AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 20, 2000
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
SMARTDISK CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
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>
3506 MERCANTILE AVENUE
NAPLES, FLORIDA 34104
(941) 436-2500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
MICHAEL S. BATTAGLIA
PRESIDENT AND CHIEF EXECUTIVE OFFICER
3506 MERCANTILE AVENUE
NAPLES, FLORIDA 34104
(941) 436-2500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
---------------
COPIES OF COMMUNICATIONS TO:
<TABLE>
<S> <C> <C>
BRUCE E. MACDONOUGH, ESQ. TIMOTHY TOMLINSON, ESQ. TREVOR J. CHAPLICK, ESQ.
GREENBERG TRAURIG, LLP TOMLINSON ZISKO MOROSOLI & MASER LLP WILSON SONSINI GOODRICH & ROSATI,
ONE EAST CAMELBACK ROAD 200 PAGE MILL ROAD PROFESSIONAL CORPORATION
SUITE 1100 PALO ALTO, CALIFORNIA 94306 7927 JONES BRANCH DRIVE, SUITE 200
PHOENIX, ARIZONA 58012 (650) 325-8666 MCLEAN, VIRGINIA 22102
(602) 263-2300 (703) 734-3100
</TABLE>
---------------
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
================================================================================
PROPOSED MAXIMUM
TITLE OF EACH CLASS AGGREGATE OFFERING AMOUNT OF
OF SECURITIES TO BE REGISTERED PRICE(1)(2) REGISTRATION FEE(2)
- --------------------------------------------------------------------------------
Common Stock, $0.001 par value......... $140,673,750 $37,138
================================================================================
(1) Includes 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(c) under the Securities Act.
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 IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED APRIL 20, 2000
PROSPECTUS
- ----------
4,200,000 SHARES
[GRAPHIC OMITTED]
COMMON STOCK
----------------
SmartDisk Corporation is selling 2,224,561 shares of our common stock and
some of our stockholders are selling 1,975,439 shares. We will not receive any
of the proceeds from the sale of shares by the selling stockholders.
Our shares are quoted on the Nasdaq National Market under the symbol
"SMDK." On April 19, 2000, the last sale price of the shares as reported on the
Nasdaq National Market was $29 per share.
INVESTING IN THE COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 6 OF THIS PROSPECTUS.
----------------
PER SHARE TOTAL
----------- ------
Public offering price ............................ $ $
Underwriting discount ............................ $ $
Proceeds, before expenses, to SmartDisk .......... $ $
Proceeds to the selling stockholders ............. $ $
The underwriters may also purchase up to an additional 630,000 shares from
us and some of the members of our management at the public offering price, less
the underwriting discount, within 30 days from the date of this prospectus to
cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The shares will be ready for delivery on or about , 2000.
----------------
MERRILL LYNCH & CO.
CHASE H&Q
U.S. BANCORP PIPER JAFFRAY
----------------
The date of this prospectus is , 2000.
<PAGE>
SIMPLIFYING THE DIGITAL LIFESTYLE/trademark/
SmartDisk's flash memory card readers enable consumers to transfer digital
information from digital information from digital appliances to their PCs and
the Internet. Our personal storage systems serve as libraries for digital
photographs, documents, music, video files and more.
[drawings of digital appliances with arrows
pointing to picture of FlashPath readers,
USB Tri-Media readers
and USB future readers]
<TABLE>
<S> <C> <C>
FlashPath USB Tri-Media Future
Floppy Drive Reader Readers
Readers
</TABLE>
[arrows pointing to a personal computer with arrows pointing to pictures of
personal storage systems]
[Internet] [Internet]
Photo Album Music Jukebox Video Library
The products shown above highlighted in yellow
are part of the SmartDisk product line.
Other products shown are manufactured by third parties.
