend rights, dividend rate,
conversion rights, voting rights, terms of redemption, liquidation preference,
sinking fund terms and all other preferences and rights of any series of
Preferred Stock, including rights that could adversely affect the voting power
of the holders of the Common Stock. The issuance of Preferred Stock may have the
effect of delaying, deferring or preventing a change of control of the Company.
The Company has no present plans to issue any shares of Preferred Stock.
The authorized shares of Preferred Stock, as well as the authorized but
unissued shares of Common Stock, will be available for issuance without further
action by stockholders of the Company, unless such action is required by
applicable law or the rules of any stock exchange or quotation system on which
the Company's securities may be listed or quoted.
LIMITATION ON LIABILITY
As permitted by the Delaware General Corporation Law ("DGCL"), the
Company's Certificate of Incorporation provides that no director of the Company
shall be personally liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director; provided, however, that such
prohibition shall not apply to any liability of a director (i) for any breach of
the director's duty of loyalty to the Company 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 payment of dividends, or unlawful
stock purchase or redemption under Section 174 of the DGCL, or (iv) for any
transaction from which the director derived an improper personal benefit.
38
<PAGE> 42
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
Delaware Law
The Company is subject to the provisions of Section 203 ("Section 203") of
the DGCL. In general, Section 203 prohibits a publicly-held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an "interested stockholder", unless the business combination is approved
in a prescribed manner. A "business combination" is defined generally to include
mergers or consolidations between a Delaware corporation and an "interested
stockholder," transactions with an "interested stockholder" involving the assets
or stock of the corporation or its majority-owned subsidiaries and transactions
which increase an "interested stockholder's" percentage ownership of stock. An
"interested stockholder" is a person and his associates and affiliates who owns
15% or more of the corporation's outstanding voting stock, or who is an
affiliate or associate of the corporation and owns (or, in certain cases, within
three years prior, did own) 15% or more of the corporation's outstanding voting
stock. Under Section 203, a business combination between the Company and an
"interested stockholder" is prohibited unless it satisfies one of the following
conditions: (i) the Company's Board of Directors must have previously approved
either the business combination or the transaction that resulted in the
stockholder becoming an "interested stockholder"; or (ii) upon consummation of
the transaction that resulted in the stockholder becoming an "interested
stockholder", the "interested stockholder" owned at least 85% of the voting
stock of the Company outstanding at the time the transaction commenced
(excluding, for purposes of determining the number of shares outstanding, shares
owned by (a) persons who are directors and also officers and (b) employee stock
plans, in certain instances); or (iii) the business combination is approved by
the Board of Directors and authorized at an annual or special meeting of the
shareholders by the affirmative vote of at least 66 2/3% of the outstanding
voting stock which is not owned by the "interested stockholder".
Special Meetings
The By-Laws provide that special meetings of shareholders for any purpose
or purposes can be called only upon the request of the Chairman of the Board,
the request to the Chairman in writing by a majority of the Directors or the
written consent of three-quarters of the issued and outstanding capital stock
which is regularly entitled to vote.
Number of Directors; Removal; Filling Vacancies
The By-Laws provide that the number of directors shall be not less than two
nor more than 21; provided, however, that no decrease in the number of directors
shall have the effect of shortening the term of any incumbent director. Any
vacancy occurring in the Board caused by death, resignation, removal or
otherwise, and any newly created directorship resulting from an increase in the
number of directors, may be filled only by the affirmative vote of at least a
majority of the remaining directors then in office, although such directors are
less than a quorum, or by the sole remaining director. Furthermore, the By-Laws
provide that any one or more of the directors of the Company may be removed from
office only for cause by the affirmative vote of three-quarters of the entire
Board of Directors or by the affirmative vote of two-thirds of the votes
represented by the issued and outstanding shares of the Company entitled to vote
at a meeting called for such purpose.
The provisions of the By-Laws governing removal may have the effect of
discouraging a third party from initiating a proxy contest, making a tender
offer or otherwise attempting to gain control of the Company, or of attempting
to change the composition or policies of the Board of Directors, even though
such attempt might be beneficial to the Company or its shareholders. These
provisions of the By-Laws could thus increase the likelihood that incumbent
directors will retain their positions.
Amendment of Company By-Laws
In order to adopt, repeal, alter or amend the provisions set forth therein,
the By-Laws require the unanimous written consent of all directors or the
affirmative vote of a majority of the entire Board of Directors acting at a
regular or special meeting called by written notice, which written notice shall
include notice of the
39
<PAGE> 43
proposed action to amend the By-Laws, or by the affirmative vote of a majority
of votes represented by the issued and outstanding shares of the Company
entitled to vote at a meeting called for such purpose.
Advance Notice Provisions for Shareholder Nominations and Proposals
The By-Laws establish an advance notice procedure for shareholders to make
nominations of candidates for election as director, or to bring other business
before an annual or special meeting of shareholders of the Company. The By-Laws
provide that only persons nominated by, or at the direction of, a majority of
the Board of Directors, or by a shareholder who has given timely written notice
to the Secretary of the Company prior to the meeting at which directors are to
be elected, will be eligible for election as directors of the Company.
Furthermore, the By-Laws provide that at an annual meeting, only such business
may be conducted as has been brought before the meeting by, or at the direction
of, a majority of the Board of Directors or by a shareholder who has given
timely written notice to the Secretary of the Company of such shareholder's
intention to bring such business before such meeting. Under the By-Laws, to be
timely, notice of shareholder nominations or proposals to be made at an annual
meeting must be received by the Company not less than 60 days nor more than 90
days prior to the scheduled annual meeting or with respect to any other annual
or special meeting of stockholders notice must be received by the Company, not
later than the close of business on the 10th day following the date that the
public disclosure of such meeting was first made.
Under the By-Laws, a shareholder's notice to the Company proposing to
nominate a person for election as a director must contain certain information
about the nominating shareholder and the proposed nominee. Similarly, a
shareholder's notice relating to the conduct of business other than the
nomination of directors must contain certain information about such business and
about the proposing shareholder. If a majority of the directors determine that a
person was not nominated, or if the Chairman of the Board or other presiding
officer of the annual meeting determines that other business was not brought
before the meeting, in accordance with the By-Laws, such person will not be
eligible for election as a director, or such business will not be conducted at
such meeting, as the case may be.
By requiring advance notice of nominations by shareholders, the By-Laws
afford the Board an opportunity to consider the qualifications of the proposed
nominee and, to the extent deemed necessary or desirable by the Board, to inform
shareholders about such qualifications. By requiring advance notice of other
proposed business, the By-Laws also provide an orderly procedure for conducting
annual meetings of shareholders and, to the extent deemed necessary or desirable
by the Board, provides the Board with an opportunity to inform shareholders,
prior to such meetings, of any business proposed to be conducted at such
meetings, together with any recommendations as to the Board's position regarding
action to be taken with respect to such business, so that shareholders can
better decide whether to attend such a meeting or to grant a proxy regarding the
disposition of any such business.
Although the Certificate of Incorporation does not give the Board any power
to approve or disapprove shareholder nominations of the election of directors or
proposals for action, the foregoing provisions may have the effect of precluding
a contest for the election of directors or the consideration of shareholder
proposals if the proper procedures are not followed, and of discouraging or
deterring a third party from conducting a solicitation of proxies to elect its
own slate of directors or to approve its own proposal, without regard to whether
consideration of such nominees or proposals might be harmful or beneficial to
the Company and its shareholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock will be American
Stock Transfer & Trust Co.
40
<PAGE> 44
UNDERWRITING
The Underwriters named below represented by NationsBanc Montgomery
Securities LLC, Lazard Freres & Co. LLC, Raymond James & Associates, Inc. and
Smith Barney Inc. (the "Representatives"), have severally agreed, subject to the
terms and conditions set forth in the Underwriting Agreement, to purchase from
the Company the number of shares of Common Stock opposite their respective names
below at the initial public offering price less the underwriting discount set
forth on the cover page of this Prospectus. The Underwriting Agreement provides
that the obligations of the Underwriters are subject to certain conditions
precedent and that the Underwriters are committed to purchase all of such
shares, if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------ ----------
<S> <C>
NationsBanc Montgomery Securities LLC.......................
Lazard Freres & Co. LLC.....................................
Raymond James & Associates, Inc. ...........................
Smith Barney Inc. ..........................................
----------
Total............................................. 13,636,000
==========
</TABLE>
The Representatives have advised the Company that the Underwriters propose
initially to offer the Common Stock to the public on the terms set forth on the
cover page of this Prospectus. The Underwriters may allow to selected dealers a
concession of not more than $ per share, and the Underwriters may allow,
and such dealers may reallow, a concession of not more than $ per share to
certain other dealers. After this Offering, the offering price and other selling
terms may be changed by the Representatives. The shares of Common Stock are
offered subject to receipt and acceptance by the Underwriters, and to certain
other conditions, including the right to reject orders in whole or in part.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a maximum
of 2,045,400 additional shares of Common Stock to cover over-allotments, if any,
at the offering price less the Underwriting Discount set forth on the cover page
of this Prospectus. To the extent the Underwriters exercise this option, each of
the Underwriters will be committed, subject to certain conditions, to purchase
such additional shares in approximately the same proportion as set forth in the
above table. The Underwriters may purchase such shares only to cover over-
allotments made in connection with the Offering.
The directors and officers of the Company have agreed that for a period of
180 days after the date of this Prospectus they will not, without the prior
written consent of NationsBanc Montgomery Securities LLC, directly or
indirectly, sell, offer, contract or grant an option to sell (including, without
limitation, any short sale), pledge, transfer, establish an open put equivalent
position or otherwise dispose of any shares of Common Stock, options or to
acquire shares of Common Stock or securities exchangeable or exercisable or
convertible into shares of Common Stock held by them except gifts and pledges of
shares where the donee or pledgee, as the case may be, agrees in writing to be
bound by the terms of such agreement.
The Company has agreed not to issue, offer, sell, grant options to sell or
otherwise dispose of any of the Company's equity securities or any other
securities convertible into or exchangeable for its equity securities for a
period of 180 days after the effective date of the Offering without the prior
written consent of NationsBanc Montgomery Securities LLC, subject to certain
exceptions, including shares of Common Stock offered hereby, and grants and
exercises of stock options under the Company's 1998 Plan. Additionally, ABN has
agreed not to offer, sell, grant options to sell or otherwise dispose of any of
the Company's equity securities or any other securities convertible into or
exchangeable for its equity securities for a period of 180 days after the
effective date of the Offering without the prior written consent of NationsBanc
Montgomery Securities LLC, subject to certain exceptions, including shares of
Common Stock offered hereby.
The Common Stock has been approved for listing on the NYSE under the symbol
"ABH." In order to meet one of the requirements for listing the Common Stock on
the NYSE, the Underwriters have undertaken to sell lots of 100 or more shares to
a minimum of 2,000 beneficial holders.
41
<PAGE> 45
The Underwriting Agreement provides that the Company and ABN will indemnify
the Underwriters against certain liabilities, including liabilities under the
Securities Act, or will contribute to payments the Underwriters may be required
to make in respect thereof. The Company has been advised that in the opinion of
the Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
The Representatives have informed the Company that the Underwriters do not
expect to make sales to accounts over which they exercise discretionary
authority in excess of 5% of the number of shares of Common Stock offered
hereby.
Prior to the Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price has been determined by
negotiations among the Parent, the Company and the Representatives. Among the
factors considered in such negotiations were the history of, and prospects for,
the Company and the industry in which it competes, an assessment of the Company
management, its past and present operations and financial performance, the
prospects for future earnings of the Company, the present state of the Company's
development, the general conditions of the securities markets at the time of the
Offering, the market prices of and demand for publicly traded common stocks of
comparable companies in recent periods and other factors deemed relevant.
The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in the Offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid for or the purchase of the Common Stock on behalf of the Underwriters for
the purpose of fixing or maintaining the price of the Common Stock. A "syndicate
covering transaction" is the bid for or the purchase of the Common Stock on
behalf of the Underwriters to reduce a short position incurred by the
Underwriters in connection with the Offering. A "penalty bid" is an arrangement
permitting the Representatives to reclaim the selling concession otherwise
accruing to an Underwriter or syndicate member in connection with the Offering
if the Common Stock originally sold by such Underwriter or syndicate member is
purchased by the Representatives in a syndicate covering transaction and has
therefore not been effectively placed by such Underwriter or syndicate member.
The Representatives have advised the Company that such transactions may be
effected on the New York Stock Exchange or otherwise and, if commenced, may be
discontinued at any time.
If the Underwriters create a short position in the Common Stock in
connection with the Offering, i.e., if they sell more shares of Common Stock
than are set forth on the cover of this Prospectus, the Representatives may
reduce that short position by purchasing Common Stock on the New York Stock
Exchange or otherwise. The Representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option described above.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
predictions as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
42
<PAGE> 46
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby will be
passed upon for the Company by Paul, Hastings, Janofsky & Walker LLP, New York,
New York. Certain legal matters in connection with the Offering will be passed
upon for the Underwriters by Fried, Frank, Harris, Shriver & Jacobson, a
partnership including professional corporations, New York, New York.
EXPERTS
The financial statements as of December 31, 1996 and 1997 and for each of
the three years in the period ended December 31, 1997 included in this
Prospectus and the related financial statement schedule included elsewhere in
the Registration Statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein and elsewhere
in the Registration Statement, and are included in reliance upon the reports of
such firm given upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement (which
terms shall include any amendment thereto) on Form S-1 under the Securities Act
with respect to the Common Stock offered hereby. This Prospectus, which
constitutes a part of the Registration Statement, omits certain of the
information contained in the Registration Statement and the exhibits and
schedules thereto on file with the Commission pursuant to the Securities Act and
the rules and regulations of the Commission thereunder. The Registration
Statement, including exhibits and schedules thereto, may be inspected and copied
at the public reference facilities maintained by the Commission at 450 Fifth
Street, Room 1024, N.W., Washington, D.C. 20549 and copies may be obtained at
prescribed rates from the Public Reference Section of the Commission at its
principal office in Washington, D.C., and may be electronically accessed at the
Commission's site on the World Wide Web at http://www.sec.gov. Statements
contained in this Prospectus as to the contents of any contract or other
document referred to are not necessarily complete and in each instance reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference to the exhibit for a more complete description of the matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference.
43
<PAGE> 47
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Statements for the Years Ended December 31, 1995,
1996 and 1997:
Independent Auditors' Report...................... F-2
Statements of Income.............................. F-3
Balance Sheets.................................... F-4
Statements of Stockholder's Equity................ F-5
Statements of Cash Flows.......................... F-6
Notes to Financial Statements..................... F-7
Unaudited Condensed Financial Statements for the Three
Months Ended March 31, 1997 and 1998:
Condensed Statements of Income -- Unaudited....... F-16
Condensed Balance Sheets -- Unaudited............. F-17
Statement of Stockholder's Equity -- Unaudited.... F-18
Condensed Statements of Cash Flows -- Unaudited... F-19
Notes to Unaudited Condensed Financial
Statements........................................ F-20
</TABLE>
F-1
<PAGE> 48
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
American Bank Note Holographics, Inc.
New York, New York
We have audited the accompanying balance sheets of American Bank Note
Holographics, Inc., a wholly-owned subsidiary of American Banknote Corporation,
as of December 31, 1996 and 1997, and the related statements of income,
stockholder's equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
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, such financial statements present fairly, in all material
respects, the financial position of American Bank Note Holographics, Inc. as of
December 31, 1996 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
March 17, 1998 (except as to Note K, the date of which is July 2, 1998)
New York, New York
F-2
<PAGE> 49
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
------- ------- -------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Sales....................................................... $27,865 $28,649 $30,915
------- ------- -------
Costs and expenses:
Cost of goods sold........................................ 13,787 15,034 11,912
Selling and administrative................................ 4,576 4,711 6,001
Depreciation and amortization............................. 1,203 1,141 1,136
------- ------- -------
19,566 20,886 19,049
------- ------- -------
8,299 7,763 11,866
Other, net
Royalty income............................................ 103 128 785
Intercompany interest income.............................. 305 305 305
Other income.............................................. 10 68 36
Interest expense.......................................... (159)
------- ------- -------
418 501 967
------- ------- -------
Income before income taxes.................................. 8,717 8,264 12,833
Income taxes................................................ 3,663 3,444 5,294
------- ------- -------
Net income........................................ $ 5,054 $ 4,820 $ 7,539
======= ======= =======
Net income per share.............................. $ 0.37 $ 0.35 $ 0.55
======= ======= =======
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE> 50
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
-------- --------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 136 $ 253
Accounts receivable, net of allowance for doubtful
accounts of $287 and $375.............................. 7,726 14,479
Inventories, net of allowances of $265 and $215........... 4,626 5,989
Deferred income taxes..................................... 441 471
Prepaid expenses and other................................ 254 95
-------- --------
Total current assets.............................. 13,183 21,287
Machinery, equipment and leasehold improvements, net........ 6,022 5,695
Other assets................................................ 11 43
Excess of cost over net assets acquired, net of accumulated
amortization of $1,220 and $1,568......................... 9,141 8,793
-------- --------
$ 28,357 $ 35,818
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Revolving credit.......................................... $ 674
Accounts payable and accrued expenses..................... $ 2,679 3,312
-------- --------
Total current liabilities......................... 2,679 3,986
Other long-term liabilities................................. 375 460
Deferred income taxes....................................... 1,796 1,590
Commitments and Contingencies -- Note I
Stockholder's equity
Common Stock, par value $.01 per share, authorized,
30,000,000 shares; issued and outstanding, 13,636,000
shares................................................. 136 136
Additional paid-in-capital................................ 11,627 11,627
Retained earnings......................................... 33,476 41,015
-------- --------
45,239 52,778
Due from Parent and affiliates............................ (21,732) (22,996)
-------- --------
Total stockholder's equity........................ 23,507 29,782
-------- --------
$ 28,357 $ 35,818
======== ========
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE> 51
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL DUE FROM
--------------- PAID-IN RETAINED PARENT AND
SHARES AMOUNT CAPITAL EARNINGS AFFILIATES TOTAL
------ ------ ---------- -------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995................. 13,636 $136 $11,627 $23,602 $ (8,574) $26,791
Change during year....................... (6,115) (6,115)
Net income............................... 5,054 5,054
------ ---- ------- ------- -------- -------
Balance, December 31, 1995............... 13,636 136 11,627 28,656 (14,689) 25,730
Change during year....................... (7,043) (7,043)
Net income............................... 4,820 4,820
------ ---- ------- ------- -------- -------
Balance, December 31, 1996............... 13,636 136 11,627 33,476 (21,732) 23,507
Change during year....................... (1,264) (1,264)
Net income............................... 7,539 7,539
------ ---- ------- ------- -------- -------
Balance, December 31, 1997............... 13,636 $136 $11,627 $41,015 $(22,996) $29,782
====== ==== ======= ======= ======== =======
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE> 52
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating Activities:
Net income................................................ $5,054 $ 4,820 $ 7,539
Adjustments to reconcile income to net cash provided by
operating activities:
Depreciation and amortization.......................... 1,203 1,141 1,136
Loss on disposal of equipment.......................... 769
Deferred income taxes.................................. (255) 508 (236)
Changes in operating assets and liabilities:
Accounts receivable.................................... (741) (3,332) (6,753)
Inventories............................................ (230) 180 (1,363)
Prepaid expenses and other............................. 76 19 127
Accounts payable, accrued expenses and other........... 252 991 718
------ ------- -------
Net cash provided by operating activities......... 6,128 4,327 1,168
------ ------- -------
Investing Activities:
Capital expenditures...................................... (276) (390) (461)
Proceeds from sales of assets............................. 21
------ ------- -------
Net cash used in investing activities............. (255) (390) (461)
------ ------- -------
Financing Activities:
Advances to Parent and affiliates, net.................... (6,115) (7,043) (1,264)
Revolving credit borrowings, net.......................... 674
------ ------- -------
Net cash used in financing activities............. (6,115) (7,043) (590)
------ ------- -------
Increase (decrease) in cash and cash equivalents............ (242) (3,106) 117
Cash and cash equivalents -- beginning of year.............. 3,484 3,242 136
------ ------- -------
Cash and cash equivalents -- end of year.................... $3,242 $ 136 $ 253
====== ======= =======
Supplemental cash payments:
Taxes (including amounts paid to Parent).................. $3,716 $ 3,179 $ 5,485
Interest.................................................. -- -- 159
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE> 53
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A -- BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
American Bank Note Holographics, Inc. (the "Company"), incorporated in the
State of Delaware, is a wholly-owned subsidiary of American Banknote Corporation
(the "Parent"). As a wholly-owned subsidiary, the Company is provided certain
corporate and administrative services, including treasury functions, tax
planning and compliance, financial reporting, risk management, human resources
and legal services. Additionally, because the Parent manages cash and financing
requirements centrally, interest expense and financing requirements are based on
the existing capital structure. The financial position and operations of the
Company may differ from the results that may have been achieved had the Company
operated as an independent entity.
The Company is a world leader in the origination, production and marketing
of controlled and secure mass-produced holograms. Holograms are used for
security, packaging and promotional applications.
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, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of sales and expenses during the reporting
period. Actual results may differ from those estimates.
Cash and Cash Equivalents
All highly liquid investments with a maturity of three months or less, when
purchased, are considered to be cash equivalents.
Inventories and Sales Recognition
Inventories are stated at the lower of cost or market with cost being
determined on the first-in, first-out (FIFO) method. Hologram originations are
capitalized and charged to cost of goods sold over the estimated production
period. Sales are generally recognized when goods are shipped. However, pursuant
to terms with certain customers, completed items are sometimes stored at the
Company's premises and, in those instances, sales are recognized when all of the
following have occurred: the manufacturing process is complete, the goods have
been transferred to the on-site secured facility and are ready for shipment, the
risk of ownership has passed to the customer and the customer has been billed
for the order. At December 31, 1996 and 1997, accounts receivable from these
customers totaled $1.1 million and $7.8 million, respectively. In December 1997,
the Company recorded sales of $6.9 million under this arrangement.
Royalty Income
The Company enters into licensing agreements with certain manufacturers
under which the Company receives royalty payments. Royalty payments due under
licensing agreements are recognized as income either based upon shipment reports
from manufacturers, where available, or estimated shipments by such
manufacturers.
Depreciation and Amortization
Machinery and equipment is recorded at cost and depreciated by the
straight-line method over the estimated useful lives of 5 to 22 years.
Amortization of leasehold improvements is computed by the straight-line
method based upon the remaining term of the applicable lease, or the estimated
useful life of the asset, whichever is shorter.
F-7
<PAGE> 54
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Long-Lived Assets
The Company reviews its long-lived assets for impairment when changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Such changes in circumstances may include, among other factors, a
significant change in technology that may render an asset or an asset group
obsolete or noncompetitive, a significant change in the extent or manner in
which an asset is used, evidence of a physical defect in an asset or asset group
or an operating loss. If changes in circumstances indicate that the carrying
amount of an asset may not be recoverable, the Company estimates the future cash
flows (undiscounted and without interest charges) expected to result from the
use of the asset and its eventual disposition, and records an impairment loss
(equal to the amount by which the carrying amount of the asset exceeds the fair
value of the asset) if such estimated cash flows are less than the carrying
amount of the asset. No impairment losses have been recorded for the years ended
December 31, 1995, 1996, and 1997.
Assets to be disposed of and assets not expected to provide any future
service potential to the Company are recorded at the lower of carrying amount or
fair value less cost to sell. In 1995, the Company recorded a charge of
approximately $0.8 million related to disposal of fixed assets that were no
longer in service.
Intangible Assets
The excess cost over the net assets acquired is being amortized over 30
years by the straight-line method. The Company evaluates the carrying amount of
the excess cost over the net assets acquired by analyzing historical and
expected future income and undiscounted cash flows of its operations. If
impairment is indicated, a write-down to fair value is taken.
Research and Development
Research and development costs are expensed as incurred (1995 -- $0.4
million, 1996 -- $0.6 million and 1997 -- $0.5 million).
Net Income Per Share
Net income per share is computed based on the number of outstanding shares
of common stock, after giving retroactive effect to the stock split (Note K).
The weighted average number of shares outstanding were 13,636,000 for the years
ended December 31, 1995, 1996 and 1997.
Business Information
Sales to MasterCard were approximately 20%, 22% and 44% of sales for the
years ended December 31, 1995, 1996 and 1997, respectively. Approximately half
of the 1997 MasterCard sales were recorded in December 1997. Sales to
manufacturers of VISA credit cards were approximately 37%, 34% and 24% of sales
for the years ended December 31, 1995, 1996 and 1997, respectively. The loss of
a substantial portion of the sales to these customers would have a material
adverse effect on the financial position and results of operations of the
Company. At December 31, 1996 and 1997, accounts receivable from these customers
approximated $4.9 million and $11.6 million, respectively.
Export Sales
US export sales were 37%, 31% and 18% of sales for the years ended December
31, 1995, 1996 and 1997, respectively.
Concentration of Credit Risk -- Trade Accounts Receivable
The Company extends credit to its customers, principally the domestic
credit card industry, based on evaluations of customer's financial condition and
credit history and does not require collateral. The Company's allowance for
doubtful accounts is based upon expected collectibility of its trade accounts
receivable.
F-8
<PAGE> 55
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Tax Accounting Policy
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes," which requires an asset and
liability approach that recognizes deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, SFAS No. 109 generally considers all expected future events other
than enactments of changes in the tax law or rates.
Impact of Accounting Pronouncements
SFAS No. 129, "Disclosure of Information about Capital Structure," issued
in February 1997, is effective for periods ending after December 15, 1997 and
establishes standards for disclosing information about an entity's capital
structure by superseding and consolidating previously issued accounting
standards. The financial statements of the Company are prepared in accordance
with the requirements of SFAS No. 129.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," issued in June 1997, is required to be adopted by the Company
effective for the year ending December 31, 1998. SFAS No. 131 requires, among
other things, that financial and descriptive information be provided about its
reportable operating segments. Under this statement operating segments are
components of an enterprise about which separate financial information is
available that is regularly evaluated by the enterprise's chief operating
decision-maker in deciding how to allocate resources and in assessing
performance. The Company continues to evaluate the effects, if any, of the
adoption of the new standard.
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," issued in February 1998, is effective for periods
beginning after December 15, 1997. The Company is currently evaluating the
required disclosures under this new standard.
The AICPA Accounting Standards Executive Committee issued in October 1996,
Statement of Position ("SOP") 96-1, "Environmental Remediation Liabilities." The
adoption of this pronouncement in 1997 did not have a material effect on the
Company's financial condition and results of operations.
NOTE B -- INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Work in process............................................. $2,051 $2,369
Origination costs*.......................................... 1,616 2,581
Raw materials............................................... 959 1,039
------ ------
$4,626 $5,989
====== ======
</TABLE>
* Includes approximately $0.5 million and $0.8 million of costs, at December
31, 1996 and 1997, respectively, relating to work for customers in
anticipation of orders in the ordinary course of business.
NOTE C -- MACHINERY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Machinery and equipment..................................... $10,221 $10,682
Leasehold improvements...................................... 888 888
------- -------
11,109 11,570
Accumulated depreciation and amortization................... 5,087 5,875
------- -------
$ 6,022 $ 5,695
======= =======
</TABLE>
F-9
<PAGE> 56
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D -- ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Accounts payable -- trade................................... $2,074 $2,315
Accrued expenses............................................ 140 319
State and local income taxes................................ 259 325
Salaries and wages.......................................... 206 353
------ ------
$2,679 $3,312
====== ======
</TABLE>
NOTE E -- TAXES ON INCOME
In accordance with a tax allocation agreement, the Company is included in
the consolidated US federal income tax return and in certain instances
consolidated state income tax returns of its Parent and makes payments to the
Parent based on the amount which would be payable as federal and state income
taxes as if consolidated returns were not filed. The Company computes its
federal and state income tax provision as if it were filing separate tax
returns, without regard to the tax allocation agreement.
Deferred income taxes arise from temporary differences between the tax
basis of assets and liabilities, and their reported amounts in the financial
statements.
Taxes on income (benefit) for the years ended December 31, follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996 1997
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal..................................................... $3,129 $2,356 $4,417
State and local............................................. 789 580 1,113
------ ------ ------
3,918 2,936 5,530
------ ------ ------
Deferred:
Federal..................................................... (225) 438 (203)
State and local............................................. (30) 70 (33)
------ ------ ------
(255) 508 (236)
------ ------ ------
$3,663 $3,444 $5,294
====== ====== ======
</TABLE>
A reconciliation of the taxes on income and the amount computed by applying
the federal income tax statutory rate of 34% in 1995 and 1996 and 35% in 1997
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996 1997
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Statutory tax............................................... $2,964 $2,810 $4,392
Non-deductible goodwill..................................... 122 122 122
State and local income taxes, net of federal benefit........ 493 422 702
Other....................................................... 84 90 78
------ ------ ------
$3,663 $3,444 $5,294
====== ====== ======
</TABLE>
F-10
<PAGE> 57
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of the items comprising the Company's deferred income tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Current deferred tax assets:
Uniform capitalization of inventory....................... $ 220 $ 235
Bad debt provision........................................ 115 150
Inventory obsolescence.................................... 106 86
------ ------
$ 441 $ 471
====== ======
Deferred tax liabilities:
Excess tax over book depreciation......................... $1,946 $1,774
Post retirement medical accrual........................... (139) (162)
Supplemental retirement accrual........................... (11) (22)
------ ------
Net deferred tax liabilities...................... $1,796 $1,590
====== ======
</TABLE>
NOTE F -- REVOLVING CREDIT
In 1996, the Company together with its Parent and its affiliate, American
Bank Note Company, entered into a $20 million revolving credit facility (the
"Credit Facility") which matures on October 30, 1998. At December 31, 1997,
interest under the Credit Facility, as defined, was 9.0% and the weighted
average interest rate in 1996 and 1997 was approximately 9.25% and 9.0%,
respectively. The average aggregate borrowings under the Credit Facility during
1996 and 1997 was approximately $1.5 million and $6.0 million, respectively. The
Credit Facility is an asset-based facility secured by certain accounts
receivable and inventory (total carrying value for the combined companies of
approximately $24.0 million at December 31, 1997). At December 31, 1997, the
combined companies had approximately $18.5 million of availability under the
Credit Facility before reductions for $3.6 million of outstanding letters of
credit and $3.2 million of borrowings. The Company is jointly and severally
liable for all borrowings and letters of credit outstanding under the Credit
Facility.
At December 31, 1997, the Company had approximately $10.4 million of
availability under the Credit Facility before reductions for $0.7 million of
borrowings. The Company's total carrying value for accounts receivable and
inventory collateral was approximately $12.9 million at December 31, 1997.
The Company's issued and outstanding Common Stock is pledged as security
for the Parent's senior debt ($126.5 million principal amount). The Company and
each of the Parent's direct and indirect domestic operating subsidiaries have,
jointly and severally, fully and unconditionally guaranteed, on a senior
subordinated basis the Parent's 11 1/4% Senior Subordinated Notes due 2007
($95.0 million principal amount).
NOTE G -- RELATED PARTY TRANSACTIONS
The financial statements reflect both allocated and, where readily
determinable, actual expenses for services provided by the Company's Parent and
affiliates. Where allocations have been utilized, the Company, its Parent and
affiliates recorded transactions based upon systematic and reasonable methods,
including but not limited to, sales, asset values, and headcount all as a
percent of total.
F-11
<PAGE> 58
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The amounts by major category of historical transactions with affiliates
follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Due from (to) Parent and affiliates:
Balance at beginning of year............................ $ 8,574 $14,689 $21,732
Income tax liability payable to Parent............... (3,716) (3,091) (5,306)
Taxes paid to Parent................................. 3,716 3,091 5,306
Cash advances to Parent.............................. 7,668 8,606 2,851
Allocation of employee benefits(1)................... (962) (936) (1,052)
Purchases from affiliates............................ 247 30 297
Allocation of security services...................... (142) (108) (198)
Sales and administration expenses(2)................. (286) (301) (592)
Allocation of general liability insurance............ (715) (508) (293)
Intercompany interest................................ 305 305 305
Executive benefits(3)................................ (45) (54)
------- ------- -------
Balance at end of year.................................. $14,689 $21,732 $22,996
======= ======= =======
</TABLE>
- ---------------
(1) Primarily medical, life and disability insurance premiums.
(2) Includes legal fees and allocated portion of audit fees.
(3) Includes value of restricted stock of the Parent.
Included in the above balances is a $5.3 million note receivable from the
Parent that bears interest at 5 3/4% per annum.
For financial reporting purposes, the amounts due from Parent and
affiliates has been classified within stockholder's equity.
In addition to the above, the Company sold $0.3 million, $0.7 million and
$0.4 million of holograms in 1995, 1996 and 1997, respectively, to its
affiliates in the normal course of business. Purchases by the Company from
affiliates in the normal course of business were $0.1 million, $0.3 million and
$0.1 million in 1995, 1996 and 1997, respectively. Trade accounts receivable
from affiliates were $0.4 million in 1996 and $0.6 million in 1997. Trade
payables to affiliates were $0.2 million in 1996 and $12,000 in 1997.
In 1996 and 1997, employees of the Company received stock options under the
Parent's stock-based compensation plans. No such options were granted in 1995.
Had compensation cost for the stock option plans been determined based on the
fair value at the grant award dates, in 1996 and 1997, consistent with the
provisions of SFAS No. 123, "Accounting for Stock-Based-Compensation," net
income would have been reduced by approximately $13,000 and $22,000,
respectively.
NOTE H -- EMPLOYEE BENEFITS PLANS
Postretirement Health Care and Life Insurance Plans. The Company and its
affiliates participate in benefit plans which provide certain health care and
life insurance benefits for certain eligible retired employees. The Company's
employees may become eligible for these benefits if they reach normal retirement
age, with certain service requirements.
The Company accrues the estimated cost of retiree benefit payments other
than pensions during the years an employee provides services. The plan is not
funded.
F-12
<PAGE> 59
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the status of this obligation as it relates
to the Company:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1997
---- ----
(IN
THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.................................................. $156 $119
Eligible active plan participants......................... 34 35
Other active plan participants............................ 200 243
---- ----
Accumulated postretirement benefit obligation............... 390 397
Unrecognized transition obligation........................ (155) (145)
Unrecognized net gain..................................... 112 152
---- ----
Accrued postretirement benefit obligation.............. $347 $404
==== ====
</TABLE>
Net postretirement benefit costs consisted of the following components:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1995 1996 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost-benefits earned................................ $37 $25 $31
Interest cost on accumulated postretirement benefit
obligation................................................ 29 25 25
Amortization of transition obligation....................... 8 6 9
Amortization of gain........................................ (7)
--- --- ---
$74 $56 $58
=== === ===
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation, as of January 1, 1997, was 11.5% for 1997
decreasing each successive year until it reaches 5.5%, after which it remains
constant. A one-percentage-point increase in the assumed health care cost trend
rate for each year would increase service cost plus interest on the accumulated
postretirement benefit obligation by approximately 11.8%. The assumed discount
rates used in determining the accumulated postretirement benefit obligation was
7.5% at December 31, 1995 and December 31, 1996 and 7.0% at December 31, 1997.
Pension Plans. Retirement benefits are provided by the Company to eligible
employees through defined contributions to an employee's retirement plan; the
aggregate contribution to such plan and charged to operations was approximately
$0.2 million in each of the years ended December 31, 1995, 1996 and 1997,
respectively.
Certain employees of the Company participate in an affiliate's trusteed
noncontributory defined benefit pension plan. Benefits under the plan were
frozen in 1992 and were based on years of service and average final
compensation. The liability for benefits under this plan, which is substantially
funded, is the responsibility of the affiliate. The total pension expense
relating to the Company's employees in the aggregate for the past three years
was approximately $26,000.
In 1996 and 1997, the Company participated in the Parent's noncontributory
supplemental executive retirement plan ("SERP") for certain senior management
employees of the Parent and its affiliates. Benefits under the noncontributory
plan are based on years of service and average final compensation. The plan is
unfunded. Following the Offering, the Company's participants will cease to be
eligible for SERP benefits.
F-13
<PAGE> 60
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following sets forth the status of the Company's obligation under this
plan:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Accumulated benefit obligation.............................. $ 0 $ 0
===== =====
Projected benefit obligation................................ $ 162 $ 167
Prior service cost.......................................... (147) (142)
Unrecognized net gain....................................... 13 31
----- -----
Accrued pension cost.............................. $ 28 $ 56
===== =====
</TABLE>
Net periodic pension cost consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Service costs-benefits earned............................... $ 12 $ 12
Interest cost on projected benefit obligation............... 11 11
Amortization of prior service cost.......................... 5 5
------ ------
Pension expense................................... $ 28 $ 28
====== ======
</TABLE>
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.0% at December 31, 1996
and 1997.
NOTE I -- COMMITMENTS AND CONTINGENCIES
On February 14, 1997, James Rigby, Trustee in Bankruptcy for Holosonics,
Inc., Holotron Corp., Meadows Games, Inc. and Fire Diamond, Inc. commenced an
adversary proceeding in the United States Bankruptcy Court for the Western
District of Washington at Seattle against International Banknote Company, Inc.,
American Banknote Company and the Company. The complaint alleges that the
defendants are indebted to the bankruptcy estate for royalty payments under a
1981 license and that the Company is liable for unpaid royalties for 1990 in the
amount of $226,322, for 1991 in the amount of $853,582 and through July 1992 in
the amount of $568,762, plus attorney's fees and interest on unpaid amounts.
The plaintiff claims that pursuant to the 1981 arrangements, the Company is
required to pay royalties through July 1992 of 5% on sales of holographic
products using the patents covered by the license agreement for the origination
of holographic images. The Company denies all liability in the case on several
grounds, including that two of the three patents at issue expired on or before
September 30, 1991 and any obligation to pay royalties terminated with the
expiration of those patents and that the one remaining patent which expired in
July 1992 had been held invalid in part and not infringed as to its other parts
in prior litigation in the United States District Court for the Northern
District of California, which binds the plaintiff and bars the Trustee from
asserting claims against the Company. In addition, the Company claims that it
utilizes processes differently from those of the licensed patents and that at
the time the license agreement was executed by the Trustee, the debtors did not
own the patents and the license is therefore invalid and cannot be enforced.
The Company currently and from time to time is involved in litigation (as
both plaintiff and defendant) incidental to the conduct of its business, but the
Company is not a party to any lawsuit or proceeding which, in the opinion of the
Company, is likely to have a material impact on the Company's financial position
or results of operations.
F-14
<PAGE> 61
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONCLUDED)
The Company has long-term operating leases for offices, manufacturing
facilities and equipment which expire through 2007. The Company has renewal
options on some locations, which provide for renewal rents based upon increases
tied to the consumer price index.
Net rental expense was approximately $1.2 million for each of the years
ended December 31, 1995, 1996 and 1997.
At December 31, 1997, future minimum lease payments under noncancelable
operating leases are as follows: $1.1 million in 1998; $0.9 million in 1999;
$0.9 million in 2000; $0.8 million in 2001; $0.8 million in 2002; and $3.4
million thereafter.
NOTE J -- QUARTERLY RESULTS OF OPERATIONS -- UNAUDITED
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1997
Sales(a).......................... $ 5,241 $ 6,296 $ 8,104 $11,274
Cost of goods sold................ 2,629 2,591 2,617 4,075
Net income........................ 657 1,422 2,275 3,185
Net income per share...... $ .05 $ .10 $ .17 $ .23
======= ======= ======= =======
1996
Sales............................. $ 7,232 $ 8,052 $ 6,134 $ 7,231
Cost of goods sold................ 3,323 3,905 2,962 4,844
Net income........................ 1,365 1,673 983 799
Net income per share...... $ .10 $ .12 $ .07 $ .06
======= ======= ======= =======
</TABLE>
- ---------------
(a) In December 1997, the Company recorded sales of $6.9 million relating to a
customer order which was transferred to the Company's on site secured
facility. (See Note A).
NOTE K -- SUBSEQUENT EVENTS
On May 5, 1998, the Company filed a Registration Statement on Form S-1 for
the sale by the Parent of all of the issued and outstanding Common Stock of the
Company (the "Offering"). The Company will not receive any of the proceeds from
the sale of Common Stock by the Parent. After the sale, the Parent will not own
any of the Company's Common Stock. On June 11, 1998, the Company declared a
1,363.6 to one stock split, effective July 2, 1998, in the form of a stock
dividend, of the Company's Common Stock and increased its authorized Common
Stock to 30,000,000 shares and its authorized Preferred Stock to 5,000,000
shares. The accompanying financial statements give retroactive effect to the
consummation of the stock split. Additionally, immediately prior to the Offering
the amounts due from Parent and affiliates will be cancelled. For financial
reporting purposes the amounts due from Parent and affiliates have been
classified within stockholder's equity; accordingly, the cancellation of such
amounts will result in a reclassification within stockholder's equity.
SOP 98-5, "Reporting on the Costs of Start-Up Activities," was issued in
April 1998 and is effective for the fiscal years beginning after December 15,
1998. SOP 98-5 provides guidance on the financial reporting of start-up costs
and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. The Company is evaluating the
effect of this recent pronouncement.
F-15
<PAGE> 62
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
CONDENSED STATEMENTS OF INCOME -- UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1997 1998
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Sales....................................................... $ 5,241 $ 7,035
Costs and expenses:
Cost of goods sold........................................ 2,629 2,438
Selling and administrative................................ 1,310 1,256
Depreciation and amortization............................. 293 292
------- -------
4,232 3,986
------- -------
1,009 3,049
Other, net
Royalty income............................................ 2 30
Intercompany interest income.............................. 76 76
Other income.............................................. 31 4
Interest expense.......................................... -- (105)
------- -------
109 5
------- -------
Income before income taxes.................................. 1,118 3,054
Income taxes................................................ 461 1,261
------- -------
Net income.................................................. $ 657 $ 1,793
======= =======
Net income per share........................................ $ 0.05 $ 0.13
======= =======
</TABLE>
See Notes to Unaudited Condensed Financial Statements.
F-16
<PAGE> 63
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
CONDENSED BALANCE SHEETS -- UNAUDITED
<TABLE>
<CAPTION>
DECEMBER MARCH
31, 1997 31, 1998
-------- --------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 253 $ 252
Accounts receivable, net of allowance for doubtful
accounts of $375 and $395.............................. 14,479 9,184
Inventories, net of allowances of $215 and $253........... 5,989 7,886
Deferred income taxes..................................... 471 414
Prepaid expenses and other................................ 95
------- -------
Total current assets.............................. 21,287 17,736
Machinery, equipment and leasehold improvements, net........ 5,695 5,623
Other assets................................................ 43 50
Excess of cost over net assets acquired, net of accumulated
amortization of $1,568 and $1,658......................... 8,793 8,703
------- -------
$35,818 $32,112
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Revolving credit.......................................... $ 674 $ 4,987
Accounts payable and accrued expenses..................... 3,312 3,199
------- -------
Total current liabilities......................... 3,986 8,186
Other long-term liabilities................................. 460 481
Deferred income taxes....................................... 1,590 1,499
Commitments and Contingencies -- Note D
Stockholder's equity
Common Stock, par value $.01 per share, authorized,
30,000,000 shares; issued and outstanding 13,636,000
shares................................................. 136 136
Additional paid-in-capital................................ 11,627 11,627
Retained earnings......................................... 41,015 42,808
------- -------
52,778 54,571
Due from Parent and affiliates............................ (22,996) (32,625)
------- -------
Total stockholder's equity........................ 29,782 21,946
------- -------
$35,818 $32,112
======= =======
</TABLE>
See Notes to Unaudited Condensed Financial Statements.
F-17
<PAGE> 64
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
STATEMENT OF STOCKHOLDER'S EQUITY -- UNAUDITED
THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL DUE FROM
--------------- PAID-IN RETAINED PARENT AND
SHARES AMOUNT CAPITAL EARNINGS AFFILIATES TOTAL
------ ------ ---------- -------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance -- January 1, 1998........... 13,636 $136 $11,627 $41,015 $ (22,996) $29,782
Change during period................. (9,629) (9,629)
Net income........................... 1,793 1,793
------ ---- ------- ------- ---------- -------
Balance -- March 31, 1998............ 13,636 $136 $11,627 $42,808 $ (32,625) $21,946
====== ==== ======= ======= ========== =======
</TABLE>
See Notes to Unaudited Condensed Financial Statements.
F-18
<PAGE> 65
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS -- UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1997 1998
------- --------
(IN THOUSANDS)
<S> <C> <C>
Operating Activities:
Net cash from operations after adjustments to reconcile
net income to net cash provided by operating
activities............................................. $ 939 $ 2,053
Changes in operating assets and liabilities:
Accounts receivable.................................... 941 5,295
Inventories............................................ 21 (1,897)
Prepaid expenses and other............................. 43 95
Accounts payable, accrued and other expenses........... (627) (99)
------ -------
Net cash provided by operating activities......... 1,317 5,447
------ -------
Investing Activities:
Capital expenditures...................................... (122) (132)
------ -------
Net cash used in investing activities............. (122) (132)
------ -------
Financing Activities:
Advances to Parent and affiliates, net.................... (555) (9,629)
Revolving credit borrowings, net.......................... 4,313
------ -------
Net cash used in financing activities............. (555) (5,316)
------ -------
Increase (decrease) in cash and cash equivalents............ 640 (1)
Cash and cash equivalents -- beginning of period............ 136 253
------ -------
Cash and cash equivalents -- end of period.................. $ 776 $ 252
====== =======
Supplemental disclosure of cash payments for:
Taxes (including amounts paid to Parent).................. $ 550 $ 1,270
Interest.................................................. -- 100
</TABLE>
See Notes to Unaudited Condensed Financial Statements.
F-19
<PAGE> 66
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE A -- BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
American Bank Note Holographics, Inc. (the "Company"), incorporated in the
State of Delaware, is a wholly-owned subsidiary of American Banknote Corporation
(the "Parent"). As a wholly-owned subsidiary, the Company is provided certain
corporate and administrative services, including treasury functions, tax
planning and compliance, financial reporting, risk management, human resources
and legal services. Additionally, because the Parent manages cash and financing
requirements centrally, interest expense and financing requirements are based on
the existing capital structure. The financial position and operations of the
Company may differ from the results that may have been achieved had the Company
operated as an independent entity.
The accompanying unaudited condensed financial statements do not contain
all disclosures required by generally accepted accounting principles. Reference
should be made to the Company's audited financial statements included elsewhere
herein. The accompanying unaudited condensed financial statements reflect all
adjustments (consisting of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair statement of the results of the
interim periods presented and are not necessarily indicative of the results
which may be expected for a full year.
Sales Recognition
Sales are generally recognized when goods are shipped. However, pursuant to
terms with certain customers, completed items are sometimes stored at the
Company's premises and, in those instances, sales are recognized when the goods
are transferred to the on-site secured facility. At December 31, 1997 and March
31, 1998, accounts receivable from these customers totaled $7.8 million and $0.4
million, respectively.
Net Income Per Share
Net income per share is computed based on the number of outstanding shares
of common stock, after giving retroactive effect to the stock split (Note E).
The weighted average shares outstanding was 13,636,000 for the three months
ended March 31, 1997 and 1998.
Business Information
Sales to MasterCard were approximately 24% and 6% of sales for the three
months ended March 31, 1997 and 1998, respectively. Sales to manufacturers of
VISA credit cards were approximately 21% and 41% of sales for the three months
ended March 31, 1997 and 1998, respectively. At December 31, 1997 and March 31,
1998, accounts receivable from these customers approximated $11.6 million and
$5.8 million, respectively.
Impact of Accounting Pronouncements
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." Comprehensive
income for the three months ended March 31, 1998 was the same as reported net
income.
The AICPA Accounting Standards Executive Committee issued Statement of
Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities," in April
1998 which is effective for fiscal years beginning after December 15, 1998. SOP
98-5 provides guidance on the financial reporting of start-up costs and
organization costs. It requires costs of start-up activities and organization
costs to be expensed as incurred. The Company is evaluating the effect of this
recent pronouncement.
F-20
<PAGE> 67
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ---------
<S> <C> <C>
Work in process...................................... $2,369 $4,022
Origination costs*................................... 2,581 2,975
Raw materials........................................ 1,039 889
------ ------
$5,989 $7,886
====== ======
</TABLE>
- ---------------
* Includes approximately $0.8 million and $0.6 million, respectively, of costs
relating to work for customers in anticipation of orders in the ordinary
course of business.
NOTE C -- RELATED PARTY TRANSACTIONS
The financial statements reflect both allocated and, where readily
determinable, actual expenses for services provided by the Company's Parent and
affiliates. Where allocations have been utilized, the Company and its Parent and
affiliates recorded transactions based upon systematic and reasonable methods,
including but not limited to, sales, asset values, and headcount all as a
percent of total.
The amounts by major category of historical transactions with affiliates
follow for the three months ended March 31, 1998 (in thousands):
<TABLE>
<S> <C>
Due from (to) Parent and affiliates:
Balance at beginning of period............................ $22,996
Income tax liability payable to Parent................. (1,241)
Taxes paid to Parent................................... 1,241
Cash advances to Parent................................ 9,934
Allocation of employee benefits(1)..................... (201)
Allocation of security services........................ (50)
Sales and administration expenses(2)................... (122)
Intercompany interest.................................. 76
Executive benefits(3).................................. (8)
-------
Balance at end of period.................................. $32,625
=======
</TABLE>
- ---------------
(1) Primarily medical, life and disability insurance premiums.
(2) Includes legal fees and allocated portion of audit fees.
(3) Includes value of restricted stock of the Parent.
Included in the above balances is a $5.3 million note receivable from the
Parent that bears interest at 5 3/4% per annum.
For financial reporting purposes, the amounts due from Parent and
affiliates has been classified within stockholder's equity.
In addition to the above, the Company sold $0.1 million and $0.3 million of
holograms in the three months ended March 31, 1997 and 1998, respectively, to
its affiliates in the normal course of business. There were no purchases by the
Company from affiliates in the first quarter of 1997 or 1998. Trade accounts
F-21
<PAGE> 68
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS -- (CONCLUDED)
receivable from affiliates were $0.7 million and $0.6 million at December 31,
1997 and March 31, 1998, respectively. There were no trade payables to
affiliates at March 31, 1998.
NOTE D -- COMMITMENTS AND CONTINGENCIES
On February 14, 1997, James Rigby, Trustee in Bankruptcy for Holosonics,
Inc., Holotron Corp., Meadows Games, Inc. and Fire Diamond, Inc. commenced an
adversary proceeding in the United States Bankruptcy Court for the Western
District of Washington at Seattle against International Banknote Company, Inc.,
American Banknote Company and the Company. The complaint alleges that the
defendants are indebted to the bankruptcy estate for royalty payments under a
1981 license and that the Company is liable for unpaid royalties for 1990 in the
amount of $226,322, for 1991 in the amount of $853,582 and through July 1992 in
the amount of $568,762, plus attorney's fees and interest on unpaid amounts.
The plaintiff claims that pursuant to the 1981 arrangements, the Company is
required to pay royalties through July 1992 of 5% on sales of holographic
products using the patents covered by the license agreement for the origination
of holographic images. The Company denies all liability in the case on several
grounds, including that two of the three patents at issue expired on or before
September 30, 1991 and any obligation to pay royalties terminated with the
expiration of those patents and that the one remaining patent which expired in
July 1992 had been held invalid in part and not infringed as to its other parts
in prior litigation in the United States District Court for the Northern
District of California, which binds the plaintiff and bars the Trustee from
asserting claims against the Company. In addition, the Company claims that it
utilizes processes differently from those of the licensed patents and that at
the time the license agreement was executed by the Trustee, the debtors did not
own the patents and the license is therefore invalid and cannot be enforced.
The Company currently and from time to time is involved in litigation (as
both plaintiff and defendant) incidental to the conduct of its business, but the
Company is not a party to any lawsuit or proceeding which, in the opinion of the
Company, is likely to have a material impact on the Company's financial position
or results of operations.
NOTE E -- SUBSEQUENT EVENTS
On May 5, 1998, the Company filed a Registration Statement on Form S-1 for
the sale by the Parent of all of the issued and outstanding Common Stock of the
Company (the "Offering"). The Company will not receive any of the proceeds from
the sale of Common Stock by the Parent. After the sale, the Parent will not own
any of the Company's Common Stock. On June 11, 1998, the Company declared a
1,363.6 to one stock split, effective July 2, 1998, in the form of a stock
dividend, of the Company's Common Stock and increased its authorized Common
Stock to 30,000,000 shares and its authorized Preferred Stock to 5,000,000
shares. The accompanying unaudited condensed financial statements give
retroactive effect to the consummation of the stock split. Additionally,
immediately prior to the Offering the amounts due from Parent and affiliates
will be canceled. For financial reporting purposes the amounts due from Parent
and affiliates have been classified within stockholder's equity; accordingly,
the cancellation of such amounts will result in a reclassification within
stockholder's equity.
F-22
<PAGE> 69
INDEX TO UNAUDITED PRO FORMA CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Unaudited Pro Forma Condensed Statements of Income for the
Year Ended December 31, 1997 and for the Three Months
Ended March 31, 1998:
Unaudited Pro Forma Condensed Statements of
Income............................................. P-2
Notes to Unaudited Pro Forma Condensed Statements
of Income.......................................... P-5
</TABLE>
P-1
<PAGE> 70
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
UNAUDITED PRO FORMA CONDENSED STATEMENTS OF INCOME
The following Unaudited Pro Forma Condensed Statements of Income for the
year ended December 31, 1997 and for the three months ended March 31, 1998,
include the historical accounts of the Company and give effect to certain
expenses which the Company expects to incur as an independent public company.
Additionally, these statements give effect to certain non-operating income that
the Company will forego.
The Unaudited Pro Forma Condensed Statements of Income are for
informational purposes only and are not intended to represent, and are not
indicative of, the results of operations of the Company that would have occurred
nor are they necessarily indicative of the results of operations that may be
achieved in the future.
The Unaudited Pro Forma Condensed Statements of Income are based on
available information and certain assumptions and adjustments as described in
the notes thereto, which management of the Company believes are reasonable under
the circumstances. The Unaudited Pro Forma Condensed Statements of Income should
be read in conjunction with "Risk Factors," "Capitalization," "Selected
Historical and Pro Forma Financial Data," "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and the Company's audited
financial statements and notes thereto and unaudited condensed financial
statements and notes thereto included elsewhere herein.
P-2
<PAGE> 71
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
UNAUDITED PRO FORMA CONDENSED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Sales...................................................... $30,915 $30,915
------- -------
Costs and expenses:
Cost of goods sold....................................... 11,912 11,912
Selling and administrative............................... 6,001 $ 850(a) 6,851
Depreciation and amortization............................ 1,136 1,136
------- ------ -------
19,049 850 19,899
------- ------ -------
11,866 (850) 11,016
Other, net
Royalty income........................................... 785 785
Intercompany interest income............................. 305 (305)(b) --
Other income............................................. 36 36
Interest expense......................................... (159) (159)
------- ------ -------
967 (305) 662
------- ------ -------
Income before income taxes................................. 12,833 (1,155) 11,678
Income taxes............................................... 5,294 (462)(c) 4,832
------- ------ -------
Net income............................................... $ 7,539 $ (693) $ 6,846
======= ====== =======
Net income per share..................................... $ 0.55 $(0.05) $ 0.50
======= ====== =======
Weighted average shares outstanding...................... 13,636 13,636
======= =======
</TABLE>
See Notes to Unaudited Pro Forma Condensed Statements of Income.
P-3
<PAGE> 72
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
UNAUDITED PRO FORMA CONDENSED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Sales...................................................... $7,035 $7,035
------- -------
Costs and expenses:
Cost of goods sold....................................... 2,438 2,438
Selling and administrative............................... 1,256 $ 213(a) 1,469
Depreciation and amortization............................ 292 292
------- ------ -------
3,986 213 4,199
------- ------ -------
3,049 (213) 2,836
Other, net
Royalty income........................................... 30 30
Intercompany interest income............................. 76 (76)(b) --
Other income............................................. 4 4
Interest expense......................................... (105) (105)
------- ------ -------
5 (76) (71)
------- ------ -------
Income before income taxes................................. 3,054 (289) 2,765
Income taxes............................................... 1,261 (116)(c) 1,145
------- ------ -------
Net income............................................... $1,793 $ (173) $1,620
======= ====== =======
Net income per share..................................... $ 0.13 $(0.01) $ 0.12
======= ====== =======
Weighted average shares outstanding...................... 13,636 13,636
======= =======
</TABLE>
See Notes to Unaudited Pro Forma Condensed Statements of Income.
P-4
<PAGE> 73
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED STATEMENTS OF INCOME
(a) Adjustment represents estimated expenses for shareholder communications and
other costs associated with public ownership.
(b) Adjustment represents reduction in interest income from loans to Parent.
(c) Adjustment represents tax effect of the above adjustments at an effective
income tax rate of 40%.
P-5
<PAGE> 74
======================================================
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made in this Prospectus and, if given or
made, such information or representations must not be relied upon as having been
authorized by the Company, American Banknote Corporation, Inc. or any of the
Underwriters. This Prospectus does not constitute an offer to sell or a
solicitation of any offer to buy any securities other than the shares of Common
Stock to which it relates or an offer to, or a solicitation of, any person in
any jurisdiction where such an offer or solicitation would be unlawful. Neither
the delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that the information contained herein is
correct as of any time subsequent to the date hereof.
----------------------------------
TABLE OF CONTENTS
----------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 5
Use of Proceeds....................... 9
Dividend Policy....................... 9
Capitalization........................ 10
Dilution.............................. 11
Selected Historical and Pro Forma
Financial Data...................... 12
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 13
Business.............................. 21
Management............................ 31
Certain Relationships and Related
Transactions........................ 35
Principal and Selling Stockholders.... 37
Description of Capital Stock.......... 38
Underwriting.......................... 41
Legal Matters......................... 43
Experts............................... 43
Additional Information................ 43
Index to Financial Statements......... F-1
Index to Unaudited Pro Forma Condensed
Statements of Income................ P-1
</TABLE>
---------------------
Until , 1998 (25 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
======================================================
======================================================
13,636,000 SHARES
AM. BANKNOTE LOGO
AMERICAN BANK NOTE
HOLOGRAPHICS, INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
NationsBanc Montgomery
Securities LLC
Lazard Freres & Co. LLC
Raymond James & Associates, Inc.
Salomon Smith Barney
, 1998
======================================================
<PAGE> 75
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, to be paid in connection with the sale
of the Common Stock being registered, all of which will be paid by ABN. All
amounts are estimates except the registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
<S> <C>
Registration fee............................................ $ 55,513
NASD filing fee............................................. 19,318
New York Stock Exchange listing fee......................... 123,100
Blue Sky fees and expenses.................................. 15,000
Accounting fees and expenses................................ 160,000
Legal fees and expenses..................................... 225,000
Transfer agent and registrar fees........................... 1,500
Printing and engraving expenses............................. 300,000
Miscellaneous expenses...................................... 1,000
Total............................................. $900,431
</TABLE>
- ---------------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("Delaware Law") and
Article Sixth of the Company's Certificate of Incorporation provide for
indemnification of the Company's directors and officers in a variety of
circumstances which may include liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). Article Sixth provides that unless otherwise
determined by the Board of Directors of the Company, the Company shall indemnify
to the full extent permitted by the laws of Delaware as from time to time in
effect, the persons described in Section 145 of Delaware Law.
The general effect of the provisions in the Company's Certificate of
Incorporation and Delaware Law is to provide that the Company shall indemnify
its directors and officers against all liabilities and expenses actually and
reasonably incurred in connection with the defense or settlement of any judicial
or administrative proceedings in which they have become involved by reason of
their status as corporate directors or officers, if they acted in good faith and
in the reasonable belief that their conduct was neither unlawful (in the case of
criminal proceedings) nor inconsistent with the best interests of the Company.
With respect to legal proceedings by or in the right of the Company in which a
director or officer is adjudged liable for improper performance of his duty to
the Company or another enterprise which such person served in a similar capacity
at the request of the Company, indemnification is limited by such provisions
that amount which is permitted by the court.
The Company will maintain officers' and directors' liability insurance
which will insure against liabilities that officers and directors of the Company
may incur in such capacities. The Company will also enter into indemnification
agreements with its directors and officers.
Reference is made to the Form of Underwriting Agreement filed as Exhibit
1.1 which provides for indemnification of the directors and officers of the
Company signing the Registration Statement and certain controlling persons of
the Company against certain liabilities, including those arising under the
Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On July 2, 1998, the Company issued a stock dividend of 13,626,000 shares
of Common Stock to its sole Stockholder, American Banknote Corporation, subject
to the consummation of the Offering. The transaction does not constitute a sale
for the purposes of Section 2(3) of the Securities Act of 1993, as amended.
II-1
<PAGE> 76
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<S> <C>
1.1 Form of Underwriting Agreement
3.1 Amended and Restated Certificate of Incorporation
3.2 Amended and Restated By-laws of the Company
4.1 Form of Common Stock Certificate
5.1 Opinion of Paul, Hastings, Janofsky & Walker LLP as to the
validity of the securities being registered
10.1 Form of Separation Agreement
10.2 Form of License Agreement
10.3 Form of Transitional Services Agreement
10.4 Form of 1998 Stock Incentive Plan
10.5 Form of Defined Contribution Plan
10.6 Production Agreement between Mastercard International
Incorporated and the Company, dated as of February 1, 1996+
10.7 Form of Employee Benefits Allocation Agreement
10.8 Form of Employment Agreement (Morris Weissman)
23.1 Consent of Paul, Hastings, Janofsky & Walker LLP (included
in Exhibit 5.1)
23.2 Consent of Deloitte & Touche LLP and Report on Financial
Statement Schedule
24.1 Power of Attorney*
99.1 Affidavit of the Company (Morris Weissman)
</TABLE>
(b) Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts
* Previously filed
+ Confidential treatment requested
ITEM 17. UNDERTAKINGS
(a) The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted against
the Registrant by such director, officer or controlling person in connection
with the securities being registered, the Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
(c) The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, 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 filed as part of this Registration Statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities
Act (sec. 230.424(b)(1) or (4) or sec. 230.497(h)) shall be deemed to be
part of this Registration Statement as of the time the Commission declared
it effective.
II-2
<PAGE> 77
(2) For purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement for the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-3
<PAGE> 78
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 3 to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of New York, State of
New York, on July 2, 1998.
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
By: /s/ JOSHUA C. CANTOR
---------------------------------------
JOSHUA C. CANTOR, PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 3 Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ JOSHUA C. CANTOR, ATTORNEY-IN-FACT Chairman of the Board and July 2, 1998
------------------------------------------------------ Chief Executive Officer
MORRIS WEISSMAN (Principal Executive
Officer)
/s/ JOSHUA C. CANTOR, ATTORNEY-IN-FACT Vice President -- Finance July 2, 1998
------------------------------------------------------ (Principal Financial and
RICHARD P. MACCHIARULO Accounting Officer)
/s/ JOSHUA C. CANTOR President and Director July 2, 1998
------------------------------------------------------
JOSHUA C. CANTOR
Director
------------------------------------------------------
JOHN T. GORMAN
</TABLE>
II-4
<PAGE> 79
SCHEDULE II
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
---------------------
BALANCE AT CHARGED TO CHARGED
BEGINNING OF COSTS AND TO OTHER BALANCE AT
DESCRIPTION YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
----------- ------------ ---------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Allowance for doubtful accounts
(deducted from accounts
receivable)........................ $287 $899 $811(1) $375
==== ==== ==== ====
Allowance for obsolescence (deducted
from inventory).................... $265 $ 50 $215
==== ==== ====
Year ended December 31, 1996:
Allowance for doubtful accounts
(deducted from accounts
receivable)........................ $130 $150 $ (7)(2) $287
==== ==== ==== ====
Allowance for obsolescence (deducted
from inventory).................... $322 $ 57 $265
==== ==== ====
Year ended December 31, 1995:
Allowance for doubtful accounts
(deducted from accounts
receivable)........................ $160 $ 45 $ 75(1) $130
==== ==== ==== ====
Allowance for obsolescence (deducted
from inventory).................... $241 $ 81 $322
==== ==== ====
</TABLE>
- ---------------
(1) Accounts deemed to be uncollectible, net of recoveries.
(2) Amount of recoveries exceeded amounts deemed uncollectible during year.
S-1
<PAGE> 1
Exhibit 1.1
13,636,000 SHARES
AMERICAN BANK NOTE
HOLOGRAPHICS, INC.
