AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 4, 1999
REGISTRATION NO. 333-82793
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SMARTDISK CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 3577 65-0733580
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
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MICHAEL S. BATTAGLIA
PRESIDENT AND CHIEF EXECUTIVE OFFICER
3506 MERCANTILE AVENUE 3506 MERCANTILE AVENUE
NAPLES, FLORIDA 34104 NAPLES, FLORIDA 34104
(941) 436-2500 (941) 436-2500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) INCLUDING AREA CODE, OF AGENT FOR SERVICE)
</TABLE>
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COPIES OF COMMUNICATIONS TO:
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ALAN K. AUSTIN, ESQ.
BRUCE E. MACDONOUGH, ESQ. TREVOR J. CHAPLICK, ESQ.
MICHAEL G. TAYLOR, ESQ. TIMOTHY TOMLINSON, ESQ. WILSON SONSINI GOODRICH & ROSATI,
GREENBERG TRAURIG, P.A. TOMLINSON ZISKO MOROSOLI & MASER LLP PROFESSIONAL CORPORATION
1221 BRICKELL AVENUE 200 PAGE MILL ROAD 650 PAGE MILL ROAD
MIAMI, FLORIDA 33131 PALO ALTO, CALIFORNIA 94306 PALO ALTO, CALIFORNIA 94303
(305) 579-0500 (650) 325-8666 (650) 493-9300
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
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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 (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, 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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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SELL THESE SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES, IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED OCTOBER 4, 1999
[GRAPHIC OMITTED]
3,000,000 SHARES
COMMON STOCK
SmartDisk Corporation is offering 3,000,000 shares of its common stock.
This is our initial public offering and no public market currently exists for
our shares. We have filed an application for the common stock to be quoted on
the Nasdaq National Market under the symbol "SMDK." We anticipate that the
initial public offering price will be between $10.00 and $12.00 per share.
---------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 4.
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PER SHARE TOTAL
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Public Offering Price ........................... $ $
Underwriting Discounts and Commissions .......... $ $
Proceeds to SmartDisk ........................... $ $
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THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS
HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
We have granted the underwriters a 30-day option to purchase up to an
additional 450,000 shares of common stock to cover over-allotments.
ROBERTSON STEPHENS
HAMBRECHT & QUIST
U.S. BANCORP PIPER JAFFRAY
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The date of this prospectus is , 1999.
<PAGE>
[INSIDE FRONT COVER]
Current FlashPath Product
FLASHPATH/trademark/
is the easiest way to
transfer data from
digital cameras SmartMedia/trademark/ flash mem-
[picture of a digital ory cards to PCs. Flash memory
camera with arrows pointing cards are miniature digital
from camera to flash data storage devices
memory card to FlashPath that are designed to
to computer to Internet, work with a range
with computer user at of audio and video
a desk viewing digital product applications.
image on computer screen] Primarily used today with
digital still cameras, FlashPath
offers users greater
portability, convenience,
and ease of use than any
other solution.
FlashPath Products Under Development
digital cameras digital music players SMARTDISK/TRADEMARK/
digital voice recorders is developing
digital phones digital video cameras FlashPath products
that are designed to
[picture of each of support leading flash
above-listed appliances] memory cards. We
expect to offer solutions
[picture of Memory Stick that keep pace with the
floppy disk constantly changing
adapter] landscape of digital
appliances and competing
[pictures of two computer users flash memory technologies.
viewing digital images
on computer screens, The above pictured flash memory
with "Internet" cards are manufactured by
superimposed between them] third parties.
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF THE COMMON STOCK. IN THIS PROSPECTUS, REFERENCES
TO "SMARTDISK," "WE," "OUR" AND "US" REFER TO SMARTDISK CORPORATION.
UNTIL , 1999, ALL DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
---------------------
TABLE OF CONTENTS
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PAGE
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Prospectus Summary ................................................................... 1
Risk Factors ......................................................................... 4
Corporate History and Development .................................................... 16
Note Regarding Forward-Looking Statements ............................................ 17
Use of Proceeds ...................................................................... 17
Dividend Policy ...................................................................... 17
Capitalization ....................................................................... 18
Dilution ............................................................................. 19
Selected Financial Data .............................................................. 20
Management's Discussion and Analysis of Financial Condition and Results of Operations 21
Business ............................................................................. 29
Management ........................................................................... 41
Certain Transactions ................................................................. 50
Principal Stockholders ............................................................... 53
Description of Capital Stock ......................................................... 55
Shares Eligible for Future Sale ...................................................... 58
Underwriting ......................................................................... 60
Legal Matters ........................................................................ 62
Experts .............................................................................. 62
Where You can Find Additional Information ............................................ 62
Index to Financial Statements ........................................................ F-1
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We own or have rights to the product names, tradenames and trademarks that we
use inconjunction with the sale of our products. This prospectus also contains
product names, tradenames and trademarks of other companies.
ii
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PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. YOU SHOULD READ THIS ENTIRE PROSPECTUS CAREFULLY.
OUR BUSINESS
SmartDisk designs and develops products that enable consumers to easily
share digital data among advanced consumer electronic products, PCs and the
Internet. Consumers are increasingly relying on the transfer of digital
information between electronic devices as an important part of their daily
lifestyles. We believe that our products provide an easy-to-use, cost-effective
and versatile solution for the exchange of digital data. Our patented products,
FlashPath and Smarty, allow consumers to use the familiar 3.5 inch floppy
drive--found on most PCs worldwide--to simplify the exchange of images, music,
voice and other digital data.
We have derived substantially all of our revenues to date from the sale of
our FlashPath product. FlashPath is a solid state electronic device in the
shape of a 3.5 inch floppy diskette. Our current FlashPath product is used
primarily to transfer images to PCs from consumer digital cameras using the
Toshiba SmartMedia flash memory card, which is currently the only flash memory
card commercially supported by our product. Flash memory cards are miniature
digital data storage devices that are designed to work with a range of audio
and video product applications. In digital cameras they serve as the camera's
film. Once pictures have been taken, the flash memory card is removed from the
camera and placed into FlashPath. FlashPath is then inserted into the PC's
floppy disk drive and the images are easily and conveniently transferred to the
PC, without the need to use connecting cables or PC peripheral ports. After
transferring the images to a PC, the consumer is able to edit and transmit the
pictures through the Internet using readily available software. SmartMedia
cards are used in cameras made by a number of leading camera manufacturers,
including Agfa, FujiFilm, Olympus, Polaroid, Ricoh, Sanyo, Sharp and Toshiba.
During the 12-month period ended June 30, 1999, we sold over 700,000
FlashPaths. At June 30, 1999, our accumulated deficit was $24.9 million.
We are currently developing, with Sony and SanDisk, additional FlashPath
products to support their flash memory cards--the Memory Stick and the
MultiMediaCard. These flash memory cards are expected to have applications in
"smart" cellular phones, digital cameras and camcorders, digital audio players
and video game devices. FlashPath is also capable of transferring digital music
downloaded from the Internet to the Diamond Rio MP3 audio player.
Our strategic relationships take a variety of forms. Sony reimburses us
for a portion of our development expenses with respect to the Memory Stick and
pays us additional fees during the course of development. Under our SanDisk
arrangement, we fund most of the development costs and will receive revenues
derived from the sale of our FlashPath for the MultiMediaCard. We will pay
SanDisk a royalty based on the portion of those revenues derived from sales to
parties other than SanDisk. We recently completed a limited production run of
FlashPath for the Memory Stick, and we anticipate commencing volume production
in time for commercial introduction of the product in the fourth quarter of
1999. We also expect to commercially introduce FlashPath for the MultiMediaCard
in the first quarter of 2000. In addition to our product development efforts
with Sony and SanDisk, as more fully discussed in "Business--Marketing,
Customers and Strategic Relationships," we also have strategic relationships
with a number of key electronics industry players, including Hitachi, NEC and
Toshiba. They actively participate in the development of our products, provide
us with access to leading-edge manufacturing capabilities, and market and
distribute our products globally. We currently outsource our manufacturing and
plan to continue this strategy for the foreseeable future.
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Our objective is to establish our FlashPath products as the
industry-standard solution for the transfer of data between digital appliances
and PCs by strengthening our position as a technological and market leader. Key
elements of our business strategy include:
/bullet/ Capitalizing on our technology expertise and technology platform
to expand our product offerings;
/bullet/ Expanding our customer and strategic industry relationships to
take advantage of the significant marketing clout of our OEM
customers and the new product insights that result from our
cooperative development activities;
/bullet/ Supporting different flash memory card standards, such as those
from SanDisk, Sony and Toshiba, in order to address the data
transfer needs of purchasers of emerging digital appliances that
use different flash memory cards;
/bullet/ Promoting market awareness of our products and the FlashPath and
Smarty brand names; and
/bullet/ Continuing our focus on easy-to-use products that do not require
hardware installation, connecting cables or the use of PC
peripheral ports, which are normally used to connect modems,
printers and other peripherals to the PC.
We were incorporated in Delaware on March 5, 1997 as "Fintos, Inc." and
changed our name to "SmartDisk Corporation" on September 26, 1997. Our
predecessor, SmartDisk Security Corporation, was incorporated on May 18, 1993.
We commenced significant operations related to our current products in January
1998, and we received our first significant capital contributions in May 1998.
Our executive offices are located at 3506 Mercantile Avenue, Naples, Florida
34104, and our telephone number is (941) 436-2500.
THE OFFERING
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Common stock offered by SmartDisk ......... 3,000,000 shares
Common stock to be outstanding
after this offering ..................... 15,523,511 shares
Use of proceeds ........................... We intend to use the estimated $29.4 million net
proceeds from this offering for working capital,
potential acquisitions of technology or businesses and
other general corporate purposes.
Proposed Nasdaq National Market symbol..... SMDK
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Except as otherwise indicated, information in this prospectus is based on
the following assumptions:
/bullet/ The number of shares of our common stock to be outstanding after
the offering is based on shares outstanding as of August 31, 1999.
/bullet/ All share information gives retroactive effect to a one-for-four
reverse split of our common stock effected in August 1999.
2
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SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------- ---------------------------
1996 1997 1998 1998 1999
------------ ----------- ------------ ------------ ------------
(UNAUDITED)
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STATEMENT OF OPERATIONS DATA:
Total revenues ....................... $ 500 $ 893 $ 15,323 $ 3,972 $ 13,993
Cost of revenues ..................... 367 301 12,600 3,252 10,271
--------- -------- -------- -------- --------
Gross profit (loss) .................. 133 592 2,723 720 3,722
Operating expenses:
Research and development ............ 720 1,412 1,608 685 2,454
Sales and marketing ................. 6 12 2,547 731 1,443
General and administrative .......... 3,418 3,184 4,149 2,086 1,971
Impairment loss ..................... 7,807 -- -- -- --
--------- -------- -------- -------- --------
Total operating expenses ............. 11,951 4,608 8,304 3,502 5,868
--------- -------- -------- -------- --------
Operating loss ....................... (11,818) (4,016) (5,581) (2,782) (2,146)
Net loss before income taxes ......... (11,818) (4,009) (5,605) (2,767) (2,088)
Income tax expense (benefit) ......... (2,348) (45) (102) (38) 68
--------- -------- -------- -------- --------
Net loss ............................. $ (9,470) $ (3,964) $ (5,503) $ (2,729) $ (2,156)
========= ======== ======== ======== ========
Net loss per share(1) ................ $ (1.25) $ (0.51) $ (0.68) $ (0.35) $ (0.24)
Shares used in computing net loss
per share(2) ....................... 7,579 7,739 8,040 7,774 9,043
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<CAPTION>
JUNE 30, 1999
-----------------------------
ACTUAL AS ADJUSTED(3)
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BALANCE SHEET DATA:
Cash and cash equivalents ....................... $ 1,335 $30,735
Working capital ................................. 1,125 30,525
Total assets .................................... 15,439 44,839
Redeemable common stock(4) ...................... 9,992 --
Total stockholders' equity (deficit)(4) ......... (6,133) 33,259
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(1) Basic and diluted net loss per share are the same for all periods
presented.
(2) Shares used in computing net loss per share reflect the retroactive
adjustment of outstanding shares related to the mergers of SmartDiskette
Limited and SmartDisk Security Corporation into SmartDisk.
(3) Adjusted to give effect to our sale of the 3,000,000 shares of common stock
at an assumed public offering price of $11.00 per share (after deduction
of the estimated underwriting discount and offering expenses) and the
receipt and application of the net proceeds. See "Use of Proceeds."
(4) Redeemable common stock will convert to nonredeemable common stock upon
completion of the offering.
3
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RISK FACTORS
BEFORE YOU INVEST IN OUR COMMON STOCK, YOU SHOULD BE AWARE OF THE RISKS
DESCRIBED BELOW. YOU SHOULD CAREFULLY CONSIDER THESE RISK FACTORS, TOGETHER
WITH ALL OF THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS, BEFORE YOU
DECIDE WHETHER TO PURCHASE SHARES OF OUR COMMON STOCK.
WE HAVE INCURRED OPERATING LOSSES AND CANNOT GUARANTEE THAT WE WILL EVER BE
PROFITABLE
We have incurred operating losses on a quarterly basis since inception. We
had operating losses of $5.6 million and $2.1 million during 1998 and the first
six months of 1999, respectively. In addition, as of June 30, 1999, we had an
accumulated deficit of $24.9 million. In light of our loss history, we cannot
assure you when, if ever, SmartDisk will be able to achieve or sustain
profitability on an annual or quarterly basis in the future.
WE HAVE A LIMITED OPERATING HISTORY ON WHICH TO BASE AN INVESTMENT DECISION
We were incorporated in March 1997, commenced operations in January 1998,
and our predecessor corporation only conducted limited operations. Further,
commercial sales of our primary product, FlashPath, only commenced in mid-1998.
As a result of our limited operating history, we have limited financial data
that can be used in evaluating our business and prospects and in projecting
future operating results.
OUR MANAGEMENT TEAM HAS ONLY RECENTLY BEEN ASSEMBLED AND MAY NOT BE ABLE TO
WORK TOGETHER AS A COHESIVE UNIT
Our Chief Financial Officer, Senior Vice President, Research and
Development, Vice President, Asian Operations, Vice President, Corporate
Development and Legal Affairs, and Vice President, Audio/Video Products all
joined SmartDisk during the last year. There is the possibility that our
management team may not be able to work together as a cohesive unit.
WE WILL NOT BE ABLE TO SELL SUFFICIENT QUANTITIES OF OUR PRODUCTS TO SUSTAIN A
VIABLE BUSINESS IF THE MARKET FOR FLASH MEMORY PRODUCTS DOES NOT DEVELOP OR IF
A COMPETING TECHNOLOGY DISPLACES FLASH MEMORY PRODUCTS
Our current and planned FlashPath products are designed to provide
connectivity between personal computers and digital appliances that use flash
memory cards. The flash memory market is in the early stage of development and
is still evolving. Our current dependence on sales of FlashPath and lack of
product diversification exposes us to a substantial risk of loss in the event
that the flash memory market does not develop or if a competing technology
replaces flash memory cards. If a competing memory storage device replaces or
takes significant market share from the flash memory cards which our products
support, we will not be able to sell our products in quantities sufficient to
grow our business.
WE MAY NOT BE ABLE TO SELL SUFFICIENT QUANTITIES OF OUR PRODUCTS TO SUSTAIN A
VIABLE BUSINESS IF A SINGLE STANDARD FOR FLASH MEMORY CARDS EMERGES
We believe that demand for our flash memory connectivity products is
driven, to a large extent, by the absence of a single standard for flash memory
cards. There are currently four major flash memory cards, none of which has
emerged as the industry standard. Should one of these cards or a new technology
emerge as an industry standard, flash memory card readers could be built in to
PCs, eliminating the need for our current flash memory connectivity products.
A REDUCTION IN THE USE OF THE 3.5 INCH FLOPPY DISK DRIVE BY CONSUMERS WOULD
LEAD TO A REDUCTION IN DEMAND FOR OUR PRODUCTS
Our current products only work in conjunction with the standard 3.5 inch
floppy disk drive. While the 3.5 inch floppy disk drive is today found in most
PCs, a number of newer PC models, such as the
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Apple iMac and the Apple G3 desktop, do not have this device and new industry
standards may emerge that render the 3.5 inch floppy disk drive obsolete.
Advances in input devices such as CD-ROM and removable data storage disk
drives, such as Zip drives, may reduce or eliminate the need for the 3.5 floppy
diskette, which will lead to a corresponding reduction in demand for our
products. We would then have to develop new products that use a different
interface between personal computers and digital appliances. We may not be able
to redesign our products to fit the new interface and demonstrate technological
feasibility of those products on a timely basis, if at all, or in a cost
effective manner.
SINCE OUR PRODUCTS ONLY WORK IN CONJUNCTION WITH THE 3.5 INCH FLOPPY DISK
DRIVE, ADVANCES IN FLASH MEMORY CARDS MAY MAKE OUR PRODUCTS LESS COMPETITIVE
BECAUSE OF THE INCREASED TIME NEEDED TO TRANSFER DATA USING THE 3.5 INCH FLOPPY
DISK DRIVE
Consumer acceptance of our products will depend upon their ability to
quickly transfer information from flash memory cards to PCs. However, the time
needed to transfer information using a 3.5 inch disk drive increases as more
data is transferred. As more memory is condensed on to flash memory cards, the
time necessary to transfer all of the data from a single card will increase. As
technological advances make it possible and feasible to produce higher density
cards, our ability to create products which quickly transfer all of the stored
information on a single card will be constrained by the inherent limitations of
the 3.5 inch disk drive. In that case, our products would be less attractive to
consumers and our sales would decline.
MOST OF OUR REVENUES ARE DERIVED FROM ONLY ONE PRODUCT AND OUR BUSINESS WILL BE
SERIOUSLY HARMED IF DEMAND FOR THAT PRODUCT DECLINES
To date, substantially all of our revenue has been derived from the sale
of our FlashPath product that stores data on and retrieves data from only the
SmartMedia flash memory card. While our long-term strategy is to derive revenue
from multiple products, we anticipate that the sale of FlashPath for SmartMedia
products will continue to represent the most substantial portion of our
revenues through at least 2000. A decline in the price of or demand for
FlashPath products as a result of competition, technological change, the
introduction of new products by us or others, a failure to adequately manage
product transitions, or for other reasons, would seriously harm our business.
For the year ended December 31, 1998 and the six months ended June 30, 1999, we
derived approximately 89.7% and 95.2%, respectively, of our product revenues
from the sale of FlashPath.
WE MUST DEVELOP NEW PRODUCTS AND INTRODUCE THEM IN A TIMELY MANNER IN ORDER TO
REMAIN COMPETITIVE
We operate in an industry that is subject to evolving industry standards,
rapid technological changes, rapid changes in consumer demands and the rapid
introduction of new, higher performance products which shorten product life
cycles. To be competitive in this demanding market, we must both continue to
refine current products so that they remain competitive, and continually
design, develop and introduce, in a timely manner, new data transfer products
that meet the performance and price demands of OEMs and consumers. These
development activities will require the investment of substantial resources
before revenues are derived from product sales. Any significant delay in
releasing new products would adversely affect our reputation, provide a
competitor a first-to-market opportunity or allow a competitor to achieve
greater market share. The growth of our business will depend on the timely
introduction and sale of our FlashPath products for the Sony Memory Stick and
the SanDisk MultiMediaCard. We have not yet demonstrated that we will be able
to develop these products on a timely basis and in a cost-effective manner, or
at all with respect to the MultiMediaCard. Even if we are able to do so, we
cannot guarantee that they will achieve market acceptance. Product development
is inherently risky because it is difficult to foresee developments in
technology, coordinate our technical personnel and strategic relationships, and
identify and eliminate design flaws. If we are unable to develop and sell new
products, we will not be able to continue our
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strategy of maintaining media neutrality, and our target market will be
limited. Further, we may not be able to recoup research and development
expenditures if new products are not widely commercially accepted.
WE MAY NOT BE ABLE TO DEVELOP OR MAINTAIN THE STRATEGIC RELATIONSHIPS NECESSARY
TO PROVIDE US WITH THE INSIGHT WE NEED TO DEVELOP COMMERCIALLY VIABLE PRODUCTS
We may not be able to produce commercially viable products if we are
unable to anticipate market trends and the price, performance and functionality
requirements of flash memory manufacturers. We must continue to collaborate
closely with our customers, flash memory manufacturers and our contract
manufacturers to ensure that critical development projects proceed in a
coordinated manner. This collaboration is also important because our ability to
anticipate trends and plan our product development activities depends to a
significant degree upon our continued access to information derived from the
strategic relationships we currently have with flash memory card manufacturers
and consumer product OEMs. However, collaboration is more difficult because
many of these companies are located overseas. If any of our current
relationships deteriorates or is terminated, or if we are unable to enter into
future alliances that provide us with comparable insight into market trends, we
will be hindered in our ability to produce commercially viable products.
OUR OPERATING RESULTS HAVE FLUCTUATED SIGNIFICANTLY AND MAY FLUCTUATE
SIGNIFICANTLY IN THE FUTURE, WHICH COULD LEAD TO DECREASES IN OUR STOCK PRICE
Our operating results have fluctuated significantly in the past and we
expect that they will continue to fluctuate in the future. If our future
operating results materially fluctuate or are below the expectations of stock
market analysts, our stock price would likely decline. Future fluctuations may
result from a variety of factors including the following:
/bullet/ The timing and amount of orders we receive from our customers,
which may be tied to seasonal demand for the consumer products
manufactured and sold by these OEMs;
/bullet/ Cancellations or delays of customer product orders, or the loss of
a significant customer;
/bullet/ Reductions in consumer demand for our customers' products
generally or for our products in particular;
/bullet/ The timing and amount of research and development expenditures;
/bullet/ The availability of manufacturing capacity necessary to make our
products;
/bullet/ General business conditions in our markets, particularly Japan, as
well as global economic uncertainty;
/bullet/ Any new product introductions, or delays in product introductions,
by us or our competitors;
/bullet/ Increased costs charged by our suppliers or changes in the
delivery of products to us;
/bullet/ Increased competition or reductions in the average selling prices
that we are able to charge;
/bullet/ Fluctuations in the value of foreign currencies, particularly the
Japanese yen, against the U.S. dollar; and
/bullet/ Changes in our product mix as well as possible seasonal demand for
our products.
As a result of these and other factors, we believe that period-to-period
comparisons of our historical results of operations are not a good predictor of
our future performance.
WE MAY FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY AND, THEREFORE,
LOSE OUR COMPETITIVE ADVANTAGE
Our proprietary technology with respect to 3.5 inch floppy disk drive
interfaces is critical to our future growth. We rely in part on patent, trade
secret, trademark and copyright law to protect our
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intellectual property. However, the patents issued to us may not be adequate to
protect our proprietary rights, to deter misappropriation or to prevent an
unauthorized third party from copying our technology, designing around the
patents we own or otherwise obtaining and using our products, designs or other
information. We have, in fact, filed a complaint against one of our former
patent attorneys for improperly copying one of our patent applications and
filing a patent application without our consent naming himself as a
co-inventor. This matter recently was settled with no materially adverse
consequences to SmartDisk. In addition, we may not receive trademark protection
for our "SmartDisk" name. We have filed for trademark registration of the name
"SmartDisk," but this has not yet been granted. We are aware of a trademark
application for the name "SmartDisk" that was filed by another company. Our
application could be denied and we could be prohibited from using the
"SmartDisk" name. In that event, we would be required to incur costs to
establish new name recognition.
We also claim copyright protection for some proprietary software and
documentation. We attempt to protect our trade secrets and other proprietary
information through agreements with our customers, employees and consultants,
and through other security measures. However, despite our efforts to protect
our intellectual property, unauthorized parties may attempt to copy aspects of
our products or obtain and use information and software that we regard as
proprietary. Those parties may have substantially greater financial resources
than us, and we may not have the resources available to challenge their use of
our proprietary technology. If we fail to adequately protect our intellectual
property, it will be easier for our competitors to sell competing products.
WE MAY FACE COMPETITION FROM INTEL IF IT DECIDES TO UTILIZE ITS COMPETING
PATENT
Intel Corporation was issued a patent in 1997 disclosing and claiming
technology substantially similar to that disclosed in one of our key patents.
The Intel patent was filed four years after our effective filing date, and we
do not believe that the Intel patent can be validly applied to any of the
technology disclosed in our patent . However, given the substantial resources
available to Intel, our financial condition could suffer if we engage in a
dispute with Intel. Our business could also be harmed if Intel's patent is
determined to be valid and Intel or any licensee of Intel decides to sue our
customers or develop and commercialize products based on its patent.
INFRINGEMENT CLAIMS BY THIRD PARTIES COULD RESULT IN COSTLY LITIGATION AND
OTHERWISE ADVERSELY IMPACT OUR BUSINESS
From time to time we may receive communications from third parties
asserting that our products infringe, or may infringe, the proprietary rights
of these third parties. These claims of infringement may result in protracted
and costly litigation which could require us to pay substantial damages or have
sales of our products stopped by an injunction. Infringement claims could also
cause product shipment delays, require us to redesign our products or require
us to enter into royalty or licensing agreements, any of which could harm our
business. For example, we received a letter from SanDisk stating that SanDisk
held two patents which might apply to our products. Although we subsequently
obtained a non-exclusive worldwide license for all of SanDisk's intellectual
property rights in connection with multimedia floppy disk interfaces for a
10-year period, if the license terminates or expires, we could face a potential
conflict with SanDisk regarding the scope of those patents. In another
instance, we received communications alleging that our FlashPath products
infringed a third party's patent rights. We also received correspondence
alleging that our SafeBoot product violated another third party's intellectual
property rights. We reviewed the patents and concluded that our products do not
infringe upon either of the third parties' patent rights. While none of these
claims has resulted in litigation, future claims may. In addition, we license a
portion of the intellectual property included in our products from third
parties, which may increase our exposure to infringement actions because we
rely upon those third parties for information about the origin and ownership of
the licensed intellectual property. We may also lose our license rights with
respect to the intellectual property for which infringement is claimed.
Further, if our customers are required to obtain a license on other than
commercially reasonable terms, our business could be jeopardized.
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WE MAY HAVE PARTICULAR DIFFICULTY PROTECTING OUR INTELLECTUAL PROPERTY RIGHTS
OVERSEAS
The laws of some foreign countries do not protect proprietary rights to as
great an extent as do the laws of the United States, and many U.S. companies
have encountered substantial infringement problems in some foreign countries.
Because most of our products are sold and most of our business is conducted
overseas, our exposure to intellectual property risks may be higher.
BECAUSE MOST OF OUR SALES ARE TO A RELATIVELY SMALL NUMBER OF CUSTOMERS,
PRIMARILY ORIGINAL EQUIPMENT MANUFACTURERS, THE LOSS OF ANY OF OUR KEY
CUSTOMERS WOULD SERIOUSLY HARM OUR BUSINESS
Our business will be seriously harmed if we lose any of our significant
customers, particularly Olympus or FujiFilm, or suffer a substantial reduction
in or cancellation of orders from these customers. Our current strategy is
principally based on sales to OEMs, which results and will continue to result
in sales to only a limited number of customers. Our products are sold as
stand-alone products by OEMs and, to a lesser extent, are bundled together and
sold with systems manufactured by third party OEMs. We currently sell to seven
OEMs, sales to which collectively accounted for approximately 81.0% and 76.0%
of our revenues for 1998 and the first six months of 1999, respectively. More
specifically, Olympus and FujiFilm accounted for approximately 32.0% and 38.0%
of our revenues in fiscal 1998 and our top five customers collectively
accounted for approximately 92.8% of our revenues during that period. In the
six months ended June 30, 1999, Olympus and FujiFilm accounted for
approximately 36.0% and 29.0% of our revenues and our top five customers
collectively accounted for approximately 86.0% of our revenues during that
period. Furthermore, we expect to continue to depend on sales of our products
to relatively few customers, which will continue to account for a significant
portion of our net revenues, for the foreseeable future.
OUR CUSTOMERS COULD STOP PURCHASING OUR PRODUCTS AT ANY TIME BECAUSE WE DO NOT
HAVE LONG-TERM PURCHASE CONTRACTS WITH THEM
No OEM or other customer is contractually obligated to purchase products
from us. As a result, our customers are free to cancel their orders or stop
ordering our products at any time. In addition, even if we are able to
demonstrate that our products are superior, OEMs may still choose not to bundle
our products with theirs or market and distribute our products on a stand-alone
basis. OEMs may also change their business strategies and manufacturing
practices, which could cause them to purchase fewer of our products, find other
sources for products we currently manufacture or manufacture these products
internally.
OUR ABILITY TO SELL OUR PRODUCTS WILL BE LIMITED IF THE OEMS' PRODUCTS DO NOT
ACHIEVE MARKET ACCEPTANCE OR IF THE OEMS DO NOT ADEQUATELY PROMOTE OUR PRODUCTS
We depend upon our OEM customers to market our products and we do not have
significant experience and resources devoted to independent marketing efforts.
Failure of the OEMs' products to achieve market acceptance, the failure of the
OEMs to bundle our products with theirs, or any other event causing a decline
in our sales to the OEMs could seriously harm our business. Even if consumers
buy OEMs' products, their ultimate decision to buy our products depends on OEM
packaging, distribution and sales efforts, which may not be sufficient to
maintain or increase sales of our products. If we cannot achieve or maintain a
sufficient consumer acceptance rate of our products concurrent with their
purchases of OEM products, our future sales to OEM customers will be adversely
affected.
A NEW OR COMPETING DATA TRANSFER SOLUTION THAT ACHIEVES SIGNIFICANT MARKET
SHARE OR RECEIVES SIGNIFICANT SUPPORT FROM FLASH CARD MANUFACTURERS WOULD
JEOPARDIZE OUR BUSINESS
Our products currently compete with a number of cable and non-cable
interfaces between personal computers and digital appliances, including ports,
USBs, PCMCIA slots and infrared interfaces, all of which are PC peripheral
interfaces. It is possible that one of these competing data
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transfer solutions, or another existing or new technology, could achieve a
significant market presence or become supported by a number of significant
flash memory card or digital appliance manufacturers. Regardless of the
relative benefits of our products, if a competing product gains significant
market share or significant support of flash card manufacturers, this product
would likely emerge as the industry standard and thereby achieve a dominant
market position that would jeopardize our survival.
SINCE WE SELL OUR PRODUCTS TO A LIMITED NUMBER OF LARGE CUSTOMERS, WE EXPECT
THOSE CUSTOMERS TO PRESSURE US TO MAKE PRICE CONCESSIONS, WHICH WOULD REDUCE
OUR FUTURE GROSS MARGINS
Our reliance on sales to a limited number of large customers exposes us to
pressure for price concessions. Because of this reliance and because of our
dependence on OEMs as our primary distribution channel, we expect that our OEM
customers may seek price concessions from us, which would reduce our average
selling prices and our gross margins. Since we do not manufacture our own
products, we may be unable to reduce our manufacturing costs in response to
declining average per unit selling prices.
WE EXPECT TO CONTINUE OUTSOURCING KEY OPERATIONAL FUNCTIONS AND OUR ABILITY TO
DO SO WILL BE IMPAIRED IF WE ARE UNABLE TO MAINTAIN OUR STRATEGIC RELATIONSHIPS
We have formed strategic relationships with a number of significant
industry participants, including FujiFilm, Hitachi, Olympus, Rohm, SanDisk,
Sony, Toshiba, Visa and Yamaichi. We depend upon these corporations to provide
technical assistance and perform key manufacturing, marketing, distribution and
other functions. For example, Yamaichi is currently one of two manufacturers of
our FlashPath products, Toshiba provides technological assistance in the
development of our products, and Olympus and FujiFilm market our products. We
expect that these and similar types of relationships will be critical to our
growth because our business model calls for the continued outsourcing of many
key operational functions and we do not currently have the resources to perform
these functions ourselves.
WE MUST OVERCOME GEOGRAPHIC AND CULTURAL DIFFERENCES IN ORDER TO MAINTAIN OUR
STRATEGIC RELATIONSHIPS
There are inherent difficulties in developing and maintaining
relationships with foreign entities. Language and cultural differences often
impair relationships, and geographical distance, at times, is also an
impediment. We must overcome these difficulties. If any of our current
relationships is impaired, or if we are unable to develop additional strategic
relationships in the future, our product development costs would significantly
increase and our business would be materially and adversely affected.
OUR SALES AND EXPENSES ARE GEOGRAPHICALLY CONCENTRATED IN JAPAN, AND,
THEREFORE, WE COULD SUFFER FROM EXCHANGE RATE FLUCTUATIONS AND ECONOMIC AND
POLITICAL DIFFICULTIES
Approximately 84.0% of our revenues for 1998 were attributable to sales to
Japanese customers, and we expect that sales to Japanese customers will
continue to account for a significant portion of our total revenues for the
foreseeable future. All of our Japanese sales, as well as the related expenses,
are denominated in yen. Fluctuations in exchange rates between the yen and the
U.S. dollar, particularly with respect to Japanese transactions denominated in
a currency other than the yen, could adversely impact our financial results.
Some transactions and accounts of our Japanese subsidiary are U.S. dollar
denominated. Since the Japanese subsidiary's accounting records are kept in
yen, those U.S. dollar denominated transactions are accounted for in yen at the
time of the transaction. U.S. dollar denominated accounts are remeasured at the
end of the accounting period. This remeasurement results in adjustments to
income. In addition, the balance sheet accounts of our Japanese subsidiary are
translated to the U.S. dollar for financial reporting purposes and resulting
adjustments are made to stockholders equity. The value of the yen may
deteriorate against the dollar, which would impair the value of stockholders'
investment in us. Deterioration of the yen against the dollar has occurred in
recent years, resulting in a foreign currency loss of approximately $48,000 and
a foreign currency
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translation loss adjustment to equity of approximately $290,000 for 1998.
Further, we do not currently hedge against foreign currency exposure. In the
future, we could be required to denominate our product sales in other
currencies, which would make the management of currency fluctuations more
difficult and expose us to greater currency risks.
We are also subject to risks associated with a significant amount of sales
being made to one geographical area. An economic downturn in Asia generally,
and Japan in particular, could lead to a reduced demand for our products. In
recent years, Japan has been subject to political and economic instability and,
while that instability has not yet adversely impacted us, if it continues,
sales of our products in Japan may be adversely affected.
Given our dependence on sales to Japanese customers, we must develop and
maintain alliances in Japan to help with the promotion and distribution of our
products. We may not be able to develop or maintain these alliances.
OUR FOREIGN OEM CUSTOMERS MAY CHOOSE TO WORK WITH A LOCAL COMPETITOR, WHICH
WOULD ADVERSELY IMPACT OUR SALES
Our OEM customers, most of which are based in Japan and to whom most of
our sales are made, may choose to work with, and purchase products from, a
local competitor if one were able to provide a substitute product. This may
occur because of geographic distance, time differences, or for other reasons.
In that event, we may not be able to find other OEM customers and our sales
could decline.
WE DEPEND ON A LIMITED NUMBER OF CONTRACT AND OFFSHORE MANUFACTURERS, AND IT
MAY BE DIFFICULT TO FIND REPLACEMENT MANUFACTURERS IF OUR EXISTING
RELATIONSHIPS ARE IMPAIRED
We contract with offshore manufacturers to produce our products and our
dependence on a limited number of contract manufacturers exposes us to a
variety of risks, including shortages of manufacturing capacity, reduced
control over delivery schedules, quality assurance, production yield and costs.
Yamaichi and Mitsumi are the sole manufacturers of our FlashPath products. We
do not have contracts with either Yamaichi or Mitsumi. If Yamaichi or Mitsumi
terminates production or cannot meet our production requirements, we may have
to rely on other contract manufacturing sources or identify and qualify new
contract manufacturers. The lead time required to qualify a new manufacturer
could range from approximately three to six months. Despite efforts to do so,
we may not be able to identify or qualify new contract manufacturers in a
timely manner and these new manufacturers may not allocate sufficient capacity
to us in order to meet our requirements. Any significant delay in our ability
to obtain adequate quantities of our products from our current or alternative
contract manufacturers would cause our sales to decline.
TOSHIBA INTRODUCED US TO ONE OF OUR MANUFACTURERS AND WE MAY NOT BE ABLE TO
RETAIN THE SERVICES OF THE MANUFACTURER IF OUR RELATIONSHIP WITH TOSHIBA IS
IMPAIRED
Yamaichi, one of the manufacturers of our FlashPath products, was
introduced to us by Toshiba, which is one of our major stockholders. If our
relationship with Toshiba is impaired, we may not be able to retain the
services of Yamaichi in manufacturing our products.
OUR DEPENDENCE ON FOREIGN MANUFACTURING AND INTERNATIONAL SALES EXPOSES US TO
DIFFICULTIES OFTEN NOT ENCOUNTERED BY EXCLUSIVELY DOMESTIC COMPANIES
Our products are manufactured overseas and a substantial portion of our
revenues are derived from overseas sales. Approximately 90.0% and 87.0% of our
revenues in 1998 and the first six months of 1999, respectively, were derived
from customers located outside the United States, primarily in Japan. Our
dependence on foreign manufacturers and international sales poses a number of
risks, including:
/bullet/ difficulties in monitoring production;
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/bullet/ transportation delays and interruptions;
/bullet/ unexpected changes in regulatory requirements;
/bullet/ currency exchange risks;
/bullet/ tariffs and other trade barriers, including import and export
restrictions;
/bullet/ difficulties in staffing and managing disparate branch operations;
/bullet/ political or economic instability;
/bullet/ compliance with foreign laws;
/bullet/ difficulties in protecting intellectual property rights in foreign
countries;
/bullet/ exchange controls; and
/bullet/ potential adverse tax consequences, including with respect to
repatriation of earnings.
We intend to continue manufacturing our products overseas and we
anticipate that international sales will continue to account for a significant
portion of our revenues. Therefore, we expect to be subject to the risks
outlined above for the foreseeable future.
WE HAVE A LIMITED NUMBER OF SUPPLIERS OF KEY COMPONENTS AND OUR ABILITY TO
OBTAIN FINISHED PRODUCTS WILL BE IMPAIRED IF WE ARE UNABLE TO OBTAIN SUFFICIENT
QUANTITIES OF COMPONENTS
Rohm is our sole provider of application specific integrated circuits, or
ASICs, for our FlashPath products and we purchase ASICs for Smarty from Rohm
and Atmel. In our products, the specific function of these integrated circuits
is the conversion of digital and analog data. Our dependence on a limited
number of suppliers and our lack of long-term supply contracts exposes us to
several risks, including a potential inability to obtain an adequate supply of
components, price increases, late deliveries and poor component quality.
Disruption or termination of the supply of components could delay shipments of
our products. The lead time required for orders of some of our components is as
much as six months. In addition, the lead time required to qualify new
suppliers for our components is as much as 12 months. If we are unable to
accurately predict our component needs, or if our component supply is
disrupted, we may miss market opportunities by not being able to meet the
demand for our products. This may damage our relationships with current and
prospective customers.
OUR CURRENT AND POTENTIAL COMPETITORS HAVE SIGNIFICANTLY GREATER RESOURCES THAN
WE DO, AND INCREASED COMPETITION COULD HARM SALES OF OUR PRODUCTS
Increased competition is likely to result in price reductions, reduced
operating margins and loss of market share. Many of our current and potential
competitors have significantly greater financial, technical, marketing,
purchasing and other resources than we do. As a result, our competitors may be
able to respond more quickly to new or emerging technologies or standards and
to changes in customer requirements. Our competitors may also be able to devote
greater resources to the development, promotion and sale of products, and may
be able to deliver competitive products at a lower end-user price. Current and
potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products to address the needs of our prospective customers. Therefore, it
is possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share.
OUR BUSINESS MAY SUFFER IF WE ARE UNABLE TO MANAGE OUR GROWTH
Failure to effectively manage our growth could impair our ability to
execute our business strategy. Our business has grown substantially in recent
periods, with revenues increasing from approximately $4.0 million in the first
six months of 1998 to approximately $14.0 million in the first six months of
1999. The growth of our business has placed a strain on our management,
operations and financial
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systems. In addition, the number of employees has increased from 16 at January
1, 1998 to 49 as of August 31, 1999. We expect to continue to increase the
number of employees as our business grows, and may expand operations to
locations other than those in which we currently operate.
Continued growth is likely to place a greater burden on our operating and
financial systems as well as our senior management and other personnel.
Existing and new members of management may not be able to improve existing
systems and controls or implement new systems and controls in response to
anticipated growth. Management of our operations in diverse locations may also
complicate the task of managing our growth.
OUR GROWTH PROSPECTS WILL BE REDUCED IF THE SMART CARD MARKET DOES NOT DEVELOP
SmartDisk's future growth and operating results will depend, in part, on
whether our Smarty family of smart card readers achieves significant sales. A
smart card reader retrieves information from a card that uses a microprocessor
or memory chip for security and data storage purposes. The current primary use
for Smarty is as a smart card token-based security application designed to
provide protection from unauthorized access to digital information. However,
the market for network and electronic commerce security applications is still
emerging and the smart card may not become the industry standard for these
applications. Similarly, the market for other smart card applications may not
develop, or may develop more slowly than we expect. If the market for the
Smarty family of products fails to develop or develops more slowly than
expected, or if any of the standards supported by us do not achieve or sustain
market acceptance, our growth prospects would be reduced.
WE HAVE INDEMNIFICATION OBLIGATIONS RELATED TO OUR INTELLECTUAL PROPERTY, WHICH
MAY REQUIRE US TO PAY DAMAGES
Our arrangements with SanDisk, Sony and Toshiba require us to indemnify
them for any damages they may suffer if a third party claims that we are
violating their intellectual property rights. While, to date, we have not
received indemnification claims, there may be future claims. Any
indemnification claim may require us to pay substantial damages, which could
negatively impact our financial condition.
OUR PRODUCTS MAY BE RETURNED TO US BY OUR CUSTOMERS IF PROJECTED CONSUMER
DEMAND DOES NOT MATERIALIZE, WHICH WOULD LEAD TO A REDUCTION IN OUR REVENUES
Lack of consumer demand for our products may result in efforts by OEMs to
return products to us. While we are not contractually obligated to accept
returned products, we may determine that it is in our best interest to accept
returns in order to maintain good relations with our customers. Product returns
would reduce our revenues. While we have experienced very limited product
returns to date, returns may increase in the future.
WE COULD BE HELD LIABLE FOR PRODUCT DEFECTS, WHICH COULD REQUIRE US TO PAY
SUBSTANTIAL DAMAGES AND HARM OUR REPUTATION WITH OUR CUSTOMERS
Complex products such as ours frequently contain errors, defects and bugs
when first introduced or as new versions are released. Delivery of products
with production defects or reliability, quality or compatibility problems could
hinder market acceptance of our products, which could damage our reputation and
harm our ability to attract and retain customers. Errors, defects or bugs could
also cause interruption, delays or a cessation of sales to our customers, and
could subject us to warranty claims from our customers. We would have to expend
significant capital and resources to remedy these problems. Errors, defects or
bugs could be discovered in our new products after we begin commercial
production of them, despite testing by us and our suppliers and customers. This
could result in additional development costs, loss of, or delays in, market
acceptance, diversion of technical and other resources from our other
development efforts, claims by our customers or others against us or the loss
of credibility with our current and prospective customers.
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OUR EXECUTIVE OFFICERS AND KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS, AND
THESE OFFICERS AND PERSONNEL MAY NOT REMAIN WITH US IN THE FUTURE
We depend upon the continuing contributions of our key management, sales
and product development personnel. The loss of any of those personnel could
seriously harm us. Although some of our officers are subject to employment
agreements, we cannot be sure that we will retain their services. In addition,
we have not obtained key-person life insurance on any of our executive officers
or key employees.
OUR LOCATION IN NAPLES, FLORIDA MAKES IT MORE DIFFICULT TO HIRE QUALIFIED
TECHNICAL PERSONNEL
Our technology is specialized and complex, requiring us to recruit and
train qualified technical personnel. However, there are many employers
competing to hire qualified technical personnel and we may have difficulty
attracting and retaining qualified technical personnel. Our recruiting efforts
are further hindered by the lack of a readily available pool of candidates in
Naples, Florida, where we are headquartered. The inability to attract and
retain qualified personnel could make it more difficult to develop our products
and execute our business strategy.
WE ARE CONTROLLED BY A PRINCIPAL STOCKHOLDER WHO MAY PREVENT OR DELAY A CHANGE
OF CONTROL AND WHOSE INTERESTS MAY BE DIFFERENT FROM THOSE OF OUR OTHER
STOCKHOLDERS
Addison Fischer, the Chairman of our board of directors, will beneficially
own approximately 51.3% of SmartDisk after the offering. Accordingly, Mr.
Fischer will be able to control SmartDisk, subject to his fiduciary duty as a
director under Delaware law. The interests of Mr. Fischer may not always
coincide with our interests or the interests of other stockholders, and he
could cause us to enter into transactions or agreements which we would not
otherwise consider absent his influence.
The purchasers of common stock in this offering will not have sufficient
voting power to elect any members of our board of directors. As a result, Mr.
Fischer will be able to exercise control over all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions, which could have the effect of delaying or preventing a
change of control of SmartDisk.
OUR BUSINESS COULD BE AFFECTED BY YEAR 2000 ISSUES
The "Year 2000 Issue" refers generally to the problems that some software
may have in determining the correct century of the year. Many existing
electronic systems, including computer systems, use only the last two digits to
refer to a year. Therefore, these systems may recognize a date using "00" as
1900 rather than the year 2000. If not corrected, these electronic systems
could fail or create erroneous results when addressing dates on and after
January 1, 2000. The Year 2000 Issue could adversely impact our business. For a
more complete discussion, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000 Issues."
WE HAVE ANTITAKEOVER DEFENSES THAT COULD DELAY OR PREVENT AN ACQUISITION OF OUR
COMPANY
Some provisions of our certificate of incorporation and bylaws and the
provisions of Delaware law could have the effect of delaying, deferring or
preventing an acquisition of SmartDisk. For example, we have a staggered board
of directors, the members of which may only be removed for cause, authorized
but unissued shares of preferred stock which could be used to fend off a
takeover attempt, our stockholders may not take actions by written consent and
our stockholders are limited in their ability to make proposals at stockholder
meetings.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL WHICH MIGHT NOT BE AVAILABLE OR WHICH,
IF AVAILABLE, MIGHT ONLY BE AVAILABLE ON TERMS ADVERSE TO PERSONS BUYING SHARES
IN THIS OFFERING
We expect the net proceeds from this offering, our current cash and cash
equivalents and cash from commercial borrowing availability under credit
facilities will meet our working capital and capital
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expenditure needs for at least one year. After that, we may need to raise
additional funds, and we cannot be certain that we will be able to obtain
additional financing on favorable terms, if at all. We may also require
additional capital for the acquisition of businesses, products and technologies
that are complementary to ours. Further, if we issue equity securities, the
ownership percentage of our stockholders would be reduced, and the new equity
securities may have rights, preferences or privileges senior to those of
existing holders of our common stock. If we cannot raise needed funds on
acceptable terms, we may not be able to develop or enhance our products, take
advantage of future opportunities or respond to competitive pressures or
unanticipated requirements, which could seriously harm our business, operating
results and financial condition.
OUR STOCK MAY BE THINLY TRADED OR VOLATILE, WHICH MIGHT MAKE IT HARD FOR
INVESTORS TO SELL THEIR SHARES AT A PREDICTABLE PRICE, OR AT ALL
Prior to this offering, you could not buy or sell our common stock on a
public market. An active public market for our common stock may not develop or
be sustained after this offering. We negotiated and determined the initial
public offering price with the representatives of the underwriters based upon
several factors, and this price will likely vary from the market price after
this offering. The market price of our common stock will likely fluctuate
significantly in response to the following factors, some of which are beyond
our control:
/bullet/ Variations in our quarterly operating results;
/bullet/ Changes in financial estimates of our revenues and operating
results by securities analysts;
/bullet/ Announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
/bullet/ Loss of or decrease in sales to a major customer or failure to
complete significant transactions;
/bullet/ Additions or departures of key personnel;
/bullet/ Future sales of our common stock, including sales which dilute
existing investors;
/bullet/ Stock market price and volume fluctuations attributable to
inconsistent trading volume levels of our stock;
/bullet/ General stock market conditions;
/bullet/ Commencement of or involvement in litigation; and
/bullet/ Announcements by us or our competitors of key innovations or
product introductions.
WE COULD BE SUBJECT TO CLASS ACTION LITIGATION DUE TO STOCK PRICE VOLATILITY,
WHICH, IF IT OCCURS, WILL DISTRACT MANAGEMENT, RESULT IN SUBSTANTIAL COSTS AND
HARM OUR BUSINESS
In the past, securities class action litigation has often been brought
against companies following periods of volatility in the market price of their
securities. We may be the target of similar litigation in the future.
Securities litigation could result in substantial costs and divert management's
attention and resources, which could cause serious harm to our business.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE
After this offering, we will have approximately 15.5 million shares of
common stock outstanding. Of these shares, the 3.0 million sold in this
offering will be freely tradable without restriction under the Securities Act
except for any shares held by "affiliates" of SmartDisk as that term is defined
in Rule 144 of the Securities Act. As of August 31, 1999, approximately 12.5
million shares of common stock held by existing stockholders were "restricted
shares" as that term is defined in Rule 144, and these shares will be available
for sale in the public market commencing 180 days after the date of this
prospectus, or earlier if the underwriters release their lock-up restrictions.
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As of August 31, 1999, there were options to purchase 1,039,750 shares of
our common stock outstanding. Should the holders of these options exercise
their options, there will be additional shares eligible for sale 180 days after
the date of this prospectus.
Three of our principal stockholders have the right to require us to file a
registration statement to enable them to sell their shares. These and one other
stockholder also have the right to require us to include their shares in
subsequently filed registration statements.
If our stockholders sell substantial amounts of the common stock,
including shares issued upon the exercise of outstanding options, in the public
market, the market price of our common stock could fall. For more detailed
information regarding future sales of our common stock, please see "Shares
Eligible for Future Sale" and "Underwriting."
OUR CURRENT STOCKHOLDERS WILL BENEFIT FROM THIS OFFERING, AND YOU WILL
EXPERIENCE IMMEDIATE DILUTION
The initial public offering price is expected to be substantially higher
than the current book value per share of our outstanding common stock.
Stockholders existing as of June 30, 1999 have paid an average of $2.36 per
share for their common stock, which is considerably less than the amount to be
paid for the common stock in this offering. As a result, investors purchasing
common stock in this offering will incur immediate and substantial dilution. In
addition, we have issued options to acquire common stock at prices
significantly below the initial public offering price. To the extent those
outstanding options are ultimately exercised, there will be further dilution to
investors in this offering.
WE HAVE BROAD DISCRETION TO USE THE OFFERING PROCEEDS AND HOW WE INVEST THESE
PROCEEDS MAY NOT YIELD A FAVORABLE RETURN
The principal purposes of this offering are to increase our equity
capital, to create a public market for our shares, to facilitate our future
access to public equity markets and to provide increased visibility and
credibility for us in a marketplace in which many of our current and potential
competitors are or are expected to be publicly held companies. As of the date
of this prospectus, we have no definite plans to use the net proceeds from the
offering other than for general corporate purposes, including possible
acquisitions, although none is as yet imminent, and plan to invest the net
proceeds in short-term, investment-grade, interest-bearing securities.
Accordingly, our management will retain broad discretion to allocate a
substantial portion of the net proceeds from this offering to uses that the
stockholders may not deem as desirable. Our use of the net proceeds may not
yield a significant return.
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CORPORATE HISTORY AND DEVELOPMENT
SmartDisk Security Corporation, or SDSC, our predecessor, was incorporated
in May 1993. At the time of incorporation, SDSC was 100% beneficially owned by
Addison Fischer, the Chairman of SmartDisk's board of directors and SmartDisk's
principal stockholder. Upon formation, SDSC entered into a manufacturing
license agreement with SmartDiskette Limited, or SDL, the indirect owner of
SmartDisk's key patents, which was also controlled by Mr. Fischer. Under this
agreement, SDL granted SDSC a license to manufacture, distribute and sell
diskettes or diskette connectors relating to the fields of data and computer
security, validation, and access control.
From 1993 to 1995, SDSC exploited the licensed technology on its own
behalf. However, in 1996 it entered into an operating agreement with Fischer
International Systems Corporation, a data security company also controlled by
Mr. Fischer, to provide operating services to enhance, manufacture and sell
products using this technology. Under this arrangement, SDSC developed
SafeBoot, a software product for computer and network security, as well as
SmartDisk's initial Smarty and FlashPath products.
On March 5, 1997 SmartDisk Corporation was incorporated. Its initial name
was "Fintos, Inc." which was changed to "SmartDisk Corporation" in September
1997.
In January 1998, SmartDisk entered into an operating agreement with SDSC
and Fischer International and commenced operations. Under this operating
agreement, SmartDisk and Fischer International agreed to provide operating
services to SDSC and to market and develop SafeBoot, Smarty and FlashPath on
behalf of SDSC.
In February 1998, Phoenix House Investments, L.L.C., an investment company
controlled by Mr. Fischer, Fischer International and Toshiba entered into a
joint venture agreement which detailed a plan of capital contribution,
corporate governance and business strategies for SmartDisk. Although SmartDisk
commenced operations in January 1998, it was under this strategic arrangement
that SmartDisk received its first significant capital contributions and became
the successor-in-interest to SDSC.
In May 1998, Mr. Fischer contributed his shares of SDSC to Phoenix House
in exchange for limited liability company units. Phoenix House was, for a short
time, the sole owner of SDSC.
Before the significant capital contributions discussed below, all
outstanding shares of SmartDisk were owned by employees of, or consultants to,
SmartDisk, as a result of the exercise of stock options. None of SmartDisk's
current directors, executive officers or significant shareholders owned any
shares before the purchases described below.
The joint venture arrangement became effective in May 1998, with the
following results:
/bullet/ Toshiba purchased 2,487,500 shares of SmartDisk common stock,
representing approximately 23.3% of SmartDisk's common stock
immediately after the purchase, in exchange for approximately $10.0
million, consisting of a cash payment of approximately $5.0 million
and the cancellation of a $5.0 million note which evidenced a prior
loan made by Toshiba to SmartDisk.
/bullet/ Phoenix House purchased 7,350,000 shares of SmartDisk common
stock, representing approximately 68.8% of SmartDisk's common stock
immediately after the purchase, in exchange for all of the
outstanding shares of SDSC.
/bullet/ Fischer International purchased 150,000 shares of SmartDisk common
stock, representing approximately 1.4% of SmartDisk's common stock
immediately after the purchase, in exchange for trademarks it owned
relating to SafeBoot, FlashPath and Smarty.
/bullet/ SDSC became a wholly owned subsidiary of SmartDisk.
16
<PAGE>
/bullet/ Fischer International, Toshiba, and Phoenix House became
SmartDisk's major shareholders.
In June 1998, SDSC was merged into SmartDisk and the separate corporate
existence of SDSC ended.
In May 1999, Phoenix House and the other shareholders of SDL exchanged all
of their SDL shares for 515,500 shares of SmartDisk common stock. As a result
of the exchange, SDL became a wholly owned subsidiary of SmartDisk.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
All statements, trend analyses and other information contained in this
prospectus regarding markets for our products and trends in net revenues, gross
margin and anticipated expense levels, and any statement that contains the
words "anticipate," "believe," "plan," "estimate," "expect," "should," "intend"
and other similar expressions, constitute forward-looking statements. These
forward-looking statements are subject to business and economic risks,
including those risks identified in "Risk Factors" and elsewhere in this
prospectus and our actual results of operations may differ significantly from
those contained in the forward-looking statements because of those risks. The
cautionary statements made in this prospectus apply to all forward-looking
statements wherever they appear in this prospectus.
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 3,000,000 shares of
common stock that we are offering will be approximately $29.4 million at an
assumed initial public offering price of $11.00 per share, after deducting
estimated offering expenses of approximately $1.3 million and underwriting
discounts and commissions payable by SmartDisk. We are conducting this offering
primarily to increase our working capital, increase our visibility in the
marketplace, create a public market for our common stock, and enable us to
access public equity markets in the future. We expect to use a portion of the
net proceeds to facilitate execution of our business plan, including for sales
and marketing activities, product development and support and capital
expenditures. We currently project that over the next 12 months we will spend a
minimum of $6.1 million for research and development, including $2.0 million
for our Atlanta audio/video products development center, as well as $3.3
million for sales and marketing and $3.0 million for capital expenditures. The
capital expenditures are expected to fund improvements in the technical
infrastructure, purchases of production equipment, including tools and dies for
the products we are developing, improvements in our operational and financial
information systems, and office space expansion. We also expect to use
approximately $700,000 of the net proceeds to pay the estimated tax liability
related to the transfer of the ownership of our principal patents from our
German subsidiary to a new subsidiary that we intend to establish in the Cayman
Islands. The amount of net proceeds that we actually spend for these purposes
will depend significantly on a number of factors, including our future revenues
and our ability to generate cash from operations. We have not yet determined
the amount of net proceeds to be used for any specific purpose. Therefore,
management will have significant flexibility in applying the net proceeds of
this offering.
We may also use a portion of the net proceeds to acquire or invest in
complementary businesses, products or technologies or to obtain the right to
use complementary technologies. We have no agreements or commitments with
respect to any acquisition or investment, and are not involved in any
negotiations with respect to any transaction.
Pending use of the net proceeds for the above purposes, we intend to
invest the net proceeds of this offering in short-term, interest bearing,
investment grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock or
other securities and do not anticipate paying cash dividends in the foreseeable
future.
17
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999:
/bullet/ On an actual basis; and
/bullet/ On an as adjusted basis to reflect the sale of the 3,000,000
shares of common stock offered by this prospectus, assuming an
initial public offering price of $11.00 per share, the conversion
of the redeemable common stock, which will occur if a public
offering is completed, and the application of the net proceeds we
will receive from the offering in the manner described in "Use of
Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 1999
-----------------------------------
ACTUAL AS ADJUSTED
---------------- ----------------
<S> <C> <C>
Cash and cash equivalents .......................................... $ 1,335,145 $ 30,735,145
============= =============
Redeemable common stock: 2,487,500 shares issued and outstanding,
actual, and none issued and outstanding, as adjusted ............. $ 9,991,918 $ --
------------- -------------
Stockholders' (deficit) equity:
Common Stock, $0.001 par value; 60,000,000 shares authorized;
9,716,988 shares issued and 9,636,011 shares outstanding, actual;
and 15,204,488 shares issued and 15,123,511 shares outstanding,
as adjusted ..................................................... 9,717 15,204
Capital in excess of par value .................................... 18,716,040 58,102,471
Treasury stock .................................................... (58,304) (58,304)
Accumulated other comprehensive income ............................ 473,517 473,517
Notes receivable from officers/employees .......................... (417,334) (417,334)
Accumulated deficit ............................................... (24,856,659) (24,856,659)
------------- -------------
Total stockholders' equity (deficit) ............................. (6,133,023) 33,258,895
------------- -------------
Total capitalization ............................................ $ 3,858,895 $ 33,258,895
============= =============
</TABLE>
The table does not reflect the issuance of 400,000 shares of common stock
in July 1999.
The outstanding share information excludes the following:
/bullet/ 905,250 shares of common stock issuable on exercise of outstanding
options as of June 30, 1999 with a weighted average exercise price
of $6.36 per share;
/bullet/ 132,534 shares of common stock reserved for grant and issuance
under our stock option plans as of June 30, 1999; and
/bullet/ 80,977 shares of common stock held in treasury as of June 30,
1999.
This table should be read together with the sections entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Use of Proceeds" and "Management--
Employee Benefit Plans" and the financial statements and the notes included
elsewhere in this prospectus.
18
<PAGE>
DILUTION
Our net tangible book value as of June 30, 1999 was approximately $3.1
million, or approximately $0.25 per share. Net tangible book value per share
represents the amount of our total tangible assets less total liabilities,
divided by the total number of shares of our common stock outstanding. Net
tangible book value excludes the $3.2 million of proceeds we realized upon the
sale of our common stock in July 1999, net of expenses.
Net tangible book value dilution per share to new investors represents the
difference between the amount per share paid by purchasers of shares of common
stock in this offering and the net tangible book value per share of common
stock immediately after completion of this offering. After giving effect to our
sale of 3.0 million shares of common stock in this offering at an assumed
initial offering price of $11.00 per share and after deducting the estimated
underwriting discounts and commissions and estimated offering expenses and the
application of the estimated net proceeds, our net tangible book value as of
June 30, 1999 would have been $32.5 million or $2.15 per share. This represents
an immediate increase in net tangible book value of $1.90 per share to existing
stockholders and an immediate dilution of $8.85 per share to purchasers of
common stock in the offering, as illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share ............................. $ 11.00
Net tangible book value per share as of June 30, 1999 ...................... $ 0.25
Increase in net tangible book value per share attributable to new investors 1.90
------
Net tangible book value per share after the offering ........................ 2.15
--------
Dilution per share to new investors ......................................... $ 8.85
========
</TABLE>
The following table summarizes, as of June 30, 1999, the differences
between existing stockholders and the new investors with respect to the number
of shares of common stock purchased from SmartDisk, the total consideration
paid and the average price per share paid, before deducting the underwriting
discounts and commissions and estimated offering expenses payable by SmartDisk.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------ -------------------------
NUMBER PERCENT AMOUNT PERCENT
------------ --------- -------------- --------
<S> <C> <C> <C> <C>
Existing stockholders ......... 12,123,511 80% $28,659,371 46%
New stockholders .............. 3,000,000 20 33,000,000 54
---------- -- ----------- --
Totals ...................... 15,123,511 100% $61,659,371 100%
========== === =========== ===
</TABLE>
The foregoing discussion and tables assume no exercise of any stock
options outstanding as of June 30, 1999. As of June 30, 1999, there were
options outstanding to purchase a total of 905,250 shares of common stock with
a weighted average exercise price of $6.36 per share. To the extent the options
are exercised, there will be an additional dilution to new investors. See
"Management--Employee Benefit Plans," "Description of Capital Stock," and note 8
of notes to financial statements.
19
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected financial data of SmartDisk as of and for each of the three
years in the period ended December 31, 1998, and as of and for the six months
ended June 30, 1999, have been derived from SmartDisk's audited consolidated
financial statements included in this prospectus. The selected financial data
of SmartDisk as of and for each of the two years in the period ended December
31, 1995, have been derived from unaudited consolidated financial statements
not included in this prospectus. The selected financial data of SmartDisk as of
and for the six months ended June 30, 1998, have been derived from unaudited
consolidated financial statements included in this prospectus and contain all
adjustments, consisting only of normal recurring accruals, which SmartDisk
believes are necessary for a fair statement of SmartDisk's financial position
and results of operations for that period. The financial information for the
six months ended June 30, 1999 may not be indicative of the results that may be
expected for the entire fiscal year ending December 31, 1999. The following
selected financial data should be read together with the "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and notes beginning on page F-1 of this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1994 1995 1996 1997 1998
------------- ------------- ------------ ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Product sales .......................... $ 102 $ 316 $ 500 $ 893 $ 15,038
Royalties .............................. -- -- -- -- 285
-------- -------- --------- -------- --------
Total revenues .......................... 102 316 500 893 15,323
Cost of revenues ........................ 68 486 367 301 12,600
-------- -------- --------- -------- --------
Gross profit (loss) ..................... 34 (170) 133 592 2,723
Operating expenses:
Research and development ............... 499 331 720 1,412 1,608
Sales and marketing .................... 47 48 6 12 2,547
General and administrative ............. 546 1,728 3,418 3,184 4,149
Impairment loss ........................ -- -- 7,807 -- --
-------- -------- --------- -------- --------
Total operating expenses ................ 1,092 2,107 11,951 4,608 8,304
-------- -------- --------- -------- --------
Operating loss .......................... (1,058) (2,277) (11,818) (4,016) (5,581)
Gain (loss) on foreign exchange ......... -- -- -- -- (48)
Interest and other income ............... -- 38 -- 8 76
Interest expense ........................ -- -- -- (1) (52)
-------- -------- --------- --------- --------
Net loss before income taxes ............ (1,058) (2,239) (11,818) (4,009) (5,605)
Income tax expense (benefit) ............ -- -- (2,348) (45) (102)
-------- -------- --------- -------- --------
Net loss ................................ $ (1,058) $ (2,239) $ (9,470) $ (3,964) $ (5,503)
======== ======== ========= ======== ========
Net loss per share(1) ................... $ (0.14) $ (0.30) $ (1.25) $ (0.51) $ (0.68)
Shares used in computing net loss
per share(2) .......................... 7,350 7,350 7,579 7,739 8,040
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1998 1999
------------ ----------
(UNAUDITED)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Product sales .......................... $ 3,790 $ 13,797
Royalties .............................. 182 196
--------- --------
Total revenues .......................... 3,972 13,993
Cost of revenues ........................ 3,252 10,271
--------- --------
Gross profit (loss) ..................... 720 3,722
Operating expenses:
Research and development ............... 685 2,454
Sales and marketing .................... 731 1,443
General and administrative ............. 2,086 1,971
Impairment loss ........................ -- --
--------- --------
Total operating expenses ................ 3,502 5,868
--------- --------
Operating loss .......................... (2,782) (2,146)
Gain (loss) on foreign exchange ......... (2) 30
Interest and other income ............... 64 52
Interest expense ........................ (47) (24)
--------- --------
Net loss before income taxes ............ (2,767) (2,088)
Income tax expense (benefit) ............ (38) 68
--------- --------
Net loss ................................ (2,729) (2,156)
========= ========
Net loss per share(1) ................... (0.35) $ (0.24)
Shares used in computing net loss
per share(2) .......................... 7,774 9,043
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------- JUNE 30,
1994 1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ................... $ 76 $ 51 $ 8 $ 330 $ 2,920 $ 1,335
Working capital (deficit) ................... (1,468) (3,579) (2,191) (4,753) 2,869 1,125
Total assets ................................ 1,054 437 250 1,607 11,136 15,439
Long-term debt (including current portion) .. -- -- 93 645 643 --
Redeemable common stock ..................... -- -- -- -- 9,992 9,992
Total stockholders' deficit ................. (1,400) (3,580) (2,017) (4,626) (6,336) (6,133)
</TABLE>
- -------
(1) Basic and diluted net loss per share are the same for all periods
presented.
(2) Shares used in computing net loss per share reflect the retroactive
adjustment of outstanding shares related to the mergers of SmartDiskette
Limited and SmartDisk Security Corporation into SmartDisk.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ TOGETHER WITH OUR FINANCIAL STATEMENTS AND THE NOTES
TO THOSE STATEMENTS INCLUDED IN THIS PROSPECTUS.
COMPANY BACKGROUND
SmartDisk Corporation was incorporated in March 1997 and commenced
operations in January 1998. From May 1993 until May 1998, we conducted
operations primarily through our predecessor, SmartDisk Security Corporation,
or SDSC. SDSC became a wholly owned subsidiary of SmartDisk in May 1998 and was
merged into SmartDisk in June 1998. Moreover, during 1996 and 1997, Fischer
International Systems Corporation, a company controlled by our principal
stockholder and Chairman of the Board, conducted all of SDSC's operations and
development activities pursuant to an operating agreement. Most of our 1996
expenses related to our acquisition and development activities for a product
that was eventually abandoned in late 1996. Moreover, in 1997, we were
primarily a development stage company with limited revenues. We did not begin
to recognize significant revenues from our Smarty and FlashPath products until
mid-1998. Because of these significant fluctuations in our product mix and the
development stage nature of our operations prior to mid-1998, we do not believe
that period-to-period comparisons of our historical results are meaningful or
predictive of future performance. For additional information, see "Certain
Transactions" and note 1 of the notes to our financial statements.
OVERVIEW
SmartDisk designs and develops products that enable consumers to easily
share digital data among advanced consumer electronic products, PCs and the
Internet. We believe that our products provide an easy-to-use, cost-effective
and versatile solution for the exchange of digital data. FlashPath and Smarty,
our patented products, allow consumers to use the well-known 3.5 inch floppy
drive, which is found on most PCs worldwide, to simplify the exchange of
images, music, voice and other digital data.
Our present FlashPath product is mainly used to transfer images to PCs
from digital cameras using the SmartMedia flash memory card. Cameras made by a
number of leading camera manufacturers, including Agfa, FujiFilm, Olympus,
Polaroid, Ricoh, Sanyo, Sharp and Toshiba, utilize SmartMedia cards. During the
12-month period ended June 30, 1999, we sold over 700,000 FlashPaths.
We are currently developing, with Sony and SanDisk, additional FlashPath
products to support their flash memory cards--the Memory Stick and the
MultiMediaCard. These flash memory cards are anticipated to have applications
in "smart" cellular phones, digital cameras and camcorders, digital audio
players and video game devices. FlashPath is also capable of transferring
digital music downloaded from the Internet to the Diamond Rio MP3 audio player.
In addition to our product development efforts with Sony and SanDisk, we also
have strategic relationships with a number of important electronics industry
players, including Hitachi, NEC and Toshiba. They actively participate in the
development of our product pipeline, provides us with access to leading-edge
manufacturing capabilities, and market and distribute our products globally.
RESULTS OF OPERATIONS
GENERAL
Today, substantially all of our revenues are derived from the sale of our
FlashPath product that works with SmartMedia flash memory cards. Moreover, most
of our revenues are derived from sales to relatively few OEM customers.
FujiFilm and Olympus collectively accounted for approximately 70.6% of our 1998
revenues and our top five customers accounted for approximately 92.8% of our
21
<PAGE>
revenues. Our OEM customers generally package, market and distribute our
products on a stand-alone basis, with approximately 25% of our sales being
derived from the sale of products that are packaged with the OEMs' cameras or
that are shipped upon presentation of a coupon that is provided, and paid for,
by the OEM. Although we work closely with the OEMs to forecast sales, we do not
have purchase contracts with any of our customers that obligate them to
continue to purchase our products, and they could cease purchasing products
from us at any time.
Our operating results fluctuate based on the timing and amount of orders
we receive from our customers and depend on the ability of OEMs to achieve
consumer acceptance of our products. This acceptance rate may in turn be tied
to seasonal demand for the consumer electronic products manufactured and sold
by these OEMs. Because fluctuations in orders from our major customers could
cause our net revenues to fluctuate significantly in any given quarter or
annual period, we do not believe that period-to-period comparisons of our
financial results are necessarily meaningful and should not be relied upon as
an indication of future performance. In addition, historically the average
selling prices of our products have declined and we expect that our OEM
customers may seek price concessions, which would reduce our average selling
prices and our gross margins in the future.
Our net losses have resulted from our significant investment in our
research and development and in building sales and marketing and general and
administrative infrastructure. These expenses have exceeded our gross profits.
We expect to continue to invest significantly in research and development
related to new and refined FlashPath products, as well as marketing and sales
activities to support those products, in each case in advance of realizing
revenues associated with those expenses. No assurance can be given that the
introduction or market acceptance of new products will be successful.
We purchase our products from contract manufacturers located in Asia. As a
result, a substantial portion of our costs and expenses are denominated in
currencies other than the U.S. dollar, primarily the Japanese yen. In addition,
approximately 90% of our 1998 revenues were derived from customers located
outside the United States, most of which were denominated in yen. See note 11
of the notes to our financial statements for additional information with
respect to our foreign operations.
While most of the transactions and accounts of our Japanese operations are
yen denominated, some are U.S. dollar denominated. Since the accounting records
of our Japanese operations are kept in yen, those dollar denominated
transactions are accounted for in yen at the time of the transaction. Dollar
denominated accounts are then remeasured at the end of the accounting period.
This remeasurement results in an adjustment to the income of the subsidiary.
Additionally, the balance sheet accounts of our Japanese operations are
translated to dollars for financial reporting purposes and resulting
adjustments are made to stockholders' equity. The value of the yen may
deteriorate against the dollar, which would impair the value of stockholders'
investment in our common stock. Deterioration has occurred in recent years,
resulting in a foreign currency loss of approximately $48,000 and a foreign
currency translation gain adjustment to equity of approximately $290,000 for
1998. For the first six months of 1999, we had a foreign currency gain of
approximately $30,000 and a foreign currency translation loss adjustment of
approximately $5,000. We could be required to denominate our product sales in
other currencies in the future, which would make the management of currency
fluctuations more difficult and expose us to greater currency risk. We do not
currently hedge against foreign currency exposure. If our Japanese operations
were to repatriate earnings to us, the lack of a hedging program would expose
us to an increased risk of foreign currency losses.
Our backlog at June 30, 1999 was approximately $11.1 million, compared to
approximately $4.6 million at June 30, 1998. The increase in backlog of
approximately $6.5 million was primarily caused by increased demand for our
FlashPath product from FujiFilm and Olympus, our major OEM customers, and from
Hagiwara, one of our distributors. However, a substantial portion of our
backlog is typically scheduled for delivery within 60 days. Variations in the
size and delivery schedules of purchase orders received by us, as well as
changes in customers' delivery requirements, may result in substantial
fluctuations in backlog from period to period. Accordingly, we believe that
backlog cannot be considered a meaningful indicator of future financial
results.
22
<PAGE>
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES. Our product revenues from the sale of our FlashPath and Smarty
products are recognized at the time of shipment to customers. Our royalty
revenues consist of royalties earned on the sales of our first product,
SafeBoot, which is licensed to and sold by Fischer International, an affiliate.