OUR PRIMARY PRODUCTS
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<S> <C> <C> <C>
FlashPath for FlashPath for Sony FlashPath for Smarty Smart
SmartMedia Memory Stick MultiMediaCard Card Reader
USB Tri-Media FireWire Hard Drives FireWire RAID Array
</TABLE>
<TABLE>
<S> <C> <C>
Reader
for SmartMedia,
CompactFlash,
IBM MicroDrive
and floppy disks
FlashTrax Digital USB Hard Drives Removable
Audio Player Media Solutions
FireWire Zip and
USB Floppy Drive
</TABLE>
[pictures of each of the above-listed products]
OUR PRIMARY CUSTOMERS
AND PARTNERS
[Apple logo] [FujiFilm logo] Hitachi
[IBM logo] [Ingram Micro logo] JVC Olympus
[SanDisk logo] Sharp Sony
[Tech Data logo] Toshiba
[GRAPHIC OMITTED]
Simplifying The Digital Lifestyle/trademark/
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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Prospectus Summary ................................................................... 1
Risk Factors ......................................................................... 6
Note Regarding Forward-Looking Statements ............................................ 20
Corporate History and Development .................................................... 20
Use of Proceeds ...................................................................... 22
Price Range of Common Stock .......................................................... 22
Dividend Policy ...................................................................... 22
Capitalization ....................................................................... 23
Selected Consolidated Financial Data ................................................. 24
Unaudited Pro Forma Financial Data ................................................... 26
Management's Discussion and Analysis of Financial Condition and Results of Operations 30
Business ............................................................................. 44
Management ........................................................................... 63
Principal and Selling Stockholders ................................................... 73
Related Party Transactions ........................................................... 75
Description of Capital Stock ......................................................... 78
Shares Eligible For Future Sale ...................................................... 80
Underwriting ......................................................................... 82
Legal Matters ........................................................................ 84
Experts .............................................................................. 84
Where You Can Find Additional Information ............................................ 84
Index to Financial Statements ........................................................ F-1
</TABLE>
----------------
We own or have rights to the product names,
trade names and trademarks that we use
in conjunction with the sale of our products. This prospectus also contains
product names, trade names and trademarks of other companies.
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate only as of the date on
the front cover of this prospectus. Our business, financial condition, results
of operations and prospects may have changed since that date.
ii
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. YOU SHOULD READ THIS ENTIRE PROSPECTUS CAREFULLY.
OUR BUSINESS
SmartDisk designs, develops, manufactures and markets digital connectivity
products and personal storage systems that allow consumers to easily access and
exchange digital data. As a result, our products provide consumers with a
user-friendly way to transfer, store, manage and share digital photographs,
video, music, voice and data among digital appliances, personal computers and
the Internet. For example, with the help of our products, consumers can use
their PCs as:
/bullet/ Electronic photo albums--to store digital still images;
/bullet/ Video libraries--for the home video collection;
/bullet/ Music jukeboxes--consisting of a selection of one's favorite
music, either retrieved from the Internet, "ripped" from a CD or
recorded from an audio cassette; and
/bullet/ Document vaults--for the secure storage and retrieval of documents
such as life insurance policies, mortgages, deeds and stock
certificates.
With the growth of digital appliances, such as digital cameras, digital
video camcorders, voice recorders and music players, consumers are increasingly
using the PC as the "multimedia center" of the home or office. These digital
appliances capture digital data on high capacity, reusable flash memory cards
that appeal to consumers because of their small size, versatility and
portability.
Our digital connectivity products and personal storage systems provide an
easy way to transfer, store, manage and share digital data. Our products are
designed to cross PC operating systems, support most leading media types and
use high performance PC interfaces, such as universal serial bus, or USB, and
FireWire. Our patented digital connectivity products, such as our FlashPath
products for the Toshiba SmartMedia card, SanDisk MultiMediaCard and Sony
Memory Stick, as well as 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 between PCs and digital appliances. Our
latest digital connectivity product, the Tri-Media Reader, utilizes a USB cable
interface to exchange digital data and is intended to address an expanding
installed base of PCs with USB cable interfaces. Our personal storage systems
include high performance, external portable hard disk drives and floppy disk
drives for desktop and notebook PCs utilizing USB and FireWire, as well as
expansion bay disk drives for notebooks. Substantially all of our personal
storage systems are compatible with Windows and Macintosh/registered trademark/
operating systems.