COMMON STOCK
FORM OF
UNDERWRITING AGREEMENT
DATED JUNE __, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
SECTION 1. REPRESENTATIONS AND WARRANTIES............................................................... 2
A. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING STOCKHOLDER................... 2
(a) Compliance with Registration Requirements........................................... 2
(b) Offering Materials Furnished to Underwriters........................................ 3
(c) Distribution of Offering Material by the Company.................................... 3
(d) The Underwriting Agreement.......................................................... 3
(e) Authorization of the Common Shares.................................................. 3
(f) No Applicable Registration or Other Similar Rights.................................. 3
(g) No Material Adverse Change.......................................................... 4
(h) Independent Accountants............................................................. 4
(i) Preparation of the Financial Statements............................................. 4
(j) Incorporation and Good Standing of the Company and its Subsidiaries................. 5
(k) Capitalization and Other Capital Stock Matters...................................... 5
(l) Stock Exchange Listing.............................................................. 5
(m) Non-Contravention of Existing Instruments; No Further
Authorizations or Approvals Required................................................ 5
(n) No Material Actions or Proceedings.................................................. 6
(o) Intellectual Property Rights........................................................ 6
(p) All Necessary Permits, etc.......................................................... 7
(q) Title to Properties................................................................. 7
(r) Tax Law Compliance.................................................................. 7
(s) Company Not an "Investment Company"................................................. 7
(t) Insurance........................................................................... 8
(u) No Price Stabilization or Manipulation.............................................. 8
(v) Related Party Transactions.......................................................... 8
(w) Contracts Described................................................................. 8
(x) Compliance with Environmental Laws.................................................. 8
(y) ERISA Compliance.................................................................... 9
(z) No Unlawful Contributions or Other Payments......................................... 10
(aa) Compliance with Cuba Act.......................................................... 10
(bb) Company's Accounting System........................................................ 10
B. ADDITIONAL REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDER........................ 10
(a) Incorporation and Good Standing of the Selling Stockholder.......................... 10
(b) The Underwriting Agreement.......................................................... 10
(c) Title to Common Shares to be Sold; All Authorizations Obtained...................... 10
(d) Delivery of the Common Shares to be Sold............................................ 11
(e) Non-Contravention; No Further Authorizations or Approvals Required.................. 11
(f) No Registration or Other Similar Rights............................................. 11
(g) No Further Consents, etc............................................................ 11
(h) Disclosure Made by the Selling Stockholder in the Prospectus........................ 12
(i) No Price Stabilization or Manipulation.............................................. 12
(j) Sale of Common Stock................................................................ 12
(k) Statements by the Selling Stockholder............................................... 12
SECTION 2. PURCHASE, SALE AND DELIVERY OF THE COMMON SHARES............................................. 12
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C>
(a) The Firm Common Shares.............................................................. 12
(b) The First Closing Date.............................................................. 13
(c) The Optional Common Shares; the Second Closing Date................................. 13
(d) Public Offering of the Common Shares................................................ 14
(e) Payment for the Common Shares....................................................... 14
(f) Delivery of the Common Shares....................................................... 14
(g) Delivery of Prospectus to the Underwriters.......................................... 15
SECTION 3. ADDITIONAL COVENANTS......................................................................... 15
A. COVENANTS OF THE COMPANY.................................................................... 15
(a) Representatives' Review of Proposed Amendments and Supplements...................... 15
(b) Securities Act Compliance........................................................... 15
(c) Amendments and Supplements to the Prospectus and Other Securities Act Matters....... 16
(d) Copies of any Amendments and Supplements to the Prospectus.......................... 16
(e) Blue Sky Compliance................................................................. 16
(f) Use of Proceeds..................................................................... 17
(g) Transfer Agent...................................................................... 17
(h) Earnings Statement.................................................................. 17
(i) Periodic Reporting Obligations...................................................... 17
(j) Agreement Not To Offer or Sell Additional Securities................................ 17
(k) Future Reports to the Representatives............................................... 18
B. COVENANTS OF THE SELLING STOCKHOLDER........................................................ 18
(a) Delivery of Form W8................................................................. 18
(b) Use of Proceeds..................................................................... 18
SECTION 4. PAYMENT OF EXPENSES.......................................................................... 18
SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS............................................ 19
(a) Accountants' Comfort Letter......................................................... 20
(b) Compliance with Registration Requirements; No Stop Order; Additional Information
Requests Complies With; No Objection from NASD...................................... 20
(c) No Material Adverse Change.......................................................... 20
(d) Opinion of Counsel for the Company.................................................. 20
(e) Opinion of Counsel for the Underwriters............................................. 21
(f) Officers' Certificate............................................................... 21
(g) Bring-down Comfort Letter........................................................... 21
(h) Lock-Up Agreement from Certain Stockholders of the Company.......................... 21
(i) Listing of Common Shares on New York Stock Exchange................................. 22
(j) Opinion of Counsel for the Selling Stockholder...................................... 22
(k) Selling Stockholder Certificate..................................................... 22
(l) Company and Selling Stockholder Documents........................................... 22
(m) Additional Documents................................................................ 22
SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES...................................................... 23
SECTION 7. EFFECTIVENESS OF THIS AGREEMENT.............................................................. 23
SECTION 8. INDEMNIFICATION.............................................................................. 23
(a) Indemnification of the Underwriters................................................. 23
(b) Indemnification of the Company, its Directors and Officers.......................... 24
(c) Notifications and Other Indemnification Procedures.................................. 25
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<S> <C>
(d) Settlements......................................................................... 26
SECTION 9. CONTRIBUTION................................................................................. 26
SECTION 10. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS......................................... 28
SECTION 11. TERMINATION OF THIS AGREEMENT.............................................................. 28
SECTION 12. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY........................................ 29
SECTION 13. NOTICES.................................................................................... 29
SECTION 14. SUCCESSORS................................................................................. 30
SECTION 15. PARTIAL UNENFORCEABILITY................................................................... 30
SECTION 16. GOVERNING LAW PROVISIONS................................................................... 30
SECTION 17. GENERAL PROVISIONS......................................................................... 30
</TABLE>
-iii-
<PAGE> 5
UNDERWRITING AGREEMENT
June __, 1998
NATIONSBANC MONTGOMERY SECURITIES LLC
LAZARD FRERES & CO. LLC
RAYMOND JAMES & ASSOCIATES, INC.
SMITH BARNEY INC.
As Representatives of the several Underwriters
c/o NATIONSBANC MONTGOMERY SECURITIES LLC
600 Montgomery Street
San Francisco, California 94111
Ladies and Gentlemen:
INTRODUCTORY. American Bank Note Corporation, a Delaware corporation
(referred to herein as the "Selling Stockholder"), the sole stockholder of
American Bank Note Holographics, Inc., a Delaware Corporation (the "Company"),
proposes to sell to the several underwriters named in Schedule A (the
"Underwriters") an aggregate of 13,636,000 shares of common stock, par value
$.01 per share (the "Common Stock") of the Company. The 13,636,000 shares of
Common Stock to be sold by the Selling Stockholder are called the "Firm Common
Shares". In addition, the Company has granted to the Underwriters an option to
purchase up to an additional 2,045,400 shares (the "Optional Common Shares") of
Common Stock, as provided in Section 2. The Firm Common Shares and, if and to
the extent such option is exercised, the Optional Common Shares are collectively
called the "Common Shares." NationsBanc Montgomery Securities LLC ("NMS"),
Lazard Freres & Co. LLC, Raymond James & Associates Inc. and Smith Barney Inc.
and have agreed to act as representatives of the several Underwriters (in such
capacity, the "Representatives") in connection with the offering and sale of the
Common Shares.
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1 (File No.
333-51845), which contains a form of prospectus to be used in connection with
the public offering and sale of the Common Shares. Such registration statement,
as amended, including the financial statements, exhibits and schedules thereto,
in the form in which it was declared effective by the Commission under the
Securities Act of 1933, as amended, and the rules and regulations promulgated
thereunder (collectively, the "Securities Act"), including any information
deemed to be a part thereof at the time of effectiveness pursuant to Rule 430A
or Rule 434 under the Securities Act, is called the "Registration Statement".
Any registration statement filed by the Company pursuant to Rule 462(b) under
the Securities Act is called the "Rule 462(b) Registration Statement", and from
and after the date and time of filing of the Rule 462(b) Registration Statement
the term "Registration Statement" shall include the Rule 462(b) Registration
Statement. Such prospectus, in the form first used by the Underwriters to
confirm sales of the Common Shares, is called the "Prospectus"; provided,
however, if the Company has, with the consent of NMS, elected to rely upon Rule
434 under the Securities Act, the term "Prospectus" shall mean the Company's
-1-
<PAGE> 6
prospectus subject to completion (each, a "preliminary prospectus") dated ___
(such preliminary prospectus is called the "Rule 434 preliminary prospectus"),
together with the applicable term sheet (the "Term Sheet") prepared and filed by
the Company with the Commission under Rules 434 and 424(b) under the Securities
Act and all references in this Agreement to the date of the Prospectus shall
mean the date of the Term Sheet. All references in this Agreement to the
Registration Statement, the Rule 462(b) Registration Statement, a preliminary
prospectus, the Prospectus or the Term Sheet, or any amendments or supplements
to any of the foregoing, shall include any copy thereof filed with the
Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval
System ("EDGAR").
The Company, the Selling Stockholder and the Underwriters hereby
confirm their respective agreements as follows:
SECTION 1. REPRESENTATIONS AND WARRANTIES
A. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
STOCKHOLDER. Each of the Company and the Selling Stockholder hereby, jointly and
severally, represent warrant and covenant to each Underwriter as follows:
(a) Compliance with Registration Requirements. The Registration
Statement and any Rule 462(b) Registration Statement have been declared
effective by the Commission under the Securities Act. The Company has
complied with all requests of the Commission for additional or supplemental
information. No stop order suspending the effectiveness of the Registration
Statement or any Rule 462(b) Registration Statement is in effect and no
proceedings for such purpose have been instituted or are pending or, to the
best knowledge of the Company, are contemplated or threatened by the
Commission.
Each preliminary prospectus and the Prospectus when filed complied
in all material respects with the Securities Act and, if filed by
electronic transmission pursuant to EDGAR (except as may be permitted by
Regulation S-T under the Securities Act), was identical to the copy thereof
delivered to the Underwriters for use in connection with the offer and sale
of the Common Shares. Each of the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendment thereto, at the
time it became effective and at all subsequent times, complied and will
comply in all material respects with the Securities Act and did not and
will not contain 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 not misleading. The Prospectus, as amended or
supplemented, as of its date and at all subsequent times, did not and will
not contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. The
representations and warranties set forth in the two immediately preceding
sentences do not apply to statements in or omissions from the Registration
Statement, any Rule 462(b) Registration Statement, or any post-effective
amendment thereto, or the Prospectus, or any amendments or supplements
thereto, made in reliance upon and in conformity with information relating
to any Underwriter furnished to the Company in writing by the
Representatives expressly for use therein. There are no contracts or other
documents required to be described in the
-2-
<PAGE> 7
Prospectus or to be filed as exhibits to the Registration Statement which
have not been described or filed as required.
(b) Offering Materials Furnished to Underwriters. The Company has
delivered to the Representatives four complete manually signed copies of
the Registration Statement and of each consent and certificate of experts
filed as a part thereof, and conformed copies of the Registration Statement
(without exhibits) and preliminary prospectuses and the Prospectus, as
amended or supplemented, in such quantities and at such places as the
Representatives have reasonably requested for each of the Underwriters.
(c) Distribution of Offering Material by the Company. Neither the
Company nor the Selling Stockholder has distributed and will not
distribute, prior to the later of the Second Closing Date (as defined
below) and the completion of the Underwriters' distribution of the Common
Shares, any offering material in connection with the offering and sale of
the Common Shares other than a preliminary prospectus, the Prospectus or
the Registration Statement.
(d) The Underwriting Agreement. This Agreement has been duly
authorized, executed and delivered by, and is a valid and binding agreement
of, the Company, enforceable in accordance with its terms, except as rights
to indemnification hereunder may be limited by applicable law and except as
the enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
the rights and remedies of creditors or by general equitable principles.
(e) Authorization of the Common Shares. The Common Shares to be sold to
the Underwriters by the Selling Stockholders, are duly authorized, validly
issued and are fully paid and nonassessable. The Common Shares to be sold
to the Underwriters by the Company, if any, pursuant to the option granted
in Section 2 of this Agreement, have been duly authorized for issuance and
sale pursuant to this Agreement, and, when delivered by the Company
pursuant to this Agreement, will be validly issued, fully paid and
nonassessable.
(f) No Applicable Registration or Other Similar Rights. There are no
persons with registration or other similar rights to have any equity or
debt securities registered for sale under the Registration Statement or
included in the offering contemplated by this Agreement, other than the
Selling Stockholder with respect to the Common Shares included in the
Registration Statement, except for such rights as have been duly waived.
(g) No Material Adverse Change. Except as otherwise disclosed in the
Prospectus, subsequent to the respective dates as of which information is
given in the Prospectus: (i) there has been no material adverse change, or
any development that could reasonably be expected to result in a material
adverse change, in the condition, financial or otherwise, or in the
earnings, business, operations or prospects, whether or not arising from
transactions in
-3-
<PAGE> 8
the ordinary course of business, of the Company and its subsidiaries,
considered as one entity (any such change is called a "Material Adverse
Change"); (ii) the Company and its subsidiaries, considered as one entity,
have not incurred any material liability or obligation, indirect, direct or
contingent, not in the ordinary course of business nor entered into any
material transaction or agreement not in the ordinary course of business;
and (iii) there has been no dividend or distribution of any kind declared,
paid or made by the Company or, except for dividends paid to the Company or
other subsidiaries, any of its subsidiaries on any class of capital stock
or repurchase or redemption by the Company or any of its subsidiaries of
any class of capital stock.
(h) Independent Accountants. Deloitte & Touche LLP, who have expressed
their opinion with respect to the financial statements (which term as used
in this Agreement includes the related notes thereto) and supporting
schedules filed with the Commission as a part of the Registration Statement
and included in the Prospectus, are independent public or certified public
accountants as required by the Securities Act.
(i) Preparation of the Financial Statements. The financial statements
filed with the Commission as a part of the Registration Statement and
included in the Prospectus present fairly the consolidated financial
position of the Company and its subsidiaries as of and at the dates
indicated and the results of their operations and cash flows for the
periods specified. The supporting schedules included in the Registration
Statement present fairly the information required to be stated therein.
Such financial statements and supporting schedules have been prepared in
conformity with generally accepted accounting principles as applied in the
United States applied on a consistent basis throughout the periods
involved, except as may be expressly stated in the related notes thereto.
No other financial statements or supporting schedules are required to be
included in the Registration Statement. The financial data set forth in the
Prospectus under the captions "Prospectus Summary--Summary Historical
Financial Data", "Selected Historical Financial Data" and "Capitalization"
fairly present the information set forth therein on a basis consistent with
that of the audited financial statements contained in the Registration
Statement. The pro forma financial statements of the Company and its
subsidiaries and the related notes thereto included under the caption
"Prospectus Summary - Selected Historical and Pro Forma Financial Data",
"Selected Historical and Pro Forma Financial Data" and elsewhere in the
Prospectus and in the Registration Statement present fairly the information
contained therein, have been prepared in accordance with the Commission's
rules and guidelines with respect to pro forma financial statements and
have been properly presented on the bases described therein, and the
assumptions used in the preparation thereof are reasonable and the
adjustments used therein are appropriate to give effect to the transactions
and circumstances referred to therein.
(j) Incorporation and Good Standing of the Company and its
Subsidiaries. Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation and has corporate
power and authority to own, lease and operate its properties and to conduct
its business as described in the Prospectus and, in the case of the
Company, to enter into and
-4-
<PAGE> 9
perform its obligations under this Agreement. The Company and each
subsidiary is duly qualified as a foreign corporation to transact business
and is in good standing in each jurisdiction in which such qualification is
required, whether by reason of the ownership or leasing of property or the
conduct of business, except for such jurisdictions where the failure to so
qualify or to be in good standing would not, individually or in the
aggregate, result in a Material Adverse Change. All of the issued and
outstanding capital stock of each subsidiary has been duly authorized and
validly issued, is fully paid and nonassessable and is owned by the
Company, directly or through subsidiaries, free and clear of any security
interest, mortgage, pledge, lien, encumbrance or claim. The Company does
not own or control, directly or indirectly, any corporation, association or
other entity other than the subsidiaries listed in Exhibit 22i to the
Registration Statement.
(k) Capitalization and Other Capital Stock Matters. The authorized,
issued and outstanding capital stock of the Company is as set forth in the
Prospectus under the caption "Capitalization" (other than for subsequent
issuances, if any, pursuant to employee benefit plans described in the
Prospectus or upon exercise of outstanding options described in the
Prospectus). The Common Stock (including the Common Shares) conforms in all
material respects to the description thereof contained in the Prospectus.
All of the issued and outstanding shares of Common Stock (including the
shares of Common stock owned by Selling Stockholder) have been duly
authorized and validly issued, are fully paid and nonassessable and have
been issued in compliance with federal and state securities laws. None of
the outstanding shares of Common Stock were issued in violation of any
preemptive rights, rights of first refusal or other similar rights to
subscribe for or purchase securities of the Company. There are no
authorized or outstanding options, warrants, preemptive rights, rights of
first refusal or other rights to purchase, or equity or debt securities
convertible into or exchangeable or exercisable for, any capital stock of
the Company or any of its subsidiaries other than those accurately
described in the Prospectus. The description of the Company's stock option,
stock bonus and other stock plans or arrangements, and the options or other
rights granted thereunder, set forth in the Prospectus accurately and
fairly presents the information required to be shown with respect to such
plans, arrangements, options and rights.
(l) Stock Exchange Listing. The Common Shares have been approved for
listing on the New York Stock Exchange, subject only to official notice of
issuance.
(m) Non-Contravention of Existing Instruments; No Further
Authorizations or Approvals Required. Neither the Company nor any of its
subsidiaries is in violation of its charter or by-laws or is in default
(or, with the giving of notice or lapse of time, would be in default)
("Default") under any indenture, mortgage, loan or credit agreement, note,
contract, franchise, lease or other instrument to which the Company or any
of its subsidiaries is a party or by which it or any of them may be bound
(including, without limitation, the Company's $30,000,000 Credit Facility,
dated _______, 1998, with The Chase Manhattan Bank (formerly Chemical Bank,
N.A.), as lender), or to which any of the property or assets of the Company
or any of its subsidiaries is subject (each, an "Existing Instrument"),
except for such Defaults as would not, individually or in the aggregate,
result in a Material Adverse
-5-
<PAGE> 10
Change. The Company's execution, delivery and performance of this
Agreement and consummation of the transactions contemplated hereby and by
the Prospectus (i) have been duly authorized by all necessary corporate
action and will not result in any violation of the provisions of the
charter or by-laws of the Company or any subsidiary, (ii) will not conflict
with or constitute a breach of, or Default under, or result in the creation
or imposition of any lien, charge or encumbrance upon any property or
assets of the Company or any of its subsidiaries pursuant to, or require
the consent of any other party to, any Existing Instrument, except for such
conflicts, breaches, Defaults, liens, charges or encumbrances as would not,
individually or in the aggregate, result in a Material Adverse Change and
(iii) will not result in any violation of any law, administrative
regulation or administrative or court decree applicable to the Company or
any subsidiary. No consent, approval, authorization or other order of, or
registration or filing with, any court or other governmental or regulatory
authority or agency, is required for the Company's execution, delivery and
performance of this Agreement and consummation of the transactions
contemplated hereby and by the Prospectus, except such as have been
obtained or made by the Company and are in full force and effect under the
Securities Act, under applicable state securities or blue sky laws and from
the NASD Regulation, Inc. (the "NASD").
(n) No Material Actions or Proceedings. Except as otherwise disclosed
in the Prospectus, there are no legal or governmental actions, suits or
proceedings pending or, to the best of the Company's and the Selling
Stockholder's knowledge, threatened (i) against or affecting the Company or
any of its subsidiaries, (ii) which has as the subject thereof any officer
or director of, or property owned or leased by, the Company or any of its
subsidiaries or (iii) relating to environmental or discrimination matters,
where in any such case (A) there is a reasonable possibility that such
action, suit or proceeding might be determined adversely to the Company or
such subsidiary and (B) any such action, suit or proceeding, if so
determined adversely, would reasonably be expected to result in a Material
Adverse Change or adversely affect the consummation of the transactions
contemplated by this Agreement. No material labor dispute with the
employees of the Company or any of its subsidiaries, or with the employees
of any principal supplier of the Company, exists or, to the best of the
Company's knowledge, is threatened or imminent.
(o) Intellectual Property Rights. Except as otherwise disclosed in the
Prospectus, the Company and its subsidiaries own or possess sufficient
trademarks, trade names, patent rights, copyrights, licenses, approvals,
trade secrets and other similar rights (collectively, "Intellectual
Property Rights") reasonably necessary to conduct their businesses as now
conducted; and the expected expiration of any of such Intellectual Property
Rights will not result in a Material Adverse Change. Neither the Company
nor any of its subsidiaries has received any notice of infringement or
conflict with asserted Intellectual Property Rights of others, which
infringement or conflict, if the subject of an unfavorable decision, would
result in a Material Adverse Change.
(p) All Necessary Permits, etc. The Company and each subsidiary possess
such valid and current certificates, authorizations or permits issued by
the appropriate state, federal or foreign regulatory agencies or bodies
necessary to conduct their respective businesses, as presently conducted,
and neither the Company nor any subsidiary has received any notice of
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<PAGE> 11
proceedings relating to the revocation or modification of, or
non-compliance with, any such certificate, authorization or permit which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, could result in a Material Adverse Change.
(q) Title to Properties. The Company and each of its subsidiaries has
good and marketable title to all the properties and assets reflected as
owned in the financial statements referred to in Section 1(i) above (or
elsewhere in the Prospectus), in each case free and clear of any security
interests, mortgages, liens, encumbrances, equities, claims and other
defects, except such as do not materially and adversely affect the value of
such property and do not materially interfere with the use made or proposed
to be made of such property by the Company or such subsidiary. The real
property, improvements, equipment and personal property held under lease by
the Company or any subsidiary are held under valid and enforceable leases,
with such exceptions as are not material and do not materially interfere
with the use made or proposed to be made of such real property,
improvements, equipment or personal property by the Company or such
subsidiary.
(r) Tax Law Compliance. The Company and its subsidiaries have filed
all necessary federal, state and foreign income and franchise tax returns
or have properly requested extensions thereof and have paid all taxes
required to be paid by any of them and, if due and payable, any related or
similar assessment, fine or penalty levied against any of them except as
may be being contested in good faith and by appropriate proceedings. The
Company has made adequate charges, accruals and reserves in the applicable
financial statements referred to in Section 1(i) above in respect of all
federal, state and foreign income and franchise taxes for all periods as to
which the tax liability of the Company or any of its subsidiaries has not
been finally determined.
(s) Company Not an "Investment Company". The Company is not, and after
giving effect to the offering and sale of the Common Shares will not be, an
"investment company" within the meaning of Investment Company Act of 1940
and will conduct its business in a manner so that it will not become
subject to the Investment Company Act of 1940.
(t) Insurance. Each of the Company and its subsidiaries are insured by
recognized, financially sound and reputable institutions with policies in
such amounts and with such deductibles and covering such risks as are
generally deemed adequate and customary for their businesses including, but
not limited to, policies covering real and personal property owned or
leased by the Company and its subsidiaries against theft, damage,
destruction, acts of vandalism and earthquakes. The Company has no reason
to believe that it or any subsidiary will not be able (i) to renew its
existing insurance coverage as and when such policies expire or (ii) to
obtain comparable coverage from similar institutions as may be necessary or
appropriate to conduct its business as now conducted and at a cost that
would not result in a Material Adverse Change. Neither of the Company nor
any subsidiary has been denied any insurance coverage which it has sought
or for which it has applied.
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<PAGE> 12
(u) No Price Stabilization or Manipulation. The Company has not taken
and will not take, directly or indirectly, any action designed to or that
might be reasonably expected to cause or result in stabilization or
manipulation of the price of the Common Stock to facilitate the sale or
resale of the Common Shares.
(v) Related Party Transactions. There are no business relationships or
related-party transactions involving the Company or any subsidiary or any
other person (including the Selling Stockholder) required to be described
in the Prospectus which have not been described as required.
(w) Contracts Described. There are no Existing Instruments required to
be described or referred to in the Registration Statement or to be filed as
exhibits thereto other than those described or referred to therein or filed
or incorporated by reference as exhibits thereto; and the descriptions
thereof and references thereto are correct in all material respects.
(x) Compliance with Environmental Laws. Except as would not,
individually or in the aggregate, result in a Material Adverse Change (i)
neither the Company nor any of its subsidiaries is in violation of any
federal, state, local or foreign law or regulation relating to pollution or
protection of human health or the environment (including, without
limitation, ambient air, surface water, groundwater, land surface or
subsurface strata) or wildlife, including without limitation, laws and
regulations relating to emissions, discharges, releases or threatened
releases of chemicals, pollutants, contaminants, wastes, toxic substances,
hazardous substances, petroleum and petroleum products (collectively,
"Materials of Environmental Concern"), or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Materials of Environmental Concern (collectively,
"Environmental Laws"), which violation includes, but is not limited to,
noncompliance with any permits or other governmental authorizations
required for the operation of the business of the Company or its
subsidiaries under applicable Environmental Laws, or noncompliance with the
terms and conditions thereof, nor has the Company or any of its
subsidiaries received any written communication, whether from a
governmental authority, citizens group, employee or otherwise, that alleges
that the Company or any of its subsidiaries is in violation of any
Environmental Law; (ii) there is no claim, action or cause of action filed
with a court or governmental authority, no investigation with respect to
which the Company has received written notice, and no written notice by any
person or entity alleging potential liability for investigatory costs,
cleanup costs, governmental responses costs, natural resources damages,
property damages, personal injuries, attorneys' fees or penalties arising
out of, based on or resulting from the presence, or release into the
environment, of any Material of Environmental Concern at any location
owned, leased or operated by the Company or any of its subsidiaries, now or
in the past (collectively, "Environmental Claims"), pending or, to the best
of the Company's and the Selling Stockholder's knowledge, threatened
against the Company or any of its subsidiaries or any person or entity
whose liability for any Environmental Claim the Company or any of its
subsidiaries has retained or assumed either contractually or by operation
of law; and (iii) to the best of the Company's knowledge, there are no past
or present actions, activities, circumstances, conditions, events or
incidents, including, without limitation, the release,
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<PAGE> 13
emission, discharge, presence or disposal of any Material of Environmental
Concern, that reasonably could result in a violation of any Environmental
Law or form the basis of a potential Environmental Claim against the
Company or any of its subsidiaries or against any person or entity whose
liability for any Environmental Claim the Company or any of its
subsidiaries has retained or assumed either contractually or by operation
of law.
(y) ERISA Compliance. Except as otherwise disclosed in the Prospectus,
the Company and its subsidiaries and any "employee benefit plan" (as
defined under the Employee Retirement Income Security Act of 1974, as
amended, and the regulations and published interpretations thereunder
(collectively, "ERISA")) established or maintained by the Company, its
subsidiaries or their "ERISA Affiliates" (as defined below) are in
compliance in all material respects with ERISA. "ERISA Affiliate" means,
with respect to the Company or a subsidiary, any member of any group of
organizations described in Sections 414(b),(c),(m) or (o) of the Internal
Revenue Code of 1986, as amended, and the regulations and published
interpretations thereunder (the "Code") of which the Company or such
subsidiary is a member. No "reportable event" (as defined under ERISA) has
occurred or is reasonably expected to occur with respect to any "employee
benefit plan" established or maintained by the Company, its subsidiaries or
any of their ERISA Affiliates. No "employee benefit plan" established or
maintained by the Company, its subsidiaries or any of their ERISA
Affiliates, if such "employee benefit plan" were terminated, would have any
"amount of unfunded benefit liabilities" (as defined under ERISA). Neither
the Company, its subsidiaries nor any of their ERISA Affiliates has
incurred or reasonably expects to incur any liability under (i) Title IV of
ERISA with respect to termination of, or withdrawal from, any "employee
benefit plan" or (ii) Sections 412, 4971, 4975 or 4980B of the Code. Each
"employee benefit plan" established or maintained by the Company, its
subsidiaries or any of their ERISA Affiliates that is intended to be
qualified under Section 401(a) of the Code is so qualified and nothing has
occurred, whether by action or failure to act, which would cause the loss
of such qualification.
(z) No Unlawful Contributions or Other Payments. Neither the Company
nor any of its subsidiaries nor, to the best of the Company's and the
Selling Stockholder's knowledge, any employee or agent of the Company or
any such subsidiary, has made any contribution or other payment to any
official of, or candidate for, any federal, state or foreign office in
violation of any law or of the character required to be disclosed in the
Prospectus.
(aa) Compliance with Cuba Act. The Company has complied with, and is
and will be in compliance with, the provisions of that certain Florida act
relating to disclosure of doing business with Cuba, codified as Section
517.075 of the Florida statutes, and the rules and regulations thereunder
or is exempt therefrom.
(bb) Company's Accounting System. The Company maintains a system of
accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with
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<PAGE> 14
generally accepted accounting principles as applied in the United States
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.
B. ADDITIONAL REPRESENTATIONS AND WARRANTIES OF THE SELLING
STOCKHOLDER. In addition to the representations, warranties and covenants set
forth in Section 1(A), the Selling Stockholder hereby represents, warrants and
covenants to each Underwriter as follows:
(a) Incorporation and Good Standing of the Selling Stockholder. The
Selling Stockholder has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware and
has the requisite corporate power and authority to enter into and perform
its obligations under this Agreement.
(b) The Underwriting Agreement. This Agreement has been duly
authorized, executed and delivered by, and is a valid and binding agreement
of, the Selling Stockholder, enforceable in accordance with its terms,
except as rights to indemnification hereunder may be limited by applicable
law and except as the enforcement hereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting the rights and remedies of creditors or by general equitable
principles.
(c) Title to Common Shares to be Sold; All Authorizations Obtained.
The Selling Stockholder has, and on the First Closing Date (as defined
below) will have, good and valid title to all of the Common Shares which
may be sold by the Selling Stockholder pursuant to this Agreement on such
date and the legal right and power, and all authorizations and approvals
required by law and under its charter or by-laws, to enter into this
Agreement, to sell, transfer and deliver all of the Common Shares which may
be sold by the Selling Stockholder pursuant to this Agreement and to comply
with the Selling Stockholder's other obligations hereunder and thereunder.
(d) Delivery of the Common Shares to be Sold. Delivery of the Common
Shares which are sold by the Selling Stockholder pursuant to this Agreement
will pass good and valid title to such Common Shares, free and clear of any
security interest, mortgage, pledge, lien, encumbrance or other claim.
(e) Non-Contravention; No Further Authorizations or Approvals Required.
The execution and delivery by the Selling Stockholder of, and the
performance by the Selling Stockholder of the Selling Stockholder's
obligations under, this Agreement will not contravene or conflict with,
result in a breach of, or constitute a Default under, or require the
consent of any other party to, its charter or by-laws or any other
agreement or instrument to which the Selling Stockholder is a party or by
which the Selling Stockholder is bound or under which the Selling
Stockholder is entitled to any right or benefit, any provision of
applicable law or any judgment, order, decree or regulation applicable to
the Selling
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<PAGE> 15
Stockholder of any court, regulatory body, administrative agency,
governmental body or arbitrator having jurisdiction over the Selling
Stockholder, except for such contraventions, conflicts, breaches and
defaults which would not, and in the case of required consents the failure
of which to obtain would not, individually or in the aggregate, result in a
Material Adverse Change. No consent, approval, authorization or other order
of, or registration or filing with, any court or other governmental
authority or agency, is required for the consummation by the Selling
Stockholder of the transactions contemplated in this Agreement, except such
as have been obtained or made or are required under the Securities Act,
under applicable state or blue sky laws and from the NASD, and to the
extent obtained or made, are in full force and effect under the Securities
Act, under applicable state securities or blue sky laws and from the NASD.
(f) No Registration or Other Similar Rights. The Selling Stockholder
does not have any registration or other similar rights to have any equity
or debt securities registered for sale by the Company under the
Registration Statement or included in the offering contemplated by this
Agreement, except with respect to the Common Shares being registered under
the Registration Statement.
(g) No Further Consents, etc. No consent, approval or waiver is
required under any instrument or agreement to which the Selling Stockholder
is a party or by which the Selling Stockholder is bound or under which the
Selling Stockholder is entitled to any right or benefit, in connection with
the offering, sale or purchase by the Underwriters of any of the Common
Shares which may be sold by the Selling Stockholder under this Agreement or
for the consummation by the Selling Stockholder of any of the other
transactions contemplated hereby.
(h) Disclosure Made by the Selling Stockholder in the Prospectus. All
information furnished by or on behalf of the Selling Stockholder in writing
expressly for use in the Registration Statement and Prospectus is, and on
the First Closing Date will be, true, correct, and complete in all material
respects, and does not, and on the First Closing Date will not, contain any
untrue statement of a material fact or omit to state any material fact
necessary to make such information not misleading. The Selling Stockholder
confirms as accurate the number of shares of Common Stock set forth
opposite the Selling Stockholder's name in the Prospectus under the caption
"Principal and Selling Stockholders" (both prior to and after giving effect
to the sale of the Common Shares).
(i) No Price Stabilization or Manipulation. The Selling Stockholder
has not taken and will not take, directly or indirectly, any action
designed to or that might be reasonably expected to cause or result in
stabilization or manipulation of the price of any security of the Company
to facilitate the sale or resale of the Common Shares.
(j) Sale of Common Stock. The Selling Stockholder is not prompted to
sell shares of Common Stock by any information concerning the Company which
is not set forth in the Registration Statement and the Prospectus.
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<PAGE> 16
(k) Statements by the Selling Stockholder. To the extent that any
statements or omissions made in the Registration Statement, any preliminary
prospectus, the Prospectus or any amendment or supplement thereto are made
in reliance upon and in conformity with written information furnished to
the Company by the Selling Stockholder expressly for use therein, such
preliminary prospectus and the Registration Statement did, and the
Prospectus and any further amendments or supplements to the Registration
Statement and the Prospectus will, when they become effective or are filed
with the Commission, as the case may be, conform in all material respects
to the requirements of the Securities Act and not 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.
Any certificate signed by or on behalf of the Selling Stockholder
and delivered to the Underwriters or to counsel for the Underwriters shall be
deemed to be a representation and warranty by the Selling Stockholder to each
Underwriter as to the matters covered thereby.
SECTION 2. PURCHASE, SALE AND DELIVERY OF THE COMMON SHARES
(a) The Firm Common Shares . Upon the terms herein set forth, the
Selling Stockholder agrees to sell to the several Underwriters an aggregate
of 13,636,000 Firm Common Shares. On the basis of the representations,
warranties and agreements herein contained, and upon the terms but subject
to the conditions herein set forth, the Underwriters agree, severally and
not jointly, to purchase from the Selling Stockholder the Firm Common
Shares. The purchase price per Firm Common Share to be paid by the several
Underwriters to the Selling Stockholder shall be $___ per share.
(b) The First Closing Date. Delivery of certificates for the Firm
Common Shares to be purchased by the Underwriters and payment therefor
shall be made at the offices of NMS, 600 Montgomery Street, San Francisco,
California (or such other place as may be agreed to by the Selling
Stockholder and the Representatives) at 6:00 a.m. San Francisco time, on
___, or such other time and date not later than 10:30 a.m. San Francisco
time, on ___(1) as the Representatives shall designate by notice to the
Selling Stockholder (the time and date of such closing are called the
"First Closing Date"). The Company and the Selling Stockholder hereby
acknowledge that circumstances under which the Representatives may provide
notice to postpone the First Closing Date as originally scheduled include,
but are in no way limited to, any determination by the Company, the Selling
Stockholder or the Representatives to recirculate to the public copies of
an amended or supplemented Prospectus or a delay as contemplated by the
provisions of Section 10.
(c) The Optional Common Shares; the Second Closing Date. In addition,
on the basis of the representations, warranties and agreements herein
contained, and upon the terms but
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(1) Insert a date ten business days following the original contemplated
First Closing Date.
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<PAGE> 17
subject to the conditions herein set forth, the Company hereby grants an
option to the several Underwriters to purchase, severally and not jointly,
up to an aggregate of 2,045,400 Optional Common Shares from the Company at
the purchase price per share to be paid by the Underwriters for the Firm
Common Shares. The option granted hereunder is for use by the Underwriters
solely in covering any over-allotments in connection with the sale and
distribution of the Firm Common Shares. The option granted hereunder may be
exercised at any time (but not more than once) upon notice by the
Representatives to the Company, which notice may be given at any time
within 30 days from the date of this Agreement. Such notice shall set forth
(i) the aggregate number of Optional Common Shares as to which the
Underwriters are exercising the option, (ii) the names and denominations in
which the certificates for the Optional Common Shares are to be registered
and (iii) the time, date and place at which such certificates will be
delivered (which time and date may be simultaneous with, but not earlier
than, the First Closing Date; and in such case the term "First Closing
Date" shall refer to the time and date of delivery of certificates for the
Firm Common Shares and the Optional Common Shares ). Such time and date of
delivery, if subsequent to the First Closing Date, is called the "Second
Closing Date" and shall be determined by the Representatives and shall not
be earlier than three nor later than five full business days after delivery
of such notice of exercise. If any Optional Common Shares are to be
purchased, each Underwriter agrees, severally and not jointly, to purchase
the number of Optional Common Shares (subject to such adjustments to
eliminate fractional shares as the Representatives may determine) that
bears the same proportion to the total number of Optional Common Shares to
be purchased as the number of Firm Common Shares set forth on Schedule A
opposite the name of such Underwriter bears to the total number of Firm
Common Shares. The Representatives may cancel the option at any time prior
to its expiration by giving written notice of such cancellation to the
Company.
(d) Public Offering of the Common Shares . The Representatives hereby
advise the Company and the Selling Stockholder that the Underwriters intend
to offer for sale to the public, as described in the Prospectus, their
respective portions of the Common Shares as soon after this Agreement has
been executed and the Registration Statement has been declared effective as
the Representatives, in their sole judgment, have determined is advisable
and practicable.
(e) Payment for the Common Shares. Payment for the Common Shares to be
sold by the Selling Stockholder shall be made at the First Closing Date by
wire transfer of immediately available funds to the order of the Selling
Stockholder. Payment for the Common Shares to be sold by the Company shall
be made, if applicable, at the First Closing Date or the Second Closing
Date, as the case may be, by wire transfer of immediately available funds
to the order of the Company.
It is understood that the Representatives have been authorized, for
their own accounts and the accounts of the several Underwriters, to accept
delivery of and receipt for, and make payment of the purchase price for,
the Firm Common Shares and any Optional Common Shares the Underwriters have
agreed to purchase. NMS, individually and not as a Representative of the
Underwriters, may (but shall not be obligated to) make payment for any
Common Shares to be purchased by any Underwriter whose funds shall not have
been
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<PAGE> 18
received by the Representatives by the First Closing Date or the Second
Closing Date, as the case may be, for the account of such Underwriter, but
any such payment shall not relieve such Underwriter from any of its
obligations under this Agreement.
The Selling Stockholder hereby agrees that such Selling
Stockholder will pay all stock transfer taxes, stamp duties and other
similar taxes, if any, payable upon the sale or delivery of the Common
Shares to be sold by such Selling Stockholder to the several Underwriters,
or otherwise in connection with the performance of such Selling
Stockholder's obligations hereunder.
(f) Delivery of the Common Shares. The Selling Stockholder shall
deliver, or cause to be delivered, to the Representatives for the accounts
of the several Underwriters certificates for the Firm Common Shares to be
sold by them at the First Closing Date, against the irrevocable release of
a wire transfer of immediately available funds for the amount of the
purchase price therefor. The Company shall also deliver, or cause to be
delivered, to the Representatives for the accounts of the several
Underwriters, certificates for the Optional Common Shares the Underwriters
have agreed to purchase from the Company at the First Closing Date or the
Second Closing Date, as the case may be, against the irrevocable release of
a wire transfer of immediately available funds for the amount of the
purchase price therefor. The certificates for the Common Shares shall be in
definitive form and registered in such names and denominations as the
Representatives shall have requested at least two full business days prior
to the First Closing Date (or the Second Closing Date, as the case may be)
and shall be made available for inspection on the business day preceding
the First Closing Date (or the Second Closing Date, as the case may be) at
a location in New York City as the Representatives may designate. Time
shall be of the essence, and delivery at the time and place specified in
this Agreement is a further condition to the obligations of the
Underwriters.
(g) Delivery of Prospectus to the Underwriters. Not later than 12:00
p.m. on the second business day following the date the Common Shares are
released by the Underwriters for sale to the public, the Company shall
deliver or cause to be delivered copies of the Prospectus in such
quantities and at such places as the Representatives shall reasonably
request.
SECTION 3. ADDITIONAL COVENANTS
A. COVENANTS OF THE COMPANY. The Company further covenants and agrees
with each Underwriter as follows:
(a) Representatives' Review of Proposed Amendments and Supplements.
During such period beginning on the date hereof and ending on the later of
the First Closing Date or such date, as in the opinion of counsel for the
Underwriters, the Prospectus is no longer required by law to be delivered
in connection with sales by an Underwriter or dealer (the "Prospectus
Delivery Period"), prior to amending or supplementing the Registration
Statement (including any registration statement filed under Rule 462(b)
under the Securities Act) or the Prospectus, the Company shall furnish to
the Representatives for review a copy of each such proposed amendment or
supplement, and the Company shall not file any such
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<PAGE> 19
proposed amendment or supplement to which the Representatives reasonably
object.
(b) Securities Act Compliance. After the date of this Agreement, the
Company shall promptly advise the Representatives in writing (i) of the
receipt of any comments of, or requests for additional or supplemental
information from, the Commission, (ii) of the time and date of any filing
of any post-effective amendment to the Registration Statement or any
amendment or supplement to any preliminary prospectus or the Prospectus,
(iii) of the time and date that any post-effective amendment to the
Registration Statement becomes effective and (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement or any post-effective amendment thereto or of any
order preventing or suspending the use of any preliminary prospectus or the
Prospectus, or of any proceedings to remove, suspend or terminate from
listing or quotation the Common Stock from any securities exchange upon
which the it is listed for trading or included or designated for quotation,
or of the threatening or initiation of any proceedings for any of such
purposes. If the Commission shall enter any such stop order at any time,
the Company will use its best efforts to obtain the lifting of such order
at the earliest possible moment. Additionally, the Company agrees that it
shall comply with the provisions of Rules 424(b), 430A and 434, as
applicable, under the Securities Act and will use its reasonable efforts to
confirm that any filings made by the Company under such Rule 424(b) were
received in a timely manner by the Commission.
(c) Amendments and Supplements to the Prospectus and Other Securities
Act Matters. If, during the Prospectus Delivery Period, any event shall
occur or condition exist as a result of which it is necessary to amend or
supplement the Prospectus in order to make the statements therein, in the
light of the circumstances when the Prospectus is delivered to a purchaser,
not misleading, or if in the opinion of the Representatives or counsel for
the Underwriters it is otherwise necessary to amend or supplement the
Prospectus to comply with law, the Company agrees to promptly prepare
(subject to Section 3(A)(a) hereof), file with the Commission and furnish
at its own expense to the Underwriters and to dealers, amendments or
supplements to the Prospectus so that the statements in the Prospectus as
so amended or supplemented will not, in the light of the circumstances when
the Prospectus is delivered to a purchaser, be misleading or so that the
Prospectus, as amended or supplemented, will comply with law.
(d) Copies of any Amendments and Supplements to the Prospectus. The
Company agrees to furnish the Representatives, without charge, during the
Prospectus Delivery Period, as many copies of the Prospectus and any
amendments and supplements thereto as the Representatives may reasonably
request.
(e) Blue Sky Compliance. The Company shall cooperate with the
Representatives and counsel for the Underwriters to qualify or register the
Common Shares for sale under (or obtain exemptions from the application of)
the state securities or blue sky laws or Canadian provincial securities
laws of those jurisdictions designated by the Representatives, shall
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<PAGE> 20
comply with such laws and shall continue such qualifications, registrations
and exemptions in effect so long as required for the distribution of the
Common Shares. The Company shall not be required to qualify as a foreign
corporation or to take any action that would subject it to general service
of process in any such jurisdiction where it is not presently qualified or
where it would be subject to taxation as a foreign corporation. The Company
will advise the Representatives promptly of the suspension of the
qualification or registration of (or any such exemption relating to) the
Common Shares for offering, sale or trading in any jurisdiction or any
initiation or threat of any proceeding for any such purpose, and in the
event of the issuance of any order suspending such qualification,
registration or exemption, the Company shall use its best efforts to obtain
the withdrawal thereof at the earliest possible moment.
(f) Use of Proceeds. The Company shall apply the net proceeds from the
sale of the Common Shares sold by it in the manner described under the
caption "Use of Proceeds" in the Prospectus.
(g) Transfer Agent. The Company shall engage and maintain, at its
expense, a registrar and transfer agent for the Common Stock.
(h) Earnings Statement. As soon as practicable, the Company will make
generally available to its security holders and to the Representatives an
earnings statement (which need not be audited) covering the twelve-month
period ending [___](2) that satisfies the provisions of Section 11(a) of
the Securities Act.
(i) Periodic Reporting Obligations. During the Prospectus Delivery
Period the Company shall file, on a timely basis, with the Commission and
the New York Stock Exchange all reports and documents required to be filed
under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
(j) Agreement Not To Offer or Sell Additional Securities. During the
period of 180 days following the date of the Prospectus, the Company will
not, without the prior written consent of NMS (which consent may be
withheld at the sole discretion of NMS), directly or indirectly, sell,
offer, contract or grant any option to sell, pledge, transfer or establish
an open "put equivalent position" within the meaning of Rule 16a-1(h) under
the Exchange Act, or otherwise dispose of or transfer, or announce the
offering of, or file any registration statement under the Securities Act in
respect of, any Common Stock, options or warrants to acquire shares of the
Common Stock or securities exchangeable or exercisable for or
- ----------
(2) Insert the date of the end of the Company's first quarter ending after one
year following the "effective date of the Registration Statement" (as
defined in Rule 158(c) under the Securities Act).
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<PAGE> 21
convertible into shares of Common Stock (other than as contemplated by this
Agreement with respect to the Common Shares); provided, however, that the
Company may issue its Common Stock or options to purchase shares of its
Common Stock, or Common Stock upon exercise of options, pursuant to any
stock option, stock bonus or other stock plan or arrangement described in
the Prospectus, but only if the holders of such shares, options, or shares
issued upon exercise of such options, agree in writing not to sell, offer,
dispose of or otherwise transfer any such shares or options during such 180
day period without the prior written consent of NMS (which consent may be
withheld at the sole discretion of the NMS).
(k) Future Reports to the Representatives. During the period of five
years hereafter the Company will furnish to the Representatives at 600
Montgomery Street, San Francisco, CA 94111 Attention: Gaurang Desai: (i) as
soon as practicable after the end of each fiscal year, copies of the Annual
Report of the Company containing the balance sheet of the Company as of the
close of such fiscal year and statements of income, stockholders' equity
and cash flows for the year then ended and the opinion thereon of the
Company's independent public or certified public accountants; (ii) as soon
as practicable after the filing thereof, copies of each proxy statement,
Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current Report
on Form 8-K or other report filed by the Company with the Commission, the
NASD or any securities exchange; and (iii) as soon as available, copies of
any report or communication of the Company mailed generally to holders of
its capital stock.
B. COVENANTS OF THE SELLING STOCKHOLDER. The Selling Stockholder
further covenants and agrees with each Underwriter.
(a) Agreement not to Offer or Sell Additional Securities. During the
period of 180 days following the date of the Prospectus, the Selling
Stockholder will, not, without the prior written consent of NMS (which
consent may be withheld in its sole discretion), directly or indirectly,
sell, offer, contract or grant any option to sell (including without
limitation any short sale), pledge, transfer, establish an open "put
equivalent position" within the meaning of Rule 16a-1(h) under the Exchange
Act, or otherwise dispose of any shares of Common Stock, options or
warrants to acquire shares of Common Stock, or securities exchangeable or
exercisable for or convertible into shares of Common Stock currently or
hereafter owned either of record or beneficially (as defined in Rule13d-3
under Exchange Act) by the undersigned, or publicly announce the
undersigned's intention to do any of the foregoing.
(b) Delivery of Form W8. To deliver to the Underwriters prior to the
First Closing Date a properly completed and executed United States Treasury
Department Form W-8.
(c) Use of Proceeds. The Selling Stockholder shall apply the net
proceeds from the sale of the Common Shares sold by it in the manner
described under the caption "Use of Proceeds" in the Prospectus.
NMS, on behalf of the several Underwriters, may, in its sole
discretion, waive in writing the performance by the Company or the Selling
Stockholder of any one or more of the foregoing covenants or extend the
time for their performance.
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SECTION 4. PAYMENT OF EXPENSES. The Company and the Selling
Stockholder, jointly and severally, agree to pay in such proportions as
they may agree upon among themselves all costs, fees and expenses incurred
in connection with the performance of their respective obligations
hereunder and in connection with the transactions contemplated hereby,
including without limitation (i) all expenses incident to the issuance and
delivery of the Common Shares (including all printing and engraving costs),
(ii) all fees and expenses of the registrar and transfer agent of the
Common Stock, (iii) all necessary issue, transfer and other stamp taxes in
connection with the issuance and sale of the Common Shares to the
Underwriters, (iv) all fees and expenses of the Company's counsel,
independent public or certified public accountants and other advisors, (v)
all costs and expenses incurred in connection with the preparation,
printing, filing, shipping and distribution of the Registration Statement
(including financial statements, exhibits, schedules, consents and
certificates of experts), each preliminary prospectus and the Prospectus,
and all amendments and supplements thereto, and this Agreement, (vi) all
filing fees, attorneys' fees and expenses incurred by the Company or the
Underwriters in connection with qualifying or registering (or obtaining
exemptions from the qualification or registration of) all or any part of
the Common Shares for offer and sale under the state securities or blue sky
laws or the provincial securities laws of Canada, and, if requested by the
Representatives, preparing and printing a "Blue Sky Survey" or memorandum,
and any supplements thereto, advising the Underwriters of such
qualifications, registrations and exemptions, (vii) the filing fees
incident to, and the reasonable fees and expenses of counsel for the
Underwriters in connection with, the NASD's review and approval of the
Underwriters' participation in the offering and distribution of the Common
Shares, (viii) the fees and expenses associated with listing the Common
Stock on the New York Stock Exchange, and (ix) all other fees, costs and
expenses referred to in Item 13 of Part II of the Registration Statement.
Except as provided in this Section 4, Section 6, Section 8 and Section 9
hereof, the Underwriters shall pay their own expenses, including the fees
and disbursements of their counsel.
The Selling Stockholder further agrees with each Underwriter to pay
(directly or by reimbursement) all fees and expenses incident to the
performance of its obligations under this Agreement which are not otherwise
specifically provided for herein, including but not limited to (i) fees and
expenses of counsel and other advisors for such Selling Stockholder, and
(ii) expenses and taxes incident to the sale and delivery of the Common
Shares to be sold by such Selling Stockholder to the Underwriters hereunder
(which taxes, if any, may be deducted by the Underwriters under the
provisions of Section 2 of this Agreement).
This Section 4 shall not affect or modify any separate, valid
agreement relating to the allocation of payment of expenses between the
Company, on the one hand, and the Selling Stockholder, on the other hand.
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SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the several Underwriters to purchase and pay for the Common
Shares as provided herein on the First Closing Date and, with respect to
the Optional Common Shares, the Second Closing Date, shall be subject to
the accuracy of the representations and warranties on the part of the
Company and the Selling Stockholder set forth in Sections 1(A) and 1(B)
hereof as of the date hereof and as of the First Closing Date as though
then made and, with respect to the Optional Common Shares, as of the Second
Closing Date as though then made, to the timely performance by the Company
and the Selling Stockholder of their respective covenants and other
obligations hereunder, and to each of the following additional conditions:
(a) Accountants' Comfort Letter. On the date hereof, the
Representatives shall have received from Deloitte & Touche LLP, independent
public or certified public accountants for the Company, a letter dated the
date hereof addressed to the Underwriters, in form and substance
satisfactory to the Representatives, containing statements and information
of the type ordinarily included in accountant's "comfort letters" to
underwriters, delivered according to Statement of Auditing Standards No. 72
(or any successor bulletin), with respect to the audited and unaudited
financial statements and certain financial information contained in the
Registration Statement and the Prospectus (and the Representatives shall
have received an additional four conformed copies of such accountants'
letter for each of the several Underwriters).
(b) Compliance with Registration Requirements; No Stop Order;
Additional Information Requests Complies With; No Objection from NASD. For
the period from and after effectiveness of this Agreement and prior to the
First Closing Date and, with respect to the Optional Common Shares, the
Second Closing Date:
(i) the Company shall have filed the Prospectus with the
Commission (including the information required by Rule 430A under the
Securities Act) in the manner and within the time period required by
Rule 424(b) under the Securities Act; or the Company shall have filed a
post-effective amendment to the Registration Statement containing the
information required by such Rule 430A, and such post-effective
amendment shall have become effective; or, if the Company elected to
rely upon Rule 434 under the Securities Act and obtained the
Representatives' consent thereto, the Company shall have filed a Term
Sheet with the Commission in the manner and within the time period
required by such Rule 424(b);
(ii) no stop order suspending the effectiveness of the
Registration Statement, any Rule 462(b) Registration Statement, or any
post-effective amendment to the Registration Statement, shall be in
effect and no proceedings for such purpose shall have been instituted
or threatened by the Commission;
(iii) all requests for additional information on the part of the
Commission shall have been complied with to the satisfaction of counsel
to the Underwriters; and
(iv) the NASD shall have raised no objection to the fairness and
reasonableness of the underwriting terms and arrangements.
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<PAGE> 24
(c) No Material Adverse Change. For the period from and after the date
of this Agreement and prior to the First Closing Date and, with respect to
the Optional Common Shares, the Second Closing Date, in the judgment of the
Representatives there shall not have occurred any Material Adverse Change.
(d) Opinion of Counsel for the Company. On each of the First Closing
Date and the Second Closing Date the Representatives shall have received
the favorable opinion of Paul, Hastings, Janofsky & Walker LLP, counsel for
the Company, dated as of such Closing Date, the form of which is attached
as Exhibit A (and the Representatives shall have received an additional
four conformed copies of such counsel's legal opinion for each of the
several Underwriters).
(e) Opinion of Counsel for the Underwriters. On each of the First
Closing Date and the Second Closing Date the Representatives shall have
received the favorable opinion of Fried, Frank, Harris, Shriver & Jacobson,
counsel for the Underwriters, dated as of such Closing Date, the form of
which is attached as Exhibit B (and the Representatives shall have received
an additional four conformed copies of such counsel's legal opinion for
each of the several Underwriters).
(f) Officers' Certificate. On each of the First Closing Date and the
Second Closing Date the Representatives shall have received a written
certificate executed by the Chief Executive Officer or President of the
Company and the Chief Financial Officer or Chief Accounting Officer of the
Company, dated as of such Closing Date, to the effect set forth in
subsection (b)(ii) of this Section 5, and further to the effect that:
(i) for the period from and after the date of this Agreement and
prior to such Closing Date, there has not occurred any Material Adverse
Change;
(ii) the representations, warranties and covenants of the Company
set forth in Section 1(A) of this Agreement are true and correct with
the same force and effect as though expressly made on and as of such
Closing Date; and
(iii) the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied
at or prior to such Closing Date.
(g) Bring-down Comfort Letter. On each of the First Closing Date and
the Second Closing Date the Representatives shall have received from
Deloitte & Touche LLP, independent public or certified public accountants
for the Company, a letter dated such date, in form and substance
satisfactory to the Representatives, to the effect that they reaffirm the
statements made in the letter furnished by them pursuant to subsection (a)
of this Section 5, except that the specified date referred to therein for
the carrying out of procedures shall be no more than three business days
prior to the First Closing Date or Second Closing Date, as the case may be
(and the Representatives shall have received an additional four conformed
copies of such accountants' letter for each of the several Underwriters).
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(h) Lock-Up Agreement from Certain Stockholders of the Company. On the
date hereof, the Company shall have furnished to the Representatives an
agreement in the form of Exhibit C hereto from each director and officer of
the Company.
(i) Listing of Common Shares on New York Stock Exchange. The Common
Shares to be sold by the Selling Stockholder and the Company at the First
Closing Date and the Second Closing Date, respectively, shall have been
duly accepted, subject to notice of issuance, for listing on the New York
Stock Exchange.
(j) Opinion of Counsel for the Selling Stockholder. On the First
Closing Date the Underwriters shall have received the favorable opinion of
Kramer, Levin, Naftalis & Frankel, counsel for the Selling Stockholder,
dated as of the First Closing Date, the form of which is attached as
Exhibit D.
(k) Selling Stockholder Certificate. On each of the First Closing Date
and the Second Closing Date the Underwriters shall received a written
certificate executed by the Selling Stockholder, dated as of such Closing
Date, to the effect that:
(i) the representations, warranties and covenants of the Selling
Stockholder set forth in Section 1 of this Agreement are true and
correct with the same force and effect as though expressly made by the
Selling Stockholder on and as of such Closing Date; and
(ii) the Selling Stockholder has complied with all the agreements
and satisfied all the conditions on its part to be performed or
satisfied at or prior to such Closing Date.
(l) Company and Selling Stockholder Documents. On the date hereof,
the Company and the Selling Stockholder shall have furnished for review by
the Underwriters such further information, certificates and documents as
the Underwriters may reasonably request.
(m) Additional Documents. On or before each of the First Closing Date
and the Second Closing Date, the Representatives and counsel for the
Underwriters shall have received such information, documents and opinions
as they may reasonably require for the purposes of enabling them to pass
upon the issuance and sale of the Common Shares as contemplated herein, or
in order to evidence the accuracy of any of the representations and
warranties, or the satisfaction of any of the conditions or agreements,
herein contained.
If any condition specified in this Section 5 is not satisfied when and
as required to be satisfied, this Agreement may be terminated by the
Representatives by notice to the Company and the Selling Stockholder at any time
on or prior to the First Closing Date and, with respect to the Optional Common
Shares, at any time prior to the Second Closing Date, which termination shall be
without liability on the part of any party to any other party, except that
Section 4, Section 6, Section 8 and Section 9 shall at all times be effective
and shall survive such termination.
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SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If this Agreement is
terminated by the Representatives pursuant to Section 5, Section 7, Section 10
or Section 11, or if the sale to the Underwriters of the Common Shares on the
First Closing Date is not consummated because of any refusal, inability or
failure on the part of the Company or the Selling Stockholder to perform any
agreement herein or to comply with any provision hereof, the Company and the
Selling Stockholder, in such proportions as they may agree upon among
themselves, agree to reimburse the Representatives and the other Underwriters
(or such Underwriters as have terminated this Agreement with respect to
themselves), severally, upon demand for all out-of-pocket expenses that shall
have been reasonably incurred by the Representatives and the Underwriters in
connection with the proposed purchase and the offering and sale of the Common
Shares, including but not limited to fees and disbursements of counsel, printing
expenses, travel expenses, postage, facsimile and telephone charges.
SECTION 7. EFFECTIVENESS OF THIS AGREEMENT. This Agreement shall not become
effective until the later of (i) the execution of this Agreement by the parties
hereto and (ii) notification by the Commission to the Company and the
Representatives of the effectiveness of the Registration Statement under the
Securities Act.
Prior to such effectiveness, this Agreement may be terminated by any
party by notice to each of the other parties hereto, and any such termination
shall be without liability on the part of (a) the Company or the Selling
Stockholder to any Underwriter, except that the Company and the Selling
Stockholder shall be obligated to reimburse the expenses of the Representatives
and the Underwriters pursuant to Sections 4 and 6 hereof, (b) of any Underwriter
to the Company or the Selling Stockholder or (c) of any party hereto to any
other party except that the provisions of Section 8 and Section 9 shall at all
times be effective and shall survive such termination.
SECTION 8. INDEMNIFICATION.
(a) Indemnification of the Underwriters . The Company and the Selling
Stockholder, jointly and severally, agree to indemnify and hold harmless
each Underwriter, its officers and employees, and each person, if any, who
controls any Underwriter within the meaning of the Securities Act and the
Exchange Act against any loss, claim, damage, liability or expense, as
incurred, to which such Underwriter or such controlling person may become
subject, under the Securities Act, the Exchange Act or other federal or
state statutory law or regulation, or at common law or otherwise (including
in settlement of any litigation, if such settlement is effected with the
written consent of the Company), insofar as such loss, claim, damage,
liability or expense (or actions in respect thereof as contemplated below)
arises out of or is based (i) upon any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement, or
any amendment thereto, including any information deemed to be a part
thereof pursuant to Rule 430A or Rule 434 under the Securities Act, or the
omission or alleged omission therefrom of a material fact required to be
stated therein or necessary to make the statements therein not misleading;
or (ii) upon any untrue statement or alleged untrue statement of a material
fact contained in any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto), or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; or (iii) in whole or in part upon any inaccuracy in the
representations and warranties of the Company or the Selling Stockholder
contained herein; or (iv) in whole or in part upon any
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<PAGE> 27
failure of the Company or the Selling Stockholder to perform their
respective obligations hereunder or under law; or (v) any act or failure to
act or any alleged act or failure to act by any Underwriter in connection
with, or relating in any manner to, the Common Stock or the offering
contemplated hereby, and which is included as part of or referred to in any
loss, claim, damage, liability or action arising out of or based upon any
matter covered by clause (i) or (ii) above, provided that neither the
Company nor the Selling Stockholder shall be liable under this clause (v)
to the extent that a court of competent jurisdiction shall have determined
by a final judgment that such loss, claim, damage, liability or action
resulted directly from any such acts or failures to act undertaken or
omitted to be taken by such Underwriter through its bad faith or willful
misconduct; and to reimburse each Underwriter and each such controlling
person for any and all expenses (including the fees and disbursements of
counsel chosen by NMS) as such expenses are reasonably incurred by such
Underwriter or such controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action; provided, however, that the foregoing
indemnity agreement shall not apply to any loss, claim, damage, liability
or expense to the extent, but only to the extent, arising out of or based
upon any untrue statement or alleged untrue statement or omission or
alleged omission made in reliance upon and in conformity with written
information furnished to the Company by the Representatives expressly for
use in the Registration Statement, any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto); provided, further,
that with respect to any preliminary prospectus, the foregoing indemnity
agreement shall not inure to the benefit of any Underwriter from whom the
person asserting any loss, claim, damage, liability or expense purchased
Common Shares, or any person controlling such Underwriter, if copies of the
Prospectus were timely delivered to the Underwriter pursuant to Section 2
and a copy of the Prospectus (as then amended or supplemented if the
Company shall have furnished any amendments or supplements thereto) was not
sent or given by or on behalf of such Underwriter to such person, if
required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Common Shares to such person, and if the
Prospectus (as so amended or supplemented) would have cured the defect
giving rise to such loss, claim, damage, liability or expense; and
provided, further, that the liability of the Selling Stockholder under the
foregoing indemnity agreement shall be limited to an amount equal to the
initial public offering price of the Common Shares sold by the Selling
Stockholder, less the underwriting discount with respect to such shares, as
set forth on the front cover page of the Prospectus. The indemnity
agreement set forth in this Section 8(a) shall be in addition to any
liabilities that the Company and the Selling Stockholder may otherwise
have.
(b) Indemnification of the Company, its Directors and Officers. Each
Underwriter agrees, severally and not jointly, to indemnify and hold
harmless the Company, each of its directors, each of its officers who
signed the Registration Statement, the Selling Stockholder, each of its
directors, and each person, if any, who controls the Company or the Selling
Stockholder within the meaning of the Securities Act or the Exchange Act,
against any loss, claim, damage, liability or expense, as incurred, to
which the Company, or any such director, officer, Selling Stockholder or
controlling person may become subject, under the Securities Act, the
Exchange Act, or other federal or state statutory law or regulation, or at
common law or otherwise (including in settlement of any litigation, if such
settlement is effected with the written consent of such Underwriter),
insofar as such loss, claim, damage, liability or
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expense (or actions in respect thereof as contemplated below) arises out of
or is based upon any untrue or alleged untrue statement of a material fact
contained in the Registration Statement, any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto), or arises out of or is
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, in each case to the extent, but 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, the Prospectus (or any amendment or supplement thereto), in
reliance upon and in conformity with written information furnished to the
Company by the Representatives expressly for use therein; and to reimburse
the Company, or any such director, officer, Selling Stockholder or
controlling person for any legal and other expense reasonably incurred by
the Company, or any such director, officer, Selling Stockholder or
controlling person in connection with investigating, defending, settling,
compromising or paying any such loss, claim, damage, liability, expense or
action. The Company and the Selling Stockholder hereby acknowledge that the
only information that the Underwriters have furnished to the Company and
the Selling Stockholder expressly for use in the Registration Statement,
any preliminary prospectus or the Prospectus (or any amendment or
supplement thereto) are the statements set forth (A) as the first paragraph
on the inside front cover page of the Prospectus concerning stabilization
by the Underwriters and (B) in the table in the first paragraph and as the
second, seventh and ninth paragraphs under the caption "Underwriting" in
the Prospectus; and the Underwriters confirm that such statements are
correct. The indemnity agreement set forth in this Section 8(b) shall be in
addition to any liabilities that each Underwriter may otherwise have.
(c) Notifications and Other Indemnification Procedures. Promptly after
receipt by an indemnified party under this Section 8 of notice of the
commencement of any action, such indemnified party will, if a claim in
respect thereof is to be made against an indemnifying party under this
Section 8, notify the indemnifying party in writing of the commencement
thereof, but the omission so to notify the indemnifying party will not
relieve it from any liability which it may have to any indemnified party
for contribution or otherwise than under the indemnity agreement contained
in this Section 8 or to the extent it is not prejudiced as a proximate
result of such failure. In case any such action is brought against any
indemnified party and such indemnified party seeks or intends to seek
indemnity from an indemnifying party, the indemnifying party will be
entitled to participate in, and, to the extent that it shall elect, jointly
with all other indemnifying parties similarly notified, by written notice
delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with
counsel reasonably satisfactory to such indemnified party; provided,
however, if the defendants in any such action include both the indemnified
party and the indemnifying party and the indemnified party shall have
reasonably concluded that a conflict may arise between the positions of the
indemnifying party and the indemnified party in conducting the defense of
any such action or that there may be legal defenses available to it and/or
other indemnified parties which are different from or additional to those
available to the indemnifying party, the indemnified party or parties shall
have the right to select separate counsel to assume such legal defenses and
to otherwise participate in the defense of such action on behalf of such
indemnified party or parties. Upon receipt of notice from the indemnifying
party to such indemnified party of such indemnifying party's election so to
assume the defense of such action and approval by
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the indemnified party of counsel, the indemnifying party will not be liable
to such indemnified party under this Section 8 for any legal or other
expenses subsequently incurred by such indemnified party in connection with
the defense thereof unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the next preceding
sentence (it being understood, however, that the indemnifying party shall
not be liable for the expenses of more than one separate counsel (together
with local counsel), approved by the indemnifying party (NMS in the case of
Section 8(b) and Section 9), representing the indemnified parties who are
parties to such action) or (ii) the indemnifying party shall not have
employed counsel satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after notice of commencement of
the action, in each of which cases the fees and expenses of counsel shall
be at the expense of the indemnifying party.
(d) Settlement. The indemnifying party under this Section 8 shall
not be liable for any settlement of any proceeding effected without its
written consent, but if settled with such consent or if there be a final
judgment for the plaintiff, the indemnifying party agrees to indemnify the
indemnified party against any loss, claim, damage, liability or expense by
reason of such settlement or judgment. Notwithstanding the foregoing
sentence, if at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses
of counsel as contemplated by Section 8(c) hereof, the indemnifying party
agrees that it shall be liable for any settlement of any proceeding
effected without its written consent if (i) such settlement is entered into
more than 30 days after receipt by such indemnifying party of the aforesaid
request and (ii) such indemnifying party shall not have reimbursed the
indemnified party in accordance with such request prior to the date of such
settlement. No indemnifying party shall, without the prior written consent
of the indemnified party, effect any settlement, compromise or consent to
the entry of judgment in any pending or threatened action, suit or
proceeding in respect of which any indemnified party is or could have been
a party and indemnity was or could have been sought hereunder by such
indemnified party, unless such settlement, compromise or consent includes
an unconditional release of such indemnified party from all liability on
claims that are the subject matter of such action, suit or proceeding.
SECTION 9. CONTRIBUTION If the indemnification provided for in Section 8 is
for any reason held to be unavailable to or otherwise insufficient to hold
harmless an indemnified party in respect of any losses, claims, damages,
liabilities or expenses referred to therein, then each indemnifying party shall
contribute to the aggregate amount paid or payable by such indemnified party, as
incurred, as a result of any losses, claims, damages, liabilities or expenses
referred to therein (i) in such proportion as is appropriate to reflect the
relative benefits received by each of the Company and the Selling Stockholder,
individually, as the case may be, on the one hand, and the Underwriters, on the
other hand, from the offering of the Common Shares pursuant to this Agreement or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company and the Selling Stockholder, on the one hand, and the Underwriters,
on the other hand, in connection with the statements or omissions or
inaccuracies in the representations and warranties herein which resulted in such
losses, claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the Company and the
Selling Stockholder,
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individually, as the case may be, on the one hand, and the Underwriters, on the
other hand, in connection with the offering of the Common Shares pursuant to
this Agreement shall be deemed to be in the same respective proportions as the
total net proceeds from the offering of the Common Shares pursuant to this
Agreement (before deducting expenses) received by the Company and the Selling
Stockholder, individually, as the case may be, and the total underwriting
discount received by the Underwriters, in each case as set forth on the front
cover page of the Prospectus (or, if Rule 434 under the Securities Act is used,
the corresponding location on the Term Sheet) bear to the aggregate initial
public offering price of the Common Shares as set forth on such cover. The
relative fault of the Company and the Selling Stockholder, on the one hand, and
the Underwriters, on the other hand, shall be determined by reference to, among
other things, whether any such untrue or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact or any such
inaccurate or alleged inaccurate representation or warranty relates to
information supplied by the Company or the Selling Stockholder, on the one hand,
or the Underwriters, on the other hand, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in Section 8(c), any legal or
other fees or expenses reasonably incurred by such party in connection with
investigating or defending any action or claim. The provisions set forth in
Section 8(c) with respect to notice of commencement of any action shall apply if
a claim for contribution is to be made under this Section 9; provided, however,
that no additional notice shall be required with respect to any action for which
notice has been given under Section 8(c) for purposes of indemnification.
