AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 3, 1999
REGISTRATION NO. 333-82793
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
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.)
</TABLE>
---------------
<TABLE>
<S> <C>
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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<S> <C> <C>
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
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
---------------
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933 (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. [ ]
---------------
CALCULATION OF REGISTRATION FEE
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<CAPTION>
=============================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS AMOUNT TO OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
OF SECURITIES TO BE REGISTERED BE REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.001 par value.. 3,450,000 $ 12.00 $41,400,000 $ 11,509(3)
=============================================================================================================
<FN>
(1) Includes an aggregate of 450,000 shares that the Underwriters have the
option to purchase from the Company to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a) under the Securities Act.
(3) Includes $11,120 which was previously paid.
</FN>
</TABLE>
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 SEPTEMBER 3, 1999
[SMARTDISK LOGO]
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.
---------------------
PER SHARE TOTAL
----------- ---------
Public Offering Price ........................... $ $
Underwriting Discounts and Commissions .......... $ $
Proceeds to SmartDisk ........................... $ $
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.
BANCBOSTON ROBERTSON STEPHENS
HAMBRECHT & QUIST
U.S. BANCORP PIPER JAFFRAY
---------------------
THE UNDERSIGNED IS FACILITATING INTERNET DISTRIBUTION
E*TRADE SECURITIES
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,
with "Internet"
superimposed between them]
<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
</TABLE>
---------------------
We own or have rights to the product names, tradenames and trademarks that we
use in conjunction with the sale of our products. This prospectus also contains
product names, tradenames and trademarks of other companies.
ii
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. YOU SHOULD READ THIS ENTIRE PROSPECTUS CAREFULLY.
OUR BUSINESS
SmartDisk is a market leader in the design and development of 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, 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.
1
<PAGE>
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.
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
</TABLE>
- --------
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 July 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
<PAGE>
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)
<S> <C> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1999
-----------------------------
ACTUAL AS ADJUSTED(3)
----------- ---------------
<S> <C> <C>
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
<FN>
- --------
(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.
</FN>
</TABLE>
3
<PAGE>
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
4
<PAGE>
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.
OUR DEPENDENCE ON THE 3.5 INCH FLOPPY DISK DRIVE MAY INHIBIT OUR ABILITY TO
DEVELOP PRODUCTS THAT QUICKLY TRANSFER DATA
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. 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
strategy of maintaining media neutrality, and our target market will be
limited.
5
<PAGE>
IF WE ARE UNABLE TO SELL A LARGE VOLUME OF OUR PRODUCTS, WE WILL NOT BE ABLE TO
RECOUP RESEARCH AND DEVELOPMENT EXPENDITURES
We may not be able to realize volume sales of our products in order to
recoup research and development expenditures. We expect to spend a significant
amount of time and resources to develop new products and refine existing
products. In light of the long product development cycles present in our
industry, these expenditures will be made well in advance of the prospect of
deriving revenue from the sale of products. Our ability to commercially
introduce and market new products is subject to a wide variety of challenges
during this development cycle, including start-up bugs, design defects and
other matters that could delay launch of the product. In addition, since our
customers are not obligated by long-term contracts to purchase our products,
our anticipated product orders may not materialize, or orders for products may
be cancelled. In that event, we would be unable to sell our products in
sufficient quantities to recoup our research and development expenses.
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
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/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 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.
Further, 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 correspondence alleging that our SafeBoot product
violated a third party's intellectual property rights. We reviewed the patent
and concluded that our products do not infringe upon the third party's patent
rights. While neither claim has resulted in litigation, future claims may. In
addition, we license a portion of the intellectual property included in our
products from
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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.
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.
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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 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.
WE EXPECT THAT OEM DEMANDS WILL REDUCE OUR GROSS MARGINS IN THE FUTURE
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.
THE DIFFICULTY OF MAINTAINING STRATEGIC RELATIONSHIPS IS EXACERBATED BY
GEOGRAPHIC AND CULTURAL DIFFERENCES
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.
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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 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.
WE MAY LOSE ONE OF OUR MANUFACTURERS 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
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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;
/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.
Several competitive developments would have a particularly significant
impact on our business. First, new competing data storage devices may replace
the flash memory cards which our products
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support. Second, the market for flash memory connectivity and digital data
security products may ultimately require technological solutions that are not
based on the floppy disk drive interface technology that is the basis for our
products. Third, it is possible that a new or existing competing data transfer
solution that achieves a significant market presence will emerge as an industry
standard and achieve a dominant market position. Any of those events would have
a material adverse effect on our business and prospects.
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 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
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.
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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.
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
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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 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.
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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 July 31, 1999, approximately 12.5
million shares of common stock held by existing stockholders are "restricted
shares" as that term is defined in Rule 144, and 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.
As of July 31, 1999, there were options to purchase 966,250 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.
15
<PAGE>
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, 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
Investments, L.L.C., an investment company controlled by Mr. Fischer, in
exchange for limited liability company units. Phoenix House was, for a short
time, the sole owner of SDSC.
The joint venture arrangement became effective in May 1998, with the
following results:
/bullet/ Toshiba purchased 2,487,500 shares of SmartDisk common stock 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
in exchange for all of the outstanding shares of SDSC.
/bullet/ Fischer International purchased 150,000 shares of SmartDisk common
stock in exchange for trademarks it owned relating to SafeBoot, FlashPath
and Smarty.
/bullet/ SDSC became a wholly owned subsidiary of SmartDisk.
/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.
16
<PAGE>
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. 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 15,123,311 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 ............... 499 163 720 1,412 1,608
Sales and marketing .................... 47 48 6 12 2,547
General and administrative ............. 546 1,933 3,418 3,184 4,149
Impairment loss ........................ -- -- 7,807 -- --
-------- -------- --------- -------- --------
Total operating expenses ................ 1,092 2,144 11,951 4,608 8,304
-------- -------- --------- -------- --------
Operating loss .......................... (1,058) (2,314) (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) (2,276) (11,818) (4,009) (5,605)
Income tax expense (benefit) ............ -- -- (2,348) (45) (102)
-------- -------- --------- -------- --------
Net loss ................................ $ (1,058) $ (2,276) $ (9,470) $ (3,964) $ (5,503)
======== ======== ========= ======== ========
Net loss per share(1) ................... $ (0.14) $ (0.31) $ (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) (3,652) (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)
<FN>
- -------
(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.
</FN>
</TABLE>
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 is a market leader in the design and development of 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. See note 11 of the notes to our financial statements
for additional information with respect to our foreign operations.
Our backlog at June 30, 1999 was approximately $11.1 million, compared to
approximately $4.6 million at June 30, 1998. 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.
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.
22
<PAGE>
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 $200,000 to
additions in our sales and marketing staff and related expenses at our
headquarters office in Florida, and approximately $100,000 to promotional
programs.
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 $400,000 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.
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
23
<PAGE>
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.
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.
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<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 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.
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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 were subject to extended payment term arrangements
secured by promissory notes. This is a normal business practice in Japan and,
in these cases, credit terms generally range from 90 to 150 days. 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 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 $2.2 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
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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.
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.
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<PAGE>
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 is a market leader in the design and development of 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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<PAGE>
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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<PAGE>
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, 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.
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 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
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<PAGE>
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, and companies such as Microsoft and
Netscape have selected smart cards as key components of their systems
architecture. Microsoft has also launched Windows Card, an operating system for
the smart card.
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 pilot programs have provided us with useful feedback that has resulted in
improvements to the product, but we do 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.
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<PAGE>
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 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.
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<PAGE>
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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<PAGE>
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
July 31, 1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- ----- --------------------------------------------------------
<S> <C> <C>
Addison M. Fischer .............. 50 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) .............. 54 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
<FN>
- --------
(1) Member of the compensation committee.
(2) Member of the audit committee.
</FN>
</TABLE>
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
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<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. 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 September
1998, 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.
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 various management positions. Most
recently, he served as a Senior Manager, International Sales & Marketing,
Storage Device Division for Toshiba.
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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 and Timothy Tomlinson, with the initial term
of office of the Class I directors expiring at the annual meeting of
stockholders in 2002. Class II consists of Shigeki Morita, D. James Bidzos and
Joseph M. Tucci, with the initial term of office of Class II directors expiring
at the annual meeting of stockholders in 2000. 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 2001.
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":
44
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------ -------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS 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
<FN>
- --------
(1) In addition, Mr. Battaglia received $100,440 in salary and $60,000 in bonus
from Fischer International for services rendered to Fischer International
in 1998. Commencing January 1, 1999, Mr. Battaglia became our full-time
employee.
</FN>
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options during the
fiscal year ended December 31, 1998 to each of the named executive officers. No
stock appreciation rights were granted to these individuals during that year.
<TABLE>
<CAPTION>
OPTION GRANTS IN 1998
INDIVIDUAL GRANTS
----------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE APPRECIATION
NUMBER OF SECURITIES % OF TOTAL OPTIONS EXERCISE OR FOR OPTION TERM(1)
UNDERLYING OPTIONS GRANTED TO EMPLOYEES BASE PRICE EXPIRATION -----------------------
NAME GRANTED(2) IN FISCAL YEAR ($)(SH)(3) DATE 5%($) 10%($)
- ------------------------------ ---------------------- ---------------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Michael S. Battaglia ......... 426,136 45.5% $ 0.72 1/27/08 $192,956 $488,989
Quresh Sachee ................ 30,000 3.2 1.00 5/4/08 18,867 47,812
20,000 2.1 4.00 8/21/08 50,312 127,499
<FN>
- --------
(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 requirements promulgated by the Securities and
Exchange Commission. 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.
</FN>
</TABLE>
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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. We have not granted
46
<PAGE>
any options under the plan. 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 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.
47
<PAGE>
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 July 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 July 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,
48
<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.
49
<PAGE>
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.
The 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, Fischer International, Toshiba and Phoenix House 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 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
50
<PAGE>
International and its affiliates. In addition, operating expenses totaling
approximately $2.6 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 $222,000 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.
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
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<PAGE>
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. 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 July 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 July 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 July 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 * *
Timothy Tomlinson(5) ......................... 87,500 * *
D. James Bidzos(6) ........................... 31,250 * *
Anthony A. Ibarguen(7) ....................... 310 * *
Hatim Tyabji(8) .............................. 310 * *
Joseph M. Tucci(9) ........................... 310 * *
Shigeki Morita ............................... 0 0 0
All directors and executive officers
as a group (14 persons)(10) ................ 8,541,501 68.1 54.9
<FN>
- --------
* 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 July 31, 1999.
(5) Includes 80,000 shares held by investment partnerships or trusts for which
Mr. Tomlinson is either the general partner or trustee. Mr. Tomlinson
disclaims beneficial ownership of those shares, except to the extent of
his pecuniary interest in the partnerships.
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<PAGE>
(6) 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.
(7) Includes 310 shares subject to options either currently exercisable or
exercisable by Mr. Ibarguen within 60 days of July 31, 1999.
(8) Includes 310 shares subject to options either currently exercisable or
exercisable by Mr. Tyabji within 60 days of July 31, 1999.
(9) Includes 310 shares subject to options either currently exercisable or
exercisable by Mr. Tucci within 60 days of July 31, 1999.
(10) See footnotes (2), (4), (5), (6), (7), (8) and (9) above.
</FN>
</TABLE>
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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 July 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 July 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
56
<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.
57
<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 July 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 July 31, 1999, options to purchase a total of 821,969 shares were
outstanding and 34,315 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 37,219 shares were reserved for future issuance under the 1998
Directors and Consultants Stock Option Plan, 2,500,000 shares were reserved for
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 subject to lock-up agreements. Common
stock issued upon exercise of
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<PAGE>
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.
NUMBER
UNDERWRITER OF SHARES
- -------------------------------------------------- ------------
BancBoston Robertson Stephens Inc. .........
Hambrecht & Quist LLC ......................
U.S. Bancorp Piper Jaffray Inc. ............
---------
Total .................................... 3,000,000
=========
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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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:
1999 ............. $ 59,063
2000 ............. 124,031
2001 ............. 130,233
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% 24% 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 $2.6 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]
<PAGE>
[SMARTDISK LOGO]
<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 SEPTEMBER 3, 1999
[SMARTDISK LOGO]
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.
---------------------
PER SHARE TOTAL
----------- ---------
Public Offering Price ........................... $ $
Underwriting Discounts and Commissions .......... $ $
Proceeds to SmartDisk ........................... $ $
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.
BANCBOSTON ROBERTSON STEPHENS INTERNATIONAL LIMITED
HAMBRECHT & QUIST
U.S. BANCORP PIPER JAFFRAY
---------------------
THE UNDERSIGNED IS FACILITATING INTERNET DISTRIBUTION
E*TRADE SECURITIES
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
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
==========
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 July 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
3.1 Certificate of Incorporation
3.2 Bylaws
5.1 Opinion of Greenberg Traurig, P.A.
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)
10.4 1999 Employee Stock Purchase Plan(1)
10.5 Employment Agreement with Michael S. Battaglia(2)
10.6 Employment Agreement with Robert Protheroe(2)
10.7 Employment Agreement with Quresh Sachee(2)
10.8 License Agreement dated May 26, 1998 between Toshiba Corporation and SmartDisk, as
amended
10.9 Operating Agreement dated May 28, 1998 between Fischer International System Corporation
and SmartDisk, as amended(2)
10.10 License and Distribution Agreement dated May 28, 1998 between SmartDisk and Fischer
International Systems Corporation
10.11 Distribution Agreement dated May 28, 1998 between Fischer International Systems
Corporation and SmartDisk(2)
10.12 Investors' Rights Agreement dated May 22, 1998 among Smart Disk and each of the investors
a party thereto(2)
10.13 Lease Agreement dated October 4, 1993 between Arnold Industrial Park and SmartDisk, by
assignment
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(2)
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
23.1 Consent of Greenberg Traurig, P.A. (included in Exhibit 5.1)
23.2 Consent of Ernst & Young LLP
25.1 Power of Attorney(2)
27.1 Financial Data Schedules (SEC use only)
<FN>
- --------
(1) Management Compensation Plan or Arrangement.
(2) Previously filed as an exhibit to the Registration Statement on Form S-1
filed on July 14, 1999 (registration no. 333-82793).
(3) Confidential treatment requested for portions of this exhibit.
</FN>
</TABLE>
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. 1 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 3rd day of September, 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. 1 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 September 3, 1999
- --------------------------------------
Addison M. Fischer
/s/ Michael S. Battaglia President, Chief Executive Officer and September 3, 1999
- -------------------------------------- Director (Principal Executive Officer)
Michael S. Battaglia
/s/ Michael R. Mattingly Chief Financial Officer (Principal September 3, 1999
- -------------------------------------- Financial and Accounting Officer)
Michael R. Mattingly
/s/ Timothy Tomlinson* Director September 3, 1999
- --------------------------------------
Timothy Tomlinson
/s/ D. James Bidzos* Director September 3, 1999
- --------------------------------------
D. James Bidzos
/s/ Shigeki Morita* Director September 3, 1999
- --------------------------------------
Shigeki Morita
/s/ Anthony A. Ibarguen Director September 3, 1999
- --------------------------------------
Anthony A. Ibarguen
/s/ Hatim Tyabji Director September 3, 1999
- --------------------------------------
Hatim Tyabji
/s/ Joseph M. Tucci Director September 3, 1999
- --------------------------------------
Joseph M. Tucci
* By: /s/ Michael S. Battaglia
--------------------------------
Michael S. Battaglia,
Attorney-in-Fact
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- ------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation
3.2 Bylaws
5.1 Opinion of Greenberg Traurig, P.A.
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)
10.4 1999 Employee Stock Purchase Plan(1)
10.5 Employment Agreement with Michael S. Battaglia(2)
10.6 Employment Agreement with Robert Protheroe(2)
10.7 Employment Agreement with Quresh Sachee(2)
10.8 License Agreement dated May 26, 1998 between Toshiba Corporation and SmartDisk, as
amended
10.9 Operating Agreement dated May 28, 1998 between Fischer International System Corporation
and SmartDisk, as amended(2)
10.10 License and Distribution Agreement dated May 28, 1998 between SmartDisk and Fischer
International Systems Corporation
10.11 Distribution Agreement dated May 28, 1998 between Fischer International Systems
Corporation and SmartDisk(2)
10.12 Investors' Rights Agreement dated May 22, 1998 among Smart Disk and each of the investors
a party thereto(2)
10.13 Lease Agreement dated October 4, 1993 between Arnold Industrial Park and SmartDisk, by
assignment
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(2)
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
23.1 Consent of Greenberg Traurig, P.A. (included in Exhibit 5.1)
23.2 Consent of Ernst & Young LLP
25.1 Power of Attorney(2)
27.1 Financial Data Schedules (SEC use only)
<FN>
- --------
(1) Management Compensation Plan or Arrangement.
(2) Previously filed as an exhibit to the Registration Statement on Form S-1
filed on July 14, 1999 (registration no. 333-82793).
(3) Confidential treatment requested for portions of this exhibit.
</FN>
</TABLE>
EXHIBIT 1.1
UNDERWRITING AGREEMENT
_________, 1999
BancBoston Robertson Stephens Inc.
Hambrecht & Quist LLC
U.S. Bancorp Piper Jaffray Inc.
As Representatives of the several Underwriters
c/o BancBoston Robertson Stephens Inc.
555 California Street, Suite 2600
San Francisco, CA 94104
Ladies and Gentlemen:
INTRODUCTORY. SmartDisk Corporation, a Delaware corporation (the
"Company"), proposes to issue and sell to the several underwriters named in
SCHEDULE A (the "Underwriters") an aggregate of [___] shares (the "Firm Shares")
of its Common Stock, par value $[___] per share (the "Common Shares"). In
addition, the Company has granted to the Underwriters an option to purchase up
to an additional [___] Common Shares (the "Option Shares") as provided in
Section 2. The Firm Shares and, if and to the extent such option is exercised,
the Option Shares are collectively called the "Shares". BancBoston Robertson
Stephens Inc., Hambrecht & Quist LLC and U.S. Bancorp Piper Jaffray Inc. have
agreed to act as representatives of the several Underwriters (in such capacity,
the "Representatives") in connection with the offering and sale of the Shares.
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1 (File No.
333-[___]), which contains a form of prospectus to be used in connection with
the public offering and sale of the Shares. Such registration statement, as
amended, including the financial statements, exhibits and schedules thereto, in
the form in which it was declared effective by the Commission under the
Securities Act of 1933 and the rules and regulations promulgated thereunder
(collectively, the "Securities Act"), including any information deemed to be a
part thereof at the time of effectiveness pursuant to Rule 430A or Rule 434
under the Securities Act, is called the "Registration Statement". Any
registration statement filed by the Company pursuant to Rule 462(b) under the
Securities Act is called the "Rule 462(b) Registration Statement", and from and
after the date and time of filing of the Rule 462(b) Registration Statement the
term "Registration Statement" shall include the Rule 462(b) Registration
Statement. Such prospectus, in the form first used by the Underwriters to
confirm sales of the Shares, is called the "Prospectus"; provided, however, if
the Company has, with the consent of BancBoston Robertson Stephens Inc., elected
to rely upon Rule 434 under the Securities Act, the
<PAGE>
term "Prospectus" shall mean the Company's prospectus subject to completion
(each, a "preliminary prospectus") dated [___] (such preliminary prospectus is
called the "Rule 434 preliminary prospectus"), together with the applicable term
sheet (the "Term Sheet") prepared and filed by the Company with the Commission
under Rules 434 and 424(b) under the Securities Act and all references in this
Agreement to the date of the Prospectus shall mean the date of the Term Sheet.
All references in this Agreement to the Registration Statement, the Rule 462(b)
Registration Statement, a preliminary prospectus, the Prospectus or the Term
Sheet, or any amendments or supplements to any of the foregoing, shall include
any copy thereof filed with the Commission pursuant to its Electronic Data
Gathering, Analysis and Retrieval System ("EDGAR").
The Company hereby confirms its agreements with the Underwriters as
follows:
SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents, warrants and covenants to each Underwriter as follows:
(a) COMPLIANCE WITH REGISTRATION REQUIREMENTS. The Registration
Statement and any Rule 462(b) Registration Statement have been declared
effective by the Commission under the Securities Act. The Company has complied
to the Commission's satisfaction with all requests of the Commission for
additional or supplemental information. No stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement is in effect and no proceedings for such purpose have been instituted
or are pending or, to the best knowledge of the Company, are contemplated or
threatened by the Commission.
Each preliminary prospectus and the Prospectus when filed
complied in all material respects with the Securities Act and, if filed by
electronic transmission pursuant to EDGAR (except as may be permitted by
Regulation S-T under the Securities Act), was identical to the copy thereof
delivered to the Underwriters for use in connection with the offer and sale of
the Shares. Each of the Registration Statement, any Rule 462(b) Registration
Statement and any post-effective amendment thereto, at the time it became
effective and at all subsequent times, complied and will comply in all material
respects with the Securities Act and did not and will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading. The
Prospectus, as amended or supplemented, as of its date and at all subsequent
times, did not and will not contain any untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not misleading.
The representations and warranties set forth in the two immediately preceding
sentences do not apply to statements in or omissions from the Registration
Statement, any Rule 462(b) Registration Statement, or any post-effective
amendment thereto, or the Prospectus, or any amendments or supplements thereto,
made in reliance upon and in conformity with information relating to any
Underwriter furnished to the Company in writing by the Representatives expressly
for use therein. There are no contracts or other documents required to be
described in the Prospectus or to be filed as exhibits to the Registration
Statement which have not been described or filed as required.
-2-
<PAGE>
(b) OFFERING MATERIALS FURNISHED TO UNDERWRITERS. The Company has
delivered to each of the Representatives one complete conformed copy of the
Registration Statement and of each consent and certificate of experts filed as a
part thereof, and conformed copies of the Registration Statement (without
exhibits) and preliminary prospectuses and the Prospectus, as amended or
supplemented, in such quantities and at such places as the Representatives have
reasonably requested for each of the Underwriters.
(c) DISTRIBUTION OF OFFERING MATERIAL BY THE COMPANY. The Company has
not distributed and will not distribute, prior to the later of the Second
Closing Date (as defined below) and the completion of the Underwriters'
distribution of the Shares, any offering material in connection with the
offering and sale of the Shares other than a preliminary prospectus, the
Prospectus or the Registration Statement.
(d) THE UNDERWRITING AGREEMENT. This Agreement has been duly
authorized, executed and delivered by, and is a valid and binding agreement of,
the Company, enforceable in accordance with its terms, except as rights to
indemnification hereunder may be limited by applicable law and except as the
enforcement hereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting the rights and
remedies of creditors or by general equitable principles.
(e) AUTHORIZATION OF THE SHARES TO BE SOLD BY THE COMPANY. The Shares
to be purchased by the Underwriters from the Company have been duly authorized
for issuance and sale pursuant to this Agreement and, when issued and delivered
by the Company pursuant to this Agreement, will be validly issued, fully paid
and nonassessable.
(f) [INTENTIONALLY OMITTED].
(g) NO APPLICABLE REGISTRATION OR OTHER SIMILAR RIGHTS. There are no
persons with registration or other similar rights to have any equity or debt
securities registered for sale under the Registration Statement or included in
the offering contemplated by this Agreement, except for such rights as have been
duly waived.
(h) NO MATERIAL ADVERSE CHANGE. Subsequent to the respective dates as
of which information is given in the Prospectus: (i) there has been no material
adverse change, or any development that could reasonably be expected to result
in a material adverse change, in the condition, financial or otherwise, or in
the earnings, business, operations or prospects, whether or not arising from
transactions in the ordinary course of business, of the Company and its
subsidiaries, considered as one entity (any such change or effect, where the
context so requires, is called a "Material Adverse Change" or a "Material
Adverse Effect"); (ii) the Company and its subsidiaries, considered as one
entity, have not incurred any material liability or obligation, indirect, direct
or contingent, not in the ordinary course of business nor entered into any
material transaction or agreement not in the ordinary course of business; and
(iii) there has been no dividend or distribution of any kind declared, paid or
made by the Company or, except for dividends paid to the Company or
-3-
<PAGE>
other subsidiaries, any of its subsidiaries on any class of capital stock or
repurchase or redemption by the Company or any of its subsidiaries of any class
of capital stock.
(i) INDEPENDENT ACCOUNTANTS. Ernst & Young LLP, who have expressed
their opinion with respect to the financial statements (which term as used in
this Agreement includes the related notes thereto and supporting schedules filed
with the Commission as a part of the Registration Statement and included in the
Prospectus, are independent public or certified public accountants as required
by the Securities Act.
(j) PREPARATION OF THE FINANCIAL STATEMENTS. The financial statements
filed with the Commission as a part of the Registration Statement and included
in the Prospectus present fairly the consolidated financial position of the
Company and its subsidiaries as of and at the dates indicated and the results of
their operations and cash flows for the periods specified. The supporting
schedules included in the Registration Statement present fairly the information
required to be stated therein. Such financial statements and supporting
schedules have been prepared in conformity with generally accepted accounting
principles as applied in the United States applied on a consistent basis
throughout the periods involved, except as may be expressly stated in the
related notes thereto. No other financial statements or supporting schedules are
required to be included in the Registration Statement. The financial data set
forth in the Prospectus under the captions "Prospectus Summary--Summary
Financial Data", "Selected Financial Data" and "Capitalization" fairly present
the information set forth therein on a basis consistent with that of the audited
financial statements contained in the Registration Statement.
(k) COMPANY'S ACCOUNTING SYSTEM. The Company and each of its
subsidiaries maintain a system of accounting controls sufficient to provide
reasonable assurances that (i) transactions are executed in accordance with
management's general or specific authorization; (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles as applied in the United States and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(l) SUBSIDIARIES OF THE COMPANY. The Company does not own or control,
directly or indirectly, any corporation, association or other entity other than
the subsidiaries listed in Exhibit 21 to the Registration Statement.
(m) INCORPORATION AND GOOD STANDING OF THE COMPANY AND ITS
SUBSIDIARIES. Each of the Company and its subsidiaries has been duly organized
and is validly existing as a corporation or limited liability company, as the
case may be, in good standing under the laws of the jurisdiction in which it is
organized with full corporate power and authority to own its properties and
conduct its business as described in the prospectus, and is duly qualified to do
business as a foreign corporation and is in good standing under the laws of each
jurisdiction which requires such qualification.
-4-
<PAGE>
(n) CAPITALIZATION OF THE SUBSIDIARIES. All the outstanding shares of
capital stock of each subsidiary have been duly and validly authorized and
issued and are fully paid and nonassessable, and, except as otherwise set forth
in the Prospectus, all outstanding shares of capital stock of the subsidiaries
are owned by the Company either directly or through wholly owned subsidiaries
free and clear of any security interests, claims, liens or encumbrances.
(o) NO PROHIBITION ON SUBSIDIARIES FROM PAYING DIVIDENDS OR MAKING
OTHER DISTRIBUTIONS. No subsidiary of the Company is currently prohibited,
directly or indirectly, from paying any dividends to the Company, from making
any other distribution on such subsidiary's capital stock, from repaying to the
Company any loans or advances to such subsidiary from the Company or from
transferring any of such subsidiary's property or assets to the Company or any
other subsidiary of the Company, except as described in or contemplated by the
Prospectus.
(p) CAPITALIZATION AND OTHER CAPITAL STOCK MATTERS. The authorized,
issued and outstanding capital stock of the Company is as set forth in the
Prospectus under the caption "Capitalization" (other than for subsequent
issuances, if any, pursuant to employee benefit plans described in the
Prospectus or upon exercise of outstanding options or warrants described in the
Prospectus). The Common Shares (including the Shares) conform in all material
respects to the description thereof contained in the Prospectus. All of the
issued and outstanding Common Shares have been duly authorized and validly
issued, are fully paid and nonassessable and have been issued in compliance with
federal and state securities laws. None of the outstanding Common Shares were
issued in violation of any preemptive rights, rights of first refusal or other
similar rights to subscribe for or purchase securities of the Company. There are
no authorized or outstanding options, warrants, preemptive rights, rights of
first refusal or other rights to purchase, or equity or debt securities
convertible into or exchangeable or exercisable for, any capital stock of the
Company or any of its subsidiaries other than those accurately described in the
Prospectus. The description of the Company's stock option, stock bonus and other
stock plans or arrangements, and the options or other rights granted thereunder,
set forth in the Prospectus accurately and fairly presents the information
required to be shown with respect to such plans, arrangements, options and
rights.
(q) STOCK EXCHANGE LISTING. The Shares have been approved for listing
on the Nasdaq National Market, subject only to official notice of issuance.
(r) NO CONSENTS, APPROVALS OR AUTHORIZATIONS REQUIRED. No consent,
approval, authorization, filing with or order of any court or governmental
agency or regulatory body is required in connection with the transactions
contemplated herein, except such as have been obtained or made under the
Securities Act and such as may be required (i) under the blue sky laws of any
jurisdiction in connection with the purchase and distribution of the Shares by
the Underwriters in the manner contemplated here and in the Prospectus, (ii) by
the National Association of Securities Dealers, LLC and (iii) by the federal and
provincial laws of Canada.
(s) NON-CONTRAVENTION OF EXISTING INSTRUMENTS AND AGREEMENTS. Neither
the issue and sale of the Shares nor the consummation of any other of the
transactions herein contemplated nor the
-5-
<PAGE>
fulfillment of the terms hereof will conflict with, result in a breach or
violation or imposition of any lien, charge or encumbrance upon any property or
assets of the Company or any of its subsidiaries pursuant to, (i) the charter or
by-laws of the Company or any of its subsidiaries, (ii) the terms of any
indenture, contract, lease, mortgage, deed of trust, note agreement, loan
agreement or other agreement, obligation, condition, covenant or instrument to
which the Company or any of its subsidiaries is a party or bound or to which its
or their property is subject or (iii) any statute, law, rule, regulation,
judgment, order or decree applicable to the Company or any of its subsidiaries
of any court, regulatory body, administrative agency, governmental body,
arbitrator or other authority having jurisdiction over the Company or any of its
subsidiaries or any of its or their properties.
(t) NO DEFAULTS OR VIOLATIONS. Neither the Company nor any subsidiary
is in violation or default of (i) any provision of its charter or by-laws, (ii)
the terms of any indenture, contract, lease, mortgage, deed of trust, note
agreement, loan agreement or other agreement, obligation, condition, covenant or
instrument to which it is a party or bound or to which its property is subject
or (iii) any statute, law, rule, regulation, judgment, order or decree of any
court, regulatory body, administrative agency, governmental body, arbitrator or
other authority having jurisdiction over the Company or such subsidiary or any
of its properties, as applicable, except any such violation or default which
would not, singly or in the aggregate, result in a Material Adverse Change
except as otherwise disclosed in the Prospectus.
(u) NO ACTIONS, SUITS OR PROCEEDINGS. No action, suit or proceeding by
or before any court or governmental agency, authority or body or any arbitrator
involving the Company or any of its subsidiaries or its or their property is
pending or, to the best knowledge of the Company, threatened that (i) could
reasonably be expected to have a Material Adverse Effect on the performance of
this Agreement or the consummation of any of the transactions contemplated
hereby or (ii) could reasonably be expected to result in a Material Adverse
Effect.
(v) ALL NECESSARY PERMITS, ETC. The Company and each subsidiary possess
such valid and current certificates, authorizations or permits issued by the
appropriate state, federal or foreign regulatory agencies or bodies necessary to
conduct their respective businesses, and neither the Company nor any subsidiary
has received any notice of proceedings relating to the revocation or
modification of, or non-compliance with, any such certificate, authorization or
permit which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, could result in a Material Adverse Change.
(w) TITLE TO PROPERTIES. The Company and each of its subsidiaries has
good and marketable title to all the properties and assets reflected as owned in
the financial statements referred to in Section 1(i) above, in each case free
and clear of any security interests, mortgages, liens, encumbrances, equities,
claims and other defects, except such as do not materially and adversely affect
the value of such property and do not materially interfere with the use made or
proposed to be made of such property by the Company or such subsidiary. The real
property, improvements, equipment and personal property held under lease by the
Company or any subsidiary are held under valid and enforceable leases, with such
exceptions as are not material and do not materially interfere
-6-
<PAGE>
with the use made or proposed to be made of such real property, improvements,
equipment or personal property by the Company or such subsidiary.
(x) TAX LAW COMPLIANCE. The Company and its consolidated subsidiaries
have filed all necessary federal, state and foreign income and franchise tax
returns and have paid all taxes required to be paid by any of them and, if due
and payable, any related or similar assessment, fine or penalty levied against
any of them. The Company has made adequate charges, accruals and reserves in the
applicable financial statements referred to in Section 1(i) above in respect of
all federal, state and foreign income and franchise taxes for all periods as to
which the tax liability of the Company or any of its consolidated subsidiaries
has not been finally determined. The Company is not aware of any tax deficiency
that has been or might be asserted or threatened against the Company that could
result in a Material Adverse Change.
(y) INTELLECTUAL PROPERTY RIGHTS. Each of the Company and its
subsidiaries owns or possesses adequate rights to use all patents, patent rights
or licenses, inventions, collaborative research agreements, trade secrets,
know-how, trademarks, service marks, trade names and copyrights which are
necessary to conduct its businesses as described in the Registration Statement
and Prospectus; the expiration of any patents, patent rights, trade secrets,
trademarks, service marks, trade names or copyrights would not result in a
Material Adverse Change that is not otherwise disclosed in the Prospectus; the
Company has not received any notice of, and has no knowledge of, any
infringement of or conflict with asserted rights of the Company by others with
respect to any patent, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, trade names or copyrights; and the Company has not
received any notice of, and has no knowledge of, any infringement of or conflict
with asserted rights of others with respect to any patent, patent rights,
inventions, trade secrets, know-how, trademarks, service marks, trade names or
copyrights which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, might have a Material Adverse Change. There is no
claim being made against the Company regarding patents, patent rights or
licenses, inventions, collaborative research, trade secrets, know-how,
trademarks, service marks, trade names or copyrights. The Company and its
subsidiaries do not in the conduct of their business as now or proposed to be
conducted as described in the Prospectus infringe or conflict with any right or
patent of any third party, or any discovery, invention, product or process which
is the subject of a patent application filed by any third party, known to the
Company or any of its subsidiaries, which such infringement or conflict is
reasonably likely to result in a Material Adverse Change.
(z) YEAR 2000 PREPAREDNESS. There are no issues related to the
Company's, or any of its subsidiaries', preparedness for the Year 2000 that (i)
are of a character required to be described or referred to in the Registration
Statement or Prospectus by the Securities Act which have not been accurately
described in the Registration Statement or Prospectus or (ii) might reasonably
be expected to result in any Material Adverse Change or that might materially
affect their properties, assets or rights. All internal computer systems and
each Constituent Component (as defined below) of those systems and all
computer-related products and each Constituent Component (as defined below) of
those products of the Company and each of its subsidiaries fully comply with
Year 2000 Qualification Requirements. "Year 2000 Qualifications Requirements"
means that the internal
-7-
<PAGE>
computer systems and each Constituent Component (as defined below) of those
systems and all computer-related products and each Constituent Component (as
defined below) of those products of the Company and each of its Subsidiaries (i)
have been reviewed to confirm that they store, process (including sorting and
performing mathematical operations, calculations and computations), input and
output data containing date and information correctly regardless of whether the
date contains dates and times before, on or after January 1, 2000, (ii) have
been designated to ensure date and time entry recognition and calculations, and
date data interface values that reflect the century, (iii) accurately manage and
manipulate data involving dates and times, including single century formulas and
multi-century formulas, and will not cause an abnormal ending scenario within
the application or generate incorrect values or invalid results involving such
dates, (iv) accurately process any date rollover, and (v) accept and respond to
two-digit year date input in a manner that resolves any ambiguities as to the
century. "Constituent Component" means all software (including operating
systems, programs, packages and utilities), firmware, hardware, networking
components, and peripherals provided as part of the configuration. The Company
has inquired of material vendors as to their preparedness for the Year 2000 and
has disclosed in the Registration Statement or Prospectus any issues that might
reasonably be expected to result in any Material Adverse Change.
(aa) NO TRANSFER TAXES OR OTHER FEES. There are no transfer taxes or
other similar fees or charges under Federal law or the laws of any state, or any
political subdivision thereof, required to be paid in connection with the
execution and delivery of this Agreement or the issuance and sale by the Company
of the shares.
(bb) COMPANY NOT AN "INVESTMENT COMPANY". The Company has been advised
of the rules and requirements under the Investment Company Act of 1940, as
amended (the "Investment Company Act"). The Company is not, and after receipt of
payment for the Shares will not be, an "investment company" or an entity
"controlled" by an "investment company" within the meaning of the Investment
Company Act and will conduct its business in a manner so that it will not become
subject to the Investment Company Act.
(cc) INSURANCE. Each of the Company and its subsidiaries are insured by
recognized, financially sound and reputable institutions with policies in such
amounts and with such deductibles and covering such risks as are generally
deemed adequate and customary for their businesses including, but not limited
to, policies covering real and personal property owned or leased by the Company
and its subsidiaries against theft, damage, destruction, acts of vandalism and
earthquakes, general liability and Directors and Officers liability. The Company
has no reason to believe that it or any subsidiary will not be able (i) to renew
its existing insurance coverage as and when such policies expire or (ii) to
obtain comparable coverage from similar institutions as may be necessary or
appropriate to conduct its business as now conducted and at a cost that would
not result in a Material Adverse Change. Neither of the Company nor any
subsidiary has been denied any insurance coverage which it has sought or for
which it has applied.
(dd) LABOR MATTERS. To the best of Company's knowledge, no labor
disturbance by the employees of the Company or any of its subsidiaries exists or
is imminent; and the Company is not
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<PAGE>
aware of any existing or imminent labor disturbance by the employees of any of
its principal suppliers, manufacturers, subcontractors, original equipment
manufacturers or international distributors that might be expected to result in
a Material Adverse Change.
(ee) NO PRICE STABILIZATION OR MANIPULATION. The Company has not taken
and will not take, directly or indirectly, any action designed to or that might
be reasonably expected to cause or result in stabilization or manipulation of
the price of the Common Stock to facilitate the sale or resale of the Shares.
(ff) LOCK-UP AGREEMENTS. Each officer and director of the company and
each beneficial owner of one or more percent of the outstanding issued share
capital of the Company has agreed to sign an agreement substantially in the form
attached hereto as EXHIBIT A (the "Lock-up Agreements"). The Company has
provided to counsel for the Underwriters a complete and accurate list of all
securityholders of the Company and the number and type of securities held by
each securityholder. The Company has provided to counsel for the Underwriters
true, accurate and complete copies of all of the Lock-up Agreements presently in
effect or effected hereby. The Company hereby represents and warrants that it
will not release any of its officers, directors or other stockholders from any
Lock-up Agreements currently existing or hereafter effected without the prior
written consent of BancBoston Robertson Stephens Inc.
(gg) RELATED PARTY TRANSACTIONS. There are no business relationships or
related-party transactions involving the Company or any subsidiary or any other
person required to be described in the Prospectus which have not been described
as required.
(hh) NO UNLAWFUL CONTRIBUTIONS OR OTHER PAYMENTS. Neither the Company
nor any of its subsidiaries nor, to the best of the Company's knowledge, any
employee or agent of the Company or any subsidiary, has made any contribution or
other payment to any official of, or candidate for, any federal, state or
foreign office in violation of any law or of the character required to be
disclosed in the Prospectus.
(ii) ENVIRONMENTAL LAWS. (i) The Company is in compliance with all
rules, laws and regulations relating to the use, treatment, storage and disposal
of toxic substances and protection of health or the environment ("Environmental
Laws") which are applicable to its business, except where the failure to comply
would not result in a Material Adverse Change, (ii) the Company has received no
notice from any governmental authority or third party of an asserted claim under
Environmental Laws, which claim is required to be disclosed in the Registration
Statement and the Prospectus, (iii) the Company will not be required to make
future material capital expenditures to comply with Environmental Laws and (iv)
no property which is owned, leased or occupied by the Company has been
designated as a Superfund site pursuant to the Comprehensive Response,
Compensation, and Liability Act of 1980, as amended (42 U.S.C. ss. 9601, et
seq.), or otherwise designated as a contaminated site under applicable state or
local law.
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(jj) ERISA COMPLIANCE. The Company and its subsidiaries and any
"employee benefit plan" (as defined under the Employee Retirement Income
Security Act of 1974, as amended, and the regulations and published
interpretations thereunder (collectively, "ERISA")) established or maintained by
the Company, its subsidiaries or their "ERISA Affiliates" (as defined below) are
in compliance in all material respects with ERISA. "ERISA Affiliate" means, with
respect to the Company or a subsidiary, any member of any group of organizations
described in Sections 414(b),(c),(m) or (o) of the Internal Revenue Code of
1986, as amended, and the regulations and published interpretations thereunder
(the "Code") of which the Company or such subsidiary is a member. No "reportable
event" (as defined under ERISA) has occurred or is reasonably expected to occur
with respect to any "employee benefit plan" established or maintained by the
Company, its subsidiaries or any of their ERISA Affiliates. No "employee benefit
plan" established or maintained by the Company, its subsidiaries or any of their
ERISA Affiliates, if such "employee benefit plan" were terminated, would have
any "amount of unfounded benefit liabilities" (as defined under ERISA). Neither
the Company, its subsidiaries nor any of their ERISA Affiliates has incurred or
reasonably expects to incur any liability under (i) Title IV of ERISA with
respect to termination of, or withdrawal from, any "employee benefit plan" or
(ii) Sections 412, 4971, 4975 or 4980B of the Code. Each "employee benefit plan"
established or maintained by the Company, its subsidiaries or any of their ERISA
Affiliates that is intended to be qualified under Section 401(a) of the Code is
so qualified and nothing has occurred, whether by action or failure to act,
which would cause the loss of such qualification.
Any certificate signed by an officer of the Company and delivered to
the Representatives or to counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to each Underwriter as to the matters
set forth therein.
SECTION 2. PURCHASE, SALE AND DELIVERY OF THE SHARES.
(a) THE FIRM SHARES. The Company agrees to issue and sell to the
several Underwriters the Firm Shares upon the terms herein set forth. On the
basis of the representations, warranties and agreements herein contained, and
upon the terms but subject to the conditions herein set forth, the Underwriters
agree, severally and not jointly, to purchase from the Company the respective
number of Firm Shares set forth opposite their names on SCHEDULE A. The purchase
price per Firm Share to be paid by the several Underwriters to the Company shall
be $[___] per share.
(b) THE FIRST CLOSING DATE. Delivery of the Firm Shares to be purchased
by the Underwriters and payment therefor shall be made by the Company and the
Representatives at 6:00 a.m. San Francisco time, at the offices of Greenberg
Traurig, P.A., 1221 Brickell Avenue, Miami, Florida 33131 (or at such other
place as may be agreed upon among the Representatives and the Company), (i) on
the third (3rd) full business day following the first day that Shares are
traded, (ii) if this Agreement is executed and delivered after 1:30 P.M., San
Francisco time, the fourth (4th) full business day following the day that this
Agreement is executed and delivered or (iii) at such other time and date not
later that seven (7) full business days following the first day that Shares are
traded as the Representatives and the Company may determine (or at such time and
date to which payment
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and delivery shall have been postponed pursuant to Section 8 hereof), such time
and date of payment and delivery being herein called the "Closing Date;"
provided, however, that if the Company has not made available to each of the
Representatives copies of the Prospectus within the time provided in Section
4(d) hereof, the Representatives may, in their sole discretion, postpone the
Closing Date until no later that two (2) full business days following delivery
of copies of the Prospectus to each of the Representatives.
(c) THE OPTION SHARES; THE SECOND CLOSING DATE. In addition, on the
basis of the representations, warranties and agreements herein contained, and
upon the terms but subject to the conditions herein set forth, the Company
hereby grants an option to the several Underwriters to purchase, severally and
not jointly, up to an aggregate of [___] Option Shares from the Company at the
purchase price per share to be paid by the Underwriters for the Firm Shares. The
option granted hereunder is for use by the Underwriters solely in covering any
over-allotments in connection with the sale and distribution of the Firm Shares.
The option granted hereunder may be exercised at any time upon notice by the
Representatives to the Company, which notice may be given at any time within 30
days from the date of this Agreement. The time and date of delivery of the
Option Shares, if subsequent to the First Closing Date, is called the "Second
Closing Date" and shall be determined by the Representatives and shall not be
earlier than three nor later than five full business days after delivery of such
notice of exercise. If any Option Shares are to be purchased, each Underwriter
agrees, severally and not jointly, to purchase the number of Option Shares
(subject to such adjustments to eliminate fractional shares as the
Representatives may determine) that bears the same proportion to the total
number of Option Shares to be purchased as the number of Firm Shares set forth
on SCHEDULE A opposite the name of such Underwriter bears to the total number of
Firm Shares. The Representatives may cancel the option at any time prior to its
expiration by giving written notice of such cancellation to the Company.
(d) PUBLIC OFFERING OF THE SHARES. The Representatives hereby advise
the Company that the Underwriters intend to offer for sale to the public, as
described in the Prospectus, their respective portions of the Shares as soon
after this Agreement has been executed and the Registration Statement has been
declared effective as the Representatives, in their sole judgment, have
determined is advisable and practicable.
(e) PAYMENT FOR THE SHARES. Payment for the Shares shall be made at the
First Closing Date (and, if applicable, at the Second Closing Date) by wire
transfer in immediately-available funds to the order of the Company.
It is understood that the Representatives have been
authorized, for their own accounts and the accounts of the several Underwriters,
to accept delivery of and receipt for, and make payment of the purchase price
for, the Firm Shares and any Option Shares the Underwriters have agreed to
purchase. BancBoston Robertson Stephens Inc., individually and not as the
Representative of the Underwriters, may (but shall not be obligated to) make
payment for any Shares to be purchased by any Underwriter whose funds shall not
have been received by the Representatives by the First Closing Date or the
Second Closing Date, as the case may be, for the account of such
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Underwriter, but any such payment shall not relieve such Underwriter from any of
its obligations under this Agreement.
(f) DELIVERY OF THE SHARES. The Company shall deliver, or cause to be
delivered, a credit representing the Firm Shares to an account or accounts at
The Depository Trust Company, as designated by the Representatives for the
accounts of the Representatives and the several Underwriters at the First
Closing Date, against the irrevocable release of a wire transfer of immediately
available funds for the amount of the purchase price therefor. The Company shall
also deliver, or cause to be delivered a credit representing the Option Shares
the Underwriters have agreed to purchase at the First Closing Date (or the
Second Closing Date, as the case may be), to an account or accounts at The
Depository Trust Company as designated by the Representatives for the accounts
of the Representatives and the several Underwriters, against the irrevocable
release of a wire transfer of immediately available funds for the amount of the
purchase price therefor. Time shall be of the essence, and delivery at the time
and place specified in this Agreement is a further condition to the obligations
of the Underwriters.
(g) DELIVERY OF PROSPECTUS TO THE UNDERWRITERS. Not later than 12:00
noon on the second business day following the date the Shares are released by
the Underwriters for sale to the public, the Company shall deliver or cause to
be delivered copies of the Prospectus in such quantities and at such places as
the Representatives shall request.
SECTION 3. COVENANTS OF THE COMPANY. The Company further covenants and
agrees with each Underwriter as follows:
(a) REGISTRATION STATEMENT MATTERS. The Company will (i) use its best
efforts to cause a registration statement on Form 8-A (the "Form 8-A
Registration Statement") as required by the Securities Exchange Act of 1934 (the
"Exchange Act") to become effective simultaneously with the Registration
Statement, (ii) use its best efforts to cause the Registration Statement to
become effective or, if the procedure in Rule 430A of the Securities Act is
followed, to prepare and timely file with the Commission under Rule 424(b) under
the Securities Act a Prospectus in a form approved by the Representatives
containing information previously omitted at the time of effectiveness of the
Registration Statement in reliance on Rule 430A of the Securities Act and (iii)
not file any amendment to the Registration Statement or supplement to the
Prospectus of which the Representatives shall not previously have been advised
and furnished with a copy or to which the Representatives shall have reasonably
objected in writing or which is not in compliance with the Securities Act. If
the Company elects to rely on Rule 462(b) under the Securities Act, the Company
shall file a Rule 462(b) Registration Statement with the Commission in
compliance with Rule 462(b) under the Securities Act prior to the time
confirmations are sent or given, as specified by Rule 462(b)(2) under the
Securities Act, and shall pay the applicable fees in accordance with Rule 111
under the Securities Act.
(b) SECURITIES ACT COMPLIANCE. The Company will advise each of the
Representatives promptly (i) when the Registration Statement or any
post-effective amendment thereto shall have
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become effective, (ii) of receipt of any comments from the Commission, (iii) of
any request of the Commission for amendment of the Registration Statement or for
supplement to the Prospectus or for any additional information and (iv) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or the use of the Prospectus or of the institution of any
proceedings for that purpose. The Company will use its best efforts to prevent
the issuance of any such stop order preventing or suspending the use of the
Prospectus and to obtain as soon as possible the lifting thereof, if issued.
(c) BLUE SKY COMPLIANCE. The Company will cooperate with the
Representatives and counsel for the Underwriters in endeavoring to qualify the
Shares for sale under the securities laws of such jurisdictions (both national
and foreign) as the Representatives may reasonably have designated in writing
and will make such applications, file such documents, and furnish such
information as may be reasonably required for that purpose, provided the Company
shall not be required to qualify as a foreign corporation or to file a general
consent to service of process in any jurisdiction where it is not now so
qualified or required to file such a consent. The Company will, from time to
time, prepare and file such statements, reports and other documents, as are or
may be required to continue such qualifications in effect for so long a period
as the Representatives may reasonably request for distribution of the Shares.
(d) AMENDMENTS AND SUPPLEMENTS TO THE PROSPECTUS AND OTHER SECURITIES
ACT MATTERS. The Company will comply with the Securities Act and the Exchange
Act, and the rules and regulations of the Commission thereunder, so as to permit
the completion of the distribution of the Shares as contemplated in this
Agreement and the Prospectus. If during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer, any event shall
occur as a result of which, in the judgment of the Company or in the reasonable
opinion of the Representatives or counsel for the Underwriters, it becomes
necessary to amend or supplement the Prospectus in order to make the statements
therein, in the light of the circumstances existing at the time the Prospectus
is delivered to a purchaser, not misleading, or, if it is necessary at any time
to amend or supplement the Prospectus to comply with any law, the Company
promptly will prepare and file with the Commission, and furnish at its own
expense to the Underwriters and to dealers, an appropriate amendment to the
Registration Statement or supplement to the Prospectus so that the Prospectus as
so amended or supplemented will not, in the light of the circumstances when it
is so delivered, be misleading, or so that the Prospectus will comply with the
law.