We have strategic relationships with a number of leading flash memory card
manufacturers, PC manufacturers and consumer product OEMs, including Apple,
Cannon, FujiFilm, Hitachi, IBM, Iomega, JVC, NEC, Olympus, Panasonic, SanDisk,
Sony and Toshiba. As such, they actively participate in the development of our
products, provide us with access to leading-edge manufacturing capabilities
and market and/or distribute our products globally. For example, we have a
strategic relationship with Sony for the development of our FlashPath product
for the Sony Memory Stick and a strategic relationship with SanDisk for the
development of our FlashPath product for the SanDisk MultiMediaCard. In
addition, under our arrangement with Iomega, we have the exclusive right to
develop and market internal Zip drives for Apple's Macintosh PowerBooks.
1
<PAGE>
Our strategy is to use our proprietary technologies to:
/bullet/ Establish our connectivity solutions as the industry standard for
the transfer of data among digital appliances, PCs and the
Internet by strengthening our position as a technological and
market leader; and
/bullet/ Bring our personal storage systems quickly to market with industry
leading solutions that emphasize ease of use and portability and
therefore capitalize on the growth of the PC as the "multimedia
center" of the home or office.
Key elements of this business strategy are to:
/bullet/ Capitalize on our technology expertise and technology platforms to
expand our product lines;
/bullet/ Expand our customer and strategic industry relationships to take
advantage of the significant marketing strength of our OEM
customers and the new product designs that result from our
cooperative development activities;
/bullet/ Maintain media, interface and platform neutrality by supporting
different flash memory card standards, such as those from SanDisk,
Sony and Toshiba, as well as all rotational media, including hard
disk drives, floppy disk drives, Iomega Zip drives and Imation
SuperDisk drives, in order to address the data transfer and
storage needs of purchasers of emerging digital appliances;
/bullet/ Promote market awareness of our products, as well as the SmartDisk
name;
/bullet/ Continue our focus on easy-to-use digital connectivity products
and personal storage systems that offer seamless integration with
the PC's operating system to conveniently transfer and store
digital information; and
/bullet/ Capitalize on the first-to-market advantages provided by our
technical expertise to provide various connectivity and storage
solutions that satisfy the needs created by the proliferation of
digital appliances.
2
<PAGE>
RECENT DEVELOPMENTS
On March 6, 2000, we completed our acquisition of VST Technologies, Inc.
VST designs, develops, manufactures and markets USB-based flash memory readers
and USB and FireWire-based high performance personal storage systems for Windows
and Macintosh operating systems. Our acquisition of VST will, therefore, expand
our existing product lines to include advanced FireWire and USB technologies
and, additionally, expand our access to the rapidly growing digital video and
digital music markets. In addition, we expect that the acquisition of VST will
position us to participate in the market for Apple products. VST's product line
includes expansion bay storage devices, such as the Zip 100 drive for Apple, IBM
and Fujitsu notebooks, SuperDisk drives for select Apple and IBM notebooks, USB
floppy drives, portable FireWire hard drives and a dual flash memory card and
rotational media reader, as well as a recently introduced 100 Gigabyte FireWire
redundant array of independent disks, or RAID array.
We acquired VST for approximately $16.4 million in cash, approximately 1.1
million shares of our common stock and options to acquire approximately 443,000
shares of our common stock with exercise prices ranging from $0.90 to $4.45.
VST, a Delaware corporation whose predecessor was incorporated in 1993, is
located near Boston, Massachusetts. For the year ended December 31, 1999, VST
had gross revenues of approximately $61.5 million, operating income of
approximately $6.5 million and net income of approximately $6.2 million.
----------------
We were incorporated in Delaware on March 5, 1997 as "Fintos, Inc." and
changed our name to "SmartDisk Corporation" on September 26, 1997. Our
executive offices are located at 3506 Mercantile Avenue, Naples, Florida 34104,
and our telephone number is (941) 436-2500.
3
<PAGE>
THE OFFERING
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Common stock offered:
By SmartDisk ................................. 2,224,561 shares
By the selling stockholders .................. 1,975,439 shares
Total ..................................... 4,200,000 shares
Shares outstanding after the offering ......... 19,351,046 shares
Use of proceeds ............................... We estimate that our net proceeds from this offering
without exercise of the over-allotment options will be
approximately $60.8 million. We intend to use these net
proceeds for working capital and other general corporate
purposes, including potential acquisitions of technology or
businesses. We will not receive any proceeds from the sale
of shares by the selling stockholders.