The Company, the Selling Stockholder and the Underwriters agree that it
would not be just and equitable if contribution pursuant to this Section 9 were
determined by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to in this Section 9.
Notwithstanding the provisions of this Section 9, no Underwriter shall
be required to contribute any amount in excess of the underwriting commissions
received by such Underwriter in connection with the Common Shares underwritten
by it and distributed to the public. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 9 are several, and not joint, in proportion to their
respective underwriting commitments as set forth opposite their names in
Schedule A. For purposes of this Section 9, each officer and employee of an
Underwriter and each person, if any, who controls an Underwriter within the
meaning of the Securities Act and the Exchange Act shall have the same rights to
contribution as such Underwriter, and each director of the Company, each officer
of the Company who signed the Registration Statement, and each person, if any,
who controls the Company with the meaning of the Securities Act and the Exchange
Act shall have the same rights to contribution as the Company.
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SECTION 10. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS. If, on the
First Closing Date or the Second Closing Date, as the case may be, any one or
more of the several Underwriters shall fail or refuse to purchase Common Shares
that it or they have agreed to purchase hereunder on such date, and the
aggregate number of Common Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase does not exceed 10% of the
aggregate number of the Common Shares to be purchased on such date, the other
Underwriters shall be obligated, severally, in the proportions that the number
of Firm Common Shares set forth opposite their respective names on Schedule A
bears to the aggregate number of Firm Common Shares set forth opposite the names
of all such non-defaulting Underwriters, or in such other proportions as may be
specified by the Representatives with the consent of the non-defaulting
Underwriters, to purchase the Common Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase on such date. If, on the
First Closing Date or the Second Closing Date, as the case may be, any one or
more of the Underwriters shall fail or refuse to purchase Common Shares and the
aggregate number of Common Shares with respect to which such default occurs
exceeds 10% of the aggregate number of Common Shares to be purchased on such
date, and arrangements satisfactory to the Representatives and the Company for
the purchase of such Common Shares are not made within 48 hours after such
default, this Agreement shall terminate without liability of any party to any
other party except that the provisions of Section 4, Section 6, Section 8 and
Section 9 shall at all times be effective and shall survive such termination. In
any such case either the Representatives or the Company shall have the right to
postpone the First Closing Date or the Second Closing Date, as the case may be,
but in no event for longer than seven days in order that the required changes,
if any, to the Registration Statement and the Prospectus or any other documents
or arrangements may be effected.
As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
10. Any action taken under this Section 10 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
SECTION 11. TERMINATION OF THIS AGREEMENT. Prior to the First Closing Date
this Agreement may be terminated by the Representatives by notice given to the
Company and the Selling Stockholder if at any time (i) trading or quotation in
any of the Company's securities shall have been suspended or limited by the
Commission or by the Nasdaq Stock Market or trading in securities generally on
either the Nasdaq Stock Market or the New York Stock Exchange shall have been
suspended or limited, or minimum or maximum prices shall have been generally
established on any of such stock exchanges by the Commission or the NASD; (ii) a
general banking moratorium shall have been declared by any of federal, New York,
Delaware or California authorities; (iii) there shall have occurred any outbreak
or escalation of national or international hostilities or any crisis or
calamity, or any change in the United States or international financial markets,
or any substantial change or development involving a prospective substantial
change in United States' or international political, financial or economic
conditions, as in the judgment of the Representatives is material and adverse
and makes it impracticable to market the Common Shares in the manner and on the
terms described in the Prospectus or to enforce contracts for the sale of
securities; (iv) in the judgment of the Representatives there shall have
occurred any Material Adverse Change; or (v) the Company shall have sustained a
loss by strike, fire, flood, earthquake, accident or other calamity of such
character as in the judgment of the Representatives may interfere materially
with the conduct of
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<PAGE> 32
the business and operations of the Company regardless of whether or not such
loss shall have been insured. Any termination pursuant to this Section 11 shall
be without liability on the part of (a) the Company or the Selling Stockholder
to any Underwriter, except that the Company and the Selling Stockholder shall be
obligated to reimburse the expenses of the Representatives and the Underwriters
pursuant to Sections 4 and 6 hereof, (b) any Underwriter to the Company or the
Selling Stockholder, or (c) of any party hereto to any other party except that
the provisions of Section 8 and Section 9 shall at all times be effective and
shall survive such termination.
SECTION 12. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers, of the Selling Stockholder and of
the several Underwriters set forth in or made pursuant to this Agreement will
remain in full force and effect, regardless of any investigation made by or on
behalf of any Underwriter or the Company or any of its or their partners,
officers or directors or any controlling person, or the Selling Stockholder as
the case may be, and will survive delivery of and payment for the Common Shares
sold hereunder and any termination of this Agreement.
SECTION 13. NOTICES. All communications hereunder shall be in writing and
shall be mailed, hand delivered or telecopied and confirmed to the parties
hereto as follows:
If to the Representatives:
NationsBanc Montgomery Securities LLC
600 Montgomery Street
San Francisco, California 94111
Facsimile: 415-249-5558
Attention: Richard A. Smith
with a copy to:
NationsBanc Montgomery Securities LLC
600 Montgomery Street
San Francisco, California 94111
Facsimile: (415) 249-5553
Attention: David A. Baylor, Esq.
If to the Company:
American Bank Note Holographics, Inc.
399 Executive Boulevard
Elmsford, NY 10523
Facsimile: (212) 328-0728
Attention: Morris Weissman
If to the Selling Stockholder:
American Banknote Corporation
200 Park Avenue
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<PAGE> 33
New York, NY 10166
Facsimile: (212) 328-0728
Attention: Morris Weissman
Any party hereto may change the address for receipt of communications
by giving written notice to the others.
SECTION 14. SUCCESSORS. This Agreement will inure to the benefit of and be
binding upon the parties hereto, including any substitute Underwriters pursuant
to Section 10 hereof, and to the benefit of the employees, officers and
directors and controlling persons referred to in Section 8 and Section 9, and in
each case their respective successors, and personal representatives, and no
other person will have any right or obligation hereunder. The term "successors"
shall not include any purchaser of the Common Shares as such from any of the
Underwriters merely by reason of such purchase.
SECTION 15. PARTIAL UNENFORCEABILITY. The invalidity or unenforceability of
any Section, paragraph or provision of this Agreement shall not affect the
validity or enforceability of any other Section, paragraph or provision hereof.
If any Section, paragraph or provision of this Agreement is for any reason
determined to be invalid or unenforceable, there shall be deemed to be made such
minor changes (and only such minor changes) as are necessary to make it valid
and enforceable.
SECTION 16. GOVERNING LAW PROVISIONS. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK
APPLICABLE TO AGREEMENTS MADE AND TO BE ENTIRELY PERFORMED IN SUCH STATE.
SECTION 17. GENERAL PROVISIONS. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may be executed in two
or more counterparts, each one of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement may not be amended or modified unless in writing by all of the
parties hereto, and no condition herein (express or implied) may be waived
unless waived in writing by each party whom the condition is meant to benefit.
The Table of Contents and the Section headings herein are for the convenience of
the parties only and shall not affect the construction or interpretation of this
Agreement.
Each of the parties hereto acknowledges that it is a sophisticated
business person who was adequately represented by counsel during negotiations
regarding the provisions hereof, including, without limitation, the
indemnification provisions of Section 8 and the contribution provisions of
Section 9, and is fully informed regarding said provisions. Each of the parties
hereto further acknowledges that the provisions of Sections 8 and 9 hereto
fairly allocate the risks in light of the ability of the parties to investigate
the Company, its affairs and its business in order to assure that adequate
disclosure has been made in the Registration Statement, any preliminary
prospectus and the Prospectus (and any amendments and supplements thereto), as
required by the Securities Act and the Exchange Act.
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<PAGE> 34
[Remainder of Page Intentionally Left Blank]
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<PAGE> 35
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to the Company and the Selling Stockholder the
enclosed copies hereof, whereupon this instrument, along with all counterparts
hereof, shall become a binding agreement in accordance with its terms.
Very truly yours,
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
By: _________________________
Name:
Title:
AMERICAN BANKNOTE CORPORATION
By: _________________________
Name:
Title:
The foregoing Underwriting Agreement is hereby confirmed and accepted
by the Representatives in San Francisco, California as of the date first above
written.
NATIONSBANC MONTGOMERY SECURITIES LLC
LAZARD FRERES & CO. LLC
RAYMOND JAMES & ASSOCIATES, INC.
SMITH BARNEY INC.
Acting as Representatives of the several Underwriters named in the attached
Schedule A.
By: NATIONSBANC MONTGOMERY SECURITIES LLC
By: _________________________
Richard A. Smith,
Authorized Signatory
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<PAGE> 36
SCHEDULE A
NUMBER OF
FIRM COMMON SHARES
TO BE PURCHASED
UNDERWRITERS
NationsBanc Montgomery Securities LLC .............. [___]
Lazard Freres & Co. LLC ............................ [___]
Raymond James & Associates, Inc. ................... [___]
Smith Barney Inc.................................... [___]
[___] .............................................. [___]
Total...................................... [___]
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<PAGE> 37
EXHIBIT A
The final opinion in draft form should be attached as Exhibit A at the time this
Agreement is executed.
Opinion of Paul, Hastings, Janofsky & Walker LLP, counsel for the
Company, to be delivered pursuant to Section 5(d) of the Underwriting Agreement.
References to the Prospectus in this Exhibit A include any supplements
thereto at the Closing Date.
(i) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of Delaware.
(ii) The Company has corporate power and authority to own, lease
and operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under the
Underwriting Agreement.
(iii) The Company is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in which
such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except for such
jurisdictions where the failure to so qualify or to be in good standing
would not, individually or in the aggregate, result in a Material Adverse
Change.
(iv) Each significant subsidiary (as defined in Rule 405 under the
Securities Act) has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has corporate power and authority to own, lease and operate
its properties and to conduct its business as described in the Prospectus
and, to the best knowledge of such counsel, is duly qualified as a foreign
corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason of
the ownership or leasing of property or the conduct of business, except for
such jurisdictions where the failure to so qualify or to be in good
standing would not, individually or in the aggregate, result in a Material
Adverse Change.
(v) All of the issued and outstanding capital stock of each such
significant subsidiary has been duly authorized and validly issued, is
fully paid and non-assessable and is owned by the Company, directly or
through subsidiaries, free and clear of any security interest, mortgage,
pledge, lien, encumbrance or, to the best knowledge of such counsel, any
pending or threatened claim.
(vi) The authorized, issued and outstanding capital stock of the
Company (including the Common Stock) conforms to the description thereof
set forth in the Prospectus. All of the outstanding shares of Common Stock
including the shares of Common Stock owned by Selling Stockholder have been
duly authorized and validly issued, are fully paid and nonassessable and,
to the best of such counsel's knowledge, have been
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<PAGE> 38
issued in compliance with the registration and qualification requirements
of federal and state securities laws. The form of certificate used to
evidence the Common Stock is in due and proper form and complies with all
applicable requirements of the charter and by-laws of the Company and the
General Corporation Law of the State of Delaware. The description of the
Company's stock option, stock bonus and other stock plans or arrangements,
and the options or other rights granted and exercised thereunder, set forth
in the Prospectus accurately and fairly presents the information required
to be shown with respect to such plans, arrangements, options and rights.
(vii) No stockholder of the Company or any other person has any
preemptive right, right of first refusal or other similar right to
subscribe for or purchase securities of the Company arising (i) by
operation of the charter or by-laws of the Company or the General
Corporation Law of the State of Delaware or (ii) to the best knowledge of
such counsel, otherwise.
(viii) The Underwriting Agreement has been duly authorized,
executed and delivered by, and is a valid and binding agreement of, the
Company, enforceable in accordance with its terms, except as rights to
indemnification thereunder may be limited by applicable law and except as
the enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles.
(ix) The Common Shares to be purchased by the Underwriters from the
Company have been duly authorized for issuance and sale pursuant to the
Underwriting Agreement and, when issued and delivered by the Company
pursuant to the Underwriting Agreement against payment of the consideration
set forth therein, will be validly issued, fully paid and nonassessable.
(x) Each of the Registration Statement and the Rule 462(b)
Registration Statement, if any, has been declared effective by the
Commission under the Securities Act. To the best knowledge of such counsel,
no stop order suspending the effectiveness of either of the Registration
Statement or the Rule 462(b) Registration Statement, if any, has been
issued under the Securities Act and no proceedings for such purpose have
been instituted or are pending or are contemplated or threatened by the
Commission. Any required filing of the Prospectus and any supplement
thereto pursuant to Rule 424(b) under the Securities Act has been made in
the manner and within the time period required by such Rule 424(b).
(xi) The Registration Statement, including any Rule 462(b)
Registration Statement, the Prospectus, and each amendment or supplement to
the Registration Statement and the Prospectus, as of their respective
effective or issue dates (other than the financial statements and
supporting schedules included or incorporated by reference therein or in
exhibits to or excluded from the Registration Statement, as to which no
opinion need be rendered) comply as to form in all material respects with
the applicable requirements of the Securities Act.
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<PAGE> 39
(xii) The Common Shares have been approved for listing on the New York
Stock Exchange.
(xiii) The statements (i) in the Prospectus under the captions
"Description of Capital Stock", "Management's Discussion and Analysis and
Results of Operations--Liquidity and Capital Resources", "Business--Legal
Proceedings", "Business--Trademarks and Patents", "Certain Relationships
and Related Transactions", and "Underwriting" and (ii) in Item 14 and Item
15 of the Registration Statement, insofar as such statements constitute
matters of law, summaries of legal matters, the Company's charter or by-law
provisions, documents or legal proceedings, or legal conclusions, has been
reviewed by such counsel and fairly present and summarize, in all material
respects, the matters referred to therein.
(xiv) To the best knowledge of such counsel, there are no legal or
governmental actions, suits or proceedings pending or threatened which are
required to be disclosed in the Registration Statement, other than those
disclosed therein.
(xv) To the best knowledge of such counsel, there are no Existing
Instruments required to be described or referred to in the Registration
Statement or to be filed as exhibits thereto other than those described or
referred to therein or filed or incorporated by reference as exhibits
thereto; and the descriptions thereof and references thereto are correct in
all material respects.
(xvi) No consent, approval, authorization or other order of, or
registration or filing with, any court or other governmental authority or
agency, is required for the Company's execution, delivery and performance
of the Underwriting Agreement and consummation of the transactions
contemplated thereby and by the Prospectus, except as required under the
Securities Act, applicable state securities or blue sky laws and from the
NASD.
(xvii) The execution and delivery of the Underwriting Agreement by
the Company and the performance by the Company of its obligations
thereunder (other than performance by the Company of its obligations under
the indemnification section of the Underwriting Agreement, as to which no
opinion need be expressed) (i) have been duly authorized by all necessary
corporate action on the part of the Company; (ii) will not result in any
violation of the provisions of the charter or by-laws of the Company or any
subsidiary; (iii) will not constitute a breach of, or Default under, or
result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company or any of its subsidiaries
pursuant to, (A) the Company's $30,000,000 Credit Facility, dated
___________, 1998 with The Chase Manhattan Bank, as lender, or (B) to the
best knowledge of such counsel, any other material Existing Instrument; or
(iv) to the best knowledge of such counsel, will not result in any
violation of any law, administrative regulation or administrative or court
decree applicable to the Company or any subsidiary.
(xviii) The Company is not, and after giving effect to the offering
of the Common Shares contemplated by the Underwriting Agreement, will not
be, an "investment company" within the meaning of Investment Company Act.
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<PAGE> 40
(xix) To the best knowledge of such counsel, there are no persons
with registration or other similar rights to have any equity or debt
securities registered for sale under the Registration Statement or included
in the offering contemplated by the Underwriting Agreement, other than the
Selling Stockholder, except for such rights as have been duly waived.
(xx) To the best knowledge of such counsel, neither the Company nor
any subsidiary is in violation of its charter or by-laws or any law,
administrative regulation or administrative or court decree applicable to
the Company or any subsidiary or is in Default in the performance or
observance of any obligation, agreement, covenant or condition contained in
any material Existing Instrument, except in each such case for such
violations or Defaults as would not, individually or in the aggregate,
result in a Material Adverse Change.
In addition, such counsel shall state that they have participated in
conferences with officers and other representatives of the Company,
representatives of the independent public or certified public accountants for
the Company and with representatives of the Underwriters at which the contents
of the Registration Statement and the Prospectus, and any supplements or
amendments thereto, and related matters were discussed and, although such
counsel is not passing upon and does not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus (other than as specified above), and
any supplements or amendments thereto, on the basis of the foregoing, nothing
has come to their attention which would lead them to believe that either the
Registration Statement or any amendments thereto, at the time the Registration
Statement or such amendments became effective, contained an untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or that the
Prospectus, as of its date or at the First Closing Date or the Second Closing
Date, as the case may be, contained an untrue statement of a material fact or
omitted to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading (it being understood that such counsel need express no belief as to
the financial statements or schedules or other financial or statistical data
derived therefrom, included in the Registration Statement or the Prospectus or
any amendments or supplements thereto).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the General
Corporation Law of the State of Delaware or the State of New York or the federal
law of the United States, to the extent they deem proper and specified in such
opinion, upon the opinion (which shall be dated the First Closing Date or the
Second Closing Date, as the case may be, shall be satisfactory in form and
substance to the Underwriters, shall expressly state that the Underwriters may
rely on such opinion as if it were addressed to them and shall be furnished to
the Representatives) of other counsel of good standing whom they believe to be
reliable and who are satisfactory to counsel for the Underwriters; provided,
however, that such counsel shall further state that they believe that they and
the Underwriters are justified in relying upon such opinion of other counsel,
and
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<PAGE> 41
(B) as to matters of fact, to the extent they deem proper, on certificates of
responsible officers of the Company and public officials.
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<PAGE> 42
EXHIBIT B
Opinion of counsel for the Underwriters to be delivered pursuant to
Section 5(e) of the Underwriting Agreement.
References to the Prospectus in this Exhibit B include any supplements
thereto at the Closing Date.
(i) The Company is validly existing as a corporation in good
standing under the laws of the State of Delaware.
(ii) No stockholder of the Company or any other person has any
preemptive right, right of first refusal or other similar right to
subscribe for or purchase securities of the Company arising by operation of
the charter or by-laws of the Company or the General Corporation Law of the
State of Delaware.
(iii) The Underwriting Agreement has been duly authorized, executed
and delivered by, and is a valid and binding agreement of, the Company,
enforceable against the Company in accordance with its terms, except as
rights to indemnification thereunder may be limited by applicable law and
except as the enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles.
(iv) The Common Shares to be purchased by the Underwriters from the
Company have been duly authorized for issuance and sale pursuant to the
Underwriting Agreement and, when issued and delivered by the Company
pursuant to the Underwriting Agreement against payment of the consideration
set forth therein, will be validly issued, fully paid and nonassessable.
(v) Each of the Registration Statement and the Rule 462(b)
Registration Statement, if any, has been declared effective by the
Commission under the Securities Act. To the best knowledge of such counsel,
no stop order suspending the effectiveness of either of the Registration
Statement or the Rule 462(b) Registration Statement, if any, has been
issued under the Securities Act and no proceedings for such purpose have
been instituted or are pending or are contemplated or threatened by the
Commission. Any required filing of the Prospectus and any supplement
thereto pursuant to Rule 424(b) under the Securities Act has been made in
the manner and within the time period required by such Rule 424(b).
(vi) The Registration Statement, including any Rule 462(b)
Registration Statement, the Prospectus, and each amendment or supplement to
the Registration Statement and the Prospectus, as of their respective
effective or issue dates (other than the financial statements and
supporting schedules included or incorporated by reference therein or in
exhibits to or excluded from the Registration Statement, as to which no
opinion need be rendered)
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<PAGE> 43
appeared on their face to be responsive as to form in all material respects
with the applicable requirements of the Securities Act.
(vii) The Common Shares have been approved for testing on the New
York Stock Exchange, subject to official notice of issuance.
(viii) The statements in the Prospectus under the captions
"Description of Capital Stock" and "Underwriting", insofar as such
statements constitute matters of law, summaries of legal matters,
provisions of the charter or by-laws of the Company, documents or legal
conclusions, have been reviewed by such counsel and fairly present, in all
material respects, the matters referred to therein.
In addition, such counsel shall state that in the course of the
preparation by the Company and Company counsel of the Registration Statement and
the Prospectus, such counsel participated in conferences with certain of the
officers and representatives of, and the independent public accountants for, the
Company. Such counsel shall state that between the date of the Registration
Statement and the time of delivery of their opinion, they participated in
additional conferences with certain officers and representatives of the Company
at which the contents of the Registration Statement and the Prospectus were
discussed to a limited extent. Such counsel may state that given the limitations
inherent in the independent verification of factual matters and the character of
determinations involved in the registration process, they are not passing upon
and do not assume any responsibility for the accuracy, completeness or fairness
of the statements contained in the Registration Statement or the Prospectus.
Such counsel shall state that subject to the foregoing and on the basis of the
information they gained in the course of the performance of the services
referred to above, including information obtained from officers and
representatives of the Company, no facts have come to their attention that cause
them to believe that the Registration Statement, at the time the Registration
Statement became effective, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading or that the Prospectus, as of its
date, contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. Also, such counsel shall state that, subject to the foregoing,
no facts have come to their attention in the course of the proceedings described
in the second sentence of this paragraph that cause them to believe that the
Prospectus, as of the date and time of delivery of their opinion letter,
contains any untrue statement of a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. In each case, however,
such counsel shall not be required to express any view or belief with respect to
(i) financial statements, notes or schedules included or omitted in the
Registration Statement or the Prospectus or (ii) other financial data included
or omitted in the Registration Statement or the Prospectus.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the General
Corporation Law of the State of
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<PAGE> 44
Delaware or the State of New York or the federal law of the United States, to
the extent they deem proper and specified in such opinion, upon the opinion
(which shall be dated the First Closing Date or the Second Closing Date, as the
case may be, and shall be satisfactory in form and substance to the
Underwriters) of other counsel of good standing whom they believe to be
reliable; and (B) as to matters of fact, to the extent they deem proper, on
certificates of responsible officers of the Company, the Selling Stockholder and
public officials.
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<PAGE> 45
EXHIBIT C
[Date]
NATIONSBANC MONTGOMERY SECURITIES LLC
LAZARD FRERES & CO. LLC
RAYMOND JAMES & ASSOCIATES INC.
SMITH BARNEY INC.
As Representatives of the Several Underwriters
c/o NationsBanc Montgomery Securities LLC
600 Montgomery Street
San Francisco, California 94111
RE: AMERICAN BANK NOTE HOLOGRAPHICS, INC. (the "Company")
Ladies & Gentlemen:
The undersigned is an owner of record or beneficially of certain shares of
Common Stock of the Company ("Common Stock") or securities convertible into or
exchangeable or exercisable for Common Stock. The Company proposes to carry out
a public offering of Common Stock (the "Offering") for which you will act as the
representatives of the underwriters. The undersigned recognizes that the
Offering will be of benefit to the undersigned and will benefit the Company. The
undersigned acknowledges that you and the other underwriters are relying on the
representations and agreements of the undersigned contained in this letter in
carrying out the Offering and in entering into underwriting arrangements with
the Company with respect to the Offering.
In consideration of the foregoing, the undersigned hereby agrees that the
undersigned will not, without the prior written consent of NationsBanc
Montgomery Securities LLC ("NMS") (which consent may be withheld in its sole
discretion), directly or indirectly, sell, offer, contract or grant any option
to sell (including without limitation any short sale), pledge, transfer,
establish an open "put equivalent position" within the meaning of Rule 16a-1(h)
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or
otherwise dispose of any shares of Common Stock, options or warrants to acquire
shares of Common Stock, or securities exchangeable or exercisable for or
convertible into shares of Common Stock currently or hereafter owned either of
record or beneficially (as defined in Rule 13d-3 under the Exchange Act) by the
undersigned, or publicly announce the undersigned's intention to do any of the
foregoing, for a period commencing on the date hereof and continuing through the
close of trading on the date 180 days after the date of the Prospectus. The
undersigned also agrees and consents to the entry of stop transfer instructions
with the Company's transfer agent and registrar against the transfer of shares
of Common Stock or securities convertible into or exchangeable or exercisable
for Common Stock held by the undersigned except in compliance with the foregoing
restrictions.
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<PAGE> 46
With respect to the Offering only, the undersigned waives any registration
rights relating to registration under the Securities Act of any Common Stock
owned either of record or beneficially by the undersigned, including any rights
to receive notice of the Offering.
This agreement is irrevocable and will be binding on the undersigned and the
respective successors, heirs, personal representatives, and assigns of the
undersigned.
- ---------------------------------
Printed Name of Holder
By:
- ---------------------------------
Signature
- ---------------------------------
Printed Name of Person Signing
(and indicate capacity of person signing if signing as
custodian, trustee, or on behalf of an entity)
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<PAGE> 47
EXHIBIT D
The final opinion in draft form should be attached as Exhibit D at the time this
Agreement is executed.
The opinion of Kramer Levin Naftalis & Frankel, counsel for
the Selling Stockholder, pursuant to Section 5(j) shall be rendered to the
Underwriters at the request of the Company and shall so state therein.
References to the Prospectus in this Exhibit D include any supplements thereto
at the Closing Date.
(i) The Underwriting Agreement has been duly authorized, executed
and delivered by or on behalf of, and is a valid and binding agreement of,
the Selling Stockholder, enforceable in accordance with its terms, except
as rights to indemnification thereunder may be limited by applicable law
and except as the enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable principles.
(ii) The execution and delivery by the Selling Stockholder of, and
the performance by the Selling Stockholder of the Selling Stockholder's
obligations under, the Underwriting Agreement will not contravene or
conflict with, result in a breach of, or constitute a default under, the
charter or by-laws or any other organizational documents of the Selling
Stockholder, or, to the best of such counsel's knowledge, violate or
contravene any provision of applicable law or regulation, or violate,
result in a breach of or constitute a default under the terms of any other
agreement or instrument to which such Selling Stockholder is a party or by
which such Selling Stockholder is bound, or any judgment, order or decree
applicable to such Selling Stockholder of any court, regulatory body,
administrative agency, governmental body or arbitrator having jurisdiction
over such Selling Stockholder.
(iii) Such Selling Stockholder has good and valid title to all of
the Common Stock which may be sold by the Selling Stockholder under the
Underwriting Agreement and has the legal right and power, and all
authorizations and approvals required under its charter and by-laws or
other organizational documents to enter into the Underwriting Agreement, to
sell, transfer and deliver all of the Common Shares which may sold by the
Selling Stockholder under the Underwriting Agreement and to comply with the
Selling Stockholder's other obligations under the Underwriting Agreement.
(iv) Assuming that the Underwriters purchase the Common Shares
which are sold by such Selling Stockholder pursuant to the Underwriting
Agreement for value and without notice of any adverse claim as such term is
used in Section 8-105 of the Uniform Commercial Code as currently in effect
in the State of New York, the delivery of the certificates representing
such Common Shares either registered in the name of the Underwriters or
effectively endorsed to the Underwriters or in blank pursuant to the
-1-
<PAGE> 48
Underwriting Agreement will pass to the Underwriters all rights that such
Selling Stockholder has in such Common Shares, free of all adverse claims.
(v) To the best of such counsel's knowledge, no consent, approval,
authorization or other order of, or registration or filing with, any court
or governmental authority or agency, is required for the consummation by
such Selling Stockholder of the transactions contemplated in the
Underwriting Agreement, except as required under the Securities Act,
applicable state securities or blue sky laws, and from the NASD.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the General
Corporation Law of the State of Delaware or the State of New York or the federal
law of the United States, to the extent they deem proper and specified in such
opinion, upon the opinion (which shall be dated the First Closing Date or the
Second Closing Date, as the case may be, shall be satisfactory in form and
substance to the Underwriters, shall expressly state that the Underwriters may
rely on such opinion and shall be furnished to the Underwriters) of other
counsel of good standing whom they believe to be reliable and who are
satisfactory to counsel for the Underwriters; provided, however, that such
counsel shall further state that they believe that they and the Underwriters are
justified in relying upon such opinion of other counsel, and (B) as to matters
of fact, to the extent they deem proper, on certificates of the Selling
Stockholder and public officials.
-2-
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
American Bank Note Holographics, Inc., a corporation organized
and existing under the laws of the State of Delaware (the "Corporation"), hereby
certifies as follows:
A. The name of the Corporation is American Bank Note
Holographics, Inc.
B. The original Certificate of Incorporation of the Corporation
was filed with the Secretary of State of the State of Delaware on August 19,
1985. An amendment to such Certificate of Incorporation was filed with the
Secretary of State of the State of Delaware on August 12, 1986. A second
amendment to such Certificate of Incorporation was filed with the Secretary of
State of the State of Delaware on August 1, 1988.
C. This Amended and Restated Certificate of Incorporation
restates and further amends the Amended Certificate of Incorporation as
heretofore amended and restated and has been duly adopted by the Board of
Directors and the Shareholders of the Corporation in accordance with the
provisions of Sections 242 and 245 of the General Corporation Law of the State
of Delaware. The text of the Certificate of Incorporation as amended and
restated shall be read in full as follows:
Article I
The name of the Corporation is American Bank Note Holographics, Inc.
(hereinafter, the "Corporation").
Article II
The address of the Corporation's registered office in the State of
Delaware is the Corporation Trust Center, 1209 Orange Street, Wilmington, New
Castle County, Delaware 19801. The name of its registered agent at such address
is The Corporation Trust Company.
Article III
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
Article IV
The total number of shares of all classes of stock which the
Corporation shall have authority to issue is thirty-five million (35,000,000)
shares, consisting of thirty million
<PAGE> 2
(30,000,000) shares of Common Stock, with a par value of $.01 per share (the
"Common Stock") and five million (5,000,000) shares of Preferred Stock, with a
par value of $.01 per share (the "Preferred Stock"). The Preferred Stock of the
Corporation may be issued from time to time in one or more series. The Board of
Directors is hereby authorized to provide for the issuance of such shares of
Preferred Stock in one or more series and to fix from time to time before
issuance the number of shares to be included in any series and the designation,
relative powers, preferences and rights, and the qualifications, limitations or
restrictions of all shares of any such series. Without limiting the generality
of the foregoing, as to each such series of Preferred Stock, the Board of
Directors is authorized to fix or to alter the dividend rights, dividend rate,
conversion rights, voting rights, rights and terms of redemption (including
sinking fund provisions), the redemption price or prices, the liquidation
preferences, rights to subscribe for or purchase any securities of the
Corporation or any other corporation, and the number of shares constituting such
series or any or all of them all as shall be determined from time to time by the
Board of Directors and as shall be stated in a resolution or resolutions
providing for the issuance of such Preferred Stock. The Board of Directors may
increase or decrease the number of shares in any such series after the issuance
of shares of that series, but not below the number of shares of such series then
outstanding. If the number of shares of any such series is so decreased, the
shares constituting such decrease shall resume the status which they had prior
to the adoption of the resolution originally fixing the number of shares of such
series.
1. Voting Rights of Common Stock. Except as otherwise
provided herein or may otherwise be required by law, the holders
of the Common Stock shall be entitled to one vote per share on
all matters to be voted on by the stockholders of the
Corporation.
2. Dividend Rights of Common Stock. Subject to the other
provisions of this Amended and Restated Certificate of
Incorporation, as it may be amended from time to time, holders of
the Common Stock shall be entitled to receive such dividends and
other distributions in cash, in property or in shares of capital
stock of the Corporation as may be declared thereon by the Board
of Directors of the Corporation from time to time out of assets
or funds of the Corporation legally available therefor.
Article V
The Corporation is to have perpetual existence.
Article VI
Election of directors of the Corporation need not be by written ballot
unless the By-laws of the Corporation so provide.
-2-
<PAGE> 3
Article VII
1. A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the General Corporation Law of the
State of Delaware or (iv) for any transaction for which the director derives an
improper personal benefit. If the General Corporation Law of the State of
Delaware is amended after the date of filing of this Amended and Restated
Certificate of Incorporation to authorize corporate action further eliminating
or limiting the personal liability of directors, then the liability of a
director of the Corporation shall be eliminated or limited to the fullest extent
permitted by the General Corporation Law of the State of Delaware as so amended.
Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing in respect of any act or
omission occurring prior to the time of such repeal or modification.
2. The Corporation shall indemnify, to the fullest extent now or
hereafter permitted by the General Corporation Law of the State of Delaware, any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he or she
is or was or has agreed to become a director or officer of the Corporation, or
is or was serving or has agreed to serve at the request of the Corporation as a
director or officer of another corporation, partnership, joint venture, trust or
other enterprise, or by reason of any action alleged to be taken or omitted in
such capacity, and may to the same extent indemnify any person who was or is a
party or is threatened to be made a party to such an action, suit or proceeding
by reason of the fact that he or she is or was or has agreed to become an
employee or agent of the Corporation, or is or was serving or has agreed to
serve at the request of the Corporation as an employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement in connection with such action, suit or proceeding or any appeal
therefrom.
-3-
<PAGE> 4
Article VIII
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, and all rights conferred on stockholders
herein are granted subject to this reservation.
Article IX
In furtherance, and not in limitation of, the powers conferred by
statute, the Board of Directors is expressly authorized to make, repeal, alter,
amend and rescind the By-laws of the Corporation.
-4-
<PAGE> 5
IN WITNESS WHEREOF, American Bank Note Holographics, Inc., has
caused this Amended and Restated Certificate of Incorporation to be signed by
Morris Weissman, the Chief Executive Officer, and attested by Naina Prasad, its
Assistant Secretary, this 1st day of July, 1998.
By: /s/ Harvey Kesner
---------------------------
Harvey Kesner
Executive Vice President
General Counsel
ATTEST:
By: /s/ Naina Prasad
-------------------
Naina Prasad
Assistant Secretary
<PAGE> 1
Exhibit 3.2
AMENDED AND RESTATED
BY-LAWS
OF
AMERICAN BANK NOTE HOLOGRAPHICS, INC
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I - STOCKHOLDERS ................................................ 1
CERTIFICATES REPRESENTING STOCK ................................... 1
FRACTIONAL SHARE INTERESTS ........................................ 2
STOCK TRANSFERS ................................................... 2
RECORD DATE FOR STOCKHOLDERS ...................................... 3
MEANING OF CERTAIN TERMS .......................................... 4
STOCKHOLDER MEETINGS .............................................. 5
TIME ........................................................ 5
PLACE ....................................................... 5
CALL ........................................................ 5
NOTICE OR WAIVER OF NOTICE .................................. 5
STOCKHOLDER LIST ............................................ 6
CONDUCT OF MEETING .......................................... 7
PROXY REPRESENTATION ........................................ 7
INSPECTORS AND JUDGES ....................................... 8
QUORUM ...................................................... 9
VOTING ...................................................... 9
NOTICE OF STOCKHOLDER PROPOSAL .............................. 10
PROCEDURE FOR NOMINATION BY STOCKHOLDERS .................... 11
ARTICLE II - DIRECTORS .................................................. 13
FUNCTIONS AND DEFINITION .......................................... 13
QUALIFICATIONS AND NUMBER ......................................... 13
ELECTION AND TERM ................................................. 13
MEETINGS .......................................................... 14
TIME ........................................................ 14
FIRST MEETING ............................................... 14
PLACE ....................................................... 15
CALL ........................................................ 15
NOTICE OR ACTUAL OR CONSTRUCTIVE WAIVER ..................... 15
QUORUM AND ACTION ........................................... 15
CHAIRMAN OF THE MEETING ..................................... 16
REMOVAL OF DIRECTORS .............................................. 16
COMMITTEES ........................................................ 17
EXECUTIVE COMMITTEE ............................................... 17
APPOINTMENT ................................................. 17
CHAIRMAN .................................................... 18
MEETINGS .................................................... 18
NOTICE OF MEETING ........................................... 18
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
WAIVER OF NOTICE ............................................ 18
QUORUM ...................................................... 18
RULES ....................................................... 18
VACANCIES ................................................... 19
ACTION IN WRITING ................................................. 19
ARTICLE III - OFFICERS .................................................. 19
EXECUTIVE OFFICERS ................................................ 19
TERM OF OFFICE; REMOVAL ........................................... 19
AUTHORITY AND DUTIES .............................................. 20
THE CHAIRMAN OF THE BOARD OF DIRECTORS ............................ 20
THE PRESIDENT ..................................................... 20
VICE PRESIDENTS ................................................... 20
THE SECRETARY ..................................................... 20
THE TREASURER ..................................................... 21
ARTICLE IV - CORPORATE-SEAL AND CORPORATE BOOKS ......................... 22
ARTICLE V - FISCAL YEAR ................................................. 22
ARTICLE VI - INDEMNITY .................................................. 22
ARTICLE VII - AMENDMENTS ................................................ 25
</TABLE>
<PAGE> 4
AMENDED AND RESTATED
BY-LAWS
OF
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
(A Delaware Corporation)
ARTICLE I
STOCKHOLDERS
[1. CERTIFICATES REPRESENTING STOCK.
(a) Every holder of stock in the Corporation shall be entitled to have a
certificate signed by, or in the name of, the Corporation by the Chairman or
Vice-Chairman of the Board of Directors, if any, or by the President or a
Vice-President and by the Treasurer or an Assistant Treasurer or the Secretary
or an Assistant Secretary of the Corporation representing the number of shares
owned by such person in the Corporation. If such certificate is countersigned by
a transfer agent other than the Corporation or its employee or by a registrar
other than the Corporation or its employee, any other signature on the
certificate may be a facsimile. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the Corporation with the
same effect as if such person were such officer, transfer agent or registrar at
the date of issue.
<PAGE> 5
(b) Whenever the Corporation shall be authorized to issue more than one
class of stock or more than one series of any class of stock, and whenever the
Corporation shall issue any shares of its stock as partly paid stock, the
certificates representing shares of any such class or series or of any such
partly paid stock shall set forth thereon the statements prescribed by the
General Corporation Law. Any restrictions on the transfer or registration of
transfer of any shares of stock of any class or series shall be noted
conspicuously on the certificate representing such shares.
(c) The Corporation may issue a new certificate of stock in place of any
certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the Board of Directors may require the owner of any lost, stolen
or destroyed certificate, or such person's legal representative, to give the
Corporation a bond sufficient to indemnify the Corporation against any claim
that may be made against it on account of the alleged loss, theft or destruction
of any such certificate or the issuance of any such new certificate.]
2. FRACTIONAL SHARE INTERESTS.
The Corporation may, but shall not be required to, issue fractions of a
share.
3. STOCK TRANSFERS.
Upon compliance with provisions restricting the transfer or registration
of transfer of shares of stock, if any, transfers or registration of transfer of
shares of stock of the Corporation shall be made only on the stock ledger of the
Corporation by the registered holder thereof, or by such person's attorney
thereunto authorized by power of attorney duly executed and filed with the
Secretary of the Corporation or with a transfer agent or a registrar, if any,
and on surrender of the
2
<PAGE> 6
certificate or certificates for such shares of stock properly endorsed and the
payment of all taxes due thereon.
4. RECORD DATE FOR STOCKHOLDERS.
(a) In order that the Corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof, the Board of Directors may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record date is adopted
by the Board of Directors, and which record date shall not be more than sixty
nor less than ten days before the date of such meeting. If no record date has
been fixed by the Board of Directors, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day next preceding the day on which notice is
given, or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held. A determination of stockholders
of record entitled to notice of or to vote at a meeting of stockholders shall
apply to any adjournment of the meeting; provided, however, that the Board of
Directors may fix a new record date for the adjourned meeting.
(b) In order that the Corporation may determine the stockholders entitled
to receive payment of any dividend or other distribution or allotment of any
rights or the stockholders entitled to exercise any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action, the Board of Directors may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record date is
adopted, and which record date shall be not more than sixty days prior to such
action. If no record date
3
<PAGE> 7
has been fixed, the record date for determining stockholders for any such
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
5. MEANING OF CERTAIN TERMS.
As used herein in respect of the right to notice of a meeting of
stockholders or a waiver thereof or to participate or vote thereat or to consent
or dissent in writing in lieu of a meeting, as the case may be, the term "share"
or "shares" or "share of stock" or "shares of stock" or "stockholder" or
"stockholders" refers to an outstanding share or shares of stock and to a holder
or holders of record of outstanding shares of stock when the Corporation is
authorized to issue only one class of shares of stock, and said reference is
also intended to include any outstanding share or shares of stock and any holder
or holders of record of outstanding shares of stock of any class upon which or
upon whom the Certificate of Incorporation confers such rights where there are
two or more classes or series of shares of stock or upon which or upon whom the
General Corporation Law confers such rights notwithstanding that the Certificate
of Incorporation may provide for more than one class or series of shares of
stock, one or more of which are limited or denied such rights thereunder;
provided, however, that no such right shall vest in the event of an increase or
a decrease in the authorized number of shares of stock of any class or series
which is otherwise denied voting rights under the provisions of the Certificate
of Incorporation, including any preferred stock which is denied voting rights
under the provisions of the resolution or resolutions adopted by the Board of
Directors with respect to the issuance thereof.
4
<PAGE> 8
6. STOCKHOLDER MEETINGS.
(a) TIME. The annual meeting shall be held on the date and at the time
fixed, from time to time, by the Board of Directors. A special meeting shall be
held on the date and at the time fixed by the Board of Directors.
(b) PLACE. Annual meetings and special meetings shall be held at such
place, within or without the State of Delaware, as the Board of Directors may,
from time to time, fix. Whenever the Board of Directors shall fail to fix such
place, the meeting shall be held at the registered office of the Corporation in
the State of Delaware.
(c) CALL. Annual meetings may be called by the Board of Directors or by
any officer instructed by the Board of Directors to call the meeting. Special
meetings of the stockholders may be called by the Chairman of the Board of
Directors whenever the Chairman shall deem it proper to do so; and on the
request to the Chairman in writing by a majority of the Directors or by the
holders of three-fourths of the total amount of the Corporation's issued and
outstanding capital stock which is regularly entitled to vote.
(d) NOTICE OR WAIVER OF NOTICE. Written notice of all meetings shall be
given, stating the place, date and hour of the meeting. The notice of an annual
meeting shall state that the meeting is called for the election of Directors and
for the transaction of other business which may properly come before the
meeting, and shall (if any other action which could be taken at a special
meeting is to be taken at such annual meeting) state such other action or
actions as are known at the time of such notice. The notice of a special meeting
shall in all instances state the purpose or purposes for which the meeting is
called and no other business
5
<PAGE> 9
shall be transacted at such meeting. Except as otherwise provided by the General
Corporation Law, a copy of the notice of any meeting shall be given, personally
or by mail, not less than ten days nor more than sixty days before the date of
the meeting, unless the lapse of the prescribed period of time shall have been
waived, and directed to each stockholder at such person's address as it appears
on the records of the Corporation. Notice by mail shall be deemed to be given
when deposited, with postage thereon prepaid, in the United States mail. If a
meeting is adjourned to another time, not more than thirty days hence, and/or to
another place, and if an announcement of the adjourned time and place is made at
the meeting, it shall not be necessary to give notice of the adjourned meeting
unless the Board of Directors, after adjournment, fixes a new record date for
the adjourned meeting. Notice need not be given to any stockholder who submits a
written waiver of notice before or after the time stated therein. Attendance of
a person at a meeting of stockholders shall constitute a waiver of notice of
such meeting, except when the stockholder attends a 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. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice.
(e) STOCKHOLDER LIST. There shall be prepared and made, at least ten days
before every meeting of stockholders, a complete list of the stockholders,
arranged in alphabetical order, and showing the address of each stockholder and
the number of shares registered in the name of each stockholder. Such list shall
be open to the examination of any stockholder, for any purpose germane to the
meeting, during ordinary business hours, for a
6
<PAGE> 10
period of at least ten days prior to the meeting either at a place within the
city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or if not so specified, at the place where the meeting is
to be held. The list shall also be produced and kept at the time and place of
the meeting during the whole time thereof, and may be inspected by any
stockholder who is present. The stock ledger shall be the only evidence as to
who are the stockholders entitled to examine the stock ledger, the list required
by this section or the books of the Corporation, or to vote at any meeting of
stockholders.
(f) CONDUCT OF MEETING. Meetings of the stockholders shall be presided
over by one of the following officers in the order of seniority and if present
and acting: the Chairman of the Board, if any, the Vice-Chairman of the Board,
if any, the President, a Vice President, a chairman for the meeting chosen by
the Board of Directors or, if none of the foregoing is in office and present and
acting, by a chairman to be chosen by the stockholders. The Secretary of the
Corporation or, in such person's absence, an Assistant Secretary, shall act as
secretary of every meeting, but if neither the Secretary nor an Assistant
Secretary is present the chairman for the meeting shall appoint a secretary of
the meeting.
(g) PROXY REPRESENTATION. Every stockholder may authorize another person
or persons to act for such stockholder by proxy in all matters in which a
stockholder is entitled to participate, whether by waiving notice of any
meeting, voting or participating at a meeting, or expressing consent or dissent
without a meeting. Every proxy must be signed by the stockholder or by such
person's attorney-in-fact. No proxy shall be voted or acted upon after three
years from its date unless such proxy provides for a longer period. A duly
executed proxy shall be
7
<PAGE> 11
irrevocable if it states that it is irrevocable and, if, and only as long as, it
is coupled with an interest sufficient in law to support an irrevocable power. A
proxy may be made irrevocable regardless of whether the interest with which it
is coupled is an interest in the stock itself or an interest in the Corporation
generally.
(h) INSPECTORS AND JUDGES. The Board of Directors, in advance of any
meeting, may, but need not, appoint one or more inspectors of election or judges
of the vote, as the case may be, to act at the meeting or any adjournment
thereof. If an inspector or inspectors or judge or judges are not appointed by
the Board of Directors, the person presiding at the meeting may, but need not,
appoint one or more inspectors or judges. In case any person who may be
appointed as an inspector or judge fails to appear or act, the vacancy may be
filled by appointment made by the person presiding thereat. Each inspector or
judge, if any, before entering upon the discharge of such person's duties, shall
take and sign an oath faithfully to execute the duties of inspector or judge at
such meeting with strict impartiality and according to the best of his ability.
The inspectors or judges, if any, shall determine: the number of shares of stock
outstanding and the voting power of each, the shares of stock represented at the
meeting, the existence of a quorum and the validity and effect of proxies. The
inspectors or judges, if any, shall also receive votes, ballots or consents,
hear and determine all challenges and questions arising in connection with the
right to vote, count and tabulate all votes, ballots or consents, determine the
result, and do such other acts as are proper to conduct the election or vote
with fairness to all stockholders. On request of the person presiding at the
meeting, the inspector (or
8
<PAGE> 12
inspectors) or judge (or judges), if any, shall make a report in writing of any
challenge, question or matter determined by such person or persons and execute a
certificate of any fact so found.
(i) QUORUM. Except as the General Corporation Law or these By-Laws may
otherwise provide, the holders of a majority of the outstanding shares of stock
entitled to vote shall constitute a quorum at a meeting of stockholders for the
transaction of any business. The stockholders present may adjourn the meeting
despite the absence of a quorum. When a quorum is once present to organize a
meeting, it is not broken by the subsequent withdrawal of any shareholders.
(j) VOTING. Each stockholder entitled to vote in accordance with the terms
of the Certificate of Incorporation and of these By-Laws, or, with respect to
the issuance of preferred stock, in accordance with the terms of a resolution or
resolutions of the Board of Directors providing for the issuance thereof, shall
be entitled to one vote (or, in the case of preferred stock, such number of
votes as is specified in he applicable resolutions of the Board of Directors
providing for the issuance thereof), in person or by proxy, for each share of
stock entitled to vote held by such stockholder. In the election of Directors, a
plurality of the votes present at the meeting and entitled to vote on the
election of Directors shall elect such Directors. Any other action shall be
authorized by the affirmative vote of a majority of the shares present at the
meeting and entitled to vote on the subject matter, except where the Certificate
of Incorporation or the General Corporation Law prescribes a different
percentage of votes and/or a different exercise of voting power.
9
<PAGE> 13
Voting by ballot shall not be required for corporate action except as
otherwise provided by the General Corporation Law.
(k) NOTICE OF STOCKHOLDER PROPOSAL. At an annual meeting of the
stockholders, only such business shall be conducted as shall have been properly
brought before the Meeting. To be properly brought before an annual meeting
business must be (a) specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the Board of Directors, (b) otherwise
properly brought before the meeting by or at the direction of the Board of
Directors, or (c) otherwise properly brought before the meeting by a
stockholder. For business to be properly brought before an annual meeting by a
stockholder, the stockholder must have given timely notice thereof in writing to
the. Secretary of the Corporation. To be timely, a stockholder's notice must be
personally delivered to or mailed (by United States mail, postage prepaid) and
received by the Secretary at the principal Executive offices of the Corporation
not later than the following dates: (1) 60 days in advance of such meeting if
such meeting is to be held on a day which is within 30 days preceding the
anniversary of the previous year's annual meeting or 90 days in advance of such
meeting if such meeting is to be hold on or after the anniversary of the
previous year's annual meeting; and (2) with respect to any other annual meeting
of stockholders the close of business on the tenth day following the date of
public disclosure of the date of such meeting is first made. A stockholder's
notice to the Secretary shall set forth as to each matter the stockholder
proposes to bring before the annual meeting (a) a brief description of the
business desired to be brought before the annual meeting and the reasons for
conducting such business at the annual meeting, (b) the name and address, as
they appear on the
10
<PAGE> 14
Corporation's books, of the stockholder proposing such business, (c) the class
and number of shares of the corporation which are beneficially owned by the
stockholder, and (d) any material interest of the stockholder in such business.
Notwithstanding anything in the By-Laws to the contrary, no business shall be
conducted at any annual meeting except in accordance with the procedures set
forth in this paragraph. The Chairman of the annual meeting shall, if the facts
warrant, determine and declare to the meeting that business was not properly
brought before the meeting in accordance with the provisions of this paragraph
and if he should so determine, he shall so declare to the meeting and any such
business not properly brought before the meeting shall not be transacted.
(l) PROCEDURE FOR NOMINATION BY STOCKHOLDERS. Nominations of
candidates for election as directors at any meeting of stockholders called for
the election of directors (an "Election Meeting") may be made by the Board of
Directors or by any stockholder entitled to vote at such Election Meeting only
in accordance with the procedures established by this paragraph. Any stockholder
entitled to vote for the election of a director at an Election Meeting may
nominate one or more persons for such election only if written notice at such
stockholder's intent to make such nomination is given, either by personal
delivery or by United States mail postage prepaid, to the Secretary of the
Corporation. Such notice must be received by the secretary at the principal
executive offices of the Corporation not later than the following dates: (1)
with respect to an annual meeting of stockholders, 60 days in advance of such
meeting if such meeting is to be held on a day which is within 30 days preceding
the anniversary of the previous year's annual meeting or 90 days in advance of
such meeting if such, meeting is to be
11
<PAGE> 15
held on or after the anniversary of the previous year's annual meeting; and (2)
with respect to any other annual meeting of stockholders or a special meeting of
stockholders, the close of business on the tenth day following the date of
public disclosure of the date of such meeting is first made. The written notice
shall set forth (a) as to each person whom the stockholder proposes to nominate
for election as director (i) the name, age, business address and residence
address of each nominee proposed in such notice, (ii) the principal occupation
or employment of each such nominee, (iii) the number of shares of capital stock
of the Corporation which are beneficially owned by each such nominee, and (iv)
such other information concerning each such nominee as would be required under
the rules of the United States Securities and Exchange Commission to be set
forth in a proxy statement soliciting proxies for the election of such nominee
as a director (including without limitation, a signed consent of each such
nominee to serve as a director of the Corporation, if elected) and (b) as to the
stockholder giving the notice (i) the name and address, as they appear on the
Corporation's books, of such stockholder and (ii) the number of shares of
capital stock of the Corporation which are beneficially owned by such
stockholder. At the request of the Board of Directors, any person nominated by
the Board of Directors for election an a Director shall furnish to the Secretary
of the Corporation that information required to be set forth in a stockholders'
notice of nomination which pertains to the nominee. No person shall be eligible
for election as a Director of the Corporation unless nominated in accordance
with the procedures set forth in this paragraph. The Chairman of the meeting
shall, if the facts warrant, determine and declare to the meeting that a
nomination was not made in accordance with the
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<PAGE> 16
procedures prescribed by the By-Laws, and if the Chairman should so determine,
the Chairman shall so declare to the meeting and the defective nomination shall
be disregarded.
ARTICLE II
DIRECTORS
1. FUNCTIONS AND DEFINITION.
The business and affairs of the Corporation shall be managed by or under
the direction of the Board of Directors of the Corporation. The use of the
phrase "whole Board" herein refers to the total number of Directors which the
Corporation would have if there were no vacancies.
2. QUALIFICATIONS AND NUMBER.
A Director need not be a stockholder, a citizen of the United States, or a
resident of the State of Delaware. The initial Board of Directors shall consist
of three persons. Thereafter the number of Directors constituting the whole
board shall be at least two and not more than 21. Subject to the provisions of
the Certificate of Incorporation, the number of Directors may be increased or
decreased by action of the Board of Directors; provided, however, that no
decrease in the number of Directors shall have the effect of shortening the term
of any incumbent Director.
3. ELECTION AND TERM.
The first Board of Directors, unless the members thereof shall have been
named in the Certificate of Incorporation, shall be those directors in office as
of the date of the adoption of these Amended and Restated By-Laws and shall hold
office until the first annual meeting of stockholders and until their successors
have been elected and qualified or until their resignation or removal. Any
Director may resign at any time upon written notice to the Corporation.
13
<PAGE> 17
Thereafter, Directors who are elected at an annual meeting of stockholders, and
Directors who are elected in the interim to fill vacancies and newly created
Directorships, shall hold office until the next annual meeting of stockholders
and until their successors have been elected and qualified or until their
resignation or removal. In the interim between annual meetings of stockholders
or of special meetings of stockholders called for the election of Directors
and/or for the removal of one or more Directors and for the filing of any
vacancies in the Board of Directors, including vacancies resulting from the
removal of Directors for cause or without cause, any vacancy in the Board of
Directors may be filled by the vote of a majority of the remaining Directors
then in office, although less than a quorum, or by the sole remaining Director.
4. MEETINGS.
(a) TIME. Regular meetings shall be held at such time as the Board shall
fix. Special meetings may be called upon notice.
(b) FIRST MEETING. The first meeting of each newly elected Board may be
held immediately after each annual meeting of the stockholders at the same place
at which the meeting is held, and no notice of such meeting shall be necessary
to call the meeting, provided a quorum shall be present. In the event such first
meeting is not so held immediately after the annual meeting of the stockholders,
it may be held at such time and place as shall be specified in the notice given
as provided for special meetings of the Board of Directors, or at such time and
place as shall be fixed by the consent in writing of all of the Directors.
14
<PAGE> 18
(c) PLACE. Meetings, both regular and special, shall be held at such place
within or without the State of Delaware as shall be fixed by the Board.
(d) CALL. No call shall be required for regular meetings for which the
time and place have been fixed. Special meetings may be called by or at the
direction of the Chairman of the Board, the President, or of a majority of the
Directors.
(e) NOTICE OR ACTUAL OR CONSTRUCTIVE WAIVER. No notice shall be required
for regular meetings for which the time and place have been fixed. Written, oral
or any other mode of notice of the time and place shall be given for special
meetings at least three days prior to the meeting; notice may be given by
telephone of telefax (in which case it is effective when given) or by mail (in
which case it is effective seventy-two hours after mailing by prepaid first
class mail). The notice of any meeting need not specify the purpose of the
meeting. Any requirement of furnishing a notice shall be waived by any Director
who signs a written waiver of such notice before or after the time stated
therein. Attendance of a Director at a meeting of the Board shall constitute a
waiver of notice of such meeting, except when the Director attends a 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.
(f) QUORUM AND ACTION. A majority of the whole Board shall constitute a
quorum except when a vacancy or vacancies prevents such majority, whereupon a
majority of the Directors in office shall constitute a quorum, provided that
such majority shall constitute at least one-third (1/3) of the whole Board. Any
Director may participate in a meeting of the Board by means of a conference
telephone or similar communications equipment by means of which all
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<PAGE> 19
Directors participating in the meeting can hear each other, and such
participation in a meeting of the Board shall constitute presence in person at
such meeting. A majority of the Directors present, whether or not a quorum is
present, may adjourn a meeting to another time and place. Except as herein
otherwise provided, and except as otherwise provided by the General Corporation
Law, the act of the Board shall be the act by vote of a majority of the
Directors present at a meeting, a quorum being present. The quorum and voting
provisions herein stated shall not be construed as conflicting with any
provisions of the General Corporation Law and these By-Laws which govern a
meeting of Directors held to fill vacancies and newly created Directorships in
the Board.
(g) CHAIRMAN OF THE MEETING. The Chairman of the Board, if any and if
present and acting, shall preside at all meetings. Otherwise, the Vice-Chairman
of the Board, if any and if present and acting, or the President, if present and
acting, or any other Director chosen by the Board, shall preside.
5. REMOVAL OF DIRECTORS.
Any or all of the Directors may be removed only for cause by the
affirmative vote of three-quarters of the entire Board of Directors or by the
affirmative vote of two-thirds of the votes represented by the issued and
outstanding shares of the Corporation entitled to vote at a meeting called for
such purpose.
16
<PAGE> 20
6. COMMITTEES.
The Board of Directors may, by resolution passed by a majority of the
whole Board, designate one or more committees, each committee to consist of one
or more of the Directors of the Corporation. The Board may designate one or more
Directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. Any such committee, to the
extent provided in the resolution of the Board, shall have and may exercise the
powers of the Board of Directors in the management of the business and affairs
of the Corporation, and may authorize the seal of the Corporation to be affixed
to all papers which may require it. In the absence or, disqualification of any
member of any such committee or committees, the members thereof present at any
meeting and not disqualified from voting, whether or not they constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
at the meeting in the place of any such absent or disqualified member.
7. EXECUTIVE COMMITTEE.
(a) APPOINTMENT. The Directors at their meeting held immediately after the
annual meeting of stockholders shall appoint the Chairman of the Board, the
President, and such other members of their body as they shall determine in their
sole discretion as an Executive Committee. During the intervals between the
meetings of the Board of Directors, the Executive Committee shall possess and
may exercise (subject to any regulations which the Directors may from time to
time make) all the powers of the Board of Directors in the management and
direction of the operations of the corporation (except only such acts as must by
law be performed by the Directors themselves) in such manner as the Executive
Committee may deem best for the
17
<PAGE> 21
interests of the corporation in all cases in which specific directions shall not
have been given by the Board of Directors. All action by the Executive Committee
shall be reported to and shall be subject to review by the Board of Directors.
(b) CHAIRMAN. The Board of Directors shall designate one of the members of
the Executive Committee to be its Chairman. The Chairman of the Executive
Committee shall preside at all meetings of the Executive Committee. The Chairman
of the Executive Committee shall perform such other duties as may be designated
by the Board of Directors.
(c) MEETINGS. The Executive Committee shall meet at the office of the
Corporation at such times as they shall by resolution appoint, and may meet at
any other time or place on the call of the Chairman.
(d) NOTICE OF MEETING. Notice of meetings of the Executive Committee shall
be given to each member by the Chairman at least five days before the meeting.
(e) WAIVER OF NOTICE. If any meeting of the Executive Committee at which
all of the members are present, though held without notice, any and all business
may be transacted in the same manner as if due notice had been given.
(f) QUORUM. A majority of the members of the Executive Committee shall
constitute a quorum.
(g) RULES. The Executive Committee may from time to time adopt rules for
its procedures not in conflict with the By-Laws of the Corporation or the
actions taken by the Board of Directors.
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<PAGE> 22
(h) VACANCIES. The Board of Directors shall have the power at any time to
fill vacancies in, change the membership of, or to dissolve the Executive
Committee.
8. ACTION IN WRITING.
Any action required or permitted to be taken at any meeting of the Board
of Directors or any committee thereof may be taken without a meeting if all
members of the Board or committee, as the case may be, consent thereto in
writing, and the writing or writings are filed with the minutes of proceedings
of the Board or committee.
ARTICLE III
OFFICERS
1. EXECUTIVE OFFICERS.
The Board of Directors may elect or appoint a Chairman of the Board of
Directors, a President, one or more Vice Presidents (which may be denominated
with additional descriptive titles), a Secretary, one or more Assistant
Secretaries, a Treasurer, one or more Assistant Treasurers and such other
officers as it may determine. Any number of offices may be held by the same
person.
2. TERM OF OFFICE; REMOVAL.
Unless otherwise provided in the resolution of election or appointment,
each officer shall hold office until the meeting of the Board of Directors
following the next annual meeting of stockholders and until such officer's
successor has been elected and qualified or until the earlier resignation or
removal of such officer. The Board of Directors may at any time remove any
officer for cause or without cause.
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<PAGE> 23
3. AUTHORITY AND DUTIES.
All officers, as between themselves and the Corporation, shall have such
authority and perform such duties in the management of the Corporation as may be
provided in these By-Laws, or, to the extent not so provided, by the Board of
Directors.
4. THE CHAIRMAN OF THE BOARD OF DIRECTORS.
The Chairman of the Board of Directors, if present and acting, shall
preside at all meetings of the Board of Directors, otherwise, the President, if
present, shall preside, or if the President does not so preside, any other
Director chosen by the Board shall preside. The Chairman of the Board of
Directors shall be the chief executive officer of the Corporation.
5. THE PRESIDENT.
The President shall be the chief operating officer of Corporation.
6. VICE PRESIDENTS.
Any Vice President that may have been appointed, in the absence or
disability of the President, shall perform the duties and exercise the powers of
the President, in the order of their seniority, and shall perform such other
duties as the Board of Directors shall prescribe.
7. THE SECRETARY.
The Secretary shall keep in safe custody the seal of the Corporation and
affix it to any instrument when authorized by the Board of Directors, and shall
perform such other duties as may be prescribed by the Board of Directors. The
Secretary (or in such officer's absence, an Assistant Secretary, but if neither
is present another person selected by the Chairman for the
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<PAGE> 24
meeting) shall have the duty to record the proceedings of the meetings of the
stockholders and Directors in a book to be kept for that purpose.
8. THE TREASURER.
The Treasurer shall have the care and custody of the corporate funds, and
other valuable effects, including securities, and shall keep full and accurate
accounts of receipts and disbursements in books belonging to the Corporation and
shall deposit all moneys and other valuable effects in the name and to the
credit of the Corporation in such depositories as may be designated by the Board
of Directors. The Treasurer shall disburse the funds of the Corporation as may
be ordered by the Board, taking proper vouchers for such disbursements, and
shall render to the President and Directors, at the regular meetings of the
Board, or whenever they may require it, an account of all transactions as
Treasurer and of the financial condition of the Corporation. If required by the
Board of Directors, the Treasurer shall give the Corporation a bond for such
term, in such sum and with such surety or sureties as shall be satisfactory to
the Board for the faithful performance of the duties of such office and for the
restoration to the Corporation, in case of such person's death, resignation,
retirement or removal from office, of all books, papers, vouchers, money and
other property of whatever kind in such person's possession or under such
person's control belonging to the Corporation.
21
<PAGE> 25
ARTICLE IV
CORPORATE-SEAL
AND
CORPORATE BOOKS
The corporate seal shall be in such form as the Board of Directors shall
prescribe. The books of the Corporation may be kept within or without the State
of Delaware, at such place or places as the Board of Directors may, from time to
time, determine.
ARTICLE V
FISCAL YEAR
The fiscal year of the Corporation shall be fixed, and shall be subject to
change, by the Board of Directors.
ARTICLE VI
INDEMNITY
(a) Any person who was or is a party or threatened to be made a party to
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Corporation) by reason of the fact that he or she is or was a
Director, officer, employee or agent of the Corporation or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
(including employee benefit plans) (hereinafter an "Indemnitee"), shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the General Corporation Laws as the same exists or may hereafter
be amended (but, in the case of any such amendment, only to the extent
22
<PAGE> 26
that such amendment permits the Corporation to provide broader indemnification
than permitted prior thereto), against expenses (including attorneys fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such Indemnitee in connection with such action, suit or proceeding, if the
Indemnitee acted in good faith and in a manner he or she reasonably believed to
be in or not opposed to the best interests of the Corporation, and with respect
to any criminal action or proceeding, had no reasonable cause to believe such
conduct was unlawful. The termination of the proceeding, whether by judgment,
order, settlement, conviction or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did not
act in good faith and in a manner which he or she reasonably believed to be in
or not opposed to the best interests of the Corporation and, with respect to any
criminal action or proceeding, had reasonable cause to believe such conduct was
unlawful.
(b) Any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
Corporation to procure a judgment in its favor by reason of the fact that he or
she is or was a Director, officer, employee or agent of the Corporation, or is
or was serving at the request of the Corporation as a director, officer,
employee or agent of another Corporation partnership, joint venture, trust or
other enterprise (including employee benefit plans) shall be indemnified and
held harmless by the Corporation to the fullest extent authorized by the General
Corporation Law, as the same exists or may hereafter be amended (but, in the
case of any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification than permitted prior thereto,
against expenses (including attorneys fees) actually and reasonably incurred by
him or
23
<PAGE> 27
her in connection with the defense or settlement of such action or suit if he or
she acted in good faith and in a manner he or she reasonably believed to be in
or not opposed to the best interests of the Corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Court in which such suit or action was
brought, shall determine, upon application, that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which such court
shall deem proper.
(c) All reasonable expenses incurred by or on behalf of the Indemnitee in
connection with any suit, action or proceeding, may be advanced to the
Indemnitee by the Corporation to the extent permitted under the General
Corporation Law.
(d) The rights to indemnification and to advancement of expenses conferred
in this article shall not be exclusive of any other right which any person may
have or hereafter acquire under any statute, the Certificate of Incorporation, a
By-Law of the Corporation, agreement, vote of stockholders or disinterested
Directors or otherwise.
(e) The indemnification and advancement of expenses provided by this
article shall continue as to a person who has ceased to be a Director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such person.
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<PAGE> 28
ARTICLE VII
AMENDMENTS
The By-Laws may be amended, added to, rescinded or repealed by the
unanimous written consent of all Directors or the affirmative vote of a majority
of the entire Board of Directors acting at a regular or special meeting called
by written notice, which written notice shall include notice of the proposed
action to amend the By-Laws, or by the affirmative vote of a majority of votes
represented by the issued and outstanding shares of the Corporation entitled to
vote at a meeting called for such purpose.
25
<PAGE> 1
Exhibit 4.1
FORM OF COMMON STOCK
CERTIFICATE
Cusip 024377103
Incorporated Under the Laws of the State of Delaware
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
_____________________________________
This Certifies that __________________________________ is the owner of ________
__________________ fully paid and non-assessable Shares of the above Corporation
transferable only on the books of the Corporation by the holder hereof in person
or by duly authorized attorney upon surrender of this Certificate properly
endorsed. This certificate and the shares represented hereby are issued and
shall be held subject to all of the provisions of the Corporation's Certificate
of Incorporation and Bylaws, and any amendments thereto, copies to which are on
file at the principal office of the Corporation, to all of which the holder by
acceptance hereof assents. This certificate is not valid until countersigned and
registered by the Transfer Agent and the Registrar.