(e) COPIES OF ANY AMENDMENTS AND SUPPLEMENTS TO THE PROSPECTUS. The
Company agrees to furnish the Representatives, without charge, during the period
beginning on the date hereof and ending on the later of the First Closing Date
or such date, as in the opinion of counsel for the Underwriters, the Prospectus
is no longer required by law to be delivered in connection with sales by an
Underwriter or dealer (the "Prospectus Delivery Period"), as many copies of the
Prospectus and any amendments and supplements thereto as the Representatives may
request.
(f) INSURANCE. The Company shall (i) obtain Directors and Officers
liability insurance in the minimum amount of $10 million which shall apply to
the offering contemplated hereby and (ii) shall
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cause BancBoston Robertson Stephens Inc., Hambrecht & Quist LLC and U.S. Bancorp
Piper Jaffray Inc. to be added as additional insureds to such policy in respect
of the offering contemplated hereby.
(g) NOTICE OF SUBSEQUENT EVENTS. If at any time during the ninety (90)
day period after the Registration Statement becomes effective, any rumor,
publication or event relating to or affecting the Company shall occur as a
result of which in your opinion the market price of the Company Shares has been
or is likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the
Prospectus), the Company will, after written notice from you advising the
Company to the effect set forth above, forthwith prepare, consult with you
concerning the substance of and disseminate a press release or other public
statement, reasonably satisfactory to you, responding to or commenting on such
rumor, publication or event.
(h) USE OF PROCEEDS. The Company shall apply the net proceeds from the
sale of the Shares sold by it in the manner described under the caption "Use of
Proceeds" in the Prospectus.
(i) TRANSFER AGENT. The Company shall engage and maintain, at its
expense, a registrar and transfer agent for the Company Shares.
(j) EARNINGS STATEMENT. As soon as practicable, the Company will make
generally available to its security holders and to the Representatives an
earnings statement (which need not be audited) covering the twelve-month period
ending [___]1 that satisfies the provisions of Section 11(a) of the Securities
Act.
(k) PERIODIC REPORTING OBLIGATIONS. During the Prospectus Delivery
Period the Company shall file, on a timely basis, with the Commission and the
Nasdaq National Market all reports and documents required to be filed under the
Exchange Act.
(l) AGREEMENT NOT TO OFFER OR SELL ADDITIONAL SECURITIES. The Company
will not, without the prior written consent of BancBoston Robertson Stephens
Inc., for a period of 180 days following the date of the Prospectus, offer, sell
or contract to sell, or otherwise dispose of or enter into any transaction which
is designed to, or could be expected to, result in the disposition (whether by
actual disposition or effective economic disposition due to cash settlement or
otherwise by the Company or any affiliate of the Company or any person in
privity with the Company or any affiliate of the Company) directly or
indirectly, or announce the offering of, any other Common Shares or any
securities convertible into, or exchangeable for, Common Shares; provided,
however, that the Company may (i) issue and sell Common Shares pursuant to any
director or employee stock option plan, stock ownership plan or dividend
reinvestment plan of the Company in effect at the date of the
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1 Insert the date of the end of the Company's first quarter ending after one
year following the "effective date of the Registration Statement" (as defined in
Rule 158(c) under the Securities Act).
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<PAGE>
Prospectus and described in the Prospectus so long as none of those shares may
be transferred on during the period of 180 days from the date that the
Registration Statement is declared effective (the "Lock-Up Period") and the
Company shall enter stop transfer instructions with its transfer agent and
registrar against the transfer of any such Common Shares and (ii) the Company
may issue Common Shares issuable upon the conversion of securities or the
exercise of warrants outstanding at the date of the Prospectus and described in
the Prospectus.
(m) FUTURE REPORTS TO THE REPRESENTATIVES. During the period of five
years hereafter the Company will furnish to each of the Representatives (i) as
soon as practicable after the end of each fiscal year, copies of the Annual
Report of the Company containing the balance sheet of the Company as of the
close of such fiscal year and statements of income, stockholders' equity and
cash flows for the year then ended and the opinion thereon of the Company's
independent public or certified public accountants; (ii) as soon as practicable
after the filing thereof, copies of each proxy statement, Annual Report on Form
10-K, Quarterly Report on Form 10-Q, Current Report on Form 8-K or other report
filed by the Company with the Commission, the National Association of Securities
Dealers, LLC or any securities exchange; and (iii) as soon as available, copies
of any report or communication of the Company mailed generally to holders of its
capital stock.
SECTION 4. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the several Underwriters to purchase and pay for the Shares as
provided herein on the First Closing Date and, with respect to the Option
Shares, the Second Closing Date, shall be subject to the accuracy of the
representations and warranties on the part of the Company set forth in Section 1
hereof as of the date hereof and as of the First Closing Date as though then
made and, with respect to the Option Shares, as of the Second Closing Date as
though then made, to the timely performance by the Company of its covenants and
other obligations hereunder, and to each of the following additional conditions:
(a) COMPLIANCE WITH REGISTRATION REQUIREMENTS; NO STOP ORDER; NO
OBJECTION FROM THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, LLC. The
Registration Statement shall have become effective prior to the execution of
this Agreement, or at such later date as shall be consented to in writing by
you; and no stop order suspending the effectiveness thereof shall have been
issued and no proceedings for that purpose shall have been initiated or, to the
knowledge of the Company or any Underwriter, threatened by the Commission, and
any request of the Commission for additional information (to be included in the
Registration Statement or the Prospectus or otherwise) shall have been complied
with to the satisfaction of Underwriters' Counsel; and the National Association
of Securities Dealers, LLC shall have raised no objection to the fairness and
reasonableness of the underwriting terms and arrangements.
(b) CORPORATE PROCEEDINGS. All corporate proceedings and other legal
matters in connection with this Agreement, the form of Registration Statement
and the Prospectus, and the registration, authorization, issue, sale and
delivery of the Shares, shall have been reasonably satisfactory to Underwriters'
Counsel, and such counsel shall have been furnished with such papers and
information
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<PAGE>
as they may reasonably have requested to enable them to pass upon the matters
referred to in this Section.
(c) NO MATERIAL ADVERSE CHANGE. Subsequent to the execution and
delivery of this Agreement and prior to the First Closing Date, or the Second
Closing Date, as the case may be, there shall not have been any Material Adverse
Change in the condition (financial or otherwise), earnings, operations, business
or business prospects of the Company and its subsidiaries considered as one
enterprise from that set forth in the Registration Statement or Prospectus,
which, in your sole judgment, is material and adverse and that makes it, in your
sole judgment, impracticable or inadvisable to proceed with the public offering
of the Shares as contemplated by the Prospectus.
(d) OPINION OF COUNSEL FOR THE COMPANY. You shall have received on the
First Closing Date, or the Second Closing Date, as the case may be, an opinion
of (i) Greenberg Traurig, P.A., counsel for the Company, substantially in the
form of EXHIBIT B-1 attached hereto, (ii) [Name of Japanese counsel for
unincorporated division in Japan], substantially in the form of EXHIBIT B-2
attached hereto, (iii) [Name of German counsel for German subsidiary],
substantially in the form of EXHIBIT B-3 attached hereto, and (iv) [Name of
United Kingdom counsel for U.K. subsidiary], substantially in the form of
EXHIBIT B-4 attached hereto, each such opinion dated as of the First Closing
Date, or the Second Closing Date, addressed to the Underwriters and with
reproduced copies or signed counterparts thereof for each of the Underwriters.
Counsel rendering the opinion contained in EXHIBIT B-1 may
rely as to questions of law not involving the laws of the United States or the
States of Florida and Delaware upon opinions of local counsel, and as to
questions of fact upon representations or certificates of officers of the
Company, and of government officials, in which case their opinion is to state
that they are so relying and that they have no knowledge of any material
misstatement or inaccuracy in any such opinion, representation or certificate.
Copies of any opinion, representation or certificate so relied upon shall be
delivered to you, as Representatives of the Underwriters, and to Underwriters'
Counsel.
(e) OPINION OF PATENT COUNSEL FOR THE COMPANY. You shall have received
on the First Closing Date, or the Second Closing Date, as the case may be, an
opinion of Nixon, Vanderhye, patent counsel for the Company substantially in the
form of EXHIBIT C-1 attached hereto and an opinion from each of [NAME OF GERMAN
PATENT COUNSEL] in substantially the form of EXHIBIT C-2 attached hereto.
(f) OPINION OF COUNSEL FOR THE UNDERWRITERS. You shall have received on
the First Closing Date or the Second Closing Date, as the case may be, an
opinion of Wilson Sonsini Goodrich & Rosati, P.C., substantially in the form of
EXHIBIT D hereto. The Company shall have furnished to such counsel such
documents as they may have requested for the purpose of enabling them to pass
upon such matters.
(g) ACCOUNTANTS' COMFORT LETTER. You shall have received on the First
Closing Date and on the Second Closing Date, as the case may be, a letter from
Ernst & Young LLP addressed to the
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Underwriters, dated the First Closing Date or the Second Closing Date, as the
case may be, confirming that they are independent certified public accountants
with respect to the Company within the meaning of the Act and the applicable
published Rules and Regulations and based upon the procedures described in such
letter delivered to you concurrently with the execution of this Agreement
(herein called the "Original Letter"), but carried out to a date not more than
four (4) business days prior to the First Closing Date or the Second Closing
Date, as the case may be, (i) confirming, to the extent true, that the
statements and conclusions set forth in the Original Letter are accurate as of
the First Closing Date or the Second Closing Date, as the case may be, and (ii)
setting forth any revisions and additions to the statements and conclusions set
forth in the Original Letter which are necessary to reflect any changes in the
facts described in the Original Letter since the date of such letter, or to
reflect the availability of more recent financial statements, data or
information. The letter shall not disclose any change in the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company and its subsidiaries considered as one enterprise from that set
forth in the Registration Statement or Prospectus, which, in your sole judgment,
is material and adverse and that makes it, in your sole judgment, impracticable
or inadvisable to proceed with the public offering of the Shares as contemplated
by the Prospectus. The Original Letter from Ernst & Young LLP shall be addressed
to or for the use of the Underwriters in form and substance satisfactory to the
Underwriters and shall (i) represent, to the extent true, that they are
independent certified public accountants with respect to the Company within the
meaning of the Act and the applicable published Rules and Regulations, (ii) set
forth their opinion with respect to their examination of the consolidated
balance sheet of the Company as of June 30, 1999 and related consolidated
statements of operations, shareholders' equity, and cash flows for the twelve
(12) months ended December 31, 1998 and for the six (6) months ended June 30,
1999, (iii) state that Ernst & Young LLP has performed the procedures set out in
Statement on Auditing Standards No. 71 ("SAS 71") for a review of interim
financial information and providing the report of Ernst & Young LLP as described
in SAS 71 on the financial statements for each of the quarters in the
two-quarter period ended June 30, 1999 (the "Quarterly Financial Statements"),
(iv) state that in the course of such review, nothing came to their attention
that leads them to believe that any material modifications need to be made to
any of the Quarterly Financial Statements in order for them to be in compliance
with generally accepted accounting principles consistently applied across the
periods presented, and address other matters agreed upon by Ernst & Young LLP
and you. In addition, you shall have received from Ernst & Young LLP a letter
addressed to the Company and made available to you for the use of the
Underwriters stating that their review of the Company's system of internal
accounting controls, to the extent they deemed necessary in establishing the
scope of their examination of the Company's consolidated financial statements as
of December 31, 1998, did not disclose any weaknesses in internal controls that
they considered to be material weaknesses.
(h) OFFICERS' CERTIFICATE. You shall have received on the First Closing
Date and the Second Closing Date, as the case may be, a certificate of the
Company, dated the First Closing Date or the Second Closing Date, as the case
may be, signed by the Chief Executive Officer and Chief Financial Officer of the
Company, to the effect that, and you shall be satisfied that:
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(i) The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the First Closing Date
or the Second Closing Date, as the case may be, and the Company has complied
with all the agreements and satisfied all the conditions on its part to be
performed or satisfied at or prior to the First Closing Date or the Second
Closing Date, as the case may be;
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose have
been instituted or are pending or threatened under the Act;
(iii) When the Registration Statement became effective and at
all times subsequent thereto up to the delivery of such certificate, the
Registration Statement and the Prospectus, and any amendments or supplements
thereto, contained all material information required to be included therein by
the Securities Act and the applicable rules and regulations of the Commission
thereunder, as the case may be, and in all material respects conformed to the
requirements of the Securities Act and the applicable rules and regulations of
the Commission thereunder, as the case may be, the Registration Statement and
the Prospectus, and any amendments or supplements thereto, did not and does not
include any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading; and, since the effective date of the Registration Statement, there
has occurred no event required to be set forth in an amended or supplemented
Prospectus which has not been so set forth; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, there has not
been (a) any material adverse change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise, (b) any transaction that is material
to the Company and its subsidiaries considered as one enterprise, except
transactions entered into in the ordinary course of business, (c) any
obligation, direct or contingent, that is material to the Company and its
subsidiaries considered as one enterprise, incurred by the Company or its
subsidiaries, except obligations incurred in the ordinary course of business,
(d) any change in the capital stock or outstanding indebtedness of the Company
or any of its subsidiaries that is material to the Company and its subsidiaries
considered as one enterprise, (e) any dividend or distribution of any kind
declared, paid or made on the capital stock of the Company or any of its
subsidiaries, or (f) any loss or damage (whether or not insured) to the property
of the Company or any of its subsidiaries which has been sustained or will have
been sustained which has a material adverse effect on the condition (financial
or otherwise), earnings, operations, business or business prospects of the
Company and its subsidiaries considered as one enterprise.
(i) LOCK-UP AGREEMENT FROM CERTAIN STOCKHOLDERS OF THE COMPANY. The
Company shall have obtained and delivered to you an agreement substantially in
the form of EXHIBIT A attached hereto from each officer and director of the
Company and each beneficial owner of one or more percent of the outstanding
issued share capital of the Company.
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(j) STOCK EXCHANGE LISTING. The Shares shall have been approved for
listing on the Nasdaq National Market, subject only to official notice of
issuance.
(k) COMPLIANCE WITH PROSPECTUS DELIVERY REQUIREMENTS. The Company shall
have complied with the provisions of Sections 2(g) and 3(e) hereof with respect
to the furnishing of Prospectuses.
(l) ADDITIONAL DOCUMENTS. On or before each of the First Closing Date
and the Second Closing Date, as the case may be, the Representatives and counsel
for the Underwriters shall have received such information, documents and
opinions as they may reasonably require for the purposes of enabling them to
pass upon the issuance and sale of the Shares as contemplated herein, or in
order to evidence the accuracy of any of the representations and warranties, or
the satisfaction of any of the conditions or agreements, herein contained.
If any condition specified in this Section 4 is not satisfied
when and as required to be satisfied, this Agreement may be terminated by the
Representatives by notice to the Company at any time on or prior to the First
Closing Date and, with respect to the Option Shares, at any time prior to the
Second Closing Date, which termination shall be without liability on the part of
any party to any other party, except that Section 5 (Payment of Expenses),
Section 6 (Reimbursement of Underwriters' Expenses), Section 7 (Indemnification
and Contribution) and Section 10 (Representations and Indemnities to Survive
Delivery) shall at all times be effective and shall survive such termination.
SECTION 5. PAYMENT OF EXPENSES. The Company agrees to pay all costs,
fees and expenses incurred in connection with the performance of its obligations
hereunder and in connection with the transactions contemplated hereby, including
without limitation (i) all expenses incident to the issuance and delivery of the
Common Shares (including all printing and engraving costs), (ii) all fees and
expenses of the registrar and transfer agent of the Common Stock, (iii) all
necessary issue, transfer and other stamp taxes in connection with the issuance
and sale of the Shares to the Underwriters, (iv) all fees and expenses of the
Company's counsel, independent public or certified public accountants and other
advisors, (v) all costs and expenses incurred in connection with the
preparation, printing, filing, shipping and distribution of the Registration
Statement (including financial statements, exhibits, schedules, consents and
certificates of experts), each preliminary prospectus and the Prospectus, and
all amendments and supplements thereto, and this Agreement, (vi) all filing
fees, attorneys' fees and expenses incurred by the Company or the Underwriters
in connection with qualifying or registering (or obtaining exemptions from the
qualification or registration of) all or any part of the Shares for offer and
sale under the state securities or blue sky laws or the provincial securities
laws of Canada or any other country, and, if requested by the Representatives,
preparing and printing a "Blue Sky Survey", an "International Blue Sky Survey"
or other memorandum, and any supplements thereto, advising the Underwriters of
such qualifications, registrations and exemptions, (vii) the filing fees
incident to, and the reasonable fees and expenses of counsel for the
Underwriters in connection with, the National Association of Securities Dealers,
LLC review and approval of the Underwriters' participation in the offering and
distribution of the Common Shares, (viii) the fees and expenses associated with
listing the Common Shares on the
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Nasdaq National Market, (ix) all costs and expenses incident to the preparation
and undertaking of "road show" preparations to be made to prospective investors,
and (x) all other fees, costs and expenses referred to in Item 13 of Part II of
the Registration Statement. Except as provided in this Section 5, Section 6, and
Section 7 hereof, the Underwriters shall pay their own expenses, including the
fees and disbursements of their counsel.
SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If this Agreement
is terminated by the Representatives pursuant to Section 4, Section 7, Section
8, Section 9 or Section 15, or if the sale to the Underwriters of the Shares on
the First Closing Date is not consummated because of any refusal, inability or
failure on the part of the Company to perform any agreement herein or to comply
with any provision hereof, the Company agrees to reimburse each of the
Representatives and the other Underwriters (or such Underwriters as have
terminated this Agreement with respect to themselves), severally, upon demand
for all out-of-pocket expenses that shall have been reasonably incurred by the
Representatives and the Underwriters in connection with the proposed purchase
and the offering and sale of the Shares, including but not limited to fees and
disbursements of counsel, printing expenses, travel expenses, postage, facsimile
and telephone charges.
SECTION 7. INDEMNIFICATION AND CONTRIBUTION.
(a) INDEMNIFICATION OF THE UNDERWRITERS. The Company agrees to
indemnify and hold harmless each Underwriter, its officers and employees, and
each person, if any, who controls any Underwriter within the meaning of the
Securities Act and the Exchange Act against any loss, claim, damage, liability
or expense, as incurred, to which such Underwriter or such controlling person
may become subject, under the Securities Act, the Exchange Act or other federal
or state statutory law or regulation, or at common law or otherwise (including
in settlement of any litigation, if such settlement is effected with the written
consent of the Company, which consent shall not be unreasonably withheld),
insofar as such loss, claim, damage, liability or expense (or actions in respect
thereof as contemplated below) arises out of or is based (i) upon any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement, or any amendment thereto, including any information
deemed to be a part thereof pursuant to Rule 430A or Rule 434 under the
Securities Act, or the omission or alleged omission therefrom of a material fact
required to be stated therein or necessary to make the statements therein not
misleading; or (ii) upon any untrue statement or alleged untrue statement of a
material fact contained in any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto), or the omission or alleged omission therefrom
of a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading; or (iii)
in whole or in part upon any inaccuracy in the representations and warranties of
the Company contained herein; or (iv) in whole or in part upon any failure of
the Company to perform its obligations hereunder or under law; or (v) any act or
failure to act or any alleged act or failure to act by any Underwriter in
connection
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with, or relating in any manner to, the Shares or the offering contemplated
hereby, and which is included as part of or referred to in any loss, claim,
damage, liability or action arising out of or based upon any matter covered by
clause (i), (ii), (iii) or (iv) above, provided that the Company shall not be
liable under this clause (v) to the extent that a court of competent
jurisdiction shall have determined by a final judgment that such loss, claim,
damage, liability or action resulted directly from any such acts or failures to
act undertaken or omitted to be taken by such Underwriter through its bad faith
or willful misconduct; and to reimburse each Underwriter and each such
controlling person for any and all expenses (including the fees and
disbursements of counsel chosen by BancBoston Robertson Stephens Inc.) as such
expenses are reasonably incurred by such Underwriter or such controlling person
in connection with investigating, defending, settling, compromising or paying
any such loss, claim, damage, liability, expense or action; provided, however,
that the foregoing indemnity agreement shall not apply to any loss, claim,
damage, liability or expense to the extent, but only to the extent, arising out
of or based upon any untrue statement or alleged untrue statement or omission or
alleged omission made in reliance upon and in conformity with written
information furnished to the Company by the Representatives expressly for use in
the Registration Statement, any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto); and provided, further, that with respect to
any preliminary prospectus, the foregoing indemnity agreement shall not inure to
the benefit of any Underwriter from whom the person asserting any loss, claim,
damage, liability or expense purchased Shares, or any person controlling such
Underwriter, if copies of the Prospectus were timely delivered to the
Underwriter pursuant to Section 2 and a copy of the Prospectus (as then amended
or supplemented if the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such Underwriter
to such person, if required by law so to have been delivered, at or prior to the
written confirmation of the sale of the Shares to such person, and if the
Prospectus (as so amended or supplemented) would have cured the defect giving
rise to such loss, claim, damage, liability or expense. The indemnity agreement
set forth in this Section 7(a) shall be in addition to any liabilities that the
Company may otherwise have.
(b) INDEMNIFICATION OF THE COMPANY, ITS DIRECTORS AND OFFICERS. Each
Underwriter agrees, severally and not jointly, to indemnify and hold harmless
the Company, each of its directors, each of its officers who signed the
Registration Statement and each person, if any, who controls the Company within
the meaning of the Securities Act or the Exchange Act, against any loss, claim,
damage, liability or expense, as incurred, to which the Company, or any such
director, officer or controlling person may become subject, under the Securities
Act, the Exchange Act, or other federal or state statutory law or regulation, or
at common law or otherwise (including in settlement of any litigation, if such
settlement is effected with the written consent of such Underwriter), insofar as
such loss, claim, damage, liability or expense (or actions in respect thereof as
contemplated below) arises out of or is based upon any untrue or alleged untrue
statement of a material fact contained in the Registration Statement, any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto), or arises out of or is based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in the Registration Statement, any
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<PAGE>
preliminary prospectus, the Prospectus (or any amendment or supplement thereto),
in reliance upon and in conformity with written information furnished to the
Company by the Representatives expressly for use therein; and to reimburse the
Company, or any such director, officer or controlling person for any legal and
other expense reasonably incurred by the Company, or any such director, officer
or controlling person in connection with investigating, defending, settling,
compromising or paying any such loss, claim, damage, liability, expense or
action. The indemnity agreement set forth in this Section 7(b) shall be in
addition to any liabilities that each Underwriter may otherwise have.
(c) INFORMATION PROVIDED BY THE UNDERWRITERS. The Company hereby
acknowledges that the only information that the Underwriters have furnished to
the Company expressly for use in the Registration Statement, any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto) are the
statements set forth in the table in the first, second and [third] paragraph
under the caption "Underwriting" in the Prospectus; and the Underwriters confirm
that such statements are correct.
(d) NOTIFICATIONS AND OTHER INDEMNIFICATION PROCEDURES. Promptly after
receipt by an indemnified party under this Section 7 of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party under this Section 7, notify
the indemnifying party in writing of the commencement thereof, but the omission
so to notify the indemnifying party will not relieve it from any liability which
it may have to any indemnified party for contribution or otherwise than under
the indemnity agreement contained in this Section 7 or to the extent it is not
prejudiced as a proximate result of such failure. In case any such action is
brought against any indemnified party and such indemnified party seeks or
intends to seek indemnity from an indemnifying party, the indemnifying party
will be entitled to participate in, and, to the extent that it shall elect,
jointly with all other indemnifying parties similarly notified, by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party; provided, however, if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that a conflict may arise between the positions of the indemnifying party and
the indemnified party in conducting the defense of any such action or that there
may be legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of such indemnifying
party's election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to such
indemnified party under this Section 7 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence (it being understood,
however, that the indemnifying party shall not be liable for the expenses of
more than one separate counsel (together with local counsel), approved by the
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indemnifying party (BancBoston Robertson Stephens Inc. in the case of Section
7(b) and Section 8), representing the indemnified parties who are parties to
such action), (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of commencement of the action, or (iii) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party, in each of which cases the fees
and expenses of counsel shall be at the expense of the indemnifying party.
(e) SETTLEMENTS. The indemnifying party under this Section 7 shall not
be liable for any settlement of any proceeding effected without its written
consent, which consent shall not be unreasonably withheld, but if settled with
such consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party against any loss, claim, damage,
liability or expense by reason of such settlement or judgment. Notwithstanding
the foregoing sentence, if at any time an indemnified party shall have requested
an indemnifying party to reimburse the indemnified party for fees and expenses
of counsel as contemplated by Section 7(d) hereof, the indemnifying party agrees
that it shall be liable for any settlement of any proceeding effected without
its written consent if (i) such settlement is entered into more than 30 days
after receipt by such indemnifying party of the aforesaid request and (ii) such
indemnifying party shall not have reimbursed the indemnified party in accordance
with such request prior to the date of such settlement. No indemnifying party
shall, without the prior written consent of the indemnified party, effect any
settlement, compromise or consent to the entry of judgment in any pending or
threatened action, suit or proceeding in respect of which any indemnified party
is or could have been a party and indemnity was or could have been sought
hereunder by such indemnified party, unless such settlement, compromise or
consent includes (i) an unconditional release of such indemnified party from all
liability on claims that are the subject matter of such action, suit or
proceeding and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act by or on behalf of any indemnified party.
(f) CONTRIBUTION. If the indemnification provided for in this Section 7
is unavailable to or insufficient to hold harmless an indemnified party under
Section 7(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) then each
indemnifying party shall contribute to the aggregate amount paid or payable by
such indemnified party in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the Underwriters
on the other from the offering of the Shares. If, however, the allocation
provided by the immediately preceding sentence is not permitted by applicable
law then each indemnifying party shall contribute to such amount paid or payable
by such indemnified party in such proportion as is appropriate to reflect not
only such relative benefits but also the relative fault of the Company on the
one hand and the Underwriters on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities, (or
actions or proceedings in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the Underwriter on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received
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<PAGE>
by the Company bears to the total underwriting discounts and commissions
received by the Underwriters, in each case as set forth in the table on the
cover page of the Prospectus. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company on the one hand or the
Underwriters on the other and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and Underwriters agree that it would not be just
and equitable if contributions pursuant to this Section 7(f) were determined by
pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to above in this Section 7(f). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
referred to above in this Section 7(f) shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (f), (i) no Underwriter shall be required to
contribute any amount in excess of the underwriting discounts and commissions
applicable to the Shares purchased by such Underwriter and (ii) no person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this Section 7(f) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(g) TIMING OF ANY PAYMENTS OF INDEMNIFICATION. Any losses, claims,
damages, liabilities or expenses for which an indemnified party is entitled to
indemnification or contribution under this Section 7 shall be paid by the
indemnifying party to the indemnified party as such losses, claims, damages,
liabilities or expenses are incurred, but in all cases, no later than thirty
(30) days of invoice to the indemnifying party.
(h) SURVIVAL. The indemnity and contribution agreements contained in
this Section 7 and the representation and warranties of the Company set forth in
this Agreement shall remain operative and in full force and effect, regardless
of (i) any investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter, the Company, its directors or officers or any
persons controlling the Company, (ii) acceptance of any Shares and payment
therefor hereunder, and (iii) any termination of this Agreement. A successor to
any Underwriter, or to the Company, its directors or officers, or any person
controlling the Company, shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 7.
(i) ACKNOWLEDGEMENTS OF PARTIES. The parties to this Agreement hereby
acknowledge that they are sophisticated business persons who were represented by
counsel during the negotiations regarding the provisions hereof including,
without limitation, the provisions of this Section 7, and are fully informed
regarding said provisions. They further acknowledge that the provisions of this
Section 7 fairly allocate the risks in light of the ability of the parties to
investigate the Company and
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<PAGE>
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Securities Act and the
Exchange Act.
SECTION 8. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS. If, on
the First Closing Date or the Second Closing Date, as the case may be, any one
or more of the several Underwriters shall fail or refuse to purchase Shares that
it or they have agreed to purchase hereunder on such date, and the aggregate
number of Common Shares which such defaulting Underwriter or Underwriters agreed
but failed or refused to purchase does not exceed 10% of the aggregate number of
the Shares to be purchased on such date, the other Underwriters shall be
obligated, severally, in the proportions that the number of Firm Common Shares
set forth opposite their respective names on SCHEDULE A bears to the aggregate
number of Firm Shares set forth opposite the names of all such non-defaulting
Underwriters, or in such other proportions as may be specified by the
Representatives with the consent of the non-defaulting Underwriters, to purchase
the Shares which such defaulting Underwriter or Underwriters agreed but failed
or refused to purchase on such date. If, on the First Closing Date or the Second
Closing Date, as the case may be, any one or more of the Underwriters shall fail
or refuse to purchase Shares and the aggregate number of Shares with respect to
which such default occurs exceeds 10% of the aggregate number of Shares to be
purchased on such date, and arrangements satisfactory to the Representatives and
the Company for the purchase of such Shares are not made within 48 hours after
such default, this Agreement shall terminate without liability of any party to
any other party except that the provisions of Section 4, and Section 7 shall at
all times be effective and shall survive such termination. In any such case
either the Representatives or the Company shall have the right to postpone the
First Closing Date or the Second Closing Date, as the case may be, but in no
event for longer than seven days in order that the required changes, if any, to
the Registration Statement and the Prospectus or any other documents or
arrangements may be effected.
As used in this Agreement, the term "Underwriter" shall be
deemed to include any person substituted for a defaulting Underwriter under this
Section 8. Any action taken under this Section 8 shall not relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
SECTION 9. TERMINATION OF THIS AGREEMENT. Prior to the First Closing
Date, this Agreement may be terminated by the Representatives by notice given to
the Company if at any time (i) trading or quotation in any of the Company's
securities shall have been suspended or limited by the Commission or by the
Nasdaq Stock Market, or trading in securities generally on either the Nasdaq
Stock Market or the New York Stock Exchange shall have been suspended or
limited, or minimum or maximum prices shall have been generally established on
any of such stock exchanges by the Commission or the National Association of
Securities Dealers, LLC; (ii) a general banking moratorium shall have been
declared by any of federal, New York or Florida authorities; (iii) there shall
have occurred any outbreak or escalation of national or international
hostilities or any crisis or calamity, or any change in the United States or
international financial markets, or any substantial change or development
involving a prospective change in United States' or international political,
financial or economic conditions, as in the judgment of the Representatives is
material and adverse
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<PAGE>
and makes it impracticable or inadvisable to market the Common Shares in the
manner and on the terms described in the Prospectus or to enforce contracts for
the sale of securities; (iv) in the judgment of the Representatives there shall
have occurred any Material Adverse Change; or (v) the Company shall have
sustained a loss by strike, fire, flood, earthquake, accident or other calamity
of such character as in the judgment of the Representatives may interfere
materially with the conduct of the business and operations of the Company
regardless of whether or not such loss shall have been insured. Any termination
pursuant to this Section 9 shall be without liability on the part of (a) the
Company to any Underwriter, except that the Company shall be obligated to
reimburse the expenses of the Representatives and the Underwriters pursuant to
Sections 5 and 6 hereof, (b) any Underwriter to the Company, or (c) of any party
hereto to any other party except that the provisions of Section 7 shall at all
times be effective and shall survive such termination.
SECTION 10. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers and of the several Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter
or the Company or any of its or their partners, officers or directors or any
controlling person, as the case may be, and will survive delivery of and payment
for the Shares sold hereunder and any termination of this Agreement.
SECTION 11. NOTICES. All communications hereunder shall be in writing
and shall be mailed, hand delivered or telecopied and confirmed to the parties
hereto as follows:
If to the Representatives:
BANCBOSTON ROBERTSON STEPHENS INC.
555 California Street
San Francisco, California 94104
Facsimile: (415) 676-2696
Attention: General Counsel
HAMBRECHT & QUIST LLC
555 California Street
San Francisco, CA 94104
Facsimile: (415) 693-3283
Attention: General Counsel
U.S. BANCORP PIPER JAFFRAY INC.
222 South 9th Street
Minneapolis, MN 55402
Facsimile: (612) 342-8524
Attention: General Counsel
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<PAGE>
If to the Company:
SMARTDISK CORPORATION
3506 Mercantile Avenue
Naples, Florida 34104
Facsimile: (941) 436-2553
Attention: General Counsel
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
SECTION 12. SUCCESSORS. This Agreement will inure to the benefit of and
be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 9 hereof, and to the benefit of the employees, officers and
directors and controlling persons referred to in Section 7, and to their
respective successors, and no other person will have any right or obligation
hereunder. The term "successors" shall not include any purchaser of the Shares
as such from any of the Underwriters merely by reason of such purchase.
SECTION 13. PARTIAL UNENFORCEABILITY. The invalidity or
unenforceability of any Section, paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other Section, paragraph or
provision hereof. If any Section, paragraph or provision of this Agreement is
for any reason determined to be invalid or unenforceable, there shall be deemed
to be made such minor changes (and only such minor changes) as are necessary to
make it valid and enforceable.
SECTION 14. GOVERNING LAW PROVISIONS.
(a) GOVERNING LAW. This agreement shall be governed by and construed in
accordance with the internal laws of the state of California applicable to
agreements made and to be performed in such state.
(b) CONSENT TO JURISDICTION. Any legal suit, action or proceeding
arising out of or based upon this Agreement or the transactions contemplated
hereby ("Related Proceedings") may be instituted in the federal courts of the
United States of America located in the City and County of San Francisco or the
courts of the State of California in each case located in the City and County of
San Francisco (collectively, the "Specified Courts"), and each party irrevocably
submits to the exclusive jurisdiction (except for proceedings instituted in
regard to the enforcement of a judgment of any such court (a "Related
Judgment"), as to which such jurisdiction is non-exclusive) of such courts in
any such suit, action or proceeding. Service of any process, summons, notice or
document by mail to such party's address set forth above shall be effective
service of process for any suit, action or other proceeding brought in any such
court. The parties irrevocably and unconditionally waive any objection to the
laying of venue of any suit, action or other proceeding in the Specified Courts
and irrevocably and unconditionally waive and agree not to plead or claim in any
such court that any such suit, action or other proceeding brought in any such
court has been brought in an inconvenient
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<PAGE>
forum. Each party not located in the United States irrevocably appoints CT
Corporation System, which currently maintains a San Francisco office at 49
Stevenson Street, San Francisco, California 94105, United States of America, as
its agent to receive service of process or other legal summons for purposes of
any such suit, action or proceeding that may be instituted in any state or
federal court in the City and County of San Francisco.
SECTION 15. GENERAL PROVISIONS. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may be executed in two
or more counterparts, each one of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement may not be amended or modified unless in writing by all of the
parties hereto, and no condition herein (express or implied) may be waived
unless waived in writing by each party whom the condition is meant to benefit.
The Table of Contents and the Section headings herein are for the convenience of
the parties only and shall not affect the construction or interpretation of this
Agreement.
[The remainder of this page has been intentionally left blank.]
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<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company the enclosed copies hereof,
whereupon this instrument, along with all counterparts hereof, shall become a
binding agreement in accordance with its terms.
Very truly yours,
SMARTDISK CORPORATION
By:
---------------------------------------
President and Chief Executive Officer
The foregoing Underwriting Agreement is hereby confirmed and accepted
by the Representatives as of the date first above written.
BANCBOSTON ROBERTSON STEPHENS INC.
HAMBRECHT & QUIST LLC
U.S. BANCORP PIPER JAFFRAY INC.
On their behalf and on behalf of each of the several underwriters named in
SCHEDULE A hereto.
BY BANCBOSTON ROBERTSON STEPHENS INC.
By:
------------------------------
Authorized Signatory
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<PAGE>
SCHEDULE A
Underwriters Number of Firm
Common Shares
To Be Purchased
BANCBOSTON ROBERTSON STEPHENS
INC. AND BANCBOSTON ROBERTSON
STEPHENS INTERNATIONAL LIMITED............................ [___]
HAMBRECHT & QUIST LLC..................................... [___]
U.S. BANCORP PIPER JAFFRAY INC. .......................... [___]
[___] .................................................... [___]
[___] .................................................... [___]
[___] .................................................... [___]
[___]
Total............................................
S-A
<PAGE>
EXHIBIT A
LOCK-UP AGREEMENT
BancBoston Robertson Stephens Inc.
Hambrecht & Quist LLC
U.S. Bancorp Piper Jaffray Inc.
As Representatives of the Several Underwriters
c/o BancBoston Robertson Stephens Inc.
555 California Street, Suite 2600
San Francisco, California 94104
RE: SmartDisk Corporation (the "Company")
Ladies & Gentlemen:
The undersigned is an owner of record or beneficially of certain shares
of Common Stock of the Company ("Common Stock") or securities convertible into
or exchangeable or exercisable for Common Stock. The Company proposes to carry
out a public offering of Common Stock (the "Offering") for which you will act as
the representatives (the "Representatives") of the underwriters. The undersigned
recognizes that the Offering will be of benefit to the undersigned and will
benefit the Company by, among other things, raising additional capital for its
operations. The undersigned acknowledges that you and the other underwriters are
relying on the representations and agreements of the undersigned contained in
this letter in carrying out the Offering and in entering into underwriting
arrangements with the Company with respect to the Offering.
In consideration of the foregoing, the undersigned hereby agrees that
the undersigned will not offer to sell, contract to sell, or otherwise sell,
dispose of, loan, pledge or grant any rights with respect to (collectively, a
"Disposition") 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 (collectively, "Securities") now owned or hereafter
acquired directly by such person or with respect to which such person has or
hereafter acquires the power of disposition, otherwise than (i) as a bona fide
gift or gifts, provided the donee or donees thereof agree in writing to be bound
by this restriction, (ii) as a distribution to partners or shareholders of such
person, provided that the distributees thereof agree in writing to be bound by
the terms of this restriction, (iii) with respect to dispositions of Common
Shares acquired on the open market or (iv) with the prior written consent of
BancBoston Robertson Stephens Inc., for a period commencing on the date hereof
and continuing to a date 180 days after the Registration Statement is declared
effective by the Securities and Exchange Commission (the "Lock-up Period"). The
foregoing restriction has been expressly agreed to preclude the holder of the
Securities from engaging in any hedging or other transaction
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<PAGE>
which is designed to or reasonably expected to lead to or result in a
Disposition of Securities during the Lock-up Period, even if such Securities
would be disposed of by someone other than such holder. Such prohibited hedging
or other transactions would include, without limitation, any short sale (whether
or not against the box) or any purchase, sale or grant of any right (including,
without limitation, any put or call option) with respect to any Securities or
with respect to any security (other than a broad-based market basket or index)
that included, relates to or derives any significant part of its value from
Securities. The undersigned also agrees and consents to the entry of stop
transfer instructions with the Company's transfer agent and registrar against
the transfer of shares of Common Stock or Securities held by the undersigned
except in compliance with the foregoing restrictions. BancBoston Robertson
Stephens Inc., acting alone and in its sole discretion, may waive any provisions
of this Lock-Up Agreement without notice to any third party
This agreement is irrevocable and will be binding on the undersigned
and the respective successors, heirs, personal representatives, and assigns of
the undersigned. In the event that the Registration Statement shall not have
been declared effective on or before March 31, 2000, this Lock-Up Agreement
shall be of no further force or effect.
Dated:
-----------------------------------------------
-----------------------------------------------------
Printed Name of Holder
By:
--------------------------------------------------
Signature
-----------------------------------------------------
Printed Name of Person Signing (and indicate
capacity of person signing if signing as custodian,
trustee, or on behalf of an entity)
A-2
<PAGE>
EXHIBIT B-1
MATTERS TO BE COVERED IN THE OPINION OF U.S. COMPANY COUNSEL
(i) The Company and each Significant Subsidiary (as that term is defined in
Regulation S-X of the Act) has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the jurisdiction of its
incorporation;
(ii) The Company and each Significant Subsidiary has the corporate power and
authority to own, lease and operate its properties and to conduct its business
as described in the Prospectus;
(iii) The Company and each Significant Subsidiary is duly qualified to do
business as a foreign corporation and is in good standing in each jurisdiction,
if any, in which the ownership or leasing of its properties or the conduct of
its business requires such qualification, except where the failure to be so
qualified or be in good standing would not have a Material Adverse Effect. To
such counsel's knowledge, the Company does not own or control, directly or
indirectly, any corporation, association or other entity other than [list
subsidiaries];
(iv) The authorized, issued and outstanding capital stock of the Company is as
set forth in the Prospectus under the caption "Capitalization" as of the dates
stated therein, the issued and outstanding shares of capital stock of the
Company have been duly and validly issued and are fully paid and nonassessable,
and, to such counsel's knowledge, will not have been issued in violation of or
subject to any preemptive right, co-sale right, registration right, right of
first refusal or other similar right;
(v) All issued and outstanding shares of capital stock of each Significant
Subsidiary of the Company have been duly authorized and validly issued and are
fully paid and nonassessable, and, to such counsel's knowledge, have not been
issued in violation of or subject to any preemptive right, co-sale right,
registration right, right of first refusal or other similar right and are owned
by the Company free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest;
(vi) The Firm Shares or the Option Shares, as the case may be, to be issued by
the Company pursuant to the terms of this Agreement have been duly authorized
and, upon issuance and delivery against payment therefor in accordance with the
terms hereof, will be duly and validly issued and fully paid and nonassessable,
and will not have been issued in violation of or subject to any preemptive
right, co-sale right, registration right, right of first refusal or other
similar right.
(vii) The Company has the corporate power and authority to enter into this
Agreement and to issue, sell and deliver to the Underwriters the Shares to be
issued and sold by it hereunder;
(viii) This Agreement has been duly authorized by all necessary corporate action
on the part of the Company and has been duly executed and delivered by the
Company and, assuming due
B-1
<PAGE>
authorization, execution and delivery by you, is a valid and binding agreement
of the Company, enforceable in accordance with its terms, except as rights to
indemnification hereunder may be limited by applicable law and except as
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws relating to or affecting creditors' rights generally
or by general equitable principles;
(ix) The Registration Statement has become effective under the Act and, to such
counsel's knowledge, no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose have
been instituted or are pending or threatened under the Securities Act;
(x) The 8-A Registration Statement complied as to form in all material respects
with the requirements of the Exchange Act; the 8-A Registration Statement has
become effective under the Exchange Act; and the Firm Shares or the Option
Shares have been validly registered under the Securities Act and the Rules and
Regulations of the Exchange Act and the applicable rules and regulations of the
Commission thereunder;
(xi) The Registration Statement and the Prospectus, and each amendment or
supplement thereto (other than the financial statements (including supporting
schedules) and financial data derived therefrom as to which such counsel need
express no opinion), as of the effective date of the Registration Statement,
complied as to form in all material respects with the requirements of the Act
and the applicable Rules and Regulations;
(xii) The information in the Prospectus under the caption "Description of
Capital Stock," to the extent that it constitutes matters of law or legal
conclusions, has been reviewed by such counsel and is a fair summary of such
matters and conclusions; and the forms of certificates evidencing the Common
Stock and filed as exhibits to the Registration Statement comply with Delaware
law;
(xiii) The description in the Registration Statement and the Prospectus of the
charter and bylaws of the Company and of statutes are accurate and fairly
present the information required to be presented by the Securities Act;
(xiv) To such counsel's knowledge, there are no agreements, contracts, leases or
documents to which the Company is a party of a character required to be
described or referred to in the Registration Statement or Prospectus or to be
filed as an exhibit to the Registration Statement which are not described or
referred to therein or filed as required;
(xv) The performance of this Agreement and the consummation of the transactions
herein contemplated (other than performance of the Company's indemnification
obligations hereunder, concerning which no opinion need be expressed) will not
(a) result in any violation of the Company's charter or bylaws or (b) to such
counsel's knowledge, result in a material breach or violation of any of the
terms and provisions of, or constitute a default under, any bond, debenture,
note or other evidence of indebtedness, or any lease, contract, indenture,
mortgage, deed of trust, loan agreement,
B-2
<PAGE>
joint venture or other agreement or instrument known to such counsel to which
the Company is a party or by which its properties are bound, or any applicable
statute, rule or regulation known to such counsel or, to such counsel's
knowledge, any order, writ or decree of any court, government or governmental
agency or body having jurisdiction over the Company or any of its subsidiaries,
or over any of their properties or operations;
(xvi) No consent, approval, authorization or order of or qualification with any
court, government or governmental agency or body having jurisdiction over the
Company or any of its subsidiaries, or over any of their properties or
operations is necessary in connection with the consummation by the Company of
the transactions herein contemplated, except (i) such as have been obtained
under the Securities Act, (ii) such as may be required under state or other
securities or Blue Sky laws in connection with the purchase and the distribution
of the Shares by the Underwriters, (iii) such as may be required by the National
Association of Securities Dealers, LLC and (iv) such as may be required under
the federal or provincial laws of Canada;
(xvii) To such counsel's knowledge, there are no legal or governmental
proceedings pending or threatened against the Company or any of its subsidiaries
of a character required to be disclosed in the Registration Statement or the
Prospectus by the Securities Act or the applicable rules and regulations of the
Commission thereunder, other than those described therein;
(xviii) To such counsel's knowledge, neither the Company nor any of its
subsidiaries is presently (a) in material violation of its respective charter or
bylaws, or (b) in material breach of any applicable statute, rule or regulation
known to such counsel or, to such counsel's knowledge, any order, writ or decree
of any court or governmental agency or body having jurisdiction over the Company
or any of its subsidiaries, or over any of their properties or operations; and
(xix) To such counsel's knowledge, except as set forth in the Registration
Statement and Prospectus, no holders of Company Shares or other securities of
the Company have registration rights with respect to securities of the Company
and, except as set forth in the Registration Statement and Prospectus, all
holders of securities of the Company having rights known to such counsel to
registration of such shares of Company Shares or other securities, because of
the filing of the Registration Statement by the Company have, with respect to
the offering contemplated thereby, waived such rights or such rights have
expired by reason of lapse of time following notification of the Company's
intent to file the Registration Statement or have included securities in the
Registration Statement pursuant to the exercise of and in full satisfaction of
such rights.
(xx) The Company is not and, after giving effect to the offering and the sale of
the Shares and the application of the proceeds thereof as described in the
Prospectus, will not be, an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended.
(xxi) To such counsel's knowledge, the Company owns or possesses sufficient
trademarks, trade names, patent rights, copyrights, licenses, approvals, trade
secrets and other similar rights (collectively, "Intellectual Property Rights")
reasonably necessary to conduct their business as now
B-3
<PAGE>
conducted; and the expected expiration of any such Intellectual Property Rights
would not result in a Material Adverse Effect. The Company has not received any
notice of infringement or conflict with asserted Intellectual Property Rights of
others, which infringement or conflict, if the subject of an unfavorable
decision, would result in a Material Adverse Effect. To such counsel's
knowledge, the Company's discoveries, inventions, products, or processes
referred to in the Registration Statement or Prospectus do not infringe or
conflict with any right or patent which is the subject of a patent application
known to the Company.
In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives of the
Company, the Representatives, Underwriters' Counsel and the independent
certified public accountants of the Company, at which such conferences the
contents of the Registration Statement and Prospectus and related matters were
discussed, and although they have not verified the accuracy or completeness of
the statements contained in the Registration Statement or the Prospectus,
nothing has come to the attention of such counsel which leads them to believe
that, at the time the Registration Statement became effective and at all times
subsequent thereto up to and on the First Closing Date or Second Closing Date,
as the case may be, the Registration Statement and any amendment or supplement
thereto (other than the financial statements including supporting schedules and
other financial and statistical information derived therefrom, as to which such
counsel need express no comment) contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or at the First Closing
Date or the Second Closing Date, as the case may be, the Registration Statement,
the Prospectus and any amendment or supplement thereto (except as aforesaid)
contained any untrue statement of a material fact or omitted to state a material
fact necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
B-4
<PAGE>
EXHIBIT B-2
MATTERS TO BE COVERED IN THE OPINION OF COMPANY JAPANESE COUNSEL
B-5
<PAGE>
EXHIBIT B-3
MATTERS TO BE COVERED IN THE OPINION OF COMPANY GERMAN COUNSEL
B-6
<PAGE>
EXHIBIT B-4
MATTERS TO BE COVERED IN THE OPINION OF COMPANY UNITED KINGDOM COUNSEL
B-7
<PAGE>
EXHIBIT C-1
MATTERS TO BE COVERED IN THE OPINION OF
U.S. PATENT COUNSEL FOR THE COMPANY
Such counsel are familiar with the technology used by the Company in
its business and the manner of its use thereof and have read the Registration
Statement and the Prospectus, including particularly the portions of the
Registration Statement and the Prospectus referring to patents, trade secrets,
trademarks, service marks or other proprietary information or materials and:
(i) The Company is listed in the records of the United States Patent
and Trademark Office as the holder of record of the patents listed on a schedule
to such opinion (the "Patents") and each of the applications listed on a
schedule to such opinion (the "Applications"). To the knowledge of such counsel,
there are no claims of third parties to any ownership interest or lien with
respect to any of the Patents or Applications. Such counsel is not aware of any
material defect in form in the preparation or filing of the Applications on
behalf of the Company. To the knowledge of such counsel, the Applications are
being pursued by the Company. To the knowledge of such counsel, the Company owns
as its sole property the Patents and pending Applications;
(ii) The Company is listed in the records of the appropriate foreign
offices as the sole holder of record of the foreign patents listed on a schedule
to such opinion (the "Foreign Patents") and each of the applications listed on a
schedule to such opinion (the "Foreign Applications"). Such counsel knows of no
claims of third parties to any ownership interest or lien with respect to the
Foreign Patents or Foreign Applications. Such counsel is not aware of any
material defect of form in the preparation or filing of the Foreign Applications
on behalf of the Company. To the knowledge of such counsel, the Foreign
Applications are being pursued by the Company. To the knowledge of such counsel,
the Company owns as its sole property the Foreign Patents and pending Foreign
Applications;
(iii) Such counsel knows of no reason why the Patents or Foreign
Patents are not valid as issued. Such counsel has no knowledge of any reason why
any patent to be issued as a result of any Application or Foreign Application
would not be valid or would not afford the Company useful patent protection with
respect thereto;
(iv) As to the statements under the captions "Risk Factors - Our
success depends upon protecting our intellectual property" and "Business -
Intellectual Property," nothing has come to the attention of such counsel which
caused them to believe that the above-mentioned sections of the Registration
Statement, at the time the Registration Statement became effective and at all
times subsequent thereto up to and on the Closing Date and on any later date on
which Option Stock are to be purchased the Registration Statement and any
amendment or supplement thereto made available and reviewed by such counsel
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading,
C-1
<PAGE>
or at the Closing Date or any later date on which the Option Stock are to be
purchased, as the case may be, the above-mentioned sections of the Registration
Statement, Prospectus and any amendment or supplement thereto made available and
reviewed by such counsel contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading; and
(v) Such counsel knows of no material action, suit, claim or proceeding
relating to patents, patent rights or licenses, trademarks or trademark rights,
copyrights, collaborative research, licenses or royalty arrangements or
agreements or trade secrets, know-how or proprietary techniques, including
processes and substances, owned by or affecting the business or operations of
the Company which are pending or threatened against the Company or any of its
officers or directors.