Our total revenues were approximately $14.0 million in the first half 1999,
compared to approximately $4.0 million in the first half of 1998. This increase
was attributable to the commercial introduction of our FlashPath product in
mid-1998, partially offset by an approximately $300,000 decrease in our Smarty
sales. As a result of the growth of our FlashPath revenues and the decrease in
Smarty sales, Smarty revenues represented less than 4% of total revenues in the
first half of 1999.
COST OF REVENUES. Cost of revenues includes the purchased cost of product,
packaging, freight and royalties for our FlashPath and Smarty products, the
creation of disks for our SafeBoot product and scrap and inventory provisions.
Cost of revenues increased to approximately $10.3 million in the first half of
1999 from approximately $3.3 million in the first half of 1998, due primarily
to the increase in production and sales of our FlashPath product.
GROSS PROFIT. Our gross profit increased to approximately $3.7 million in
the first half 1999 from approximately $700,000 in the comparable 1998 period,
resulting from FlashPath revenue growth.
RESEARCH AND DEVELOPMENT EXPENSES. Our research and development expenses
consist primarily of salaries and payroll-related expenses for our design and
development engineers, as well as prototype supplies and contract or
professional services. These expenses increased to approximately $2.5 million
in the first half of 1999 from approximately $700,000 in the first half of
1998. Approximately $1.0 million of this increase was attributable to the
outsourcing of product development and approximately $600,000 to the hiring of
additional technical personnel. All of these expenses were to support our
development of enhanced versions of our existing FlashPath and Smarty products,
as well as our development of a new FlashPath product designed to work with the
Sony Memory Stick and the SanDisk MultiMediaCard. We expect that our research
and development expenses will continue to increase in connection with the
development of our future FlashPath products.
SALES AND MARKETING EXPENSES. Sales and marketing expenses include
salaries, benefits and travel expenses for our marketing and product management
personnel in the United States and Japan. These expenses also include other
selling and marketing expenditures for items such as trade shows, marketing and
promotional programs. Sales and marketing expenses increased to approximately
$1.4 million in the first half of 1999 from approximately $700,000 in the
comparable 1998 period. Approximately $400,000 of this incease was attributable
to the staffing, including salaries and related expenses, of our Tokyo, Japan
office, which was established in March 1998, approximately $100,000 to
additions in our sales and marketing staff and related expenses at our
headquarters office in Florida, and approximately $200,000 to promotional
programs, including travel and related expenses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
include the salaries and related expenses of our executive management, finance,
information systems, human resources, legal and administrative functions, as
well as lease rental expense, utilities, maintenance expenses, taxes,
insurance, legal and accounting professional fees, depreciation and
amortization. General and administrative expenses decreased to approximately
$2.0 million in the first half of 1999 from approximately $2.1 million in the
first half of 1998, due to an approximately $300,000 decrease in relocation
expenses, professional services and legal fees, partially offset by increased
staffing costs of approximately $200,000.
GAIN (LOSS) ON FOREIGN EXCHANGE. Most of our revenues, as well as related
expenses, are denominated in Japanese yen. Gain (loss) on foreign exchange
generally reflects the remeasurement of cash and inter-company accounts that
are denominated in different currencies into U.S. dollars. We had a gain of
approximately $30,000 in the first half of 1999 compared to a loss of
approximately $2,000 in the first half of 1998. See note 2 of the notes to our
financial statements for additional information.
23
<PAGE>
PROVISION FOR INCOME TAXES. We are subject to tax in Japan and a number of
other jurisdictions where we do business, including the United States and
United Kingdom. These jurisdictions have different marginal tax rates. For the
period ended June 30, 1999 we provided for Japanese withholding tax of
approximately $130,000 on royalty income from Japan. In addition, income tax
benefits of approximately $38,000 and $63,000 were realized in the June 30,
1998 and 1999 periods due to amortization of intangible assets. As of June 30,
1999 we had a net operating loss carry forward of approximately $6.1 million
for United States federal income tax purposes. However, we have provided a
valuation allowance to reduce the related deferred tax asset to zero. See note
10 of the notes to our financial statements for additional information.
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
REVENUES. Our revenues increased to approximately $15.3 million in 1998
from $893,000 in 1997 and $500,000 in 1996. The increase from 1997 to 1998 was
due to an approximately $13.4 million increase in sales of our FlashPath
product and a $1.0 million increase in sales of Smarty. Substantial shipments
of these products did not occur until the first quarter of 1998 for Smarty and
the second quarter of 1998 for FlashPath. The only product shipped in all three
years was SafeBoot. During 1996 approximately $277,000 of our Crypto-SmartDisk
product was shipped. This product was specifically developed and produced for
the United States General Services Administration and was expected to be a high
volume product, but significant orders never developed and the product was
abandoned in late 1996. Because of these significant fluctuations in our
product mix and the development stage nature of our operations prior to
mid-1998, we do not believe that period-to-period comparisons of our historical
results are meaningful or predictive of future performance.
GROSS PROFIT. Gross profit increased to approximately $2.7 million in 1998
from $592,000 in 1997 and $134,000 in 1996. The increase in gross profit was
due to increasing revenues caused especially by the market introduction of the
Smarty product in late 1997 and the FlashPath product in mid-1998. Gross profit
as a percentage of revenues increased from 26.7% in 1996 to 66.3% in 1997 as a
result of increased sales of our SafeBoot product at very high margins, plus
the initial sales of FlashPath and Smarty at high margins. Gross profit as a
percentage of revenues decreased to 17.8% in 1998 as a result of lower overall
margins due to the sales of FlashPath at quantity pricing levels to major
customers. The margins generated in 1996 and 1997 were unrealistically high and
could not be maintained with increases in volume sales to large customers.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $1.6 million in 1998 from $1.4 million in 1997 and $720,000 in
1996. The increases were attributable to the hiring of additional technical
personnel to support the development of our FlashPath and Smarty products.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased to
$2.5 million in 1998 from $12,000 in 1997 and $6,000 in 1996. These increases
were due to the hiring of sales, marketing and product management personnel to
support our FlashPath and Smarty products, particularly the opening of our
Tokyo, Japan office in March 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to approximately $4.1 million in 1998 from $3.2 million in 1997 and
$3.4 million in 1996. The increase from 1997 to 1998 was attributable to our
hiring of additional executives to support our growth, including executives to
staff our Tokyo office which opened in March 1998. The decrease from 1996 to
1997 was attributable to the abandonment of our Crypto-SmartDisk business.
IMPAIRMENT LOSS. As discussed in more detail in note 5 of the notes to our
financial statements, in 1996 we incurred an approximately $7.8 million
impairment loss. The loss related to the acquisition by one of our affiliates
of a business that was primarily based on the future potential of one product,
Crypto-SmartDisk. This product was specifically being developed and produced
for the United States General Services Administration and was expected to be a
high volume product. However, significant orders never developed and the
product was eventually abandoned in late 1996.
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QUARTERLY RESULTS
The following table sets forth unaudited quarterly operating data for each
of the six quarters ended June 30, 1999. In the opinion of management, these
data have been prepared substantially on the same basis as the audited
financial statements appearing elsewhere in this prospectus, and include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the data. However, our operating results have fluctuated
significantly in the past and we expect that they will continue to fluctuate in
the future. Future fluctuations may be a result of a variety of factors,
including the timing and amount of orders we receive from our customers,
reductions in average selling prices, the timing and level of our research and
development expenditures, and the availability of manufacturing capacity
necessary to make our products. Therefore, we believe that period-to-period
comparisons of our historical results are neither meaningful nor predictive of
our future performance. The quarterly data should be read together with the
financial statements and the notes to those statements appearing elsewhere in
this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1998 1998 1998 1998 1999 1999
----------- ---------- --------------- -------------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues ......................... $ 532 $ 3,440 $ 4,889 $ 6,462 $ 5,507 $ 8,486
Gross profit ..................... 91 629 1,520 483 836 2,886
Gross profit margin .............. 17% 18% 31% 7% 15% 34%
Total operating expenses ......... 1,297 2,205 2,187 2,615 2,831 3,037
Operating loss ................... 1,206 1,576 667 2,132 1,995 151
Net loss ......................... $1,189 $ 1,540 $ 690 $ 2,084 $ 1,967 $ 189
</TABLE>
Our revenues fluctuated on a quarter-to-quarter basis during the periods
presented primarily because we were in the early stages of our development:
/bullet/ Substantial shipments of our FlashPath product did not commence
until the second quarter of 1998, and our operating expenses in
that quarter increased significantly as a result of our hiring
additional personnel to support our growth.
/bullet/ The increase in our revenues from the second to third quarter of
1998 was primarily attributable to a 30% increase in unit sales of
our FlashPath product and, to a lesser extent, a 16% increase in
the average selling price of that product. These increases resulted
in significantly higher gross profit and gross profit margin for
the third quarter.
/bullet/ The increase in our revenues from the third to fourth quarter of
1998 was primarily attributable to a 55% increase in FlashPath unit
sales in connection with the holiday selling season, partially
offset by a 14% decline in average selling prices instituted by us
in order to gain market share. Our gross profit and gross profit
margin decreased as a result of this decrease in average selling
price, as well as a $400,000 write-down of inventories related to
the introduction of the eight megabyte SmartMedia card and a
$300,000 write-off of unamortized tooling costs associated with the
first version of our FlashPath product.
/bullet/ The decrease in our revenues from the fourth quarter of 1998 to
the first quarter of 1999 was primarily attributable to a 12%
decrease in FlashPath unit sales, reflecting the drop in demand
following the holiday selling season, and a 6% decrease in average
selling price.
/bullet/ The increase in our revenues from the first to second quarter of
1999 was primarily attributable to a 70% increase in FlashPath unit
sales, partially offset by an approximately 5% decrease in average
selling price.
As a result of our extremely limited operating history, we do not have
historical financial data for a significant number of periods on which to base
planned operating expenses. Our expense levels are based in part upon our
expectations concerning future revenue and, to an extent, are fixed. Quarterly
revenues and operating results depend substantially upon the timing and amount
of orders we receive
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from our relatively small number of customers, which may be tied to seasonal
demand for the consumer electronic products manufactured and sold by these
OEMs. Accordingly, the cancellation or delay of customer orders, or the loss of
a significant customer, could have a material adverse effect on our business.
We may be unable to adjust spending for our research and development or other
activities in a timely manner to compensate for any unexpected revenue
shortfall, and any significant shortfall in revenue in relation to our
expectations would have an immediate adverse effect on our business, results of
operations and financial condition.
Due to the above factors, quarterly revenues and results of operations are
difficult to forecast, and we believe that period-to-period comparisons of our
operating results are neither meaningful nor predictive of future performance.
In one or more future quarters our results of operations may fall below the
expectations of securities analysts and investors. In that event, the trading
price of our common stock would likely be materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
In 1996 and 1997, we financed our operations principally through loans
payable to related parties. During 1998 and 1999, we financed our operations
and repaid loans outstanding through short-term borrowings and the sale of
equity securities in private placements with several strategic investors
including Hitachi, NEC, Rohm, Toshiba and Yamaichi. At June 30, 1999, we had
working capital of approximately $1.1 million and approximately $1.3 million of
cash and cash equivalents.
To date, we have experienced negative cash flows from operating
activities. Net cash used in operating activities was approximately $6.0
million in 1998 and approximately $3.4 million in the first half of 1999. Cash
used in operating activities in 1998 was primarily attributable to a net loss
of approximately $5.5 million, a $3.8 million increase in accounts receivable
and a $1.4 million increase in inventories, partially offset by a $4.0 million
increase in accounts payable and accrued liabilities. Cash used in operating
activities for the first six months of 1999 primarily resulted from a $2.2
million net loss and a $5.2 million increase in accounts receivable, partially
offset by a $1.3 million decrease in inventories and a $2.6 million increase in
accounts payable and accrued liabilities. Our accounts receivable and days
sales outstanding increased significantly from 1998 to the first half of 1999,
because of dramatic growth in sales of our FlashPath product, the majority of
which occurred in Japan. At June 30, 1999 approximately $3.5 million, or 39%,
of our accounts receivable, substantially all of which related to sales to
Asian OEMs, were subject to extended payment term arrangements secured by
promissory notes. This is a normal business practice in Asia, particularly in
Japan, and, in these cases, credit terms generally range from 90 to 150 days.
The OEMs are required to pay for the products that they order from us and which
we deliver to them whether or not they ultimately resell the products. Product
returns are contractually required only for defective products and, to date,
returns have been negligible. In addition, our allowance for doubtful accounts
at June 30, 1999 was minimal in relation to the value of the accounts
receivable, but we believe it to be adequate because the majority of our
revenues are derived from sales in Japan to "blue chip" customers, who either
secure the accounts receivable with a promissory note or have historically
consistently paid without default.
Net cash used in investing activities of $2.1 million in 1998 was
attributable to approximately $1.0 million of capital expenditures, primarily
production equipment for the manufacture of our products, and our approximately
$1.1 million time deposit that collateralizes our credit facility. Net cash
used in investing activities in the first half of 1999 was $1.7 million, all of
which was attributable to our purchases of property and equipment, primarily
production equipment for an enhanced version of our FlashPath for SmartMedia
product. Although we have no commitments, we expect that we will spend up to
approximately $3.0 million for capital expenditures over the next 12 months to
acquire production equipment for the products we are currently developing,
particularly the FlashPaths for the Sony Memory Stick and the SanDisk
MultiMediaCard.
Net cash provided by financing activities totaled approximately $10.4
million in 1998 and consisted primarily of proceeds from our issuance of common
stock and short-term borrowings under
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our credit facility, partially offset by the repayment of certain loans to
affiliates. Net cash provided by financing activities was approximately $3.5
million in the first half of 1999 and consisted primarily of proceeds from our
issuance of common stock and short-term borrowings. We have an approximately
$2.5 million credit facility with a Japanese bank that permits borrowings based
upon our time deposits and the accounts receivable of specified customers.
Borrowings under the facility bear interest at 1.375% per year and mature
December 1999.
We believe that the net proceeds of this offering, along with cash on
hand, will be sufficient to meet our working capital and anticipated capital
expenditure needs for at least the next 12 months. Thereafter, we may require
additional sources of funds to continue to support our business. The capital,
if needed, may not be available or may not be available on terms acceptable to
us.
YEAR 2000 ISSUES
The "Year 2000 Issue" refers generally to the problems that some software
may have in determining the correct century of the year. Many existing
electronic systems, including computer systems, use only the last two digits to
refer to a year. Therefore, these systems may recognize a date using "00" as
1900 rather than the year 2000. If not corrected, these electronic systems
could fail or create erroneous results when addressing dates on and after
January 1, 2000.
In assessing the effect of the Year 2000 Issue on SmartDisk, we determined
that we need to evaluate four general areas:
/bullet/ Supplier relationships;
/bullet/ Internal infrastructure;
/bullet/ Products sold to customers; and
/bullet/ Other third-party relationships.
MANUFACTURER AND SUPPLIER RELATIONSHIPS. We outsource the manufacturing of
our products to a number of subcontractors. If our subcontractors are affected
by the Year 2000 Issue, our supply of products could be delayed or eliminated.
Any disruption in our supply of products from our subcontractors would
seriously harm our business, financial condition and results of operations. We
are currently seeking assurances from our subcontractors that their
manufacturing of our products will be unaffected by the Year 2000 Issue but
have not received assurances to date.
INTERNAL INFRASTRUCTURE. The Year 2000 Issue could also affect our
internal systems, including both our information technology and non-information
technology systems. We have completed an assessment of our material internal
information technology systems, including third-party software and hardware
technology. In addition, we are currently in the process of implementing
changes to our network and workstation software and hardware for our
information technology internal systems to make them Year 2000 ready. We have
also completed an assessment of our non-information technology internal
systems, such as our test facility, and we are currently in the process of
implementing changes to make them Year 2000 ready. We expect to have all
changes to our information and non-information technology internal systems
completed by the end of September 1999. We do not currently have a remediation
plan for non-compliant or possibly non-compliant information technology
systems.
PRODUCTS SOLD TO CUSTOMERS. Our FlashPath and Smarty products do not
contain two digit date codes and therefore are generally unaffected by the Year
2000 Issue. However, once shipped, our products are used in conjunction with
products which we do not develop. The performance of our products could be
affected if a Year 2000 Issue exists in a different component of a customer's
product. We have not, and will not, assess the existence of these potential
problems in our customers' products.
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We do not currently have any information concerning the Year 2000
compliance status of our customers. Our current or future customers may incur
significant expenses to achieve Year 2000 compliance. If our customers are not
Year 2000 compliant, they may experience significant costs to remedy problems,
or they may face litigation costs. In either case, Year 2000 issues could
reduce or eliminate the budgets that current or potential customers could have
for purchases of our products and services. As a result, our business, results
of operations or financial condition could be materially adversely affected.
OTHER THIRD-PARTY RELATIONSHIPS. We rely on outside vendors for utilities
and telecommunication services as well as climate control, building access and
other infrastructure services. We are not capable of independently evaluating
the Year 2000 compliance of the systems utilized to supply these services. We
cannot assure you that these suppliers will resolve any or all Year 2000 Issues
with these systems before the occurrence of a material disruption to our
business. Any failure of these third parties to resolve Year 2000 Issues with
their systems in a timely manner could have a material adverse effect on our
business, financial condition or results of operations.
We have not developed a contingency plan to address situations that may
result if we are unable to achieve Year 2000 readiness of our critical
operations, and we do not plan to do so in the future. Any investigations we
have undertaken with respect to Year 2000 Issues have been funded from
available cash, and these costs have not been separately accounted for. To
date, these costs have not been significant.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
Number 133, Accounting for Derivative Instruments and Hedging Activities. We
expect to adopt the new statement effective January 1, 2001. The statement will
require us to recognize all derivatives on our balance sheet at fair value. We
do not anticipate that the adoption of the statement will have a significant
effect on our results of operations or financial position.
28
<PAGE>
BUSINESS
OVERVIEW
SmartDisk designs and develops products that enable consumers to easily
share digital data among advanced consumer electronic products, PCs and the
Internet. Consumers are increasingly relying on the transfer of digital
information between electronic devices as an important part of their daily
lifestyles. We believe that our products provide an easy-to-use, cost-effective
and versatile solution for the exchange of digital data. Our patented products,
FlashPath and Smarty, allow consumers to use the familiar 3.5 inch floppy
drive--found on most PCs worldwide--to simplify the exchange of images, music,
voice and other digital data.
Our current FlashPath product is used primarily to transfer images to PCs
from digital cameras using the Toshiba SmartMedia flash memory card. SmartMedia
cards are used in cameras made by a number of leading camera manufacturers,
including Agfa, FujiFilm, Olympus, Polaroid, Ricoh, Sanyo, Sharp and Toshiba.
During the 12-month period ended June 30, 1999, we sold over 700,000
FlashPaths.
We are currently developing, with Sony and SanDisk, additional FlashPath
products to support their flash memory cards--the Memory Stick and the
MultiMediaCard. These flash memory cards are expected to have applications in
"smart" cellular phones, digital cameras and camcorders, digital audio players
and video game devices. FlashPath is also capable of transferring digital music
downloaded from the Internet to the Diamond Rio MP3 audio player. In addition
to our product development efforts with Sony and SanDisk, we also have
strategic relationships with a number of key electronics industry players,
including Hitachi, NEC and Toshiba. Our strategic partners actively participate
in the development of our product pipeline, provide us with access to
leading-edge manufacturing capabilities, and market and distribute our products
globally.
INDUSTRY OVERVIEW
Consumer lifestyles are being transformed by the increasing use of digital
information in the home and workplace. Individuals increasingly rely upon PCs,
computer networks and the Internet to access digital information for
entertainment and productivity purposes. The proliferation of PCs in both the
home and office, as well as the explosive growth of Internet use, has led to
widespread consumer familiarity with the storage, manipulation, transfer and
management of digital data.
In recent years, digital computing and processing have expanded beyond the
boundaries of desktop computer systems to include a broader array of
sophisticated consumer electronic products. These products are often referred
to as information appliances, or Internet appliances, because they are designed
to provide the features and benefits of one or more Internet applications.
These digital appliances include personal digital assistants, "smart" phones,
Internet screen phones and gaming devices, and NetTVs. We believe that
approximately 5.9 million of these types of digital appliances were shipped in
1998, and that this number will grow to approximately 54.8 million by 2002. A
related digital product, the digital camera, has also achieved significant
commercial success. We believe that approximately 3.1 million digital cameras
were shipped in 1998, and that this number will grow to 19.6 million in 2002.
The convergence of advanced consumer electronic products, PCs and the
Internet offers consumers the opportunity to personalize and exchange digital
data generated from a wide range of sources. This convergence has precipitated
greater demand for connectivity. While significant resources have focused on
increasing the speed and capacity of the connection between PCs and the
Internet, the connection between digital appliances and PCs has yet to achieve
the compatibility, simplicity and convenience sought by consumers.
One of the principal barriers to connectivity is the variety of
non-standardized flash memory cards available in the market today. Flash memory
cards are the miniature devices used by many of the
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emerging consumer electronic products to store digital data. There are
currently four major removable flash memory cards, none of which has emerged as
an industry standard and none of which is compatible or operable with any of
the others:
/bullet/ the Toshiba SmartMedia card;
/bullet/ the SanDisk CompactFlash card;
/bullet/ the SanDisk MultiMediaCard; and
/bullet/ the Sony Memory Stick.
A second major barrier is the current lack of convenient connection
methods. While many consumers have increased their use of digital appliances,
there is still a large group of potential users that has not ventured beyond
desktop PCs because they are intimidated by the inherent difficulty of
connecting digital appliances that have non-conforming interfaces and
difficult-to-master connections. As a result, we believe that the continued
growth of the consumer-oriented digital appliance market will depend in large
part upon the ability of users to conveniently transfer stored digital data
which is captured by digital appliances. For example, the rapid growth of the
digital camera market was based, to a large degree, upon consumers' ability to
easily transfer images to family members and others through the Internet and
manipulate the captured images with their PCs. The popularity of the PalmPilot
was also largely fueled by the ability of consumers to easily connect and
transfer data to and from their PCs. Therefore, one of the principal challenges
faced by manufacturers of consumer digital appliances is the interface between
their appliances and PCs or other digital appliances.
There are currently a number of interfaces used to transfer data from
digital appliances to personal computers:
/bullet/ cable interfaces such as serial ports, the Universal Serial Bus,
or USB, and parallel ports; and
/bullet/ non-cable interfaces such as infrared interfaces and PCMCIA and
floppy disk drive slots.
We believe that most interfaces have disadvantages that make them
impractical for use with consumer-oriented digital appliances. Consumers
typically do not like to use cable connections, such as serial port, USB and
parallel port connections. Those interfaces require the use of limited PC
peripheral ports, which are frequently dedicated to connecting the PC to
devices such as printers, modems, PalmPilots and other peripherals. In
addition, the need to connect a cable to the back of the PC is inconvenient and
often resisted. Other disadvantages of cable interfaces include desktop clutter
and the fact that the newer interfaces such as USB are not present on most
installed PCs. Some of the non-cable interfaces also have inherent limitations.
For example, while virtually all portable PCs being sold today contain a PCMCIA
slot or infrared interface as a standardized feature, we believe that neither
the PCMCIA slot nor the infrared interface is generally available on desktop
computers.
THE SMARTDISK SOLUTION
We design, develop, manufacture and distribute easy-to-use, portable and
low cost devices that facilitate data exchange between digital appliances, PCs
and the Internet. Our patented products connect through the most
widely-accepted and user-friendly PC interface, the 3.5 inch floppy disk drive,
allowing the OEMs that market their and our consumer products to reach a large
installed base of potential users.
Our current and planned FlashPath and Smarty products are designed to
offer the following principal benefits:
EASE OF USE. Our products are easy to use and install. FlashPath transfers
digital data to the PC without cables or hardware installation and without
using limited desktop space or personal computer ports. A consumer using a
digital camera removes the flash memory card that serves as the camera's
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digital film, places that flash memory card into our FlashPath product, and
then inserts the FlashPath into the PC's 3.5 inch floppy disk drive. FlashPath
easily transfers to the PC the images that are captured by the digital camera
and stored on the flash memory card. The consumer can then use the PC to edit
and print the image, add sound or text, transmit the image over the Internet or
incorporate the image in advertisements, newsletters, reports or other
documents produced using the PC.
PRODUCTS COMPATIBLE WITH MULTIPLE MEDIA. We believe that our established
ability to design products that support competing flash memory cards is
critical because of the lack of flash memory industry standards. Our initial
FlashPath product was designed to transfer digital photographs from the Toshiba
SmartMedia card to the PC for transmission over the Internet. Other flash
memory products under development are designed to be compatible with the Sony
Memory Stick and the SanDisk MultiMediaCard. Our ability to design products
compatible with multiple media is enhanced by our strategic relationships with
the three leading manufacturers of flash memory storage cards--
SanDisk, Sony and Toshiba. By supporting various media, we will be able to
address the data transfer needs of purchasers of existing and emerging digital
appliances that use different flash memory cards. In addition, our Smarty
product supports various smart card formats.
FAMILIAR FORM. Our products are shaped like a 3.5 inch floppy disk and use
the floppy disk drive slot familiar to most PC users. This widely recognized
format reduces consumer intimidation frequently created by new technologies,
facilitating the adoption of our products and various consumer-oriented digital
appliances.
VERSATILE. Our FlashPath and Smarty products can be used with a variety of
PC hardware platforms and software environments. Our driver software is
included with our products and can also be downloaded free of charge from the
Internet. The software enables our products to operate with Windows 95, Windows
98, Windows NT, NEC Windows and Macintosh operating systems. As a result, the
same FlashPath that is used by an advertising executive to transfer images from
his Olympus digital camera to his Microsoft-based office PC can be used by his
daughter to transfer images from her FujiFilm camera to her Apple computer.
Similarly, the same FlashPath that is used to transfer images may also be used
to transfer voice and other digital data from a variety of digital appliances
that use the same flash memory card. The versatility of our products will
become more important as consumers increase their reliance on flash memory
cards to store and transfer digital data where traditional memory storage
devices such as floppy disks are inadequate due to capacity or form factor
constraints.
INDEPENDENT POWER SOURCE. Unlike cables, our FlashPath and Smarty products
do not rely upon a digital appliance's power source to transfer digital data
from a flash memory card to a PC. Each of our products runs on two replaceable
batteries. This is important because digital appliances, such as digital
cameras, consume significant amounts of power and require frequent battery
replacement or recharging. The use of cable interfaces quickly drains power
from digital appliances, making those competing products less attractive.
BUSINESS STRATEGY
Our objective is to establish our FlashPath products as the
industry-standard solution for the transfer of data between digital appliances
and PCs by strengthening our position as a technological and market leader. We
also intend to capitalize on the anticipated growth of smart card applications
through our Smarty product line. Key elements of our business strategy include
the following:
CAPITALIZE ON TECHNOLOGY EXPERTISE TO EXPAND OUR PRODUCT OFFERINGS. We
have developed extensive expertise, intellectual property and core capabilities
in flash memory data transfer and smart card technologies. Each of our products
is developed using a building block approach that employs previously developed
technologies. This ability to modify our existing technologies allows us to
quickly respond to industry developments, providing first-to-market advantages
and reducing development costs for future products. We expect to capitalize on
our technology base and patent portfolio to
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design, develop and manufacture a broad range of data transfer devices that can
operate across a variety of flash memory products, hardware platforms and
software environments. In the short-term, we are developing products to
transfer digital data between PCs and different flash memory cards and are
expanding our applications to support digital audio players. In addition, we
are using our technology expertise, patents and trade secrets to develop
application-specific, non-PC-based devices that will permit flash memory cards
to be used with other existing technologies. We will also strive to capitalize
on our past design experience to develop products that support computer
interfaces other than the 3.5 inch floppy disk drive.
EXPAND CUSTOMER AND STRATEGIC INDUSTRY RELATIONSHIPS. We have formed
strategic relationships with a number of leading consumer product OEMs and
other key industry players, including FujiFilm, Hitachi, NEC, Olympus, SanDisk,
Sony and Toshiba. We intend to continue to develop long-term alliances with a
diversified base of OEMs and other industry participants in additional consumer
electronics segments. We believe that these relationships provide significant
operating leverage and a number of other important benefits:
/bullet/ Our OEM customers advertise, promote, package, sell and distribute
our products under some of the world's most recognized brand names.
These include FujiFilm, Hitachi, Olympus, Polaroid, Sharp and
Toshiba. As a result, we have access to extraordinary market clout
without the need to invest heavily in our own marketing
infrastructure and programs.
/bullet/ Our product development relationships frequently provide access to
flash memory card manufacturers early in the design phase of their
product development process. This allows us to anticipate these
manufacturers' future technological requirements and to develop
long-term relationships across a number of products and through
multiple product generations. In addition, these partners often
assist with engineering and design for manufacturability, which
helps assure that mechanical and electrical considerations are
integrated into a total systems approach to achieve a high quality
and cost-effective product.
MAINTAIN MEDIA NEUTRALITY. We are using our flexible technology
architecture and core capabilities to create products that enable consumers to
use most leading flash memory cards. There is a rapidly growing number of
digital appliances that use competing flash memory technologies, none of which
we currently expect to become an industry standard. We are committed to
maintaining media neutrality to enable users of various leading flash memory
technologies to transfer data quickly and easily among devices that use
different flash memory card formats.
PROMOTE BRAND AWARENESS OF OUR PRODUCTS. Approximately 75% of our products
are packaged, marketed and distributed by OEMs on a stand-alone basis. The
remainder of our products are either packaged with the cameras manufactured by
the OEMs or are shipped by us upon presentation by the consumer of a coupon
that is provided, and paid for, by the OEM. Accordingly, it is critical that we
obtain ultimate consumer acceptance of and demand for our products independent
of sales that occur in conjunction with sales of our OEMs' products. To this
end, we intend to build upon our initial success by promoting the FlashPath and
Smarty brand names. Our brands are often displayed on the packaging of the OEM
products and, as a result, we are able to benefit from the powerful advertising
and promotion of our products by the OEMs while simultaneously building our
brand identity. In addition, we intend to expand our use of advertising and
other marketing programs designed to promote our brand and enhance brand
awareness. We also intend to increase distribution channels for our products by
promoting direct sales via the Internet and through retailers.
EMPHASIZE USER-FRIENDLY PRODUCTS. We are committed to capitalizing on our
patent portfolio to enable consumers to conveniently transfer images, music,
voice and other types of digital data between consumer electronic devices, the
Internet and PCs without hardware installation, cables or the use of PC
peripheral ports.
TECHNOLOGY
Since our inception, we have focused our research and development efforts
on designing and developing products that facilitate the transfer of data from
digital appliances using flash memory
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cards and smart cards to PCs. We have been actively involved in all aspects of
this development process, including the development of a proprietary technology
architecture which supports all of our FlashPath and Smarty products and can be
used as the basis for new products. We believe that our patents provide
substantial proprietary protection relating to the transfer of digital data
through floppy disk interfaces. We also believe that we have developed
particular expertise in research, product design and product development.
Our products are compatible with a broad range of hardware platforms and
software environments. Our floppy disk drive interface architecture builds upon
key elements of our technology, including digital and analog ASICs, driver
software and key mechanical components, and allows us to develop products that
support different flash memory and smart cards. In addition, we believe that
this architecture improves reliability, decreases time to market and lowers new
product development costs. For example, the development of our FlashPath
product for SmartMedia flash memory cards took approximately 18 months from
determining product feasibility to commencing commercial production, and we
expect the time for the development of our products for the MultiMediaCard and
Sony Memory Stick will be shortened to less than 12 months. We believe that we
will take advantage of similar opportunities to utilize our core technological
capabilities as we continue our efforts to develop products to conveniently
transfer digital data from competing flash memory cards to existing, non-PC
technologies and, in the future, products that support computer interfaces
other than the 3.5 inch floppy disk drive.
During the remainder of 1999 and 2000, we expect that our development
efforts will be primarily focused on the following initiatives:
/bullet/ expanding our FlashPath product line to support the Sony Memory
Stick and the MultiMediaCard;
/bullet/ further reducing our production costs;
/bullet/ enhancing product performance; and
/bullet/ developing new, application-specific products that will allow
flash memory cards to be used with existing non-PC technologies.
An element of our business strategy is to enter into strategic alliances
without licensing our technology to OEMs. Our strategic alliances with Hitachi,
NEC, Sony and Toshiba began with their initial inquiries to license our
FlashPath technology. Those preliminary overtures developed into more extensive
dialogues and the exchange of information that permitted us to better
demonstrate our technology platform, proprietary rights and research, design
and development expertise. We believe that the broad scope of our strategic
alliances with these leading industry participants demonstrates the appeal and
strength of our proprietary technology. Many of these alliances have led to
equity investments and cooperative development arrangements.
The technology comprised in our product offerings consists of five key
components:
/bullet/ FLASH MEMORY OR SMART CARD READ/WRITE SYSTEM. This proprietary
system uses the central processing logic to store data on and
retrieve data from the flash memory card in the product.
/bullet/ DIGITAL ASIC. Our proprietary digital ASIC prepares the digital
data to be retrieved from the flash memory, encodes it and sends it
to the analog ASIC. The digital ASIC also decodes data from the
analog ASIC for use with the flash memory or smart card read/write
system.
/bullet/ ANALOG ASIC. Our proprietary analog ASIC converts the digital data
to analog signals for retrieval from the flash memory card.
/bullet/ CENTRAL PROCESSING UNIT. This unit consists of an industry
standard microprocessor, memory and other processing logic to
control the functions of the digital and analog ASICs and the flash
memory or smart card read/write system.
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/bullet/ DRIVER SOFTWARE. Our proprietary driver software enables our
products to operate with a variety of commonly installed personal
computer operating systems such as Microsoft Windows.
MARKETING, CUSTOMERS AND STRATEGIC RELATIONSHIPS
SALES AND MARKETING. We market and sell our current FlashPath product
primarily to OEMs, including Agfa, FujiFilm, Olympus, Polaroid, Ricoh, Sanyo,
Sharp and Toshiba. These OEMs compete in some of the fastest growing segments
of the electronics industry, including digital cameras, digital audio players,
digital camcorders and personal digital assistants.
OEMs sell approximately 75% of our products on a stand-alone basis, and
approximately 25% of our products are sold either packaged with the OEMs'
products or are shipped by us upon presentation of a coupon that is provided,
and paid for, by the OEMs. Often, both the OEM's brand name and our FlashPath
or Smarty tradename appear on the product packaging. As a result, we benefit
from the powerful advertising and promotion of our products by the OEMs without
having to incur significant additional marketing expenses. For example, our
products have been featured in OEM advertisements in major publications,
including THE WALL STREET JOURNAL, TIME MAGAZINE and USA TODAY.
The packaging of our FlashPath product with FujiFilm's and Olympus'
digital cameras illustrates the synergistic relationships we have with some of
our customers. Their marketing campaigns emphasize the convenience of using the
FlashPath product to transfer digital photographs to the PC. We believe that
our FlashPath adapter is one of the key reasons that many of the top selling
digital cameras in the world use Toshiba's SmartMedia card. We shipped
approximately 700,000 FlashPath units during the 12-month period ended June 30,
1999 largely as a result of our customers' extensive market penetration.
We support the marketing activities of our customers with a dedicated
product manager for each of our product lines. In addition, we support their
sales efforts through sales training courses, public relations activities,
trade shows and industry education programs. We also employ marketing
communications personnel to develop packaging, brochures and other collateral
materials.
We market and sell our Smarty product to financial institutions and other
service providers who promote Smarty to their customers as part of their smart
card-based programs. Our Smarty customers include ABN Amro Bank (The
Netherlands), Bally Gaming, Bank of America, la Caixa Bank (Spain) and Visa.
As of August 31, 1999, we had 9 full-time employees engaged in sales and
marketing activities. We also use the services of Japan-based dealers to serve
as our agents in connection with sales to OEMs based in that country. Those
intermediaries generally mark up the selling price to the OEM purchaser by
approximately 3%. Our customers generally place orders for our products on an
as-needed basis, with no long-term commitments.
STRATEGIC RELATIONSHIPS. An important element of our business strategy is
to develop strategic relationships with industry players that can assist us in
the development of new products, provide us with access to leading-edge
manufacturing capabilities and market and distribute our products globally.
This approach allows us to concentrate our resources on our core expertise of
product design and development, reduces our capital requirements and generally
provides a high degree of operating leverage. In addition, our close
relationships with flash memory card manufacturers and consumer product OEMs
frequently provide insight into the current and future needs of these
companies, enabling us to design specific products to meet these needs. OEMs
frequently distribute our FlashPath product in connection with the distribution
of their consumer electronic products. As a result, we believe that these
strategic relationships allow us to take advantage of OEMs' direct sales
organization, distributors and manufacturers' representatives. We evaluate
potential collaborative arrangements on an ongoing basis and intend to continue
to pursue additional strategic relationships.
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Set forth below are brief descriptions of some of our strategic relationships:
TOSHIBA. Toshiba Corporation, a leading electronics company, played a
critical role in our early development stage. Toshiba made an equity
investment of approximately $10.0 million in SmartDisk and introduced us to
most of the key technical personnel that now constitute our Tokyo-based
applied engineering and production engineering team. Toshiba also assisted
us in the development and engineering of FlashPath, helped guide our
selection of manufacturing techniques, aided our introduction into mass
production and introduced our management to potential strategic partners.
Toshiba continues to provide cooperative support in several areas. For
example, four of their engineers continue to reside in and provide
full-time support to our Tokyo office on a contract basis.
SONY. Under our co-development agreement with Sony, which terminates no
later than March 31, 2000, we are developing a FlashPath product for use
with the Sony Memory Stick. Sony reimburses us for a portion of our
development expenses and pays us additional fees during the course of
development. We expect that we will manufacture, and that Sony will
distribute, the co-developed product.
SANDISK. We also have a co-development agreement with SanDisk, a leading
developer and marketer of flash memory storage products, including
CompactFlash and the MultiMediaCard. Under this arrangement, we are jointly
developing a FlashPath product to support the SanDisk MultiMediaCard. We
are funding the development costs and we will be entitled to revenues
derived from the sale of our FlashPath for the MultiMediaCard. We will pay
SanDisk a royalty based on the portion of those revenues derived from sales
other than to SanDisk. We issued 37,500 shares of our common stock to
SanDisk as partial payment for entering into the co-development agreement.
VISA. We have a non-contractual arrangement with VISA International, a
leading issuer of credit cards, to test our Smarty product. Under the pilot
program, Smarty is used in conjunction with the Visa Platinum card to
permit controlled access to the Visa website, allowing card holders to
access account information and other ancillary services. Since inception of
the program, Visa has purchased and distributed approximately 15,000 Smarty
units.
The following table illustrates the nature of some of our strategic
relationships:
<TABLE>
<CAPTION>
TYPE OF STRATEGIC RELATIONSHIP
--------------------------------------------------------------------------------------------------
ASSISTED IN MANUFACTURER
INVESTED IN PRODUCT PROVIDED SUPPLIER OF OF SMARTDISK CUSTOMER OF
NAME SMARTDISK DEVELOPMENT LICENSE COMPONENTS PRODUCTS SMARTDISK
- ------------------ -------------- -------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Atmel ............ /check mark/ /check mark/
Hitachi .......... /check mark/ /check mark/ /check mark/ /check mark/
Mitsumi .......... /check mark/ /check mark/
NEC .............. /check mark/ /check mark/ /check mark/
Rohm ............. /check mark/ /check mark/ /check mark/
SanDisk .......... /check mark/ /check mark/ /check mark/ /check mark/
Sony ............. /check mark/ /check mark/
Toshiba .......... /check mark/ /check mark/ /check mark/ /check mark/
Yamaichi ......... /check mark/ /check mark/ /check mark/ /check mark/
</TABLE>
PRODUCTS
Each of our products is based upon our core, patented technology and is
designed to easily transfer digital data between PCs, the Internet and various
types of digital appliances.
FLASHPATH. FlashPath is a solid state electronic device in the shape of a
3.5 inch floppy diskette. It works in any standard 3.5 inch floppy drive--the
type found in most PCs today. The current
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principal use of our FlashPath product is to transfer images from digital
cameras to PCs. Digital cameras use flash memory cards as film. After the flash
memory card captures and stores images, the flash memory card is removed from
the camera and is placed into FlashPath. FlashPath is then inserted into the
PC's floppy disk drive and the images are transferred to the PC. With the aid
of readily available software, the consumer may then edit the images, add text,
graphics or sound, or mail the images over the Internet. Because FlashPath
transfers images from the camera to the PC without using cables or PC
peripheral ports and without any hardware installation, the consumer has a
device that is familiar, easy to use, not intimidating and transportable among
multiple PCs. FlashPath uses our proprietary driver software provided with our
products and available free of charge from the Internet. Our driver software
enables our products to operate with Windows 95, Windows 98, Windows NT, NEC
Windows and Macintosh operating systems.
Our current FlashPath product transfers images from digital cameras using
the SmartMedia flash memory card manufactured by Toshiba and Samsung. A number
of manufacturers use the SmartMedia card in their digital cameras, including
Agfa, FujiFilm, Olympus, Polaroid, Ricoh, Sanyo, Sharp and Toshiba. During the
12-month period ended June 30, 1999, we sold over 700,000 FlashPath adapters
for SmartMedia cards.
We are also developing two other FlashPath products that use different
flash memory media. One is designed to work with the Sony Memory Stick, which
initially will have applications in digital cameras, and the other is designed
to work with the SanDisk MultiMediaCard, which initially will be used in
conjunction with "smart" cellular telephones being developed by Nokia and
camcorders by JVC. In addition, we expect that these new FlashPath adapters
will support other applications, including digital audio players. We recently
completed production of a limited number of our FlashPath product for the Sony
Memory Stick, and we expect to commercially introduce FlashPath for the Sony
Memory Stick in the fourth quarter of 1999. We are currently in the early
stages of developing a prototype of FlashPath for the SanDisk MultiMediaCard
and we expect to commercially launch that product in the first quarter of 2000.
We expect that these new products will enable us to reach new markets and new
customers. In addition, we are developing a new consumer-oriented product that
is designed to allow flash memory cards to be used with an existing, non-PC
technology.
SMARTY. Our Smarty products enable smart cards to store and retrieve
information through a PC's floppy disk drive, thereby eliminating the need for
dedicated smart card reader peripherals. Like our FlashPath products, the
Smarty product is a solid state electronic device the size of a 3.5 inch floppy
disk, is powered by two replaceable batteries and requires no external power
source or wire connections. Smart cards are inserted into our Smarty product,
which accesses information on the smart card from the card's embedded
microprocessing chip. A user simply places the smart card into Smarty, inserts
Smarty into the 3.5 inch floppy disk drive and connects with the smart card
application. Smarty retrieves data from and stores data on any standard smart
card without cable connections, without any hardware installation and without
consuming PC peripheral ports.
Smart cards are typically used to store information such as medical
information, digital money and security codes. Accordingly, smart cards can
serve as personal identification, a credit card, a mass transit pass and as a
cash substitute for purchases at stores or over the Internet. Smart cards are
used in a number of applications in Europe but, as yet, have not gained
widespread consumer acceptance in the United States. However, we believe that
acceptance is increasing among businesses.
Today, Smarty is primarily being used in pilot programs, the earliest of
which began in October 1997. The major users of Smarty are ABN Amro Bank (The
Netherlands), Bally Gaming, Bank of America, la Caixa Bank (Spain) and Visa.
The product is sold to these customers, who in turn distribute it to their
customers for use with their accounts. Bank of America, for example,
distributes Smarty to some of its corporate customers for use in making secure
electronic funds transfers. Visa distributes Smarty with its Platinum card in
some Latin American regions for use in authenticating permitted access to
restricted areas on the Visa Platinum world wide web site. The pilot programs
have provided us with useful feedback that has resulted in improvements to the
product, but we do
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not expect a significant increase in our Smarty sales in the near future.
Smarty is designed to work with Microsoft's Personal Computer/Smart Card
(PC/SC) standard.
RESEARCH AND DEVELOPMENT
Our product design and development activities are conducted in both our
Naples, Florida and Tokyo, Japan offices.
NAPLES. Our Naples team is primarily responsible for our core research and
development activities, including product conceptualization, software and
firmware development, technical writing, printed circuit board layouts and
mechanical engineering. Our Naples team has significant expertise with floppy
disk drive interfaces, flash memory media and smart card interfaces, driver,
user and utility software interfaces, and design and firmware for ASICs. Our
engineers and other research and development employees also develop design
specifications based on customer requirements and supervise our quality
assurance activities. This 26-person Naples team consists of executive
management, line management, engineers, developers and quality assurance
personnel.
TOKYO. Our Tokyo research and development team actively assists in the
implementation of our product designs, with primary responsibility for applied
engineering, production engineering and the supervision of our contract
manufacturers. Our Tokyo team also plays a principal role in coordinating our
development activities with the leading flash memory card manufacturers and
refining the product requirements of our OEM customers. Other activities
include the localization/translation of our products for the Japanese market,
debugging and quality assurance. Our Tokyo research and development team
consists of our Japanese subsidiary's Vice President of Engineering and four
Toshiba engineers who provide services on a contract basis.
For 1996, 1997, 1998 and the first six months of 1999, our research and
development expenditures were approximately $720,000, $1.4 million, $1.6
million and $2.5 million, respectively.
In addition, since our inception we have endeavored to develop and
maintain close relationships with key suppliers of components and technologies
in order to enable us to quickly introduce new products that incorporate the
latest technological advances. As a result, the substantial resources of
companies such as Hitachi, Mitsumi, NEC, Rohm, SanDisk, Sony, Toshiba and
Yamaichi augment our internal research and development efforts. These
cooperative arrangements take many forms and provide a number of benefits. For
example, SanDisk, Sony and Toshiba have licensed technology to us that allows
our products to interface with their flash memory cards and provide extensive
engineering support. We believe that our close relationships with flash card
manufacturers and consumer product OEMs also provide insight into their current
and future needs, enabling us to design specific products that meet those
requirements.
MANUFACTURING AND SOURCES OF SUPPLY
We currently outsource our manufacturing and plan to continue to outsource
manufacturing for the foreseeable future. This strategy allows us to focus on
our core research, product design and development capabilities, and to reduce
the substantial capital investment required to manufacture our products. We
also believe that our use of experienced, high-volume manufacturers provides
greater manufacturing specialization and expertise, higher levels of
flexibility and responsiveness, and faster delivery of product than in-house
manufacturing. In addition, we frequently seek the advice of our experienced
manufacturers with respect to design changes that reduce manufacturing costs or
lead times or increase the manufacturing yields and the quality of our finished
products.
Our products are currently manufactured in the Philippines at facilities
operated by Yamaichi and Mitsumi. Under our manufacturing arrangements, we
receive fully assembled and tested products based upon our proprietary designs
and specifications. We selected our manufacturers based upon their reputations
for quality, their cost structures, their production capacities and their
support of
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state-of-the-art manufacturing processes and systems. However, our current
dependence on a limited number of manufacturers exposes us to a variety of
risks, including shortages of manufacturing capacity, and reduced control over
delivery schedules, quality assurance, production yields and costs.
Accordingly, we intend to seek additional manufacturing capacity and, in
particular, at least two manufacturers for each of our products. To that end,
in January 1999, we signed an agreement with Hitachi to manufacture our Smarty
product. We expect production by Hitachi to begin by the end of 1999. We do not
have contracts in place with any of our current manufacturers.
To ensure that products manufactured by others meet our standards, our
Tokyo production and engineering team works closely with our contract
manufacturers in all key aspects of the production process. We establish
product specifications, select the components to be used to produce our
products, select the suppliers, and negotiate the prices for most of these
components. We also work with our contract manufacturers to improve process
control and product design, and conduct periodic, on-site inspections of our
manufacturers. In addition, our Tokyo team conducts monthly review meetings
with our manufacturers to discuss sales forecasts and the procurement of long
lead-time parts, production capacities and facilities.
We rely upon a limited number of suppliers of several key components used
in our products. In particular, Rohm manufactures our proprietary ASICs used in
our FlashPath products and our proprietary analog ASICs used in our Smarty
products, and Atmel manufactures our proprietary digital ASICs used in our
Smarty products. Moreover, we purchase ASICs and other components pursuant to
purchase orders placed from time to time and have no guaranteed supply
arrangements. Our reliance on limited source suppliers involves several risks,
including a potential inability to obtain an adequate supply of required
components, unexpected price increases, lack of timely delivery and variable
component quality.
COMPETITION
There are no competitors known to us that offer a digital data transfer
solution for flash memory or smart cards using a 3.5 inch floppy drive.
However, we face competition from numerous providers of cable and other
non-cable interfaces, including ports, USBs and infrared interfaces. These
competing products are offered by a number of companies, including:
/bullet/ in the case of flash memory card interfaces, Hagiwara, SanDisk and
SCM Microsystems; and
/bullet/ in the case of smart card interfaces, Gemplus, Hitachi, SCM
Microsystems and Toshiba.
The market for data transfer products is intensely competitive and
characterized by rapidly changing technology and rapid changes in consumer
preference. We believe that competition is likely to intensify as a result of
increasing demand for digital appliances using flash memory cards. Future
competition may also include flash memory card manufacturers and the consumer
product OEMs that are our current customers. In addition, it is possible that
third parties may design around our patents or license technology to develop
competing products that use a 3.5 inch floppy drive interface.
Many of our current and potential competitors have significantly greater
financial, technical, marketing, purchasing and other resources than we do. As
a result, our competitors may be able to respond more quickly to new or
emerging technologies or standards or to changes in customer requirements. Our
competitors may also be able to devote greater resources to the development,
promotion and sale of products, and may be able to deliver competitive products
at a lower end-user price. Current and potential competitors have established
or may establish cooperative relationships among themselves or with third
parties to increase the ability of their products to address the needs of our
prospective customers. Therefore, it is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share. Increased competition is likely to result in price reductions, reduced
operating margins and loss of market share. Any of these factors could have a
material adverse effect on our business and operating results.
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<PAGE>
We believe that the principal competitive factors affecting the market for
flash memory connectivity and smart card products include:
/bullet/ the extent to which products work with existing and will work with
future digital appliances;
/bullet/ ease of use;
/bullet/ quality and reliability;
/bullet/ rate of throughput, or data transfer speed;
/bullet/ strength of distribution channels; and
/bullet/ price.
We believe that our products compete successfully on most of these bases.
INTELLECTUAL PROPERTY
We do not intend to license our proprietary technology to flash memory
card manufacturers, consumer product OEMs or other third parties in the future.
We have granted Fischer International a non-exclusive license to produce our
SafeBoot product until 2001. The protection of our intellectual property rights
is critical to our future success, and we rely in part on patent, trade secret,
trademark, maskwork and copyright law. We own five United States patents and 55
foreign patents. We also have a number of pending patent applications in
various countries. Our patents and patent applications cover various aspects of
our technology.
Although we believe that our patent rights, when considered in conjunction
with our allowed patent applications and trade secret protection, should
prevent another party from manufacturing and selling competing data transfer
products that use a floppy disk drive interface, we cannot guarantee that the
steps we have taken to protect our technology will be successful. The patents
issued to us may not be adequate to protect our proprietary rights, to deter
misappropriation or to prevent an unauthorized third party from copying our
technology, designing around the patents we own or otherwise obtaining and
using our products, designs or other information. In addition, patents may not
be issued under our current or future patent applications, and the patents
issued under those patent applications could be invalidated, circumvented or
challenged. It may also be particularly difficult to protect our products and
intellectual property under the laws of some countries in which our products
are or may be manufactured or sold.
Moreover, third parties could develop technologies that are similar or
superior to our technology or could make infringement claims against us.
Regardless of the outcome, an infringement claim would likely result in
substantial cost and diversion of our resources. In addition, we may not
prevail in litigation or be able to license any valid and infringed patents
from third parties on commercially reasonable terms, if at all. Any
infringement claim or other litigation against us or by us could therefore harm
our business, financial condition and results of operations.
Our FlashPath and Smarty trademarks are registered in the United States
and a variety of other countries in which we do business, and we will continue
to evaluate the registration of additional trademarks as appropriate. However,
we do not have the rights to the Smarty trade name in either Germany or The
Netherlands, and our trademark application for the SmartDisk name is still
pending in the United States. We also claim copyright protection for some of
our proprietary software and documentation. In addition, we generally enter
into confidentiality and non-disclosure agreements with our employees and with
key consultants, vendors and suppliers.
EMPLOYEES
As of August 31, 1999, we had 49 full-time employees, including 27
employees engaged in research and development, 9 engaged in sales and marketing
and 13 engaged in general and
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administrative activities. Our employees are not represented by any collective
bargaining agreements, and we have never experienced a work stoppage. We
believe our employee relations are good.
PROPERTIES
Our corporate and technical headquarters are located in Naples, Florida.
We lease approximately 15,000 square feet of space in Naples, Florida under a
three-year lease which expires in December 2001. We also lease approximately
3,500 square feet of space in Tokyo for our Japanese operations. This lease
expires in April 2000. We believe that our existing facilities are adequate to
support our existing operations and that, if needed, we will be able to obtain
suitable additional facilities on commercially reasonable terms.
LITIGATION
SmartDisk is not a party to any material legal proceedings.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
Our executive officers, directors and key employees, and their ages as of
August 31, 1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- ----- --------------------------------------------------------
<S> <C> <C>
Addison M. Fischer .............. 51 Chairman of the Board of Directors
Michael S. Battaglia ............ 54 President, Chief Executive Officer and Director
Douglas R. Kraul ................ 44 Vice President, Audio/Video Products
Michael R. Mattingly ............ 50 Chief Financial Officer
Robert Protheroe ................ 43 Senior Vice President, Research and Development
Daniel E. Reed .................. 31 Vice President, Corporate Development and Legal Affairs
Quresh Sachee ................... 36 Vice President, Marketing
Yoshiaki Uchida ................. 56 Vice President and General Manager, Asian Operations
D. James Bidzos(1) .............. 44 Director
Anthony A. Ibarguen(2) .......... 39 Director
Shigeki Morita .................. 54 Director
Timothy Tomlinson(2) ............ 49 Director
Hatim Tyabji(1) ................. 54 Director
Joseph M. Tucci(1) .............. 51 Director
</TABLE>
Other Key Employees:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------- ----- --------------------------------------------------------
<S> <C> <C>
O. Lee Drennan ............. 41 Director of Product Engineering
Kazuhisa Fukatsu ........... 58 Senior Manager, Production Control and Assistant to the
President of SmartDisk International
Kazuhiro Iwata ............. 53 Vice President, Engineering of SmartDisk International
Jon Kaplan ................. 41 Vice President, Software Development
Konosuke Nakamura .......... 52 Vice President, Marketing of SmartDisk International
</TABLE>
- --------
(1) Member of the compensation committee.
(2) Member of the audit committee.
ADDISON M. FISCHER has served as Chairman of the Board of Directors since
our inception in 1997. Mr. Fischer has been an investor in numerous emerging
technology companies as his principal occupation for at least the past five
years. Many of these companies are involved in the fields of computer security
and office automation. He also serves on the board of directors of a number of
companies, including Fischer International Systems Corporation, a
privately-held software company which he controls. He was also a long-time
board member of and significant investor in RSA Data Security, Inc., a leader
in cryptographic software, until its merger in 1996 with Security Dynamics,
Inc. Mr. Fischer also controls Phoenix House Investments, L.L.C., our majority
shareholder. In addition, Mr. Fischer was one of the founders of VeriSign,
Inc., a publicly-held electronic credentials/digital certificate company. Mr.
Fischer is a member of committees that set U.S. standards for computer security
and electronic commerce. He has addressed the U.S. Congress, by invitation, on
several topics, including digital signature standards, proposed FBI digital
telephony legislation, and global U.S. competitiveness. Mr. Fischer holds
numerous U.S. and international patents, and is a lifetime member of the
Association of Former Intelligence Officers.
MICHAEL S. BATTAGLIA has served as our President and Chief Executive
Officer since January 1998 and as a director since October 1998. From May 1995
to December 1998, Mr. Battaglia was President and Chief Executive Officer of
Fischer International Systems Corporation, a company controlled by Addison
Fischer, our Chairman of the board of directors and holder of a majority
interest in Phoenix House Investments, L.L.C., our major shareholder. During
1998, Mr. Battaglia served as an officer of
41
<PAGE>
both SmartDisk and Fischer International. From August 1992 to December 1994,
Mr. Battaglia was President of Mosler Inc., a provider of electronic security
systems and security equipment. For the 25-year period prior to his Mosler
tenure, Mr. Battaglia held various senior management positions in the computer
and information systems industry. He spent most of his professional career at
Sperry Corporation in New York City and Philadelphia. Mr. Battaglia also serves
on the board of directors of Fischer International, which is privately-held.
DOUGLAS R. KRAUL has served as our Vice President, Audio/Video Products
since July 1999. From February 1997 to June 1999, Mr. Kraul was President and
Chairman of Harmony Systems, Inc., a developer of Internet desktop client
software and applications for information management and electronic musical
products. From October 1993 until February 1997, Mr. Kraul served in several
positions with Motorola, Inc., an electronics and communications company, most
recently as Vice President, General Manager, Motorola Platform Software
Division and Vice President, General Manager, Personal Communicator Systems &
Software Division.
MICHAEL R. MATTINGLY has served as our Chief Financial Officer since May
1999 and was our Corporate Controller from February 1999 to May 1999.
Previously, Mr. Mattingly was employed by Mosler Inc., a provider of electronic
security systems and security equipment. During a 20-year career at Mosler, Mr.
Mattingly held various positions in finance and accounting, most recently Cost
Controller and Company Controller. Prior to his service with Mosler, Mr.
Mattingly served in various financial and accounting positions with American
Standard, Inc., a public company whose shares are traded on the New York Stock
Exchange. His professional background includes 28 years of general accounting,
cost accounting, planning and budgeting, as well as management of those
functions.
ROBERT PROTHEROE has served as our Senior Vice President, Research and
Development since March 1999. From November 1995 to March 1999, Mr. Protheroe
held senior management positions, most recently Vice President of Engineering,
at IVI/Checkmate Electronics, Inc., an Atlanta based designer and manufacturer
of point-of-sale payment systems. Prior to joining IVI/Checkmate, Mr. Protheroe
was employed by Electronic Power Technologies, Inc., AT&T Global Information
Systems and by NCR Corporation in various engineering and engineering
management positions.
DANIEL E. REED has served as our Vice President, Corporate Development and
Legal Affairs since May 1999. From August 1994 to May 1999, Mr. Reed was an
attorney with the law firm of Greenberg Traurig, P.A., Miami, Florida, where he
concentrated his law practice in the areas of mergers and acquisitions, public
offerings and private financings, representing both public and private
companies. From August 1989 to April 1991, Mr. Reed served as a senior auditor
with Ernst & Young, LLP, New York City, New York, concentrating his practice in
the financial services and electronics industries.
QURESH SACHEE has served as our Vice President, Marketing, since May 1998.
From 1993 to May 1998, Mr. Sachee was employed by IVI/Checkmate Electronics,
Inc., a designer and manufacturer of point-of-sale systems, in various
positions, including Executive Vice President, Senior Vice President of Product
Management, and prior to that, Vice President, International Sales. Prior to
that time, Mr. Sachee was employed by VeriFone, Inc., a Hewlett Packard
point-of-sale software products company, in various product development and
marketing management positions, and by Unisys Corporation.
YOSHIAKI UCHIDA has served as our Vice President and General Manager,
Asian Operations, since November 1998. Prior to that time, Mr. Uchida spent 33
years with Toshiba Corporation in various management positions. He served as
Deputy General Manager of Toshiba's OME manufacturing and development facility,
and most recently was Senior Executive Vice President of MediaServe
Corporation, a Toshiba affiliate.
D. JAMES BIDZOS has served as a director since May 1998. Mr. Bidzos is
presently Vice Chairman of the Board of Directors of Security Dynamics
Technologies, Inc., a network security company, and served as its Executive
Vice President from July 1996 to February 1999. From 1986 to February 1999,
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Mr. Bidzos served as President, Chief Executive Officer and a director of RSA
Data Security, Inc., an encryption software company that was acquired by
Security Dynamics Technologies in July 1996. Mr. Bidzos is Chairman of the
Board of Directors of VeriSign, Inc., an electronic credentials/digital
certificate company, and was Chief Executive Officer of that company from April
1995 to July 1995.
ANTHONY A. IBARGUEN has served as a director since August 1999. From
September 1996, Mr. Ibarguen has served in varying capacities at Tech Data
Corp., a manufacturer of micro-computer hardware and software, including
President and Chief Operating Officer since March 1997. Mr. Ibarguen also
serves as a director of Tech Data. From August 1993 to August 1996, he was
employed by ENTEX Information Services, Inc., an information technology
company, as Executive Vice President of Sales and Marketing.
SHIGEKI MORITA has served as a director since April 1999. Since 1994, Mr.
Morita has served in various capacities with Toshiba Corporation, including his
current position as General Manager, Strategic Marketing Divisions, which he
has held since November 1998.
TIMOTHY TOMLINSON has served as a director since SmartDisk's inception in
1997. He co-founded Tomlinson Zisko Morosoli & Maser LLP, a law firm, in 1983,
and has been a partner there since that time. Mr. Tomlinson also serves on the
board of directors of VeriSign, Inc., Oak Technology, Inc. and Portola
Packaging, Inc., as well as other, privately held companies, including Fischer
International where he has served since April 1999.
HATIM TYABJI has served as a director since August 1999. Since February
1999, Mr. Tyabji has been Chairman and Chief Executive Officer of Saraide,
Inc., a provider of Internet and wireless data services. From 1986 until 1998,
Mr. Tyabji served as President and Chief Executive Officer of VeriFone, Inc. He
also served as Chairman of VeriFone from 1992 until 1998. Mr. Tyabji is also a
director of Best Buy Co., Inc., PubliCARD, Inc., Deluxe Corporation, Ariba
Technologies, Inc., and Novatel Wireless, Inc.
JOSEPH M. TUCCI has served as a director since August 1999. Since August
1990, Mr. Tucci has been employed by Wang Laboratories, Inc., a provider of
information technology services and solutions, initially as Executive Vice
President, Operations, and, since January 1993, as President and Chief
Executive Officer. Mr. Tucci has been Chairman of the Board of Directors of
Wang Laboratories since October 1993. Mr. Tucci was appointed deputy Chief
Executive Officer and a director of Getronics NV, a provider of information and
communication technology services, when Wang Laboratories was acquired by
Getronics in June 1999. Wang Laboratories is currently a subsidiary of
Getronics.
O. LEE DRENNAN has served as our Director of Product Engineering since
January 1998. From March 1991 to January 1998, he served in a number of
positions for Fischer International and SmartDisk Security Corporation, most
recently as Director of Product Engineering for Fischer International.
KAZUHISA FUKATSU has served as Senior Manager, Production Control and
Assistant to the President of SmartDisk International since June 1998. From
July 1996 to May 1998, he served in the position of Director of Akia
Corporation, a computer and electronics company. From September 1992 to July
1996, he served as Controller for Serano Japan Co., Ltd., a pharmaceutical
company.
KAZUHIRO IWATA has served as Vice President, Engineering of SmartDisk
International since April 1999. Prior to that time, Mr. Iwata spent almost 28
years with Toshiba Corporation where he held a number of management positions,
most recently Chief Specialist, Engineering Administration.
JON KAPLAN has served as our Vice President, Software Development since
January 1998. Prior to that time, he spent 8 years with Fischer International
as Vice President, Product Development.
KONOSUKE NAKAMURA has served as Vice President, Marketing of SmartDisk
International since March 1999. Prior to that time, Mr. Nakamura spent nearly
29 years with Toshiba Corporation in
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various management positions. Most recently, he served as a Senior Manager,
International Sales & Marketing, Storage Device Division for Toshiba.
BOARD OF DIRECTORS AND COMMITTEES
Our certificate of incorporation provides for a board of directors
consisting of three classes serving three-year staggered terms. Class I
consists of Michael S. Battaglia, Timothy Tomlinson and Joseph M. Tucci, with
the initial term of office of the Class I directors expiring at the annual
meeting of stockholders in 2000. Class II consists of Shigeki Morita and D.
James Bidzos, with the initial term of office of Class II directors expiring at
the annual meeting of stockholders in 2001. Class III consists of Addison M.
Fischer, Anthony A. Ibarguen and Hatim Tyabji, with the initial term of office
of Class III directors expiring at the annual meeting of stockholders in 2002.
The board of directors has a compensation committee and an audit
committee.
COMPENSATION COMMITTEE. The compensation committee of the board of
directors reviews and makes recommendations to the board regarding all forms of
compensation provided to the executive officers and directors of SmartDisk and
its subsidiaries including stock compensation and loans. In addition, the
compensation committee reviews and makes recommendations on stock compensation
arrangements for all employees of SmartDisk. The compensation committee also
administers our 1998 Employee Stock Option Plan, 1998 Directors and Consultants
Stock Option Plan, 1999 Incentive Compensation Plan and 1999 Employee Stock
Purchase Plan. The current members of the compensation committee are D. James
Bidzos, Hatim Tyabji and Joseph M. Tucci, with Mr. Bidzos chairing the
committee.
AUDIT COMMITTEE. The audit committee of the board of directors reviews and
monitors the corporate financial reporting and the internal and external audits
of SmartDisk, including, among other things, our internal audit and control
functions, the results and scope of the annual audit and other services
provided by our independent auditors and our compliance with legal requirements
that have a significant impact on our financial reports. The audit committee
also consults with our management and our independent auditors regarding the
preparation of financial statements and, as appropriate, initiates inquiries
into aspects of our financial affairs. In addition, the audit committee has the
responsibility to consider and recommend the appointment of, and to review fee
arrangements with, our independent auditors. The current members of the audit
committee are Timothy Tomlinson and Anthony A. Ibarguen, with Mr. Tomlinson
chairing the committee.
DIRECTOR COMPENSATION
Our 1999 Incentive Compensation Plan includes an automatic option grant
program for non-employee directors of SmartDisk. See "Employee Benefit Plans -
1999 Incentive Compensation Plan" for a description of the automatic grant
program.
Timothy Tomlinson, one of our directors, will receive a stock grant of
2,500 shares of our common stock upon completion of this offering.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee of the board of directors consisted in 1998 of
Timothy Tomlinson and D. James Bidzos. It currently consists of Messrs. Bidzos,
Tyabji and Tucci. There were no compensation committee interlocks during our
last fiscal year.
EXECUTIVE COMPENSATION
The following table sets forth compensation information for the fiscal
year ended December 31, 1998 paid by us for services by our Chief Executive
Officer and our other executive officer whose total salary and bonus for that
fiscal year exceeded $100,000, collectively referred to below as the "named
executive officers":
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------ --------------------
SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS UNDERLYING OPTIONS COMPENSATION
- --------------------------------------- ----------------- ---------------- -------------------- -------------
<S> <C> <C> <C> <C>
Michael S. Battaglia .................. $ 100,440(1) $ 45,000(1) 426,136 --
Chief Executive Officer and President
Quresh Sachee ......................... 89,306 47,500 50,000 --
Vice President, Marketing
</TABLE>
- --------
(1) In addition, Mr. Battaglia received $100,440 in salary and $60,000 in bonus
from Fischer International for services rendered to Fischer International
in 1998. Commencing January 1, 1999, Mr. Battaglia became our full-time
employee.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options during the
fiscal year ended December 31, 1998 to each of the named executive officers. No
stock appreciation rights were granted to these individuals during that year.
<TABLE>
<CAPTION>
OPTION GRANTS IN 1998
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
-------------------------------------------------------------- ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE APPRECIATION
SECURITIES OPTIONS GRANTED EXERCISE OR FOR OPTION TERM(1)
UNDERLYING TO EMPLOYEES BASE PRICE EXPIRATION ----------------------------
NAME OPTIONS GRANTED(2) IN FISCAL YEAR ($)(SH)(3) DATE 5%($) 10%($)
- ------------------------------ -------------------- ----------------- ------------ ----------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Michael S. Battaglia ......... 426,136 45.5% $ 0.72 1/27/08 $7,328,619 $11,851,339
Quresh Sachee ................ 30,000 3.2 1.00 5/4/08 507,535 825,935
20,000 2.1 4.00 8/21/08 278,357 490,623
</TABLE>
- --------
(1) Potential realizable value is based on the assumption that the common stock
price appreciates at the annual rate shown, compounded annually, from the
date of grant until the end of the option term. The amounts have been
calculated based on the assumed appreciation rates shown in the table,
assuming a per share market price at the time of grant of $11.00, which is
the mid-point of the proposed offering range. The actual value, if any, a
named executive officer may realize will depend on the excess of the stock
price over the exercise price on the date the option is exercised, if the
executive were to sell the shares on the date of exercise, so there is no
assurance that the value realized will be equal to or near the potential
realizable value as calculated in this table.
(2) The options granted to Michael Battaglia are immediately exercisable,
subject to our right to repurchase the shares upon the termination of Mr.
Battaglia's employment with us. Our repurchase right lapses as to 2% of
the shares each month for fifty months from the date of grant. The options
granted to Quresh Sachee in May 1998 are immediately exercisable, subject
to our repurchase right which lapses as to 25% of the shares one year
after the date of grant and as to 6.25% of the shares each quarter
thereafter. Those options granted to Mr. Sachee in August 1998 are
immediately exercisable, subject to our right of repurchase which lapses
as to 25% of the shares on January 1, 2000 and as to 6.25% of the shares
each quarter thereafter. Each of the options granted have a term of ten
years from the date of grant, subject to acceleration upon a change of
control of our company.
(3) Prior to this offering, there has been no public market for our common
stock. The exercise price of each of these options is equal to the fair
market value of our common stock on the date of grant as determined by our
board of directors.
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<PAGE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information concerning the year-end number
and value of unexercised options for each of the named executive officers.
There was no public trading market for the common stock as of December 31,
1998. In light of the substantial disparity between the fair market value of
the common stock as of December 31, 1998, and the likely initial public
offering price of the common stock, in order to quantify the effect of this
offering on the value of the options we have used $11.00, the mid-point of the
proposed offering range, in calculating the values in the table. These values
have been calculated based on a price of $11.00 per share, minus the applicable
per share exercise price. We have never granted stock appreciation rights.
Value Realized is calculated by subtracting the aggregate exercise price paid
from the likely value of the shares on completion of this offering.
AGGREGATE OPTION EXERCISES IN 1998 AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
SHARES DECEMBER 31, 1998(#) AT DECEMBER 31, 1998($)
ACQUIRED VALUE ----------------------------- ----------------------------
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------ ---------------- ------------ ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Michael S. Battaglia ......... 426,136 $4,380,678 -- -- -- --
Quresh Sachee ................ 30,000 300,000 20,000 -- $140,000 --
</TABLE>
EMPLOYMENT AGREEMENTS
The following executive officers have signed employment agreements with
SmartDisk.
MICHAEL S. BATTAGLIA. Mr. Battaglia's employment agreement has a
three-year term ending December 31, 2002. His annual base salary is $275,000
and he is eligible for annual merit increases at the discretion of our board of
directors and an annual bonus of $125,000 for 1999 if we achieve specific
revenue and profitability goals. Bonuses for the remaining years in the term
are at the discretion of the compensation committee of our board of directors.
If we terminate Mr. Battaglia without cause, we must pay him severance of six
months' base salary plus fifty percent of his bonus, if any, for the year in
which he was terminated. Mr. Battaglia has agreed not to compete with us for
one year after his employment if he resigns and for six months after his
employment if we terminate him.
ROBERT PROTHEROE. Mr. Protheroe's employment agreement has a three-year
term ending March 15, 2002. His annual base salary is $180,000 and he is
eligible for a bonus of $60,000 for 1999 if we achieve specific revenue and
profitability goals. We have agreed to reimburse Mr. Protheroe for up to
$40,000 in relocation expenses. Bonuses for the remaining years are at the
discretion of the compensation committee of our board of directors. If we
terminate Mr. Protheroe without cause, we must pay him severance of six months'
base salary. Mr. Protheroe has agreed not to compete with us for one year after
termination of his employment.
QURESH SACHEE. Mr. Sachee's employment agreement has a two-year term
ending May 3, 2000. His annual base salary is $150,000 and he is eligible for a
bonus of $50,000 for 1999 if we achieve specific revenue and profitability
goals. We agreed to reimburse Mr. Sachee for up to $40,000 in relocation
expenses. If we terminate Mr. Sachee without cause, we must pay him severance
of three months' base salary. Mr. Sachee has agreed not to compete with us for
one year after termination of his employment if he resigns and for six months
after his employment if we terminate him.
EMPLOYEE BENEFIT PLANS
1999 INCENTIVE COMPENSATION PLAN. Our board of directors adopted our 1999
Incentive Compensation Plan in July 1999 and our stockholders approved the
adoption of the plan in July 1999. We have reserved 2,500,000 shares of common
stock for issuance under the plan, of which options to
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purchase 73,500 shares were outstanding as of August 31, 1999. Under the plan,
officers, employees, members of the board of directors and consultants are
eligible to receive awards. The types of awards that may be made under the plan
are options to purchase shares of common stock, stock appreciation rights,
restricted shares, deferred shares, bonus shares, dividend equivalents and
other stock-based awards. Options may be either incentive stock options that
qualify for favorable tax treatment for the optionee under Section 422 of the
Internal Revenue Code of 1986 or nonstatutory stock options not designed to
qualify for favorable tax treatment. If shares awarded under the plan are
forfeited, then those shares will again become available for new awards under
the plan. Annual cash awards are limited to $10,000,000 per person, and annual
cash performance awards are limited to $20,000,000 per person.