Witness, the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated__________________________
COUNTERSIGNED AND REGISTERED: ___________________________
AMERICAN STOCK TRANSFER & TRUST CO. CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
_______________________________ ___________________________
AUTHORIZED OFFICER SECRETARY
<PAGE> 2
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
THE CORPORATION WILL FURNISH, WITHOUT CHARGE TO EACH SHAREHOLDER WHO SO
REQUESTS, A FULL STATEMENT OF THE DESIGNATION, RELATIVE RIGHTS, PREFERENCES AND
LIMITATIONS OF EACH CLASS AUTHORIZED TO BE ISSUED, AND A FULL STATEMENT OF THE
DESIGNATION, RELATIVE RIGHTS, PREFERENCES AND LIMITATIONS OF EACH SERIES OF
ANY CLASS OF PREFERRED SHARES AUTHORIZED TO BE ISSUED SO FAR AS THE SAME MAY
HAVE BEEN FIXED AND THE AUTHORITY OF THE BOARD TO DESIGNATE AND FIX THE
RELATIVE RIGHTS, PREFERENCES AND LIMITATIONS OF OTHER SERIES. ANY SUCH REQUEST
SHOULD BE ADDRESSED TO THE SECRETARY OF THE COMPANY, OR TO THE TRANSFER AGENT
AND REGISTRAR NAMED ON THE FACE OF THIS CERTIFICATE.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT - ________ Custodian _________
(Cust) (Minor)
Under Uniform Gifts to Minors
Act ________________________
(State)
Additional abbreviations may also be used though not in the above list.
For value received,______________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
___________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE.
_______________________________________________________________________________
_______________________________________________________________________, Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint_____________________________________________
_______________________________________________________________________________
Attorney to transfer the said stock on the books of the within-named
Corporation with full power of substitution in the premises.
Dated, _________________________________
_______________________________________________________________________________
NOTICE THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT, OR ANY CHANGE WHATEVER
Signature(s) Guaranteed:
_______________________________________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
<PAGE> 1
Exhibit 5.1
[Paul, Hastings, Janofsky & Walker LLP Letterhead]
American Bank Note Holographics, Inc.
399 Executive Boulevard
Elmsford, NY 10523
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
REGISTRATION STATEMENT OF FORM S-1 (File No. 333-51845)
Ladies and Gentlemen:
This opinion is delivered in our capacity as counsel to American Bank Note
Holographics, Inc., a Delaware corporation (the "Company"), in connection with
the Company's registration statement on Form S-1 (the "Registration Statement")
filed with the Securities and Exchange Commission under the Securities Act of
1933, as amended, relating to the registration by the Company of up to
15,681,400 shares of common stock, par value $.01 per share (the "Shares").
In connection with this opinion, we have examined copies or originals of
such documents, resolutions, certificates and instruments of the Company as we
have deemed necessary to form a basis for the opinion hereinafter expressed. In
addition, we have reviewed such other instruments and documents as we have
deemed necessary to form a basis for the opinion hereinafter expressed. In our
examination of the foregoing, we have assumed, without independent
investigation, (i) the genuineness of all signatures, and the authority of all
persons or entities signing all documents examined by us and (ii) the
authenticity of all documents submitted to us as originals and the conformity to
authentic original documents of all copies submitted to us as certified,
conformed or photostatic copies. With regard to certain factual matters, we have
relied, without independent investigation or verification, upon statements and
representations of representatives of the Company.
Based upon and subject to the foregoing, we are of the opinion, as of the
date hereof, that the Shares, when issued and delivered in the manner set forth
in the Registration Statement, will be legally issued, fully paid and
nonassessable.
<PAGE> 2
American Bank Note Holographics, Inc.
July 2, 1998
Page 2
We hereby consent to being named as counsel to the Company in the
Registration Statement, to the references therein to our firm under the caption
"Legal Matters" and to the inclusion of this opinion as an exhibit to the
Registration Statement. In giving this consent, we do not thereby admit that we
are within the category of persons whose consent is required under Section 7 of
the Securities Act of 1933, as amended, or the rules and regulations of the
Commission thereunder.
Very truly yours,
/s/ Paul, Hastings, Janofsky & Walker LLP
<PAGE> 1
Exhibit 10.1
FORM OF
SEPARATION AGREEMENT
BY AND BETWEEN
AMERICAN BANKNOTE CORPORATION
AND
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
DATED AS OF [________ __,] 1998
<PAGE> 2
SEPARATION AGREEMENT
SEPARATION AGREEMENT (this "Agreement"), dated as of the IPO Effective
Date, is entered into by and between Parent and ABNH. Capitalized terms used in
this Agreement and not otherwise defined herein shall have the respective
meanings assigned to them in Section 1.
WHEREAS, the Board of Directors of Parent has determined that it is
appropriate and desirable for Parent to sell for its account all of the shares
of ABNH Common Stock owned by Parent; and
WHEREAS, it is appropriate and desirable to set forth certain
agreements of the parties in connection with the Separation;
NOW, THEREFORE, in consideration of the mutual agreements, provisions
and covenants contained herein, the parties hereto agree as follows:
Section 1. Definitions.
For the purpose of this Agreement the following terms shall have the
following meanings:
"Action" means any demand, action, suit, countersuit, arbitration,
inquiry, proceeding or investigation by or before any federal, state, local,
foreign or international Governmental Authority or any arbitration or mediation
tribunal.
"Affiliate" of any Person means a Person that controls, is controlled
by, or is under common control with such Person. As used herein, "control" of
any Person means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of such Person, whether
through ownership of voting securities or other interests, by contract or
otherwise.
"Agreement" means this Separation Agreement, including any Schedules
hereto.
"Ancillary Agreements" means any and all supplemental and other
agreements and instruments contemplated by this Agreement or entered into in
connection with this Agreement.
"ABNH" means American Bank Note Holographics, Inc., a Delaware
corporation.
"ABNH Common Stock" means the Common Stock, $0.01 par value per share,
of ABNH.
<PAGE> 3
"ABNH Indemnitees" has the meaning set forth in Section 11.3.
"Closing" means the receipt by Parent of the net proceeds of the shares
of ABNH Common Stock sold by it in the IPO in accordance with the terms of the
Underwriting Agreement.
"Closing Date" means the date on which the Closing occurs.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission, including
the members of its staff.
"Environmental Law" means any federal, state, local, foreign or
international statute, ordinance, rule, regulation, code, license, permit,
authorization, approval, consent, common law (including tort and environmental
nuisance law), legal doctrine, order, judgment, decree, injunction, requirement
or agreement with any Governmental Authority, now or hereafter in effect,
relating to health, safety, pollution or the environment (including ambient air,
surface water, groundwater, land surface or subsurface strata) or to emissions,
discharges, releases or threatened releases of any substance currently or at any
subsequent time listed, defined, designated or classified as hazardous, toxic,
waste, radioactive or dangerous, or otherwise regulated, under any of the
foregoing, or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of any such substances,
including the Comprehensive Environmental Response, Compensation and Liability
Act, the Superfund Amendments and Reauthorization Act and the Resource
Conservation and Recovery Act and comparable provisions in state, local, foreign
or international law.
"Environmental Liabilities" means all Liabilities relating to, arising
out of or resulting from any Environmental Law or contract or agreement relating
to environmental, health or safety matters (including all removal, remediation
or cleanup costs, investigatory costs, governmental response costs, natural
resources damages, property damages, personal injury damages, costs of
compliance with any settlement, judgment or other determination of Liability and
indemnity, contribution or similar obligations) and all costs and expenses
(including allocated costs of in-house counsel and other personnel), interest,
fines, penalties or other monetary sanctions in connection with such
liabilities.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
together with the rules and regulations promulgated under the Exchange Act.
"GAAP" means generally accepted accounting principles.
-2-
<PAGE> 4
"Governmental Authority" shall mean any federal, state, local, foreign
or international court, government, department, commission, board, bureau,
agency, official or other regulatory, administrative or governmental authority.
"Indemnifying Party" has the meaning set forth in Section 11.4.
"Indemnitee" has the meaning set forth in Section 11.4.
"Indemnity Payment" has the meaning set forth in Section 11.4.
"Information" means information, whether or not patentable or
copyrightable, in written, oral, electronic or other tangible or intangible
forms, stored in any medium, including studies, reports, records, books,
contracts, instruments, surveys, discoveries, ideas, concepts, know-how,
techniques, designs, specifications, drawings, blueprints, diagrams, models,
prototypes, samples, flow charts, data, computer data, disks, diskettes, tapes,
computer programs or other software, marketing plans, customer names,
communications by or to attorneys (including attorney-client privileged
communications), memos and other materials prepared by attorneys or under their
direction (including attorney work product), and other technical, financial,
employee or business information or data.
"Insurance Proceeds" means those monies:
(a) received by an insured from an insurance carrier;
(b) paid by an insurance carrier on behalf of the insured; or
(c) received (including by way of set-off) from any third party in
the nature of insurance, contribution or indemnification in respect of any
Liability; in any such case net of any applicable premium adjustments (including
reserves and retrospectively rated premium adjustments) and net of any costs or
expenses (including allocated costs of in-house counsel and other personnel)
incurred in the collection of proceeds.
"IPO" means the public offering of shares of ABNH Common Stock pursuant
to the IPO Registration Statement.
"IPO Effective Date" means [_____ __], 1998, which is the date on which
the IPO Registration Statement was declared effective by the Commission.
"IPO Registration Statement" means the registration statement,
Registration No. 333-51845, on Form S-1 filed under the Securities Act, pursuant
to which the ABNH Common Stock to be sold in the IPO has been registered.
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"Liabilities" means any and all losses, claims, charges, debts,
demands, actions, causes of action, suits, damages, obligations, costs and
expenses, including those arising under any law, rule, regulation, Action,
threatened or contemplated Action (including the costs and expenses of demands,
assessments, judgments, settlements and compromises relating thereto and
attorneys' fees and any and all costs and expenses (including allocated costs of
in-house counsel and other personnel) whatsoever reasonably incurred in
investigating, preparing or defending against any such Actions or threatened or
contemplated Actions), order or consent decree of any Governmental Authority or
any award of any arbitrator or mediator of any kind.
"Parent" means American Banknote Corporation, a Delaware corporation.
"Parent Group" means Parent and each Person (other than ABNH) that is
an Affiliate of Parent immediately after the Closing Date.
"Parent Indemnitees" has the meaning set forth in Section 11.2.
"Person" means an individual, a general or limited partnership, a
corporation, a trust, a joint venture, an unincorporated organization, a limited
liability entity, any other entity and any Governmental Authority.
"Prime Rate" means the rate which The Chase Manhattan Bank (or any
successor or other major money center commercial bank agreed to by the parties)
announces from time to time as its prime lending rate, as in effect from time to
time.
"Prospectus" means each preliminary, final or supplemental prospectus
forming a part of the IPO Registration Statement.
"Securities Act" means the Securities Act of 1933, as amended, together
with the rules and regulations promulgated under the Securities Act.
"Separation" means the transactions, arrangements and agreements
embodied in this Agreement entered into by the parties in preparation for the
sale by Parent of all ABNH Common Stock held by Parent.
"Subsidiary" of any Person means any corporation or other organization
whether incorporated or unincorporated of which at least a majority of the
securities or interests having by the terms thereof ordinary voting power to
elect at least a majority of the board of directors or others performing similar
functions with respect to such corporation or other organization is directly or
indirectly owned or controlled by such Person or
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by any one or more of its Subsidiaries, or by such Person and one or more of its
Subsidiaries; provided, however that no Person that is not directly or
indirectly wholly owned by any other Person shall be a Subsidiary of such other
Person unless such other Person controls, or has the right, power or ability to
control, that Person.
"Tax" or "Taxes" means all taxes, charges, fees, levies or other
assessments, including, without limitation, income, gross receipts, excise,
property, sales, withholding, social security, occupations, use, service,
service use, license, payroll, franchise, transfer and recording taxes, fees and
charges, imposed by the United States, or any state, local or foreign government
or subdivision or agency thereof, whether computed on a separate, consolidated,
unitary, combined or any other basis; and such term shall include any interest,
fines, penalties or additional amounts attributable to or imposed on or with
respect to any such taxes, charges, fees, levies or other assessments.
"Third Party Claim" has the meaning set forth in Section 11.5.
"Underwriters" means the managing underwriters for the IPO.
"Underwriting Agreement" means the underwriting agreement entered into
among Parent, ABNH and the Underwriters with respect to the IPO.
Section 2. Effect of Agreement. This Agreement is being executed and
delivered on the IPO Effective Date to memorialize actions that have been taken
by the parties prior to the IPO Effective Date in connection with the
Separation, and to govern the conduct of the parties subsequent to the IPO
Effective Date as to the matters addressed in this Agreement. If the Closing
does not occur, this Agreement shall terminate.
Section 3. Closing Date Unrestricted Cash. The parties acknowledge and
agree that, as of the Closing Date, ABNH's unrestricted cash on hand is not
likely to exceed a nominal amount, and that there is no requirement that Parent
take any action to cause ABNH's unrestricted cash on hand to be any particular
amount. Prior to the Closing Date, Parent shall be entitled to all unrestricted
cash of ABNH.
Section 4. Certain Tax Matters.
4.1 Consolidated, Combined and Unitary Income Tax Returns. Parent will
include the income of ABNH (including any deferred income required to be
recognized under Treasury
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Regulation Sections 1.1502-13 and any excess loss account taken into income
under Treasury Regulation Sections 1.1502-19) on the Parent consolidated federal
income tax returns (and on any state, local and foreign income tax returns filed
by Parent on a consolidated, combined or unitary basis) for all periods that end
prior to or include the Closing Date and will pay all Taxes assessed, and retain
for its own account any refunds received, with respect to such income tax
returns, provided that ABNH shall, no later than 10 days following receipt of
notice from Parent requesting such payment, pay to Parent the amount of any
Taxes to the extent incurred or treated as being incurred by ABNH or arising
with respect to the activities of ABNH. ABNH will furnish all information
reasonably required by Parent for inclusion in Parent' consolidated, combined or
unitary income tax returns in accordance with ABNH's past custom and practice.
Parent will allow ABNH an opportunity to review and comment on such income tax
returns (including any amended returns) to the extent they relate to ABNH. ABNH
will include its income on its separate income tax returns for all taxable
periods beginning after the Closing Date. The income of ABNH will be apportioned
to the period up to and including the Closing Date and the period after the
Closing Date by closing the books of ABNH as of the end of the Closing Date,
unless Parent and ABNH elect ratable allocation pursuant to Treasury Regulation
Sections 1.1502-76(b)(2)(ii). ABNH shall assign and pay over to Parent all
refunds of Taxes with respect to any period ending on or before the Closing
Date, or with respect to which Parent has agreed to indemnify ABNH under Section
11.3(iii). For all purposes of this Section and Sections 4.3, 11.2 and 11.3,
Taxes shall be treated as incurred by ABNH, whether or not actually assessed or
paid, if and to the extent such Taxes would be incurred and payable by ABNH if
ABNH filed its returns on a separate company basis.
4.2 Separate Tax Returns. For all periods following the Closing Date,
and for all periods ending prior to or on the Closing Date with respect to
state, local and foreign income and other tax returns not filed by Parent and
ABNH on a consolidated, combined or unitary basis, Parent and ABNH will file
their tax returns for state, local and foreign income tax purposes and all other
tax returns on a separate basis and, subject to Sections 11.2 and 11.3, shall be
separately responsible for all Taxes assessed with respect to such returns.
4.3 Audits. Parent will allow ABNH and its counsel to participate at
ABNH's own expense in any audits of the federal, state, local or foreign
consolidated, combined or unitary income tax returns of Parent to the extent
that such returns relate to ABNH. ABNH shall indemnify Parent for attorneys'
fees and any and all costs and expenses (including allocated costs of in-house
counsel and other personnel) whatsoever reasonably incurred in connection with
any such audit to the extent such audit relates to Taxes incurred by ABNH or
arising with respect to the activities of ABNH. Parent will not settle any such
audit in a manner that would adversely affect ABNH after the Closing Date,
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<PAGE> 8
unless such settlement would be reasonable in the case of a person that owned
ABNH both before and after the Closing Date.
4.4 Post-Closing Elections. At Parent's request, ABNH will make or join
with Parent in making any election for Tax purposes if the making of such
election does not have a material adverse impact on ABNH for any taxable period
after the Closing Date.
4.5 Termination of Other Tax Sharing Agreements. Any Tax sharing or
allocation agreements between Parent and ABNH other than this Agreement shall
terminate on the Closing Date.
Section 5. Insurance Matters.
5.1 New Policies. On or prior to the date hereof, ABNH obtained binders
for such new business insurance policies as it deems necessary and proper for
the conduct of its business, which policies by their terms became or become
effective no later than the Closing Date. ABNH is responsible for paying all
premiums required under such policies and, to the extent any such premiums
became due prior to the IPO Effective Date, ABNH has paid such premiums.
5.2 Tail Coverages. ABNH is or has been a named insured under various
blanket business insurance policies owned by Parent (the "Parent Blanket
Policies"). Parent has made available to ABNH the opportunity to purchase
extended discovery period coverage for the benefit of ABNH under the Parent
Blanket Policies, and ABNH has purchased such extended discovery period
coverages as it deems necessary and proper for the conduct of its business.
5.3 Refunds and Adjustments, etc. The parties acknowledge that certain
of the premiums paid by Parent under the Parent Blanket Policies are subject to
reduction after the applicable insurer audits the related claims history.
Refunds reflecting any such reductions shall be solely for the account of
Parent, and ABNH shall have no claim with respect thereto. To the extent that
ABNH receives any such refund, ABNH shall immediately pay it over to Parent.
ABNH shall indemnify Parent for the full amount of any retroactive premium
adjustment or similar charge, with respect to workers' compensation or other
insurance, arising out of the activities of ABNH. Any retroactive adjustments
for ABNH from prior years shall be paid by ABNH.
5.4 Workers' Compensation. Effective as of Closing Date (the "WC Switch
Date"), ABNH obtained such workers' compensation insurance arrangements as it
deems necessary and proper for the conduct of its business, and ABNH shall be
solely responsible for all workers' compensation claims of ABNH employees
incurred after the WC Switch Date.
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Section 6. Lien and Guaranty Releases. It is the parties' intention
that, from and after the Closing Date, (a) no assets (including, without
limitation, cash balances in bank accounts and rights as lessee) or capital
stock of ABNH will be subject to any lien, security interest, mortgage or other
encumbrance relating to any indebtedness of Parent or of any member of the
Parent Group, and ABNH will have no obligation, as guarantor or otherwise, for
any indebtedness of Parent or of any member of the Parent Group, and (b) no
assets (including, without limitation, cash balances in bank accounts and rights
as lessee) or capital stock of Parent will be subject to any lien, security
interest, mortgage or other encumbrance relating to any indebtedness of ABNH,
and Parent will have no obligation, as guarantor or otherwise, for any
indebtedness of ABNH. If, after the Closing Date, any lien or guaranty is
discovered that encumbers any asset or capital stock of ABNH, or under which
ABNH has any obligation, and that relates to any indebtedness of Parent or of
any member of the Parent Group, Parent shall take all actions that shall be
necessary to obtain the release of such lien or guaranty. If, after the Closing
Date, any lien or guaranty is discovered that encumbers any asset or capital
stock of Parent, or under which Parent has any obligation, and that relates to
any indebtedness of ABNH, ABNH shall take all actions that shall be necessary to
obtain the release of such lien or guaranty.
Section 7. Asset Transfer. As of the Closing Date, (a) Parent shall
execute and deliver to ABNH a quitclaim bill of sale, transferring to ABNH any
interest Parent might have in any of the assets used by ABNH in the conduct of
its business and (b) ABNH shall execute and deliver to Parent a quitclaim deed,
transferring to Parent any interest ABNH might have in any of the assets used by
Parent in the conduct of its business which are not necessary for the conduct of
ABNH's business.
Section 8. Bank Accounts/Cash Management. Prior to the IPO Effective
Date, ABNH has established such bank accounts as it deems to be necessary to
conduct its business (and/or, with the assistance of Parent, has amended the
authorizations relating to mutually agreed existing bank accounts so that they
are controlled exclusively by ABNH personnel), and, where applicable, all
authorizations, standing wire instructions and the like relating to ABNH's
participation in Parent's cash management system have been terminated.
Section 9. Employee Benefit Plans. Simultaneously with the execution of
this Agreement, ABNH and Parent have executed the Employee Benefits Allocation
Agreement attached as Schedule 13 hereto, which agreement constitutes the
agreement between ABNH and Parent with respect to employee benefit aspects of
the Separation.
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Section 10. Termination of Agreements. Except for this Agreement and
any Ancillary Agreements, in furtherance of the Separation, ABNH and Parent
hereby terminate any and all agreements, arrangements, commitments or
understandings, whether or not in writing, between or among ABNH, on the one
hand, and Parent and/or any member of the Parent Group, on the other hand,
effective as of the Closing Date.
Section 11. Mutual Releases; Indemnification.
11.1 Release of Pre-Closing Claims. (a) Except as provided in Section
11.1(c), effective as of the Closing Date, ABNH does, for itself and its
successors and assigns, remise, release and forever discharge Parent, the
members of the Parent Group, their respective Affiliates (other than ABNH),
successors and assigns, and all Persons who at any time prior to the Closing
Date have been shareholders, directors, officers, agents or employees of any
member of the Parent Group (in each case, in their respective capacities as
such), and their respective heirs, executors, administrators, successors and
assigns, from any and all Liabilities to ABNH, whether at law or in equity
(including any right of contribution), whether arising under any contract or
agreement, by operation of law or otherwise, existing or arising from any acts
or events occurring or failing to occur or alleged to have occurred or to have
failed to occur or any conditions existing or alleged to have existed on or
before the Closing Date.
(b) Except as provided in Section 11.1(c), effective as of the Closing
Date, Parent does, for itself and each other member of the Parent Group, their
respective Affiliates (other than ABNH), successors and assigns, remise, release
and forever discharge ABNH, and all Persons who at any time prior to the Closing
Date have been shareholders, directors, officers, agents or employees of ABNH
(in each case, in their respective capacities as such), and their respective
heirs, executors, administrators, successors and assigns, from any and all
Liabilities to Parent or any of the Parent Group, whether at law or in equity
(including any right of contribution), whether arising under any contract or
agreement, by operation of law or otherwise, existing or arising from any acts
or events occurring or failing to occur or alleged to have occurred or to have
failed to occur or any conditions existing or alleged to have existed on or
before the Closing Date, except to the extent of such product warranty
obligations or other Liabilities, if any, as may arise out of the provision of
goods by ABNH to Parent or other members of the Parent Group or their respective
Affiliates which are or have been customers of ABNH, which shall not be subject
to or affected by the foregoing release.
(c) Nothing contained in Section 11.1(a) or (b) shall impair any
obligation under this Agreement or any Ancillary
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Agreement or any right of any Person to enforce this Agreement or any Ancillary
Agreement.
11.2 Indemnification by ABNH. Except as provided in Section 11.4, ABNH
shall indemnify, defend and hold harmless Parent, each member of the Parent
Group and each of their respective directors, officers, agents and employees,
and each of the heirs, executors, successors and assigns of any of the foregoing
(collectively, the "Parent Indemnitees"), from and against any and all
Liabilities of the Parent Indemnitees relating to, arising out of or resulting
from any of the following items (without duplication):
(i) the IPO, the conduct by ABNH of its business, whether
before or after the Closing Date, including as a result of guarantees
by Parent of any obligations of ABNH, and the purchase of any goods or
services from or through Parent prior to the Closing;
(ii) any breach by ABNH of this Agreement or any Ancillary
Agreement;
(iii) Taxes incurred by ABNH (including any amounts assessed
by a federal, state or local taxing authority), or arising with respect
to the activities of, ABNH, with respect to any and all periods,
whether ending before, on or after the Closing Date; and
(iv) the IPO, provided that such indemnification will be
subordinate to any indemnity provided by ABNH to the Underwriters in
connection with the IPO pursuant to the Underwriting Agreement, among
ABNH, Parent and the Underwriters listed on Schedule A thereto, and
no amount shall be paid pursuant to such indemnification until any
amount which is then payable under the Underwriting Agreement is
paid in full.
11.3 Indemnification by Parent. Parent shall indemnify, defend and hold
harmless ABNH, and each of its directors, officers, agents and employees, and
each of the heirs, executors, successors and assigns of any of the foregoing
(collectively, the "ABNH Indemnitees"), from and against any and all Liabilities
of the ABNH Indemnitees relating to, arising out of or resulting from any of the
following items (without duplication):
(i) the conduct by Parent or any member of the Parent Group,
of their respective businesses at any time, including as a result of
guarantees by ABNH of any obligations of Parent or any member of the
Parent Group;
(ii) any breach by Parent or any member of the Parent Group of
this Agreement or any Ancillary Agreement; and
(iii) Taxes incurred by, or arising with respect to the
activities of, Parent or any member of the Parent Group, other than
Taxes incurred by, or arising with respect to the activities of, ABNH,
during or with respect to any and all periods ending before, on or
after the Closing Date.
11.4 Indemnification Obligations Net of Insurance Proceeds and Other
Amounts. The parties intend that any Liability subject to indemnification or
reimbursement pursuant to this Section 11 will be net of Insurance Proceeds.
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11.5 Procedures for Indemnification of Third Party Claims. (a) If an
Indemnitee shall receive notice or otherwise learn of the assertion by a Person
of any claim or of the commencement by any such Person of any Action
(collectively, a "Third Party Claim") with respect to which an Indemnifying
Party may be obligated to provide indemnification to such Indemnitee pursuant to
Section 11.2 or 11.3, or any other Section of this Agreement or any Ancillary
Agreement, such Indemnitee shall give such Indemnifying Party written notice
within 20 days after becoming aware of such Third Party Claim. Any such notice
shall describe the Third Party Claim in reasonable detail. Notwithstanding the
foregoing, the failure of any Indemnitee or other Person to give notice as
provided in this Section 11.5(a) shall not relieve the related Indemnifying
Party of its obligations under this Section 11, except to the extent that such
Indemnifying Party is actually prejudiced by such failure to give notice.
(b) An Indemnifying Party may elect to defend (or, with respect to a
Third partly Claim relating to Taxes to which Section 11.2(iii) applies,
participate), and to seek to settle or compromise, at such Indemnifying Party's
own expense and by such Indemnifying Party's own counsel, any Third Party Claim.
Within 30 days after the receipt of notice from an Indemnitee in accordance with
Section 11.5(a) (or sooner, if the nature of such Third Party Claim so
requires), the Indemnifying Party shall notify the Indemnitee whether the
Indemnifying Party will assume responsibility for defending such Third Party
Claim.
(c) If an Indemnifying Party elects not to assume responsibility for
defending a Third Party Claim, or fails to notify an Indemnitee of its election
as provided in Section 11.5(d), such Indemnitee may defend such Third Party
Claim at the cost and expense (including allocated costs of in-house counsel and
other personnel) of the Indemnifying Party.
(d) Unless the Indemnifying Party has failed to assume the defense of
the Third Party Claim in accordance with the terms of this Agreement, no
Indemnitee may settle or compromise any Third Party Claim without the consent of
the Indemnifying Party.
(e) No Indemnifying Party shall consent to entry of any judgment or
enter into any settlement of the Third Party Claim without the consent of the
Indemnitee if the effect thereof is to permit any injunction, declaratory
judgment, other order or other nonmonetary relief to be entered, directly or
indirectly, against any Indemnitee.
11.6 Additional Matters. (a) Any claim on account of a Liability that
does not result from a Third Party Claim shall be asserted by written notice
given by the Indemnitee to the related Indemnifying Party. Such Indemnifying
Party shall have a period of 30 days after the receipt of such notice within
which to respond. If such Indemnifying Party does not respond within
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such 30-day period, such Indemnifying Party shall be deemed to have refused to
accept responsibility to make payment. If such Indemnifying Party does not
respond within such 30-day period or rejects such claim in whole or in part,
such Indemnitee shall be free to pursue such remedies as may be available to
such party as contemplated by this Agreement and any Ancillary Agreement.
(b) In the event of payment by or on behalf of any Indemnifying Party
to any Indemnitee in connection with any Third Party Claim, such Indemnifying
Party shall be subrogated to and shall stand in the place of such Indemnitee as
to any events or circumstances in respect of which such Indemnitee may have any
right, defense or claim relating to such Third Party Claim against any claimant
or plaintiff asserting such Third Party Claim or against any other person. Such
Indemnitee shall cooperate with such Indemnifying Party in a reasonable manner,
and at the cost and expense (including allocated costs of in-house counsel and
other personnel) of such Indemnifying Party, in prosecuting any subrogated
right, defense or claim.
11.7 Remedies Cumulative. The remedies provided in this Section 11
shall be cumulative and shall not preclude assertion by any Indemnitee of any
other rights or the seeking of any and all other remedies against any
Indemnifying Party.
11.8 Survival of Indemnities. The rights and obligations of each of
Parent and ABNH and their respective Indemnitees under this Section 11 shall
survive the Closing for a period of three years or, in the case of any Tax, for
the longer of such period or the period of the applicable statute of limitations
(including any period for which such statute is tolled or waived by agreement or
otherwise).
Section 12. Certain Business Matters. (a) Neither ABNH, Parent nor any
member of the Parent Group shall have any duty to refrain from (i) engaging in
the same or similar activities or lines of business as any other of such
Persons, (ii) doing business with any potential or actual supplier or customer
of any other of such Persons, or (iii) engaging in, or refraining from, any
other activities relating to any of the potential or actual suppliers or
customers of any other of such Persons. Until the first anniversary of the
Closing Date, ABNH shall not solicit any employee of Parent or of any member of
the Parent Group to become an employee of ABNH, and neither Parent nor any
member of the Parent Group shall solicit any employee of ABNH to become an
employee of Parent or of any member of the Parent Group.
Section 13. Late Payments. Any amount not paid when due pursuant to
this Agreement or any Ancillary Agreement shall accrue interest at a rate per
annum equal to the Prime Rate plus 1%.
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Section 14. Exchange of Information. Each of Parent and ABNH agrees to
provide, or cause to be provided, to each other, at any time after the Closing
Date, as soon as reasonably practicable after written request, any Information
in its possession or under its control that the requesting party reasonably
needs (i) to comply with reporting, disclosure, filing or other requirements
imposed on the requesting party (including under applicable securities or tax
laws) by a Governmental Authority having jurisdiction over the requesting party,
(ii) for use in any other judicial, regulatory, administrative, tax or other
proceeding or in order to satisfy audit, accounting, claims, regulatory,
litigation, tax or other similar requirements, or (iii) to comply with its
obligations under this Agreement or any Ancillary Agreement; provided, however,
that if any party determines that any such provision of Information could be
commercially detrimental, violate any law or agreement, or waive any
attorney-client privilege, the parties shall take all reasonable measures to
permit the compliance with such obligations in a manner that avoids any such
harm or consequence.
Section 15. Confidentiality. Each of Parent and ABNH agrees to hold,
and to cause its respective directors, officers, employees, agents, accountants,
counsel, other advisors and representatives, and Subsidiaries to hold, in strict
confidence, with at least the same degree of care that applies to Parent's
confidential and proprietary information pursuant to policies in effect as of
the Closing Date, all Information concerning the other that is either in its
possession (including Information in its possession prior to the Closing Date)
or furnished by such other or its respective directors, officers, employees,
agents, accountants, counsel and other advisors and representatives at any time
pursuant to this Agreement, any Ancillary Agreement or otherwise, and shall not
use any such Information other than for such purposes as contemplated by such
agreements, except, in each case, to the extent that such Information has been
(i) in the public domain through no fault of such party or any of its directors,
officers, employees, agents, accountants, counsel and other advisors and
representatives, (ii) later lawfully acquired from other sources by such party,
which sources are not themselves bound by a confidentiality obligation, or (iii)
independently generated without reference to any proprietary or confidential
Information of the other party. In the event that any party either determines on
the advice of its counsel that it is required to disclose any Information
pursuant to applicable law or receives any demand under lawful process or from
any Governmental Authority to disclose or provide Information of any other party
that is subject to the confidentiality provisions of this Agreement, such party
shall notify the other party prior to disclosing or providing such Information
and shall cooperate at the expense of the requesting party in seeking any
reasonable protective arrangements requested by such other party. Subject to the
foregoing, the Person that received such request may
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subsequently disclose or provide Information to the extent required by such law
(as so advised by counsel) or by lawful process or such Governmental Authority.
Section 16. Further Assurances. In addition to the actions specifically
provided for elsewhere in this Agreement, each of the parties hereto shall use
its reasonable best efforts, prior to, on and after the Closing Date, to take,
or cause to be taken, all actions, and to do, or cause to be done, all things,
reasonably necessary, proper or advisable under applicable laws, regulations and
agreements to consummate and make effective the transactions contemplated by
this Agreement and the Ancillary Agreements.
Section 17. Miscellaneous.
17.1 Counterparts; Entire Agreement. (a) This Agreement and each
Ancillary Agreement may be executed in one or more counterparts, all of which
shall be considered one and the same agreement, and shall become effective when
one or more counterparts have been signed by each of the parties and delivered
to the other party.
(b) This Agreement, any Ancillary Agreements and the Schedules hereto
and thereto contain the entire agreement between the parties with respect to the
subject matter hereof, supersede all previous agreements, negotiations,
discussions, writings, understandings, commitments and conversations with
respect to such subject matter and there are no agreements or understandings
between the parties other than those set forth or referred to herein or therein.
17.2 Governing Law. This Agreement and each Ancillary Agreement shall
be governed by and construed and interpreted in accordance with the laws of the
State of New York, irrespective of the choice of laws principles of the State of
New York, as to all matters, including matters of validity, construction,
effect, enforceability, performance and remedies.
17.3 Assignability. This Agreement and each Ancillary Agreement shall
be binding upon and inure to the benefit of the parties to such agreements,
respectively, and their respective successors and assigns; provided, however,
that no party may assign its respective rights or delegate its respective
obligations under this Agreement or any Ancillary Agreement without the express
prior written consent of the other parties.
17.4 Third Party Beneficiaries. Except for the indemnification rights
under this Agreement of any Parent Indemnitee or ABNH Indemnitee in their
respective capacities as such, (a) the provisions of this Agreement and each
Ancillary Agreement are solely for the benefit of the parties and are not
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intended to confer upon any Person except the parties any rights or remedies
under this Agreement, and (b) there are no third party beneficiaries of this
Agreement or any Ancillary Agreement and neither this Agreement nor any
Ancillary Agreement shall provide any third person with any remedy, claim,
liability, reimbursement, claim of action or other right in excess of those
existing without reference to this Agreement or any Ancillary Agreement.
17.5 Notices. All notices or other communications under this Agreement
or any Ancillary Agreement shall be in writing and shall be deemed to be duly
given when (a) delivered in person or (b) deposited in the United States mail or
private express mail, postage prepaid, addressed as follows:
If to Parent, to: Secretary
American Banknote Corporation
200 Park Avenue
New York, NY 10166
If to ABNH, to: Secretary
American Bank Note
Holographics, Inc.
399 Executive Boulevard
Elmsford, NY 10523
Any party may, by notice to the other party, change the address to which such
notices are to be given.
17.6 Severability. If any provision of this Agreement or any Ancillary
Agreement or its application to any Person or circumstance is determined by a
court of competent jurisdiction to be invalid, void or unenforceable, the
remaining provisions of such agreement, or the application of such provision to
Persons or circumstances or in jurisdictions other than those as to which it has
been held invalid or unenforceable, shall remain in full force and effect and
shall in no way be affected, impaired or invalidated, so long as the economic or
legal substance of the transactions contemplated by such agreement, as the case
may be, is not affected in any manner adverse to any party. Upon such
determination, the parties shall negotiate in good faith in an effort to agree
upon such a suitable and equitable provision to effect the original intent of
the parties.
17.7 Force Majeure. No party shall be deemed in default of this
Agreement or any Ancillary Agreement to the extent that any delay or failure in
the performance of its obligations under this Agreement or any Ancillary
Agreement results from any cause beyond its reasonable control and without its
fault or negligence, such as acts of God, acts of civil or military authority,
embargoes, epidemics, war, riots, insurrections, fires, explosions, earthquakes,
floods, unusually severe weather conditions, labor problems or unavailability of
parts, or, in the case of computer systems, any failure in
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<PAGE> 17
electrical or air conditioning equipment. In the event of any such excused
delay, the time for performance shall be extended for a period equal to the time
lost by reason of the delay.
17.8 Publicity; Expenses. Prior to the Closing Date, each of ABNH and
Parent shall consult with each other prior to issuing any press releases or
otherwise making public statements with respect to the IPO, the Separation or
any of the other transactions contemplated hereby. All expenses of ABNH and
Parent incurred in connection with the implementation of the IPO and the
Separation shall be for the account of ABNH, except for expenses incurred by
Parent in connection with the Separation and Underwriters' commission for the
shares of ABNH Common Stock to be sold in the IPO which shall be for the account
of Parent. Notwithstanding the provisions of the foregoing sentence and of
Section 11.2(i), Parent shall pay all SEC filing fees and legal, accounting,
printing and other similar out-of-pocket expenses directly relating to ABNH's
participation in the completion of the IPO; provided however, that in the event
the Underwriters exercise their over-allotment option to purchase Common Stock
from ABNH, such expenses shall be allocated in such amounts and percentages as
the parties shall agree.
17.9 Waivers of Default. Waiver by any party of any default by the
other party of any provision of this Agreement or any Ancillary Agreement shall
not be deemed a waiver by the waiving party of any subsequent or other default,
nor shall it prejudice the rights of the other party.
17.10 Specific Performance. In the event of any actual or threatened
default in, or breach of, any of the terms, conditions and provisions of this
Agreement or any Ancillary Agreement, the party or parties who are or are to be
aggrieved shall have the right to specific performance and injunctive or other
equitable relief of its rights under this Agreement or such Ancillary Agreement,
in addition to any and all other rights and remedies at law or in equity, and
all such rights and remedies shall be cumulative. The parties agree that the
remedies at law for any breach or threatened breach, including monetary damages,
are inadequate compensation for any loss and that any defense in any action for
specific performance that a remedy at law would be adequate is waived. Any
requirements for the securing or posting of any bond with such remedy are
waived.
17.11 Amendments. No provision of this Agreement or any Ancillary
Agreement shall be deemed waived, amended, supplemented or modified by any
party, unless such waiver, amendment, supplement or modification is in writing
and signed by the authorized representative of the party against whom it is
sought to enforce such waiver, amendment, supplement or modification.
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<PAGE> 18
IN WITNESS WHEREOF, each of the parties has caused this Separation
Agreement to be duly executed by its duly authorized officer as of the day and
year first written above.
AMERICAN BANKNOTE CORPORATION
By:_______________________________
Name:_____________________________
Title:____________________________
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
By:_______________________________
Name:_____________________________
Title:____________________________
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<PAGE> 1
Exhibit 10.2
FORM OF LICENSE AGREEMENT
LICENSE AGREEMENT (this "Agreement"), dated as of
____________, 1998, is between American Banknote Corporation ("Parent"), a
Delaware corporation, and American Bank Note Holographics, Inc. ("ABNH"), a
Delaware corporation.
WHEREAS, Parent, a public company whose common shares are
traded on the New York Stock Exchange, directly owns 100% of the issued and
outstanding shares of common stock of ABNH;
WHEREAS, the Board of Directors of Parent has determined that
it is appropriate and desirable for Parent to sell for its account by means of
an initial public offering by ABNH all of the shares of ABNH common stock owned
by Parent (the "IPO");
WHEREAS, Parent and ABNH are parties to a Separation
Agreement, dated as of [ ], 1998 (the "Separation Agreement"), which sets forth
certain agreements between the parties in connection with the Separation (as
defined in the Separation Agreement); and
WHEREAS, Parent and ABNH have determined that is necessary and
desirable to make certain agreements regarding intellectual property owned by
the parties together or singly for the continued operation of their respective
businesses;
NOW, THEREFORE, in consideration of the mutual agreements,
provisions and covenants contained herein, the parties hereto agree as follows:
1. Capitalized terms used and not otherwise defined herein will have
the respective meanings set forth in the Separation Agreement.
2. For a term commencing on the Closing Date and continuing for a
period of one year thereafter (the "Agreement Term"), Parent grants to ABNH the
non-exclusive right to use of the "American Bank Note" name in connection with
the business currently conducted by ABNH and any other business conducted by
ABNH within the holography industry. An annual fee of $1.00 per year will be
payable at the commencement of the Agreement Term from ABNH to Parent. The
Agreement Term will be automatically renewed for consecutive one-year periods at
the end of each Agreement Term.
<PAGE> 2
3. ABNH agrees not to use the name "American Bank Note" or any
variation thereof in connection with any company, business, enterprise or
venture outside of the holography industry, and not to sublicense such name to
any third parties.
4. Parent hereby grants to ABNH a perpetual, paid-in-full, royalty-free
license for any patents, trademarks or proprietary technology used by ABNH in
its business, and ABNH hereby grants to Parent and each of its subsidiaries a
perpetual, paid-in-full royalty-free license for any patents, trademarks or
proprietary technology used by Parent or any of its subsidiaries in their
respective businesses. Each such license is granted by the granting party in
consideration of the grant of license from the other party, notwithstanding that
the term of any patent rights, trademark rights or proprietary technology
granted by one party may not correspond to the term of any patent rights,
trademark rights or proprietary technology rights being granted by the other
party.
5. This Agreement shall automatically be terminated in the event that
the Separation Agreement is terminated and the IPO abandoned prior to the
Closing Date. In the event of such termination, neither party shall have any
liability of any kind to the other party.
6. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York, without regard to the principles of conflicts
of laws thereof. This Agreement may not be modified or amended except by an
agreement in writing signed by the parties hereto. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the parties
and their respective successors and permitted assigns. This Agreement may not be
assigned by either party without the written consent of the other party. This
Agreement, and the Separation Agreement and the other agreements and documents
referred to in the Separation Agreement, constitute the entire agreement between
the parties with respect to the subject matter hereof and shall supersede all
previous negotiations, commitments and writings with respect to such subject
matter. All notices and other communications hereunder shall be in writing and
shall be delivered by hand or mailed by registered or certified mail (return
receipt requested) to the parties at the following addresses (or at such other
address for either party as such party may specify by like notice to the other
party) and shall be deemed given on the date on which such notice is actually
received:
If to Parent, to: Secretary
American Banknote Corporation
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<PAGE> 3
200 Park Avenue
New York, NY 10166
-3-
<PAGE> 4
If to ABNH, to: Secretary
American Bank Note
Holographics, Inc.
399 Executive Boulevard
Elmsford, NY 10523
IN WITNESS WHEREOF, each of the parties has caused this
Agreement to be duly executed by its duly authorized officer as of the day and
year first above written.
AMERICAN BANKNOTE CORPORATION
By:_______________________________
Name:
Title:
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
By:_______________________________
Name:
Title:
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<PAGE> 1
Exhibit 10.3
FORM OF
TRANSITIONAL SERVICES AGREEMENT
TRANSITIONAL SERVICES AGREEMENT (this "Agreement"), dated as of
____________, 1998, is between American Banknote Corporation ("Parent"), a
Delaware corporation, and American Bank Note Holographics, Inc. ("ABNH"), a
Delaware corporation.
WHEREAS, Parent, a public company whose common shares are traded on
the New York Stock Exchange, directly owns 100% of the issued and outstanding
shares of common stock of ABNH;
WHEREAS, the Board of Directors of Parent has determined that it is
appropriate and desirable for Parent to sell for its account by means of an
initial public offering by ABNH all of the shares of ABNH common stock owned by
Parent (the "IPO");
WHEREAS, Parent and ABNH are parties to a Separation Agreement,
dated as of [ ], 1998 (the "Separation Agreement"), which sets forth certain
agreements between the parties in connection with the Separation (as defined in
the Separation Agreement); and
WHEREAS, Parent and ABNH have determined that it is necessary and
desirable to make certain agreements regarding services to be provided by Parent
to ABNH for a specified period following the closing of the IPO;
NOW, THEREFORE, in consideration of the mutual agreements,
provisions and covenants contained herein, the parties hereto agree as follows:
1. Capitalized terms used and not otherwise defined herein will have the
respective meanings set forth in the Separation Agreement.
2. For a term commencing on the Closing Date and continuing for a period
of one year thereafter (the "Agreement Term"), Parent will provide to ABNH the
services described on Exhibit A hereto, and such other services, if any, as may
be agreed to in writing by the parties (the "Services").
<PAGE> 2
3. The fees for the performance of the Services will be equal to Parent's
cost thereof (which shall include both direct out-of-pocket expenses incurred in
the performance of the Services and a pro rata allocation of the compensation of
Parent's personnel performing such Services). Payment for the Services will be
made on a monthly basis, due promptly upon receipt of any invoice from Parent
setting forth the amounts due. Notwithstanding the foregoing, any third-party
fees and expenses incurred in connection with the performance of the Services
will not be the responsibility of Parent, but will be submitted to ABNH and paid
directly by it.
4. (a) Following any termination of this Agreement upon the expiration of
the Agreement Term or otherwise, ABNH shall be liable under Section 3 above with
respect to any Services performed during the Agreement Term, and shall continue
to be liable indefinitely under Section 5 below.
(b) This Agreement shall automatically be terminated in the event that the
Separation Agreement is terminated and the IPO abandoned prior to the Closing
Date. In the event of such termination, neither party shall have any liability
of any kind to the other party pursuant to this Agreement (provided that nothing
in this Section 4(b) shall affect any obligation either party may have other
than pursuant to this Agreement, in respect of normal intercompany charges or
otherwise).
5. ABNH shall indemnify, defend and hold harmless Parent, each person that
is an affiliate of Parent at any time following the Closing Date, and each of
their respective directors, officers employees and agents, and each of the
heirs, executors, successors and assigns of any of the foregoing (collectively,
the "Parent Indemnitees"), from, against and in respect of (and shall on demand
advance to the indemnified party funds in respect of), any and all claims,
losses, demands, actions, suits, expenses (including reasonable attorneys'
fees), damages, obligations and liabilities ("Liabilities") of the Parent
Indemnitees relating to, arising out of or resulting from this Agreement or the
Services to be performed hereunder; provided that the foregoing indemnification
shall not apply to the extent of any Liabilities found to result solely from the
gross negligence or willful misconduct by such Parent Indemnitee, as established
in a final, non-appealable judgment of a court of competent jurisdiction. The
terms of this Section 5 shall survive indefinitely following the expiration of
the Agreement Term.
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<PAGE> 3
6. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York, without regard to the principles of conflicts
of laws thereof. This Agreement may not be modified or amended except by an
agreement in writing signed by the parties hereto. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the parties
and their respective successors and permitted assigns. This Agreement may not be
assigned by either party without the written consent of the other party. This
Agreement, and the Separation Agreement and the other agreements and documents
referred to in the Separation Agreement, constitute the entire agreement between
the parties with respect to the subject matter hereof and shall supersede all
previous negotiations, commitments and writings with respect to such subject
matter. All notices and other communications hereunder shall be in writing and
shall be delivered by hand or mailed by registered or certified mail (return
receipt requested) to the parties at the following addresses (or at such other
address for either party as such party may specify by like notice to the other
party) and shall be deemed given on the date on which such notice is actually
received:
If to Parent, to: Secretary
American Banknote Corporation
200 Park Avenue
New York, NY 10166
If to ABNH, to: Secretary
American Bank Note
Holographics, Inc.
399 Executive Boulevard
Elmsford, NY 10523
IN WITNESS WHEREOF, each of the parties has caused this Agreement to
be duly executed by its duly authorized officer as of the day and year first
above written.
AMERICAN BANKNOTE CORPORATION
By:_______________________________
Name:
Title:
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<PAGE> 4
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
By:_______________________________
Name:
Title:
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<PAGE> 5
EXHIBIT A
SERVICES TO BE PROVIDED
1. Tax planning and compliance.
2. Financial reporting (not including any SEC reporting or other reports to
or filings with any third party).
3. Risk management.
4. Human resources.
5. Legal and related services.
6. Miscellaneous general and administrative services reasonably requested
from time to time within the scope of the services customarily provided to
ABNH by Parent immediately prior to the Closing of the IPO.
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<PAGE> 1
Exhibit 10.4
Page 1
FORM OF
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
INCENTIVE STOCK OPTION PLAN
1. Purpose. The purpose of the American Bank Note, Inc. Incentive Stock
Option Plan (the "Plan") is to advance the interests of American Bank Note
Holographics, Inc. (the "Company") by encouraging and enabling present and
future key employees of the Company and any parent or subsidiary to acquire a
financial interest in the Company through incentive stock options under the
Plan. The Company believes that the Plan will also aid the Company and any
parent or subsidiary in attracting and retaining outstanding key employees and
in stimulating the efforts of such employees to work for the success of the
Company.
2. Administration.
(a) General. The Plan shall be administered, construed and
interpreted by a committee (the "Committee") formed by the Board of Directors of
the Company, or if no such committee is established, then by the Board of
Directors. In the event that there is not a Committee established at any time
during the term of any option granted hereunder, references herein to the
Committee shall be interpreted to be references to the Board of Directors.
(b) Grant of Options. The Committee shall from time to time recommend
the persons who shall participate in the Plan and the extent of their
participation. The Committee also shall recommend the price to be paid for
shares upon the exercise of options granted under the Plan, the period within
which each option may be exercised, and the terms and conditions of each
individual Stock Option Agreement by and between the Company and the holder of
the option. The terms and conditions of each individual Stock Option Agreement
shall be consistent with the provisions of the Plan,
<PAGE> 2
Page 2
but the Committee may provide for such additional terms and conditions, not in
conflict with the provisions of the Plan, as it deems advisable. All such
recommendations by the Committee shall be final upon approval of the Board of
Directors.
(c) Interpretation of Plan. In interpreting the Plan, the Committee and
Board of Directors shall be governed by the principles and requirements of
sections 421 and 422 and related sections of the Internal Revenue Code of 1986,
as amended ("the Code"), and the Treasury Regulations applicable to incentive
stock options and incentive stock option plans. A "parent corporation" is any
corporation in an unbroken chain of corporations ending with the Company if, at
the time the option is granted, each of the corporations other than the Company
owns stock possessing fifty percent (50%) or more of the total combined voting
power of all classes of stock in one of the other corporations in the chain. A
"subsidiary corporation" is any corporation in an unbroken chain of corporations
beginning with the Company if, at the time the option is granted, each of the
corporations, other than the last corporation in the unbroken chain, owns stock
possessing fifty percent (50%) or more of the total combined voting power of all
classes of stock in one of the other corporations in the chain. Such definition
of parent corporation and subsidiary corporation shall be consistent with the
definition of such terms as set forth in Code section 424. All other terms used
herein shall have and shall be interpreted as having the meanings set forth in
the applicable provisions of the Code. The interpretation and construction by
the Committee of any provision of or term used in the Plan or any option granted
under the Plan and any determination pursuant to any provision of the Plan or
any such option shall be final and conclusive, unless otherwise determined by
the Board of Directors. No member of the Committee or Board of Directors shall
be liable for any action or determination made in good faith, and members of the
Committee and Board of Directors shall be entitled to
<PAGE> 3
Page 3
indemnification and reimbursement from time to time for expenses incurred in
defense of such good faith action or determination.
3. Eligibility. Options under the Plan may be granted to key officers
and other key employees of the Company or of one or more of any future parents
or subsidiaries of the Company who, in the opinion of the Committee, are
contributing significantly to the effective management and supervision of the
business of the Company or its parents or subsidiaries. Options may be granted
under the Plan only to persons who are employed by the Company or one of its
parents or subsidiaries at the time of the grant. The fact that an employee is a
member of the Board of Directors of the Company shall not make him ineligible
for an option grant unless his vote is required to secure a majority vote in
favor of the grant of his option. For purposes of the Plan, a person to whom an
option is granted under the Plan shall be referred to as a "Grantee".
4 . Shares Subject to Plan. The shares subject to the Plan shall be
authorized but unissued or treasury shares of the Company's common stock (the
"Common Stock") . Subject to readjustment in accordance with the provisions of
paragraph 6 of the Plan, the maximum number of shares of Common Stock for which
options may be granted under the Plan shall be equal to ten percent (10%) of the
outstanding Common Stock as of the date of approval by the shareholders, or
1,363,000 shares of Common Stock, and the adoption of the Plan by the Board of
Directors of the Company shall constitute a reservation of such shares of Common
Stock for issuance only upon the exercise of options granted under the Plan. In
the event that any outstanding option granted under the Plan for any reason
expires or is terminated prior to the end of the period during which options may
be granted under the
<PAGE> 4
Page 4
Plan, the shares of Common Stock allocable to the unexercised portion of such
option may again be subject in whole or in part to any option granted under the
Plan.
5. Terms and Conditions of Options. Options granted pursuant to the
Plan shall be evidenced by agreements (the "Stock Option Agreements") in such
form as the Committee and Board of Directors shall, consistent with the
provisions of Code sections 421 and 422 and related sections of the Code and
applicable Treasury Regulations, approve from time to time. Such Stock Option
Agreements and the options evidenced thereby shall comply with and be subject to
the following terms and conditions:
(a) Number of Shares. Each Stock Option Agreement shall state
the total number of shares of Common Stock to which it pertains.
(b) Amount Limitation. A key employee may not be granted
incentive stock options which are exercisable for the first time in any one
calendar year under the Plan and any other incentive stock option plan of the
Company or any parent or subsidiary corporation of the Company, for the purchase
of Common Stock with an aggregate fair market value of more than one hundred
thousand dollars ($100,000) (valued as of the date of grant of the option).
(c) Option Price. The option price for each option granted
under the Plan shall be the amount determined by the Board of Directors, upon
the recommendation of the Committee, but, subject to the provisions of paragraph
5(j) of the Plan, shall not be less than one hundred percent (100%) of the fair
market value of the shares of
<PAGE> 5
Page 5
Common Stock subject to the option on the date of grant of the option.
Notwithstanding the foregoing, the option price shall not be less than one
hundred ten percent (110%) of the fair market value of the shares of Common
Stock subject to the option on the date of grant of the option as to any Grantee
who at the time the option is granted, owned more than ten percent (10%) of the
total combined voting power of all classes of stock of the Company. The date on
which the Board of Directors approves the granting of an option shall be
considered the date on which such option is granted. For purposes of the Plan,
the "fair market value" of the shares of Common Stock shall be the mean between
the high "bid" and the low "asked" prices of the common stock in the
over-the-counter market on the day on which such value is to be determined or,
if no shares were traded on such day, on the next preceding day on which shares
were traded, an reported. If the common Stock is not regularly traded in the
over-the-counter market but is registered on a national securities exchange, the
"fair market value" of the shares of Common Stock shall mean the closing price
of the Common Stock on such national securities exchange on the day on which
such value is to be determined or, if no shares were traded on such day, on the
next preceding day on which shares were traded, as reported by National
Quotation Bureau, Incorporated or other national quotation service. If the
Common Stock is not regularly traded in the over-the-counter market or
registered in a national securities exchange the Committee shall determine the
fair market value of the common stock in good faith in accordance with Code
section 422 (c) (1) and accompanying Treasury Regulations.
(d) Medium and Time of Payment. The Option price shall be
payable upon the exercise of an option in cash or by check or, if provided in
the Stock Option Agreement, in shares of Common Stock owned by the Grantee. In
the event that all or part of the option price is paid in shares of Common
Stock, the value of such shares
<PAGE> 6
Page 6
shall be equal to the fair market value of such shares on the date of exercise
of the option (determined as provided in paragraph 5(c) of the Plan), and the
Grantee shall deliver to the Company a certificate or certificates representing
such shares duly endorsed to the Company or accompanied by a duly-executed
separate instrument of transfer satisfactory to the Committee.
(e) Term and Exercise. Except as set forth in paragraph 5(j)
of the Plan, each option granted under the Plan shall be exercisable by the
Grantee only during a term fixed by the Board of Directors upon recommendation
of the Committee ending not later than ten (10) years after the date of grant of
the option. Options granted under the Plan will either become vested and
exercisable for up to 33 1/3% of the total optioned shares upon each succeeding
anniversary (until the option is fully exercisable at the end of the third year)
or, if immediately vested, will be exercisable for restricted shares of Common
Stock with restrictions lapsing with respect to 33 1/3% of such shares upon each
succeeding anniversary (until the restrictions expire at the end of the third
year). The Board of Directors, upon recommendation of the Committee, shall
determine whether the option shall be exercisable in full at any time during the
term or in cumulative or non-cumulative installments during the term.
(f) Method of Exercise. All options granted under the Plan
shall be exercised by written notice directed to the officer of the Company
indicated in the Stock Option Agreement at the Company's principal place of
business. Such written notice shall specify the form of payment made by the
Grantee or his successor as provided by paragraph 5(d) of the Plan and shall be
accompanied by payment in full of the option price for the shares for which such
option is being exercised. The Company shall make
<PAGE> 7
Page 7
delivery of certificates representing the shares for which an option has been
exercised within a reasonable period of time; provided, however, that if any
law, regulation or agreement required the Company to take any action with
respect to the shares for which an option has been exercised before the issuance
thereof, then the date of delivery of such shares shall be extended for the
period necessary to take such action.
(g) Effect of Termination of Employment or Death.
(A) Termination of Employment. Except as otherwise
provided in this subparagraph (A) or in subparagraph (B) below, upon termination
of the employment of any Grantee with the Company or any parent or subsidiary
corporation of the Company for any reason, all options hold by the Grantee under
the Plan shall immediately terminate. Whether military, government or other
service or other leave of absence shall constitute a termination of employment
shall be determined in each case by the Committee in its discretion, and any
determination by the Committee shall be final and conclusive. The Board of
Directors upon recommendation of the Committee at its election may provide in
any Stock Option Agreement that the Grantee may exercise an option at any time
within three (3) months after the termination of employment of the Grantee with
the Company or any parent or subsidiary corporation then employing the Grantee
(or within one (1) year after the termination of such employment if such
employment is terminated due to the Grantee's permanent disability). In no
event, however, will the option be exercisable after the expiration of the term
of the option. In addition, exercise of the option following termination of the
Grantee's employment shall be subject to the following terms and conditions: (i)
with respect to any and all installments of the option that had not become
exercisable at the time of termination of employment, the period of extension
shall not, unless otherwise
<PAGE> 8
Page 8
provided in the Stock Option Agreement, operate to permit such installment to
become exercisable within such period; and (ii) with respect to any installment
of the option that had become exercisable at the time of termination of
employment, the period of extension shall not operate to permit the exercise of
such installment after the expiration of the period within which such
installment may be exercised. For purposes of this subparagraph (A), if any
corporation ceases to be a parent or subsidiary of the Company, the employment
of any Grantee employed by such corporation shall be deemed to have terminated
unless such Grantee becomes an employee of the Company or another parent or
subsidiary of the Company simultaneously with or prior to the time such
corporation ceases to be a parent or subsidiary of the Company. For purposes of
the Plan, "permanent disability" shall mean a permanent disability as defined in
Code section 22(e)(3).
(B) Death. In granting any option under the Plan, the
Board of Directors and Committee may provide in the Stock Option Agreement
representing such option that in the event of the death of a Grantee at a time
when an option in exercisable by the Grantee, the Grantee's personal
representatives, heirs or legatees (the "Grantee's Successors") may exercise all
or any portion of such option held by the Grantee on the date of his death upon
proof satisfactory to the Company of their authority. The Grantee's Successors
must exercise any such option within twelve (12) months after the date of the
Grantee's death and in any event prior to the date of expiration of the option.
Such exercise otherwise shall be subject to the terms and conditions of the
Plan; provided, however, that with respect to any installment of the option that
had not become exercisable on the date of the Grantee's death, the period of
extension shall not, unless otherwise provided in the option Agreement, operate
to permit such installment to become exercisable within such period.
<PAGE> 9
Page 9
(h) Nonassignability of Option Rights. No option shall be
assignable or transferable by the Grantee except by will or by the laws of
descent and distribution. During the lifetime of the Grantee, the option shall
be exercisable only by the Grantee.
(i) Rights as Stockholder. Neither the Grantee nor the
Grantee's Successors shall have rights an a stockholder of the Company with
respect to shares of Common Stock covered by the Grantee's option until the
Grantee or the Grantee's Successors become the holder of record of such shares.
Except as specified in paragraph 6 of the Plan, no adjustment will be made for
dividends or other rights for which the record date is prior to the date on
which shares are issued upon exercise of an option.
(j) No Options in Certain Cases. Except as set forth in this
paragraph 5 (j), no options shall be granted except within a period of ten (10)
years after the effective date of the Plan. In no event shall an option be
granted to any person who, at the time such option is granted, owns (as defined
in Code section 422 (b) (6) ) stock possessing more than ten percent (10%) of
the total combined voting power or value of all classes of stock of the Company
or of any parent or subsidiary corporation of the Company unless (i) the option
price under such option is not less than one hundred and ten percent (110%) of
the fair market value of the shares of Common Stock subject to such option on
the date of grant of such option (determined as provided in paragraph 5(c) of
the Plan) and (ii) the terms of the Stock Option Agreement shall make such
option expire on the date that is no later than the fifth (5th) anniversary
after the date on which the option is granted.
<PAGE> 10
Page 10
(k) Miscellaneous Provisions. The Stock Agreements authorized
under the Plan may contain such Other Provisions, not inconsistent with the Plan
or the applicable provisions of the Code, as the Committee shall deem advisable.
6. Adjustments.
(a) Recapitalization. In the event that, after the effective
date of the Plan, the outstanding shares decreased or changed into or exchanged
for a different number or kind of shares or other shares or other securities of
the Company by reason of a recapitalization, reclassification, stock split-up,
combination of shares, or dividend payable in stock, appropriate adjustments
shall be made by the Committee in the number and kind of shares or other
securities for which options may be granted under the Plan. In addition, the
Committee upon the occurrence of such an event shall make appropriate
adjustments in the number and kind of shares or other securities as to which
outstanding options, or portions thereof then unexercised, shall be exercisable,
so that each Grantee's proportionate interest shall be maintained as before the
occurrence of such event. Such adjustment in outstanding options shall be made
without change in the total price applicable to the unexercised portion of each
option and with a corresponding adjustment in the option price per share. Any
fractional shares resulting from any of the foregoing adjustments under this
subparagraph (a) shall be disregarded and eliminated. Each such adjustment under
this subparagraph (a) shall be made in such a manner that such adjustment will
not constitute a "modification" an defined in Code section 424. All adjustments
made by the Committee unless otherwise determined by the Board of Directors)
under this subparagraph (a) shall be final and conclusive.
(b) Reorganization; Liquidation. If the Company shall be a party to any
<PAGE> 11
Page 11
reorganization involving a sale, merger or liquidation of the Company,
outstanding options may be exercised immediately prior to the consummation of
such a transaction, whether or not vested as of such date of consummation of
such transaction.
7. Effective Date and Termination of Plan.
(a) Effective Date. The effective date of the Plan shall be
_______ __, 1998, the date of its adoption by the Board of Directors of the
Company, provided that the stockholders of the Company (acting at a duly called
meeting of the stockholders) shall approve the Plan before _______ __, 1998.
(b) Termination. The Plan shall terminate ten (10) years after
its effective date, but the Board of Directors may terminate the Plan at any
time prior to such date. Termination of the Plan shall not alter or impair any
of the rights or obligations under any option theretofore granted under the Plan
unless the Grantee shall so consent.
8. Application of Funds. The proceeds received by the Company from the
sale of shares of Common Stock pursuant to options granted under the Plan will
be used for general corporate purposes.
9. No Obligation to Exercise Option. The granting of an option shall
impose no obligation upon the Grantee to exercise such option.
10. Amendment. The Board of Directors of the Company by majority vote
may at any time and from time to time amend the Plan in such respects as it
shall deem advisable in order that options granted under the Plan shall be
"incentive stock options"
<PAGE> 12
Page 12
as defined in Code section 422, or to conform to any change in the law, or for
any other purpose; provided, however, that without the approval of the
stockholders of the Company, no such amendment shall change:
(a) The maximum number of shares of Common Stock as to which
options may be granted under the Plan (except by operation of the adjustment
provisions of the Plan); or
(b) The date on which the Plan will terminate as provided by
paragraph 7(b) of the Plan; or
(c) The minimum option price as provided under paragraph 5(c)
of the Plan, other than to change the manner of determining the fair market
value of the Common Stock to conform with any provisions of the Code or Treasury
Regulations thereunder applicable to incentive stock options or if such change
is necessitated by a change in the manner in which Common Stock is traded; or
(d) The period during which options may be granted as provided
in paragraph 5(j) of the Plan (provided, however, that the Board of Directors of
the Company shall have the power set forth in paragraph 7(b) to terminate the
Plan); or
(e) The provisions of paragraph 3 of the Plan relating to the
determination of employees to whom options may be granted.
Any amendment to the Plan shall not, without the written consent of the
Grantee, affect such Grantee's rights under any option theretofore granted to
such Grantee.
<PAGE> 13
Page 13
Executed this ___ day of _________, 1998
American Bank Note Holographics, Inc.
by: _____________________________
[Title]
<PAGE> 14
Page 1
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
INCENTIVE STOCK OPTION AGREEMENT
1998 GRANT
As of the ___ day of _______, 1998, and pursuant to its Incentive
Stock Option Plan (the "Plan"), American Bank Note Holographics, Inc., a
Delaware corporation (the "Company"), hereby grants to _________________________
(the "Grantee") an option, exercisable for the period and upon the terms
hereinafter set out, to purchase __________ shares of the Common Stock, par
value $____ per share ("Common Stock"), of the Company, at an exercise price of
$___ per share, subject to adjustment as provided in the Plan. Such exercise
price represents at least 100% of the fair market value of a share of the Common
Stock at the Date of Grant (as hereinafter defined). In the case of an
individual who, at the time of the Date of Grant owns more than 10% of the total
combined voting power of all classes of stock of the Company, the above exercise
price represents at least 110% of the fair market value of a share of the Common
Stock at the Date of Grant.
1. TERM OF OPTION. This option is granted as of the date first
above written (sometimes hereinafter called the "Date of Grant"), and will
terminate and expire, to the extent not previously exercised, at 5:00 p.m.
(E.D.T. or E.S.T., as applicable) on the tenth anniversary of the Date of Grant,
or at such earlier time as may be specified in the Plan.
2. RIGHT TO EXERCISE. Subject to the applicable limitations set
out in the Plan or as otherwise set out in this Agreement, the Grantee shall
have the right to exercise the option as to 331/3 percent of the shares covered
by this agreement upon each succeeding anniversary of the Date of Grant. The
amount of Common Stock for which options may be exercised after such dates is
cumulative; that is, if the Grantee fails to exercise all of the options during
any period set forth above, then any options that were not exercised during such
period may be exercised during any subsequent period, until the termination of
such options pursuant to the terms of this Agreement and the Plan. Prior to
issuance of any shares of Common Stock, the Grantee shall: (i) deliver an
investment representation and (ii) enter into any applicable stockholder's
agreement, as deemed necessary by the Board of Directors of the Company or such
Committee established by the Board of Directors (the "Committee").
3. MANNER OF EXERCISE OF THE OPTION. The option shall be exercised
in the manner set forth in the Plan. Options granted under this Agreement Plan
will become vested and exercisable for up to 331/3% of the total optioned shares
upon each succeeding anniversary (until the option is fully exercisable at the
end of the third year) or, if immediately vested, will be exercisable for
restricted shares of Common Stock with restrictions lapsing with respect to
331/3% of such shares upon each succeeding anniversary (until the restrictions
expire at the end of the third year).