C-2
<PAGE>
EXHIBIT C-2
MATTERS TO BE COVERED IN THE OPINION OF
GERMAN PATENT COUNSEL FOR THE COMPANY
C-3
<PAGE>
EXHIBIT D
MATTERS TO BE COVERED IN THE OPINION
OF UNDERWRITERS' COUNSEL
(i) The Firm Shares have been duly authorized and, upon issuance and
delivery and payment therefor in accordance with the terms of the Underwriting
Agreement, will be validly issued, fully paid and non-assessable.
(ii) The Registration Statement complied as to form in all material
respects with the requirements of the Act; the Registration Statement has become
effective under the Act and, to such counsel's knowledge, no stop order
proceedings with respect thereto have been instituted or threatened or are
pending under the Act.
(iii) The Underwriting Agreement has been duly authorized, executed and
delivered by the Company.
Such counsel shall state that such counsel has reviewed the opinions
addressed to the Representatives from Greenberg Traurig, P.A., [list any other
counsel that has provided an opinion], each dated the date hereof, and furnished
to you in accordance with the provisions of the Underwriting Agreement. Such
opinions appear on their face to be appropriately responsive to the requirements
of the Underwriting Agreement.
In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives of the
Company, the Representatives, Underwriters' Counsel and the independent
certified public accountants of the Company, at which such conferences the
contents of the Registration Statement and Prospectus and related matters were
discussed, and although they have not verified the accuracy or completeness of
the statements contained in the Registration Statement or the Prospectus,
nothing has come to the attention of such counsel which leads them to believe
that, at the time the Registration Statement became effective and at all times
subsequent thereto up to and on the First Closing Date or Second Closing Date,
as the case may be, the Registration Statement and any amendment or supplement
thereto (other than the financial statements including supporting schedules and
other financial and statistical information derived therefrom, as to which such
counsel need express no comment) contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or at the First Closing
Date or the Second Closing Date, as the case may be, the Registration Statement,
the Prospectus and any amendment or supplement thereto (except as aforesaid)
contained any untrue statement of a material fact or omitted to state a material
fact necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
SMARTDISK CORPORATION
- --------------------------------------------------------------------------------
A. (i) The present name of the corporation (hereinafter called
the "Corporation") is SmartDisk Corporation.
(ii) The name under which the Corporation was originally
incorporated is Fintos, Inc., and the date of filing the original Certificate of
Incorporation of the Corporation with the Secretary of State of the State of
Delaware is March 5, 1997.
B. The provisions of the Certificate of Incorporation of the
Corporation as heretofore amended and/or supplemented, are hereby amended,
restated and integrated into the single instrument which is hereinafter set
forth, and which is entitled Restated Certificate of Incorporation of SmartDisk
Corporation, without any further amendments other than the amendments herein
certified and without any discrepancy between the provisions of the Certificate
of Incorporation as heretofore amended and supplemented and the provisions
hereinafter set forth.
C. The amendments and the restatement of the Restated Certificate of
Incorporation herein certified have been duly adopted by the board of directors
and stockholders in accordance with the provisions Section 242 and 245 of the
General Corporation Law of the State of Delaware.
The Certificate of Incorporation of the Corporation, as amended and
restated herein, shall at the effective time of this Restated Certificate of
Incorporation, read as follows:
FIRST: The name of the Corporation is SmartDisk Corporation.
SECOND: The registered office of the Corporation in the State of
Delaware is located at 30 Old Rudnick Lane, in the City of Dover, County of
Kent. The name of the registered agent in charge thereof is CorpAmerica, Inc. at
30 Old Rudnick Lane, Dover, Delaware 19901.
THIRD: The purpose for which the Corporation is organized is to engage
in any and all lawful acts and activity for which corporations may be organized
under the General Corporation Law of Delaware. The Corporation will have
perpetual existence.
FOURTH: The total number of shares of stock which the Corporation shall
have authority to issue is sixty-five million (65,000,000) shares of capital
stock, classified as (i) five million (5,000,000) shares of preferred stock, par
value $.001 per share ("Preferred Stock"), and
<PAGE>
(ii) sixty million (60,000,000) shares of common stock, par value $.001 per
share ("Common Stock").
All of the shares of Common Stock of the Corporation issued and
outstanding, or held as treasury shares, immediately prior to the time this
Restated Certificate of Incorporation becomes effective shall be and are by this
means automatically reclassified and changed (without further act) into fully
paid and nonassessable shares of Common Stock, the number of which shall equal
the number of shares obtained by dividing (1) the total number of shares of
Common Stock issued and outstanding, or held as treasury shares, immediately
prior to the time this Restated Certificate of Incorporation becomes effective
by (2) four. The shares of Common Stock returned to the Corporation as a result
of the reclassification and change shall become effective without increasing or
decreasing the amount of stated capital or paid-in-surplus of the Corporation,
and shall constitute a one for four reverse stock split, provided no fractional
shares of less than one share shall be issued. The holders of fractional share
interests of less than one share shall be paid in cash by the Corporation the
value of their fractional share based upon the fair market value of the Common
Stock, as determined by the board of directors of the Corporation.
The designations and the powers, preferences, rights, qualifications,
limitations, and restrictions of the Preferred Stock and Common Stock are as
follows:
1. PROVISIONS RELATING TO THE PREFERRED STOCK.
(a) The Preferred Stock may be issued from time to time in one
or more classes or series, the shares of each class or series to have such
designations and powers, preferences, and rights, and qualifications,
limitations, and restrictions thereof, as are stated and expressed herein and in
the resolution or resolutions providing for the issue of such class or series
adopted by the board of directors of the Company as hereafter prescribed.
(b) Authority is hereby expressly granted to and vested in the
board of directors of the Corporation to authorize the issuance of the Preferred
Stock from time to time in one or more classes or series, and with respect to
each class or series of the Preferred Stock, to fix and state by the resolution
or resolutions from time to time adopted providing for the issuance thereof the
following:
(i) whether or not the class or series is to have
voting rights, full, special, or limited, or is to be without voting rights, and
whether or not such class or series is to be entitled to vote as a separate
class either alone or together with the holders of one or more other classes or
series of stock;
(ii) the number of shares to constitute the class or
series and the designations thereof;
(iii) the preferences, and relative, participating,
options, or other special rights, if any, and the qualifications, limitations,
or restrictions thereof, if any, with respect to any class or series;
2
<PAGE>
(iv) whether or not the shares of any class or series
shall be redeemable at the option of the Corporation or the holders thereof or
upon the happening of any specified event, and, if redeemable, the redemption
price or prices (which may be payable in the form of cash, notes, securities, or
other property), and the time or times at which, and the terms and conditions
upon which, such shares shall be redeemable and the manner of redemption;
(v) whether or not the shares of a class or series
shall be subject to the operation of retirement or sinking funds to be applied
to the purchase or redemption of such shares for retirement, and, if such
retirement or sinking fund or funds are to be established, the annual amount
thereof, and the terms and provisions relative to the operation thereof;
(vi) the dividend rate, whether dividends are payable
in cash, stock of the Corporation, or other property, the conditions upon which
and the times when such dividends are payable, the preference of or the relation
to the payment of dividends payable on any other class or classes or series of
stock, whether or not such dividends shall be cumulative or noncumulative, and
if cumulative, the date or dates from which such dividends shall accumulate;
(vii) the preferences, if any, and the amounts
thereof which the holders of any class or series thereof shall be entitled to
receive upon the voluntary or involuntary dissolution of, or upon any
distribution of the assets of, the Corporation;
(viii) whether or not the shares of any class or
series, at the option of the Corporation or the holder thereof or upon the
happening of any specified event, shall be convertible into or exchangeable for,
the shares of any other class or classes or of any other series of the same or
any other class or classes of stock, securities, or other property of the
Corporation and the conversion price or prices or ratio or ratios or the rate or
rates at which such exchange may be made, with such adjustments, if any, as
shall be stated and expressed or provided for in such resolution or resolutions;
and
(ix) such other special rights and protective
provisions with respect to any class or series as may seem advisable to the
board of directors of the Corporation.
(c) The shares of each class or series of the Preferred Stock
may vary from the shares of any other class or series thereof in any or all of
the foregoing respects. The board of directors of the Corporation may increase
the number of shares of the Preferred Stock designated for any existing class or
series by a resolution adding to such class or series authorized and unissued
shares of the Preferred Stock not designated for any other class or series. The
board of directors of the Corporation may decrease the number of shares of the
Preferred Stock designated for any existing class or series by a resolution
subtracting from such class or series authorized and unissued shares of the
Preferred Stock designated for such existing class or series, and the shares so
subtracted shall become authorized, unissued, and undesignated shares of the
Preferred Stock.
3
<PAGE>
2. PROVISIONS RELATING TO THE COMMON STOCK.
(a) Each share of Common Stock of the Corporation shall have
identical rights and privileges in every respect. The holders of shares of
Common Stock shall be entitled to vote upon all matters submitted to a vote of
the stockholders of the Corporation and shall be entitled to one vote for each
share of Common Stock held.
(b) Subject to the prior rights and preferences, if any,
applicable to shares of the Preferred Stock or any series thereof, the holders
of shares of the Common Stock shall be entitled to receive such dividends
(payable in cash, stock, or otherwise) as may be declared thereon by the board
of directors at any time and from time to time out of any funds of the
Corporation legally available therefor.
(c) In the event of any voluntary or involuntary liquidation,
dissolution, or winding-up of the Corporation, after distribution in full of the
preferential amounts, if any, to be distributed to the holders of shares of the
Preferred Stock or any series thereof, the holders of shares of the Common Stock
shall be entitled to receive all of the remaining assets of the Corporation
available for distribution to its stockholders, ratably in proportion to the
number of shares of the Common Stock held by them. A liquidation, dissolution,
or winding-up of the Corporation, as such terms are used in this paragraph (c),
shall not be deemed to be occasioned by or to include any consolidation or
merger of the Corporation with or into any other corporation or corporations or
other entity or a sale, lease, exchange, or conveyance of all or a part of the
assets of the Corporation.
3. GENERAL.
(a) Subject to the foregoing provisions of this Restated
Certificate of Incorporation, the Corporation may issue shares of its Preferred
Stock and Common Stock from time to time for such consideration (not less than
the par value thereof) as may be fixed by the board of directors of the
Corporation, which is expressly authorized to fix the same in its absolute and
uncontrolled discretion subject to the foregoing conditions. Shares so issued
for which the consideration shall have been paid or delivered to the Corporation
shall be deemed fully paid stock and shall not be liable to any further call or
assessment thereon, and the holders of such shares shall not be liable for any
further payments in respect of such shares.
(b) The Corporation shall have authority to create and issue
rights and options entitling their holders to purchase shares of the
Corporation's capital stock of any class or series or other securities of the
Corporation, and such rights and options shall be evidenced by instrument(s)
approved by the board of directors of the Corporation. The board of directors of
the Corporation shall be empowered to set the exercise price, duration, times
for exercise, and other terms of such options or rights; PROVIDED, HOWEVER, that
the consideration to be received for any shares of capital stock subject thereto
shall not be less than the par value thereof.
FIFTH: The name of the incorporator of the Corporation is Richard
Judkins, and the mailing address of such incorporator is c/o Tomlinson Zisko
Morosoli & Maser LLP, 200 Page Mill Road, Second Floor, Palo Alto, CA 94306.
4
<PAGE>
SIXTH: (a) GENERAL. The number of directors constituting the board of
directors is five, and the name and mailing address of each person who is to
serve as director until his or her successor is elected and qualified are Class
I: Michael S. Battaglia and Timothy Tomlinson; Class II: Shigeki Morita and D.
James Bidzos; Class III: Addison M. Fischer. The number of directors
constituting the entire board of directors shall not be less than three nor more
than twelve as fixed from time to time by vote of a majority of the entire board
of directors; provided, however, that the number of directors shall not be
reduced so as to shorten the term of any director at that time in office.
Election of directors need not be by written ballot unless the Bylaws of the
Corporation so provide.
(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.
(c) TERM OF OFFICE; VACANCIES. A director shall hold office
until the annual meeting for the year in which his or her term expires and until
his or her successor shall be elected and shall qualify, subject, however, to
prior death, resignation, retirement or removal from office. Except as provided
in paragraph (b) of this Article, the directors have the exclusive power to fill
vacancies and newly created directorships resulting from any increase in the
authorized number of directors. Any newly created directorship resulting from an
increase in the number of directors or any other vacancy on the board of
directors, however caused, shall be filled by a majority of the directors then
in office, although less than a quorum, or by a sole remaining director. Any
director elected by one or more directors to fill a newly created directorship
or other vacancy shall hold office until the next election of the class for
which such directors shall have been chosen and until his or her successor shall
have been elected and qualified. Notwithstanding the foregoing, and except as
otherwise required by law, whenever the holders of any one or more series of
Preferred Stock shall have the right, voting separately as a class, to elect one
or more directors of the Corporation, the terms of the director or directors
elected by such holders shall expire at the next succeeding annual meeting of
stockholders.
(d) REMOVAL. Notwithstanding any other provisions of this
Restated Certificate of Incorporation or the Bylaws of the Corporation (and
notwithstanding the fact that some lesser percentage may be specified by law,
this Restated Certificate of Incorporation or the Bylaws of the Corporation),
any director or the entire board of directors of the Corporation may be removed
at any time, but only for cause and only by the affirmative vote of the holders
of at
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least 80% of the votes of the outstanding shares of stock generally entitled to
vote in the election of directors (considered for this purpose as one class)
("Voting Stock") cast at a meeting of stockholders called for that purpose.
(e) NOTICE OF NOMINATIONS. Advance notice of nominations for
the election of directors, other than nominations by the board of directors or a
committee thereof, shall be given to the Corporation in the manner provided in
the Bylaws.
(f) ELECTION OF DIRECTORS BY HOLDERS OF PARTICULAR CLASSES OR
SERIES OF STOCK. Notwithstanding the foregoing, whenever the holders of any one
or more classes or series of stock issued by the Corporation shall have the
right, voting separately by class or series, to elect directors at an annual or
special meeting of stockholders, the election, term of office, filling of
vacancies and other features of such directorships shall be governed by the
provisions of this Restated Certificate of Incorporation, including any
applicable resolutions of the board of directors, adopted pursuant to Article
FOURTH. Directors so elected shall not be divided into classes and shall be
elected by such holders annually unless expressly provided otherwise by those
provisions or resolutions, and, during the prescribed terms of office of those
directors, the board of directors shall consist of a number of directors equal
to the number of those directors plus the number of directors determined as
provided in paragraph (a) of this Article.
SEVENTH: A director of the Corporation shall not be personally liable
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director except for liability (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or
knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which the director derived an
improper personal benefit. Any repeal or amendment of this Article by the
stockholders of the Corporation shall be prospective only, and shall not
adversely affect any limitation on the personal liability of a director of the
Corporation arising from an act or omission occurring prior to the time of such
repeal or amendment. In addition to the circumstances in which a director of the
Corporation is not personally liable as set forth in the foregoing provisions of
this Article, a director shall not be liable to the Corporation or its
stockholders to such further extent as permitted by any law hereafter enacted,
including without limitation any subsequent amendment to the Delaware General
Corporation Law.
EIGHTH: The Corporation shall indemnify any person who was, is, or is
threatened to be made a party to a proceeding (as hereinafter defined) by reason
of the fact that he or she (i) is or was a director or officer of the
Corporation or (ii) while a director or officer of the Corporation, is or was
serving at the request of the Corporation as a director, officer, partner,
venturer, proprietor, trustee, employee, agent, or similar functionary of
another foreign or domestic corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan, or other enterprise, to the
fullest extent permitted under the Delaware General Corporation Law, as the same
exists or may hereafter be amended. Such right shall be a contract right and as
such shall run to the benefit of any director or officer who is elected and
accepts the position of director or officer of the Corporation while this
Article is in effect. Any repeal or amendment of
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this Article shall be prospective only and shall not limit the rights of any
such director or officer or the obligations of the Corporation with respect to
any claim arising from or related to the services of such director or officer in
any of the foregoing capacities prior to any such repeal of or amendment to this
Article. Such right shall include the right to be paid by the Corporation for
expenses incurred in defending any such proceeding in advance of its final
disposition to the maximum extent permitted under the Delaware General
Corporation Law, as the same exists or may hereafter be amended. If a claim for
indemnification or advancement of expenses hereunder is not paid in full by the
Corporation within sixty days after a written claim has been received by the
Corporation, the claimant may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim, and if successful in
whole or in part, the claimant shall also be entitled to be paid the expenses of
prosecuting such claim. It shall be a defense to any such action that such
indemnification or advancement of costs of defense are not permitted under the
Delaware General Corporation Law, but the burden of proving such defense shall
be on the Corporation. Neither (i) the failure of the Corporation (including its
board of directors or any committee thereof, independent legal counsel, or
stockholders) to have made its determination prior to the commencement of such
action that indemnification of, or advancement of costs of defense to, that the
claimant is permissible in the circumstances, nor (ii) an actual determination
by the Corporation (including its board of directors or any committee thereof,
independent legal counsel, or stockholders) that such indemnification or
advancement is not permissible shall be a defense to the action or create a
presumption that such indemnification or advancement is not permissible. In the
event of the death of any person having a right of indemnification under the
foregoing provisions, such right shall inure to the benefit of his or her heirs,
executors, administrators, and personal representatives. The rights conferred
above shall not be exclusive of any other right which any person may have or
hereafter acquire under any statute, by-law, resolution of stockholders or
directors, agreement, or otherwise.
The Corporation may additionally indemnify any employee or agent of the
Corporation to the fullest extent permitted by law.
As used herein, the term "proceeding" means any threatened, pending, or
completed action, suit, or proceeding, whether civil, criminal, administrative,
arbitrative, or investigative, any appeal in such action, suit, or proceeding,
and any inquiry or investigation that could lead to such an action, suit or
proceeding.
NINTH: After the Corporation first has a class of securities registered
under Sections 12 or 15 of the Securities Exchange Act of 1934, as amended, or
its equivalent, any action required or permitted to be taken by the stockholders
of the Corporation must be taken at a duly called annual or special meeting of
the stockholders and may not be taken by consent in writing or otherwise.
TENTH: Except as otherwise required by law or provided in the Bylaws of
the Corporation, and subject to the rights of the holders of any class or series
of shares issued by the corporation having a preference over the Common Stock as
to dividends or upon liquidation to elect directors in certain circumstances,
special meetings of the stockholders of the Corporation
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<PAGE>
may be called only by the board of directors pursuant to a resolution approved
by the affirmative vote of a majority of the directors then in office.
ELEVENTH: The board of directors shall have the power to adopt, alter,
amend or repeal the Bylaws of the Corporation by vote of not less than a
majority of the directors then in office. The holders of shares of capital stock
of the Corporation entitled at the time to vote for the election of directors
shall, to the extent such power is at the time conferred on them by applicable
law, also have the power to adopt, alter, amend or repeal the Bylaws of the
Corporation, but only if such action receives the affirmative vote of at least
80% of the outstanding Voting Stock, voting together as a single class.
TWELFTH: (a) 1. In addition to any affirmative vote required by
law, and except as otherwise expressly provided in sections (b) and (c) of this
Article, any business combination (as hereinafter defined) shall require the
affirmative vote of the holders of at least 80% of the outstanding Voting Stock
voting together as a single class. Such affirmative vote shall be required
notwithstanding the fact that no vote may be required, or that some lesser
percentage may be specified, by law or in any agreement with any national
securities exchange or otherwise.
2. The term "business combination" as used in this
Article shall mean any transaction which is referred to in any one or more of
the following clauses (A) through (E):
(A) any merger or consolidation of the
Corporation or any Subsidiary (as hereinafter defined) with or into (i) any
Interested Stockholder (as hereinafter defined) or (ii) any other corporation
(whether or not it is itself an Interested Stockholder) which, after such merger
or consolidation, would be an Affiliate (as hereinafter defined) of an
Interested Stockholder, or
(B) any sale, lease, exchange, mortgage,
pledge, transfer or other disposition (in one transaction or a series of related
transactions) to or with any Interested Stockholders of any assets of the
Corporation or any Subsidiary having an aggregate fair market value of
$5,000,000 or more, or
(C) the issuance or transfer by the
Corporation or any Subsidiary (in one transaction or a series of related
transactions) of any securities of the Corporation or any Subsidiary to any
Interested Stockholder or any Affiliate of any Interested Stockholder in
exchange for cash, securities or other property (or a combination thereof)
having an aggregate fair market value of $5,000,000 or more, or
(D) `the adoption of any plan or proposal
for the liquidation or dissolution of the Corporation, or
(E) any reclassification of securities
(including any reverse stock split), or recapitalization of the Corporation, or
any merger or consolidation of the Corporation with any of its Subsidiaries or
any similar transaction (whether or not with or into or otherwise involving an
Interested Stockholder) which has the effect, directly or indirectly, of
8
<PAGE>
increasing the proportionate share of the outstanding shares of any class of
equity or convertible securities of the Corporation or any Subsidiary which is
directly or indirectly owned by any Interested Stockholder or any Affiliate of
any Interested Stockholder.
(b) The provisions of section (a) of this Article shall not be
applicable to any particular business combination, and such business combination
shall require only such affirmative vote as is required by law and any other
provision of this Restated Certificate of Incorporation, if the business
combination has been approved by two-thirds of the whole board of directors.
(c) For the purposes of this Article:
1. A "person" shall mean any individual, firm,
corporation or other entity.
2. "Interested Stockholder" shall mean, in respect of
any business combination, any person (other than the Corporation or any
Subsidiary) who or which, as of the record date for the determination of
stockholders entitled to notice of and to vote on such business combination, or
immediately prior to the consummation of any such transaction:
(A) is the beneficial owner, directly or
indirectly, of more than 10% of the Voting Stock, or
(B) is an Affiliate of the Corporation and
at any time within two years prior thereto was the beneficial owner, directly or
indirectly, of not less than 10% of the then outstanding Voting Stock, or
(C) is an assignee of or has otherwise
succeeded to any shares of capital stock of the Corporation which were at any
time within two years prior thereto beneficially owned by any Interested
Stockholder, and such assignment or succession shall have occurred in the course
of stockholders entitled to notice of and to vote on such business coming within
the meaning of the Securities Act of 1933.
3. A "person" shall be the "beneficial owner" of any
Voting Stock:
(A) which such person or any of its
Affiliates and Associates (as hereinafter defined) beneficially own, directly or
indirectly, or
(B) which such person or any of its
Affiliates or Associates has (i) the right to acquire (whether such right is
exercisable immediately or only after the passage of time), pursuant to any
agreement, arrangement or understanding or upon the exercise of conversion
rights, exchange rights, warrants or options, or otherwise, or (ii) the right to
vote pursuant to any agreement, arrangement or understanding, or
(C) which are beneficially owned, directly
or indirectly, by any other person with which such first mentioned person or any
of its Affiliates or Associates has any
9
<PAGE>
agreement, arrangement or understanding for the purposes of acquiring, holding,
voting or disposing of any shares of capital stock of the Corporation.
4. The outstanding Voting Stock shall include shares
deemed owned through application of paragraph 3 above but shall not include any
other Voting Stock which may be issuable pursuant to any agreement, or upon
exercise of conversion rights, warrants or options, or otherwise.
5. "Affiliate" and "Associate" shall have the
respective meanings given those terms in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as in effect on the date
of adoption of this Article.
6. "Subsidiary" shall mean any corporation of which a
majority of any class of equity security (as defined in Rule 3a11-1 of the
General Rules and Regulations under the Securities Exchange Act of 1934, as in
effect on the date of the adoption of this Article) is owned, directly or
indirectly, by the Corporation; provided, however, that for the purposes of the
definition of Interested Stockholder set forth in paragraph 2 of this section
(c) the term "Subsidiary" shall mean only a corporation of which a majority of
each class of equity security is owned, directly or indirectly, by the
Corporation.
(d) A majority of the directors shall have the power and duty
to determine for the purposes of this Article on the basis of information known
to them, (1) the number of shares of Voting Stock beneficially owned by any
person, (2) whether a person is an Affiliate or Associate of another, (3)
whether a person has an agreement, arrangement or understanding with another as
to the matters referred to in paragraph 3 of section (d), or (4) whether the
assets subject to any business combination or the consideration received for the
issuance or transfer of securities by the Corporation or any Subsidiary has an
aggregate fair market value of $5,000,000 or more.
(e) Nothing contained in this Article shall be construed to
relieve any Interested Stockholder from any fiduciary obligation imposed by law.
THIRTEENTH: No holder of shares of the Corporation of any class or
series shall have any preemptive right to subscribe for, purchase, or receive
any shares of the Corporation of any class or series now or hereafter
authorized, or any options or warrants for such shares, or any securities
convertible into or exchangeable for such shares, which may at any time be
issued, sold or offered for sale by the Corporation. Cumulative voting by the
stockholders of the Corporation at any election of directors of the Corporation
is hereby prohibited.
FOURTEENTH: Notwithstanding anything to the contrary in this Restated
Certificate of Incorporation, the affirmative vote of the holders of at least
80% of the votes of the outstanding Voting Stock, voting together as a single
class, shall be required to amend, repeal or adopt any provision inconsistent
with any of Articles SIXTH, NINTH, TENTH, ELEVENTH, TWELFTH, THIRTEENTH and
FOURTEENTH of this Restated Certificate of Incorporation.
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FIFTEENTH: No contract or transaction between the Corporation and one
or more of its directors, officers, or stockholders or between the Corporation
and any person (as used herein "person" means other corporation, partnership,
association, firm, trust, joint venture, political subdivision, or
instrumentality) or other organization in which one or more of its directors,
officers, or stockholders are directors, officers, or stockholders, or have a
financial interest, shall be void or voidable solely for this reason, or solely
because the director or officer is present at or participates in the meeting of
the board or committee which authorizes the contract or transaction, or solely
because his, her or their votes are counted for such purposes, if: (i) the
material facts as to his or her relationship or interest and as to the contract
or transaction are disclosed or are known to the board of directors or the
committee, and the board of directors or committee in good faith authorizes the
contract or transaction by the affirmative votes of a majority of the
disinterested directors, even though the disinterested directors be less than a
quorum; or (ii) the material facts as to his or her relationship or interest and
as to the contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of the stockholders; or (iii) the contract or
transaction is fair as to the Corporation as of the time it is authorized,
approved or ratified by the board of directors, a committee thereof, or the
stockholders. Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the board of directors or of a committee
which authorizes the contract or transaction.
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IN WITNESS WHEREOF, said Corporation has caused this Certificate to be
signed and attested by its duly authorized officer, this 10th day of August,
A.D. 1999.
/s/ DANIEL E. REED
-----------------------------------------
Daniel E. Reed
Vice President, Corporate Development and
Legal Affairs
12
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS
OF
SMARTDISK CORPORATION
A DELAWARE CORPORATION
<PAGE>
TABLE OF CONTENTS
PAGE
----
ARTICLE ONE: OFFICES
1.1 Registered Office and Agent..............ERROR! BOOKMARK NOT DEFINED.
1.2 Other Offices.......................................................5
ARTICLE TWO: MEETINGS OF STOCKHOLDERS
2.1 Annual Meeting......................................................5
2.2 Special Meeting.....................................................5
2.3 Place of Meetings...................................................5
2.4 Notice..............................................................5
2.5 Voting List.........................................................5
2.6 Quorum..............................................................6
2.7 Required Vote; Withdrawal of Quorum.................................6
2.8 Method of Voting; Proxies...........................................6
2.9 Record Date.........................................................7
2.10 Conduct of Meeting..................................................7
2.11 Notice Requirements for Director Nominations and
Shareholder Proposals............................................4
2.13 Inspectors..........................................................9
ARTICLE THREE: DIRECTORS
3.1 Management.........................................................10
3.2 Number; Qualification; Term........................................10
3.3 Change in Number...................................................10
3.4 Vacancies..........................................................10
3.5 Meetings of Directors..............................................11
3.6 First Meeting......................................................11
3.7 Election of Officers...............................................11
3.8 Regular Meetings...................................................11
3.9 Special Meetings...................................................11
3.10 Notice.............................................................11
3.11 Quorum; Majority Vote..............................................11
3.12 Procedure..........................................................12
3.13 Presumption of Assent..............................................12
3.14 Action Without a Meeting...........................................12
3.15 Compensation.......................................................12
(i)
<PAGE>
ARTICLE FOUR: COMMITTEES
4.1 Designation........................................................12
4.2 Number; Qualification; Term........................................12
4.3 Authority..........................................................13
4.4 Committee Changes..................................................13
4.5 Alternate Members of Committees....................................13
4.6 Regular Meetings...................................................13
4.7 Special Meetings...................................................13
4.8 Quorum; Majority Vote..............................................13
4.9 Minutes............................................................14
4.10 Compensation.......................................................14
4.11 Responsibility.....................................................14
ARTICLE FIVE: NOTICES
5.1 Method.............................................................14
5.2 Waiver.............................................................14
ARTICLE SIX: OFFICERS
6.1 Officers and Their Election........................................14
6.2 Term of Office.....................................................15
6.3 Vacancies..........................................................15
6.4 Chairman of the Board..............................................15
6.5 Chief Executive Officer............................................15
6.6 President..........................................................15
6.7 Vice Presidents....................................................15
6.8 Chief Financial Officer............................................15
6.9 Assistant Chief Financial Officers; Treasurer......................16
6.10 Secretary..........................................................16
6.11 Assistant Secretaries..............................................16
6.12 Salaries...........................................................16
6.13 Removal............................................................17
6.14 Bond...............................................................17
6.15 Resignations.......................................................17
ARTICLE SEVEN: CERTIFICATES AND SHAREHOLDERS
7.1 Certificates for Shares............................................17
7.2 Destroyed Certificates.............................................17
7.3 Transfer of Shares.................................................17
7.4 Registered Stockholders............................................18
7.5 Regulations,.......................................................18
7.6 Legends............................................................18
(ii)
<PAGE>
ARTICLE EIGHT: MISCELLANEOUS PROVISIONS
8.1 Dividends..........................................................18
8.2 Reserves...........................................................18
8.3 Books and Records..................................................18
8.4 Fiscal Year........................................................19
8.5 Seal...............................................................19
8.6 Resignations.......................................................19
8.7 Securities of Other Corporations...................................19
8.8 Telephone Meetings.................................................19
8.9 Invalid Provisions.................................................19
8.10 Mortgages, etc.....................................................19
8.11 Headings...........................................................20
8.12 References.........................................................20
8.13 Amendments.........................................................20
(iii)
<PAGE>
AMENDED AND RESTATED BYLAWS
OF
SMARTDISK CORPORATION
A DELAWARE CORPORATION
WHEREAS, the directors of SmartDisk Corporation, a Delaware corporation
(the "Corporation") desire to amend and restate certain provisions of the
existing Bylaws of Corporation as enacted on March 14, 1997;
WHEREAS, the provisions of the Bylaws of the Corporation heretofore
amended and/or supplemented, and as herein amended, restated and integrated into
the single instrument which is hereinafter set forth, and which is entitled the
Amended and Restated Bylaws of Smartdisk Corporation without any further
amendments other than the amendments herein certified and without any
discrepancy between the provisions of the Bylaws heretofore enacted and the
provisions of the single instrument hereinafter set forth (these "Bylaws"); and
WHEREAS, the amendments and restatements set forth herein have been
duly adopted by the board of directors in accordance with the Restated
Certificate of Incorporation of the Corporation and the General Corporation Law
of the State of Delaware.
The Bylaws of the Corporation, as amended and restated herein, shall as
of the effective time hereof, read as follows:
PREAMBLE
These Bylaws are subject to, and governed by, the General Corporation
Law of the State of Delaware (the "Delaware General Corporation Law") and the
certificate of incorporation of the Corporation. In the event of a direct
conflict between the provisions of these Bylaws and the mandatory provisions of
the Delaware General Corporation Law or the provisions of the certificate of
incorporation of the Corporation, such provisions of the Delaware General
Corporation Law or the certificate of incorporation of the Corporation, as the
case may be, will be controlling.
ARTICLE ONE: OFFICES
1.1 REGISTERED OFFICE AND AGENT. The registered office and registered
agent of the Corporation shall be as designated from time to time by the
appropriate filing by the Corporation in the office of the Secretary of State of
the State of Delaware.
<PAGE>
1.2 OTHER OFFICES. The Corporation may also have offices at such other
places, both within and without the State of Delaware, as the board of directors
may from time to time determine or as the business of the Corporation may
require.
ARTICLE TWO: MEETINGS OF STOCKHOLDERS
2.1 ANNUAL MEETING. An annual meeting of stockholders of the
Corporation shall be held each calendar year on such date and at such time as
shall be designated from time to time by the board of directors and stated in
the notice of the meeting or in a duly executed waiver of notice of such
meeting. At such meeting, the stockholders shall elect directors and transact
such other business as may properly be brought before the meeting. Failure to
hold an annual meeting as required by these Bylaws shall not invalidate any
action taken by the board of directors or officers of the Corporation.
2.2 SPECIAL MEETING. A special meeting of the stockholders, for any
purpose or purposes, may be called only by the Chairman of the Board, the Chief
Executive Officer or President or the board of directors pursuant to a
resolution approved by the affirmative vote of a majority of directors then in
office.
2.3 PLACE OF MEETINGS. An annual meeting of stockholders may be held at
any place within or without the State of Delaware designated by the board of
directors. A special meeting of stockholders may be held at any place within or
without the State of Delaware designated in the notice of the meeting or a duly
executed waiver of notice of such meeting. Meetings of stockholders shall be
held at the principal office of the Corporation unless another place is
designated for meetings in the manner provided herein.
2.4 NOTICE. Written or printed notice stating the place, day, and time
of each meeting of the stockholders and, in case of a special meeting, the
purpose or purposes for which the meeting is called shall be delivered not less
than ten nor more than 60 days before the date of the meeting, either personally
or by mail, by or at the direction of the Chief Executive Officer or President,
the Secretary, or the officer or person(s) calling the meeting, to each
stockholder of record entitled to vote at such meeting. If such notice is to be
sent by mail, it shall be directed to such stockholder at his address as it
appears on the records of the Corporation, unless he shall have filed with the
Secretary of the Corporation a written request that notices to him be mailed to
some other address, in which case it shall be directed to him at such other
address. Notice of any meeting of stockholders shall not be required to be given
to any stockholder who shall attend such meeting in person or by proxy and shall
not, at the beginning of such meeting, object to the transaction of any business
because the meeting is not lawfully called or convened, or who shall, either
before or after the meeting, submit a signed waiver of notice, in person or by
proxy.
2.5 VOTING LIST. At least ten days before each meeting of stockholders,
the Secretary or other officer of the Corporation who has charge of the
Corporation's stock ledger, either directly or through another officer appointed
by him or through a transfer agent appointed by the board of directors, shall
prepare a complete list of stockholders entitled to vote thereat, arranged in
alphabetical order and showing the address of each stockholder and number of
shares
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registered in the name of each stockholder. For a period of ten days prior to
such meeting, such list shall be kept on file at a place within the city where
the meeting is to be held, which place shall be specified in the notice of
meeting or a duly executed waiver of notice of such meeting, or if not so
specified, at the place where the meeting is to be held and shall be open to
examination by any stockholder during ordinary business hours. Such list shall
be produced at such meeting and kept at the meeting at all times during such
meeting and may be inspected by any stockholder who is present.
2.6 QUORUM The holders of a majority of the outstanding shares entitled
to vote on a matter, present in person or by proxy, shall constitute a quorum at
any meeting of stockholders, except as otherwise provided by law, the
certificate of incorporation of the Corporation, or these Bylaws. If a quorum
shall not be present, in person or by proxy, at any meeting of stockholders, the
stockholders entitled to vote thereat who are present, in person or by proxy,
or, if no stockholder entitled to vote is present, any officer of the
Corporation may adjourn the meeting from time to time, without notice other than
announcement at the meeting (unless the board of directors, after such
adjournment, fixes a new record date for the adjourned meeting), until a quorum
shall be present, in person or by proxy. At any adjourned meeting at which a
quorum shall be present, in person or by proxy, any business may be transacted
which may have been transacted at the original meeting had a quorum been
present; provided that, if the adjournment is for more than 30 days or if after
the adjournment a new record date is fixed for the adjourned meeting, a notice
of the adjourned meeting shall be given to each stockholder of record entitled
to vote at the adjourned meeting.
2.7 REQUIRED VOTE; WITHDRAWAL OF QUORUM.. When a quorum is present at
any meeting, the vote of the holders of at least a majority of the outstanding
shares entitled to vote who are present, in person or by proxy, shall decide any
question brought before such meeting, unless the question is one on which, by
express provision of statute, the certificate of incorporation of the
Corporation, or these Bylaws, a different vote is required, in which case such
express provision shall govern and control the decision of such question. The
stockholders present at a duly constituted meeting may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum.
2.8 METHOD OF VOTING; PROXIES. Except as otherwise provided in the
certificate of incorporation of the Corporation or by law, each outstanding
share, regardless of class, shall be entitled to one vote on each matter
submitted to a vote at a meeting of stockholders. Elections of directors need
not be by written ballot. At any meeting of stockholders, every stockholder
having the right to vote may vote either in person or by a proxy executed in
writing by the stockholder or by his duly authorized attorney-in-fact. Each such
proxy shall be filed with the Secretary of the Corporation before or at the time
of the meeting. No proxy shall be valid after three years from the date of its
execution, unless otherwise provided in the proxy. If no date is stated in a
proxy, such proxy shall be presumed to have been executed on the date of the
meeting at which it is to be voted. Each proxy shall be revocable unless
expressly provided therein to be irrevocable and coupled with an interest
sufficient in law to support an irrevocable power or unless otherwise made
irrevocable by law.
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2.9 RECORD DATE. For the purpose of determining stockholders entitled
to notice of or to vote at any meeting of stockholders, or any adjournment
thereof, or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion, or exchange of stock or for the purpose of any other lawful
action, the board of directors may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record date is adopted
by the board of directors, for any such determination of stockholders, such date
in any case to be not more than 60 days and not less than ten days prior to such
meeting nor more than 60 days prior to any other action. If no record date is
fixed:
(i) The record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close
of business on the day next preceding the day on which notice is given
or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held.
(ii) The record date for determining stockholders for any
other purpose shall be at the close of business on the day on which the
board of directors adopts the resolution relating thereto.
(iii) A determination of stockholders of record entitled to
notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the board of
directors may fix a new record date for the adjourned meeting.
2.10 CONDUCT OF MEETING. The Chairman of the Board, if such office has
been filled, and, if not or if the Chairman of the Board is absent or otherwise
unable to act, the Chief Executive Officer or President shall preside at all
meetings of stockholders. The Secretary shall keep the records of each meeting
of stockholders. In the absence or inability to act of any such officer, such
officer's duties shall be performed by the officer given the authority to act
for such absent or non-acting officer under these Bylaws or by some person
appointed by the meeting.
2.11 NOTICE REQUIREMENTS FOR DIRECTOR NOMINATIONS AND SHAREHOLDER
PROPOSALS.
(a) Only persons who are nominated in accordance with the procedures
set forth in these Bylaws shall be eligible to serve as directors. Nominations
of persons for election to the Board of Directors of the Corporation may be made
at a meeting of shareholders (i) by or at the direction of the Board of
Directors or (ii) by any shareholder of the Corporation who is a shareholder of
record at the time of giving of notice provided for in this Bylaw, who shall be
entitled to vote for the election of directors at the meeting and who complies
with the notice procedures set forth in this Bylaw.
(b) Nominations by shareholders shall be made pursuant to timely notice
in writing to the Secretary of the Corporation. To be timely, a shareholder's
notice shall be delivered to or mailed and received at the principal executive
offices of the Corporation (a) in the case of an annual meeting, not less than
90 days nor more than 120 days prior to the first anniversary of the date of the
notice of preceding year's annual meeting; PROVIDED, HOWEVER, that in the event
that the date of the annual meeting is changed by more than 30 days from such
anniversary date,
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notice by the shareholder to be timely must be so received not later than the
close of business on the 10th day following the earlier of the day on which
notice of the date of the meeting was mailed or public disclosure was made, and
(b) in the case of a special meeting at which directors are to be elected, not
later than the close of business on the 10th day following the earlier of the
day on which notice of the date of the meeting was mailed or public disclosure
was made. Such shareholder's notice shall set forth (i) as to each person whom
the shareholder proposes to nominate for election or reelection as a director
all information relating to such person that is required to be disclosed in
solicitations of proxies for elections of directors, or is otherwise required,
in each case pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended (including such person's written consent to being named in the
proxy statement as a nominee and to serving as a director if elected); (ii) as
to the shareholder giving the notice (A) the name and address, as they appear on
the Corporation's books, of such shareholder and (B) the class and number of
shares of the Corporation which are beneficially owned by such shareholder and
also which are owned by such shareholder and also which are owned of record by
such shareholder; and (iii) as to the beneficial owner, if any, on whose behalf
the nomination is made, (A) the name and address of such person and (B) the
class and number of shares of the Corporation which are beneficially owned by
such person. At the request of the Board of Directors, any person nominated by
the Board of Directors for election as a director shall furnish to the Secretary
of the Corporation that information required to be set forth in a shareholder's
notice of nomination which pertains to the nominee.
(c) No person shall be eligible to serve as a director of the
Corporation unless nominated in accordance with the procedures set forth in this
Bylaw. The Chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
procedures prescribed by these Bylaws, and if he should so determine, he shall
so declare to the meeting and the defective nomination shall be disregarded.
Notwithstanding the foregoing provisions of this Bylaw, a shareholder shall also
comply with all applicable requirements of the Securities Exchange Act of 1934,
as amended, and the rules and regulations thereunder with respect to the matters
set forth in this Bylaw.
(d) At an annual meeting of the shareholders, only such business shall
be conducted as shall have been brought before the meeting (i) pursuant to the
Corporation's notice of meeting, (ii) by or at the direction of the Board of
Directors or (iii) by any shareholder of the Corporation who is a shareholder of
record at the time of giving of the notice provided for in this Bylaw, who shall
be entitled to vote at such meeting and who complies with the notice procedures
set forth in this Bylaw.
(e) For business to be properly brought before an annual meeting by a
shareholder pursuant to clause (iii) of paragraph (d) of this Bylaw, the
shareholder must have given timely notice thereof in writing to the Secretary of
the Corporation. To be timely, a shareholder's notice must be delivered to or
mailed and received at the principal executive offices of the Corporation not
less than 90 days nor more than 120 days prior to the first anniversary of the
date of the notice of the preceding year's annual meeting; PROVIDED, HOWEVER,
that in the event that the date of the meeting is changed by more than 30 days
from such anniversary date, to be timely, notice by the shareholder must be
received no later than the close of business on the 10th day following
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the earlier of the day on which notice of the date of the meeting was mailed or
public disclosure was made. A shareholder's notice to the Secretary shall set
forth as to each matter the shareholder proposes to bring before the meeting (i)
a brief description of the business desired to be brought before the meeting and
the reasons for conducting such business at the meeting, (ii) the name and
address, as they appear on the Corporation's books, of the shareholder proposing
such business, and the name and address of the beneficial owner, if any, on
whose behalf the proposal is made, (iii) the class and number of shares of the
Corporation which are owned beneficially and of record by such shareholder of
record and by the beneficial owner, if any, on whose behalf the proposal is made
and (iv) any material interest of such shareholder of record and the beneficial
owner, if any, on whose behalf the proposal is made in such business.
Notwithstanding anything in these Bylaws to the contrary, no business
shall be conducted at an annual meeting except in accordance with the procedures
set forth in this Bylaw. The Chairman of the meeting shall, if the facts
warrant, determine and declare to the meeting that business was not properly
brought before the meeting and in accordance with the procedures prescribed by
this Bylaw, and if he should so determine, he shall so declare to the meeting
and any such business not properly brought before the meeting shall not be
transacted. Notwithstanding the foregoing provisions of this Bylaw, a
shareholder shall also comply with all applicable requirements of the Securities
Exchange Act of 1934, as amended, and the rules and regulations thereunder with
respect to the matters set forth in this Bylaw.
2.12 INSPECTORS. The board of directors may, in advance of any meeting
of stockholders, appoint one or more inspectors to act at such meeting or any
adjournment thereof. If any of the inspectors so appointed shall fail to appear
or act, the chairman of the meeting shall, or if inspectors shall not have been
appointed, the chairman of the meeting may, appoint one or more inspectors. Each
inspector, before entering upon the discharge of his duties, shall take and sign
an oath faithfully to execute the duties of inspector at such meeting with
strict impartiality and according to the best of his ability. The inspectors
shall determine the number of shares of capital stock of the Corporation
outstanding and the voting power of each, the number of shares represented at
the meeting, the existence of a quorum, and the validity and effect of proxies
and shall receive votes, ballots, or consents, hear and determine all challenges
and questions arising in connection with the right to vote, count and tabulate
all votes, ballots, or consents, determine the results, and do such acts as are
proper to conduct the election or vote with fairness to all stockholders. On
request of the chairman of the meeting, the inspectors shall make a report in
writing of any challenge, request, or matter determined by them and shall
execute a certificate of any fact found by them. No director or candidate for
the office of director shall act as an inspector of an election of directors.
Inspectors need not be stockholders.
ARTICLE THREE: DIRECTORS
3.1 MANAGEMENT. The business and property of the Corporation shall be
managed by the board of directors. Subject to the restrictions imposed by law,
the certificate of incorporation of the Corporation, or these Bylaws, the board
of' directors may exercise all the powers of the Corporation.
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3.2 NUMBER; QUALIFICATION; TERM. The number of directors which shall
constitute the entire board of directors shall be not less than three. The first
board of directors shall consist of the number of directors named in the
certificate of incorporation of the Corporation or, if no directors are so
named, shall consist of the number of directors elected by the incorporator(s)
at an organizational meeting or by unanimous written consent in lieu thereof.
Thereafter, within the limits above specified, the number of directors which
shall constitute the entire board of directors shall be determined by resolution
of the board of directors. Except as otherwise required by law, the certificate
of incorporation of the Corporation, or these Bylaws, the directors shall be
elected at an annual meeting of stockholders at which a quorum is present.
Directors shall be elected by a plurality of the votes of the shares present in
person or represented by proxy and entitled to vote on the election of
directors. At each annual meeting of stockholders, 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. Except as otherwise required by law, whenever the holders of any one
or more series of preferred stock shall have the right, voting separately as a
class, to elect one or more directors of the corporation, the terms of the
director or directors elected by such holders shall expire at the next
succeeding annual meeting of stockholders. Each director shall hold office until
his successor shall have been elected and qualified or until his earlier death,
resignation or removal. Directors need not be residents of Delaware or
stockholders of the corporation. Each director must have attained the age of
majority.
3.3 CHANGE IN NUMBER. No decrease in the number of directors
constituting the entire board of directors shall have the effect of shortening
the term of any incumbent director.
3.4 VACANCIES. Unless otherwise provided in the certificate of
incorporation, any vacancy or any newly created directorship resulting from any
increase in the authorized number of directors may be filled by a majority of
the directors then in office, though less than a quorum, or by the affirmative
vote of two directors if there are only two directors remaining, or by the sole
remaining director. Any director elected by one or more directors to fill a
newly created directorship or other vacancy shall hold office until the next
election of the class for which such directors shall have been chosen and until
his or her successor shall have been elected and qualified, or, if earlier,
until his death, resignation, or removal from office. If there are no directors
in office, an election of directors may be held in the manner provided by
statute. When one or more directors shall resign from the board of directors,
effective at a future date, a majority of the directors then in office,
including those who have so resigned, shall have the power to fill such vacancy
or vacancies, the vote thereon to take effect when such resignation or
resignations shall become effective, and each director so chosen shall hold
office as provided in these Bylaws with respect to the filling of other
vacancies.
3.5 MEETINGS OF DIRECTORS. The directors may hold their meetings and
may have an office and keep the books of the Corporation, except as otherwise
provided by statute, in such place or places within or outside the State of
Delaware as the board of directors may from time to time determine or as shall
be specified in the notice of such meeting or duly executed waiver of notice of
such meeting.
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3.6 FIRST MEETING. Each newly elected board of directors may hold its
first meeting for the purpose of organization and the transaction of business,
if a quorum is present, immediately after and at the same place as the annual
meeting of stockholders, and no notice of such meeting shall be necessary.
3.7 ELECTION OF OFFICERS. At the first meeting of the board of
directors after each annual meeting of stockholders at which a quorum shall be
present, the board of directors shall elect the officers of the Corporation.
3.8 REGULAR MEETINGS. Regular meetings of the board of directors shall
be held at such times and places as shall be designated from time to time by
resolution of the board of directors. Notice of such regular meetings shall not
be required.
3.9 SPECIAL MEETINGS. Special meetings of the board of directors shall
be held whenever called by the Chairman of the Board, the Chief Executive
Officer or President, or any other two directors.
3.10 NOTICE. The Secretary shall give notice of each special meeting to
each director, it least 24 hours before the meeting. Notice of any such meeting
need not be given to any director who shall, either before or after the meeting,
submit a signed waiver of notice or who shall attend such meeting without
protesting, prior to or at its commencement, the lack of notice to him. Neither
the business to be transacted at, nor the purpose of, any regular or special
meeting of the board of directors need be specified in the notice or waiver of
notice of such meeting.
3.11 QUORUM; MAJORITY VOTE. At all meetings of the board of directors,
a majority of the directors fixed in the manner provided in these Bylaws shall
constitute a quorum for the transaction of business. If at any meeting of the
board of directors there be less than a quorum present, a majority of those
present or any director solely present may adjourn the meeting from time to time
without further notice. Unless the act of a greater number than is required by
law, the certificate of incorporation of the Corporation, or these Bylaws, the
act of a majority of the directors present at a meeting at which a quorum is in
attendance shall be the act of the board of directors. At any time that the
certificate of incorporation of the Corporation provides that directors elected
by the holders of a class or series of stock shall have more or less than one
vote per director on any matter, every reference in these Bylaws to a majority
or other proportion of directors shall refer to a majority or other proportion
of the votes of such directors.
3.12 PROCEDURE. At meetings of the board of directors, business shall
be transacted in such order as from time to time the board of directors may
determine. The Chairman of the Board, if such office has been filled, and, if
not or if the Chairman of the Board is absent or otherwise unable to act, the
Chief Executive Officer or President shall preside at all meetings of the board
of directors. In the absence or inability to act of either such officer, a
chairman shall be chosen by the board of directors from among the directors
present. The Secretary of the Corporation shall act as the secretary of each
meeting of the board of directors unless the board of directors appoints another
person to act as secretary of the meeting. The board of directors shall keep
regular minutes of its proceedings which shall be placed in the minute book of
the Corporation.