The compensation committee of our board of directors administers the plan.
The committee has complete discretion to make all decisions relating to the
interpretation and operation of the plan, including the discretion to determine
which eligible individuals are to receive any award, and to determine the type,
number, vesting requirements and other features and conditions of each award.
The exercise price for incentive stock options granted under the plan may
not be less than 100% of the fair market value of the common stock on the
option grant date. The exercise price may be paid in cash or by other means,
including a cashless exercise method as determined by the committee.
The plan includes an automatic grant program for our non-employee
directors. Under the plan, non-employee directors are automatically granted
options to purchase 15,000 shares of common stock upon their initial election
to the board of directors and 500 shares upon appointment to any committee of
the board and upon appointment as chairman of a committee. Thereafter, the
directors are granted options to purchase an additional 6,000 shares in January
of each year that they serve on the board and 500 each year that they serve as
a member, and 500 each year that they serve as chairman, of a committee. All
options granted under the automatic grant program vest 2% a month for each
month after the grant. Directors who were serving on the board on the date that
the plan was adopted are eligible to participate in the program in 2001.
Otherwise, directors are eligible upon election.
Our board of directors may amend or terminate our plan at any time. If the
board amends the plan, stockholder approval of the amendment will be sought
only if required by an applicable law. The plan will continue in effect
indefinitely unless the board decides to terminate the plan earlier.
1999 EMPLOYEE STOCK PURCHASE PLAN. Our board of directors adopted our 1999
Employee Stock Purchase Plan in July 1999, and our stockholders approved the
adoption of the plan in July 1999. We have reserved 465,000 shares of common
stock for issuance under the plan, none of which has been issued. Once an
employee enters the plan, on the first day of each offering period he or she is
granted an option to purchase shares of our common stock, up to a maximum of
1,000 shares, on June 30 and December 31 of each offering period. The plan,
which is intended to qualify under Section 423 of the Internal Revenue Code of
1986, will be implemented through successive twelve-month offering periods,
generally commencing the first of January each year. The initial offering
period will commence on the effective date of this offering and will run
through December 31, 1999. The plan will be administered by the compensation
committee. Employees will be eligible to participate if they are employed by us
for at least 20 hours per week and have been employed for more than five (5)
months in a calendar year. The plan permits eligible employees to purchase
common stock through payroll deductions, which may not exceed 15% of an
employee's compensation. The price of stock purchased under the plan will be
85% of the lower of the fair market value of the common stock at the beginning
or the end of each twelve-month offering period. Employees may not be granted
shares under the plan if immediately following a grant they would hold stock
and/or options to acquire stock possessing more than 5% of the total voting
power of the shares of our company. In addition, employees may be granted
options to purchase a maximum of $25,000 worth of stock per year under the
plan. Employees may end their participation at any time and participation ends
automatically
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<PAGE>
upon termination of employment with us. Our board of directors may amend or
terminate the plan at any time. If the board amends the plan, stockholder
approval of the amendment will be sought only if required by an applicable law.
1998 EMPLOYEE STOCK OPTION PLAN. Our board of directors adopted our 1998
Employee Stock Option Plan in January 1998, and our stockholders approved the
adoption of the plan in March 1998. We have reserved 1,454,545 shares of common
stock for issuance under the plan, of which options to purchase 821,969 shares
were outstanding as of August 31, 1999. Under the plan, the eligible
individuals are our employees or those of any parent or subsidiary. The types
of awards that may be made under the plan are options to purchase shares of
common stock. Options may be incentive stock options that qualify for favorable
tax treatment for the optionee under Section 422 of the Internal Revenue Code
of 1986 or nonstatutory stock options not designed to qualify for favorable tax
treatment. If options awarded under the plan are forfeited, then the shares
underlying those options will generally become available for new awards under
the plan.
Our board of directors or a committee of our board administers the plan.
The administrator has complete discretion to make all decisions relating to the
interpretation and operation of the plan, including the discretion to determine
which eligible individuals are to receive any award, and to determine the type,
number, vesting requirements and other features and conditions of each award.
The exercise price for incentive stock options granted under the plan may
not be less than 100% of the fair market value of the common stock on the
option grant date. The exercise price may be paid in cash or, at the discretion
of the compensation committee, in outstanding shares of common stock, by
delivery of a promissory note, or by any combination of cash, shares of common
stock or promissory notes. At the discretion of the compensation committee, the
exercise price may also be paid by using a cashless exercise method.
If a merger or other reorganization occurs, and our stockholders before
the transaction hold a majority of the voting securities of the acquiring or
surviving corporation after the transaction, outstanding options under the plan
shall become exercisable for securities of the acquiring or surviving
corporation. If our stockholders before the transaction hold less than a
majority of the voting securities of the acquiring or surviving corporation
after the transaction, outstanding options shall generally be canceled unless
the merger or reorganization agreement provides otherwise.
Our 1998 Employee Stock Option Plan was terminated in July 1999.
1998 DIRECTORS AND CONSULTANTS STOCK OPTION PLAN. Our board of directors
adopted our 1998 Directors and Consultants Stock Option Plan in January 1998,
and our stockholders approved the adoption of the plan in March 1998. We have
reserved 250,000 shares of common stock for issuance under the plan, of which
options to purchase 144,281 shares were outstanding as of August 31, 1999.
Under the plan, our officers, directors and consultants and those of our
subsidiaries are eligible for option grants and other awards. The types of
awards that may be made under the plan are options to purchase shares of common
stock. Options will be nonstatutory stock options and are not designed to
qualify for favorable tax treatment under Section 422 of the Internal Revenue
Code of 1986. If options awarded under the plan are forfeited, then the shares
underlying those options generally become available for new awards under the
plan
Our board of directors or a committee of the board administers the plan.
The administrator has complete discretion to make all decisions relating to the
interpretation and operation of the plan, including the discretion to determine
which eligible individuals are to receive any award, and to determine the type,
number, vesting requirements and other features and conditions of each award.
The exercise price for stock options granted under the plan shall be
determined by the compensation committee at the time of grant. The exercise
price may be paid in cash or, at the discretion of the committee, in
outstanding shares of common stock, by delivery of a promissory note,
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<PAGE>
or by any combination of cash, shares of common stock or promissory notes. At
the discretion of the committee, the exercise price may also be paid by using a
cashless exercise method.
If a merger or other reorganization occurs, and our stockholders before
the transaction hold a majority of the voting securities of the acquiring or
surviving corporation after the transaction, outstanding options under the plan
shall become exercisable for securities of the acquiring or surviving
corporation. If our stockholders before the transaction hold less than a
majority of the voting securities of the acquiring or surviving corporation
after the transaction, outstanding options shall generally be canceled unless
the merger or reorganization agreement provides otherwise.
Our 1998 Directors and Consultants Stock Option Plan was terminated in
July 1999.
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CERTAIN TRANSACTIONS
PRE-FORMATION ADVANCES
Prior to 1997, Addison Fischer and his affiliates, including Fischer
International, advanced SDSC, SmartDisk's predecessor, non-interest bearing
loans in the aggregate amount of approximately $9.6 million in order to fund
SmartDisk's operations. Of the total amount advanced to SDSC, approximately
$4.6 million was contributed to the capital stock of SDSC in 1996 and 1997.
SDSC repaid the remaining $5.0 million of advances in May 1998, of which
$1,045,000 was paid to Fischer International and $3,955,000 was paid to Addison
Fischer.
In addition, from 1996 to March 1999, Addison Fischer and his affiliates,
including Fischer International, advanced SmartDiskette Limited, or SDL,
non-interest bearing loans in the aggregate amount of approximately $600,000.
In May 1999, prior to SmartDisk's acquisition of SDL, these advances were
converted into 96,710 shares of SDL common stock and, after the acquisition in
May 1999, these shares were in turn converted into 76,018 shares of SmartDisk
common stock.
FORMATION TRANSACTIONS
Although SmartDisk commenced operations in January 1998, it did not
receive significant capital contributions until February of that year. In
February 1998, Toshiba, Phoenix House and SmartDisk entered into a joint
venture agreement which detailed a plan of capital contribution, corporate
governance and business strategies for SmartDisk. Pursuant to this agreement,
each of Toshiba, Fischer International and Phoenix House agreed to purchase
shares of SmartDisk common stock and become SmartDisk's principal stockholders.
Before the May 1998 stock purchases described below, all oustanding shares of
SmartDisk were owned by employees of, or consultants to, SmartDisk, as a result
of the exercise of stock options. None of SmartDisk's current directors,
executive officers or significant shareholders owned any shares before the
purchases described below.
The joint venture agreement called for Toshiba to make an immediate loan
to SmartDisk of $5.0 million in exchange for a convertible note. The note had
an interest rate of 4% per annum. The note remained outstanding until May 22,
1998. At that time, Toshiba acquired 2,487,500 shares of SmartDisk common stock
in exchange for a cash payment of $4,950,000 and delivery and cancellation of
the February 1998 note, including accrued interest.
At the same time that Toshiba purchased its shares of SmartDisk common
stock, both Phoenix House and Fischer International acquired shares of
SmartDisk common stock. Both Phoenix House and Fischer International are
controlled by Addison Fischer, the Chairman of SmartDisk's board of directors.
Phoenix House acquired 7,350,000 shares of SmartDisk common Stock in exchange
for all of the outstanding shares of SDSC. As a result, SDSC became a wholly
owned subsidiary of SmartDisk and SmartDisk became the owner of the exclusive
patent licenses owned by SDSC. Fischer International acquired 150,000 shares of
SmartDisk common stock in return for trademarks it owned relating to the
SafeBoot, FlashPath and Smarty products. Immediately after their capital
contributions, Phoenix House, Toshiba and Fischer International owned 68.8%,
23.3% and 1.4% of SmartDisk's outstanding common stock.
On May 26, 1999, the shareholders of SDL, which included Addison Fischer
and Phoenix House, exchanged all of their shares of SDL for 515,500 shares of
SmartDisk common stock. Of the total number of SmartDisk shares issued, Addison
Fischer received 428,768 shares, Phoenix House received 32,918 shares and the
other shareholders of SDL received the remaining 53,814 shares. As a result of
this transaction, SmartDisk acquired 100% of SDL, the indirect owner of its
current principal patents.
FISCHER TRANSACTIONS
In 1996 and 1997, all of the products of SDSC were sold through Fischer
International and its affiliates. Under this arrangement, Fischer International
and its affiliates received a fee of
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approximately 25% of the sales of SDSC. The consolidated revenues shown in
SmartDisk's 1996 and 1997 financial statements, which reflect the revenue of
SDSC, are net of the fees paid to Fischer International and its affiliates. In
addition, operating expenses totaling approximately $2.3 million in 1996 and
$4.0 million in 1997 were incurred by Fischer International on behalf of SDSC.
In January 1998, SDSC entered into an operating agreement with Fischer
International and SmartDisk to provide operating services to SDSC, including
developing and marketing the SafeBoot, FlashPath and Smarty products. SDSC
agreed in return to reimburse Fischer International and SmartDisk for the
expenses related to providing those services. Upon SmartDisk's obtaining
control of SDSC in May 1998, this agreement was terminated and replaced with a
new operating agreement between Fischer International and SmartDisk. Under this
new agreement, as amended in June 1999, SmartDisk reimburses Fischer
International for marketing, accounting and other similar services. In
addition, until recently SmartDisk has shared office space with Fischer
International. SmartDisk has reimbursed Fischer International for the cost of
this office space as well as other general and administrative expenses.
SmartDisk's share of these expenses is based on an internal analysis of the
relative amount of time devoted to its business by employees of Fischer
International as well as the overhead charges attributable to these employees.
In 1998, SmartDisk paid Fischer International $1.5 million under this
arrangement for the reimbursement of expenses under the operating agreement and
for the other shared services.
In May 1998, SmartDisk entered into license and distribution agreements
with Fischer International. Under these agreements, SmartDisk granted Fischer
International a non-exclusive license to its SafeBoot product and distribution
rights to its SafeBoot, Smarty and FlashPath products until 2001. Pursuant to
this agreement, Fischer International agreed to pay SmartDisk 33.3% of the net
revenue derived from the sale of SmartDisk products on a stand-alone basis and
5% of the net revenue derived from the sale of SmartDisk products which are
bundled with the products of third parties. In 1998, SmartDisk received
approximately $285,000 from Fischer International under these agreements in
royalties related to SafeBoot, and no royalties related to Smarty and
FlashPath.
TOSHIBA TRANSACTIONS
In May 1998, SmartDisk entered into a license agreement with Toshiba,
which was contemporaneously becoming one of our principal shareholders. Under
this agreement, Toshiba granted us a non-exclusive license to patents relating
to the interface with Toshiba's SmartMedia cards. We agreed to pay a one-half
of 1% royalty on the net sales price of our products that use the Toshiba
license. This agreement was amended in September 1998 to expand the field of
use for the non-exclusive license. In 1998, we paid approximately $69,000 to
Toshiba under this license.
In addition, we sell a number of our products to an affiliate of Toshiba
which in turn serves as sales agent to Toshiba in its role as an OEM customer.
In 1997 and 1998, we had aggregate sales to Toshiba or the sales agent of
approximately $495,000 and $0.
Also, since September 1998, four engineers from Toshiba have worked for us
on a contract basis. In 1998, we paid Toshiba $74,296 for these services.
EMPLOYEE ADVANCES
On March 3, 1998, we loaned Michael Battaglia $305,114 in connection with
Mr. Battaglia's exercise of an option to acquire 426,136 shares of common
stock. The loan bears interest at the rate of 5.47% per year and the interest
is payable quarterly. The principal balance is due on the earlier of March 3,
2003 or the end of his employment with us or an affiliate of ours.
On March 3, 1998, we loaned David Stone, a former officer, $61,023 in
connection with Mr. Stone's exercise of an option to acquire 85,227 shares of
common stock. The loan bore interest at the rate of 5.47% per year and was
repaid in full in June 1998.
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<PAGE>
On March 29, 1999, we loaned Robert Protheroe $60,000 in connection with
his repayment of amounts owed to his previous employer. The loan bears interest
at the rate of 4.71% per year and is due in four annual installments ending in
2003, unless his employment with us ends at an earlier date, in which case the
principal balance and accrued interest are due within 30 days after termination
of employment.
OTHER TRANSACTIONS
On May 28, 1998, we sold 28,750 shares of our common stock at a price of
$4.00 per share to First TZMM Investment Partnership, an entity affiliated with
Tomlinson Zisko Morosoli & Maser LLP. Timothy Tomlinson, one of our directors,
is a partner of Tomlinson Zisko Morosoli & Maser LLP.
On July 1, 1999, as part of a larger round of investments led by SCM
Microsystems, we sold an aggregate of 20,000 shares of common stock to Messrs.
Tomlinson and Bidzos, two of our directors, for $160,000, or $8.00 per share.
Individually, Mr. Tomlinson received 7,500 shares and Mr. Bidzos received
12,500 shares. In addition, First TZMM Investment Partnership acquired 27,500
shares for $220,000.
Timothy Tomlinson, one of our directors, is a partner of Tomlinson Zisko
Morosoli & Maser LLP, which provided legal services to us in 1998. Fees paid in
1998 to Mr. Tomlinson's firm did not exceed 5% of the law firm's gross revenues
for its last full fiscal year.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The table below sets forth information regarding the beneficial ownership
of SmartDisk's common stock as of August 31, 1999, by the following individuals
or groups:
/bullet/ Each person or entity who is known by SmartDisk to own
beneficially more than 5.0% of SmartDisk's outstanding stock;
/bullet/ Each of the named executive officers;
/bullet/ Each director of SmartDisk; and
/bullet/ All directors and executive officers as a group.
Unless otherwise indicated, the address of each of the individuals listed
in the table is c/o SmartDisk Corporation, 3506 Mercantile Avenue, Naples,
Florida 34104. Except as otherwise indicated, the persons named in the table
have sole voting and investment power with respect to all shares of common
stock held by them.
Percentage ownership in the following table is based on 12,523,511 shares
of common stock outstanding as of August 31, 1999. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and generally includes voting or investment power with respect to
securities. Shares of our common stock subject to options that are presently
exercisable or exercisable within 60 days of August 31, 1999 are deemed to be
outstanding and beneficially owned by the person holding the options for the
purpose of computing the percentage of ownership of that person, but are not
treated as outstanding for the purpose of computing the percentage of any other
person.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
AS A PERCENTAGE OF CLASS OUTSTANDING
NUMBER OF SHARES ------------------------------------
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING
- ---------------------------------------------- ------------------- ----------------- ---------------
<S> <C> <C> <C>
Phoenix House Investments, L.L.C.(1) ......... 7,382,917 59.0% 47.6%
Addison M. Fischer(2) ........................ 7,961,685 63.6 51.3
Toshiba Corporation(3) ....................... 2,487,500 19.9 16.0
Michael S. Battaglia ......................... 410,136 3.3 2.6
Quresh Sachee(4) ............................. 50,000 * *
D. James Bidzos(5) ........................... 31,250 * *
Timothy Tomlinson(6) ......................... 21,584 * *
Anthony A. Ibarguen(7) ....................... 620 * *
Hatim Tyabji(8) .............................. 620 * *
Joseph M. Tucci(9) ........................... 620 * *
Shigeki Morita ............................... 0 0 0
All directors and executive officers
as a group (14 persons)(10) ................ 8,476,515 67.6 54.5
</TABLE>
- --------
* Less than one percent.
(1) The address for Phoenix House is 400 West King Street, Carson City, Nevada
89703. Phoenix House is controlled by Addison M. Fischer, the Chairman of
our board of directors.
(2) Includes 7,382,917 shares held of record by Phoenix House and 150,000
shares held by Fischer International. Mr. Fischer effectively controls
both entities.
(3) The address for Toshiba Corporation is 1-1 Shibaura 1-Chome, Minato-ku,
Tokyo 105, Japan.
(4) Includes 20,000 shares subject to options either currently exercisable or
exercisable by Mr. Sachee within 60 days of August 31, 1999.
(5) Excludes shares held by Phoenix House, in which Mr. Bidzos owns a 2.5%
ownership interest. Mr. Bidzos disclaims beneficial ownership of the
shares held by Phoenix House.
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<PAGE>
(6) Includes 1,500 shares held by trusts for which Mr. Tomlinson is the sole
trustee. Mr. Tomlinson disclaims beneficial ownership of those shares.
Also includes 7,417 shares held by an investment fund as to which Mr.
Tomlinson exercises sole voting and dispositive power.
(7) Includes 620 shares subject to options either currently exercisable or
exercisable by Mr. Ibarguen within 60 days of August 31, 1999.
(8) Includes 620 shares subject to options either currently exercisable or
exercisable by Mr. Tyabji within 60 days of August 31, 1999.
(9) Includes 620 shares subject to options either currently exercisable or
exercisable by Mr. Tucci within 60 days of August 31, 1999.
(10) See footnotes (2), (4), (5), (6), (7), (8) and (9) above.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Our authorized capital stock consists of 60,000,000 shares of common
stock, $0.001 par value, and 5,000,000 shares of preferred stock, $0.001 par
value.
COMMON STOCK
As of August 31, 1999, there were 12,523,511 shares of common stock
outstanding that were held of record by approximately 43 stockholders. There
will be 15,523,511 shares of common stock outstanding, assuming no exercise
after August 31, 1999 of outstanding options, after giving effect to the sale
of the shares of common stock offered to the public by this prospectus.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to any preferential
rights of preferred stock holders, the holders of common stock are entitled to
receive dividends on a pro rata basis, if any, declared from time to time by
the board of directors out of legally available funds. We have never paid
dividends in the past and do not intend to do so in the future. In the event of
our liquidation, dissolution or winding up, subject to any preferential rights
of preferred stock holders, the holders of common stock are entitled to share
on a pro rata basis in all assets remaining after payment of liabilities. The
common stock has no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions applicable to the
common stock. All outstanding shares of common stock are fully paid and
nonassessable, and the shares of common stock to be issued upon completion of
this offering will be fully paid and nonassessable.
PREFERRED STOCK
On the closing of this offering, no shares of preferred stock will be
outstanding. The board of directors has the authority to issue the preferred
stock in one or more series and to fix the rights, preferences, privileges and
restrictions of the preferred stock, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any series or the
designation of any series, without further vote or action by the stockholders.
The issuance of preferred stock may have the effect of delaying, deferring or
preventing a change in control of our company without further action by the
stockholders and may adversely affect the voting and other rights of the
holders of common stock. The issuance of preferred stock with voting and
conversion rights may adversely affect the voting power of the holders of
common stock, including the loss of voting control to others. At present, we
have no plans to issue any preferred stock.
REGISTRATION RIGHTS
Concurrently with the purchase of our common stock by Toshiba Corporation,
Phoenix House Investments, L.L.C. and Fischer International Systems
Corporation, we entered into an agreement providing registration rights for
Toshiba, Phoenix House and Fischer International. At any time after 180 days
following the date of this prospectus, Toshiba Corporation, Phoenix House
Investments, L.L.C. or the holders of a majority of the shares held by them may
require us to file a registration statement under the Securities Act covering
at least 20% of the securities of SmartDisk held by them, or a lesser
percentage if the net aggregate offering price would exceed $10.0 million. We
will not be required to comply with a request for registration on more than
three occasions or within 60 days before or 180 days after our good faith
estimate of the effective date of another registration statement filed pursuant
to a request.
When we are eligible to utilize a registration statement on Form S-3 to
register an offering of our securities, holders of 20% of the shares held by
Toshiba Corporation, Phoenix House Investments,
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<PAGE>
L.L.C. and Fischer International Systems Corporation may request that we file a
registration statement on Form S-3, covering all or a portion of securities of
SmartDisk held by them, provided that the aggregate public offering price is at
least $500,000. These holders can request only two S-3 registrations.
These registration rights will be subject to SmartDisk's right to delay
the filing of a registration statement if, in the view of our board of
directors, a filing would be seriously detrimental to us, not more than once in
any 12-month period, for not more than 150 days after the appropriate number of
holders have requested we file a registration statement.
In addition, Toshiba Corporation, Phoenix House Investments, L.L.C., SCM
Microsystems, Inc. and Fischer International Systems Corporation have
"piggyback" registration rights. If we propose to register any common stock
under the Securities Act, other than pursuant to the registration rights noted
above and in some other instances, Toshiba Corporation, Phoenix House
Investments, L.L.C. and Fischer International Systems Corporation may require
us to include all or a portion of their securities in the registration.
However, the managing underwriter, if any, of any offering has the right to
limit the number of securities proposed to be included in the registration.
We are required to bear all registration expenses incurred in connection
with these registrations. Toshiba Corporation, Phoenix House Investments,
L.L.C. and Fischer International Systems Corporation will pay all underwriting
discounts and selling commissions applicable to the sale of their securities.
We also agreed to indemnify Toshiba Corporation, Phoenix House
Investments, L.L.C. and Fischer International Systems Corporation for any
damages they suffer due to any untrue statement or omission that we make in a
registration statement covering their shares.
The registration rights of Toshiba Corporation, Phoenix House Investments,
L.L.C. and Fischer International Systems Corporation under the agreement
providing registration rights will terminate, as to each of them, when it may
sell all its shares in a three-month period under Rule 144 under the Securities
Act.
ANTITAKEOVER EFFECTS OF DELAWARE LAW AND PROVISIONS OF OUR CERTIFICATE OF
INCORPORATION AND BYLAWS
CERTIFICATE OF INCORPORATION AND BYLAWS. Our certificate of incorporation
provides that all stockholder actions must be effected at a duly called meeting
and not by a consent in writing. Our certificate of incorporation also provides
that the affirmative vote of 80% of our outstanding stock is required to remove
any of our directors, to approve a business combination involving our company
or for our stockholders to amend our bylaws or the anti-takeover provisions of
our certificate of incorporation. Our bylaws provide that our stockholders may
not call a special meeting of stockholders. The bylaws also include advance
notice procedures with regard to the nomination, other than by the board of
directors, of candidates for director elections. These provisions of our
certificate of incorporation and bylaws could discourage potential acquisition
proposals and could delay or prevent a change in control of SmartDisk. These
provisions are intended to enhance the likelihood of continuity and stability
in the composition of our board of directors and in the policies formulated by
our board of directors and to discourage some types of transactions that may
involve an actual or threatened change of control of SmartDisk. These
provisions are designed to reduce our vulnerability to an unsolicited
acquisition proposal. The provisions also are intended to discourage tactics
that may be used in proxy fights. However, these provisions could have the
effect of discouraging others from making tender offers for our shares or proxy
fights and, as a consequence, they also may inhibit fluctuations in the market
price of our shares that could result from actual or rumored takeover attempts.
These provisions also may have the effect of preventing changes in our
management.
DELAWARE ANTITAKEOVER LAW. SmartDisk is subject to Section 203 of the
Delaware General Corporation Law, an antitakeover law. In general, Section 203
prohibits a publicly held Delaware
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<PAGE>
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became
an interested stockholder, unless the "business combination" or the transaction
in which the person became an interested stockholder is approved in a
prescribed manner. Generally, a "business combination" includes a merger, asset
or stock sale, or other transaction resulting in a financial benefit to the
interested stockholder. Generally, an "interested stockholder" is a person who,
together with affiliates and associates, owns or within three years prior to
the determination of interested stockholder status, did own, 15.0% or more of a
corporation's voting stock. The existence of this provision may have an
antitakeover effect with respect to transactions not approved in advance by the
board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by
stockholders.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the common stock is American Stock
Transfer & Trust Company.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the common stock of
SmartDisk, and there can be no assurance that a significant public market for
the common stock will develop or be sustained after this offering. Future sales
of substantial amounts of common stock, including shares issued upon exercise
of outstanding options, in the public market following this offering could
adversely affect market prices prevailing from time to time and could impair
our ability to raise capital through sale of our equity securities. As
described below, no shares currently outstanding will be available for sale
immediately after this offering because of contractual restrictions on resale.
Sales of substantial amounts of our common stock in the public market after the
restrictions lapse could adversely affect the prevailing market price and our
ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding 15,523,511
shares of common stock based upon shares outstanding as of August 31, 1999,
assuming no exercise of outstanding options prior to completion of this
offering and no exercise of the underwriters' over-allotment option. Of these
shares, the 3,000,000 shares sold in this offering will be freely tradable
without restriction under the Securities Act except for any shares purchased by
"affiliates" of SmartDisk as that term is defined in Rule 144 under the
Securities Act. The remaining 12,523,511 shares of common stock held by
existing stockholders are "restricted securities" as that term is defined in
Rule 144. All of these restricted shares are subject to lock-up agreements
providing that the stockholder generally will not offer, sell, contract to sell
or otherwise dispose of any common stock or any securities that are convertible
into common stock for a period of 180 days after the date of this prospectus
without the prior written consent of BancBoston Robertson Stephens Inc. As a
result of these lock-up agreements, notwithstanding possible earlier
eligibility for sale under the provisions of Rules 144, 144(k) and 701, none of
these shares will be eligible for resale until 181 days after the date of this
prospectus. BancBoston Robertson Stephens Inc. may, at its sole discretion, and
at any time without notice, release all or any portion of the securities
subject to lock-up agreements.
Beginning 181 days after the date of this prospectus, approximately 11.5
million restricted shares will be eligible for sale in the public market, all
of which are subject to the volume limitations under Rule 144 described below.
In general, the volume limitations under Rule 144, as currently in effect,
provide that beginning 90 days after the date of this prospectus, a person who
has beneficially owned restricted shares for at least one year, including the
holding period of any prior owner except an affiliate, would be entitled to
sell in any three-month period a number of shares that does not exceed the
greater of:
/bullet/ 1.0% of the number of shares of our common stock then outstanding,
which will equal approximately 155,235 shares immediately after
this offering; or
/bullet/ the average weekly trading volume of our common stock during the
four calendar weeks preceding the filing of Form 144 with respect
to the sale.
Sales under Rule 144 must also be made in broker's transactions and are
subject to notice requirements and to the public availability of current
information about SmartDisk.
Within 90 days following the effectiveness of this offering, we will file
a registration statement on Form S-8 registering shares of common stock subject
to outstanding options or reserved for future issuance under its stock option
plans. As of August 31, 1999, options to purchase a total of 821,969 shares
were outstanding and no shares were reserved for future issuance under our 1998
Employee Stock Option Plan, options to purchase a total of 144,281 shares were
outstanding and no shares were reserved for future issuance under the 1998
Directors and Consultants Stock Option Plan, options to purchase a total of
73,500 shares were outstanding and 2,426,500 shares were reserved for future
issuance under the 1999 Incentive Compensation Plan, and 465,000 shares were
reserved for issuance under the 1999 Employee Stock Purchase Plan. The holders
of all of those outstanding options are
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<PAGE>
subject to lock-up agreements. Common stock issued upon exercise of outstanding
vested options, other than common stock issued to our affiliates, will be
available for resale in the open market 181 days after the close of this
offering.
Beginning six months after the date of this offering, Toshiba Corporation,
Phoenix House Investments, L.L.C. and Fischer International Systems Corporation
will be entitled to registration rights for sale of their shares in the public
market. Registration of those shares under the Securities Act would result in
those shares becoming freely tradable without restriction under the Securities
Act, except for shares purchased by affiliates, immediately upon the
effectiveness of the registration and this could affect the stock price at that
time.
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<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc., Hambrecht & Quist LLC and U.S. Bancorp
Piper Jaffray Inc., have severally agreed with SmartDisk, subject to the terms
and conditions set forth in the underwriting agreement, to purchase from
SmartDisk the number of shares of common stock set forth opposite their names
below. The underwriters are committed to purchase and pay for all the shares if
any are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- -------------------------------------------------- ------------
<S> <C>
BancBoston Robertson Stephens Inc. .........
Hambrecht & Quist LLC ......................
U.S. Bancorp Piper Jaffray Inc. ............
---------
Total .................................... 3,000,000
=========
</TABLE>
SmartDisk has been advised by the representatives of the underwriters that
the underwriters propose to offer the shares of common stock to the public at
the initial public offering price set forth on the cover page of this
prospectus and to some dealers at that price less a concession of not in excess
of $ per share, of which $ may be reallowed to other dealers. After
the initial public offering, the public offering price, concession and
reallowance to dealers may be reduced by the representatives. No reduction
shall change the amount of proceeds to be received by SmartDisk as set forth on
the cover page of this prospectus. The common stock is offered by the
underwriters, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part.
The underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
OVER-ALLOTMENT OPTION. SmartDisk has granted to the underwriters an
option, exercisable during the 30-day period after the date of this prospectus,
to purchase up to 450,000 additional shares of common stock at the same price
per share as SmartDisk will receive for the 3,000,000 shares that the
underwriters have agreed to purchase. To the extent that the underwriters
exercise this option, each of the underwriters will have a firm commitment to
purchase approximately the same percentage of additional shares that the number
of shares of common stock to be purchased by it shown in the above table
represents as a percentage of the shares offered by this prospectus. If
purchased, the additional shares will be sold by the underwriters on the same
terms as those on which the 3,000,000 shares are being sold. SmartDisk will be
obligated, pursuant to the option, to sell shares to the extent the option is
exercised. The underwriters may exercise the option only to cover
over-allotments made in connection with the sale of the shares of common stock
offered by this prospectus. If the option is exercised in full, the total
public offering price, underwriting discounts and commissions and proceeds to
SmartDisk will be $ , $ and $ , respectively.
The following table summarizes the compensation and expenses we will pay.
<TABLE>
<CAPTION>
TOTAL
----------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
----------- ---------------- ---------------
<S> <C> <C> <C>
Underwriting discounts and commissions paid by us ......... $ $ $
Expenses payable by us .................................... $ $ $
</TABLE>
INDEMNITY. The underwriting agreement contains covenants of indemnity
among the underwriters and SmartDisk against some civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
LOCK-UP AGREEMENTS. Each of SmartDisk's executive officers, directors,
director-nominees, stock-holders of record and option-holders of record has
agreed with the representatives of the
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<PAGE>
underwriters, for a period of 180 days after the date of this prospectus,
subject to some exceptions, not to offer to sell, contract to sell, or
otherwise sell, dispose of, loan, pledge or grant any rights with respect to
any shares of common stock, any options or warrants to purchase any shares of
common stock, or any securities convertible into or exchangeable for shares of
common stock owned as of the date of this prospectus or thereafter acquired
directly by the holders or with respect to which they have or hereafter acquire
the power of disposition, without the prior written consent of BancBoston
Robertson Stephens Inc. However, BancBoston Robertson Stephens Inc. may, in its
sole discretion and at any time without notice, release all or any portion of
the securities subject to the lock-up agreements. There are no agreements
between the representatives and any of SmartDisk's stockholders providing
consent by the representatives to the sale of shares prior to the expiration of
the lock-up period.
FUTURE SALES. In addition, SmartDisk has agreed that during the lock-up
period SmartDisk will not, without the consent of BancBoston Robertson Stephens
Inc., subject to some exceptions,
/bullet/ consent to the disposition of any shares held by stockholders
subject to lock-up agreements prior to the expiration of the
lock-up period or
/bullet/ issue, sell, contract to sell, or otherwise dispose of, any shares
of common stock, any options to purchase any shares of common stock
or any securities convertible into, exercisable for or exchangeable
for shares of common stock other than SmartDisk's sale of shares in
this offering, the issuance of common stock upon the exercise of
outstanding options, and the issuance of options or shares under
existing stock option and incentive plans provided those options do
not vest, or the right to resell those shares do not arise until,
prior to the expiration of the lock-up period.
LISTING. We have filed an application for the common stock to be quoted on
The Nasdaq National Market under the symbol "SMDK."
NO PRIOR PUBLIC MARKET. Prior to this offering, there has been no public
market for the common stock of SmartDisk. Consequently, the initial public
offering price for the common stock offered by this prospectus will be
determined through negotiations between SmartDisk and the representatives of
the underwriters. Among the factors to be considered in the negotiations are
prevailing market conditions, financial information of SmartDisk, market
valuations of other companies that SmartDisk and the representatives believe to
be comparable to SmartDisk, estimates of the business potential of SmartDisk,
the present state of SmartDisk's development and other factors deemed relevant.
STABILIZATION. The representatives of the underwriters have advised
SmartDisk that some persons participating in this offering may engage in
transactions, including stabilizing bids, syndicate covering transactions or
the imposition of penalty bids, that 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 this 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 this offering, if the common
stock originally sold by the underwriter or syndicate member is purchased by
the representatives in a syndicate covering transaction and has therefore not
been effectively placed by the underwriter or syndicate member. The
representatives have advised SmartDisk that the transactions may be effected on
The Nasdaq National Market or otherwise and, if commenced, may be discontinued
at any time.
DIRECTED SHARE PROGRAM. At our request, the underwriters have reserved up
to 7.5 percent of the shares of common stock to be issued by SmartDisk and
offered by this prospectus for sale, at the
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initial public offering price, to directors, officers, employees, business
associates and related persons of SmartDisk. Those shares will be offered to
the program participants on the same basis as the shares offered to the general
public. The number of shares of common stock available for sale to the general
public will be reduced to the extent that those individuals purchase all or a
portion of these reserved shares. Any reserved shares which are not so
purchased will be offered by the underwriters to the general public on the same
basis as the shares of common stock offered by this prospectus.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for SmartDisk by Greenberg Traurig, P.A., Miami, Florida. Certain legal
matters in connection with the offering will be passed upon for the
underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation,
Palo Alto, California.
EXPERTS
Ernst & Young LLP, independent certified public accountants, have audited
our consolidated financial statements at December 31, 1997 and 1998 and June
30, 1999 and for each of the three years in the period ended December 31, 1998
and the six months ended June 30, 1999, as set forth in their report. We have
included our financial statements in this prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, Washington,
D.C. 20549, a registration statement on Form S-1 under the Securities Act with
respect to the common stock offered by this prospectus. This prospectus does
not contain all of the information set forth in the registration statement and
the exhibits and schedules to the registration statement. For further
information with respect to SmartDisk and the common stock offered by this
prospectus, refer to the registration statement and the exhibits and schedules
filed as a part of the registration statement. Statements contained in this
prospectus concerning the contents of any contract or any other document
referred to are not necessarily complete; refer in each instance to the copy of
the contract or document filed as an exhibit to the registration statement.
Each statement of the type referred to in the preceding sentence is qualified
in all respects by reference to the exhibit. You may inspect a copy of the
registration statement without charge at the Securities and Exchange
Commission's principal office in Washington, D.C. and obtain copies of all or
any part thereof upon payment of a fee from the Public Reference Room of the
Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, or at the Securities and Exchange Commission's regional offices in New
York, located at 7 World Trade Center, Suite 1300, New York, New York 10048, or
in Chicago, located at 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. You may obtain information on the operation of the Public Reference Room
by calling the Securities and Exchange Commission at 1-800-SEC-0330. The
Securities and Exchange Commission maintains an Internet site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Securities and Exchange
Commission. The Securities and Exchange Commission's World Wide Web address is
www.sec.gov.
SmartDisk intends to furnish holders of its common stock with annual
reports containing, among other information, audited financial statements
certified by an independent public accounting firm and quarterly reports
containing unaudited condensed financial information for the first three
quarters of each fiscal year. SmartDisk intends to furnish other reports as it
may determine or as may be required by law.
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SMARTDISK CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997 and 1998 and
Six months ended June 30, 1998 (Unaudited) and 1999
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Certified Public Accountants .................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 and June 30, 1999 ........ F-3
Consolidated Statements of Operations for the Years Ended December 31, 1996, 1997 and
1998 and for the Six Months Ended June 30, 1998 (Unaudited) and 1999 ................ F-4
Consolidated Statements of Stockholders' Deficit for the Years Ended December 31, 1996,
1997 and 1998 and for the Six Months Ended June 30, 1999 ............................ F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1997 and
1998 and for the Six Months Ended June 30, 1998 (Unaudited) and 1999 ................ F-6
Notes to Consolidated Financial Statements ............................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of SmartDisk Corporation:
We have audited the accompanying consolidated balance sheets of SmartDisk
Corporation as of December 31, 1997 and 1998, and June 30, 1999, and the
related consolidated statements of operations, stockholders' deficit and cash
flows for each of the three years in the period ended December 31, 1998 and for
the six months ended June 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of SmartDisk Corporation at December 31, 1997 and 1998, and June 30, 1999, and
the consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1998 and for the six months ended
June 30, 1999, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Miami, Florida,
August 11, 1999
F-2
<PAGE>
SMARTDISK CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
-------------------------------- JUNE 30, JUNE 30,
1997 1998 1999 1999 (NOTE 7)
---------------- --------------- --------------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................. $ 329,778 $ 2,919,728 $ 1,335,145
Restricted cash ....................................... -- 1,050,000 1,050,000
Accounts receivable, net of allowance for doubtful
accounts of $0 in 1997, $33,848 in 1998 and
$70,814 in 1999 ..................................... -- 3,736,751 8,945,407
Inventories, net ...................................... 294,496 1,689,020 376,312
Prepaid expenses and other current assets ............. 24,005 120,782 880,672
------------- ------------- -------------
Total current assets ................................. 648,279 9,516,281 12,587,536
Property and equipment, net ............................ 210,119 682,014 1,956,298
Intangible assets, net ................................. 748,137 740,978 771,168
Deposits and other assets .............................. -- 196,682 123,657
------------- ------------- -------------
TOTAL ASSETS ........................................... $ 1,606,535 $ 11,135,955 $ 15,438,659
============= ============= =============
LIABILITIES, REDEEMABLE COMMON
STOCK, AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable ...................................... $ 253,812 $ 3,706,297 $ 4,646,017
Bank line of credit ................................... -- 2,247,718 4,455,088
Deferred research and development
contract revenue .................................... -- -- 968,415
Other accrued liabilities ............................. 147,933 693,590 1,392,815
Due to related parties ................................ 1,045,000 -- --
Stockholder loan ...................................... 3,955,000 -- --
------------- ------------- -------------
Total current liabilities ............................ 5,401,745 6,647,605 11,462,335
Stockholder loan ....................................... 644,591 648,147 --
Deferred income tax liability .......................... 186,039 184,658 117,429
Commitments and contingencies .......................... -- -- --
Redeemable common stock: 2,487,500 shares issued
and outstanding ....................................... -- 9,991,918 9,991,918 --
Stockholders' deficit:
Common stock: $.001 par value; 60,000,000 shares
authorized; 7,747,892 issued and outstanding in
1997; 9,296,723 issued and 9,216,496 outstanding
in 1998; 9,716,988 issued and 9,636,011
outstanding in 1999; 12,204,488 issued and
12,123,511 outstanding pro forma at June 30,
1999 ................................................ 7,748 9,297 9,717 $ 12,204
Capital in excess of par value ........................ 12,375,340 16,351,092 18,716,040 28,705,471
Treasury stock, 80,227 shares in 1998 and 80,977 in
1999, at cost ....................................... -- (57,764) (58,304) (58,304)
Accumulated other comprehensive income ................ 188,740 478,948 473,517 473,517
Notes receivable from officers/employees .............. -- (417,334) (417,334) (417,334)
Accumulated deficit ................................... (17,197,668) (22,700,612) (24,856,659) (24,856,659)
------------- ------------- ------------- -------------
Total stockholders' equity (deficit) ................. (4,625,840) (6,336,373) (6,133,023) $ 3,858,895
------------- ------------- ------------- =============
TOTAL LIABILITIES, REDEEMABLE
COMMON STOCK, AND STOCKHOLDERS'
DEFICIT ............................................... $ 1,606,535 $ 11,135,955 $ 15,438,659
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE>
SMARTDISK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------------- --------------------------------
1996 1997 1998 1998 1999
---------------- --------------- ---------------- --------------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues
Product sales ...................... $ 500,252 $ 892,530 $ 15,038,281 $ 3,789,979 $ 13,796,720
Royalties .......................... -- -- 284,298 182,323 196,020
------------- ------------ ------------ ------------ ------------
Total revenues ...................... 500,252 892,530 15,322,579 3,972,302 13,992,740
Cost of revenues .................... 366,693 300,678 12,600,330 3,252,518 10,271,018
------------- ------------ ------------ ------------ ------------
Gross profit ........................ 133,559 591,852 2,722,249 719,784 3,721,722
Operating expenses
Research and development ........... 720,009 1,411,986 1,607,950 684,871 2,453,491
Sales and marketing ................ 5,884 11,582 2,546,602 730,750 1,443,385
General and administrative ......... 3,418,010 3,184,552 4,149,191 2,085,899 1,971,408
Impairment loss .................... 7,807,157 -- -- -- --
------------- ------------ ------------ ------------ ------------
Total operating expenses ............ 11,951,060 4,608,120 8,303,743 3,501,520 5,868,284
------------- ------------ ------------ ------------ ------------
Operating loss ...................... (11,817,501) (4,016,268) (5,581,494) (2,781,736) (2,146,562)
Gain (loss) on foreign exchange ..... -- -- (47,678) (2,324) 29,639
Interest and other income ........... -- 8,210 75,770 63,705 51,900
Interest expense .................... (275) (514) (51,858) (47,058) (23,258)
------------- ------------ ------------ ------------ ------------
Net loss before income taxes ........ (11,817,776) (4,008,572) (5,605,260) (2,767,413) (2,088,281)
Income tax expense (benefit) ........ (2,347,876) (44,598) (102,316) (38,394) 67,766
------------- ------------ ------------ ------------ ------------
Net loss ............................ $ (9,469,900) $ (3,963,974) $ (5,502,944) $ (2,729,019) $ (2,156,047)
============= ============ ============ ============ ============
Net loss per share .................. $ (1.25) $ (0.51) $ (0.68) $ (0.35) $ (0.24)
============= ============ ============ ============ ============
Shares used in computing
net loss per share ................. 7,578,889 7,738,909 8,040,169 7,773,719 9,042,975
============= ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE>
SMARTDISK CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN
-------------------- EXCESS OF COMPREHENSIVE
SHARES AMOUNT PAR VALUE LOSS
----------- -------- -------------- ---------------
<S> <C> <C> <C> <C>
BALANCE,
DECEMBER 31, 1995 ............ 7,350,000 $7,350 $ 176,725
Comprehensive loss:
Net loss .................... $ (9,469,900)
Foreign currency
translation ................ 181,207
------------
Comprehensive loss .......... $ (9,288,693)
============
Acquisition of SDL ............ 374,639 375 6,941,730
Contribution of stockholder
loan to capital .............. 3,908,823
-----------
BALANCE,
DECEMBER 31, 1996 ............ 7,724,639 7,725 11,027,278
Comprehensive loss:
Net loss .................... $ (3,963,974)
Foreign currency
translation ................ 7,533
------------
Comprehensive loss .......... $ (3,956,441)
============
Acquisition of SDL ............ 23,253 23 693,401
Contribution of stockholder
loan to capital .............. 654,661
-----------
BALANCE,
DECEMBER 31, 1997 ............ 7,747,892 7,748 12,375,340
Comprehensive loss:
Net loss .................... $ (5,502,944)
Foreign currency
translation ................ 290,208
------------
Comprehensive loss .......... $ (5,212,736)
============
Issuance of common stock for
trademarks ................... 150,000 150 (150)
Issuance of common stock ...... 666,250 666 3,164,334
Shares issued upon exercise of
options ...................... 699,863 700 511,601
Acquisition of SDL minority
interest ..................... 32,718 33 299,967
Repurchase of common stock.....
BALANCE,
DECEMBER 31, 1998 ............ 9,296,723 9,297 16,351,092
Comprehensive loss:
Net loss .................... $ (2,156,047)
Foreign currency
translation ................ (5,431)
------------
Comprehensive loss .......... $ (2,161,478)
============
Issuance of common stock ...... 250,000 250 1,099,750
Stock compensation ............ 76,500
Shares issued upon exercise of
options ...................... 47,875 48 175,448
Issuance of SDL shares ........ 8,872 9 65,216
Conversion of stockholder
loan into SDL shares ......... 76,018 76 648,071
Issuance of common stock
for license .................. 37,500 37 299,963
Repurchase of common stock.....
BALANCE,
JUNE 30, 1999 ................ 9,716,988 $9,717 $18,716,040
========= ====== ===========
<CAPTION>
NOTES
ACCUMULATED RECEIVABLE
OTHER FROM TOTAL
ACCUMULATED COMPREHENSIVE OFFICERS/ TREASURY STOCKHOLDERS'
DEFICIT INCOME EMPLOYEES STOCK DEFICIT
---------------- --------------- ------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
BALANCE,
DECEMBER 31, 1995 ............ $ (3,763,794) $ -- $ -- $ -- $ (3,579,719)
Comprehensive loss:
Net loss .................... (9,469,900)
Foreign currency
translation ................ 181,207
Comprehensive loss .......... (9,288,693)
Acquisition of SDL ............ 6,942,105
Contribution of stockholder
loan to capital .............. 3,908,823
------------
BALANCE,
DECEMBER 31, 1996 ............ (13,233,694) 181,207 -- -- (2,017,484)
Comprehensive loss:
Net loss .................... (3,963,974)
Foreign currency
translation ................ 7,533
Comprehensive loss .......... (3,956,441)
Acquisition of SDL ............ 693,424
Contribution of stockholder
loan to capital .............. 654,661
------------
BALANCE,
DECEMBER 31, 1997 ............ (17,197,668) 188,740 -- -- (4,625,840)
Comprehensive loss:
Net loss .................... (5,502,944)
Foreign currency
translation ................ 290,208
Comprehensive loss .......... (5,212,736)
Issuance of common stock for
trademarks ...................
Issuance of common stock ...... 3,165,000
Shares issued upon exercise of
options ...................... (417,334) 94,967
Acquisition of SDL minority
interest ..................... 300,000
Repurchase of common stock..... (57,764) (57,764)
--------- ------------
BALANCE,
DECEMBER 31, 1998 ............ (22,700,612) 478,948 (417,334) (57,764) (6,336,373)
Comprehensive loss:
Net loss .................... (2,156,047)
Foreign currency
translation ................ (5,431)
Comprehensive loss .......... (2,161,478)
Issuance of common stock ...... 1,100,000
Stock compensation ............ 76,500
Shares issued upon exercise of
options ...................... 175,496
Issuance of SDL shares ........ 65,225
Conversion of stockholder
loan into SDL shares ......... 648,147
Issuance of common stock
for license .................. 300,000
Repurchase of common stock..... (540) (540)
--------- ------------
BALANCE,
JUNE 30, 1999 ................ $ (24,856,659) $473,517 $ (417,334) $ (58,304) $ (6,133,023)
============= ======== ========== ========= ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE>
SMARTDISK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1996 1997 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................... $ (9,469,900) $ (3,963,974) $ (5,502,944)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation .............................................. 130,494 227,089 613,777
Amortization .............................................. 1,653,914 179,346 410,917
Bad debt expense .......................................... -- -- 26,565
Provision for inventory obsolescence ...................... -- -- --
Foreign currency (gain) loss .............................. -- -- (31,235)
Employee stock option expense ............................. -- -- --
Deferred income tax benefit ............................... (2,347,876) (44,598) (102,316)
Impairment loss ........................................... 7,807,157 -- --
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable ...................................... -- -- (3,763,316)
Inventories .............................................. 289,236 23,529 (1,394,524)
Prepaid expenses and other current assets ................ (25,237) (274,894) (80,660)
Deposits and other assets ................................ (20,525) 20,525 (176,942)
Increase (decrease) in liabilitities:
Accounts payable ......................................... 546,890 (397,416) 3,452,485
Deferred research and development contract revenue ....... -- -- --
Other accrued liabilities ................................ (4,584) 80,588 587,575
------------ ------------ ------------
Net cash used in operating activities ....................... (1,440,431) (4,149,805) (5,960,618)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ........................ (200,821) (284,943) (1,019,878)
Increase in restricted cash ................................ -- -- (1,050,000)
------------ ------------ ------------
Net cash used in investing activities ....................... (200,821) (284,943) (2,069,878)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of exchangeable note ................ -- -- 5,000,000
Net proceeds from line of credit ........................... -- -- 2,247,718
Net proceeds (repayment) of stockholder loan ............... 1,450,844 3,709,527 (3,955,000)
Proceeds (repayment) of due to related parties ............. -- 1,045,000 (1,045,000)
Proceeds from sale of redeemable common stock .............. -- -- 4,950,000
Proceeds from sale of common stock ......................... -- -- 3,165,000
Proceeds from exercise of stock options .................... -- -- 94,967
Proceeds from sale of stock by SDL ......................... -- -- --
Purchase of treasury stock ................................. -- -- (57,764)
------------ ------------ ------------
Net cash provided by financing activities ................... 1,450,844 4,754,527 10,399,921
Effect of exchange rate fluctuations on cash ................ 4,490 1,973 220,525
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents ............ (185,918) 321,752 2,589,950
Cash and cash equivalents at beginning of period ............ 193,944 8,026 329,778
------------ ------------ ------------
Cash and cash equivalents at end of period .................. $ 8,026 $ 329,778 $ 2,919,728
============ ============ ============
SIGNIFICANT NON-CASH ACTIVITIES:
Acquisition of SDL/patents ................................. $ 6,942,105 $ 693,424 $ 300,000
Contribution/conversion of stockholder loan to capital ..... $ 3,908,823 $ 654,661 --
Exchange of note payable plus accrued
interest for redeemable common stock ...................... --- -- $ 5,041,918
Note receivable obtained for stock options ................. -- -- $ 417,334
Issuance of common stock for trademarks/license ............ $ 600,000
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
---------------------------------
1998 1999
---------------- ----------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................... $ (2,729,019) $ (2,156,047)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation .............................................. 265,484 471,317
Amortization .............................................. 154,572 251,409
Bad debt expense .......................................... 31,364 39,062
Provision for inventory obsolescence ...................... -- 32,900
Foreign currency (gain) loss .............................. 35,969 (29,639)
Employee stock option expense ............................. -- 76,500
Deferred income tax benefit ............................... (36,802) (67,229)
Impairment loss ........................................... -- --
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable ...................................... (909,934) (5,247,718)
Inventories .............................................. (1,687,652) 1,279,808
Prepaid expenses and other current assets ................ (237,694) (759,890)
Deposits and other assets ................................ (84,320) 73,025
Increase (decrease) in liabilitities:
Accounts payable ......................................... 3,027,760 939,720
Deferred research and development contract revenue ....... -- 968,415
Other accrued liabilities ................................ 499,175 699,225
------------ ------------
Net cash used in operating activities ....................... (1,671,097) (3,429,142)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ........................ (750,128) (1,745,601)
Increase in restricted cash ................................ (1,289,771) --
------------ ------------
Net cash used in investing activities ....................... (2,039,899) (1,745,601)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of exchangeable note ................ 5,000,000 --
Net proceeds from line of credit ........................... -- 2,207,370
Net proceeds (repayment) of stockholder loan ............... (4,258,321) --
Proceeds (repayment) of due to related parties ............. (1,045,000) --
Proceeds from sale of redeemable common stock .............. 4,950,000 --
Proceeds from sale of common stock ......................... 165,000 1,100,000
Proceeds from exercise of stock options .................... 94,967 175,496
Proceeds from sale of stock by SDL ......................... -- 65,225
Purchase of treasury stock ................................. (57,764) (540)
------------ ------------
Net cash provided by financing activities ................... 4,848,882 3,547,551
Effect of exchange rate fluctuations on cash ................ (104,387) 42,609
------------ ------------
Increase (decrease) in cash and cash equivalents ............ 1,033,499 (1,584,583)
Cash and cash equivalents at beginning of period ............ 329,778 2,919,728
------------ ------------
Cash and cash equivalents at end of period .................. $ 1,363,277 $ 1,335,145
============ ============
SIGNIFICANT NON-CASH ACTIVITIES:
Acquisition of SDL/patents ................................. --- --
Contribution/conversion of stockholder loan to capital ..... -- $ 648,147
Exchange of note payable plus accrued
interest for redeemable common stock ...................... $ 5,041,918 --
Note receivable obtained for stock options ................. $ 417,334 --
Issuance of common stock for trademarks/license ............ $ 600,000 $ 300,000
</TABLE>
The accompanying notes are an intregral part of these consolidated
financial statements.
F-6
<PAGE>
SMARTDISK CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND NATURE OF OPERATIONS
ORGANIZATION AND NATURE OF OPERATIONS
SmartDisk Corporation ("SmartDisk" or the "Company") was incorporated on
March 5, 1997, and its predecessor, SmartDisk Security Corporation ("SDSC") was
incorporated on May 18, 1993. SDSC was substantially wholly-owned by Addison
Fischer ("Fischer").
From 1993 to 1995, SDSC exploited technology that it licensed under a
manufacturing license agreement with Fischer International Systems Corporation
("FISC"), another company substantially wholly-owned by Fischer. The patents
underlying the licensed technology were held by SmartDiskette GmbH ("SDG"), a
German company that is wholly-owned by SmartDiskette Limited ("SDL"), an
English company that was approximately 37% owned by Fischer through May 1996.
SDG licensed these patents to SDL. SDL in turn entered into a manufacturing
license agreement with FISC that FISC subsequently assigned to SDSC. The
license agreement covered the manufacture and sale of solid state diskettes
relating to the fields of data security and validation and computer security
and access control. For the period January 1, 1996 through December 31, 1997,
FISC, pursuant to an operating agreement with SDSC, conducted all operations
and development activities on behalf of SDSC. During this period, SDSC (through
FISC) developed several products using proprietary, high-density flash memory
technology. These products are hereafter referred to as the "SmartDisk
Products." The SmartDisk Products consist primarily of FlashPath (used to
read/write flash memory cards) and Smarty (used to read/write smart cards).
SDSC reimbursed FISC for the cost of services provided by FISC under the
operating agreement. In addition, FISC retained 25% of the gross sales price of
SmartDisk Products distributed by it on behalf of SDSC.
On March 21, 1997, FISC and Toshiba Corporation ("Toshiba") entered into a
memorandum of understanding in which the parties agreed to exploit the
SmartDisk Products. SmartDisk commenced operations January 1, 1998. Effective
on that date, SDSC's operating agreement with FISC was terminated.
On May 26, 1998, an agreement was finalized with Toshiba and FISC in order
to, among other things, capitalize SmartDisk. SDSC stockholders exchanged all
the issued and outstanding shares of SDSC for 7,350,000 shares of common stock
of SmartDisk, Toshiba contributed $9,991,918 (see note 7) for 2,487,500 shares
of redeemable common stock and FISC assigned trademarks to SmartDisk in
exchange for 150,000 shares of common stock. In conjunction with the
capitalization, SDSC was merged into SmartDisk. The merger was a combination of
entities under common control and accounted for at historical cost. The
accounts of SmartDisk and SDSC are combined in the accompanying financial
statements.
In May 1996 and May 1997, Fischer increased his ownership of SDL to 87%
and 92%, respectively. In May 1998, Phoenix House Investments, LLC ("Phoenix
House"), an investment company substantially owned by Fischer, acquired the
remaining outstanding interests of SDL through the issuance of common stock
valued at approximately $300,000. In May 1999, the stockholders of SDL
exchanged all their shares of SDL for 515,500 shares of common stock of
SmartDisk and SDL became a wholly owned subsidiary of SmartDisk. The merger was
a combination of entities under common control and accounted for at historical
cost. The individual financial statements of SmartDisk and SDL are combined in
the accompanying financial statements from May 22, 1996, the date SDL came
under common control. The accounts of SDL were adjusted as of that date to
reflect a new basis under the purchase accounting method.
F-7
<PAGE>
SMARTDISK CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1. ORGANIZATION AND NATURE OF OPERATIONS--(CONTINUED)
The Company serves customers in the electronics, banking and other
consumer markets. Principal geographic markets for the Company's products
include the United States, Japan, Europe and other world markets.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
In August 1999, the Company effected a reverse stock split of one for
four. The financial statements have been restated to give retroactive
recognition to the reverse stock split in the prior periods, including all
references in the financial statements to number of shares and per share
amounts.
In August 1999, the Company amended and restated its Certificate of
Incorporation such that the number of shares of authorized capital stock was
increased to 65,000,000 shares, consisting of 60,000,000 shares of common stock
with a par value of $0.001 per share and 5,000,000 shares of preferred stock
with a par value $0.001 per share.
The accompanying consolidated financial statements include the accounts of
SmartDisk, SDSC and SDL (from May 1996), entities that were under common
control and subsequently merged to form the entity that is now known as
SmartDisk Corporation. All significant intercompany balances and transactions
have been eliminated in consolidation.
Common stock shares and amounts as presented in the accompanying financial
statements have been retroactively adjusted to reflect the effect of the
mergers of SDL and SDSC into SmartDisk.
CERTAIN UNCERTAINTIES AND RISKS
The Company sells to original equipment manufacturers, retailers, and
distributors in the United States, Japan, Europe and other world markets.
However, the majority of the Company's sales are to Japanese customers.
Japanese sales as well as related expenses are denominated in Yen and,
accordingly, are subject to the risks associated with fluctuations in exchange
rates between the Yen and the US dollar. The Company does not hedge against
foreign currency exposure.
In the normal course of business, the Company extends unsecured credit to
its customers for the sale of products. Credit terms generally range from 30 to
150 days receivables with extended credit terms secured by promissory notes.
The Company evaluates and monitors the credit worthiness of each customer on a
case by case basis. Allowances are maintained for potential credit losses.
A limited number of customers account for a substantial portion of the
Company's revenues. Further, one product accounts for a substantial portion of
the Company's revenues. Sales of the Company's products will vary as a result
of fluctuations in market demand.
Certain raw materials used by the Company in the manufacture of its
products are available from a limited number of suppliers. The Company is
dependent on its manufacturers to allocate a sufficient portion of their
manufacturing capacity to meet the Company's needs.
F-8
<PAGE>
SMARTDISK CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, accounts receivable, accounts payable and
other accrued liabilities in the accompanying balance sheet approximates fair
value because of the short-term maturity of these financial instruments. The
fair value of the restricted cash and line of credit approximates market, as
the interest rates on these financial instruments are market rates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and money market instruments
with short term maturities of 90 days or less.
RESTRICTED CASH
Restricted cash is composed of a time deposit that the Company maintains
as collateral for a line of credit.
INVENTORIES
Inventories are stated at the lower of cost or market with cost being
determined on a first-in, first-out basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
All major expenditures for production equipment are capitalized and depreciated
over the economic life of the asset. The costs of repairs and maintenance are
charged to expense in the year when they are incurred. Depreciation is computed
using the straight-line and declining balance methods over the estimated useful
lives of 2 to 15 years. In addition, certain production equipment is
depreciated using the units of production method. The units of production
method depreciates the property over the estimated life cycle production
quantities. The monthly depreciation cost is calculated by using the number of
pieces produced times the cost per piece computed from the estimated total
production quantity.
IMPAIRMENT OF LONG-LIVED ASSETS
In the event that facts and circumstances indicate that the costs of
assets may be impaired, an evaluation of recoverability is performed. If an
evaluation is required, the estimated future undiscounted cash flow associated
with the asset is compared to the asset's carrying amount to determine if a
write-down to market value is required.
SOFTWARE DEVELOPMENT COSTS
Development costs incurred in the research and development of new software
products and enhancements to existing software products are expensed as
incurred until technological feasibility has
F-9
<PAGE>
SMARTDISK CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
been established, at which time certain development costs required to attain
general production release would be capitalized. To date, the Company's
software development has essentially been completed concurrent with the
establishment of technological feasibility, and, accordingly, no costs have
been capitalized.
INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes". Deferred income tax assets and liabilities are determined based
upon differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
REVENUE RECOGNITION
Sales revenue is recognized at the time of shipment to customers. Royalty
revenue consists of royalties earned on sales of licensed products. Royalty
revenues are recognized when earned based upon contractual agreement. To date,
all of the Company's royalties relate to the licensing of one software product
to FISC. The Company has no continuing obligations under this licensing
agreement. Revenues from research and development contracts are recognized when
earned based upon achievement of contract milestones.
FOREIGN CURRENCY TRANSACTIONS
Substantially all of the Company's sales are made through a Japanese
subsidiary. This subsidiary and other foreign subsidiaries have their local
currency as their functional currency. Their assets and liabilities are
translated to the US dollar at the current exchange rates in effect at the
balance sheet date. Items of revenue and expense are translated using average
exchange rates in effect for the period in which the items occur. The resulting
gains and losses from translation are included as a component of stockholders'
equity.
Certain cash time deposits and inter-company accounts of the Japanese
subsidiary are dollar-denominated balances. These balances are remeasured to
the functional currency using the current exchange rate at the balance sheet
date, and resulting adjustments are reflected in the gain (loss) on foreign
exchange account included in the statement of operations. Inter-company gains
(losses) included in this account for the year ended December 31, 1998 and the
six months ended June 30, 1998 (unaudited) and 1999 totaled $170,416, $0 and
$(53,855), respectively.
STOCK BASED COMPENSATION
The Company applies the intrinsic value method in accounting for its stock
options. Accordingly, no compensation expense has been recognized for options
granted with an exercise price equal to market value at the date of grant.
NET LOSS PER SHARE
Basic net income (loss) per share as disclosed in the statement of
operations, is based on the weighted effect of all common shares issued and
outstanding, and is calculated by dividing net income
F-10
<PAGE>
SMARTDISK CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(loss) by the weighted average shares outstanding during the period. Diluted
net income (loss) per share would be calculated by dividing net income by the
weighted average common shares used in the basic calculation plus the number of
common shares that would be issued assuming conversion of all potentially
dilutive common shares outstanding. Diluted net income (loss) is not presented,
as the effect of including potentially dilutive securities would be
anti-dilutive. Potentially dilutive securities include common stock options and
redeemable common stock. Subsequent to June 30, 1999, the Company issued
400,000 shares of common stock and granted 86,000 common stock options.
The Company has outstanding 2,487,500 shares of redeemable common stock
that will convert to nonredeemable common stock if the Company becomes a
publicly traded company prior to February 24, 2000. Pro forma net loss per
share assuming expiration of the redemption feature and inclusion of the
redeemable common stock shares in weighted average shares outstanding, for the
year ended December 31, 1998 and the six months ended June 30, 1999 would be
$0.57 and $0.19 per share, respectively.
Net loss per share has been computed reflecting the retroactive adjustment
of outstanding shares related to the mergers of SDL and SDSC into SmartDisk.
ADVERTISING
Advertising costs are charged to expense as incurred, advertising expenses
for 1996, 1997 and 1998 were $3,539, $3,785 and $214,002, respectively, and for
the six months ended June 30, 1998 (unaudited) and 1999 were $15,350 and
$37,044, respectively.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARD
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. The Company expects to adopt the new
Statement effective January 1, 2001. The Statement will require the Company to
recognize all derivatives on the balance sheet at fair value. The Company does
not anticipate that the adoption of this Statement will have a significant
effect on its results of operations or financial position.
NOTE 3. INVENTORY
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1997 1998 1999
---------- ------------- -----------
<S> <C> <C> <C>
Finished goods ..................... $ -- $1,687,905 $ 403,616
Raw materials ...................... 294,496 1,115 5,596
-------- ---------- ---------
Total inventories .................. $294,496 $1,689,020 $ 409,212
Allowance for obsolescence ......... -- -- (32,900)
-------- ---------- ---------
Net inventory ...................... $294,496 $1,689,020 $ 376,312
======== ========== =========
</TABLE>
F-11
<PAGE>
SMARTDISK CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- JUNE 30,
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Production equipment .............................. $ 396,307 $ 702,779 $2,287,715
Furniture and fixtures ............................ 9,789 191,576 220,560
Software .......................................... 31,112 167,519 290,120
---------- ---------- ----------
Property and equipment, at cost ................... $ 437,208 $1,061,874 $2,798,395
Accumulated depreciation and amortization ......... (227,089) (379,860) (842,097)
---------- ---------- ----------
Property and equipment, net ....................... $ 210,119 $ 682,014 $1,956,298
========== ========== ==========
</TABLE>
NOTE 5. INTANGIBLE ASSETS AND IMPAIRMENT LOSS
The financial statements of SDL are combined with those of the Company as
of May 22, 1996, the date that SDL came under common control ("1996
acquisition") as a result of the Company's principal stockholder acquiring an
87% ownership interest in SDL through a series of acquisitions. The purchase
price as of May 22, 1996 totaled approximately $7 million, all of which was
allocated to patents. In addition, goodwill and a corresponding deferred tax
liability totaling approximately $2.3 million were recorded to reflect the tax
effect of the acquisition. The intangibles were being amortized over their
estimated useful life of three years. Subsequently, pursuant to SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of", the Company evaluated the recoverability of the recorded
patents and goodwill. SDL was acquired for its two developed products. The
potential customer (U.S. Government) for one of these products abandoned an
initiative in late 1996 for which this product was to be used and management's
assessment was that there was no alternative use for this product. The other
product did not meet management's market expectations. Further, no significant
sales ever occurred related to the patented products and such products were
discontinued in late 1996. The technology underlying the patents was assessed
by management to be obsolete and the related patents deemed worthless.
Accordingly, during 1996, the Company recorded an impairment loss of $7,807,157
to write-off the remaining unamortized cost of the patents and related
goodwill.
On May 22, 1997, an additional 5% ownership interest in SDL was purchased
for approximately $700,000 through the exercise of a put option given to SDL
stockholders in connection with the 1996 acquisition. In May 1998, the
remaining minority interest in SDL was acquired in exchange for common stock of
Phoenix House valued at approximately $300,000. All of the additional purchase
price was allocated to new patents that were issued subsequent to the 1996
acquisition, and unrelated to the patented technology that became worthless in
1996. In addition, goodwill and a corresponding deferred tax liability totaling
approximately $330,000 were recorded to reflect the related tax effect. These
intangible assets are being amortized on a straight line basis over their
estimated useful lives (through 2000).
On June 30, 1999 the Company issued 37,500 shares of its common stock to
SanDisk Corporation ("SanDisk") in exchange for a license to utilize certain
patented technology developed by SanDisk. The Company is amortizing the license
on a straight-line basis over the ten year term of the license. In addition,
the Company is required to pay a royalty to SanDisk on net revenues from direct
sales to customers other than SanDisk of products developed by the Company
utilizing this licensed technology.
F-12
<PAGE>
SMARTDISK CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5. INTANGIBLE ASSETS AND IMPAIRMENT LOSS--(CONTINUED)
Intangible assets consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- JUNE 30,
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Patents ............................... $ 695,615 $ 998,334 $ 985,758
Goodwill .............................. 231,871 332,791 326,966
License ............................... -- -- 300,000
---------- ---------- ----------
927,486 1,331,125 1,612,724
Less accumulated amortization ......... (179,349) (590,147) (841,556)
---------- ---------- ----------
Intangible assets, net .............. $ 748,137 $ 740,978 $ 771,168
========== ========== ==========
</TABLE>
NOTE 6. BANK LINE OF CREDIT
The Company's wholly-owned Japanese subsidiary entered into an agreement
with the Bank of Tokyo-Mitsubishi, Ltd. on June 8, 1998, revised on January 29,
1999, for a Line of Credit with maximum borrowing capacity of $2.52 million
(305 million Yen). The facility is collateralized by a time deposit and
accounts receivable. The Company maintains a time deposit with the bank that
has a balance at June 30, 1999 of $1,050,000 (127,155,000 Yen). The Company may
borrow up to 90% of this amount. In addition, accounts receivable of up to
$1.65 million (200 million Yen) of specified trade customers may be used as
additional collateral. The interest rate on borrowings under the credit
facility is 1.375% per year and the credit facility must be renewed every six
months. The current agreement expires on December 25, 1999. The Company also
discounts certain short-term promissory notes received from trade customers
with the bank. Bank borrowings collateralized by promissory notes totaled
$1,382,000 at December 31, 1998 and $3,523,000 at June 30, 1999.
Interest paid during the periods ended December 31, 1998, June 30, 1998
(unaudited) and 1999 amounted to $5,017, $0 and $23,227, respectively.
NOTE 7. COMMITMENTS AND CONTINGENCIES
LEASES
Through May 31, 1999, the Company leased space for its corporate
headquarters from a related party, FISC, on a month-to-month basis. There was
no formalized agreement and the expense was accrued and paid monthly based on a
percent of usage basis. As of June 1, 1999, the Company assumed from FISC a
facilities operating lease with an unrelated lessor that continues through
December 31, 2001. The Company's Japanese subsidiary leases office space under
a two year operating lease that commenced in April 1998. Total rent expense for
1996, 1997 and 1998 and for the six months ended June 30, 1998 (unaudited) and
1999 was $14,155, $36,995, $261,399, $89,500 and $179,718, respectively. Rent
expense incurred related to FISC for these same periods totaled $14,155,
$36,995, $135,290, $64,301 and $58,578, respectively.
F-13
<PAGE>
SMARTDISK CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
The table below sets forth minimum payments for the years indicated under
leases with remaining terms in excess of one year, at June 30, 1999:
<TABLE>
<S> <C>
1999 ............. $ 59,063
2000 ............. 124,031
2001 ............. 130,233
</TABLE>
CONTINGENCIES
The Company relies on a combination of patents, trademarks, copyright and
trade secret laws, confidentiality procedures and licensing arrangements to
protect its intellectual property rights. There can be no assurance that there
will not be any disputes regarding the Company's intellectual property rights.
Specifically, there can be no assurance that any patents held by the Company
will not be invalidated, that patents will be issued for any of the Company's
pending applications or that any claims allowed from existing or pending
patents will be of sufficient scope or strength or be issued in the primary
countries where the Company's products can be sold that will provide meaningful
protection or any commercial advantage to the Company. Additionally,
competitors of the Company may be able to design around the Company's patents.
REDEEMABLE COMMON STOCK
In connection with the agreement that was finalized in May 1998 (see Note
1), Toshiba received 2,487,500 shares of redeemable common stock in exchange
for $9,991,918 (consisting of $4,950,000 cash, the exchange of a $5,000,000
note and accrued interest of $41,918). In March 1998, SmartDisk had executed a
4% note with Toshiba for $5,000,000 that was exchangeable into common stock at
$4 per share. The terms of the agreement provided Toshiba a put option that is
exercisable on February 24, 2000 and for a period of ninety days from that
date. This option provides that the Company may be asked to purchase all of the
redeemable common stock shares for a total of $9,950,000 plus 4% simple
interest per year. This right terminates if the Company completes an initial
public offering prior to the exercise date of the option. The redeemable common
stock will convert to nonredeemable common stock if the Company becomes a
publicly traded company prior to February 24, 2000 or the put option is not
exercised. In addition, Toshiba received Board of Director representation and
registration rights with regard to its common stock ownership in the Company.
The redeemable common stock has a redemption amount at June 30, 1999 of
$10,475,330.
Unaudited pro forma stockholders' equity at June 30, 1999 as set forth on
the accompanying balance sheets reflects the conversion of the redeemable
common stock, which will occur if a public offering is completed, as if such
conversion had occurred on June 30, 1999.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain of its
employees. These agreements stipulate, among other things, severance and
benefit arrangements in the event of termination. In addition, the agreements
include confidentiality provisions, invention assignment provisions, and
covenants not to compete.
F-14
<PAGE>
SMARTDISK CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8. STOCK BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options.