<PAGE> 15
Page 2
4. TERMINATION OF EMPLOYMENT. In all events where Grantee's
employment by the Company and its Affiliates is terminated, the options granted
hereunder shall be governed by the Plan.
5. SUBJECT TO PLAN. This option is subject to all the terms and
conditions of the Plan, and specifically to the power of the Committee to make
interpretations of the Plan and of options granted thereunder, and of the Board
of Directors of the Company to alter, amend, suspend or discontinue the Plan
subject to the limitations expressed in the Plan. By acceptance hereof, the
Grantee acknowledges receipt of a copy of the Plan and hereby accepts and agrees
to be bound by all of its terms and conditions as if it had been set out
verbatim in this Agreement. In addition, the Grantee recognizes and agrees that
all determinations, interpretations or other actions respecting the Plan may be
made by a majority of the Board of Directors of the Company or of the Committee,
and that such determinations, interpretations or other actions are final,
conclusive and binding upon all parties, including the Grantee, his heirs and
representatives.
6. SHAREHOLDER APPROVAL. Notwithstanding anything to the contrary
contained herein or in the Plan, this option is expressly conditioned on the
Plan being approved by the shareholders of the Company and may not be exercised
until such approval has been obtained.
7. NOTICES. Any notice, payment or communication required or
permitted to be given by any provision of this Agreement shall be in writing and
shall be delivered personally or sent by certified mail, return receipt
requested, addressed as follows: if to American Bank Note Holographics, Inc.
[Address] Attention President; if to Grantee, at the address set forth on the
signature page hereto. Each party may, from time to time, by notice to the other
party hereto, specify a new address for delivery of notices to such party
hereunder. Any such notice shall be deemed to be delivered, given, and received
for all purposes as of the date such notice is received or properly mailed.
8. BINDING EFFECT. Except as otherwise provided in this Agreement
or in the Plan, every covenant, term, and provision of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
heirs, legatees, legal representatives, successors, transferees, and assigns.
9. HEADINGS. Section and other headings contained in this
Agreement are for reference purposes only and are not intended to describe,
interpret, define or limit the scope or intent of this Agreement or any
provision hereof.
10. SEVERABILITY. Every provision of this Agreement is intended to
be severable. If any term or provision hereof is illegal or invalid for any
reason whatsoever, such illegality or invalidity shall not affect the validity
or legality of the remainder of this Agreement.
11. GOVERNING LAW. The laws of the State of New York shall govern
the validity of this Agreement, the construction of its terms, and the
interpretation of the rights and duties of the parties hereto.
<PAGE> 16
Page 3
IN WITNESS WHEREOF, this Agreement is executed as of the _____ day
of ________________, 199__.
American Bank Note Holographics, Inc.
By:______________________________________________
The undersigned Grantee hereby accepts the terms of the foregoing
Incentive Stock Option Agreement and the Plan.
By: _____________________________ Grantee
_________________________________
_________________________________
(address)
The undersigned spouse of __________________________ is fully
aware of, understands and fully consents and agrees to the provisions of this
Agreement and its binding effect upon any community property or marital property
interest he or she may now or hereafter own in or with respect to the Common
Stock referred to in this Agreement, and agrees that the termination of his or
her marital relationship with the Grantee for any reason shall not have the
effect of removing the Common Stock from the coverage of this Agreement. Such
understanding, consent, and agreement of the undersigned are evidenced by his or
her execution of this Agreement as of the _____ day of ________________, 199__.
By: _____________________________
Spouse
<PAGE> 1
Exhibit 10.5
FORM OF DEFINED CONTRIBUTION PLAN
<PAGE> 2
TABLE OF CONTENTS
INTRODUCTION
1.1 Introduction ..................................................... 1-1
DEFINITIONS
2.1 Definitions ...................................................... 2-1
PARTICIPATION IN THE PLAN
3.1 Eligibility to Participate ....................................... 3-1
3.2 Commencement of Participation .................................... 3-1
3.3 Cessation of Participation ....................................... 3-1
3.4 Year of Service for Eligibility Purposes ......................... 3-1
3.5 Eligibility Computation Periods .................................. 3-2
3.6 Participation and Service upon Reemployment ...................... 3-2
3.7 Transfers To or From Covered Status .............................. 3-3
CONTRIBUTIONS
4.1 Employee Pre-Tax Basic and Supplemental Contributions ............ 4-1
4.2 Salary Reduction Agreement ....................................... 4-1
4.3 Employee Pre-Tax Bonus Contributions ............................. 4-3
4.4 Maximum Amount of Employee Pre-Tax Contributions ................. 4-4
4.5 Employee After-Tax Contributions ................................. 4-5
4.6 Employer Matching Contributions .................................. 4-6
4.7 Employer Nonelective Contributions ............................... 4-6
4.8 Rollover Contributions ........................................... 4-7
4.9 Manner of Making Contributions ................................... 4-7
4.10 Transfer of Assets ............................................... 4-8
NONDISCRIMINATION REQUIREMENTS
5.1 Definitions ...................................................... 5-1
5.2 Average Actual Deferral Percentage Tests ......................... 5-6
5.3 Special Rules .................................................... 5-6
TC-l
<PAGE> 3
5.4 Treatment of Qualified Matching Contributions and Qualified
Nonelective Contributions as Employee Pre-Tax Contributions ...... 5-7
5.5 Correction of Excess Contributions ............................... 5-8
5.6 Average Contribution Percentage Tests ............................ 5-11
5.7 Special Rules .................................................... 5-11
5.8 Treatment of Employee Pre-Tax Contributions and Qualified
Nonelective Contributions as Employer Matching Contributions ..... 5-12
5.9 Correction of Excess Aggregate Contributions ..................... 5-13
5.10 Multiple Use of Alternative Limitation ........................... 5-16
5.11 Recordkeeping Requirements ....................................... 5-18
ALLOCATIONS AND INVESTMENTS
6.1 Receipt of Contributions by Trustee .............................. 6-1
6.2 Establishment of Separate Accounts by Recordkeeper ............... 6-1
6.3 Allocation of Employer Nonelective Contributions
Under Integrated Plan ............................................ 6-2
6.4 Allocation of Forfeitures ........................................ 6-4
6.5 Investment of Plan Assets ........................................ 6-5
6.6 Allocation of Earnings and Losses ................................ 6-5
6.7 Insurance Contracts .............................................. 6-6
6.8 No Rights Created by Allocation .................................. 6-6
VESTING
7.1 Full Vesting in Employee Contributions and Rollover
Contributions .................................................... 7-1
7.2 Vesting in Employer Contributions ................................ 7-1
7.3 Year of Service for Vesting Purposes ............................. 7-2
7.4 Years of Service Upon Reemployment ............................... 7-2
DISTRIBUTION OF BENEFITS
8.1 Distribution Upon Separation from Service ........................ 8-1
8.2 Distribution Upon Death .......................................... 8-1
8.3 Optional Forms of Distribution; Participant Consent .............. 8-1
8.4 Distribution Upon Written Instructions; Valuation of
Distributions .................................................... 8-3
8.5 Forfeitures Upon Separation from Service ......................... 8-4
8.6 Minimum Distribution Requirements ................................ 8-5
8.7 Joint and Survivor Annuity Requirement ........................... 8-11
TC-2
<PAGE> 4
8.8 Preretirement Survivor Annuity Requirement ....................... 8-11
8.9 Notice and Explanation to Participants ........................... 8-12
8.10 Waiver of Qualified Joint or Survivor Annuity or Qualified
Preretirement Survivor Annuity ................................... 8-13
8.11 Exception To Joint and Survivor Annuity and Preretirement
Survivor Annuity Requirements .................................... 8-15
8.12 Cash-Outs ........................................................ 8-15
8.13 Former Spouse Under Qualified Domestic Relations Order ........... 8.16
8.14 Purchase of Annuities; Nontransferability Provisions ............. 8-16
8.15 Commencement of Benefits ......................................... 8-16
8.16 Designation of Beneficiary ....................................... 8-16
8.17 Distributions Pursuant to Qualified Domestic
Relations Orders ................................................. 8-17
8.18 Direct Rollovers ................................................. 8-18
WITHDRAWALS
9.1 Withdrawals of Employee After-Tax Contributions .................. 9-1
9.2 Withdrawals of Rollover Contributions ............................ 9-1
9.3 Withdrawals on or After Age 59 1/2 ............................... 9-1
9.4 Hardship Withdrawals ............................................. 9-1
9.5 Manner of Making Withdrawals ..................................... 9-4
LOANS
10.1 Amount of Loan ................................................... 10-1
10.2 Security for Loan ................................................ 10-1
10.3 Interest Rate Charged ............................................ 10-2
10.4 Repayment of Loans ............................................... 10-2
10.5 Default on Loan .................................................. 10-2
10.6 Setoff of Loan Upon Distributions ................................ 10-2
10.7 Manner of Making Loans ........................................... 10-3
10.8 Spousal Consent Required ......................................... 10-3
10.9 Accounting for Loans ............................................. 10-4
LIMITATION ON CONTRIBUTIONS AND BENEFITS
11.1 Definitions ...................................................... 11-1
11.2 Employers Who Maintain No Other Qualified Plans .................. 11-6
11.3 Employers Who Maintain Other Qualified Master or
Prototype Defined Contribution Plans ............................. 11-8
11.4 Employers Who Maintain a Qualified Defined
Contribution Plan Other Than a Master or Prototype Plan .......... 11-9
TC-3
<PAGE> 5
11.5 Employers Who Maintain a Qualified Defined Benefit Plan ..........11-10
TOP-HEAVY PROVISIONS
12.1 Application ...................................................... 12-1
12.2 Definitions ...................................................... 12-1
12.3 Minimum Allocation ............................................... 12-4
12.4 Minimum Vesting Schedules ........................................ 12-5
ADMINISTRATION
13.1 Duties and Responsibilities of Fiduciaries; Allocation of
Fiduciary Responsibility ......................................... 13-1
13.2 Powers and Responsibilities of the Plan Administrator ............ 13-1
13.3 Allocation of Duties and Responsibilities ........................ 13-3
13.4 Expenses ......................................................... 13-4
13.5 Liabilities ...................................................... 13-4
13.6 Claims Procedure ................................................. 13-4
AMENDMENT, TERMINATION AND MERGER
14.1 Amendment of Plan
14.2 Termination of Plan; Suspension of Contributions ................. 14-3
14.3 Successor Employer ............................................... 14-3
14.4 Merger, Consolidation or Transfer ................................ 14-3
14.5 Distribution Upon Termination of Plan or Disposition
of Assets or Subsidiary .......................................... 14-4
MISCELLANEOUS
15.1 Exclusive Benefit of Participants and Beneficiaries .............. 15-1
15.2 Leased Employees ................................................. 15-1
15.3 Crediting Service With Predecessor Employer ...................... 15-2
15.4 Special Requirements For Controlled Business
By Owner-Employees ............................................... 15-2
15.5 Nonguarantee of Employment ....................................... 15-3
15.6 Right to Trust Assets ............................................ 15-3
15.7 Nonalienation of Benefits ........................................ 15-4
15.8 Failure of Qualification ......................................... 15-4
15.9 Applicable Law ................................................... 15-4
TC-4
<PAGE> 6
ARTICLE 1
INTRODUCTION
1.1 Introduction. This 401(k) Savings Plan has been adopted by the Employer for
the exclusive benefit of eligible Employees and their Beneficiaries. The Plan is
to be maintained and administered according to the terms and conditions of this
instrument. The assets of the Plan are held and managed by the Trustee in
accordance with the terms and conditions of the Trust Agreement, which is
considered to be an integral part of the Plan.
1-1
<PAGE> 7
ARTICLE 2
DEFINITIONS
2.1 "Adoption Agreement" means the 40l(k) Plan Adoption Agreement (either
Non-Standardized Safe Harbor Adoption Agreement #001 or Standardized Adoption
Agreement #002) as executed by the Employer for purposes of adopting or amending
the Plan. The provisions of the Adoption Agreement shall be considered an
integral part of the Plan as if set forth fully herein.
2.2 "Beneficiary" means a person or persons (natural or otherwise) designated by
a Participant in accordance with Article 8.16 to receive any undistributed
amounts credited to the Participant's separate accounts under the Plan at the
time of the Participant's death.
2.3 "Benefiting" means, for any Plan Year, that the Participant has received or
is deemed to have received an allocation under the Plan in accordance with IRS
Regulation ss. 1.410(b)-3(a).
2.4 "Break in Service" means:
(a) for purposes of determining an Employee's eligibility to participate
in the Plan, an eligibility computation period (as determined under
Article 3.5) during which the Employee does not complete more than 500
Hours of Service; and
(b) for all other purposes under the Plan, including the determination of
the Employee's vested percentage under Article 7.4, a Plan Year during
which an Employee does not complete more than 500 Hours of Service.
An Employee shall not be deemed to have incurred a Break in Service during any
leave of absence granted in writing by the Employer.
2.5 "Code" means the Internal Revenue Code of 1986, including any amendments
thereto.
2.6 "Compensation" means compensation as that term is defined in Article 11.1(b)
of the Plan, unless the Employer selects an alternative definition of
Compensation under the Non-Standardized Safe Harbor Adoption Agreement (#001).
Compensation shall include only that
2-1
<PAGE> 8
Compensation which is actually paid by the Employer to the Participant while
participating in the Plan during the Plan Year, adjusted as follows:
(a) the Compensation of each Participant for a Plan Year shall include all
Employee Pre-Tax Contributions made to the Plan on behalf of the
Participant for the Plan Year and all pre-tax elective contributions made
to any other plan by the Employer for the Plan Year pursuant to a salary
reduction agreement with the Participant which are not includible in the
Participant's gross income under Section 125, 402(e)(3), 402(h)(1)(B) or
403(b) of the Code, provided that the Employer has elected to treat all
such pre-tax elective contributions as Compensation with respect to all
employees under all plans of the Employer; and
(b) in no event shall the amount of Compensation of any Participant taken
into account for purposes of determining any benefits under the Plan for
any Plan Year exceed the Annual Compensation Limit. For these purposes,
the Annual Compensation Limit for Plan Years beginning on or after January
1, 1994, is $150,000, as adjusted by the Commissioner of Internal Revenue
for increases in the cost of living in accordance with Section
401(a)(17)(B) of the Code. The cost-of-living adjustment in effect for any
calendar year shall apply to any Plan Year beginning in such calendar
year. For Plan Years beginning on or after January 1, 1989, but before
January 1, 1994, the Annual Compensation Limit is $200,000, as adjusted by
the Commissioner of Internal Revenue at the same time and in the same
manner as under Section 415(d) of the Code, with the exception that the
adjustment in effect on January 1 of any calendar year is effective for
any Plan Year beginning in such calendar year and the first adjustment to
the $200,000 limitation is effective on January 1, 1990. If a Plan Year
consists of fewer than 12 months, the Annual Compensation Limit for such
Plan Year shall be multiplied by a fraction, the numerator of which is the
number of months in such Plan Year and the denominator of which is 12.
For purposes of the Annual Compensation Limit, the family aggregation rules of
Section 414(q)(6) of the Code shall apply, with the exception that in applying
such rules the term "family" shall include only the spouse of the Participant
and any lineal descendants of the Participant who have not attained age 19
before the close of the Plan Year. If, as a result of the application of such
family aggregation rules, the Annual Compensation Limit is exceeded, then
2-2
<PAGE> 9
the Annual Compensation Limit shall be prorated among the affected individuals
in proportion to each such individual's Compensation as otherwise determined
under this Article 2.2 prior to the application of the Annual Compensation Limit
(with the exception that such proration shall not apply for purposes of
determining the portion of Compensation up to the Integration Level designated
by the Employer in the Adoption Agreement if the Plan is an Integrated Plan). In
the case of a Self-Employed Individual who is treated as employed by the
Employer under Section 401(c) of the Code, Compensation shall include the
individual's Earned Income as defined in Article 2.8.
2.7 "Disability" means an inability to engage in any substantial gainful
activity by reason of any medically determinable physical or mental impairment
which can be expected to result in death or which has lasted or can be expected
to last for a continuous period of not less than 12 months. The permanence and
degree of impairment shall be supported by medical evidence.
2.8 "Earned Income" means the net earnings derived by an Employee from
self-employment in the trade or business with respect to which the Plan is
established and for which the personal services of the Employee are a material
income-producing factor, determined without regard to any items not included in
the Employee's gross income and the deductions allocable to such items. Net
earnings shall be reduced by contributions by the Employer to a qualified plan
to the extent deductions are allowed to the Employee for such contributions
under Section 404 of the Code. Net Earnings shall be determined by taking into
account any deduction allowed to the taxpayer under Section 164(f) of the Code.
2.9 "Effective Date" means the date designated by the Employer in the Adoption
Agreement as the date on which the provisions of the Plan, as originally adopted
or as amended and restated by the Employer (whichever is applicable) shall
apply.
2.10 "Employee" means any individual who is employed (or treated as employed
under Section 401(c)(1) of the Code) by the Employer or by any other employer
required to be aggregated with the Employer under Section 414(b), (c), (m) or
(o) of the Code, and shall include any leased employee as described in Article
15.2 who is deemed to be an employee of the Employer or of any employer required
to be aggregated with the Employer as provided under Section 414(n) or (o) of
the Code.
2-3
<PAGE> 10
2.11 "Employee After-Tax Contribution" means an after-tax contribution to the
Plan by a Participant in accordance with Article 4.5 which is includible in the
Participant's gross income for federal income tax purposes in the year of
contribution.
2.12 "Employee After-Tax Contribution Account" means the separate account
established in the name of a Participant pursuant to Article 6.2(a)(ii) to
record the Employee After-Tax Contributions by the Participant and the earnings,
losses and expenses allocated thereto.
2.13 "Employee Pre-Tax Basic Contribution" means an Employee Pre-Tax
Contribution to the Plan on behalf of a Participant in accordance with Article
4.1(a).
2.14 "Employee Pre-Tax Bonus Contribution" means an Employee Pre-Tax
Contribution to the Plan on behalf of a Participant in accordance with Article
4.3.
2.15 "Employee Pre-Tax Contribution" means a pre-tax contribution to the Plan by
the Employer on behalf of a Participant in accordance with the Participant's
election under Article 4.1 or 4.3 to have the amount contributed to the Plan
rather than paid to the Participant as current-year Compensation.
2.16 "Employee Pre-Tax Contribution Account" means the separate account
established in the name of a Participant pursuant to Article 6.2(a)(i) to record
the Employee Pre-Tax Contributions on behalf of the Participant and the
earnings, losses and expenses allocated thereto.
2.17 "Employee Pre-Tax Supplemental Contribution" means an Employee Pre-Tax
Contribution to the Plan on behalf of a Participant in accordance with Article
4.1(b).
2.18 "Employer" means the corporation, partnership or other employer which has
adopted the Plan by executing the Adoption Agreement.
2.19 "Employer Matching Contribution" means a contribution to the Plan by the
Employer on behalf of a Participant in accordance with Article 4.6 on account of
the Employee Pre-Tax Contributions or Employee After-Tax Contributions by the
Participant to the Plan.
2-4
<PAGE> 11
2.20 "Employer Matching Contribution Account" means the separate account
established in the name of a Participant pursuant to Article 6.2(a)(iii) to
record the Employer Matching Contributions on behalf of the Participant and the
earnings, losses, and expenses allocated thereto.
2.21 "Employer Nonelective Contribution" means a contribution to the Plan by the
Employer on behalf of a Participant for a Plan Year in accordance with Article
4.7.
2.22 "Employer Nonelective Contribution Account" means the separate account
established in the name of a Participant pursuant to Article 6.2(a)(iv) to
record the Employer Nonelective Contributions on behalf of the Participant and
the earnings, losses, and expenses allocated thereto.
2.23 "Entry Date" means the date designated by the Employer in the Adoption
Agreement on which an Employee who has otherwise satisfied the participation
requirements selected by the Employer in the Adoption Agreement shall be
eligible to commence participation in the Plan. In no event shall the initial
Entry Date for any Employee be later than the earlier of:
(a) the first day of the Plan Year coinciding with or next following the
date the Employee otherwise satisfies the participation requirements
selected by the Employer in the Adoption Agreement; or
(b) the date that is six months after the date the Employee satisfies such
participation requirements.
2.24 "Excess Elective Deferral" means the amount of a Participant's pre-tax
elective deferrals (as defined in Article 4.4(a)) for a taxable year which are
includible in the Participant's gross income for the taxable year for the reason
they exceed the dollar limitation in effect under Section 402(g) of the Code.
2.25 "Forfeiture" means the portion of a Participant's Employer Matching
Contribution Account or Employer Nonelective Contribution Account which is
forfeited, in accordance with the provisions of Article 8.5, on account of the
Participant's termination of employment prior to full vesting under Article 7.2.
Forfeitures shall also include any Employer Matching
2-5
<PAGE> 12
Contributions on behalf of Highly Compensated Employees (as defined in Article
5.1(j)) which are forfeited in accordance with the provisions of Article 4.6 and
any Excess Aggregate Contributions on behalf of Highly Compensated Employees
which are forfeited in accordance with the provisions of Article 5.9(c).
2.26 "Hour of Service" means:
(a) Each hour for which the individual is paid or entitled to be paid for
the performance of duties for the Employer. Hours of Service under this
paragraph shall be credited to the individual for the computation period
in which the duties are performed.
(b) Each hour for which the individual is paid or entitled to be paid by
the Employer on account of a period of time during which no duties are
performed (irrespective of whether the employment relationship has
terminated) due to vacation, holiday, illness, incapacity (including
disability), layoff, jury duty, military duty or leave of absence;
provided, however, that no more than 501 Hours of Service shall be
credited under this paragraph for any single continuous period (whether or
not such period occurs in a single computation period) during which the
individual performed no duties. Hours of Service under this paragraph
shall be calculated and credited pursuant to Section 2530.200b-2 of the
Department of Labor Regulations which are incorporated herein by
reference.
(c) Each hour for which back pay, irrespective of mitigation or damages,
is either awarded or agreed to by the Employer; provided, however, that
Hours of Service credited under paragraphs (a) or (b) above shall not be
re-credited by operation of this paragraph. Hours of Service under this
paragraph shall be credited to the individual for the computation period
or periods to which the award or agreement pertains rather than the
computation period in which the award, agreement or payment is made.
Hours of Service shall be credited to an Employee in a manner consistent with
the rules of (a), (b) and (c) above for employment with any other employer
required to be aggregated with the Employer in an affiliated service group under
Section 414(m) of the Code, a controlled group of corporations under Section
414(b) of the Code, or a group of trades or businesses under common control
under Section 414(c) of the Code, or with any other employer required to be
aggregated
2-6
<PAGE> 13
with the Employer pursuant to Section 414(o) of the Code and the regulations
thereunder. Hours of Service shall also be credited to any leased employee as
described in Article 15.2 who is deemed to be an Employee for purposes of the
Plan as required under Section 414(n) or (o) of the Code and the regulations
thereunder.
Solely for purposes of determining whether a Break in Service has occurred for
participation and vesting purposes, an individual who is absent from work for
maternity or paternity reasons shall receive credit for the Hours of Service
which would otherwise normally have been credited to such individual but for
such absence, or in any case in which such Hours of Service cannot be
determined, eight Hours of Service per day of such absence. For purposes of this
paragraph, an absence from work for maternity or paternity reasons means an
absence: (i) by reason of the pregnancy of the individual; (ii) by reason of the
birth of a child of the individual; (iii) by reason of the placement of a child
with the individual in connection with the adoption of such child by such
individual; or (iv) for purposes of caring for such child for a period beginning
immediately following such birth or placement. The Hours of Service credited
under this paragraph shall be credited: (i) in the eligibility computation
period or Plan Year in which the absence begins if the crediting is necessary to
prevent a Break in Service in that period; or (ii) in all other cases, in the
following eligibility computation period or Plan Year.
In lieu of determining Hours of Service on the basis of the actual hours for
which an individual is paid or entitled to be paid under subsections (a) through
(c) above, the Employer may elect under the Non-Standardized Safe Harbor
Adoption Agreement (#001) to credit Hours of Service in accordance with an
equivalency method prescribed by regulations issued by the Department of Labor.
2.27 "Integrated Plan" means the Plan if the Employer has executed the
Non-Standardized Safe Harbor Adoption Agreement (#001) and elected under that
Adoption Agreement either: (1) the Permitted Disparity (Integration with Social
Security) Contribution Formula for Employer Nonelective Contributions; or (2)
the Permitted Disparity (Integration with Social Security) Allocation Formula
for Employer Nonelective Contributions. The Employer may not adopt this Plan as
an Integrated Plan if the Employer maintains any other integrated plan providing
for permitted disparity which covers any of the same Participants under this
Plan.
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2.28 "Normal Retirement Age" means the date a Participant attains age 65, unless
the Employer designates a different Normal Retirement Age in the Adoption
Agreement. If the Employer enforces a mandatory retirement age, the Normal
Retirement Age shall not exceed such mandatory retirement age.
2.29 "Owner-Employee" means: (1) if the Employer is a sole proprietorship, the
proprietor of the sole proprietorship; or (2) if the Employer is a partnership,
a partner who owns more than 10 percent of either the capital interest or the
profits interest of the partnership.
2.30 "Participant" means an Employee who is participating in the Plan in
accordance with the provisions of Article 3.
2.31 "Plan" means the 401(k) Savings Plan as set forth herein and as adopted by
the Employer under the Adoption Agreement, as each such document may be amended
from time to time.
2.32 "Plan Administrator" means the individual(s) or committee designated by the
Employer in the Adoption Agreement or subsequent written resolution furnished to
the Trustee to be solely responsible for the administration of the Plan, as more
fully described in Article 13.2. If no such designation is made, the Employer
shall be deemed to be the Plan Administrator.
2.33 "Plan Year" means the 12-consecutive month period designated by the
Employer in the Adoption Agreement.
2.34 "Recordkeeper" means the individual(s) or firm selected by the Employer to
provide record-keeping and participant accounting services for the Plan,
including the maintenance of separate accounts for Participants in accordance
with the provisions of Article 6.
2.35 "Rollover Contribution Account" means the separate account established in
the name of a Participant pursuant to Article 6.2(a)(v) to record any rollover
contributions to the Plan by or on behalf of the Participant under Article 4.8
and the earnings, losses and expenses allocated thereto.
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<PAGE> 15
2.36 "Self-Employed Individual" means an individual who has Earned Income for
the taxable year from the trade or business with respect to which the Plan is
established or who would have had such Earned Income but for the fact that the
trade or business had no net profits for the taxable year.
2.37 "Sponsor" means Vanguard Fiduciary Trust Company, a trust company
incorporated under Pennsylvania banking laws. Vanguard Fiduciary Trust Company
is a wholly-owned subsidiary of The Vanguard Group, Inc., Vanguard Financial
Center, Valley Forge, Pennsylvania 19482.
2.38 "Straight Life Annuity" means an annuity payable in equal installments for
the life of the Participant that terminates upon the death of the Participant.
2.39 "Trust" means the trust maintained by the Trustee to hold the assets of the
Plan in accordance with the terms and conditions of the Trust Agreement.
2.40 "Trust Agreement" means the agreement between the Employer and Trustee
which governs the management and administration of the Trust. The provisions of
the Trust Agreement shall be considered an integral part of this Plan as if set
forth fully herein.
2.41 "Trustee" means the individual(s) or qualified corporate fiduciary
designated by the Employer in the Adoption Agreement to serve as Trustee for the
Plan and any successor thereto.
2.42 "Valuation Date" means any business day that the New York Stock Exchange is
open for trading.
2.43 "Vanguard Fund(s)" means one or more of the regulated investment companies,
collective investment funds or other investments offered by The Vanguard Group,
Inc. as funding vehicles for employee benefit plans. The Employer shall have the
authority to designate the Vanguard Funds available for investment under the
Plan in accordance with the provisions of the Trust Agreement.
2.44 "Year of Service" means a 12-consecutive month period during which an
Employee completes at least 1,000 Hours of Service as determined under Article
3.4 for purposes of
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determining the Employee's eligibility to participate in the Plan and Article
7.3 for purposes of determining the Employee's vested percentage under the Plan.
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<PAGE> 17
ARTICLE 3
PARTICIPATION IN THE PLAN
3.1 Eligibility to Participate. An Employee shall be eligible to participate in
the Plan when the Employee satisfies the participation requirements designated
by the Employer in Section 2 of the Adoption Agreement.
3.2 Commencement of Participation.
(a) An Employee who satisfies the participation requirements designated by
the Employer in Section 2 of the Adoption Agreement as of the Effective
Date of the Plan shall become a Participant on the Effective Date.
(b) An Employee who satisfies the participation requirements designated by
the Employer in Section 2 of the Adoption Agreement after the Effective
Date of the Plan shall become a Participant on the next Entry Date.
3.3 Cessation of Participation. An Employee shall cease to participate in the
Plan on the date on which the Employee's employment with the Employer terminates
for any reason or the Employee no longer satisfies the participation
requirements designated by the Employer in Section 2 of the Adoption Agreement.
3.4 Year of Service for Eligibility Purposes.
(a) General Rule. For purposes of determining the eligibility of an
Employee to participate in the Plan, the Employee shall be credited with
one Year of Service for each eligibility computation period (as determined
under Article 3.5) during which the Employee completes 1,000 or more Hours
of Service. All Years of Service by an Employee (including Years of
Service completed prior to the Effective Date of the Plan) shall be
counted for purposes of determining the Employee's eligibility to
participate in the Plan, except as specifically provided otherwise in
Article 3.6(b).
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<PAGE> 18
(b) Service With Predecessor Employer. If so designated by the Employer in
the Adoption Agreement, an Employee's Years of Service for eligibility
purposes shall include all years of service (determined in a manner
consistent with subsection (a) above) with any predecessor employer of the
Employer; provided, however, that if the Employer is maintaining the Plan
as the plan of a predecessor employer, an Employee's Years of Service
shall automatically include years of service with such predecessor
employer without regard to any designation in the Adoption Agreement.
3.5 Eligibility Computation Periods. For purposes of determining the eligibility
of an Employee to participate in the Plan, the Employee's initial eligibility
computation period which shall be used to measure the Employee's Years of
Service and Breaks in Service shall be the 12-consecutive month period beginning
on the date the Employee first performs an Hour of Service for the Employer (the
Employee's "employment commencement date"). The Employee's subsequent
eligibility computation periods shall be the 12-consecutive month periods
beginning on each anniversary of the Employee's employment commencement date.
3.6 Participation and Service upon Reemployment
(a) Participation. A Participant who terminates employment with the
Employer shall be eligible to resume participation in the Plan immediately
upon reemployment by the Employer (provided that, upon reemployment, the
former Participant satisfies the participation requirements designated by
the Employer in Section 2 of the Adoption Agreement).
(b) Years of Service. An Employee who terminates employment with the
Employer prior to becoming a Participant in the Plan shall have all Years
of Service which the Employee completed for eligibility purposes
automatically reinstated upon reemployment by the Employer, unless the
Employee incurs a Break in Service, in which case the Employee's prior
Years of Service shall be reinstated only if the number of the Employee's
consecutive one-year Breaks in Service is less than the greater of five or
the aggregate number of the Employee's Years of Service prior to the Break
in Service. For these purposes, the Employee's aggregate number of Years
of Service prior to the period of consecutive one-year Breaks in Service
shall exclude any Years of Service which were not reinstated under this
Article 3.6(b) by reason of any prior
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<PAGE> 19
period of consecutive one-year Breaks in Service. If an Employee's Years
of Service are disregarded pursuant to this Article 3.6(b), the Employee
shall be treated as a new Employee for eligibility purposes upon
reemployment by the Employer.
3.7 Transfers To or From Covered Status.
(a) In the event a Participant ceases participation in the Plan because he
or she is no longer a member of the category of Employees who are eligible
to participate in the Plan as designated by the Employer in Section 2 of
the Adoption Agreement, the former Participant shall be eligible to resume
participation in the Plan immediately upon his or her return to such
category of eligible Employees.
(b) Any Employee who is not a member of the category of Employees who are
eligible to participate in the Plan (as designated by the Employer in
Section 2 of the Adoption Agreement) shall be eligible to immediately
commence participation in the Plan if the Employee becomes such a member
and has otherwise satisfied the participation requirements designated by
the Employer in the Adoption Agreement.
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ARTICLE 4
CONTRIBUTIONS
4.1 Employee Pre-Tax Basic and Supplemental Contributions.
(a) Employee Pre-Tax Basic Contributions. A Participant may elect under a
salary reduction agreement as described in Article 4.2 to have the
Employer make Employee Pre-Tax Basic Contributions to the Plan on the
Participant's behalf in an amount not to exceed the maximum amount
permitted under the Adoption Agreement, subject to the limitations of
Article 4.4 and Article 11.
(b) Employee Pre-Tax Supplemental Contributions. If so designated by the
Employer in the Adoption Agreement, a Participant who has elected to have
the Employer make Employee Pre-Tax Basic Contributions to the Plan in the
maximum amount permitted under the Adoption Agreement may also elect under
the Participant's salary reduction agreement to have the Employer make
Employee Pre-Tax Supplemental Contributions to the Plan on the
Participant's behalf, subject to the limitations of Article 4.4 and
Article 11.
4.2 Salary Reduction Agreement.
(a) Nature of Agreement. The salary reduction agreement referred to in
Article 4.1 shall be on a form prescribed by the Plan Administrator
whereby the Participant agrees to reduce his or her Compensation by
specified amounts for purposes of having the Employer contribute the
reduced Compensation amount to the Plan as Employee Pre-Tax Contributions
on behalf of the Participant under Article 4.1.
(b) Commencement of Agreement. Every Employee who is eligible to
participate in the Plan under Article 3.1 shall be afforded a reasonable
opportunity by the Plan Administrator to enter into a salary reduction
agreement and to elect to have Employee Pre-Tax Contributions made to the
Plan on his or her behalf under Article 4.1. A Participant's salary
reduction agreement shall be effective as soon as practicable following
the date the agreement is received in executed form by the Plan
Administrator, provided such effective date shall be no earlier than the
date the
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<PAGE> 21
Participant would otherwise commence participation in the Plan under
Article 3.2. Under no circumstances shall a Participant's salary reduction
agreement be adopted retroactively. A Participant's salary reduction
agreement shall remain in effect until amended or terminated by the
Participant in accordance with (f) or (g) below.
(c) Timing of Reduction and Contribution. The reduction in a Participant's
Compensation which is used for purposes of funding the Participant's
Employee Pre-Tax Contributions under Article 4.1 shall be done on a
monthly, semi-monthly, biweekly, weekly or other periodic basis in
accordance with the Participant's regular payroll period and, if
applicable under (h) below, at the time any bonus is payable to the
Participant. The Employee Pre-Tax Contributions on behalf of a Participant
for a payroll period shall be contributed to the Trust as of the earliest
date on which such amounts can reasonably be segregated from the
Employer's general assets, and in no event later than 90 days following
the date on which such amounts would otherwise have been payable to the
Participant as Compensation.
(d) Cut-Back in Employee Pre-Tax Contributions. If the Plan Administrator
reasonably determines that all or any part of the Participant's reduced
Compensation amount for any Plan Year may not be contributed to the Plan
as Employee Pre-Tax Contributions under Article 4.1 without causing the
Plan to fail the nondiscrimination requirements of Article 5 or the
contribution limitations of Article 11, the Employer shall not be required
to make such contributions to the Plan and shall instead pay such reduced
Compensation amount directly to the Participant.
(e) Amendment of Agreement. A Participant shall be permitted to amend his
or her salary reduction agreement at any time with respect to Compensation
not yet received to provide a new amount which will be used to determine
the Employee Pre-Tax Contributions to the Plan on the Participant's behalf
under Article 4.1. A Participant's amended salary reduction agreement
shall be effective as soon as practicable following the date the amended
agreement is received in executed form by the Plan Administrator. The Plan
Administrator may prescribe uniform and nondiscriminatory rules limiting
the number of times a Participant may amend his or her salary reduction
agreement during a Plan Year, provided that Participants are afforded a
reasonable opportunity at least once each Plan Year to amend their salary
reduction agreements.
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<PAGE> 22
(f) Termination of Agreement. A Participant may terminate his or her
salary reduction agreement at any time with respect to Compensation not
yet received by delivering written notice of termination to the Plan
Administrator. Any Participant who terminates his or her salary reduction
agreement may be permitted, in accordance with uniform and
nondiscriminatory rules prescribed by the Plan Administrator, to execute a
new salary reduction agreement and resume having Employee Pre-Tax
Contributions made to the Plan on his or her behalf under Article 4.1.
(g) Transfer to or from Non-Covered Employment. A Participant's salary
reduction agreement shall automatically terminate if the Participant is no
longer a member of the category of Employees who are eligible to
participate in the Plan as designated by the Employer in Section 2 of the
Adoption Agreement. If such a Participant subsequently returns to the
category of eligible Employees, the Participant shall be permitted to
execute a new salary reduction agreement and resume having Employee
Pre-Tax Contributions made to the Plan on his or her behalf under Article
4.1.
(h) Coordination with Employee Pre-Tax Bonus Contributions. If the
Employer has elected under the Adoption Agreement to allow Participants to
make Employee Pre-Tax Bonus Contributions, any designated bonus payable to
a Participant shall be eligible for reduction as Employee Pre-Tax Bonus
Contributions under Article 4.3 (and not as Employee Pre-Tax Basic or
Supplemental Contributions under Article 4.1).
4.3 Employee Pre-Tax Bonus Contributions.
(a) Bonus Reduction Agreement. If so designated by the Employer in the
Adoption Agreement, a Participant may elect to have the Employer make
Employee Pre-Tax Bonus Contributions to the Plan on the Participant's
behalf by executing a bonus reduction agreement. Such agreement shall be
on a form prescribed by the Plan Administrator whereby the Participant
agrees to reduce the amount of any designated bonus payable to the
Participant by the Employer by an amount specified by the Participant (not
to exceed the maximum amount permitted under the Adoption Agreement) for
purposes of having the Employer contribute the bonus reduction amount to
the Plan as an Employee Pre-Tax Bonus Contribution on behalf of the
Participant, subject to the limitations of Article 4.4 and Article 11.
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<PAGE> 23
(b) Timing of Contribution. Any Employee Pre-Tax Bonus Contribution on
behalf of a Participant shall be contributed to the Trust by the Employer
as of the earliest date on which such amount can reasonably be segregated
from the Employer's general assets, and in no event later than 90 days
following the date on which such amount would otherwise have been payable
to the Participant as Compensation.
4.4 Maximum Amount of Employee Pre-Tax Contributions.
(a) Limitation on Employee Pre-Tax Contributions. No Participant shall be
permitted to have aggregate elective deferrals made to this Plan or any
other qualified plans maintained by the Employer during any taxable year
in excess of the dollar limitation of Section 402(g) of the Code in effect
at the beginning of such taxable year. For these purposes, a Participant's
"elective deferrals" include: (i) the Participant's Employee Pre-Tax
Contributions to this Plan (excluding any Employee Pre-Tax Contributions
returned to the Participant as an Excess Amount under Article 11): (ii)
Employer contributions made on behalf of the Participant pursuant to an
election to defer under any other plan with a qualified cash or deferred
arrangement under Section 401(k) of the Code, any simplified employee
pension as described in Section 402(h)(1)(B) of the Code, any eligible
deferred compensation plan as described in Section 457 of the Code, or any
plan as described in Section 501(c)(18) of the Code; and (iii) Employer
contributions made on behalf of the Participant pursuant to a salary
reduction agreement to purchase an annuity contract under Section 403(b)
of the Code.
(b) Allocation of Excess Elective Deferrals. If a Participant has made
Excess Elective Deferrals for any taxable year, the Participant may assign
to this Plan any portion of such Excess Elective Deferrals by notifying
the Plan Administrator in writing no later than the first March 1st
following the close of the taxable year. Such written notification shall
certify that the Participant has made Excess Elective Deferrals for the
taxable year, and shall specify the amount of such Excess Elective
Deferrals to be allocated to this Plan for the taxable year. A Participant
shall be deemed to have notified the Plan Administrator of the existence
of any Excess Elective Deferrals which arise by taking into account only
those elective deferrals on behalf of the Participant to this Plan and any
other plans maintained by the Employer, and to have assigned those Excess
Elective Deferrals to such plans maintained by the Employer.
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<PAGE> 24
(c) Distribution of Excess Elective Deferrals. Notwithstanding any
provision of the Plan to the contrary, if a Participant has assigned
Excess Elective Deferrals to this Plan for a taxable year, the amount of
such Excess Elective Deferrals, plus any income or minus any loss
allocable thereto, shall be distributed to the Participant from the
Participant's Employee Pre-Tax Contribution Account no later than the
first April 15th following the close of the taxable year.
(d) Income or Loss Allocable to Excess Elective Deferrals. The income or
loss allocable to the amount of Excess Elective Deferrals referred to in
subsection (c) above shall include all allocable income or loss for the
taxable year of the Excess Elective Deferral and shall be calculated using
any reasonable method for computing income or loss, provided such method
is used consistently for all Participants and for all corrective
distributions under the Plan for the relevant year, and is used by the
Plan for allocating income or loss to Participants' Employee Pre-Tax
Contribution Accounts.
(e) Alternative Method for Calculating Income or Loss Allocable to Excess
Elective Deferrals. Notwithstanding (d) above, the Plan may elect to
calculate the income or loss allocable to the amount of Excess Elective
Deferrals referred to in subsection (c) above by multiplying the total
investment income or loss (including dividends, interest, realized gains
or losses, and unrealized appreciation or depreciation) allocated to the
Participant's Employee Pre-Tax Contribution Account for the taxable year
of the Excess Elective Deferrals by a fraction, the numerator of which is
the Excess Elective Deferral amount to be distributed to the Participant
by the Plan for the taxable year, and the denominator of which is the
total account balance attributable to the Participant's Employee Pre-Tax
Contributions as of the end of the taxable year, reduced by the investment
gain or increased by the investment loss allocated to such total amount
for the taxable year.
4.5 Employee After-Tax Contributions. If so designated by the Employer in the
Adoption Agreement, a Participant shall be permitted to make Employee After-Tax
Contributions to the Plan in an amount not to exceed the maximum amount
permitted under the Adoption Agreement, subject to the limitations of Article
11. All Employee After-Tax Contributions for a Plan Year shall be made to the
Trust no later than the last day of the Plan Year.
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<PAGE> 25
4.6 Employer Matching Contributions. If so designated by the Employer in the
Adoption Agreement, the Employer shall make Employer Matching Contributions to
the Plan for each Plan Year in an amount determined under the provisions of the
Adoption Agreement, subject to the limitations of Article 11. All Employer
Matching Contributions for any Plan Year shall be made to the Trust no later
than the end of the 12-month period immediately following the close of the Plan
Year. Notwithstanding the preceding, if any Employer Matching Contribution on
behalf of any Highly Compensated Employee (as defined in Article 5.1(j)) relates
to an Excess Elective Deferral, Excess Contribution (as defined in Article
5.1(g)) or an Excess Aggregate Contribution (as defined in Article 5.1(h)) which
is distributed to the Highly Compensated Employee, such Employer Matching
Contribution shall be forfeited no later than the end of the 12-month period
immediately following the close of the Plan Year.
4.7 Employer Nonelective Contributions.
(a) If so designated by the Employer in the Adoption Agreement, the
Employer shall make Employer Nonelective Contributions to the Plan for
each Plan Year in an amount determined under the provisions of the
Adoption Agreement, subject to the limitations of Article 11. Employer
Nonelective Contributions for any Plan Year shall be allocated to the
Employer Nonelective Contribution Accounts of each Participant who either
completes more than 500 Hours of Service during the Plan Year or who is
employed by the Employer on the last day of the Plan Year in the
proportion that such Participant's Compensation for the Plan Year bears to
the total Compensation of all such Participants for the Plan Year.
Employer Nonelective Contributions for any Plan Year shall be made to the
Trust no later than the end of the 12-month period immediately following
the close of the Plan Year.
(b) For any Plan Year in which the Plan does not satisfy one of the
Average Actual Deferral Percentage tests of Article 5.2 or one of the
Average Contribution Percentage tests of Article 5.6, the Employer shall
be permitted, in its sole discretion by resolution duly adopted on or
before the last day of the following Plan Year, to make Employer
Nonelective Contributions which qualify as Qualified Nonelective
Contributions (as defined is Article 5.1(m)) to the Plan on behalf of
Eligible Employees who are Non-Highly Compensated Employees (as defined in
Article 5.1(k)) for the Plan Year in an amount sufficient to enable the
Plan to satisfy one of the Average Actual Deferral
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<PAGE> 26
Percentage tests or one of the Average Contribution Percentage Tests for
the Plan Year. All Qualified Nonelective Contributions for a Plan Year
shall be made to the Trust no later than the end of the 12-month period
immediately following the close of the Plan Year.
4.8 Rollover Contributions.
(a) An Employee who has participated in any other qualified plan described
in Section 401(a) of the Code or in a qualified annuity plan described in
Section 403(a) of the Code shall be permitted, subject to the approval of
the Plan Administrator, to make a rollover contribution to the Plan of an
amount received by the Employee which is attributable to participation in
such other plan (reduced by any employee after-tax contributions made to
the plan), provided that the rollover contribution complies with all
applicable requirements of the Code and the regulations and rulings
thereunder.
(b) Any Employee who is permitted to make a rollover contribution to the
Plan, but who has not otherwise commenced participation in the Plan under
Article 3.2, shall be considered a Participant for all purposes under the
Plan except Articles 4.1, 4.3, 4.5, 4.6 and 4.7.
(c) The Sponsor, Trustee and Recordkeeper shall not be liable for any
adverse consequences which may result to any Employee, the Employer, the
Plan or the Trust should any rollover contribution pursuant to this
Article 4.8 which is duly authorized by the Plan Administrator be
determined not to constitute a proper rollover contribution under the
Code, and the Employer specifically agrees to hold the Sponsor, Trustee
and Recordkeeper harmless from any and all such liability.
4.9 Manner of Making Contributions. All contributions to the Trust shall be paid
directly to the Trustee. Contributions may be made by check, bank wire or money
order. The Plan Administrator shall furnish the Recordkeeper with allocation
instructions with respect to each contribution which: (i) identify each
Participant on whose behalf the contribution is being made and the amount
thereof; (ii) identify whether the amount contributed on behalf of the
Participant represents an Employee Pre-Tax Contribution, Employee After-Tax
Contribution, Employer Matching Contribution, Employer Nonelective Contribution,
or rollover contribution; and (iii)
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<PAGE> 27
direct the investment of the amount contributed on behalf of the Participant in
accordance with the provisions of Article 6.5.
4.10 Transfer of Assets.
(a) If so authorized by the Plan Administrator, the Trustee may accept a
transfer of assets from the trustee of any other qualified plan described
in Section 401(a) of the Code or from a qualified annuity plan described
in Section 403(a) of the Code on behalf of any one or more Employees to
the extent permitted by the Code and the regulations and rulings
thereunder.
(b) In the event assets are transferred to this Plan on behalf of any
Employee in accordance with (a) above, the transferred assets shall be
accounted for separately under Article 6.2, and any optional forms of
benefit available to the Employee under the transferor plan shall be
preserved with respect to the transferred assets of the Employee under
this Plan to the extent required by the Code and the regulations and
rulings thereunder.
(c) The Sponsor, Trustee and Recordkeeper shall not be liable for any
adverse consequences which may result to any Employee, the Employer, the
Plan or the Trust should any transfer of assets that is duly authorized by
the Plan Administrator pursuant to this Article 4.10 be determined not to
constitute a proper transfer under the Code, and the Employer specifically
agrees to hold the Sponsor, Trustee and Recordkeeper harmless from any and
all such liability.
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<PAGE> 28
ARTICLE 5
NONDISCRIMINATION REQUIREMENTS
5.1 Definitions. For purposes of this Article 5, the following terms shall be
defined as follows:
(a) "Actual Deferral Percentage" means the ratio, expressed as a
percentage calculated to the nearest one-hundredth of one percent, of the
amount of Employee Pre-Tax Contributions on behalf of an Eligible Employee
for a Plan Year to the Employee's Compensation for the Plan Year, whether
or not the Employee was a Participant in the Plan for the entire Plan
Year. For these purposes, an Eligible Employee's Employee Pre-Tax
Contributions shall include any Qualified Nonelective Contributions and
Qualified Matching Contributions on behalf of the Eligible Employee for
the Plan Year which the Employer elects to treat as Employee Pre-Tax
Contributions under Article 5.4, but shall not include any Employee
Pre-Tax Contributions on behalf of the Eligible Employee for the Plan Year
which the Employer elects to treat as Employer Matching Contributions
under Article 5.8. A Highly Compensated Employee's Employee Pre-Tax
Contributions shall include any Excess Elective Deferrals on behalf of the
Highly Compensated Employee for the Plan Year. Any Eligible Employee who
does not elect to make Employee Pre-Tax Contributions and who does not
receive any allocation of Qualified Nonelective Contributions or Qualified
Matching Contributions which are treated as Employee Pre-Tax Contributions
for a Plan Year shall have a zero Actual Deferral Percentage for the Plan
Year. An Eligible Employee's Actual Deferral Percentage for a Plan Year
shall be calculated by disregarding any Employee Pre-Tax Contributions on
behalf of the Eligible Employee for the Plan Year which are properly
returned to the Eligible Employee as an Excess Amount under Article 11.
(b) "Average Actual Deferral Percentage" means, for the group of Eligible
Employees who are Highly Compensated Employees for a Plan Year or the
group of Eligible Employees who are Non-Highly Compensated Employees for
the Plan Year, the average of the Actual Deferral Percentages of all
Eligible Employees in such group for the Plan Year.
(c) "Average Contribution Percentage" means, for the group of Eligible
Employees who are Highly Compensated Employees for a Plan Year or the
group of Eligible
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<PAGE> 29
Employees who are Non-Highly Compensated Employees for the Plan Year, the
average of the Contribution Percentages of all Eligible Employees in such
group for the Plan Year.
(d) "Contribution Percentage" means the ratio, expressed as a percentage
calculated to the nearest one-hundredth of one percent, of the sum of
Employer Matching Contributions (other than Qualified Matching
Contributions treated as Employee Pre-Tax Contributions under Article
5.4), Employee After-Tax Contributions, and any Employee Pre-Tax
Contributions and Qualified Nonelective Contributions treated as Employer
Matching Contributions under Article 5.8, on behalf of an Eligible
Employee for a Plan Year to the Employee's Compensation for the Plan Year,
whether or not the Employee was a Participant in the Plan for the entire
Plan Year. For these purposes, an Eligible Employee's Contribution
Percentage for any Plan Year shall be calculated by excluding any Employer
Matching Contributions which are forfeited either to correct Excess
Aggregate Contributions or because the contributions to which they relate
are Excess Elective Deferrals, Excess Contributions, or Excess Aggregate
Contributions. An Eligible Employee's Contribution Percentage for a Plan
Year shall be calculated by disregarding any Employee After-Tax
Contributions or Employee Pre-Tax Contributions on behalf of the Eligible
Employee for the Plan Year which are properly returned to the Eligible
Employee as an Excess Amount under Article 11.
(e) "Compensation" means the total amount of compensation (as defined in
Article 11.1(b) of the Plan) received by an Employee from the Employer
while an Eligible Employee under the Plan during the Plan Year. An
Eligible Employee's Compensation for a Plan Year shall include all
Employee Pre-Tax Contributions made to the Plan on behalf of the Employee
for the Plan Year, and all elective contributions made by the Employer for
the Plan Year to any other plan on behalf of the Employee which are not
currently includible in the gross income of the Employee under Section
125, 402(a)(8), 402(h) or 403(b) of the Code, provided that the Employer
has elected to treat all such elective contributions as compensation with
respect to all employees under all plans of the Employer.
(f) "Eligible Employee" means, with respect to any Plan Year, any Employee
who is eligible to commence participation in the Plan under Article 3.2
and to have Employee
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Pre-Tax Contributions made to the Plan under Article 4.1 for the Plan
Year, regardless of whether any contributions are made to the Plan on
behalf of the Employee for the Plan Year.
(g) "Excess Contributions" means, with respect to any Plan Year, the
excess of the aggregate amount of Employee Pre-Tax Contributions,
including any Qualified Nonelective Contributions and Qualified Matching
Contributions treated as Employee Pre-Tax Contributions under Article 5.4,
actually made to the Plan on behalf of Highly Compensated Employees for
the Plan Year over the maximum amount of such contributions permitted
under Article 5.2.
(h) "Excess Aggregate Contributions" means, with respect to any Plan Year,
the excess of the aggregate amount of Employer Matching Contributions,
Employee After-Tax Contributions, and any Employee Pre-Tax Contributions
and Qualified Nonelective Contributions treated as Employer Matching
Contributions under Article 5.8, actually made to the Plan on behalf of
Highly Compensated Employees for the Plan Year over the maximum amount of
such contributions permitted under Article 5.6.
(i) "Family Member" means, with respect to any Eligible Employee, an
individual described in Section 414(q)(6)(B)of the Code.
(j) "Highly Compensated Employee" includes, for any Plan Year, all Highly
Compensated Active Employees and all Highly Compensated Former Employees:
(1) A Highly Compensated Active Employee includes any Employee who
performs service for the Employer during the Determination Year and
who during the Look-Back Year:
(i) received Compensation from the Employer in excess of the
$75,000 indexed amount of Section 414(q)(1)(B) of the Code
in effect for the Look-Back Year;
(ii) received Compensation from the Employer in excess of the
$50,000 indexed amount of Section 414(q)(1)(C) of the Code in
effect
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for the Look-Back Year and was a member of the top-paid group
within the meaning of Section 414(q)(4) of the Code for such
year; or
(iii) was an officer of the Employer as described in Section
414(q)(l)(D)of the Code for such year.
(2) A Highly Compensated Active Employee also includes:
(i) any Employee who is described in (1) above if the term
"Determination Year" is substituted for the term "Look-Back
Year" and the Employee is one of the 100 Employees who
received the most Compensation from the Employer during the
Determination Year: and
(ii) any Employee who is a five percent owner of the Employer
at any time during the Look-Back Year or Determination Year.
(3) A Highly Compensated Former Employee includes any Employee who
separated from service with the Employer (or was deemed to have
separated from service) prior to the Determination Year, performs no
service for the Employer during the Determination Year, and was a
Highly Compensated Active Employee for either the year of separation
from service or any Determination Year ending on or after the
employee's 55th birthday.
(4) For purposes of this Article 5.1(j), the term "Determination
Year" shall mean the Plan Year, and the term "Look-Back Year" shall
mean the twelve-month period immediately preceding the Determination
Year (unless the Employer elects, in accordance with the regulations
under Section 414(q) of the Code, to make the Look-Back Year the
calendar year ending with or within the applicable Determination
Year).
(5) If during a Determination Year or Look-Back Year an Employee is
a family member of either (i) a five percent owner who is an active
or former employee, or (ii) a Highly Compensated Employee who is one
of the 10 most highly compensated Employees ranked on the basis of
Compensation paid by
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<PAGE> 32
the Employer during such year, then the family member and the five
percent owner or top-ten Highly Compensated Employee shall be
treated as a single Employee receiving aggregate Compensation and
Plan contributions equal to the sum of the Compensation and Plan
contributions on behalf of the family member and five percent owner
or top-ten Highly Compensated Employee. For these purposes, family
members shall include the spouse, lineal ascendant and descendants
of the Employee and the spouses of such lineal ascendant and
descendants.
(6) The determination of Highly Compensated Employees, including the
determination of the number and identity of Employees in the
top-paid group, the top-100 Employees, the number of Employees
treated as officers and the Compensation that is taken into account
with respect to each Employee shall be made in accordance with
Section 414(q) of the Code and the regulations thereunder.
(k) "Non-Highly Compensated Employee" means, for any Plan Year, an
Employee who is not a Highly Compensated Employee.
(l) "Qualified Matching Contributions" means any Employer Matching
Contributions to this Plan on behalf of Eligible Employees, and any
matching contributions (as defined in Section 401(m)(4)(A) of the Code) by
the Employer to any other plan or plans on behalf of Eligible Employees,
which are nonforfeitable (fully vested) when made and which are subject to
the distribution restrictions of Section 401(k)(2)(B) of the Code,
provided that amounts attributable to such contributions are not
distributable solely on account of the Employee's hardship. A Qualified
Matching Contribution is not treated as forfeitable merely because under
the Plan it is forfeited when the contribution to which it relates is
treated as an Excess Elective Deferral, Excess Contribution or Excess
Aggregate Contribution.
(m) "Qualified Nonelective Contributions" means any Employer Nonelective
Contributions to this Plan on behalf of Eligible Employees, and any
qualified nonelective contributions (as defined in Section 401(m)(4)(C)
of the Code) by the Employer to any other plan or plans on behalf of
Eligible Employees that Eligible
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<PAGE> 33
Employees may not elect to receive in cash until distributed from the
plan, which are nonforfeitable (fully-vested) when made, and which are
subject to the distribution restrictions of Section 401(k)(2)(B) of the
Code, provided that amounts attributable to such contributions are not
distributable merely on account of the Employee's hardship.
5.2 Average Actual Deferral Percentage Tests. For each Plan Year, the Plan shall
satisfy one of the following Average Actual Deferral Percentage tests with
respect to the Employee Pre-Tax Contributions, and any Qualified Nonelective
Contributions and Qualified Matching Contributions created as Employee Pre-Tax
Contributions under Article 5.4, made to the Plan for the Plan Year:
(a) the Average Actual Deferral Percentage for the group of Eligible
Employees who are Highly Compensated Employees for the Plan Year shall not
exceed the Average Actual Deferral Percentage for the group of Eligible
Employees who are Non-Highly Compensated Employees for the Plan Year
multiplied by 1.25; or
(b) the Average Actual Deferral Percentage for the group of Eligible
Employees who are Highly Compensated Employees for the Plan Year shall not
exceed the Average Actual Deferral Percentage for the group of Eligible
Employees who are Non-Highly Compensated Employees for the Plan Year
multiplied by two, provided that the Average Actual Deferral Percentage
for the group of Eligible Employees who are Highly Compensated Employees
for the Plan Year does not exceed the Average Actual Deferral Percentage
for the group of Eligible Employees who are Non-Highly Compensated
Employees by more than two percentage points.
5.3 Special Rules.
(a) Aggregation of Family Members. For purposes of determining the Actual
Deferral Percentage of any Eligible Employee who is a Highly Compensated
Employee and who is subject to the family aggregation rule of Section
414(q)(6) of the Code because the Employee is either a five-percent owner
or one of the ten most highly-paid Highly Compensated Employees, the
Employee Pre-Tax Contributions (and any Qualified Matching Contributions
and Qualified Nonelective Contributions treated is Employee Pre-Tax
Contributions under Article 5.4) made on behalf of any Family
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<PAGE> 34
Member of the Highly Compensated Employee for the Plan Year shall, to the
extent required by regulations of the Secretary of Treasury, be treated as
made on behalf of the Highly Compensated Employee, and any Compensation of
such Family Member for the Plan Year shall, to the extent required by
regulations of the Secretary of Treasury, be treated as Compensation of
the Highly Compensated Employee. In such a case, the Family Member of the
Highly Compensated Employee shall not be considered a separate employee
for purposes of calculating Average Actual Deferral Percentages for the
Plan Year.
(b) Highly Compensated Employees Under Multiple Cash or Deferred
Arrangements. In the case of any Eligible Employee who is a Highly
Compensated Employee for a Plan Year and who is eligible to participate in
more than one cash or deferred arrangement described in Section 401(k) of
the Code maintained by the Employer during the Plan Year, the Actual
Deferral Percentage of the Employee for the Plan Year shall be calculated
by treating all such cash or deferred arrangements in which the Employee
is eligible to participate as one arrangement. If the Highly Compensated
Employee participates in two or more such cash or deferred arrangements
that have different plan years, all cash or deferred arrangements ending
with or within the same calendar year shall be treated as a single
arrangement.
(c) Aggregation of Plans. In the event that this Plan satisfies the
requirements of Section 401(a)(4), 401(k) or 410(b) of the Code only if
aggregated with one or more other plans, or if one or more other plans
satisfy the requirements of such sections of the Code only if aggregated
with this Plan, then this Article 5 shall be applied by determining the
Actual Deferral Percentages of Employees as if all such plans were a
single plan. For plan years beginning after December 31, 1989, plans may
be aggregated in order to satisfy Section 401(k) of the Code only if they
have the same plan year.
5.4 Treatment of Qualified Matching Contributions and Qualified Nonelective
Contributions as Employee Pre-Tax Contributions. If any Qualified Matching
Contributions or Qualified Nonelective Contributions are made on behalf of
Eligible Employees for a Plan Year, the Employer may elect, in accordance with
the regulations of the Secretary of Treasury under Section 401(k) of the Code,
to treat all or a portion of such Qualified Matching
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<PAGE> 35
Contributions or Qualified Nonelective Contributions as Employee Pre-Tax
Contributions for purposes of calculating the Actual Deferral Percentages of
Eligible Employees for the Plan Year. Any such Qualified Nonelective
Contributions or Qualified Matching Contributions for a Plan Year must be made
no later than the end of the 12-month period immediately following the close of
the Plan Year.
5.5 Correction of Excess Contributions
(a) General rule. If the Plan does not satisfy one of the Average Actual
Deferral Percentage tests of Article 5.2 as of the end of a Plan Year, the
Excess Contributions for the Plan Year shall be corrected if the Employer
makes Qualified Nonelective Contributions to the Plan on behalf of
Non-Highly Compensated Employees in accordance with Article 4.7(b) in an
amount sufficient to enable the Plan to satisfy one of the Average Actual
Deferral Percentage tests of Article 5.2 for the Plan Year, or if the
Excess Contributions for the Plan Year are timely distributed to Highly
Compensated Employees in accordance with subsection (c) below.
(b) Allocation of Excess Contributions. In the event Excess Contributions
are made to the Plan for a Plan Year, the Actual Deferral Percentage for
the Highly Compensated Employee with the highest Actual Deferral
Percentage for the Plan Year shall be reduced to the minimum extent
necessary either:
(i) to enable the Plan to satisfy one of the Average Actual Deferral
Percentage tests of Article 5.2 for the Plan Year; or
(ii) to cause the Employee's Actual Deferral Percentage to equal the
next highest Actual Deferral Percentage of any Highly Compensated
Employee for the Plan Year.
This process shall be repeated until the Average Actual Deferral
Percentage for the group of Eligible Employees who are Highly Compensated
Employees is sufficiently reduced to enable the Plan to satisfy one of the
Average Actual Deferral Percentage tests of Article 5.2 for the Plan Year.
The amount of Excess Contributions to be allocated to each Highly
Compensated Employee for the Plan Year shall equal the total
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<PAGE> 36
Employee Pre-Tax Contributions, including Qualified Matching Contributions
and Qualified Nonelective Contributions treated as Employee Pre-Tax
Contributions under Article 5.4, on behalf of the Highly Compensated
Employee for the Plan Year minus the amount determined by multiplying the
Highly Compensated Employee's reduced Actual Deferral Percentage (as
determined above) by the Employee's Compensation for the Plan Year. Excess
Contributions shall be allocated to Employees who are subject to the
family aggregation rule of Section 414(q)(6) of the Code in the manner
prescribed by regulations of the Secretary of Treasury.
(c) Distribution of Excess Contributions. If any Excess Contributions
allocated to Highly Compensated Employees for a Plan Year are not
corrected by Qualified Nonelective Contributions under Article 4.7(b),
such Excess Contributions, plus any income and minus any loss allocable
thereto, shall be distributed to Highly Compensated Employees no later
than 12 months following the close of the Plan Year. Such distributions
shall be made to Highly Compensated Employees on the basis of the
respective portions of the Excess Contributions attributable to each such
Highly Compensated Employee. Excess Contributions of Highly Compensated
Employees who are subject to the family member aggregation rules of
Article 5.3(a) shall be allocated among the Family Members of the Highly
Compensated Employee in proportion to the Employee Pre-Tax Contributions
(and amounts treated as Employee Pre-Tax Contributions) of each Family
Member which are combined to determine the Highly Compensated Employee's
Actual Deferral Percentage.
(d) Income or Loss Allocable to Excess Contributions. The income or loss
allocable to the Excess Contributions referred to in subsection (c) above
shall include the allocable income or loss for the Plan Year of the Excess
Contributions and shall be calculated using any reasonable method for
computing income or loss, provided such method is used consistently for
all Participants and for all corrective distributions under the Plan for
the Plan Year, and is used by the Plan for allocating income or loss to
Participants' separate accounts under the Plan.
(e) Alternative Method for Calculating Income or Loss Allocable to Excess
Contributions. Notwithstanding (d) above, the Plan may elect to calculate
the income or loss allocable to the amount of Excess Contributions
referred to in subsection (c)
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<PAGE> 37
above by multiplying the total investment income or loss (including
dividends, interest, realized gains or losses, and unrealized appreciation
or depreciation) allocable to the Participant's Employee Pre-Tax
Contributions and amounts treated as Employee Pre-Tax Contributions under
Article 5.4 for the Plan Year by a fraction, the numerator of which is the
Excess Contributions allocated to the Participant for the Plan Year, and
the denominator of which is the total account balance attributable to the
Participant's Employee Pre-Tax Contributions and amounts treated as
Employee Pre-Tax Contributions under Article 5.4 as of the end of the Plan
Year, reduced by the investment gain (or increased by the investment loss)
allocated to such total amount for the Plan Year.
(f) Coordination with Excess Elective Deferrals. The amount of any Excess
Contributions to be distributed under subsection (c) above with respect to
any Highly Compensated Employee for a Plan Year shall be reduced by any
Excess Elective Deferrals previously distributed to the Highly Compensated
Employee under Article 4.4(c) for the Employee's taxable year ending with
or within the Plan Year.
(g) Accounting for Excess Contributions. The amount of Excess
Contributions allocated to a Highly Compensated Employee for a Plan Year
which is distributed under subsection (c) above shall be attributed first
to the Participant's Employee Pre-Tax Contributions for the Plan Year and
then, to the extent such Excess Contributions exceed the Participant's
Employee Pre-Tax Contributions for the Plan Year, attributed to amounts
treated as Employee Pre-Tax Contributions under Article 5.4 in proportion
to the amounts of such contributions on behalf of the Participant for the
Plan Year.
(h) Excise Tax. If any Excess Contributions for a Plan Year are not
distributed to Highly Compensated Employees in accordance with subsection
(c) above within 2 1/2 months after the close of the Plan Year, the
Employer shall be subject to the 10 percent excise tax of Section 4979 of
the Code, unless Qualified Nonelective Contributions are made to the Plan
on behalf of Non-Highly Compensated Employees in accordance with Article
4.7(b) prior to the end of the 12-month period immediately following the
close of the Plan Year in an amount sufficient to enable the Plan to
satisfy one of the Average Actual Deferral Percentage tests of Article 5.2
for the Plan Year.
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5.6 Average Contribution Percentage Tests. For each Plan Year for which any
Employer Matching Contributions are made to the Plan (other than Qualified
Matching Contributions treated as Employee Pre-Tax Contributions for the Plan
Year under Article 5.4) or any Employee After-Tax Contributions are made to the
Plan, the Plan shall satisfy one of the following Average Contribution
Percentage tests for the Plan Year:
(a) the Average Contribution Percentage for the group of Eligible
Employees who are Highly Compensated Employees for the Plan Year shall not
exceed the Average Contribution Percentage for the group of Eligible
Employees who are Non-Highly Compensated Employees for the Plan Year
multiplied by 1.25; or
(b) the Average Contribution Percentage for the group of Eligible
Employees who are Highly Compensated Employees for the Plan Year shall not
exceed the Average Contribution Percentage for the group of Eligible
Employees who are Non-Highly Compensated Employees for the Plan Year
multiplied by two, provided that the Average Contribution Percentage for
the group of Eligible Employees who are Highly Compensated Employees for
the Plan Year does not exceed the Average Contribution Percentage for the
group of Eligible Employees who are Non-Highly Compensated Employees by
more than two percentage points.