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3.13 PRESUMPTION OF ASSENT. A director of the Corporation who is
present at the meeting of the board of directors at which action on any
corporate matter is taken shall be presumed to have assented to the action
unless his dissent shall be entered in the minutes of the meeting or unless he
shall file his written dissent to such action with the person acting as
secretary of the meeting before the adjournment thereof or shall forward any
dissent by certified or registered mail to the Secretary of the Corporation
immediately after the adjournment of the meeting. Such right to dissent shall
not apply to a director who voted in favor of such action.
3.14 ACTION WITHOUT A MEETING. Any action required or permitted to be
taken at any meeting of the board of directors may be taken without a meeting,
without prior notice and without a vote, if all members of the board consent
thereto in writing and the writing or writings are filed with the minutes of the
proceedings of the board.
3.15 COMPENSATION. The board of directors shall have the authority to
fix the compensation, including fees and reimbursement of expenses, paid to
directors for attendance at regular or special meetings of the board of
directors or any committee thereof; provided, that nothing contained herein
shall be construed to preclude any director from serving the Corporation in any
other capacity or receiving compensation therefor.
ARTICLE FOUR: COMMITTEES
4.1 DESIGNATION. The board of directors may, by resolution adopted by a
majority of the entire board of directors, designate one or more committees.
4.2 NUMBER; QUALIFICATION; TERM. Each committee shall consist of one or
more directors appointed by resolution adopted by a majority of the entire board
of directors. The number of committee members may be increased or decreased from
time to time by resolution adopted by a majority of the entire board of
directors. Each committee member shall serve as such until the earliest of (i)
the expiration of his term as director, (ii) his resignation as a committee
member or as a director, or (iii) his removal as a committee member or as a
director.
4.3 AUTHORITY. Each committee, to the extent expressly provided in the
resolution establishing such committee, shall have and may exercise all of the
authority of the board of directors in the management of the business and
property of the Corporation except to the extent expressly restricted by law,
the certificate of incorporation of the Corporation or these Bylaws.
4.4 COMMITTEE CHANGES. The board of directors shall have the power at
any time to fill vacancies in, to change the membership of, and to discharge any
committee.
4.5 ALTERNATE MEMBERS OF COMMITTEES. The board of directors may
designate one or more directors as alternate members of any committee. Any such
alternate member may replace any absent or disqualified member at any meeting of
the committee. If no alternate committee members have been so appointed to a
committee or each such alternate committee member is absent or disqualified, the
member or members of such Committee present at any meeting and not disqualified
from voting, whether or not he or they constitute a quorum, may unanimously
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appoint another member of the board of directors to act at the meeting in the
place of any such absent or disqualified member.
4.6 REGULAR MEETINGS. Regular meetings of any committee may be held
without notice at such time and place as may be designated from time to time by
the committee and communicated to all members thereof.
4.7 SPECIAL MEETINGS. Special meetings of any committee may be held
whenever called by any committee member. The committee member calling any
special meeting shall cause notice of such special meeting, including therein
the time and place of such special meeting, to be given to each committee member
at least two days before such special meeting. Neither the business to be
transacted at, nor the purpose of, any special meeting of any committee need be
specified in the notice or waiver of notice of any special meeting.
4.8 QUORUM; MAJORITY VOTE. At meetings of any committee, a majority of
the number of members designated by the board of directors shall constitute a
quorum for the transaction of business. If a quorum is not present at a meeting
of any committee, a majority of the members present may adjourn the meeting from
time to time, without notice other than an announcement at the meeting, until a
quorum is present. The act of a majority of the members present at any meeting
at which a quorum is in attendance shall be the act of a committee, unless the
act of a greater number is required by law, the certificate of incorporation of
the Corporation, or these Bylaws.
4.9 MINUTES. Each committee shall cause minutes of its proceedings to
be prepared and shall report the same to the board of directors upon the request
of the board of directors. The minutes of the proceedings of each committee
shall be delivered to the Secretary of the Corporation for placement in the
minute books of the Corporation.
4.10 COMPENSATION. Committee members may, by resolution of the board of
directors, be allowed a fixed sum and expenses of attendance, if any, for
attending any committee meetings or a stated salary.
4.11 RESPONSIBILITY. The designation of any committee, and the
delegation of authority to it, shall not operate to relieve the board of
directors or any director of any responsibility imposed upon it or such director
by law.
ARTICLE FIVE: NOTICE
5.1 METHOD. Whenever by statute, the certificate of incorporation of
the Corporation, or these Bylaws, notice is required to be given to any
committee member, director, or stockholder and no provision is made as to how
such notice shall be given, personal notice shall not be required and any such
notice may be given (a) in writing, by mail, postage prepaid, addressed to such
committee member, director, or stockholder at his address as it appears on the
books or (in the case of a stockholder) the stock transfer records of the
Corporation, or (b) by any other method permitted by law (including but not
limited to overnight courier service, telegram,
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telex, or facsimile). Any notice required or permitted to be given by mail shall
be deemed to be delivered and given at the time when the same is deposited in
the United States mail as aforesaid. Any notice required or permitted to be
given by overnight courier service shall be deemed to be delivered and given at
the time delivered to such service with all charges prepaid and addressed as
aforesaid. Any notice required or permitted to be given by telegram, telex, or
telefax shall be deemed to be delivered and given at the time transmitted with
all charges prepaid and addressed as aforesaid.
5.2 WAIVER. Whenever any notice is required to be given to any
stockholder, director, or committee member of the Corporation by statute, the
certificate of incorporation of the Corporation, or these Bylaws, a waiver
thereof in writing signed by the person or persons entitled to such notice,
whether before or after the time stated therein, shall be equivalent to the
giving of such notice. Attendance of a stockholder, director, or committee
member at a meeting shall constitute a waiver of notice of such meeting, except
where such person attends for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.
ARTICLE SIX: OFFICERS
6.1 OFFICERS AND THEIR ELECTION. The officers of the corporation shall
be a Chief Executive Officer, a President, a Secretary, a Chief Financial
Officer and such Vice Presidents, Assistant Secretaries, Assistant Chief
Financial Officers and other officers as the board of directors may from time to
time determine and elect or appoint. The board of directors may appoint one of
its members to the office of Chairman of the Board and another of its members to
the office of Vice-Chairman of the Board and from time to time define the powers
and duties of these offices notwithstanding any other provisions of these
Bylaws. All officers shall be elected by the board of directors and shall serve
at the will of the board of directors. Any officer may, but need not, be a
Director. Two or more offices may be held by the same person.
6.2 TERM OF OFFICE. The Chief Executive Officer, the President, the
Chief Financial Officer and the Secretary shall hold office until his successor
is elected and qualified or until his earlier resignation or removal.
6.3 VACANCIES. Any vacancy at any time existing in any office may be
filled by the board of directors.
6.4 CHAIRMAN OF THE BOARD. The board of directors may, in its
discretion, elect a Chairman of the Board from among its members. He may be the
Chief Executive Officer of the corporation if so designated by the Board, and he
shall preside at all meetings of the board of directors at which he is present
and shall exercise and perform such other powers and duties as may from time to
time be assigned to him by the board of directors or prescribed by the Bylaws.
6.5 CHIEF EXECUTIVE OFFICER. The Board of Directors may elect a Chief
Executive Officer of the corporation who may also be the Chairman of the Board
or President of the corporation or both. It shall be his duty and he shall have
the power to see that all orders and
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resolutions of the board of directors are carried into effect. He shall from
time to time report to the board of directors all matters within his knowledge
which the interests of the corporation may require to be brought to its notice.
The Chief Executive Officer, when present, shall preside at all meetings of the
stockholders and, unless there shall be a Chairman of the Board, of the board of
directors, unless otherwise provided by the board of directors.
6.6 PRESIDENT. If there is no Chief Executive Officer, the President
shall be the chief executive officer of the corporation except as the board of
directors may otherwise provide. The President shall perform such duties and
have such powers additional to the foregoing as the board of directors shall
designate.
6.7 VICE PRESIDENTS. In the absence or disability of the Chief
Executive Officer or President, his powers and duties shall be performed by the
Vice President, if only one, or, if more than one, by the one designated for the
purpose by the board of directors. Each Vice President shall perform such duties
and have such powers additional to the foregoing as the board of directors shall
designate.
6.8 CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall be the
treasurer of the corporation and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the corporation and shall
deposit all monies and other valuable effects in the name and to the credit of
the corporation in such depositories as shall be designated by the board of
directors or in the absence of such designation in such depositories as he shall
from time to time deem proper. The Chief Financial Officer (or any Assistant
Chief Financial Officer) shall sign all stock certificates as treasurer of the
corporation. He shall disburse the funds of the corporation as shall be ordered
by the Board of Directors, taking proper vouchers for such disbursements. He
shall promptly render to the Chief Executive Officer and to the board of
directors such statements of his transactions and accounts as the Chief
Executive Officer and board of directors respectively may from time to time
require. The Chief Financial Officer shall perform such duties and have such
powers additional to the foregoing as the board of directors may designate.
6.9 ASSISTANT CHIEF FINANCIAL OFFICERS; TREASURER. In the absence or
disability of the Chief Financial Officer, his powers and duties shall be
performed by the Assistant Chief Financial Officer or by the Treasurer, if only
one, or if more than one, by the one designated for the purpose by the board of
directors or by the Treasurer. Each Assistant Chief Financial Officer or the
Treasurer shall perform such duties and have such powers additional to the
foregoing as the board of directors shall designate.
6.10 SECRETARY. The Secretary shall issue notices of all meetings of
stockholders, of the board of directors and of committees thereof where notices
of such meetings are required by law or these Bylaws. He shall record the
proceedings of the meetings of the stockholders and of the board of directors
and shall be responsible for the custody thereof in a book to be kept for that
purpose. He shall also record the proceedings of the committees of the board of
directors unless such committees appoint their own respective secretaries.
Unless the board of directors shall appoint a transfer agent and/or registrar,
the Secretary shall be charged with the duty of keeping,
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or causing to be kept, accurate records of all stock outstanding, stock
certificates issued and stock transfers. He shall sign such instruments as
require his signature. The Secretary shall have custody of the corporate seal
and shall affix and attest such seal on all documents whose execution under seal
is duly authorized. In his absence at any meeting, an Assistant Secretary or the
Secretary pro tempore shall perform his duties thereat. He shall perform such
duties and have such powers addition to the foregoing as the Board of Directors
shall designate.
6.11 ASSISTANT SECRETARIES. In the absence or disability of the
Secretary, his powers and duties shall be performed by the Assistant Secretary,
if only one, or, if more than one, by the one designated for the purpose by the
board of directors. Each Assistant Secretary shall perform such duties and have
such powers additional to the foregoing as the Board of Directors shall
designate.
6.12 SALARIES. The salaries and other compensation of officers, agents
and employees shall be fixed from time to time or under authority from the board
of directors. No officer shall be prevented from receiving a salary or other
compensation by reason of the fact that he is also a Director of the
corporation.
6.13 REMOVAL. The board of directors may remove any officer, either
with or without cause, at any time.
6.14 BOND. The Corporation may secure the fidelity of any or all of its
officers or agents by bond or otherwise.
6.15 RESIGNATIONS. Any officer of the Corporation may resign as an
officer at any time by giving written notice to the board of directors, to the
Chairman of the Board, if any, to the Chief Executive Officer or to the
Secretary of the Corporation. Any such resignation shall take effect at the time
specified therein, or, if the time be not specified, upon receipt thereof; and
unless otherwise specified therein, the acceptance of such resignation shall not
be necessary to make it effective.
ARTICLE SEVEN: CERTIFICATES AND SHAREHOLDERS
7.1 CERTIFICATES FOR SHARES. Certificates for shares of stock of the
Corporation shall be in such form as shall be approved by the board of
directors. The certificates shall be signed by the Chairman of the Board or the
Chief Executive Officer or President or a Vice President and also by the
Secretary or an Assistant Secretary or by the Treasurer or an Assistant
Treasurer. Any and all signatures on the certificate may be a facsimile and may
be settled with the seal of the Corporation or a facsimile thereof. If any
officer, transfer agent, or registrar who has signed, or whose facsimile
signature has been placed upon, a certificate has ceased to be such officer,
transfer agent, or registrar before such certificate is issued, such certificate
may be issued by the Corporation with the same effect as if he were such
officer, transfer agent, or registrar at the date of issue. The certificates
shall be consecutively numbered and shall be entered in the books of the
Corporation as they are issued and shall exhibit the holder's name and the
number of shares.
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7.2 DESTROYED CERTIFICATES. The board of directors may direct a new
certificate or certificates to be issued in place of a certificate or
certificates theretofore issued by the Corporation and alleged to have been lost
or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate or certificates representing shares to be lost or
destroyed. When authorizing such issue of a new certificate or certificates the
board of directors may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost or destroyed certificate or
certificates, or his legal representative, to advertise the same in such manner
as it shall require and/or to give the Corporation a bond with a surety or
sureties satisfactory to the Corporation in such sum as it may direct as
indemnity against any claim, or expense resulting from a claim, that may be made
against the Corporation with respect to the certificate or certificates alleged
to have been lost or destroyed.
7.3 TRANSFER OF SHARES. Shares of stock of the Corporation shall be
transferable only on the books of the Corporation by the holders thereof in
person or by their duly authorized attorneys or legal representatives. Upon
surrender to the Corporation or the transfer agent of the Corporation of a
certificate representing shares duly endorsed or accompanied by proper evidence
of succession, assignment, or authority to transfer, the Corporation or its
transfer agent shall issue a new certificate to the person entitled thereto,
cancel the old certificate, and record the transaction upon its books.
7.4 REGISTERED STOCKHOLDERS. The Corporation shall be entitled to treat
the holder of record of any share or shares of stock as the holder in fact
thereof and, accordingly, shall not be bound to recognize any equitable or other
claim to or interest in such share or shares on the part of any other person,
whether or not it shall have express or other notice thereof, except as
otherwise provided by law.
7.5 REGULATIONS. The board of directors shall have the power and
authority to make all such rules and regulations as they may deem expedient,
including, without limitation, a requirement that a transferor furnish a legal
opinion or such other evidence as is reasonably satisfactory to the Corporation
and its counsel that any proposed transfer of shares does not violate the
registration requirements of any state or federal securities law, concerning the
issue, transfer, and registration or the replacement of certificates for shares
of stock of the Corporation.
7.6 LEGENDS. The board of directors shall have the power and authority
to provide that certificates representing shares of stock bear such legends as
the board of directors deems appropriate to assure that the Corporation does not
become liable for violations of federal or state securities laws or other
applicable law.
ARTICLE EIGHT: MISCELLANEOUS PROVISIONS
8.1 DIVIDENDS. Subject to provisions of law and the certificate of
incorporation of the Corporation, dividends may be declared by the board of
directors at any regular or special meeting and may be paid in cash, in
property, or in shares of stock of the Corporation. Such declaration and payment
shall be at the discretion of the board of directors.
14
<PAGE>
8.2 RESERVES. There may be created by the board of directors out of
funds of the Corporation legally available therefor such reserve or reserves as
the directors from time to time, in their discretion, consider proper to provide
for contingencies, to equalize dividends, or to repair or maintain any property
of the Corporation, or for such other purpose as the board of directors shall
consider beneficial to the Corporation, and the board of directors may modify or
abolish any such reserve in the manner in which it was created.
8.3 BOOKS AND RECORDS. The Corporation shall keep correct and complete
books and records of account, shall keep minutes of the proceedings of its
stockholders and board of directors and shall keep at its registered office or
principal place of business, or at the office of its transfer agent or
registrar, a record of its stockholders, giving the names and addresses of all
stockholders and the number and class of the shares held by each.
8.4 FISCAL YEAR. The fiscal year of the Corporation shall be fixed by
the board of directors. provided, that if such fiscal year is not fixed by the
board of directors and the selection of the fiscal year is not expressly
deferred by the board of directors, the fiscal year shall be the calendar year.
8.5 SEAL. The seal of the Corporation shall be such as from time to
time may be approved by the board of directors.
8.6 RESIGNATIONS. Any director, committee member, or officer may resign
by so stating at any meeting of the board of directors or by giving written
notice to the board of directors, the Chairman of the Board, the Chief Executive
Officer or President, or the Secretary. Such resignation shall take effect at
the time specified therein or, if no time is specified therein, immediately upon
its receipt. Unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
8.7 SECURITIES OF OTHER CORPORATIONS. The Chairman of the Board, the
Chief Executive Officer or President, or any Vice President of the Corporation
shall have the power and authority to transfer, endorse for transfer, vote,
consent, or take any other action with respect to any securities of another
issuer which may be held or owned by the Corporation and to make, execute, and
deliver any waiver, proxy, or consent with respect to any such securities.
8.8 TELEPHONE MEETINGS. Stockholders (acting for themselves or through
a proxy), members of the board of directors, and members of a committee of the
board of directors may participate in and hold a meeting of such stockholders,
board of directors, or committee by means of a conference telephone or similar
communications equipment by means of which persons participating in the meeting
can hear each other, and participation in a meeting pursuant to this section
shall constitute presence in person at such meeting, except where a person
participates in the meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.
8.9 INVALID PROVISIONS. If any part of these Bylaws shall be held
invalid or inoperative for any reason, the remaining parts, so far as it is
possible and reasonable, shall remain valid and operative.
15
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8.10 MORTGAGES, ETC. With respect to any deed, deed of trust, mortgage,
or other instrument executed by the Corporation through its duly authorized
officer or officers, the attestation to such execution by the Secretary of the
Corporation shall not be necessary to constitute such deed, deed of trust,
mortgage, or other instrument a valid and binding obligation against the
Corporation unless the resolutions, if any, of the board of directors
authorizing such execution expressly state that such attestation is necessary.
8.11 HEADINGS. The headings used in these Bylaws have been inserted for
administrative convenience only and do not constitute matter to be construed in
interpretation.
8.12 REFERENCES. Whenever herein the singular number is used, the same
shall include the plural where appropriate, and words of any gender should
include each other gender where appropriate.
8.13 AMENDMENTS. The Board of Directors shall have the power to adopt,
alter, amend or repeal the Bylaws of the Corporation by vote of not less than a
majority of the directors then in office. The holders of shares of capital stock
of the Corporation entitled at the time to vote for the election of directors
shall, to the extent such power is at the time conferred on them by applicable
law, also have the power to adopt, alter, amend or repeal the bylaws of the
Corporation, but only if such action receives the affirmative vote of at least
80% of the outstanding Voting Stock (as defined in the Corporation's Certificate
of Incorporation), voting together as a single class.
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The undersigned, the Secretary of the Corporation, hereby certifies
that the foregoing bylaws were adopted by the directors of the Corporation as of
July 22, 1999.
/s/ TIMOTHY TOMLINSON
----------------------------------------
Timothy Tomlinson, Secretary
EXHIBIT 5.1
GREENBERG TRAURIG, P.A.
1221 BRICKELL AVENUE
MIAMI, FLORIDA 33131
TELEPHONE: (305) 579-0500
TELECOPIER: (305) 579-0717
September 3, 1999
SmartDisk Corporation
3506 Mercantile Avenue
Naples, Florida 34104
Re: SMARTDISK CORPORATION
Registration Statement on Form S-1
Ladies and Gentlemen:
In connection with the Registration Statement on Form S-1 (File No.
333-82793) (the "Registration Statement"), filed by SmartDisk Corporation, a
Delaware corporation (the "Company"), with the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended (the "Act"), and
the rules and regulations promulgated thereunder (the "Rules"), you have
requested us to furnish you our opinion as to the legality of the 3,450,000
shares (including 450,000 shares subject to the over-allotment option) of common
stock, par value $.001 per share, of the Company (the "Shares") being registered
thereunder.
For the purpose of rendering our opinion, we have reviewed (a) the
Registration Statement and the exhibits thereto; (b) the Certificate of
Incorporation, as amended to date, and the Bylaws of the Company, as amended to
date; and (c) certain records of the Company's corporate proceedings as
reflected in its minute books. In our examination, we have assumed the
genuineness of signatures, the authenticity of all documents submitted to us as
originals and the conformity with the originals of all documents submitted to us
as copies thereof. In addition, we have made such other examinations of law and
fact as we considered necessary in order to form a basis for the opinion
hereinafter expressed.
Based on the foregoing, we are of the opinion that the Shares have been
duly and validly authorized and, when such Shares are issued and delivered by
the Company and paid for as contemplated in the Registration Statement, will be
validly issued, fully paid and non-assessable.
<PAGE>
SmartDisk Corporation
Re. Registration Statement on Form S-1
September 3, 1999
Page 2
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement, and further consent to the use of our name wherever
appearing in the Registration Statement, including any Prospectus constituting a
part thereof, and any amendments thereto. In giving this consent we do not
thereby admit that we come within the category of persons whose consent is
required by the Act or the Rules.
Very truly yours,
GREENBERG TRAURIG, P.A.
/S/GREENBERG TRAURIG, P.A.
---------------------------
EXHIBIT 10.3
SMARTDISK CORPORATION
1999 INCENTIVE COMPENSATION PLAN
<PAGE>
SMARTDISK CORPORATION
1999 INCENTIVE COMPENSATION PLAN
1. Purpose....................................................................1
2. Definitions................................................................1
3. Administration.............................................................4
(a) Authority of the Committee........................................4
(b) Manner of Exercise of Committee Authority.........................5
(c) Limitation of Liability...........................................5
4. Stock Subject to Plan......................................................5
(a) Limitation on Overall Number of Shares Subject to Awards..........5
(b) Application of Limitations........................................6
5. Eligibility; Per-Person Award Limitations..................................6
6. Specific Terms of Awards...................................................6
(a) General...........................................................6
(b) Options...........................................................6
(c) Stock Appreciation Rights.........................................9
(d) Restricted Stock..................................................9
(e) Deferred Stock...................................................10
(f) Bonus Stock and Awards in Lieu of Obligations....................11
(g) Dividend Equivalents.............................................12
(h) Other Stock-Based Awards.........................................12
7. Certain Provisions Applicable to Awards...................................12
(a) Stand-Alone, Additional, Tandem, and Substitute Awards...........12
(b) Term of Awards...................................................13
(c) Form and Timing of Payment Under Awards; Deferrals...............13
(d) Exemptions from Section 16(b) Liability..........................13
8. Performance and Annual Incentive Awards...................................13
(a) Performance Conditions...........................................13
(b) Performance Awards Granted to Designated Covered Employees.......14
(c) Annual Incentive Awards Granted to Designated
Covered Employees.............................................15
(d) Written Determinations...........................................16
(e) Status of Section 8(b) and Section 8(c) Awards Under Code
Section 162(m)................................................17
9. Change in Control.........................................................17
(a) Effect of "Change in Control."...................................17
(b) Definition of "Change in Control.................................18
(c) Definition of "Change in Control Price.".........................19
10. General Provisions........................................................19
(A) Compliance With Legal and Other Requirements.....................19
(b) Limits on Transferability; Beneficiaries.........................19
(c) Adjustments......................................................20
(d) Taxes............................................................21
(i)
<PAGE>
(e) Changes to the Plan and Awards...................................21
(f) Limitation on Rights Conferred Under Plan........................21
(g) Unfunded Status of Awards; Creation of Trusts....................22
(h) Nonexclusivity of the Plan.......................................22
(i) Payments in the Event of Forfeitures; Fractional Shares..........22
(j) Governing Law....................................................22
(k) Plan Effective Date and Stockholder Approval;
Termination of Plan...........................................22
(ii)
<PAGE>
SMARTDISK CORPORATION
1999 INCENTIVE COMPENSATION PLAN
1. PURPOSE. The purpose of this 1999 Incentive Compensation Plan (the
"Plan") is to assist SMARTDISK CORPORATION (the "Company"), its parent
corporation and its subsidiaries in attracting, motivating, retaining and
rewarding employees, officers, Directors and independent contractors by enabling
such persons to acquire or increase a proprietary interest in the Company in
order to strengthen the mutuality of interests between such persons and the
Company's stockholders, and providing such persons with annual and long term
performance incentives to expend their maximum efforts in the creation of
shareholder value. The Plan is also intended to qualify certain compensation
awarded under the Plan for tax deductibility under Section 162(m) of the Code
(as hereafter defined) to the extent deemed appropriate by the Committee (or any
successor committee) of the Board of Directors of the Company.
2. DEFINITIONS. For purposes of the Plan, the following terms shall be
defined as set forth below, in addition to such terms defined in Section 1
hereof.
(a) "Annual Incentive Award" means a conditional right granted
to a Participant under Section 8(c) hereof to receive a cash payment, Stock or
other Award, unless otherwise determined by the Committee, after the end of a
specified fiscal year.
(b) "Award" means any Option, SAR (including Limited SAR),
Restricted Stock, Deferred Stock, Stock granted as a bonus or in lieu of another
award, Dividend Equivalent, Other Stock-Based Award, Performance Award or Annual
Incentive Award, together with any other right or interest, granted to a
Participant under the Plan.
(c) "Beneficiary" means the person, persons, trust or trusts
which have been designated by a Participant in his or her most recent written
beneficiary designation filed with the Committee to receive the benefits
specified under the Plan upon such Participant's death or to which Awards or
other rights are transferred if and to the extent permitted under Section 10(b)
hereof. If, upon a Participant's death, there is no designated Beneficiary or
surviving designated Beneficiary, then the term Beneficiary means the person,
persons, trust or trusts entitled by will or the laws of descent and
distribution to receive such benefits.
(d) "Beneficial Owner", "Beneficially Owning" and "Beneficial
Ownership" shall have the meanings ascribed to such terms in Rule 13d-3 under
the Exchange Act and any successor to such Rule.
(e) "Board" means the Company's Board of Directors.
(f) "Change in Control" means Change in Control as defined
with related terms in Section 9 of the Plan.
<PAGE>
(g) "Change in Control Price" means the amount calculated in
accordance with Section 9(c) of the Plan.
(h) "Code" means the Internal Revenue Code of 1986, as amended
from time to time, including regulations thereunder and successor provisions and
regulations thereto.
(i) "Committee" means a committee designated by the Board to
administer the Plan; provided, however, that the Committee shall consist of at
least two directors and, after the Publicly-Traded Date, each member of the
Committee shall be (i) a "non-employee director" within the meaning of Rule
16b-3 under the Exchange Act, unless administration of the Plan by "non-employee
directors" is not then required in order for exemptions under Rule 16b-3 to
apply to transactions under the Plan, and (ii) an "outside director" within the
meaning of Section 162(m) of the Code, unless administration of the Plan by
"outside directors" is not then required in order to qualify for tax
deductibility under Section 162(m) of the Code.
(j) "Corporate Transaction" means a Corporate Transaction as
defined in Section 9(b)(i) of the Plan.
(k) "Covered Employee" means an Eligible Person who is a
Covered Employee as specified in Section 8(e) of the Plan.
(l) "Deferred Stock" means a right, granted to a Participant
under Section 6(e) hereof, to receive Stock, cash or a combination thereof at
the end of a specified deferral period.
(m) "Director" means a member of the Board.
(n) "Disability" means a permanent and total disability
(within the meaning of Section 22(e) of the Code), as determined by a medical
doctor satisfactory to the Committee.
(o) "Dividend Equivalent" means a right, granted to a
Participant under Section 6(g) hereof, to receive cash, Stock, other Awards or
other property equal in value to dividends paid with respect to a specified
number of shares of Stock, or other periodic payments.
(p) "Effective Date" means the effective date of the Plan,
which shall be July 21, 1999.
(q) "Eligible Person" means each Executive Officer of the
Company (as defined under the Exchange Act) and other officers, Directors and
employees of the Company, of any Parent Corporation or of any Subsidiary, and
independent contractors with the Company, any Parent Corporation or any
Subsidiary. The foregoing notwithstanding, only employees of the Company, any
Parent Corporation or any Subsidiary shall be Eligible Persons for purposes of
receiving any Incentive Stock Options. An employee on leave of absence may be
considered as still in the employ of the Company, a Parent Corporation or a
Subsidiary for purposes of eligibility for participation in the Plan.
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<PAGE>
(r) "Exchange Act" means the Securities Exchange Act of 1934,
as amended from time to time, including rules thereunder and successor
provisions and rules thereto.
(s) "Executive Officer" means an executive officer of the
Company as defined under the Exchange Act.
(t) "Fair Market Value" means the fair market value of Stock,
Awards or other property as determined by the Committee or the Board, or under
procedures established by the Committee or the Board. Unless otherwise
determined by the Committee or the Board, the Fair Market Value of Stock as of
any reference date shall be the closing sale price per share on the business day
immediately preceding the date of reference, reported on a consolidated basis
for stock listed on the principal stock exchange or market on which Stock is
traded on the date as of which such value is being determined or, if there is no
sale on that date, then on the last previous day on which a sale was reported.
(u) "Incentive Stock Option" or "ISO" means any Option
intended to be designated as an incentive stock option within the meaning of
Section 422 of the Code or any successor provision thereto.
(v) "Incumbent Board" means the Incumbent Board as defined in
Section 9(b)(iii) of the Plan.
(w) "Limited SAR" means a right granted to a Participant under
Section 6(c) hereof.
(x) "Option" means a right granted to a Participant under
Section 6(b) hereof, to purchase Stock or other Awards at a specified price
during specified time periods.
(y) "Other Stock-Based Awards" means Awards granted to a
Participant under Section 6(h) hereof.
(z) "Parent Corporation" means any corporation (other than the
Company) in an unbroken chain of corporations ending with the Company, if each
of the corporations in the chain (other than the Company) owns stock possessing
50% or more of the combined voting power of all classes of stock in one of the
other corporations in the chain.
(aa) "Participant" means a person who has been granted an
Award under the Plan which remains outstanding, including a person who is no
longer an Eligible Person.
(bb) "Performance Award" means a right, granted to an Eligible
Person under Section 8 hereof, to receive Awards based upon performance criteria
specified by the Committee or the Board.
(cc) "Person" shall have the meaning ascribed to such term in
Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d)
thereof, and shall include a "group" as defined in Section 13(d) thereof.
3
<PAGE>
(dd) "Publicly-Traded Date" means the date on which the Stock
of the Company, or the stock of any successor company into which the Stock is
substituted or exchanged, is registered pursuant to Section 12(b) or 12(g) of
the Securities Exchange Act.
(ee) "Restricted Stock" means Stock granted to a Participant
under Section 6(d) hereof, that is subject to certain restrictions and to a risk
of forfeiture.
(ff) "Retire" or "Retirement" means termination of service as
a Director after having attained at least age 62 and having served as a Director
for at least 5 years, other than by reason of death, Disability or the
Director's willful misconduct or negligence.
(gg) "Rule 16b-3" and "Rule 16a-1(c)(3)" means Rule 16b-3 and
Rule 16a-1(c)(3), as from time to time in effect and applicable to the Plan and
Participants, promulgated by the Securities and Exchange Commission under
Section 16 of the Exchange Act
(hh) "Stock" means the Company's Common Stock, and such other
securities as may be substituted (or resubstituted) for Stock pursuant to
Section 10(c) hereof.
(ii) "Stock Appreciation Rights" or "SAR" means a right
granted to a Participant under Section 6(c) hereof.
(jj) "Subsidiary" means any corporation or other entity in
which the Company has a direct or indirect ownership interest of 50% or more of
the total combined voting power of the then outstanding securities or interests
of such corporation or other entity entitled to vote generally in the election
of directors or in which the Company has the right to receive 50% or more of the
distribution of profits or 50% or more of the assets on liquidation or
dissolution.
3. ADMINISTRATION.
(a) AUTHORITY OF THE COMMITTEE. The Plan shall be administered
by the Committee; provided, however, that except as otherwise expressly provided
in this Plan or in order to comply with Code Section 162(m) or Rule 16b-3 under
the Exchange Act, the Board may exercise any power or authority granted to the
Committee under this Plan. The Committee or the Board shall have full and final
authority, in each case subject to and consistent with the provisions of the
Plan, to select Eligible Persons to become Participants, grant Awards, determine
the type, number and other terms and conditions of, and all other matters
relating to, Awards, prescribe Award agreements (which need not be identical for
each Participant) and rules and regulations for the administration of the Plan,
construe and interpret the Plan and Award agreements and correct defects, supply
omissions or reconcile inconsistencies therein, and to make all other decisions
and determinations as the Committee or the Board may deem necessary or advisable
for the administration of the Plan. In exercising any discretion granted to the
Committee or the Board under the Plan or pursuant to any Award, the Committee or
the Board shall not be required to follow past practices, act in a manner
consistent with past practices, or treat any Eligible Person in a manner
consistent with the treatment of other Eligible Persons.
4
<PAGE>
(b) MANNER OF EXERCISE OF COMMITTEE AUTHORITY. The Committee,
and not the Board, shall exercise sole and exclusive discretion on any matter
relating to a Participant then subject to Section 16 of the Exchange Act with
respect to the Company to the extent necessary in order that transactions by
such Participant shall be exempt under Rule 16b-3 under the Exchange Act. Any
action of the Committee or the Board shall be final, conclusive and binding on
all persons, including the Company, its subsidiaries, Participants,
Beneficiaries, transferees under Section 10(b) hereof or other persons claiming
rights from or through a Participant, and stockholders. The express grant of any
specific power to the Committee or the Board, and the taking of any action by
the Committee or the Board, shall not be construed as limiting any power or
authority of the Committee or the Board. The Committee or the Board may delegate
to officers or managers of the Company or any subsidiary, or committees thereof,
the authority, subject to such terms as the Committee or the Board shall
determine, (i) to perform administrative functions, (ii) with respect to
Participants not subject to Section 16 of the Exchange Act, to perform such
other functions as the Committee or the Board may determine, and (iii) with
respect to Participants subject to Section 16, to perform such other functions
of the Committee or the Board as the Committee or the Board may determine to the
extent performance of such functions will not result in the loss of an exemption
under Rule 16b-3 otherwise available for transactions by such persons, in each
case to the extent permitted under applicable law and subject to the
requirements set forth in Section 8(d). The Committee or the Board may appoint
agents to assist it in administering the Plan.
(c) LIMITATION OF LIABILITY. The Committee and the Board, and
each member thereof, shall be entitled to, in good faith, rely or act upon any
report or other information furnished to him or her by any executive officer,
other officer or employee of the Company, a Parent Corporation or a Subsidiary,
the Company's independent auditors, consultants or any other agents assisting in
the administration of the Plan. Members of the Committee and the Board, and any
officer or employee of the Company, a Parent Corporation or a Subsidiary acting
at the direction or on behalf of the Committee or the Board, shall not be
personally liable for any action or determination taken or made in good faith
with respect to the Plan, and shall, to the extent permitted by law, be fully
indemnified and protected by the Company with respect to any such action or
determination.
4. STOCK SUBJECT TO PLAN.
(a) LIMITATION ON OVERALL NUMBER OF SHARES SUBJECT TO AWARDS.
Subject to adjustment as provided in Section 10(c) hereof, the total number of
shares of Stock reserved and available for delivery in connection with Awards
under the Plan shall be the sum of (i) Two Million Five Hundred Thousand
(2,500,000), plus (ii) the number of shares with respect to Awards previously
granted under the Plan that terminate without being exercised, expire, are
forfeited or canceled, and the number of shares of Stock that are surrendered in
payment of any Awards or any tax withholding with regard thereto. Any shares of
Stock delivered under the Plan may consist, in whole or in part, of authorized
and unissued shares or treasury shares. Subject to adjustment as provided in
Section 10(c) hereof, in no event shall the aggregate number of shares of Stock
which may be issued pursuant to ISOs exceed Five Hundred Thousand (500,000)
shares.
5
<PAGE>
(b) APPLICATION OF LIMITATIONS. The limitation contained in
Section 4(a) shall apply not only to Awards that are settleable by the delivery
of shares of Stock but also to Awards relating to shares of Stock but settleable
only in cash (such as cash-only SARs). The Committee or the Board may adopt
reasonable counting procedures to ensure appropriate counting, avoid double
counting (as, for example, in the case of tandem or substitute awards) and make
adjustments if the number of shares of Stock actually delivered differs from the
number of shares previously counted in connection with an Award.
5. ELIGIBILITY; PER-PERSON AWARD LIMITATIONS. Awards may be granted
under the Plan only to Eligible Persons. In each fiscal year during any part of
which the Plan is in effect, an Eligible Person may not be granted Awards
relating to more than One Hundred Thousand (100,000) shares of Stock, subject to
adjustment as provided in Section 10(c), under each of Sections 6(b), 6(c),
6(d), 6(e), 6(f), 6(g), 6(h), 8(b) and 8(c). In addition, the maximum amount
that may be earned as an Annual Incentive Award or other cash Award in any
fiscal year by any one Participant shall be $10,000,000, and the maximum amount
that may be earned as a Performance Award or other cash Award in respect of a
performance period by any one Participant shall be $20,000,000.
6. SPECIFIC TERMS OF AWARDS6.SpecificTermsofAwards.
(a) GENERAL. Awards may be granted on the terms and conditions
set forth in this Section 6. In addition, the Committee or the Board may impose
on any Award or the exercise thereof, at the date of grant or thereafter
(subject to Section 10(e)), such additional terms and conditions, not
inconsistent with the provisions of the Plan, as the Committee or the Board
shall determine, including terms requiring forfeiture of Awards in the event of
termination of employment by the Participant and terms permitting a Participant
to make elections relating to his or her Award. The Committee or the Board shall
retain full power and discretion to accelerate, waive or modify, at any time,
any term or condition of an Award that is not mandatory under the Plan. Except
in cases in which the Committee or the Board is authorized to require other
forms of consideration under the Plan, or to the extent other forms of
consideration must be paid to satisfy the requirements of Florida law, no
consideration other than services may be required for the grant (but not the
exercise) of any Award.
(b) OPTIONS. The Committee and the Board each is authorized to
grant Options to Participants on the following terms and conditions:
(i) EXERCISE PRICE. The exercise price per share of
Stock purchasable under an Option shall be determined by the
Committee or the Board, provided that such exercise price
shall not, in the case of Incentive Stock Options, be less
than 100% of the Fair Market Value of the Stock on the date of
grant of the Option and shall not, in any event, be less than
the par value of a share of Stock on the date of grant of such
Option. If an employee owns or is deemed to own (by reason of
the attribution rules applicable under Section 424(d) of the
Code) more than 10% of the combined voting power of all
classes of stock of the Company or any Parent Corporation and
an Incentive Stock Option is granted to such
6
<PAGE>
employee, the option price of such Incentive Stock Option (to
the extent required by the Code at the time of grant) shall be
no less than 110% of the Fair Market Value of the Stock on the
date such Incentive Stock Option is granted.
(ii) TIME AND METHOD OF EXERCISE. The Committee or
the Board shall determine the time or times at which or the
circumstances under which an Option may be exercised in whole
or in part (including based on achievement of performance
goals and/or future service requirements), the time or times
at which Options shall cease to be or become exercisable
following termination of employment or upon other conditions,
the methods by which such exercise price may be paid or deemed
to be paid (including in the discretion of the Committee or
the Board a cashless exercise procedure), the form of such
payment, including, without limitation, cash, Stock, other
Awards or awards granted under other plans of the Company or
any subsidiary, or other property (including notes or other
contractual obligations of Participants to make payment on a
deferred basis), and the methods by or forms in which Stock
will be delivered or deemed to be delivered to Participants.
(III) ISOS. The terms of any ISO granted under the
Plan shall comply in all respects with the provisions of
Section 422 of the Code. Anything in the Plan to the contrary
notwithstanding, no term of the Plan relating to ISOs
(including any SAR in tandem therewith) shall be interpreted,
amended or altered, nor shall any discretion or authority
granted under the Plan be exercised, so as to disqualify
either the Plan or any ISO under Section 422 of the Code,
unless the Participant has first requested the change that
will result in such disqualification. Thus, if and to the
extent required to comply with Section 422 of the Code,
Options granted as Incentive Stock Options shall be subject to
the following special terms and conditions:
(A) the Option shall not be exercisable more
than ten years after the date such Incentive Stock Option is
granted; provided, however, that if a Participant owns or is
deemed to own (by reason of the attribution rules of Section
424(d) of the Code) more than 10% of the combined voting power
of all classes of stock of the Company or any Parent
Corporation and the Incentive Stock Option is granted to such
Participant, the term of the Incentive Stock Option shall be
(to the extent required by the Code at the time of the grant)
for no more than five years from the date of grant; and
(B) The aggregate Fair Market Value
(determined as of the date the Incentive Stock Option is
granted) of the shares of stock with respect to which
Incentive Stock Options granted under the Plan and all other
option plans of the Company or its Parent Corporation during
any calendar year exercisable for the first time by the
Participant during any calendar year shall not (to the extent
required by the Code at the time of the grant) exceed
$100,000.
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(IV) FORMULA GRANTS OF OPTIONS TO NON-EMPLOYEE
DIRECTORS. Subject to adjustment as provided in the first
sentence of Section 10(c) hereof, each non-employee Director
shall receive (A) on the date of his or her appointment as a
non-employee Director of the Company, an Option to purchase
15,000 shares of Stock; (B) on the date of his or her
appointment to a committee of the Board, an Option to purchase
500 shares of Stock; (C) on the date of his or her election as
a chairman of a committee of the Board, an Option to purchase
500 shares of Stock; (D) each year, on January 1, an Option to
purchase 6,000 shares of Stock (pro rated for non-employee
Directors who are elected during that year but subsequent to
January 1, based upon the portion of the year they serve as
non-employee Directors), (E) for each committee assignment on
each January 1, an Option to purchase 500 shares of Stock (pro
rated for non-employee Directors who are elected during that
year but subsequent to January 1, based upon the portion of
the year they serve as non-employee Directors), and (F) for
each committee chairmanship on January 1, an Option to
purchase 500 shares of Stock (pro rated for non-employee
Directors who are elected during that year but subsequent to
January 1, based upon the portion of the year they serve as
non-employee Directors). Options granted to non-employee
Directors pursuant to this paragraph (iv) shall be for a term
of 10 years and shall become exercisable at the rate of 2% per
month commencing on the first month immediately following the
month in which the Option is granted; provided, however, that
the Options shall be fully exercisable in the event that,
while serving as a non-employee Director, the non-employee
Director dies, suffers a Disability, Retires or in the event
of a Change in Control. The per share exercise price of all
Options granted to non-employee Directors pursuant to this
paragraph (iv) shall be equal to the Fair Market Value of a
share of Stock on the last trading day immediately preceding
the January 1 on which the Option is granted. Unless otherwise
extended in the sole of the discretion of the Committee, the
unexercised portion of any Option granted pursuant to this
paragraph (iv) shall become null and void (V) three months
after the date on which such non-employee Director ceases to
be a non-employee Director of the Company for any reason other
than the Director's willful misconduct or negligence,
Disability, death or Retirement, (W) immediately in the event
of the non-employee Director's willful misconduct or
negligence, (X) one year after the non-employee Director
ceases to be a non-employee Director by reason of his
Disability, (Y) at the expiration of its original term, if the
non-employee Director ceases to be a non-employee Director by
reason of his Retirement, and (Z) twelve months after the date
of the non-employee Director's death in the event that such
death occurs prior to the time the Option otherwise would
become null and void pursuant to this sentence.
Notwithstanding the foregoing, with respect to those
individuals who are non-employee Directors as of the Effective
Date of this Plan, this paragraph (iv) shall apply on or after
January 1, 2001. The option grants made to a non-employee
Director pursuant to this paragraph (iv) shall not preclude
the grant of other Awards to such non-employee Director under
this Plan.
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(c) STOCK APPRECIATION RIGHTS. The Committee and the Board
each is authorized to grant SAR's to Participants on the following terms and
conditions:
(i) RIGHT TO PAYMENT. A SAR shall confer on the
Participant to whom it is granted a right to receive, upon
exercise thereof, the excess of (A) the Fair Market Value of
one share of stock on the date of exercise (or, in the case of
a "Limited SAR" that may be exercised only in the event of a
Change in Control, the Fair Market Value determined by
reference to the Change in Control Price, as defined under
Section 9(c) hereof), over (B) the grant price of the SAR as
determined by the Committee or the Board. The grant price of
an SAR shall not be less than the Fair Market Value of a share
of Stock on the date of grant except as provided under Section
7(a) hereof.
(ii) OTHER TERMS. The Committee or the Board shall
determine at the date of grant or thereafter, the time or
times at which and the circumstances under which a SAR may be
exercised in whole or in part (including based on achievement
of performance goals and/or future service requirements), the
time or times at which SARs shall cease to be or become
exercisable following termination of employment or upon other
conditions, the method of exercise, method of settlement, form
of consideration payable in settlement, method by or forms in
which Stock will be delivered or deemed to be delivered to
Participants, whether or not a SAR shall be in tandem or in
combination with any other Award, and any other terms and
conditions of any SAR. Limited SARs that may only be exercised
in connection with a Change in Control or other event as
specified by the Committee or the Board, may be granted on
such terms, not inconsistent with this Section 6(c), as the
Committee or the Board may determine. SARs and Limited SARs
may be either freestanding or in tandem with other Awards.
(d) RESTRICTED STOCK. The Committee and the Board each is
authorized to grant Restricted Stock to Participants on the following terms and
conditions:
(i) GRANT AND RESTRICTIONS. Restricted Stock shall be
subject to such restrictions on transferability, risk of
forfeiture and other restrictions, if any, as the Committee or
the Board may impose, which restrictions may lapse separately
or in combination at such times, under such circumstances
(including based on achievement of performance goals and/or
future service requirements), in such installments or
otherwise, as the Committee or the Board may determine at the
date of grant or thereafter. Except to the extent restricted
under the terms of the Plan and any Award agreement relating
to the Restricted Stock, a Participant granted Restricted
Stock shall have all of the rights of a stockholder, including
the right to vote the Restricted Stock and the right to
receive dividends thereon (subject to any mandatory
reinvestment or other requirement imposed by the Committee or
the Board). During the restricted period applicable to the
Restricted Stock, subject to Section 10(b) below, the
Restricted Stock may not be sold,
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<PAGE>
transferred, pledged, hypothecated, margined or otherwise
encumbered by the Participant.
(ii) FORFEITURE. Except as otherwise determined by
the Committee or the Board at the time of the Award, upon
termination of a Participant's employment during the
applicable restriction period, the Participant's Restricted
Stock that is at that time subject to restrictions shall be
forfeited and reacquired by the Company; provided that the
Committee or the Board may provide, by rule or regulation or
in any Award agreement, or may determine in any individual
case, that restrictions or forfeiture conditions relating to
Restricted Stock shall be waived in whole or in part in the
event of terminations resulting from specified causes, and the
Committee or the Board may in other cases waive in whole or in
part the forfeiture of Restricted Stock.
(iii) CERTIFICATES FOR STOCK. Restricted Stock
granted under the Plan may be evidenced in such manner as the
Committee or the Board shall determine. If certificates
representing Restricted Stock are registered in the name of
the Participant, the Committee or the Board may require that
such certificates bear an appropriate legend referring to the
terms, conditions and restrictions applicable to such
Restricted Stock, that the Company retain physical possession
of the certificates, and that the Participant deliver a stock
power to the Company, endorsed in blank, relating to the
Restricted Stock.
(iv) DIVIDENDS AND SPLITS. As a condition to the
grant of an Award of Restricted Stock, the Committee or the
Board may require that any cash dividends paid on a share of
Restricted Stock be automatically reinvested in additional
shares of Restricted Stock or applied to the purchase of
additional Awards under the Plan. Unless otherwise determined
by the Committee or the Board, Stock distributed in connection
with a Stock split or Stock dividend, and other property
distributed as a dividend, shall be subject to restrictions
and a risk of forfeiture to the same extent as the Restricted
Stock with respect to which such Stock or other property has
been distributed.
(e) DEFERRED STOCK. The Committee and the Board each is
authorized to grant Deferred Stock to Participants, which are rights to receive
Stock, cash, or a combination thereof at the end of a specified deferral period,
subject to the following terms and conditions:
(i) AWARD AND RESTRICTIONS. Satisfaction of an Award
of Deferred Stock shall occur upon expiration of the deferral
period specified for such Deferred Stock by the Committee or
the Board (or, if permitted by the Committee or the Board, as
elected by the Participant). In addition, Deferred Stock shall
be subject to such restrictions (which may include a risk of
forfeiture) as the Committee or the Board may impose, if any,
which restrictions may lapse at the expiration of the deferral
period or at earlier specified times (including based on
achievement of performance goals and/or future service
requirements), separately
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or in combination, in installments or otherwise, as the
Committee or the Board may determine. Deferred Stock may be
satisfied by delivery of Stock, cash equal to the Fair Market
Value of the specified number of shares of Stock covered by
the Deferred Stock, or a combination thereof, as determined by
the Committee or the Board at the date of grant or thereafter.
Prior to satisfaction of an Award of Deferred Stock, an Award
of Deferred Stock carries no voting or dividend or other
rights associated with share ownership.
(ii) FORFEITURE. Except as otherwise determined by
the Committee or the Board, upon termination of a
Participant's employment during the applicable deferral period
thereof to which forfeiture conditions apply (as provided in
the Award agreement evidencing the Deferred Stock), the
Participant's Deferred Stock that is at that time subject to
deferral (other than a deferral at the election of the
Participant) shall be forfeited; provided that the Committee
or the Board may provide, by rule or regulation or in any
Award agreement, or may determine in any individual case, that
restrictions or forfeiture conditions relating to Deferred
Stock shall be waived in whole or in part in the event of
terminations resulting from specified causes, and the
Committee or the Board may in other cases waive in whole or in
part the forfeiture of Deferred Stock.
(iii) DIVIDEND EQUIVALENTS. Unless otherwise
determined by the Committee or the Board at date of grant,
Dividend Equivalents on the specified number of shares of
Stock covered by an Award of Deferred Stock shall be either
(A) paid with respect to such Deferred Stock at the dividend
payment date in cash or in shares of unrestricted Stock having
a Fair Market Value equal to the amount of such dividends, or
(B) deferred with respect to such Deferred Stock and the
amount or value thereof automatically deemed reinvested in
additional Deferred Stock, other Awards or other investment
vehicles, as the Committee or the Board shall determine or
permit the Participant to elect.
(f) BONUS STOCK AND AWARDS IN LIEU OF OBLIGATIONS. The
Committee and the Board each is authorized to grant Stock as a bonus, or to
grant Stock or other Awards in lieu of Company obligations to pay cash or
deliver other property under the Plan or under other plans or compensatory
arrangements, provided that, in the case of Participants subject to Section 16
of the Exchange Act, the amount of such grants remains within the discretion of
the Committee to the extent necessary to ensure that acquisitions of Stock or
other Awards are exempt from liability under Section 16(b) of the Exchange Act.
Stock or Awards granted hereunder shall be subject to such other terms as shall
be determined by the Committee or the Board.