The Company's 1998 Employee Stock Option Plan has authorized the grant of
options to employees including members of the Company's Board of Directors who
are employees of the Company for up to 1,454,545 shares of the Company's common
stock of which 55,315 remain available as of June 30, 1999. Options granted
under the plan have vesting dates ranging from four to five years and all
options granted have a ten year contractual life.
The Company's 1998 Directors and Consultants Stock Option Plan has
authorized the grant of options to officers, directors, consultants and other
independent contractors (including members of the Company's Board of Directors
who are not employees of the Company) for up to 250,000 shares of the Company's
common stock of which 77,219 remain available as of June 30, 1999. Options
granted under the plan have vesting dates ranging from four to five years and
all options granted have a ten year contractual life.
The Company had reserved 1,704,545 shares of common stock for issuance
under the aforementioned stock option plans. At June 30, 1999, 132,534 options
remain available for future grant.
In July 1999 the Company's 1998 Employee Stock Option Plan and 1998
Directors and Consultants Stock Option Plan were terminated.
In July 1999, the Company established the 1999 Incentive Compensation Plan
(the 1999 Plan). Pursuant to the terms of the 1999 Plan, the Company may grant
participants stock options, stock appreciation rights, restricted stock,
deferred stock, other stock-related awards and performance or annual incentive
awards that may be settled in cash, stock or other property (collectively, the
Awards). Under the 1999 Plan, the total number of shares of common stock that
may be subject to the granting of Awards at any time during the term of the
1999 Plan shall equal 2,500,000 shares, plus the number of shares with respect
to which Awards previously granted under the 1999 Incentive Plan that terminate
without being exercised, and the number of shares of common stock that are
surrendered in the payment of any Awards or any tax withholding requirements.
No options have been granted to date under the 1999 Plan.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock option under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1998 and 1999; volatility factor of the expected market price
of the Company's common stock of .80; risk-free interest rate of 5.25% and a
weighted-average expected life of the option of 5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option
F-15
<PAGE>
SMARTDISK CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8. STOCK BASED COMPENSATION--(CONTINUED)
valuation models require the input of highly subjective assumptions including
the expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The company's
pro forma information follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------- -----------------------------------
1998 1998 1999
---------------- ---------------- ----------------
(UNAUDITED)
<S> <C> <C> <C>
Pro forma net loss ............... $ (5,620,529) $ (2,766,811) $ (2,351,972)
Pro forma loss per share ......... $ (0.70) $ (0.36) $ (0.26)
</TABLE>
A summary of the Company's stock option activity, and related information
for the year ended December 31, 1998 and the six months ended June 30, 1999 are
as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
------------- -----------------
<S> <C> <C>
Outstanding at December 31, 1997 ......... -- --
Options granted with exercise prices
equal to fair market value ............ 1,041,613 $ 1.29
Options granted with exercise prices
less than fair market value ........... 25,000 4.00
Options exercised ....................... (699,863) 0.73
Options canceled ........................ (750) 0.72
---------
Outstanding at December 31, 1998 ......... 366,000 $ 2.54
---------
Options granted with exercise prices
equal to fair market value ............ 792,500 6.98
Options exercised ....................... (47,875) 3.67
Options canceled ........................ (205,375) 2.64
---------
Outstanding at June 30, 1999 ............. 905,250 $ 6.36
=========
</TABLE>
The weighted average fair value of options granted during the year ended
December 31, 1998 and the six months ended June 30, 1999 with exercise prices
equal to market value was $0.84 and $4.71, respectively.
The weighted average fair value of options granted during the year ended
December 31, 1998 with exercise prices less than market value was $3.40.
During the six months ended June 30, 1999, compensation expense of $76,500
was recognized relating to the accelerated vesting of 21,000 options,
exercisable at $0.72 per share.
As of December 31, 1998 and June 30, 1999, 513,136 and 432,344 shares of
common stock issued upon the exercise of 699,864 options during 1998 remain
non-vested. Vesting of this restricted stock is subject to the vesting
provisions of the original option award.
F-16
<PAGE>
SMARTDISK CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8. STOCK BASED COMPENSATION--(CONTINUED)
The following table summarizes information about stock options outstanding
as of December 31, 1998 and June 30, 1999.
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
--------------------------------------------------- ----------------------------
WEIGHTED AVERAGE
WEIGHTED AVERAGE REMAINING WEIGHTED AVERAGE
RANGE OF EXERCISE PRICE SHARES EXERCISE PRICE CONTRACTUAL LIFE SHARES EXERCISE PRICE
- ------------------------ --------- ------------------ ------------------ -------- -----------------
<S> <C> <C> <C> <C> <C>
December 31, 1998
$0.72 - $1.00 171,000 $ 0.77 9.1 years 2,250 $ 0.72
$4.00 - $4.80 195,000 $ 4.08 9.7 years -- --
- ------------------------ ------- -----
$0.72 - $4.80 366,000 $ 2.54 9.4 years 2,250 $ 0.72
======= =====
June 30, 1999
$0.72 - $1.00 58,750 $ 0.76 8.6 years 17,188 $ 0.75
$4.00 - $8.00 846,500 $ 6.73 9.7 years 4,969 $ 4.43
- ------------------------ ------- ------
$0.72 - $8.00 905,250 $ 6.36 9.7 years 22,157 $ 1.57
======= ======
</TABLE>
NOTE 9. EMPLOYEE BENEFIT PLANS
Effective January 1, 1998, for the benefit of qualified employees, the
Company became a participant in a tax deferred savings plan offered to
employees of FISC. The plan is designed to provide employees with an
accumulation of funds at retirement. Qualified employees may elect to make pre
tax contributions into the plan for up to 15% of their annual compensation, up
to a maximum of $10,000 per year. The Company may make annual contributions to
the plan at the discretion of the Board of Directors. The Company's matching
contributions are earned by the employee based on a straight line, five year
vesting schedule. For the year ended December 31, 1998, and the six months
ended June 30, 1998 (unaudited) and 1999, the Company made matching
contributions of $10,747, $4,840, and $15,809, respectively.
In July 1999, the Company established the 1999 Employee Stock Purchase
Plan (the Plan). The Plan provides for the issuance of a maximum of 465,000
shares of common stock pursuant to the exercise of nontransferable options
granted to participating employees. The Plan will enable eligible employees who
have completed a service requirement to purchase shares of common stock for 85%
of market price of the stock, up to 25% of the participant's total compensation
excluding bonuses and commissions. The Purchase Plan will take effect upon
completion of the Company's initial public offering.
F-17
<PAGE>
SMARTDISK CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10. INCOME TAXES
The United States and foreign components of loss from continuing
operations before income taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------------------ -----------------------------------
1996 1997 1998 1998 1999
---------------- ---------------- ---------------- ---------------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
United States ......... $ (2,118,417) $ (3,462,924) $ (4,584,045) $ (2,469,735) $ (3,140,297)
Foreign ............... (9,699,359) (545,648) (1,021,215) (297,678) 1,052,016
------------- ------------ ------------ ------------ ------------
Total ............... $ (11,817,776) $ (4,008,572) $ (5,605,260) $ (2,767,413) $ (2,088,281)
============= ============ ============ ============ ============
</TABLE>
The income tax benefit for periods prior to 1999 as presented in the
statements of operations relates to the reduction of the deferred income tax
liability associated with the identified intangible assets. The income tax
expense for the six months ended June 30, 1999 consists of a foreign tax
expense of $130,418 and a deferred income tax benefit of $62,652 related to the
intangible assets.
The significant components of the Company's deferred income taxes are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------- JUNE 30,
1997 1998 1999
------------- --------------- ---------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carry forwards ......... $ 770,243 $ 2,615,236 $ 3,081,774
Depreciation and amortization ............. -- 18,377 16,953
Accrued expenses .......................... -- 9,225 13,837
Foreign tax credit ........................ -- -- 198,358
---------- ------------ ------------
Deferred tax assets ....................... 770,243 2,642,838 3,310,922
Less valuation allowance ................ (770,243) (2,642,838) (3,310,922)
---------- ------------ ------------
Net deferred tax assets ..................... -- -- --
Deferred tax liabilities:
Acquired intangibles ...................... (186,039) (184,658) (117,429)
---------- ------------ ------------
Total net deferred taxes .................... $ (186,039) $ (184,658) $ (117,429)
========== ============ ============
</TABLE>
F-18
<PAGE>
SMARTDISK CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10. INCOME TAXES--(CONTINUED)
The reconciliation of the U.S. federal statutory income tax rate to the
effective income tax rate is:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------------- -----------------------------
1996 1997 1998 1998 1999
-------------- -------------- -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Federal income tax benefit .................. (34.00)% (34.00)% (34.00)% (34.00)% (34.00)%
State taxes, net of federal benefit ......... ( 3.63) ( 3.63) ( 3.63) ( 3.63) ( 3.63)
Foreign tax rate differential ............... 3.80 0.63 ( 0.13) 0.33 3.26
Non-deductible items ........................ -- -- 1.38 0.11 2.79
Goodwill .................................... 6.55 0.37 0.13 0.52 0.71
Recognition of net deferred tax
assets from change in SDSC status -- -- ( 0.17) -- --
S corporation loss reported by
stockholders ............................... 6.75 32.51 -- -- --
Change in valuation allowance ............... 0.67 3.02 34.01 35.21 33.60
Other ....................................... -- -- 0.61 0.07 0.47
------ ------ ------ ------ ------
(19.86)% ( 1.10)% ( 1.80)% ( 1.39)% 3.2 %
====== ====== ====== ====== ======
</TABLE>
Prior to May 1998, SDSC elected to be taxed as an S corporation under the
Internal Revenue Code. As a result, the taxable income or losses for periods
prior to May 1998 were reported by the stockholders on their individual income
tax returns. Upon the conversion from an S corporation to a C corporation, SDSC
became subject to income tax. Subsequent to the conversion from an S
corporation to a C corporation, SDSC was merged into SmartDisk, a C
corporation.
SFAS 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative, management has
determined that a valuation allowance of approximately $770,000, $2,643,000 and
$3,311,000 at December 31, 1997 and 1998, and June 30, 1999, respectively, is
necessary to reduce the deferred tax assets to the amount that will more likely
than not be realized. The change in valuation allowance amounted to
approximately $121,000, $1,873,000 and $668,000 for December 31, 1997 and 1998,
and June 30, 1999, respectively.
At December 31, 1998 and June 30, 1999, the Company had United States and
foreign net operating loss carry forwards for tax purposes as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 JUNE 30, 1999
---------------------------- ---------------------------
JURISDICTION AMOUNT EXPIRATION AMOUNT EXPIRATION
- --------------------------- ------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
United States .......... $4,932,000 2018 $6,085,000 2018-2019
United Kingdom ......... $2,343,000 Unlimited $2,400,000 Unlimited
Japan .................. $ 377,000 2003 $ 0
N/A
</TABLE>
F-19
<PAGE>
SMARTDISK CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11. SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," replacing the
"industry segment" approach with the "management" approach. The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of the
Company's reportable segments. SFAS No. 131 also requires disclosures about
products and services, geographic areas and major customers. The Company
operates in one reportable business segment.
Sales to foreign markets and to significant customers as a percentage of
the Company's total revenues were as follows:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------ -----------------------
1996 1997 1998 1998 1999
-------- -------- -------- ------------ --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Foreign markets:
Asian and Pacific Rim Market ......... --% --% 84% 77% 83%
United States ........................ 75 82 10 13 13
Europe ............................... 25 18 6 10 4
-- -- -- -- --
100% 100% 100% 100% 100%
=== === === === ===
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------ --------------------
1996 1997 1998 1998 1999
------ ------ ------ ------------ -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Significant customers:
FISC ................ 100% 100% 14% 20% 11%
FujiFilm ............ -- -- 38 34 29
Olympus ............. -- -- 32 20 36
Hagiwara ............ -- -- 4 11 6
</TABLE>
The following is a summary of the carrying amounts of the Company's
foreign net assets (liabilities) by geographic area in which they are located:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1997 1998 1999
-------------- -------------- -------------
<S> <C> <C> <C>
Asia and Pacific Rim ......... $ -- $1,830,076 $2,575,751
Europe ....................... (28,263) (46,025) 284,132
</TABLE>
The following is a summary of the Company's foreign long-lived assets by
geographic area in which they are located:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1997 1998 1999
-------------- -------------- -------------
<S> <C> <C> <C>
Asia and Pacific Rim ......... $ -- $281,347 $1,204,681
Europe ....................... 757,926 750,821 480,522
</TABLE>
F-20
<PAGE>
SMARTDISK CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12. RELATED PARTY TRANSACTIONS
Material related party transactions that have been entered into by the
Company that are not disclosed otherwise in these notes are summarized below.
As outlined in Note 1, SmartDisk (including SDSC and SDL) and FISC were
under the common ownership of Fischer. Further, there were various transactions
between SmartDisk and FISC, such as sharing of certain general and
administrative resources, the purchases/sales of products and services and
similar transactions. In the opinion of management, the allocations were
reasonable and reflect all of the cost of the Company's doing business.
During 1996 and 1997, FISC provided operating services to SmartDisk
pursuant to an operating agreement. FISC retained 25% of the gross sales price
of SmartDisk Products distributed by it on behalf of the Company. In addition,
FISC allocated direct expenses attributable to the Company such as cost of
sales, product development and depreciation, and indirect expenses such as
selling, general and administrative expenses. The direct expense allocation was
based on actual expenses incurred and the indirect expense allocation was based
upon a pro rata allocaton of the total expenses incurred by FISC based upon
management's estimate of the percentage attributable to the Company. All of the
Company's revenues for those years and operating expenses totaling
approximately $2.3 million in 1996 and $4.0 million in 1997 were recognized or
incurred by FISC on behalf of SmartDisk. Management estimates that had the
Company operated on a stand-alone basis for those years, expenses would have
approximated the amounts reported.
As a direct result of this operating arrangement between FISC and
SmartDisk, the Company's stockholder loan from Fischer was increased by
$1,450,844 in 1996 and $3,158,817 in 1997 representing funding of SmartDisk
operations by Fischer through FISC. Stockholder loan amounts totaling
$3,908,823 in 1996 and $654,661 in 1997 were contibuted to capital. In
addition, stockholder loan amounts totaling $644,591 and $648,147 at December
31, 1997 and 1998, respectively, represented advances made by Fischer and
related companies to fund the operations of SDL. Those advances, which were
non-interest bearing and due upon demand, were converted into 386,841 shares of
common stock of SDL in May 1999, which in turn were exchanged for 76,018 shares
of SmartDisk.
At December 31, 1997, the Company owed $1,045,000 to FISC and $3,955,000
to Fischer, which represented non-interest amounts advanced to fund the
Company's operations. These amounts were repaid in 1998.
In connection with the 1998 agreement (see Note 1), the Company was
granted a non-exclusive license to certain patents relating to the interface
with Toshiba's SmartMedia cards. In September 1998, this license was amended to
expand the field of use for the license. In return, the Company agreed to pay a
1/2% royalty on products covered by the Toshiba patents. Royalty expenses
pertaining to this license were $68,752 in 1998, and $15,171, and $25,555 for
the six months ended June 30, 1998 (unaudited) and 1999, respectively.
The Company has entered into various strategic agreements with related
parties to sell, manufacture and distribute products. In addition, the Company
procures certain engineering services from a strategic investor. During 1998,
and for the six months ended June 30, 1998 (unaudited) and 1999, approximately
34%, 100% and 13%, respectively, of the Company's sales were to related
parties. During 1998 and for the six months ended June 30, 1998 (unaudited) and
1999, purchases of products and services of approximately $14.0 million, $4.7
million and $9.3 million, respectively, were made from related parties.
F-21
<PAGE>
SMARTDISK CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12. RELATED PARTY TRANSACTIONS--(CONTINUED)
Pursuant to license and distribution agreements entered into in 1998
between FISC and the Company, FISC was granted the right to license and
distribute the Company's products through 2001. For this right, FISC agreed to
pay to the Company royalties ranging from 5% to 33.3% of net revenue derived
from SmartDisk product sales. All of the Company's royalty revenues are from
FISC.
Pursuant to operating agreements entered into in 1998, FISC provides
operating assistance to the Company consisting of services, facilities and
shared equipment. The Company's share of expenses for these services is based
on an internal analysis of the relative amount of time devoted to its business
by employees of FISC as well as the overhead charges attributable to these
employees. The Company recorded operating expenses related to these agreements
for the year ended December 31, 1998 and the six months ended June 30, 1998
(unaudited) and 1999 of approximately $1,500,000, $483,000 and $166,000,
respectively.
Three of the Company's principal stockholders have the right to require
the Company to file a registration statement to enable them to sell their
shares
During February 1999, the Company loaned $60,000 to one of its officers
and the amount was outstanding as of June 30, 1999. The loan was made pursuant
to a Promissory Note, bears interest at 4.71%, and is repayable in four annual
installments. In addition, the Company has, in conjunction with the 1998
Employee Stock Option Plan, made loans to various of its employees to allow for
the immediate exercise of stock option grants. Each loan was made pursuant to a
full recourse Promissory Note, is secured by a pledge of the shares of stock
which the employee has acquired, bears interest at approximately 5.5% which is
payable quarterly, and is required to be paid in full within five years of the
date of issuance.
NOTE 13. RESEARCH AND DEVELOPMENT CONTRACT
During 1999, the Company entered into a research and development contract
with Sony Corporation ("Sony") to develop a FlashPath product to support Sony's
flash memory card. The Company will manufacture and Sony will distribute the
final product. The contract entitles the Company to receive funds from Sony
over the development period, which is through March 31, 2000, some of which are
conditioned upon Sony's acceptance of deliverables. In accordance with the
terms of the contract, the Company invoices Sony on a monthly basis for
development work. Contract billings are earned based upon achievement of
milestones defined in the contract. Through June 30, 1999, the Company has
invoiced Sony approximately $968,000 for development work, no revenues have
been recognized and approximately $897,000 of contract costs have been charged
to expense. The Company's accounting has been based upon final customer
acceptance being a condition of the Company earning revenue under the contract.
Total estimated contract costs are approximately $1.4 million.
NOTE 14. INITIAL PUBLIC OFFERING
On July 14, 1999, the Company filed a registration statement with the
Securities and Exchange Commission to sell shares of its common stock in an
initial public offering.
F-22
<PAGE>
[INSIDE BACK COVER]
Digital Digital
Cameras Music Players
[Picture of FlashPath: [Picture of floppy
digital camera disk drive with
with arrow arrow pointing to
pointing to FlashPath]
flash memory
card] [Picture of
Easy to Use FlashPath with
[Picture of ----------- arrow pointing to
flash memory Convenient flash memory
card with arrow pointing ----------- card]
to FlashPath] Versatile
[Picture of [Picture of
FlashPath flash memory
with arrow card with
pointing to arrow pointing
floppy disk to digital
drive] music player]
[SmartDisk Logo]
The above pictured flash memory cards and camera are manufactured by third
parties.
<PAGE>
[GRAPHIC OMITTED]
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SELL THESE SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES, IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED OCTOBER 4, 1999
[GRAPHIC OMITTED]
3,000,000 SHARES
COMMON STOCK
SmartDisk Corporation is offering 3,000,000 shares of its common stock.
This is our initial public offering and no public market currently exists for
our shares. We have filed an application for the common stock to be quoted on
the Nasdaq National Market under the symbol "SMDK." We anticipate that the
initial public offering price will be between $10.00 and $12.00 per share.
---------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 4.
---------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
----------- ---------
<S> <C> <C>
Public Offering Price ........................... $ $
Underwriting Discounts and Commissions .......... $ $
Proceeds to SmartDisk ........................... $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS
HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
We have granted the underwriters a 30-day option to purchase up to an
additional 450,000 shares of common stock to cover over-allotments.
ROBERTSON STEPHENS INTERNATIONAL LIMITED
HAMBRECHT & QUIST
U.S. BANCORP PIPER JAFFRAY
---------------------
The date of this prospectus is , 1999.
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc., Hambrecht & Quist LLC and U.S. Bancorp
Piper Jaffray Inc., have severally agreed with SmartDisk, subject to the terms
and conditions set forth in the underwriting agreement, to purchase from
SmartDisk the number of shares of common stock set forth opposite their names
below. The underwriters are committed to purchase and pay for all the shares if
any are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ----------
<S> <C>
BancBoston Robertson Stephens Inc. ..........................
Hambrecht & Quist LLC .......................................
U.S. Bancorp Piper Jaffray Inc. .............................
---------
INTERNATIONAL UNDERWRITER
-------------------------
BancBoston Robertson Stephens International Limited .........
Hambrecht & Quist LLC .......................................
U.S. Bancorp Piper Jaffray Inc. .............................
---------
Total ..................................................... 3,000,000
=========
</TABLE>
SmartDisk has been advised by the representatives of the underwriters that
the underwriters propose to offer the shares of common stock to the public at
the initial public offering price set forth on the cover page of this
prospectus and to some dealers at that price less a concession of not in excess
of $ per share, of which $ may be reallowed to other dealers. After
the initial public offering, the public offering price, concession and
reallowance to dealers may be reduced by the representatives. No reduction
shall change the amount of proceeds to be received by SmartDisk as set forth on
the cover page of this prospectus. The common stock is offered by the
underwriters, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part.
The underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
OVER-ALLOTMENT OPTION. SmartDisk has granted to the underwriters an
option, exercisable during the 30-day period after the date of this prospectus,
to purchase up to 450,000 additional shares of common stock at the same price
per share as SmartDisk will receive for the 3,000,000 shares that the
underwriters have agreed to purchase. To the extent that the underwriters
exercise this option, each of the underwriters will have a firm commitment to
purchase approximately the same percentage of additional shares that the number
of shares of common stock to be purchased by it shown in the above table
represents as a percentage of the shares offered by this prospectus. If
purchased, the additional shares will be sold by the underwriters on the same
terms as those on which the 3,000,000 shares are being sold. SmartDisk will be
obligated, pursuant to the option, to sell shares to the extent the option is
exercised. The underwriters may exercise the option only to cover
over-allotments made in connection with the sale of the shares of common stock
offered by this prospectus. If the option is exercised in full, the total
public offering price, underwriting discounts and commissions and proceeds to
SmartDisk will be $ , $ and $ , respectively.
The following table summarizes the compensation and expenses we will pay.
<TABLE>
<CAPTION>
TOTAL
----------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
----------- ---------------- ---------------
<S> <C> <C> <C>
Underwriting discounts and commissions paid by us ......... $ $ $
Expenses payable by us .................................... $ $ $
</TABLE>
INDEMNITY. The underwriting agreement contains covenants of indemnity
among the underwriters and SmartDisk against some civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
60
<PAGE>
LOCK-UP AGREEMENTS. Each of SmartDisk's executive officers, directors,
director-nominees, stock-holders of record and option-holders of record has
agreed with the representatives of the underwriters, for a period of 180 days
after the date of this prospectus, subject to some exceptions, not to offer to
sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant
any rights with respect to any shares of common stock, any options or warrants
to purchase any shares of common stock, or any securities convertible into or
exchangeable for shares of common stock owned as of the date of this prospectus
or thereafter acquired directly by the holders or with respect to which they
have or hereafter acquire the power of disposition, without the prior written
consent of BancBoston Robertson Stephens Inc. However, BancBoston Robertson
Stephens Inc. may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to the lock-up agreements.
There are no agreements between the representatives and any of SmartDisk's
stockholders providing consent by the representatives to the sale of shares
prior to the expiration of the lock-up period.
FUTURE SALES. In addition, SmartDisk has agreed that during the lock-up
period SmartDisk will not, without the consent of BancBoston Robertson Stephens
Inc., subject to some exceptions,
/bullet/ consent to the disposition of any shares held by stockholders
subject to lock-up agreements prior to the expiration of the lock-up
period or
/bullet/ issue, sell, contract to sell, or otherwise dispose of, any shares
of common stock, any options to purchase any shares of common
stock or any securities convertible into, exercisable for or
exchangeable for shares of common stock other than SmartDisk's
sale of shares in this offering, the issuance of common stock upon
the exercise of outstanding options, and the issuance of options
or shares under existing stock option and incentive plans provided
those options do not vest, or the right to resell those shares do
not arise until, prior to the expiration of the lock-up period.
LISTING. We have filed an application for the common stock to be quoted on
The Nasdaq National Market under the symbol "SMDK."
NO PRIOR PUBLIC MARKET. Prior to this offering, there has been no public
market for the common stock of SmartDisk. Consequently, the initial public
offering price for the common stock offered by this prospectus will be
determined through negotiations between SmartDisk and the representatives of
the underwriters. Among the factors to be considered in the negotiations are
prevailing market conditions, financial information of SmartDisk, market
valuations of other companies that SmartDisk and the representatives believe to
be comparable to SmartDisk, estimates of the business potential of SmartDisk,
the present state of SmartDisk's development and other factors deemed relevant.
STABILIZATION. The representatives of the underwriters have advised
SmartDisk that some persons participating in this offering may engage in
transactions, including stabilizing bids, syndicate covering transactions or
the imposition of penalty bids, that 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 this 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 this offering, if the common
stock originally sold by the underwriter or syndicate member is purchased by
the representatives in a syndicate covering transaction and has therefore not
been effectively placed by the underwriter or syndicate member. The
representatives have advised SmartDisk that the transactions may be effected on
The Nasdaq National Market or otherwise and, if commenced, may be discontinued
at any time.
DIRECTED SHARE PROGRAM. At our request, the underwriters have reserved up
to 7.5 percent of the shares of common stock to be issued by SmartDisk and
offered by this prospectus for sale, at the
61
<PAGE>
initial public offering price, to directors, officers, employees, business
associates and related persons of SmartDisk. Those shares will be offered to
the program participants on the same basis as the shares offered to the general
public. The number of shares of common stock available for sale to the general
public will be reduced to the extent that those individuals purchase all or a
portion of these reserved shares. Any reserved shares which are not so
purchased will be offered by the underwriters to the general public on the same
basis as the shares of common stock offered by this prospectus.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for SmartDisk by Greenberg Traurig, P.A., Miami, Florida. Certain legal
matters in connection with the offering will be passed upon for the
underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation,
Palo Alto, California.
EXPERTS
Ernst & Young LLP, independent certified public accountants, have audited
our consolidated financial statements at December 31, 1997 and 1998 and June
30, 1999 and for each of the three years in the period ended December 31, 1998
and the six months ended June 30, 1999, as set forth in their report. We have
included our financial statements in this prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, Washington,
D.C. 20549, a registration statement on Form S-1 under the Securities Act with
respect to the common stock offered by this prospectus. This prospectus does
not contain all of the information set forth in the registration statement and
the exhibits and schedules to the registration statement. For further
information with respect to SmartDisk and the common stock offered by this
prospectus, refer to the registration statement and the exhibits and schedules
filed as a part of the registration statement. Statements contained in this
prospectus concerning the contents of any contract or any other document
referred to are not necessarily complete; refer in each instance to the copy of
the contract or document filed as an exhibit to the registration statement.
Each statement of the type referred to in the preceding sentence is qualified
in all respects by reference to the exhibit. You may inspect a copy of the
registration statement without charge at the Securities and Exchange
Commission's principal office in Washington, D.C. and obtain copies of all or
any part thereof upon payment of a fee from the Public Reference Room of the
Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, or at the Securities and Exchange Commission's regional offices in New
York, located at 7 World Trade Center, Suite 1300, New York, New York 10048, or
in Chicago, located at 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. You may obtain information on the operation of the Public Reference Room
by calling the Securities and Exchange Commission at 1-800-SEC-0330. The
Securities and Exchange Commission maintains an Internet site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Securities and Exchange
Commission. The Securities and Exchange Commission's World Wide Web address is
www.sec.gov.
SmartDisk intends to furnish holders of its common stock with annual
reports containing, among other information, audited financial statements
certified by an independent public accounting firm and quarterly reports
containing unaudited condensed financial information for the first three
quarters of each fiscal year. SmartDisk intends to furnish other reports as it
may determine or as may be required by law.
62
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by SmartDisk in connection with
the sale of common stock being registered. All amounts are estimates except the
SEC registration fee and the NASD filing fees. Securities and Exchange
Commission registration fee
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee ......... $ 11,509
NASD filing fee ............................................. 4,640
Nasdaq National Market listing fee .......................... 50,000
Printing and engraving expenses ............................. 100,000
Accounting fees and expenses ................................ 500,000
Legal fees and expenses ..................................... 400,000
Blue Sky fees and expenses .................................. 10,000
Transfer Agent's fees and expenses .......................... 3,500
Miscellaneous ............................................... 210,351
----------
TOTAL ..................................................... $1,290,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's Board of Directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). The Registrant's bylaws provides for
mandatory indemnification of its directors and officers and permissible
indemnification of employees and other agents to the maximum extent permitted
by the Delaware General Corporation Law. The Registrant's certificate of
incorporation provides that, pursuant to Delaware law, its directors shall not
be liable for monetary damages for breach of the directors' fiduciary duty as
directors to SmartDisk and its stockholders. This provision in the certificate
of incorporation does not eliminate the directors' fiduciary duty, and in
appropriate circumstances equitable remedies such as injunctive or other forms
of non-monetary relief will remain available under Delaware law. In addition,
each director will continue to be subject to liability for breach of the
director's duty of loyalty to SmartDisk for acts or omissions not in good faith
or involving intentional misconduct, for knowing violations of law, for actions
leading to improper personal benefit to the director, and for payment of
dividends or approval of stock repurchases or redemptions that are unlawful
under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws. Prior to the closing of this offering, the
Registrant will enter into Indemnification Agreements with its officers and
directors, a form of which is attached as Exhibit 10.16 hereto and incorporated
herein by reference. The Indemnification Agreements provide the Registrant's
officers and directors with further indemnification to the maximum extent
permitted by the Delaware General Corporation Law. Reference is made to Section
7 of the Underwriting Agreement contained in Exhibit 1.1 hereto, indemnifying
officers and directors of the Registrant against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On May 22, 1998, SmartDisk sold 7,350,000 shares of common stock to
Phoenix House Investments, L.L.C. in exchange for all outstanding shares of
SmartDisk Security Corporation.
On May 22, 1998, SmartDisk sold 2,487,500 shares of common stock to
Toshiba Corporation for $9,950,000.
II-1
<PAGE>
On May 22, 1998, SmartDisk sold 150,000 shares of common stock to Fischer
International Systems Corporation in exchange for the assignment to SmartDisk
of certain trademarks.
On May 28, 1998, SmartDisk sold 28,750 shares of common stock to First
TZMM Investment Partnership for $115,000.
On October 15, 1998, SmartDisk sold 250,000 shares of common stock to
Yamaichi Electronics Co., Ltd. for $1,200,000.
On October 16, 1998, SmartDisk sold 250,000 shares of common stock to Rohm
Co., Ltd. for $1,200,000.
On November 26, 1998, SmartDisk sold 125,000 shares of common stock to NEC
Corporation for $600,000.
On January 13, 1999, SmartDisk sold 250,000 shares of common stock to
Hitachi Software Engineering Co., Ltd. for $1,100,000.
On May 26, 1999, SmartDisk sold 515,500 shares of common stock to the
shareholders of SmartDiskette Limited, an English corporation, in exchange for
all of the outstanding shares of capital stock of SmartDiskette Limited.
On June 30, 1999, SmartDisk issued 37,500 shares of common stock to
SanDisk Corporation as partial consideration for the grant of a license to
certain intellectual property.
On July 1, 1999, SmartDisk sold 312,500 shares of common stock to SCM
Microsystems, Inc. for $2,500,000. On that date, SmartDisk also sold an
aggregate of 87,500 shares of common stock to five investors, including two of
its directors, Messrs. Tomlinson and Bidzos, for $700,000, or $8.00 per share.
Between January 1, 1998 and August 31, 1999, SmartDisk issued an aggregate
of 747,738 shares of common stock to 20 persons, all of whom were employees or
directors of, or consultants to, SmartDisk. Such shares were issued upon
exercise of stock options with exercise prices ranging from $0.72 to $8.00 per
share.
The sale of the above securities was deemed to be exempt from registration
under the Securities Act in reliance upon Section 4(2) of the Securities Act or
Rule 701 promulgated under Section 3(b) of the Securities Act as transactions
by an issuer not involving any public offering or transactions pursuant to
compensation benefit plans and contracts relating to compensation as provided
under such Rule 701. The recipients of securities in each such transaction
represented their intentions to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof, and
appropriate legends were affixed to the share certificates issued in such
transactions. All recipients had adequate access, through their relationships
with the Registrant, to information about the Registrant.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
A. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- -----------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement(1)
3.1 Certificate of Incorporation(1)
3.2 Bylaws(1)
3.3 Certificate of Correction of Restated Certificate of Incorporation
5.1 Opinion of Greenberg Traurig, P.A.(1)
10.1 1998 Employee Stock Option Plan(1)(2)
10.2 1998 Directors and Consultants Stock Option Plan(1)(2)
10.3 1999 Incentive Compensation Plan(1)(2)
10.4 1999 Employee Stock Purchase Plan(1)(2)
10.5 Employment Agreement with Michael S. Battaglia(3)
10.6 Employment Agreement with Robert Protheroe
10.7 Employment Agreement with Quresh Sachee(3)
10.8 License Agreement dated May 26, 1998 between Toshiba Corporation and SmartDisk, as
amended(1)
10.9 Operating Agreement dated May 28, 1998 between Fischer International System Corporation
and SmartDisk, as amended(1)
10.10 License and Distribution Agreement dated May 28, 1998 between SmartDisk and Fischer
International Systems Corporation(1)
10.11 Distribution Agreement dated May 28, 1998 between Fischer International Systems
Corporation and SmartDisk(1)
10.12 Investors' Rights Agreement dated May 22, 1998 among SmartDisk and each of the investors
a party thereto(1)
10.13 Lease Agreement dated October 4, 1993 between Arnold Industrial Park and SmartDisk, by
assignment(1)
10.14 Development and License Agreement between SmartDisk and Sony Corporation(3)
10.15 Cooperative Development Agreement dated June 30, 1999 between SmartDisk and SanDisk
Corporation(3)
10.16 Form of Indemnification Agreement between the Registrant and each of its directors and
executive officers(1)
10.17 Joint Venture Agreement dated as of February 24, 1998 by and among Phoenix House
Investments, L.L.C., Toshiba Corporation and SmartDisk Corporation(1)
21.1 Subsidiaries of the Registrant(1)
23.1 Consent of Greenberg Traurig, P.A. (included in Exhibit 5.1)(1)
23.2 Consent of Ernst & Young LLP
24.1 Power of Attorney(1)
27.1 Financial Data Schedules (SEC use only)(1)
</TABLE>
- --------
(1) Previously filed as an exhibit to the Registration Statement on Form S-1
filed on July 14, 1999 (registration no. 333-82793), Amendment No. 1 to
the Registration Statement on Form S-1 filed on September 3, 1999 or
Amendment No. 2 to the Registration Statement on Form S-1 filed on
September 27, 1999.
(2) Management Compensation Plan or Arrangement.
(3) Confidential treatment requested for portions of this exhibit.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS
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.
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 Delaware General Corporation Law, the Certificate of
Incorporation or the Bylaws of the Registrant, the Underwriting Agreement, 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 by such director, officer or
controlling person in connection with the securities being registered
hereunder, 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 of 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.
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 by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose 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 relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Naples, State of Florida, on this 4th day of October, 1999.
SMARTDISK CORPORATION
By: /s/ Michael S. Battaglia*
------------------------------------
Michael S. Battaglia
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------- ---------------------------------------- ----------------
<S> <C> <C>
/s/ Addison M. Fischer* Chairman and Director October 4, 1999
- ---------------------------------
Addison M. Fischer
/s/ Michael S. Battaglia* President, Chief Executive Officer and October 4, 1999
- --------------------------------- Director (Principal Executive Officer)
Michael S. Battaglia
/s/ Michael R. Mattingly* Chief Financial Officer (Principal October 4, 1999
- --------------------------------- Financial and Accounting Officer)
Michael R. Mattingly
/s/ Timothy Tomlinson* Director October 4, 1999
- ---------------------------------
Timothy Tomlinson
/s/ D. James Bidzos* Director October 4, 1999
- ---------------------------------
D. James Bidzos
/s/ Shigeki Morita* Director October 4, 1999
- ---------------------------------
Shigeki Morita
- --------------------------------- Director October 4, 1999
Anthony A. Ibarguen
- --------------------------------- Director October 4, 1999
Hatim Tyabji
- --------------------------------- Director October 4, 1999
Joseph M. Tucci
- -----------
* By: /s/ Daniel E. Reed
---------------------------
Daniel E. Reed,
Attorney-in-Fact
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- -----------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement(1)
3.1 Certificate of Incorporation(1)
3.2 Bylaws(1)
3.3 Certificate of Correction of Restated Certificate of Incorporation
5.1 Opinion of Greenberg Traurig, P.A.(1)
10.1 1998 Employee Stock Option Plan(1)(2)
10.2 1998 Directors and Consultants Stock Option Plan(1)(2)
10.3 1999 Incentive Compensation Plan(1)(2)
10.4 1999 Employee Stock Purchase Plan(1)(2)
10.5 Employment Agreement with Michael S. Battaglia(3)
10.6 Employment Agreement with Robert Protheroe
10.7 Employment Agreement with Quresh Sachee(3)
10.8 License Agreement dated May 26, 1998 between Toshiba Corporation and SmartDisk, as
amended(1)
10.9 Operating Agreement dated May 28, 1998 between Fischer International System Corporation
and SmartDisk, as amended(1)
10.10 License and Distribution Agreement dated May 28, 1998 between SmartDisk and Fischer
International Systems Corporation(1)
10.11 Distribution Agreement dated May 28, 1998 between Fischer International Systems
Corporation and SmartDisk(1)
10.12 Investors' Rights Agreement dated May 22, 1998 among SmartDisk and each of the investors
a party thereto(1)
10.13 Lease Agreement dated October 4, 1993 between Arnold Industrial Park and SmartDisk, by
assignment(1)
10.14 Development and License Agreement between SmartDisk and Sony Corporation(3)
10.15 Cooperative Development Agreement dated June 30, 1999 between SmartDisk and SanDisk
Corporation(3)
10.16 Form of Indemnification Agreement between the Registrant and each of its directors and
executive officers(1)
10.17 Joint Venture Agreement dated as of February 24, 1998 by and among Phoenix House
Investments, L.L.C., Toshiba Corporation and SmartDisk Corporation(1)
21.1 Subsidiaries of the Registrant(1)
23.1 Consent of Greenberg Traurig, P.A. (included in Exhibit 5.1)(1)
23.2 Consent of Ernst & Young LLP
24.1 Power of Attorney(1)
27.1 Financial Data Schedules (SEC use only)(1)
</TABLE>
- --------
(1) Previously filed as an exhibit to the Registration Statement on Form S-1
filed on July 14, 1999 (registration no. 333-82793), Amendment No. 1 to
the Registration Statement on Form S-1 filed on September 3, 1999 or
Amendment No. 2 to the Registration Statement on Form S-1 filed on
September 27, 1999.
(2) Management Compensation Plan or Arrangement.
(3) Confidential treatment requested for portions of this exhibit.
EXHIBIT 3.3
CERTIFICATE OF CORRECTION OF
RESTATED CERTIFICATE OF INCORPORATION
OF
SMARTDISK CORPORATION
- --------------------------------------------------------------------------------
It is hereby certified that:
1. The name of the corporation (hereinafter called the "Corporation")
is SmartDisk Corporation.
2. The Restated Certificate of Incorporation of the Corporation (the
"Certificate"), which was filed by the Secretary of State of Delaware on August
10, 1999, is hereby corrected.
3. The inaccurate portion of the Certificate to be corrected is as
follows:
SIXTH: (b) CLASSIFICATION OF DIRECTORS. The directors shall
be divided into three classes of equal or approximately
equal number and designated Class I, Class II and Class
III. If the number of directors is not evenly divisible by
three, the remainder positions shall be allocated first to
Class III and second to Class II. The initial term of
office of Class I will expire at the annual meeting of
stockholders in 1999; of Class II at the annual meeting of
stockholders in 2000; and of Class III at the annual
meeting of stockholders in 2001. Each director elected
shall hold office until his successor shall be elected and
shall qualify. At each annual meeting of stockholders
beginning with the annual meeting of stockholders in 1999,
directors elected to succeed those whose terms are then
expiring shall be elected for a full term of office
expiring at the third succeeding annual meeting of
stockholders after their election. Should the number of
directors which constitutes the whole board of directors be
changed as permitted by paragraph (a) of this Article, such
majority of the whole board of directors shall also fix and
determine the number of directors of which each class shall
be comprised.
4. The portion of the Certificate in corrected form is as follows:
SIXTH: (b) CLASSIFICATION OF DIRECTORS. The directors shall
be divided into three classes of equal or approximately
equal number and designated Class I, Class II and Class
III. The initial term of office of Class I will expire at
the annual meeting of stockholders
<PAGE>
in 2000; of Class II at the annual meeting of stockholders
in 2001; and of Class III at the annual meeting of
stockholders in 2002. Each director elected shall hold
office until his successor shall be elected and shall
qualify. At each annual meeting of stockholders beginning
with the annual meeting of stockholders in 2000, directors
elected to succeed those whose terms are then expiring
shall be elected for a full term of office expiring at the
third succeeding annual meeting of stockholders after their
election. Should the number of directors which constitutes
the whole board of directors be changed as permitted by
paragraph (a) of this Article, such majority of the whole
board of directors shall also fix and determine the number
of directors of which each class shall be comprised.
IN WITNESS WHEREOF, said Corporation has caused this Certificate to be
signed by its duly authorized officer, this 28TH day of September, 1999.
/S/ DANIEL E. REED
------------------------------------
Daniel E. Reed, Vice President, Corporate
Development and Legal Affairs
Exhibit 10.5
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("AGREEMENT") is entered into as of January
1, 1999, the "EFFECTIVE DATE") by and between SmartDisk Corporation, a Delaware
corporation ("COMPANY") and Michael S. Battaglia ("EMPLOYEE").
1. EMPLOYMENT RELATIONSHIP.
1.1 COMMENCEMENT AND TERM OF EMPLOYMENT. The Company employs
Employee and Employee accepts employment by the Company as of the Effective Date
on the terms and conditions set forth in this Agreement. The term of employment
("TERM OF EMPLOYMENT") shall commence as of the Effective Date and shall
continue thereafter for a period of thirty-six (36) months unless sooner
terminated pursuant to Section 5.
1.2 DUTIES. During the Term of Employment, Employee shall have
the title and perform and faithfully discharge the duties and responsibilities
of President and Chief Executive Officer of the Company. Employee shall use his
best efforts to perform and discharge such duties and responsibilities in such
manner as the Company's Board of Directors may reasonably prescribe to Employee
from time to time. Employee shall also use his best efforts to observe all
policies, procedures and other requirements not inconsistent with this Agreement
that may be implemented or revised by the Company during the Term of Employment.
1.3 COMMITMENT OF EMPLOYEE. Employee shall devote
substantially all of his productive business time, attention, knowledge and
skill exclusively to the performance of his duties hereunder throughout the Term
of Employment and shall at all times discharge his duties faithfully,
industriously and to the best of his ability, experience and talents.
2. COMPENSATION.
2.1 SALARY. For all of Employee's services during the Term of
Employment, Employee shall be paid a salary of Two Hundred Seventy Five Thousand
Dollars ($275,000.00) per year. Employee shall be eligible for merit increases
as determined by the Board of Directors after the first anniversary of the
Effective Date of this Agreement. Payment shall be made in periodic installments
in accordance with Company's payroll policies instituted from time to time. Upon
termination of this Agreement pursuant to Section 5, the Company shall have no
obligation to pay salary or other benefits to Employee except as may be provided
in Section 5.
<PAGE>
2.2 BONUS. Employee shall be entitled to an annual bonus
pursuant to Company's incentive plan set forth in EXHIBIT A (the "INCENTIVE
PLAN") attached hereto, or as the same may be amended by the Compensation
Committee of the Board of Directors. Upon attainment of one hundred percent
(100%) of the objective set forth in the Incentive Plan, Employee shall be
entitled to a bonus in the first year of One Hundred Twenty Five Thousand
Dollars ($125,000.00). Said bonus shall be payable on the dates established by
the Company for payment of quarterly and annual bonuses and shall be payable
only if Employee continues to remain in the employ of the Company on such date;
provided, however, that in the event the Company terminates Employee's
employment hereunder without cause pursuant to Section 5.4, Incentive Plan bonus
may be paid in accordance with Section 5.5.
2.3 EMPLOYEE BENEFITS. During the Term of Employment, Employee
shall be entitled to participate in the group medical, dental and disability
policies and other benefits maintained from time to time by the Company for the
benefit of senior officers of the Company. During the Term of Employment,
Employee shall be entitled to receive all other benefits, and to participate in
all other benefit plans, as are generally available to employees of the Company
on the same terms as other senior management employees. Employee shall be
entitled to reimbursement for all usual and customary business expenses in
reasonable amount incurred by Employee in the performance of his duties for the
Company in accordance with the Company's then current expense reimbursement
policies and guidelines.
2.4 STOCK OPTION. Employee shall receive an incentive stock
option in the form attached as EXHIBIT B-1 pursuant to which Employee shall be
entitled to purchase two hundred seventy-one thousand eight hundred fifty-eight
(271,858) shares of the Company's Common Stock at an exercise price of not more
than $1.20 per share and a non-statutory stock option in the form attached
hereto as EXHIBIT B-2 pursuant to which Employee shall be entitled to purchase
seventy-eight thousand one hundred forty-two (78,142) shares of the Company's
Common Stock at a price of not more than $1.20 per share.
3. VACATIONS. During the Term of Employment, Employee shall be entitled
to fifteen (15) days of paid vacation per year, plus a one-time carry-over of
the amount of accrued and unpaid vacation time and other personal time off from
Fischer International Systems Corporation ("FISC VACATION TIME"). Other than the
FISC Vacation Time, in no event shall Employee be entitled to accrue and carry
forward more than five (5) days of paid vacation from any calendar year to
another, and if Employee has reached this total, no further vacation days shall
accrue until the total of accrued but unused vacation days falls below such
maximum.
4. PLACE OF BUSINESS. During the Term of Employment, Employee shall
render services hereunder at the Company's principal executive offices in
Naples, Florida, or any successor principal office. Employee shall also be
available to travel for business purposes incident to the performance of his
duties, as required from time to time. Transportation, lodging and meal expenses
shall be incurred and reimbursed in accordance with the general policy of the
Company as adopted by the Company from time to time
5. EARLY TERMINATION.
<PAGE>
5.1 TERMINATION UPON PERMANENT DISABILITY OR DEATH. This
Agreement shall automatically terminate upon the permanent disability or death
of Employee, subject to the obligation of the Company to pay Employee or
Employee's personal representative or designated beneficiary, as the case may
be, (i) the balance of Employee's salary and other benefits for the remainder of
the month in which disability or death occurs, (ii) a pro rata portion of any
bonus to which Employee was otherwise entitled under Section 2.2 based upon the
ratio the number of months employed (calculated through the end of the then
current month) bears to the bonus period of twelve (12) months and (iii) any
other disability benefits described in this Section 5.1 to which Employee may be
entitled. The Company will continue to pay Employee his regular salary during
any period during which Employee is incapable of continuing the further
performance of Employee's normal employment activities with the Company because
of a mental, emotional or physical injury, sickness or disorder. However, when
such period exceeds an aggregate of sixty (60) business days (exclusive of any
accrued vacation within the limits set forth above) out of any three hundred
sixty-five (365) consecutive calendar days, Employee shall be deemed permanently
disabled. Employee shall also be deemed permanently disabled if so certified by
any two physicians, or upon the expiration of any elimination period under any
disability insurance policy purchased by the Company for the benefit of
Employee. Should Employee become permanently disabled, Employee or his personal
representative shall be entitled to receive his termination compensation set
forth in subsections (i), (ii) and (iii) above, as well as any disability
benefits maintained for Employee by the Company, if any, pursuant to the terms
and subject to the conditions of any such applicable disability benefit program
or policy.
5.2 TERMINATION FOR CAUSE. During the Term of Employment, the
Company may at any time, without giving notice to Employee, immediately
terminate this Agreement if Employee (a) commits any act of embezzlement, theft,
fraud or dishonesty; (b) engages in unfair competition with the Company or any
subsidiary of the Company whether or not wholly-owned; (c) is convicted of any
felony; (d) breaches any material provision of the Confidentiality Agreement
entered into by Employee pursuant to Section 6 of this Agreement; (e) uses
illegal drugs or other substances or (f) willfully breaches any other material
provision of this Agreement. If Employee materially breaches or habitually
neglects or fails in any material way to perform the usual and customary duties
of his job, or any other duties required to be performed under the terms of this
Agreement, or the policies of the Company, the Company may, at its option,
terminate this Agreement by giving written notice of termination to Employee.
Any termination pursuant to either of the two preceding sentences shall be
without prejudice to any other remedy to which the Company may be entitled
either at law, in equity, or under this Agreement. Before the Company may
terminate this Agreement by reason of Employee's habitual neglect of or failure
to perform the usual and customary duties of his job or policies of the Company,
the Company must first notify Employee in writing, setting forth in detail those
duties and/or policies which Employee has habitually neglected or failed to
perform, and provide Employee a reasonable period of time, not to exceed thirty
(30) days, in which to cure such neglect or failure. If Employee does not cure
the specified areas of neglect of failure, the Company may terminate this
Agreement immediately by giving Employee written notice. At the time of any
termination for cause, Employee shall be entitled to receive any salary and
employment benefits which shall have accrued prior to the date of termination,
but shall not be entitled to any bonus or severance payments, salary or
employment benefits relating to periods subsequent to the date of termination,
subject to Employee's rights to continue medical and dental coverage under the
Company's group policy, at Employee's expense, as may be provided by law.
<PAGE>
5.3 TERMINATION BY EMPLOYEE. This Agreement may be terminated
by Employee for any reason, or no reason, by giving thirty (30) days' written
notice of termination to the Company. Upon termination by Employee, all rights
accruing to Employee under the terms of this Agreement shall cease, and Employee
shall not be entitled to any bonus or severance payments, salary or employment
benefits, except to the extent earned and accrued prior to the termination date,
and subject to Employee's rights to continue medical and dental coverage under
the Company's group policy, at Employee's expense, as may be provided by law.
5.4 TERMINATION WITHOUT CAUSE. Employee's employment with the
Company during the Term of Employment may be terminated by the Company at any
time without cause, by the Company's giving thirty (30) days prior written
notice. A termination without cause, for purposes of this Agreement, means
termination by the Company other than as provided for in Sections 5.1 and 5.2.
5.5 SEVERANCE PAYMENTS. If Employee is terminated pursuant to
Section 5.4, Employee shall be entitled to severance pay in accordance with the
Company's normal payroll practices at the rate of Employee's salary for such
year set forth in Section 2.1 for a period of six (6) months following
termination together with fifty percent (50%) of the Incentive Plan target bonus
for such year, if any, described in Section 2.2. All bonuses shall be payable
only at the discretion of the Compensation Committee of the Board of Directors
and shall reflect Employee's performance to the date of termination. All
severance pay shall be payable in equal consecutive monthly installments on the
last day of each month following the effective date of Employee's termination
for the number of months of severance pay to which Employee is entitled
hereunder. Any pro rata bonus shall be payable on the effective date of
termination of employment. Employee understands and agrees that such payments
shall be his only entitlement as and for severance pay or severance
compensation. Upon termination pursuant to Section 5.4, except for the severance
payments stated above, all rights and obligations accruing to Employee under the
terms of this Agreement or otherwise shall cease, and Employee shall not be
entitled to any further salary or employment benefits, except to the extent
earned and accrued prior to such date, and subject to Employee's rights to
continue medical and dental coverage under the Company's group policy, at
Employee's expense, as may be provided by law.
6. NONDISCLOSURE OF CONFIDENTIAL INFORMATION. Concurrently with the
execution and delivery of this Agreement, Employee agrees to enter into the
Company's Confidentiality Agreement for senior executive officers of the Company
in the form attached as EXHIBIT C (the "CONFIDENTIALITY AGREEMENT"). In the
event of any inconsistency between the terms and provisions of this Agreement
and those of the Confidentiality Agreement, the terms and provisions of this
Agreement shall prevail.
7. NON-COMPETITION.
7.1 AGREEMENT NOT TO COMPETE. Employee agrees that during the
Term of Employment and for the period thereafter specified in the next sentence,
Employee will not engage, directly or indirectly, either as principal, agent,
consultant, proprietor, stockholder, director, officer or Employee, or
participate in the ownership, management, operation or control of any other
business engaged in the type of business conducted by the Company. Such
agreement not to compete shall extend after the date of termination for one year
if employee voluntarily terminates his employment and for a period of six (6)
months if the Company involuntarily terminates Employee's employment. This
<PAGE>
Section 7.1 shall not apply to Employee's ownership of less than one percent
(1%) of the capital stock of any corporation having a class of capital stock
which is traded on any national stock exchange or in the over-the-counter
market.
7.2 SOLICITATION. During the Term of Employment, and for the
period of two (2) years thereafter, Employee agrees that he will not, without
the Company's prior written consent, solicit or encourage any of the employees
of the Company or Fischer International Systems Corporation ("FISC") to leave
the employ of the Company or FISC, or terminate or alter their contractual
relationships in a way that is adverse to the Company's or FISC's interest or,
during the period of Employee's employment, solicit business from any customer
of the Company on behalf of any competitor of the Company.
8. MISCELLANEOUS.
8.1 GOVERNING LAWS. It is the intention of the parties hereto
that the internal laws of the State of Florida (irrespective of its choice of
law principles) shall govern the validity of this Agreement, the construction of
its terms, and the interpretation and enforcement of the rights and duties of
the parties hereto.
8.2 BINDING UPON SUCCESSORS AND ASSIGNS. Subject to, and
unless otherwise provided in, this Agreement, each and all of the covenants,
terms, provisions, and agreements contained herein shall be binding upon, and
inure to the benefit of, the permitted successors, executors, heirs,
representatives, administrators and assigns of the parties hereto. Employee may
not assign this Agreement or any of Employee's rights hereunder except as
provided herein or with the prior written consent of the Company.
8.3 SEVERABILITY. If any provision of this Agreement, or the
application thereof, shall for any reason and to any extent be invalid or
unenforceable, the remainder of this Agreement and application of such provision
to other persons or circumstances shall be interpreted so as best to reasonably
effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision which will achieve, to the extent possible, the economic,
business and other purposes of the void or unenforceable provision.
8.4 ENTIRE AGREEMENT. This Agreement (together with the Option
and Confidentiality Agreement) constitutes the entire understanding and
agreement of the parties hereto with respect to the subject matter hereof and
thereof and supersede all prior and contemporaneous agreements or understanding,
inducements or conditions, express or implied, written or oral, between the
parties with respect hereto and thereto.
8.5 AMENDMENT AND WAIVERS. Any term or provision of this
Agreement may be amended, and the observance of any term of this Agreement may
be waived (either generally or in a particular instance and either retroactively
or prospectively) only by a writing signed by the party to be bound thereby. The
waiver by a party of any breach hereof or default in the performance hereof
shall not be deemed to constitute a waiver of any other default or any
succeeding breach or default.
<PAGE>
8.6 NO WAIVER. The failure of any party to enforce any of the
provisions hereof shall not be construed to be a waiver of the right of such
party thereafter to enforce such provisions.
8.7 NOTICES. Whenever any party hereto desires or is required
to give any notice, demand, or request with respect to this Agreement, each such
communication shall be in writing and shall be effective only if it is delivered
by personal service or mailed, United States certified mail, postage prepaid,
addressed as follows:
Company: 3506 Mercantile Avenue
Naples, Florida 43104-3310
Attn: Chairman of the Board
Employee: To the address set forth on the signature
page hereof
Such communications shall be effective when they are received
by the addressee thereof; but if sent by certified mail in the manner set forth
above, they shall be effective no later than five (5) days after being deposited
in the United States mail. Any party may change its address for such
communications by giving notice thereof to the other party in conformity with
this Section.
8.8 FURTHER ASSURANCES. Each party agrees to cooperate fully
with the other parties and to execute such further instruments, documents and
agreements and to give such further written assurances, as may be reasonably
requested by any other party to better evidence and reflect the transactions
described herein and contemplated hereby and to carry into effect the intents
and purposes of this Agreement.
8.9 INSURABLE INTEREST. Employee hereby grants to the Company
an insurable interest in Employee's life, and agrees and understands that the
Company may at any time or from time to time during the Term of Employment
choose to purchase and maintain key man life insurance on Employee.
8.10 EMPLOYEE'S REPRESENTATIONS. Employee represents and
warrants that he is free to enter into this Employment Agreement and to perform
each of the terms and covenants of it. Employee represents and warrants that he
is not restricted or prohibited, contractually or otherwise, from entering into
and performing this Employment Agreement, and that his execution and performance
of this Employment Agreement is not a violation or breach of any other agreement
between Employee and any other person or entity.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first hereinabove written.
EMPLOYEE'S ADDRESS FOR NOTICE: EMPLOYEE:
<PAGE>
/s/ MICHAEL S. BATTAGLIA
---------------------------------------
Michael S. Battaglia
COMPANY:
SMARTDISK CORPORATION
By: /s/ MICHAEL R. MATTINGLY
------------------------------
Name: Michael R. Mattingly
Title: Chief Financial Officer
<PAGE>
Exhibit A
MEMORANDUM
Date: January 28, 1999
To: Michael Battaglia
From: SmartDisk Corporation
Compensation Committee
Subject: Management Incentive Plan
- --------------------------------------------------------------------------------
It is with enormous pleasure and a sense of positive anticipation that I
am providing you with your 1999 Management Incentive Plan. I am convinced that,
though ambitious, our objectives this year are realistic and attainable.
Specifically, your 1999 WORLDWIDE financial objectives are (in $U.S.):
<TABLE>
<CAPTION>
<S> <C>
ANNUAL TOTAL REVENUE......................................[*****]
First Quarter........................................[*****]
Second Quarter.......................................[*****]
Third Quarter........................................[*****]
Fourth Quarter.......................................[*****]
ANNUAL TOTAL PROFIT........................................[*****]
First Quarter....................................... [*****]
Second Quarter.......................................[*****]
Third Quarter........................................[*****]
Fourth Quarter.......................................[*****]
</TABLE>
Your individual Management Incentive Plan for 1999 is attached.
***** CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.
<PAGE>
The following terms and conditions apply to your 1999 Management Incentive Plan:
1. Only the Chairman of the Board, or the President and Chief Executive
Officer of SmartDisk Corporation may award a bonus/incentive. The
bonus/incentive, when awarded, will be in accordance with the attached
plan. The Chairman of the Board and/or the President and Chief
Executive Officer of SmartDisk Corporation reserves the right to modify
any element of the attached bonus/incentive plan at any time prior to
the award of a bonus/incentive. Any bonus/incentive/plan may be
rescinded, in whole or part, at any time. There is no contractual
obligation on the part of SmartDisk Corporation to fund the
bonus/incentive plan, and it is entirely gratuitous in nature.
2. Any disagreement with or interpretation of the incentive plans will be
resolved by the Chairman or President. Such resolution will be final.
3. In the event an executive/manager ceases to be employed by SmartDisk
Corporation during 1999, he or she may, at the sole discretion of the
Chairman or President of SmartDisk Corporation:
a) receive a pro-rated quarterly bonus for the quarter
in which the cessation of employment occurs; and
b) receive a pro-rated annual bonus for the fiscal year.
4. Quarterly bonuses are planned to be paid within 45 days of the last day
of the quarter.
5. Annual bonuses are planned to be paid on or prior to February 15, 2000.
Best of luck in 1999 and let us all dedicate ourselves to "REACHING THE NEXT
CREST"
<PAGE>
Michael Battaglia
President, CEO
1999 INCENTIVE PLAN
<TABLE>
<CAPTION>
REVENUE PROFIT TOTAL
<S> <C> <C> <C> <C> <C> <C>
TOTAL TARGET ANNUAL BONUS 100% 125,000 Q1 9,375 6,250 15,625
Portion Based on Revenue 60% 75,000 Q2 9,375 6,250 15,625
Portion Based on Profit 40% 50,000 Q3 9,375 6,250 15,625
Q4 9,375 6,250 15,625
------------------------------
Quarterly Weighting 50% 62,500 37,500 25,000 62,500
Year-End Weighting 50% 62,500 Year-End 37,500 25,000 62,500
==============================
75,000 50,000 125,000
ANNUAL REVENUE QUARTERLY REVENUE
----------------------- ------------------------------------------------------
TARGET ANNUAL QTLY
REVENUE BONUS Q1 Q2 Q3 Q4 BONUS
----------------------- ------------------------------------------------------ ACTUAL
000's 000's Rev Bonus
------------- -------------------------------------------
[*****] 15,000 [*****] [*****] [*****] [*****] 3,000 Q1
[*****] 25,000 [*****] [*****] [*****] [*****] 5,000 Q2
[*****] 37,500 [*****] [*****] [*****] [*****] 9,375 Q3
[*****] 40,000 [*****] [*****] [*****] [*****] 12,000 Q4
[*****] 43,000 [*****] [*****] [*****] [*****] 14,000 0 0
[*****] 46,000 [*****] [*****] [*****] [*****] 16,000
[*****] 49,000 [*****] [*****] [*****] [*****] 18,000 Year-End
[*****] 52,000 [*****] [*****] [*****] [*****] 20,000 Total 0 0
ANNUAL P & L QUARTERLY P & L
----------------------- ------------------------------------------------------
TARGET ANNUAL QTLY
P & L BONUS Q1 Q2 Q3 Q4 BONUS
----------------------- ------------------------------------------------------ ACTUAL
000's 000's P&L Bonus
------------- -------------------------------------------
No Bonus - [*****] [*****] [*****] [*****] 2,000 Q1
[*****] 15,000 [*****] [*****] [*****] [*****] 4,000 Q2
[*****] 25,000 [*****] [*****] [*****] [*****] 6,250 Q3
[*****] 27,000 [*****] [*****] [*****] [*****] 8,000 Q4
[*****] 29,000 [*****] [*****] [*****] [*****] 9,000 0 0
[*****] 31,000 [*****] [*****] [*****] [*****] 10,000
[*****] 33,000 [*****] [*****] [*****] [*****] 11,000 Year-End
[*****] 35,000 [*****] [*****] [*****] [*****] 12,000 Total 0 0
Annual Quarterly
Incr Adj (IncrnAdj (ProfiIncr Adj (RIncruAdj (Profit) Profit numbers are NET of BOTH bonus costs
Budget - - - - First have to deduct Incremental revenue bonus cost
Budget +1 (10) (10) (5) (5) BEFORE calculating gross bonus profit qualifier. If
Budget +2 (20) (20) (10) (10) resulting profit number equals or exceeds profit plus
Budget +3 (30) (30) (15) (15) incremnetal adjustment then profit bonus is paid.
Budget +4 (40) (40) (20) (20)
Budget +5 (50) (50) (25) (25)
</TABLE>
***** CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.
<PAGE>
EXHIBIT B-1
THE SECURITY REPRESENTED BY THIS AGREEMENT HAS BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR
DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION
IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
SMARTDISK CORPORATION
EMPLOYEE INCENTIVE STOCK OPTION AGREEMENT
(CHANGE OF CONTROL PROVISIONS)
THIS EMPLOYEE INCENTIVE STOCK OPTION AGREEMENT ("AGREEMENT") by and
between SmartDisk Corporation, a Delaware corporation (the "COMPANY"), and
MICHAEL S. BATTAGLIA (the "EMPLOYEE") is made as of the 11th day of February,
1999 (such date being sometimes referred to herein as the "DATE OF GRANT").
R E C I T A L S
A. The Company has adopted and implemented its 1998 Employee Stock
Option Plan (the "PLAN") permitting the grant of stock options to employees of
the Company and its subsidiary corporations (as defined in the Plan), some of
which are intended to be incentive stock options within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended (the "INTERNAL REVENUE
CODE"), to purchase shares of the authorized but unissued Common Stock or
treasury shares of the Company ("COMMON STOCK").
B. The Board of Directors (or a duly authorized Committee thereof) of
the Company (in either case, referred to herein as the "BOARD") has authorized
the granting of a stock option to the Employee, thereby allowing the Employee to
acquire an ownership interest (or increase his or her ownership interest) in the
Company.
A G R E E M E N T
NOW, THEREFORE, in reliance on the foregoing Recitals and in
consideration of the mutual covenants hereinafter set forth, the parties hereby
agree as follows:
1. GRANT OF STOCK OPTION. The Company hereby grants to the Employee a
non-transferable and non-assignable option to purchase an aggregate of up to TWO
HUNDRED SEVENTY-ONE THOUSAND EIGHT HUNDRED FIFTY EIGHT (271,858) shares of the
Company's Common Stock, par value $.001, at the exercise price of ONE DOLLAR AND
TWENTY CENTS ($1.20) per share, upon the terms and conditions set forth herein
(such purchase right being sometimes referred to herein as "THE OPTION" or "THIS
OPTION").
2. TERM AND TYPE OF OPTION. Unless earlier terminated in accordance
with Sections 6 or 7.2 hereof, the Option and all rights of the Employee to
purchase Common Stock hereunder shall expire with respect to all of the shares
then subject to this Agreement at 5:00 p.m. Eastern time on FEBRUARY 11, 2009
(the "OPTION EXPIRATION DATE"). This Option is intended to qualify as an
incentive stock option within the meaning of Section 422 of the Internal Revenue
Code but the Company does not represent or warrant that this Option qualifies as
such. Accordingly, the Employee understands that in order to obtain the benefits
of incentive stock option treatment under Section 421 of the Internal Revenue
Code, no sale or other disposition may be made of any shares acquired upon
exercise of this Option for at least one (1) year after the date of the
issuance of such
<PAGE>
SmartDisk Corporation
Employee Incentive Stock Option Agreement
Page 2
shares upon exercise hereunder AND for at least two (2) years after the Date of
Grant of this Option. (NOTE: If the aggregate exercise price of the Option (that
is, the exercise price set forth in Section 1 multiplied by the number of shares
subject to the Option set forth in Section 1) plus the aggregate exercise price
of any other incentive stock options held by the Employee (whether granted
pursuant to the Plan or any other stock option plan of the Company) is greater
than one hundred thousand dollars ($100,000), the Employee should contact the
Chief Financial Officer of the Company to ascertain whether the entire Option
qualifies as an incentive stock option).
3. EXERCISE SCHEDULE. Subject to the remaining provisions of this
Agreement, this Option shall be exercisable as follows:
3.1 EXERCISE DATES. Commencing upon the first anniversary of
February 11, 1999 (the "VESTING START DATE"), Employee may exercise this Option
pursuant to the following schedule:
VEST DATE NO. OF SHARES
--------- -------------
02/11/00 83,333
02/11/01 21,875
05/11/01 21,875
08/11/01 21,875
11/11/01 17,700
02/11/02 21,875
05/11/02 21,875
08/11/02 21,875
11/11/02 17,700
02/11/03 21,875
Therefore, this Option shall become fully exercisable as of February 11, 2003.
In no event shall the Option be exercisable for more shares than the number of
shares set forth in Section 1.
3.2 CUMULATIVE NATURE OF EXERCISE SCHEDULE. The exercise dates
specified above refer to the earliest dates on which the Option may be exercised
with respect to the stated number of shares of the Common Stock covered by this
Option and this Option may be exercised with respect to all or any part of any
such number of the total shares at any time on or after such dates (until the
expiration date specified in Section 2 above or any earlier termination of this
Option pursuant to Section 6 or 7.2 of this Agreement). Except as permitted in
Section 6, the Employee must be and remain in the employ of the Company, or of
any Parent corporation or Subsidiary corporation of the Company (as defined in
Internal Revenue Code Sections 424(e) and (f)), during the entire period
commencing with the Date of Grant of this Option and ending with each of the
periods appearing in the above schedule in order to exercise this Option with
respect to the shares applicable to any such period. Except as otherwise
expressly provided in this Agreement, the Employee's employment shall be deemed
to have terminated upon an actual termination of employment and upon such Parent
corporation or Subsidiary corporation of the Company ceasing to have such
relationship with the Company. Any references in this Agreement to the
Employee's employment with the Company shall be
<PAGE>
SmartDisk Corporation
Employee Incentive Stock Option Agreement
Page 3
deemed to also refer to the Employee's employment with any Parent corporation or
Subsidiary corporation of the Company, as applicable.
3.3 CHANGE OF CONTROL. In the event of a Change of Control (as
defined below), one hundred percent of the unvested Shares under this Option
shall immediately become vested Shares as of the consummation of such Change of
Control. The vesting that was permissible solely by reason of this Section shall
be conditioned upon the consummation of the Change in Control. A "Change of
Control" shall be deemed to have occurred in the event any of the following
occurs with respect to the Company:
3.3.1 the direct or indirect sale or exchange by the
stockholders of the Company of all or substantially all of the stock of the
Company where the stockholders of the Company before such sale or exchange do
not retain, directly or indirectly, at least a majority of the beneficial
interest in the voting stock of the Company after such sale or exchange.
3.3.2 a merger or consolidation in which the Company
is not the surviving corporation, other than (i) a merger in which the
stockholders of the Company before such merger or consolidation retain directly
or indirectly, at least a majority of the voting stock of the surviving
corporation or the parent corporation of the surviving corporation and the
Options are assumed or substituted by the surviving corporation which assumption
or substitution shall be binding on Employee, or (ii) a merger or consolidation
with a wholly-owned subsidiary, a reincorporation of the Company in a different
jurisdiction, or other transaction in which there is no substantial change in
the stockholders of the Company and the Options are assumed or substituted by
the surviving, continuing, successor or parent corporation, which assumption or
substitution shall be binding on the Employee.
3.3.3 a merger or consolidation in which the Company
is the surviving corporation where the stockholders of the Company before such
merger or consolidation do not retain, directly or indirectly, at least a
majority of the voting stock of the Company after such merger or consolidation.
3.3.4 the sale, exchange, or transfer of all or
substantially all of the assets of the Company other than a sale, exchange, or
transfer to one (1) or more subsidiaries of the Company.
3.3.5 a liquidation or dissolution of the Company.
3.3.6 any other transaction which qualifies as a
"corporate transaction" under Section 424 of the Code wherein the stockholders
of the Company give up all of their equity interest in the Company (except for
the acquisition, sale or transfer of all or substantially all of the outstanding
shares of the Company).
3.4 OVERRIDING LIMITATION ON TIME FOR EXERCISE.
Notwithstanding any other provisions of this Agreement, the Option may not be
exercised after the expiration of ten (10) years from the Date of Grant.
4. RIGHT OF FIRST REFUSAL. The Employee and successors-in-interest to
Employee shall not sell, assign, pledge or in any manner transfer any of the
shares of the Common Stock purchased hereunder, or any right or interest
therein, whether voluntarily or by operation of law, or by gift or otherwise,
except for a transfer which meets the requirements hereinafter set forth.
<PAGE>
SmartDisk Corporation
Employee Incentive Stock Option Agreement
Page 4
4.1 NOTICE OF PROPOSED SALE. If the Employee desires to sell
or otherwise transfer any of his or her shares of Common Stock, the Employee
shall first give written notice thereof to the Company. The notice shall name
the proposed transferee and state the number of shares to be transferred, the
proposed consideration and all other material terms and conditions of the
proposed transfer.
4.2 OPTION OF COMPANY TO PURCHASE. For forty-five (45) days
following receipt of such notice, the Company (and its assignees as provided in
Section 4.3 below) shall have the option to elect to purchase all of the shares
specified in the notice at the price and upon the terms set forth in such
notice; provided that if the terms of payment set forth in the Employee's notice
were other than cash against delivery, the Company (and its assignees) shall pay
cash for said shares equal to the fair market value thereof as determined in
good faith by the Board, except that to the extent such consideration is
composed, in whole or in part, of promissory notes, the Company (and its
assignees) shall have the option of similarly issuing promissory notes of like
form, tenor and effect. Notwithstanding the foregoing, in the event that the
Employee disagrees with the determination of fair market value made by the
Board, the Employee shall have the right to have such fair market value
determined by arbitration in accordance with the rules of the American
Arbitration Association. The arbitration shall be held in the county in which
the Company has its executive offices. The cost of the arbitration shall be
borne in equal shares by the Company and the Employee. In the event the Company
(and its assignees) elects to purchase all of such shares, it shall give written
notice to the Employee of its election and settlement for such purchase of
shares shall be made as provided below in Section 4.4.
4.3 ASSIGNABILITY OF COMPANY'S RIGHTS HEREUNDER. The Company
may at any time transfer and assign its rights and delegate its obligations
under this Section 4 to any other person, corporation, firm or entity, including
its officers, directors or stockholders, with or without consideration.
4.4 CLOSING OF COMPANY PURCHASE. In the event the Company (or
its assignees) elects to acquire all of those shares of the Employee as
specified in the Employee's notice, the Secretary of the Company shall so notify
the Employee within forty-five (45) days after receipt of the Employee's notice,
and settlement thereof shall be made in cash or as otherwise set forth above
within forty-five (45) days after the date the Secretary of the Company gives
the Employee notice of the Company's election.
4.5 TRANSFERRED SHARES REMAIN SUBJECT TO RESTRICTIONS. In the
event the Company (or its assignees) do not elect to acquire all of the shares
specified in the Employee's notice, the Employee may, within the sixty (60) day
period following the expiration of the forty-five (45) day period for electing
to exercise the purchase rights granted to the Company (and its assignees) in
Section 4.2, transfer the shares in the manner specified in his or her notice.