5.7 Special Rules.
(a) Aggregation of Family Members. For purposes of determining the
Contribution Percentage of any Eligible Employee who is a Highly
Compensated Employee and who is subject to the family aggregation rule of
Section 414(q)(6) of the Code because the Employee is either a
five-percent owner or one of the ten most highly paid Highly Compensated
Employees, the Employee After-Tax Contributions and Employer Matching
Contributions (and any Employee Pre-Tax Contributions and Qualified
Nonelective Contributions treated as Employer Matching Contributions under
Article 5.8) made on behalf of any Family Member of the Highly Compensated
Employee for the Plan Year shall, to the extent required by regulations of
the Secretary of Treasury, be treated as made on behalf of the Highly
Compensated Employee, and any Compensation of such Family Member for the
Plan Year shall, to the extent required by regulations of the Secretary of
Treasury, be treated as Compensation of the Highly
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<PAGE> 39
Compensated Employee. In such a case, the Family Member of the Highly
Compensated Employee shall not be considered a separate employee for
purposes of calculating Avenge Contribution Percentages for the Plan Year.
(b) Highly Compensated Employees Under Multiple Plans. In the case of any
Eligible Employee who is a Highly Compensated Employee for a Plan Year and
who is eligible to participate in more than one plan maintained by the
Employer during the Plan Year, all matching contributions (as defined in
Section 401(m)(4)(A) of the Code), all employee contributions, and any
elective deferrals and qualified nonelective contributions taken into
account under Section 401(m)(3) of the Code with respect to the Employee
for the Plan Year, shall be aggregated for purposes of determining the
Employee's Contribution Percentage for the Plan Year. If the Highly
Compensated Employee participates in two or more cash or deferred
arrangements described in Section 401(k) of the Code maintained by the
Employer that have different plan years, all such cash or deferred
arrangements ending with or within the same calendar year shall be treated
as a single arrangement.
(c) Aggregation of Plans. In the event that this Plan satisfies the
requirements of Section 401(a)(4), 401(m) or 410(b) of the Code only if
aggregated with one or more other plans, or if one or more other plans
satisfy the requirements of such sections of the Code only if aggregated
with this Plan, then this Article 5 shall be applied by determining the
Contribution Percentages of Employees as if all such plans were a single
plan. For plan years beginning after December 31, 1989, plans may be
aggregated to satisfy Section 401(m) of the Code only if they have the
same plan year.
(d) Collectively Bargained Plans. If this Plan (or any portion of the
Plan) is a collectively bargained plan which automatically satisfies
Section 410(b) of the Code, the requirements of Article 5.6 shall be
treated as satisfied with respect to the Employee After-Tax Contributions
and Employer Matching Contributions to the Plan (or portion of the Plan).
5.8 Treatment of Employee Pre-Tax Contributions and Qualified Nonelective
Contributions as Employer Matching Contributions. The Employer may elect, in
accordance with the regulations of the Secretary of Treasury under Section
401(m) of the Code, to treat all
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<PAGE> 40
or a portion of the Employee Pre-Tax Contributions and any Qualified Nonelective
Contributions on behalf of Eligible Employees for a Plan Year as Employer
Matching Contributions for purposes of calculating the Contribution Percentages
of Eligible Employees for the Plan Year. Any such Employee Pre-Tax Contributions
or Qualified Nonelective Contributions for a Plan Year must be made no later
than the end of the 12-month period immediately following the close of the Plan
Year. Notwithstanding the preceding, the Employer may elect to treat Employee
Pre-Tax Contributions as Employer Matching Contributions for purposes of
calculating Contribution Percentages only if one of the Average Actual Deferral
Percentage Tests of Article 5.2 is satisfied before the Employee Pre-Tax
Contributions are treated as Employer Matching Contribution for the Plan Year,
and one of the Average Actual Deferral Percentage Tests of Article 5.2 continues
to be satisfied for the Plan Year excluding the Employee Pre-Tax Contributions
treated as Employer Matching Contributions for the Plan Year.
5.9 Correction of Excess Aggregate Contributions
(a) General Rule. If the Plan does not satisfy one of the Average
Contribution Percentages tests of Article 5.6 as of the end of a Plan
Year, the Excess Aggregate Contributions for the Plan Year shall be
corrected if the Employer makes Qualified Nonexclusive Contributions to
the Plan on behalf of Non-Highly Compensated Employees in accordance with
Article 4.7(b) in an amount sufficient to enable the Plan to satisfy one
of the Avenge Contribution Percentage tests of Article 5.6 for the Plan
Year, or if the Excess Aggregate Contributions for the Plan Year are
forfeited or timely distributed to Highly Compensated Employees in
accordance with subsection (c) below.
(b) Allocation of Excess Contributions. In the event Excess Aggregate
Contributions are made to the Plan for a Plan Year, the Contribution
Percentage for the Highly Compensated Employee with the highest
Contribution Percentage for the Plan Year shall be reduced to the minimum
extent necessary either:
(i) to enable the Plan to satisfy one of the Average Contribution
Percentage tests of Article 5.6 for the Plan Year, or;
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<PAGE> 41
(ii) to cause the Highly Compensated Employee's Contribution
Percentage to equal the next highest Contribution Percentage of any
Highly Compensated Employee for the Plan Year.
This process shall be repeated until the Average Contribution Percentage
for the group of Eligible Employees who are Highly Compensated Employees
for the Plan Year is sufficiently reduced to enable the Plan to satisfy
one of the Average Contribution Percentage tests of Article 5.6 for the
Plan Year. The amount of Excess Aggregate Contributions to be allocated to
each Highly Compensated Employee for the Plan Year shall equal the total
Employee After-Tax Contributions and Employer Marching Contributions,
including Employee Pre-Tax Contributions and Qualified Nonelective
Contributions treated as Employer Matching Contributions under Article
5.8, on behalf of the Highly Compensated Employee for the Plan Year minus
the amount determined by multiplying the Highly Compensated Employee's
reduced Contribution Percentage (as determined above) by the Employee's
Compensation for the Plan Year. Excess Aggregate Contributions shall be
allocated to Employees who are subject to the family aggregation rules of
Section 414(q)(6) of the Code in the manner prescribed by regulations of
the Secretary of Treasury.
(c) Forfeiture or Distribution of Excess Aggregate Contributions. If any
Excess Aggregate Contributions allocated to Highly Compensated Employees
for a Plan Year are not corrected by Qualified Nonelective Contributions
under Article 4.7(b), such Excess Aggregate Contributions, plus any income
or minus any loss allocable thereto, must be forfeited to the extent
attributable under subsection (g) below to Employer Matching
Contributions that are not vested under Article 7.2, and otherwise
distributed to Highly Compensated Employees no later than 12 months
following the close of the Plan Year. Such distributions shall be made to
Highly Compensated Employees on the basis of the respective portions of
the Excess Aggregate Contributions attributable to each such Highly
Compensated Employee. Excess Aggregate Contributions of Highly Compensated
Employees who are subject to the family member aggregation rules of
Article 5.7(a) shall be allocated among the Family Members of the Highly
Compensated Employee in proportion to the Employee After-Tax Contributions
and Employer Matching Contributions of each Family Member which are
combined to determine the Highly Compensated Employee's Average
Contribution Percentage.
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<PAGE> 42
(d) Income or Loss Allocable to Excess Aggregate Contributions. The income
or loss allocable to the Excess Aggregate Contributions referred to in
subsection (c) above shall include the allocable income or loss for the
Plan Year of the Excess Aggregate Contributions and shall be calculated
using any reasonable method for computing income or loss, provided such
method is used consistently for all Participants and for all corrective
distributions under the Plan for the Plan Year, and is used by the Plan
for allocating income or loss to Participants' separate accounts under the
Plan.
(e) Alternative Method for Calculating Income or Loss Allocable to Excess
Aggregate Contributions. Notwithstanding (d) above, the Plan may elect to
calculate the income or loss allocable to the amount of Excess Aggregate
Contributions referred to in subsection (c) above by multiplying the total
investment income or loss (including dividends, interest, realized gains
or losses, and unrealized appreciation or depreciation) allocable to the
Participant's Employee After-Tax Contributions, Employer Marching
Contributions, and amounts treated as Employer Matching Contributions
under Article 5.8 for the Plan Year by a fraction, the numerator of which
is the Excess Aggregate Contributions allocated to the Participant for the
Plan Year, and the denominator of which is the total account balance
attributable to the Participant's Employee After-Tax Contributions,
Employer Matching Contributions and amounts treated as Employer Matching
Contributions under Article 5.8 as of the end of the Plan Year, reduced by
the investment gain (or increased by the investment loss) allocated to
such total amount for the Plan Year.
(f) Coordination with Excess Contributions. The determination of the
amount of Excess Aggregate Contributions for a Plan Year shall be made
after the determination of the amount of any Excess Contributions for the
Plan Year.
(g) Accounting for Excess Aggregate Contributions.
(i) Non-Matched Employee After-Tax Contributions. If the Plan
provides for Employee After-Tax Contributions which are not matched
by Employer Matching Contributions under Article 4.6, the amount of
Excess Aggregate Contributions allocated to a Highly Compensated
Employee for a Plan Year shall be attributed first to the Employee
After-Tax Contributions by the
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<PAGE> 43
Participant for the Plan Year. To the extent such Excess Aggregate
Contributions exceed the Participant's Employee After-Tax
Contributions for the Plan Year, such Excess Aggregate Contributions
shall be attributed to the Employer Matching Contributions and any
amounts treated as Employer Matching Contributions under Article 5.8
in proportion to the amounts of such contributions on behalf of the
Participant for the Plan Year.
(ii) Other Situations. If subsection (a) above does not apply, the
amount of Excess Aggregate Contributions allocated to a Highly
Compensated Employee for a Plan Year shall be attributed to the
Employee After-Tax Contributions, Employer Matching Contributions
and any amounts treated as Employer Matching Contributions under
Article 4.6 in proportion to the amounts of such contributions on
behalf of the Participant for the Plan Year.
(h) Excise Tax. If any Excess Aggregate Contributions for a Plan Year are
not forfeited or distributed to Highly Compensated Employees in accordance
with subsection (c) above within 2 1/2 months after the close of the Plan
Year, the Employer shall be subject to the 10 percent excise tax of
Section 4979 of the Code, unless Qualified Nonelective Contributions are
made to the Plan on behalf of Non-Highly Compensated Employees in
accordance with Article 4.7(b) prior to the end of the 12-month period
immediately following the close of the Plan Year in an amount sufficient
to enable the Plan to satisfy one of the Average Contribution Percentage
Tests of Article 5.6 for the Plan Year.
5.10 Multiple Use of Alternative Limitation.
(a) In General. This Article 5.10 shall apply for any Plan Year if:
(i) any Eligible Employee who is a Highly Compensated Employee is
eligible to participate in a plan maintained by the Employer
(including this Plan) which is subject to the requirements of
Section 401(m) of the Code because such plan accepts matching
contributions or employee contributions for the plan's plan year
beginning with or within the Plan Year;
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<PAGE> 44
(ii) this Plan does not pass the 1.25 Average Actual Deferral
Percentage Test of Article 5.2(a) for the Plan Year, and the
Employer's plan which is subject to the requirements of Section
401(m) of the Code does not pass the 1.25 contribution percentage
tear of Section 401(m)(2)(A)(i) of the Code for the plan's plan year
beginning with or within the Plan Year; and
(iii) the sum of the Average Actual Deferral Percentage for all
Eligible Employees who are Highly Compensated Employees for the Plan
Year, and the average contribution percentage (as defined in Section
401(m)(3) of the Code) for all Highly Compensated Employees who are
eligible to participate in the Employer's plan which is subject to
Section 401(m) of the Code for the plan's plan year beginning with
or within the Plan Year, exceeds the aggregate limit of subsection
(b) below.
For purposes of this Article 5.10, the Average Actual Deferral Percentage
of Highly Compensated Employees for the Plan Year shall be determined
after any corrective measures as described in Article 5.5 are undertaken
for the Plan Year. The average contribution percentage for all Highly
Compensated Employees under the Employer's plan that is subject to Section
401(m) of the Code shall be determined after any corrective measures
(including those described in Article 5.9) are undertaken to satisfy the
average contribution percentage tests of Section 401(m)(2) of the Code
for the plan's plan year beginning with or within the Plan Year.
(b) Aggregate Limit. For purposes of this Article 5.10, the term
"aggregate limit" shall means the sum of:
(i) 125 percent of the greater of: (1) the Average Actual Deferral
Percentage for Eligible Employees who are Non-Highly Compensated
Employees for the Plan Year or (2) the average contribution
percentage (as defined in Section 401(m)(3) of the Code) for
Non-Highly Compensated Employees who are eligible to participate in
the Employer's plan that is subject to Section 401(m) of the Code
for the plan's plan year beginning with or within the Plan Year;
plus
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(ii) two plus the lesser of (1) or (2) above, provided that in no
event shall this amount exceed 200 percent of the lesser of (1) or
(2) above.
(c) Required Correction. In the event that the aggregate limit of
subsection (b) is exceeded as of the end of any Plan Year, the Employer
shall reduce the Average Actual Deferral Percentage of those Highly
Compensated Employees who also participate in the Employer's plan which is
subject to Section 401(m) of the Code (beginning with such Highly
Compensated Employees whose Actual Deferral Percentage is the highest) so
that the aggregate limit is not exceeded. The amount by which each such
Highly Compensated Employee's Average Actual Deferral Percentage is
reduced shall be determined in accordance with the procedures of Article
5.5, by treating the excess amount as Excess Contributions.
5.11 Recordkeeping Requirements
(a) Average Actual Deferral Percentage Tests. The Employer shall maintain
records sufficient to demonstrate satisfaction of the Average Actual
Deferral Percentage tests of Article 5.2 for each Plan Year and the extent
to which any Qualified Nonelective Contributions and Qualified Matching
Contributions are treated as Employee Pre-Tax Contributions under Article
5.4 for purposes of such tests. The determination of Eligible Employees'
Actual Deferral Percentages, and the disposition of all Employee Pre-Tax
Contributions (and any Qualified Nonelective Contributions and Qualified
Matching Contributions treated as Employee Pre-Tax Contributions under
Article 5.4) on behalf of Participants, shall satisfy such other
requirements as may be prescribed by the Secretary of Treasury.
(b) Average Contribution Percentage Tests. The Employer shall maintain
records sufficient to demonstrate satisfaction of the Average Contribution
Percentage tests of Article 5.6 for each Plan Year and the extent to which
any Employee Pre-Tax Contributions and Qualified Nonelective Contributions
are treated as Employer Matching Contributions under Article 5.8 for
purposes of such tests. The determination of Eligible Employees' Average
Contribution Percentages, and the disposition of all Employer Matching
Contributions and Employee After-Tax Contributions (and any Employee
Pre-Tax Contributions and Qualified Nonelective Contributions treated as
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Employer Matching Contributions under Article 5.8) on behalf of
Participants, shall satisfy such other requirements as may be prescribed
by the Secretary of Treasury.
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ARTICLE 6
ALLOCATIONS AND INVESTMENTS
6.1 Receipt of Contributions by Trustee. All contributions to the Plan which are
paid to the Trustee under Article 4.9 shall be held in trust and managed by the
Trustee in accordance with the terms and conditions of the Trust Agreement.
6.2 Establishment of Separate Accounts by Recordkeeper.
(a) In accordance with the directions of the Plan Administrator, the
Recordkeeper shall establish and maintain the following separate accounts
in the name of each Participant:
(i) an Employee Pre-Tax Contribution Account to record the Employee
Pre-Tax Contributions to the Plan on behalf of the Participant under
Articles 4.1 and 4.3, and the earnings, losses and expenses
allocated thereto;
(ii) an Employee After-Tax Contribution Account to record any
Employee After-Tax Contributions to the Plan by the Participant
under Articles 4.5 and the earnings, losses and expenses allocated
thereto;
(iii) an Employer Matching Contribution Account to record any
Employer Matching Contributions to the Plan under Article 4.6 on
behalf of the Participant and the earnings, losses and expenses
allocated thereto;
(iv) an Employer Nonelective Contribution Account to record any
Employer Nonelective Contributions to the Plan on behalf of the
Participant under Article 4.7 and the earnings, losses and expenses
allocated thereto;
(v) a Rollover Contribution Account to record any rollover
contributions to the Plan on behalf of the Participant under Article
4.8 and the earnings, losses and expenses allocated thereto; and
(vi) such other accounts as the Plan Administrator shall direct in
accordance with the provisions of the Plan or the requirements of
the Code.
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If the Employer makes both Employer Nonelective Contributions under
Article 4.7(a) which do not qualify as Qualified Nonelective Contributions
and Qualified Nonelective Contributions under Article 4.7(b), separate
sub-accounts shall be established within the Participant's Employer
Nonelective Contribution Account to record separately such contributions
and the earnings, losses and expenses allocated thereto.
(b) The Plan Administrator shall certify to the Recordkeeper the name,
address and social security number of each Participant for whom a separate
account is to be established under the Plan. The Plan Administrator shall
furnish the Recordkeeper with instructions in accordance with Article 4.9
allocating all contributions to the Plan to Participants' separate
accounts. In crediting amounts to Participants' separate accounts, the
Recordkeeper shall be fully entitled to rely on the instructions furnished
by the Plan Administrator, and shall be under no duty to make any inquiry
or investigation with respect thereto.
(c) The maintenance of separate accounts under subsection (a) above shall
be for accounting purposes only. Any amount distributed to a Participant
or Beneficiary under Article 8, or any amount withdrawn by a Participant
under Article 9, shall be charged to the appropriate separate accounts of
the Participant as of the applicable Valuation Date for such distribution
or withdrawal under Article 8.4 or 9.5.
6.3 Allocation of Employer Nonelective Contributions Under Integrated Plan. If
the Employer has adopted an Integrated Plan by selecting the Permitted Disparity
(Integration with Social Security) Allocation Formula under Section 6(b) of the
Adoption Agreement, the Employer Nonelective Contributions to the Plan for any
Plan Year plus any Forfeitures (if applicable under Article 6.4) shall be
allocated to Participants' Employer Nonelective Contribution Accounts In
accordance with the Steps One through Four outlined below, subject to the
Overall Permitted Disparity Limits set forth in (e) below:
(a) Step One (Top-Heavy Plans). First, for any Plan Year that the Plan is
a Top-Heavy Plan as defined in Article 12.2(b), the Employer Nonelective
Contributions and Forfeitures, if applicable, shall be allocated to the
Employer Nonelective Contribution Accounts of all Participants in the
proportion that each such Participant's total
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Compensation for the Plan Year bears to the total Compensation of all
Participants for the Plan Year; provided, however, that the amount
allocated to any Participant's Employer Nonelective Contribution Account
for the Plan Year under this paragraph shall not exceed three percent of
the Participant's Compensation for the Plan Year.
(b) Step Two (Top Heavy Plans). Second, for any Plan Year that the Plan is
a Top-Heavy Plan as defined in Article 12.2(b), any Employer Nonelective
Contributions and Forfeitures, if applicable, remaining after Step One
shall be allocated to the Employer Nonelective Contribution Accounts of
all Participants in the proportion that each such Participant's
Compensation in excess of the Integration Level designated in the Adoption
Agreement for the Plan Year bears to the total Compensation in excess of
said Integration Level of all such Participants; provided, however, that
the amount allocated to any Participant's Employer Nonelective
Contribution Account for the Plan Year under this paragraph shall not
exceed three percent of the Participant's Compensation. In the case of any
Participant who has exceeded the Cumulative Permitted Disparity Limit set
forth in (e)(ii) below, such Participant's total Compensation for the Plan
Year shall be taken into account for purposes of this paragraph.
(c) Step Three. Third, any Employer Nonelective Contributions and
Forfeitures, if applicable, remaining after Steps One and Two shall be
allocated to the Employer Nonelective Contribution Accounts of all
Participants in the proportion that the sum of each such Participant's
total Compensation plus Compensation in excess of the Integration Level
designated in the Adoption Agreement bears to the sum of the total
Compensation plus Compensation in excess of said Integration Level for all
such Participants for the Plan Year; provided however, that the amount
allocated to any Participant's Employer Nonelective Contribution Accounts
for the Plan Year under this paragraph shall not exceed the Maximum
Disparity Rate designated in the Adoption Agreement multiplied by the sum
of the Participant's total Compensation plus Compensation in excess of the
Integration Level designated in the Adoption Agreement. In the case of any
Participant who has exceeded the Cumulative Permitted Disparity Limit set
forth in (e)(ii) below, two times such Participant's total Compensation
for the Plan Year shall be taken into account for purposes of this
paragraph.
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(d) Step Four. Fourth, any remaining Employer Nonelective Contributions
and Forfeitures, if applicable, shall be allocated to the Employer
Nonelective Contribution Accounts of all Participants in the proportion
that each such Participant's total Compensation for the Plan Year bears to
the total Compensation of all eligible Participants for the Plan Year.
(e) Overall Permitted Disparity Limits
(i) Annual Overall Permitted Disparity Limit. If for any Plan Year
the Plan benefits any Participant who also benefits under another
qualified plan or simplified employee pension maintained by the
Employer that provides for permitted disparity (or imputes
disparity), the Employer Nonelective Contributions and Forfeitures
shall be allocated to the Employer Nonelective Contribution Accounts
of each Participant eligible to share in Employer Nonelective
Contributions for the Plan Year in the proportion that each such
Participant's total Compensation for the Plan Year bears to the
total Compensation of all eligible Participants for the Plan Year.
(ii) Cumulative Permitted Disparity Limit. Effective for Plan Years
beginning on or after January 1, 1995, the Cumulative Permitted
Disparity Limit for a Participant is 35 total cumulative permitted
disparity years. Total cumulative permitted disparity years means
the number of years credited to the Participant for allocation or
accrual purposes under this Plan or any other qualified plan or
simplified employee pension (whether or not terminated) ever
maintained by the Employer. For purposes of determining a
Participant's Cumulative Permitted Disparity Limit, all years ending
in the same calendar year are treated as the same year. If the
Participant has not benefited under a defined benefit plan or target
benefit plan for any year beginning on or after January 1, 1994, the
Cumulative Permitted Disparity Limit shall be satisfied with respect
to such Participant.
6.4 Allocation of Forfeiture. Any Forfeitures which have become available for
allocation under Article 4.6, Article 5.9(c) or Article 8.5 during a Plan Year
shall be used to reduce the amount of contributions thereafter required to be
made to the Plan by the Employer.
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6.5 Investment of Plan Assets.
(a) Unless otherwise designated by the Employer in the Adoption Agreement,
all amounts which are allocated to the separate accounts of a Participant
under the Plan shall be invested and reinvested in the Vanguard Funds or
other investments authorized under the Trust Agreement in accordance with
the Participant's investment directions. All such investment directions by
a Participant shall be wade in accordance with rules and procedures
prescribed by the Plan Administrator. To the extent that any Participant
fails to provide investment directions in accordance with such rules and
procedures, the Plan Administrator or other named fiduciary for the Plan
which the Employer identifies in the Adoption Agreement shall be
responsible for directing the investment of amounts allocated to the
Participant's separate accounts under the Plan. A Participant shall be
permitted to change investment directions both as to existing amounts
credited to his or her separate accounts under the Plan and future
contributions by or on behalf of the Participant under the Plan. Any such
change in investment directions shall be made in accordance with rules and
procedures prescribed by the Plan Administrator.
(b) To the extent that the Employer provides in the Adoption Agreement
that the investment of the assets of the Plan shall not be subject to
participant direction, such Plan assets shall be invested and reinvested
in the Vanguard Funds or other investments authorized under the Trust
Agreement as directed by the Plan Administrator or other named fiduciary
for the Plan which the Employer identifies in the Adoption Agreement to be
responsible for Plan investments. All such investment directions by the
Plan Administrator or other named fiduciary for the Plan shall uniformly
and ratably apply to all Participants similarly situated.
6.6 Allocation of Earnings and Losses.
(a) The dividends, capital gains distributions, and other earnings
received on any shares or units of the Vanguard Funds or on any other Plan
investments which are specifically credited or earmarked to a
Participant's separate account under the Plan shall be allocated to such
separate account and immediately reinvested, to the extent practicable, in
additional shares or units of such Vanguard Funds or other earmarked Plan
investments.
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(b) Any Plan earnings or losses attributable to the investment of a
Participant's separate account under the Plan in a loan to the Participant
under Article 10 shall be allocated to the Participant's separate account
in accordance with the provisions of Article 10.9.
(c) To the extent not otherwise provided in subsection (a) or (b) above,
the assets of the Plan shall be valued at their current fair market value
on periodic Valuation Dates as determined by the Recordkeeper, which shall
occur no less frequently than once each calendar quarter. On each such
periodic Valuation Date, the earnings or losses of the Plan since the
immediately preceding periodic Valuation Date shall be allocated to the
separate accounts of all Participants and former Participants under the
Plan in the ratio that the fair market value of each such account as of
that immediately preceding Valuation Date, reduced by any distributions
or withdrawals therefrom since such preceding Valuation Date, bears to the
total fair market value of all separate accounts as of the immediately
preceding Valuation Date, reduced by any distributions or withdrawals
therefrom since such preceding Valuation Date.
6.7 Insurance Contracts. Any insurance contract purchased on behalf of a
Participant under the Plan shall provide that all proceeds payable upon the
death of the Participant shall be paid to the Plan. The Plan shall be required
to distribute all such proceeds in accordance with the Plan's distribution
provisions (including the provisions of Article 8.8(a) requiring in certain
cases a qualified preretirement survivor annuity to be distributed to the
Participant's surviving spouse). Under no circumstances shall the Plan retain
any part of the proceeds. In the event of any conflict between the terms of the
Plan and the terms of any insurance contract purchased hereunder, the provisions
of the Plan shall control.
6.8 No Rights Created by Allocation. Any allocation of contributions or earnings
to the separate account of a Participant under this Article 6 shall not cause
the Participant to have any right, title or interest in any assets of the Plan
except at the time and under the terms and conditions expressly provided for in
the Plan.
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ARTICLE 7
VESTING
7.1 Full Vesting in Employee Contributions and Rollover Contributions. A
Participant shall be fully vested at all times in all Employee Pre-Tax
Contributions, Employee After-Tax Contributions, and Rollover Contributions made
to the Plan on the Participant's behalf and all earnings on such contributions.
7.2 Vesting in Employer Contributions.
(a) General Rule. Except as otherwise provided below, the vested amounts
in a Participant's Employer Matching Contribution Account and Employer
Nonelective Contribution Account shall be determined by the number of
Years of Service completed by the Participant for vesting purposes (as
determined under Article 7.3) and the vesting schedules designated by the
Employer in the Adoption Agreement.
(b) Full Vesting Upon Normal Retirement Age, Disability or Death.
Notwithstanding the vesting schedules designated by the Employer in the
Adoption Agreement, all amounts allocated to a Participant's Employer
Matching Contribution Account and Employer Nonelective Contribution
Account shall automatically become fully vested if the Participant attains
Normal Retirement Age, incurs a Disability or dies while employed by the
Employer.
(c) Vesting After In-Service Withdrawals. If a Participant makes an
in-service withdrawal under Article 9.2 or 9.3 from the Participant's
Employer Matching Contribution Account or Employer Nonelective
Contribution Account at a time when the Participant is not fully-vested,
the Participant's vested amount in such account on any date thereafter
shall be an amount ("X") determined by the following formula: X = P(AB +
D) - D. For purposes of this formula, "P" is the Participant's vested
percentage under the Plan's vesting schedule on the relevant date, "AB" is
the account balance on the relevant date, and "D" is the amount of the
Participant's in-service withdrawal.
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7.3 Year of Service for Vesting Purposes.
(a) General Rule. For vesting purposes, a Participant shall be credited
with one Year of Service for each Plan Year during which the Participant
completes 1,000 or more Hours of Service. All Years of Service completed
by the Participant, including Years of Service completed prior to the
Effective Date of the Plan or prior to the Participant's commencement of
participation in the Plan, shall be counted for vesting purposes except as
otherwise provided in Article 7.4.
(b) Service With Predecessor Employer. If so designated in the Adoption
Agreement, a Participant's Years of Service shall include years of service
(determined in a manner consistent with (a) above) with any predecessor
employer of the Employer; provided, however, that if the Employer is
maintaining the Plan as the plan of a predecessor employer, an Employee's
Years of Service shall automatically include years of service with such
predecessor employer without regard to any designation in the Adoption
Agreement.
7.4 Years of Service Upon Reemployment. If a Participant incurs five or more
consecutive one-year Breaks in Service, any Years of Service completed by the
Participant after the Breaks in Service shall be disregarded for purposes of
determining the Participant's vested amounts an his or her Employer Matching
Contribution Account and Employer Nonelective Contribution Account prior to the
date the Participant incurred the Breaks in Service (although both pre-Break and
post-Break Years of Service shall count for purposes of determining the
Participant's vested percentage in his or her Employer Marching Contribution
Account and Employer Nonelective Contribution Account after the date the
Participant incurred the Breaks in Service). To the extent necessary, separate
sub-accounts shall be established by the Recordkeeper within the Participant's
Employer Matching Computation Account and Employer Nonelective Contribution
Account to reflect the Participant's pre-Break and post-Break amounts derived
from Employer Matching Contributions and Employer Nonelective Contributions,
which sub-accounts shall share in the allocation of earnings and losses under
Article 6.6. In the case of any Participant who incurs a Break in Service of
less than five consecutive one-year Breaks in Service, all pre-Break Years of
Service and any post-Break Years of Service completed by the Participant shall
count for purposes of determining the Participant's vested percentage in his or
her Employer
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Matching Contribution Account and Employer Nonelective Contribution Account both
before and after the date the Participant incurred the Break in Service.
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ARTICLE 8
DISTRIBUTION OF BENEFITS
8.1 Distribution Upon Separation from Service. A Participant shall be entitled
to receive the vested amounts (as determined under Articles 7.1 and 7.2)
credited to the Participant's separate accounts under the Plan when the
Participant separates from service with the Employer.
8.2 Distribution Upon Death. In the event of a Participant's death, the
Participant's Beneficiary under Article 8.16 shall be entitled to receive the
vested amounts (as determined under Article 7.1 and 7.2) credited to the
Participant's separate accounts under the Plan, which amounts shall be
determined after the payment of any preretirement survivor annuity required
under Article 8.8.
8.3 Optional Forms of Distribution; Participant Consent.
(a) Amounts Not Greater than $3,500. If the total vested amount which a
Participant is entitled to receive under Article 8.1 does not exceed (or
at the time of any prior distribution did not exceed) $3,500, such amount
shall be distributed to the Participant in a lump-sum payment as soon as
practicable following the date of the Participant's separation from
service. For purposes of this Article 8.3(a), a Participant's vested
account balance shall not include any accumulated deductible employee
contributions within the meaning of Section 72(o)(5)(B) of the Code for
Plan Years beginning prior to January 1, 1989.
(b) Amount Greater than $3,500. If the total vested amount which a
Participant is entitled to receive under Article 8.1 exceeds (or at the
time of any prior distribution exceeded) $3,500, such amount shall not be
distributed to the Participant prior to his or her required beginning date
under Article 8.6(b) unless the Participant consents to such distribution
within 90 days before the date of distribution. If the vested amount which
the Participant is entitled to receive is not required to be distributed
in the form of a qualified joint and survivor annuity under Article 8.7,
the Participant shall be permitted to elect to have such amount
distributed:
(i) in a single-sum payment; or
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(ii) if so designated by the Employer in the Adoption Agreement, in
monthly, quarterly or annual installment payments over a period not
to exceed the life expectancy of the Participant or the joint life
and last survivor expectancy of the Participant and the
Participant's designated Beneficiary.
The method (if applicable) and timing of distribution shall be selected by
the Participant on a form prescribed for these purposes by the Plan
Administrator. If no such selection is made by the Participant and the
Participant's distribution is not required to be made in the form of a
qualified joint and survivor annuity under Article 8.7, the Participant's
distribution shall be automatically made in a lump-sum payment no later
than the Participant's required beginning date under Article 8.6(b).
Notwithstanding the preceding, if the Plan is terminated under Article
14.2 and if the Employer (or any entity within the same controlled group
as the Employer) maintains another defined contribution plan (other than
an employee stock ownership plan as defined in Section 4975(e)(7) of the
Code), then the amounts which a Participant is entitled to receive under
the Plan shall be transferred without the Participant's consent directly
to the other plan if the Participant does not consent to an immediate
distribution.
(c) Explanation to Participants. No more than 90 days and no less than 30
days prior to the date of any distribution to a Participant under (b)
above, the Plan Administrator shall furnish the Participant with a notice
of the material features and relative values of the optional forms of
distribution available under the Plan and the Participant's right to defer
such distribution to the Participant's required beginning date. However,
distribution to the Participant may commence less than 30 days after the
notice in the preceding sentence is given to the Participant, provided
that the following conditions are satisfied;
(i) the distribution is one to which Sections 401(a)(11) and 417
of the Internal Revenue Code do not apply;
(ii) the Plan Administrator clearly informs the Participant that the
Participant has a right to a period of at least 30 days after
receiving the notice to consider the decision of whether or not to
elect a distribution (and, if applicable, a particular distribution
option); and
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(iii) the Participant, after receiving the notice, affirmatively
elects to receive a distribution from the Plan (or to make a direct
rollover under Article 8.18).
If the Participant elects to defer the distribution of all or any portion
of the amount which the Participant is entitled to receive, such deferred
amount shall remain in the Plan and continue to receive allocations of
earnings and losses pursuant to Article 6.6 until the Participant elects
or is otherwise required to receive such deferred amount.
(d) Payments to Death Beneficiaries. Any amount which a Participant's
Beneficiary is entitled to receive under Article 8.2 upon the death of the
Participant shall be distributed in a lump-sum payment or in monthly,
quarterly or annual installment payments over a specified period as
selected by the Beneficiary in accordance with the minimum distribution
requirements of Article 8 6(e). The method and timing of distribution
shall be selected by the Beneficiary on a form prescribed for these
purposes by the Plan Administrator. If the Beneficiary does not select a
method of distribution, the entire amount which the Beneficiary is
entitled to receive under Article 8.2 shall be distributed to the
Beneficiary in a lump-sum payment no later than the December 31st of the
calendar year containing the fifth anniversary of the Participant's death.
If the Beneficiary dies before receiving a complete distribution of any
amount which the Beneficiary is entitled to receive under Article 8.2,
such remaining amount shall be distributed as soon as practicable in a
lump-sum payment to the Beneficiary's estate.
8.4 Distribution Upon Written Instructions; Valuation of Distributions. All
distributions from the Plan shall be made by the Trustee as soon as practicable
following receipt of proper instructions furnished by the Plan Administrator
setting forth the name and address of the recipient and the amount and form of
distribution. In the case of a single-sum payment, the amount of the
distribution shall be determined by the value of the amounts credited to the
Participant's separate accounts under the Plan as of the Valuation Date on which
the Trustee receives instructions in good order from the Plan Administrator to
make the distribution. In the case of installment payments, the amount of each
distribution shall be determined by the value of the amounts credited to the
Participant's separate accounts under the Plan as of the Valuation Date on which
the installment payment is to be made in accordance with the Plan
Administrator's instructions. In making any distribution from the Plan, the
Trustee shall be fully entitled to rely on instruction furnished to it by the
Plan Administrator, and shall be under no duty to make any inquiry or
investigation with respect thereto.
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8.5 Forfeitures Upon Separation from Service.
(a) If a Participant separates from service with the Employer prior to
becoming fully vested in the Participant's Employer Matching Contribution
Account or Employer Nonelective Contribution Account (the "Employer
Contribution Accounts") under Article 7.2 and the Participant elects or is
otherwise required to receive a distribution of the entire vested amounts
credited to the Participant's Employer Contribution Accounts, the total
non-vested amount of the Participant's Employer Contribution Accounts
shall be treated as a Forfeiture. For these purposes, a Participant who
separates from service at a time when the vested amount credited to the
Participant's Employer Contribution Accounts is zero shall be deemed to
have received a distribution of the vested amount credited to the
Participant's Employer Contribution Accounts and the entire non-vested
amount of the Participant's Employer Contribution Accounts shall be
treated as a Forfeiture. All Forfeitures by Participants under this
Article 8.5 shall be available for allocation in accordance with the
provisions of Article 6.4.
(b) If a Participant who separates from service with the Employer prior to
becoming fully vested in the Participant's Employer Contribution Accounts
under Article 7.2 elects at any time under Article 8.4 to receive less
than the entire vested amount credited to the Participant's Employer
Contribution Accounts, the non-vested amount of the Participant's Employer
Contribution Accounts which shall be treated as a Forfeiture upon such
distribution shall equal the total non-vested amount credited to the
Participant's Employer Contribution Accounts prior to the distribution
multiplied by a fraction, the numerator of which is the amount of the
Participant's distribution from the Employer Contribution Accounts, and
the denominator of which is the total vested amount credited to the
Employer Contribution Accounts immediately prior to the distribution.
(c) Any amount forfeited by a Participant under (a) or (b) above
(unadjusted for gains or losses) shall be restored to the Participant's
Employer Contribution Accounts if the Participant returns to the service
of the Employer and repays the amount of any distribution the Participant
received from the Participant's Employer Contribution Accounts upon the
Participant's prior separation from service before the earlier of:
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(i) five years after the first date the Participant is subsequently
reemployed by the Employer; or
(ii) the date the Participant incurs five consecutive one-year
Breaks in Service for vesting purposes following the date of the
Participant's distribution.
The amount of any such Forfeiture shall be restored to the Participant's
Employer Contribution Accounts from other Forfeiture amounts by
Participants and the Plan earnings attributable thereto, or by additional
Employer contributions to the Plan on behalf of the Participant. If a
Participant is deemed to have received a distribution under (a) above
because the Participant separated from service at a time when the vested
amount credited to the Participant's Employer Contribution Accounts was
zero and the Participant resumes employment covered under the Plan before
the date the Participant incurs five consecutive one-year Breaks in
Service, the amount forfeited by the Participant under (a) above shall be
restored to the Participant's Employer Contribution Accounts upon the
Participant's reemployment by the Employer.
8.6 Minimum Distribution Requirements.
(a) Application. Subject to the joint and survivor annuity requirements of
Article 8.7, all minimum distributions required to be made to Participants
and Beneficiaries under this Article 8.6 shall be determined in accordance
with the U.S. Department of Treasury regulations under Section 401(a)(9)
of the Code, including the minimum distribution incidental benefit
requirement of Treasury Regulation ss. 1.401(a)(9)-2. Unless otherwise
specified, the provisions of this Article 8.6 shall apply to calendar
years beginning after December 31, 1984, and shall take precedence over
any inconsistent provisions of the Plan.
(b) Required Beginning Date. All amounts which a Participant is entitled
to receive under Article 8.1 shall be distributed or begin to be
distributed to the Participant no later than the Participant's required
beginning date. For purposes of this requirement, a Participant's required
beginning date shall be the first day of April of the calendar year
following the calendar year in which the Participant attains age 70 1/2.
However, in the case of any Participant who attained age 70 1/2 before
January 1, 1988, the Participant's required beginning date shall be
determined in accordance with (i) or (ii) below;
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(i) In general. If the Participant is not a five-percent owner of
the Employer (as defined in (ii) below), the Participant's required
beginning date shall be the first day of April of the calendar year
following the calendar year in which the later of the Participant's
retirement or attainment of age 70 1/2 occurs.
(ii) Five-percent owners. If the Participant is a five-percent owner
of the Employer during any year beginning after December 31, 1979,
the Participant's required beginning date shall be the first day of
April following the later of: (1) the calendar year in which the
Participant attains age 70 1/2, or (2) the earlier of the calendar
year with or within which ends the Plan Year in which the
Participant becomes a five-percent owner or the calendar year in
which the Participant retires. Once minimum distributions have
commenced to a five-percent owner under this Article 8.6. they must
continue to be made even if the Participant ceases to be a
five-percent owner in a subsequent year. For purposes of this
Article 8.6, a Participant is treated as a five-percent owner if
such Participant is a five-percent owner as defined in Section
416(i) of the Code (without regard to whether the Plan is a
top-heavy plan) at any time during the Plan Year ending with or
within the calendar year in which such owner attains age 66-1/2 or
any subsequent Plan Year.
(c) Limits on Distribution Periods. The method of distribution selected by
a Participant under Article 8.3 shall satisfy the minimum distribution
requirements of this Article 8.6 for each calendar year beginning with the
calendar year immediately preceding the calendar year which contains the
Participant's required beginning date (the "first distribution calendar
year"). As of the first distribution calendar year, distributions, if not
made in a single-sum, shall be made over one of the following periods (or
combination thereof):
(i) the life of the Participant;
(ii) the life of the Participant and his or her designated
Beneficiary;
(iii) a period certain not extending beyond the life expectancy of
the Participant; or
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(iv) a period certain not extending beyond the joint and last
survivor expectancy of the Participant and his or her designated
Beneficiary.
(d) Minimum Distribution Amounts. The minimum distribution amount for the
first distribution calendar year shall be made on or before the
Participant's required beginning date. The minimum distribution amount for
each distribution calendar year thereafter, including the calendar year in
which the Participant's required beginning date occurs, shall be made on
or before December 31st of that calendar year. Such minimum distribution
amounts shall be calculated as follows:
(i) For calendar years beginning after December 31. 1988, the
minimum distribution amount for each distribution calendar year
shall be determined by dividing the Participant's account balance
under the Plan for the distribution calendar year by the lesser of:
(1) the life expectancy of the Participant or joint life and last
survivor expectancy of the Participant and his or her designated
Beneficiary for the calendar year; or (2) if the Participant's
designated Beneficiary under the Plan is not the Participant's
spouse, the applicable divisor for the distribution calendar year
determined from the table set forth in Treasury Regulation
ss. 1.401(a)(9)-2, Q&A-4.
(ii) For calendar years beginning before January 1, 1989, the
minimum distribution amount for each distribution calendar year
shall be determined by dividing the Participant's vested account
balance under the Plan for the distribution calendar year by the
life expectancy of the Participant or joint and last survivor
expectancy of the Participant and his or her designated Beneficiary
for the distribution calendar year: provided however, that if the
Participant's designated Beneficiary under the Plan is not the
Participant's spouse, the method of distribution selected by the
Participant under Article 8.3 must provide for at least 50 percent
of the amount available for distribution under the Plan at the time
of selection to be paid within the life expectancy of the
Participant.
For purposes of these minimum distribution requirements, a Participant's
account balance under the Plan for any distribution calendar year shall
mean the total vested amount credited to the Participant's separate
accounts under the Plan as of the last
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Valuation Date of the preceding calendar year (the "valuation calendar
year"), increased by the amount of any contributions or Forfeitures
allocated to the Participant's accounts in the valuation calendar year
after such Valuation Date, and decreased by any distributions made from
the Participant's accounts in the valuation calendar year after such
Valuation Date. If any minimum distribution for the Participant's first
distribution calendar year is made in the following calendar year but on
or before the Participant's required beginning date, the amount of such
minimum distribution shall be treated as if it had been made in the
Participant's first distribution calendar year.
(e) Death Distribution Provisions. Any amount which a Participant's
designated Beneficiary shall be entitled to receive under Article 8.2 upon
the death of the Participant shall be distributed in accordance with the
following rules:
(i) Where Distribution Had Already Commenced. If the Participant
died after minimum distributions had already commenced, all amounts
payable to the Participant's designated Beneficiary shall be
distributed at least as rapidly as under the method of distribution
in effect prior to the Participant's death. For these purposes, a
Participant's minimum distributions shall be considered to have
commenced no earlier than the Participant's required beginning date.
If distribution in the form of an annuity as described in Article
8.6(f) has irrevocably commenced prior to the Participant's required
beginning date, the Participant's minimum distributions shall be
considered to have commenced on the date distributions actually
commenced under the annuity contract.
(ii) Five-Year Rule. If the Participant died before minimum
distributions had already commenced in accordance with (a) above,
all amounts payable to the Participant's designated Beneficiary
shall be distributed by December 31st of the calendar year which
contains the fifth anniversary of the date of the Participant's
death.
(iii) Exception to Five-Year Rule. Notwithstanding subsection (ii)
above, all amounts payable to the Participant's designated
Beneficiary may (if subsection (a) does not apply) be distributed in
installment payments over a period not extending beyond the
Beneficiary's life expectancy, provided such distribution commences
by December 31st of the calendar year following the calendar year
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of the Participant's death. If the designated Beneficiary is the
surviving spouse of the Participant, the date that distributions are
required to commence in accordance with the preceding sentence shall
be the later of: (1) December 31st of the calendar year following
the calendar year of the Participant's death, or (2) December 31st
of the calendar year in which the Participant would have attained
age 70 1/2.
(iv) Calculation of Minimum Installment Payments. In the case of
installment payments over the Beneficiary's life expectancy under
(iii) above, the minimum distribution amount for each calendar year
shall be determined by dividing the Beneficiary's account balance
under the Plan for the calendar year by the Beneficiary's life
expectancy for the calendar year. For these purposes, a
Beneficiary's account balance under the Plan for any calendar year
shall mean the total vested amount credited to the deceased
Participant's separate accounts under the Plan which the Beneficiary
is entitled to receive under Article 8.2 as of the last Valuation
Date of the preceding calendar year (the "valuation calendar year").
increased by the amount of any contributions or Forfeitures
allocated to the deceased Participant's accounts in the valuation
calendar year after such Valuation Date, and decreased by any
distributions made from the deceased Participant's accounts in the
valuation calendar year after such Valuation Date.
(f) Applicable Life Expectancy. For purposes of this Article 8.6, the life
expectancy of the Participant or his or her designated Beneficiary, or the
joint life and last survivor expectancy of the Participant and his or her
designated Beneficiary, shall be determined by the following rules:
(i) Life expectancy or joint life and last survivor expectancy shall
be computed by using the expected return multiples contained in
Tables V and VI of Treasury Regulation ss. 1.72-9. The life
expectancies of the Participant and his or her spouse (if the spouse
is designated Beneficiary) shall be recalculated annually unless
otherwise elected by the Participant or by the spouse in the case of
distributions referred to in (d)(iii) above on or before the date
minimum distributions are required to begin. Any such election by
the Participant or
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spouse shall be irrevocable and shall apply to all subsequent years.
The life expectancy of a non-spouse Beneficiary shall not be
recalculated.
(ii) For purposes of determining the minimum distribution amounts to
be paid to the Participant for each distribution calendar year under
(c)(i) or (ii) above, the life expectancy of the Participant, or the
joint life and last survivor expectancy of the Participant and his
or her designated Beneficiary, shall be calculated based on the
attained age of the Participant or Beneficiary as of the
Participant's or Beneficiary's birthday in the first distribution
calendar year. If life expectancy is being recalculated, the life
expectancy of the Participant, or the joint life and last survivor
expectancy of the Participant and his or her spouse (if the spouse
is the designated Beneficiary), shall be calculated based on the
attained age of the Participant and spouse as of the Participant's
and spouse's birthday in each succeeding distribution calendar year.
(iii) For purposes of determining the minimum distribution amounts
to be paid to the Beneficiary for each calendar year under (d)(iv)
above, the life expectancy of the designated Beneficiary shall be
calculated based on the attained age of the Beneficiary as of the
Beneficiary's birthday in the calendar year in which distributions
are required to commence under (d)(iii). If life expectancy is being
recalculated, the life expectancy of the Participant's surviving
spouse (if the spouse is designated Beneficiary) shall be calculated
based on the attained age of the spouse as of the spouse's birthday
in each succeeding calendar year.
(iv) For purposes of determining the joint life and last survivor
expectancy of the Participant and his or her designated Beneficiary
under (c)(i) or (ii) above, or the life expectancy of the
Participant's designated Beneficiary under (d)(iii) above, the
Participant's designated Beneficiary shall mean the appropriate
individual (if any) designated as Beneficiary under Article 8.16 as
determined in accordance with the Department of Treasury regulations
under Section 401(a)(9) of the Code.
(g) Annuity Distributions. If distributions to any Participant or
Beneficiary from the Plan are to be made in the form of an annuity
contract purchased from an insurance
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company, such contract shall provide for distributions to be made in
accordance with Section 401(a)(9) of the Code and the Treasury Regulations
thereunder.
8.7 Joint and Survivor Annuity Requirement
(a) General Rule. Notwithstanding any provision of the Plan to the
contrary, any amount which a Participant is entitled to receive from the
Plan (including any withdrawal under Article 9) shall be distributed in
the form of a qualified joint and survivor annuity in the absence of a
qualified waiver under Article 8.10, or except as otherwise provided in
Article 8.11 or 8.12. The requirement for a qualified joint and survivor
annuity shall apply to all vested amounts payable to the Participant under
the Plan (whether derived from Employer or Employee contributions) as of
the earliest date upon which the Participant is entitled to receive a
distribution under the Plan.
(b) Definition of Qualified Joint and Survivor Annuity. For purposes of
this Article 8, the term "qualified joint and survivor annuity" means, in
the case of a married participant, an immediate annuity payable for the
life of the Participant with a survivor annuity payable for the life of
the Participant's surviving spouse which is not less than 50 percent nor
more than 100 percent of the annuity payable for the life of the
Participant, as designated by the Participant during his or her lifetime;
provided that if no such designation is made by the Participant, the
percentage shall be 50 percent. In the case of an unmarried participant,
the term "qualified joint and survivor annuity" means an annuity payable
for the life of the Participant. The qualified joint and survivor annuity
shall be purchased with the total amount available for distribution from
the Participant's separate accounts under the Plan at the time of
distribution.
8.8 Preretirement Survivor Annuity Requirement
(a) General Rule. Notwithstanding any provision of the Plan to the
contrary, in the case of any vested Participant who dies before his or her
annuity starting date, a qualified preretirement survivor annuity shall be
payable to the surviving spouse of the Participant in the absence of a
qualified waiver under Article 8.10, or except as otherwise provided in
Article 8.11 or 8.12. For these purposes, the Participant's "annuity
starting date" means the first day of the first period for which an amount
is paid to the Participant under the Plan as an annuity or any other form
of benefit. The
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surviving spouse may elect to have the preretirement survivor annuity
distributed within a reasonable time after the Participant's death.
(b) Definition of Qualified Preretirement Survivor Annuity. For purposes
of this Article 8, the term "qualified preretirement survivor annuity"
means an annuity payable for the life of the Participant's surviving
spouse which is purchased with 50 percent of the Participant's vested
account balance under the Plan at the time of the Participant's death. For
these purposes, the Participant's "vested account balance" shall mean the
aggregate vested amount (as determined under Article 7) credited to the
Participant's separate accounts under the Plan derived from all Employer
and Employee contributions (including rollover contributions) at the time
of death.
8.9 Notice and Explanation to Participants
(a) Explanation of Joint and Survivor Annuity. The Plan Administrator
shall provide each Participant with a written explanation at least 30
days, but no more than 90 days. prior to the Participant's annuity
starting date (as defined in Article 8.8(a)) setting forth: (i) the terms
and conditions of the qualified joint and survivor annuity under Article
8.7; (ii) the Participant's right to make, and the effect of, an election
to waive the qualified joint and survivor annuity form of distribution in
accordance with Article 8.10; (iii) the rights of the Participant's
spouse; and (iv) the right to make, and the effect of, a revocation of a
previous election to waive the qualified joint and survivor annuity method
of distribution.
(b) Explanation of Preretirement Survivor Annuity. The Plan Administrator
shall provide each Participant within the period beginning with the first
day of the Plan Year in which the Participant attains age 32 and ending
with the close of the Plan Year in which the Participant attains age 35 a
written explanation of the qualified preretirement survivor annuity of
Article 8.8 in such terms and in such a manner as would be comparable to
the explanation required under subsection (a) above with respect to the
qualified joint and survivor annuity. If a Participant commences
participation in the Plan after the first day of the Plan Year in which
the Participant attains age 32, the Plan Administrator shall provide the
written explanation required by the preceding sentence no later than the
end of the one-year period beginning on the date the Participant commences
participation in the Plan. If a Participant terminates employment with the
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Employer before attaining age 35, the Plan Administrator shall provide the
required written explanation during the period beginning one year before
the Participant's termination of employment and ending one year after such
termination of employment; provided that if the Participant thereafter
resumes employment with the Employer, the Plan Administrator shall provide
the required written explanation during the period otherwise required
above.
8.10 Waiver of Qualified Joint or Survivor Annuity or Qualified Preretirement
Survivor Annuity.
(a) General Rule. A Participant may elect at any time during the
applicable election period to waive the qualified joint and survivor
annuity form of distribution or the qualified preretirement survivor
annuity (or both), and may revoke any such election at any time during the
applicable election period.
(b) Spousal Consent Required. Any election by a Participant to waive the
qualified joint and survivor annuity form of distribution or the qualified
preretirement survivor annuity under (a) above shall not be effective
unless:
(i) the Participant's spouse consents in writing to the
Participant's election;
(ii) the Participant's election designates the specific non-spouse
Beneficiary (including any class of Beneficiaries or contingent
Beneficiaries) to receive the Participant's benefits under the Plan
upon the Participant's death, which Beneficiary designation shall
not be thereafter changed by the Participant without further spousal
consent (unless the spouse expressly permits subsequent Beneficiary
designations by the Participant without further spousal consent);
(iii) the spouse's consent acknowledges the effect of the
Participant's election; and
(iv) the spouse's consent is witnessed by a Plan representative or a
notary public.
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In addition, in the case of a waiver of the qualified joint and survivor
annuity, the Participant's election shall specify the optional form of
distribution elected by the Participant under Article 8.3 which may not be
thereafter changed without further spousal consent (unless the spouse
expressly permits subsequent changes by the Participant without further
spousal consent). Notwithstanding the preceding, if the Participant
establishes to the satisfaction of the Plan Administrator that there is no
spouse or the spouse cannot be located, the Participant's election to
waive the qualified joint and survivor annuity form of distribution or the
qualified preretirement survivor annuity shall be deemed a qualified
election for which no spousal consent is required.
Any consent by a spouse or establishment that the consent of a
spouse may not be obtained, shall not be effective with respect to any
other spouse. Any spousal consent which permits subsequent changes by the
Participant to the Beneficiary designation or optional form of
distribution without the requirement of further spousal consent shall
acknowledge that the spouse has the right to limit such consent to a
specific Beneficiary or optional form of distribution, and that the spouse
voluntarily elects to relinquish such right. A Participant may revoke any
prior waiver of the qualified joint and survivor annuity or qualified
preretirement survivor annuity at any time prior to the commencement of
benefits without the consent of his or her spouse, and the number of such
revocations shall not be limited. Any new waiver of the qualified joint
and survivor annuity or qualified preretirement survivor annuity, or any
change to an existing Beneficiary designation by a Participant under
Article 8.16 which was in effect at the time of a waiver of the qualified
joint and survivor annuity or qualified preretirement survivor annuity,
shall require a new spousal consent in accordance with this Article
8.10(b). No consent obtained under this Article 8.10(b) shall be valid
unless the Participant has received the appropriate notice and written
explanation as provided in Article 8.9.
(c) Applicable Election Period Defined. For purposes of this Article 8.10,
the term "applicable election period" means: (i) in the case of an
election to waive the qualified joint and survivor annuity form of
distribution, the 90-day period ending on the Participant's annuity
starting date (as defined in Article 8.8(a)); or (ii) in the case of an
election to waive the qualified preretirement survivor annuity, the period
which begins on the first day of the Plan Year in which the Participant
attains age 35 and ends on the date of the Participant's depth. If
Participant separates from service prior to the first
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day of the Plan Year in which he attains age 35, the applicable election
period for purposes of (ii) shall begin on the date of the Participant's
separation from service with respect to the separate accounts of the
Participant under the Plan as of the date of separation.
8.11 Exception To Joint and Survivor Annuity and Preretirement Survivor Annuity
Requirements. The qualified joint and survivor annuity requirement of Article
8.7 and the qualified preretirement survivor annuity requirement of Article 8.8
shall not apply with respect to any Participant: (1) who does not or cannot
elect to receive payments under the Plan in the form of a life annuity; and (2)
whose spouse is the sole Beneficiary entitled to receive the Participant's
vested account balance under the Plan at the time of the Participant's death,
unless the Participant has no surviving spouse or the Participant's spouse has
consented, in a manner conforming to the requirements of Article 8.10(b), to
the designation by the Participant of another Beneficiary who shall receive all
amounts credited to the Participant's separate accounts under the Plan at the
time of the Participant's death. This Article 8.11 shall not be operative with
respect to any Participant if it is determined that this Plan constitutes a
direct or indirect transferee of the Participant's interest in a defined benefit
plan, money purchase pension plan (including a target benefit plan). or stock
bonus or profit-sharing plan which is subject to the survivor annuity
requirements of Sections 401(a)(11) and 417 of the Code. In addition, this
Article 8.11 shall not be operative with respect to any Participant unless the
Participant's spouse is the beneficiary of any insurance on the Participant's
life which may be purchased by Employer Contributions or Forfeitures which are
allocated to the Participant's separate accounts under the Plan. For purposes of
this Article 8.11 the Participant's "vested account balance" shall have the same
meaning as provided in Article 8.8(b).
8.12 Cash-Outs.
(a) Distributions Not In Excess of $3,500. if the total amount otherwise
required to be distributed in the form of a qualified joint and survivor
annuity or a qualified preretirement survivor annuity to a Participant or
his or her surviving spouse under Article 8.7 or 8.8 does not exceed
$3,500, such distribution shall automatically be made in the form of a
lump-sum payment. No distribution shall be made under the preceding
sentence after the first day of the first period for which an amount is
received as an annuity unless the Participant and his or her spouse (or
the Participant's surviving spouse if the Participant has died) consents
in writing to such distribution.
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(b) Distributions In Excess of $3,500 Only With Consent. If the total
amount otherwise required to be distributed in the form of a qualified
joint and survivor annuity or a qualified preretirement survivor annuity
to a Participant or his or her surviving spouse under Article 8.7 or 8.8
exceeds $3,500, such distribution shall be made in the form of a lump-sum
payment if the Participant and his or her spouse (or the Participant's
surviving spouse if the Participant has died) consent in writing to such
distribution.
8.13 Former Spouse Under Qualified Domestic Relations Order. For purposes of the
qualified joint and survivor annuity requirement and the qualified preretirement
survivor annuity requirement of this Article 8, a former spouse of a Participant
shall be treated as the spouse or surviving spouse of the Participant, and any
current spouse of a Participant shall not be treated as the spouse or surviving
spouse of the Participant, to the extent provided for in any qualified domestic
relations order as described in Section 414(p) of the Code.
8.14 Purchase or Annuities; Nontransferability Provisions. The Plan
Administrator shall be responsible for arranging the purchase of any annuity
contract required to be distributed by the Plan under this Article 8 and
directing the Trustee to transfer Plan funds for purposes of making any such
purchase. Any annuity contract distributed by the Plan to a Participant or his
or her surviving spouse shall be nontransferable and comply with all
requirements of this Plan.
8.15 Commencement of Benefits. Unless a Participant elects otherwise,
distribution of the Participant's benefits under the Plan shall commence no
later than 60 days after the close of the Plan Year in which the latest of the
following events occurs: (i) the Participant attains age 65 (or Normal
Retirement Age, if earlier); (ii) the 10th anniversary of the Plan Year in which
the Participant commenced participation in the Plan; or (iii) the Participant's
termination of employment with the Employer. Notwithstanding the foregoing, the
failure of any Participant to consent to a distribution of benefits under
Article 8.3(b) shall be deemed to be an election by the Participant to defer the
distribution of his benefits for purposes of this Article 8.15.
8.16 Designation of Beneficiary. A Participant may designate from time to time
any person or persons, who may be designated contingently or successively and
who may be an entity other than a natural person, as the Participant's
Beneficiary who shall be entitled to receive, except as otherwise required under
Article 8.7 or 8.8, any undistributed vested amounts credited to the
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Participant's separate accounts under the Plan at the time of the Participant's
death. Notwithstanding the preceding, to the extent that the Employer elects to
satisfy the exception of Article 8.11 to the survivor annuity requirements with
respect to all Participants in the Plan, the Employer may require that the sole
Beneficiary of every Participant be the Participant's spouse, unless the
Participant has no spouse or the Participant's spouse has consented, in a manner
conforming to the requirements of Article 8.10(b), to the designation by the
Participant of another Beneficiary who shall be entitled to receive any
undistributed vested amounts credited to the Participant's separate accounts
under the Plan at the time of the Participant's death. Any Beneficiary
designation by a Participant shall be made on a form prescribed by the Plan
Administrator and shall be effective only when filed with the Plan Administrator
during the Participant's lifetime. A Participant may change or revoke his or her
Beneficiary designation at any time by filing a new instrument with the Plan
Administrator (except where the Participant's spouse is required to be the
Beneficiary). If the designated Beneficiary predeceases the Participant, the
Participant's Beneficiary designation shall be ineffective. If no Beneficiary
designation is in effect at the time of the Participant's death, the
Participant's Beneficiary shall be the Participant's estate.
3.17 Distributions Pursuant to Qualified Domestic Relations Orders.
(a) In General. Notwithstanding any provision of the Plan to the contrary,
the Plan Administrator may direct the Trustee to distribute all or any
portion of a Participant's benefits under the Plan to an alternate payee
in accordance with the terms and conditions of a qualified domestic
relations order as defined in Section 414(p) of the Code (a "QDRO"). The
Plan hereby specifically permits and authorizes distribution of a
Participant's benefits under the Plan to an alternate payee in accordance
with a QDRO prior to the date the Participant separates from service with
the Employer or attains the Participant's earliest retirement age as
defined in Section 414(p)(4)(B) of the Code.
(b) Plan Procedures. The Plan Administrator shall be responsible for
establishing reasonable procedures for determining whether any domestic
relations order received with respect to the Plan qualifies as a QDRO and
for administering distributions in accordance with the terms and
conditions of a QDRO. If any domestic relations order is received with
respect to the Plan, the Plan Administrator shall promptly notify the
Participant and each alternate payee identified in the order. The Plan
Administrator shall determine within a reasonable period after receipt of
the domestic relations order
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whether the order qualifies as a QDRO, and notify the Participant and each
alternate payee of such determination. In making any distribution to an
alternate payee pursuant to the Plan Administrator's directions under this
Article 8.17, the Trustee shall be fully entitled to rely on such
directions furnished by the Plan Administrator and shall be under no duty
to make any inquiry or investigation with respect thereto.
8.13 Direct Rollovers. This Article applies to distributions made on or after
January 1, 1993. Notwithstanding any provision of the Plan to the contrary which
would otherwise limit a distributee's election under this Article 8.18, a
distributee may elect, at the time and in the manner prescribed by the Plan
Administrator, to have all or any portion of an eligible rollover distribution
paid directly in the form of a direct rollover to any eligible retirement plan
specified by the distributee. For purposes of this Article 8.18, the following
definitions shall apply:
(a) Eligible Rollover Distribution. An eligible rollover distribution
includes any distribution of all or any portion of the balance to the
credit of the distributee, except than an eligible rollover distribution
does not include:
(1) any distribution which is one of a series of substantially equal
periodic payments made (not less frequently than annually) for (i)
the life or life expectancy of the distributee, (ii) the joint lives
or joint life expectancies of the distributed and the distributee's
designated beneficiary, or (iii) a specified period of ten years or
more;
(2) any distribution to the extent that such distribution is
required under Section 401(a)(9) of the Code;
(3) the portion of any distribution which is not includible in the
distributee's gross income (determined without regard to the
exclusion for net unrealized appreciation with respect to employer
securities); and
(4) any other distribution(s) that is reasonably expected to total
less than $200 during a year.
(b) Eligible Retirement Plan. An eligible retirement plan includes an
individual retirement account described in Section 408(a) of the Code, an
individual retirement
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annuity described in Section 408(b) of the Code, an annuity plan described
in Section 403(a) of the Code, or a qualified trust described in Section
401(a) of the Code which accepts the distributee's eligible rollover
distribution. However, in the case of an eligible rollover distribution to
an Employee's surviving spouse, an eligible retirement plan is limited to
an individual retirement account or individual retirement annuity.
(c) Distributee. A distributee includes an Employee or former Employee. In
addition, the Employee's or former Employee's surviving spouse and the
Employee's or former Employee's spouse or former spouse who is the
alternate payee under a qualified domestic relations order, as defined in
Section 414(p) of the Code, are distributees with regard to the interest
of the spouse or former spouse.
(d) Direct Rollover. A direct rollover is a payment by the Plan to the
eligible retirement plan specified by the distributee.
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ARTICLE 9
WITHDRAWALS
9.1 Withdrawals of Employee After-Tax Contributions. A Participant shall be
permitted to withdraw at any time all or any portion of the total amount
credited to the Participant's Employee After-Tax Contribution Account. The Plan
Administrator may prescribe uniform and nondiscriminatory rules and procedures
limiting the number of times that any Participant may make withdrawals under
this Article 9.1 during any Plan Year and the minimum amount that a Participant
may withdraw on any single occasion. No forfeitures or penalties shall apply
under the Plan solely as a result of a Participant's withdrawal of Employee
After-Tax Contributions.
9.2 Withdrawals of Rollover Contributions. A Participant shall be permitted to
withdraw at any time all or any portion of the total amount credited to the
Participant's Rollover Contribution Account. The Plan Administrator may
prescribe uniform and nondiscriminatory rules and procedures limiting the number
of times that any Participant may make withdrawals under this Article 9.2 during
any Plan Year and the minimum amount that a Participant may withdraw on any
single occasion.
9.3 Withdrawals on or After Age 59 1/2. If so designated by the Employer in the
Adoption Agreement, a Participant who has attained age 59 1/2 shall be entitled
to withdraw all or any portion of the total vested amount (as determined under
Article 7) credited to the Participant's separate accounts under the Plan. The
Plan Administrator may prescribe uniform and nondiscriminatory rules and
procedures limiting the number of times that a Participant may make withdrawals
under this Article 9.3 during any Plan Year and the minimum amount that a
Participant may withdraw on any single occasion.
9.4 Hardship Withdrawals.
(a) Immediate and Heavy Financial Need. If so designated by the Employer
in the Adoption Agreement, a Participant shall be permitted to make a
hardship withdrawal from the Plan, subject to the joint and survivor
annuity requirements of Article 8.7, if the Participant certifies that he
or she has incurred an immediate and heavy financial need for funds. For
these purposes, an immediate and heavy financial need shall include a
need:
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(1) to pay expenses incurred or necessary for medical care,
described in Section 213(d) of the Code, of the Participant or the
Participant's spouse, children or dependents;
(2) to purchase the principal residence of the Participant
(excluding mortgage payments);
(3) to pay tuition and related educational fees for the next 12
months of post-secondary education for the Participant or the
Participant's spouse, children, or dependents; or
(4) to prevent the eviction of the Participant from his or her
principal residence or foreclosure on the mortgage of the
Participant's principal residence.