(g) DIVIDEND EQUIVALENTS. The Committee and the Board each is
authorized to grant Dividend Equivalents to a Participant entitling the
Participant to receive cash, Stock, other Awards, or other property equal in
value to dividends paid with respect to a specified number of shares of Stock,
or other periodic payments. Dividend Equivalents may be awarded on a
free-standing basis or in connection with another Award. The Committee or the
Board may provide that Dividend Equivalents shall be paid or distributed when
accrued or shall be deemed to have
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<PAGE>
been reinvested in additional Stock, Awards, or other investment vehicles, and
subject to such restrictions on transferability and risks of forfeiture, as the
Committee or the Board may specify.
(h) OTHER STOCK-BASED AWARDS. The Committee and the Board each
is authorized, subject to limitations under applicable law, to grant to
Participants such other Awards that may be denominated or payable in, valued in
whole or in part by reference to, or otherwise based on, or related to, Stock,
as deemed by the Committee or the Board to be consistent with the purposes of
the Plan, including, without limitation, convertible or exchangeable debt
securities, other rights convertible or exchangeable into Stock, purchase rights
for Stock, Awards with value and payment contingent upon performance of the
Company or any other factors designated by the Committee or the Board, and
Awards valued by reference to the book value of Stock or the value of securities
of or the performance of specified subsidiaries or business units. The Committee
or the Board shall determine the terms and conditions of such Awards. Stock
delivered pursuant to an Award in the nature of a purchase right granted under
this Section 6(h) shall be purchased for such consideration, paid for at such
times, by such methods, and in such forms, including, without limitation, cash,
Stock, other Awards or other property, as the Committee or the Board shall
determine. Cash awards, as an element of or supplement to any other Award under
the Plan, may also be granted pursuant to this Section 6(h).
7. CERTAIN PROVISIONS APPLICABLE TO AWARDS.
(a) STAND-ALONE, ADDITIONAL, TANDEM, AND SUBSTITUTE AWARDS.
Awards granted under the Plan may, in the discretion of the Committee or the
Board, be granted either alone or in addition to, in tandem with, or in
substitution or exchange for, any other Award or any award granted under another
plan of the Company, any subsidiary, or any business entity to be acquired by
the Company or a subsidiary, or any other right of a Participant to receive
payment from the Company or any subsidiary. Such additional, tandem, and
substitute or exchange Awards may be granted at any time. If an Award is granted
in substitution or exchange for another Award or award, the Committee or the
Board shall require the surrender of such other Award or award in consideration
for the grant of the new Award. In addition, Awards may be granted in lieu of
cash compensation, including in lieu of cash amounts payable under other plans
of the Company or any subsidiary, in which the value of Stock subject to the
Award is equivalent in value to the cash compensation (for example, Deferred
Stock or Restricted Stock), or in which the exercise price, grant price or
purchase price of the Award in the nature of a right that may be exercised is
equal to the Fair Market Value of the underlying Stock minus the value of the
cash compensation surrendered (for example, Options granted with an exercise
price "discounted" by the amount of the cash compensation surrendered).
(b) TERM OF AWARDS. The term of each Award shall be for such
period as may be determined by the Committee or the Board; provided that in no
event shall the term of any Option or SAR exceed a period of ten years (or such
shorter term as may be required in respect of an ISO under Section 422 of the
Code).
(c) FORM AND TIMING OF PAYMENT UNDER AWARDS; DEFERRALS.
Subject to the terms of the Plan and any applicable Award agreement, payments to
be made by the Company or
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<PAGE>
a subsidiary upon the exercise of an Option or other Award or settlement of an
Award may be made in such forms as the Committee or the Board shall determine,
including, without limitation, cash, Stock that have been held for at least 6
months, other Awards or other property, and may be made in a single payment or
transfer, in installments, or on a deferred basis. The settlement of any Award
may be accelerated, and cash paid in lieu of Stock in connection with such
settlement, in the discretion of the Committee or the Board or upon occurrence
of one or more specified events (in addition to a Change in Control).
Installment or deferred payments may be required by the Committee or the Board
(subject to Section 10(e) of the Plan) or permitted at the election of the
Participant on terms and conditions established by the Committee or the Board.
Payments may include, without limitation, provisions for the payment or
crediting of a reasonable interest rate on installment or deferred payments or
the grant or crediting of Dividend Equivalents or other amounts in respect of
installment or deferred payments denominated in Stock.
(d) EXEMPTIONS FROM SECTION 16(B) LIABILITY. It is the intent
of the Company that this Plan comply in all respects with applicable provisions
of Rule 16b-3 or Rule 16a-1(c)(3) to the extent necessary to ensure that neither
the grant of any Awards to nor other transaction by a Participant who is subject
to Section 16 of the Exchange Act is subject to liability under Section 16(b)
thereof (except for transactions acknowledged in writing to be non-exempt by
such Participant). Accordingly, if any provision of this Plan or any Award
agreement does not comply with the requirements of Rule 16b-3 or Rule
16a-1(c)(3) as then applicable to any such transaction, such provision will be
construed or deemed amended to the extent necessary to conform to the applicable
requirements of Rule 16b-3 or Rule 16a-1(c)(3) so that such Participant shall
avoid liability under Section 16(b). In addition, the purchase price of any
Award conferring a right to purchase Stock shall be not less than any specified
percentage of the Fair Market Value of Stock at the date of grant of the Award
then required in order to comply with Rule 16b-3.
8. PERFORMANCE AND ANNUAL INCENTIVE AWARDS.
(a) PERFORMANCE CONDITIONS. The right of a Participant to
exercise or receive a grant or settlement of any Award, and the timing thereof,
may be subject to such performance conditions as may be specified by the
Committee or the Board. The Committee or the Board may use such business
criteria and other measures of performance as it may deem appropriate in
establishing any performance conditions, and may exercise its discretion to
reduce the amounts payable under any Award subject to performance conditions,
except as limited under Sections 8(b) and 8(c) hereof in the case of a
Performance Award or Annual Incentive Award intended to qualify under Code
Section 162(m). If and to the extent required under Code Section 162(m), any
power or authority relating to a Performance Award or Annual Incentive Award
intended to qualify under Code Section 162(m), shall be exercised by the
Committee and not the Board.
(b) PERFORMANCE AWARDS GRANTED TO DESIGNATED COVERED
EMPLOYEES. If and to the extent that the Committee determines that a Performance
Award to be granted to an Eligible Person who is designated by the Committee as
likely to be a Covered Employee should qualify as "performance-based
compensation" for purposes of Code Section 162(m), the grant,
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<PAGE>
exercise and/or settlement of such Performance Award shall be contingent upon
achievement of preestablished performance goals and other terms set forth in
this Section 8(b).
(i) PERFORMANCE GOALS GENERALLY. The performance
goals for such Performance Awards shall consist of one or more
business criteria and a targeted level or levels of
performance with respect to each of such criteria, as
specified by the Committee consistent with this Section 8(b).
Performance goals shall be objective and shall otherwise meet
the requirements of Code Section 162(m) and regulations
thereunder including the requirement that the level or levels
of performance targeted by the Committee result in the
achievement of performance goals being "substantially
uncertain." The Committee may determine that such Performance
Awards shall be granted, exercised and/or settled upon
achievement of any one performance goal or that two or more of
the performance goals must be achieved as a condition to
grant, exercise and/or settlement of such Performance Awards.
Performance goals may differ for Performance Awards granted to
any one Participant or to different Participants.
(ii) BUSINESS CRITERIA. One or more of the following
business criteria for the Company, on a consolidated basis,
and/or specified subsidiaries or business units of the Company
(except with respect to the total stockholder return and
earnings per share criteria), shall be used exclusively by the
Committee in establishing performance goals for such
Performance Awards: (1) total stockholder return; (2) such
total stockholder return as compared to total return (on a
comparable basis) of a publicly available index such as, but
not limited to, the Standard & Poor's 500 Stock Index or the
S&P Specialty Retailer Index; (3) net income; (4) pretax
earnings; (5) earnings before interest expense, taxes,
depreciation and amortization; (6) pretax operating earnings
after interest expense and before bonuses, service fees, and
extraordinary or special items; (7) operating margin; (8)
earnings per share; (9) return on equity; (10) return on
capital; (11) return on investment; (12) operating earnings;
(13) working capital or inventory; and (14) ratio of debt to
stockholders' equity. One or more of the foregoing business
criteria shall also be exclusively used in establishing
performance goals for Annual Incentive Awards granted to a
Covered Employee under Section 8(c) hereof that are intended
to qualify as "performance-based compensation under Code
Section 162(m).
(iii) PERFORMANCE PERIOD; TIMING FOR ESTABLISHING
PERFORMANCE GOALS. Achievement of performance goals in respect
of such Performance Awards shall be measured over a
performance period of up to ten years, as specified by the
Committee. Performance goals shall be established not later
than 90 days after the beginning of any performance period
applicable to such Performance Awards, or at such other date
as may be required or permitted for "performance-based
compensation" under Code Section 162(m).
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(iv) PERFORMANCE AWARD POOL. The Committee may
establish a Performance Award pool, which shall be an unfunded
pool, for purposes of measuring Company performance in
connection with Performance Awards. The amount of such
Performance Award pool shall be based upon the achievement of
a performance goal or goals based on one or more of the
business criteria set forth in Section 8(b)(ii) hereof during
the given performance period, as specified by the Committee in
accordance with Section 8(b)(iii) hereof. The Committee may
specify the amount of the Performance Award pool as a
percentage of any of such business criteria, a percentage
thereof in excess of a threshold amount, or as another amount
which need not bear a strictly mathematical relationship to
such business criteria.
(v) SETTLEMENT OF PERFORMANCE AWARDS; OTHER TERMS.
Settlement of such Performance Awards shall be in cash, Stock,
other Awards or other property, in the discretion of the
Committee. The Committee may, in its discretion, reduce the
amount of a settlement otherwise to be made in connection with
such Performance Awards. The Committee shall specify the
circumstances in which such Performance Awards shall be paid
or forfeited in the event of termination of employment by the
Participant prior to the end of a performance period or
settlement of Performance Awards.
(c) ANNUAL INCENTIVE AWARDS GRANTED TO DESIGNATED COVERED
EMPLOYEES. If and to the extent that the Committee determines that an Annual
Incentive Award to be granted to an Eligible Person who is designated by the
Committee as likely to be a Covered Employee should qualify as
"performance-based compensation" for purposes of Code Section 162(m), the grant,
exercise and/or settlement of such Annual Incentive Award shall be contingent
upon achievement of preestablished performance goals and other terms set forth
in this Section 8(c).
(i) ANNUAL INCENTIVE AWARD POOL. The Committee may
establish an Annual Incentive Award pool, which shall be an
unfunded pool, for purposes of measuring Company performance
in connection with Annual Incentive Awards. The amount of such
Annual Incentive Award pool shall be based upon the
achievement of a performance goal or goals based on one or
more of the business criteria set forth in Section 8(b)(ii)
hereof during the given performance period, as specified by
the Committee in accordance with Section 8(b)(iii) hereof. The
Committee may specify the amount of the Annual Incentive Award
pool as a percentage of any such business criteria, a
percentage thereof in excess of a threshold amount, or as
another amount which need not bear a strictly mathematical
relationship to such business criteria.
(ii) POTENTIAL ANNUAL INCENTIVE AWARDS. Not later
than the end of the 90th day of each fiscal year, or at such
other date as may be required or permitted in the case of
Awards intended to be "performance-based compensation" under
Code Section 162(m), the Committee shall determine the
Eligible Persons who will potentially receive Annual Incentive
Awards, and the amounts potentially
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payable thereunder, for that fiscal year, either out of an
Annual Incentive Award pool established by such date under
Section 8(c)(i) hereof or as individual Annual Incentive
Awards. In the case of individual Annual Incentive Awards
intended to qualify under Code Section 162(m), the amount
potentially payable shall be based upon the achievement of a
performance goal or goals based on one or more of the business
criteria set forth in Section 8(b)(ii) hereof in the given
performance year, as specified by the Committee; in other
cases, such amount shall be based on such criteria as shall be
established by the Committee. In all cases, the maximum Annual
Incentive Award of any Participant shall be subject to the
limitation set forth in Section 5 hereof.
(iii) PAYOUT OF ANNUAL INCENTIVE AWARDS. After the
end of each fiscal year, the Committee shall determine the
amount, if any, of (A) the Annual Incentive Award pool, and
the maximum amount of potential Annual Incentive Award payable
to each Participant in the Annual Incentive Award pool, or (B)
the amount of potential Annual Incentive Award otherwise
payable to each Participant. The Committee may, in its
discretion, determine that the amount payable to any
Participant as an Annual Incentive Award shall be reduced from
the amount of his or her potential Annual Incentive Award,
including a determination to make no Award whatsoever. The
Committee shall specify the circumstances in which an Annual
Incentive Award shall be paid or forfeited in the event of
termination of employment by the Participant prior to the end
of a fiscal year or settlement of such Annual Incentive Award.
(d) WRITTEN DETERMINATIONS. All determinations by the
Committee as to the establishment of performance goals, the amount of any
Performance Award pool or potential individual Performance Awards and as to the
achievement of performance goals relating to Performance Awards under Section
8(b), and the amount of any Annual Incentive Award pool or potential individual
Annual Incentive Awards and the amount of final Annual Incentive Awards under
Section 8(c), shall be made in writing in the case of any Award intended to
qualify under Code Section 162(m). The Committee may not delegate any
responsibility relating to such Performance Awards or Annual Incentive Awards if
and to the extent required to comply with Code Section 162(m).
(e) STATUS OF SECTION 8(B) AND SECTION 8(C) AWARDS UNDER CODE
SECTION 162(M). It is the intent of the Company that Performance Awards and
Annual Incentive Awards under Section 8(b) and 8(c) hereof granted to persons
who are designated by the Committee as likely to be Covered Employees within the
meaning of Code Section 162(m) and regulations thereunder shall, if so
designated by the Committee, constitute "qualified performance-based
compensation" within the meaning of Code Section 162(m) and regulations
thereunder. Accordingly, the terms of Sections 8(b), (c), (d) and (e), including
the definitions of Covered Employee and other terms used therein, shall be
interpreted in a manner consistent with Code Section 162(m) and regulations
thereunder. The foregoing notwithstanding, because the Committee cannot
determine with certainty whether a given Participant will be a Covered Employee
with respect to a fiscal year that has not yet been completed, the term Covered
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Employee as used herein shall mean only a person designated by the Committee, at
the time of grant of Performance Awards or an Annual Incentive Award, as likely
to be a Covered Employee with respect to that fiscal year. If any provision of
the Plan or any agreement relating to such Performance Awards or Annual
Incentive Awards does not comply or is inconsistent with the requirements of
Code Section 162(m) or regulations thereunder, such provision shall be construed
or deemed amended to the extent necessary to conform to such requirements.
9. CHANGE IN CONTROL.
(a) EFFECT OF "CHANGE IN CONTROL." If and to the extent
provided in the Award, in the event of a "Change in Control," as defined in
Section 9(b), the following provisions shall apply:
(i) Any Award carrying a right to exercise that was
not previously exercisable and vested may become exercisable
and vested as of the time of the Change in Control, subject
only to applicable restrictions set forth in Section 10(a)
hereof, to the extent provided in the Award;
(ii) Limited SARs (and other SARs if so provided by
their terms) may become exercisable for amounts, in cash,
determined by reference to the Change in Control Price, to the
extent provided in the Award;
(iii) The restrictions, deferral of settlement, and
forfeiture conditions applicable to any other Award granted
under the Plan may lapse and such Awards may be deemed fully
vested as of the time of the Change in Control, except to the
extent of any waiver by the Participant and subject to
applicable restrictions set forth in Section 10(a) hereof, to
the extent provided in the Award; and
(iv) With respect to any such outstanding Award
subject to achievement of performance goals and conditions
under the Plan, such performance goals and other conditions
may be deemed to be met if and to the extent so provided by
the Committee in the Award agreement relating to such Award.
(b) DEFINITION OF "CHANGE IN CONTROL. A "Change in Control"
shall be deemed to have occurred upon:
(i) Approval by the shareholders of the Company of a
reorganization, merger, consolidation or other form of corporate transaction or
series of transactions, in each case, with respect to which persons who were the
shareholders of the Company immediately prior to such reorganization, merger or
consolidation or other transaction do not, immediately thereafter, own more than
50% of the combined voting power entitled to vote generally in the election of
directors of the reorganized, merged or consolidated company's then outstanding
voting securities, or a liquidation or dissolution of the Company or the sale of
all or substantially all of the assets of the Company (unless such
reorganization, merger, consolidation or other
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corporate transaction, liquidation, dissolution or sale (any such event being
referred to as a "Corporate Transaction") is subsequently abandoned);
(ii) Approval by the shareholders of the Parent
Corporation of a reorganization, merger, consolidation or other form of
corporate transaction or series of transactions, in each case, with respect to
which persons who were the shareholders of the Parent Corporation immediately
prior to such reorganization, merger or consolidation or other transaction do
not, immediately thereafter, own more than 50% of the combined voting power
entitled to vote generally in the election of directors of the reorganized,
merged or consolidated company's then outstanding voting securities, or a
liquidation or dissolution of the Parent Corporation or the sale of all or
substantially all of the assets of the Parent Corporation (unless such Corporate
Transaction is subsequently abandoned);
(iii) Individuals who, as of the date on which the
Award is granted, constitute the Board (the "Incumbent Board") cease for any
reason to constitute at least a majority of the Board, provided that any person
becoming a director subsequent to the date on which the Award was granted whose
election, or nomination for election by the Company's shareholders, was approved
by a vote of at least a majority of the directors then comprising the Incumbent
Board (other than an election or nomination of an individual whose initial
assumption of office is in connection with an actual or threatened election
contest relating to the election of the Directors of the Company, as such terms
are used in Rule 14a-11 of Regulation 14A promulgated under the Securities
Exchange Act) shall be, for purposes of this Agreement, considered as though
such person were a member of the Incumbent Board; or
(iv) the acquisition (other than from the Company) by
any person, entity or "group", within the meaning of Section 13(d)(3) or
14(d)(2) of the Securities Exchange Act, of 30% of either the then outstanding
shares of the Company's Common Stock or the combined voting power of the
Company's then outstanding voting securities entitled to vote generally in the
election of directors (hereinafter referred to as the ownership of a
"Controlling Interest") excluding, for this purpose, any acquisitions by (1) the
Company or its Subsidiaries, (2) any person, entity or "group" that as of the
date on which the Award is granted owns beneficial ownership (within the meaning
of Rule 13d-3 promulgated under the Securities Exchange Act) of a Controlling
Interest, (3) Addison Fisher and/or any entities owned and/or controlled by
Addison Fisher, or (4) any employee benefit plan of the Company or its
Subsidiaries.
(c) DEFINITION OF "CHANGE IN CONTROL PRICE." The "Change in
Control Price" means an amount in cash equal to the higher of (i) the amount of
cash and fair market value of property that is the highest price per share paid
(including extraordinary dividends) in any Corporate Transaction triggering the
Change in Control under Section 9(b)(i) hereof or any liquidation of shares
following a sale of substantially all of the assets of the Company, or (ii) the
highest Fair Market Value per share at any time during the 60-day period
preceding and the 60-day period following the Change in Control.
18
<PAGE>
10. GENERAL PROVISIONS.
(a) COMPLIANCE WITH LEGAL AND OTHER REQUIREMENTS. The Company
may, to the extent deemed necessary or advisable by the Committee or the Board,
postpone the issuance or delivery of Stock or payment of other benefits under
any Award until completion of such registration or qualification of such Stock
or other required action under any federal or state law, rule or regulation,
listing or other required action with respect to any stock exchange or automated
quotation system upon which the Stock or other Company securities are listed or
quoted, or compliance with any other obligation of the Company, as the Committee
or the Board, may consider appropriate, and may require any Participant to make
such representations, furnish such information and comply with or be subject to
such other conditions as it may consider appropriate in connection with the
issuance or delivery of Stock or payment of other benefits in compliance with
applicable laws, rules, and regulations, listing requirements, or other
obligations. The foregoing notwithstanding, in connection with a Change in
Control, the Company shall take or cause to be taken no action, and shall
undertake or permit to arise no legal or contractual obligation, that results or
would result in any postponement of the issuance or delivery of Stock or payment
of benefits under any Award or the imposition of any other conditions on such
issuance, delivery or payment, to the extent that such postponement or other
condition would represent a greater burden on a Participant than existed on the
90th day preceding the Change in Control.
(b) LIMITS ON TRANSFERABILITY; BENEFICIARIES. No Award or
other right or interest of a Participant under the Plan, including any Award or
right which constitutes a derivative security as generally defined in Rule
16a-1(c) under the Exchange Act, shall be pledged, hypothecated or otherwise
encumbered or subject to any lien, obligation or liability of such Participant
to any party (other than the Company or a Subsidiary), or assigned or
transferred by such Participant otherwise than by will or the laws of descent
and distribution or to a Beneficiary upon the death of a Participant, and such
Awards or rights that may be exercisable shall be exercised during the lifetime
of the Participant only by the Participant or his or her guardian or legal
representative, except that Awards and other rights (other than ISOs and SARs in
tandem therewith) may be transferred to one or more Beneficiaries or other
transferees during the lifetime of the Participant, and may be exercised by such
transferees in accordance with the terms of such Award, but only if and to the
extent such transfers and exercises are permitted by the Committee or the Board
pursuant to the express terms of an Award agreement (subject to any terms and
conditions which the Committee or the Board may impose thereon, and further
subject to any prohibitions or restrictions on such transfers pursuant to Rule
16b-3). A Beneficiary, transferee, or other person claiming any rights under the
Plan from or through any Participant shall be subject to all terms and
conditions of the Plan and any Award agreement applicable to such Participant,
except as otherwise determined by the Committee or the Board, and to any
additional terms and conditions deemed necessary or appropriate by the Committee
or the Board.
(c) ADJUSTMENTS. In the event that any dividend or other
distribution (whether in the form of cash, Stock, or other property),
recapitalization, forward or reverse split, reorganization, merger,
consolidation, spin-off, combination, repurchase, share exchange, liquidation,
dissolution or other similar corporate transaction or event affects the Stock
such that
19
<PAGE>
a substitution or adjustment is determined by the Committee or the Board to be
appropriate in order to prevent dilution or enlargement of the rights of
Participants under the Plan, then the Committee or the Board shall, in such
manner as it may deem equitable, substitute or adjust any or all of (i) the
number and kind of shares of Stock which may be delivered in connection with
Awards granted thereafter, (ii) the number and kind of shares of Stock by which
annual per-person Award limitations are measured under Section 5 hereof, (iii)
the number and kind of shares of Stock subject to or deliverable in respect of
outstanding Awards and (iv) the exercise price, grant price or purchase price
relating to any Award and/or make provision for payment of cash or other
property in respect of any outstanding Award. In addition, the Committee (and
the Board if and only to the extent such authority is not required to be
exercised by the Committee to comply with Code Section 162(m)) is authorized to
make adjustments in the terms and conditions of, and the criteria included in,
Awards (including Performance Awards and performance goals, and Annual Incentive
Awards and any Annual Incentive Award pool or performance goals relating
thereto) in recognition of unusual or nonrecurring events (including, without
limitation, events described in the preceding sentence, as well as acquisitions
and dispositions of businesses and assets) affecting the Company, any Subsidiary
or any business unit, or the financial statements of the Company or any
Subsidiary, or in response to changes in applicable laws, regulations,
accounting principles, tax rates and regulations or business conditions or in
view of the Committee's assessment of the business strategy of the Company, any
Subsidiary or business unit thereof, performance of comparable organizations,
economic and business conditions, personal performance of a Participant, and any
other circumstances deemed relevant; provided that no such adjustment shall be
authorized or made if and to the extent that such authority or the making of
such adjustment would cause Options, SARs, Performance Awards granted under
Section 8(b) hereof or Annual Incentive Awards granted under Section 8(c) hereof
to Participants designated by the Committee as Covered Employees and intended to
qualify as "performance-based compensation" under Code Section 162(m) and the
regulations thereunder to otherwise fail to qualify as "performance-based
compensation" under Code Section 162(m) and regulations thereunder.
(d) TAXES. The Company and any Subsidiary is authorized to
withhold from any Award granted, any payment relating to an Award under the
Plan, including from a distribution of Stock, or any payroll or other payment to
a Participant, amounts of withholding and other taxes due or potentially payable
in connection with any transaction involving an Award, and to take such other
action as the Committee or the Board may deem advisable to enable the Company
and Participants to satisfy obligations for the payment of withholding taxes and
other tax obligations relating to any Award. This authority shall include
authority to withhold or receive Stock or other property and to make cash
payments in respect thereof in satisfaction of a Participant's tax obligations,
either on a mandatory or elective basis in the discretion of the Committee.
(e) CHANGES TO THE PLAN AND AWARDS. The Board may amend,
alter, suspend, discontinue or terminate the Plan, or the Committee's authority
to grant Awards under the Plan, without the consent of stockholders or
Participants, except that any amendment or alteration to the Plan shall be
subject to the approval of the Company's stockholders not later than the annual
meeting next following such Board action if such stockholder approval is
required by any federal
20
<PAGE>
or state law or regulation (including, without limitation, Rule 16b-3 or Code
Section 162(m)) or the rules of any stock exchange or automated quotation system
on which the Stock may then be listed or quoted, and the Board may otherwise, in
its discretion, determine to submit other such changes to the Plan to
stockholders for approval; provided that, without the consent of an affected
Participant, no such Board action may materially and adversely affect the rights
of such Participant under any previously granted and outstanding Award. The
Committee or the Board may waive any conditions or rights under, or amend,
alter, suspend, discontinue or terminate any Award theretofore granted and any
Award agreement relating thereto, except as otherwise provided in the Plan;
provided that, without the consent of an affected Participant, no such Committee
or the Board action may materially and adversely affect the rights of such
Participant under such Award. Notwithstanding anything in the Plan to the
contrary, if any right under this Plan would cause a transaction to be
ineligible for pooling of interest accounting that would, but for the right
hereunder, be eligible for such accounting treatment, the Committee or the Board
may modify or adjust the right so that pooling of interest accounting shall be
available, including the substitution of Stock having a Fair Market Value equal
to the cash otherwise payable hereunder for the right which caused the
transaction to be ineligible for pooling of interest accounting; provided that,
without the consent of an affected Participant, no such Committee or Board
action may materially and adversely affect the rights of such Participant under
any previously granted and outstanding Award.
(f) LIMITATION ON RIGHTS CONFERRED UNDER PLAN. Neither the
Plan nor any action taken hereunder shall be construed as (i) giving any
Eligible Person or Participant the right to continue as an Eligible Person or
Participant or in the employ of the Company or a Subsidiary; (ii) interfering in
any way with the right of the Company or a Subsidiary to terminate any Eligible
Person's or Participant's employment at any time, (iii) giving an Eligible
Person or Participant any claim to be granted any Award under the Plan or to be
treated uniformly with other Participants and employees, or (iv) conferring on a
Participant any of the rights of a stockholder of the Company unless and until
the Participant is duly issued or transferred shares of Stock in accordance with
the terms of an Award.
(g) UNFUNDED STATUS OF AWARDS; CREATION OF TRUSTS. The Plan is
intended to constitute an "unfunded" plan for incentive and deferred
compensation. With respect to any payments not yet made to a Participant or
obligation to deliver Stock pursuant to an Award, nothing contained in the Plan
or any Award shall give any such Participant any rights that are greater than
those of a general creditor of the Company; provided that the Committee may
authorize the creation of trusts and deposit therein cash, Stock, other Awards
or other property, or make other arrangements to meet the Company's obligations
under the Plan. Such trusts or other arrangements shall be consistent with the
"unfunded" status of the Plan unless the Committee otherwise determines with the
consent of each affected Participant. The trustee of such trusts may be
authorized to dispose of trust assets and reinvest the proceeds in alternative
investments, subject to such terms and conditions as the Committee or the Board
may specify and in accordance with applicable law.
(h) NONEXCLUSIVITY OF THE PLAN. Neither the adoption of the
Plan by the Board nor its submission to the stockholders of the Company for
approval shall be construed as creating
21
<PAGE>
any limitations on the power of the Board or a committee thereof to adopt such
other incentive arrangements as it may deem desirable including incentive
arrangements and awards which do not qualify under Code Section 162(m).
(i) PAYMENTS IN THE EVENT OF FORFEITURES; FRACTIONAL SHARES.
Unless otherwise determined by the Committee or the Board, in the event of a
forfeiture of an Award with respect to which a Participant paid cash or other
consideration, the Participant shall be repaid the amount of such cash or other
consideration. No fractional shares of Stock shall be issued or delivered
pursuant to the Plan or any Award. The Committee or the Board shall determine
whether cash, other Awards or other property shall be issued or paid in lieu of
such fractional shares or whether such fractional shares or any rights thereto
shall be forfeited or otherwise eliminated.
(j) GOVERNING LAW. The validity, construction and effect of
the Plan, any rules and regulations under the Plan, and any Award agreement
shall be determined in accordance with the laws of the State of Delaware without
giving effect to principles of conflicts of laws, and applicable federal law.
(k) PLAN EFFECTIVE DATE AND STOCKHOLDER APPROVAL; TERMINATION
OF PLAN. The Plan shall become effective on the Effective Date, subject to
subsequent approval within 12 months of its adoption by the Board by
stockholders of the Company eligible to vote in the election of directors, by a
vote sufficient to meet the requirements of Code Sections 162(m) and 422, Rule
16b-3 under the Exchange Act, applicable NASDAQ requirements, and other laws,
regulations, and obligations of the Company applicable to the Plan. Awards may
be granted subject to stockholder approval, but may not be exercised or
otherwise settled in the event stockholder approval is not obtained. The Plan
shall terminate at such time as no shares of Common Stock remain available for
issuance under the Plan and the Company has no further rights or obligations
with respect to outstanding Awards under the Plan.
22
EXHIBIT 10.4
SMARTDISK CORPORATION
1999 EMPLOYEE STOCK PURCHASE PLAN
<PAGE>
SMARTDISK CORPORATION
1999 EMPLOYEE STOCK PURCHASE PLAN
1. Purpose....................................................................1
2. Definitions................................................................1
3. Eligibility................................................................3
4. Offering Periods...........................................................3
5. Election to Participate....................................................4
6. Participant Contributions..................................................4
7. Grant of Option............................................................5
8. Exercise Price.............................................................6
9. Exercise of Options........................................................6
10. Delivery...................................................................6
11. Withdrawal; Termination of Employment......................................7
12. Stock......................................................................7
13. Administration.............................................................7
14. Designation of Beneficiary.................................................8
15. Transferability............................................................8
16. Participant Accounts.......................................................8
17. Adjustments Upon Changes in Capitalization; Corporate Transactions.........8
18. Amendment of the Plan......................................................9
19. Termination of the Plan...................................................10
20. Notices...................................................................10
21. Effective Date............................................................10
22. Conditions Upon Issuance of Shares........................................10
23. Expenses of the Plan......................................................10
24. No Employment Rights......................................................11
25. Applicable Law............................................................11
26. Additional Restrictions of Rule 16b-3.....................................11
<PAGE>
SMARTDISK CORPORATION
1999 EMPLOYEE STOCK PURCHASE PLAN
1. PURPOSE. The purpose of the Plan is to provide incentive for present
and future employees of the Company and any Designated Subsidiary to acquire a
proprietary interest (or increase an existing proprietary interest) in the
Company through the purchase of Common Stock. It is the Company's intention that
the Plan qualify as an "employee stock purchase plan" under Section 423 of the
Code. Accordingly, the provisions of the Plan shall be administered, interpreted
and construed in a manner consistent with the requirements of that section of
the Code.
2. DEFINITIONS.
(a) "APPLICABLE PERCENTAGE" means the percentage specified in
Section 8, subject to adjustment by the Committee as provided in Section 8.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as
amended, and any successor thereto.
(d) "COMMITTEE" means the committee appointed by the Board to
administer the Plan as described in Section 13 of the Plan or, if no such
Committee is appointed, the Board.
(e) "COMMON STOCK" means the Company's common stock, par value
$.001 per share.
(f) "COMPANY" means SMARTDISK CORPORATION, a Delaware
corporation.
(g) "COMPENSATION" means, with respect to each Participant for
each pay period, the full base salary, overtime, bonuses and commissions paid to
such Participant by the Company or a Designated Subsidiary. Except as otherwise
determined by the Committee, "Compensation" does not include: (i) any amounts
contributed by the Company or a Designated Subsidiary to any pension plan; (ii)
any automobile or relocation allowances (or reimbursement for any such
expenses); (iii) any amounts paid as a starting bonus or finder's fee; (iv) any
amounts realized from the exercise of any stock options or incentive awards; (v)
any amounts paid by the Company or a Designated Subsidiary for other fringe
benefits, such as health and welfare, hospitalization and group life insurance
benefits, or perquisites, or paid in lieu of such benefits, or (vi) other
similar forms of extraordinary compensation.
(h) "CONTINUOUS STATUS AS AN EMPLOYEE" means the absence of
any interruption or termination of service as an Employee. Continuous Status as
an Employee shall not be considered interrupted in the case of a leave of
absence agreed to in writing by the Company or the
<PAGE>
Designated Subsidiary that employs the Employee, provided that such leave is for
a period of not more than 90 days or reemployment upon the expiration of such
leave is guaranteed by contract or statute.
(i) "DESIGNATED SUBSIDIARIES" means the Subsidiaries that have
been designated by the Board from time to time in its sole discretion as
eligible to participate in the Plan.
(j) "EMPLOYEE" means any person, including an Officer, whose
customary employment with the Company or one of its Designated Subsidiaries is
at least twenty (20) hours per week and more than five (5) months in any
calendar year.
(k) "ENTRY DATE" means the first day of each Exercise Period.
(l) "EXCHANGE ACT" means the Securities Exchange Act of 1934,
as amended.
(m) "EXERCISE DATE" means the last Trading Day ending on or
before December 31, 1999, and the last Trading Day ending on or before each June
30 and December 31 thereafter.
(n) "EXERCISE PERIOD" means, for any Offering Period, each
period commencing on the Offering Date and on the day after each Exercise Date,
and terminating on the immediately following Exercise Date.
(o) "EXERCISE PRICE" means the price per share of Common Stock
offered in a given Offering Period determined as provided in Section 8.
(p) "FAIR MARKET VALUE" means, with respect to a share of
Common Stock, the Fair Market Value as determined under Section 7(b).
(q) "FIRST OFFERING DATE" means the commencement date of the
initial public offering contemplated by the Registration Statement on Form S-1
filed by the Company with the Securities and Exchange Commission.
(r) "OFFERING DATE" means the first Trading Day of each
Offering Period; PROVIDED, that in the case of an individual who becomes
eligible to become a Participant under Section 3 after the first Trading Day of
an Offering Period, the term "Offering Date" shall mean the first Trading Day of
the Exercise Period coinciding with or next succeeding the day on which that
individual becomes eligible to become a Participant. Options granted after the
first day of an Offering Period will be subject to the same terms as the options
granted on the first Trading Day of such Offering Period except that they will
have a different grant date (thus, potentially, a different exercise price) and,
because they expire at the same time as the options granted on the first Trading
Day of such Offering Period, a shorter term.
(s) "OFFERING PERIOD" means (i) with respect to the first
Offering Period, the period beginning on the First Offering Date and ending on
December 31, 2000, and (ii) with respect to each Offering Period thereafter, and
subject to adjustment as provided in Section 4, the period
2
<PAGE>
beginning on January 1 in the immediately succeeding calendar year and ending on
the last Trading Day of that calendar year.
(t) "OFFICER" means a person who is an officer of the Company
within the meaning of Section 16 under the Exchange Act and the rules and
regulations promulgated thereunder.
(u) "PARTICIPANT" means an Employee who has elected to
participate in the Plan by filing an enrollment agreement with the Company as
provided in Section 5 of the Plan.
(v) "PLAN" shall mean this 1999 Employee Stock Purchase Plan.
(w) "PLAN CONTRIBUTIONS" means, with respect to each
Participant, the after-tax payroll deductions withheld from the Compensation of
the Participant and contributed to the Plan for the Participant as provided in
Section 6 of the Plan and any other amounts contributed to the Plan for the
Participant in accordance with the terms of the Plan.
(x) "SUBSIDIARY" shall mean any corporation, domestic or
foreign, of which the Company owns, directly or indirectly, 50% or more of the
total combined voting power of all classes of stock, and that otherwise
qualifies as a "subsidiary corporation" within the meaning of Section 424(f) of
the Code.
(y) "TRADING DAY" shall mean a day on which the national stock
exchanges and the Nasdaq system are open for trading.
3. ELIGIBILITY.
(a) Any Employee who is an Employee as of the Offering Date of
a given Offering Period shall be eligible to become a Participant as of any
Entry Date within that Offering Period under the Plan, subject to the
requirements of Section 5(a) and the limitations imposed by Section 423(b) of
the Code.
(b) Notwithstanding any provision of the Plan to the contrary,
no Participant shall be granted an option under the Plan (i) to the extent that
if, immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own stock and/or hold outstanding options to purchase stock possessing 5%
or more of the total combined voting power or value of all classes of stock of
the Company or of any Subsidiary of the Company, or (ii) to the extent that his
or her rights to purchase stock under all employee stock purchase plans of the
Company and its Subsidiaries intended to qualify under Section 423 of the Code
to accrue at a rate which exceeds $25,000 of fair market value of stock
(determined at the time such option is granted) for each calendar year in which
such option is outstanding at any time.
4. OFFERING PERIODS. The Plan shall be implemented by a series of
consecutive Offering Periods. The first Offering Period shall commence on the
First Offering Date, the second Offering Period shall commence on the first
Trading Day in January, 2001, and succeeding Offering Periods
3
<PAGE>
shall commence on the first Trading Day in each succeeding calendar year (or at
such other time or times as may be determined by the Committee). The Committee
shall have the power to change the duration and/or the frequency of Offering
Periods with respect to future offerings if such change is announced at least
five (5) days prior to the scheduled beginning of the first Offering Period to
be affected.
5. ELECTION TO PARTICIPATE.
(a) An eligible Employee may elect to participate in the Plan
commencing on any Entry Date by completing an enrollment agreement on the form
provided by the Company and filing the enrollment agreement with the Company on
or prior to such Entry Date, unless a later time for filing the enrollment
agreement is set by the Committee for all eligible Employees with respect to a
given offering. The enrollment agreement shall set forth the percentage of the
Participant's Compensation that is to be withheld by payroll deduction pursuant
to the Plan.
(b) Except as otherwise determined by the Committee under
rules applicable to all Participants, payroll deductions for a Participant shall
commence on the first payroll following the Entry Date on which the Participant
elects to participate in accordance with Section 5(a) and shall end on the last
payroll in the Offering Period, unless sooner terminated by the Participant as
provided in Section 11.
(c) Unless a Participant elects otherwise prior to the last
Exercise Date of an Offering Period, such Participant shall be deemed (i) to
have elected to participate in the immediately succeeding Offering Period (and,
for purposes of such Offering Period such Participant's "Entry Date" shall be
deemed to be the first day of such Offering Period) and (ii) to have authorized
the same payroll deduction for such immediately succeeding Offering Period as
was in effect for such Participant immediately prior to the commencement of such
succeeding Offering Period.
6. PARTICIPANT CONTRIBUTIONS.
(a) Except as otherwise authorized by the Committee pursuant
to Section 6(d) below, all Participant contributions to the Plan shall be made
only by payroll deductions. At the time a Participant files the enrollment
agreement with respect to an Offering Period, the Participant may authorize
payroll deductions to be made on each payroll date during the portion of the
Offering Period that he or she is a Participant in an amount not less than 1%
and not more than 15% of the Participant's Compensation on each payroll date
during the portion of the Offering Period that he or she is a Participant (or
subsequent Offering Periods as provided in Section 5(c)). The amount of payroll
deductions shall be a whole percentage (i.e., 1%, 2%, 3%, etc.) of the
Participant's Compensation.
(b) A Participant may discontinue his or her participation in
the Plan as provided in Section 11, or may decrease or increase the rate or
amount of his or her payroll deductions during such Offering Period (within the
limitations of Section 6(a) above) by completing and filing with the Company a
new enrollment agreement authorizing a change in the rate or amount of payroll
4
<PAGE>
deductions; PROVIDED, that a Participant may not change the rate or amount of
his or her payroll deductions more than once in any Exercise Period. The change
in rate or amount shall be effective with the first full payroll period
following ten (10) business days after the Company's receipt of the new
enrollment agreement.
(c) Notwithstanding the foregoing, to the extent necessary to
comply with Section 423(b)(8) of the Code and Section 3(b) hereof, a
Participant's payroll deductions may be decreased to 0% at such time during any
Exercise Period which is scheduled to end during the current calendar year that
the aggregate of all payroll deductions accumulated with respect to such
Exercise Period and any other Exercise Period ending within the same calendar
year are equal to the product of $25,000 multiplied by the Applicable Percentage
for the calendar year. Payroll deductions shall recommence at the rate provided
in the Participant's enrollment agreement at the beginning of the following
Exercise Period which is scheduled to end in the following calendar year, unless
terminated by the Participant as provided in Section 11.
(d) Notwithstanding anything to the contrary in the foregoing,
but subject to the limitations set forth in Section 3(b), the Committee may
permit Participants to make after-tax contributions to the Plan at such times
and subject to such terms and conditions as the Committee may in its discretion
determine. All such additional contributions shall be made in a manner
consistent with the provisions of Section 423 of the Code or any successor
thereto, and shall be held in Participants' accounts and applied to the purchase
of shares of Common Stock pursuant to options granted under this Plan in the
same manner as payroll deductions contributed to the Plan as provided above.
(e) All Plan Contributions made for a Participant shall be
deposited in the Company's general corporate account and shall be credited to
the Participant's account under the Plan. No interest shall accrue or be
credited with respect to a Participant's Plan Contributions. All Plan
Contributions received or held by the Company may be used by the Company for any
corporate purpose, and the Company shall not be obligated to segregate or
otherwise set apart such Plan Contributions from any other corporate funds.
7. GRANT OF OPTION.
(a) On a Participant's Entry Date, subject to the limitations
set forth in Sections 3(b) and 12(a), the Participant shall be granted an option
to purchase on each subsequent Exercise Date during the Offering Period in which
such Entry Date occurs (at the Exercise Price determined as provided in Section
8 below) up to a number of shares of Common Stock determined by dividing such
Participant's Plan Contributions accumulated prior to such Exercise Date and
retained in the Participant's account as of such Exercise Date by the Exercise
Price; PROVIDED, that the maximum number of shares an Employee may purchase
during any Exercise Period shall be 1,000 shares. The Fair Market Value of a
share of Common Stock shall be determined as provided in Section 7(b).
(b) The Fair Market Value of a share of Common Stock on a
given date shall be determined by the Committee in its discretion; PROVIDED,
that if there is a public market for the Common Stock, the Fair Market Value per
share shall be either (i) the closing price of the Common
5
<PAGE>
Stock on such date (or, in the event that the Common Stock is not traded on such
date, on the immediately preceding trading date), as reported by the National
Association of Securities Dealers Automated Quotation (Nasdaq) National Market
System, (ii) if such price is not reported, the average of the bid and asked
prices for the Common Stock on such date (or, in the event that the Common Stock
is not traded on such date, on the immediately preceding trading date), as
reported by Nasdaq, (iii) in the event the Common Stock is listed on a stock
exchange, the closing price of the Common Stock on such exchange on such date
(or, in the event that the Common Stock is not traded on such date, on the
immediately preceding trading date), as reported in The Wall Street Journal, or
(iv) if no such quotations are available for a date within a reasonable time
prior to the valuation date, the value of the Common Stock as determined by the
Committee using any reasonable means. For purposes of the First Offering Date,
the Fair Market Value of a share of Common Stock shall be the Price to Public as
set forth in the final prospectus filed by the Company with the Securities and
Exchange Commission pursuant to Rule 424 under the Securities Act of 1933, as
amended.
8. EXERCISE PRICE. The Exercise Price per share of Common Stock offered
to each Participant in a given Offering Period shall be the lower of: (i) the
Applicable Percentage of the greater of (A) the Fair Market Value of a share of
Common Stock on the Offering Date or (B) the Fair Market Value of a share of
Common Stock on the Entry Date on which the Employee elects to become a
Participant within the Offering Period or (ii) the Applicable Percentage of the
Fair Market Value of a share of Common Stock on the Exercise Date. The
Applicable Percentage with respect to each Offering Period shall be 85%, unless
and until such Applicable Percentage is increased by the Committee, in its sole
discretion, provided that any such increase in the Applicable Percentage with
respect to a given Offering Period must be established not less than fifteen
(15) days prior to the Offering Date thereof.
9. EXERCISE OF OPTIONS. Unless the Participant withdraws from the Plan
as provided in Section 11, the Participant's option for the purchase of shares
will be exercised automatically on each Exercise Date, and the maximum number of
full shares subject to such option shall be purchased for the Participant at the
applicable Exercise Price with the accumulated Plan Contributions then credited
the Participant's account under the Plan. During a Participant's lifetime, a
Participant's option to purchase shares hereunder is exercisable only by the
Participant.
10. DELIVERY. As promptly as practicable after each Exercise Date, the
Company shall arrange for the delivery to each Participant (or the Participant's
beneficiary), as appropriate, or to a custodial account for the benefit of each
Participant (or the Participant's beneficiary) as appropriate, of a certificate
representing the shares purchased upon exercise of such Participant's option.
Any amount remaining to the credit of a Participant's account after the purchase
of shares by such Participant on an Exercise Date, or which is insufficient to
purchase a full share of Common Stock, shall be carried over to the next
Exercise Period if the Participant continues to participate in the Plan or, if
the Participant does not continue to participate, shall be returned to the
Participant.
11. WITHDRAWAL; TERMINATION OF EMPLOYMENT.
(a) A Participant may withdraw from the Plan at any time by
giving written notice to the Company. All of the Plan Contributions credited to
the Participant's account and not
6
<PAGE>
yet invested in Common Stock will be paid to the Participant as soon as
administratively practicable after receipt of the Participant's notice of
withdrawal, the Participant's option to purchase shares pursuant to the Plan
automatically will be terminated, and no further payroll deductions for the
purchase of shares will be made for the Participant's account. Payroll
deductions will not resume on behalf of a Participant who has withdrawn from the
Plan (a "Former Participant") unless the Former Participant enrolls in a
subsequent Offering Period in accordance with Section 5(a).
(b) Upon termination of the Participant's Continuous Status as
an Employee prior to any Exercise Date for any reason, including retirement or
death, the Plan Contributions credited to the Participant's account and not yet
invested in Common Stock will be returned to the Participant or, in the case of
death, to the Participant's beneficiary as determined pursuant to Section 14,
and the Participant's option to purchase shares under the Plan will
automatically terminate.
(c) A Participant's withdrawal from an Offering Period will
not have any effect upon the Participant's eligibility to participate in
succeeding Offering Periods or in any similar plan which may hereafter be
adopted by the Company.
12. STOCK.
(a) The maximum number of shares of the Company's Common Stock
that shall be made available for sale under the Plan shall be Four Hundred Sixty
Five Thousand (465,000) shares, subject to adjustment as provided in Section 17.
Shares of Common Stock subject to the Plan may be newly issued shares or shares
reacquired in private transactions or open market purchases. If and to the
extent that any right to purchase reserved shares shall not be exercised by any
Participant for any reason or if such right to purchase shall terminate as
provided herein, shares that have not been so purchased hereunder shall again
become available for the purpose of the Plan unless the Plan shall have been
terminated, but all shares sold under the Plan, regardless of source, shall be
counted against the limitation set forth above.
(b) A Participant will have no interest or voting right in
shares covered by his option until such option has been exercised.
(c) Shares to be delivered to a Participant under the Plan
will be registered in the name of the Participant or in the name of the
Participant and his or her spouse, as requested by the Participant.
13. ADMINISTRATION.
(a) The Plan shall be administered by the Committee. The
Committee shall have the authority to interpret the Plan, to prescribe, amend
and rescind rules and regulations relating to the Plan, and to make all other
determinations necessary or advisable for the administration of the Plan. The
administration, interpretation, or application of the Plan by the Committee
shall be final, conclusive and binding upon all persons.
(b) Notwithstanding the provisions of Subsection (a) of this
Section 13, in the event that Rule 16b-3 promulgated under the Exchange Act or
any successor provision thereto
7
<PAGE>
("Rule 16b-3") provides specific requirements for the administrators of plans of
this type, the Plan shall only be administered by such body and in such a manner
as shall comply with the applicable requirements of Rule 16b-3. Unless permitted
by Rule 16b-3, no discretion concerning decisions regarding the Plan shall be
afforded to any person that is not "disinterested" as that term is used in Rule
16b-3.
14. DESIGNATION OF BENEFICIARY.
(a) A Participant may file a written designation of a
beneficiary who is to receive any shares and cash, if any, from the
Participant's account under the Plan in the event of the Participant's death
subsequent to an Exercise Date on which the Participant's option hereunder is
exercised but prior to delivery to the Participant of such shares and cash. In
addition, a Participant may file a written designation of a beneficiary who is
to receive any cash from the Participant's account under the Plan in the event
of the Participant's death prior to the exercise of the option.
(b) A Participant's beneficiary designation may be changed by
the Participant at any time by written notice. In the event of the death of a
Participant and in the absence of a beneficiary validly designated under the
Plan who is living at the time of such Participant's death, the Company shall
deliver such shares and/or cash to the executor or administrator of the estate
of the Participant, or if no such executor or administrator has been appointed
(to the knowledge of the Company), the Company, in its discretion, may deliver
such shares and/or cash to the spouse or to any one or more dependents or
relatives of the Participant, or if no spouse, dependent or relative is known to
the Company, then to such other person as the Company may designate.
15. TRANSFERABILITY. Neither Plan Contributions credited to a
Participant's account nor any rights to exercise any option or receive shares of
Common Stock under the Plan may be assigned, transferred, pledged or otherwise
disposed of in any way (other than by will or the laws of descent and
distribution, or as provided in Section 14). Any attempted assignment, transfer,
pledge or other distribution shall be without effect, except that the Company
may treat such act as an election to withdraw funds in accordance with Section
11.
16. PARTICIPANT ACCOUNTS. Individual accounts will be maintained for
each Participant in the Plan to account for the balance of his Plan
Contributions and options issued and shares purchased under the Plan. Statements
of account will be given to Participants semi-annually in due course following
each Exercise Date, which statements will set forth the amounts of payroll
deductions, the per share purchase price, the number of shares purchased and the
remaining cash balance, if any.
17. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION; CORPORATE TRANSACTIONS.