In that event, the transferee, assignee or other recipient shall, as a condition
of the transfer of ownership, receive and hold such shares subject to the
provisions of Sections 4, 5, 10, 13-21 of this Agreement and shall execute such
documentation as may be requested by the Company, including, but not limited to,
an investment representation letter containing provisions similar to those set
forth in the Notice of Exercise and Investment Representation Statement attached
as EXHIBIT A hereto.
4.6 EXCEPTIONS TO FIRST REFUSAL RIGHTS. Anything to the
contrary contained herein notwithstanding, the following transactions shall be
exempt from the provisions of this Section 4 (provided that the transferee shall
first agree in writing, satisfactory to the Company, to be bound by the terms
and provisions of Sections 4, 5, 10 and 13-21 hereof):
4.6.1 TRANSFER TO FAMILY MEMBER. The Employee's
transfer of any or all shares held subject to this Agreement (either during the
Employee's lifetime or on death by will or intestacy) to such
<PAGE>
SmartDisk Corporation
Employee Incentive Stock Option Agreement
Page 5
Employee's Immediate family, as herein defined, or to any custodian or trustee
for the account of the Employee or his or her Immediate family. "Immediate
family" as used herein shall mean spouse, lineal descendants, father, mother, or
brother or sister of the Employee.
4.7 WAIVERS BY THE COMPANY. The provisions of this Section 4
may be waived by the Company with respect to any transfer proposed by the
Employee only by duly authorized action of the Board.
4.8 UNAUTHORIZED TRANSFERS VOID. Any sale or transfer, or
purported sale or transfer, of the Common Stock subject to this Agreement shall
be null and void unless the terms, conditions and provisions of this Section 4
are strictly complied with.
4.9 TERMINATION OF FIRST REFUSAL RIGHT. The foregoing right of
first refusal shall terminate upon the earlier of:
4.9.1 PUBLIC OFFERING. The date equity securities of
the Company are first offered and sold to the public generally pursuant to a
registration statement filed with, and declared effective by, the United States
Securities and Exchange Commission (the "SEC") under the Securities Act of 1933,
as amended (the "SECURITIES ACT"); or
4.9.2 ACQUISITION OF THE COMPANY. Immediately prior
to the acquisition of substantially all of the business and assets of the
Company by an unaffiliated third party (as determined by the Board), whether by
merger, sale of outstanding stock or of the Company's assets, or otherwise,
where no express provision is made for the assignment and continuation of the
Company's rights hereunder by a new or successor corporation.
5. AGREEMENT TO LOCK-UP IN THE EVENT OF PUBLIC OFFERING. In the event
of a public offering of the Company's Common Stock pursuant to a registration
statement declared effective with the SEC, if requested by the Company or by its
underwriters, the Employee agrees not to sell, sell short, grant any option to
buy or otherwise dispose of the shares of Common Stock purchased pursuant to
this Agreement (except for any such shares which may be included in the
registration) for a period of up to one hundred eighty (180) days following the
consummation of such offering. The Company may impose stop-transfer instructions
with respect to the shares of the Common Stock subject to the foregoing
restriction until the end of said period. The Employee shall be subject to this
Section 5 provided and only if the executive officers and directors of the
Company are also subject to similar arrangements.
6. RIGHTS ON TERMINATION OF EMPLOYMENT. Upon the Employee's termination
of employment with the Company (and with any Parent or Subsidiary corporation of
the Company as defined in Section 3.2 above), the Employee's right to exercise
this Option shall be limited in the manner set forth in this Section 6 (and this
Option shall terminate in the event not so exercised), and shall also be subject
to the limitation provided in Section 3.3.
6.1 DEATH. If the Employee's employment with the Company is
terminated by death, the Employee's estate may, for a period of twelve (12)
months following the date of such termination, exercise the Option to the extent
it was exercisable by the Employee on the date of such termination. The
Employee's estate shall mean the Employee's legal representative upon death or
any person who acquires the right to exercise the Option by reason of such death
in accordance with Section 8.2.
<PAGE>
SmartDisk Corporation
Employee Incentive Stock Option Agreement
Page 6
6.2 RETIREMENT. If the Employee's employment with the Company
is terminated by voluntary retirement at or after reaching sixty-five (65) years
of age, the Employee may, within three (3) months following such termination,
exercise the Option to the extent it was exercisable by the Employee on the date
of such termination unless the Employee dies prior thereto, in which event the
Employee shall be treated as though the Employee had died on the date of
retirement and the provisions of Section 6.1 above shall apply.
6.3 DISABILITY. If the Employee's employment with the Company
is terminated because of a permanent and total disability, the Employee or the
Employee's estate may, within twelve (12) months following the date of such
termination, exercise the Option to the extent it was exercisable by the
Employee on the date of such termination unless the Employee dies prior to the
expiration of such period, in which event the Employee shall be treated as
though his or her death occurred on the date of termination due to such
disability and the provisions of Section 6.1 shall apply. The Employee hereby
acknowledges that the favorable tax treatment provided under Section 421 of the
Internal Revenue Code may be inapplicable in the event the Option is not
exercised within three (3) months after the date of the Employee's termination
due to a partial, temporary or other disability not meeting the requirements of
Internal Revenue Code Section 22(e)(3).
6.4 TERMINATION FOR CAUSE. If the Employee's employment is
terminated for cause, the option granted by this Agreement shall expire on
Employee's termination date or at such later time and on such conditions as
determined by the Board. For purposes of this paragraph, "cause" shall be
defined as the willful breach or habitual neglect of the duties which Employee
is required to perform under Employee's employment agreement with Company, or
any act of dishonesty, fraud, misrepresentation or other acts of moral turpitude
as would prevent the effective performance of Employee's duties.
6.5 OTHER TERMINATION. If the Employee's employment with the
Company is terminated for any reason other than provided in Sections 6.1, 6.2,
6.3 and 6.4 above, the Employee or the Employee's estate may, within three (3)
months after the date of the Employee's termination exercise the Option to the
extent it was exercisable by the Employee on the date of such termination.
6.6 TRANSFER TO RELATED CORPORATION. In the event the Employee
leaves the employ of the Company to become an employee of any Parent or
Subsidiary corporation of the Company (as defined in Section 3.2 above) or if
the Employee leaves the employ of any Parent or Subsidiary corporation to become
an employee of the Company or of another such Parent or Subsidiary corporation
of the Company, the Employee shall be deemed to continue in the employ of the
Company for all purposes of this Agreement.
6.7 EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding
the foregoing, if the exercise of an Option within the applicable time periods
set forth above is prevented because the issuance of shares upon such exercise
would constitute a violation of any applicable federal, state or foreign
securities law or other law or regulation, the Option shall remain exercisable
until three (3) months after the date the Employee is notified by the Company
that the Option is exercisable, but in any event no later than the expiration of
ten (10) years from the Date of Grant. The Company makes no representation as to
the tax consequences of any such delayed exercise. The Employee should consult
with the Employee's own tax advisor as to the tax consequences to the Employee
of any such delayed exercise.
6.8 EXTENSION IF EMPLOYEE IS SUBJECT TO SECTION 16(B).
Notwithstanding the foregoing, if a sale within the applicable time periods set
forth in Section 6 of shares acquired upon the exercise of the Option would
subject the Employee to liability under Section 16(b) of the Securities Exchange
Act of 1934, as amended, the Option shall remain exercisable until the earliest
to occur of (i) the tenth (10th) day following the
<PAGE>
SmartDisk Corporation
Employee Incentive Stock Option Agreement
Page 7
date on which a sale of such shares by the Employee would no longer be subject
to such liability, (ii) the one hundred and ninetieth (190th) day after the
Employee's termination of Employee's employment, or (iii) the Option Expiration
Date.
7. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER.
7.1 STOCK SPLITS AND SIMILAR EVENTS; RECLASSIFICATIONS. The
number of shares of Common Stock covered by the Option and the exercise price
thereof shall be proportionately adjusted for any increase or decrease in the
number of issued and outstanding shares of Common Stock resulting from a
subdivision or combination of such shares or the payment of a stock dividend
(but only on the Common Stock) or a recapitalization or any other increase or
decrease in the number of such outstanding shares of Common Stock effected
without the receipt of consideration by the Company; provided, however, that the
conversion of any convertible securities of the Company shall not be deemed to
have been "effected without receipt of consideration." In the event that the
shares of Common Stock covered by this Option are reclassified by the Company,
other than pursuant to a transaction described in Section 7.2, then this Option
shall apply to the appropriate number of shares of newly classified Common Stock
designated by the Board.
7.2 MERGERS AND ACQUISITIONS. Subject to any required action
by the Company's Board and stockholders, if the Company shall be the surviving
corporation in any merger or consolidation which results in the holders of the
outstanding voting securities of the Company (determined immediately prior to
such merger or consolidation) owning, directly or indirectly, at least a
majority of the beneficial interest in the outstanding voting securities of the
surviving corporation or its Parent corporation (determined immediately after
such merger or consolidation), the Option shall pertain and apply to the
securities or other property to which a holder of the number of shares subject
to the unexercised portion of this Option would have been entitled. Any of (i) a
dissolution or liquidation of the Company; (ii) a sale of all or substantially
all of the Company's business and assets; or (iii) a merger or consolidation in
which the Company is not the surviving corporation or a constituent corporation)
which results in the holders of the outstanding voting securities of the Company
(determined immediately prior to such merger or consolidation) owning, directly
or indirectly, less than a majority of the beneficial interest in the
outstanding voting securities of the surviving corporation or its Parent
corporation (determined immediately after such merger or consolidation) will
cause the Option to terminate, unless (a) the agreement of such sale, merger,
consolidation or other transaction otherwise provides or (b) a sale on the day
preceding the scheduled consummation of such event (the "test date") of shares
acquired upon the exercise of the option would subject the Employee to liability
under Section 16(b) of the Securities Exchange Act of 1934, as amended, in which
event the Option shall remain exercisable until the earliest to occur of (i) the
tenth (10th) day following the date on which a sale of such shares by the
Employee would no longer be subject to such liability, (ii) the one hundred and
ninetieth (190th) day after the test date, or (iii) the Option Expiration Date.
7.3 BOARD'S DETERMINATION FINAL AND BINDING UPON EMPLOYEE. To
the extent that the foregoing adjustments in this Section 7 relate to stock or
securities of the Company, such adjustments shall be made by the Board, whose
determination in that respect shall be final, binding and conclusive. The
Company agrees to give notice of any such adjustment to the Employee; provided,
however, that any such adjustment shall be effective and binding for all
purposes hereof whether or not such notice is given or received.
7.4 NO RIGHTS EXCEPT AS EXPRESSLY STATED. Except as
hereinabove expressly provided in this Section 7, no additional rights shall
accrue to the Employee by reason of any subdivision or combination of shares of
the capital stock of any class or the payment of any stock dividend or any other
increase or
<PAGE>
SmartDisk Corporation
Employee Incentive Stock Option Agreement
Page 8
decrease in the number of shares of any class or by reason of any dissolution,
liquidation, merger or consolidation or spin-off of assets or of stock of
another corporation, and any issue by the Company of shares of stock of any
class or of securities convertible into shares of stock of any class shall not
affect, and no adjustment by reason thereof shall be made with respect to, the
number or exercise price of shares subject to the Option. Neither the Employee
nor any person claiming under or through the Employee shall be, or have any of
the rights or privileges of, a stockholder of the Company in respect of any of
the shares issuable upon the exercise of this Option, unless and until this
Option is properly and lawfully exercised and a certificate representing the
shares so purchased is duly issued and delivered to the Employee or to his or
her estate.
7.5 NO LIMITATIONS ON COMPANY'S DISCRETION. The grant of the
Option hereby shall not affect in any way the right or power of the Company to
make adjustments, reclassifications, reorganizations or changes of its capital
or business structure or to merge or consolidate or to dissolve, liquidate, sell
or transfer all or any part of its business or assets.
8. MANNER OF EXERCISE.
8.1 GENERAL INSTRUCTIONS FOR EXERCISE. The Option shall be
exercised by the Employee by completing, executing and delivering to the Company
the Notice of Exercise and Investment Representation Statement ("NOTICE OF
EXERCISE"), in substantially the form attached hereto as Exhibit A, which Notice
of Exercise shall specify the number of shares of Common Stock which the
Employee elects to purchase. The Company's obligation to deliver shares upon the
exercise of this Option shall be subject to the Employee's satisfaction of all
applicable federal, state, local and foreign income and employment tax
withholding requirements, if any. Upon receipt of such Notice of Exercise and of
payment of the purchase price (and payment of applicable taxes as provided
above), the Company shall, as soon as reasonably possible and subject to all
other provisions hereof, deliver certificates for the shares of Common Stock so
purchased, registered in the Employee's name or in the name of his or her legal
representative (if applicable). Payment of the purchase price upon any exercise
of the Option shall be made by check acceptable to the Company or in cash;
provided, however, that the Board may, in its sole and absolute discretion,
accept any other legal consideration to the extent permitted under applicable
laws and the Plan.
8.2 EXERCISE PROCEDURE AFTER DEATH. To the extent exercisable
after the Employee's death, this Option shall be exercised only by the
Employee's executor(s) or administrator(s) or the person or persons duly
authorized or to whom this Option is transferred under the Employee's will or,
if the Employee shall fail to make testamentary disposition of this Option,
under the applicable laws of descent and distribution. Any such transferee
exercising this Option must furnish the Company with (1) written Notice of
Exercise and relevant information as to his or her status, (2) evidence
satisfactory to the Company to establish the validity of the transfer of this
Option and compliance with any laws or regulations pertaining to said transfer,
and (3) written acceptance of the terms and conditions of this Option as
contained in this Agreement.
9. NON-TRANSFERABLE. The Option shall, during the lifetime of the
Employee, be exercisable only by the Employee and shall not be transferable or
assignable by the Employee in whole or in part other than by will or the laws of
descent and distribution. If the Employee shall make any such purported transfer
or assignment of the Option, such assignment shall be null and void and of no
force or effect whatsoever.
10. COMPLIANCE WITH SECURITIES AND OTHER LAWS. The Option may not be
exercised and the Company shall not be obligated to deliver any certificates
evidencing shares of Common Stock hereunder if the issuance of shares upon such
exercise would constitute a violation of any applicable requirements of: (i) the
<PAGE>
SmartDisk Corporation
Employee Incentive Stock Option Agreement
Page 9
Securities Act, (ii) the Securities Exchange Act of 1934, as amended, (iii)
applicable state securities laws, (iv) any applicable listing requirement of any
stock exchange on which the Company's Common Stock is then listed, and (v) any
other law or regulation applicable to the issuance of such shares. Nothing
herein shall be construed to require the Company to register or qualify any
securities under applicable federal and state securities laws, or take any
action to secure an exemption from such registration and qualification for the
issuance of any securities upon the exercise of this Option. Shares of Common
Stock issued upon exercise of this Option shall include the following legends
and such other legends as in the opinion of the Company's counsel may be
required by applicable federal, state and foreign securities laws:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
RESTRICTIONS ON TRANSFER AND OTHER AGREEMENTS CONTAINED IN A STOCK
OPTION AGREEMENT DATED FEBRUARY 11, 1999, A COPY OF WHICH IS ON FILE
WITH THE COMPANY.
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE
SALE IS MADE IN ACCORDANCE WITH RULE 144 OR RULE 701 UNDER THE ACT, OR
THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE
SECURITIES REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH
SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE
REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
11. NO RIGHT TO CONTINUED EMPLOYMENT. Nothing contained in this
Agreement shall: (i) confer upon the Employee any right with respect to the
continuance of his or her employment agreement with the Company, or with any
Parent or Subsidiary corporation of the Company, or (ii) limit in any way the
right of the Company, or of any Parent or Subsidiary corporation, to terminate
the employment of the Employee at any time. Except to the extent the Company and
the Employee shall have otherwise agreed in writing, the Employee's employment
shall be terminable by the Company (or by a Parent or Subsidiary, if applicable)
at will. Subject to Section 12, the Board in its sole discretion shall determine
whether any leave of absence or interruption in employment (including an
interruption during military service) shall be deemed a termination of
employment for the purposes of this Agreement.
12. LEAVE OF ABSENCE. For purposes hereof, the Employee's employment
shall not be deemed to terminate if the Employee takes any military leave, sick
leave, or other bona fide leave of absence approved by the Company of ninety
(90) days or less. In the event of a leave in excess of ninety (90) days, the
Employee's employment shall be deemed to terminate on the ninety-first (91st)
day of the leave unless the Employee's right to reemployment remains guaranteed
by statute or contract. Notwithstanding the foregoing, however, a leave of
absence shall be treated as employment for purposes of Section 3 if and only if
the leave of absence is designated by the Company as (or required by law to be)
a leave for which vesting credit is given.
13. COMMITTEE OF THE BOARD. In the event that the Plan is administered
by a committee of the Board (the "COMMITTEE"), all references herein to the
Board shall be construed to mean the Committee for the period(s) during which
the Committee administers the Plan.
<PAGE>
SmartDisk Corporation
Employee Incentive Stock Option Agreement
Page 10
14. OPTION SUBJECT TO TERMS OF PLAN. In addition to the provisions
hereof, this Agreement and the Option are governed by, and subject to the terms
and conditions of, the Plan. The Employee acknowledges receipt of a copy of the
Plan (a copy of which is attached hereto as Exhibit B). The Employee represents
that he or she is familiar with the terms and conditions of the Plan, and hereby
accepts the Option subject to all of the terms and conditions thereof, which
terms and conditions shall control to the extent inconsistent in any respect
with the provisions of this Agreement. The Employee hereby agrees to accept as
binding, conclusive and final all decisions and interpretations of the Board as
to any questions arising under the Plan or under this Agreement.
15. NOTICES. All notices and other communications of any kind which
either party to this Agreement may be required or may desire to serve on the
other party hereto in connection with this Agreement shall be in writing and may
be delivered by personal service or by registered or certified mail, return
receipt requested, deposited in the United States mail with postage thereon
fully prepaid, addressed to the other party at the addresses indicated on the
signature page hereof or as otherwise provided below. Service of any such notice
or other communication so made by mail shall be deemed complete on the date of
actual delivery as shown by the addressee's registry or certification receipt or
at the expiration of the third (3rd) business day after the date of mailing,
whichever is earlier in time. Either party may from time to time, by notice in
writing served upon the other as aforesaid, designate a different mailing
address or a different person to which such notices or other communications are
thereafter to be addressed or delivered.
16. FURTHER ASSURANCES. The Employee shall, upon request of the
Company, take all actions and execute all documents requested by the Company
which the Company deems to be reasonably necessary to effectuate the terms and
intent of this Agreement and, when required by any provision of this Agreement
to transfer all or any portion of the Common Stock purchased hereunder to the
Company (and/or its assignees), the Employee shall deliver such Common Stock
endorsed in blank or accompanied by Stock Assignments Separate from Certificate
endorsed in blank, so that title thereto will pass by delivery alone. Any sale
or transfer by the Employee of the Common Stock to the Company (and/or its
assignees) shall be made free of any and all claims, encumbrances, liens and
restrictions of every kind, other than those imposed by this Agreement.
17. NOTICE OF SALES UPON DISQUALIFYING DISPOSITION. The Employee shall
dispose of the shares acquired pursuant to the Option only in accordance with
the provisions of this Agreement. In addition, the Employee shall promptly
notify the Chief Financial Officer of the Company if the Employee disposes of
any of the shares acquired pursuant to the Option within one (1) year from the
date the Employee exercises all or part of the Option or within two (2) years of
the Date of Grant of this Option. Until such time as the Employee disposes of
such shares in a manner consistent with the provisions of this Agreement, the
Employee shall hold all shares acquired pursuant to the Option in the Employee's
name (and not in the name of any nominee) for the one (1) year period
immediately after exercise of the Option and the two (2) year period immediately
after the Date of Grant of this Option. At any time during the one (1) year or
two (2) year periods set forth above, the Company may place a legend or legends
on any certificate or certificates representing shares accurate pursuant to the
Option requesting the transfer agent for the Company's stock to notify the
Company of any such transfers. The obligation of the Employee to notify the
Company of any such transfer shall continue notwithstanding that a legend has
been placed on the certificate or certificates pursuant to the preceding
sentence.
<PAGE>
SmartDisk Corporation
Employee Incentive Stock Option Agreement
Page 11
18. SUCCESSORS. Except to the extent the same is specifically limited
by the terms and provisions of this Agreement, this Agreement is binding upon
the Employee and the Employee's successors, heirs and personal representatives,
and upon the Company, its successors and assigns.
19. TERMINATION OR AMENDMENT. Subject to the terms and conditions of
the Plan, the Board may terminate or amend the Plan and/or the Option at any
time; provided, however, that no such termination or amendment may adversely
affect the Option or any unexercised portion hereof without the consent of the
Employee.
20. INTEGRATED AGREEMENT. This Agreement and the Plan constitute the
entire understanding and agreement of the Employee and the Company with respect
to the subject matter contained herein, and there are no agreements,
understandings, restrictions, representations, or warranties between the
Employee and the Company other than those set forth or provided for herein. To
the extent contemplated herein, the provisions of this Agreement shall survive
any exercise of the Option and shall remain in full force and effect.
21. OTHER MISCELLANEOUS TERMS. Titles and captions contained in this
Agreement are inserted only as a matter of convenience and for reference, and in
no way define, limit, extend or describe the scope of this Agreement or the
intent of any provision hereof. This Agreement shall be governed by and
construed in accordance with the laws of the State of Florida, irrespective of
its choice of law principles.
22. INDEPENDENT TAX ADVICE. The Employee agrees that he or she has
obtained or will obtain the advice of independent tax counsel (or has determined
not to obtain such advice, having had adequate opportunity to do so) regarding
the federal and state income tax consequences of the receipt and exercise of the
Option and of the disposition of Common Stock acquired upon exercise hereof. The
Employee acknowledges that he or she has not relied and will not rely upon any
advice or representation by the Company or by its employees or representatives
with respect to the tax treatment of the Option.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first hereinabove written.
COMPANY: EMPLOYEE:
SMARTDISK CORPORATION,
a Delaware corporation
By:---------------------------- ----------------------------
Timothy Tomlinson, (Signature)
Secretary
Name Printed: Michael S. Battaglia
Address: Address:__________________________
3506 Mercantile Avenue __________________________
Naples, FL 34104-3310 __________________________
<PAGE>
SCHEDULE OF EXHIBITS
EXHIBIT A: Form of Notice of Exercise and Investment Representation
Statement for Employee Incentive Stock Option Agreement
EXHIBIT B: 1998 Employee Stock Option Plan
<PAGE>
EXHIBIT A
SMARTDISK CORPORATION
FORM OF NOTICE OF EXERCISE
AND INVESTMENT REPRESENTATION STATEMENT FOR
EMPLOYEE INCENTIVE STOCK OPTION AGREEMENT
SmartDisk Corporation
3506 Mercantile Avenue
Naples, FL 34104-3310
Attention: Corporate Secretary
Re: NOTICE OF EXERCISE OF STOCK OPTION
Ladies and Gentlemen:
I hereby exercise, as of _________________, ____, my stock option
(granted February 11, 1999) to purchase ( ) shares (the "OPTION SHARES") of the
Common Stock of SmartDisk Corporation, a Delaware corporation (the "COMPANY").
Payment of the option price of $________________ is attached to this notice.
As a condition to this notice of exercise, I hereby make the following
representations and agreements:
INVESTMENT REPRESENTATION STATEMENT.
1. I am purchasing the Option Shares for investment for my own account
only and not with a view to, or for resale in connection with, any
"distribution" thereof. I am aware of the Company's business affairs and
financial condition and have had access to such information about the Company as
I have deemed necessary or desirable to reach an informed and knowledgeable
decision to acquire the Option Shares.
2. I understand that the Option Shares have not been registered under
the Securities Act of 1933, as amended (the "ACT"), or qualified or registered
under the blue sky law of any state (the "LAW"), by reason of specific
exemptions therefrom, which exemptions depend upon, among other things, the bona
fide nature of my investment intent as expressed herein. In this connection, I
understand that, in the view of the Securities and Exchange Commission (the
"COMMISSION"), the statutory basis for one such exemption may not exist if my
representation means that my present intention is to hold the Option Shares for
a minimum capital gains period under the tax laws, for a deferred sale, for a
market rise, for a sale if the market does not rise, or for a year or any other
fixed period in the future.
3. I acknowledge and agree that the Option Shares are restricted
securities which must be held indefinitely unless they are subsequently
registered under the Act or an exemption from such registration
<PAGE>
Employee Incentive Stock Option Agreement
Exhibit A
Page 2
is available. I further acknowledge and understand that the Company is under no
obligation to register the Option Shares.
4. I am aware of the adoption of Rule 144 by the Commission, which
permits limited public resale of securities acquired in a non-public offering,
subject to the satisfaction of certain conditions, including, among other
things, the availability of certain current public information about the issuer,
the passage of not less than one (1) year after the holder has purchased and
paid for the securities to be sold, effectuation of the sale on the public
market through a broker in an unsolicited "brokers' transaction" or to a "market
maker," and compliance with specified limitations on the amount of securities to
be sold (generally, one percent (1%) of the total amount of common stock
outstanding) during any three (3)-month period, except that such conditions need
not be met by a person who is not an affiliate of the Company at the time of
sale and has not been an affiliate for the preceding three (3) months if the
securities to be sold have been beneficially owned by such person for at least
two (2) years prior to their sale.
5. I understand that the Company currently does not, and at the time I
wish to sell the Option Shares may not, satisfy the current public information
requirement of Rule 144 and, consequently, I may be precluded from selling the
Option Shares under Rule 144 even if the one (1)-year minimum holding period has
been satisfied.
6. I further understand that if all of the requirements of Rule 144 are
not met, compliance with Regulation A or some other exemption from registration
will be required; and that, although Rule 144 is not exclusive, the Staff of the
Commission has expressed its opinion that persons proposing to sell restricted
securities other than in a registered offering and other than pursuant to Rule
144 will have a substantial burden of proof in establishing that an exemption
from registration is available for such offers or sales and that such persons
and the brokers who participate in such transactions do so at their own risk.
7. I further understand that the certificate(s) representing the Option
Shares, whether upon initial issuance or any transfer thereof, shall bear on
their face legends, prominently stamped or printed thereon in capital letters,
reading as follows:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
RESTRICTIONS ON TRANSFER AND OTHER AGREEMENTS CONTAINED IN A STOCK
OPTION AGREEMENT DATED FEBRUARY 11, 1999, A COPY OF WHICH IS ON FILE
WITH THE COMPANY.
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE
SALE IS MADE IN ACCORDANCE WITH RULE 144 OR RULE 701 UNDER THE ACT, OR
THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE
SECURITIES
<PAGE>
Employee Incentive Stock Option Agreement
Exhibit A
Page 3
REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH SALE,
TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION
AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
8. I further understand in order to obtain the benefits of incentive
stock option treatment under Section 421 of the Internal Revenue Code, no sale
or other disposition may be made of any Option shares for at least one (1) year
after the date of the issuance of such Option Shares upon exercise hereunder and
for at least two (2) years after the Date of Grant of the Option. I shall
promptly notify the Company in writing in the event that I sell or otherwise
dispose of any Option Shares before the expiration of such periods. I further
understand that I may suffer adverse tax consequences as a result of my purchase
or disposition of the Option Shares. I represent that I have consulted with any
tax consultant(s) I deem advisable in connection with the purchase or
disposition of the Option Shares and that I am not relying on the Company for
any tax advice.
IN WITNESS WHEREOF, the undersigned has executed this Notice of
Exercise as of the date set forth below.
Signed:_______________________________
Dated:________________________________
<PAGE>
EXHIBIT B
SMARTDISK CORPORATION
1998 EMPLOYEE STOCK OPTION PLAN
As Adopted January 27, 1998
[Refer to Exhibit 10.1 to SmartDisk Corporation's Registration Statement on Form
S-1 (file # 333-82793) for the text of the 1998 Employee Stock Option Plan]
<PAGE>
EXHIBIT B-2
THE SECURITY REPRESENTED BY THIS AGREEMENT HAS BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR
DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS
NOT REQUIRED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
SMARTDISK CORPORATION
EMPLOYEE NON-STATUTORY STOCK OPTION AGREEMENT
(CHANGE OF CONTROL PROVISIONS)
THIS EMPLOYEE NON-STATUTORY STOCK OPTION AGREEMENT ("AGREEMENT") by and
between SmartDisk Corporation, a Delaware corporation (the "COMPANY"), and
MICHAEL S. BATTAGLIA (the "EMPLOYEE") is made as of the 11th day of February,
1999 (such date being sometimes referred to herein as the "DATE OF GRANT").
R E C I T A L S
A. The Company has adopted and implemented its 1998 Employee Stock
Option Plan (the "PLAN") permitting the grant of stock options to employees,
consultants and other independent contractors of the Company and its
subsidiaries (as defined in the Plan), some of which are intended to be
non-statutory stock options in that they do not qualify as incentive stock
options within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the "INTERNAL REVENUE CODE"), to purchase shares of the authorized
but unissued Common Stock or treasury shares of the Company ("COMMON STOCK").
B. The Board of Directors (or a duly authorized Committee thereof) of
the Company (in either case, referred to herein as the "BOARD") has authorized
the granting of a non-statutory stock option to the Employee, thereby allowing
the Employee to acquire an ownership interest (or increase his or her ownership
interest) in the Company.
A G R E E M E N T
NOW, THEREFORE, in reliance on the foregoing Recitals and in
consideration of the mutual covenants hereinafter set forth, the parties hereby
agree as follows:
1. GRANT OF STOCK OPTION. The Company hereby grants to the Employee a
non-transferable and non-assignable (except as provided herein) option to
purchase an aggregate of up to SEVENTY EIGHT THOUSAND ONE HUNDRED FORTY TWO
(78,142) shares of the Company's Common Stock, par value $0.001, at the exercise
price of ONE DOLLAR AND TWENTY CENTS ($1.20) per share, upon the terms and
conditions set forth herein (such purchase right being sometimes referred to
herein as "THE OPTION" or "THIS OPTION").
2. TERM AND TYPE OF OPTION. Unless earlier terminated in accordance with
Sections 6 or 7.2 hereof, the Option and all rights of the Employee to purchase
Common Stock hereunder shall expire with respect to all of the shares then
subject to this Agreement at 5:00 p.m. Eastern time on FEBRUARY 11, 2009 (the
"OPTION EXPIRATION DATE"). This Option is a non-statutory stock option in that
it is not intended to qualify as an incentive stock option within the meaning of
Section 422 of the Internal Revenue Code. Accordingly, the Employee understands
that under current law he or she will recognize ordinary income for federal
income tax purposes upon exercise of this Option in an amount equal to the
excess (if any) of the fair market value of the
<PAGE>
Smartdisk Corporation
Employee Non-Statutory Stock Option Agreement
Page 2
shares of Common Stock so purchased over the exercise price paid for such
shares. Employee further understands that Employee must satisfy all applicable
federal, state, local and foreign income and employment tax withholding
requirements at the date of exercise.
3. EXERCISE SCHEDULE. Subject to the remaining provisions of this
Agreement, this Option shall be exercisable as follows:
3.1 EXERCISE DATES. Commencing upon the first anniversary of
February 11, 1999 (the "VESTING START DATE"), the Employee may exercise this
Option pursuant to the following schedule:
VEST DATE NO. OF SHARES
02/11/00 4,167
05/11/00 21,875
08/11/00 21,875
11/11/00 21,875
11/11/01 4,175
11/11/02 4,175
In no event shall the Option be exercisable for more shares than the number of
shares set forth in Section 1.
3.2 CUMULATIVE NATURE OF EXERCISE SCHEDULE. The exercise dates
specified above refer to the earliest dates on which the Option may be exercised
with respect to the stated number of shares of the Common Stock covered by this
Option and this Option may be exercised with respect to all or any part of any
such number of the total shares at any time on or after such dates (until the
expiration date specified in Section 2 above or any earlier termination of this
Option pursuant to Section 6 or 7.2 of this Agreement). Except as permitted in
Section 6, as a condition to exercise of this Option the Employee must be and
remain in the employ of the Company, or of any Parent or Subsidiary corporation
of the Company (as defined in Internal Revenue Code Sections 424(e) and (f)),
during the entire period commencing with the Date of Grant of this Option and
ending with the date of exercise of this Option. Except as otherwise expressly
provided in this Agreement, the Employee's employment shall be deemed to have
terminated upon an actual termination of employment and upon such Parent or
Subsidiary corporation of the Company ceasing to have such relationship with the
Company. Any references in this Agreement to the Employee's employment with the
Company shall be deemed to also refer to the Employee's employment with any
Parent or Subsidiary corporation of the Company, as applicable.
3.3 CHANGE OF CONTROL. In the event of a Change of Control (as
defined below), one hundred percent of the unvested Shares under this Option
shall immediately become vested Shares as of the consummation of such Change of
Control. The vesting that was permissible solely by reason of this Section shall
be conditioned upon the consummation of the Change in Control. A "Change of
Control" shall be deemed to have occurred in the event any of the following
occurs with respect to the Company:
3.3.1 the direct or indirect sale or exchange by the
stockholders of the Company of all or substantially all of the stock of the
Company where the stockholders of the Company before such sale or
<PAGE>
Smartdisk Corporation
Employee Non-Statutory Stock Option Agreement
Page 3
exchange do not retain, directly or indirectly, at least a majority of the
beneficial interest in the voting stock of the Company after such sale or
exchange.
3.3.2 a merger or consolidation in which the Company is
not the surviving corporation, other than (i) a merger in which the stockholders
of the Company before such merger or consolidation retain directly or
indirectly, at least a majority of the voting stock of the surviving corporation
or the parent corporation of the surviving corporation and the Options are
assumed or substituted by the surviving corporation which assumption or
substitution shall be binding on Employee, or (ii) a merger or consolidation
with a wholly-owned subsidiary, a reincorporation of the Company in a different
jurisdiction, or other transaction in which there is no substantial change in
the stockholders of the Company and the Options are assumed or substituted by
the surviving, continuing, successor or parent corporation, which assumption or
substitution shall be binding on the Employee.
3.3.3 a merger or consolidation in which the Company is
the surviving corporation where the stockholders of the Company before such
merger or consolidation do not retain, directly or indirectly, at least a
majority of the voting stock of the Company after such merger or consolidation.
3.3.4 the sale, exchange, or transfer of all or
substantially all of the assets of the Company other than a sale, exchange, or
transfer to one (1) or more subsidiaries of the Company.
3.3.5 a liquidation or dissolution of the Company.
3.3.6 any other transaction which qualifies as a
"corporate transaction" under Section 424 of the Code wherein the stockholders
of the Company give up all of their equity interest in the Company (except for
the acquisition, sale or transfer of all or substantially all of the outstanding
shares of the Company).
3.4 OVERRIDING LIMITATION ON TIME FOR EXERCISE. Notwithstanding
any other provisions of this Agreement, the Option may not be exercised after
the expiration of ten (10) years from the date of grant.
4. RIGHT OF FIRST REFUSAL. The Employee and successors-in-interest to
Employee shall not sell, assign, pledge or in any manner transfer any of the
shares of the Common Stock purchased hereunder, or any right or interest
therein, whether voluntarily or by operation of law, or by gift or otherwise,
except for a transfer which meets the requirements hereinafter set forth.
4.1 NOTICE OF PROPOSED SALE. If the Employee desires to sell or
otherwise transfer any of his or her shares of Common Stock, the Employee shall
first give written notice thereof to the Company. The notice shall name the
proposed transferee and state the number of shares to be transferred, the
proposed consideration and all other material terms and conditions of the
proposed transfer.
4.2 OPTION OF COMPANY TO PURCHASE. For forty-five (45) days
following receipt of such notice, the Company (and its assignees as provided in
Section 4.3 below) shall have the option to elect to purchase all of the shares
specified in the notice at the price and upon the terms set forth in such
notice; provided that if the terms of payment set forth in the Employee's notice
were other than cash against delivery, the Company (and its assignees) shall pay
cash for said shares equal to the fair market value thereof as determined in
good faith by the Board, except that to the extent such consideration is
composed, in whole or in part, of promissory notes, the Company (and its
assignees) shall have the option of similarly issuing promissory
<PAGE>
Smartdisk Corporation
Employee Non-Statutory Stock Option Agreement
Page 4
notes of like form, tenor and effect. Notwithstanding the foregoing, in the
event that the Employee disagrees with the determination of fair market value
made by the Board, the Employee shall have the right to have such fair market
value determined by arbitration in accordance with the rules of the American
Arbitration Association. The arbitration shall be held in the county in which
the Company has its executive offices. The cost of the arbitration shall be
borne in equal shares by the Company and the Employee. In the event the Company
(and its assignees) elects to purchase all of such shares, it shall give written
notice to the Employee of its election and settlement for such purchase of
shares shall be made as provided below in Section 4.4.
4.3 ASSIGNABILITY OF COMPANY'S RIGHTS HEREUNDER. The Company may
at any time transfer and assign its rights and delegate its obligations under
this Section 4 to any other person, corporation, firm or entity, including its
officers, directors or stockholders, with or without consideration.
4.4 CLOSING OF COMPANY PURCHASE. In the event the Company (and
its assignees) elects to acquire all of those shares of the Employee as
specified in the Employee's notice, the Secretary of the Company shall so notify
the Employee within forty-five (45) days after receipt of the Employee's notice,
and settlement thereof shall be made in cash or as otherwise set forth above
within forty-five (45) days after the date the Secretary of the Company gives
the Employee notice of the Company's election.
4.5 TRANSFERRED SHARES REMAIN SUBJECT TO RESTRICTIONS. In the
event the Company (or its assignees) do not elect to acquire all of the shares
specified in the Employee's notice, the Employee may, within the sixty (60) day
period following the expiration of the forty-five (45) day period for electing
to exercise the purchase rights granted to the Company (and its assignees) in
Section 4.2, transfer the shares in the manner specified in his or her notice.
In that event, the transferee, assignee or other recipient shall, as a condition
of the transfer of ownership, receive and hold such shares subject to the
provisions of Sections 4, 5, 10, 13-20 of this Agreement and shall execute such
documentation as may be requested by the Company, including, but not limited to,
an investment representation letter containing provisions similar to those set
forth in the Notice of Exercise and Investment Representation Statement attached
as EXHIBIT A hereto.
4.6 EXCEPTIONS TO FIRST REFUSAL RIGHTS. Anything to the contrary
contained herein notwithstanding, the following transactions shall be exempt
from the provisions of this Section 4 (provided that the transferee shall first
agree in writing, satisfactory to the Company, to be bound by the terms and
provisions of Sections 4, 5, 10 and 13-20 hereof):
4.6.1 TRANSFER TO FAMILY MEMBER. The Employee's transfer
of any or all shares held subject to this Agreement (either during the
Employee's lifetime or on death by will or intestacy) to such Employee's
Immediate family, as herein defined, or to any custodian or trustee for the
account of the Employee or his or her Immediate family. "Immediate family" as
used herein shall mean spouse, lineal descendants, father, mother, or brother or
sister of the Employee.
4.7 WAIVERS BY THE COMPANY. The provisions of this Section 4 may
be waived by the Company with respect to any transfer proposed by the Employee
only by duly authorized action of the Board.
4.8 UNAUTHORIZED TRANSFERS VOID. Any sale or transfer, or
purported sale or transfer, of the Common Stock subject to this Agreement shall
be null and void unless the terms, conditions and provisions of this Section 4
are strictly complied with.
<PAGE>
Smartdisk Corporation
Employee Non-Statutory Stock Option Agreement
Page 5
4.9 TERMINATION OF FIRST REFUSAL RIGHT. The foregoing right
of first refusal shall terminate upon the earlier of:
4.9.1 PUBLIC OFFERING. The date equity securities of the
Company are first offered and sold to the public generally pursuant to a
registration statement filed with, and declared effective by, the United States
Securities and Exchange Commission (the "SEC") under the Securities Act of 1933,
as amended (the "SECURITIES ACT"); or
4.9.2 ACQUISITION OF THE COMPANY. Immediately prior to
the acquisition of substantially all of the business and assets of the Company
by an unaffiliated third party (as determined by the Board), whether by merger,
sale of outstanding stock or of the Company's assets, or otherwise, where no
express provision is made for the assignment and continuation of the Company's
rights hereunder by a new or successor corporation.
5. AGREEMENT TO LOCK-UP IN THE EVENT OF PUBLIC OFFERING. In the event of
a public offering of the Company's Common Stock pursuant to a registration
statement declared effective with the SEC, if requested by the Company or by its
underwriters, the Employee agrees not to sell, sell short, grant any option to
buy or otherwise dispose of the shares of Common Stock purchased pursuant to
this Agreement (except for any such shares which may be included in the
registration) for a period of up to one hundred eighty (180) days following the
consummation of such offering. The Company may impose stop-transfer instructions
with respect to the shares of the Common Stock subject to the foregoing
restriction until the end of said period. The Employee shall be subject to this
Section 5 provided and only if the executive officers and directors of the
Company are also subject to similar arrangements.
6. RIGHTS ON TERMINATION OF EMPLOYMENT. Upon the Employee's termination
of employment with the Company (and with any Parent or Subsidiary corporation of
the Company as defined in Section 3.3 above), the Employee's right to exercise
this Option shall be limited in the manner set forth in this Section 6 (and this
Option shall terminate in the event not so exercised), and subject to the
limitation provided in Section 3.4.
6.1 DEATH. If the Employee's employment with the Company is
terminated by death, the Employee's estate may, for a period of twelve (12)
months following the date of such termination, exercise the Option to the extent
it was exercisable by the Employee on the date of such termination. The
Employee's estate shall mean the Employee's legal representative upon death or
any person who acquires the right to exercise the Option by reason of such death
in accordance with Section 8.2.
6.2 RETIREMENT. If the Employee's employment with the Company is
terminated by voluntary retirement at or after reaching sixty-five (65) years of
age, the Employee may, within three (3) months following such termination,
exercise the Option to the extent it was exercisable by the Employee on the date
of such termination unless the Employee dies prior thereto, in which event the
Employee shall be treated as though the Employee had died on the date of
retirement and the provisions of Section 6.1 above shall apply.
6.3 DISABILITY. If the Employee's employment with the Company is
terminated because of a disability, the Employee may, within twelve (12) months
following the date of such termination, exercise the Option to the extent it was
exercisable by the Employee on the date of such termination unless the Employee
dies prior to the expiration of such period, in which event the Employee shall
be treated as though his or her death occurred on the date of termination due to
such disability and the provisions of Section 6.1 shall apply.
<PAGE>
Smartdisk Corporation
Employee Non-Statutory Stock Option Agreement
Page 6
6.4 TERMINATION FOR CAUSE. If the Employee's employment is
terminated for cause, the option granted by this Agreement shall expire on
Employee's termination date or at such later time and on such conditions as
determined by the Board. For purposes of this paragraph, "cause" shall be
defined as the willful breach or habitual neglect of the duties which Employee
is required to perform under his employment agreement with Company, or any act
of dishonesty, fraud, misrepresentation or other acts of moral turpitude as
would prevent the effective performance of Employee's duties.
6.5 OTHER TERMINATION. If the Employee's employment with the
Company is terminated for any reason other than provided in Sections 6.1, 6.2,
6.3 and 6.4 above, the Employee or the Employee's estate may, within three (3)
months after the date of the Employee's termination exercise the Option to the
extent it was exercisable by the Employee on the date of such termination.
6.6 TRANSFER TO RELATED CORPORATION. In the event the Employee
leaves the employ of the Company to become an employee of any Parent or
Subsidiary corporation of the Company (as defined in Section 3.3 above) or if
the Employee leaves the employ of any such Parent or Subsidiary corporation to
become an employee of the Company or of another such Parent or Subsidiary
corporation of the Company, the Employee shall be deemed to continue in the
employ of the Company for all purposes of this Agreement.
6.7 EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the
foregoing, if the exercise of an Option within the applicable time periods set
forth above is prevented because the issuance of shares upon such exercise would
constitute a violation of any applicable federal, state or foreign securities
law or other law or regulation, the Option shall remain exercisable until three
(3) months after the date the Employee is notified by the Company that the
Option is exercisable, but in any event no later than the expiration of ten (10)
years from the date of grant. The Company makes no representation as to the tax
consequences of any such delayed exercise. The Employee should consult with the
Employee's own tax advisor as to the tax consequences to the Employee of any
such delayed exercise.
6.8 EXTENSION IF EMPLOYEE IS SUBJECT TO SECTION 16(B).
Notwithstanding the foregoing, if a sale within the applicable time periods set
forth in Section 6 of shares acquired upon the exercise of the Option would
subject the Employee to liability under Section 16(b) of the Securities Exchange
Act of 1934, as amended, the Option shall remain exercisable until the earliest
to occur of (i) the tenth (10th) day following the date on which a sale of such
shares by the Employee would no longer be subject to such liability, (ii) the
one hundred and ninetieth (190th) day after the Employee's termination of
Employee's employment, or (iii) the Option Expiration Date.
7. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER.
7.1 STOCK SPLITS AND SIMILAR EVENTS; RECLASSIFICATIONS. The
number of shares of Common Stock covered by the Option and the exercise price
thereof shall be proportionately adjusted for any increase or decrease in the
number of issued and outstanding shares of Common Stock resulting from a
subdivision or combination of such shares or the payment of a stock dividend
(but only on the Common Stock) or a recapitalization or any other increase or
decrease in the number of such outstanding shares of Common Stock effected
without the receipt of consideration by the Company; provided, however, that the
conversion of any convertible securities of the Company shall not be deemed to
have been "effected without receipt of
<PAGE>
Smartdisk Corporation
Employee Non-Statutory Stock Option Agreement
Page 7
consideration." In the event that the shares of Common Stock covered by this
Option are reclassified by the Company, other than pursuant to a transaction
described in Section 7.2, then this Option shall apply to the appropriate number
of shares of newly classified Common Stock designated by the Board.
7.2 MERGERS AND ACQUISITIONS. If the Company shall be a
constituent corporation in any merger or consolidation which results in the
holders of the outstanding voting securities of the Company (determined
immediately prior to such merger or consolidation) owning, directly or
indirectly, at least a majority of the beneficial interest in the outstanding
voting securities of the surviving corporation or its Parent corporation
(determined immediately after such merger or consolidation), the Option shall
pertain and apply to the securities or other property to which a holder of the
number of shares subject to the unexercised portion of this Option would have
been entitled. Any of (i) a dissolution or liquidation of the Company; (ii) a
sale of substantially all of the Company's business and assets; or (iii) a
merger or consolidation (in which the Company is a constituent corporation)
which results in the holders of the outstanding voting securities of the Company
(determined immediately prior to such merger or consolidation) owning, directly
or indirectly, less than a majority of the beneficial interest in the
outstanding voting securities of the surviving corporation or its Parent
corporation (determined immediately after such merger or consolidation) will
cause the Option to terminate, unless (a) the agreement of such sale, merger,
consolidation or other transaction otherwise provides or (b) a sale on the day
preceding the scheduled consummation of such event (the "test date") of shares
acquired upon the exercise of the option would subject the Employee to liability
under Section 16(b) of the Securities Exchange Act of 1934, as amended, in which
event the option shall remain exercisable until the earliest to occur of (i) the
tenth (10th) day following the date on which a sale of such shares by the
Employee would no longer be subject to such liability, (ii) the one hundred and
ninetieth (190th) day after the test date, or (iii) the Option Expiration Date.
7.3 BOARD'S DETERMINATION FINAL AND BINDING UPON EMPLOYEE. To the
extent that the foregoing adjustments in this Section 7 relate to stock or
securities of the Company, such adjustments shall be made by the Board, whose
determination in that respect shall be final, binding and conclusive. The
Company agrees to give notice of any such adjustment to the Employee; provided,
however, that any such adjustment shall be effective and binding for all
purposes hereof whether or not such notice is given or received.
7.4 NO RIGHTS EXCEPT AS EXPRESSLY STATED. Except as hereinabove
expressly provided in this Section 7, no additional rights shall accrue to the
Employee by reason of any subdivision or combination of shares of the capital
stock of any class or the payment of any stock dividend or a recapitalization or
any other increase or decrease in the number of shares of any class or by reason
of any dissolution, liquidation, merger or consolidation or spin-off of assets
or of stock of another corporation, and any issue by the Company of shares of
stock of any class or of securities convertible into shares of stock of any
class shall not affect, and no adjustment by reason thereof shall be made with
respect to, the number or exercise price of shares subject to the Option.
Neither the Employee nor any person claiming under or through the Employee shall
be, or have any of the rights or privileges of, a stockholder of the Company in
respect of any of the shares issuable upon the exercise of this Option, unless
and until this Option is properly and lawfully exercised and a certificate
representing the shares so purchased is duly issued and delivered to the
Employee or to his or her estate.
7.5 NO LIMITATIONS ON COMPANY'S DISCRETION. The grant of the
Option hereby shall not affect in any way the right or power of the Company to
make adjustments, reclassifications, reorganizations or changes of its capital
or business structure or to merge or consolidate or to dissolve, liquidate, sell
or transfer all or any part of its business or assets.
<PAGE>
Smartdisk Corporation
Employee Non-Statutory Stock Option Agreement
Page 8
8. MANNER OF EXERCISE.
8.1 GENERAL INSTRUCTIONS FOR EXERCISE. The Option shall be
exercised by the Employee by completing, executing and delivering to the Company
the Notice of Exercise and Investment Representation Statement ("NOTICE OF
EXERCISE"), in substantially the form attached hereto as Exhibit A, which Notice
of Exercise shall specify the number of shares of Common Stock which the
Employee elects to purchase. The Company's obligation to deliver shares upon the
exercise of this Option shall be subject to the Employee's satisfaction of all
applicable federal, state, local and foreign income and employment tax
withholding requirements, if any. Upon receipt of such Notice of Exercise and of
payment of the purchase price (and payment of applicable taxes as provided
above), the Company shall, as soon as reasonably possible and subject to all
other provisions hereof, deliver certificates for the shares of Common Stock so
purchased, registered in the Employee's name or in the name of his or her legal
representative (if applicable). Payment of the purchase price upon any exercise
of the Option shall be made by check acceptable to the Company or in cash;
provided, however, that the Board may, in its sole and absolute discretion,
accept any other legal consideration to the extent permitted under applicable
laws and the Plan.
8.2 EXERCISE PROCEDURE AFTER DEATH. To the extent exercisable
after the Employee's death, this Option shall be exercised only by the
Employee's executor(s) or administrator(s) or the person or persons duly
authorized or to whom this Option is transferred under the Employee's will or,
if the Employee shall fail to make testamentary disposition of this Option,
under the applicable laws of descent and distribution. Any such transferee
exercising this Option must furnish the Company with (1) written Notice of
Exercise and relevant information as to his or her status, (2) evidence
satisfactory to the Company to establish the validity of the transfer of this
Option and compliance with any laws or regulations pertaining to said transfer,
and (3) written acceptance of the terms and conditions of this Option as
contained in this Agreement.
9. NON-TRANSFERABLE. The Option shall, during the lifetime of the
Employee, be exercisable only by the Employee and shall not be transferable or
assignable by the Employee in whole or in part other than by will or the laws of
descent and distribution. If the Employee shall make any such purported transfer
or assignment of the Option, such assignment shall be null and void and of no
force or effect whatsoever.
10. COMPLIANCE WITH SECURITIES AND OTHER LAWS. The Option may not be
exercised and the Company shall not be obligated to deliver any certificates
evidencing shares of Common Stock hereunder if the issuance of shares upon such
exercise would constitute a violation of any applicable requirements of: (i) the
Securities Act, (ii) the Securities Exchange Act of 1934, as amended, (iii)
applicable state securities laws, (iv) any applicable listing requirement of any
stock exchange on which the Company's Common Stock is then listed, and (v) any
other law or regulation applicable to the issuance of such shares. Nothing
herein shall be construed to require the Company to register or qualify any
securities under applicable federal and state securities laws, or take any
action to secure an exemption from such registration and qualification for the
issuance of any securities upon the exercise of this Option. Shares of Common
Stock issued upon exercise of this Option shall include the following legends
and such other legends as in the opinion of the Company's counsel may be
required by applicable federal, state and foreign securities laws:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
RESTRICTIONS ON TRANSFER AND OTHER AGREEMENTS CONTAINED IN A STOCK
OPTION AGREEMENT, DATED FEBRUARY 11, 1999, A COPY OF WHICH IS ON FILE
WITH THE COMPANY.
<PAGE>
Smartdisk Corporation
Employee Non-Statutory Stock Option Agreement
Page 9
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE
IS MADE IN ACCORDANCE WITH RULE 144 OR RULE 701 UNDER THE ACT, OR THE
COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE
SECURITIES REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH
SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE
REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
11. NO RIGHT TO CONTINUED EMPLOYMENT. Nothing contained in this
Agreement shall: (i) confer upon the Employee any right with respect to the
continuance of his or her employment agreement with the Company, or with any
Parent or Subsidiary corporation of the Company, or (ii) limit in any way the
right of the Company, or of any Parent or Subsidiary corporation, to terminate
the employment of the Employee at any time. Except to the extent the Company and
the Employee shall have otherwise agreed in writing, the Employee's employment
shall be terminable by the Company (or by a Parent or Subsidiary, if applicable)
at will. Subject to Section 12, the Board in its sole discretion shall determine
whether any leave of absence or interruption in employment (including an
interruption during military service) shall be deemed a termination of
employment for the purposes of this Agreement.
12. LEAVE OF ABSENCE. For purposes hereof, the Employee's employment
shall not be deemed to terminate if the Employee takes any military leave, sick
leave, or other bona fide leave of absence approved by the Company of ninety
(90) days or less. In the event of a leave in excess of ninety (90) days, the
Employee's employment shall be deemed to terminate on the ninety-first (91st)
day of the leave unless the Employee's right to reemployment remains guaranteed
by statute or contract. Notwithstanding the foregoing, however, a leave of
absence shall be treated as employment for purposes of Section 3 if and only if
the leave of absence is designated by the Company as (or required by law to be)
a leave for which vesting credit is given.
13. COMMITTEE OF THE BOARD. In the event that the Plan is administered
by a committee of the Board (the "COMMITTEE"), all references herein to the
Board shall be construed to mean the Committee for the period(s) during which
the Committee administers the Plan.
14. OPTION SUBJECT TO TERMS OF PLAN. In addition to the provisions
hereof, this Agreement and the Option are governed by, and subject to the terms
and conditions of, the Plan. The Employee acknowledges receipt of a copy of the
Plan (a copy of which is attached hereto as Exhibit B). The Employee represents
that he or she is familiar with the terms and conditions of the Plan, and hereby
accepts the Option subject to all of the terms and conditions thereof, which
terms and conditions shall control to the extent inconsistent in any respect
with the provisions of this Agreement. The Employee hereby agrees to accept as
binding, conclusive and final all decisions and interpretations of the Board as
to any questions arising under the Plan or under this Agreement.
15. NOTICES. All notices and other communications of any kind which
either party to this Agreement may be required or may desire to serve on the
other party hereto in connection with this Agreement shall be in writing and may
be delivered by personal service or by registered or certified mail, return
receipt requested, deposited in the United States mail with postage thereon
fully prepaid, addressed to the other party
<PAGE>
Smartdisk Corporation
Employee Non-Statutory Stock Option Agreement
Page 10
at the addresses indicated on the signature page hereof or as otherwise provided
below. Service of any such notice or other communication so made by mail shall
be deemed complete on the date of actual delivery as shown by the addressee's
registry or certification receipt or at the expiration of the third (3rd)
business day after the date of mailing, whichever is earlier in time. Either
party may from time to time, by notice in writing served upon the other as
aforesaid, designate a different mailing address or a different person to which
such notices or other communications are thereafter to be addressed or
delivered.
16. FURTHER ASSURANCES. The Employee shall, upon request of the Company,
take all actions and execute all documents requested by the Company which the
Company deems to be reasonably necessary to effectuate the terms and intent of
this Agreement and, when required by any provision of this Agreement to transfer
all or any portion of the Common Stock purchased hereunder to the Company
(and/or its assignees), the Employee shall deliver such Common Stock endorsed in
blank or accompanied by Stock Assignments Separate from Certificate endorsed in
blank, so that title thereto will pass by delivery alone. Any sale or transfer
by the Employee of the Common Stock to the Company (and/or its assignees) shall
be made free of any and all claims, encumbrances, liens and restrictions of
every kind, other than those imposed by this Agreement.
17. SUCCESSORS. Except to the extent the same is specifically limited by
the terms and provisions of this Agreement, this Agreement is binding upon the
Employee and the Employee's successors, heirs and personal representatives, and
upon the Company, its successors and assigns.
18. TERMINATION OR AMENDMENT. Subject to the terms and conditions of the
Plan, the Board may terminate or amend the Plan and/or the Option at any time;
provided, however, that no such termination or amendment may adversely affect
the Option or any unexercised portion hereof without the consent of the
Employee.
19. INTEGRATED AGREEMENT. This Agreement and the Plan constitute the
entire understanding and agreement of the Employee and the Company with respect
to the subject matter contained herein, and there are no agreements,
understandings, restrictions, representations, or warranties between the
Employee and the Company other than those set forth or provided for herein. To
the extent contemplated herein, the provisions of this Agreement shall survive
any exercise of the Option and shall remain in full force and effect.
20. OTHER MISCELLANEOUS TERMS. Titles and captions contained in this
Agreement are inserted only as a matter of convenience and for reference, and in
no way define, limit, extend or describe the scope of this Agreement or the
intent of any provision hereof. This Agreement shall be governed by and
construed in accordance with the laws of the State of Florida, irrespective of
its choice of law principles.
21. INDEPENDENT TAX ADVICE. The Employee agrees that he or she has
obtained or will obtain the advice of independent tax counsel (or has determined
not to obtain such advice, having had adequate opportunity to do so) regarding
the federal and state income tax consequences of the receipt and exercise of the
Option and of the disposition of Common Stock acquired upon exercise hereof. The
Employee acknowledges that he or she has not relied and will not rely upon any
advice or representation by the Company or by its employees or representatives
with respect to the tax treatment of the Option.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first hereinabove written.
COMPANY: EMPLOYEE:
<PAGE>
SMARTDISK CORPORATION,
a Delaware corporation
----------------------------------
(Signature)
By:
--------------------------------------
Timothy Tomlinson, Name Printed: MICHAEL S. BATTAGLIA
Secretary ---------------------
Address:
--------------------------
--------------------------
--------------------------
Address: 3506 Mercantile Avenue
Naples, FL 34104-3310
<PAGE>
SCHEDULE OF EXHIBITS
EXHIBIT A: Form of Notice of Exercise and Investment Representation
Statement for Employee Non-Statutory Stock Option Agreement
EXHIBIT B: 1998 Employee Stock Option Plan
<PAGE>
EXHIBIT A
FORM OF NOTICE OF EXERCISE
AND INVESTMENT REPRESENTATION STATEMENT
FOR EMPLOYEE NON-STATUTORY STOCK OPTION AGREEMENT
SmartDisk Corporation
3506 Mercantile Avenue
Naples, FL 34104-3310
Attention: Corporate Secretary
Re: NOTICE OF EXERCISE OF STOCK OPTION
-----------------------------------
Ladies and Gentlemen:
I hereby exercise, as of ____________________, ____, my stock option
(granted February 11, 1999) to purchase ______________ shares (the "OPTION
SHARES") of the Common Stock of SmartDisk Corporation, a Delaware corporation
(the "COMPANY"). Payment of the option price of $________________ is attached to
this notice.
As a condition to this notice of exercise, I hereby make the following
representations and agreements:
INVESTMENT REPRESENTATION STATEMENT.
1. I am purchasing the Option Shares for investment for my own account
only and not with a view to, or for resale in connection with, any
"distribution" thereof. I am aware of the Company's business affairs and
financial condition and have had access to such information about the Company as
I have deemed necessary or desirable to reach an informed and knowledgeable
decision to acquire the Option Shares.
2. I understand that the Option Shares have not been registered under
the Securities Act of 1933, as amended (the "ACT"), or qualified or registered
under the blue sky law of any state (the "LAW"), by reason of specific
exemptions therefrom, which exemptions depend upon, among other things, the bona
fide nature of my investment intent as expressed herein. In this connection, I
understand that, in the view of the Securities and Exchange Commission (the
"COMMISSION"), the statutory basis for one such exemption may not exist if my
representation means that my present intention is to hold the Option Shares for
a minimum capital gains period under the tax laws, for a deferred sale, for a
market rise, for a sale if the market does not rise, or for a year or any other
fixed period in the future.
3. I acknowledge and agree that the Option Shares are restricted
securities which must be held indefinitely unless they are subsequently
registered under the Act or an exemption from such registration is available. I
further acknowledge and understand that the Company is under no obligation to
register the Option Shares.
4. I am aware of the adoption of Rule 144 by the Commission, which
permits limited public resale of securities acquired in a non-public offering,
subject to the satisfaction of certain conditions, including, among other
things, the availability of certain current public information about the issuer,
the passage of not less than one (1) year after the holder has purchased and
paid for the securities to be sold, effectuation of the sale on the public
market through a broker in an unsolicited "brokers' transaction" or to a "market
maker," and compliance with specified limitations on the amount of securities to
be sold (generally, one percent (1%) of the total amount of common stock
outstanding) during any three (3)-month period, except that such conditions need
<PAGE>
Employee Non-Statutory Stock Option Agreement
Exhibit A
Page 2
not be met by a person who is not an affiliate of the Company at the time of
sale and has not been an affiliate for the preceding three (3) months if the
securities to be sold have been beneficially owned by such person for at least
two (2) years prior to their sale.
5. I understand that the Company currently does not, and at the time I
wish to sell the Option Shares may not, satisfy the current public information
requirement of Rule 144 and, consequently, I may be precluded from selling the
Option Shares under Rule 144 even if the one (1)-year minimum holding period has
been satisfied.
6. I further understand that if all of the requirements of Rule 144 are
not met, compliance with Regulation A or some other exemption from registration
will be required; and that, although Rule 144 is not exclusive, the Staff of the
Commission has expressed its opinion that persons proposing to sell restricted
securities other than in a registered offering and other than pursuant to Rule
144 will have a substantial burden of proof in establishing that an exemption
from registration is available for such offers or sales and that such persons
and the brokers who participate in such transactions do so at their own risk.
7. I further understand that the certificate(s) representing the Option
Shares, whether upon initial issuance or any transfer thereof, shall bear on
their face legends, prominently stamped or printed thereon in capital letters,
reading as follows:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
RESTRICTIONS ON TRANSFER AND OTHER AGREEMENTS CONTAINED IN A STOCK
OPTION AGREEMENT, DATED FEBRUARY 11, 1999, A COPY OF WHICH IS ON FILE
WITH THE COMPANY.
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE
IS MADE IN ACCORDANCE WITH RULE 144 OR RULE 701 UNDER THE ACT, OR THE
COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE
SECURITIES REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH
SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE
REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
8. I further understand that I may suffer adverse tax consequences as a
result of my purchase or disposition of the Option Shares. I represent that I
have consulted with any tax consultant(s) I deem advisable in connection with
the purchase or disposition of the Option Shares and that I am not relying on
the Company for any tax advice.
IN WITNESS WHEREOF, the undersigned has executed this Notice of Exercise
as of the date set forth below.
Signed:
-----------------------------
Dated:
------------------------------------
<PAGE>
EXHIBIT B
SMARTDISK CORPORATION
1998 EMPLOYEE STOCK OPTION PLAN
As Adopted January 27, 1998
[Refer to Exhibit 10.1 to SmartDisk Corporation's Registration Statement on Form
S-1 (file # 333-82793) for the text of the 1998 Employee Stock Option Plan]
<PAGE>
Exhibit C
CONFIDENTIALITY AGREEMENT
This Confidentiality Agreement is entered into this ___ day of ________,
____, by and between SmartDisk Corporation (hereafter "SDC"), and
________________________________, (hereafter "Employee"), and is made a part of,
and shall be incorporated into as Exhibit , the Employment Agreement between SDC
and Employee.
1. Confidential Disclosure.
a. Employee acknowledges that he/she will, during the course of his/her
employment by SDC, be exposed to confidential information and materials relating
to SDC, its business and methods of doing business, and to confidential
information and materials of or pertaining to clients of SDC. Such information
includes, but is not limited to, trade secrets, proprietary material and
knowledge, marketing and development ideas and plans, software program source
and object codes, date files, confidential methods, operations, ideas, plans,
and the terms of this Agreement.
b. Employee agrees that he/she will preserve and maintain the privacy of
all such confidential information received during the course of his/her
employment by SDC, will discuss or disclose the same only as necessary during
the normal course of employment, and then only to other employees of SDC as
necessary. In the event extraordinary or unusual business circumstances require
confidential information to be discussed with or disclosed to third parties
other than the client, Employee shall obtain prior authorization of an officer
of SDC before making such disclosure.
2. Inventions, Discoveries, and Developments.
Employee's rights, title, equities and interests in and to every
invention, discovery and development which Employee conceives or develops,
whether alone or together with others, while in the employment of SDC, or during
the course of Employee's use of any funds, space or facilities of SDC, shall be
determined in accordance with the following:
a. Employee shall promptly notify an officer of SDC with respect to each
such invention, discovery and development.
b. If requested by SDC, and at the expense of SDC, Employee shall
execute all instruments and take all other action, including without limitation,
the furnishing of information reasonably requested by SDC, to:
1) Assign to SDC or its designee all Employee's rights, title,
equities and interests, including without limitation all patent rights, in and
to each such invention, discovery and development except those inventions,
discoveries and developments as to which SDC has determined, in writing, that
exclusive property therein belongs to, and may be retained by, Employee;
2) Assist SDC and any designee thereof in their respective
efforts to secure, maintain, extend and enforce domestic and foreign patent
protection, and to effect other legal protection for any such invention,
discovery or development;
c. Employee shall comply with all temporary restrictions on publication
of writings relating to such inventions, discoveries and developments which are
required by any client or sponsor of a project in connection with the activities
of SDC.
3. Survival
<PAGE>
The agreements made by Employee and SDC under Paragraph 1 and 2 above
shall continue until terminated by mutual agreement and shall extend to the
successors and assigns of SDC, and assigns of the Employee.
Agreed to and accepted:
SmartDisk Corporation
By
-------------------------------
- ---------------------------------
Employee
Exhibit 10.6
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("AGREEMENT") is entered into as of March 16,
1999, (the "EFFECTIVE DATE") by and between SmartDisk Corporation, a Delaware
corporation ("COMPANY") and Robert Protheroe ("EMPLOYEE").
1. EMPLOYMENT RELATIONSHIP.
1.1 COMMENCEMENT AND TERM OF EMPLOYMENT. The Company employs
Employee and Employee accepts employment by the Company as of the Effective Date
on the terms and conditions set forth in this Agreement. The term of employment
("TERM OF EMPLOYMENT") shall commence as of the Effective Date and shall
continue thereafter for a period of thirty-six (36) months unless sooner
terminated pursuant to Section 5.
1.2 DUTIES. During the Term of Employment, Employee shall have
the title and perform and faithfully discharge the duties and responsibilities
of Senior Vice President, Development and Engineering of the Company. Employee
shall use his best efforts to perform and discharge such duties and
responsibilities in such manner as the Company's Board of Directors or President
and Chief Executive Officer may reasonably prescribe to Employee from time to
time. Employee shall also use his best efforts to observe all policies,
procedures and other requirements not inconsistent with this Agreement that may
be implemented or revised by the Company during the Term of Employment.
1.3 COMMITMENT OF EMPLOYEE. Employee shall devote
substantially all of his productive business time, attention, knowledge and
skill exclusively to the performance of his duties hereunder throughout the Term
of Employment and shall at all times discharge his duties faithfully,
industriously and to the best of his ability, experience and talents.
2. COMPENSATION.
2.1 SALARY. For all of Employee's services during the Term of
Employment, Employee shall be paid a salary of One Hundred Eighty Thousand
Dollars ($180,000.00) per year ("BASE SALARY"). Employee shall be eligible for
merit increases in salary after the first anniversary of the Effective Date of
this Agreement, as determined by the Compensation Committee of the Company's
Board of Directors (the "COMPENSATION COMMITTEE"). Payment shall be made in
periodic installments in accordance with Company's payroll policies instituted
from time to time. Upon termination of this Agreement pursuant to Section 5, the
Company shall have no obligation to pay salary or other benefits to Employee
except as may be provided in Section 5.
2.2 BONUS. Employee shall be entitled to an annual bonus
("BONUS"). Upon attainment of one hundred percent (100%) of the bonus
objectives, Employee shall be entitled to a Bonus in calendar year 1999 of Sixty
Thousand Dollars ($60,000.00). Each year the parties shall agree on a mutually
acceptable Bonus objectives. Said Bonus shall be payable on the dates
established by the Company for payment of annual bonuses and shall be payable
only if Employee continues to remain in the employ of the Company on such date.
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SmartDisk Corporation
Employment Agreement
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2.3 EMPLOYEE BENEFITS. During the Term of Employment, Employee
shall be entitled to participate in the group medical, dental and disability
policies and other benefits maintained from time to time by the Company for the
benefit of senior officers of the Company. During the Term of Employment,
Employee shall be entitled to receive all other benefits, and to participate in
all other benefit plans, as are generally available to employees of the Company
on the same terms as other senior management employees. Employee shall be
entitled to reimbursement for all usual and customary business expenses in
reasonable amount incurred by Employee in the performance of his duties for the
Company in accordance with the Company's then current expense reimbursement
policies and guidelines.
2.4 RELOCATION AND OTHER ASSISTANCE. Employee shall be
reimbursed by Company up to a maximum amount of Forty Thousand Dollars
($40,000.00) for relocation costs all of which are set forth on EXHIBIT A.
2.5 STOCK OPTIONS. The Company shall recommend to the
Compensation Committee that Employee receive an incentive stock option in the
form attached as EXHIBIT B (the "OPTION") pursuant to which Employee shall be
entitled to purchase one hundred sixty thousand (160,000) shares of the
Company's Common Stock at an exercise price equal to the fair market value of
the Company's Common Stock on the date of the grant, which the Company
anticipates will be $1.20 per share, and shall vest twenty-five percent (25%)
one year after the Effective Date and then in twelve equal quarterly
installments, all as more fully provided in the Initial Option. To the extent
that the Option grant cannot be an incentive stock option, the balance of such
grant shall be a non-statutory option.
2.6 LOAN. The Company will extend to Employee a loan of Sixty
Thousand Dollars ($60,000). The loan will be evidenced by a Promissory Note in
the form attached hereto as EXHIBIT C.
3. VACATIONS. During the Term of Employment, Employee shall be entitled
to fifteen (15) days of paid vacation per year. In no event shall Employee be
entitled to accrue and carry forward more than five (5) days of paid vacation
from any calendar year to another, and if Employee has reached this total, no
further vacation days shall accrue until the total of accrued but unused
vacation days falls below such maximum.
4. PLACE OF BUSINESS. During the Term of Employment, Employee shall
render services hereunder at the Company's principal executive offices in
Naples, Florida, or any successor principal office. Employee shall also be
available to travel for business purposes incident to the performance of his
duties, as required from time to time. Transportation, lodging and meal expenses
shall be incurred and reimbursed in accordance with the general policy of the
Company as adopted by the Company from time to time.
5. EARLY TERMINATION.
5.1 TERMINATION UPON PERMANENT DISABILITY OR DEATH. This
Agreement shall automatically terminate upon the permanent disability or death
of Employee, subject to the obligation of the Company to pay Employee or
Employee's personal representative or designated beneficiary, as the case may
be, (i) the balance of Employee's Base Salary and other benefits for the
remainder of the month in which disability or death occurs, (ii) a pro rata
portion of any Bonus to which Employee was otherwise entitled under Section 2.2
based upon the ratio the number of months employed for the year in question
(calculated through the end of the then current month) bears to the bonus period
of twelve (12) months and
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Employment Agreement
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(iii) any other disability benefits described in this Section 5.1 to which
Employee may be entitled. The Company will continue to pay Employee his regular
Base Salary during any period during which Employee is incapable of continuing
the further performance of Employee's normal employment activities with the
Company because of a mental, emotional or physical injury, sickness or disorder.
However, when such period exceeds an aggregate of sixty (60) business days
(exclusive of any accrued vacation within the limits set forth above) out of any
three hundred sixty-five (365) consecutive calendar days, Employee shall be
deemed permanently disabled. Employee shall also be deemed permanently disabled
if so certified by any two physicians, or upon the expiration of any elimination
period under any disability insurance policy purchased by the Company for the
benefit of Employee. Should Employee become permanently disabled, Employee or
his personal representative shall be entitled to receive his termination
compensation, as well as any disability benefits maintained for Employee by the
Company, if any, pursuant to the terms and subject to the conditions of any such
applicable disability benefit program or policy.