Risk factors .................................. See "Risk Factors" and other information included in this
prospectus for a discussion of factors you should carefully
consider before deciding to purchase shares of our
common stock.
Nasdaq National Market symbol ................. SMDK
</TABLE>
The number of shares outstanding after the offering is based upon the
shares outstanding as of March 31, 2000 and excludes 3,456,685 shares reserved
for issuance under our stock option plans as of March 31, 2000, of which options
to purchase 2,500,683 shares at an average option price of $18.65 were
outstanding as of March 31, 2000.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
HISTORICAL PRO FORMA
-------------------------------------- ------------
1997 1998 1999 1999(1)
----------- ------------ --------- ------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues ................................................ $ 893 $ 15,323 40,319 $ 101,845
Cost of revenues .............................................. 301 12,600 24,820 70,594
-------- -------- ------ ---------
Gross profit .................................................. 592 2,723 15,499 31,251
Operating expenses:
Research and development ..................................... 1,412 2,107 5,869 8,477
Sales and marketing .......................................... 12 1,566 1,608 5,373
General and administrative ................................... 3,184 4,631 6,259 9,161
Amortization of goodwill and other intangible assets ......... -- -- -- 15,857
-------- -------- ------ ---------
Total operating expenses ...................................... 4,608 8,304 13,736 38,868
-------- -------- ------ ---------
Operating income (loss) ....................................... (4,016) (5,581) 1,763 (7,617)
Net income (loss) before income taxes ......................... (4,009) (5,605) 2,325 (8,620)
Income tax expense (benefit) .................................. (45) (102) 1,367 3,332
-------- -------- ------ ---------
Net income (loss) ............................................. $ (3,964) $ (5,503) $ 958 $ (11,952)
======== ======== ======= =========
Weighted average shares used to calculate
earnings (loss) per share amounts:(2)
Basic ........................................................ 7,739 8,040 10,725 11,795
Diluted ...................................................... 7,739 8,040 13,349 11,795
Earnings (loss) per share:
Basic ........................................................ $ (0.51) $ (0.68) $ 0.09 $ (1.01)
Diluted ...................................................... $ (0.51) $ (0.68) $ 0.07 $ (1.01)
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
---------------------------------------------
ACTUAL PRO FORMA(3) AS ADJUSTED(4)
---------- -------------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments ......... $45,720 $ 30,117 $ 90,904
Working capital ........................................... 46,108 34,640 95,427
Total assets .............................................. 63,444 152,043 212,830
Total stockholders' equity ................................ 49,787 118,887 179,674
</TABLE>
- ----------------
(1) Gives effect to the VST acquisition as if it had occurred as of January 1,
1999. See "Unaudited Pro Forma Financial Data."
(2) Shares used in computing earnings (loss) per share reflect the retroactive
adjustment of outstanding shares related to the mergers of SmartDiskette
Limited and SmartDisk Security Corporation into SmartDisk, as well as the
one-for-four reverse stock split completed in August 1999.
(3) Gives effect to the VST acquisition as if it had occurred as of December
31, 1999.
(4) Adjusted to give effect to (i) our sale of the 2,224,561 shares of common
stock at an assumed public offering price of $29.00 per share (after
deduction of the estimated underwriting discount and offering expenses)
and the receipt and application of the net proceeds and (ii) the VST
acquisition as if each had occurred as of December 31, 1999. See "Use of
Proceeds," "Capitalization" and "Unaudited Pro Forma Financial Data."
5
<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 BE ABLE TO
SUSTAIN OUR PROFITABILITY.