(a) If the outstanding shares of Common Stock are increased or
decreased, or are changed into or are exchanged for a different number or kind
of shares, as a result of one or more reorganizations, restructurings,
recapitalizations, reclassifications, stock splits, reverse stock splits, stock
dividends or the like, upon authorization of the Committee, appropriate
adjustments shall be made in the number and/or kind of shares, and the per-share
option price thereof, which may be issued in the aggregate and to any
Participant upon exercise of options granted under the Plan.
8
<PAGE>
(b) In the event of the proposed dissolution or liquidation of
the Company, the Offering Period will terminate immediately prior to the
consummation of such proposed action, unless otherwise provided by the
Committee. In the event of a proposed sale of all or substantially all of the
Company's assets, or the merger of the Company with or into another corporation
(each, a "Sale Transaction"), each option under the Plan shall be assumed or an
equivalent option shall be substituted by such successor corporation or a parent
or subsidiary of such successor corporation, unless the Committee determines, in
the exercise of its sole discretion and in lieu of such assumption or
substitution, to shorten the Exercise Period then in progress by setting a new
Exercise Date (the "New Exercise Date"). If the Committee shortens the Exercise
Period then in progress in lieu of assumption or substitution in the event of a
Sale Transaction, the Committee shall notify each Participant in writing, at
least ten (10) days prior to the New Exercise Date, that the exercise date for
such Participant's option has been changed to the New Exercise Date and that
such Participant's option will be exercised automatically on the New Exercise
Date, unless prior to such date the Participant has withdrawn from the Plan as
provided in Section 11. For purposes of this Section 17(b), an option granted
under the Plan shall be deemed to have been assumed if, following the Sale
Transaction, the option confers the right to purchase, for each share of option
stock subject to the option immediately prior to the Sale Transaction, the
consideration (whether stock, cash or other securities or property) received in
the Sale Transaction by holders of Common Stock for each share of Common Stock
held on the effective date of the Sale Transaction (and if such holders were
offered a choice of consideration, the type of consideration chosen by the
holders of a majority of the outstanding shares of Common Stock); PROVIDED, that
if the consideration received in the Sale Transaction was not solely common
stock of the successor corporation or its parent (as defined in Section 424(e)
of the Code), the Committee may, with the consent of the successor corporation
and the Participant, provide for the consideration to be received upon exercise
of the option to be solely common stock of the successor corporation or its
parent equal in fair market value to the per share consideration received by the
holders of Common Stock in the Sale Transaction.
(c) In all cases, the Committee shall have sole discretion to
exercise any of the powers and authority provided under this Section 17, and the
Committee's actions hereunder shall be final and binding on all Participants. No
fractional shares of stock shall be issued under the Plan pursuant to any
adjustment authorized under the provisions of this Section 17.
18. AMENDMENT OF THE PLAN. The Board or the Committee may at any time,
or from time to time, amend the Plan in any respect; PROVIDED, that (i) no such
amendment may make any change in any option theretofore granted which adversely
affects the rights of any Participant and (ii) the Plan may not be amended in
any way that will cause rights issued under the Plan to fail to meet the
requirements for employee stock purchase plans as defined in Section 423 of the
Code or any successor thereto. To the extent necessary to comply with Rule 16b-3
under the Exchange Act, Section 423 of the Code, or any other applicable law or
regulation), the Company shall obtain shareholder approval of any such
amendment.
19. TERMINATION OF THE PLAN.
The Plan and all rights of Employees hereunder shall terminate on the
earliest of:
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<PAGE>
(a) the Exercise Date that Participants become entitled to
purchase a number of shares greater than the number of reserved shares remaining
available for purchase under the Plan;
(b) such date as is determined by the Board in its discretion;
or
(c) the last Exercise Date immediately preceding the tenth
(10th) anniversary of the Plan's effective date.
In the event that the Plan terminates under circumstances described in
Section 19(a) above, reserved shares remaining as of the termination date shall
be sold to Participants on a PRO RATA basis.
20. NOTICES. All notices or other communications by a Participant to
the Company under or in connection with the Plan shall be deemed to have been
duly given when received in the form specified by the Company at the location,
or by the person, designated by the Company for the receipt thereof.
21. EFFECTIVE DATE. Subject to adoption of the Plan by the Board, the
Plan shall become effective on the First Offering Date. The Board shall submit
the Plan to the shareholders of the Company for approval within twelve months
after the date the Plan is adopted by the Board.
22. CONDITIONS UPON ISSUANCE OF SHARES.
(a) The Plan, the grant and exercise of options to purchase
shares under the Plan, and the Company's obligation to sell and deliver shares
upon the exercise of options to purchase shares shall be subject to compliance
with all applicable federal, state and foreign laws, rules and regulations and
the requirements of any stock exchange on which the shares may then be listed.
(b) The Company may make such provisions as it deems
appropriate for withholding by the Company pursuant to federal or state tax laws
of such amounts as the Company determines it is required to withhold in
connection with the purchase or sale by a Participant of any Common Stock
acquired pursuant to the Plan. The Company may require a Participant to satisfy
any relevant tax requirements before authorizing any issuance of Common Stock to
such Participant.
23. EXPENSES OF THE PLAN. All costs and expenses incurred in
administering the Plan shall be paid by the Company, except that any stamp
duties or transfer taxes applicable to participation in the Plan may be charged
to the account of such Participant by the Company.
24. NO EMPLOYMENT RIGHTS. The Plan does not, directly or indirectly,
create any right for the benefit of any employee or class of employees to
purchase any shares under the Plan, or create in any employee or class of
employees any right with respect to continuation of employment by the Company,
and it shall not be deemed to interfere in any way with the Company's right to
terminate, or otherwise modify, an employee's employment at any time.
25. APPLICABLE LAW. The laws of the State of Delaware shall govern all
matter relating to this Plan except to the extent (if any) superseded by the
laws of the United States.
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26. ADDITIONAL RESTRICTIONS OF RULE 16B-3. The terms and conditions of
options granted hereunder to, and the purchase of shares by, persons subject to
Section 16 of the Exchange Act shall comply with the applicable provisions of
Rule 16b-3. This Plan shall be deemed to contain, and such options shall
contain, and the shares issued upon exercise thereof shall be subject to, such
additional conditions and restrictions as may be required by Rule 16b-3 to
qualify for the maximum exemption from Section 16 of the Exchange Act with
respect to Plan transactions.
Exhibit 10.8
LICENSE AGREEMENT
THIS AGREEMENT made and entered into as of May 26, 1998 by and between
Toshiba Corporation, a corporation of Japan, having its principal office at 1-1,
Shibaura 1-chome, Minato-ku, Tokyo 105-8001, Japan (hereinafter called
'Toshiba"), and SmartDisk Corporation, a corporation of the state of Delaware,
the United States, having its principal office at 3506 Mercantile Avenue,
Naples, Florida 34104 (hereinafter called "SDC");
WITNESSETH:
WHEREAS, Toshiba and Phoenix House Investments, L.L.C., a Delaware
limited liability company ("Limited"), entered into the Joint Venture Agreement
dated February 24, 1998 (the "JV Agreement") for the formation of SmartDisk
Corporation ("SDC");
WHEREAS, SDC intends to develop, manufacture and sell the floppy disk
adapter named FlashPath for allowing reading and/or writing Toshiba's SmartMedia
(SSFDC) cards, and for this purpose desires to obtain from Toshiba necessary
license under Toshiba's patents, and Toshiba is willing to grant the same in
accordance with the terms and conditions hereinafter set forth; and
WHEREAS, Toshiba and SDC each represents that it is fully authorized to
deal generally with and to make an agreement respecting the subject matter
hereof;
NOW, THEREFORE, in consideration of the premises and mutual covenants
hereinafter contained, the parties hereto agree as follows:
ARTICLE 1 DEFINITIONS
For the purpose of this Agreement:
1.1 "Licensed Product" means a floppy disk adapter referenced as FlashPath as
described in the Business Plan for allowing reading and/or writing Toshiba's
SmartMedia.
1.2 "SmartMedia" means Toshiba's storage media using NAND flash memory with
dimensions of 37.0 X 45.0 X 0.76mm and revision, modification or improvement
thereof.
1.3 "Licensed Patents" means patents and patent applications relating to
SmartMedia set forth in Exhibit A hereto and their foreign counterparts, and any
reissues, reexarninations, renewals, extensions, continuations and
continuations-in-part with respect thereto.
1.4 "Effective Date" means the date of the execution of this Agreement by the
parties hereto.
1.5 "Business Plan" means a Business Plan adopted and approved by Toshiba and
Limited pursuant to Section 1.4 of the JV Agreement.
ARTICLE 2 LICENSES
2.1 Toshiba hereby grants to SDC, during the term of this Agreement, a
non-exclusive, non-transferable and non-assignable license under Licensed
Patents, without the right to grant sublicense,
<PAGE>
to make, have made, use, offer for sale, sell, have sold or otherwise dispose of
Licensed Products in all countries of the world.
2.2 Toshiba makes no representation that Licensed Products manufactured, used,
sold or otherwise disposed of under the licenses granted to SDC hereunder will
not infringe patents of third parties, and Toshiba shall not be liable, either
directly or as an indemnitor or otherwise, to SDC, its customer, mediate or
immediate, for any infringement of third parties patents.
2.3 Toshiba is not aware of any basis on which Licensed Patents, or any portion
thereof, are invalid or unenforceable, and as of the date hereof Toshiba is not
aware of patents and patent applications relating to SmartMedia held by it which
are necessary to conduct SDC's business related to Licensed Products as
contemplated in the Business Plan other than those licensed to SDC under this
Agreement. Toshiba makes no other representation and assumes no responsibility
concerning the scope, validity, enforcement or maintenance of any Licensed
Patents, and the amount of any compensation agreed to be paid hereunder by SDC
shall not be reduced or otherwise affected thereby.
ARTICLE 3 COMPENSATION
3.1 In consideration of the license granted to SDC hereunder, SDC shall pay
Toshiba a royalty at the rate of 0.5% of the Net Selling Price (hereinafter
defined) of all Licensed Products, sold or otherwise disposed of by or on behalf
of SDC prior to and during the term of this Agreement.
3.2 The royalty shall be paid quarterly within thirty (30) days after the end of
each calendar quarter during the term of this Agreement and after the date of
the expiration or termination of this Agreement. However, the first royalty
shall cover Licensed Products sold prior to the Effective Date and during the
period from Effective Date to the end of the calendar quarter to which Effective
Date belongs.
3.3 For the purpose of calculating the royalty payable hereunder, the term "Net
Selling Price" means the gross invoice price of Licensed Products sold by SDC in
normal commercial transactions, less the following items of expenses to the
extent to which they are actually paid or allowed to be paid and are included in
the gross invoice price:
3.3.1 normal discount actually granted;
3.3.2 insurance fees, packing and transportation charges as invoiced to
customers; and
3.3.3 duties and sales taxes actually incurred and paid by SDC in
connection with the delivery of such Licensed Products
3.4 In case Licensed Products are sold by SDC to any subsidiary or affiliated
company of SDC or used or otherwise disposed of by SDC, the term "Net Selling
Price" for the purpose of computing the royalty hereunder shall be SDC's then
current list price (subject to listed volume discounts generally available as
listed on such price list), or, if SDC has no list price, at the Licensed
Product's fair market values as determined in good faith by Toshiba.
3.5 Licensed Products shall be considered as used, sold or otherwise disposed of
when billed out or, if not billed out, when delivered, shipped, mailed, used or
set aside for subsequent use by SDC. Upon expiration or termination of this
Agreement, all Licensed Products which have been manufactured but not yet used,
sold or otherwise disposed of, or are in the process of being manufactured shall
be considered as sold and therefore shall be subject to the royalty.
2
<PAGE>
3.6 SDC shall submit certified written statements of Licensed Products to
Toshiba quarterly within thirty (30) days after the end of each calendar quarter
during the term of this Agreement, and after the date of the expiration or
termination of this Agreement, specifying the quantities of the Licensed
Products sold, the Net Selling Prices of all model numbers of Licensed Products
used, sold or otherwise disposed of under this Agreement during the preceding
calendar quarter (and portion thereof in the case of last statement) and the
royalty due thereon. However, the first such statement shall cover Licensed
Products sold prior to the Effective Date and during the period from Effective
Date to the calendar quarter to which Effective Date belongs.
3.7 All amounts payable hereunder by SDC to Toshiba shall be paid by SDC to
Toshiba without deduction for taxes or charges of any kind, and such taxes or
charges, if any, shall be assumed and paid by SDC. Provided, however, that
income taxes or taxes of a similar nature levied on Toshiba by the Government of
the United States and paid by SDC for the account of Toshiba shall be deductible
to the extent that such taxes are allowable as a credit against taxes levied on
Toshiba by the tax authorities of Japan. SDC shall send Toshiba the certificate
of such tax payment as may be required by the tax authorities of Japan as soon
as practicable after such payment is made.
3.8 All payments to be made hereunder by SDC to Toshiba shall be made in Tokyo,
in Japanese yen or other currency acceptable to Toshiba. If the provisions of
this Agreement require the conversion of currency with respect to any amount
payable under this Agreement, the currency amount payable under this Agreement
shall be determined on the basis of the official rate of exchange quoted by an
authorized exchange bank in Japan designated by Toshiba, on the day on which the
payment for such amount is made hereunder.
3.9 SDC agrees to keep true and accurate records, files and books of account
containing all the data necessary for the full computation and verification of
the amounts to be paid and the information to be given in the statement herein
provided for and further to permit the same to be examined from time to time to
the extent necessary for verifying the royalty due and payable hereunder. Such
examination shall be made at the expense of Toshiba by a person appointed by
Toshiba. If the amount of royalties paid by SDC to Toshiba is found to be less
than amounts due, Toshiba will invoice SDC for the additional amount plus
interest at the rate of 10% per annum from the date such royalties were payable.
Such amounts shall be payable ten (10) days after such invoice date. If the
resulting adjustments to the amount of royalties due are greater than five
percent (5%) of the royalties reported by SDC in any twelve month period, SDC
will pay the reasonable expenses associated with such audit, in addition to the
royalty adjustment.
3.10 All amounts payable under this Agreement shall, when overdue, bear interest
at 8% per annum for the period from the due date to the date of payment.
ARTICLE 4 TERM AND TERMINATION
4.1 This Agreement shall become effective on Effective Date and shall continue
until terminated pursuant to Articles 4.2 and 4.3 hereof.
4.2 In the event that SDC fails to perform any or all of the obligations and
undertakings to be performed by it under this Agreement and such default shall
not be cured within thirty (30) days after notice from Toshiba, then Toshiba
shall have the right to terminate this Agreement forthwith upon notice. The
termination by Toshiba does not prejudice its right to claim damages suffered by
Toshiba in connection with SDC's default or failure or termination of this
Agreement.
4.3 Toshiba reserves the right at any time during the term of this Agreement to
terminate this Agreement at its sole discretion upon giving notice to SDC in the
event that SDC is dissolved or liquidated or commences a proceeding seeking
liquidation, reorganization, readjustment of debt, composition or
3
<PAGE>
other relief under any bankruptcy, insolvency or other similar law, or seeking
the appointment of a trustee, receiver, liquidator, custodian or other similar
official.
4.4 Upon expiration or termination of this Agreement as provided for in this
Article 4 hereof, all rights and licenses granted to and obligations undertaken
by the parties hereunder shall terminate forthwith except:
4.4.1 SDC's obligation to pay any amount due hereunder on or prior to
expiration or termination of this Agreement.
4.4.2 SDC's obligation to submit written statements under Article 3
hereof.
4.4.3 Toshiba's right to examine records, files and books under Article
3 hereof.
ARTICLE 5 MISCELLANEOUS
5.1 APPLICABLE LAWS. This Agreement shall be construed and the legal
relationship between the parties hereto shall be determined in accordance with
the laws of the State of Delaware, provided that all questions concerning the
construction or effect of patent applications and patents included in Licensed
Patents shall be decided in accordance with the laws of the country in which the
particular patent application or patent concerned has been filed or granted, as
the case may be.
5.2 NOTICE. Any notice or request hereunder shall be by airmail, facsimile,
telex, or telegram given to Toshiba at its office at 1-1, Shibaura 1-chome,
Minato-ku, Tokyo 105-8001, Japan and to SDC at its office at 3506 Mercantile
Avenue, Naples, Florida 34104 . Either party may, by notice to the other party,
change the address to which notices or requests shall be given. All notices or
requests shall become effective when received.
5.3 ASSIGNMENT. This Agreement may not be assigned by SDC and shall not inure to
the benefit of any trustee in bankruptcy, receiver or other successor of SDC
without written consent of Toshiba.
5.4 PATENT MARKING. SDC shall attach proper notices of the Licensed Patents to
all Licensed Products in a manner conforming to the applicable laws.
5.5 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement in respect
of the subject matter hereof between the parties hereto and supersedes all
previous negotiations, commitments and writings, and may not be changed or
modified in any manner, orally or otherwise, except by an instrument in writing
signed by a duly authorized officer or representative of each of the parties
hereto.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in duplicate as of the date first above written by its
duly authorized officer or representative.
TOSHIBA CORPORATION SMARTDISK CORPORATION
By:/s/ MASAICHI KOGA By: /s/ MICHAEL S. BATTAGLIA
----------------- ------------------------
Masaichi Koga
Senior Executive Vice President
Date: MAY 22, 1998 Date: MAY 26, 1999
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EXHIBIT A
LICENSED PATENTS
1. U.S. Patent No. 5,550,709
2. U.S. Patent Application No. 657,198
3. Japanese Patent Application No. 09-046318
<PAGE>
AMENDMENT NO. 1
TO
LICENSE AGREEMENT
This Amendment No. 1 to License Agreement is made and entered into as of
September __, 1998 and between Toshiba Corporation, a corporation of Japan,
having its principal office at 1-1, Shibaura 1-Chome, Minato-Ku, Tokyo 105-8001
Japan (hereinafter called "TOSHIBA") and SmartDisk Corporation, a corporation of
the State of Delaware, the United States, having its principal office at 3506
Mercantile Avenue, Naples, Florida 34104 (hereinafter called "SDC").
WITNESSETH:
WHEREAS, Toshiba and SDC wish to amend that certain License Agreement
between them dated May 26, 1998.
NOW, THEREFORE, in consideration of the premises and mutual covenants
hereinafter contained, the parties hereto agree as follows:
1. The definition of "Licensed Product" contained at Section 1.1 of the
License Agreement is hereby amended to read in its entirety as follows:
"1.1 "Licensed Product" means a floppy disk adaptor referenced
as FlashPath and other SmartMedia applications as described in the Business
Plan, as amended from time to time as set forth in the JV Agreement, for
allowing and/or writing Toshiba's SmartMedia."
2. Except as amended hereby, all terms and provisions of the License
Agreement remain in full force and effect.
IN WITNESS WHEREOF, each of the parties hereto has caused this
agreement to be executed in duplicate as of the date first above written by its
duly authorized officer or representative.
Dated: SEPTEMBER 16, 1998 TOSHIBA CORPORATION
By: /s/ CLIDETELA LAEANTS
---------------------
Its: GENERAL MANAGER, ADI BUSINESS GROUP
Dated: SEPTEMBER 23, 1998 SMARTDISK CORPORATION
By: /s/ MICHAEL S. BATTAGLIA
------------------------
Michael S. Battaglia
Chief Executive Officer
Exhibit 10.10
LICENSE AND DISTRIBUTION AGREEMENT
THIS LICENSE AND DISTRIBUTION AGREEMENT (this "AGREEMENT") is made and
entered into as if the 28th day of May, 1998 by and between SmartDisk
Corporation, a Delaware corporation (the "COMPANY") and Fischer International
Systems Corporation a Florida corporation ("LICENSEE").
In consideration of the mutual promises herein and subject to the
following terms and conditions, the parties do hereby agree as follows:
1. DISTRIBUTION RIGHTS.
1.1 GRANT OF RIGHTS. Subject to the terms and conditions of
this Agreement, the Company hereby grants Licensee a non-exclusive,
nontransferable (except as set forth herein) right and license to: (i) reproduce
the Products, as defined in Section 2 below, in object code form only, and the
Documentation, as defined in Section 2 below, for the sole purpose of
distribution as authorized herein; (ii) market and distribute only in the
Territory throughout the term of this Agreement copies of the Products together
with appropriate Documentation, in their stand-alone form or combined with other
products to form combined products ("COMBINED PRODUCTS") or pursuant to customer
orders for Products which are intended to carry a product name of a third party
("PRIVATE LABEL PRODUCTS") pursuant to the procedure set forth in Section 2.3
below; and (iii) to resell the Company's maintenance program for the Products,
as then in effect.. Unless otherwise set forth herein, "Products" shall include
the appropriate Documentation for each such Product.
1.2 RESERVATION OF RIGHTS. The Company shall be entitled to
appoint additional distributors to distribute and market the Products in the
Territory and may distribute the Products direct to end users, to original
equipment manufacturers, systems integrators and value-added resellers for
resale in the Territory.
1.3 FURTHER APPOINTMENTS. The Company grants Licensee the
non-exclusive right and license to appoint, by written agreement only,
subdistributors and dealers ("SUBDISTRIBUTORS") for the Products in the
Territory; provided that the Company's and its Affiliates' Intellectual Property
Rights are as fully protected under each such written appointment as they are
protected under this Agreement. A license or appointment by Licensee of
substantially all rights hereunder shall be considered an assignment and shall
be prohibited pursuant to Section 13.18.
1.4 DELIVERY. Within ten (10) calendar days after the
Effective Date of this Agreement, the Company shall deliver to Licensee one (1)
reproducible master of object code for each of the Products set forth on Exhibit
A. In addition, simultaneously with the delivery of the masters for the Products
set forth on Exhibit A, the Company shall deliver to Licensee source code for
such Products. As Products are added to this Agreement, pursuant to the terms
and conditions hereof, the parties will mutually agree upon the delivery date
and form of such additional Product object code masters and it shall be in the
discretion of the Company whether the Company delivers source code for such
Products.
2. PRODUCTS AND TERRITORY.
2.1 PRODUCTS. Licensee's reproduction and distribution rights
as set forth herein shall be for the products listed on attached Exhibit A and
all updates, enhancements and modifications thereto (individually, a "PRODUCT"
and collectively, the "PRODUCTS") and the end-user documentation
("DOCUMENTATION") delivered with the master copy of such product to Licensee by
the Company. The Company may from time to time, by written notice to Licensee,
make updates, enhancements and modifications to the Products without otherwise
affecting the terms of this Agreement although Company may only do so upon sixty
(60) calendar days written
<PAGE>
notice to Licensee.
2.2 ADDITIONAL PRODUCTS. For any additional product
("ADDITIONAL PRODUCT") developed by the Company which has substantially the same
functionality as the Products, but does not constitute an update, enhancement or
modification of any Product, the Company will discuss with, and offer to
Licensee in writing, the right to distribute such Additional Product in the
Territory for a royalty specified by the Company and, unless otherwise specified
by the Company, upon such other terms as are set forth herein with respect to
the Products. For each Additional Product, the Company shall commence such
discussion and offer with Licensee no later than any other discussion with or
offer to any other distributor for such Additional Product. Within thirty (30)
calendar days, or such longer period as the parties may agree upon in writing,
after receipt of any offer of appointment from the Company pursuant to this
Section 2.2, Licensee shall notify the Company in writing whether Licensee
elects to accept or reject such offer. Failure by Licensee to give any notice
within such period shall constitute a rejection by Licensee of such offer. In
the event Licensee accepts any such offer of appointment, the Additional
Product(s) accepted shall become Product(s) under this Agreement and shall be
governed by the terms and conditions hereof applicable to the Products, except
that the terms and conditions of the Company's written offer shall govern to the
extent they supplement or modify the terms and conditions of this Agreement. In
the event Licensee rejects any Company offer of appointment, Licensee shall have
no rights with respect to the Additional Product covered by such rejected offer.
The Company shall have no obligation to make any further offer of appointment to
Licensee for an Additional Product for which Licensee has rejected an initial
offer of appointment, including at the time that any distribution arrangement
with another licensee for such Additional Product expires. Notwithstanding any
of the foregoing, and as an exception thereto, in the event that the Company
offers any such Additional Product to any other licensee or third party on terms
or conditions more favorable than those offered to Licensee, the Company shall
reoffer such Additional Product to Licensee on such more favorable terms and
conditions. The Company's obligation hereunder to offer Licensee the right to
distribute Additional Products shall only be applicable for such periods as
Licensee is in compliance with all of the terms and provisions of this
Agreement.
2.3 PRIVATE LABEL PRODUCTS In the event that a Subdistributor
desires to distribute a Private Label Product, Licensee shall have the right to
grant such Subdistributor the right to distribute such Private Label Product,
the subject Private Label Product is in accordance with the Private Label
Product criteria established by the Company from time to time. All such Private
Label Products shall become Products under this Agreement and shall be governed
by the terms and conditions hereof applicable to Products.
2.4 MAINTENANCE. The Company may from time to time, by written
notice to Licensee, change its Product maintenance policy although Company may
only do so upon sixty (60) calendar days written notice to Licensee.
2.5 TERRITORY. Licensee shall distribute and solicit orders
for the distribution of the Products, and shall permit its Subdistributors to
distribute and solicit orders for the distribution of the Products only within
the geographic area set forth on Exhibit B (the "TERRITORY").
3. LICENSEE'S DISTRIBUTION DUTIES.
During the term of this Agreement, Licensee shall be
responsible for the following:
3.1 REASONABLE COMMERCIAL EFFORTS. Licensee shall use its
reasonable commercial efforts to solicit orders and distribute the Products
within the Territory and to develop the full sales potential for the Products
within the Territory consistent with ethical business practices and in a manner
that will reflect favorably on the Products and on the good will and reputation
of the Company.
3.2 SUPPORT AND TRAINING COMMITMENT. The Company hereby grants
Licensee the right and confers upon Licensee the obligation to pass through to
the end-user the warranty established by the
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Page 3
Company for the Products. The Company reserves the right to modify the form of
Product warranty from time to time upon written notice to Licensee. Licensee
shall warrant the media upon which the Product resides in accordance with the
Company's media warranty policy for licensees. Licensee shall provide all
Subdistributor and end-user support, as well as Subdistributor training, for the
Products which Licensee distributes, except for modifications and corrections to
errors in the software code which cause a Product to cease functioning
substantially in accordance with its specifications, if any, as set forth in the
Documentation, which modifications and corrections shall be performed only by
the Company. Notwithstanding anything set forth herein, Licensee shall encourage
all end-user customers to bring their claims for Product support and warranty to
the relevant Subdistributor, and shall instruct all Subdistributors to bring
their claims for Product support and warranty to Licensee. To assist Licensee
perform its support obligations set forth in this Section 3.2, the Company
hereby grants Licensee a non-exclusive, nontransferable right and license to use
internally the source code for the Products, if delivered by the Company, only
for the purpose of providing customer support and maintenance. Licensee shall
NOT have the right to: (i) make copies of Product source code; (ii) make
modifications to the Product source code; or (iii) distribute, sell, assign,
license, convey, disclose or transfer any or all of the Product source code.
3.3 PROPRIETARY MARKINGS. As both a covenant by Licensee and a
condition of the grant by the Company of the rights in this Agreement, Licensee
agrees to include in each copy of the Products distributed by Licensee and its
Subdistributors, on all containers and storage media therefore and in all
marketing material, all trademarks, copyright notices, patent notices, trade
secret notices and other notices regarding proprietary rights included by the
Company in copies of the Products (and on containers and storage media
therefore), as well as the statement that Licensee is an authorized licensee of
the Company.
3.4 DISTRIBUTION MATERIALS. Licensee shall create appropriate
promotion and advertising materials for the Products. Licensee's promotion and
advertising material shall be subject to the Company's prior written consent
which shall not be unreasonably withheld. Licensee shall provide the Company
with not less than fourteen (14) calendar days prior delivery of copies of the
promotion and advertising material to be approved by the Company. Failure of the
Company to accept or reject such materials on or before the fourteen (14th)
calendar day after receipt by the Company thereof shall be deemed acceptance of
such materials.
3.5 GOVERNMENTAL REGULATIONS AND REGULATORY COMPLIANCE.
Licensee shall comply with all laws, regulations and orders of government, and
with all other governmental requirements applicable to its sales activities with
respect to the Products in the Territory. The Company shall furnish Licensee
with such assistance and cooperation as may reasonably be requested in
connection with compliance with such governmental requirements. All
registrations and permits required for the sale and distribution of the Products
shall be filed by Licensee in the name of, for the benefit of and at the expense
of the Company. In the event any registration or permit must be filed in the
name of any entity other than the Company because of requirements of applicable
law, Licensee agrees promptly upon termination or expiration of this Agreement
to assign or cause to be assigned to the Company or its designee, without
charge, every such registration or permit to the fullest extent assignable.
Licensee shall also obtain, at its own expense, any import license, foreign
exchange license, foreign exchange permit, or other permit or approval it may
need for the performance of its obligations under this Agreement. Licensee
further agrees to maintain and to provide the Company with such records and
reports as the Company deems necessary or advisable to enable the Company to
satisfy and conform to all regulatory requirements relating to the distribution
of the Products. In particular, Licensee agrees to maintain and to provide the
Company with product liability and traceability, quality assurance and defect
incident reports in such form as may be requested by the Company from time to
time. Licensee will immediately report to the Company all defects in the
Products discovered by or reported to Licensee in sufficient detail to enable
the Company to take
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Page 4
corrective action.
4. RESTRICTIONS.
Licensee's rights to the Products are limited to those expressly
granted in this Agreement. As both a covenant by Licensee and a condition of the
grant of rights set forth above by the Company, Licensee agrees not to do any of
the following:
(a) copy, disclose or distribute to any person all or any part of the
Products, except as specifically permitted by this Agreement for the marketing,
distribution and support of the Products;
(b) make any representation, guarantee or warranty to any
Subdistributor, end user or any other party regarding the performance or
functional characteristics of the Products inconsistent with or beyond those
expressly contained in the Company's Documentation with respect to the Products,
or as approved in writing by the Company; or
(c) modify or permit others to modify the Products or any Product
source code, except as expressly set forth in this Agreement. In the even that
Licensee or any Subdistributor requires modifications to a Product to enable
such Product to interoperate with another product, whether the Product will be
distributed as a stand alone product, a Combined Product, or a Private Label
Product, Licensee shall send the Company a written description of such required
modification and, if the Company deems it in the interests of the Company and
the Product, in its sole and absolute discretion, the Company will use its
reasonable commercial efforts to make such modifications to the Product pursuant
to a schedule to be agreed upon by the parties. Such modifications shall be
known hereafter as "INTEROPERABILITY MODIFICATIONS."
5. PAYMENTS.
5.1 ROYALTIES. Licensee will pay to the Company the following
royalties:
(a) for the distribution of Products as stand alone
products (which shall include Private Label Products to the extent such are not
combined with other products) and resale of maintenance therefor: thirty-three
and three tenths percent (33.3%) of Net Revenue derived therefrom;
(b) for the distribution of Products as Combined
Products (which shall include Private Label Products to the extent such are
combined with other products) and resale of maintenance therefor: five percent
(5%) of Net Revenue derived therefrom.
5.2 NET REVENUE. As used "NET REVENUE" means the total amount
received by Licensee for all copies of the subject Products or Combined
Products, as the case may be, less the following amounts, in each case either
allocated from Licensee'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; sales commissions which are reasonable and consistent
with the amounts customarily paid in the industry; freight paid by Licensee for
shipments of Products; any currency exchange fees incurred by Licensee with
respect to invoiced amounts other than in United States dollars.
5.3 PAYMENT AND REPORTING. Within thirty twenty (20) calendar
days after the end
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License and Distribution Agreement
Page 5
of each month, Licensee will furnish the Company with a detailed written report
of all payments and fees owed to the Company for that month, which report will
include a complete itemized accounting of the number of units of Products which
Licensee and its Subdistributors licensed and otherwise distributed during that
month and an accounting of royalty payments owed to the Company for such month.
At the time of each such report, Licensee will pay the Company the amount due
pursuant to such report. All payments made under this Agreement after their due
date will incur interest at a rate equal to 1.5% per month or the highest rate
permitted by applicable law, whichever is lower.
5.4 TAXES AND ASSESSMENTS. In addition to royalty payments and
other charges, Licensee assumes and agrees to pay (or provide the Company with a
certificate of exemption acceptable to the appropriate taxing authorities prior
to shipment) and to indemnify and hold the Company harmless from all export
charges and import duties and any and all sales, use, excise or other taxes or
assessments imposed upon or applicable to any sale or license to Licensee
hereunder by any governmental authority. If any taxes or assessments are
required to be withheld from payments to the Company, Licensee will pay the
Company an amount which, after such withholding, equals the original amount due
under this Agreement, and will provide the Company With official tax receipts or
other evidence of payment of such withheld taxes or assessments sufficient to
substantiate a claim by the Company for credit against United States federal
income tax.
5.5 EXAMINATION. The Company will have the right at least once
per calendar year to have the Company's internal or external accounting
representatives examine Licensee's books, records and accounts for the purpose
of verifying payments made hereunder. Each such examination will be upon at
least five (5) calendar days prior written notice to Licensee and will not
unreasonably interfere With Licensee's business. If any examination discloses a
shortfall in any monthly payment due under this Agreement of more than five
percent (5%), then, in addition to paying the delinquent amount plus interest at
the rate specified above, Licensee will pay the fees and expenses of the
Company's accounting representatives for that examination. In all written
agreements between Licensee and Subdistributors, Licensee will include a
provision which permits the Company the same examination rights as set forth
herein With respect to the books and records of all Subdistributors.
6. OWNERSHIP OF INTELLECTUAL PROPERTY.
6.1 MATERIAL OWNED BY THE COMPANY. The Company has and will
retain all rights of ownership in and to the Products, including without
limitation the object code, source code and documentation, all proprietary
rights embodied therein and related thereto, and all modifications, enhancements
and derivatives thereof and Licensee agrees and understands that it will not
obtain, assert or claim any right or license therein except as specifically set
forth in this Agreement.
6.2 ASSIGNMENT OF RIGHTS BY LICENSEE. Licensee hereby assigns
and transfers to the Company all its right, title and interest in and to any
marketing material developed by Licensee for the Products, subject to the rights
of Licensee in any Licensee corporate trademarks, and Licensee agrees to execute
such other and further documents as may be reasonably necessary and appropriate
to secure to the Company all rights of ownership in such materials and the
proprietary rights embodied therein.
7. TERM OF AGREEMENT AND TERMINATION.
7.1 TERM. Subject to earlier termination as provided in this
Section 7, the term of this Agreement shall extend from the date hereof through
December 31, 2001. This Agreement shall automatically be renewed for successive
periods of twelve (12) months, unless either party sends a written notice to the
other not
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License and Distribution Agreement
Page 6
less than sixty (60) calendar days before the expiration of the initial term of
this Agreement or any renewal thereof stating that such party is not renewing
this Agreement.
7.2 TERMINATION BY EITHER PARTY. Either party may terminate
this Agreement as follows:
7.2.1 In the event of a material default by either
party in the performance of its duties, obligations or undertakings under this
Agreement, the non-defaulting party shall have the right to give written notice
to the defaulting party advising such party of the specific default involved
and, if within thirty (30) calendar days after such notice, the defaulting party
shall not have remedied such default, the other party shall have the
unconditional right, in addition to any other rights and remedies it may have,
to terminate this Agreement immediately upon giving written notice to the
defaulting party.
7.2.2 At any time by giving written notice of such
termination in the event the other party becomes insolvent or institutes or
permits to be instituted against it any proceedings seeking receivership,
trusteeship, bankruptcy, reorganization, arrangement, readjustment of debt,
assignment for the benefit of creditors, or other similar proceedings under any
applicable law.
7.3 TERMINATION OF RIGHTS AND OBLIGATIONS. Upon termination of
this Agreement for any reason:
7.3.1 All amounts owed by Licensee to the Company
shall become immediately due, except in the case of expiration of the term of
this Agreement, in which case all amounts owed shall be paid in accordance with
Section 7.3;
7.3.2 The right of Licensee to act as a licensee for
the Company shall cease, and Licensee shall immediately discontinue all use of
the Company's trade names and trademarks, and Licensee shall return to the
Company all masters, source code, catalogs, sales literature, operating and
service manuals, advertising literature and materials relating to the Products
and send to the Company a written certification by an officer of Licensee that
all source code and masters of the Products have been returned;
7.3.3 Licensees shall return all copies of the
Products to the Company and send to the Company a written certification by an
officer of Licensee that all copies of the Products have been returned or, at
the sole option of the Company, destroy all copies the Products and send to the
Company a written certification by an officer of Licensee that all copies of the
Products have been destroyed;
7.3.4 Licensee shall not thereafter represent or hold
itself out as being an authorized licensee for the Company's Products or engage
in any practices which might make it appear that Licensee is still such an
authorized licensee; and
7.3.5 Licensee shall transfer to the Company any
rights it may have to any trademarks or trade names of the Company and Licensee
shall assign to the Company, or its nominee, any registrations or other
governmental permits with respect to the Products except to the extent a
Combined Product carries a trademark which is distinct from the Products, or if
such assignment is not permitted by law, Licensee shall cooperate in the
cancellation of such registrations and permits standing in its name and the
reassurance thereof to the Company or its nominee.
7.4 NO LIABILITY. The Company shall have no obligation to
Licensee by reason of the
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License and Distribution Agreement
Page 7
expiration or termination, in compliance with the provisions of Section 7.2, of
this Agreement or the Company's non-renewal of this Agreement at the expiration
of the initial term or any extension thereof, and Licensee hereby agrees not to
assert any claim by reason of such expiration or termination of this Agreement.
Neither party, by reason of the termination of this Agreement, shall be liable
to the other because of any loss of anticipated revenue or prospective profits
or because of expenditures or investments related to the performance of this
Agreement or the goodwill created in the course of performance hereunder.
7.5 NO RELEASE. No termination of this Agreement shall in any
manner whatsoever release, or be construed as releasing, any party from any
liability to the other arising out of or in connection with a party's breach of,
of failure to perform, any covenant, agreement, duty or obligation contained
herein.
7.6 SURVIVAL. The provisions of Sections 5,6,7, 8,9, 10, 11,
12 and 13 will survive the expiration or termination of this Agreement.
8. WARRANTIES.
8.1 PRODUCT WARRANTY. The Company warrants that for a period
of ninety (90) calendar days, the Products will substantially conform to the
specifications set forth in the Documentation. The Company may change its
Product warranty for a Product from time to time upon giving Licensee written
notice thereof at least thirty (30) calendar days in advance of the effective
date of any change together with a copy of the new Product warranty which will
be effective as to all subject Products distributed after the effective date
specified in such notice. Licensee shall not make any Product warranty to its
customers of the Products other than the Company's Product warranty then in
effect with respect to such Product. Licensee shall pass the Company's warranty
through to its customers as set forth in Section 3.2 above. Licensee will be
solely responsible for all warranties with respect to the media upon which the
Products reside.
8.2 THE COMPANY OPTION. The Company shall, at its option,
replace, repair or issue credit to Licensee for any confirmed defective Products
licensed by the Company to Licensee under this Agreement and covered under the
warranty period.
8.3 EXCLUSIVE REMEDY. In case of breach of the Product
warranties, Licensee's or its customers' exclusive remedy against the Company,
and the Company's sole liability, shall be, as set forth in Section 8.2.
Licensee or its customers shall prepay return transportation charges to the
Company's designated site. If the returned Product is found defective by the
Company under the terms of the warranty and the Company elects to repair or
replace the defective Product, the Company will prepay return transportation
charges to Licensee or its customers, as appropriate. The Company shall have a
reasonable time to make repairs, replace or issue credit with respect to
Products found to be defective.
8.4 LIMITATION. The Company's warranty will not apply to a
Product if its correction, repair or replacement is required due to: (i) natural
disasters, including fire, smoke, water, wind, earthquakes or lightning, (ii)
electric power failures, (iii) the failure to maintain appropriate environmental
conditions, (iv) the neglect, misuse or other than the ordinary use of the
Product, or (v) attempted repairs or alterations by persons other than those
employed by the Company. Under these circumstances, the Company may charge
Licensee or its customers for the correction, repair or replacement on a
time-and-materials basis at the Company's then-current rates.
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License and Distribution Agreement
Page 8
8.5 DISCLAIMER. EXCEPT AS EXPRESSLY PROVIDED IN THIS SECTION
8, ALL WARRANTIES, CONDITIONS, REPRESENTATIONS, INDEMNITIES AND GUARANTEES,
WHETHER EXPRESS OR IMPLIED, ARISING BY LAW, CUSTOM, PRIOR ORAL OR WRITTEN
STATEMENTS BY THE COMPANY OR OTHERWISE (INCLUDING, BUT NOT LIMITED TO, ANY
WARRANTY OF MERCHANTABILITY OR FITNESS FOR PARTICULAR PURPOSE OR OF
UNINTERRUPTED USE) ARE HEREBY OVERRIDDEN, EXCLUDED AND DISCLAIMED.
8.6 NO CONSEQUENTIAL DAMAGES. THE COMPANY WILL NOT BE LIABLE
TO LICENSEE OR ITS CUSTOMERS OR SUBDISTRIBUTORS AND LICENSEE WILL NOT BE LIABLE
TO THE COMPANY FOR ANY CONSEQUENTIAL, INDIRECT, PUNITIVE, SPECIAL OR INCIDENTAL
DAMAGES, WHETHER FORESEEABLE OR UNFORESEEABLE, BASED ON CLAIMS OF LICENSEE, OR
ITS CUSTOMERS, OR THE COMPANY, AS THE CASE MAY BE, (INCLUDING, BUT NOT LIMITED
TO, CLAIMS FOR LOSS OF GOODWILL, PROFITS, INVESTMENTS, USE OF MONEY, LOSS OF USE
OF THE COMPANY'S PRODUCTS; INTERRUPTION IN USE, STOPPAGE OF OTHER WORK OR
IMPAIRMENT OF OTHER ASSETS, OR LABOR CLAIMS), ARISING OUT OF BREACH OF EXPRESS
OR
IMPLIED WARRANTY, BREACH OF CONTRACT, MISREPRESENTATION,
NEGLIGENCE, STRICT LIABILITY IN TORT OR OTHERWISE, EXCEPT ONLY IN THE CASE OF
DEATH OR PERSONAL INJURY WHERE AND SOLELY TO THE EXTENT THAT APPLICABLE LAW
REQUIRES SUCH LIABILITY.
8.7 LICENSEE INDEMNITY. If Licensee makes any warranty or
representation inconsistent with or in addition to the warranties stated in this
Section 8, Licensee shall, at its own expense, defend, indemnify and hold the
Company harmless from any claim to the extent it is based upon such inconsistent
or additional warranty or representation.
9. TRADEMARKS AND TRADE NAMES.
9.1 VALIDITY AND LICENSEE REGISTRATION. Licensee recognizes
the validity of the Company's trademarks and trade names as set forth on Exhibit
C attached hereto, (the "COMPANY TRADEMARKS"), acknowledges that the same are
the property of the Company, and agrees not to infringe upon, harm or contest
the rights of the Company in the Company Trademarks. Licensee further agrees, if
requested by the Company and at the Company's expense, to register or otherwise
obtain protection in the Territory for the Company Trademarks on behalf and for
the benefit of the Company.
9.2 OWNERSHIP. All Company Trademarks are and will remain the
exclusive property of the Company, whether or not specifically recognized or
registered under applicable law. Licensee will not take any action that
jeopardizes the proprietary rights of or acquire any right to the Company
Trademarks, except the limited use rights specified in this Section 9. Licensee
will not register, directly or indirectly, any trademark, service mark, trade
name, copyright, company name or other proprietary or commercial right which is
identical or confusingly similar to the Company Trademarks.
9.3 USE. Licensee shall have the right to use in the Territory
all the Company Trademarks as well as other trademarks which are or may be owned
by the Company during the term of this Agreement in connection with the Products
for the exclusive purpose of advertising and promoting the Products in the
Territory. All advertisements and promotional materials will (i) clearly
identify the Company as the owner of its trademarks, (ii) conform to the
Company's then-current trademark and logotype guidelines and (iii) otherwise
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License and Distribution Agreement
Page 9
comply with any local applicable notice or marking requirement. Before
publishing or disseminating any advertisement or promotional materials bearing a
trademark of the Company, Licensee will deliver a copy of the advertisement or
promotional materials in the English language to the Company for approval, which
approval shall not be unreasonably withheld. If the Company gives Licensee
written notice that the proposed use of its trademark is inappropriate within
ten (10) calendar days from the date of submission by Licensee, Licensee will
not place the advertisement or promotional materials in circulation.
9.4 RETURN OF MATERIALS. Licensee agrees that upon termination
of this Agreement for any reason it will destroy or return to the Company any
advertising, stationery or other materials bearing any of the Company's trade
names or trademarks.
9.5 INFRINGEMENT. Licensee will immediately notify the Company
if it learns (i) of any potential infringement of a Company trademark by a third
party or (ii) that the use of a the Company trademark may infringe the
proprietary rights of a third party. The Company will determine the steps to be
taken under these circumstances in accordance with Section 10.2 below.
10. INTELLECTUAL PROPERTY RIGHTS.
10.1 COMPANY'S RIGHTS. The Company is the sole author and
exclusive owner, or authorized licensee of the Products and all intellectual
property rights therein. The Products do not and will not throughout the term of
this Agreement infringe upon any patent, copyright, trade secret or other
proprietary right held by any third party and there is no such claim or pen4ing
or threatening action with respect thereto.
10.2 COMPANY'S OBLIGATIONS. The Company will indemnify and
hold harmless Licensee 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 proprietary right, including copyrights,
trademarks, patent rights and trade secrets, arising out of the Products (but
not attributable to any product with which a Product is combined to form a
Combined Product, nor attributable to any Interoperability Modifications.) This
obligation will be subject to the following terms and conditions:
(i) The obligation will arise only if Licensee gives the
Company prompt notice of the infringement claim and grants the Company, in
writing, exclusive control over its defense and settlements;
(ii) Without limiting the introduction to this Section 10.2
above, this obligation will cover the Products only in the form as licensed to
Licensee by the Company or its agents, and will not cover any correction,
modification, improvement, enhancement or addition to any Product made by anyone
other than the Company without the Company'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 the Company if that claim could have been
avoided by the use of that Product in combination with other hardware or
software;
(iv) Without limiting the Company's general obligation of
indemnification, and in addition thereto, if an infringement claim is asserted,
or if the Company believes one likely, the Company will have the right and the
obligation to do any of the following: (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 the Company
modifies
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Page 10
any Product to avoid a claim of infringement, the Company will have no
obligation to indemnify Licensee with respect to unmodified Products distributed
by Licensee after the Company has supplied the modification to Licensee; and
THE FOREGOING STATES THE COMPANY'S EXCLUSIVE AND ENTIRE OBLIGATION WITH RESPECT
TO ANY CLAIMS OF INFRINGEMENT OF PROPRIETARY RIGHTS OF ANY KIND.
10.3 LICENSEES INDEMNIFICATION. Licensee will indemnify and
hold harmless the Company 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 proprietary right, including copyrights,
trademarks, patent rights and trade secrets, arising out of the inclusion of any
product not supplied by the Company and combined with the Product for
distribution as a Combined Product or a Private Label Product. Licensee's
obligation to indemnify the Company will arise if the Company gives Licensee
prompt notice of the claim and cooperates and consults fully with Licensee in
its defense and/or settlement. If such an infringement claim is asserted, or if
Licensee believes one likely, Licensee will have the right, but no obligation,
to procure a license from the person claiming or likely to claim infringement.
11. CONFIDENTIAL INFORMATION. Each party agrees that it will treat
accordingly all verbal and written communications from the other party which are
designated, or which should reasonably be regarded in the normal commercial
view, as constituting business secrets or proprietary information, and will
impose upon its employees and agents the same obligations with respect to the
other party's proprietary information as it employs with respect to its own
confidential information, but in no event less than a reasonable degree of care.
The provisions of this Section shall survive the termination of this Agreement.
12. INDEPENDENT CONTRACTOR.
12.1 NO AUTHORIZATION. Licensee shall be an independent
contractor hereunder. Licensee is not authorized to: (i) enter into agreements
for or on behalf of the Company; (ii) create any obligation or responsibility,
express or implied, for or on behalf of the Company; (iii) accept payment of any
obligation due or owed to the Company; (iv) accept service of process for the
Company; or (v) bind the Company in any manner whatsoever, except for Licensee's
right to pass to its customers and end-users the Company's product warranties
for the Products as set forth herein. Licensee shall not list, print, or display
the Company's name in such manner as to indicate or imply that there is an
employer-employee or a principal-agent relationship between the Company and
Licensee.
12.2 CONTROL OF LICENSEE. Subject to its compliance with all
applicable laws and regulations and except as otherwise provided herein,
Licensee shall have control over the manner and means of performing its
obligations under this Agreement. All expenses incurred by Licensee in
connection with the performance of its obligations hereunder shall be borne
solely by Licensee. Licensee shall be responsible for appointing its own
employees, agents and representatives, who shall be compensated by Licensee.
13. MISCELLANEOUS PROVISIONS.
13.1 SALES AND LICENSES. All Products delivered hereunder are
licensed as provided herein. All references in this Agreement to the "sale" or
"purchase" of Products signify only the delivery of the Product in question
subject to the terms set forth in this Agreement. Licensee shall acquire no
rights with respect to the Products other than the right to reproduce and
distribute such Products and provide related support, as provided
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herein.
13.2 MOST FAVORED NATIONS. In no event shall the Company offer
any other distributor or third party customer any terms or conditions more
favorable than those set forth in this Agreement.
13.3 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. THE PARTIES AGREE THAT
THE UNITED NATIONS CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS
SHALL NOT APPLY TO THIS AGREEMENT AND ITS APPLICATION IS HEREBY EXPRESSLY
EXCLUDED.
13.4 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. Nothing in this Agreement,
express or implied, is intended to confer upon any party, other than the parties
hereto or their respective permitted successors and assigns, any rights,
remedies, obligations or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement.
13.5 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.
13.6 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.
13.7 COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be an original as against any party
whose signature appears thereon, and all of which together shall constitute one
and the same instrument.
13.8 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.
13.9 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 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.
13.10 ATTORNEYS' FEES. Should suit be brought to enforce or
interpret any part of this
<PAGE>
License and Distribution Agreement
Page 12
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.
13.11 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
telecopy, telegraph, cable, mail or other delivery and telecopied, telegraphed,
cabled, mailed or delivered to the intended recipient at the addresses specified
below:
If to the Company: SmartDisk Corporation
3506 Mercantile Avenue
Naples, FL 34104
Facsimile: (941) 436-2509
Attn: Michael S. Battaglia
with a copy to: Baker & McKenzie
660 Hansen Way
Palo Alto, CA 94304
Facsimile: (650) 856-9299
Attn: J. Pat Powers, Esq.