5.2 TERMINATION FOR CAUSE. During the Term of Employment, the
Company may at any time, without giving notice to Employee, immediately
terminate this Agreement for Cause. As used herein, "Cause" shall mean if
Employee (a) commits any act of embezzlement, theft, fraud or dishonesty; (b)
engages in unfair competition with the Company or any subsidiary of the Company
whether or not wholly-owned; (c) is convicted of any felony; (d) breaches any
material provision of the Confidentiality Agreement entered into by Employee
pursuant to Section 6 of this Agreement; (e) uses illegal drugs or abuses other
substances or (f) willfully breaches any other material provision of this
Agreement. The Company may also terminate Employee for "Cause" if Employee
materially breaches or habitually neglects or fails in any material way to
perform the usual and customary duties of his job, or any other duties required
to be performed under the terms of this Agreement, or the policies of the
Company, in which case the Company may, at its option, terminate this Agreement
by giving written notice of termination to Employee. Any termination pursuant to
either of the two preceding sentences shall be without prejudice to any other
remedy to which the Company may be entitled either at law, in equity, or under
this Agreement. Before the Company may terminate this Agreement by reason of
Employee's habitual neglect of or failure to perform the usual and customary
duties of his job or policies of the Company, the Company must first notify
Employee in writing, setting forth in detail those duties and/or policies which
Employee has habitually neglected or failed to perform, and provide Employee a
reasonable period of time, not to exceed thirty (30) days, in which to cure such
neglect or failure. If Employee does not cure the specified areas of neglect of
failure, the Company may terminate this Agreement immediately by giving Employee
written notice. At the time of any termination for Cause, Employee shall be
entitled to receive any Base Salary and employment benefits which shall have
accrued prior to the date of termination, but shall not be entitled to any Bonus
or severance payments, salary or employment benefits relating to periods
subsequent to the date of termination, subject to Employee's rights to continue
medical and dental coverage under the Company's group policy, at Employee's
expense, as may be provided by law.
5.3 TERMINATION BY EMPLOYEE. This Agreement may be terminated
by Employee for any reason, or no reason, by giving thirty (30) days' written
notice of termination to the Company. Upon termination by Employee, all rights
accruing to Employee under the terms of this Agreement shall cease, and Employee
shall not be entitled to any Bonus or severance payments, Base Salary or
employment benefits, except to the extent earned and accrued prior to the
termination date, and subject to Employee's rights to continue medical and
dental coverage under the Company's group policy, at Employee's expense, as may
be provided by law.
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SmartDisk Corporation
Employment Agreement
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5.4 TERMINATION WITHOUT CAUSE. Employee's employment with the
Company during the Term of Employment may be terminated by the Company at any
time without Cause, by the Company's giving fifteen (15) days prior written
notice. A termination without Cause, for purposes of this Agreement, means
termination by the Company other than as provided for in Sections 5.1 and 5.2.
5.5 SEVERANCE PAYMENTS. If Employee is terminated pursuant to
Section 5.4, Employee shall be entitled to severance pay in accordance with the
Company's normal payroll practices at the rate of Employee's Base Salary for
such year set forth in Section 2.1 for a period of six (6) months following
termination. All severance pay shall be payable in equal consecutive monthly
installments on the last day of each month following the effective date of
Employee's termination for the number of months of severance pay to which
Employee is entitled hereunder. Employee understands and agrees that such
payments shall be his only entitlement as and for severance pay or severance
compensation. Upon termination pursuant to Section 5.4, except for the severance
payments stated above, all rights and obligations accruing to Employee under the
terms of this Agreement or otherwise shall cease, and Employee shall not be
entitled to any further salary, bonus or employment benefits, except to the
extent earned and accrued prior to such date, and subject to Employee's rights
to continue medical and dental coverage under the Company's group policy, at
Employee's expense, as may be provided by law.
6. NONDISCLOSURE OF CONFIDENTIAL INFORMATION. Concurrently with the
execution and delivery of this Agreement, Employee agrees to enter into the
Company's Confidentiality Agreement for senior executive officers of the Company
in the form attached as EXHIBIT D (the "CONFIDENTIALITY AGREEMENT"). In the
event of any inconsistency between the terms and provisions of this Agreement
and those of the Confidentiality Agreement, the terms and provisions of this
Agreement shall prevail.
7. NON-COMPETITION.
7.1 AGREEMENT NOT TO COMPETE. Employee agrees that during the
Term of Employment and for the period thereafter specified in the next sentence,
Employee will not engage, directly or indirectly, either as principal, agent,
consultant, proprietor, stockholder, director, officer or Employee, or
participate in the ownership, management, operation or control of any other
business engaged in the type of business conducted by the Company. Such
agreement not to compete shall extend after the date of termination for any
reason for one year. This Section 7.1 shall not apply to Employee's ownership of
less than one percent (1%) of the capital stock of any corporation having a
class of capital stock which is traded on any national stock exchange or in the
over-the-counter market.
7.2 SOLICITATION. During the Term of Employment, and for the
period of one (1) year thereafter, Employee agrees that he will not, without the
Company's prior written consent, solicit or encourage any of the employees of
the Company or Fischer International Systems Corporation ("FISC") to leave the
employ of the Company or FISC, or terminate or alter their contractual
relationships in a way that is adverse to the Company's or FISC's interest or,
during the period of Employee's employment, solicit business from any customer
of the Company on behalf of any competitor of the Company.
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Employment Agreement
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8. MISCELLANEOUS.
8.1 GOVERNING LAWS. It is the intention of the parties hereto
that the internal laws of the State of Florida (irrespective of its choice of
law principles) shall govern the validity of this Agreement, the construction of
its terms, and the interpretation and enforcement of the rights and duties of
the parties hereto.
8.2 BINDING UPON SUCCESSORS AND ASSIGNS. Subject to, and
unless otherwise provided in, this Agreement, each and all of the covenants,
terms, provisions, and agreements contained herein shall be binding upon, and
inure to the benefit of, the permitted successors, executors, heirs,
representatives, administrators and assigns of the parties hereto. Employee may
not assign this Agreement or any of Employee's rights hereunder except as
provided herein or with the prior written consent of the Company.
8.3 SEVERABILITY. If any provision of this Agreement, or the
application thereof, shall for any reason and to any extent be invalid or
unenforceable, the remainder of this Agreement and application of such provision
to other persons or circumstances shall be interpreted so as best to reasonably
effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision which will achieve, to the extent possible, the economic,
business and other purposes of the void or unenforceable provision.
8.4 ENTIRE AGREEMENT. This Agreement (together with the Option
and Confidentiality Agreement) constitutes the entire understanding and
agreement of the parties hereto with respect to the subject matter hereof and
thereof and supersede all prior and contemporaneous agreements or understanding,
inducements or conditions, express or implied, written or oral, between the
parties with respect hereto and thereto.
8.5 AMENDMENT AND WAIVERS. Any term or provision of this
Agreement may be amended, and the observance of any term of this Agreement may
be waived (either generally or in a particular instance and either retroactively
or prospectively) only by a writing signed by the party to be bound thereby. The
waiver by a party of any breach hereof or default in the performance hereof
shall not be deemed to constitute a waiver of any other default or any
succeeding breach or default.
8.6 NO WAIVER. The failure of any party to enforce any of the
provisions hereof shall not be construed to be a waiver of the right of such
party thereafter to enforce such provisions.
8.7 NOTICES. Whenever any party hereto desires or is required
to give any notice, demand, or request with respect to this Agreement, each such
communication shall be in writing and shall be effective only if it is delivered
by personal service or mailed, United States certified mail, postage prepaid,
addressed as follows:
Company: 3506 Mercantile Avenue
Naples, Florida 34104-3310
Attn: Chief Executive Officer
Employee: To the address set forth on the signature page hereof
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Employment Agreement
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Such communications shall be effective when they are received
by the addressee thereof; but if sent by certified mail in the manner set forth
above, they shall be effective no later than five (5) days after being deposited
in the United States mail. Any party may change its address for such
communications by giving notice thereof to the other party in conformity with
this Section.
8.8 FURTHER ASSURANCES. Each party agrees to cooperate fully
with the other parties and to execute such further instruments, documents and
agreements and to give such further written assurances, as may be reasonably
requested by any other party to better evidence and reflect the transactions
described herein and contemplated hereby and to carry into effect the intents
and purposes of this Agreement.
8.9 INSURABLE INTEREST. Employee hereby grants to the Company
an insurable interest in Employee's life, and agrees and understands that the
Company may at any time or from time to time during the Term of Employment
choose to purchase and maintain key man life insurance on Employee.
8.10 EMPLOYEE'S REPRESENTATIONS. Employee represents and
warrants that he is free to enter into this Employment Agreement and to perform
each of the terms and covenants of it. Employee represents and warrants that he
is not restricted or prohibited, contractually or otherwise, from entering into
and performing this Employment Agreement, and that his execution and performance
of this Employment Agreement is not a violation or breach of any other agreement
between Employee and any other person or entity.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first hereinabove written.
EMPLOYEE'S ADDRESS FOR NOTICE: EMPLOYEE:
3506 MERCANTILE AVENUE
NAPLES, FL 34104
/s/ ROBERT PROTHEROE
------------------------------------
Robert Protheroe
COMPANY:
SMARTDISK CORPORATION
By: /s/ MICHAEL S. BATTAGLIA
---------------------------
Its: PRESIDENT
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SmartDisk Corporation
Employment Agreement
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EXHIBIT A
Relocation Assistance: Up to $40,000
- Relocation of household goods
- Closing costs and realtor's fees for sale of Employee's residence in Ohio
- House hunting travel and lodging expenses
- Other related expenses to purchasing a residence in Naples, Florida
<PAGE>
EXHIBIT B
THE SECURITY REPRESENTED BY THIS AGREEMENT HAS BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR
DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION
IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
SMARTDISK CORPORATION
EMPLOYEE INCENTIVE STOCK OPTION AGREEMENT
(CHANGE OF CONTROL PROVISIONS)
THIS EMPLOYEE INCENTIVE STOCK OPTION AGREEMENT ("AGREEMENT") by and
between SmartDisk Corporation, a Delaware corporation (the "COMPANY"), and
ROBERT L. PROTHEROE (the "EMPLOYEE") is made as of the 16th day of March, 1999
(such date being sometimes referred to herein as the "DATE OF GRANT").
R E C I T A L S
A. The Company has adopted and implemented its 1998 Employee Stock
Option Plan (the "PLAN") permitting the grant of stock options to employees of
the Company and its subsidiary corporations (as defined in the Plan), some of
which are intended to be incentive stock options within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended (the "INTERNAL REVENUE
CODE"), to purchase shares of the authorized but unissued Common Stock or
treasury shares of the Company ("COMMON STOCK").
B. The Board of Directors (or a duly authorized Committee thereof) of
the Company (in either case, referred to herein as the "BOARD") has authorized
the granting of a stock option to the Employee, thereby allowing the Employee to
acquire an ownership interest (or increase his or her ownership interest) in the
Company.
A G R E E M E N T
NOW, THEREFORE, in reliance on the foregoing Recitals and in
consideration of the mutual covenants hereinafter set forth, the parties hereby
agree as follows:
1. GRANT OF STOCK OPTION. The Company hereby grants to the Employee a
non-transferable and non-assignable option to purchase an aggregate of up to ONE
HUNDRED SIXTY THOUSAND (160,000) shares of the Company's Common Stock, par value
$.001, at the exercise price of ONE DOLLAR AND TWENTY CENTS ($1.20) per share,
upon the terms and conditions set forth herein (such purchase right being
sometimes referred to herein as "THE OPTION" or "THIS OPTION").
2. TERM AND TYPE OF OPTION. Unless earlier terminated in accordance
with Sections 6 or 7.2 hereof, the Option and all rights of the Employee to
purchase Common Stock hereunder shall expire with respect to all of the shares
then subject to this Agreement at 5:00 p.m. Eastern time on March 16,
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Employee Incentive Stock Option Agreement
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2009 (the "OPTION EXPIRATION DATE"). This Option is intended to qualify as an
incentive stock option within the meaning of Section 422 of the Internal Revenue
Code but the Company does not represent or warrant that this Option qualifies as
such. Accordingly, the Employee understands that in order to obtain the benefits
of incentive stock option treatment under Section 421 of the Internal Revenue
Code, no sale or other disposition may be made of any shares acquired upon
exercise of this Option for at least one (1) year after the date of the issuance
of such shares upon exercise hereunder AND for at least two (2) years after the
Date of Grant of this Option. (NOTE: If the aggregate exercise price of the
Option (that is, the exercise price set forth in Section 1 multiplied by the
number of shares subject to the Option set forth in Section 1) plus the
aggregate exercise price of any other incentive stock options held by the
Employee (whether granted pursuant to the Plan or any other stock option plan of
the Company) is greater than one hundred thousand dollars ($100,000), the
Employee should contact the Chief Financial Officer of the Company to ascertain
whether the entire Option qualifies as an incentive stock option).
3. EXERCISE SCHEDULE. Subject to the remaining provisions of this
Agreement, this Option shall be exercisable as follows:
3.1 EXERCISE DATES. Commencing upon the first anniversary of
March 16, 1999 (the "VESTING START DATE"), Employee may exercise this Option for
up to twenty-five percent (25%) of the shares covered hereby (rounded up to the
nearest whole number of shares). Thereafter, the remaining number of shares
shall vest in twelve (12) quarterly installments, each equal to six and
one-quarter percent (6.25%), with each to be effective as of the 16th day of
each of June, September, December and March, commencing June 16, 2000.
Therefore, this Option shall become fully exercisable as of March 16, 2003. In
no event shall the Option be exercisable for more shares than the number of
shares set forth in Section 1.
3.2 CUMULATIVE NATURE OF EXERCISE SCHEDULE. The exercise dates
specified above refer to the earliest dates on which the Option may be exercised
with respect to the stated percentages of the Common Stock covered by this
Option and this Option may be exercised with respect to all or any part of any
such percentage of the total shares at any time on or after such dates (until
the expiration date specified in Section 2 above or any earlier termination of
this Option pursuant to Section 6 or 7.2 of this Agreement). Except as permitted
in Section 6, the Employee must be and remain in the employ of the Company, or
of any Parent corporation or Subsidiary corporation of the Company (as defined
in Internal Revenue Code Sections 424(e) and (f)), during the entire period
commencing with the Date of Grant of this Option and ending with each of the
periods appearing in the above schedule in order to exercise this Option with
respect to the shares applicable to any such period. Except as otherwise
expressly provided in this Agreement, the Employee's employment shall be deemed
to have terminated upon an actual termination of employment and upon such Parent
corporation or Subsidiary corporation of the Company ceasing to have such
relationship with the Company. Any references in this Agreement to the
Employee's employment with the Company shall be deemed to also refer to the
Employee's employment with any Parent corporation or Subsidiary corporation of
the Company, as applicable.
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Employee Incentive Stock Option Agreement
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3.3 CHANGE OF CONTROL. In the event of a Change of Control (as
defined below), fifty percent (50%) of the unvested Shares under this Option
shall immediately become vested Shares as of the consummation of such Change of
Control. The vesting that was permissible solely by reason of this Section shall
be conditioned upon the consummation of the Change in Control. A "Change of
Control" shall be deemed to have occurred in the event any of the following
occurs with respect to the Company:
3.3.1 the direct or indirect sale or exchange by the
stockholders of the Company of all or substantially all of the stock of the
Company where the stockholders of the Company before such sale or exchange do
not retain, directly or indirectly, at least a majority of the beneficial
interest in the voting stock of the Company after such sale or exchange.
3.3.2 a merger or consolidation in which the Company
is not the surviving corporation, other than (i) a merger in which the
stockholders of the Company before such merger or consolidation retain directly
or indirectly, at least a majority of the voting stock of the surviving
corporation or the parent corporation of the surviving corporation and the
Options are assumed or substituted by the surviving corporation which assumption
or substitution shall be binding on Employee, or (ii) a merger or consolidation
with a wholly-owned subsidiary, a reincorporation of the Company in a different
jurisdiction, or other transaction in which there is no substantial change in
the stockholders of the Company and the Options are assumed or substituted by
the surviving, continuing, successor or parent corporation, which assumption or
substitution shall be binding on the Employee.
3.3.3 a merger or consolidation in which the Company
is the surviving corporation where the stockholders of the Company before such
merger or consolidation do not retain, directly or indirectly, at least a
majority of the voting stock of the Company after such merger or consolidation.
3.3.4 the sale, exchange, or transfer of all or
substantially all of the assets of the Company other than a sale, exchange, or
transfer to one (1) or more subsidiaries of the Company.
3.3.5 a liquidation or dissolution of the Company.
3.3.6 any other transaction which qualifies as a
"corporate transaction" under Section 424 of the Code wherein the stockholders
of the Company give up all of their equity interest in the Company (except for
the acquisition, sale or transfer of all or substantially all of the outstanding
shares of the Company).
3.4 OVERRIDING LIMITATION ON TIME FOR EXERCISE.
Notwithstanding any other provisions of this Agreement, the Option may not be
exercised after the expiration of ten (10) years from the Date of Grant.
4. RIGHT OF FIRST REFUSAL. The Employee and successors-in-interest to
Employee shall not sell, assign, pledge or in any manner transfer any of the
shares of the Common Stock purchased
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Employee Incentive Stock Option Agreement
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hereunder, or any right or interest therein, whether voluntarily or by operation
of law, or by gift or otherwise, except for a transfer which meets the
requirements hereinafter set forth.
4.1 NOTICE OF PROPOSED SALE. If the Employee desires to sell
or otherwise transfer any of his or her shares of Common Stock, the Employee
shall first give written notice thereof to the Company. The notice shall name
the proposed transferee and state the number of shares to be transferred, the
proposed consideration and all other material terms and conditions of the
proposed transfer.
4.2 OPTION OF COMPANY TO PURCHASE. For forty-five (45) days
following receipt of such notice, the Company (and its assignees as provided in
Section 4.3 below) shall have the option to elect to purchase all of the shares
specified in the notice at the price and upon the terms set forth in such
notice; provided that if the terms of payment set forth in the Employee's notice
were other than cash against delivery, the Company (and its assignees) shall pay
cash for said shares equal to the fair market value thereof as determined in
good faith by the Board, except that to the extent such consideration is
composed, in whole or in part, of promissory notes, the Company (and its
assignees) shall have the option of similarly issuing promissory notes of like
form, tenor and effect. Notwithstanding the foregoing, in the event that the
Employee disagrees with the determination of fair market value made by the
Board, the Employee shall have the right to have such fair market value
determined by arbitration in accordance with the rules of the American
Arbitration Association. The arbitration shall be held in the county in which
the Company has its executive offices. The cost of the arbitration shall be
borne in equal shares by the Company and the Employee. In the event the Company
(and its assignees) elects to purchase all of such shares, it shall give written
notice to the Employee of its election and settlement for such purchase of
shares shall be made as provided below in Section 4.4.
4.3 ASSIGNABILITY OF COMPANY'S RIGHTS HEREUNDER. The Company
may at any time transfer and assign its rights and delegate its obligations
under this Section 4 to any other person, corporation, firm or entity, including
its officers, directors or stockholders, with or without consideration.
4.4 CLOSING OF COMPANY PURCHASE. In the event the Company (or
its assignees) elects to acquire all of those shares of the Employee as
specified in the Employee's notice, the Secretary of the Company shall so notify
the Employee within forty-five (45) days after receipt of the Employee's notice,
and settlement thereof shall be made in cash or as otherwise set forth above
within forty-five (45) days after the date the Secretary of the Company gives
the Employee notice of the Company's election.
4.5 TRANSFERRED SHARES REMAIN SUBJECT TO RESTRICTIONS. In the
event the Company (or its assignees) do not elect to acquire all of the shares
specified in the Employee's notice, the Employee may, within the sixty (60) day
period following the expiration of the forty-five (45) day period for electing
to exercise the purchase rights granted to the Company (and its assignees) in
Section 4.2, transfer the shares in the manner specified in his or her notice.
In that event, the transferee, assignee or other recipient shall, as a condition
of the transfer of ownership, receive and hold such shares subject to the
provisions of Sections 4, 5, 10, 13-21 of this Agreement and shall execute such
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SmartDisk Corporation
Employee Incentive Stock Option Agreement
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documentation as may be requested by the Company, including, but not limited to,
an investment representation letter containing provisions similar to those set
forth in the Notice of Exercise and Investment Representation Statement attached
as EXHIBIT A hereto.
4.6 EXCEPTIONS TO FIRST REFUSAL RIGHTS. Anything to the
contrary contained herein notwithstanding, the following transactions shall be
exempt from the provisions of this Section 4 (provided that the transferee shall
first agree in writing, satisfactory to the Company, to be bound by the terms
and provisions of Sections 4, 5, 10 and 13-21 hereof):
4.6.1 TRANSFER TO FAMILY MEMBER. The Employee's
transfer of any or all shares held subject to this Agreement (either during the
Employee's lifetime or on death by will or intestacy) to such Employee's
Immediate family, as herein defined, or to any custodian or trustee for the
account of the Employee or his or her Immediate family. "Immediate family" as
used herein shall mean spouse, lineal descendants, father, mother, or brother or
sister of the Employee.
4.7 WAIVERS BY THE COMPANY. The provisions of this Section 4
may be waived by the Company with respect to any transfer proposed by the
Employee only by duly authorized action of the Board.
4.8 UNAUTHORIZED TRANSFERS VOID. Any sale or transfer, or
purported sale or transfer, of the Common Stock subject to this Agreement shall
be null and void unless the terms, conditions and provisions of this Section 4
are strictly complied with.
4.9 TERMINATION OF FIRST REFUSAL RIGHT. The foregoing right of
first refusal shall terminate upon the earlier of:
4.9.1 PUBLIC OFFERING. The date equity securities of
the Company are first offered and sold to the public generally pursuant to a
registration statement filed with, and declared effective by, the United States
Securities and Exchange Commission (the "SEC") under the Securities Act of 1933,
as amended (the "SECURITIES ACT"); or
4.9.2 ACQUISITION OF THE COMPANY. Immediately prior
to the acquisition of substantially all of the business and assets of the
Company by an unaffiliated third party (as determined by the Board), whether by
merger, sale of outstanding stock or of the Company's assets, or otherwise,
where no express provision is made for the assignment and continuation of the
Company's rights hereunder by a new or successor corporation.
5. AGREEMENT TO LOCK-UP IN THE EVENT OF PUBLIC OFFERING. In the event
of a public offering of the Company's Common Stock pursuant to a registration
statement declared effective with the SEC, if requested by the Company or by its
underwriters, the Employee agrees not to sell, sell short, grant any option to
buy or otherwise dispose of the shares of Common Stock purchased pursuant to
this Agreement (except for any such shares which may be included in the
registration) for a period of up to one hundred eighty (180) days following the
consummation of such offering. The Company may impose
<PAGE>
SmartDisk Corporation
Employee Incentive Stock Option Agreement
Page 6
stop-transfer instructions with respect to the shares of the Common Stock
subject to the foregoing restriction until the end of said period. The Employee
shall be subject to this Section 5 provided and only if the executive officers
and directors of the Company are also subject to similar arrangements.
6. RIGHTS ON TERMINATION OF EMPLOYMENT. Upon the Employee's termination
of employment with the Company (and with any Parent or Subsidiary corporation of
the Company as defined in Section 3.2 above), the Employee's right to exercise
this Option shall be limited in the manner set forth in this Section 6 (and this
Option shall terminate in the event not so exercised), and shall also be subject
to the limitation provided in Section 3.3.
6.1 DEATH. If the Employee's employment with the Company is
terminated by death, the Employee's estate may, for a period of twelve (12)
months following the date of such termination, exercise the Option to the extent
it was exercisable by the Employee on the date of such termination. The
Employee's estate shall mean the Employee's legal representative upon death or
any person who acquires the right to exercise the Option by reason of such death
in accordance with Section 8.2.
6.2 RETIREMENT. If the Employee's employment with the Company
is terminated by voluntary retirement at or after reaching sixty-five (65) years
of age, the Employee may, within three (3) months following such termination,
exercise the Option to the extent it was exercisable by the Employee on the date
of such termination unless the Employee dies prior thereto, in which event the
Employee shall be treated as though the Employee had died on the date of
retirement and the provisions of Section 6.1 above shall apply.
6.3 DISABILITY. If the Employee's employment with the Company
is terminated because of a permanent and total disability, the Employee or the
Employee's estate may, within twelve (12) months following the date of such
termination, exercise the Option to the extent it was exercisable by the
Employee on the date of such termination unless the Employee dies prior to the
expiration of such period, in which event the Employee shall be treated as
though his or her death occurred on the date of termination due to such
disability and the provisions of Section 6.1 shall apply. The Employee hereby
acknowledges that the favorable tax treatment provided under Section 421 of the
Internal Revenue Code may be inapplicable in the event the Option is not
exercised within three (3) months after the date of the Employee's termination
due to a partial, temporary or other disability not meeting the requirements of
Internal Revenue Code Section 22(e)(3).
6.4 TERMINATION FOR CAUSE. If the Employee's employment is
terminated for cause, the option granted by this Agreement shall expire on
Employee's termination date or at such later time and on such conditions as
determined by the Board. For purposes of this paragraph, "cause" shall be
defined as the willful breach or habitual neglect of the duties which Employee
is required to perform under Employee's employment agreement with Company, or
any act of dishonesty, fraud, misrepresentation or other acts of moral turpitude
as would prevent the effective performance of Employee's duties.
<PAGE>
SmartDisk Corporation
Employee Incentive Stock Option Agreement
Page 7
6.5 OTHER TERMINATION. If the Employee's employment with the
Company is terminated for any reason other than provided in Sections 6.1, 6.2,
6.3 and 6.4 above, the Employee or the Employee's estate may, within three (3)
months after the date of the Employee's termination exercise the Option to the
extent it was exercisable by the Employee on the date of such termination.
6.6 TRANSFER TO RELATED CORPORATION. In the event the Employee
leaves the employ of the Company to become an employee of any Parent or
Subsidiary corporation of the Company (as defined in Section 3.2 above) or if
the Employee leaves the employ of any Parent or Subsidiary corporation to become
an employee of the Company or of another such Parent or Subsidiary corporation
of the Company, the Employee shall be deemed to continue in the employ of the
Company for all purposes of this Agreement.
6.7 EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding
the foregoing, if the exercise of an Option within the applicable time periods
set forth above is prevented because the issuance of shares upon such exercise
would constitute a violation of any applicable federal, state or foreign
securities law or other law or regulation, the Option shall remain exercisable
until three (3) months after the date the Employee is notified by the Company
that the Option is exercisable, but in any event no later than the expiration of
ten (10) years from the Date of Grant. The Company makes no representation as to
the tax consequences of any such delayed exercise. The Employee should consult
with the Employee's own tax advisor as to the tax consequences to the Employee
of any such delayed exercise.
6.8 EXTENSION IF EMPLOYEE IS SUBJECT TO SECTION 16(B).
Notwithstanding the foregoing, if a sale within the applicable time periods set
forth in Section 6 of shares acquired upon the exercise of the Option would
subject the Employee to liability under Section 16(b) of the Securities Exchange
Act of 1934, as amended, the Option shall remain exercisable until the earliest
to occur of (i) the tenth (10th) day following the date on which a sale of such
shares by the Employee would no longer be subject to such liability, (ii) the
one hundred and ninetieth (190th) day after the Employee's termination of
Employee's employment, or (iii) the Option Expiration Date.
7. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER.
7.1 STOCK SPLITS AND SIMILAR EVENTS; RECLASSIFICATIONS. The
number of shares of Common Stock covered by the Option and the exercise price
thereof shall be proportionately adjusted for any increase or decrease in the
number of issued and outstanding shares of Common Stock resulting from a
subdivision or combination of such shares or the payment of a stock dividend
(but only on the Common Stock) or a recapitalization or any other increase or
decrease in the number of such outstanding shares of Common Stock effected
without the receipt of consideration by the Company; provided, however, that the
conversion of any convertible securities of the Company shall not be deemed to
have been "effected without receipt of consideration." In the event that the
shares of Common Stock covered by this Option are reclassified by the Company,
other than pursuant to a transaction described in Section 7.2, then this Option
shall apply to the appropriate number of shares of newly classified Common Stock
designated by the Board.
<PAGE>
SmartDisk Corporation
Employee Incentive Stock Option Agreement
Page 8
7.2 MERGERS AND ACQUISITIONS. Subject to any required action
by the Company's Board and stockholders, if the Company shall be the surviving
corporation in any merger or consolidation which results in the holders of the
outstanding voting securities of the Company (determined immediately prior to
such merger or consolidation) owning, directly or indirectly, at least a
majority of the beneficial interest in the outstanding voting securities of the
surviving corporation or its Parent corporation (determined immediately after
such merger or consolidation), the Option shall pertain and apply to the
securities or other property to which a holder of the number of shares subject
to the unexercised portion of this Option would have been entitled. Any of (i) a
dissolution or liquidation of the Company; (ii) a sale of all or substantially
all of the Company's business and assets; or (iii) a merger or consolidation in
which the Company is not the surviving corporation and which results in the
holders of the outstanding voting securities of the Company (determined
immediately prior to such merger or consolidation) owning, directly or
indirectly, less than a majority of the beneficial interest in the outstanding
voting securities of the surviving corporation or its Parent corporation
(determined immediately after such merger or consolidation) will cause the
Option to terminate, unless (a) the agreement of such sale, merger,
consolidation or other transaction otherwise provides or (b) a sale on the day
preceding the scheduled consummation of such event (the "test date") of shares
acquired upon the exercise of the option would subject the Employee to liability
under Section 16(b) of the Securities Exchange Act of 1934, as amended, in which
event the Option shall remain exercisable until the earliest to occur of (i) the
tenth (10th) day following the date on which a sale of such shares by the
Employee would no longer be subject to such liability, (ii) the one hundred and
ninetieth (190th) day after the test date, or (iii) the Option Expiration Date.
7.3 BOARD'S DETERMINATION FINAL AND BINDING UPON EMPLOYEE. To
the extent that the foregoing adjustments in this Section 7 relate to stock or
securities of the Company, such adjustments shall be made by the Board, whose
determination in that respect shall be final, binding and conclusive. The
Company agrees to give notice of any such adjustment to the Employee; provided,
however, that any such adjustment shall be effective and binding for all
purposes hereof whether or not such notice is given or received.
7.4 NO RIGHTS EXCEPT AS EXPRESSLY STATED. Except as
hereinabove expressly provided in this Section 7, no additional rights shall
accrue to the Employee by reason of any subdivision or combination of shares of
the capital stock of any class or the payment of any stock dividend or any other
increase or decrease in the number of shares of any class or by reason of any
dissolution, liquidation, merger or consolidation or spin-off of assets or of
stock of another corporation, and any issue by the Company of shares of stock of
any class or of securities convertible into shares of stock of any class shall
not affect, and no adjustment by reason thereof shall be made with respect to,
the number or exercise price of shares subject to the Option. Neither the
Employee nor any person claiming under or through the Employee shall be, or have
any of the rights or privileges of, a stockholder of the Company in respect of
any of the shares issuable upon the exercise of this Option, unless and until
this Option is properly and lawfully exercised and a certificate representing
the shares so purchased is duly issued and delivered to the Employee or to his
or her estate.
<PAGE>
SmartDisk Corporation
Employee Incentive Stock Option Agreement
Page 9
7.5 NO LIMITATIONS ON COMPANY'S DISCRETION. The grant of the
Option hereby shall not affect in any way the right or power of the Company to
make adjustments, reclassifications, reorganizations or changes of its capital
or business structure or to merge or consolidate or to dissolve, liquidate, sell
or transfer all or any part of its business or assets.
8. MANNER OF EXERCISE.
8.1 GENERAL INSTRUCTIONS FOR EXERCISE. The Option shall be
exercised by the Employee by completing, executing and delivering to the Company
the Notice of Exercise and Investment Representation Statement ("NOTICE OF
EXERCISE"), in substantially the form attached hereto as Exhibit A, which Notice
of Exercise shall specify the number of shares of Common Stock which the
Employee elects to purchase. The Company's obligation to deliver shares upon the
exercise of this Option shall be subject to the Employee's satisfaction of all
applicable federal, state, local and foreign income and employment tax
withholding requirements, if any. Upon receipt of such Notice of Exercise and of
payment of the purchase price (and payment of applicable taxes as provided
above), the Company shall, as soon as reasonably possible and subject to all
other provisions hereof, deliver certificates for the shares of Common Stock so
purchased, registered in the Employee's name or in the name of his or her legal
representative (if applicable). Payment of the purchase price upon any exercise
of the Option shall be made by check acceptable to the Company or in cash;
provided, however, that the Board may, in its sole and absolute discretion,
accept any other legal consideration to the extent permitted under applicable
laws and the Plan.
8.2 EXERCISE PROCEDURE AFTER DEATH. To the extent exercisable
after the Employee's death, this Option shall be exercised only by the
Employee's executor(s) or administrator(s) or the person or persons duly
authorized or to whom this Option is transferred under the Employee's will or,
if the Employee shall fail to make testamentary disposition of this Option,
under the applicable laws of descent and distribution. Any such transferee
exercising this Option must furnish the Company with (1) written Notice of
Exercise and relevant information as to his or her status, (2) evidence
satisfactory to the Company to establish the validity of the transfer of this
Option and compliance with any laws or regulations pertaining to said transfer,
and (3) written acceptance of the terms and conditions of this Option as
contained in this Agreement.
9. NON-TRANSFERABLE. The Option shall, during the lifetime of the
Employee, be exercisable only by the Employee and shall not be transferable or
assignable by the Employee in whole or in part other than by will or the laws of
descent and distribution. If the Employee shall make any such purported transfer
or assignment of the Option, such assignment shall be null and void and of no
force or effect whatsoever.
10. COMPLIANCE WITH SECURITIES AND OTHER LAWS. The Option may not be
exercised and the Company shall not be obligated to deliver any certificates
evidencing shares of Common Stock hereunder if the issuance of shares upon such
exercise would constitute a violation of any applicable requirements of: (i) the
Securities Act, (ii) the Securities Exchange Act of 1934, as amended, (iii)
applicable state securities laws, (iv) any applicable listing requirement of any
stock exchange on
<PAGE>
SmartDisk Corporation
Employee Incentive Stock Option Agreement
Page 10
which the Company's Common Stock is then listed, and (v) any other law or
regulation applicable to the issuance of such shares. Nothing herein shall be
construed to require the Company to register or qualify any securities under
applicable federal and state securities laws, or take any action to secure an
exemption from such registration and qualification for the issuance of any
securities upon the exercise of this Option. Shares of Common Stock issued upon
exercise of this Option shall include the following legends and such other
legends as in the opinion of the Company's counsel may be required by applicable
federal, state and foreign securities laws:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
RESTRICTIONS ON TRANSFER AND OTHER AGREEMENTS CONTAINED IN A STOCK
OPTION AGREEMENT DATED MARCH 16, 1999, A COPY OF WHICH IS ON FILE WITH
THE COMPANY.
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE
SALE IS MADE IN ACCORDANCE WITH RULE 144 OR RULE 701 UNDER THE ACT, OR
THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE
SECURITIES REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH
SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE
REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
11. NO RIGHT TO CONTINUED EMPLOYMENT. Nothing contained in this
Agreement shall: (i) confer upon the Employee any right with respect to the
continuance of his or her employment agreement with the Company, or with any
Parent or Subsidiary corporation of the Company, or (ii) limit in any way the
right of the Company, or of any Parent or Subsidiary corporation, to terminate
the employment of the Employee at any time. Except to the extent the Company and
the Employee shall have otherwise agreed in writing, the Employee's employment
shall be terminable by the Company (or by a Parent or Subsidiary, if applicable)
at will. Subject to Section 12, the Board in its sole discretion shall determine
whether any leave of absence or interruption in employment (including an
interruption during military service) shall be deemed a termination of
employment for the purposes of this Agreement.
12. LEAVE OF ABSENCE. For purposes hereof, the Employee's employment
shall not be deemed to terminate if the Employee takes any military leave, sick
leave, or other bona fide leave of absence approved by the Company of ninety
(90) days or less. In the event of a leave in excess of ninety (90) days, the
Employee's employment shall be deemed to terminate on the ninety-first (91st)
day of the leave unless the Employee's right to reemployment remains guaranteed
by statute or contract. Notwithstanding the foregoing, however, a leave of
absence shall be treated as employment for purposes of Section 3 if and only if
the leave of absence is designated by the Company as (or required by law to be)
a leave for which vesting credit is given.
<PAGE>
SmartDisk Corporation
Employee Incentive Stock Option Agreement
Page 11
13. COMMITTEE OF THE BOARD. In the event that the Plan is administered
by a committee of the Board (the "COMMITTEE"), all references herein to the
Board shall be construed to mean the Committee for the period(s) during which
the Committee administers the Plan.
14. OPTION SUBJECT TO TERMS OF PLAN. In addition to the provisions
hereof, this Agreement and the Option are governed by, and subject to the terms
and conditions of, the Plan. The Employee acknowledges receipt of a copy of the
Plan (a copy of which is attached hereto as Exhibit B). The Employee represents
that he or she is familiar with the terms and conditions of the Plan, and hereby
accepts the Option subject to all of the terms and conditions thereof, which
terms and conditions shall control to the extent inconsistent in any respect
with the provisions of this Agreement. The Employee hereby agrees to accept as
binding, conclusive and final all decisions and interpretations of the Board as
to any questions arising under the Plan or under this Agreement.
15. NOTICES. All notices and other communications of any kind which
either party to this Agreement may be required or may desire to serve on the
other party hereto in connection with this Agreement shall be in writing and may
be delivered by personal service or by registered or certified mail, return
receipt requested, deposited in the United States mail with postage thereon
fully prepaid, addressed to the other party at the addresses indicated on the
signature page hereof or as otherwise provided below. Service of any such notice
or other communication so made by mail shall be deemed complete on the date of
actual delivery as shown by the addressee's registry or certification receipt or
at the expiration of the third (3rd) business day after the date of mailing,
whichever is earlier in time. Either party may from time to time, by notice in
writing served upon the other as aforesaid, designate a different mailing
address or a different person to which such notices or other communications are
thereafter to be addressed or delivered.
16. FURTHER ASSURANCES. The Employee shall, upon request of the
Company, take all actions and execute all documents requested by the Company
which the Company deems to be reasonably necessary to effectuate the terms and
intent of this Agreement and, when required by any provision of this Agreement
to transfer all or any portion of the Common Stock purchased hereunder to the
Company (and/or its assignees), the Employee shall deliver such Common Stock
endorsed in blank or accompanied by Stock Assignments Separate from Certificate
endorsed in blank, so that title thereto will pass by delivery alone. Any sale
or transfer by the Employee of the Common Stock to the Company (and/or its
assignees) shall be made free of any and all claims, encumbrances, liens and
restrictions of every kind, other than those imposed by this Agreement.
17. NOTICE OF SALES UPON DISQUALIFYING DISPOSITION. The Employee shall
dispose of the shares acquired pursuant to the Option only in accordance with
the provisions of this Agreement. In addition, the Employee shall promptly
notify the Chief Financial Officer of the Company if the Employee disposes of
any of the shares acquired pursuant to the Option within one (1) year from the
date the Employee exercises all or part of the Option or within two (2) years of
the Date of Grant of this Option. Until such time as the Employee disposes of
such shares in a manner consistent with the provisions of this Agreement, the
Employee shall hold all shares acquired pursuant to the Option in the
<PAGE>
SmartDisk Corporation
Employee Incentive Stock Option Agreement
Page 12
Employee's name (and not in the name of any nominee) for the one (1) year period
immediately after exercise of the Option and the two (2) year period immediately
after the Date of Grant of this Option. At any time during the one (1) year or
two (2) year periods set forth above, the Company may place a legend or legends
on any certificate or certificates representing shares accurate pursuant to the
Option requesting the transfer agent for the Company's stock to notify the
Company of any such transfers. The obligation of the Employee to notify the
Company of any such transfer shall continue notwithstanding that a legend has
been placed on the certificate or certificates pursuant to the preceding
sentence.
18. SUCCESSORS. Except to the extent the same is specifically limited
by the terms and provisions of this Agreement, this Agreement is binding upon
the Employee and the Employee's successors, heirs and personal representatives,
and upon the Company, its successors and assigns.
19. TERMINATION OR AMENDMENT. Subject to the terms and conditions of
the Plan, the Board may terminate or amend the Plan and/or the Option at any
time; provided, however, that no such termination or amendment may adversely
affect the Option or any unexercised portion hereof without the consent of the
Employee.
20. INTEGRATED AGREEMENT. This Agreement and the Plan constitute the
entire understanding and agreement of the Employee and the Company with respect
to the subject matter contained herein, and there are no agreements,
understandings, restrictions, representations, or warranties between the
Employee and the Company other than those set forth or provided for herein. To
the extent contemplated herein, the provisions of this Agreement shall survive
any exercise of the Option and shall remain in full force and effect.
21. OTHER MISCELLANEOUS TERMS. Titles and captions contained in this
Agreement are inserted only as a matter of convenience and for reference, and in
no way define, limit, extend or describe the scope of this Agreement or the
intent of any provision hereof. This Agreement shall be governed by and
construed in accordance with the laws of the State of Florida, irrespective of
its choice of law principles.
22. INDEPENDENT TAX ADVICE. The Employee agrees that he or she has
obtained or will obtain the advice of independent tax counsel (or has determined
not to obtain such advice, having had adequate opportunity to do so) regarding
the federal and state income tax consequences of the receipt and exercise of the
Option and of the disposition of Common Stock acquired upon exercise hereof. The
Employee acknowledges that he or she has not relied and will not rely upon any
advice or representation by the Company or by its employees or representatives
with respect to the tax treatment of the Option.
<PAGE>
SmartDisk Corporation
Employee Incentive Stock Option Agreement
Page 1
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first hereinabove written.
COMPANY: EMPLOYEE:
SMARTDISK CORPORATION,
a Delaware corporation --------------------------------
(Signature)
By:
------------------------------------ Name Printed: Robert L. Protheroe
Michael S. Battaglia,
Chief Executive Officer
Address: 3506 Mercantile Avenue Address:_______________________________
Naples, FL 34104-3310 _______________________________
_______________________________
<PAGE>
SCHEDULE OF EXHIBITS
EXHIBIT A: Form of Notice of Exercise and Investment Representation
Statement for Employee Incentive Stock Option Agreement
EXHIBIT B: 1998 Employee Stock Option Plan
<PAGE>
EXHIBIT A
SMARTDISK CORPORATION
FORM OF NOTICE OF EXERCISE
AND INVESTMENT REPRESENTATION STATEMENT FOR
EMPLOYEE INCENTIVE STOCK OPTION AGREEMENT
SmartDisk Corporation
3506 Mercantile Avenue
Naples, FL 34104-3310
Attention: Corporate Secretary
Re: NOTICE OF EXERCISE OF STOCK OPTION
Ladies and Gentlemen:
I hereby exercise, as of ______________, ____, my stock option (granted
March 16, 1999) to purchase ________________________ (_______) shares (the
"OPTION SHARES") of the Common Stock of SmartDisk Corporation, a Delaware
corporation (the "COMPANY"). Payment of the option price of $________________ is
attached to this notice.
As a condition to this notice of exercise, I hereby make the following
representations and agreements:
INVESTMENT REPRESENTATION STATEMENT.
1. I am purchasing the Option Shares for investment for my own account
only and not with a view to, or for resale in connection with, any
"distribution" thereof. I am aware of the Company's business affairs and
financial condition and have had access to such information about the Company as
I have deemed necessary or desirable to reach an informed and knowledgeable
decision to acquire the Option Shares.
2. I understand that the Option Shares have not been registered under
the Securities Act of 1933, as amended (the "ACT"), or qualified or registered
under the blue sky law of any state (the "LAW"), by reason of specific
exemptions therefrom, which exemptions depend upon, among other things, the bona
fide nature of my investment intent as expressed herein. In this connection, I
understand that, in the view of the Securities and Exchange Commission (the
"COMMISSION"), the statutory basis for one such exemption may not exist if my
representation means that my present intention is to hold the Option Shares for
a minimum capital gains period under the tax laws, for a deferred sale, for a
market rise, for a sale if the market does not rise, or for a year or any other
fixed period in the future.
3. I acknowledge and agree that the Option Shares are restricted
securities which must be held indefinitely unless they are subsequently
registered under the Act or an exemption from such registration
<PAGE>
Employee Incentive Stock Option Agreement
Exhibit A
Page 2
is available. I further acknowledge and understand that the Company is under no
obligation to register the Option Shares.
4. I am aware of the adoption of Rule 144 by the Commission, which
permits limited public resale of securities acquired in a non-public offering,
subject to the satisfaction of certain conditions, including, among other
things, the availability of certain current public information about the issuer,
the passage of not less than one (1) year after the holder has purchased and
paid for the securities to be sold, effectuation of the sale on the public
market through a broker in an unsolicited "brokers' transaction" or to a "market
maker," and compliance with specified limitations on the amount of securities to
be sold (generally, one percent (1%) of the total amount of common stock
outstanding) during any three (3)-month period, except that such conditions need
not be met by a person who is not an affiliate of the Company at the time of
sale and has not been an affiliate for the preceding three (3) months if the
securities to be sold have been beneficially owned by such person for at least
two (2) years prior to their sale.
5. I understand that the Company currently does not, and at the time I
wish to sell the Option Shares may not, satisfy the current public information
requirement of Rule 144 and, consequently, I may be precluded from selling the
Option Shares under Rule 144 even if the one (1)-year minimum holding period has
been satisfied.
6. I further understand that if all of the requirements of Rule 144 are
not met, compliance with Regulation A or some other exemption from registration
will be required; and that, although Rule 144 is not exclusive, the Staff of the
Commission has expressed its opinion that persons proposing to sell restricted
securities other than in a registered offering and other than pursuant to Rule
144 will have a substantial burden of proof in establishing that an exemption
from registration is available for such offers or sales and that such persons
and the brokers who participate in such transactions do so at their own risk.
7. I further understand that the certificate(s) representing the Option
Shares, whether upon initial issuance or any transfer thereof, shall bear on
their face legends, prominently stamped or printed thereon in capital letters,
reading as follows:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
RESTRICTIONS ON TRANSFER AND OTHER AGREEMENTS CONTAINED IN A STOCK
OPTION AGREEMENT DATED MARCH 16, 1999, A COPY OF WHICH IS ON FILE WITH
THE COMPANY.
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE
SALE IS MADE IN ACCORDANCE WITH RULE 144 OR RULE 701 UNDER THE ACT, OR
THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE
SECURITIES
<PAGE>
Employee Incentive Stock Option Agreement
Exhibit A
Page 3
REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH SALE,
TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION
AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
8. I further understand in order to obtain the benefits of incentive
stock option treatment under Section 421 of the Internal Revenue Code, no sale
or other disposition may be made of any Option shares for at least one (1) year
after the date of the issuance of such Option Shares upon exercise hereunder and
for at least two (2) years after the Date of Grant of the Option. I shall
promptly notify the Company in writing in the event that I sell or otherwise
dispose of any Option Shares before the expiration of such periods. I further
understand that I may suffer adverse tax consequences as a result of my purchase
or disposition of the Option Shares. I represent that I have consulted with any
tax consultant(s) I deem advisable in connection with the purchase or
disposition of the Option Shares and that I am not relying on the Company for
any tax advice.
IN WITNESS WHEREOF, the undersigned has executed this Notice of
Exercise as of the date set forth below.
Signed:______________________
Dated:_______________________
<PAGE>
EXHIBIT B
SMARTDISK CORPORATION
1998 EMPLOYEE STOCK OPTION PLAN
As Adopted January 27, 1998
[Refer to Exhibit 10.1 to SmartDisk Corporation's Registration Statement on Form
S-1 (file # 333-82793) for the text of the 1998 Employee Stock Option Plan]
<PAGE>
EXHIBIT C
PROMISSORY NOTE
$60,000.000 March __, 1999
FOR VALUE RECEIVED, Robert Protheroe ("DEBTOR"), hereby promises to pay
in lawful money of the United States to the order of SmartDisk Corporation, a
Delaware corporation ("LENDER"), at the office of Lender located at 3506
Mercantile Avenue, Naples, Florida, or at such other place as Lender or a future
holder hereof (Lender or such other holder being sometimes referenced herein as
"HOLDER") may from time to time designate in writing, the principal sum of SIXTY
THOUSAND DOLLARS ($60,000.00), plus interest on the unpaid balance at the rate
of four and 71/100ths percent (4.71%) per annum.
1. PAYMENTS. Debtor shall repay the principal amount of this Promissory
Note (the "NOTE") in four equal annual installments of FIFTEEN THOUSAND DOLLARS
($15,000.00), each installment of which is due within two (2) business days of
Lender's payment to Debtor of an annual bonus in each of 2000, 2001, 20002 and
2003, respectively. In the event that Debtor is an employee of Lender and does
not receive a bonus payment from Debtor in any of 2000, 2001, 2002 or 2003,
Debtor shall nevertheless, repay to Lender FIFTEEN THOUSAND DOLLARS ($15,000.00)
for such year, as appropriate, two (2) business days after Lender informs Debtor
that Lender will not be paying a bonus to Debtor for such year. Upon the date of
any payment of principal by Debtor, Debtor shall also pay to Lender all interest
accrued through such date. In the event that Debtor is not an employee of Lender
and there remains any outstanding principal or accrued interest pursuant to this
Note, Debtor shall repay to Lender all outstanding principal and interest
accrued through the payment date within thirty (30) calendar days after Debtor's
last day of employment with Lender.
2. NO CHANGES. Nothing set forth herein shall amend, revoke or in any
way alter any of the terms of Debtor's employment with Lender as set forth in
that certain Employment Agreement entered into as of March 16, 1999 (the
"EMPLOYMENT AGREEMENT"). Without limiting the general nature of the foregoing,
nothing set forth herein shall be deemed to be a guaranty by Lender of any bonus
payment to Debtor nor of a four year employment term.
3. PREPAYMENT. This Note may be prepaid in whole or in part at any
time.
4. EVENT OF DEFAULT. Failure to pay any part of the principal or
accrued interest shall be deemed to be an event of default (an "EVENT OF
DEFAULT") hereunder. Upon the occurrence of an Event of Default and at the
option of Holder (exercisable upon five (5) days' written notice to Debtor), the
entire payoff balance then applicable (an amount equal to the sum of unpaid
principal, accrued and unpaid interest at the annual rate specified herein)
shall become immediately due and payable.
5. ATTORNEYS' FEES. Should suit be brought to enforce, interpret or
collect any part of this Note, the prevailing party shall be entitled to
recover, as an element of the costs of suit and not as damages, reasonable
attorneys' fees and other costs of enforcement and collection to be fixed by the
court. The prevailing party shall be the party entitled to recover its costs of
suit, regardless of whether such suit proceeds to final judgment. A party not
entitled to recover its costs shall not be entitled to recover attorney's fees.
No sum for attorneys' fees shall be counted in calculating the amount of
judgment for purposes of determining if a party is entitled to recover costs or
attorneys' fees.
<PAGE>
SMARTDISK CORPORATION
Promissory Note
Page 2
6. JURISDICTION. This Note shall be construed and enforced in
accordance with the internal laws of the State of Florida, U.S.A. irrespective
of its choice of law principles.
7. OBLIGATION UNCONDITIONAL. No reference herein to the Employment
Agreement and no provision of this Note or any other agreement shall alter,
impair or render conditional the obligation of Debtor, which is absolute and
unconditional, to pay the principal and accrued interest at the place, at the
respectable times, and in the currency herein prescribed.
8. WAIVER. Debtor hereby waives presentment, protest, demand for
payment, notice of dishonor, and any and all other notices or demands in
connection with the delivery, acceptance, performance, default, or enforcement
of this Note and hereby consents to any extensions of time, renewals, releases
of any party to this Note, waivers or modifications that may be granted or
consented to by the holder hereof in respect of the time of payment or other
provisions of this Note.
9. AMENDMENT. Any term or provision of this Note may be amended, and
the observance of any term of this Note may be waived (either generally or in a
particular instance and either retroactively or prospectively) only by a writing
signed by the party to be bound thereby. The waiver by a party of any breach
hereof for default in payment of any amount due hereunder or default in the
performance hereof shall not be deemed to constitute a waiver of any succeeding
breach of default.
DEBTOR:
- -----------------------------------
Robert Protheroe
<PAGE>
EXHIBIT D
CONFIDENTIALITY AGREEMENT
This Confidentiality Agreement is entered into this ___ day of
February, 1999, by and between SmartDisk Corporation (hereafter "ASDC"), and
________________________________, (hereafter "Employee"), and is made a part of,
and shall be incorporated into as Exhibit , the Employment Agreement between
SDC and Employee.
1. Confidential Disclosure.
a. Employee acknowledges that he/she will, during the course of his/her
employment by SDC, be exposed to confidential information and materials relating
to SDC, its business and methods of doing business, and to confidential
information and materials of or pertaining to clients of SDC. Such information
includes, but is not limited to, trade secrets, proprietary material and
knowledge, marketing and development ideas and plans, software program source
and object codes, date files, confidential methods, operations, ideas, plans,
and the terms of this Agreement.
b. Employee agrees that he/she will preserve and maintain the privacy
of all such confidential information received during the course of his/her
employment by SDC, will discuss or disclose the same only as necessary during
the normal course of employment, and then only to other employees of SDC as
necessary. In the event extraordinary or unusual business circumstances require
confidential information to be discussed with or disclosed to third parties
other than the client, Employee shall obtain prior authorization of an officer
of SDC before making such disclosure.
2. Inventions, Discoveries, and Developments.
Employee's rights, title, equities and interests in and to every
invention, discovery and development which Employee conceives or develops,
whether alone or together with others, while in the employment of SDC, or during
the course of Employee's use of any funds, space or facilities of SDC, shall be
determined in accordance with the following:
a. Employee shall promptly notify an officer of SDC with respect to
each such invention, discovery and development.
b. If requested by SDC, and at the expense of SDC, Employee shall
execute all instruments and take all other action, including without limitation,
the furnishing of information reasonably requested by SDC, to:
1) Assign to SDC or its designee all Employee's rights, title,
equities and interests, including without limitation all patent rights, in and
to each such invention, discovery and development except those inventions,
discoveries and developments as to which SDC has determined, in writing, that
exclusive property therein belongs to, and may be retained by, Employee;
2) Assist SDC and any designee thereof in their respective
efforts to secure, maintain, extend and enforce domestic and foreign patent
protection, and to effect other legal protection for any such invention,
discovery or development;
c. Employee shall comply with all temporary restrictions on publication
of writings relating to such inventions, discoveries and developments which are
required by any client or sponsor of a project in connection with the activities
of SDC.
<PAGE>
3. Survival
The agreements made by Employee and SDC under Paragraph 1 and 2 above
shall continue until terminated by mutual agreement and shall extend to the
successors and assigns of SDC, and assigns of the Employee.
Agreed to and accepted:
SmartDisk Corporation
By
---------------------------------------
- ------------------------------------------
Employee
Exhibit 10.7
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("AGREEMENT") is entered into as of May 4,
1998, (the "EFFECTIVE DATE") by and between SmartDisk Corporation, a Delaware
corporation ("COMPANY") and Quresh Sachee ("EMPLOYEE").
1. EMPLOYMENT RELATIONSHIP.
1.1 COMMENCEMENT AND TERM OF EMPLOYMENT. The Company employs
Employee and Employee accepts employment by the Company as of the Effective Date
on the terms and conditions set forth in this Agreement. The term of employment
("TERM OF EMPLOYMENT") shall commence as of the Effective Date and shall
continue thereafter for a period of twenty-four (24) months unless sooner
terminated pursuant to Section 5.
1.2 DUTIES. During the Term of Employment, Employee shall have
the title and perform and faithfully discharge the duties and responsibilities
of Vice President, Marketing of the Company. Employee shall use his best efforts
to perform and discharge such duties and responsibilities in such manner as the
Company's Board of Directors or President and Chief Executive Officer may
reasonably prescribe to Employee from time to time. Employee shall also use his
best efforts to observe all policies, procedures and other requirements not
inconsistent with this Agreement that may be implemented or revised by the
Company during the Term of Employment.
1.3 COMMITMENT OF EMPLOYEE. Employee shall devote
substantially all of his productive business time, attention, knowledge and
skill exclusively to the performance of his duties hereunder throughout the Term
of Employment and shall at all times discharge his duties faithfully,
industriously and to the best of his ability, experience and talents.
2. COMPENSATION.
2.1 SALARY. For all of Employee's services during the Term of
Employment, Employee shall be paid a salary of One Hundred Forty Thousand
Dollars ($140,000.00) per year. Employee shall be eligible for merit increases
in salary after the first anniversary of the Effective Date of this Agreement.
Payment shall be made in periodic installments in accordance with Company's
payroll policies instituted from time to time. Upon termination of this
Agreement pursuant to Section 5, the Company shall have no obligation to pay
salary or other benefits to Employee except as may be provided in Section 5.
2.2 BONUS. Employee shall be entitled to an annual bonus
pursuant to Company's incentive plan set forth in EXHIBIT A (the "INCENTIVE
PLAN") attached hereto, or as the same may be amended by Board of Directors,
Chief Executive Officer or President. Upon attainment of one hundred percent
(100%) of the objective set forth in the Incentive Plan, Employee shall be
entitled to a bonus in the first year of Forty Thousand Dollars ($40,000.00).
The parties agree that the columns "Percent Achievement" and "Quarterly Revenue"
shall be adjusted to reflect specific dollar targets rather than percent of
achievement of goals. The parties shall agree on a mutually acceptable targets.
Said bonus shall be payable on the dates established by the Company for payment
of quarterly and annual bonuses and shall be payable only if Employee continues
to remain in the employ of the Company on such date; provided, however, that in
the event the Company terminates Employee's employment hereunder without cause
pursuant to Section 5.4, Incentive Plan bonus may be paid in accordance with
Section 5.5.
2.3 EMPLOYEE BENEFITS. During the Term of Employment, Employee
shall be entitled to
<PAGE>
SmartDisk Corporation
Employment Agreement
Page 2
participate in the group medical, dental and disability policies and other
benefits maintained from time to time by the Company for the benefit of senior
officers of the Company. During the Term of Employment, Employee shall be
entitled to receive all other benefits, and to participate in all other benefit
plans, as are generally available to employees of the Company on the same terms
as other senior management employees. Employee shall be entitled to
reimbursement for all usual and customary business expenses in reasonable amount
incurred by Employee in the performance of his duties for the Company in
accordance with the Company's then current expense reimbursement policies and
guidelines.
2.4 RELOCATION AND OTHER ASSISTANCE. Employee shall be
reimbursed by Company or FISC up to a maximum amount of Forty Thousand Dollars
($40,000.00) for relocation costs all of which are set forth on EXHIBIT B.
2.5 NON QUALIFIED STOCK OPTION. Employee shall receive an
incentive stock option in the form attached as EXHIBIT C (the "OPTION") pursuant
to which Employee shall be entitled to purchase one hundred twenty thousand
(120,000) shares of the Company's Common Stock at an exercise price of not more
than $ 1.00 per share, and shall vest twenty-five percent (25%) one year after
the Effective Date and then in twelve equal quarterly installments (or such
other vesting schedule as is offered to other senior executives) all as more
fully provided in the Option.
3. VACATIONS. During the Term of Employment, Employee shall be entitled
to fifteen (15) days of paid vacation per year. In no event shall Employee be
entitled to accrue and carry forward more than five (5) days of paid vacation
from any calendar year to another, and if Employee has reached this total, no
further vacation days shall accrue until the total of accrued but unused
vacation days falls below such maximum.
4. PLACE OF BUSINESS. During the Term of Employment, Employee shall
render services hereunder at the Company's principal executive offices in
Naples, Florida, or any successor principal office. Employee shall also be
available to travel for business purposes incident to the performance of his
duties, as required from time to time. Transportation, lodging and meal expenses
shall be incurred and reimbursed in accordance with the general policy of the
Company as adopted by the Company from time to time.
5. EARLY TERMINATION.
5.1 TERMINATION UPON PERMANENT DISABILITY OR DEATH. This
Agreement shall automatically terminate upon the permanent disability or death
of Employee, subject to the obligation of the Company to pay Employee or
Employee's personal representative or designated beneficiary, as the case may
be, (i) the balance of Employee's salary and other benefits for the remainder of
the month in which disability or death occurs, (ii) a pro rata portion of any
bonus to which Employee was otherwise entitled under Section 2.2 based upon the
ratio the number of months employed (calculated through the end of the then
current month) bears to the bonus period of twelve (12) months and (iii) any
other disability benefits described in this Section 5.1 to which Employee may be
entitled. The Company will continue to pay Employee his regular salary during
any period during which Employee is incapable of continuing the further
performance of Employee's normal employment activities with the Company because
of a mental, emotional or physical injury, sickness or disorder. However, when
such period exceeds an aggregate of sixty (60) business days (exclusive of any
<PAGE>
SmartDisk Corporation
Employment Agreement
Page 3
accrued vacation within the limits set forth above) out of any three hundred
sixty-five (365) consecutive calendar days, Employee shall be deemed permanently
disabled. Employee shall also be deemed permanently disabled if so certified by
any two physicians, or upon the expiration of any elimination period under any
disability insurance policy purchased by the Company for the benefit of
Employee. Should Employee become permanently disabled, Employee or his personal
representative shall be entitled to receive his termination compensation, as
well as any disability benefits maintained for Employee by the Company, if any,
pursuant to the terms and subject to the conditions of any such applicable
disability benefit program or policy.
5.2 TERMINATION FOR CAUSE. During the Term of Employment, the
Company may at any time, without giving notice to Employee, immediately
terminate this Agreement if Employee (a) commits any act of embezzlement, theft,
fraud or dishonesty; (b) engages in unfair competition with the Company or any
subsidiary of the Company whether or not wholly-owned; (c) is convicted of any
felony; (d) breaches any material provision of the Confidentiality Agreement
entered into by Employee pursuant to Section 6 of this Agreement; (e) uses
illegal drugs or other substances or (f) willfully breaches any other material
provision of this Agreement. If Employee materially breaches or habitually
neglects or fails in any material way to perform the usual and customary duties
of his job, or any other duties required to be performed under the terms of this
Agreement, or the policies of the Company, the Company may, at its option,
terminate this Agreement by giving written notice of termination to Employee.
Any termination pursuant to either of the two preceding sentences shall be
without prejudice to any other remedy to which the Company may be entitled
either at law, in equity, or under this Agreement. Before the Company may
terminate this Agreement by reason of Employee's habitual neglect of or failure
to perform the usual and customary duties of his job or policies of the Company,
the Company must first notify Employee in writing, setting forth in detail those
duties and/or policies which Employee has habitually neglected or failed to
perform, and provide Employee a reasonable period of time, not to exceed thirty
(30) days, in which to cure such neglect or failure. If Employee does not cure
the specified areas of neglect of failure, the Company may terminate this
Agreement immediately by giving Employee written notice. At the time of any
termination for cause, Employee shall be entitled to receive any salary and
employment benefits which shall have accrued prior to the date of termination,
but shall not be entitled to any bonus or severance payments, salary or
employment benefits relating to periods subsequent to the date of termination,
subject to Employee's rights to continue medical and dental coverage under the
Company's group policy, at Employee's expense, as may be provided by law.
5.3 TERMINATION BY EMPLOYEE. This Agreement may be terminated
by Employee for any reason, or no reason, by giving thirty (30) days' written
notice of termination to the Company. Upon termination by Employee, all rights
accruing to Employee under the terms of this Agreement shall cease, and Employee
shall not be entitled to any bonus or severance payments, salary or employment
benefits, except to the extent earned and accrued prior to the termination date,
and subject to Employee's rights to continue medical and dental coverage under
the Company's group policy, at Employee's expense, as may be provided by law.
5.4 TERMINATION WITHOUT CAUSE. Employee's employment with the
Company during the Term of Employment may be terminated by the Company at any
time without cause, by the Company's giving fifteen (15) days prior written
notice. A termination without cause, for purposes of this Agreement, means
termination by the Company other than as provided for in Sections 5.1 and 5.2.
<PAGE>
SmartDisk Corporation
Employment Agreement
Page 4
5.5 SEVERANCE PAYMENTS. If Employee is terminated pursuant to
Section 5.4, Employee shall be entitled to severance pay in accordance with the
Company's normal payroll practices at the rate of Employee's salary for such
year set forth in Section 2.1 for a period of six (6) months if Employee is
terminated pursuant to Section 5.4 during the first twelve months of employment,
or for a period of three (3) months if Employee is terminated pursuant to
Section 5.4 during the second twelve (12) months of employment, following
termination together with the Incentive Plan earned bonus for such year, if any,
described in Section 2.2 pro rated to the date of termination. All pro rated
bonuses shall be payable only at the discretion of the President or Chief
Executive Officer of the Company and shall reflect Employee's performance to the
date of termination. All severance pay shall be payable in equal consecutive
monthly installments on the last day of each month following the effective date
of Employee's termination for the number of months of severance pay to which
Employee is entitled hereunder. Any pro rata bonus shall be payable on the
effective date of termination of employment. Employee understands and agrees
that such payments shall be his only entitlement as and for severance pay or
severance compensation. Upon termination pursuant to Section 5.4, except for the
severance payments stated above, all rights and obligations accruing to Employee
under the terms of this Agreement or otherwise shall cease, and Employee shall
not be entitled to any further salary or employment benefits, except to the
extent earned and accrued prior to such date, and subject to Employee's rights
to continue medical and dental coverage under the Company's group policy, at
Employee's expense, as may be provided by law.
6. NONDISCLOSURE OF CONFIDENTIAL INFORMATION. Concurrently with the
execution and delivery of this Agreement, Employee agrees to enter into the
Company's Confidentiality Agreement for senior executive officers of the Company
in the form attached as EXHIBIT C (the "CONFIDENTIALITY AGREEMENT"). In the
event of any inconsistency between the terms and provisions of this Agreement
and those of the Confidentiality Agreement, the terms and provisions of this
Agreement shall prevail.
7. NON-COMPETITION.
7.1 AGREEMENT NOT TO COMPETE. Employee agrees that during the
Term of Employment and for the period thereafter specified in the next sentence,
Employee will not engage, directly or indirectly, either as principal, agent,
consultant, proprietor, stockholder, director, officer or Employee, or
participate in the ownership, management, operation or control of any other
business engaged in the type of business conducted by the Company. Such
agreement not to compete shall extend after the date of termination for one year
if employee voluntarily terminates his employment and for a period of six (6)
months if the Company involuntarily terminates Employee's employment. This
Section 7.1 shall not apply to Employee's ownership of less than one percent
(1%) of the capital stock of any corporation having a class of capital stock
which is traded on any national stock exchange or in the over-the-counter
market.
7.2 SOLICITATION. During the Term of Employment, and for the
period of two (2) years thereafter, Employee agrees that he will not, without
the Company's prior written consent, solicit or encourage any of the employees
of the Company or Fischer International Systems Corporation ("FISC") to leave
the employ of the Company or FISC, or terminate or alter their contractual
relationships in a way that is adverse to the Company's or FISC's interest or,
during the period of Employee's employment, solicit business from any
<PAGE>
SmartDisk Corporation
Employment Agreement
Page 5
customer of the Company on behalf of any competitor of the Company.
8. MISCELLANEOUS.
8.1 GOVERNING LAWS. It is the intention of the parties hereto
that the internal laws of the State of Florida (irrespective of its choice of
law principles) shall govern the validity of this Agreement, the construction of
its terms, and the interpretation and enforcement of the rights and duties of
the parties hereto.
8.2 BINDING UPON SUCCESSORS AND ASSIGNS. Subject to, and
unless otherwise provided in, this Agreement, each and all of the covenants,
terms, provisions, and agreements contained herein shall be binding upon, and
inure to the benefit of, the permitted successors, executors, heirs,
representatives, administrators and assigns of the parties hereto. Employee may
not assign this Agreement or any of Employee's rights hereunder except as
provided herein or with the prior written consent of the Company.
8.3 SEVERABILITY. If any provision of this Agreement, or the
application thereof, shall for any reason and to any extent be invalid or
unenforceable, the remainder of this Agreement and application of such provision
to other persons or circumstances shall be interpreted so as best to reasonably
effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision which will achieve, to the extent possible, the economic,
business and other purposes of the void or unenforceable provision.
8.4 ENTIRE AGREEMENT. This Agreement (together with the Option
and Confidentiality Agreement) constitutes the entire understanding and
agreement of the parties hereto with respect to the subject matter hereof and
thereof and supersede all prior and contemporaneous agreements or understanding,
inducements or conditions, express or implied, written or oral, between the
parties with respect hereto and thereto.
8.5 AMENDMENT AND WAIVERS. Any term or provision of this
Agreement may be amended, and the observance of any term of this Agreement may
be waived (either generally or in a particular instance and either retroactively
or prospectively) only by a writing signed by the party to be bound thereby. The
waiver by a party of any breach hereof or default in the performance hereof
shall not be deemed to constitute a waiver of any other default or any
succeeding breach or default.
8.6 NO WAIVER. The failure of any party to enforce any of the
provisions hereof shall not be construed to be a waiver of the right of such
party thereafter to enforce such provisions.
8.7 NOTICES. Whenever any party hereto desires or is required
to give any notice, demand, or request with respect to this Agreement, each such
communication shall be in writing and shall be effective only if it is delivered
by personal service or mailed, United States certified mail, postage prepaid,
addressed as follows:
Company: 3506 Mercantile Avenue
Naples, Florida 34104-3310
<PAGE>
SmartDisk Corporation
Employment Agreement
Page 6
Attn: Chief Executive Officer
Employee: To the address set forth on the signature page
hereof
Such communications shall be effective when they are received
by the addressee thereof; but if sent by certified mail in the manner set forth
above, they shall be effective no later than five (5) days after being deposited
in the United States mail. Any party may change its address for such
communications by giving notice thereof to the other party in conformity with
this Section.
8.8 FURTHER ASSURANCES. Each party agrees to cooperate fully
with the other parties and to execute such further instruments, documents and
agreements and to give such further written assurances, as may be reasonably
requested by any other party to better evidence and reflect the transactions
described herein and contemplated hereby and to carry into effect the intents
and purposes of this Agreement.
8.9 INSURABLE INTEREST. Employee hereby grants to the Company
an insurable interest in Employee's life, and agrees and understands that the
Company may at any time or from time to time during the Term of Employment
choose to purchase and maintain key man life insurance on Employee.
[THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK]
<PAGE>
SmartDisk Corporation
Employment Agreement
Page 7
8.10 EMPLOYEE'S REPRESENTATIONS. Employee represents and
warrants that he is free to enter into this Employment Agreement and to perform
each of the terms and covenants of it. Employee represents and warrants that he
is not restricted or prohibited, contractually or otherwise, from entering into
and performing this Employment Agreement, and that his execution and performance
of this Employment Agreement is not a violation or breach of any other agreement
between Employee and any other person or entity.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first hereinabove written.
EMPLOYEE'S ADDRESS FOR NOTICE: EMPLOYEE:
3506 Mercantile Avenue /s/ QURESH SACHEE
Naples, FL 34103 --------------------------
Quresh Sachee
COMPANY:
SMARTDISK CORPORATION
By: /s/ MICHAEL S. BATTAGLIA
--------------------------
Its: PRESIDENT AND CEO
<PAGE>
EXHIBIT A
MEMORANDUM
Date: January 28, 1999
To: Quresh Sachee
From: Michael S. Battaglia
Subject: Management Incentive Plan
- --------------------------------------------------------------------------------
It is with enormous pleasure and a sense of positive anticipation that
I am providing you with your 1999 Management Incentive Plan. I am convinced
that, though ambitious, our objectives this year are realistic and attainable.
Specifically, your 1999 WORLDWIDE financial objectives are (in $U.S.):
ANNUAL TOTAL REVENUE....................[*****]
First Quarter......................[*****]
Second Quarter.....................[*****]
Third Quarter......................[*****]
Fourth Quarter.....................[*****]
ANNUAL TOTAL PROFIT.....................[*****]
First Quarter......................[*****]
Second Quarter.....................[*****]
Third Quarter......................[*****]
Fourth Quarter.....................[*****]
Your individual Management Incentive Plan for 1999 is attached.
***** CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.
<PAGE>
The following terms and conditions apply to your 1999 Management Incentive Plan:
1. Only the Chairman of the Board, or the President and Chief Executive
Officer of SmartDisk Corporation may award a bonus/incentive. The
bonus/incentive, when awarded, will be in accordance with the attached
plan. The Chairman of the Board and/or the President and Chief
Executive Officer of SmartDisk Corporation reserves the right to modify
any element of the attached bonus/incentive plan at any time prior to
the award of a bonus/incentive. Any bonus/incentive/plan may be
rescinded, in whole or part, at any time. There is no contractual
obligation on the part of SmartDisk Corporation to fund the
bonus/incentive plan, and it is entirely gratuitous in nature.
2. Any disagreement with or interpretation of the incentive plans will be
resolved by the Chairman or President. Such resolution will be final.
3. In the event an executive/manager ceases to be employed by SmartDisk
Corporation during 1999, he or she may, at the sole discretion of the
Chairman or President of SmartDisk Corporation:
a) receive a pro-rated quarterly bonus for the quarter
in which the cessation of employment occurs; and
b) receive a pro-rated annual bonus for the fiscal year.
4. Quarterly bonuses are planned to be paid within 45 days of the last day
of the quarter.