Except for the third and fourth quarter of 1999, we have incurred net
losses on a quarterly basis since inception. We had a net loss of approximately
$5.5 million during 1998. We had net income of approximately $1.0 million
during 1999 (a net loss of approximately $12.0 million on a pro forma basis
after giving effect to the VST acquisition). In addition, as of December 31,
1999, we had an accumulated deficit of approximately $21.7 million. In light of
our loss history and the VST acquisition, we cannot assure you that we will be
able to achieve profitability 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, Japanese Operations,
Vice President, Corporate Development and Legal Affairs, Vice President,
Audio/Video Products all joined us during 1999 and our Chief Technology Officer
and Senior Vice President and General Manager, Personal Storage Systems, joined
us in March 2000. There is the possibility that our management team may not be
able to work together as a cohesive unit.
WE MAY NOT BE ABLE TO SELL SUFFICIENT QUANTITIES OF OUR PRODUCTS TO SUSTAIN A
VIABLE BUSINESS IF THE MARKET FOR DIGITAL CONNECTIVITY PRODUCTS DOES NOT
CONTINUE TO DEVELOP OR IF A COMPETING TECHNOLOGY DISPLACES THESE 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 digital
connectivity 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 FLASHPATH PRODUCTS TO
SUSTAIN OUR CURRENT 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 into
PCs, eliminating the need for our current flash memory connectivity products.
6
<PAGE>
A REDUCTION IN THE USE OF THE 3.5 INCH FLOPPY DISK DRIVE BY CONSUMERS AND
MANUFACTURERS WOULD LEAD TO A REDUCTION IN DEMAND FOR OUR FLASHPATH PRODUCTS.
Our current FlashPath 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 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 FlashPath products. We would then
have to rely on our other products or develop new products that use a different
interface between personal computers and digital appliances. We may not be able
to redesign our FlashPath products to fit the new interface and demonstrate
technological feasibility of those products on a timely basis, if at all, or in
a cost effective manner.
SINCE OUR FLASHPATH PRODUCTS WORK ONLY IN CONJUNCTION WITH THE 3.5 INCH FLOPPY
DISK DRIVE, ADVANCES IN FLASH MEMORY CARDS MAY MAKE THESE PRODUCTS LESS
COMPETITIVE BECAUSE OF THE INCREASED TIME NEEDED TO TRANSFER DATA USING THE 3.5
INCH FLOPPY DISK DRIVE.
Consumer acceptance of our FlashPath 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
FlashPath products would be less attractive to consumers and our sales would
decline.
WE MAY NOT BE ABLE TO SELL SUFFICIENT QUANTITIES OF OUR PERSONAL STORAGE
SYSTEMS TO SUSTAIN OUR FUTURE GROWTH IF PC MANUFACTURERS DO NOT ADOPT IEEE 1394
AS A HIGH-SPEED PERIPHERAL INTERFACE OR IF A COMPETING CPU INTERFACE DISPLACES
OR PREVENTS THE WIDESPREAD ADOPTION OF IEEE 1394.
A substantial portion of our business depends on the adoption of Institute
of Electrical and Electronics Engineering, or IEEE, 1394 technology by PC
manufacturers. IEEE 1394 is a high speed PC interface that is replacing Small
Computer System Interface, or SCSI, and parallel interfaces. If these
manufacturers do not include an IEEE 1394 interface on their PCs or notebook
computers, then we may not be able to sell sufficient quantities of our
FireWire personal storage systems to support our future growth. FireWire is
Apple's trade name for IEEE 1394. For example, a new, competing high speed
interface, such as USB 2.0, could be developed and emerge as an industry
standard, thus limiting the demand for our FireWire technology and related
personal storage systems.
WE MAY NOT BE ABLE TO SELL SUFFICIENT QUANTITIES OF OUR PERSONAL STORAGE
SYSTEMS TO SUPPORT OUR BUSINESS IF SUPPLIERS OF OUR DRIVES DEVELOP NATIVE
FIREWIRE-BASED PERSONAL STORAGE SYSTEMS THAT DO NOT REQUIRE OUR FIREWIRE
CONVERSION TECHNOLOGY.
We embed conversion ASICS and integrated software drivers in the hard disk
drives and Zip drives we obtain from our suppliers, which enables our
FireWire-based personal storage systems to be used with FireWire-equipped CPUs.
We license this technology and the firmware from LSI Logic. If our suppliers
were to develop a native FireWire solution that does not require the conversion
ASICS and drivers embedded in our products, then we may not be able to sell
sufficient quantities of our FireWire personal storage systems to support our
business.