If to Licensee: Fischer International Systems Corporation
3506 Mercantile Avenue
Naples, FL 34104
Facsimile: (941) 436-2509
Attn: John W. Wynkoop
with a copy to: Tomlinson Zisko Morosoli & Maser LLP
200 Page Mill Road, Second Floor
Palo Alto, CA 94306
Facsimile: (650) 324-1808
Attn: Jill E. Fishbein, Esq.
Except as may be otherwise provided in this Agreement, all such communications
shall be deemed to have been duly given when transmitted by telecopier with
verified receipt by the receiving telecopier, 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.
13.12 CONSTRUCTION OF AGREEMENT. This Agreement has been
negotiated by the respective parties hereto and their attorneys and the language
hereof shall not be construed for or against any party. A reference in this
Agreement to any Section shall include a reference to every Section the number
of which begins
<PAGE>
License and Distribution Agreement
Page 13
with the number of the Section to which reference is specifically made (e.g., a
reference to Section 5.8 shall include a reference to Sections 5.8.1 and
5.8.1.1). The titles and headings herein are for reference purposes only and
shall not in any manner limit the construction of this Agreement which shall be
considered as a whole. A reference to a Schedule, Exhibit or Section means a
Schedule, Exhibit or Section of this Agreement, unless the context expressly
otherwise requires.
13.13 PRONOUNS. All pronouns and any variations thereof shall
be deemed to refer to the masculine, feminine or neuter, singular or plural, as
the identity of the person, persons, entity or entities may require.
13.14 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.
13.15 ABSENCE OF THIRD PARTY BENEFICIARY RIGHTS. No provisions
of this Agreement are intended nor shall be interpreted to provide or create any
third party beneficiary rights or any other rights of any kind in any client,
customer, affiliate, shareholder or partner of any party hereto, or any other
person, unless specifically provided otherwise herein and, except as so
provided, all provisions hereof shall be personal solely between the parties to
this Agreement.
13.16 FORCE MAJEURE. Except as to the timely payment by
Licensee of the royalties as set forth herein, 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.
13.17 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.
13.18 ASSIGNMENT. Except as provided in this Section, neither
party to this Agreement shall assign or otherwise transfer any of its rights or
obligations under this Agreement to any third party, and any such attempt at
assignment shall be void. However, the Company shall have the right to assign
this Agreement, without the prior approval of Licensee, to any successor of all
or substantially all of its business and assets at the time of assignment,
provided that such successor undertakes to fulfill all the obligations of the
Company under this Agreement. Additionally, both the Company and Licensee shall
have the right to assign this Agreement or delegate its obligations hereunder to
any affiliate by giving written notice, provided that such party guarantees the
obligations to be performed by such affiliate. For purposes of this Agreement,
the term "affiliate" shall mean any corporation or business entity controlled
by, controlling or under common control with the Company or
<PAGE>
License and Distribution Agreement
Page 14
Licensee.
13.19 FOREIGN RESHIPMENT LIABILITY. THIS AGREEMENT IS
EXPRESSLY MADE SUBJECT TO ANY LAWS, REGULATIONS, ORDERS OR OTHER RESTRICTIONS ON
THE EXPORT FROM THE UNITED STATES OF AMERICA OF TECHNICAL INFORMATION OR
PRODUCTS WHICH MAY BE IMPOSED FROM TIME TO TIME BY THE GOVERNMENT OF THE UNITED
STATES OF AMERICA. NOTWITHSTANDING ANYTHING CONTAINED IN THIS AGREEMENT TO THE
CONTRARY, LICENSEE SHALL NOT EXPORT OR REEXPORT, DIRECTLY OR INDIRECTLY, ANY
TECHNICAL INFORMATION OR PRODUCTS TO ANY COUNTRY OR DESTINATION OR PERMIT ITS
TRANSHIPMENT TO ANY COUNTRY OR DESTINATION FOR WHICH SUCH GOVERNMENT OR ANY
AGENCY THEREOF REQUIRES AN EXPORT LICENSE OR OTHER GOVERNMENTAL APPROVAL AT THE
TIME OF EXPORT WITHOUT FIRST OBTAINING SUCH LICENSE OR APPROVAL.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the day and year first above written.
SMARTDISK CORPORATION FISCHER INTERNATIONAL SYSTEMS CORPORATION
By: /s/ TIMOTHY TOMLINSON By: /s/ MICHAEL S. BATTAGLIA
--------------------- ------------------------
Name: Timothy Tomlinson Name: Michael S. Battaglia
Title: Secretary Title: President
<PAGE>
EXHIBIT A
LIST OF PRODUCTS
SafeBoot
SafeBoot Corporate Edition
<PAGE>
EXHIBIT B
TERRITORY
Worldwide except:
Australia
Burma/Myanmar
China/Hong Kong
Indonesia
Japan
Korea
Laos
Malaysia
Micronesia
New Zealand
Papua / New Guinea
Philippines
Singapore
Taiwan
Thailand
Vietnam
<PAGE>
EXHIBIT C
TRADEMARKS
SmartDisk
SafeBoot
Exhibit 10.13
LEASE
THIS WRITING contains all the terms and conditions of a Lease, made and
entered into this 4TH day of OCTOBER 1993, by and between ARNOLD INDUSTRIAL PARK
("Landlord") and FISCHER INTERNATIONAL ("Tenant"), wherein the parties agree
that for the rents to be paid by Tenant and for the mutual covenants and
conditions herein set forth, Landlord hereby leases to Tenant 5,000 square feet
located at 3506 MERCANTILE AVENUE, COLLIER COUNTY, NAPLES, FLORIDA said unit
consisting of approximately 5,000 square feet (the "demises premises") to be
used and occupied by Tenant as OFFICE/STORAGE and for no other purposes or uses
whatsoever without Landlords prior written consent.
1. TERM. The term of this Lease shall be FOUR YEARS, commencing on the
1ST DAY AFTER THE ISSUANCE OF THE CERTIFICATE OF OCCUPANCY OR WHEN TENANT MOVES
IN WHICH EVER OCCURS FIRST.
2. BASE RENT. Tenant shall pay without demand to Landlord a base rent
plus applicable sales tax (currently 6%) payable in monthly installments as
follows:
<TABLE>
<CAPTION>
Maint./Mgmt/ Property Sales Total
Annual Rent Base Rent Insurance Tax Tax Monthly Rent
<S> <C> <C> <C> <C> <C>
$27,550.00 $2,295.83 $195.00 $118.02 $156.53 $2,765.38
</TABLE>
The rate shall increase by 5% each year over the previous years rental rate.
Each month's rent shall be payable in advance, on the first day of each and
every month of the term of this Lease except that rental payments for the first
calendar month or part thereof, shall be paid on execution of this Lease.
3. SECURITY DEPOSIT. The Landlord acknowledges that it has received
from the Tenant $1,000.00 to remain on deposit with the Landlord during the term
of this Lease and any extensions hereof as security for the payment of rent and
damages. No interest shall be payable on the deposit, and it may be commingled
with the general funds of the Landlord. If any rent or any other sum or charge
payable by Tenant to Landlord shall be overdue and unpaid, or if Landlord makes
any payments on behalf of Tenant, or if Tenant fails to perform any other terms
of this Lease, then Landlord may at its option and without prejudice to any
other remedy, immediately apply all or part of the security and damage deposit
toward the payment of any amount due from Tenant or toward losses sustained by
Landlord as a result of Tenant's default under this Lease. Tenant shall then
immediately restore its security and damage deposit to the original sum
deposited. Should the Landlord convey its interest under this Lease, the deposit
may be turned over by the Landlord to the Landlord's grantee or assignee. If the
security and damage deposit is turned over as aforesaid, the Tenant hereby
releases the Landlord from any and all liability with respect to the deposit or
its return, and the Tenant agrees to look solely to such grantee or assignee for
such application or return, and this provision shall also apply to subsequent
grantees or assigns.
<PAGE>
4. PAYMENT OF RENT. All payments shall be made without demand and
without any deduction, set-off or counterclaim whatsoever and shall be made at
1361 Airport Road North, Naples, Florida 33942, or at such other place and to
such other person as Landlord may from time to time designate.
5. ADDITIONAL PAYMENTS BY TENANT. The Tenant shall pay for the
following as additional rent:
5.1 REAL ESTATE TAXES. During the term of this Lease, Tenant
shall pay to Landlord as additional rent his pro-rata share of all of the real
estate taxes and assessments for road, sewer, water, drainage or other
improvements and any other assessments for the property. The real estate taxes
shall be payable monthly during the term of this Lease, or any extension
thereto, within thirty (30) days after being billed therefor. If this Lease
commences or terminates during any tax year, Tenant's proportionate share of
taxes for that year shall be prorated for that portion of the tax year during
which this Lease shall be effective.
5.2 SALES AND PERSONAL PROPERTY TAXES. Tenant shall pay to
Landlord an amount equal to any sales or similar tax now or hereafter imposed
upon Landlord on account of this Lease or rents due hereunder. Tenant shall pay
such amount on the first day of each and every month of this Lease in which a
base rent installment is payable to Landlord in accordance with Article 2.
Tenant shall pay, promptly when due, and personal property tax levied against
the demised premises and attributable to Tenant's personal property, trade
fixtures and leasehold improvements placed in or about the demised premises.
5.3 UTILITIES. Tenant shall pay all charges for electricity,
gas and other utilities used on the demised premises, including the costs of
electricity to operate the air conditioning and interior lighting equipment
provided by Landlord, and additional wiring, if any, required for special
equipment, if any, installed by Tenant. The costs for electricity will be billed
to Tenant directly and it shall be Tenant's responsibility to make satisfactory
arrangements with Florida Power & Light Company to have electricity activated.
5.4 SEWER, WATER AND TRASH. Tenant agrees to pay sewer, water
and trash charges directly to the respective suppliers thereof.
5.5 PROPERTY INSURANCE. During the term of this Lease, Tenant
shall pay to Landlord as :additional rent all costs for insurance of the demised
premises in an amount equal to the property's then current market value, along
with a loss of rents policy that shall pay Landlord rent equal to 100% of all
lost rental Income. The payments for the insurance premiums shall be payable and
included with the monthly rental payment. If this Lease commences or terminates
at a time when the insurance has already been paid, Tenant's proportionate share
of insurance shall be prorated for that portion of the year during which this
Lease shall be affective.
6. ASSIGNMENT AND SUBLETTING. Tenant shall not assign this Lease, nor
sublet the demised premises, or any part thereof, nor use the same, or any part
thereof, nor permit the same, or any part thereof, to be used by anyone other
than Tenant, without prior written consent of Landlord. If Tenant requests such
written consent, Tenant shall compensate Landlord for any
2
<PAGE>
legal fees incurred by Landlord in drafting or evaluating documents, or in
otherwise dealing with such request. The Landlord will not unreasonably withhold
an assignment. No subletting to which the Landlord may consent shall release or
relieve the Tenant from its obligations under this Lease, and Landlord may look
solely to Tenant for payment of rent and the performance of the terms and
conditions of this Lease.
7. COMPLIANCE WITH LAWFUL ORDERS. Tenant, at its sole cost and expense,
shall promptly execute and comply with all statutes, ordinances, rules, orders,
regulations and requirements of the federal, state, county, and city governments
and of any and all their departments and bureaus applicable to the demised
premises, for the correction, prevention and abatement of nuisances or other
grievances, in, upon, or connected with the demised premises during the Lease
term. Tenant shall also promptly comply with and execute all rules, orders and
regulations of insurance underwriters and insurance rating bureaus having
jurisdiction for the prevention of fires. Tenant shall not commit or suffer any
waste on the premises. nor use the premises for any unlawful purpose. Landlord
shall not require Tenant to comply with any rules, orders, and regulations of
any such governmental entity, department, or bureau regarding any damage,
nuisance, or waste (including in particular any environmental damage), caused by
any prior tenant, which includes Taylor Rental, the previous tenant. It is
agreed that the Landlord will seek to have the previous Tenant be responsible
for any such damage, nuisance or waste that occurred prior to this Lease and
which any governmental unit seeks to correct, abate, diminish or otherwise
prevent. If Taylor Rental fails to correct the problems the Landlord shall be
responsible.
8. ALTERATIONS. Tenant shall not, make any repairs, alterations or
additions to the demised premises or the building of which the demises premises
are a part nor attach or affix any articles thereto nor make any repairs,
alterations or additions to the electrical service and heating, cooling and air
conditioning, plumbing or sprinkler system without the written consent of the
Landlord. If alterations become necessary because of the application of laws or
ordinances or other directions, rules or regulations of any regulatory authority
having jurisdiction over the business carried on by Tenant, or because of any
act or default on the part of Tenant, or because Tenant has overloaded any
electrical or other facility, Tenant shall make such alterations at its own cost
and expense after first obtaining Landlord's written approval of plans and
specifications and furnishing such indemnifications against liens, costs and
damage as Landlord may reasonably require. All alterations, additions,
improvements and fixtures, other than trade fixtures, which may be made or
installed by Tenant upon the demised promises and which in any manner are
attached to the floors, walls or ceiling, at the termination of this Lease shall
become the property of Landlord, unless Landlord requests their removal,. and
shall remain upon and be surrendered with the demised premises as a part
thereof, without damage or injury, all without compensation or credit to Tenant.
If Landlord requests Tenant, in writing, to do so, Tenant shall, on or before
the end of the term, remove all such additions, installations and fixtures
placed in the demised premises by Tenant and so designated by Landlord and
Tenant shall pay for the reasonable cost of repairing damage occasioned by the
removal. Tenant shall insure its leasehold improvements.
3
<PAGE>
9. MAINTENANCE BY TENANT. Except as provided in paragraph 28.2, Tenant
accepts the demised premises in the condition they are `in at the beginning of
this Lease and agrees to maintain the demised premises in the same condition,
order and repair as they are at, at the commencement of said term, excepting
only reasonable wear and tear arising from the use thereof under this Lease and
damage or destruction by fire or other casualty, without the fault or neglect of
Tenant. Tenant shall keep the windows and entrance doors clean at all times.
Tenant shall pay to Landlord the cost of repairing any damage to the building or
building equipment caused by any act or neglect of Tenant or its invitees
(including, but limited to, damage to air conditioning equipment, water
apparatus, electric lights, fixtures, appliances or appurtenances of the demised
premises or damage caused by overflow or escape of water, steam or gas or from
improper use of the electrical system due to negligence of Tenant or its
invitees) to the extent Landlord is not reimbursed for such cost through
insurance carried by Landlord, it being understood that Landlord is not required
by this paragraph to maintain insurance against any particular type of loss or
in an amount which will result in a 100% recovery of any loss.
10. AIR CONDITIONING AND INTERIOR REPAIRS AND REPLACEMENT. Tenant
agrees to maintain regularly and to repair the air conditioning equipment, and
to keep such equipment in good working order. Tenant agrees to employ, at its
expense, an air-conditioning maintenance service acceptable to the Landlord to
inspect the equipment, change filters and lubricate the air conditioning
equipment no less than four times per year and maintain the equipment in good
working order, and shall provide evidence of such service, at the Landlord's
request, in the form of paid invoices for such service. Tenant agrees to pay all
costs of replacements or repairs of fixtures, lamps, tubes, ballasts, starters,
transformers, fuses, and all other interior electric service and lighting
equipment. Tenant agrees to maintain interior walls, ceiling and floors in good
order, condition and repair.
11. GLASS. Tenant shall forthwith at its own cost and expense replace
with glass of the same quality any cracked or broken glass, including plate
glass, other glass, or breakable material used in structural portions, and any
interior and exterior windows and doors in the demised premises. Tenant shall
procure and maintain during the term of this Lease a policy or policies in
companies acceptable to Landlord, insuring Landlord and Tenant, as their
interest may appear, against breakage of all such glass and breakable materials
in the demised premises and shall deposit such policy or policies, or
certificates evidencing their existence, together with evidence of the payment
of the premiums thereon, with Landlord at the commencement of the term and at
least thirty days prior to the expiration of each such policy. Should Tenant
fail to procure and maintain any such insurance, Landlord may, at its option,
obtain the insurance and keep t ' he same in force and effect, and Tenant shall
pay Landlord upon demand for the costs of the insurance.
12. SIGNS. Tenant shall not erect or install any exterior or interior
window or door signs, advertising media, or window or door lettering or placards
without Landlord's prior written consent. Tenant shall not install any lighting
or plumbing fixtures, shades or awnings, or make any decoration or painting, or
install any radio or television antenna, loud speakers, sound amplifiers or
similar devices, or make any changes to the store front without Landlord's prior
written consent. Landlord may withhold approval of any items which he deems to
be not in
4
<PAGE>
conformity with the character of the building or the neighborhood. Tenant may
install a sign on the exterior of the building conforming to county codes and
requirements with Landlord having final approval if such sign.
13. INSPECTION, ENTRY AND REPAIR. Landlord and his agent shall have the
right to enter the demised premises during all reasonable hours, to examine the
same, to make such repairs, additions or alterations as may be deemed necessary
for the safety, comfort, or preservation of the demised premises, or of the
building, and to put or keep upon the doors and windows thereof a notice "FOR
RENT" at any time within ninety (90) days before the expiration of this Lease.
The right of entry shall likewise exist for the purpose of removing placards,
signs, fixtures, alterations or additions, which do not conform to this
agreement or to the reasonable rules and regulations of the building which the
Landlord may from time to time promulgate and which shall be applicable to all
tenants. Landlord reserves the right to have a pass key to the demised premises.
It is further understood and agreed between the parties that any charges against
the Tenant by the Landlord for services or work done on the premises by order of
the Tenant or otherwise accruing under this contract shall be considered as rent
due and shall be included in any lion for rent due and unpaid.
14. RIGHT TO SHOW PREMISES. During the last ninety (90) days of this
Lease, Landlord may, during normal business hours and after reasonable notice to
Tenant, enter and exhibit the premises to prospective tenants.
15. DESTRUCTION OF DEMISED PREMISES. In the event the demised premises
are destroyed, damaged or injured by fire or other casualty insurable under
standard fire and extended coverage insurance during the term of this Lease then
Landlord shall repair the demised premises, restoring them as nearly as
practicable to their condition before the occurrence of the casualty. However,
if the Landlord notifies Tenant in writing that the demised premises cannot
reasonably be restored within one hundred twenty (120) days after the notice of
occurrence of the casualty either party may terminate this Lease by written
notice to the other. If the demised premises themselves are not damaged by fire
or other casualty, but the building is so damaged that Landlord shall determine
not to rebuild, then Landlord may terminate this Lease by written notice to
Tenant. In the event of termination under this paragraph, the rent shall be
payable only to the date of the fire or casualty and all obligations and
liabilities of Landlord and Tenant under this Lease shall thereupon terminate
and Landlord shall refund to Tenant any unearned rent paid in advance.
16. CONDEMNATION OF DEMISES PREMISES. If the demised premises are
condemned or appropriated by any public or quasi-public authority having power
of eminent domain, or sold under imminent threat, of eminent domain, then this
Lease shall terminate as of the data that possession shall be required by the
appropriating authority. If condemnation, appropriation or sale occurs with
respect to only a portion of the demised premises and the demised premises
remain tenantable, this Lease shall terminate as to the portion of the demised
premises so condemned, appropriated or sold on the day Tenant must yield
possession thereof. Landlord shall make such repairs and alterations as may be
necessary in order to restore the remaining demised premises to usable condition
and the rent payable under this Lease shall be reduced
5
<PAGE>
equitably according to Tenant's use of the part of the demised premises so
taken. In the event of a termination or partial termination as described above,
Landlord shall refund to Tenant the unearned portion of any rent paid in
advance. Tenant shall surrender the premises for which the Lease was terminated,
and Tenant shall not be entitled to participate in any award or sale price of
the premises. However, the Landlord shall not be entitled to any portion of the
award to the Tenant for loss of business, depreciation to and cost of removal of
stock and fixtures. Tenant shall be entitled to appear in any appropriation
proceedings or to claim a value for the unexpired term of this Lease.
17. DAMAGE TO TENANT. All personal property placed in, or moved into,
the demised premises shall be at risk of Tenant or owner of the personal
property, and Landlord shall not be liable to Tenant or to any other person for
damage to the personal property from any cause whatsoever unless directly
resulting from Landlord's act, or neglect after notice. Landlord shall not be
liable for any damage arising from any acts or neglect of co-tenants or other
occupants of the building or of adjacent property or of any other person. For
purposes of this clause, the term "personal property" shall include, but not be
limited to, merchandise, inventory and all improvements within the demised
premises whether installed by the Landlord or Tenant, such as ceiling tiles,
shelving or other improvements.
18. DEFAULT BY TENANT.
18.1 The prompt payment of rent for the demised premises upon
the dates named, or when billed therefor, the faithful performance of all
covenants of this Lease and the faithful observance of the rules and regulations
of the entire building, grounds and parking facilities now in existence, and
which are hereby made a part of this Lease, and of such further reasonable rules
and regulations for the entire building, grounds and parking facilities which
may be hereafter made by the Landlord, are the conditions upon which this Lease
is made and accepted. Any failure on the part of Tenant to comply with the terms
of this Lease, or any of the reasonable rules and regulations now in existence,
or hereafter prescribed by the Landlord, shall at the option of Landlord, after
giving notice as provided in this paragraph, work a forfeiture of this Lease and
all of the rights of Tenant hereunder, and thereupon Landlord, its agent or
attorneys, shall have. the right to enter the demised premises and remove all
persons therefrom and shall have the right to declare the entire rent for the
balance of the term, or any part thereof, immediately due and payable in full
and may proceed to collect same either by distress or otherwise, and thereupon
the Lease shall terminate.
The expression "entire rent for the balance of the term" as used herein shall
mean all of the rent prescribed to be paid by the Tenant to the Landlord for the
full term of the Lease, less any payments that have been made on account of and
pursuant to the terms of the Lease. Tenant shall be entitled to ten days notice
of any monetary default under this Lease and thirty days notice of any
non-monetary default, but Tenant agrees that if Tenant's default has not been
cured within the time prescribed by any notice of default, Landlord, its agent
or attorneys, may immediately re-enter the demised premises and dispossess
Tenant without further legal notice or the institution of any legal proceedings
whatsoever, to the extent that such waiver and agreement by Tenant, or such acts
by Landlord are not prohibited by law.
6
<PAGE>
18.2 If Tenant shall abandon or vacate the demised premises
before the end of the term of this Lease, or permit the rent to be in arrears or
otherwise fail to comply with the terms of this Lease, Landlord may, at its
option, forthwith terminate this Lease or may enter the demised premises as the
agent of Tenant, in any manner not prohibited by law, without being liable in
any way therefor, and relet the demised premises with or without any furniture,
fixtures, and equipment that may be situated therein, at such rent and upon such
terms and for such duration of time as Landlord may determine, and receive the
rent therefor, applying the same to the payment of the rent due hereunder. If
the full rental herein provided shall not be realized by Landlord over and above
the expenses to Landlord in reletting, Tenant shall pay any deficiency.
18.3 Tenant agrees to pay, to the extent not prohibited by
law, all expenses which Landlord may incur in reletting the demised premises
after Tenant's forfeiture of the Lease, abandonment or vacation of the demised
premises, Tenant also agrees that if Landlord retains an attorney to enforce the
provisions of this Lease, or if suit is brought for recovery of possession of
the Premises, for the recovery of rent or any other amount due under this Lease,
or because of the breach of any other covenant herein to be kept or performed by
Tenant, Tenant shall pay to Landlord all expenses incurred, including reasonable
attorneys' fees, which fees shall include services at trial and appellate
levels.
18.4 The rights and remedies of Landlord upon any default by
Tenant as set forth in this Lease shall be cumulative and not exclusive of any
other rights or remedies of law or in equity. The failure of Landlord to
promptly exercise any right or remedy shall not operate to forfeit any right or
remedy.
19. WAIVER OF JURY TRIAL. The parties hereby waive trial by jury in any
action, proceeding or counterclaim brought by either against the other on any
matters whatsoever arising out of or in any way connected with this Lease or
Tenant's use or occupancy of the premises.
20. LATE CHARGE FOR DELINQUENT RENT. If the Tenant defaults in the
payment of any installment of base rent or additional rent by the 10th of each
month, then the Landlord may impose a late charge of five percent of the base
rent.
21. RIGHT OF LANDLORD TO CURE TENANT'S DEFAULT. If Tenant defaults in
the making of any payment or in the doing of any act required by this Lease to
be made or done by Tenant, Landlord may, but shall not be required to, make such
payment or do such act, and the expense thereof, if made or done by Landlord,
with interest thereon at the rate of eighteen percent (18%) per annum from the
date paid by Landlord, shall be paid by Tenant to Landlord and shall constitute
additional rent due and payable with the next monthly installment of base rent.
The making of such payment or the doing of such act by Landlord shall not
operate to cure the default or to prevent Landlord from the pursuit of any
remedy to which it would otherwise be entitled.
22. BANKRUPTCY OF TENANT. If Tenant shall become insolvent or unable to
pay its debts as they mature, or if bankruptcy proceedings shall be begun by or
against Tenant before the end of the Lease term, Landlord is hereby irrevocably
authorized at its option, to forthwith terminate this Lease, as upon a default
by Tenant. Landlord may elect to accept rent from such receiver, trustee, or
other judicial officer during the term of occupancy in a fiduciary capacity
without
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<PAGE>
affecting Landlord's rights as contained in this Lease, but no receiver, trustee
or other judicial officer shall ever have any right, title or interest in or to
the demised premises by virtue of Landlord's election.
23. ENCUMBRANCES. Tenant, shall not in any way pledge, mortgage, or
encumber this Lease or its rights under it without prior written consent of the
Landlord.
24. LIEN AND SECURITY. Tenant hereby pledges and assigns to Landlord,
and agrees that Landlord shall have a lien upon all the carpeting, furniture,
fixtures, goods, chattels, and equipment of Tenant, which shall or may be
brought or put on the demised premises, as security for the payment of the rent
herein reserved. In the event Lessor exercises the option to terminate the
Lease, and to re-enter and relet the premises as provided in this Lease, the
Lessor may take possession of all of the Lessee's property on the premises and
sell the same at public or private sale after giving Lessee reasonable notice of
the time and place of any public sale or of the time after which any private
sale is to be made, for cash or on credit, or for such price and terms as Lessor
deems best, with or without having the property present at the sale. The
proceeds of the sale shall, to the extent not prohibited by law, be applied
first to the necessary and proper expenses of removing, storing and selling the
property including attorney's fees, then to the payment of any rent due or to
become due under this Lease, with the balance, if any, to be paid to Lessee.
Landlord agrees to execute a subordination agreement on the equipment.
25. INDEMNITY BY TENANT AND LIABILITY INSURANCE.
25.1 Tenant shall protect, save and keep Landlord harmless and
indemnified against any loss, costs, damage or expense, including reasonable
attorney's fees incurred by Landlord in the defense or payment of any .claim
arising out of or from any accident or other occurrence in the demised premises
causing injury or damage to any person or property, due or claimed to be due to
any act, failure to act or negligence on the part of Tenant, its agents,
employees, invitees, or licensees, or due or claimed to be due to any failure of
Tenant, its agents, employees, invitees, or licensees, to comply with or perform
any of the requirements of this Lease on its part to be performed, or due or,
claimed to be due to any use of the demised premises by Tenant, its agents,
employees, invitees, licensees or lessees.
25.2 Tenant agrees to procure and maintain a policy or
policies of insurance at its own cost and expense with a company authorized and
permitted to do business in the State of Florida, indemnifying Landlord from all
claim, demands or actions arising or claimed to have arisen because of the
injury to, or death of, any one or more persons in any one occurrence in amounts
of not less than $1,000,000.00 and because of damage to property in amounts of
not less than $500,000.00 made by or on behalf' of any one or more persons or
corporations alleged to have arisen from, been related to, or been connected
with the conduct and operation of Tenant's business in the demised premises, or
Tenant's occupancy thereof.
Furthermore, if experience during the term of this Lease shows the above
coverage to be insufficient, additional coverage will be procured by the Tenant
at Landlord's request. The insurance shall not be subject to cancellation except
after at least ten (10) days prior written. notice to Landlord. The policy or
policies, or duly executed certificates or certificates for the
8
<PAGE>
same, together with satisfactory evidence of the payments of the premium
thereon, shall be deposited with Landlord at the commencement of the term and
renewals thereof not less than ninety (90) days prior to the expiration of the
term of such coverage.
26. OUTSIDE AREAS. Tenant shall keep any outside area and common area
immediately adjoining the demised premises clean and free from dirt and rubbish,
and Tenant shall not permit any obstruction or any merchandise, packing
containers, and materials to be placed or kept in such areas.
27. HOLDING OVER. In the event Tenant remains in possession of the
demised premises after the expiration of the tenancy created by this Lease, and
without the execution of a new Lease, Tenant shall be deemed to be occupying the
demised premises as a tenant from month to month. at two hundred percent (200%)
of fixed base rent for the last month of the Lease, subject to all the other
conditions, provisions and obligations of this Lease insofar as the same are
applicable to a month-to-month tenancy.
28. LANDLORD'S COVENANTS.
28.1 The Landlord covenants and agrees with Tenant that so
long as Tenant shall pay the rent and keep and perform the other covenants of
this Lease to be kept and performed by Tenant, Tenant shall peaceably and
quietly hold the demised premises without any interference from the Landlord.
28.2 Landlord warrants that the demised premises comply with
all applicable rules, orders, regulations and laws respecting zoning and fire
prevention and that the plumbing and electrical will be in good working order at
the commencement of this Lease, Landlord will, at his expense, repair any
defects in the plumbing and electrical of which he is notified within seven (7)
days after occupancy of the demised premises by Tenant, but in no event shall
the Landlord's obligation to repair last more than 30 days after the Lease
commences.
29. OPERATION OF BUSINESS. Tenant agrees to keep the demised premises
open for business at least eleven months of each calendar year. During the time
that the business may be closed, the demised premises should be kept so as to
appear that they are still open for business in so far as is practicable.
30. WAIVER OF HOMESTEAD. Tenant hereby waives and renounces for himself
and family any and all homestead and exemption rights he may have now, or
hereafter, under or by virtue of the constitution and laws of the State of
Florida, or of any other State, or of the United States, as against the payment
of said rental or any portion hereof, or any other obligation or damage that may
accrue under the terms of this Lease.
31. TIME OF ESSENCE. It is understood and agreed that time is of the
essence of this Lease and this applies to all terms and conditions contained in
this Lease.
32. MECHANICS LIENS. The parties acknowledge that no improvements or
repairs are required by this Lease, and any improvements or repairs to the
demised premises which may be
9
<PAGE>
made shall be at Tenant's sole expense, unless otherwise specifically provided
in this Lease. Tenant agrees that it shall not under any circumstances permit or
allow a mechanics lien to be filed against the Landlord's property as a result
of work or materials provided to the demised premises. If any mechanics lien
shall be filed against Landlord's property as a result of work or materials
provided to the demised premises, the Tenant shall cause the lien to be removed
to a bond as provided by Florida's Mechanic's Lien Law within seven days after
Landlord's demand. Failure to remove the lien to bond within seven days after
demand constitutes a default under this Lease and shall, at Landlord's option,
be grounds for forfeiture of this Lease.
33. BINDING EFFECT. This Lease shall bind Landlord and Tenant and their
respective heirs, executors, administrators, successors and assigns.
34. NOTICES. All notices, consents, requests, payments and other
communications required or permitted to be sent by this Lease shall be in
writing and shall be delivered in person or sent by registered or certified
mail, return receipt requested, to the proper address of the other party to this
Lease, which address shall be (unless and until another address is furnished by
notice):
If to Landlord, to: 1361 Airport Road North
Naples, Florida 33942
If to Tenant, to: Fischer International
3506 Merchantile Avenue
Bay B & C
Naples, Florida 33942
Notices shall be effective and deemed delivered when properly addressed and
deposited with the United States or Canadian Post Office for delivery, postage
prepaid.
35. NON WAIVER OF BREACH. No waiver of a breach of any of the covenants
or conditions of this Lease shall be construed to be a waiver of any succeeding
breach of that same covenant, condition or any other covenant or condition.
36. OPTION TO RENEW. So long as Tenant is not in default of this Lease,
Tenant shall have the option to renew this Lease of the demised premises for a
further term of One/Four year term, under and subject to the same covenants and
agreements as are herein contained. The rent for the renewal options shall be as
follows:
ANNUAL BASE RATE MONTHLY BASE RENT
---------------- -----------------
$66,974.39 $5,581.20
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<PAGE>
The rental rate for the renewal options shall escalate as outlined in Addendum
"A" hereto attached. Tenant must exercise the option by notifying Landlord in
writing not less than one hundred eighty (180) days prior to the expiration of
the term granted by this Lease. Tenant's right to renew is void if Tenant is not
in compliance with all terms and conditions of this Lease at the time the
renewal period commences.
37. HEADINGS. The headings to the several articles of this Lease are
for convenient reference only and shall not be construed as limited or changing
the context of any article.
38. SEVERABILITY. Each paragraph and provision of this Lease and any
part thereof, is an independent paragraph, provision or part thereof, and the
holding of any paragraph, provision or part thereof to be void or ineffective
for any reason whatsoever does not affect the validity or effectiveness of any
other paragraph, provision or part thereof.
39. ENTIRE AGREEMENT. This instrument contains the entire agreement of
Landlord and Tenant. No oral amendment, modification, or understanding shall be
made, but only an agreement in writing signed by the parties shall be valid as
an amendment, modification or change to this Lease.
40. LEASE COMMENCEMENT. This Lease will commence on the 1st day after
the Certificate of Occupancy is issued or when tenant moves in which ever occurs
first.
IN WITNESS WHEREOF, the parties hereto have hereunto executed this
instrument for the purposes herein expressed, the day and year above written.
Signed, Sealed and Delivered
in the presence of
ARNOLD INDUSTRIAL PARK ("Landlord")
/s/ LAMONA D. ANVIL By:/s/ JOHN L. ARNOLD
------------------
John L Arnold
FISCHER INTERNATIONAL ("Tenant")
/s/ PATRICIA JAN PALMER By:/s/ M.L. MENUDA
---------------
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<PAGE>
LEASE
RENEWAL
THIS WRITING contains all the terms and conditions of a Lease, made and
entered into this 4TH day of. OCTOBER 1993, by and between ARNOLD INDUSTRIAL
PARK ("Landlord") and FISCHER INTERNATIONAL ("Tenant"), wherein the parties
agree that for the rents to be paid by Tenant and for the mutual covenants and
conditions herein set forth, Landlord hereby leases to Tenant 10,000 square feet
located at 3506 MERCHANTILE AVENUE BAY B & C, COLLIER COUNTY, NAPLES, FLORIDA
said unit consisting of approximately 10,000 square feet (the "demised
premises") to be used and occupied by Tenant as OFFICE/STORAGE and for no other
purposes or uses whatsoever without Landlords prior written consent.
1. TERM. The term of this Lease shall be FOUR (4) YEARS, commencing on
the JANUARY 1, 1994 and ending on DECEMBER 31, 1997.
2. BASE RENT. Tenant shall pay without demand to Landlord a base rent
plus applicable sales tax (currently 6%) payable In monthly installments as
follows,
<TABLE>
<CAPTION>
Property Sales Total
------------------------------ ---------------
Annual Rent Base Rent Maint./Mgmt./Insurance Tax Tax Monthly Rent
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$55,100.00 4,591.67 348.37 252.00 311.52 5,503.56
</TABLE>
The rate shall increase by 5% each year over the previous years rental rate.
Each months RENT shall be payable in advance, on the first day of each and every
month of the term of this Lease except that rental payments for the first
calendar month or part thereof, shall be paid On execution of this Lease.
3. SECURITY DEPOSIT. The Landlord acknowledges that it has received
from the Tenant $1,590,00 to remain on deposit with the Landlord during the term
of this Lease and any extensions hereof as security for the payment of rent and
damages. No interest shall be payable on the deposit, and it may be commingled
with the general funds of the Landlord. If any rent or any other sum or charge
payable by Tenant to Landlord shall be overdue and unpaid, or if Landlord makes
any payments on behalf of Tenant, or if Tenant fails to perform any other terms
of this Lease, then Landlord may at its option and without prejudice, to any
other remedy, immediately apply all or part of the security and damage deposit
toward the payment of any amount due from Tenant or toward losses sustained by
Landlord as a result of Tenant's default under this Lease, Tenant shall then
immediately restore its security and damage deposit to the original sum
deposited. Should the Landlord convey its interest under this Lease, the deposit
may be turned over by the Landlord to the Landlord's grantee or assignee. If the
security and damage deposit is turned over as aforesaid, the Tenant hereby
releases the Landlord from. any and all liability with respect to the deposit or
its return, and the Tenant agrees to look solely to such grantee or assignee for
such application or return, and this provision shall also apply to subsequent
grantees or assigns.
<PAGE>
4. PAYMENT OF RENT. All payments shall be made without demand and
without any deduction set-off or counterclaim whatsoever and shall be made at
1361 Airport Road North, Naples, Florida 33942, or at such other place and to
such other person as Landlord may from time to time designate.
5. ADDITIONAL PAYMENTS BY TENANT, The Tenant shall pay for the
following as additional rent:
5.1. REAL ESTATE TAXES. During the term of this Lease, Tenant
shall pay to Landlord as additional rent his pro-rata share of all of the real
estate taxes and assessments for road, sewer, water, drainage or other
improvements and any other assessments for the property. The real estate taxes
shall be payable monthly during the term of this Lease, or any extension
thereto, within thirty (30) days after being billed therefor. If this Lease
commences or terminates during any tax year, Tenant's proportionate share of
taxes for that year shall be prorated for that portion of the tax year during
which this Lease shall be effective.
5.2. SALES AND PERSONAL PROPERTY TAXES. Tenant shall pay to
Landlord an amount equal to any sales or similar tax now or hereafter imposed
upon Landlord on account of this Lease or rents due hereunder. Tenant shall pay
such amount on the first day of each and every month of this Lease in which a
base rent installment is payable to Landlord in accordance with Article 2,
Tenant shall pay, promptly when due and personal property tax envied against the
demised promises and attributable to Tenant's personal property, trade fixtures
and leasehold improvements placed in or about the demised premises.
5.3. UTILITIES, Tenant shall pay all charges for electricity,
gas and other utilities used on the demised premises, including the costs of
electricity to operate the air conditioning and interior lighting equipment
provided by Landlord, and additional wiring, if any, if any, required for
special equipment, if any, installed by Tenant. The costs for electricity will
be billed to Tenant directly and it shall be Tenant's responsibility to make
satisfactory arrangements with Florida Power & Light Company to have electricity
activated.
5.4. SEWER, WATER AND TRASH, Tenant agrees to pay sewer, water
and trash charges directly to the respective suppliers thereof.
5.5. PROPERTY INSURANCE. During the term of this Lease, Tenant
shall pay to Landlord-as additional rent all costs for insurance of the demised
premises in an amount equal to the property's then current market value, along
with a loss of rents policy that shall pay Landlord rent equal to 100% of all
lost rental income. The payments for. the insurance premiums shall be payable
and included with the monthly rental payment. If this Lease commences or
terminates at a time when the insurance has already been paid, Tenant's
proportionate share of insurance shall be prorated for that portion of the year
during which this Lease shall be effective.
6. ASSIGNMENT AND SUBLETTING, Tenant shall not assign this Lease, nor
sublet the demised premises, or any part thereof, nor use the same, or any part
thereof, nor permit the same, or any part thereof, to be used by anyone other
than Tenant, without prior written consent of
2
<PAGE>
Landlord. If Tenant requests such written consent, Tenant shall compensate
Landlord for any legal fees incurred by Landlord in drafting or evaluating
documents, or in otherwise dealing with such request. The Landlord will not
unreasonably withhold an assignment, No subletting to which the Landlord may
consent shall release or relieve the Tenant from its obligations under this
Lease, and Landlord may look 'solely to Tenant for payment of rent and the
performance of the terms and conditions of this Lease.
7. COMPLIANCE WITH LAWFUL ORDERS. Tenant, at its sole cost and expense,
shall promptly execute and comply with all statutes, ordinances, rules, orders,
regulations and requirements of the federal, state, county, and city governments
and of any and all their departments and bureaus applicable to the demised
premises, for the correction, prevention and abatement of nuisances or other
grievances, in, upon, or connected with the demised premises during the Lease
term. Tenant shall also promptly comply with and execute all rules, orders and
regulations of insurance underwriters and insurance rating bureaus having
jurisdiction for the prevention of fires. Tenant shall not commit or suffer any
waste on the premises nor use the premises for any unlawful purpose.
8. ALTERATIONS. Tenant shall not, make any repairs, alterations or
additions to the demised premises or the building of which the demises premises
are a part nor attach or affix any articles thereto nor make any repairs,
alterations or additions to the electrical service and heating, cooling and air
conditioning, plumbing or sprinkler system without the written consent of the
Landlord. If alterations become necessary because of the application of laws or
ordinances or other directions, rules or regulations of any regulatory authority
having jurisdiction over the business carried on by Tenant, or because of any
act or default on the part of Tenant, or because Tenant has overloaded any
electrical or other facility, Tenant shall make such alterations at its own cost
and expense after first obtaining Landlord's written approval of plans and
specifications and furnishing such indemnifications against liens, costs and
damage as Landlord may reasonably require. All alterations, additions,
improvements and fixtures, other than trade fixtures, which may be made or
installed by Tenant upon the demised promises and which in any manner are
attached to the floors, walls or ceiling, at the termination of this Lease shall
become the property of Landlord, unless Landlord requests their removal,. and
shall remain upon and be surrendered with the demised premises as a part
thereof, without damage or injury, all without compensation or credit to Tenant.
If Landlord requests Tenant, in writing, to do so, Tenant shall, on or before
the end of the term, remove all such additions, installations and fixtures
placed in the demised premises by Tenant and so designated by Landlord and
Tenant shall pay for the reasonable cost of repairing damage occasioned by the
removal. Tenant shall insure its leasehold improvements.
9. MAINTENANCE BY TENANT. Except as provided in paragraph 28.2, Tenant
accepts the demised premises in the condition they are `in at the beginning of
this Lease and agrees to maintain the demised premises in the same condition,
order and repair as they are at, at the commencement of said term, excepting
only reasonable wear and tear arising from the use thereof under this Lease and
damage or destruction by fire or other casualty, without the fault or neglect of
Tenant. Tenant shall keep the windows and entrance doors clean at all times.
Tenant shall pay to Landlord the cost of repairing any damage to the building or
building equipment
3
<PAGE>
caused by any act or neglect of Tenant or its invitees (including, but limited
to, damage to air conditioning equipment, water apparatus, electric lights,
fixtures, appliances or appurtenances of the demised premises or damage caused
by overflow or escape of water, steam or gas or from improper use of the
electrical system due to negligence of Tenant or its invitees) to the extent
Landlord is not reimbursed for such cost through insurance carried by Landlord,
it being understood that Landlord is not required by this paragraph to maintain
insurance against any particular type of loss or in an amount which will result
in a 100% recovery of any loss.
10. AIR CONDITIONING AND INTERIOR REPAIRS AND REPLACEMENT. Tenant
agrees to maintain regularly and to repair the air conditioning equipment, and
to keep such equipment in good working order. Tenant agrees to employ, at its
expense, an air-conditioning maintenance service acceptable to the Landlord to
inspect the equipment, change filters and lubricate the air conditioning
equipment no less than four times per year and maintain the equipment in good
working order, and shall provide evidence of such service, at the Landlord's
request, in the form of paid invoices for such service. Tenant agrees to pay all
costs of replacements or repairs of fixtures, lamps, tubes, ballasts, starters,
transformers, fuses, and all other interior electric service and lighting
equipment. Tenant agrees to maintain interior walls, ceiling and floors in good
order, condition and repair.
11. GLASS. Tenant shall forthwith at its own cost and expense replace
with glass of the same quality any cracked or broken glass, including plate
glass, other glass, or breakable material used in structural portions, and any
interior and exterior windows and doors in the demised premises. Tenant shall
procure and maintain during the term of this Lease a policy or policies in
companies acceptable to Landlord, insuring Landlord and Tenant, as their
interest may appear, against breakage of all such glass and breakable materials
in the demised premises and shall deposit such policy or policies, or
certificates evidencing their existence, together with evidence of the payment
of the premiums thereon, with Landlord at the commencement of the term and at
least thirty days prior to the expiration of each such policy. Should Tenant
fail to procure and maintain any such insurance, Landlord may, at its option,
obtain the insurance and keep t ' he same in force and effect, and Tenant shall
pay Landlord upon demand for the costs of the insurance.
12. SIGNS. Tenant shall not erect or install any exterior or interior
window or door signs, advertising media, or window or door lettering or placards
without Landlord's prior written consent. Tenant shall not install any lighting
or plumbing fixtures, shades or awnings, or make any decoration or painting, or
install any radio or television antenna, loud speakers, sound amplifiers or
similar devices, or make any changes to the store front without Landlord's prior
written consent. Landlord may withhold approval of any items which he deems to
be not in conformity with the character of the building or the neighborhood.
Tenant may install a sign on the exterior of the building conforming to county
codes and requirements with Landlord having final approval if such sign.
13. INSPECTION, ENTRY AND REPAIR. Landlord and his agent shall have the
right to enter the demised premises during all reasonable hours, to examine the
same, to make such repairs, additions or alterations as may be deemed necessary
for the safety, comfort, or preservation of
4
<PAGE>
the demised premises, or of the building, and to put or keep upon the doors and
windows thereof a notice "FOR RENT" at any time within ninety (90) days before
the expiration of this Lease. The right of entry shall likewise exist for the
purpose of removing placards, signs, fixtures, alterations or additions, which
do not conform to this agreement or to the reasonable rules and regulations of
the building which the Landlord may from time to time promulgate and which shall
be applicable to all tenants. Landlord reserves the right to have a pass key to
the demised premises. It is further understood and agreed between the parties
that any charges against the Tenant by the Landlord for services or work done on
the premises by order of the Tenant or otherwise accruing under this contract
shall be considered as rent due and shall be included in any lion for rent due
and unpaid.
14. RIGHT TO SHOW PREMISES. During the last ninety (90) days of this
Lease, Landlord may, during normal business hours and after reasonable notice to
Tenant, enter and exhibit the premises to prospective tenants.
15. DESTRUCTION OF DEMISED PREMISES. In the event the demised premises
are destroyed, damaged or injured by fire or other casualty insurable under
standard fire and extended coverage insurance during the term of this Lease then
Landlord shall repair the demised premises, restoring them as nearly as
practicable to their condition before the occurrence of the casualty. However,
if the Landlord notifies Tenant in writing that the demised premises cannot
reasonably be restored within one hundred twenty (120) days after the notice of
occurrence of the casualty either party may terminate this Lease by written
notice to the other. If the demised premises themselves are not damaged by fire
or other casualty, but the building is so damaged that Landlord shall determine
not to rebuild, then Landlord may terminate this Lease by written notice to
Tenant. In the event of termination under this paragraph, the rent shall be
payable only to the date of the fire or casualty and all obligations and
liabilities of Landlord and Tenant under this Lease shall thereupon terminate
and Landlord shall refund to Tenant any unearned rent paid in advance.
16. CONDEMNATION OF DEMISES PREMISES. If the demised premises are
condemned or appropriated by any public or quasi-public authority having power
of eminent domain, or sold under imminent threat, of eminent domain, then this
Lease shall terminate as of the data that possession shall be required by the
appropriating authority. If condemnation, appropriation or sale occurs with
respect to only a portion of the demised premises and the demised premises
remain tenantable, this Lease shall terminate as to the portion of the demised
premises so condemned, appropriated or sold on the day Tenant must yield
possession thereof. Landlord shall make such repairs and alterations as may be
necessary in order to restore the remaining demised premises to usable condition
and the rent payable under this Lease shall be reduced equitably according to
Tenant's use of the part of the demised premises so taken. In the event of a
termination or partial termination as described above, Landlord shall refund to
Tenant the unearned portion of any rent paid in advance. Tenant shall surrender
the premises for which the Lease was terminated, and Tenant shall not be
entitled to participate in any award or sale price of the premises. However, the
Landlord shall not be entitled to any portion of the award to the Tenant for
loss of business, depreciation to and cost of removal of stock and fixtures.
Tenant
5
<PAGE>
shall be entitled to appear in any appropriation proceedings or to claim a value
for the unexpired term of this Lease.
17. DAMAGE TO TENANT. All personal property placed in, or moved into,
the demised premises shall be at risk of Tenant or owner of the personal
property, and Landlord shall not be liable to Tenant or to any other person for
damage to the personal property from any cause whatsoever unless directly
resulting from Landlord's act, or neglect after notice. Landlord shall not be
liable for any damage arising from any acts or neglect of co-tenants or other
occupants of the building or of adjacent property or of any other person. For
purposes of this clause, the term "personal property" shall include, but not be
limited to, merchandise, inventory and all improvements within the demised
premises whether installed by the Landlord or Tenant, such as ceiling tiles,
shelving or other improvements.
18. DEFAULT BY TENANT.
18.1 The prompt payment of rent for the demised premises upon
the dates named, or when billed therefor, the faithful performance of all
covenants of this Lease and the faithful observance of the rules and regulations
of the entire building, grounds and parking facilities now in existence, and
which are hereby made a part of this Lease, and of such further reasonable rules
and regulations for the entire building, grounds and parking facilities which
may be hereafter made by the Landlord, are the conditions upon which this Lease
is made and accepted. Any failure on the part of Tenant to comply with the terms
of this Lease, or any of the reasonable rules and regulations now in existence,
or hereafter prescribed by the Landlord, shall at the option of Landlord, after
giving notice as provided in this paragraph, work a forfeiture of this Lease and
all of the rights of Tenant hereunder, and thereupon Landlord, its agent or
attorneys, shall have. the right to enter the demised premises and remove all
persons therefrom and shall have the right to declare the entire rent for the
balance of the term, or any part thereof, immediately due and payable in full
and may proceed to collect same either by distress or otherwise, and thereupon
the Lease shall terminate.
The expression "entire rent for the balance of the term" as used herein shall
mean all of the rent prescribed to be paid by the Tenant to the Landlord for the
full term of the Lease, less any payments that have been made on account of and
pursuant to the terms of the Lease. Tenant shall be entitled to ten days notice
of any monetary default under this Lease and thirty days notice of any
non-monetary default, but Tenant agrees that if Tenant's default has not been
cured within the time prescribed by any notice of default, Landlord, its agent
or attorneys, may immediately re-enter the demised premises and dispossess
Tenant without further legal notice or the institution of any legal proceedings
whatsoever, to the extent that such waiver and agreement by Tenant, or such acts
by Landlord are not prohibited by law.