5. Annual bonuses are planned to be paid on or prior to February 15, 2000.
Best of luck in 1999 and let us all dedicate ourselves to "REACHING THE NEXT
CREST"
<PAGE>
QURESH SACHEE
VP MARKETING
1999 INCENTIVE PLAN
Revenue Profit TOTAL
Total Target Annual Bonus 100% 50,000 Q1 4,375 1,875 6,250
Portion Based on Revenue 70% 35,000 Q2 4,375 1,875 6,250
Portion Based on Profit 30% 15,000 Q3 4,375 1,875 6,250
Q4 4,375 1,875 6,250
---------------------
Quarterly Weighting 50% 25,000 17,500 7,500 25,000
Year-End Weighting 50% 25,000 Year-End 17,500 7,500 25,000
======================
35,000 15,000 50,000
<TABLE>
<CAPTION>
ANNUAL REVENUE QUARTERLY REVENUE
---------------- ---------------------------------------
TARGET ANNUAL QTLY
REVENUE BONUS Q1 Q2 Q3 Q4 BONUS ACTUAL
---------------- --------------------------------------- Rev Bonus
000's 000's -------------
--------- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
[*****] 5,000 [*****] [*****] [*****] [*****] 1,500 Q1
[*****] 10,000 [*****] [*****] [*****] [*****] 2,500 Q2
[*****] 17,500 [*****] [*****] [*****] [*****] 4,375 Q3
[*****] 19,000 [*****] [*****] [*****] [*****] 6,000 Q4
[*****] 21,000 [*****] [*****] [*****] [*****] 7,000 0 0
[*****] 23,000 [*****] [*****] [*****] [*****] 8,000
[*****] 25,000 [*****] [*****] [*****] [*****] 9,000 Year-End
[*****] 27,000 [*****] [*****] [*****] [*****] 10,000 Total 0 0
</TABLE>
<TABLE>
<CAPTION>
ANNUAL P & L QUARTERLY P & L
---------------- ---------------------------------------
TARGET ANNUAL QTLY
P & L BONUS Q1 Q2 Q3 Q4 BONUS ACTUAL
---------------- --------------------------------------- P&L Bonus
000's 000's -------------
--------- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
No Bonus -- No Bonus No Bonus [*****] [*****] 500 Q1
[*****] 4,000 No Bonus No Bonus [*****] [*****] 1,000 Q2
[*****] 7,500 [*****] [*****] [*****] [*****] 1,875 Q3
[*****] 9,000 [*****] [*****] [*****] [*****] 2,500 Q4
[*****] 10,000 [*****] [*****] [*****] [*****] 3,000 0 0
[*****] 11,000 [*****] [*****] [*****] [*****] 3,500
[*****] 12,000 [*****] [*****] [*****] [*****] 4,000 Year-End
[*****] 13,000 [*****] [*****] [*****] [*****] 4,500 Total 0 0
</TABLE>
***** CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.
<PAGE>
EXHIBIT B
Relocation Assistance: Up to $40,000
- Relocation of household goods
- Relocation of automobiles
- Closing costs in Georgia
- Closing costs in Florida
- Realtor Fees in Georgia
- Miscellaneous (House Repairs,
Auto Tags, etc. not to exceed $3,000)
<PAGE>
EXHIBIT C
THE SECURITY REPRESENTED BY THIS AGREEMENT HAS BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR
DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION
IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
SMARTDISK CORPORATION
EMPLOYEE INCENTIVE STOCK OPTION AGREEMENT
(Exercisable Immediately)
(Exercise Price Payable by Note)
(Change of Control Provisions)
(Non-Transferable)
THIS EMPLOYEE INCENTIVE STOCK OPTION AGREEMENT ("Agreement"), by and
between SmartDisk Corporation, a Delaware corporation (the "Company"), and
Quresh Sachee (the "Employee"), is made as of the 4th day of May, 1998 (such
date being sometimes referred to herein as the 'Date of Grantll).
RECITALS
A. The Company has adopted and implemented its 1998 Employee Stock
Option Plan (the "Plan") permitting the grant of stock options to employees of
the Company and its subsidiary corporations (as defined in the Plan), some of
which are intended to be incentive stock options within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended (the Internal Revenue
Codell), to purchase shares of the authorized but unissued Common stock or
treasury shares of the Company ("Common Stock").
B. The Board of Directors (or a duly authorized Committee thereof) of
the Company (in either case, referred to herein as the "Board") has authorized
the granting of a stock option to the Employee, thereby allowing the Employee to
acquire an ownership interest (or increase his or her ownership interest) in the
Company.
AGREEMENT
NOW, THEREFORE, in reliance on the foregoing Recitals and in
consideration of the mutual covenants hereinafter set forth, the parties hereby
agree as follows:
1. Grant of Stock Option. The Company hereby grants to the Employee a
non-transferable and non- assignable option to purchase an aggregate of up to
one hundred twenty thousand (120,000) shares of the Company's Common Stock, par
value $0.001, at the exercise price of tv~enty-five cents ($0.25) per share,
upon the terms and conditions set forth herein (such purchase right being
sometimes referred to herein as "the Option" or "this Option").
2. Term and Tvpe of Option. Unless earlier terminated in accordance
witlr Sections 6 or 7.2 hereof, this Option and all rights of the Employee to
purchase Common Stock hereunder shall expire with respect to all of the shares
then subject to this Agreement at 5:00 p.m. Eastern time on May 4, 2008 (the
"Option Expiration Date") This Option is intended to qualify as an incentive
stock option within the meaning of
<PAGE>
SmartDisk Corporation
Employee Incentive Stock Option Agreement
Page 2
Section 422 of the Internal Revenue Code but the Company does not represent or
warrant that this Option qualifies as such. Accordingly, the Employee
understands that in order to obtain the benefits of incentive stock option
treatment under Section 421 of the Internal Revenue Code, no sale or other
disposition may be made of any shares acquired upon exercise of this Option for
at least one (1) year after the date of the issuance of such shares upon
exercise hereunder and for at least two (2) years after the Date of Grant of
this Option. NOTE: If the aggregate exercise price of the Option (that is, the
exercise price set forth in Section l multiplied by the number of shares subject
to the Option set forth in Section 1) plus the aggregate exercise price of any
other incentive stock options held by the Employee (whether granted pursuant to
the Plan or any other stock option plan of the Company) in any calendar year is
greater than One Hundred Thousand Dollars ($100,000), the Employee should
contact the Chief Financial Officer of the Company to ascertain whether the
entire Option qualifies as an incentive stock option.
3. Option Immediately Exercisable. Subject to the remaining provisions of this
Agreement, the option granted hereby shall be exercisable in full or in part at
any time after the date hereof and prior to the expiration date stated in
Section 2 (or any earlier termination of this option as provided in this
Agreement). Except as permitted in Section 7, as a condition to exercise this
option the Employee must be and remain in the employ of the Company, or of any
Parent or Subsidiary corporation of the Company (as defined i Internal Revenue
Code Sections 424(e) and (f)), during the entire period commencing with the Date
of Grant of this Option and ending with the date of exercise of this Option.
Except as otherwise expressly provided in this Agreement, the Employee's
employment shall be deemed to have terminated upon an actual termination of
employment and upon such Parent or Subsidiary corporation of the Company ceasing
to have such relationship with the Company. Any references in this Agreement to
the Employee's employment with the Company shall be deemed to also refer to the
Employee's employment with any Parent or Subsidiary corporation of the Company,
as applicable.
Notwithstanding any other provisions of this Agreement, the Option may
not be exercised after the expiration of ten (10) years from the Date of Grant.
4. Restrictions on "Non-Vested Shares".
4.1 Obligation to Resell Non-Vested Shares.
4.1.1 Repurchase Right Accrues Upon Emplovee's Termination of
Employment . On the termination of the Employee's employment with the Company,
whether by reason of Employee's voluntary resignation, involuntary termination
(with or without cause), or under any other circumstances, the Company (and its
assignees as provided in Section 4.2.4 below) shall have the option to
repurchase from the Employee, and the Employee shall be obligated to sell to the
Company (and to its assignees pursuant to Section 4.2.4 below) all or any
portion of the shares of the Common Stock which at the date of the termination
of the Employee's employment with the Company are "Non-Vested Shares" (as
defined in Section 4.2.1 below) at the price stated in Section 4.2.3 below.
4.1.2 Repurchase Procedure. The Company shall within forty-five
(45) days after the later of (1) the termination or expiration of exercisability
of this option or (2) the date of any termination of the Employee's employment
with the Company, give written notice to the Employee or to the Employee's
representative, as the case may be, specifying the number of Non-Vested Shares
which the Company (or its assignees) is electing to purchase hereunder, and the
place and time (which in no event shall be later than forty-fve (45) days from
the date of such notice) of the closing of such repurchase, and the Employee
shall
<PAGE>
SmartDiskCorporation
Employee Incentive Stock Option Agreement
Page 3
deliver any certificates in the Employee's possession representing Non-Vested
Shares to the Company prior to such time.
4.2 Vesting Schedule.
4.2.1 Definition of "Non-Vested Shares." The percentage of the
shares covered by this Agreement which shall be "Non-Vested Shares" shall be
determined solely on the basis of the length of time from the date of this
Agreement that the Employee remains in the employ of the Company. Until May 4,
1999, all of the shares covered by this Agreement shall be Non-Vested Shares.
Effective upon the aforementioned date, twenty-five percent (25%) of the shares
covered by this Agreement shall cease to be Non-Vested Shares. Thereafter, the
number of shares constituting Non-Vested Shares at any given time shall be
further reduced in twelve (12) quarterly installments, each equal to six and
one-quarter percent (6.25%) of the shares subject to this Agreement, with each
to be effective as of the 4th day of each of August, November, February and May
commencing on August 4, 1999. Therefore, all shares shall be Vested Shares on
and after May 4, 2002. For purposes of this Agreement, any reference to Vested
Shares" shall mean those shares subject to this Agreement which are no longer
"Non-Vested Shares". Notwithstanding the foregoing, all of the Employee's shares
subject to this Agreement shall become Vested Shares and none of the shares
covered hereby shall remain Non-Vested Shares at such time as the repurchase
rights of the Company under this Section 4 have expired.
4.2.2 Agreement Binds All Securities that May Be Issued. If after
the date of issuance of the Common Stock to the Employee upon exercise of the
option granted pursuant to the terms hereof, the Company shall issue any
additional shares of its Common Stock upon such Common Stock, by way of dividend
or stock split or other distribution, or if any shares of capital stock or other
securities of the Company or of any other corporation are issued in exchange
for, or with respect to, the Common Stock issued hereunder pursuant to any
recapitalization, merger, sale of assets, liquidation or other reorganization
(collectively, "Reorganization"), regardless of whether the Company shall
survive such Reorganization, all of such shares of Common Stock, capital stock
and other securities shall be considered to be additional shares acquired by the
Employee under this Agreement and shall be ratably subject to all provisions of
this Agreement (including, without limitation, this Section 4) as if they had
been issued to the Employee hereunder.
4.2.3 Repurchase Price. The repurchase price under this Section 4
shall be equal to twenty- five cents ($0.25) for each Non-Vested Share being
repurchased by the Company (or its assignees), reasonably and ratably adjusted
for any stock split, stock dividend or Reorganization. Payment for all shares of
Non-Vested Shares repurchased under this Section 4 shall be made by cancellation
of the Employee's indebtedness to the Company (if any) or by cash or Company
check.
4.2.4 Assignability of Companv's Rights. The Company may at any
time transfer and assign its rights and delegate its obligations under this
Section 4 to any other person, corporation, firm or entity, including its
officers, directors or shareholders with or without consideration.
4.2.5 Prohibition on Transfers of Non-Vested Shares. In addition to
the restrictions on transfer set forth elsewhere in this Agreement and in the
Notice of Exercise and Investment Representation Statement attached hereto as
Exhibit A, the Employee agrees that neither Employee nor Employee's heirs,
successors and assigns will have any right or power under any circumstances to
sell, transfer (with or without consideration), pledge, assign, hypothecate or
dispose of (collectively, "Disposition") any Non-Vested Shares
<PAGE>
SmartDisk Corporation
Employee Incentive Stock Option Agreement
Page 4
or any interest therein, except to the Company (or its assigns as designated in
writing to Employee). Any attempted Disposition in breach of this Section 4.2.5
shall be null and void and of no force or effect whatsoever.
4.2.6 Retention by Company of Certificates Evidencing Non-Vested
Shares. Each stock certificate evidencing, in whole or in part, Non-Vested
Shares issued to Employee hereunder shall be immediately redelivered by Employee
to the Company, together with collateral instruments of transfer executed in
blank and escrow instructions in form provided by the Company, to be held by the
Company until such time as: (1) such shares are no longer Non-Vested Shares
hereunder; and (2) any indebtedness of Employee to the Company with respect to
the purchase of the shares under any promissory note issued by Employee (if
applicable) has been paid in full. After any and all such indebtedness has been
paid in full and the shares have become Vested Shares hereunder, the Company
shall, from time to time within sixty (60) days from the date of receipt of
Employee's written request therefor, deliver or cause to be delivered to
Employee stock certificates evidencing these shares covered by this Agreement
which are at that time Vested Shares hereunder. In lieu of formal documentation,
as contemplated by the foregoing, the stock certificate may be retained by or on
behalf of the Company, subject to a simple letter and executed stock power
referencing this Stock Option Agreement and including a statement that the stock
certificate will be delivered to the Employee when or as the shares become
Vested Shares upon Optionee's written request.
4.2.7 Change of Control. In the event of a Change of Control (as
defined below), one half of the Unvested Shares purchased under this Option
shall immediately become Vested Shares as of the consummation of such Change of
Control. The vesting that was permissible solely by reason of this Section shall
be conditioned upon the consummation of the Change in Control. A "Change of
Control" shall be deemed to have occurred in the event any of the following
occurs with respect to the Company:
4.2.7.1 the direct or indirect sale or exchange by the
stockholders of the Company of all or substantially all of the stock of the
Company where the stockholders of the Company before such sale or exchange do
not retain, directly or indirectly, at least a majority of the beneficial
interest in the voting stock of the Company after such sale or exchange.
4.2.7.2 a merger or consolidation in which the Company is not
the surviving corporation, other than (i) a merger in which the stockholders of
the Company before such merger or consolidation retain directly or indirectly,
at least a majority of the voting stock of the surviving corporation or the
parent corporation of the surviving corporation and the Options are assumed or
substituted by the surviving corporation which assumption or substitution shall
be binding on Employee, or (ii) a merger or consolidation with a wholly-owned
subsidiary, a reincorporation of the Company in a different jurisdiction, or
other transaction in which there is no substantial change in the stockholders of
the Company and the Options are assumed or substituted by the surviving,
continuing, successor or parent corporation, which assumption or substitution
shall be binding on the Employee.
4.2.7.3 a merger or consolidation in which the Company is the
surviving corporation where the stockholders of the Company before such merger
or consolidation do not retain, directly or indirectly, at least a majority of
the voting stock of the Company after such merger or consolidation.
4.2.7.4 the sale, exchange, or transfer of all or
substantially all of the assets of the Company other than a sale, exchange, or
transfer to one (1) or more subsidiaries of the Company.
<PAGE>
SmartDisk Corporation
Employee Incentive Stock Option Agreement
Page 5
4.2.7.S a liquidation or dissolution of the Company.
4.2.7.6 any other transaction which qualifies as a "corporate
transaction" under Section 424 of the Code wherein the stockholders of the
Company give up all of their equity interest in the Company (except for the
acquisition, sale or transfer of all or substantially all of the outstanding
shares of the Company).
5. Right of First Refusal Applicable to Vested Shares. The Employee and
successors in interest to Employee shall not sell, assign, pledge or in any
manner transfer any of the Vested Shares of the Common Stock purchased hereunder
(Non-Vested Shares being subject to the absolute prohibition on transfers under
Section 4.2.5 above), or any right or interest therein, whether voluntarily or
by operation of law, or by gift or otherwise, except for a transfer which meets
the requirements hereinafter set forth.
5.1 Notice of Proposed Sale. If the Employee desires to sell or
otherwise transfer any of his or her Vested Shares of Common Stock, the Employee
shall first written notice thereof to the Company. The notice shall name the
proposed transferee and state the number of Vested Shares to be transferred, the
proposed consideration and all other material terms and conditions of the
proposed transfer.
5.2 Option of Company to Purchase. For forty-five (45) days following
receipt of such notice, the Company (and its assignees as provided in Section
5.3 below) shall have the option to elect to purchase all of the shares
specified in the notice at the price and upon the terms set forth in such
notice; provided that if the terms of payment set forth in the Employee's notice
were other than cash against delivery, the Company (and its assignees) shall pay
in cash or by check for said shares equal to the fair market value thereof as
determined in good faith by the Board, except that to the extent such
consideration is composed, in whole or in part, of promissory notes, the Company
(and its assignees) shall have the option of similarly issuing promissory notes
of like form, tenor and effect.
Notwithstanding the foregoing, in the event that the Employee disagrees
with the determination of fair market value made by the Board, the Employee
shall have the right to have such fair market value determined by arbitration in
accordance with the rules of the American Arbitration Association. The
arbitration shall be held in the county in which the Company has its executive
offices.. The cost of the arbitration shall be borne in equal shares by the
Company and the Employee. In the event the Company (or its assignees) elects to
purchase all of such shares, it shall give written notice to the Employee of its
election and settlement for such purchase of shares shall be made as provided
below in Section 5.4.
5.3 Assignability of Companv's Rights Hereunder. The Company may at any
time transfer and assign its rights and delegate its obligations under this
Section 5 to any other person, corporation, firm or entity, including its
officers, directors or shareholders, with or without consideration.
S.4 Closing of Company Repurchase. In the event the Company (or its
assignees) elects to acquire all Vested Shares of the Employee as specified in
the Employee's notice, the Secretary of the Company shall so notify the Employee
within forty-five (45) days after receipt of the Employee's notice, and
settlement thereof shall be made by cash or as otherwise set forth above within
forty-five (45) days after the date the Secretary of the Company gives the
Employee notice of the Company's election.
5.5 Transferred Shares Remain Subject to Restrictions. In the event the
Company (or its assignees) do not elect to acquire all of the Vested Shares
specified in the Employee's notice, the Employee
<PAGE>
SmartDiskCorporation
Employee Incentive Stock Option Agreement
Page 6
may, within the sixty (60) day period following the expiration of the forty-five
(45) day period for electing to exercise the purchase rights granted to the
Company (and its assignees) in Section 5.2, transfer the number of Vested Shares
in the manner specified in his or her notice. In that event, the transferee,
assignee or other recipient shall, as a condition of the transfer of ownership
receive and hold such shares subject to the provisions of Sections 5, 6, 11 and
13-22 of this Agreement, and shall execute such documentation as may be
requested by the Company, including, but not limited to, an investment
representation letter containing provisions similar to those set forth in the
Notice of Exercise and Investment Representation Statement attached as Exhibit A
hereto.
5.6 Exceptions to First Refusal Rights. Anything to the contrary
contained herein notwithstanding, the following transactions shall be exempt
from the provisions of this Section 5 (provided that the transferee shall first
agree in writing, satisfactory to the Company, to be bound by the terms and
provisions of Sections 5, 6, 11 and 13-22 hereof..
5.6.1 Transfer to Family Member. The Employee s transfer of any or
all Vested Shares held subject to this Agreement (either during the Employee's
lifetime or on death by will or the laws of intestate succession) to such
Employee's Immediate family, as herein deemed, or to any custodian or trustee
for the account of the Employee or his or her Immediate family. "Immediate
family" as used herein shall mean spouse, lineal descendants, father, mother, or
brother or sister of the Employee.
5.7 Waivers by the Company. The provisions of this Section 5 may be
waived by the Company with respect to any transfer proposed by the Employee only
by duly authorized action of the Board.
5.8 Unauthorized Transfers Void. Any sale or transfer, or purported
sale or transfer, of the Vested Shares of Common Stock subject to this Agreement
shall be null and void unless the terms, conditions and provisions of this
Section 5 are strictly complied with.
5.9 Termination of First Refusal Right. The foregoing right of first
refusal shall terminate upon the earlier of:
5.9.1 Public Offering. The date equity securities of the Company
are first offered and sold to the public generally pursuant to a registration
statement fled with, and declared effective by, the United States Securities and
Exchange Commission (the "SEC") under the Securities Act of 1933, as amended
(the "Securities Act"); or
5.9.2 Acquisition of the Company. Immediately prior to the
acquisition of substantially all of the business and assets of the Company by an
unaffiliated third park (as determined by the Board), whether by merger, sale of
outstanding stock or of the Company s assets, or otherwise, where no express
provision is made for the assignment and continuation of the Company's rights
hereunder by a new or successor corporation.
6. Agreement to Lock-Up in the Event of Public Offering. In the event of a
public offering of the Company's Common Stock pursuant to a registration
statement declared effective with the SEC, if requested by the Company or by its
underwriters, the Employee agrees not to sell, sell shorts grant any option to
buy or otherwise dispose of the shares of Common Stock purchased pursuant to
this Agreement (except-for any such shares which may be included in the
registration) for a period of up to one hundred eighty (180) days following the
consummation date of such offering. The Company may impose stop-transfer
instructions with
<PAGE>
SmartDisk Corporation
Employee Incentive Stock Option Agreement
Page 7
respect to the shares of the Common Stock subject to the foregoing restriction
until the end of said period. The Employee shall be subject to this Section 6
provided and only if the executive officers and directors of the Company are
also subject to similar arrangements.
7. Rights on Termination of Employment. Upon the termination of the Employee's
employment with the Company (and with any Parent or Subsidiary corporation of
the Company), the Employee's right to exercise this Option shall be limited in
the manner set forth in this Section 7 (and this Option shall terminate in the
event not so exercised), and shall also be subject to the limitation provided in
Section 3.
7.1 Death. If the Employee's employment with the Company is
terminated because of the death of Employee, the Employee's estate may, for a
period of twelve (12) months following the date of such termination, exercise
the Option to the extent it was exercisable by the Employee on the date of such
termination. The Employee's estate shall mean the Employee's legal
representative upon death or any person who acquires the right to exercise the
Option by reason of such death in accordance with Section 9.2.
7.2 Retirement. If the Employee's employment is terminated by
voluntary retirement at or after reaching sixty-five (65) years of age, the
Employee may, within three (3) months following such termination, exercise the
Option to the extent it was exercisable by the Employee on the date of such
termination unless the Employee dies prior thereto, in which event the Employee
shall be treated as though the Employee had died on the date of retirement and
the provisions of Section 7.1 above shall apply.
7.3 Disability. If the Employee's employment with the Company is
terminated because of a permanent and total disability, the Employee or the
Employee's estate may, within twelve (12) months following the date of such
termination, exercise the Option to the extent it was exercisable by the
Employee on the date of such termination unless the Employee dies prior to the
expiration of such period, in which event the Employee shall be treated as
though his or her death occurred on the date of termination due to such
disability and the provisions of Section 7.1 above shall apply. The Employee
hereby acknowledges that the favorable tax treatment provided under Section 421
of the Internal Revenue Code may be inapplicable in the event the Option is not
exercised within three (3) months after the date of the Employee's termination
due to a partial, temporary or other disability not meeting the requirements of
Internal Revenue Code Section 22(e)(3).
7.4 Termination For Cause. If the Employee's employment is
terminated for cause, the option granted by this Agreement shall expire on
Employee's termination date or at such later time and on such conditions as
determined by the Board. For purposes of this paragraph, "cause" shall be
defined as the willful breach or habitual neglect of the duties which Employee
is required to perform under his employment agreement with Company, or any act
of dishonesty, fraud, misrepresentation or other acts of moral turpitude as
would prevent the effective performance of Employee's duties.
7.5 Other Termination. If the Employee's employment with the
Company is terminated for any reason other than provided in Sections 7.1, 7.2,
7.3 and 7.4 above, the Employee or the Employee's estate may, within three (3)
months after the date of the Employee's termination exercise the Option to the
extent it was exercisable by the Employee on the date of such termination.
7.6 Transfer to Related Corporation. In the event the Employee
leaves the employ of the Company to become an employee of any Parent or
Subsidiary corporation of the Company or if the Employee leaves the employ of
any such Parent or Subsidiary corporation to become an employee of the Company
or of
<PAGE>
SmartDisk Corporation
Employee Incentive Stock Option Agreement
Page 8
another Parent or Subsidiary corporation, the Employee shall be deemed to
continue in the employ of the Company for all purposes of this Agreement.
7.7 Extension if Exercise Prevented by Law. Notwithstanding the
foregoing, if the exercise of an Option within the applicable time periods set
forth above is prevented because the issuance of shares upon such exercise would
constitute a violation of any applicable federal, state or foreign securities
law or other law or regulation, the Option shall remain exercisable until three
(3) months after the date the Employee is notified by the Company that the
Option is exercisable, but in any event no later than the expiration of ten (10)
years from the Date of Grant. The Company makes no representation as to the tax
consequences of any such delayed exercise. The Employee should consult with the
Employee's own tax advisor as to the tax consequences to the Employee of any
such delayed exercise.
7.8 Extension if Employee is Subject to Section 16(b).
Notwithstanding the foregoing, if a sale within the applicable time periods set
forth in Section 7 of shares acquired upon the exercise of the Option would
subject the Employee to suit under Section 16(b) of the Securities Exchange Act
of 1934, as amended, the Option shall remain exercisable until the earliest to
occur of (i) the tenth (lOth) day following the date on which a sale of such
shares by the Employee would no longer be subject to such suit, (ii) the one
hundred and ninetieth (19Oth) day after the Employee's termination of
employment, or (iii) the Option Expiration Date.
8. Adjustments upon Changes in Capitalization or Merger.
8.1 Stock Splits and Similar Events. Subject to any required action
by the Company's Board and stockholders, the number of shares of Common Stock
covered by the Option and the exercise price thereof shall be proportionately
adjusted for any increase or decrease in the number of issued and outstanding
shares of Common Stock resulting from a subdivision or combination of such
shares or the payment of a stock dividend (but only on the Common Stock) or a
recapitalization or any other increase or decrease in the number of such
outstanding shares of Common Stock effected without the receipt of consideration
by the Company; provided, however, that the conversion of any convertible
securities of the Company shall not be deemed to have been "effected without
receipt of consideration."
8.2 Mergers and Acquisitions. Subject to any required action by the
Company's Board and stockholders, if the Company shall be the surviving
corporation in any merger or consolidation which results in the holders of the
outstanding voting securities of the Company (determined immediately prior to
such merger or consolidation) owning, directly or indirectly, at least a
majority of the beneficial interest in the outstanding voting securities of the
surviving corporation or its Parent corporation (determined immediately after
such merger or consolidation), the Option shall pertain and apply to the
securities or other property to which a holder of the number of shares subject
to the unexercised portion of this Option would have been entitled. Any of (i) a
dissolution or liquidation of the Company or (ii) a sale of all or substantially
all its business and assets or (iii) a merger or consolidation in which the
Company is not the surviving corporation or which results in the holders of the
outstanding voting securities of the Company (determined immediately prior to
such merger or consolidation) owning, directly or indirectly, less than a
majority of the beneficial interest in the outstanding voting securities of the
surviving corporation or its Parent corporation (determined immediately after
such merger or consolidation) will cause the Option to terminate' unless (a) the
agreement of such sale, merger, consolidation or other transaction otherwise
provides or (b) a sale on the day preceding the scheduled consummation of such
event (the "test date") of shares acquired upon the exercise of the option would
subject the Employee to liability under Section 16(b) of the Securities Exchange
Act of 1934, as
<PAGE>
SmartDisk Corporation
Employee Incentive Stock Option Agreement
Page 9
amended, in which event the Option shall remain exercisable until the earliest
to occur of (i) the tenth (lath) day following the date on which a sale of such
shares by the Employee would no longer be subject to such liability, (ii) the
one hundred and ninetieth (19Oth) day after the test date, or (iii) the Option
Expiration Date.
8.3 Board's Determination Final and Binding Upon Employee. To the
extent that the foregoing adjustments in this Section 8 relate to stock or
securities of the Company, such adjustments shall be made by the Board, whose
determination in that respect shall be final, binding and conclusive. The
Company agrees to give notice of any such adjustment to the Employee; provided,
however, that any such adjustment shall be effective and binding for all
purposes hereof whether or not such notice is given or received.
8.4 No Rights Except as Expressly Stated. Except as hereinabove
expressly provided in this Section 8, no additional rights shall accrue to the
Employee by reason of any subdivision or combination of shares of the capital
stock of any class or the payment of any stock dividend or any other increase or
decrease in the number of shares of any class or by reason of any dissolution,
liquidation, merger or consolidation or spin-off of assets or of stock of
another corporation, and any issue by the Company of shares of stock of any
class or of securities convertible into shares of stock of any class shall not
affect, and no adjustment by reason thereof shall be made with respect to, the
number or exercise price of shares subject to the Option. Neither the Employee
nor any person claiming under or through the Employee shall be, or have any of
the rights or privileges of, a stockholder of the Company in respect of any of
the shares issuable upon the exercise of this Option, unless and until this
Option is properly and lawfully exercised and a certificate representing the
shares so purchased is duly issued and delivered to the Employee or to his or
her estate.
8.5 No Limitations on Companv's Discretion. The grant of the Option
hereby shall not affect in any way the right or power of the Company to make
adjustments, reclassifications, reorganizations or changes of its capital or
business structure or to merge or consolidate or to dissolve, liquidate, sell or
transfer all or any part of its business or assets.
9. Manner of Exercise.
9.1 General Instructions for Exercise. The Option shall be
exercised by the Employee by completing, executing and delivering to the Company
the Notice of Exercise and Investment Representation Statement ("Notice of
Exercise"), in substantially the form attached hereto as Exhibit A, which Notice
of Exercise shall specify the number of shares of Common Stock which the
Employee elects to purchase. The Company's obligation to deliver shares upon the
exercise of this Option shall be subject to the Employee's satisfaction of all
applicable federal, state, local and foreign income and employment tax
withholding requirements, if any. Upon receipt of such Notice of Exercise and of
payment of the purchase price (and payment of applicable taxes as provided
above), the Company shall, as soon as reasonably possible and subject to all
other provisions hereof, deliver certificates for the shares of Common Stock so
purchased, registered in the Employee's name or in the name of his or her legal
representative (if applicable). Payment of the purchase price upon any exercise
of the Option shall be by delivery of a combination of cash or a check and a
promissory note to the extent permitted by the Plan and under the applicable
provisions of the Delaware General Corporation Law and any other law. Subject to
the limitations set forth in the immediately preceding sentence, the par value
of the shares to which the exercise of the Option relates shall be paid in cash
or by check and the balance of the exercise price shall be paid by delivery to
the Company of cash, a check or a full recourse secured promissory note, bearing
interest at the per annum rate which is not less than the "test rate" as set by
the regulations promulgated under Sections 483 or 1274, as applicable, of the
Internal Revenue Code and as in effect on the date of exercise. Any such
promissory note shall be secured by a
<PAGE>
SmartDisk Corporation
Employee Incentive Stock Option Agreement
Page 10
pledge of the shares of Common acquired upon exercise of the Option. If this
Option is exercised by Optionee's successor in interest following a transfer of
the Option under Sections 9.2 or 10, payment of the purchase price shall be by
cash or check and no portion may be paid by such successor's promissory note.
9.2 Exercise Procedure After Death. To the extent exercisable after
the Employee's death, this Option shall be exercised only by the Employee's
executor(s) or administrator(s) or the person or persons to whom this Option is
transferred under the Employee's will or, if the Employee shall fail to make
testamentary disposition of this Option, under the applicable laws of descent
and distribution. Any such transferee exercising this Option must furnish the
Company with (1) written Notice of Exercise and relevant information as to his
or her status, (2) evidence satisfactory to the Company to establish the
validity of the transfer of this Option and compliance with any laws or
regulations pertaining to said transfer, and (3) written acceptance of the terms
and conditions of this Option as contained in this Agreement.
10. Non-Transferable. The Option shall, during the lifetime of the Employee, be
exercisable only by the Employee and shall not be transferable or assignable by
the Employee in whole or in part other than by will or the laws of descent and
distribution. If the Employee shall make any such purported transfer or
assignment of the Option, such assignment shall be null and void and of no force
or effect whatsoever.
11. Compliance with Securities and Other Laws. The Option may not be exercised
and the Company shall not be obligated to deliver any certificates evidencing
shares of Common Stock hereunder if the issuance of shares upon such exercise
would constitute a violation of any applicable requirements of: (i) the
Securities Act, (ii) the Securities Exchange Act of 1934, as amended, (iii)
applicable state securities laws, (iv) any applicable listing requirement of any
stock exchange on which the Company's Common Stock is then listed, and (v) any
other law or regulation applicable to the issuance of such shares. Nothing
herein shall be construed to require the Company to register or qualify any
securities under applicable federal or state securities laws, or take any action
to secure an exemption from such registration and qualification for the issuance
of any securities upon the exercise of the Option. Shares of Common Stock issued
upon exercise of this Option shall include the following legends and such other
legends as in the opinion of the Company's counsel may be required by applicable
federal, state and foreign securities laws:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
RESTRICTIONS ON TRANSFER AND OTHER AGREEMENTS (INCLUDING CERTAIN
REPURCHASE RIGHTS UPON TERMINATION OF EMPLOYMENT WITH THE COMPANY)
CONTAINED IN A STOCK OPTION AGREEMENT, DATED MAY 4, 1998, A COPY OF
WHICH IS ON FILE WITH THE COMPANY.
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE
SALE IS MADE IN ACCORDANCE WITH RULE 144 OR RULE 701 UNDER THE ACT, OR
THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE
SECURITIES REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH
SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE
REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
<PAGE>
SmartDisk Corporation
Employee Incentive Stock Option Agreement
Page ll
12. No Right to Continue Employment. Nothing contained in this Agreement shall:
(i) confer upon the Employee any right with respect to the continuance of his or
her employment agreement with the Company, or by any Parent or Subsidiary
corporation of the Company, or (ii) limit in any way the right of the Company,
or of any Parent or Subsidiary corporation, to terminate the Employee's
employment at any time. Except to the extent the Company and the Employee shall
have otherwise agreed in writing, the Employee's employment shall be terminable
by the Company (or by a Parent or Subsidiary, if applicable) at will. Subject to
Section 13, the Board in its sole discretion shall determine whether any leave
of absence or interruption in employment (including an interruption during
military service) shall be deemed a termination of employment for the purposes
of this Agreement.
13. Leave of Absence. For purposes hereof, the Employee's employment shall not
be deemed to terminate if the Employee takes any military leave, sick leave, or
other bona fide leave of absence approved by the Company of ninety (90) days or
less. In the event of a leave in excess of ninety (90) days, the Employee's
employment shall be deemed to terminate on the ninety-first (91st) day of the
leave unless the Employee's right to reemployment remains guaranteed by statute
or contract. Notwithstanding the foregoing, however, a leave of absence shall be
treated as employment for purposes of Section 3 if and only if the leave of
absence is designated by the Company as (or required by law to be) a leave for
which vesting credit is given.
14. Committee of the Board. In the event that the Plan is administered by a
committee of the Board (the "Committee"), all references herein to the Board
shall be construed to mean the Committee for the period(s) during which the
Committee administers the Plan.
15. Option Subject to Terms. of Plan. In addition to the provisions hereof, this
Agreement and the Option are governed by, and subject to the terms and
conditions of, the Plan. The Employee acknowledges receipt of a copy of the Plan
(a copy of which is attached hereto as Exhibit B). The Employee represents that
he or she is familiar with the terms and conditions of the Plan, and hereby
accepts the Option subject to all of the terms and conditions thereof, which
terms and conditions shall control to the extent inconsistent in any respect
with the provisions of this Agreement. The Employee hereby agrees to accept as
binding, conclusive and final all decisions and interpretations of the Board as
to any questions arising under the Plan or under this Agreement.
16. Notices. All notices and other communications of any kind which either party
to this Agreement may be required or may desire to serve on the other party
hereto in connection with this Agreement shall be in writing and may be
delivered by personal service or by registered or certified mail, return receipt
requested, deposited in the United States mail with postage thereon fully
prepaid, addressed to the other party at the addresses indicated on the
signature page hereof or as otherwise provided below. Service of any such notice
or other communication so made by mail shall be deemed complete on the date of
actual delivery as shown by the addressee's registry or certification receipt or
at the expiration of the third (3rd) business day after the date of mailing,
whichever is earlier in time. Either party may from time to time, by notice in
writing served upon the other as aforesaid, designate a different mailing
address or a different person to which such notices or other communications are
thereafter to be addressed or delivered.
17. Further Assurances. The Employee shall, upon request of the Company,. take
all actions and execute all documents requested by the Company which the Company
deems to be reasonably necessary to effectuate the terms and intent of this
Agreement and, when required by any provision of this Agreement to transfer all
or any portion of the Common Stock purchased hereunder to the Company (and its
assignees), the
<PAGE>
SmartDiskCorporation
Employee Incentive Stock Option Agreement
Page 12
Employee shall deliver such Common Stock endorsed in blank or accompanied by
Stock Assignments Separate from Certificate endorsed in blank, so that title
thereto will pass by delivery alone. Any sale or transfer by the Employee of the
Common Stock to the Company (and its assignees) shall be made free of any and
all claims, encumbrances, liens and restrictions of every kind, other than those
imposed by this Agreement.
18. Notice of Sales Upon Disqualifving Disposition. The Employee shall dispose
of the shares acquired pursuant to the Option only in accordance with the
provisions of this Agreement. In addition, the Employee shall promptly notify
the Chief Financial Officer of the Company if the Employee disposes of any of
the shares acquired pursuant to the Option within one (1) year from the date the
Employee exercises all or part of the Option or within two (2) years of the Date
of Grant of this Option. Until such time as the Employee disposes of such shares
in a manner consistent with the provisions of this Agreement, the Employee shall
hold all shares acquired pursuant to the Option in the Employee's name (and not
in the name of any nominee) for the one (l)-year period immediately after
exercise of the Option and the two (2)year period immediately after the Date of
Grant of this Option. At any time during the one (1)-year or two (2)-year
periods set forth above, the Company may place a legend or legends on any
certificate or certificates representing shares acquired pursuant to the Option
requesting the transfer agent for the Company's stock to notify the Company of
any such transfers. The obligation of the Employee to notify the Company of any
such transfer shall continue notwithstanding that a legend has been placed on
the certificate or certificates pursuant to the preceding sentence.
19. Successors. Except to the extent the same is specifically limited by the
terms and provisions of this Agreement, this Agreement is binding upon the
Employee and the Employee's successors, heirs and personal representatives, and
upon the Company, its successors and assigns.
20. Termination or Amendment. Subject to the terms and conditions of the Plan,
the Board may terminate or amend the Plan and/or the Option at any time;
provided, however, that no such termination or amendment may adversely affect
the Option or any unexercised portion hereof without the consent of the Employee
unless such amendment is required to enable the Option to qualify as an
Incentive Stock Option.
21. Integrated Agreement. This Agreement and the Plan constitute the entire
understanding and agreement of the Employee and the Company with respect to the
subject matter contained herein, and there are no agreements, understandings,
restrictions, representations, or warranties between the Employee and the
Company other than those set forth or provided for herein. To the extent
contemplated herein, the provisions of this Agreement shall survive any exercise
of the Option and shall remain in full force and effect.
22. Other Miscellaneous Terms. Titles and captions contained in this Agreement
are inserted only as a matter of convenience and for reference, and in no way
define, limit, extend or describe the scope of this Agreement or the intent of
any provision hereof. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida, irrespective of its choice of
law principles.
23. Independent Tax Advice. The Employee agrees that he or she has obtained or
will obtain the advice of independent tax counsel (or has determined not to
obtain such advice, having had adequate opportunity to do so) regarding the
federal and state income tax consequences of the receipt and exercise of the
Option and of the disposition of Common Stock acquired upon exercise hereof. The
Employee acknowledges that he or she has not relied and will not rely upon any
advice or representation by the Company or by its employees or representatives
with respect to the tax treatment of the Option.
<PAGE>
SmartDiskCorporation
Employee Incentive Stock Option Agreement
Page 13
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first hereinabove written.
COMPANY: EMPLOYEE:
SMARTDISK CORPORATION, /s/ Quresh Sachee
a Delaware corporation ---------------------------------------
Quresh Sachee
By: /s/ Michael S. Battaglia Name Printed: Quresh Sachee
------------------------
Michael S. Battaglia Social Security No. ###-##-####
Chief Executive Officer
Address: SmartDisk Corporation Address: 3506 Mercantile Ave
2506 Mercantile Avenue Naples, FL 34104-3310
Naples, FL 34104-3310
<PAGE>
SCHEDULE OF EXHIBITS
Exhibit A: Form of Notice of Exercise and Investment
Representation Statement for Employee
Incentive Stock Option Agreement
Exhibit B: 1998 Employee Stock Option Plan
<PAGE>
EXHIBIT A
FORM OF NOTICE OF EXERCISE
AND
INVESTMENT REPRESENTATION STATEMENT FOR
EMPLOYEE INCENTIVE STOCK OPTION AGREEMENT
SmartDisk Corporation
3506 Mercantile Avenue
Naples, FL 34104-3310
Attention: Corporate Secretary
Re: Notice of Exercise of Stock Option
Ladies and Gentlemen:
I hereby exercise, as of ____________, my stock option (granted May 4,
1998) to purchase ________ (_____) shares (the "Option Shares") of the Common
Stock of SmartDisk Corporation, a Delaware corporation (the "Company"). Payment
of the option price of ________ Dollars ($_____) is made as follows: (i) a
check, dated ________, in the amount of _____ Dollars ($_____ ) is attached to
this notice in payment of the par value of the Common Stock (the par value of
the Common Stock being $0.001 per share); and (ii) a Full Recourse Secured
Promissory Note in the amount of _______________ Dollars ($_____ ), bearing
interest at the rate specified therein, together with the Pledge and Security
Agreement pertaining thereto, is delivered herewith.
As a condition to this notice of exercise, I hereby make the following
representations and agreements:
Investment Representation Statement.
1. I am purchasing the Option Shares for investment for my own account
only and not with a view to, or for resale in connection with, any
"distribution" thereof. I am aware of the Company's business affairs and
financial condition and have had access to such information about the Company as
I have deemed necessary or desirable to reach an informed and knowledgeable
decision to acquire the Option Shares.
2. I understand that the Option Shares have not been registered under
the Securities Act of 1933, as amended (the "Act"), or qualified or registered
under the blue sky law of any state (the "Law"), by reason of specific
exemptions therefrom, which exemptions depend upon, among other things, the bona
fide nature of my investment intent as expressed herein. In this connection, I
understand that, in the view of the Securities and Exchange Commission (the
"Commission"), the statutory basis for one such exemption may not exist if my
representation means that my present intention is to hold the Option Shares for
a minimum capital gains period under the tax laws, for a deferred sale, for a
market rise, for a sale if the market does not rise, or for a year or any other
fixed period in the future.
3. I acknowledge and agree that the Option Shares are restricted
securities which must be held indefinitely unless they are subsequently
registered under the Act or an exemption from such registration is available. I
further acknowledge and understand that the Company is under no obligation to
register the Option Shares.
<PAGE>
Employee Incentive Stock Option Agreement
Exhibit A
Page 2
4. I am aware of the adoption of Rule 144 by the Commission, which
permits limited public resale of securities acquired in a non-public offering,
subject to the satisfaction of certain conditions, including, among other
things, the availability of certain current public information about the issuer,
the passage of not less than one (1) year after the holder has purchased and
paid for the securities to be sold, effectuation of the sale on the public
market through a broker in an unsolicited "brokers' transaction" or to a "market
maker," and compliance with specified limitations on the amount of securities to
be sold (generally, one percent (I %) of the total amount of common stock
outstanding) during any three (3)-month period, except that such conditions need
not be met by a person who is not an affiliate the Company at the time of sale
and has not been an affiliate for the preceding three (3) months if the
securities to be sold have been beneficially owned by such person for at least
two (2) years prior to their sale.
5. I understand that the Company currently does not, and at the time I
wish to sell the Option Shares may not, satisfy the current public information
requirement of Rule 144 and, consequently, I may be precluded from selling the
Option Shares under Rule 144 even if the one (1)-year minimum holding period has
been satisfied.
6. I further understand that if all of the requirements of Rule 144 are
not met, compliance with Regulation A or some other exemption from registration
will be required; and that, although Rule 144 is not exclusive, the Staff of the
Commission has expressed its opinion that persons proposing to sell restricted
securities other than in a registered offering and other than pursuant to Rule
144 will have a substantial burden of proof in establishing that an exemption
from registration is available for such offers or sales and . that such persons
and the brokers who participate in such transactions do so at their own risk.
7. I further understand that the certificate(s) representing the Option
Shares, whether upon initial issuance or any transfer thereof, shall bear on
their face legends, prominently stamped or printed thereon in capital letters,
reading as follows:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
RESTRICTIONS ON TRANSFER AND OTHER AGREEMENTS aNCLUDING CERTAIN
REPURCHASE RIGHTS UPON TERMINATION OF EMPLOYMENT WITH THE COMPANY)
CONTAINED IN A STOCK OPTION AGREEMENT, DATED MAY 4, 1998, A COPY OF
WHICH IS ON FILE WITH THE COMPANY.
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE
SALE IS MADE IN ACCORDANCE WITH RULE 144 OR RULE 701 UNDER THE ACT, OR
THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE
SECURITIES REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH
SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE
REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
8. I further understand that in order to obtain the benefits of
incentive stock option treatment under Section 421 of the Internal Revenue Code,
no sale or other disposition may be made of any Option Shares for at least one
(1) year after the date of the issuance of such Option Shares upon exercise
hereunder and for at
<PAGE>
Employee Incentive Stock Option Agreement
Exhibit A
Page 3
least two (2) years after the Date of Grant of the Option. I shall promptly
notify the Company in writing in the event that I sell or otherwise dispose of
any Option Shares before the expiration of such periods. I further understand
that I may suffer adverse tax consequences as a result of my purchase or
disposition of the Option Shares. I represent that I have consulted with any tax
consultant(s) I deem advisable in connection with the purchase or disposition of
the Option Shares and that I am not relying on the Company for any tax advice.
IN WITNESS WHEREOF, the undersigned has executed this Notice of
Exercise as of the date set forth below.
Signed:________________________________
Dated:_________________________________
<PAGE>
EXHIBIT D
CONFIDENTIALITY AGREEMENT
This Confidentiality Agreement is entered into this ___ day of
______________, by and between SmartDisk Corporation (hereafter "SDC"), and
________________________________, (hereafter "Employee"), and is made a part of,
and shall be incorporated into as Exhibit , the Employment Agreement between
SDC and Employee.
1. Confidential Disclosure.
a. Employee acknowledges that he/she will, during the course of his/her
employment by SDC, be exposed to confidential information and materials relating
to SDC, its business and methods of doing business, and to confidential
information and materials of or pertaining to clients of SDC. Such information
includes, but is not limited to, trade secrets, proprietary material and
knowledge, marketing and development ideas and plans, software program source
and object codes, date files, confidential methods, operations, ideas, plans,
and the terms of this Agreement.
b. Employee agrees that he/she will preserve and maintain the privacy
of all such confidential information received during the course of his/her
employment by SDC, will discuss or disclose the same only as necessary during
the normal course of employment, and then only to other employees of SDC as
necessary. In the event extraordinary or unusual business circumstances require
confidential information to be discussed with or disclosed to third parties
other than the client, Employee shall obtain prior authorization of an officer
of SDC before making such disclosure.
2. Inventions, Discoveries, and Developments.
Employee's rights, title, equities and interests in and to every
invention, discovery and development which Employee conceives or develops,
whether alone or together with others, while in the employment of SDC, or during
the course of Employee's use of any funds, space or facilities of SDC, shall be
determined in accordance with the following:
a. Employee shall promptly notify an officer of SDC with respect to
each such invention, discovery and development.
b. If requested by SDC, and at the expense of SDC, Employee shall
execute all instruments and take all other action, including without limitation,
the furnishing of information reasonably requested by SDC, to:
1) Assign to SDC or its designee all Employee's rights, title,
equities and interests, including without limitation all patent rights, in and
to each such invention, discovery and development except those inventions,
discoveries and developments as to which SDC has determined, in writing, that
exclusive property therein belongs to, and may be retained by, Employee;
2) Assist SDC and any designee thereof in their respective
efforts to secure, maintain, extend and enforce domestic and foreign patent
protection, and to effect other legal protection for any such invention,
discovery or development;
c. Employee shall comply with all temporary restrictions on publication
of writings relating to such inventions, discoveries and developments which are
required by any client or sponsor of a project in connection with the activities
of SDC.
<PAGE>
3. Survival
The agreements made by Employee and SDC under Paragraph 1 and 2 above
shall continue until terminated by mutual agreement and shall extend to the
successors and assigns of SDC, and assigns of the Employee.
Agreed to and accepted:
SmartDisk Corporation
By
--------------------------------
- -----------------------------------
Employee
EXHIBIT 10.14
DEVELOPMENT AND LICENSE AGREEMENT
This Development and License Agreement (this "AGREEMENT") is entered
into as of June 30, 1999 (the "EFFECTIVE DATE") by and between SMARTDISK
CORPORATION, a Delaware corporation, with its principal offices at 3506
Mercantile Avenue, Naples, FL 34104 and SmartDisk International, Inc., a
Delaware corporation, having a Japan branch with its principal place of business
located at Kyoei Yaesu Bldg., 2-3-12 Yaesu, Chuo-Ku, Tokyo, 104-0028, Japan,
(collectively "SMARTDISK"), and SONY CORPORATION, a corporation formed under the
laws of Japan, with its principal offices at 6-7-35 Kitashinagawa
Shinagawa-ku,Tokyo, 141-0001 Japan ("SONY").
R E C I T A L S
A. "FLOPPY DISK" means higher density 3.5 inch micro floppydisks which
conform to the technical specifications of the document entitled "Information
processing - Data interchange on 90mm (3.5in) flexible disk cartridges using
modified frequency modulation recording at 15916 ftprad on 80 tracks on each
side" issued by ISO as "ISO-9529-1."
B. SmartDisk designs, develops and manufactures, among other products,
products for the ability to read data to and write data from flash memory
storage products, in the form of Floppy Disks ("FLASHPATH").
C. Sony has developed and distributes a certain form of flash memory
card system known as the Memory Stick ("MEMORY STICK").
D. The parties desire to have SmartDisk design, develop, manufacture
and sell to Sony a type of FlashPath product for use with the Memory Stick which
will allow FlashPath to interoperate with the Memory Stick (the "PRODUCT") and
have Sony distribute such Product.
E. The parties intend to set forth more fully the terms of SmartDisk's
manufacturing and Sony's distribution of the Product in separate agreements.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. DEFINITIONS
1.1 "CONFIDENTIAL INFORMATION" means (i) all information
disclosed by either party to the other during the term of this Agreement
relating to either party's financial or business plans and affairs, financial
statements, internal management tools and systems, marketing plans, clients,
contracts, products and programs, product and program development plans,
hardware, firmware, software programs and other technology which information is
deemed by the disclosing party as confidential; (ii) which is disclosed in oral,
written, graphic, machine recognizable, and/or
<PAGE>
Cooperative Development Agreement
SmartDisk Corporation / Sony Corporation
Page 2
sample form; and, (iii) is clearly designated, labeled or marked as
confidential. Confidential Information which is disclosed other than in material
form will be confirmed as Confidential Information in writing by the disclosing
party within thirty (30) days after such disclosure, identifying the place and
date of such disclosure and names of the receiving party's employees to whom
such disclosure was made and describing the resume of the information disclosed.
1.2 "DESIGN SPECIFICATIONS" means the written preliminary
specifications for the Product attached hereto as EXHIBIT A which shall be
deemed to be part of this Agreement.
1.3 "DEVELOPMENT SCHEDULE" means a description of the
development obligations of each party with respect to the Product to be set
forth in EXHIBIT B attached hereto. The Development Schedule shall include,
without limitation, a detailed description of each party's deliverables,
delivery dates and milestones for: (i) developing various beta-version
components of the Product; (ii) developing and testing a production prototype
which shall be used as a manufacturing sample; (iii) developing and testing
manufacturing and engineering improvements for commercial manufacturing cost
reductions; and (iv) developing commercialized, final products.
1.4 "FINAL SPECIFICATIONS" means the written final
specifications for the Product to be agreed to by the parties as set forth in
Section 2.1 below and when so agreed to shall become EXHIBIT C attached hereto
and shall be deemed to be part of this Agreement.
1.5 "INTELLECTUAL PROPERTY RIGHTS" means patents, copyrights
including rights in audiovisual works and moral rights, trademarks, service
marks, and trade names and registrations and applications therefor, trade
secrets, know-how, rights in trade dress and packaging and other intellectual
property rights recognized by the law of the United States and each applicable
jurisdiction.
1.6 "MEMORY STICK ASIC COMPONENTS" means the Intellectual
Property Rights in those portions of the digital chip used solely to provide a
serial to parallel interface allowing the Memory Stick to communicate with the
FlashPath, and which the parties hereto may develop to create the Product.
1.7 "MEMORY STICK UPDATES" means updates, additions,
enhancements, or modifications to the Memory Stick.
1.8 "PATENTABLE DEVELOPMENTS" means all ideas conceived
during, and which are directly related to, the development of the Product which
are patentable ideas or inventions, excluding the Memory Stick ASIC Components
and the Specified Driver Source Code.
1.9 "SPECIFIED DRIVER SOURCE CODE" means all Intellectual
Property Rights in those portions of the driver software source code which are
developed pursuant to this Agreement and which specifically support only the
Product.
2. DEVELOPMENT PHASE I - PROJECT PLANNING
<PAGE>
Cooperative Development Agreement
SmartDisk Corporation / Sony Corporation
Page 3
SmartDisk has developed the Design Specifications for the
Product which previously have been delivered to Sony. The parties shall review
and revise, as is acceptable to both parties, the Design Specifications to
create the Final Specifications by June 30, 1999. By no later than June 30,
1999, the parties shall negotiate in good faith to develop and agree upon the
Development Schedule, which shall be deemed to be part of this Agreement as
EXHIBIT B.
3. DEVELOPMENT PHASE II - PROJECT DEVELOPMENT
3.1 DESIGNATED CONTACTS. EXHIBIT D attached hereto sets forth
each party's designated "Principal Contact", which shall be each party's
respective point of contact for the resolution of problems. In addition, Exhibit
D sets forth each party's respective "Program Manager", who shall have overall
responsibility for the direction and coordination of the development of the
Product. The Sony and SmartDisk Program Managers shall establish and implement
reasonable project management procedures. In addition to the responsibilities
set forth herein, the Principal Contact and Program Manager shall be responsible
for matters designated in the Development Schedule, if any.
3.2 DEVELOPMENT OPERATIONS. The parties hereby agree to carry
out their respective obligations pursuant to and in accordance with the Final
Specifications and Development Schedule. In addition to the requirements set
forth in the Final Specifications and Development Schedule, Sony agrees to
provide technology resources which Sony deems necessary to assist in SmartDisk's
understanding of the Memory Stick so as to enable SmartDisk to develop the
Product.
3.3 ACCEPTANCE OF MILESTONES. SmartDisk shall deliver to Sony
each milestone associated with a deliverable as set forth in the Development
Schedule for review and approval by Sony. Sony will test the delivered milestone
to determine whether such delivered milestone is in conformity with the Final
Specifications. Sony will inform SmartDisk whether such delivered milestones are
in conformity with the Final Specifications within the time periods set forth in
the Development Schedule. In the event that a delivered milestone does not
conform to the relevant portion of the Final Specification (such nonconformance
will be referred to as "DEFICIENCIES"), Sony shall reject the delivered
milestone and provide written notice to SmartDisk describing the Deficiencies in
sufficient detail to allow SmartDisk to correct the Deficiencies. Within a
period of time to be agreed between the parties after receiving each report
regarding Deficiencies, SmartDisk will use its best commercial efforts to
correct the Deficiencies so that the milestone conforms to the applicable part
of the Final Specifications. The procedure in this Section 3.3 will be repeated
with respect to a milestone to determine whether it is acceptable to Sony. In
the event a delivered milestone fails to conform to the Final Specifications
more than two times, the Program Managers shall meet to determine the
appropriate course of action.
3.4 CHANGES TO FINAL SPECIFICATIONS. Either party may request
changes to the Final Specifications during the development of the Product. All
requested changes by a party shall be submitted to the other party's Program
Manager in writing. Upon such other party's receipt of such changes, the parties
shall determine the amount of rework necessary, the additional development time
<PAGE>
Cooperative Development Agreement
SmartDisk Corporation / Sony Corporation
Page 4
necessary, any additional costs associated with such changes and which party
shall be responsible for such costs. All such determinations shall be made by
the mutual consent of the parties. Upon written approval by both parties to
effect the requested change, SmartDisk will commence implementation of such
change. SmartDisk will revise the Final Specifications and Development Schedule
to reflect such change.
3.5 MEMORY STICK MODIFICATIONS. In the event that during the
term of this Agreement, Sony develops, or has developed on its behalf, any
modification, enhancement or update to the Memory Stick which causes the Product
to no longer interoperate with the Memory Stick or causes the Product to become
commercially obsolete, Sony shall send SmartDisk written notice thereof no later
than six (6) months prior to Sony's anticipated first commercial release of such
modification and the Principal Contacts shall meet to determine the appropriate
course of action for the parties. Notwithstanding the foregoing, in the event of
minor modifications, enhancements or updates to the Memory Stick, Sony shall
exercise its best efforts to advise SmartDisk of such minor modifications,
enhancements, or updates, as soon as possible. SmartDisk shall exercise best
efforts to incorporate such minor modifications, enhancements, or updates, as
soon as commercially reasonable, taking into consideration the cost of such
modifications and the impact on manufacturing lead times.
3.6 COMPLETION. The development of the Product shall be deemed
completed upon Sony's acceptance of the final milestone as set forth in the
Development Schedule, but shall in no event be later than March 31, 2000.
4. OWNERSHIP AND LICENSE
4.1 FLASHPATH. SmartDisk has and will retain all rights of
ownership in and to FlashPath, including without limitation the object code,
source code and documentation, all proprietary rights embodied therein and
related thereto, and Sony agrees and understands that it will not obtain, assert
or claim any right or license therein except as specifically set forth in this
Agreement. SmartDisk hereby grants and agrees to grant to Sony a non-exclusive,
worldwide, fully-paid right and license to market, sell and distribute those
portions of FlashPath (and Intellectual Property Rights incorporated therein)
which are incorporated in the Product for a period of five (5) years from the
Effective Date and to grant sublicenses of the foregoing to distributors of Sony
products.
4.2 MEMORY STICK. Sony has and will retain all rights of
ownership in and to the Memory Stick, including without limitation the object
code, source code and documentation, all proprietary rights embodied therein and
related thereto, and SmartDisk agrees and understands that it will not obtain,
assert or claim any right or license therein except as specifically set forth in
this Agreement. Sony hereby grants and agrees to grant to SmartDisk a
non-exclusive, worldwide, fully-paid right and license to use and reproduce, as
reasonably required by SmartDisk, the Memory Stick, including its design
documentation and object and source code, for the sole internal purpose of
designing, developing, manufacturing, testing, performing quality assurance,
performing quality control, improving and providing support and maintenance for
the Product. Notwithstanding the
<PAGE>
Cooperative Development Agreement
SmartDisk Corporation / Sony Corporation
Page 5
grant of non-exclusive rights by Sony as set forth above, the parties understand
and agree that SmartDisk shall be the exclusive developer of the Product as
developed in accordance with the Final Specifications and Sony's technical
assistance. In the event the Product contains any portion of the Memory Stick
which is proprietary to Sony, Sony hereby grants SmartDisk an exclusive,
fully-paid, worldwide right and license to reproduce, modify and include such
portions of the Memory Stick in the Product as developed in accordance with the
Final Specifications and Sony's technical assistance and to make, have made,
market, sell and distribute to Sony the Product as developed in accordance with
the Final Specifications and Sony's technical assistance which includes such
portions of the Memory Stick and to sublicense any of the foregoing solely for
the purposes of manufacturing the Product for distribution to Sony.
4.3 MEMORY STICK ASIC COMPONENTS AND SPECIFIED DRIVER SOURCE
CODE. SmartDisk hereby assigns and agrees to assign to Sony all worldwide right,
title and interest SmartDisk may have or acquire in and to the Memory Stick ASIC
Components and the Specified Driver Source Code without royalty or any other
consideration except as may be expressly set forth herein. In addition, Sony
hereby grants and agrees to grant to SmartDisk a perpetual, exclusive,
worldwide, fully-paid right and license to make, have made, use and reproduce
the Memory Stick ASIC Components and the Specified Driver Source Code for the
sole purposes of designing, developing, manufacturing, testing, performing
quality assurance, performing quality control, improving and providing support
and maintenance for the Product and any other product which SmartDisk may
develop and supply to Sony in the future. In the event Sony requests that
SmartDisk perform additional development work with respect to the Memory Stick
ASIC Components and the Specified Driver Source Code for the Sony product
currently known as the "Mavica", the parties will determine an appropriate
additional development fee to paid by Sony to SmartDisk for such work.
4.4 PATENTABLE DEVELOPMENTS. All Patentable Developments shall
be owned jointly by Sony and SmartDisk. Each party hereto hereby assigns and
agrees to assign to the other a one-half undivided interest in and to all
worldwide right, title and interest which each such party may have or acquire in
and to the Patentable Developments without royalty or any other consideration
except as may be expressly set forth herein. The parties further agree to use
their commercially reasonable efforts to cause any third party involved in the
development of the Patentable Developments to likewise contribute any rights
such third party may have in the Patentable Developments to an equal joint
ownership among all such parties. Notwithstanding the joint ownership described
herein, no party shall have the obligation to account to the others for any
further development, distribution, commercialization or other use of the
Patentable Developments and each party hereto waives its rights to claim the
other party committed waste of any Patentable Development. Any party to this
Agreement (the "CLAIMING PARTY") shall have the right to bring a claim of
infringement against any third party which infringes any of the Patentable
Developments and the other party hereto agrees to cooperate in any claim brought
by the Claiming Party at the expense of the Claiming Party.
4.5 ADDITIONAL LICENSES. To the extent that Sony owns or has
licenses to any additional Intellectual Property Rights which affect the design,
development, manufacture, license
<PAGE>
Cooperative Development Agreement
SmartDisk Corporation / Sony Corporation
Page 6
or sale of the Product, Sony hereby grants and agrees to grant to SmartDisk a
non-exclusive, worldwide, fully-paid right and license to use such Intellectual
Property Rights to design, make, have made, use and sell the Product to Sony for
distribution by Sony.
4.6 PROPRIETARY MARKINGS. The parties agree that the Products
shall be labeled as set forth in Exhibit E attached hereto and shall carry on
all containers and storage media therefor and in all marketing material the
trademarks, copyright notices, patent notices, trade secret notices and other
notices regarding proprietary rights as set forth in Exhibit E.
5. DEVELOPMENT FEES
5.1 GENERAL. In consideration of the development of the
Product, Sony shall pay to SmartDisk the development fees set forth in EXHIBIT F
attached hereto and incorporated herein by reference (the "FEES").
5.2 MONTHLY INVOICES. For those Fees designated on Exhibit F
as "Invoice Fees", SmartDisk shall send to Sony on a monthly basis an invoice
and an accounting for Product development work performed by SmartDisk during the
month. Sony shall pay each such invoice within thirty (30) calendar days of
receipt.
5.3 PAYMENT FOR DELIVERABLES. SmartDisk shall submit
deliverables to Sony in accordance with Section 3.3 above. Upon acceptance any
delivered milestone, Sony shall remit to SmartDisk the applicable Fee associated
therewith in accordance with the Development Schedule.
5.4 TOOLING AND DIES. SmartDisk shall purchase on behalf of
Sony, and as Sony's purchasing agent, tooling and dies for the manufacture of
the Product. As of the Effective Date the parties estimate the cost of such
tooling and dies to be [*****] and Sony shall reimburse SmartDisk for the costs
thereof. The actual amount of reimbursement by Sony shall be determined by both
parties at the time SmartDisk orders such tooling and dies. The timing and
manner of payment of such costs shall be more fully set forth in a separate
Manufacturing Agreement to be entered into by the parties hereto.
5.5 TAXES. All taxes, duties, fees and other governmental
charges of any kind (including customs duties, import sales, services and use
taxes, but excluding taxes based on the gross revenues or net income of
SmartDisk) which are imposed by or under the authority of any government or any
political subdivision thereof on the Fees shall be borne by Sony and shall not
be considered a part of, a deduction from or an offset against such fees.
SmartDisk shall be responsible for all taxes assessed on the gross revenues or
net income of SmartDisk by any governmental authority with jurisdiction over
SmartDisk. In the event that Sony is required to withhold taxes based on such
gross revenues or net income of SmartDisk by any such governmental authority,
Sony is hereby authorized to make such payment of withholding taxes and Sony
will provide SmartDisk with official tax receipts or other evidence of payment
of such withheld taxes sufficient to substantiate a claim by SmartDisk for
credit against SmartDisk's United States federal income tax.
***** CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.
<PAGE>
Cooperative Development Agreement
SmartDisk Corporation / Sony Corporation
Page 7
6. INDEMNIFICATION AND LIMITATIONS ON LIABILITY
6.1 SMARTDISK'S OBLIGATIONS. (a) SmartDisk will indemnify and
hold harmless Sony from and against all claims, actions, damages, costs and
expenses (including attorneys' fees) arising out of any actual or threatened
claim of infringement of any patent, or any copyright, trademark, or trade
secret arising out of FlashPath or any of SmartDisk's other contributions to the
Product only as used in the Product, to the extent that such contributions were
not a direct result of instructions or technical assistance received from Sony.
This obligation will be subject to the following terms and conditions:
(i) The obligation will arise only if Sony gives SmartDisk
prompt notice of the infringement claim and grants SmartDisk, in writing,
exclusive control over its defense and settlements;
(ii) This obligation will cover the Products only in the form
as delivered to Sony by SmartDisk or its agents, and will not cover any
correction, modification, improvement, enhancement or addition to any Product
made by anyone other than SmartDisk without SmartDisk's prior written
authorization;
(iii) This obligation will not cover any claim that any
Product infringes any third party's rights as used in combination with any
hardware or software not supplied by SmartDisk if that claim could have been
avoided by the use of that Product in combination with other hardware or
software, notwithstanding the foregoing, the obligation will cover any claim
that any Product infringes any third party's rights as used in combination with
any Floppy Disk drives in common and/or in combination with any Memory Stick in
common;
(iv) This obligation will not cover any use of the Memory
Stick ASIC Components, the Specified Driver Source Code or the Patentable
Developments used with or in any product other than the Product;
(v) Without limiting SmartDisk's general obligation of
indemnification, and in addition thereto, if an infringement claim is asserted,
or if SmartDisk believes one likely, SmartDisk will have the right and the
obligation to do any of the following, if approved by Sony: (a) procure a
license from the person(s) claiming or likely to claim infringements; or (b)
modify the Product to avoid the claim of infringement; or (c) suspend the
Agreement with respect to such Product until the infringement claim has
otherwise been resolved. If SmartDisk choose the option (c) and as a result, the
development of the Product hereunder is delayed by more than ninety (90) days,
Sony shall have the right to terminate this Agreement, and SmartDisk shall
reimburse Sony, in such amounts as the parties shall agree but in no event more
than the payments made by Sony hereunder.
(b) SmartDisk warrants that the Memory Stick ASIC Components
and Specified Driver Source Code supplied to Sony will perform in accordance
with the Final Specifications. SmartDisk warrants that for twelve (12) months
from the date on which Sony accepted the final
<PAGE>
Cooperative Development Agreement
SmartDisk Corporation / Sony Corporation
Page 8
milestone as set forth in the Development Schedule, the Memory Stick ASIC
Components and Specified Driver Source Code shall be free from any significant
programming errors and from defects in workmanship and materials. In the event
that any defect is found during the warranty period, SmartDisk shall remedy such
defect at no additional expense to Sony.
6.2 SONY'S OBLIGATIONS. Sony will indemnify and hold harmless
SmartDisk from and against all claims, actions, damages, costs and expenses
(including attorneys' fees) arising out of any actual or threatened claim of
infringement of any patent , or any copyright, trademark, or trade secret
arising out of the Memory Stick or any of Sony's other contributions to the
Product, only as used in the Product, including arising from Sony's instructions
and technical assistance. This obligation will be subject to the following terms
and conditions:
(i) The obligation will arise only if SmartDisk gives Sony
prompt notice of the infringement claim and grants Sony, in writing, exclusive
control over its defense and settlements;
(ii) This obligation will cover the Products only in the form
developed pursuant to the Final Specifications or as corrected, modified,
improved, or enhanced by SmartDisk to the extent that such action by SmartDisk
did not give rise to the claim;
(iii) This obligation will not cover any claim that any
Product infringes any third party's rights as used in combination with any
hardware or software not supplied by Sony if that claim could have been avoided
by the use of that Product in combination with other hardware or software;
(iv) This obligation will not cover any use of the Memory
Stick ASIC Components, Specified Driver Source Code or the Patentable
Developments used with or in any product other than the Product;
(v) Without limiting Sony's general obligation of
indemnification, and in addition thereto, if an infringement claim is asserted,
or if Sony believes one likely, Sony will have the right and the obligation to
do any of the following if approved by SmartDisk: (a) procure a license from the
person(s) claiming or likely to claim infringements; or (b) reimburse SmartDisk
to have SmartDisk modify the Product to avoid the claim of infringement; or (c)
suspend the Agreement with respect to such Product until the infringement claim
has otherwise been resolved; and
6.3 ENTIRE OBLIGATION. SECTIONS 6.1 AND 6.2 STATE THE PARTIES'
EXCLUSIVE AND ENTIRE OBLIGATIONS WITH RESPECT TO ANY CLAIMS OF INFRINGEMENT OF
PROPRIETARY RIGHTS OF ANY KIND.
6.4 GENERAL INDEMNIFICATION. Subject to the provisions of
Sections 6.1, 6.2 and 6.3 hereof, each party shall indemnify, defend and hold
the other and its successors harmless from any and all claims, demands, actions,
losses, liabilities, costs, expenses or damages of any kind or
<PAGE>
Cooperative Development Agreement
SmartDisk Corporation / Sony Corporation
Page 9
nature (including, but not limited to reasonable attorneys fees) arising out of
any misrepresentation or breach or default in connection with any of the
representations, warranties, covenants or obligations made by such party.
6.5 DISCLAIMER OF WARRANTIES. EXCEPT FOR THE EXPRESS
WARRANTIES STATED IN THIS AGREEMENT, SMARTDISK MAKES NO WARRANTIES, EXPRESS OR
IMPLIED, WITH RESPECT TO THE PRODUCT AND SMARTDISK SPECIFICALLY DISCLAIMS ANY
WARRANTIES, WHETHER EXPRESS OR IMPLIED, FOR MERCHANTABILITY OR FITNESS FOR A
PARTICULAR USE.
6.6 LIMITATION OF LIABILITY. IN NO EVENT SHALL EITHER PARTY BE
LIABLE FOR INCIDENTAL, SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES OF ANY KIND OR
THE LOSS OF ANTICIPATED PROFITS ARISING FROM ANY BREACH OF THIS AGREEMENT EVEN
IF SUCH PARTY IS NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES AND REGARDLESS OF
WHETHER ANY REMEDY SET FORTH HEREIN FAILS OF ITS ESSENTIAL PURPOSE. UNDER NO
CIRCUMSTANCES SHALL EITHER PARTY'S LIABILITY TO THE OTHER ARISING OUT OF OR
RELATED TO THIS AGREEMENT OR THE PRODUCT, EXCEED THE AMOUNTS PAID BY SONY TO
SMARTDISK UNDER THIS AGREEMENT REGARDLESS OF WHETHER ANY ACTION OR CLAIM IS
BASED ON SUCH CONTRACT, WARRANTY, INDEMNITY, NEGLIGENCE, STRICT LIABILITY OR
OTHER TORT OR OTHERWISE.
7. ASSIGNMENT
This Agreement shall not be assigned by either party, in whole or in
part without the written consent of the other, which consent will not be
unreasonably withheld. However, either party may assign this Agreement to a
subsidiary or entity controlled by or under common control with such party, or
to any successor in-interest resulting from a reorganization, merger,
acquisition or sale of substantially all of the assets of such party, upon
written notice to the other party, (as long as the original party hereto, to the
extent such party continues to exist, remains primarily liable to the other
contracting party).
8. DURATION AND TERMINATION OF AGREEMENT
8.1 TERM. This Agreement is effective for a period commencing
on the Effective Date, and ending on the earlier of the completion of the
development of the Product or March 31, 2000.
8.2 TERMINATION FOR CAUSE. Subject to Section 8.3, in the
event that either materially breaches this Agreement and such breach remains
uncured twenty (20) calendar days following receipt of written notice by the
nonbreaching party, the nonbreaching party may terminate this Agreement by
written notice to the breaching party in which case the effective date of such
termination shall be the day following the twenty (20) day cure period described
herein.
<PAGE>
Cooperative Development Agreement
SmartDisk Corporation / Sony Corporation
Page 10
8.3 SURVIVAL. Sections 4, 5.4, 6, 9, and 10 shall survive the
termination or expiration of this Agreement.