MOST OF OUR REVENUES ARE DERIVED FROM ONLY A FEW MAJOR PRODUCTS AND OUR
BUSINESS WILL BE SERIOUSLY HARMED IF DEMAND FOR THOSE PRODUCTS DECLINES.
To date, substantially all of our revenue has been derived from the sale
of only a few major products. While our long-term strategy is to derive revenue
from multiple products, we anticipate that
7
<PAGE>
the sale of our FlashPath products and our USB and FireWire storage systems
will continue to represent the most substantial portion of our revenues through
at least 2001. A decline in the price of or demand for these 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. On a pro forma basis after
giving effect to the VST acquisition, for the year ended December 31, 1999, we
derived approximately 36% of our product revenues from the sale of FlashPath,
19% from the sale of our USB-based personal storage systems, 20% from the sale
of our Zip drives and 8% from the sale of our FireWire-based personal storage
systems.
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 products that meet the
performance and price demands of OEMs and consumers. These development
activities will require the investment of substantial resources before revenues
are derived from product sales. Any significant delay in releasing new products
would adversely affect our reputation, provide a competitor a first-to-market
opportunity and allow a competitor to achieve greater market share. 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. Further, we may not be able
to recoup research and development expenditures if new products are not widely
commercially accepted.
WE MAY NOT BE ABLE TO DEVELOP OR MAINTAIN THE STRATEGIC RELATIONSHIPS NECESSARY
TO PROVIDE US WITH THE INSIGHT WE NEED TO DEVELOP COMMERCIALLY VIABLE PRODUCTS.
We may not be able to produce commercially viable products if we are
unable to anticipate market trends and the price, performance and functionality
requirements of flash memory card, PC and digital appliance manufacturers. We
must continue to collaborate closely with our customers, our OEM manufacturers
and our other 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 these strategic relationships. We currently rely on
strategic relationships with flash memory card manufacturers, such as Sony,
SanDisk and Toshiba, PC manufacturers, such as Apple, and consumer product
OEMs, such as IBM and FujiFilm. For example, through our co-development efforts
with Sony, we developed our FlashPath for the Sony Memory Stick, which began
shipping in the fourth quarter 1999, and introduced a follow-on FlashPath
product for new models of Sony's Mavica digital still camera a few months
later. If we cannot maintain our relationship with these manufacturers, like
Sony, then we may not be able to continue to develop products that are
compatible with their flash memory cards, PCs and digital appliances. 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. For example, we depend on our relationship with
Iomega Corporation in order to produce our Zip drive products for IBM notebook
computers. If we cannot maintain our relationship with Iomega, or if Iomega
wishes to produce these products internally, then our current market for these
products will deteriorate.
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WE MAY NOT BE ABLE TO SUSTAIN OUR RELATIONSHIP WITH APPLE COMPUTER WHICH WOULD
GREATLY HINDER OUR ABILITY TO TIMELY DEVELOP PRODUCTS WHICH ARE COMPATIBLE WITH
MACINTOSH OPERATING SYSTEMS.
In 1999 on a pro forma basis after giving effect to the VST acquisition,
approximately 53% of our revenues were derived from Apple-related products.
Historically, Apple has provided us, as an Apple developer, access to selected
product road maps, which has allowed us to timely develop and engineer many of
our current products, including our current FireWire and USB storage systems.
As a result of this collaborative relationship, we are substantially dependent
on Apple for a significant portion of our historical revenues from direct sales
to Apple and Apple users. Moreover, we anticipate that a significant portion of
our product revenues will continue to be derived from sales of our Apple
compatible products in the future. If Apple were to terminate our status as an
Apple developer or if there were a material deterioration of our relationship,
we would not be able to timely develop new technologies which are compatible
with Apple's product road maps and this would have a material adverse effect on
our business. Moreover, we currently sell a number of our Apple products
through the Apple Web Store, where our products may be sold separately or may
be configured and ordered along with a Macintosh CPU. While we do not
anticipate any change in this arrangement, Apple is not contractually obligated
to offer our products on their website. In addition, Apple chooses which of our
products they wish to include on their website.