18.2 If Tenant shall abandon or vacate the demised premises
before the end of the term of this Lease, or permit the rent to be in arrears or
otherwise fail to comply with the terms of this Lease, Landlord may, at its
option, forthwith terminate this Lease or may enter the demised premises as the
agent of Tenant, in any manner not prohibited by law, without being liable in
any way therefor, and relet the demised premises with or without any furniture,
fixtures,
6
<PAGE>
and equipment that may be situated therein, at such rent and upon such terms and
for such duration of time as Landlord may determine, and receive the rent
therefor, applying the same to the payment of the rent due hereunder. If the
full rental herein provided shall not be realized by Landlord over and above the
expenses to Landlord in reletting, Tenant shall pay any deficiency.
18.3 Tenant agrees to pay, to the extent not prohibited by
law, all expenses which Landlord may incur in reletting the demised premises
after Tenant's forfeiture of the Lease, abandonment or vacation of the demised
premises, Tenant also agrees that if Landlord retains an attorney to enforce the
provisions of this Lease, or if suit is brought for recovery of possession of
the Premises, for the recovery of rent or any other amount due under this Lease,
or because of the breach of any other covenant herein to be kept or performed by
Tenant, Tenant shall pay to Landlord all expenses incurred, including reasonable
attorneys' fees, which fees shall include services at trial and appellate
levels.
18.4 The rights and remedies of Landlord upon any default by
Tenant as set forth in this Lease shall be cumulative and not exclusive of any
other rights or remedies of law or in equity. The failure of Landlord to
promptly exercise any right or remedy shall not operate to forfeit any right or
remedy.
19. WAIVER OF JURY TRIAL. The parties hereby waive trial by jury in any
action, proceeding or counterclaim brought by either against the other on any
matters whatsoever arising out of or in any way connected with this Lease or
Tenant's use or occupancy of the premises.
20. LATE CHARGE FOR DELINQUENT RENT. If the Tenant defaults in the
payment of any installment of base rent or additional rent by the 10th of each
month, then the Landlord may impose a late charge of five percent of the base
rent.
21. RIGHT OF LANDLORD TO CURE TENANT'S DEFAULT. If Tenant defaults in
the making of any payment or in the doing of any act required by this Lease to
be made or done by Tenant, Landlord may, but shall not be required to, make such
payment or do such act, and the expense thereof, if made or done by Landlord,
with interest thereon at the rate of eighteen percent (18%) per annum from the
date paid by Landlord, shall be paid by Tenant to Landlord and shall constitute
additional rent due and payable with the next monthly installment of base rent.
The making of such payment or the doing of such act by Landlord shall not
operate to cure the default or to prevent Landlord from the pursuit of any
remedy to which it would otherwise be entitled.
22. BANKRUPTCY OF TENANT. If Tenant shall become insolvent or unable to
pay its debts as they mature, or if bankruptcy proceedings shall be begun by or
against Tenant before the end of the Lease term, Landlord is hereby irrevocably
authorized at its option, to forthwith terminate this Lease, as upon a default
by Tenant. Landlord may elect to accept rent from such receiver, trustee, or
other judicial officer during the term of occupancy in a fiduciary capacity
without affecting Landlord's rights as contained in this Lease, but no receiver,
trustee or other judicial officer shall ever have any right, title or interest
in or to the demised premises by virtue of Landlord's election.
7
<PAGE>
23. ENCUMBRANCES. Tenant, shall not in any way pledge, mortgage, or
encumber this Lease or its rights under it without prior written consent of the
Landlord.
24. LIEN AND SECURITY. Tenant hereby pledges and assigns to Landlord,
and agrees that Landlord shall have a lien upon all the carpeting, furniture,
fixtures, goods, chattels, and equipment of Tenant, which shall or may be
brought or put on the demised premises, as security for the payment of the rent
herein reserved. In the event Lessor exercises the option to terminate the
Lease, and to re-enter and relet the premises as provided in this Lease, the
Lessor may take possession of all of the Lessee's property on the premises and
sell the same at public or private sale after giving Lessee reasonable notice of
the time and place of any public sale or of the time after which any private
sale is to be made, for cash or on credit, or for such price and terms as Lessor
deems best, with or without having the property present at the sale. The
proceeds of the sale shall, to the extent not prohibited by law, be applied
first to the necessary and proper expenses of removing, storing and selling the
property including attorney's fees, then to the payment of any rent due or to
become due under this Lease, with the balance, if any, to be paid to Lessee.
Landlord agrees to execute a subordination agreement on the equipment.
25. INDEMNITY BY TENANT AND LIABILITY INSURANCE.
25.1 Tenant shall protect, save and keep Landlord harmless and
indemnified against any loss, costs, damage or expense, including reasonable
attorney's fees incurred by Landlord in the defense or payment of any .claim
arising out of or from any accident or other occurrence in the demised premises
causing injury or damage to any person or property, due or claimed to be due to
any act, failure to act or negligence on the part of Tenant, its agents,
employees, invitees, or licensees, or due or claimed to be due to any failure of
Tenant, its agents, employees, invitees, or licensees, to comply with or perform
any of the requirements of this Lease on its part to be performed, or due or,
claimed to be due to any use of the demised premises by Tenant, its agents,
employees, invitees, licensees or lessees.
25.2 Tenant agrees to procure and maintain a policy or
policies of insurance at its own cost and expense with a company authorized and
permitted to do business in the State of Florida, indemnifying Landlord from all
claim, demands or actions arising or claimed to have arisen because of the
injury to, or death of, any one or more persons in any one occurrence in amounts
of not less than $1,000,000.00 and because of damage to property in amounts of
not less than $500,000.00 made by or on behalf' of any one or more persons or
corporations alleged to have arisen from, been related to, or been connected
with the conduct and operation of Tenant's business in the demised premises, or
Tenant's occupancy thereof.
Furthermore, if experience during the term of this Lease shows the above
coverage to be insufficient, additional coverage will be procured by the Tenant
at Landlord's request. The insurance shall not be subject to cancellation except
after at least ten (10) days prior written. notice to Landlord. The policy or
policies, or duly executed certificates or certificates for the same, together
with satisfactory evidence of the payments of the premium thereon, shall be
deposited with Landlord at the commencement of the term and renewals thereof not
less than ninety (90) days prior to the expiration of the term of such coverage.
8
<PAGE>
26. OUTSIDE AREAS. Tenant shall keep any outside area and common area
immediately adjoining the demised premises clean and free from dirt and rubbish,
and Tenant shall not permit any obstruction or any merchandise, packing
containers, and materials to be placed or kept in such areas.
27. HOLDING OVER. In the event Tenant remains in possession of the
demised premises after the expiration of the tenancy created by this Lease, and
without the execution of a new Lease, Tenant shall be deemed to be occupying the
demised premises as a tenant from month to month. at two hundred percent (200%)
of fixed base rent for the last month of the Lease, subject to all the other
conditions, provisions and obligations of this Lease insofar as the same are
applicable to a month-to-month tenancy.
28. LANDLORD'S COVENANTS.
28.1 The Landlord covenants and agrees with Tenant that so
long as Tenant shall pay the rent and keep and perform the other covenants of
this Lease to be kept and performed by Tenant, Tenant shall peaceably and
quietly hold the demised premises without any interference from the Landlord.
28.2 Landlord warrants that the demised premises comply with
all applicable rules, orders, regulations and laws respecting zoning and fire
prevention and that the plumbing and electrical will be in good working order at
the commencement of this Lease, Landlord will, at his expense, repair any
defects in the plumbing and electrical of which he is notified within seven (7)
days after occupancy of the demised premises by Tenant, but in no event shall
the Landlord's obligation to repair last more than 30 days after the Lease
commences.
29. OPERATION OF BUSINESS. Tenant agrees to keep the demised premises
open for business at least eleven months of each calendar year. During the time
that the business may be closed, the demised premises should be kept so as to
appear that they are still open for business in so far as is practicable.
30. WAIVER OF HOMESTEAD. Tenant hereby waives and renounces for himself
and family any and all homestead and exemption rights he may have now, or
hereafter, under or by virtue of the constitution and laws of the State of
Florida, or of any other State, or of the United States, as against the payment
of said rental or any portion hereof, or any other obligation or damage that may
accrue under the terms of this Lease.
31. TIME OF ESSENCE. It is understood and agreed that time is of the
essence of this Lease and this applies to all terms and conditions contained in
this Lease.
32. MECHANICS LIENS. The parties acknowledge that no improvements or
repairs are required by this Lease, and any improvements or repairs to the
demised premises which may be made shall be at Tenant's sole expense, unless
otherwise specifically provided in this Lease. Tenant agrees that it shall not
under any circumstances permit or allow a mechanics lien to be filed against the
Landlord's property as a result of work or materials provided to the demised
9
<PAGE>
premises. If any mechanics lien shall be filed against Landlord's property as a
result of work or materials provided to the demised premises, the Tenant shall
cause the lien to be removed to a bond as provided by Florida's Mechanic's Lien
Law within seven days after Landlord's demand. Failure to remove the lien to
bond within seven days after demand constitutes a default under this Lease and
shall, at Landlord's option, be grounds for forfeiture of this Lease.
33. BINDING EFFECT. This Lease shall bind Landlord and Tenant and their
respective heirs, executors, administrators, successors and assigns.
34. NOTICES. All notices, consents, requests, payments and other
communications required or permitted to be sent by this Lease shall be in
writing and shall be delivered in person or sent by registered or certified
mail, return receipt requested, to the proper address of the other party to this
Lease, which address shall be (unless and until another address is furnished by
notice):
If to Landlord, to: 1361 Airport Road North
Naples, Florida 33942
If to Tenant, to: Fischer International
3506 Merchantile Avenue
Bay B & C
Naples, Florida 33942
Notices shall be effective and deemed delivered when properly addressed and
deposited with the United States or Canadian Post Office for delivery, postage
prepaid.
35. NON WAIVER OF BREACH. No waiver of a breach of any of the covenants
or conditions of this Lease shall be construed to be a waiver of any succeeding
breach of that same covenant, condition or any other covenant or condition.
36. OPTION TO RENEW. So long as Tenant is not in default of this Lease,
Tenant shall have the option to renew this Lease of the demised premises for a
further term of One/Four year term, under and subject to the same covenants and
agreements as are herein contained. The rent for the renewal options shall be as
follows:
ANNUAL BASE RATE MONTHLY BASE RENT
---------------- -----------------
$66,974.39 $5,581.20
The rental rate for the renewal options shall escalate as outlined in Addendum
"A" hereto attached. Tenant must exercise the option by notifying Landlord in
writing not less than one hundred eighty (180) days prior to the expiration of
the term granted by this Lease. Tenant's
10
<PAGE>
right to renew is void if Tenant is not in compliance with all terms and
conditions of this Lease at the time the renewal period commences.
37. HEADINGS. The headings to the several articles of this Lease are
for convenient reference only and shall not be construed as limited or changing
the context of any article.
38. SEVERABILITY. Each paragraph and provision of this Lease and any
part thereof, is an independent paragraph, provision or part thereof, and the
holding of any paragraph, provision or part thereof to be void or ineffective
for any reason whatsoever does not affect the validity or effectiveness of any
other paragraph, provision or part thereof.
39. ENTIRE AGREEMENT. This instrument contains the entire agreement of
Landlord and Tenant. No oral amendment, modification, or understanding shall be
made, but only an agreement in writing signed by the parties shall be valid as
an amendment, modification or change to this Lease.
40. LEASE COMMENCEMENT. This Lease will commence on the 1st day after
the Certificate of Occupancy is issued or when tenant moves in which ever occurs
first.
IN WITNESS WHEREOF, the parties hereto have hereunto executed this
instrument for the purposes herein expressed, the day and year above written.
Signed, Sealed and Delivered
in the presence of
ARNOLD INDUSTRIAL PARK ("Landlord")
/s/ LAMONA D. ANVIL By:/s/ JOHN L. ARNOLD
------------------
John L. Arnold
FISCHER INTERNATIONAL ("Tenant")
/S/ PATRICIA JAN PALMER By:/s/ M.L. MENUDA
---------------
11
<PAGE>
ARNOLD INDUSTRIAL PARK
1361 AIRPORT ROAD NORTH
NAPLES, FLORIDA 34104
(941) 643-6333 FAX: (941) 643-6625
October 20, 1997
HAND DELIVERY TO: MR. ART WEBBER
For: Mr. Mike Battaglia, President and CEO
Fischer International Systems Corporation
3506 Mercantile Avenue
Naples, Florida 34104
Re: Lease Renewals with Arnold Industrial Park
Dear Mike,
This letter reflects our latest proposal for leasing the facilities you are
presently occupying, and negates any previous offer.
We agree to lease you 3506 Mercantile Avenue, Bays A, B, and C (15,000 square
feet) for three (3) years commencing January 1, 1998 at- a rate of $7.50 per
square foot plus all common use maintenance, taxes, insurance and sales tax. The
lease rate shall escalate by 5% annually over the previous year's rate.
We agree to lease the 3390 Mercantile Avenue building (10,400 square feet) for
two (2) years commencing January 1, 1998 at a rate of $7.50 per square foot plus
all common area maintenance, taxes, insurance and sales tax. The lease rate for
the second year shall escalate by 5% over the first year's rate.
The breakout of your costs are attached hereto. You are presently paying
$22,054.52 per month. With the new lease rates, the monthly payment drops to
$18,902.57 per month.
Arnold Industrial Park agrees that these leases will terminate if a new facility
is constructed for Fischer International.
If you have questions, please feel free to contact me at 643-6333,
Very truly yours,
ARNOLD INDUSTRIAL PARK
John L. Arnold
Accepted:
Date: 11/12/97 By: /s/ MICHAEL S. BATTAGLIA
---------------------------
President and CEO
<PAGE>
ASSIGNMENT, ASSUMPTION AND CONSENT TO ASSIGNMENT OF LEASE
THIS AGREEMENT dated this 1ST day JUNE, 1999, among FISCHER
INTERNATIONAL SYSTEMS CORPORATION, hereinafter referred to as "Assignor", and
SMART DISK CORPORATION, hereinafter referred to as "Assignee", and ARNOLD
INDUSTRIAL PARK, hereinafter referred to as "Lessor".
WITNESSETH:
WHEREAS, the Assignor is the Tenant under a lease dated October 4,
1993, between the Lessor and the Assignor, covering premises located in the City
of Naples, Collier County, Florida, more commonly known as 3506 Mercantile
Avenue, Bays A, B & C, Naples, Florida ("Lease'"), which is incorporated herein
by reference and made part hereof and desires to assign its interest in said
Lease to Assignee, and
WHEREAS, the Assignee desires to acquire Assignor's interest in and to
the Lease; and
NOW, THEREFORE, in consideration of the premises and the mutual
covenants hereinafter set forth, the parties agree as follows:
1. ASSIGNMENT: Assignor assigns to Assignee as of JUNE 1, 1999
("Effective Date"), all Assignor's right, title and interest
in the Lease; provided that Assignor shall continue to remain
fully liable and responsible for the performance of the
covenants to be performed by Tenant under the Lease.
2. ASSUMPTION OF LIABILITY. The Assignee will, from and after the
Effective Date, assume the performance of all of the terms,
covenants and conditions of the Lease and agrees to pay the
rent reserved under the Lease and will perform all the terms,
covenants and conditions of the Lease; all with full force and
effect as if the assignee had signed the Lease originally as
tenant named herein.
3. INDEMNIFICATION. From and after the Effective Date, Assignee
will indemnify and hold harmless Assignor and its officers,
employees, and agents from any and all claims, liabilities,
suits, judgments, awards, damages, losses, fines, penalties,
costs and expenses, including reasonable attorneys' fees and
expenses of defense which Assignor may suffer, incur or be
liable for by reason of or arising out of the failure or
refusal of Assignee to comply with, observe or perform the
terms, covenants, condition and obligations of Assignor under
the Lease.
4. CONSENT. The Lessor consents to the assignment of the Lease by
assignor to the assignee upon the express condition that no
further assignment of the Lease shall be made without Assignee
under the terms of the original Lease.
<PAGE>
5. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but
all of which together shall constitute one and the same
instrument. Facsimile copies of this Agreement shall have full
legal force and effect.
IN WITNESS WHEREOF, the parties hereto have caused their duly
authorized officers to execute this Assignment, Assumption and Consent to
Assignment of Lease as of the Effective Date written above.
WITNESSES: ASSIGNOR:
Fischer International Systems Corp.
/s/ HAROLD MCCABE /s/ JOHN WYNKOOP
- ---------------------------------- ------------------------------------
Print Name: Harold McCabe By: John Wynkoop, Secretary
/s/ ELLEN L. BRADLEY
- ----------------------------------
Print Name: Ellen L. Bradley
ASSIGNEE:
Smart Disk Corporation
/s/ QURESH SACHEE /s/ MICHAEL S. BATTAGLIA
- ---------------------------------- ------------------------------------
Print Name: Quresh Sachee By: Michael S. Battaglia, President and
CEO
/s/ ELLEN L. BRADLEY
- ----------------------------------
Print Name: Ellen L. Bradley
LESSOR:
Arnold Industrial Park
/s/ JULIE M. HILBURN /s/ JOHN L. ARNOLD
- ----------------------------------- ------------------------------------
Print Name: Julie M. Hilburn By: John L. Arnold, Partner
/s/ GLENNA S. TOLSON
- -----------------------------------
Print Name: Glenna S. Tolson
2
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 [*****].
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
***** 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 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 [*****].
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.
***** 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 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>
Cooperative Development Agreement
SmartDisk Corporation / Sony Corporation
Page 15
EXHIBIT D
DESIGNATED CONTACTS
SMARTDISK:
Principal Contact - Michael S. Battaglia
Program Manager - Yoshiaki Uchida
SONY:
Principal Contact - Tsutomu Mikami
Program Manager - Toshio Koyama
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) [*****], payable within three (3) business days
of the Effective Date.[*****].
(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 4.1
A. 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
Exhibit 10.17
JOINT VENTURE AGREEMENT
BY AND AMONG
PHOENIX HOUSE INVESTMENTS, L.L.C.,
TOSHIBA CORPORATION,
AND
SMARTDISK CORPORATION
Dated as of February 24, 1998
<PAGE>
JOINT VENTURE AGREEMENT
THIS JOINT VENTURE AGREEMENT (this "Agreement") dated as of February
24, 1998 ("Effective Date"), is by and among Phoenix House Investments, L.L.C.
("Limited"), a Delaware limited liability corporation controlled by Addison M.
Fischer; Toshiba Corporation ("Toshiba"), a Japanese corporation; and SmartDisk
Corporation ("Newco"), a Delaware company.
RECITALS
A. Smart Disk Security Corporation ("SDSC"), a Florida corporation, is
currently developing or producing certain products which include an SSFDC reader
and writer device known as Flashpath ("Flashpath"), a smart card reader and
writer known as Smarty ("Smarty"), and computer and a network security product
known as Safeboot ("Safeboot"). Collectively, Flashpath, Smarty, and SafeBoot
are referred to as "SDSC Products." SDSC is wholly owned by Limited.
B. Limited's Certificate of Formation is attached as Exhibit A.
C. Limited and Toshiba desire to establish a long-term business
relationship through Newco. Limited and Toshiba have agreed to establish and
operate Newco upon the terms and conditions herein. Newco will pursue full
research, development and marketing of Flashpath and Smarty upon execution of
this Agreement, and of the remaining SDSC Products as Newco shall determine
after the Closing Date. To this end and subject to the terms and conditions of
this Agreement and the Ancillary Agreements (defined below), Limited will
transfer all of the stock of SDSC to Newco, and Toshiba will contribute capital,
as well as production, engineering and marketing expertise, to Newco.
D. Simultaneously with the execution and delivery of this Agreement,
Newco is executing an Exchangeable Note ("Note") in favor of Toshiba in the
principal amount of $5,000,000 and delivering such Note upon receipt of
$5,000,000 from Toshiba. The Note is exchangeable for common stock of Newco.
E. Limited and Toshiba anticipate that after the initial funding of
Newco, Newco will sell additional shares of its common stock to new third party
investors. Newco, with Toshiba's assistance, will arrange the sale of such
shares to such entities as the parties may agree.
F. Limited and Toshiba intend that Newco shall become a publicly traded
corporation through an initial public offering of common stock ("IPO") within
twenty-four months after the date of this Agreement and that this Agreement
shall be modified to
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accommodate the IPO as set forth herein.
G. Both parties understand the importance of good communication
regardless of the nature or the magnitude of any issue in question, and both
parties will use every effort to act in good faith to expedite all
communications and approval procedures.
NOW, THEREFORE, the parties agree as follows:
ARTICLE 1
ESTABLISHMENT OF JOINT VENTURE COMPANY;
ANCILLARY AGREEMENTS
1.1 OBJECT OF JOINT VENTURE. Limited and Toshiba hereby associate
themselves as stockholders in a joint venture relationship that shall have as
its principal purpose the expansion of sales worldwide of Flashpath and Smarty
upon the execution of this Agreement, and of the other SDSC Products as Newco
shall determine after the Closing Date. The parties shall pursue this joint
venture relationship through Newco, which will be formed and operated in
accordance with the terms of this Agreement. Subject to the specific terms of
this Agreement, it is intended that Newco will have its own employees,
facilities, equipment and banking arrangements, and that the pricing of its
products and its other policies will be such as to result in reasonable levels
of profitability of Newco as an independent enterprise.
1.2 FORMATION OF NEWCO. Newco is a Delaware corporation with its
principal place of business in Naples, Florida. The parties shall take all steps
necessary to revise Newco's certificate of incorporation and bylaws so as to
reflect the terms and conditions of this Agreement that are inconsistent with
the certificate of incorporation or bylaws or must be reflected in the the
certificate of incorporation or bylaws under Delaware law.
1.3 ANCILLARY AGREEMENTS; FISC; AFFILIATES. Attached to this Agreement
for execution on the Closing Date established under Article 8 below is the
Founders' Subscription Agreement (Exhibit B). The parties shall prepare for
execution on the Closing Date, in form mutually agreeable to Limited and
Toshiba, the Toshiba Technology License Agreement between Toshiba and Newco (the
"Toshiba Technology License Agreement") and the Registration Rights Agreement as
defined in section 7.3 below (collectively, the Founders' Subscription
Agreement, Toshiba Technology License Agreement, and Registration Rights
Agreement shall be referred to as the "Ancillary Agreements"). In this
Agreement, the term "FISC" refers to Fischer International Systems Corporation,
a Florida corporation controlled by Addison M. Fischer. For purposes of this
Agreement, "affiliates" means, with respect to an individual, corporation,
company, voluntary associations, partnership, joint venture, limited liability
company, trust, estate, unincorporated organization, governmental entity or
other entity ("person"), any other person which directly or indirectly controls,
is controlled by, or is under common control with such person; and "control"
means the possession, directly or indirectly, of
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the power to cause the direction of the management and policies of a person,
whether through the ownership of voting securities, by contract or otherwise.
1.4 BUSINESS PLAN. Toshiba has prepared a draft business plan for Newco
dated January 13, 1998 (Business Plan SDC-II A-2, Ref: 0013), and Limited has
prepared a draft business plan for Newco dated August 25, 1997. Toshiba and
Limited will use their best efforts to finalize a final joint business plan (the
"Business Plan") as soon as possible. The parties reasonably anticipate that
Newco's operations will track the Business Plan, but they also realize that
amendments to the Business Plan may be necessary from time to time. The parties
will cooperate in good faith to accomplish the same as necessary, subject to
section 3.4.1(o) below.
ARTICLE 2
CAPITALIZATION OF NEWCO
2.1 CAPITALIZATION AND CLASSES OF STOCK. The authorized capital of
Newco shall be represented by 60,000,000 shares of common stock ("Common
Stock"), each having a par value of $0.001. Prior to the IPO, Newco shall issue
no other classes of stock without Toshiba's approval. The stock shall have equal
rights in all respects.
2.2 SUBSCRIPTION FOR STOCK. Limited will transfer all of the issued and
outstanding shares of stock of SDSC to Newco in exchange for thirty million
shares of Common Stock of Newco, while Toshiba shall subscribe for and purchase
respectively the following number of shares of Common Stock on the following
terms and conditions:
2.2.1 TOSHIBA. Toshiba shall (i) purchase 4,950,000 shares of
Common Stock for a total price of Four Million Nine Hundred
Fifty Thousand Dollars ($4,950,000) payable at Closing, and
(ii) exchange the Note at Closing for 5,000,000 shares of
Common Stock.
2.2.2 INDEMNITY. Limited will defend, indemnify and hold
harmless Newco and Toshiba from all claims arising out of or
in connection with the operation of SDSC prior to the date
Limited contributes SDSC's shares to Newco. Limited hereby
indemnifies and agrees to defend and hold Toshiba, Newco and
Newco's affiliates, directors and officers, harmless from and
against any and all loss, liability, damage or expense
(including interest, penalties, and reasonable attorneys' fees
and disbursements)(collectively, the "Damages") based upon,
arising out of or otherwise in respect of (i) any breach or
inaccuracy of any representation or warranty in the Founders'
Subscription Agreement, (ii) any breach or failure to perform
any covenant or agreement in this Agreement, or (iii)
operation or business of SDSC, or the assets or business
transferred to SDSC, in each case as conducted or utilized
prior to the Closing Date, including, without limitation,
arising out or any liability or obligation to employees.
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2.3 NEW THIRD PARTY INVESTORS. The parties intend and agree that Newco
shall initially be a joint venture between Limited and Toshiba. Additional stock
may be sold to such other entities as the parties may agree. The parties
currently anticipate that Newco's stock may be sold to Hitachi, Ltd., at a price
ten percent (10%) or more than that paid by Toshiba under section 2.2.1 above
and that sales to subsequent investors may be at a price twenty percent (20%) or
more than that paid by Toshiba under section 2.2.1 above
2.4 RIGHT TO PURCHASE STOCK. If the parties should agree to cause Newco
to issue additional stock prior to the IPO (except in accordance with Article 5
below or Section 2.3 above), Limited and Toshiba shall have the right to
subscribe for any shares of stock whenever they may be issued in an amount
proportional to the stockholder's ownership interest in Newco immediately prior
to the issuance of such additional stock.
2.5 RESTRICTION ON TRANSFER OF STOCK. Prior to the IPO, neither party
shall have the right to transfer or encumber its stock ownership in Newco
without the other party's prior written consent. The stock certificates issued
by Newco shall bear a legend evidencing this transfer restriction.
2.6 CONTROL OF LIMITED. Notwithstanding anything herein to the
contrary, Addison Fischer agrees to retain control of, and to maintain the
existence and good standing of, Limited.
2.7 POST-CLOSING INVOICES. Toshiba will prepare and submit to Newco
after the Closing Date accurate reports of costs that Toshiba has incurred for
services rendered to Newco prior to the Closing Date. Newco shall reimburse
Toshiba for such costs up to a maximum amount of $1,400,000.
2.8 NEWCO PAYMENT OF SDSC LIABILITIES. The parties acknowledge and
agree that SDSC has a total liability of $5,000,000 and that Newco will pay such
sum immediately after the Closing Date.
2.9 NEWCO REPAYMENT OF OPERATING EXPENSES. The parties acknowledge and
agree that Newco has been incurring operating expenses after January 1, 1998,
and before Toshiba's funding under the Note, which expenses have been covered by
short term operating loans from FISC and its affiliates and which will be repaid
by Newco as soon as possible.
2.10 NO OTHER COMMITMENTS. The parties agree that, except as set forth
in Section 2.2.1, neither Toshiba nor Limited is obligated or committed to
provide any funding or financing to Newco, whether in the form of cash payment,
the provision of guaranties, or otherwise.
ARTICLE 3
MANAGEMENT AND EMPLOYEES OF NEWCO
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3.1 BOARD OF DIRECTORS. The Board of Directors of Newco shall consist
of five (5) Directors, which number shall not be changed without the prior
written consent of Limited and Toshiba. Limited shall have the right to appoint
three (3) directors (the "Limited Directors"), and Toshiba shall have the right
to appoint two (2) directors (the "Toshiba Directors"). Toshiba shall be
entitled at any time and for any or no reason to designate any Toshiba Director
for removal, and Limited shall be entitled at any time and for any or no reason
to designate any Limited Director for removal. Limited and Toshiba agree that
they shall vote their stock acquired hereunder in a manner so as to maintain the
Board constituency described in this Section 3.1. In the event of any vacancy on
the Board of Directors, such vacancy shall be filled in a manner consistent with
this Section 3.1. The parties shall cause any committee of the Board of
Directors of Newco that has three or fewer members to have one Toshiba Director
as a member.
3.2 BOARD MEETINGS. Unless otherwise agreed to in writing by the
parties, the Board of Directors shall meet at least four times per year. To the
extent legally permitted, such meetings may be conducted by telephone.
Reasonable expenses of directors to attend meetings of the Board of Directors
shall be borne by Newco.
3.3 QUORUM OF THE BOARD OF DIRECTORS. The parties hereto agree that all
matters specified in Section 3.4.1 below shall be decided by the Board of
Directors at meetings having a quorum of at least four (4) members. Other
matters shall be decided by a majority vote at any meeting of the Board of
Directors where a majority of the directors are present.
3.4 RESPONSIBILITIES OF THE BOARD OF DIRECTORS; MATTERS FOR BOARD
APPROVAL. The Board of Directors of Newco shall manage the affairs of Newco in
accordance with the bylaws of Newco, applicable laws, and the following
provisions of this Agreement:
3.4.1 Except as provided in the Ancillary Agreements, the
following matters shall require the approval of at least four of the five
Directors:
(a) amending, modifying, granting any waiver with respect to,
terminating or extending any of the certificate of
incorporation or bylaws of Newco, the Ancillary Agreements or
this Agreement;
(b) except pursuant to the Ancillary Agreements and the
Business Plan, Newco or any of its affiliates entering into
any transaction, agreement or understanding with a stockholder
of Newco or any affiliate of such stockholder;
(c) prior to the IPO, declaring any dividend or making any
other distribution to the stockholders, or any repurchase or
redemption by Newco of its securities;
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(d) entering into any merger or consolidation in which Newco
or any material subsidiary is a constituent entity, acquiring
all or substantially all of the assets or securities of
another person (or a division or other business unit of
another person), selling, leasing, exchanging or otherwise
disposing of all or substantially all of the assets or
securities of Newco or any material subsidiary (or a division
or other business unit thereof), consummating any other
business combination, or liquidating, dissolving or winding up
Newco or any material subsidiary, in each case, whether in a
single transaction or a series of related transactions;
(e) except in the ordinary course of business selling,
leasing, exchanging or otherwise disposing of any property,
asset or business, whether in a single transactions or a
series of related transactions, with a value in excess of five
percent (5%) of Newco's annual gross revenues on a
consolidated basis;
(f) Newco or any subsidiary incorporating, forming or
otherwise organizing a subsidiary or any other person;
(g) Newco or any subsidiary commencing or settling any
litigation, arbitration or governmental proceeding which
relates to an amount in excess of five percent (5%) of Newco's
annual gross revenues or is reasonably likely to have a
material impact on Newco or its business;
(h) any material change in the business of Newco or any of its
material subsidiaries not contemplated in the Business Plan;
(i) any issuance or agreement to issue any securities of Newco
or any of its material subsidiaries or any securities or
rights of any kind convertible into or exchangeable for such
securities, or to issue any option, warrant, put, call or
other arrangement of any kind to purchase or otherwise receive
from Newco or such material subsidiary any securities, profit
share or interest, except pursuant to Article 5 (Stock Option
Plan) and Article 7 (IPO) below;
(j) except as contemplated in Articles 5 and 7 below, any
action in connection with the admission of any person as a
stockholder of Newco or any subsidiary, irrespective of
whether any securities or profit share of Newco or any of its
subsidiaries is issued in connection therewith;
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(k) except as contemplated in Articles 5 and 7 below, any
approval or disapproval of any sale or transfer by Newco or
any material subsidiary, as relevant, of any securities,
profit share or interest of Newco or any of its material
subsidiaries;
(l) except as contemplated in Article 7 below, any filing by
Newco of a registration statement under the Securities Act of
1933, as amended;
(m) except as contemplated in Article 5 below, the creation,
or material amendment or modification of an employee stock
option, stock retirement or stock severance plan; or any
issuance or grant of securities, options or interest
thereunder other than options to a director, employee or
consultant of Newco as contemplated by Article 5 below;
(n) electing or removing any of the Chairman, President, Chief
Executive Officer, Chief Operating Officer or Chief Financial
Officer, or any other employee or officer, irrespective of his
or her title, exercising authority similar to that customarily
exercised by any of the foregoing, of Newco or any material
subsidiary;
(o) adopting, or modifying or amending in any material
respect, any annual or long term budget or business plan of
Newco that differs materially from the Business Plan;
(p) except pursuant to the Business Plan, annual budget or
Ancillary Agreements, whether in a single transaction or a
series of related transactions, any of the following items
that exceed the amount of $1,000,000 during the first six
months after the Closing Date or exceed five percent (5%) of
Newco's annual gross revenues after such initial six-month
period: (i) entering into any transaction, agreement or
understanding with any person with a value in excess of the
stipulated amount; (ii) incurring any indebtedness, commitment
or liability for, or the issuance of any guarantee with
respect to, borrowed money in excess of the stipulated amount;
(iii) making any loans, investments or advances to any person
in excess of the stipulated amount; (iv) entering into,
amending, granting any waiver with respect to, terminating or
extending any agreement (or series of related agreements)
which (x) provides for (or, pursuant to its terms, could
reasonably be expected to result in) the payment or receipt by
Newco or a material subsidiary of an amount in excess of the
stipulated amount, (y) has a term in excess of one year, or
(z) provides for (or, pursuant to its terms, could reasonably
be expected to result in) payments to an employee or
consultant, or otherwise hires any employee or consultant, at
a rate in excess of $500,000 per annum; and (v) adopting or
amending any material compensation policies;
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(q) changing the fiscal year;
(r) appointing or changing Newco's independent certified
public accountants (it being agreed that Newco's initial
independent certified public accountants shall be selected
from one of the leading international accounting firms);
(s) adopting or changing any material accounting principles
not in accordance with GAAP;
(t) filing a voluntary petition in bankruptcy or for
reorganization or for the adoption of any plan or arrangement
with creditors or an admission seeking the relief therein
provided under any existing or future law of any jurisdiction
relating to bankruptcy, insolvency, reorganization or relief
of debtors;
(u) selecting an investment bank for the IPO; provided, that
if the Board cannot agree on an investment bank, then by a
vote of a majority of a quorum the Board may appoint Alex
Brown & Sons or any investment bank that is one of the top
five managers or co-managers of IPOs by number of transactions
in the United States in the prior calendar year; or
(v) entering into any options, contingent agreements or other
arrangements which if exercised or consummated in accordance
with their terms would result in an action set forth in
clauses (a) through (u) above.
3.5 MATTERS FOR SHAREHOLDER APPROVAL. The following matters shall
require the approval of seventy-nine point nine percent (79.9%) of Newco's
stockholders:
(a) The adoption, amendment or repeal of any article of the
Certificate of Incorporation or of the bylaws, except in connection with the IPO
as long as any changes are customary for a publicly traded company or are
recommended by Newco's underwriters for the IPO. Such changes in contemplation
of an IPO shall be approved as required by Delaware law.
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(b) A change in the name of Newco.
3.6 CERTAIN SDSC MATTERS. The parties shall cause SDSC to have a board
whose membership is identical to that of Newco. The parties agree that SDSC may
not undertake any of the actions similar to those referred to in Section 3.4.1
without the approval of four directors, including a Toshiba Director. The board
of directors of any subsidiaries of Newco shall be comprised in such manner as
Limited and Toshiba may agree from time to time.
3.7 FINANCIAL STATEMENTS AND ACCOUNTING RECORDS. Newco shall submit
financial statements, including, without limitation, a balance sheet and income
statement, to Limited and Toshiba within forty-five (45) days after the end of
each fiscal quarter for such quarter and within one hundred (100) days after the
end of the fiscal year for such year. Such quarterly and annual statements shall
be (i) prepared in accordance with U.S. generally accepted accounting principles
(GAAP); (ii) in reasonable detail and shall contain such financial data as the
parties may mutually agree are necessary in order to keep each of them advised
of Newco's financial status; and (iii) audited by Newco's independent certified
accountants in the case of the annual financial statements. During office hours
of Newco, Limited and Toshiba shall have full access to all books of account,
records and the like of Newco, and Newco shall furnish to each of Limited and
Toshiba all information concerning the same which such party may reasonably
require in connection with a complete examination thereof.
3.8 EMPLOYEES. Limited (and other entities controlled by Addison M.
Fischer) and Toshiba anticipate that they will either transfer or second certain
of their employees to Newco on either a permanent or temporary, full-time or
part-time basis. In Toshiba's case, such employees may render their services to
Newco from Toshiba's facilities in Japan. Both parties will discuss such matters
(including English language ability, experience, personality, salary level,
benefits, and participation in the stock option plan) in good faith on a case by
case basis so as to maximize the operating efficiency and profitability of
Newco.
ARTICLE 4
RESOLUTION OF DEADLOCKS
The parties shall diligently and in good faith discuss and try amicably
to resolve all disputes, controversies or differences that arise out of or in
relation to or in connection with this Agreement or the Ancillary Agreements at
meetings of the Board of Directors of the Newco. If Limited and Toshiba are
deadlocked on a particular dispute that requires both parties' approval, they
shall formally state their position in writing to the other party within thirty
(30) days after such deadlock arises, and within fifteen (15) days thereafter
the senior representative of Limited and of Toshiba shall meet in Honolulu,
Hawaii, or some other mutually agreeable location to discuss the matter in good
faith.
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ARTICLE 5
STOCK OPTION PLAN
Newco shall establish a stock option plan permitting the Board of
Directors to grant stock options to directors in their capacity as employees of
Newco, to outside directors, and to consultants and employees of Newco. No more
than 6,818,182 shares of the common stock of Newco (which is equivalent to 12%
of 56,818,182 shares of Common Stock) shall be allocated to the stock option
plan without the consent of four of Newco's directors.
ARTICLE 6
PATENT, TRADEMARK AND COPYRIGHT LICENSES
SmartDiskette Limited ("SDL"), an affiliate of Addison Fischer, has
licensed certain technology to SDSC pursuant to a certain Technology License
Agreement, and Toshiba shall license certain technology to Newco pursuant to the
Toshiba Technology License Agreement. To the extent required by applicable law,
Newco and SDSC shall withhold U.S. income tax from royalty payments. Toshiba
shall timely provide to Newco the IRS form 1001 so that royalty payments to
Toshiba may qualify for the reduced withholding tax rate under the U.S.-Japan
tax treaty.
ARTICLE 7
INITIAL PUBLIC OFFERING
7.1 INITIAL PUBLIC OFFERING. The parties acknowledge and agree that
their goal is for Newco to become a publicly traded corporation by means of an
initial public offering ("IPO") to be conducted within twenty-four months after
the date of this Agreement or such other date thereafter as the parties may
agree pursuant to Section 7.2 below. Newco shall use its best efforts,
consistent with its reasonable business judgment based on prevailing market
conditions, to raise additional equity capital on terms acceptable to Newco
through a public offering of common stock. The IPO shall be for an amount of
equity representing an economic and voting interest of not less than 10% and not
more than such upper limit as Newco's underwriters may determine based upon
consultation with Newco.
7.2 COOPERATION OF LIMITED AND TOSHIBA. Without limiting Section
3.4.1(u) above, Limited shall consult with Toshiba regarding the appointment of
any investment bank for the IPO. Newco, Limited and Toshiba agree to consider in
good faith the reasonable advice of such investment bank in determining the
timing and size of the IPO.
7.3 REGISTRATION RIGHTS AGREEMENT. The parties shall separately agree
upon a registration rights agreement (the "Registration Rights Agreement") with
customary terms and conditions granting Limited and Toshiba registration rights
with regard to their common stock
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ownership in Newco.
7.4 REVISION OF JOINT VENTURE. In connection with the IPO, the parties
agree that the Recitals, Sections 1.2, 2.1, 2.3, 2.4, 2.5, 2.6 Article 3 in its
entirety, and Article 5 shall terminate upon the effectiveness of Newco's
registration statement filed with the SEC.
7.5 TOSHIBA PUT OPTION. If the IPO has not occurred within twenty-four
months of the Effective Date or such other date as the parties may agree in a
writing signed by Limited and Toshiba pursuant to Section 7.2 above, Toshiba may
cause Newco to purchase all of Toshiba's stockholdings in Newco (that is, the
9,950,000 shares of Common Stock acquired hereunder) for the sum of $9,950,000
plus four percent (4%) simple interest per year from the date payment for the
stock was made to Newco by Toshiba in respect of $4,950,000 and the date of this
Agreement in respect of the other remaining $5,000,000. Toshiba's right to put
its shares to Newco shall arise on the second anniversary of the Effective Date
or such other date thereafter as the parties may agree in a writing signed by
Limited and Toshiba pursuant to Section 7.2 above and shall expire 90 days
thereafter. Toshiba shall exercise its right by giving written notice to Newco
within the 90 days.
ARTICLE 8
CLOSING
8.1 CLOSING DATE. The execution of this Agreement shall occur on
February ___, 1998, or such other date as Limited and Toshiba may mutually
agree, and the closing ("Closing Date") shall occur upon the receipt of the
notification specified in section 8.3.3 below.
8.2 CONDITIONS PRECEDENT TO THE CLOSING. All of the obligations of both
Toshiba and Limited hereunder are subject to satisfaction of each of the
following conditions, any or all of which may be waived, in whole or in part, by
the adversely affected party prior to or at the Closing Date:
8.2.1 THIRD-PARTY CONSENTS. The third-party consents described
in Section 8.3 shall have been delivered to Toshiba or
Limited, as the case may be.
8.2.2 NO SUITS, PROCEEDINGS. No suit, action, investigation,
inquiry or proceeding by any person or by any governmental
body, or other legal or administrative proceeding shall have
been instituted or threatened which questions the validity or
legality of the transactions contemplated hereby.
8.2.3 ANCILLARY AGREEMENTS. The Ancillary Agreements shall
have been finalized and ready for execution on the Closing
Date.
8.2.4 REPRESENTATIONS AND COVENANTS. With respect to Toshiba,
the representations and warranties of Limited and Newco
contained in the Founders'
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Subscription Agreement shall be true in all material respects
on and as of the Closing Date with the same force and effect
as though made as of the Closing Date. With respect to
Limited, the representations and warranties of Toshiba
contained in the Founders' Subscription Agreement shall be
true in all material respects on and as of the Closing Date
with the same force and effect as though made as of the
Closing Date. Limited and Newco shall have performed and
complied with all covenants and agreements required by this
Agreement to be performed or complied with on or prior to the
Closing Date.
8.3 THIRD-PARTY CONSENTS. As soon as reasonably possible after this
Agreement has been signed by Limited, Newco and Toshiba, they shall take all
reasonable steps to obtain the requisite approvals, validations, rulings and
consents provided for in this Agreement or made necessary hereby, including
without limitation:
8.3.1 To the extent mandated by applicable law, the Toshiba
Technology License Agreement shall have been approved and
validated by necessary and appropriate agencies of the
Japanese Government.
8.3.2 The Ministry of Finance, or such bank as it may appoint
from time to time, has given any necessary approval for
Toshiba's investment in Newco.
8.3.3 The parties shall have been informed by competent
governmental authorities that, in connection with the
transactions contemplated hereby, no investigation will be
initiated under the Trade Act of 1988 and the rules and
regulations thereunder or, if such investigation is initiated,
that the President of the United States would take no action
to suspend or prohibit such transactions.
8.3.4 All consents with respect to the transfer of the stock
of SDSC shall have been obtained.
With respect to the conditions described above, each party shall use its best
efforts to assist the other parties in filing all notices, applications and
registrations and obtaining all rulings and approvals required by Japanese or
U.S. law to satisfy and comply with said conditions and to inform the other
party of any information required by any government or any administrative
agencies thereof regarding such conditions.
8.4 ACTIONS AT CLOSING; PLACE OF CLOSING. The following actions shall
take place on the Closing Date:
8.4.1 EXECUTION OF ANCILLARY AGREEMENTS. Limited, Toshiba and Newco, as
appropriate, shall execute the Ancillary Agreements.
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8.4.2 TOSHIBA PAYMENT. Toshiba shall tender to Newco the initial
payment of $4,950,000.
8.4.3 EXCHANGE OF NOTE. Toshiba shall cancel the Note and deliver it to
Newco in exchange for Common Stock.
8.4.4 ISSUANCE OF STOCK TO TOSHIBA. Newco shall issue 9,950,000 shares
of Common Stock to Toshiba.
8.4.4 ISSUANCE OF STOCK TO LIMITED. Newco shall issue 30,000,000 shares
of Common Stock to Limited.
The closing shall occur at such location as the parties may mutually agree.
ARTICLE 9
GENERAL PROVISIONS
9.1 NOTICES AND OTHER COMMUNICATIONS. All notices shall be in writing
and delivered by (a) mail, postage prepaid, and either return receipt requested
or certified, (b) personal delivery, or (c) facsimile with confirmation under
either (a) or (b), to such party at the address set forth below, or at such
other address as such party may supply by written notice. Notice shall be
effective on the date it is delivered to the intended recipient to the address
set forth below:
TO: Phoenix House Investments, L.L.C.
c/o Fischer International Systems Corporation
3506 Mercantile Avenue
Naples, Florida 34104-3310
Attention: President
Facsimile: (941) 436-2509
TO: Mr. Addison M. Fischer
c/o Fischer International Systems Corporation
3506 Mercantile Avenue
Naples, Florida 34104-3310
Facsimile: (941) 436-2509
TO: SmartDisk Corporation
c/o Fischer International Systems Corporation
3506 Mercantile Avenue
Naples, Florida 34104-3310
Facsimile: (941) 436-2509
14
<PAGE>
with copies to:
Fischer International Systems Corporation
3506 Mercantile Avenue
Naples, Florida 34104-3310
Attention: President
Facsimile: (941) 436-2509
and
Brand Farrar & Buxbaum LLP
515 South Flower Street, Suite 3500
Los Angeles, California 90071
Attention: Robert W. Dziubla, Esq.
Facsimile: (213) 426-6282
TO: Toshiba Corporation
Advanced-I Group
1-1 Shibaura 1-chome
Minato-ku, Tokyo 105-01
Japan
Attention: Senior Executive Vice President
with copies to:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, NY 10019-6064
Attention: Toby S. Myerson, Esq.
Facsimile: (212) 757-3990
9.2 LAW TO GOVERN. All questions and disputes arising out of or in
connection with this Agreement shall be governed by the substantive laws of the
State of Delaware excluding its choice of law principles. THE PARTIES HEREBY
EXCLUDE THE UNITED NATIONS CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF
GOODS FROM THIS AGREEMENT.
9.3 SEVERABILITY. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement should be prohibited or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity without invalidating the remainder of
15
<PAGE>
such provision or the remaining provisions of this Agreement.
9.4 ASSIGNMENT AND SUCCESSION. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective
successors and assigns, but shall not be assignable by any party other than to a
person or entity acquiring substantially all of its business and assuming all of
its obligations and liabilities, except with the written consent of all of the
other parties.
9.5 ENTIRE AGREEMENT; AMENDMENTS. The terms and conditions contained in
this Agreement and Ancillary Agreements constitute the entire agreement between
the parties hereto and shall supersede all previous communications, either oral
or written, between the parties. No agreement or understanding varying or
extending the same shall be binding upon any party hereto unless in writing
signed by a duly authorized officer or representative thereof in which this
Agreement is expressly referred to. This Agreement may be amended, superseded,
canceled, renewed or extended, and the terms hereof may be waived, only by a
written agreement signed by Toshiba, Limited and Newco. No delay on the part of
any party in exercising any right, power or privilege hereunder shall operate as
a waiver thereof, nor shall any waiver on the part of any party of any such
right, power or privilege, nor any single or partial exercise of any such right,
power or privilege, preclude any further exercise thereof or the exercise of any
other such right, power or privilege. The rights and remedies herein provided
are cumulative and are not exclusive of any rights or remedies that any party
may otherwise have at law or in equity.
9.6 NO PARTNERSHIP. This Agreement shall not create and shall not be
deemed to create a partnership between or among any of the parties hereto.
9.7 FOREIGN RESHIPMENT LIABILITY. THIS AGREEMENT IS EXPRESSLY MADE
SUBJECT TO ANY LAWS, REGULATIONS, ORDERS OR OTHER RESTRICTIONS ON THE EXPORT
FROM THE UNITED STATES OF AMERICA OR JAPAN OF TECHNICAL INFORMATION OR PRODUCTS
WHICH MAY BE IMPOSED FROM TIME TO TIME BY THE GOVERNMENTS OF THE UNITED STATES
OF AMERICA OR JAPAN. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS
AGREEMENT, NEWCO SHALL NOT EXPORT OR REEXPORT, DIRECTLY OR INDIRECTLY, ANY
TECHNICAL INFORMATION OR SDSC PRODUCTS TO ANY COUNTRY OR DESTINATION OR PERMIT
THEIR TRANSHIPMENT TO ANY COUNTRY OR DESTINATION FOR WHICH SUCH GOVERNMENTS OR
ANY AGENCY THEREOF REQUIRES AN EXPORT LICENSE OR OTHER GOVERNMENTAL APPROVAL AT
THE TIME OF EXPORT WITHOUT FIRST OBTAINING SUCH LICENSE OR APPROVAL. LIMITED,
NEWCO AND TOSHIBA SHALL COOPERATE TO OBTAIN ALL SUCH LICENSES AND APPROVALS AS
ARE NECESSARY TO IMPLEMENT THE BUSINESS PLAN.
9.8 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original as against any party whose
signature appears thereon and all of
16
<PAGE>
which together shall constitute one and the same instrument. This Agreement
shall become binding when one or more counterparts hereof, individually or taken
together, shall bear the signatures of all of the parties reflected hereon as
signatories.
IN WITNESS WHEREOF, LIMITED AND TOSHIBA ACKNOWLEDGE THEY HAVE EACH READ
THIS AGREEMENT AND HAVE FULLY UNDERSTOOD THE PROVISIONS OF THE AGREEMENT.
THEREFORE, the parties hereto have caused this instrument to be
executed by their duly authorized and empowered officers and representatives as
of the day and year first above written.
PHOENIX HOUSE INVESTMENTS, L.L.C.
By: /s/ ADDISON M. FISCHER
------------------------------
Addison Fischer, President
TOSHIBA CORPORATION
By: /s/ M. KOGA
------------------------------
M. Koga, Senior Executive Vice President
SMARTDISK CORPORATION
By: /s/ MICHAEL S. BATTAGLIA
------------------------------
ADDISON M. FISCHER,
with respect to section 2.6 of this Agreement only
/s/ ADDISON M. FISCHER
- -----------------------------------
17
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. 1 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
September 1, 1999
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<INCOME-PRETAX> (5,605,260) (2,088,281)
<INCOME-TAX> (102,316) 67,766
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