(b) Necessary to Satisfy Financial Need. The amount of any hardship
withdrawal by a Participant under subsection (a) above shall not exceed
the amount which is necessary to satisfy the Participant's immediate and
heavy financial need and which is not reasonably available from other
resources of the Participant. For these purposes, a hardship withdrawal
will be treated as necessary to satisfy an immediate and heavy financial
need under subsection (a) above if:
(1) the Participant has obtained all distributions, other than
hardship distributions, and all nontaxable loans from the Plan and
any other plans maintained by the Employer:
(2) all plans maintained by the Employer provide that, if the
hardship withdrawal is made from the Participant's Employee Pre-Tax
Contribution Account under subsection (c) below, the Participant's
elective deferrals (as defined in Article 4.4) and employee
after-tax contributions will be suspended for twelve months after
the receipt of the hardship distribution;
(3) the distribution is not in excess of the amount of the
Participant's immediate and heavy financial need (including amounts
necessary to pay any
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federal, state or local income taxes or penalties reasonably
anticipated to result from the distribution); and
(4) all plans maintained by the Employer provide that, if the
hardship withdrawal is made from the Participants Employee Pre-Tax
Contribution Account under subsection (c) below, the Participant may
not make elective deferrals for the Participant's taxable year
immediately following the taxable year of the hardship distribution
in excess of the applicable limit under Section 402(g) of the Code
for such taxable year less the amount of the Participant's elective
deferrals for the taxable year of the hardship distribution.
(c) Limitations on Hardship Withdrawals. Any hardship withdrawal by a
Participant under subsection (a) above shall be made from:
(1) the Participant's Employee Pre-Tax Contributions to the Plan,
including any earnings attributable thereto which were allocated to
the Participant's Employee Pre-Tax Contribution Account as of the
end of the last Plan Year ending before July 1, 1989 (but not the
earnings allocated thereafter);
(2) the Participant's Employer Matching Contribution Account, unless
the Employer Matching Contributions allocated thereto qualify as
Qualified Matching Contributions under Article 5.1(l) in which case
only the amount allocated to the Participant's Employer Matching
Contribution Account as of the end of the last Plan Year ending
before July 1, 1989, shall be eligible for hardship withdrawal by
the Participant; and
(3) the Participant's Employer Nonelective Contribution Account,
unless the Employer Nonelective Contributions allocated thereto
qualify as Qualified Nonelective Contributions under Article 5.1(m)
in which case only the amount allocated to the Participant's
Employer Nonelective Contribution Account as of the end of the last
Plan Year ending before July 1, 1989, shall be eligible for hardship
withdrawal by the Participant.
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(d) Prior Withdrawal of Employee After-Tax and Rollover Contributions
Required. A Participant shall not be permitted to make a hardship
withdrawal under subsection (a) above unless the Participant has already
withdrawn, in accordance with Articles 9.1 and 9.2, all available amounts
credited to the Participant's Employee After-Tax Contribution Account and
Rollover Contribution Account.
9.5 Manner of Making Withdrawals. Any withdrawal by a Participant under the Plan
shall be made only after the Participant files a written request with the Plan
Administrator specifying the nature of the withdrawal (and the reasons therefor,
if a hardship withdrawal), the amount of funds requested to be withdrawn, and
the separate accounts from which the withdrawal should be made. Upon approving
any withdrawal, the Plan Administrator shall furnish the Trustee with
instructions directing the Trustee to make the withdrawal from the Participant's
separate accounts under the Plan in a lump-sum payment to the Participant,
unless such withdrawal is required to be paid in the form of a qualified joint
and survivor annuity under Article 8.7. The amount of any withdrawal shall be
determined by the value of the amounts credited to the Participant's separate
accounts under the Plan as of the Valuation Date on which the Trustee receives
instructions in good order from the Plan Administrator to make the withdrawal
payment. In making any such withdrawal payment, the Trustee shall be fully
entitled to rely on the instructions furnished by the Plan Administrator, and
shall be under no duty to make any inquiry or investigation with respect
thereto.
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ARTICLE 10
LOANS
10.1 Amount of Loan. If so designated by the Employer in the Adoption Agreement,
the Plan Administrator may direct the Trustee to make a loan to a Participant
from the vested amounts (as determined under Article 7) credited to the
Participant's separate accounts under the Plan. The total amount of any such
loan, when added to the outstanding balance of all other loans to the
Participant from the Plan, shall not exceed the lesser of:
(a) 50 percent of the total vested accrued benefits of the Participant
under the Plan as of the date of the loan; or
(b) $50,000 reduced by the excess (if any) of the highest outstanding
balance of all loans to the Participant from the Plan during the one-year
period ending on the day before the loan was made over the outstanding
balance of all loans to the Participant from the Plan on the date on which
the loan was made.
For purposes of the above limitation, all loans to the Participant from all
qualified plans maintained by the Employer and other members of a group of
employers described in Section 414(b), 414(c), or 414(m) of the Code which
includes the Employer shall be aggregated. In no event shall any loan be made
from the Plan to any Participant who is an Owner-Employee or a
shareholder-employee. For these purposes, a "shareholder-employee" means any
employee or officer of an electing small business (Subchapter S) corporation who
owns (or is considered as owning within the meaning of Section 318(a)(1) of
the Code) on any day during the taxable year of such corporation more than 5
percent of the outstanding stock of the corporation.
10.2 Security for Loan. Any loan to a Participant under the Plan shall be
adequately secured within the meaning of Section 4973(d) of the Code. Such
security shall include the pledge of all the Participant's right, title and
interest in the Plan, which pledge shall be evidenced by the execution of a
legally binding promissory note by the Participant. The Participant shall
further authorize the Employer to deduct specified amounts from the wages or
salary thereafter payable to the Participant by the Employer and to transmit
such amounts to the Trustee as the periodic repayments of the Participant's
loan.
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10.3 Interest Rate Charged. Any loan to a Participant under the Plan shall bear
a reasonable rate of interest which is commensurate with the prevailing interest
rate charged by professional lenders for similarly secured personal loans, as
determined by the Plan Administrator. The Plan Administrator shall not
discriminate among Participants in the matter of interest rates, but loans
granted at different times may bear different interest rates if, in the opinion
of the Plan Administrator, the difference in rates reflects prevailing interest
rates.
10.4 Repayment of Loans.
(a) Any loan to a Participant under the Plan shall by its terms be
required to be repaid within five years of the date on which the loan is
made, with the exception that a loan which is used to acquire a dwelling
unit which within a reasonable period of time (determined at the time the
loan is made) will be used as the principal residence of the Participant
may be repaid over a longer, reasonable period of time as determined by
the Plan Administrator. Repayments on any loan shall be made in regular
periodic installments on a schedule prescribed by the Plan Administrator
with payments not less frequently than quarterly, and shall be applied on
a substantially level amortization basis to reduce the principal as well
as the accrued interest of the loan.
(b) The Plan Administrator shall have the sole responsibility for assuring
that a Participant timely makes all loan repayments and notifying the
Trustee in the event of any default by a Participant on a loan repayment.
Loan repayments shall be paid to the Trustee and shall be accompanied by
instructions from the Plan Administrator which identify each Participant
on whose behalf a loan repayment is being made and the amount thereof.
10.5 Default on Loan. In the event of a default by a Participant on any loan
repayment, all remaining payments on the loan shall be immediately due and
payable. The Plan Administrator shall take any and all actions necessary and
appropriate to enforce collection of the unpaid loan, although foreclosure on
the Participant's promissory note and attachment of the Plan's security shall
not occur until a distributable event occurs under the Plan.
10.6 Setoff of Loan Upon Distributions. Prior to making any distribution of
benefits from a Participant's separate accounts under Article 8 upon the
Participant's separation from service or death, the Plan Administrator shall
direct the Trustee to deduct the total amount of any
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outstanding Plan loans to the Participant, plus any unpaid interest due thereon,
from the Participant's separate accounts under the Plan in order to satisfy the
amounts due on the Participant's loans. If, upon a Participant's death, a
preretirement survivor annuity is payable under Article 8.8 from 50 percent of
the total vested amount credited to the Participant's separate accounts under
the Plan, such 50 percent amount shall be determined after reducing the total
vested amount credited to the Participant's separate accounts at the time of the
Participant's death by the amount of any outstanding Plan loans to the
Participant, plus any unpaid interest due thereon.
10.7 Manner of Making Loans. A request by a Participant for a loan shall be made
in writing to the Plan Administrator and shall specify the amount of the loan
and the separate accounts of the Participant from which the loan should be made.
The terms and conditions on which the Plan Administrator shall approve loans
under the Plan shall be applied on a uniform and reasonably equivalent basis
with respect to all Participants and Beneficiaries who are "parties in interest"
as defined in Section 3(14) of ERISA. Loans shall not be made available to
Participants who are highly compensated employees (within the meaning of Section
414(q) of the Code) in an amount greater than the amount made available to other
employees. If a Participant's request for a loan is approved by the Plan
Administrator, the Plan Administrator shall furnish the Trustee with written
instructions directing the Trustee to make the loan in a lump sum payment to the
Participant. In making any loan under this Article 10.7, the Trustee shall be
fully entitled to rely on the instructions furnished by the Plan Administrator,
and shall be under no duty to make any inquiry or investigation with respect
thereto.
10.8 Spousal Consent Required. No loan shall be made to a Participant from the
Plan unless within the 90-day period before the making of the loan the
Participant's spouse consents in writing to the pledge of the participant's
interest in the Plan as security for the loan under Article 10.2. Any such
consent by the Participant's spouse shall be in writing, shall acknowledge the
effect of the loan, and shall be witnessed by a Plan representative or notary
public. The spouse's consent shall be thereafter binding on the consenting
spouse or any subsequent spouse with respect to the Participant's loan. A new
spousal consent shall be required for any renegotiation, extension, renewal or
other revision of the Participant's loan. Notwithstanding the preceding, spousal
consent shall not be required under this Article 10.8 if the qualified joint and
survivor annuity requirement of Article 8.8 and the qualified preretirement
survivor annuity requirement of Article 8.9 do not apply with respect to the
Participant by reason of Article 8.11.
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10.9 Accounting for Loans. A loan to a Participant from the Plan shall be
considered an investment of the separate accounts of the Participant from which
the loan is made, and all loan repayments by the Participant shall be credited
to such separate accounts and reinvested in the Vanguard Funds and other
investments authorized under the Trust Agreement in accordance with the
investment provisions of Article 6.5.
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ARTICLE 11
LIMITATIONS ON CONTRIBUTIONS AND BENEFITS
11.1 Definitions. For purposes of this Article 11 only, the following terms
shall be defined as follows:
(a) Annual Additions. The sum of the following amounts that are allocated
to a Participant's separate accounts under the Plan for any Limitation
Year:
(i) Employer contributions including Employee Pre-Tax Contributions,
Employer Matching Contributions and Employer Nonelective
Contributions (regardless of whether any amounts attributable to
such contributions are distributed to the Participant,
recharacterized or forfeited as Excess Elective Deferrals, Excess
Contributions or Excess Aggregate Contributions);
(ii) Employee After-Tax Contributions;
(iii) Forfeitures;
(iv) any amounts allocated after March 31, 1984, to an individual
medical account (as defined in Section 415(l)(2) of the Code) which
is part of a pension or annuity plan maintained by the Employer
shall be created as Annual Additions;
(v) any amounts derived from contributions paid or accrued after
December 31, 1985, in taxable years ending after such date, which
are attributable to post-retirement medical benefits allocated to
the separate account of a key employee (as defined in Section
419A(d)(3) of the Code) under a welfare benefit fund (as defined in
Section 419(e) of the Code) maintained by the Employer; and
(vi) allocations under a simplified employee pension maintained by
the Employer.
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For purposes of this definition, any Excess Amount, plus any investment
gains or other income or less any investment losses attributable thereto,
that is applied under Article 11.2(c) or 11.3(e) to reduce the Employer
contributions on behalf of a Participant for a Limitation Year shall be
considered Annual Additions for such Limitation Year.
(b) Compensation. A Participant's earned income, wages, salaries, fees for
professional services and other amounts received (without regard to
whether an amount is paid in cash) for personal services actually rendered
in the course of employment with the Employer maintaining the plan
(including, but not limited to, commissions paid salesmen, compensation
for services on the basis of a percentage of profits, commissions on
insurance premiums, tips, bonuses, fringe benefits, and reimbursements or
other expense allowances under a non-accountable plan as described in IRS
Reg. ss. l.62-2(c)), excluding the following:
(i) Employer contributions to a plan of deferred compensation which
are not includible in the gross income of the Participant for the
taxable year in which contributed, or Employer contributions under a
simplified employee pension plan, or any distributions from a plan
of deferred compensation;
(ii) amounts realized from the exercise of a non-qualified stock
option, or when restricted stock (or property) held by the
Participant either becomes freely transferable or is no longer
subject to a substantial risk of forfeiture;
(iii) amounts realized from the sale, exchange or other disposition
of stock acquired under a qualified stock option; and
(iv) other amounts which receive special tax benefits, such as
contributions wade by the Employer (whether or not under a salary
reduction agreement) towards the purchase of an annuity contract
under Section 403(b) of the Code (whether or not the contributions
are excludable from the gross income of the Participant).
For purposes of applying the limitations of this Article 11, Compensation
for a Limitation Year shall be the Compensation annually paid to a
Participant or includible in his gross income during such Limitation Year.
Notwithstanding the preceding
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sentence, Compensation for a Participant in a defined contribution plan
who is permanently and totally disabled (as defined in Section 22(e)(3) of
the Internal Revenue Code) shall be the Compensation such Participant
would have received for the Limitation Year if the Participant had been
paid at the rare of compensation paid immediately before becoming
permanently and totally disabled; provided that such imputed Compensation
for the disabled Participant may be taken into account only if the
Participant is not a highly compensated employee (as defined in Article
5.1(j) of the Plan) and contributions made on behalf of such Participant
to the defined contribution plan are nonforfeitable when made.
(c) Defined Benefit Plan Fraction. A fraction, the numerator of which is
the sum of a Participant's Projected Annual Benefits under all defined
benefit plans (whether or not terminated) maintained by the Employer, and
the denominator of which is the lesser of 125 percent of the dollar
limitation determined for the Limitation Year under Sections 415(b) and
(d) of the Code or 140 percent of the Participant's Highest Average
Compensation, including any adjustments under Section 415(b) of the Code.
Notwithstanding the above, if the Participant was a participant as
of the first day of the Limitation Year beginning after December 31, 1986,
in one or more defined benefit plans maintained by the Employer which were
in existence on May 6, 1986, the denominator of the Defined Benefit Plan
Fraction shall not be less than 125 percent of the sum of the annual
benefits under all such plans which the Participant had accrued as of the
close of the last Limitation Year beginning before January 1, 1987,
disregarding any changes in the terms and conditions of the plan after May
5, 1986. The preceding sentence shall apply only if the Employer's defined
benefit plans individually and in the aggregate satisfied the requirements
of Section 415 of the Code for all Limitation Years beginning before
January 1, 1987.
(d) Defined Contribution Dollar Limitation. The greater of $30,000 or
one-fourth of the defined benefit dollar limitation set forth in Section
415(b)(1) of the Code as in effect for the Limitation Year.
(e) Defined Contribution Plan Fraction. A fraction, the numerator of which
is the sum of the Annual Additions credited to a Participant's accounts
under all defined contribution plans (whether or not terminated)
maintained by the Employer for the
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current and all prior Limitation Years (including any Annual Additions
attributable to nondeductible employee contributions to any defined
benefit plans, whether or not terminated, maintained by the Employer and
any Annual Additions attributable to any welfare benefit funds, individual
medical accounts and simplified employee pensions maintained by the
Employer) and the denominator of which is the sum of the maximum aggregate
amounts for the current and all prior Limitation Years of service with the
Employer (regardless of whether a defined contribution plan was maintained
by the Employer). The maximum aggregate amount for any Limitation Year is
the lesser of 125 percent of the dollar limitation determined under
Sections 415(b) and (d) of the Code in effect under Section 415(c)(1)(A)
of the Code or 35 percent of the Participant's Compensation for such year.
Notwithstanding the above, if the Participant was a participant as
of the end of the first day of the first Limitation Year beginning after
December 31, 1986, in one or more defined contribution plans maintained by
the Employer which were in existence on May 6, 1986, the numerator of the
Defined Contribution Plan Fraction shall be adjusted if the sum of such
fraction and the Defined Benefit Plan Fraction would otherwise exceed 1.0
under the terms of this Plan. Under this adjustment, an amount equal to
the product of (i) the excess of the sum of the Defined Benefit and
Defined Contribution Plan Fractions over 1.0 times (ii) the denominator of
the Defined Contribution Plan Fraction shall be permanently subtracted
from the numerator of the Defined Contribution Plan Fraction. This
adjustment shall be calculated using the Defined Benefit and Defined
Contribution Plan Fractions as they would have been calculated as of the
end of the last Limitation Year beginning before January 1, 1987, and
disregarding any changes in the terms and conditions of the plan made
after May 5, 1986, but listing the Section 415 limitation applicable to
the first Limitation Year beginning on or after January 1, 1987.
The Annual Additions for any Limitation Year beginning before
January 1, 1987, shall not be recomputed to treat all employee
contributions as Annual Additions.
(f) Employer. For purposes of this Article 11, the Employer shall mean the
Employer that adopts this Plan and all members of a controlled group of
corporations (as defined in Section 414(b) of the Code, as modified by
Section 415(h) of the Code), all commonly controlled trades or businesses
(as defined in Section 414(c) of the Code, as
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modified by Section 415(h) of the Code) or affiliated service groups (as
defined in Section 414(m) of the Code) of which the adopting Employer is a
member, and any other entity required to be aggregated with the Employer
pursuant to regulations under Section 414(o) of the Code.
(g) Excess Amount. The excess of a Participant's Annual Additions for a
Limitation Year over the Maximum Permissible Amount for the Limitation
Year.
(h) Highest Average Compensation. A Participant's average annual
Compensation for the three consecutive Years of Service (as defined in
Article 7.3) that produces the highest average annual compensation.
(i) Limitation Year. The Plan Year or other 12-consecutive month period
designated by the Employer in the Adoption Agreement. All qualified plans
maintained by the Employer must use the same Limitation Year. If the
Limitation Year is amended to a different 12-consecutive month period, the
new Limitation Year shall begin on a date within the Limitation Year in
which the amendment is made.
(j) Master or Prototype Plan. A qualified plan the form of which is the
subject of a favorable opinion letter from the Internal Revenue Service.
(k) Maximum Permissible Amount. The maximum amount of Annual Additions
that may be contributed or allocated to any Participant's accounts under
the Plan for any Limitation Year shall not exceed the lesser of:
(a) the Defined Contribution Dollar Limitation, or
(b) 25 percent of the Participant's Compensation for the Limitation
Year.
The Compensation limitation referred to in (b) above shall not apply to
any contribution for medical benefits (within the meaning of Section
401(h) or 419A(f)(2) of the Code) which is otherwise treated as Annual
Additions under Section 415(1)(2) or 419A(d)(2) of the Code. If a short
Limitation Year is created because of an amendment changing the Limitation
Year to a different 12-consecutive month period, then the Maximum
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Permissible Amount shall not exceed the Defined Contribution Dollar
Limitation multiplied by the following fraction:
Number of months in the short Limitation Year
---------------------------------------------
12
(1) Projected Annual Benefit. The annual retirement benefit (adjusted to
an actuarially equivalent straight life annuity if such benefit is
expressed in a form other than a straight life annuity or qualified joint
and survivor annuity) to which a Participant would be entitled under the
terms of the plan assuming:
(i) the Participant will continue employment until normal retirement
age under the plan (or current age, if later), and
(ii) the Participant's Compensation for the current Limitation Year
and all other relevant factors used to determine benefits under the
plan will remain constant for all future Limitation Years.
11.2 Employers Who Maintain No Other Qualified Plans
(a) If a Participant does not participate in, and has never participated
in, another qualified plan maintained by the Employer, or a welfare
benefit fund, as defined in Section 419(e) of the Code, maintained by the
Employer, or an individual medical account, as defined in Section
415(1)(2) of the Code, maintained by the Employer, or, a simplified
employee pension, as defined in Section 408(k) of the Code, maintained by
the Employer, which provides an Annual Addition, as defined in Article
11.1(a), the amount of Annual Additions which may be credited to the
Participant's separate accounts under the Plan for any Limitation Year
shall not exceed the lesser of the Maximum Permissible Amount or any other
limitation contained in the Plan. If the Employer Contributions that would
otherwise be contributed or allocated to the Participant's separate
accounts under the Plan would cause the Annual Additions for the
Limitation Year to exceed the Maximum Permissible Amount, then the amount
contributed or allocated shall be reduced so that the Annual Additions for
the Limitation year shall equal the Maximum Permissible Amount.
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(b) Prior to determining a Participant's actual Compensation for any
Limitation Year, the Plan Administrator may determine the Participant's
Maximum Permissible Amount for the Limitation Year on the basis of a
reasonable estimation of the Participant's Compensation for the Limitation
Year, uniformly determined for all Participants similarly situated. As
soon as is administratively feasible after the end of the Limitation Year,
the Maximum Permissible Amount for such Limitation Year shall be
determined on the basis of the Participant's actual Compensation for the
Limitation Year.
(c) If, pursuant to (b) above or as a result of the allocation of
Forfeitures or a reasonable error in determining the amount of Employee
Pre-Tax Contributions which may be made by a Participant, there exists an
Excess Amount with respect to the Participant as of the end of a
Limitation Year, such Excess Amount shall be disposed of as follows:
(i) Any Employee After-Tax Contributions or Employee Pre-Tax
Contributions by the Participant, to the extent they would reduce
the Excess Amount, shall be returned to the Participant.
(ii) If, after the application of subparagraph (i) above, an Excess
Amount still exists and the Participant is covered by the Plan at
the end of the Limitation Year, then such Excess Amount, plus any
investment gains or other income or less any investment losses
attributable thereto, shall be used to reduce the Employer
contributions on behalf of the Participant for the next Limitation
Year and each succeeding Limitation Year, if necessary.
(iii) If, after the application of subparagraph (i) above, an Excess
Amount still exists and the Participant is not covered by the Plan
at the end of a Limitation Year, then such Excess Amount shall be
held unallocated in a suspense account and applied to reduce future
Employer contributions to the Plan for all remaining Participants in
the next Limitation Year and each succeeding Limitation Year, if
necessary.
(iv) If a suspense account is in existence at any time during a
Limitation Year pursuant to this Article 11.2, such account shall
participate in the allocation of the Trust's investment gains and
losses. If a suspense account is in existence at
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any time during a particular Limitation Year, all amounts in the
suspense account must be allocated and reallocated to Participants,
accounts before any Employer contributions may be made to the Plan
for that Limitation Year. Except as otherwise provided in (i) above,
Excess Amounts may not be distributed to Participants or former
Participants.
11.3 Employers Who Maintain Other Qualified Master or Prototype Defined
Contribution Plans.
(a) This Article 11.3 applies if, in addition to this Plan, a Participant
is covered under another qualified Master or Prototype defined
contribution plan maintained by the Employer, a welfare benefit fund
maintained by the Employer, an individual medical account maintained by
the Employer, or a simplified employee pension maintained by the Employer
which provides an Annual Addition during any Limitation Year. The Annual
Additions which may be credited to the Participant's separate accounts
under this Plan for any such Limitation Year shall not exceed the Maximum
Permissible Amount reduced by the total Annual Additions credited to the
Participants accounts under all such other defined contribution plans,
welfare benefit funds, individual medical accounts, and simplified
employee pensions for the Limitation Year. If the Annual Additions with
respect to the Participant under all other defined contribution plans,
welfare benefit funds, individual medical accounts, and simplified
employee pensions maintained by the Employer are less than the Maximum
Permissible Amount and the Employer Contributions that would otherwise be
contributed or allocated to the Participant's separate accounts under this
Plan would cause the Annual Additions for the Limitation Year to exceed
the Maximum Permissible Amount, then the amount contributed or allocated
under this Plan shall be reduced so that the Annual Additions under all
such plans and funds for the Limitation Year shall equal the Maximum
Permissible Amount. If the Annual Additions with respect to the
Participant under such other defined contribution plans, welfare benefit
funds, individual medical accounts, and simplified employee pensions in
the aggregate are equal to or greater than the Maximum Permissible Amount,
then no amount shall be contributed or allocated to the Participant's
separate accounts under this Plan for the Limitation Year.
(b) Prior to determining a Participant's actual Compensation for any
Limitation Year, the Plan Administrator may determine the Maximum
Permissible Amount for the
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Participant in the manner described in Article 11.2(b), As soon as is
administratively feasible after the end of the Limitation Year, the
Maximum Permissible Amount for the Limitation Year shall be determined on
the basis of the Participant's actual Compensation for the Limitation
Year.
(c) If, pursuant to Article 11.3(b) or as a result of the allocation of
forfeitures, a Participant's Annual Additions under this Plan and such
other defined contribution plans maintained by the Employer that are
Master or Prototype Plans would result in an Excess Amount for a
Limitation Year, then the Excess Amount shall be deemed to consist of the
Annual Additions last allocated, except that Annual Additions attributable
to a simplified employee pension shall be deemed to have been allocated
first, followed by Annual Additions attributable to a welfare benefit fund
or individual medical account, regardless of the actual allocation date.
(d) If an Excess Amount was allocated to a Participant's account under
this Plan on an allocation date which coincides with an allocation date of
another plan, the Excess Amount attributed to this Plan shall be the
product of:
(i) the total Excess Amount allocated as of such date, times
(ii) the ratio of (1) the Annual Additions allocated to the
Participant's separate accounts under this Plan for the Limitation
Year as of such date to (2) the total Annual Additions allocated to
the Participant's accounts for the Limitation Year as of such date
under this Plan and all other qualified defined contribution Master
or Prototype Plans maintained by the Employer.
(e) Any Excess Amount attributable to this Plan shall be disposed of in
the manner described in Article 11.2(c).
11.4 Employers Who Maintain a Qualified Defined Contribution Plan Other Than a
Master or Prototype Plan. If a Participant is covered under another qualified
defined contribution plan maintained by the Employer which is not a Master or
Prototype Plan, the Annual Additions which may be credited to the Participant's
separate accounts under this Plan for any Limitation Year shall be limited in
accordance with Article 11.3 as though the other plan
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were a Master or Prototype Plan unless the Employer designates other limitations
in the section on "Limitations on Allocations" in the Adoption Agreement.
11.5 Employers Who Maintain a Qualified Defined Benefit Plan. If the Employer
maintains, or has at any time maintained, a qualified defined benefit plan
covering any Participant in this Plan, then the sum of the Participant's Defined
Benefit Plan Fraction and Defined Contribution Plan Fraction shall not exceed
1.0 for any Limitation Year. The Annual Additions which may be credited to the
Participant's separate accounts under this Plan for any Limitation Year shall be
limited in accordance with the limitations designated by the Employer in the
section on "Limitations on Allocations" in the Adoption Agreement.
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ARTICLE 12
TOP-HEAVY PROVISIONS
12.1 Application. If the Plan is or becomes a Top-Heavy Plan in any Plan Year,
the provisions of this Article 12 shall supersede any conflicting provision in
the Plan or Adoption Agreement.
12.2 Definitions. For purposes of this Article 12, the following terms shall be
defined as follows:
(a) Key Employee. Any Employee or former Employee (and the Beneficiary of
any such Employee) who at any time during the determination period was an
officer of the Employer whose annual compensation exceeds 50 percent of
the dollar limitation under Section 415(b)(1)(A) of the Code, an owner (or
considered an owner under Section 318 of the Code) of one of the ten
largest interests in the Employer if such individual's annual compensation
exceeds 100 percent of the dollar limitation under Section 415(c)(1)(A) of
the Code, a 5-percent owner of the Employer, or a 1-percent owner of the
Employer who has annual compensation of more than $150,000. For the
purposes of this definition, the term "annual compensation" means
compensation as defined in Section 415(c)(3) of the Code, but including
amounts contributed by the Employer pursuant to a salary reduction
agreement which are excludable from the Employee's gross income under
Section 125, Section 402(a)(8), Section 402(h), or Section 403(b) of the
Code. The term "determination period" is the Plan Year containing the
Determination Date and the four preceding Plan Years. The determination of
who is a Key Employee shall be made in accordance with Section 416(i)(1)
of the Code and the regulations thereunder.
(b) Top-Heavy Plan. For any Plan Year beginning after December 31, 1983,
the Plan is a Top-Heavy Plan if any of the following conditions exists:
(i) the Top-Heavy Ratio for the Plan exceeds 60 percent and the Plan
is not part of any Required Aggregation Group or Permissive
Aggregation Group;
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(ii) the Plan is a part of a Required Aggregation Group but not part
of a Permissive Aggregation Group and the Top-Heavy Ratio for the
Required Aggregation Group exceeds 60 percent; or
(iii) the Plan is a part of a Required Aggregation Group and a
Permissive Aggregation Group and the Top-Heavy Ratio for both Groups
exceeds 60 percent.
(c) Top-Heavy Ratio.
(i) If the Employer maintains one or more defined contribution plans
(including any Simplified Employee Pension Plan), and the Employer
has not maintained any defined benefit plan which during the 5-year
period ending on the Determination Date has accrued any benefits for
any Participant in the Plan, the Top-Heavy Ratio for this Plan
alone, or for any Required Aggregation Group or Permissive
Aggregation Group, is a fraction, the numerator of which is the sum
of the account balances of all Key Employees under the plan(s) as of
the Determination Date (including any part of any account balance
distributed in the 5-year period ending on the Determination Date),
and the denominator of which is the sum of all account balances
(including any part of any account balance distributed in the 5-year
period ending on the Determination Date) of all Participants under
the plan(s) as of the Determination Date, both computed in
accordance with Section 416 of the Code and the regulations
thereunder. Both the numerator and denominator of the Top-Heavy
Ratio shall be increased to reflect any contribution which is due
but unpaid as of the Determination Date, but which is required to be
taken into account on that date under Section 416 of the Code and
the regulations thereunder.
(ii) If the Employer maintains one or more defined contribution
plans (including any Simplified Employee Pension Plan) and the
Employer maintains one or more defined benefit plans which, during
the 5-year period ending on the Determination Date, has accrued any
benefits for any Participant in this Plan, the Top-Heavy Ratio for
any Required Aggregation Group or Permissive Aggregation Group is a
fraction, the numerator of which is the sum of the
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account balances under the defined contribution plans for all Key
Employees, determined in accordance with (i) above, and the Present
Value of accrued benefits under the defined benefit plans for all
Key Employees, and the denominator of which is the sum of the
account balances under the defined contribution plans for all
participants and the Present Value of accrued benefits under the
defined benefit plans for all participants. Both the numerator and
denominator of the Top-Heavy Ratio shall be increased for any
distribution of an account balance or an accrued benefit made in the
five-year period ending on the Determination Date and any
contribution due but unpaid as of the Determination Date.
(iii) For purposes of (i) and (ii) above, the value of account
balances and the Present Value of accrued benefits will be
determined as of the most recent Valuation Date that falls within or
ends with the 12-month period ending on the Determination Date,
except as provided in Section 416 of the Code and the regulations
thereunder for the first and second plan years of a defined benefit
plan. The account balances and accrued benefits of a participant (1)
who is not a Key Employee but who was a Key Employee in a prior
year, or (2) who has not been credited with at least one hour of
service with the Employer at any time during the five-year period
ending on the Determination Date, will be disregarded. The
calculation of the Top-Heavy Ratio, and the extent to which
distributions, rollovers, and transfers are taken into account,
shall be made in accordance with Section 416 of the Code and the
regulations thereunder. Deductible employee contributions shall not
be taken into account for purposes of computing the Top-Heavy Ratio.
When aggregating plans, the value of account balances and accrued
benefits shall be calculated with reference to the Determination
Dates that fall within the same calendar year. The accrued benefit
of a Participant other than a Key Employee shall be determined under
(1) the method, if any, that uniformly applies for accrual purposes
under all defined benefit plans maintained by the Employer, or (2)
if there is no such method, as if such benefit accrued not more
rapidly than the slowest accrual rate permitted under the fractional
rule of Section 411(b)(1)(C) of the Code.
(d) Permissive Aggregation Group. The Required Aggregation Group plus any
other qualified plans of the Employer or an Affiliated Employer which,
when considered as a
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group with the Required Aggregation Group, would continue to satisfy the
requirements of Sections 401(a)(4) and 410 of the Code.
(e) Required Aggregation Group.
(i) Each qualified plan of the Employer or an Affiliated Employer in
which at least one Key Employee participates or has participated at
any time during the determination period (regardless of whether the
plan has terminated), and
(ii) any other qualified plan of the Employer or an Affiliated
Employer which enables a plan described in (i) above to meet the
requirements of Sections 401(a)(4) or 410 of the Code.
(f) Determination Date. For any Plan Year of the Plan subsequent to the
first Plan Year, the last day of the preceding Plan Year. For the first
Plan Year of the Plan, the last day of that Plan Year.
(g) Valuation Date. The Determination Date, unless the Employer designates
a different Valuation Date in the Adoption Agreement as the date as of
which account balances or accrued benefits shall be valued for purposes of
calculating the Top-Heavy Ratio.
(h) Present Value. Present value shall be based on the interest rate and
mortality table specified in the Adoption Agreement.
12.3 Minimum Allocation.
(a) Except as otherwise provided in (c) and (d) below, the Employer
contributions on behalf of any Participant who is not a Key Employee shall
not be less than the lesser of three percent of such Participant's
Compensation or, in the case where the Employer has no defined benefit
plan which designates this Plan to satisfy Section 401 of the Code, the
largest percentage of Employer contributions and forfeitures, as a
percentage of a Key Employee's Compensation, allocated on behalf of any
Key Employee for that year. The minimum allocation under this Article 12.3
shall be determined without regard to any Social Security contribution,
and shall be made even though, under other Plan provisions, the
Participant would not otherwise be entitled to receive an allocation,
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or would have received a lesser allocation for the year, because: (1) the
Participant failed to complete 1,000 Hours of Service: (2) the Participant
failed to make mandatory employee contributions to the Plan; or (3) the
Participant's Compensation was less than a stated amount. Employee Pre-Tax
Contributions and Employer Matching Contributions to the Plan shall not be
taken into account for purposes of satisfying the minimum allocation
required under this Article 12.3.
(b) For purposes of computing the minimum allocation required under (a)
above, Compensation shall mean Compensation as defined in Article 2.6
except, however, that any exclusions designated by the Employer in the
Adoption Agreement shall not be taken into account.
(c) The provisions of (a) above shall not apply to any Participant who was
not employed by the Employer on the last day of the Plan Year.
(d) The provisions of (a) above shall not apply to any Participant to the
extent the Participant is covered under any other qualified plan or plans
of the Employer and the Employer has provided in the Adoption Agreement
that the minimum benefits requirement applicable to Top-Heavy Plans under
Section 416(c) of the Code shall be satisfied through the other plan or
plans maintained by the Employer.
(e) The minimum allocation required under (a) above (to the extent
required to be nonforfeitable under Section 416(b) of the Code) may not
be forfeited under Section 411(a)(3)(B) or 411(a)(3)(D)of the Code.
12.4 Minimum Vesting Schedules.
(a) For any Plan year in which this Plan is a Top-Heavy Plan, one of the
minimum vesting schedules designated by the Employer in the Adoption
Agreement shall automatically apply to the Plan. This minimum vesting
schedule shall apply to all benefits within she meaning of Section
411(a)(7) of the Code except those attributable to employee contributions,
benefits that accrued before the effective date of Section 416 of the
Code, and benefits that accrued before the Plan became a Top-Heavy Plan.
No reduction in a Participant's vested benefits may occur in the event the
Plan's status as a top-heavy Plan changes for any Plan Year.
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(b) This Article 12.4 does not apply to the account balances of any
Employee who does not have an Hour of Service after the Plan has initially
become a Top-Heavy Plan, and such Employee's account balance attributable
to Employer Contributions and Forfeitures shall be determined without
regard to this Article.
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ARTICLE 13
ADMINISTRATION
13.1 Duties and Responsibilities of Fiduciaries; Allocation of Fiduciary
Responsibility. A fiduciary for the Plan shall have only those specific powers,
duties, responsibilities and obligations which are explicitly assigned to the
fiduciary under the Plan and Trust Agreement. In general, the Employer shall
have the responsibility for determining the provisions of the Plan by completing
the Adoption Agreement; appointing the Plan Administrator and Trustee: making
the contributions to the Plan required under Article 4; and determining the
procedures for the investment of Trust assets in accordance with Article 6. The
Plan Administrator shall have the responsibility for the administration of the
Plan, as more fully described in Article 13.2. The Trustee shall have the
responsibility for the administration of the Trust and the management of the
assets held thereunder, as specifically provided in the Trust Agreement. It is
intended that each fiduciary shall be responsible only for the proper exercise
of his or her own powers, duties, responsibilities and obligations under the
Plan and Trust Agreement, and shall not be responsible for any act or failure to
act of another fiduciary. A fiduciary may serve in more than one fiduciary
capacity with respect to the Plan.
13.2 Powers and Responsibilities of the Plan Administrator.
(a) Administration of the Plan. The Plan Administrator shall have all
powers necessary to administer the Plan, including the power to construe
and interpret the Plan documents: to decide all questions relating to an
individual's eligibility to participate in the Plan; to determine the
amount, form and timing of any distribution of benefits or withdrawal
under the Plan: to approve and enforce the repayment of any loan to a
Participant under the Plan; to resolve any claim for benefits in
accordance with Article 13.6; and to appoint or employ advisors, including
legal counsel, to render advice with respect to any of the Plan
Administrator's responsibilities under the Plan. Any construction,
interpretation or application of the Plan by the Plan Administrator shall
be finial, conclusive and binding. All actions by the Plan Administrator
shall be taken pursuant to uniform standards consistently applied to all
persons similarly situated. The Plan Administrator shall have no power to
add to, subtract from, or modify any of the terms of the Plan, or to
change or add to any benefits provided by the Plan, or to waive or fail to
apply any requirements of eligibility for a benefit under the Plan.
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(b) Records and Reports. The Plan Administrator shall be responsible for
maintaining sufficient records to reflect the Years of Service completed
by each Employee for purposes of determining the Employee's eligibility to
participate in the Plan and vested percentage under Article 7, and the
Compensation of each Participant for purposes of determining the amount of
contributions which may be made by or on behalf of the Participant under
the Plan. The Plan Administrator shall be responsible for submitting all
required reports and notifications relating to the Plan to Participants or
their beneficiaries, the Internal Revenue Service and the Department of
Labor.
(c) Furnishing Recordkeeper with Information. The Plan Administrator shall
be responsible for furnishing the Recordkeeper with sufficient information
to enable the Recordkeeper to establish and maintain separate accounts on
behalf of Participants in accordance with Article 6, including information
with respect to the allocation of Plan contributions to Participants,
disposition of Plan Forfeitures, payment of Plan distributions and
withdrawals, and accounting for Plan loans and loan repayments. In
addition, the Plan Administrator shall be responsible for furnishing the
Recordkeeper with any further information respecting the Plan which the
Recordkeeper may reasonably request for the performance of its duties or
for the purpose of making any returns to the Internal Revenue Service or
Department of Labor as may be required of the Recordkeeper.
(d) Furnishing Trustee with Instructions. The Plan Administrator shall be
responsible for furnishing the Trustee with instructions with respect to
the investment of all Plan contributions to the Trust in accordance with
Article 6, all distributions to Participants (including any purchases of
annuity contracts) in accordance with Article 8, all withdrawals by
Participants in accordance with Article 9 and all loans to Participants in
accordance with Article 10. In addition, the Plan Administrator shall be
responsible for furnishing the Trustee with any further information
respecting the Plan which the Trustee may reasonably request for the
performance of its duties or for the purpose of making any returns to the
Internal Revenue Service or Department of Labor as may be required of the
Trustee.
(e) Rules and Decisions. The Plan Administrator may adopt such rules as
the Plan Administrator deems necessary, desirable, or appropriate in the
administration of the
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Plan. All rules and decisions of the Plan Administrator shall be applied
uniformly and consistently to all Participants in similar circumstances.
When making a determination or calculation, the Plan Administrator shall
be entitled to rely upon information furnished by a Participant or
Beneficiary, the Employer, legal counsel of the Employer, the
Recordkeeper, or the Trustee.
(f) Application and Forms for Benefits. The Plan Administrator may require
a Participant, former Participant or Beneficiary to complete and file with
it an application for a benefit, and to furnish all pertinent information
requested by the Plan Administrator. The Plan Administrator may rely upon
all such information so furnished, including the Participants, former
Participant's or Beneficiary's current mailing address.
(g) Facility of Payment. Whenever, in the Plan Administrator's opinion, a
person entitled to received any payment of a benefit or installment
thereof is under a legal disability or is incapacitated in any way so as
to be unable to manage his or her financial affairs, the Plan
Administrator may direct the Trustee to apply the payment for the benefit
of such person in such manner as the Plan Administrator considers
advisable.
(h) Lost or Missing Participants. Any benefits payable under the Plan to a
Participant or Beneficiary shall be forfeited in the event the Participant
or Beneficiary cannot be located by the Plan Administrator after
reasonable efforts. Such benefits shall be reinstated if a claim is made
by the Participant or Beneficiary for the forfeited benefits, with the
exception that any benefits lost by reason of escheat under applicable
state law shall not be reinstated.
13.3 Allocation of Duties and Responsibilities. The Plan Administrator may by
written instrument designate other persons to carry out any of the Plan
Administrator's duties and responsibilities under the Plan. Any such duties, or
responsibilities thus allocated must be described in the written instrument. If
a person other than an Employee of the Employer is so designated, such person
must acknowledge in writing his or her acceptance of the allocated rules and
responsibilities. All such instruments shall be attached to, and made a part of,
the Plan.
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13.4 Expenses. The Employer shall pay all expenses authorized and incurred in
the administration of the Plan except to the extent such expenses are paid from
the Trust.
13.5 Liabilities. The Plan Administrator and each person to whom duties and
responsibilities have been allocated pursuant to Article 13.3 may be indemnified
and held harmless by the Employer to an extent determined by the Board of
Directors with respect to any alleged breach of responsibilities performed or to
be performed hereunder. The Employer shall indemnify and hold harmless the
Sponsor against all claims, liabilities, fines and penalties, and all expenses
reasonably incurred by or imposed upon the Sponsor (including, but not limited
to, reasonable attorney's fees) which arise as a result of actions or failure to
act by another party, including the Employer, Plan Administrator, Recordkeeper
or Trustee, in connection with the operation and administration of the Plan.
13.6 Claims Procedure.
(a) Filing of Claim. Any Participant or Beneficiary under the Plan may
file a written claim for a Plan benefit which the Plan Administrator or
with a person named by the Plan Administrator to receive claims under the
Plan.
(b) Notice of Denial of Claim. In the event of a denial or limitation of
any benefit or payment due to or requested by any Participant or
Beneficiary under the Plan ("claimant"), claimant shall be given a written
notification containing specific reasons for the denial or limitation. The
written notification shall contain specific reference to the pertinent
Plan provisions on which the denial or limitation of the claimant's
benefit is based. In addition, it shall contain a description of any other
material or information necessary for the claimant to perfect a claim, and
an explanation of why such material or information is necessary. The
notification shall further provide appropriate information as to the steps
to be taken if the claimant wishes to submit his or her claim for review.
This written notification shall be given to a claimant within 90 days
after receipt of the claim by the Plan Administrator unless special
circumstances require an extension of time for process of the claim. If
such an extension of time for processing is required, written notice of
the extension shall be furnished to the claimant prior to the termination
of said 90-day period, and such notice shall indicate the special
circumstances which make the postponement appropriate.
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(c) Right of Review. In the event of a denial or limitation of the
claimant's benefit, the claimant (or his or her duly authorized
representative) shall be permitted to review pertinent documents and to
submit to the Plan Administrator issues and comments in writing. In
addition, the claimant may make a written request for a full and fair
review of the claimant's claim and its denial by the Plan Administrator:
provided, however, that such written request must be received by the Plan
Administrator within 60 days after receipt by the claimant of written
notification of the denial or limitation of the claim. The 60-day
requirement may be waived by the Plan Administrator in appropriate cases.
(d) Decision on Review. A decision shall be rendered by the Plan
Administrator within 60 days after the receipt of the request for review,
provided that where special circumstances require an extension of time for
processing the decision, it may be postponed on written notice to the
claimant (prior to the expiration of the initial 60-day period) for an
additional 60 days, but in no event shall the decision by rendered more
than 120 days after the receipt of such request for review. Any decision
by the Plan Administrator shall be furnished to the claimant in writing
and shall set forth the specific reasons for the decision and the specific
plan provisions on which the decision is based.
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ARTICLE 14
AMENDMENT, TERMINATION AND MERGER
14.1 Amendment of Plan.
(a) Amendment by Sponsor. The Employer, by executing the Adoption
Agreement, has thereby delegated to the Sponsor the power to amend the
Plan at any time, including any retroactive amendment necessary to assure
that the Plan will qualify or continue to be qualified under the
applicable provisions of the Code. The Sponsor shall promptly furnish
written notice of any such amendment to the Employer.
(b) Amendment by Employer. The Employer may at any time: (i) amend any
elective or optional provision of the Adoption Agreement; (ii) amend the
Plan by adding certain model amendments published by the Internal Revenue
Service which specifically provide that their adoption will not cause the
Plan to be treated as an individually-designed plan; (iii) amend the Plan
by adding overriding Plan language to the Adoption Agreement where such
language is necessary to satisfy Section 415 or 416 of the Code because of
the required aggregation of multiple plans. Any Employer that amends the
Plan for any other reason shall cause the Plan as adopted by the Employer
to no longer represent a prototype plan covered by an opinion letter
issued by the Internal Revenue Service to the Sponsor, but rather to
represent an individually-designed plan. The Employer shall furnish an
executed copy of any amendment to the Adoption Agreement or Plan to the
Sponsor, which amendment shall become effective no earlier than the date
of receipt by the Sponsor, unless the Sponsor specifically consents to an
earlier effective date.
(c) Limitations on Amendment.
(i) Neither the Sponsor nor the Employer shall amend the Plan so as
to cause or permit any part of the assets of the Plan to be used
for, or diverted to, purposes other than for the exclusive benefit
of Participants or their Beneficiaries, or so as to cause or permit
any part of the assets of the Plan to revert to or become the
property of the Employer.
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(ii) No amendment to the Plan shall be effective to the extent that
it has the effect of decreasing a Participants accrued benefit. For
purposes of this Article 14.1(c)(ii), a Plan amendment which has
the effect of decreasing a Participant's account balance or
eliminating an optional form of benefit, with respect to benefits
attributable to service before the amendment, shall be treated as
reducing an accrued benefit. Furthermore, if the vesting schedule of
the Plan is amended, in the case of an Employee who is a Participant
as of the later of the date such amendment is adopted or the date it
becomes effective, the vested percentage (determined as of such
date) of such Employee in his or her Employer Matching Contribution
Account and Employer Nonelective Contribution Account will not be
less than the percentage computed under the Plan without regard to
such amendment.
(iii) Any amendment to the Plan or Adoption Agreement which alters
the Plan's vesting schedule (including any automatic amendment to
the Plan vesting schedule resulting from a change to or from
Top-Heavy Plan status) or any amendment which directly or indirectly
affects the computation of a Participant's vested percentage in his
or her Employer Contribution Account and Employer Nonelective
Contribution Account under Article 7.2 shall be deemed to include
the following terms:
(1) Each Participant having not less than three Years of
Service for vesting purposes at the later of the date such
amendment is adopted or the date such amendment becomes
effective shall be permitted to elect to have his or her
vested percentages computed under the Plan without regard to
such amendment. Such election must be made within 60 days from
the latest of: (i) the date the amendment is adopted, (ii) the
date the amendment becomes effective, or (iii) the date the
Participant is issued written notice of such amendment by the
Plan Administrator or the Employer. Notwithstanding the
preceding sentence, no election need be provided for any
Participant whose vested percentage in his or her Employer
Matching Contribution Account and Employer Nonelective
Contribution Account under the Plan, as amended, at any time
cannot be less than such percentage determined without regard
to such amendment.
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(2) No decrease in a Participant's vested percentage in his or
her Employer Contribution Account and Employer Nonelective
Contribution Account may occur in the event that the Plan's
status as Top-Heavy changes for any Plan Year.
14.2 Termination of Plan; Suspension of Contributions
(a) Plan Termination. The Employer, by duly adopted resolution, may
terminate the Plan at any time. In the event of the dissolution, merger,
consolidation or reorganization of the Employer, the Plan shall
automatically terminate unless it is continued by a successor employer in
accordance with Article 14.3. Upon the termination or partial termination
of the Plan, the separate accounts of all Participants affected thereby
shall immediately become fully vested and nonforfeitable.
(b) Suspension of Contributions. The Employer, by duly adopted resolution,
may discontinue all further contributions to the Plan. Upon the complete
suspension of contributions to the Plan by the Employer, the separate
accounts of all Participants affected thereby shall immediately become
fully vested and nonforfeitable. The Employer and Trustee shall continue
to maintain the Plan and Trust in accordance with the requirements of
Sections 401(a) and 501(a) of the Code, and the Plan Administrator shall
direct the Trustee to distribute the separate accounts of Participants
only at such times and in such manner as specifically provided in Article
8.
14.3 Successor Employer. In the event of the dissolution, merger, consolidation
or reorganization of the Employer, provision may be made by which the Plan and
Trust shall be continued by the successor employer, in which case such successor
employer shall be substituted for the Employer under the Plan. The substitution
of the successor employer shall constitute an assumption of Plan liabilities by
the successor employer, and the successor employer shall have all powers, duties
and responsibilities of the Employer under the Plan.
14.4 Merger Consolidation or Transfer. There shall be no merger or consolidation
of the Plan with, or transfer of assets or liabilities of the Plan to, any other
plan maintained or to be established for the benefit of all or some of the
Participants in the Plan, unless each Participant would (if either this Plan or
such other plan then terminated) receive a benefit immediately after
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the merger, consolidation or transfer which is equal to or greater than the
benefit the Participant would have been entitled to receive immediately before
the merger, consolidation or transfer (if this Plan had then terminated).
14.5 Distribution Upon Termination of Plan or Disposition of Assets or
Subsidiary. If so directed by the Plan Administrator, the Trustee shall
distribute to each Participant the amounts credited to the Participant's
separate accounts under the Plan in a lump-sum payment (unless such amount is
required to be paid in the form of a qualified joint and survivor annuity under
Article 8 or except as otherwise required under Article 8.3(b)) if:
(a) the Plan is terminated under Article 14.2 without the establishment or
maintenance by the Employer of another defined contribution plan;
(b) the Employer is a corporation and the Employer disposes of
substantially all the assets (within the meaning of Section 409(d)(2) of
the Code) used in its trade or business to an unrelated corporation,
provided that the Participant continues employment with the corporation
acquiring such assets and the Employer continues to maintain the Plan
after the disposition; or
(c) the Employer is a corporation and the Employer disposes of its
interest in a subsidiary (within the meaning of Section 409(d)(3) of the
Code), provided that the Participant continues employment with such
subsidiary and the Employer continues to maintain the Plan after the
disposition.
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ARTICLE 15
MISCELLANEOUS
15.1 Exclusive Benefit of Participants and Beneficiaries.
(a) The corpus or income of the Trust shall not be used for, or diverted
to, purposes other than for the exclusive benefit of Participants, former
Participants and their Beneficiaries. The assets of the Trust shall not
revert to the benefit of the Employer, except as otherwise specifically
provided in subsection (b) below.
(b) Employer Contributions to the Plan may be returned to the Employer
under the following conditions:
(i) If the Employer Contribution was made by mistake of fact, such
contribution may be returned to the Employer within one year of the
payment of such contribution.
(ii) Employer Contributions to the Plan are specifically conditioned
upon their deductibility under the Code. To the extent a deduction
is disallowed for any such contribution, it may be returned to the
Employer within one year after the disallowance of the deduction.
(iii) Employer contributions to the Plan are specifically
conditioned on the initial qualification of the Plan under the Code.
If the Plan is determined by the Internal Revenue Service to not be
initially qualified, any Employer contributions made incident to
that initial qualification may be returned to the Employer within
one year after the date the initial qualification is denied, but
only if the application for qualification is made by the time
prescribed by law for filing the Employer's return for the taxable
year in which the Plan is adopted, or such later date as the
Secretary of the Treasury may prescribe.
15.2 Leased Employees. For purposes of this Plan, any leased employee of the
Employer shall be treated as an Employee of the Employer and shall be otherwise
eligible for coverage and benefits under the Plan, unless:
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(1) the leased employee is covered by a money purchase pension plan
providing (i) a non-integrated employer contribution of at least 10
percent of compensation (as defined in Section 41 5(c)(3) of the Code, but
including amounts contributed pursuant to a salary reduction agreement
which are excludable from the employee's gross income under Section 125,
402(e)(3), 402(h)(1)(B) or 403(b) of the Code), (ii) immediate
participation, and (iii) full and immediate vesting; and
(2) leased employees do not constitute more than 20 percent of the
Employer's non-highly compensated workforce.
For purposes of this Article 15.2, the term "leased employee" means any person
(other than an employee of the recipient) who, pursuant to an agreement between
the recipient and any other person ("leasing organization"), has performed
services for the recipient (or for the recipient and any related persons
determined in accordance with Section 414(n)(6) of the Code) on a substantially
full time basis for a period of at least one year and such services are of a
type historically performed by employees in the business field of the recipient
employer. Contributions or benefits provided to the leased employee by the
leasing organization which are attributable to services performed for the
recipient employer shall be treated as provided by the recipient employer.
15.3 Crediting Service With Predecessor Employer. If the Employer maintains this
Plan as the plan of a predecessor employer, service with the predecessor
employer shall be treated as service with the Employer under this Plan in
accordance with Articles 3.4(b) and 7.3(b).
15.4 Special Requirements For Controlled Business By Owner-Employees
(a) If this Plan provides contributions or benefits for one or more
Owner-Employees who control both the trade or business with respect to
which this Plan is established and one or more other trades or businesses,
this Plan and any plan established with respect to such other trades or
businesses must, when looked at as a single plan, satisfy Section 401(a)
and (d) of the Code with respect to the employees of this and all such
other trades or businesses
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(b) If this Plan provides contributions or benefits for one or more
Owner-Employees who control one or more other trades of businesses, the
employees of each such other trade or business must be included in a plan
which satisfies Sections 401(a) and (d) of the Code and which provides
contributions and benefits not less favorable than provided for
Owner-Employees under this Plan.
(c) If an individual is covered as an Owner-Employee under the plans of
two or more trades or businesses which are not controlled and the
individual controls a trade or business, then the contributions or
benefits of the employees under the plan of the trades or businesses which
are controlled must be as favorable as those provided for the
Owner-Employee under the most favorable plan of the trade or business
which is not controlled.
(d) For purposes of the preceding paragraphs, an Owner-Employee, or two or
more Owner-Employees, shall be considered to control a trade or business
if such Owner-Employee, or such two or more Owner-Employees together:
(1) own the entire interest in a unincorporated trade or business;
or
(2) in the case of a partnership, own more than 50 percent of either
the capital interest or the profits interest in such partnership.
For purposes of the preceding sentence, an Owner-Employee, or two or more
Owner-Employees, shall be treated as owning any interest in a partnership
which is owned, directly or indirectly, by a partnership which such
Owner-Employee, or such two or more Owner-Employees, are considered to
control within the meaning of the preceding sentence.
15.5 Nonguarantee at Employment. Nothing contained in this Plan shall be
construed as a contract of employment between the Employer and any Employee, or
as a right of any Employee to be continued in the employment of the Employer, or
as a limitation of the right of the Employer to discharge any of its Employees,
with or without cause.
15.6 Right to Trust Assets. No Employee, Participant, former Participant or
Beneficiary shall have any right to, or interest in, any assets of the Trust
upon termination of employment or
15-3
<PAGE> 111
otherwise, except as specifically provided under the Plan. All payments of
benefits under the Plan shall be made solely out of the assets of the Trust.
15.7 Nonalienation of Benefits. Except as provided under Article 10 with respect
to Plan loans, benefits payable under the Plan shall not be subject in any
manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, charge, garnishment, execution, or levy of any kind, whether
voluntary or involuntary; provided, however, that the Trustee shall not be
hereby precluded from complying with any qualified domestic relations order as
defined in Section 414(p) of the Code or any domestic relations order entered
before January 1, 1985. Any attempt by a Participant, former Participant or
Beneficiary to anticipate, alienate, sell, transfer, assign, pledge, encumber,
charge or otherwise dispose of any right to benefits payable hereunder shall be
void, The Trustee shall not in any manner be liable for, or subject to, the
debts, contracts, liabilities, engagements or torts of any person entitled to
benefits hereunder.
15.8 Failure of Qualification. If the Employer fails to attain or retain this
Plan as a plan which qualifies under Section 401 of the Code, then the Plan as
adopted by the Employer will no longer represent a prototype plan covered by an
opinion letter issued by the Internal Revenue Service to the Sponsor as to the
acceptability of the form of the Plan and Trust Agreement under Sections 401 and
501(a) of the Code, but rather will be considered an individually-designed plan
15.9 Applicable Law. The Plan shall be construed and enforced in accordance with
and by the laws of the state in which the Employer's principal place of business
is located, as specified in the Adoption Agreement, to the extent permitted by
ERISA.
15-4
<PAGE> 1
CONFIDENTIAL TREATMENT REQUESTED
FOR PORTIONS HEREOF
EXHIBIT 10.6
PRODUCTION AGREEMENT
--------------------
AGREEMENT dated as of this 1st day of February 1996, (the "Agreement") by
and between MASTERCARD INTERNATIONAL INCORPORATED, a Delaware corporation with
offices at 2000 Purchase Street, Purchase, New York 10577-2509 ("MasterCard"),
and AMERICAN BANK NOTE HOLOGRAPHICS, INC., a Delaware corporation with offices
at 51 West 52 Street, New York, New York 10019 ("ABNH").
The parties to this Agreement, in consideration of the mutual promises,
covenants, and conditions set forth herein, agree as follows:
1.0 Agreement to Print and Sell Holograms
and Term of Agreement
1.1 During the term of the Agreement and any extension thereto,
MasterCard, from time to time, may order holograms in accordance with the terms
and conditions of this Agreement and ABNH shall produce and sell said holograms
to MasterCard in accordance with the terms and conditions of this Agreement.
1.2 Term This Agreement shall be effective as of the date hereof, and
shall remain in effect for a period of five (5) years from such date, unless
terminated earlier as provided herein (the "Term"). The Term of this Agreement
shall be automatically extended for successive periods of two (2) years unless
(i) not less than six (6) months prior to the end of then applicable termination
date of the Agreement, either party notifies the other party in writing that the
Agreement shall terminate at the end of such period or (ii) the Agreement is
terminated as is otherwise provided herein.
2.0 Specifications of MasterCard Holograms
2.1 ABNH shall manufacture holograms for MasterCard in accordance
with the specifications agreed upon by the parties hereto from time to time. [*]
The specifications for the MasterCard hologram are attached hereto and
incorporated herein as Exhibit A. Notwithstanding anything herein to the
contrary, all prior approved specifications [*] and all specifications
subsequently agreed on by the parties shall be covered by this Agreement and
shall remain in effect for all uses designated by MasterCard (including any
separate designs which may be approved for credit, debit, ATM, bank, or smart
cards or other financial products).
2.2 Additional or changed specifications with respect to produced
holograms may be effected only upon written agreement of the parties hereto.
If additional or changed specifications relate [*] which in all other respects
meet the specifications of the Exhibits incorporated herein, then such hologram
shall be deemed [*] for the purposes of this Agreement and the [*] by such
additional or changed specifications.
* Confidential portion omitted and filed separately with the Commission
<PAGE> 2
If additional or changed specifications relate to matters other than a [*] then
such hologram shall be deemed a [*] for the purposes of this Agreement and [*]
to ABNH resulting from materials or production or other efficiencies resulting
therefrom [*] for the new holograms [*] provided in this Agreement. ABNH shall
promptly advise MasterCard if any proposed additional or changed specifications
for a new hologram would require an increase in price to MasterCard and the
parties shall use good faith efforts to agree promptly on the price for such new
hologram. [*] for the new hologram following such good faith efforts, [*] for
such new hologram [*] (provided [*] is for production delivery on substantially
the same terms and conditions [*]) and ABNH shall [*] upon notification to
MasterCard of [*] within 10 days of notification from MasterCard [*] (which
notification shall include the terms and conditions of [*]) offered by such [*].
Failure of ABNH to respond within such 10 day period or ABNH response which [*]
shall be considered a refusal of [*] to agree [*] and entitle [*] for purposes
of [*] production and delivery. For purposes of this Section 2.2, [*] shall have
[*] if, after giving effect to [*] hereof, offered by such [*]. Upon the
agreement of ABNH and MasterCard to [*] or notification that ABNH [*] so
determined shall thereafter constitute [*] of the [*] hologram.
ABNH shall begin the process of implementing any additional or changed
specifications for modified or new holograms promptly after MasterCard's
agreement thereto. All work in progress at the time of such agreement shall be
completed in accordance with the original specifications. The parties shall
coordinate their efforts to minimize inventory under discontinued
specifications at the time any specifications are changed.
2.3 ABNH shall inform MasterCard promptly of any new processes,
techniques, methods, alternatives or devices for the production, application, or
use of holograms that have applicability to payment cards that it develops or
obtains the right to employ (unless, prior to the effective date hereof, and
only for so long as such a restriction is in effect, ABNH is restricted from
such disclosure to MasterCard as a result of any third-party agreement which was
entered in connection with third-party development efforts, efforts undertaken
by such third-party directly or by ABNH under contract with ABNH, or research
and development efforts funded by a third-party), and shall offer to make any
such new processes, techniques, methods, alternatives or devices permitted to be
disclosed available to MasterCard [*], giving due consideration to differences
in specifications required by MasterCard.
2.4 Subject to Section 2.2, above, during the Term, MasterCard agrees to
offer ABNH an opportunity to produce all hologram design changes, modified
holograms and new holograms MasterCard desires to use for credit, debit, ATM,
bank, and smart cards and other payment products.
* Confidential portion omitted and filed separately with the Commission
2
<PAGE> 3
All such production and the prices and conditions of sale thereof shall be
subject to this Agreement including, without limitation, the Section 3.2 hereof.
2.5 MasterCard agrees to provide ABNH not less than [*] advance
written notification of the effectiveness of any decision (i) to discontinue or
abandon any then produced hologram (ii) to adopt any additional or changed
hologram specifications and (iii) [*] shall commence production of holograms [*]
by its parent or by any subsidiary, and nothing contained in this Agreement
shall restrict [*] from taking any of the actions described in Subsections 2.5
(i), 2.5 (ii) or 2.5 (iii), above.
3.0 Orders
3.1 Orders for hologram may be placed by MasterCard during the Term
of this Agreement in amounts of not less than [*] holograms per order. ABNH
agrees to complete all such orders at a rate of delivery to be mutually agreed
upon at the time of the order, but in any event, upon MasterCard's request, to
deliver holograms at a rate of not less than [*] holograms per [*].
3.2 During the Term of this Agreement, ABNH agrees that during [*]
the Term, ABNH will ship to MasterCard a number of holograms equal to [*] of the
total hologram purchases made by MasterCard from ABNH during the [*] periods
(each, a "Calculation Period") ending the last day of the preceding [*],
respectively, at [*]. If necessary due to a relationship between ABNH and any
third party, the provisions of this Section 3.2 shall be modified to benefit
MasterCard and ensure compliance with Section 14.3 hereof.
3.3 MasterCard shall have the right to specify from among those
holograms then being produces for MasterCard by ABNH, the allocation of the
quantity of holograms to be provided by ABNH to MasterCard [*] pursuant to
Section 3.2 hereof. MasterCard agrees to provide ABNH not less than [*] advance
notice of MasterCard's desired allocation. In the event of any such allocation
by MasterCard. ABNH may modify the number of holograms to be provided where
different holograms are produced [*]. In the event MasterCard does not effect
such an allocation, ABNH shall [*] with respect to Section 3.2 by providing
MasterCard with holograms in the same proportion as ABNH delivered during the
Calculation Period.
3.4 Subject to the terms herein, during the Term of this Agreement
ABNH shall be MasterCard's exclusive supplier of holograms and shall purchase
orders for all of its requirements of holograms with ABNH: provided, however,
that MasterCard shall have no obligation to place any set quantity of hologram
orders except as determined in the sole discretion of MasterCard.
4.0 Plates and Images
* Confidential portion omitted and filed separately with the Commission
3
<PAGE> 4
4.1 ABNH has previously provided MasterCard one (1) Nickel Master
Plate of the MICRO GLOBES hologram (plate number 3258) and MasterCard agrees to
be completely responsible for the security and storage of this ABNH master
plate. The plate has been delivered solely pursuant to Section 2 and is subject
to the terms and conditions of the letter agreement dated October 16, 1984 by
and between MasterCard and American Bank Note Company (as predecessor to ABNH).
ABNH acknowledges and agrees that, at all times, MasterCard shall be the [*] of
any plate bearing a MasterCard hologram design. ABNH shall, [*], manufacture and
use a new master plate no less frequently than each [*] and shall promptly
provide MasterCard with each such master plate. Upon expiration or termination
of this Agreement [*] all master plates and any other plates bearing any
MasterCard hologram design, [*] any such plate(s) (subject to [*] solely for the
purposes of [*] ordered by MasterCard) for any purpose whatsoever without
thereby incurring or creating any obligation to pay ABNH or any third party [*].
4.2 MasterCard hereby grants ABNH a non-exclusive, worldwide,
royalty-free license to utilize the MasterCard name and logo incorporated into
the MICRO GLOBES hologram and any additional MasterCard approved designs or
specifications contemplated herein, including any MasterCard copyrights,
trademarks,logos and the like solely to produce the MICRO GLOBES hologram and
any additional hologram designs or specifications approved by MasterCard
pursuant to Section 2 hereof for the sole purpose of manufacture and sale to
MasterCard of holograms under this Agreement. MasterCard shall indemnify ABNH
and hold it harmless against any and all damages, losses, claims or demands,
including reasonable legal fees, suffered by or made upon ABNH resulting from
any alleged infringement of any such copyright, trademark, logo and the like
incorporated into the MICRO GLOBES hologram and other MasterCard approved
holograms.
5.0 Prices
5.1 During the term of this Agreement ABNH shall charge MasterCard
the prices for holograms as are set forth below (silver and gold foil). Every
[*] the parties agree to meet and discuss prices and supply terms.
However, prices may be adjusted upward only upon the approval of a change in
pricing by MasterCard.
"MICRO GLOBES" holograms -- $[*] per hologram.
5.2 The price paid for holograms purchased from ABNH by MasterCard
pursuant to this Agreement includes all license fees, royalties and other fees,
including without limitation, under any ABNH patents covering such holograms.
5.3 The only additional charges that MasterCard will incur are those
for distribution of the holograms, as set forth in section 7.0 of this
Agreement.
5.4 MasterCard and ABNH agree to discuss in good faith any separate
one-time or special charges that may result from requests to explore design
changes, modified and new hologram
* Confidential portion omitted and filed separately with the Commission.
4
<PAGE> 5
specifications in addition to those approved as of the date of this Agreement
[*].
6.0 Payment
Orders of holograms that are manufactured and stored by ABNH shall be
billed to MasterCard by ABNH when the production of such orders of holograms is
completed. Payment shall be due within [*] days after MasterCard receives ABNH's
invoice. Each such invoice as well as any other invoice anticipated hereunder
shall be payable only if accompanied by appropriate documentation so as to
enable MasterCard to understand, substantiate and reconcile charges reflected
therein.