9. CONFIDENTIAL INFORMATION
9.1 CONFIDENTIAL INFORMATION. Each party agrees to use
reasonable efforts, and at least the same care that it uses to protect its own
confidential information of like importance, to prevent unauthorized
dissemination and disclosure of the other party's Confidential Information
during and for a period of three (3) years after the term of this Agreement;
provided, however, that with respect to Confidential Information regarding
specifications of Memory Stick, SmartDisk shall, in perpetuity, use reasonable
efforts, and at least the same care that it uses to protect its own confidential
information of like importance, to prevent unauthorized dissemination and
disclosure. All these obligations under this Section 9.1 will be subject to the
following terms and conditions:
(i) The foregoing obligations will not apply to any
Confidential Information that: (a) becomes known to the general public without
fault or breach on the part of the receiving party; (b) the disclosing party
customarily provides to others without restriction on disclosures; (c) the
receiving party receives from a third party without breach of a nondisclosure
obligation and without restriction on disclosure; (d) was in the possession of
the receiving party prior to disclosure by the other; or (e) is independently
developed by the receiving party's personnel having no access to any
Confidential Information obtained from the other.
(ii) Nothing in this Agreement will affect any
obligation of either party to maintain the confidentiality of a third party's
confidential information.
9.2 NO IMPAIRMENT. Nothing in this Agreement will impair the
right of either party to use, develop or market technologies, ideas or products
similar to those of the party so long as such use, development or marketing does
not infringe on any Intellectual Property Right of such other party or use such
other party's the Confidential Information.
9.3 PUBLIC ANNOUNCEMENT. Sony and SmartDisk agree that no
press release or other public announcement about this Agreement or the business
relationship between the parties shall be made without the prior written consent
of both parties, which shall not be unreasonably withheld.
10. GENERAL
10.1 RELATIONSHIP OF THE PARTIES. The parties' relationship
during the term of this Agreement shall be that of an independent contractors.
Neither party shall have, nor shall represent that it has, any power, right or
authority to bind the other, or to assume or create any obligation or
responsibility, express or implied, on behalf of the other or in such other
party's name, except as herein expressly provided.
<PAGE>
Cooperative Development Agreement
SmartDisk Corporation / Sony Corporation
Page 11
10.2 INFORMAL DISPUTE RESOLUTION. Should any dispute or
disagreement between SmartDisk and Sony arise relating to any provision of this
Agreement (except with respect to Section 9.1), the Program Manager of one party
may give written notification of such dispute or disagreement to the Program
Manager of the other party. The Program Managers shall communicate with each
other promptly with a view to resolving such dispute or disagreement within
fourteen (14) calendar days of commencing their negotiations (or such extended
period as the Program Managers agree is appropriate in any case). In the event
that a dispute or disagreement is not resolved by the Program Managers within
such time period, the Program Managers shall refer the dispute for discussion
and resolution to the Principle Contact of SmartDisk and the Principle Contact
of Sony, who shall have an additional fourteen (14) calendar days to meet and
confer concerning a possible resolution. In the event that a dispute or
disagreement is not resolved by the Principle Contacts within such time period,
the Principle Contacts shall refer the dispute for discussion and resolution to
the President of SmartDisk and the President of Personal Video Company of Sony,
who shall have an additional fourteen (14) calendar days to meet and confer
concerning a possible resolution.
10.3 GOVERNING LAWS. The internal laws of the State of
Delaware, U.S.A., regardless of any choice of law principles, shall govern the
validity of this Agreement, the construction of its terms and the interpretation
and enforcement of the rights and duties of the parties.
10.4 SUCCESSORS AND ASSIGNS. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
permitted successors and assigns of the parties.
10.5 SEVERABILITY. If any provision of this Agreement, or the
application thereof, shall for any reason and to any extent be invalid or
unenforceable, the remainder of this Agreement and application of such provision
to other persons or circumstances shall be interpreted so as best to reasonably
effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision which will achieve, to the extent possible, the economic,
business and other purposes of the void or unenforceable provision.
10.6 ENTIRE AGREEMENT. This Agreement and the exhibits hereto,
constitute the entire understanding and agreement of the parties hereto with
respect to the subject matter hereof and thereof and supersede all prior and
contemporaneous agreements or understandings, express or implied, written or
oral, between the parties with respect hereto, except for the Memorandum of
Understanding between the parties dated executed in March, 1999 (the "MOU"),
which shall survive this Agreement. The express terms hereof control and
supersede any course of performance or usage of the trade inconsistent with any
of the terms hereof. In the event of any conflict between the terms of this
Agreement and the MOU, the terms of this Agreement shall control.
10.7 AMENDMENT AND WAIVERS. Any term or provision of this
Agreement may be amended, and the observance of any term of this Agreement may
be waived, only by a writing
<PAGE>
Cooperative Development Agreement
SmartDisk Corporation / Sony Corporation
Page 12
signed by the parties. The waiver by a party of any breach hereof for default in
payment of any amount due hereunder or default in the performance hereof shall
not be deemed to constitute a waiver of any other default or succeeding breach
or default.
10.8 ATTORNEYS' FEES. Should suit be brought to enforce or
interpret any part of this Agreement, the prevailing party shall be entitled to
recover, as an element of the costs of suit and not as damages, reasonable
attorneys' fees to be fixed by the court (including, without limitation, costs,
expenses and fees on any appeal). The prevailing party shall be the party
entitled to recover its costs of suit, regardless of whether such suit proceeds
to final judgment. A party not entitled to recover its costs shall not be
entitled to recover attorneys' fees. No sum for attorneys' fees shall be counted
in calculating the amount of a judgment for purposes of determining if a party
is entitled to recover costs or attorneys' fees.
10.9 NOTICES. Whenever any party hereto desires or is required
to give any notice, demand or request with respect to this Agreement, each such
communication shall be in writing and shall be given or made by facsimile, mail
or other delivery and faxed, mailed or delivered to the intended recipient at
the addresses specified below:
If to the Company: SmartDisk Corporation
3506 Mercantile Avenue
Naples, FL 34104 USA
Facsimile: (941) 436-2509
Attn: Michael S. Battaglia
with a copy to: Tomlinson Zisko Morosoli & Maser LLP
200 Page Mill Road, Second Floor
Palo Alto, CA 94306 USA
Facsimile: (650) 324-1808
Attn: Timothy Tomlinson, Esq.
If to Sony: Sony Corporation Shinagawa Technology Center
Shinagawa INTERCITY C Tower
2-15-3 Konan Minato-ku,Tokyo,108-6201 Japan
Facsimile:(03)5769-5944
Attn:Tsutomu Mikami
with a copy to:
Sony Corporation
6-7-35 Kitashinagawa Shinagawa-ku,Tokyo,
141-0001 Japan
Facsimile:(03)5448-7835
Attn:Contracts & Licensing Department
<PAGE>
Cooperative Development Agreement
SmartDisk Corporation / Sony Corporation
Page 13
General Manager
Except as may be otherwise provided in this Agreement, all such communications
shall be deemed to have been duly given when transmitted by facsimile with
verified receipt by the receiving fax machine, when personally delivered, four
(4) days after being delivered to an overnight air courier (E.G. DHL, or Federal
Express) upon proof of delivery, or, in the case of a mailed notice, five (5)
days after being deposited in the United States mail certified or registered
mail, postage prepaid. Either party may change its address for such
communications by giving notice thereof to the other party in conformance with
this section.
10.10 FURTHER ASSURANCES. Each party agrees to cooperate fully
with the other parties and to execute such further instruments, documents and
agreements and to give such further written assurances as may be reasonably
requested by any other party to better evidence and reflect the transactions
described herein and contemplated hereby, and to carry into effect the intents
and purposes of this Agreement.
10.11 FORCE MAJEURE. No failure or omission to carry out or
observe any of the terms, provisions or conditions of this Agreement shall give
rise to any claim by one party against the other or be deemed to be a breach of
this Agreement if the same is caused by or arises out of one or more of the
following conditions: acts of God; acts, regulations or laws of any government;
war; civil commotion; destruction of production facilities or materials by fire,
earthquake or storm; labor disturbances; epidemic; failure of public utilities
or of suppliers; or any other event, matter or thing wherever occurring and
whether or not of the same class or kind as those set forth above, which is not
reasonably within the control of the party affected thereby. Any party
temporarily excused from performance hereunder by such conditions shall resume
performance promptly when such conditions are removed or cured. Any party
claiming any such conditions as an excuse for delay in performance hereunder
shall give prompt notice in writing thereof to the other party.
<PAGE>
Cooperative Development Agreement
SmartDisk Corporation / Sony Corporation
Page 14
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the day and year first above written.
SMARTDISK CORPORATION SONY CORPORATION
By: /s/ MICHAEL S. BATTAGLIA By: /s/ TSUTOMU MIKAMI
------------------------------- ----------------------------
Name: Michael S. Battaglia Name: Tsutomu Mikami
Title: President and CEO Title: General Manager
SMARTDISK INTERNATIONAL, INC.
By: /s/ YOSHIAKI UCHIDA
-------------------------------
Name: Yoshiaki Uchida
Title: President
<PAGE>
EXHIBIT A
DESIGN SPECIFICATIONS
<PAGE>
FlashPath Memory Stick Product Specification Rev 0.4 115-1071-04 06/21/99
SMARTDISK
FLASHPATH MEMORY STICK
PRELIMINARY PRODUCT SPECIFICATION
REV. 0.4
FEBRUARY-18-1999
CONFIDENTIAL DOCUMENT
PROPERTY OF SMARTDISK CORPORATION
Page 1 of 7
<PAGE>
FlashPath Memory Stick Product Specification Rev 0.4 115-1071-04 06/21/99
TABLE OF CONTENTS
1 INTRODUCTION.............................................................3
2 GENERAL..................................................................3
2.1 MEMORY STICKS SUPPORTED BY THE FLASHPATH MEMORY STICK..............3
2.1.1 SIZE...........................................................3
2.1.2 FORMAT SPECIFICATION...........................................3
2.2 PCS SUPPORTED BY THE FLASHPATH MEMORY STICK........................3
2.2.1 PLATFORMS......................................................3
2.2.2 OPERATING SYSTEMS (OS).........................................3
2.2.3 OPERATING SYSTEMS (OS) FOREIGN LANGUAGE SUPPORT
FOR DRIVER SOFTWARE............................................4
2.2.4 FLASHPATH DRIVER SOFTWARE......................................4
2.2.5 FLOPPY DISK DRIVE (FDD)........................................4
2.3 OUTLINE SPECIFICATIONS.............................................4
2.4 WEIGHT:............................................................4
2.5 READ/WRITE PERFORMANCE.............................................4
3 BATTERIES................................................................4
3.1 BATTERY MANUFACTURER...............................................4
3.2 TYPE...............................................................5
3.3 QUANTITY...........................................................5
3.4 BATTERY LIFE.......................................................5
4 ENVIRONMENTAL CONDITION..................................................5
4.1 OPERATING CONDITION................................................5
4.2 STORAGE CONDITION..................................................5
5 RELIABILITY..............................................................5
5.1 LIFETIME...........................................................5
6 ENVIRONMENTAL SPECIFICATIONS.............................................5
6.1 ESD 10KV ATMOSPHERE DISCHARGE......................................5
7 VISUAL, MARKING SPECIFICATION............................................6
7.1 FRONT..............................................................6
7.2 BACK...............................................................7
8 OFFICIAL STANDARDS.......................................................7
Page 2 of 7
<PAGE>
FlashPath Memory Stick Product Specification Rev 0.4 115-1071-04 06/21/99
1 INTRODUCTION
The FlashPath Memory Stock (FPMS) is a 3.5 inch floppy disk shaped
device that enables you to write data into or read data from a Memory
Stick (which is inserted into the FlashPath) when the FlashPath is
inserted into a floppy disk drive of a PC in the same manner as a
floppy disk.
The FlashPath is operated by 2 lithium batteries, type CR2016 or
CR2025*. Driver software installation into the PC is necessary for
operation.
*Determination of battery type will be made at a later date.
Note:
o Memory Stick is a trademark of Sony Corporation.
o Microsoft Windows is a trademark of Microsoft Corporation USA in the
USA and other countries.
2 GENERAL
2.1 MEMORY STICKS SUPPORTED BY THE FLASHPATH MEMORY STICK
2.1.1 SIZE
--------------------------------------------------------------
4MB 8MB 16MB 32MB 64MB 128MB
--------------------------------------------------------------
Software o o o [x] [x] [z]
--------------------------------------------------------------
Firmware o o o [x] [x] [z]
--------------------------------------------------------------
o - Fully tested
[x] - Tested with emulator supplied by Sony
[z] - Designed to support
--------------------------------------------------------------
2.1.2 FORMAT SPECIFICATION
Memory Stick Rev. 1.1, English. FPMS will support the write protect
capabilities of Memory Stick.
2.2 PCS SUPPORTED BY THE FLASHPATH MEMORY STICK
2.2.1 PLATFORMS
IBM PC or compatible
NEC PC 9821
Power Mac
2.2.2 OPERATING SYSTEMS (OS)
IBM PC or compatible........Windows 95/98
Windows NT 4.0
NEC PC 9821.................Windows 95/98
Power Mac...................7.5.1 or later
(NOTE: Mac is a Read only utility)
Page 3 of 7
<PAGE>
FlashPath Memory Stick Product Specification Rev 0.4 115-1071-04 06/21/99
2.2.3 OPERATING SYSTEMS (OS) FOREIGN LANGUAGE SUPPORT FOR DRIVER SOFTWARE
o There will be an English language version and a Japanese language
version of the FPMS software
o The English language version of FPMS software will support German,
Spanish and French Windows Operating Systems.
2.2.4 FLASHPATH DRIVER SOFTWARE
The FlashPath driver software enables the FlashPath to be used in a
floppy disk drive.
The software is automatically installed by executing Setup.exe from the
driver software floppy disk in Windows 95/98.
The software includes "FlashPath Status Monitor", "Uninstall", and
"Format Utility Tool" as utility software.
2.2.5 FLOPPY DISK DRIVE (FDD)
FDD models and manufactures supported - TBD.
Note:
o An FDD that supports 1.44 MB floppy disks is supported.
o An FDD that supports a large capacity floppy disk more than 1.44MB
like the 120MB FDD is not supported.
o An FDD that is interfaced through a USB is not supported.
o An FDD that is interfaced through a PC card slot is not supported.
2.3 OUTLINE SPECIFICATIONS
<TABLE>
<S> <C> <C> <C> <C>
[+0.3mm] [+0.0mm]
94 /plus minus sign/ 0.3mm (Depth) x 90.1 [ ] (Width) x 3.3 [ ] (Height)
[-0.2mm] [-0.3mm]
</TABLE>
2.4 WEIGHT:
33 /plus minus sign/ 3g (FlashPath only. Batteries and Memory Stick are
not included)
2.5 READ/WRITE PERFORMANCE
o Read - TBD
o Write - TBD
3 BATTERIES
3.1 BATTERY MANUFACTURER
Sony
Page 4 of 7
<PAGE>
FlashPath Memory Stick Product Specification Rev 0.4 115-1071-04 06/21/99
3.2 TYPE
CR2016 or CR2025*
* Determination of battery type will be made at a later date.
3.3 QUANTITY
Two
3.4 BATTERY LIFE
----------------------------------------------
READ 1MB Continuous Read TBD
(MS to PC)
----------------------------------------------
WRITE 1MB Continuous Write TBD
(PC to MS)
----------------------------------------------
4 ENVIRONMENTAL CONDITION
4.1 OPERATING CONDITION
TBD
4.2 STORAGE CONDITION
TBD
5 RELIABILITY
5.1 LIFETIME
NOTE: Whichever occurs first, Memory Stick insertion/removal times or
FlashPath insertion/removal times.
o Memory Stick Insertion/removal TBD
o FlashPath insertion/removal TBD
6 ENVIRONMENTAL SPECIFICATIONS
TBD
Page 5 of 7
<PAGE>
FlashPath Memory Stick Product Specification Rev 0.4 115-1071-04 06/21/99
7 VISUAL, MARKING SPECIFICATION
7.1 FRONT
[Graphical illustration of the front of a FlashPath
Memory Stick diskette]
Page 6 of 7
<PAGE>
FlashPath Memory Stick Product Specification Rev 0.4 115-1071-04 06/21/99
7.2 BACK
[Graphical illustration of the back of a FlashPath
Memory Stick diskette]
8 OFFICIAL STANDARDS
TBD
Page 7 of 7
<PAGE>
EXHIBIT B
DEVELOPMENT SCHEDULE
MSFP Milestones of development
A = Sony, B = SmartDisk
<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
No. Duty Deliverables Completion Date Note
- ----------------------------------------------------------------------------------------------------------------------
1 A&B executed Agreement Executed Agreement Effective Date
- ----------------------------------------------------------------------------------------------------------------------
2 B supplies ES1 ES1 Mar 16
- ----------------------------------------------------------------------------------------------------------------------
3 A approves Basic Design Written notice April 9 A&B co-work in Feb
& Mar
- ----------------------------------------------------------------------------------------------------------------------
4 B builds and tests ES2 ES2 and an evaluation report June 21 A is informed of
ES2 status timely
- ----------------------------------------------------------------------------------------------------------------------
5 B builds and tests ES3 ES3 and an evaluation report Aug 2 A is informed of
ES3 status timely.
- ----------------------------------------------------------------------------------------------------------------------
6 A issues order for 1st 1st lot orders (committed forecast) June 30 A&B discuss terms
lot of volume production 1st lot orders (official order sheet) July 31 and conditions in
Executed distribution/Manufacturing May & June
Agreement.
- ----------------------------------------------------------------------------------------------------------------------
7 B builds ES3 for initial ES3 Aug 2 With soft tool
QA tests of A molded mechanism
- ----------------------------------------------------------------------------------------------------------------------
8 A decides the sale from Written notice Aug 6
4Q of 1999
- ----------------------------------------------------------------------------------------------------------------------
9 B builds CS for final QA CS Sept 1 Target: Aug 20
tests of A
- ----------------------------------------------------------------------------------------------------------------------
10 B supplies his QA test Test reports Sept 10
data
- ----------------------------------------------------------------------------------------------------------------------
11 A approves product Written notice Sept 14
- ----------------------------------------------------------------------------------------------------------------------
12 B release win 95/98 SW, 95/98 SW, NEC9821 SW Sept 16
NEC9821 SW
- ----------------------------------------------------------------------------------------------------------------------
13 B Starts to deliver the VP Sept 30
products
- ----------------------------------------------------------------------------------------------------------------------
14 B release other SW NT/SW, MAC SW Nov 15
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 1 of 7
<PAGE>
EXHIBIT C
FINAL SPECIFICATIONS
<PAGE>
FlashPath Memory Stick Product Specification Rev 1.0 ms-00-000 06/21/99
EXHIBIT "C"
SMARTDISK
FLASHPATH MEMORY STICK
FINAL PRODUCT SPECIFICATIONS
REV. 1.0
JUNE-21-1999
CONFIDENTIAL DOCUMENT
PROPERTY OF SMARTDISK CORPORATION
Page 1 of 9
<PAGE>
FlashPath Memory Stick Product Specification Rev 1.0 ms-00-000 06/21/99
TABLE OF CONTENTS
1 INTRODUCTION..........................................................3
2 GENERAL...............................................................3
2.1 MEMORY STICKS SUPPORTED BY THE FLASHPATH MEMORY STICK...........3
2.1.1 SIZE........................................................3
2.1.2 FORMAT SPECIFICATION........................................3
2.2 PCS SUPPORTED BY THE FLASHPATH MEMORY STICK.....................3
2.1.1 PLATFORMS...................................................3
2.1.2 OPERATING SYSTEMS (OS)......................................3
2.1.3 OPERATING SYSTEMS (OS) FOREIGN LANGUAGE SUPPORT
FOR DRIVER SOFTWARE.........................................4
2.1.4 FLASHPATH DRIVER SOFTWARE...................................4
2.1.5 FLOPPY DISK DRIVE (FDD).....................................4
2.3 OUTLINE SPECIFICATIONS..........................................4
2.4 WEIGHT:.........................................................4
2.5 READ/WRITE PERFORMANCE..........................................4
3 BATTERIES.............................................................4
3.1 BATTERY MANUFACTURER............................................4
3.2 TYPE............................................................5
3.3 QUANTITY........................................................5
3.4 BATTERY LIFE....................................................5
4 ENVIRONMENTAL CONDITION...............................................5
4.1 OPERATING CONDITION.............................................5
4.2 STORAGE CONDITION...............................................5
5 RELIABILITY...........................................................5
5.1 LIFETIME........................................................5
6 ENVIRONMENTAL SPECIFICATIONS..........................................5
6.1 ESD 10KV ATMOSPHERE DISCHARGE...................................5
7 VISUAL, MARKING SPECIFICATION.........................................6
7.1 FRONT...........................................................6
7.2 BACK............................................................7
8 OFFICIAL STANDARDS....................................................7
Page 2 of 9
<PAGE>
FlashPath Memory Stick Product Specification Rev 1.0 ms-00-000 06/21/99
1 INTRODUCTION
The FlashPath Memory Stock (FPMS) is a 3.5 inch floppy disk shaped
device that enables a user to write data into or read data from a
Memory Stick (which is inserted into the FlashPath) when the FlashPath
is inserted into a floppy disk drive of a PC in the same manner as a
floppy disk.
The FlashPath is operated by 2 lithium batteries, type CR2016 or
CR2025*. Driver software installation into the PC is necessary for
operation.
*The battery type will be determined after the test.
NOTE:
o Memory Stick is a trademark of Sony Corporation.
o Microsoft Windows is a trademark of Microsoft Corporation USA in the
USA and other countries.
2 GENERAL
2.1 MEMORY STICKS SUPPORTED BY THE FLASHPATH MEMORY STICK
2.1.1 Size
--------------------------------------------------------------
4MB 8MB 16MB 32MB 64MB 128MB
--------------------------------------------------------------
Software o o o [x] [x] [x]
--------------------------------------------------------------
Firmware o o o [x] [x] [x]
--------------------------------------------------------------
o - Fully tested
[x] - Tested with emulator supplied by Sony
--------------------------------------------------------------
2.1.2 Format Specification
Memory Stick Rev. 1.1, English. FPMS will support the write protect
capabilities of Memory Stick.
2.2 PCS SUPPORTED BY THE FLASHPATH MEMORY STICK
2.2.1 Platforms
IBM PC or compatible
NEC PC 9821
Power Mac
Page 3 of 9
<PAGE>
FlashPath Memory Stick Product Specification Rev 1.0 ms-00-000 06/21/99
2.2.2 Operating Systems (OS)
IBM PC or compatible...........Windows 95/98
Windows NT 4.0
NEC PC 9821....................Windows 95/98
Power Mac......................7.5.1 or later
(NOTE: Mac is a Read only utility)
2.2.3 Operating Systems (OS) Foreign Language Support for Driver Software
o There will be an English language version and a Japanese language
version of the FPMS software
o The English language version of FPMS software will support German,
Spanish and French Windows Operating Systems.
o The German, Spanish and French language version of FPMS software is
not included in these product specifications. The support of these
languages will be discussed separately and determined later.
2.2.4 FlashPath Driver Software
The FlashPath driver software enables the FlashPath to be used in a
floppy disk drive.
The software is automatically installed by executing Setup.exe from the
driver software floppy disk in Windows 95/98.
The software includes "FlashPath Status Monitor", "Uninstall", and
"Format Utility Tool" as utility software.
2.2.5 Floppy Disk Drive (FDD)
The following FDD models will be tested for the FDD compatibility:
MANUFACTURER PRODUCT
------------ -----------------------------------------------
ALPS FD334H901A, FD334H911A, FD334H911B, DFP723D11E,
DFR783D07A, DFR783F91A, DF334H014A
CHINON FZ-357, FZ354
CHITIZEN OSD, OSD-U, OSDE-15G, OSDF-00A, WID
EPSON SD-800, SMD-300, SMD-1300, SMD-1040-601, SMD-1340-502
MITSUBISHI MF355C-12UC, MF355C-37UC, FD355F-258MD,
FD355FD-3490UC, FD355F-3250MG, FD355F-3450MP,
MF355F-599MB, MF355H-312MG
MITSUMI D353TF, 3DG9M3, D359T2, D359T3, D359T5, D359T6, D353T7,
D359F2, D359F3, D359G
NEC FD1137H, FD1138H, FD1148H, FD1231H, FD1238T
SAFRONIC DS-34A
PANASONIC JU-257A023P, JU-257A024P, JU-257A206P, JU-257A216P,
JU-257A526P, JU-257A605, JU-257A606P, JU-257A624P,
EME278TB, EME279TD
Page 4 of 9
<PAGE>
FlashPath Memory Stick Product Specification Rev 1.0 ms-00-000 06/21/99
MANUFACTURER PRODUCT
------------ -----------------------------------------------
SONY MFD-17W-AA, MP-F73W-34D, MF17W-FP, MF17W-F1, MF17W-P2,
MF17W-17, MP-7W-12, MP-17W-10, MP-17W-09, MP-17W-20,
MP-17W-55, MP-F40W-11, MPF420-6, MFP520-1, MPF920,
MPF920-1, MPF920-1
TEAC FD-235HF, FD-235HG, FD-505, FD-235J(1/2/4M), FD05HG
SAMSUNG SFD-321D/T, ESFD^321B/E, SFD-321B/HDN
TECH MEDIA TFD310
TOSHIBA ND3561GR, ND-35641G
YE-DATA YD-7097D-6037D, YD-702D-6537D, YD-701-6062
Note:
o An FDD that supports 1.44 MB floppy disks is supported.
o An FDD that supports a large capacity floppy disk more than 1.44MB
like the 120MB FDD is not supported.
o An FDD that is interfaced through a USB is not supported.
o An FDD that is interfaced through a PC card slot is not supported.
2.3 OUTLINE SPECIFICATIONS
<TABLE>
<S> <C> <C> <C> <C>
[+0.3mm] [+0.0mm]
94 /plus minus sign/ 0.3mm (Depth) x 90.1 [ ] (Width) x 3.3 [ ] (Height)
[-0.2mm] [-0.3mm]
</TABLE>
2.4: WEIGHT:
33 /plus minus sign/ 3g (FlashPath only. Batteries and Memory Stick
are not included)
2.5 READ/WRITE PERFORMANCE
o Read - *
o Write - *
* The performance will be determined after the test.
3 BATTERIES
3.1 BATTERY MANUFACTURER
The recommended battery manufacturer will be determined after the test.
3.2 TYPE
CR2016 or CR2025*
* The battery type will be determined after the test.
Page 5 of 9
<PAGE>
FlashPath Memory Stick Product Specification Rev 1.0 ms-00-000 06/21/99
3.3 QUANTITY
Two
3.4 BATTERY LIFE
----------------------------------------------------------
READ 1MB Continuous Read 9 hr*
(MS to (PC)
----------------------------------------------------------
WRITE 1MB Continuous Write 9 hr*
(PC to MS)
----------------------------------------------------------
* The battery life is a preliminary target, and will be determined
after the test.
4 ENVIRONMENTAL CONDITION
4.1 OPERATING CONDITION*
Temperature: +5(degree)C - +55(degree)C *
Humidity: 20 - 80% RH *
* The operation condition is a preliminary target, and will be
determined after the test.
4.2 STORAGE CONDITION
Temperature: +0(degree)C - +55(degree)C
Humidity: 10 - 95% RH
* The operation condition is a preliminary target, and will be
determined after the test.
5 RELIABILITY
5.1 LIFETIME
NOTE: Whichever occurs first, Memory Stick insertion/removal times
or FlashPath insertion/removal times.
o Memory Stick Insertion/removal 5000 times *
o FlashPath insertion/removal 5000 times *
* The insertion/removal contact life is a preliminary target, and will
be determined after the test.
6 ENVIRONMENTAL SPECIFICATIONS
6.1 ESD 10kV Atmosphere Discharge *
Test condition: 200pF, 0 ohm *
* The test voltage and test condition are preliminary targets, will be
determined after the test.
Page 6 of 9
<PAGE>
FlashPath Memory Stick Product Specification Rev 1.0 ms-00-000 06/21/99
7 VISUAL, MARKING SPECIFICATION (PRELIMINARY)
7.1 Front
[Graphical illustration of the front of a FlashPath
Memory Stick diskette]
Page 7 of 9
<PAGE>
FlashPath Memory Stick Product Specification Rev 1.0 ms-00-000 06/21/99
7.2 Back
[Graphical illustration of the back of a FlashPath
Memory Stick diskette]
Page 8 of 9
<PAGE>
8 OFFICIAL STANDARDS
o Product must meet the requirements of VCCI Class2, FCC ClassB, CE,
AS-ACA, and IC.
Page 9 of 9
<PAGE>
EXHIBIT D
DESIGNATED CONTACTS
SMART DISK:
Principal Contact - Michael S. Battaglia
Program Manager - Yoshiaki Uchida
SONY:
Principal Contact - Tsutomu Mikami
Program Manager - Toshio Koyama
<PAGE>
EXHIBIT E
PROPRIETARY MARKINGS
<PAGE>
EXHIBIT "E"
PROPRIETARY MARKINGS
I. Product Marking
1. All products developed, manufactured or distributed pursuant
to this Agreement shall include the following information,
which shall clearly appear on the face of the product.
a. All products shall include the trademark
"FlashPath(TM)" or such other name as the parties may
from time to time agree upon.
b. All products shall include the words "U.S. Patent
5584043 and others."
II. Package Marking
1. All packaging for products developed, manufactured or
distributed pursuant to this Agreement shall include the
following information, which shall clearly appear on the
packaging.
a. All packaging shall include the words "U.S. Patent
5584043 and others."
b. All packaging shall include the following notice:
"(C)1999, Sony Corporation and SmartDisk Corporation,
All rights reserved."
c. All packaging wherein the trademark FlashPath(TM)
appears shall include the following notice, when it
is used: "FlashPath(TM) is a trademark of SmartDisk
Corporation."
III. End-User Documentation
1. All End-User Documentation for products developed,
manufactured or distributed pursuant to this Agreement shall
include the following information, which shall appear in a
conspicuous location.
a. All End-User Documentation shall include the words:
"U.S. Patent 5584043 and others."
b. All End-User Documentation shall include the
following notice: "(C)1999, Sony Corporation and
SmartDisk Corporation, all rights reserved."
c. All End-User Documentation wherein the trademark
FlashPath(TM) appears shall include the following
notice, when it is used: "FlashPath(TM) is a
trademark of SmartDisk Corporation."
<PAGE>
IV. Brochures and Advertising Material
1. All Brochures and Advertising Material for products developed,
manufactured or distributed pursuant to this Agreement shall
include the following information, which shall appear in a
conspicuous location.
a. All Brochures and Advertising Material shall include
the words: "U.S. Patent 5584043 and others."
b. All Brochures and Advertising Material containing
content which is provided by SmartDisk Corporation
shall include the following notice: "(C)1999, Sony
Corporation and SmartDisk Corporation, All rights
reserved."
c. All Brochures and Advertising Material wherein the
trademark FlashPath(TM) appears shall include the
following notice, when it is used: "FlashPath(TM) is
a trademark of SmartDisk Corporation."
V. Software Driver
1. All Software Drivers shall include the following information
on the screen in case of software installation.
Copyright(C)1999
Sony Corporation and SmartDisk Corporation
All rights reserved.
VI. Others
1. SmartDisk Corporation desires that the said all products, all
packaging for products and all End-User Documentation will
include the following information, which will appear on each
respectively.
"Manufactured by SmartDisk Corporation" and/or
"Co-developed by Sony Corporation and SmartDisk
Corporation"
Sony Corporation and SmartDisk Corporation will discuss the
SmartDisk Corporation's desire with faithful attitude to reach
an amicable conclusion.
<PAGE>
EXHIBIT F
FEES
<PAGE>
EXHIBIT "F"
Quotation for FlashPath for Memory Stick Development, Engineering Services,
Engineering Samples, and Customer Samples.
- --------------------------------------------------------------------------------
Manpower
A. SmartDisk Corporation (approximately 90 Man Months)....(Yen)[*****]
1. Hardware
a. Design and Development of Gate Array
b. Design and Development of Firmware
c. Design and Development of Design Systems
d. Design and Development of Engineering Samples
e. Design and Development of Customer Samples
2. Software
a. Design and Development, including Quality Assurance
testing, of Driver and Utility Software
B. SmartDisk International, Inc.
(approximately 54 Man Months)..........................(Yen)[*****]
1. Hardware
a. Design and Development of Mechanical
b. Evaluation and Reliability Testing of Hardware
c. Certification Testing & Documentation to meet
Regulatory Requirements (e.g. VCCI, CE, etc.)
2. Software
a. Development of Japanese Version of Software
----------------
Total......(Yen)[*****]
***** CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.
<PAGE>
Monthly Invoice Plan for Development Services
(Unit 1,000 Yen)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER TOTAL
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SmartDisk [*****] [*****] [*****] [*****] [*****] [*****] [*****] [*****] [*****]
Corporation
- ---------------------------------------------------------------------------------------------------------------------
SmartDisk [*****] [*****] [*****] [*****] [*****] [*****] [*****] [*****] [*****]
International
- ---------------------------------------------------------------------------------------------------------------------
FEES [*****] [*****] [*****] [*****] [*****] [*****] [*****] [*****] [*****]
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
***** CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.
Exhibit 10.15
COOPERATIVE DEVELOPMENT AGREEMENT
This Cooperative Development Agreement (this "AGREEMENT") is entered
into as of June 30, 1999 (the "EFFECTIVE DATE") by and between SMARTDISK
CORPORATION, a Delaware corporation, with its principal offices at 3506
Mercantile Avenue, Naples, FL 34104 ("SMARTDISK") and SANDISK CORPORATION, a
Delaware corporation, with its principal offices at 140 Caspian Court,
Sunnyvale, California, 94089 ("SANDISK").
R E C I T A L S
A. SmartDisk designs, develops and manufactures, among other products,
adapters that allow standard PC floppy disk drives to read and write data to and
from flash memory storage products and other devices.
B. SanDisk designs, develops and manufactures flash memory storage
products in the form of MultiMediaCards and CompactFlash Cards, among other
things.
C. SanDisk desires to have SmartDisk design, manufacture and own,
subject to SanDisk's proprietary rights, a floppy disk adapter for use with
SanDisk's MultiMediaCard partially using SanDisk's proprietary technology and
engineering assistance.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. DEFINITIONS
1.1 "MULTIMEDIACARD ADAPTER DESCRIPTION" means the written
detailed description of the MultiMediaCard Adapter to be developed by SmartDisk
as set forth in Section 2.1 below.
1.2 "ADDITIONAL PRODUCTS" means any Card Adapter that reads to
(i) a SanDisk product, (ii) a MultiMediaCard or CompactFlash Card manufactured
by an authorized SanDisk licensee, (iii) a MultiMediaCard or CompactFlash Card
that is external to the Card Adapter and which is sold separately from the Card
Adapter by a third party and (iv) a product developed by SanDisk with one or
more third parties.
1.3 "AFFILIATE" means any wholly owned subsidiary of SmartDisk
identified in EXHIBIT 1.3 that has agreed in writing to be bound by the terms of
this Agreement as such terms apply to SmartDisk.
1.4 "CARD ADAPTER" means a device designed by SmartDisk based
on SmartDisk's FlashPath product, and which is a device that can transmit data
stored on flash memory to a magnetic head media simulating the movement of a
cassette tape or the spinning of a disk or zip drive.
<PAGE>
1.5 "COMPACTFLASH" means flash memory cards that conform to
the description published by the Compact Flash Association as set forth in
Exhibit 1.5 hereto.
1.6 "CONFIDENTIAL INFORMATION" means all information disclosed
by either party to the other during the term of this Agreement relating to
either party's financial or business plans and affairs, financial statements,
internal management tools and systems, marketing plans, clients, contracts,
products and programs, product and program development plans, hardware,
firmware, software programs, Intellectual Property Rights (as defined below),
trademarks, tradenames, logos, rights in tradedress, maskwork rights, know how,
trade secrets and other technology which information is deemed by the disclosing
party as confidential. No formal identification of information as "Confidential
Information" shall be required by the disclosing party.
1.7 "INTELLECTUAL PROPERTY RIGHTS" means all classes or types
of patents, utility models, designs patents (including without limitation,
originals or divisions, continuations, continuations-in-part or reissues) and
applications therefor of all countries of the world, which are used, or
published, or have a first effective filing date prior to the date of any
expiration or termination of this Agreement. Intellectual Property Rights shall
also include masswork rights, know how and trade secrets disclosed after the
Effective Date by SanDisk employees to assist SmartDisk in the development of
the MultiMediaCard Adapter and/or Additional Products. The term Intellectual
Property does not include trademarks, trade names, logos and rights in trade
dress and packaging.
1.8 "MULTIMEDIACARD" means flash memory cards that conforms to
the description published by the MultiMediaCard Association as set forth in
Exhibit 1.8 hereto.
1.9 "MULTIMEDIACARD ADAPTER" means a card adapter designed in
accordance with the MultiMediaCard description as set forth in Exhibit 1.8
hereto.
1.10 "NET REVENUES" means the total amount received by
SmartDisk for all copies of a Royalty Product other than amounts received for
sales or licenses of such products to or on behalf of SanDisk, less the
following amounts, in each case either allocated from SmartDisk's total such
expenses or, in certain instances where it is practical to measure such expenses
on a per-product basis, attributable to the subject product: all sales,
value-added, excise and other taxes; export charges or import duties; returns;
sales commissions which are reasonable and consistent with the amounts
customarily paid in the industry; freight and insurance paid by SmartDisk for
shipments of products; any currency exchange fees incurred by SmartDisk with
respect to invoiced amounts other than in United States dollars. In the event
that SmartDisk sells a Royalty Product in combination with another product, a
portion of the amount received by SmartDisk for such combined product shall be
attributed to a Royalty Product, consistent with SmartDisk's stand-alone product
pricing practices, and it is such apportioned amount which will be deemed to be
"Net Revenues" hereunder. Such amount shall be allocated pro rata to the Royalty
Product based on the aggregate list prices of all SmartDisk products in the
bundled product, but in no event shall the amount allocated to the Royalty
Product exceed the list price for such Royalty Product.
<PAGE>
1.11 "OTHER PRODUCTS" means any Card Adapter which reads to a
SmartMedia Card, Sony MemoryStick Card or any other product that is not an
Additional Product.
1.12 "PROJECT PLAN" means a complete description of the
development of the Card Adapter which sets forth the obligations of each party
with respect thereto to be set forth in EXHIBIT 1.12 attached hereto. The
Project Plan shall include, without limitation, a detailed description of each
party's deliverables, delivery dates, milestones, target milestone achievement
dates for: (i) developing a proof of concept; (ii) developing and testing a
production prototype which shall be used as a manufacturing sample; (iii)
developing and testing manufacturing and engineering improvements for commercial
manufacturing cost reductions; and (iv) developing commercialized, final
products.
1.13 "ROYALTY PRODUCT" means the MultiMediaCard Adapter and
Additional Products collectively.
1.14 "SANDISKCARD" means the MultiMediaCard, the Compact Flash
Card and other flash memory cards produced or manufactured by SanDisk or
mutually agreed to in writing by the parties hereto.
1.15 "SANDISK CONTRIBUTIONS" means all of SanDisk's
contributions and all technical assistance SanDisk renders to the development of
the Project Plan and the Card Adaptor hereunder, and all Intellectual Property
Rights therein, whether in the form of: (i) oral or written presentations,
explanations or instructions; (ii) design specifications; or (iii) updates,
additions, enhancements, corrections and modifications to the Card Adaptor or to
any of SmartDisk's other adaptor products, but, in all cases excluding the
SanDisk Card, the Software, as defined in Section 3.1 below and the Hardware, as
defined in Section 3.1.1.16 "SANDISK CARD UPDATES" means updates, enhancements,
additions or modifications to a SanDisk Card.
2. DEVELOPMENT PHASE I - PROJECT PLANNING.
2.1 ADAPTER DESCRIPTION. THE MULTIMEDIACARD ASSOCIATION has
developed written specifications for the MultiMediaCard, a copy of which is
attached hereto as EXHIBIT 1.8. Within forty-five (45) calendar days after the
Effective Date, SmartDisk shall develop the MultiMediaCard Adapter Description
based upon such MultiMediaCard specifications, against which SmartDisk shall
develop the MultiMediaCard Adapter with SanDisk's assistance, as reasonably
requested by SmartDisk.
2.2 PROJECT PLAN. Within forty-five (45) calendar days of the
Effective Date, the parties will negotiate in good faith to develop and agree
upon the Project Plan, which shall be deemed to be part of this Agreement as
EXHIBIT 1.12.
3. DEVELOPMENT PHASE II - PROJECT PREPARATION
3.1 SANDISK TECHNICAL ASSISTANCE. Within thirty (30) calendar
days of the Effective Date, SanDisk shall deliver and convey to SmartDisk,
subject to Section 3.2 below, at SanDisk's expense, the software ("SOFTWARE"),
hardware and testing equipment (together, "HARDWARE"), as set forth in EXHIBIT
3.1 attached hereto, to enable SmartDisk to: (i) design and
<PAGE>
develop the MultiMediaCard Adapter in accordance with the MultiMedia Adapter
Description; (ii) test the MultiMediaCard Adapter; (iii) perform quality
assurance and quality control for the MultiMediaCard Adapter; and (iv) to
provide support and maintenance with respect to the MultiMediaCard Adapter.
3.2 SOFTWARE LICENSE. SanDisk hereby grants SmartDisk a
non-exclusive, perpetual, worldwide, fully-paid right and license to use, and
reproduce, as reasonably required by SmartDisk, the Software for the sole
purpose of designing, developing, manufacturing, testing, performing quality
assurance, performing quality control, improving and providing support and
maintenance for a Royalty Product and Other Products. Notwithstanding the grant
of non-exclusive rights by SanDisk as set forth above, the parties understand
and agree that SmartDisk shall be the exclusive developer of a Royalty Product
as developed in accordance with the MultiMedia Adapter Description. In the event
a Royalty Product contains any portion of the Software which is proprietary to
SanDisk or a third party, SanDisk hereby grants SmartDisk a fully-paid,
worldwide right and license, or sublicense in the case when such proprietary
portion is owned by a third party, to reproduce, have made, modify and include
such portions of the Software in the Royalty Product and to market, sell and
distribute a Royalty Product which includes such portions of the Software.
SmartDisk shall retain possession and use of the Software pursuant to the
license set forth herein through that time when SmartDisk shall no longer be in
the business of developing, making, selling, licensing or distributing a Royalty
Product.
4. DEVELOPMENT PHASE III - PROJECT DEVELOPMENT
4.1 DESIGNATED CONTACTS. EXHIBIT 4.1 attached hereto sets
forth each party's designated "Principal Contact", which shall be each party's
respective point of contact for the resolution of problems. In addition, Exhibit
4.1 sets forth each party's respective "Program Manager", who shall have overall
responsibility for the direction and coordination of the development of the
MultiMediaCard Adapter. The SanDisk and SmartDisk Program Managers shall
establish and implement reasonable project management procedures. In addition to
the responsibilities set forth herein, the Principal Contact and Program Manager
shall be responsible for matters designated in the Project Plan.
4.2 OPERATING UNDER THE PROJECT PLAN. The parties hereby agree
to carry out their respective obligations pursuant to and in accordance with the
Project Plan.
4.3 REGULATORY APPROVAL. Except as set forth in the
Distribution Agreement, as described in Section 6.2 below, SmartDisk shall bear
sole responsibility for obtaining any required regulatory approval for the
MultiMediaCard Adapter. SmartDisk reserves the right to request that SanDisk
reasonably assist SmartDisk in seeking such approvals, at SanDisk's expense.
5. OWNERSHIP
5.1 ASSIGNMENT. Subject to the license set forth in Section
5.2 and to Section 5.5 below, SanDisk acknowledges and agrees that it is the
intent of the parties that SmartDisk shall be the owner of a Royalty Product.
SanDisk agrees to do any lawful act and to sign and deliver to SmartDisk, at
SmartDisk's expense, any document necessary to apply for,
<PAGE>
prosecute or enforce any patent, copyright or other right or protection relating
to a Royalty Product which SmartDisk may reasonably request, subject to
ScanDisk's rights
5.2 LICENSE. For the term of this Agreement, SanDisk hereby
grants and agrees to grant to SmartDisk under SanDisk's Intellectual Property
Rights a non-exclusive, non-transferable to non-Affiliates of SmartDisk,
non-sublicensable, worldwide, right and license to reproduce, make, have made,
use, modify, market, sell and distribute Royalty Products and Other Products.
This license specifically excludes all other products except Royalty Products
and Other Products. Specifically, SanDisk does not grant SmartDisk a license to
make or have made flash memory or flash memory cards.
5.3 LICENSE FEES. In consideration of the license rights
granted in Section 5.2 above, SmartDisk shall pay the following amounts to
SanDisk:
(i) One hundred fifty thousand (150,000) shares of
Common Stock of SmartDisk (the "Common Stock"), payable within three
(3) business days of the Effective Date. Prior to the delivery of the
Common Stock to SanDisk. SanDisk shall executive the Investment
Representant Letter attached hereto as Exhibit S.3.
(ii) A royalty of [*****] percent ([*****]%) of the
Net Revenues. SmartDisk shall remit such payments thirty (30) calendar
days after each calendar quarter for Net Revenues received by SmartDisk
during such calendar quarter. The royalty amount of the license fee set
forth in this Section 5.3(ii) shall be subject to renegotiation by the
parties in good faith at the tenth anniversary of the Effective Date.
The parties agree that such royalty amount shall be a fair royalty at
the time. In the event the parties cannot reach agreement on the new
royalty amount payable to SanDisk within thirty (30) calendar days
prior to such date, the parties shall submit the matter to a single
arbitrator knowledgeable in the relevant technology field to determine
a fair royalty amount. The parties shall have ten (10) calendar days to
select a mutually agreeable arbitrator. If the parties cannot agree on
an arbitrator, each party shall select its own arbitrator and the two
selected arbitrators shall have ten (10) calendar days to select a
third arbitrator, which third arbitrator shall make the royalty
determination within thirty (30) calendar days.
5.4 CARD ADAPTER. Subject to Section 5.5 below, the license
rights granted to SmartDisk in Sections 3.2 and 5.2 above, SmartDisk has and
shall retain any and all rights of ownership in and to the MultiMediaCard
Adapter, any and all modifications, enhancements and derivative works thereof
and the Intellectual Property Rights embodied therein.
5.5 SANDISK CARDS. Subject to the license rights granted to
SmartDisk in Sections 3.2 and 5.2 above, SanDisk has and shall retain any and
all rights of ownership in and to the proprietary technology of the Software,
Hardware and all SanDisk Cards and all modifications, enhancements created by or
on behalf of SanDisk and the Intellectual Property Rights embodied therein.
***** CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.
<PAGE>
6. DISTRIBUTION
6.1 SMARTDISK DISTRIBUTION. SmartDisk is free to determine its
own prices for a Royalty Product or Other Products to its distributors and other
customers unilaterally. Nothing set forth herein is a guaranty of distribution
or commercial success of a Royalty Product or Other Products by SmartDisk.
6.2 APPOINTMENT OF SANDISK. SmartDisk hereby agrees to appoint
SanDisk as a non-exclusive distributor of the MultiMediaCard Adapter pursuant to
a Distribution Agreement, the material terms of which are set forth in the
Distribution Term Sheet attached hereto as EXHIBIT 6.2.
6.3 MARKETING ASSISTANCE. Prior to the first commercial
release of the MultiMediaCard Adapter, the parties shall complete a marketing
plan therefor.
7. UPDATES, SUPPORT AND MAINTENANCE
7.1 SANDISK CARD UPDATES. In the event that during the term of
this Agreement, SanDisk develops, or has developed on its behalf, SanDisk Card
Updates relating to SanDisk's MultiMediaCards, SanDisk shall send SmartDisk
written notice thereof as soon as commercially reasonable with the intent that
SmartDisk has notice at least three (3) months prior to SanDisk's anticipated
first commercial release of such SanDisk Card Update. SanDisk's notice shall
describe the updates, enhancements, additions and modifications to the SanDisk
Card and shall state whether and how the MultiMediaCard Adapter's effectiveness,
functionality and commercial viability are affected by such SanDisk Card Update.
SanDisk shall use it's best effort to insure any changes made do not impair the
use of the MultiMediaCard Adapter. To the extent SmartDisk determines in its
commercially reasonable business judgement that the MultiMediaCard Adapter
should be modified to accommodate the SanDisk Card Update, the Program Managers
shall meet and confer to develop a new project plan for a modified
MultiMediaCard Adapter. SanDisk agrees to cooperate with SmartDisk, at SanDisk's
expense, to modify the MultiMediaCard Adapter to accommodate any such SanDisk
Card Update. Such cooperation may be in the form of supplying SmartDisk with
SanDisk engineering resources, training and equipment, at Sandisk's expense.
7.2 OBSOLESCENCE. SanDisk agrees that it will not modify the
SanDisk Card relating to ScanDisk's MultiMediaCards in a manner which reduces or
appears to reduce the commercial or technical quality of the MultiMediaCard
Adapter developed by SmartDisk hereunder for a period of eighteen (18) months
from the date of first commercial shipment of the MultiMediaCard Adapter.
7.3 MULTIMEDIACARD ADAPTER SUPPORT. Throughout the term of
this Agreement, SanDisk shall provide a reasonable amount of remote (telephonic
and electronic) engineering and other technical support, at SanDisk's expense,
as reasonably requested by SmartDisk to assist SmartDisk in its efforts to
improve the MultiMediaCard Adapter and to reduce the costs of manufacturing the
MultiMediaCard Adapter. The periodic meetings held by the Program Managers shall
address mutually agreeable ways to have SanDisk render such support to
SmartDisk. Nothing set forth herein shall require SanDisk to provide distributor
or end-user support for MultiMediaCard Adapters distributed by SmartDisk to
non-SanDisk
<PAGE>
distributors or to end-users, although SanDisk's MultiMediaCard Adapter support
obligations for the MultiMediaCard Adapters which it distributes shall be as set
forth in the Distribution Agreement. SmartDisk shall provide support for the
MultiMediaCard Adapter to its distributors and end-users consistent with its
standard support and warranty programs for its products, which SmartDisk
reserves the right to modify from time to time.
7.4 SANDISK CARD SUPPORT. As between the parties, SanDisk
shall provide all distributor and end-user support for the SanDisk Card and the
SanDisk Card Updates. SmartDisk shall not be responsible for any support of the
SanDisk Card or SanDisk Card Updates.
8. WARRANTIES AND LIMITATIONS ON LIABILITY
8.1 SANDISK REPRESENTATIONS.
8.1.1 SanDisk represents and warrants to SmartDisk
that no claim of infringement as part of any actual, threatened or imminent
legal action of any SanDisk Intellectual Property Right has been made or is
pending against SanDisk relating to the SanDisk Card, the Software or the
Hardware. SanDisk will promptly notify SmartDisk in the event there is any such
claim, or threatened claim of which it is aware, of infringement of any third
party's Intellectual Property Rights arising out of the SanDisk Card, the
SanDisk Card Updates, the SanDisk Contributions, the Software, the Hardware, or
any component thereof.
8.1.2 SanDisk represents and warrants to SmartDisk
that to its knowledge after reasonable investigation, SanDisk has the right to
enter into this agreement and grant the licenses herein granted.
8.2 DISCLAIMER OF WARRANTIES. EXCEPT FOR THE EXPRESS
WARRANTIES STATED IN THIS SECTION 8, SANDISK MAKES NO WARRANTIES, EXPRESS OR
IMPLIED, WITH RESPECT TO ANY SANDISK CARD, ANY SanDisk Card Updates, THE
HARDWARE OR THE SOFTWARE, AND SANDISK SPECIFICALLY DISCLAIMS ANY WARRANTIES,
WHETHER EXPRESS OR IMPLIED, FOR MERCHANTABILITY OR FITNESS FOR A PARTICULAR USE.
8.3 LIMITATION OF LIABILITY. SUBJECT TO THE PROVISIONS OF
SECTION 9.1 HEREOF, IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR INCIDENTAL,
SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES OF ANY KIND OR THE LOSS OF
ANTICIPATED PROFITS ARISING FROM ANY BREACH OF THIS AGREEMENT EVEN IF SUCH PARTY
IS NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES AND REGARDLESS OF WHETHER ANY
REMEDY SET FORTH HEREIN FAILS OF ITS ESSENTIAL PURPOSE.
9. INFRINGEMENT AND OTHER REPRESENTATIONS
9.1 SANDISK INTELLECTUAL PROPERTY INDEMNITY. SanDisk shall use
it's best effort to defend SmartDisk from any claim, demand or liability brought
against SmartDisk to the extent it is based upon a claim that any of the SanDisk
Card or the SanDisk Card Updates, infringe upon any third party Intellectual
Property Right. SmartDisk agrees that it shall promptly
<PAGE>
notify SanDisk in writing of any such claim or action and give SanDisk full
information and assistance in connection therewith. SanDisk shall have the sole
right to control the defense of any such claim or action and the sole right to
settle or compromise any such claim or action.
9.2 LIMITATION OF SANDISK OBLIGATIONS. SanDisk shall have no
obligation hereunder for or with respect to claims, actions or demands alleging
infringement which arise by reason of a) the combination of SanDisk's
non-infringing items with any items not supplied by SanDisk unless such
combination is expressly contemplated hereunder, b) SanDisk's compliance with
SmartDisk's designs, specifications or instructions, or c) unauthorized
modification by SmartDisk of the SanDisk Card, the SanDisk Card updates, the
Software or Hardware.
9.3 SmartDisk Indemnity. SmartDisk shall be responsible for
and shall indemnify and hold SanDisk harmless for any and all losses,
liabilities or damages arising out of or incurred in connection with a)
SmartDisk's distribution of Royalty Products or Other Products, except for third
party infringement claims as set forth in Section 9.1 or any other claims
relating to the SanDisk Card, the SanDisk Card Updates, the SanDisk
Contributions, the Software, the Hardware, or any component thereof, and b) any
unauthorized representation, warranty, or agreement, express or implied, made by
SmartDisk to any third party with respect to a Royalty Product, Other Product or
any other product which SmartDisk may distribute which incorporates or uses
SanDisk Intellectual Property.
10. ASSIGNMENT
This Agreement shall not be assigned by either party, in whole or in
part without the written consent of the other, which consent will not be
unreasonably withheld. However, either party may assign this Agreement to a
subsidiary or entity controlled by or under common control with such party, or
to any successor in-interest resulting from a reorganization, merger,
acquisition or sale of substantially all of the assets of such party, upon
written notice to the other party, (as long as the original party hereto, to the
extent such party continues to exist, remains primarily liable to the other
contracting party
11. DURATION AND TERMINATION OF AGREEMENT
11.1 TERM. This Agreement is effective for a period of ten
(10) years commencing on the Effective Date and will be automatically renewed
for successive two (2) year periods, unless ninety (90) calendar days prior to
any such expiration, either party sends the other party written notice of its
intent not to renew this Agreement, in which case this Agreement shall expire at
the conclusion of its existing term.
11.2 TERMINATION FOR CAUSE. In the event that either
materially breaches this Agreement and such breach remains uncured twenty (20)
calendar days following receipt of written notice by the nonbreaching party, the
nonbreaching party may terminate this Agreement by written notice to the
breaching party in which case the effective date of such termination shall be
the day following the twenty (20) day cure period described herein.
11.3 NO EXPECTATION OF BUSINESS RELATIONSHIP. Neither party
has any expectation that the business relationship set forth herein will
continue beyond the expiration of
<PAGE>
this Agreement, or any renewal hereunder, or its earlier termination as herein
provided, or that SanDisk shall obtain any anticipated amount of profits by
virtue of this Agreement.
11.4 SURVIVAL. Sections 8, 9, 11.3, 11.4, 12, 13 and 14 shall
survive the termination or expiration of this Agreement.
12. CONFIDENTIAL INFORMATION
12.1 CONFIDENTIAL INFORMATION. Each party agrees to use
reasonable efforts, and at least the same care that it uses to protect its own
Confidential Information of like importance, to prevent unauthorized
dissemination and disclosure of the other party's Confidential Information
during and for a period of three (3) years after the term of this Agreement.
These obligations will be subject to the following terms and conditions:
(i) The foregoing obligations will not apply to any
Confidential Information that: (a) becomes known to the general public
without fault or breach on the part of the receiving party; (b) the
disclosing party customarily provides to others without restriction on
disclosures; (c) the receiving party receives from a third party
without breach of a nondisclosure obligation and without restriction on
disclosure; (d) was in the possession of the receiving party prior to
disclosure by the other; or (e) is independently developed by the
receiving party's personnel having no access to similar confidential
information obtained from the other.
(ii) Nothing in this Agreement will affect any
obligation of either party to maintain the confidentiality of a third
party's confidential information.
12.2 NO IMPAIRMENT. Nothing in this Agreement will impair the
right of either party to use, develop or market technologies, ideas or products
similar to those of the party so long as such use, development or marketing does
not infringe on any Intellectual Property Right of such other party or use such
other party's Confidential Information.
12.3 PUBLIC ANNOUNCEMENT. SanDisk and SmartDisk agree that no
press release or other public announcement about this Agreement or the business
relationship between the parties shall be made without the prior written consent
of both parties, which shall not be unreasonably withheld.
13. INFORMAL DISPUTE RESOLUTION
Should any dispute or disagreement between SmartDisk and SanDisk arise
relating to any provision of this Agreement (except with respect to Section 12
or with respect to a claim of misappropriation of the other party's Intellectual
Property or Confidential Information), the Program Manager of one party may give
written notification of such dispute or disagreement to the Program Manager of
the other party. The Program Managers shall communicate with each other promptly
with a view to resolving such dispute or disagreement within fourteen (14)
calendar days of commencing their negotiations (or such extended period as the
Program Managers agree is appropriate in any case). In the event that a dispute
or disagreement is not resolved by the Program Managers within such time period,
the Program Managers shall refer the dispute for discussion and resolution to
the Principal Contact of SmartDisk and the Principal
<PAGE>
Contact of SanDisk, who shall have an additional fourteen (14) calendar days to
meet and confer concerning a possible resolution. In the event that a dispute or
disagreement is not resolved by the Principal Contacts within such time period,
the Principal Contacts shall refer the dispute for discussion and resolution to
the President of SmartDisk and the President of SanDisk, who shall have an
additional fourteen (14) calendar days to meet and confer concerning a possible
resolution.
14. GENERAL
14.1 RELATIONSHIP OF THE PARTIES. The parties' relationship
during the term of this Agreement shall be that of independent contractors.
Neither party shall have, nor shall represent that it has, any power, right or
authority to bind the other, or to assume or create any obligation or
responsibility, express or implied, on behalf of the other or in such other
party's name, except as herein expressly provided. Nothing stated in this
Agreement shall be construed as constituting a partnership or as creating the
relationships of employer/employee, franchiser/franchisee, or principal/agent
between the parties.
14.2 GOVERNING LAWS. The internal laws of the State of
California, U.S.A., regardless of any choice of law principles, shall govern the
validity of this Agreement, the construction of its terms and the interpretation
and enforcement of the rights and duties of the parties.
14.3 SUCCESSORS AND ASSIGNS. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
permitted successors and assigns of the parties.
14.4 SEVERABILITY. If any provision of this Agreement, or the
application thereof, shall for any reason and to any extent be invalid or
unenforceable, the remainder of this Agreement and application of such provision
to other persons or circumstances shall be interpreted so as best to reasonably
effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision which will achieve, to the extent possible, the economic,
business and other purposes of the void or unenforceable provision.
14.5 ENTIRE AGREEMENT. This Agreement, the exhibits hereto,
the documents referenced herein and the exhibits thereto, constitute the entire
understanding and agreement of the parties hereto with respect to the subject
matter hereof and thereof and supersede all prior and contemporaneous agreements
or understandings, inducements or conditions, express or implied, written or
oral, between the parties with respect hereto and thereto. The express terms
hereof control and supersede any course of performance or usage of the trade
inconsistent with any of the terms hereof.
14.6 OTHER REMEDIES. Any and all remedies herein expressly
conferred upon a party shall be deemed cumulative with, and not exclusive of,
any other remedy conferred hereby or by law on such party, and the exercise of
any one remedy shall not preclude the exercise of any other.
<PAGE>
14.7 AMENDMENT AND WAIVERS. Any term or provision of this
Agreement may be amended, and the observance of any term of this Agreement may
be waived, only by a writing signed by the parties. The waiver by a party of any
breach hereof for default in payment of any amount due hereunder or default in
the performance hereof shall not be deemed to constitute a waiver of any other
default or succeeding breach or default.
14.8 ATTORNEYS' FEES. Should suit be brought to enforce or
interpret any part of this Agreement, the prevailing party shall be entitled to
recover, as an element of the costs of suit and not as damages, reasonable
attorneys' fees to be fixed by the court (including, without limitation, costs,
expenses and fees on any appeal). The prevailing party shall be the party
entitled to recover its costs of suit, regardless of whether such suit proceeds
to final judgment. A party not entitled to recover its costs shall not be
entitled to recover attorneys' fees. No sum for attorneys' fees shall be counted
in calculating the amount of a judgment for purposes of determining if a party
is entitled to recover costs or attorneys' fees.
14.9 NOTICES. Whenever any party hereto desires or is required
to give any notice, demand or request with respect to this Agreement, each such
communication shall be in writing and shall be given or made by facsimile, mail
or other delivery and faxed, mailed or delivered to the intended recipient at
the addresses specified below:
If to SmartDisk: SmartDisk Corporation
3506 Mercantile Avenue
Naples, FL 34104
Facsimile: (941) 436-2509
Attn: Michael S. Battaglia
with a copy to: Tomlinson Zisko Morosoli & Maser LLP
200 Page Mill Road, Second Floor
Palo Alto, CA 94306
Facsimile: (650) 324-1808
Attn: Timothy Tomlinson, Esq.
If to SanDisk: SanDisk Corporation
140 Caspian Court
Sunnyvale, CA 94089
Facsimile: (408) 542-0602
Attn: Charles Van Orden
with a copy to: Brobeck, Phleger & Harrison LLP
2 Embarcadero Place
2200 Geng Road
Palo Alto, CA 94303
Facsimile: (650) 496-2885
Telephone: (650) 424-0160
Attn: Timothy Curry
<PAGE>
Except as may be otherwise provided in this Agreement, all such communications
shall be deemed to have been duly given when transmitted by facsimile with
verified receipt by the receiving fax machine, when personally delivered, four
(4) days after being delivered to an overnight air courier (E.G. DHL, or Federal
Express) upon proof of delivery, or, in the case of a mailed notice, five (5)
days after being deposited in the United States mail certified or registered
mail, postage prepaid. Either party may change its address for such
communications by giving notice thereof to the other party in conformance with
this section.
14.10 FURTHER ASSURANCES. Each party agrees to cooperate fully
with the other parties and to execute such further instruments, documents and
agreements and to give such further written assurances as may be reasonably
requested by any other party to better evidence and reflect the transactions
described herein and contemplated hereby, and to carry into effect the intents
and purposes of this Agreement.
14.11 FORCE MAJEURE. No failure or omission to carry out or
observe any of the terms, provisions or conditions of this Agreement shall give
rise to any claim by one party against the other or be deemed to be a breach of
this Agreement if the same is caused by or arises out of one or more of the
following conditions: acts of God; acts, regulations or laws of any government;
war; civil commotion; destruction of production facilities or materials by fire,
earthquake or storm; labor disturbances; epidemic; failure of public utilities
or of suppliers; or any other event, matter or thing wherever occurring and
whether or not of the same class or kind as those set forth above, which is not
reasonably within the control of the party affected thereby. However, the
parties hereto shall endeavor to avoid, remove or cure all such conditions. Any
party temporarily excused from performance hereunder by such conditions shall
resume performance promptly when such conditions are removed or cured. Any party
claiming any such conditions as an excuse for delay in performance hereunder
shall give prompt notice in writing thereof to the other party.
14.12 COMPLIANCE WITH LAWS. The parties acknowledge and agree
that this Agreement and the rights and obligations of the parties hereunder are
subject to all applicable laws and regulations of governmental entities having
jurisdiction over any aspects of this Agreement.
14.13 AFFILIATE. EXHIBIT 1.3 identifies SmartDisk's Affiliates
may be amended from time to time to add new SmartDisk wholly owned subsidiaries
on the condition that each such wholly owned subsidiary has agreed in writing to
be bound by the terms of this Agreement as such terms apply to SmartDisk.
14.14 RECORDS AND INSPECTION. SmartDisk agrees to keep all
usual and proper records and books of account and all usual and proper entries
therein related to the license, royalty payments, or other rights and
restrictions hereunder. Upon reasonable notice and after the execution of a
confidentiality agreement by Sandisk and any appointed representative, SanDisk
or its duly appointed representative shall have the right, at its expense and
during normal business hours, to audit SmartDisk's records or inspect its files
necessaryto verify SmartDisk's compliance with this Agreement. In the course of
such inspection or audit, SanDisk or its representative will be entitled to copy
any item that SanDisk believes indicates violation of this Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the day and year first above written.
SMARTDISK CORPORATION SANDISK CORPORATION
By: /s/ MICHAEL S. BATTAGLIA By: /s/ DANIEL AUCLAIR
-------------------------------- -----------------------------
Name: Michael S. Battaglia Name: Daniel Auclair
Title: President and CEO Title: Vice President
<PAGE>
EXHIBIT 1.5
Reference is hereby made to that certain CompactFlash Memory
Card Product Manual that may be in effect from time to time, as
amended, and obtained from SanDisk Corporate Headquarters, 140 Caspian
Court, Sunnyvale, California 94089-9820.
<PAGE>
EXHIBIT 1.7
Reference is hereby made to that certain MultiMediaCard
Product Manual that may be effect from time to time, as amended, and
obtained from SanDisk Corporate Headquarters, 140 Caspian Court,
Sunnyvale, California 94089-9820.
<PAGE>
EXHIBIT 3.1
SOFTWARE AND HARDWARE
SOFTWARE:
1. A copy of the 2.0 release of the MMC specification.
2. Commitment from SanDisk to perform Quality Assurance tests on both the
FlashPath hardware and software.
3. Detailed specifications of how a format utility should configure the
MMC (e.g., layout of MBR).
HARDWARE:
1. A copy of the 2.0 release of the MMC specification.
2. VHDL model of MMC.
3. 20 samples of each MMC memory density (e.g., 2MB, 4MB, 8MB, 16MB, etc.)
4. Hardware emulators (3) to test future density products (e.g., 128MB)
5. A set of MMC modules which have been modified to include errors which
FlashPath firmware or software will have to handle.
6. 40 MMC sockets for building prototypes.
7. Commitment from SanDisk to perform Quality Assurance tests on both the
FlashPath hardware and software.
8. Specification on the CRC routine used with MMC.
<PAGE>
EXHIBIT 4.1
CONTACTS
PROGRAM MANAGER
SmartDisk SanDisk
- --------------------------------------------------------------------------------
Bob Protheroe Dan Auclair
PRINCIPAL CONTACT
SmartDisk SanDisk
- --------------------------------------------------------------------------------
Bob Protheroe Dan Auclair
SmartDisk Corporation SanDisk Corporation
3506 Mercantile Avenue 140 Caspian Court
Naples, Fl 34104 Sunnyvale, CA 94089
Tel: (941) 436-2505 Tel: (408) 542-0505
Fax: (941) 643-6357 Fax: (408) 542-0602
<PAGE>
EXHIBIT 5.3
INVESTMENT REPRESENTATION LETTER
SmartDisk Corporation
3506 Mercantile Avenue
Naples, FL 34104
Gentlemen:
The undersigned is acquiring One Hundred Fifty Thousand
(150,000) shares o SmartDisk Corporation, a Delaware corporation (the
"Company"), Common Stock (the "Stock").
The undersigned understands that the issuance of the Stock has
not been registered under the Securities Act of 1933 (the "ACT") or
qualified under the Florida Securities Law (the "LAW") in reliance upon
exemptions from the registration requirements of the Act and the
qualification requirements of the Law.
The undersigned further understands that the exemptions from
the registration requirements of the Act relied upon in issuing the
Stock to the undersigned are only available if, among other things, the
undersigned is acquiring the Stock for investment for its own account
and not with a view to, or for transfer in connection with, any
distribution of a security.
In light of these restrictions on the availability of the
exemptions from the Act and the Law, the undersigned hereby makes the
following statements of fact upon which the Company is entitled to rely
in connection with the issuance of the Stock to it:
1. The undersigned is aware that the Stock is highly speculative; there
can be no assurance as to what the return, if any, on this investment may be.
2. The undersigned is aware of the Company's business affairs and
financial condition and has acquired sufficient information about the Company to
reach an informed and knowledgeable decision to acquire the Stock.
3. The undersigned is acquiring the Stock for investment for its own
account and not with a view to, or for transfer in connection with, any
distribution of the Stock.
4. The undersigned understands that the Stock has not been registered
under the Act nor qualified under the Law by reason of specific exemptions
therefrom which exemptions may depend upon, among other things, the bona fide
nature of my investment intent as expressed herein. In this connection, the
undersigned understands that, in the view of the Securities and Exchange
Commission (the "SEC"), the statutory basis for the exemption from the Act may
not be present if its representations mean that its present intent is to hold
the Stock for a minimum capital gains period under the tax statutes, for a
deferred transfer, for a market rise, or a transfer if the market does not rise,
or for a year or any other fixed period in the future.
5. The undersigned understands that the Stock must be held indefinitely
unless it is subsequently registered under the Act and qualified under the Law
or exemptions from such registration and qualification are available. The
undersigned understands that the Company is under no obligation to register or
qualify the Stock. The undersigned understands that the certificate evidencing
the Stock will be imprinted with a legend which prohibits the transfer of the
Stock unless it is registered and qualified or such registration and
qualification are not required in the opinion of counsel satisfactory to the
Company.
6. The undersigned is aware of Rule 144 promulgated under the Act which
permits limited public resale of stock acquired in a non-public offering subject
to the satisfaction of certain conditions. The conditions specified in Rule 144
include, among other things: the availability of certain public information
about the Company; the resale occurring not less than one year after the
undersigned purchased and completed payment for
<PAGE>
the Stock, the sale being on the public market through a broker in an
unsolicited "broker's transaction" or to a "market-maker", and the amount of
stock being sold during any three-month period not exceeding specified
limitations (generally, one percent (1%) of the total stock outstanding every
three months) except that such conditions need not be met by a person who is not
an affiliate of the Company at the time of sale and has not been an affiliate
for the preceding three months, if the securities to be sold have been
beneficially owned by such person for at least two years prior to their sale.
The undersigned understands that the Company's stock may not be publicly traded
or may not be satisfying the current public information requirements of Rule 144
at the time the undersigned wishes to sell the Stock, and thus the undersigned
may be precluded from selling the Stock under Rule 144.
7. The undersigned further understands that in the event all of the
requirements of Rule 144 are not met, registration under the Act or compliance
with Regulation A promulgated under the Act or some other registration exemption
will be required for any disposition of the Stock; and that, although Rule 144
is not exclusive, the SEC has expressed its opinion that persons proposing to
sell private placement securities other than in a registered offering and other
than pursuant to Rule 144 will have a substantial burden of proof in
establishing that an exemption from registration is available for such offers or
sales and that such persons and the brokers who participate in the transactions
do so at their own risk.
8. The undersigned agrees, in connection with any registration of the
Company's securities in a firm commitment underwriting, upon the request of the
company, or the underwriters managing such underwriting, not to sell, make any
short sale of, loan, grant any option for the purchase of or otherwise dispose
of any of the Company's Common Stock, including Common Stock issuable upon
conversion of any convertible securities held by the undersigned, without the
prior written consent of the Company or such underwriters, as the case may be,
for such period of time (not to exceed one hundred eighty (180) days after the
effective date of such registration) as the Company or the underwriters may
specify, provided that each officer of the Company, each director of the Company
and each person then holding ten percent (10%) or more of any class of the
Company's securities then outstanding shall make the same agreement with respect
to other securities of the Company then held by such other shareholder or such
other person.
9. The undersigned understands that the certificate evidencing the
Stock will be imprinted with such legends as the Company's counsel may deem
necessary to assure the Company's compliance with the Act and the Law.
The undersigned warrants that the foregoing statements concerning
itself to be true and correct. This letter may be relied upon and enforced by
the Company.
Very truly yours,
SANDISK CORPORATION
By: /S/ DANIEL L. AUCLAIR
----------------------------------------
Name: DANIEL L. AUCLAIR
Title: SR. VP, BUSINESS DEVELOPMENT
<PAGE>
EXHIBIT 6.2
DISTRIBUTION AGREEMENT TERM SHEET
Product: Card Adaptors and updates thereto.
Status: Nonexclusive distributor of Multi Medicard Adapter, with the
right to distribute direct to end-users and through
subdistributors.
Term: Five (5) years, with successive two (2) year automatic renewal
periods thereafter, unless either party elects 90 days prior
to expiration not to renew and unless the Distribution
Agreement has not otherwise been terminated.
The Distribution Agreement will automatically terminate upon
the termination of the Cooperative Development Agreement.
Territory: Worldwide
Pricing: Equal to the best price SmartDisk offers to any other entity.
Shipping: F.O.B. SmartDisk's manufacturing facility.
Other Terms: All other terms and conditions will be as set forth in
SmartDisk's standard distribution agreement.
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated August 11, 1999, in Amendment No. 3 to the
Registration Statement (Form S-1 No. 333-82793) and related Prospectus of
SmartDisk Corporation for the registration of 3,450,000 shares of its common
stock.
/s/ Ernst & Young LLP
Miami, Florida
October 4, 1999