7.0 Storage and Delivery
7.1 During the Term of this Agreement, ABNH shall store all holograms
purchased under this Agreement [*] until such time as they are distributed by
ABNH. ABNH shall be responsible to package and ship holograms pursuant to such
reasonable instructions as may be provided by MasterCard. Storage of the
holograms by ABNH shall be in accordance with the security control procedures
set forth in Exhibit B (Hologram Security Procedures) hereto, which Exhibit B is
attached hereto and incorporated herein. MasterCard shall reimburse ABNH for
distributing holograms at the following rates:
<TABLE>
<CAPTION>
Number of Distribution Charge
Reels Shipped Per Reel
------------- -------------------
<S> <C>
[*] [*]
[*] [*]
[*] [*]
</TABLE>
In addition, MasterCard shall pay ABNH $[*] per trust receipt it submits.
ABNH shall invoice MasterCard for distribution charges on a monthly
basis, and MasterCard shall pay such invoice as it owes within [*] of receipt
of ABNH's invoice describing all shipments and charges.
7.2 ABNH shall pay the cost of returning defective holograms, as
provided in Section of 11.3 below, and the distribution charges and cost of
shipping replacements for defective holograms. However, ABNH shall have no
obligation to pay any shipping charges in connection with holograms that are
returned, but which are not defective, as provided in Section 11.0 below.
8.0 Insurance
8.1 ABNH shall maintain in force during the term of this Agreement an
insurance policy or policies, naming MasterCard as an additional insured
(except MasterCard need not be named
* Confidential portion omitted and filed separately with Commission
5
<PAGE> 6
additional insured under ABNH's fidelity insurance policy or policies), and
shall promptly, upon execution of this Agreement and annually thereafter,
provide to MasterCard reasonable evidence thereof, covering losses incurred by
MasterCard in connection with all holograms and work in progress, while on the
premises of ABNH, from the following risks of loss:
<TABLE>
<CAPTION>
Risk Amount
<S> <C> <C>
[*]
</TABLE>
All of the foregoing insurance may be subject to a deductible amount which
shall not exceed [*] per occurrence and ABNH shall remain liable for such
deductible amount. In addition, holograms will be insured by ABNH for
replacement value against fire, flood, or other destruction or damage. All
risks in excess of such insurance coverage, howsoever arising, shall be for the
account of MasterCard of the claimant. ABNH shall give MasterCard immediate
notice of cancellation of any of said insurance policies: and either such event
shall entitle MasterCard to immediately terminate this Agreement.
8.2 In the event that such insurance becomes unavailable, ABNH shall
use its best efforts to provide MasterCard with such alternative risk protection
as MasterCard shall reasonably request, taking into account the cost of the
insurance that provided the coverage called for herein while it was available;
provided, the foregoing shall not affect MasterCard's right to terminate this
Agreement due to ABNH's failure or inability to maintain required insurance.
8.3 ABNH shall notify MasterCard immediately of any loss or
occurrence that is covered by this Section 8.0.
9.0 Limitation of Liability
Unless and except to the extent covered by the insurance provided
pursuant to Section 8.0 hereof, neither party shall be liable to the other for
indirect, special or consequential damages, including, without limitation, for
loss of business or loss of business opportunity or for any damage other than
direct and ordinary. Except for any liability of ABNH pursuant to Section 13.0
hereof, in the event of any loss not covered by the insurance provided
pursuant to said Section 8.0 hereof, ABNH's liability shall be limited to the
purchase price of lost or damaged holograms. ABNH shall have no liability for
any losses or damages incurred by MasterCard after ABNH has properly shipped,
pursuant to reasonable instructions from MasterCard, holograms called for in
this Agreement.
10.0 Force Majeure
In the event either party is unable to fulfill any of its obligations
under this Agreement
* Confidential portion omitted and filed separately with the Commission
6
<PAGE> 7
as a result of causes or conditions beyond its reasonable control, such party
shall give immediate notice thereof to the other party and such obligation(s)
shall be suspended during the continuance of such causes or conditions. Causes
or conditions beyond a party's control shall include (whether in its own
facilities or in any other facilities affecting the production and delivery of
holograms) fires, storms, earthquakes, or any other natural disaster: war,
civil wars, riots, or civil commotions; government priorities or allocations or
controls; lockouts, strikes or other work stoppages; interference or restraint
of public authority (whether lawful or not); explosion or accident; epidemics
or quarantine restrictions; or any other cause which it cannot provide against
by the exercise of reasonable diligence. Notwithstanding the foregoing, if ABNH
is unable to produce any of the holograms which have been ordered by MasterCard
by reason of any of the causes listed above, upon the request of MasterCard,
ABNH shall make all reasonable efforts to produce such holograms at one of
ABNH's other facilities.
11.0 Quality and Security Procedures
11.1 Production and quality control procedures shall be in accordance
with the provisions of Exhibit C (Production and Quality Control Procedures)
attached hereto and incorporated herein.
11.2 Production and quality control standards shall be in accordance
with the provisions of Exhibit A ("MICROGLOBES" Hologram Specifications), and
Exhibit D (Foil Quality Specifications), which Exhibit D is attached hereto and
incorporated herein. ABNH may change materials or suppliers of materials or
services used in holograms provided to MasterCard, provided, however, that ABNH
shall remain responsible for compliance with Exhibits, A, B, C, and D hereto
shall receive prior approval from MasterCard (which approval shall not be
unreasonably withheld).
11.3 ABNH shall accept the return, and reimburse MasterCard for the
full price plus prorated original and return shipping costs of reels of
holograms that are defective; provided that ABNH shall have no obligation to
accept or reimburse MasterCard for any defective reels of holograms that are not
returned within, if shipped within the U.S. or Canada, [*] of shipment by ABNH,
or [*] in the event that the holograms were shipped outside of the United States
and Canada. The dates of shipment and return shall be the dates on which the
holograms were delivered to the carrier by ABNH and the recipient respectively,
except that, with respect to holograms shipped to Australia, the date of
shipment shall be the date on which the holograms were shipped from the
MasterCard hologram storage facility in Australia. A reel of holograms shall be
deemed "defective" if more than [*] of all holograms on the reel as returned to
ABNH, do not conform to any of the production and quality control standards
referenced in Section 11.2 above, or are unusable for any reason that is the
fault of ABNH, for example, damage due to defective packing or handling.
11.4 Security procedures shall be in accordance with the provisions
of Exhibit B (Hologram Security Procedures) hereto.
11.5 ABNH grants to MasterCard the right to have its designated
representative inspect ABNH's plant(s), at reasonable intervals during regular
business hours with prior notification to ABNH, to verify the adequacy of
security procedures and production facilities throughout the process
* Confidential portion omitted and filed separately with Commission
7
<PAGE> 8
or production, storage, and shipment of holograms.
11.6 Audits - ABNH shall conduct audits of holograms as detailed below
and submit audit reports to MasterCard after each audit:
(a) ABNH's internal auditors
[*]
(b) External auditors - [*]
(c) MasterCard [*]
12.0 Confidentiality
12.1 Each party hereto shall maintain in confidence all confidential
and proprietary information disclosed to it by the other party hereunder or
under previous agreements between them for the production of holograms, and
shall refrain from disclosing, using, practicing, or exploiting such
confidential information for its own benefit or for the benefit of any third
party. Confidential information shall include, but not be limited to,
information included in this Agreement pertaining to ABNH's price for holograms
and information contained in Section 14.0 hereof, the Exhibits hereto, any
technical information regarding the means of manufacture of holograms and their
replication, and any information of any nature which a party shall designate in
writing as confidential. Confidential information of MasterCard shall include,
but not be limited to, any list of MasterCard card vendors or members,
quantities of holograms ordered by MasterCard or by individual card vendors,
MasterCard's By-laws and Rules, MasterCard's manuals and guides, and any
information of any nature which MasterCard shall designate in writing as
confidential.
12.2 The obligations contained in Section 12.1 hereof shall not apply
to any information disclosed or acquired which;
(a) is known to the recipient thereof prior to its disclosure hereunder; or
(b) is subsequently received by such recipient from a third party that is
under no obligation to refrain from disclosing the same; or
* Confidential portion omitted and filed separately with the Commission
<PAGE> 9
(c) is or, through no fault of ABNH or MasterCard, as applicable, becomes
generally available to the public.
13.0 Indemnification
ABNH warrants that the holograms it manufactures for MasterCard shall
not infringe any patent rights or other property rights of any third party,
except such property rights as may pertain to any MasterCard logo or design and
any artwork or other materials provided ABNH by or on behalf of MasterCard and
ABNH shall indemnify MasterCard and hold it harmless against any and all
damages, losses, claims or demands, including reasonable legal fees, suffered
by or made upon MasterCard resulting from any alleged infringement of any such
patent rights or other property rights except such property rights as may
pertain to any MasterCard logo or design and any artwork or other materials
provided ABNH by or on behalf of MasterCard.
14.0 Warranties
14.1 ABNH warrants that the insurance coverage of the type set forth
in Section 8.0 hereof is and will at all times be at least as great as that
provided other credit card hologram customers of ABNH. ABNH further warrants
that it shall offer MasterCard the same insurance coverage provided any of
ABNH's payment card hologram customers in the event that there is an increase
in the customary coverage provided to such customers.
14.2 ABNH warrants that the storage of MasterCard's holograms is and
shall be under conditions as secure as, or more secure than, that provided any
other payment card hologram customer of ABNH.
14.3 [*]
15.0 Assignment
Neither this Agreement, nor any of the rights or obligations
hereunder, may be assigned without the prior written consent of the other party.
16.0 Governing Law
This Agreement shall in all respects be governed, interpreted, and
enforced in accordance with the internal laws of the State of New York without
reference to principles of conflicts of laws, whose courts sitting in New York
County shall have the sole jurisdiction in all claims.
17.0 Paragraph Headings
* Confidential portion omitted and filed separately with the Commission
9
<PAGE> 10
Paragraph headings are for reference purposes only and shall not
affect the interpretation or meaning of this Agreement.
18.0 Notices
All notices pursuant to this Agreement shall be in writing except as
otherwise provided herein. Notices in writing shall be deemed sufficient if
mailed by registered or certified mail, first class postage prepaid, return
receipt requested, and addressed to the party at the address below or to such
other address or in such other manner as either party may designate in a
written notice to the other. Notices shall be effective upon receipt.
MasterCard: MasterCard International Incorporated
2000 Purchase Street
Purchase, New York 10577-2509
Attention: Senior Vice President, Security
With a copy to: General Counsel
ABNH: American Bank Note Holographics, Inc.
51 West 52 Street
New York, NY 10019
Attention: Chairman and CEO
With a copy to: General Counsel
19.0 Entire Agreement
This Agreement and the Exhibits hereto, as well as the letter
agreement between MasterCard and American Bank Note Company dated October 16,
1984 and the Addendum to Letter Agreement dated October 17, 1984 (attached
hereto as Exhibit E) (except as such letter agreement and addendum is expressly
modified hereby and giving effect to the substitution of ABNH for each
reference to ABN contained herein), contain the entire agreement between the
parties concerning the subject matter hereof and supersede any other prior
agreements, whether written or oral. Any amendments or modifications hereto
shall be in writing and signed by both parties hereto.
20.0 Press
The parties agree to the issuance of a joint press release announcing
the execution of a "5 year exclusive purchase and distribution agreement for
holograms" and containing such additional information as the parties may agree.
10
<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
MASTERCARD INTERNATIONAL AMERICAN BANK NOTE
INCORPORATED HOLOGRAPHICS, INC.
By: /s/ Joel Lisker By: /s/ Morris Weissman
---------------------- -----------------------
JOEL LISKER MORRIS WEISSMAN
SENIOR VICE PRESIDENT CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
11
<PAGE> 12
CONFIDENTIAL
EXHIBIT A
"MICRO GLOBES" HOLOGRAM SPECIFICATIONS
[*]
* Confidential portion omitted and filed separately with the Commission
<PAGE> 13
CONFIDENTIAL
EXHIBIT B
HOLOGRAM SECURITY PROCEDURES
1.0 GENERAL
The ABNH facility at Huntington Valley, Pennsylvania, has been
designated as the point of manufacture, intermediate storage, and distribution
of holograms. The ABNH facility at 399 Executive Boulevard, Elmsford, NY may
also be utilized as a secondary point of manufacture, intermediate storage and
distribution of holograms, subject to MasterCard's inspection and approval of
such facility for compliance with Exhibits B and C.
2.0 PRODUCTION AND STORAGE
[*]
<PAGE> 14
CONFIDENTIAL
EXHIBIT C
PRODUCTION AND QUALITY CONTROL PROCEDURES
1.0 GENERAL
ABNH throughout the various steps of manufacturing holograms, makes
use of sophisticated equipment and trained personnel to achieve a reliable,
quality assured product.
2.0 MATERIAL
2.1 Purchases
A purchase order is generated by the following methods:
The production order sheet giving specific information as to
amounts, type of material, etc. authorizes those involved to enter purchase
requisitions for the necessary material. The purchase requisition must be
signed by the Superintendent of the Department then authorized before it can
generate a Purchase Order.
2.2 Receipt
Upon receipt, the material, prior to being inventoried, will be
inspected for quality under the following criteria:
[*]
* Confidential portion omitted and filed separately with Commission
<PAGE> 15
CONFIDENTIAL
3.0 STAMPING (EMBOSSING) DIES
All dies will be inventoried and drawn from stock on a requisition form. As
each die is put on the machine, it will be inspected to determine the optical
quality of the hologram and the registration mark. All master plates and dies
will be stored in a safe until required for production. Only authorized
personnel will have access to the contents of the safe.
4.0 MANUFACTURING QUALITY ASSURANCE
During the actual production of holograms, the following steps will be
taken to assure quality:
[*]
5.0 FINISHED ROLL
Each finished roll of holograms will be labeled and identified with date of
manufacture, machine operator number, color, batch number, sequential roll
number, and sequential numbering of all holograms [*] .
6.0 PACKAGING
The rolls of holograms will be packaged [*] to a carton with each
carton containing [*] holograms or in such lesser amounts as agreed upon
between the parties hereto. The carton will be labeled with the date of
manufacture, quantity, color, and the roll numbers.
7.0 WASTE DISPOSAL
[*]
* Confidential portion omitted and filed separately with the Commission
2
<PAGE> 16
CONFIDENTIAL
EXHIBIT D
FOIL QUALITY SPECIFICATIONS
These specifications, in conjunction with a visual sample control card of
maximum acceptable defects, are intended for use with hot stamp application of
ABNH MasterCard holographic foil on plastic credit cards. The specifications
define the acceptable limits on defects that may arise in foil manufacture
and/or hot stamp application.
[*]
Please refer to the Holographic Tape Quality Control Card for samples of
maximum mottle and grain.
* Confidential portion omitted and filed separately with Commission
<PAGE> 1
Exhibit 10.7
FORM OF
EMPLOYEE BENEFITS ALLOCATION AGREEMENT
EMPLOYEE BENEFITS ALLOCATION AGREEMENT (this "Agreement"), dated as
of ____________, 1998, is between American Banknote Corporation ("Parent"), a
Delaware corporation, and American Bank Note Holographics, Inc. ("ABNH"), a
Delaware corporation.
WHEREAS, Parent, a public company whose common shares are traded on
the New York Stock Exchange, directly owns 100% of the issued and outstanding
shares of common stock of ABNH;
WHEREAS, the Board of Directors of Parent has determined that it is
appropriate and desirable for Parent to sell for its account by means of an
initial public offering by ABNH of all of the shares of ABNH common stock owned
by Parent (the "IPO") pursuant to a Registration Statement on Form S-1 (File No.
333-51845) initially filed by ABNH with the SEC on May 5, 1998, as amended
through the date hereof;
WHEREAS, the parties hereto have determined that it is necessary and
desirable to make certain agreements regarding employee benefit plans and
related matters in connection with the IPO;
NOW, THEREFORE, in consideration of the mutual agreements,
provisions and covenants contained herein, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS; HEADINGS
SECTION 1 - DEFINITIONS. As used in this Agreement, the following
terms shall have the following meanings, unless a different meaning clearly is
required by the context:
(a) "Action" or "Claim" means any "Third-party Claim" as defined in
the Separation Agreement, together with any assessment of, or claim for, taxes
or a statutory penalty. For purposes hereof, the term "Action" or "Claim" always
is deemed to include, but is not limited to, a Qualification or ERISA Claim.
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(b) "Closing Date" means the Closing Date as defined in the
Separation Agreement.
(c) "COBRA" means the continuation health coverage required under
Section 4980B of the Code and Sections 601 to 607 of ERISA, and any successor
provisions thereto.
(d) "Code" means the Internal Revenue Code of 1986, as amended, and
any predecessor or successor thereto.
(e) "Employee" or "Active Employee" means an individual maintained
on an entity's payroll system (including, but not limited to, an individual on
approved leave of absence and an individual in receipt of or entitled to
worker's compensation or employer-provided long term disability benefits) and,
to the extent required by the context, such an individual's dependents and
beneficiaries.
(f) "ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time.
(g) "Filing" means the requirement to timely file a form related to
an employee benefit plan, including but not limited to Internal Revenue Service
("IRS") Form 5500; to timely distribute a notice related to an employee benefit
plan, including, but not limited to, a COBRA notice or a summary plan
description; and to timely pay a fee or premium.
(h) "IPO" means the initial public offering described in the
recitals to this Agreement.
(i) "Separation Agreement" means the Separation Agreement of even
date herewith between Parent and ABNH.
(j) "Policy Claim" means a routine claim for benefits under a
medical, dental, disability or group life insurance program.
(k) "Qualification" or "ERISA Claim" means any Action or Claim
arising from, or related to, the failure of a benefit plan that is intended to
be tax-qualified under the provisions of Section 401(a), et seq., of the Code to
satisfy the requirements for qualification, in form or in operation; any Action
or Claim arising from, or related to, the failure of an employee benefit plan to
comply with applicable requirements of ERISA (including, for this purpose,
Section 4975 of the Code)or the terms of such plan; and any Action or Claim
arising from, or related to, the failure to make a Filing.
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SECTION 2 - HEADINGS. The headings in this Agreement are for
convenience of reference only and are not to be construed as a part of the
Agreement.
ARTICLE II
DEFINED CONTRIBUTION 401(K) PLAN
SECTION 1 - IDENTIFICATION OF EXISTING PLAN. The American Banknote
Corporation Employees' Retirement Plan (the "American Banknote Corporation
401(k) Plan") is maintained in the United States for eligible employees and
former employees of Parent and its related participating employers.
SECTION 2 - CONTRIBUTIONS. As soon as practicable after the
Closing Date, and in any event within the period prescribed by applicable
statute or regulation, ABNH shall contribute to the American Banknote
Corporation 401(k) Plan any contributions required to be made under such plan on
behalf of participants who are employees of ABNH based on their compensation for
the period up to the Closing Date.
SECTION 3 - ESTABLISHMENT OF NEW 401(K) PLAN AND ASSET TRANSFER. On
or before the Closing Date, ABNH shall adopt a defined contribution plan
substantially in the form attached hereto as Schedule 13-1, and a similar plan
for its union employees. Each such plan (the "American Bank Note Holographics,
Inc. 401(k) Plan") shall be effective for compensation earned after the Closing
Date. At such administratively feasible date following the Closing Date as is
determined by Parent, there shall be a transfer from the American Banknote
Corporation 401(k) Plan to the corresponding American Bank Note Holographics,
Inc. 401(k) Plan of the account balances of individuals who were participants in
the American Banknote Corporation 401(k) Plan and who are eligible to become
participants in the American Bank Note Holographics, Inc. 401(k) Plan. Such
transfers may be made in cash or in kind or in a combination of both, in
Parent's sole discretion. Prior to such transfer, Parent shall continue to
administer the American Banknote Corporation 401(k) Plan in the interests of
such participants as well as all other participants in the American Banknote
Corporation 401(k) Plan. It shall be provided that no further 401(k) employee
contributions shall be made by or on behalf of a participant who is or is
scheduled to become an active employee of ABNH as of the Closing Date after the
final deposit with respect to payroll prior to the Closing Date; and provided
further, that loans, investment fund transfers and distributions shall be
suspended for such reasonable period as may be necessary as a result of such
transfer.
SECTION 4 - ALLOCATION OF RESPONSIBILITIES. ABNH shall be solely
responsible for all Filings for, and the defense of any Claim with respect to,
the plan adopted by it pursuant to Article II and Parent shall be solely
responsible for all Filings for,
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and the defense of any Claim with respect to, the American Banknote
Corporation 401(k) Plan.
ARTICLE III
MEDICAL, DENTAL, DISABILITY AND GROUP LIFE INSURANCE BENEFITS
ABNH shall establish as soon as administratively feasible on or
after the Closing Date, and in any event on or before ____________, 1998,
medical, dental, disability and group life insurance (which includes life and
accidental death and dismemberment benefits) programs for the benefit of ABNH's
active employees that provide coverage to such employees that is substantially
similar to the coverage provided for such active employees immediately prior
thereto, including coverage without any pre-existing condition limitation for
individuals currently covered under Parent's programs and credit for annual
out-of-pocket expenses that had been satisfied or paid by such employees under
similar programs maintained by Parent prior to the Closing Date (but excluding
any post-retirement medical benefits except as required by COBRA). ABNH shall be
solely responsible for all Filings and Policy Claims for the programs
established by it pursuant to this Article III, and Parent shall be solely
responsible for all Filings and, to the extent consistent with the terms of the
programs sponsored by Parent, Policy Claims and the defense (including the
settlement or payment) of all medical, dental, disability and group life
insurance Claims made by a covered participant or his or her beneficiary
relating to events that occurred prior to the close of business on the Closing
Date under an insurance program sponsored by Parent; provided that ABNH shall
continue to bear the expense of providing benefits with respect to its employees
who participated in programs maintained by Parent with respect to periods prior
to the Closing Date in accordance with agreements, understandings and practices
in effect prior to the Closing Date. Parent will hold ABNH harmless against any
claim made against it arising out of any failure by ABNH to administer any such
program maintained by Parent in accordance with its terms and applicable law,
but ABNH shall remain responsible for all contributions and benefits properly
payable with respect to its employees; provided, however, that Parent shall be
solely responsible for retiree medical coverage of employees who retired from
ABNH prior to the Closing Date or had qualified for such coverage prior to the
Closing Date and thereafter retire. No other current or former employee of ABNH
shall have any right to retiree medical coverage under any plan maintained by
Parent and/or ABNH prior to the Closing Date. ABNH shall be solely responsible
for all Filings and Policy Claims made by a covered participant who is an ABNH
employee or his or her beneficiary relating to events that occur after the close
of business on the Closing Date under an insurance program sponsored by Parent
but prior to the establishment of ABNH's programs pursuant to this Article III
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(provided, however, that Parent shall use its reasonable efforts to administer
such Claims), and ABNH shall pay to Parent the proportionate share of premiums
under such programs relating to periods after the Closing Date and prior to the
establishment of ABNH's programs for such ABNH employees and related
beneficiaries. ABNH shall cooperate with Parent in any manner reasonably
requested by Parent or its employees or agents to enable Parent to complete such
Filings and handle such Policy Claims. In addition, ABNH shall reimburse Parent
for any costs or expenses incurred by Parent in connection with such programs
that properly are allocable to ABNH (which shall specifically exclude any
increased premiums incurred by Parent as a result of the demographic shift in
the insured population as a result of ABNH employees being removed from such
programs). For purposes of this Article III, the relevant "event" shall be, in
the case of medical and dental programs, the incurring of the expense for
covered services, and in the case of disability or life insurance, the incurring
of disability or death, as the case may be. Retired ABNH employees who are
covered under Parent's retiree medical plan on the Closing Date, shall continue
to be covered under Parent's retiree medical plan, in accordance with such
plan's terms as they may be amended from time to time. ABNH employees who are
eligible for coverage under Parent's retiree medical plan on the Closing Date,
may enroll in Parent's retiree medical plan when they terminate service with
ABNH (in accordance with such plan's terms as they may be amended from time to
time). No ABNH employee shall be covered under Parent's medical plan or become
eligible for coverage under Parent's retiree medical plan after the Closing
Date. Parent will amend its retiree medical plan to comport with the provisions
of this paragraph.
ARTICLE IV
SEVERANCE PAY; VACATION PAY
SECTION 1 - SEVERANCE PAY. Although the parties are of the belief
that the IPO does not necessarily give rise to the payment of severance pay (or
salary continuation, unemployment compensation or similar pay), in the event
that on or after the close of business on the Closing Date, a Claim for any such
pay is made by an employee of ABNH, the defense of such Claim, as well as any
payment or settlement of such Claim, shall be solely the responsibility of ABNH.
SECTION 2 - VACATION PAY. Effective as of the close of business on
the Closing Date, ABNH shall continue in effect any vacation pay plans
maintained for the benefit of their employees immediately prior thereto. In the
event that on or after the close of business on the Closing Date, a Claim for
vacation pay is made by an employee of ABNH, the defense of such Claim, as well
as any payment or settlement of such Claim, shall be solely the responsibility
of ABNH.
ARTICLE V
CAFETERIA PLAN
ABNH shall adopt cafeteria plan documents in a form furnished to
ABNH with respect to the ABNH employees who, prior to the Closing Date, were
eligible and/or participating in the American Banknote Corporation Cafeteria
Plan that provided for the pre-tax payment of medical and dental insurance
premiums. The plan set forth in such document ("American Bank Note Holographics,
Inc. Cafeteria Plan") shall become effective as
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soon as administratively feasible after the Closing Date and in no event later
than ____________, 1998.
ARTICLE VI
EMPLOYMENT; EMPLOYMENT RELATED MATTERS; OTHER BENEFITS
SECTION 1 - EMPLOYMENT. Effective as of the close of business on the
Closing Date, ABNH shall continue to employ all individuals who were employees
of ABNH as a wholly-owned subsidiary of Parent immediately prior thereto.
Nothing herein shall be construed to be a guarantee of employment, and ABNH may
terminate an individual's employment or adjust such individual's compensation at
any time and for any reason.
SECTION 2 - EMPLOYMENT RELATED MATTERS. ABNH shall be solely
responsible for the defense of any Claim made by, on behalf of, or with respect
to, (i) any employee thereof, (ii) any former employee of ABNH, or (iii) any
individual described in Section 1 hereof, including the settlement or payment of
such a Claim, that arises after the Closing Date out of, or relates to, such
individual's employment with (or failure to be employed by) ABNH or an employee
benefit matter that is not covered elsewhere by the terms of this Agreement.
Such Claims include, but are not limited to, employment discrimination,
harassment, wrongful discharge and COBRA Claims.
SECTION 3 - DEFINED BENEFIT PLAN. Parent shall be solely responsible
for any contributions that may be required after the Closing Date under the
American Banknote Corporation Retirement Plan (a defined benefit plan) with
respect to service prior to the Closing Date or that may be required in order to
effect the termination of such plan.
SECTION 4 - OTHER BENEFITS. Except as otherwise expressly provided
in this Agreement, ABNH shall be solely responsible for the provision of all
employee benefits arising after the Closing Date to its employees and former
employees and for any Filings arising after the Closing Date and the defense of
any Claim arising after the Closing Date, including any settlement or payment of
such Claim, related to any such benefit provided by it or the failure after the
Closing Date to provide or maintain any particular benefit. In particular,
without limitation, ABNH shall promptly reimburse Parent for the full amount of
any payment which is due or becomes due on or after the Closing Date, pursuant
to Parent's long-term management incentive plan, to any officer or other
Employee of ABNH.
ARTICLE VII
CERTAIN BENEFITS ADMINISTRATION MATTERS
SECTION 1 - PURPOSE; RELATIONSHIP TO SEPARATION AGREEMENT. The
Separation Agreement provides that Parent shall consult with ABNH with respect
to employee benefits and certain
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related matters. The purpose of this Article VII is to bind the parties to share
in certain employee benefits responsibilities that are necessary or appropriate
in view of other agreements reached herein and the fact that, for a portion of
1998, the parties are members of a controlled group of corporations, within the
meaning of Section 414(b) of the Code. To the extent inconsistent, the
provisions hereof override the provisions of the Separation Agreement.
SECTION 2 - APPLICATION FOR DETERMINATION. ABNH shall (a) file the
application for determination with the IRS with respect to each newly adopted
Code Section 401(k) plan described in Article II and (b) make all amendments
that the Internal Revenue Service may require as a condition to issuing such
letter and to continue the qualification of such plan, and (c) operate such plan
so as to maintain such qualification (including, if applicable, taking
corrective action that might be required in the event that it were determined
that operating defects existed with respect to any plan which would require
corrective action in order to maintain the qualification of the plan, in
accordance with the Internal Revenue Service policies and procedures with
respect to avoiding the disqualification of the plans on account of operating
defects).
SECTION 3 - DISCRIMINATION TESTING; DISTRIBUTIONS. ABNH shall supply
to Parent within sixty (60) days of a request from Parent all information
reasonably requested by Parent to undertake discrimination testing under
Sections 401(a)(4), 401(k), 401(m), and 410(b) of the Code (or other applicable
sections of the Code) for the portion of 1998 during which the parties were
members of a controlled group of corporations within the meaning of Section
414(b) of the Code. Parent shall share the discrimination test findings with
ABNH, to the extent relevant to ABNH. At such times as are determined by Parent,
ABNH shall make distributions from their employee benefit plan to their
employees or take other corrective actions determined by Parent upon notice from
Parent to ABNH that such distributions or other actions are necessary to satisfy
any discrimination test for the portion of 1998 during which the parties were
members of a controlled group of corporations. Nothing herein shall be construed
to require Parent to undertake discrimination testing for any period after the
Closing Date on ABNH's behalf.
SECTION 4 - COOPERATION WITH RESPECT TO PLAN ADMINISTRATION. Parent
and ABNH shall cooperate with each other, and shall provide, or cause to be
provided, to each other information reasonably requested within sixty (60) days
of the request, in order to efficiently administer and account properly for the
employee benefit plans maintained by them and the
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undertakings contemplated herein, including for example, but not limited to,
information necessary to effectuate the provisions of Article II, Section 3
hereof, and this Article VII.
SECTION 5 - OTHER MATTERS. Except as otherwise provided in this
Agreement, unless requested by ABNH and agreed to by Parent, or unless initiated
by Parent and agreed to by ABNH, Parent shall not be responsible for employee
benefits matters affecting ABNH's employees or former employees or their
beneficiaries.
SECTION 6 - EXTENT OF PARENT'S RESPONSIBILITY. The employee benefit
services provided to ABNH by Parent pursuant to this Article VII and the
Separation Agreement are ministerial and are for the sake of administrative
convenience only. In providing such services, Parent shall not be responsible
for the accuracy, completeness or timeliness of any advice or service or any
return, report, filing or other document that it provides, prepares or assists
in preparing except to the extent that any inaccuracy, incompleteness or
untimeliness arises solely from Parent's gross negligence or willful misconduct.
The parties expressly acknowledge that with respect to any employee benefit plan
or arrangement established, maintained, or assumed by ABNH, neither Parent nor
any of its directors, officers, employees, agents and affiliates (and the heirs,
executors, successors and assigns of any of the foregoing) is or shall be a
fiduciary for any period after the Closing Date. In accordance with the
indemnification provisions of Article VIII, ABNH shall indemnify, defend and
hold harmless Parent and its directors, officers, employees, agents and
affiliates (and the heirs, executors, successors and assigns of any of the
foregoing) from and against any matter arising out of, or due to, an allegation
or determination that Parent or any other person specified herein is a fiduciary
or has fiduciary responsibility with respect to any such employee benefit plan
or arrangement for any action arising after the Closing Date.
SECTION 7 - COMMON PROJECTS. The parties acknowledge that certain
employee benefit arrangements and responsibilities including, but not limited
to, discrimination testing, may involve a commonality of interests and,
accordingly, of projects and necessary services. To the extent that such common
projects are performed by Parent and Parent cannot ascertain the precise amount
of time spent in providing services to a particular party, its fees and expenses
(the amount of which shall be determined under the Separation Agreement) shall
be apportioned on an equitable basis between Parent and ABNH. In general, the
total fees and expenses for any such common project shall be divided evenly
between Parent and ABNH unless Parent determines and ABNH agrees that, due to
such factors as the amount and complexity of the data involved, a different
apportionment is more equitable.
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SECTION 8 - OUTSIDE CONSULTANTS. The parties acknowledge that the
employee benefit arrangements made by them pursuant to this Agreement including,
but not limited to, this Article VII, may require the services of outside
consultants including, for example, attorneys and accountants. The parties shall
attempt to negotiate separate fee arrangements with outside consulting, legal
and accounting firms, even though some firms' services may relate to projects
common to both parties. However if, notwithstanding the foregoing, Parent
receives an invoice from such a firm that clearly relates to such a common
project, Parent, with ABNH's consent and assistance, shall apportion on an
equitable basis the firm's fees and expenses between the affected parties and
bill each affected party accordingly. In general, the total fees and expenses
reflected on the invoice shall be divided proportionately between Parent and
ABNH based on the relative number of participants invoices unless Parent
determines that, due to such factors as the amount and complexity of the data
involved, a different apportionment is more equitable.
SECTION 9 - EXECUTIVE COMPENSATION. All executive compensation
arrangements have been addressed outside of this Agreement.
ARTICLE VIII
INDEMNIFICATION
SECTION 1 - GENERAL. The party hereto to whom certain
responsibilities and liabilities have been allocated hereunder (the
"Indemnifying Party") shall indemnify, defend and hold harmless the other party
(the "Indemnitee"), including the Indemnitee's respective directors, officers,
employees, agents and affiliates (and the heirs, executors, successors and
assigns of any of the foregoing) from and against any and all losses,
liabilities, claims, damages, obligations, payments, costs and expenses, matured
or unmatured, absolute or contingent, accrued or unaccrued, liquidated or
unliquidated, known or unknown (including, without limitation, the costs and
expenses of any and all Actions, threatened Actions, demands, assessments,
judgments, settlements and compromises relating thereto and attorneys' fees and
any and all expenses whatsoever reasonably incurred in investigating, preparing
or defending against any such Actions or threatened Actions) arising out of or
due to the failure or alleged failure of the Indemnifying Party to pay, perform
or otherwise discharge in due course any of its responsibilities or liabilities.
SECTION 2 - INDEMNIFICATION OF FIDUCIARIES. Parent (directly or
through one or more subsidiaries) shall indemnify, defend and hold harmless each
individual who is both an employee of Parent or ABNH and a trustee or other
fiduciary of an employee benefit plan (and his heirs, executors, successors and
assigns)
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from and against any and all losses, liabilities, claims, damages, obligations,
payments, costs and expenses, matured or unmatured, absolute or contingent,
accrued or unaccrued, liquidated or unliquidated, known or unknown (including,
without limitation, the costs and expenses of any and all Actions, threatened
Actions, demands, assessments, judgments, settlements and compromises relating
thereto and attorneys' fees and any and all expenses whatsoever reasonably
incurred in investigating, preparing or defending against any such Actions or
threatened Actions) directly arising out of, or directly related to, the plan
transfer contemplated by Article II hereof.
SECTION 3 - LIMITATIONS ON, AND PROCEDURES FOR, INDEMNIFICATION. The
limitations on, and procedures for, indemnification set forth in the Separation
Agreement are incorporated herein by reference.
ARTICLE IX
MISCELLANEOUS
SECTION 1 - COMPLETE AGREEMENT; CONSTRUCTION. This Agreement, and
the agreements and documents (including the understandings and practices
referred to in Article III) referred to herein, shall constitute the entire
agreement between the parties with respect to the subject matter hereof and
shall supersede all previous negotiations, commitments and writings with respect
to such subject matter. Notwithstanding any other provisions in this Agreement
or the Separation Agreement to the contrary, in the event and to the extent that
there shall be a conflict between the provisions of the Separation Agreement and
this Agreement, the provisions of this Agreement shall control.
SECTION 2 - EXPENSES. Except as otherwise set forth in this
Agreement, each party hereto shall pay its respective costs and expenses in
connection with the preparation, execution, delivery and implementation of this
Agreement and with the consummation of the transactions contemplated by this
Agreement.
SECTION 3 - GOVERNING LAW. Subject to applicable federal law, this
Agreement shall be governed by and construed in accordance with the laws of the
State of New York, without regard to the principles of conflicts of laws
thereof.
SECTION 4 - NOTICES. All notices and other communications hereunder
shall be in writing and shall be delivered by hand or mailed by registered or
certified mail (return receipt requested) to the parties at the following
addresses (or at such other addresses for a party as shall be specified by like
notice) and shall be deemed given on the date on which such notice is received:
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If to Parent, to: Secretary
American Banknote Corporation
200 Park Avenue
New York, NY 10166
If to ABNH, to: Secretary
American Bank Note
Holographics, Inc.
399 Executive Boulevard
Elmsford, NY 10523
SECTION 5 - AMENDMENTS. This Agreement may not be modified or
amended except by an agreement in writing signed by the parties hereto.
SECTION 6 - SUCCESSORS AND ASSIGNS. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the parties
and their respective successors and permitted assigns.
SECTION 7 - TERMINATION. This Agreement may be terminated in the
event that the Separation Agreement is terminated and the IPO abandoned prior to
the Closing Date. In the event of such termination, no party shall have any
liability of any kind to the other party.
SECTION 8 - NO THIRD PARTY BENEFICIARIES. Except as provided in
Section 2 of Article VIII ("Indemnification of Fiduciaries"), this Agreement is
solely for the benefit of the parties hereto and their respective subsidiaries
and shall not be deemed to confer upon third parties including, but not limited
to, employees, any remedy, claim, liability, reimbursement, claim of action or
other right in excess of those existing without reference to this Agreement.
SECTION 9 - LEGAL ENFORCEABILITY. Any provision of this Agreement
which is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof. Any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
SECTION 10 - SATISFACTION OF CERTAIN CLAIMS. Notwithstanding any
other provision of this Agreement, in the event that a Claim relating to any
employee benefit plan or arrangement described in this agreement is successfully
made by a person who is not a party hereto (or a subsidiary or affiliate
thereof) and Parent or, with respect to any plan or arrangement
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maintained by ABNH, ABNH determines that such Claim may be satisfied from assets
of such plan or arrangement, the Claim, at Parent's or, if applicable, ABNH's
discretion, may be satisfied from such assets.
SECTION 11 - FURTHER ASSURANCES. The parties hereto agree to execute
such documents and assurances as are necessary or appropriate to give effect to
the terms and conditions of this Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]
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IN WITNESS WHEREOF, the parties, acting through their duly
authorized officers, have caused this Agreement to be duly executed as of the
day and year first above written.
AMERICAN BANKNOTE CORPORATION
By:_______________________________
Name:
Title:
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
By:_______________________________
Name:
Title:
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EXHIBIT 10.8
FORM OF EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, (this "Agreement"), is made and entered into
this day of , 1998 by and between Morris Weissman (the
"Executive") and American Bank Note Holographics, Inc., a Delaware corporation
(the "Company").
R E C I T A L
WHEREAS, the Company desires to retain the Executive to render executive
and managerial services and the Executive desires to render such services; and
WHEREAS, the Company and the Executive desire to set forth herein the terms
and conditions on which the Company will employ the Executive, and the Executive
will accept employment with the Company.
AGREEMENT
NOW THEREFORE, in consideration of the mutual promises set forth in this
Agreement and intending to be legally bound, Executive and the Company agree as
follows:
SECTION 1. EMPLOYMENT. The Company hereby employs Executive and Executive
hereby accepts such employment and agrees to render services to the Company,
upon the terms and conditions set forth in this Agreement.
SECTION 2. POSITION AND DUTIES. Executive shall assume the responsibilities
and perform the duties of Chairman of the Board of Directors (the "Board") and
Chief Executive Officer of the Company. Executive agrees to devote a sufficient
portion of his business time, attention, skill and best efforts to the diligent
performance of his duties hereunder and shall be loyal to the Company and its
affiliates and subsidiaries, and use his best efforts to further their
interests. In the performance of his duties, Executive agrees to abide by and
comply with all policies, practices, handbooks, procedures and guidelines which
are now in effect or which the Company may adopt, modify, supplement or change
from time to time.
SECTION 3. TERM OF EMPLOYMENT. (a) The term of employment hereunder shall
commence on July , 1998 and shall continue thereafter until the earlier of (i)
December 31, 2000 or (ii) termination pursuant to Section 10 hereof (the
"Employment Term"). This Agreement shall be automatically renewed for an
additional period of two years, unless the Company gives written notice at least
six (6) months prior to the end of the Employment Term of its election to
terminate such employment at the end of such Employment Term. Notwithstanding
the foregoing, if the Executive's employment is terminated pursuant to Section
10 of this agreement, the automatic renewal provided herein shall be of no
further effect as of the date of the termination.
(b) In the event Executive's employment is not renewed, the Company will
pay to the Executive an amount equal to the average earnings of the Executive
for the prior two years (including Salary, Bonus and the value of options to
purchase shares of Common Stock previously granted).
SECTION 4. EXCLUSIVITY. Except in connection with the Executive's duties for
American Banknote Corporation, during the term of Executive's employment with
the Company, Executive shall not without the prior written consent of the Board
(i) perform any managerial, sales, marketing or technical services directly or
indirectly for any person or entity competing directly or indirectly with the
Company or any of its subsidiaries in the holography business; (ii) perform any
such services for any entity owned, directly or indirectly, by anyone competing,
either directly or indirectly, with the Company or any of its subsidiaries in
the holography business; (iii) on his own behalf or that of any other person or
entity, compete, either directly or indirectly, with the Company or any of its
subsidiaries, to sell any products or services marketed or offered by the
Company or any of its subsidiaries; (iv) engage or become interested, directly
or indirectly, as owner, employer, partner, consultant, through stock ownership
(except ownership of less than one percent of the
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number of shares outstanding of any securities which are listed for trading on
any securities exchange, provided that the specific nature and amount of the
investment, if over $10,000, shall be immediately disclosed to the Company in
writing), investment of capital, lending of money or property, or otherwise
either alone or in association with others, in the operation of any type of
business or enterprise which conflicts or interferes with the performance of
Executive's services hereunder or (v) engage in any activities which could
reasonably be deemed to be a conflict of interest with his duties hereunder or
his obligations to the Company.
SECTION 5. COMPENSATION AND BENEFITS.
(a) Salary. As compensation for the performance of the Executive's
services hereunder, during the Employment Term, the Company will pay to the
Executive (i) an annual base salary of $1.00 per annum (the "Salary") and (ii)
an annual bonus (the "Bonus") based on performance measures of the Company
including but not limited to pre-tax earnings, return on equity, increase in
share price and increases in sales, payable at the sole discretion of the Board
or a committee designated by the Board to make such determination (the
"Compensation Committee"), provided however, that any Bonus in excess of
$999,999 is paid pursuant to the attainment of pre-established target
performance measures of the Company in accordance with the Bonus Plan of the
Company as in effect on , 1998 which may be amended from time to
time or terminated by the independent directors of the Company, or an option or
long-term incentive plan which qualifies as a "performance based" plan in
accordance with Section 162(m) of the Internal Revenue Code of 1986, as amended
(the "Code"). Any bonus for which the Executive shall be eligible, shall be
determined from time to time by the Board (or the Compensation Committee) in its
sole discretion. The Executive's Salary will be payable in accordance with the
customary payroll practices of the Company for its senior management personnel.
(b) Benefits. During the Employment Term, the Executive shall be eligible
to participate, on the same basis and subject to the same qualifications as
other senior management personnel of the Company, in any pension, profit
sharing, savings, bonus, life insurance, health insurance, hospitalization,
dental, drug prescription, disability, accidental death and dismemberment and
other benefit plans and policies as may from time to time be in effect with
respect to senior management personnel of the Company (collectively, the
"Benefits"). The Executive shall also be entitled to vacation days (including
the right to accrue unused vacation time from year to year), holidays and sick
days in accordance with the policies of the Company as may be in effect from
time to time; provided however, that upon termination of Executive's employment
for any reason (including resignation by the Executive), the Company shall pay
Executive for accrued vacation time unused as of the last date of employment, on
a pro rated basis calculated on the basis of the Executive's Salary and Bonus in
effect on the date of termination.
(c) Stock Options. Upon the occurrence of an initial public offering of
the Company's common stock, par value $0.01 per share (the "Common Stock") , the
Executive shall be granted stock options to purchase up to 400,000 shares of the
Common Stock, pursuant to the Company's 1998 Incentive Stock Option Plan, dated
as of July , 1998 (the "1998 Plan"), at an exercise price equal to the initial
public offering price. The options and any shares of Common Stock underlying the
options may be subject to certain restrictions as disclosed in the 1998 Plan.
Subsequent grants of options to purchase equity in the Company during the
Employment term will be made at the sole discretion of the Board or the
Compensation Committee.
(d) Expenses. The Company will pay or promptly reimburse the Executive for
all reasonable out-of-pocket business, entertainment and travel expenses
incurred by the Executive in the performance of his duties hereunder upon
presentation of appropriate supporting documentation and otherwise in accordance
with the expense reimbursement policies of the Company in effect from time to
time.
(e) Taxes and Withholdings. All appropriate deductions, including federal,
state and local taxes and social security, shall be deducted from any amount
paid by the Company to the Executive hereunder in conformity with applicable
laws.
SECTION 6. CONFIDENTIALITY. The Executive acknowledges and agrees that (a) in
connection with his employment by the Company, the Executive will be involved in
the Company's and its subsidiaries' (if any) operations; (b) in order to permit
him to carry out his responsibilities, the Company may disclose, to the
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Executive, in strict confidence, or the Executive may develop, confidential
proprietary information and trade secrets of the Company and its affiliates,
including without limitation (i) unpublished information with respect to the
Company concerning marketing or sales plans, operational techniques, strategic
plans and the identity of suppliers and supply contacts; (ii) unpublished
financial information with respect to the Company, including information
concerning revenues, profits and profit margins; (iii) internal confidential
manuals and memos; and (iv) "material inside information" as such phrase is used
for purposes of the Securities Exchange Act of 1934, as amended (collectively,
"Confidential Information"); and (c) the Company and its affiliates derive
significant economic value and competitive advantage by reason of the fact that
such Confidential Information, in whole or in part, is not generally known or
readily ascertainable by the Company's or its affiliates' actual or potential
competitors and, as such, constitutes the Company's and its affiliates' valuable
trade secrets.
In addition to any obligations set forth herein, and in recognition of the
foregoing acknowledgments, for himself and on behalf of his affiliates, the
Executive agrees that he will not, directly or indirectly, use, disseminate or
disclose, any Confidential Information (other than for the legitimate business
purposes of the Company), and that he will not knowingly permit any of his
affiliates to, directly or indirectly, use, disseminate or disclose, any
Confidential Information. At the end of the Employment Term, the Executive
agrees to deliver immediately to the Company the originals and all copies of
Confidential Information in his possession or control, whether in written form,
on computers or discs or otherwise.
The restrictions set forth in this Section 6 shall not apply to those
particular portions of Confidential Information, if any, that (a) have been
published by any of the Company or any of its affiliates in a patent, article or
other similar tangible publication or (b) become available to the Executive from
a source other than the Company, provided that the source of such Confidential
Information was not known by the Executive, after reasonable inquiry, to be
bound by a confidentiality agreement with or other obligation of confidentiality
to the Company or any of its affiliates.
The foregoing restrictions on the disclosure of Confidential Information
set forth in this Section 6 shall not apply to those particular portions of
Confidential Information, if any, that are required to be disclosed in
connection with any legal process; provided that, at least ten (10) days in
advance of any required disclosure, or such lesser time as may be required by
circumstances, the Executive shall furnish the Company with a copy of the
judicial or administrative order requiring that such information be disclosed
together with a written description of the information proposed to be disclosed
(which description shall be in sufficient detail to enable the Executive and its
affiliates to determine the nature and scope of the information proposed to be
disclosed), and the Executive covenants and agrees to cooperate with the Company
and its affiliates to deliver the minimum amount of information necessary to
comply with such order.
This Section 6 shall survive any termination of this Agreement.
SECTION 7. COVENANT NOT TO COMPETE.
(a) Scope. In order to fully protect the Company's Confidential
Information, during the Employment Term and for a period of 1 year thereafter
(the "Non-competition Period"), the Executive shall not, except as authorized in
writing by the Board, directly or indirectly, render services to, assist,
participate in the affairs of, or otherwise be connected with, any person or
enterprise (other than the Company and its subsidiaries, if any), which person
or enterprise is engaged in, or is planning to engage in, and shall not
personally engage in, any business that is in any respect competitive with the
business of the Company or any of its subsidiaries, if any, with respect to any
products or services of the Company or any of its subsidiaries, if any, in any
capacity which would utilize the Executive's services with respect to any
products or services of the Company or any of its subsidiaries, if any, that
were within the Executive's management responsibility at any time within the
twelve (12) month period immediately prior to the termination of the Executive's
employment with the Company.
(b) Remedies. The parties recognize, acknowledge and agree that (i) any
breach or threatened breach of the provisions of this Section 7 shall cause
irreparable harm and injury to the Company and that money damages will not
provide an adequate remedy for such breach or threatened breach and (ii) the
duration, scope and geographical application of this Agreement are fair and
reasonable under the circumstances, and are
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reasonably required to protect the legitimate business interests of the Company.
Accordingly, Executive agrees that the Company shall be entitled to have the
provisions of this Agreement specifically enforced by any court having
jurisdiction, and that such a court may issue a temporary restraining order,
preliminary injunction or other appropriate equitable relief, without having to
prove the inadequacy of available remedies at law. In addition, the Company
shall be entitled to avail itself of all such other actions and remedies
available to it or any of its affiliates under law or in equity and shall be
entitled to such damages as it sustains by reason of such breach or threatened
breach. It is the express desire and intent of the parties that the provisions
of this Agreement be enforced to the full extent possible.
(c) Severability. If any provision of Section 7(a) is held to be
unenforceable because of the duration of such provision, the area covered
thereby or the scope of the activity restrained, the parties hereby expressly
agree that the court making such determination shall have the power to reduce
the duration and/or areas of such provision and/or the scope of the activity to
be restrained contained in such provision and, in its reduced form, such
provision shall then be enforceable. The parties hereto intend and agree that
the covenants contained in Section 7(a) shall be construed as a series of
separate covenants, one for each municipality, community or county included
within the area designated by Section 7(a). Except for geographic coverage, the
terms and conditions of each such separate covenant shall be deemed identical to
the covenant contained in Section 7(a). Furthermore, if any court shall refuse
to enforce any of the separate covenants deemed included in Section 7(a), then
such unenforceable covenant shall be deemed eliminated from the provisions
hereof to the extent necessary to permit the remaining separate covenants to be
enforced in accordance with their terms. The prevailing party in any action
arising out of a dispute in respect of any provision of this Agreement shall be
entitled to recover from the non-prevailing party reasonable attorneys' fees and
costs and disbursements incurred in connection with the prosecution or defense,
as the case may be, of any such action.
SECTION 8. RESPONSIBILITY UPON TERMINATION. Upon the termination of his
employment for any reason and irrespective of whether or not such termination is
voluntary on his part:
(a) The Executive shall advise the Company of the identity of his new
employer within ten (10) days after accepting new employment and further agrees
to keep the Company so advised of any change in employment during the
Non-competition Period;
(b) The Company in its sole discretion may notify any new employer of the
Executive that he has an obligation not to compete with the Company during the
Non-competition Period; and
(c) The Executive shall deliver to the Company any and all records, forms,
contracts, memoranda, work papers, customer data and any other documents
(whether in written form, on computers or discs or otherwise) which have come
into his possession by reason of his employment with the Company, irrespective
of whether or not any of said documents were prepared for him, and he shall not
retain memoranda in respect of or copies of any of said documents.
SECTION 9. NONSOLICITATION. The Executive agrees that during the term of his
employment with the Company and for a period of twelve (12) months thereafter,
he will not, and will not assist any of his affiliates to, directly or
indirectly, recruit or otherwise solicit or induce any executive, customer,
subscriber or supplier of the Company or any of its subsidiaries about whom or
which he gained Confidential Information while at the Company to terminate its
employment or arrangement with the Company or any of its subsidiaries, otherwise
change its relationship with the Company or any of its subsidiaries, or
establish any relationship with the Executive or any of his affiliates for any
business purpose deemed materially competitive with the business of the Company
or any of its subsidiaries, if any.
SECTION 10. TERMINATION.
(a) Termination for Cause. Notwithstanding anything contained herein to
the contrary, the Board may terminate the Executive's employment with the
Company for cause. For purposes of this Agreement, the term "cause" shall mean,
but is not limited to, the occurrence of any one or more of the following (i)
the commission of any act of willful and material fraud, embezzlement or
misappropriation on the part of Executive, (ii) any act or omission which
constitutes a willful and material breach by Executive of this
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Agreement, including a refusal or failure by Executive to perform his duties and
obligations hereunder, (iii) Executive has been convicted of a crime, which
conviction has, or is reasonably likely to have a material adverse effect on the
Company, or its business or will prevent the Executive from performing his
duties for a sustained period of time, (iv) Executive becomes Disabled (as
hereinafter defined), or (v) the death of Executive; provided however, that
"cause" shall not include any act or omission by the Executive undertaken in the
good faith exercise of the Executive's business judgment as Chief Executive
Officer or in good faith reliance on the advice of counsel. For purposes of this
Agreement, "Disabled" shall mean Executive's inability, due to illness, accident
or any other physical or mental condition, to fully perform the essential
functions of his position or this Agreement for more than 26 weeks consecutively
or for intermittent periods aggregating 39 weeks during any 78-week period
during the Employment term, except as otherwise required by law.
If, during the Employment Term the Company terminates the Executive's
employment pursuant to clauses (i), (ii) or (iii) of this paragraph (a), then,
from and after the date of such termination, the Executive shall (a) have no
right to receive any further Salary or Bonus hereunder; (b) cease to be covered
under or be permitted to participate in any Benefits (except payments due to the
Executive or the Executive's beneficiaries or representatives under any
applicable life or disability insurance plans or policies) and (c) shall have no
right to purchase shares of the Common Stock pursuant to the 1998 Plan.
If during the Employment Term the Company terminates the Executive
employment pursuant to clause (iv) or (v) of this paragraph (a), (a) the Company
shall continue to pay the Executive (or his beneficiaries, as applicable) Salary
then in effect, together with any Bonus, which may have accrued or which
otherwise would have been granted by the Board had the Executive not been
terminated, for a period of six months following the date the Executive's
termination is effective (the "Termination Date") in accordance with the
customary payroll practices of the Company for its senior management personnel,
and (b) the Executive shall be entitled to all rights with respect to any
options granted or Common Stock purchased under the 1998 Plan for a period of
one year following the Termination Date.
(b) Termination Without Cause. The Company shall have the right to
terminate this Agreement and the employment of Executive with the Company for
any reason or no reason and without cause upon written notice to Executive of
such termination; provided that (i) the Company shall continue to pay to the
Executive the Salary then in effect, together with any Bonus which may have
accrued or which otherwise would have been granted by the Board had the
Executive not been terminated for two years following the Termination Date, in
accordance with the customary payroll practices of the Company for its senior
management personnel, (ii) the Company shall continue any benefits in which the
Executive then participates on the same basis of participation and subject to
all terms and conditions of such plans as applied prior to such termination, and
(iii) the Executive shall be entitled to all rights with respect to any options
granted or Common Stock purchased under the 1998 Plan for a period of 2 years
from the Termination Date.
(c) Termination Upon Change of Control or Resignation for Good Reason. In
the event Executive's employment is terminated by the Company subsequent to a
Change of Control (as hereinafter defined) or the Executive resigns from the
Company for Good Reason (as hereinafter defined) within one year following a
Change of Control, the Company will pay the Executive (i) a severance amount of
$1,000,000 and (ii) an amount equal to (a) two times the Executive's Salary for
the year in which the Change of Control occurs plus (b) two times the amount of
the Bonus most recently paid to the Executive. To the extent that such amounts
are in excess of the amount allowable as a deduction under Section 280(g) of the
Code, or are subject to excise tax pursuant to Section 4999 of the Code, the
Company will gross-up any additional amounts due.
(d) Resignation. Executive shall have the right to terminate this
Agreement and his employment with the Company upon thirty (30) days prior
written notice to the Company. Except if the Executive's resignation is for Good
Reason in accordance with paragraph (c) above, from and after the date of such
resignation, Executive shall (i) have no right to receive any further Salary or
bonus hereunder; (ii) cease to be covered under or by permitted to participate
in any Benefits (except payments due the Executive or the Executive's
beneficiaries or representatives under any applicable life or disability
insurance plans or policies); and (iii) forfeit any and all non-vested options
granted or non-vested Common Stock purchased under the 1998 Plan.
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(e) Definitions. For purposes of this Section 10 the terms listed below
shall mean the following:
(i) "Change in Control" shall mean:
(a) the direct or indirect acquisition, whether by sale, merger,
consolidation, or purchase of assets or stock, by any person,
corporation, or other entity or group thereof of the beneficial
ownership (as that term is used in Section 13(d)(1) of the Securities
Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder) of shares in the Company which, when added to
any other shares the beneficial ownership of which is held by the
acquiror, shall result in the acquirer's having more than 20% of the
votes that are entitled to be cast at meetings of stockholders as to
matters on which all outstanding shares are entitled to be voted as a
single class; provided however, that such acquisition shall not
constitute a Change of Control for purposes of this Agreement if prior
to such acquisition a resolution declaring that the acquisition shall
not constitute a Change of Control is adopted by the Board with the
support of a majority of the Board members who either were members of
the Board for at least two years prior to the date of the vote on such
resolution or were nominated for election to the Board by at least
two-thirds of the directors then still in office who were members of the
Board at least two years prior to the date of the vote on such
resolution; and provided further, that neither the Company, nor any
person who as of July , 1998 was a director or officer of the Company,
nor any trustee or other fiduciary holding securities under an employee
benefit plan of the Company, nor any corporation owned, directly or
indirectly, by the shareholders of the Company in substantially the same
proportions as their ownership of shares of the Company shall be deemed
to be an "acquirer" for purposes of this Section.
(b) the election during any two-year period to a majority of the
seats on the Board of Directors of the Company of individuals who were
not members of the Board at the beginning of such period unless such
additional or replacement directors were approved by at least 80% of the
continuing directors.
(c) shareholder approval of a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of
all or substantially all of the Company's assets.
(ii) "Good Reason" shall mean the occurrence of (a) a material breach
of this Agreement by the Company, (b) the assignment to the Executive of
duties inconsistent with his position as described in Section 2 herein, or
any significant adverse alteration in the status or conditions of the
Executive's employment or in the nature of the Executive's responsibilities
as described in Section 2 herein, (c) the Company's requiring the
relocation of the Executive's office to a site more than 20 miles from the
Executive's office is presently located, or (d) the failure of the Company
to continue to provide Executive with benefits substantially similar to
those described in this Agreement or to continue in effect any benefit or
stock option plan which is material to the Executive's compensation,
including but not limited to, the 1998 Plan; provided however, Executive
shall not be deemed to have Good Reason to terminate his employment if the
reason for such termination is remedied prior to the date of termination
specified in the notice of termination pursuant to Section 10(d) herein.
SECTION 11. AUTHORITY. Executive represents and warrants that he has the
ability to enter into this Agreement and perform all obligations hereunder, and
that there are no restrictions on Executive or any obligations owed by him to
third parties which are reasonably likely, in any way, to detract from or
adversely affect his performance hereunder.
SECTION 12. MISCELLANEOUS.
(a) Separate Agreements. The covenants of Executive contained in this
Agreement shall survive any termination of this Agreement and shall be construed
as separate agreements independent of any other agreement, claim, or cause of
action of Executive against the Company, whether predicated on this Agreement or
otherwise. The covenants contained in this Agreement are necessary to protect
the legitimate business interests of the Company.
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(b) Entire Agreement. The parties hereto acknowledge and agree that this
Agreement supersedes all previous contracts and agreements between the Company
and Executive relating to the subject matter hereof and that any such previous
contracts or agreements shall become null and void upon execution of this
Agreement. This Agreement constitutes the complete agreement among the parties
hereto with respect to the subject matter hereof and no party has made or is
relying on any promises by any other party or their respective representatives
not contained in this Agreement.
(c) Severability. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under present or future laws, such provision
shall be fully severable, this Agreement shall be construed and enforced as if
such illegal, invalid or unenforceable provision had never comprised a part of
this Agreement, and the remaining provisions of this Agreement shall remain in
full force and effect and shall not be affected by the illegal, invalid or
unenforceable provision or by its severance from this Agreement. If any
provision of this Agreement is held to be unenforceable because of the duration
of such provision, the area covered thereby or the scope of the activity
restrained, the parties hereby expressly agree that the court making such
determination shall have the power to reduce the duration and/or areas of such
provision and/or the scope of the activity to be restrained contained in such
provision and, in its reduced form, such provision shall then be enforceable.
(d) Successor and Assigns.
(i) This Agreement is personal in nature and neither this Agreement nor any
rights or obligations arising hereunder may be assigned, transferred or pledged
by Executive. This Agreement shall inure to the benefit of and be enforceable by
Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
(ii) This Agreement shall be binding upon and inure to the benefit of the
Company and their successors. The rights and obligations of the Company pursuant
to this Agreement are freely assignable and transferable by Company without the
consent of Executive without his being relieved of any obligations hereunder,
including, without limitation, an assignment or transfer in connection with a
merger or consolidation of the Company, or a sale or transfer of all or
substantially all of the assets of the Company; provided, the provisions of this
Agreement shall be binding on and shall inure to the benefit of the surviving
business entity or the business entity to which such assets shall be transferred
and such successor shall expressly assume and agree to perform this Agreement in
the same manner and to the same extent that the Company would be required to
perform it if no such transaction had taken place.
(e) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without regard to the
conflict of law rules thereof.
(f) Amendment. No amendment, waiver, modification or change of any
provision of this Agreement shall be valid unless in writing and signed by both
parties; provided, that any such amendment, waiver, modification or change must
be consented to on behalf of the Company by the Board. The waiver of any breach
of any duty, term or condition of this Agreement shall not be deemed to
constitute a waiver of any preceding or succeeding breach of the same or any
other duty, term or condition of this Agreement.
(g) Notices. All notices and communications under this Agreement shall be
in writing and shall be personally delivered or sent by prepaid certified mail,
return receipt requested, or by recognized courier service, and addressed as
follows:
(i) If to the Company to:
American Bank Note Holographics, Inc.
200 Park Avenue, 49th Floor
New York, NY 10166-4999
Attention: Chief Operating Officer
Telephone: (212) 557-9100
Facsimile: (212) 338-0728
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with a copy to:
Paul, Hastings, Janofsky & Walker LLP
399 Park Avenue
New York, NY 10022
Attention: Daniel Bergstein, Esq.
Telephone: (212) 318-6000
Facsimile: (212) 319-4090
(ii) If to the Executive to:
Morris Weissman
200 Park Avenue, 49th Floor
New York, NY 10166-4999
Telephone: (212) 557-9100
Facsimile: (212) 338-0728
with a copy to:
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Attention:
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Telephone: ( ) -
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Facsimile: ( ) -
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or to such other address as may be specified by notice of the parties.
(h) Arbitration. Except as provided for in Section 7(b), the Company and
Executive agree that any claim or controversy arising out of or relating to this
Agreement or any breach thereof ("Arbitrable Dispute") shall be settled by
arbitration if such claim or controversy is not otherwise settled; provided,
however, that nothing set forth herein shall in any way limit the Company's
ability to seek and obtain injunctive relief in aid of arbitration from any
court of competent jurisdiction. This arbitration agreement applies to, among
others, disputes about the validity, interpretation, or effect of this
Agreement. The arbitration shall take place in New York, New York, or such other
location as to which the parties may mutually agree. Except as expressly set
forth herein, all arbitration proceedings under this Section 10(h) shall be
undertaken in accordance with the Commercial Arbitration Rules of the American
Arbitration Association (the "AAA") then in force only before individuals who
are (i) lawyers engaged full-time in the practice of law and (ii) on the AAA
register of arbitrators. There shall be one arbitrator who shall be chosen in
accordance with the rules of the AAA. The arbitrator may not modify or change
this Agreement in any way and shall not be empowered to award punitive damages
against any party to such arbitration. Each party shall pay the fees of such
party's attorneys, the expenses of such party's witnesses, and any other
expenses that such party incurs in connection with the arbitration, but all
other costs of the arbitration, including the fees of the arbitrator, the cost
of any record or transcript of the arbitration, administrative fees, and other
fees and costs shall be paid in equal shares by Executive and the Company. The
party losing the arbitration shall reimburse the party who prevailed for all
expenses the prevailing party paid pursuant to the preceding sentence. Except as
provided for in Section 7(b), arbitration in this manner shall be the exclusive
remedy for any Arbitrable Dispute. Should Executive or the Company attempt to
resolve an Arbitrable Dispute by any method other than arbitration pursuant to
this Section, the responding party will be entitled to recover from the
initiating party all damages, expenses, and attorneys' fees incurred as a result
of that breach.
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(i) Counterparts. This Agreement may be executed in counterparts, each of
which will be deemed an original but all of which will together constitute one
and the same agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
By:
-------------------------------------
Name:
Title:
MORRIS WEISSMAN
----------------------------------------
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EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
To the Board of Directors and Stockholder of
American Bank Note Holographics, Inc.
New York, New York
We consent to the use in this Amendment No. 3 to Registration Statement No.
333-51845 of American Bank Note Holographics, Inc. (the "Company") on Form S-1
of our report dated March 17, 1998 (except as to Note K, the date of which is
July 2, 1998), appearing in the Prospectus, which is a part of such Registration
Statement, and to the reference to us under the heading "Experts" in such
Prospectus.
Our audits of the financial statements referred to in our aforementioned
report also included the financial statement schedule of the Company, listed in
Item 16(b). This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
New York, New York
July , 1998
<PAGE> 1
Exhibit 99.1
AFFIDAVIT
I, Morris Weissman, being duly sworn, hereby depose and state:
(i) I am Chairman of the Board and Chief Executive Officer of
American Bank Note Holographics, Inc. (the "Company").
(ii) The Company is presently a wholly owned subsidiary of American
Banknote Company (the "Parent"). The Company intends to effect an underwritten
initial public offering of all 13,636,000 shares of its outstanding common stock
(the "Public Offering").
(iii) Prior to the completion of the Public Offering, the Company and
the Parent do not believe it is desirable for persons who are not stockholders
or employees of the Company, the Parent or any of their respective subsidiaries
or affiliates to be members of the Company's Board of Directors. At the time
that the Company becomes a publicly-held company, the Company believes it will
be appropriate to include "independent directors" on the Board of Directors of
the Company and, in accordance with New York Stock Exchange listing
requirements, will appoint persons to the Board of Directors of the Company to
serve as "independent directors."
(iv) Messrs. Stephen A. Benton, C. Gerald Goldsmith and Jeffrey S.
Silverman have agreed to serve as directors of the Company after completion of
the Public Offering. None of such persons is a stockholder or employee of the
Company, the parent or any of their respective subsidiaries or affiliates.
(v) Each of Stephen A. Benton, C. Gerald Goldsmith and Jeffrey S.
Silverman has advised me that he is agreeable to serving as a director of the
Company concurrent with the Public Offering, but will not consent to being named
in the Registration Statement for the Public Offering as a person about to
become a director because of his lack of involvement with the Registration
Statement of the Company prior to the date of the completion of the Public
Offering. As a result of the foregoing, I believe that such consent is
impracticable.
/s/ Morris Weissman
---------------------
Morris Weissman
Subscribed and sworn to before me
this 2nd day of July, 1998.
/s/ Patrick Reddy
- -------------------------------
Notary Public