A DECLINE IN THE DEMAND FOR APPLE PRODUCTS WOULD REDUCE THE MARKET FOR MANY OF
OUR PRODUCTS.
Our continued growth depends to a large extent on both our strategic
relationship with Apple and the continued demand for Apple products. This
dependence is due primarily to the fact that, to date, Apple has been the
principal PC manufacturer using the USB and FireWire interface technologies on
which many of our products are based. If the demand for Apple products declines
or Apple suffers a material change in its business, the market for many of our
products would be negatively impacted.
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 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;
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/bullet/ Fluctuations in the value of foreign currencies, particularly the
Japanese yen, against the U.S. dollar; and
/bullet/ Changes in our product mix as well as possible seasonal demand for
our products.
As a result of these and other factors, we believe that period-to-period
comparisons of our historical results of operations are not a good predictor of
our future performance.
WE MAY FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY AND, THEREFORE,
LOSE OUR COMPETITIVE ADVANTAGE.
Our proprietary technology with respect to 3.5 inch floppy disk drive
interfaces and USB and FireWire source codes 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. We have, in fact, filed a complaint against one
of our former patent attorneys for improperly copying one of our patent
applications and filing a patent application without our consent naming himself
as a co-inventor. This matter was settled with no materially adverse
consequences to SmartDisk. In addition, we may not receive trademark protection
for our "SmartDisk" name. We have filed for trademark registration of the name
"SmartDisk," but this has not yet been granted. We are aware of a trademark
application for the name "SmartDisk" that was filed by another company. Our
application could be denied and we could be prohibited from using the
"SmartDisk" name. In that event, we would be required to incur substantial
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 we have, 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 communications alleging that our FlashPath
products infringed a third party's patent rights. We have met with this third
party
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to obtain a better understanding of its claim and have agreed to retain a
mediator to review the facts and to help us resolve this dispute. Although we
believe that we do not infringe upon this third party's patent, we cannot
guarantee that the mediation will avoid litigation, or that the outcome of any
such litigation will be favorable to SmartDisk. In another instance, we
received a letter from SanDisk stating that SanDisk held two patents which it
believes might apply to our products. Although we subsequently obtained a
non-exclusive worldwide license for a 10-year period for all of SanDisk's
intellectual property rights in connection with multimedia floppy disk
interfaces, if the license terminates or expires, we could face a potential
conflict with SanDisk regarding the scope of those patents. We also received
correspondence alleging that our SafeBoot product violated another third
party's intellectual property rights. We discussed this correspondence with
counsel and concluded that our product does not infringe upon the third party's
rights. While none of these claims has resulted in litigation at this time,
future claims may. In addition, we license a portion of the intellectual
property included in our products from third parties, which may increase our
exposure to infringement actions because we rely upon those third parties for
information about the origin and ownership of the licensed intellectual
property. We may also lose our license rights with respect to the intellectual
property for which infringement is claimed. Further, if our customers are
required to obtain a license on other than commercially reasonable terms, our
business could be jeopardized.
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 many of our products are sold and much of our business is conducted
overseas, primarily Japan, our exposure to intellectual property risks may be
higher.
BECAUSE MOST OF OUR SALES ARE TO A RELATIVELY SMALL NUMBER OF CUSTOMERS 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, FujiFilm or Ingram Micro, or suffer a
substantial reduction in or cancellation of orders from these customers. Our
current distribution strategy results, and will continue to result, in sales to
only a limited number of customers. Some of 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 ten
OEMs, sales to which collectively accounted for approximately 57% of our
revenues for 1999 on a pro forma basis after giving effect to the VST
acquisition. More specifically, on a pro forma basis after giving effect to the
VST acquisition, Olympus, FujiFilm and Ingram Micro accounted for approximately
11%, 11% and 22% of our revenues and our top five customers collectively
accounted for approximately 58% of our revenues for fiscal 1999. 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.
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OUR ABILITY TO SELL OUR PRODUCTS WILL BE LIMITED IF THE OEMS' PRODUCTS DO NOT
ACHIEVE MARKET ACCEPTANCE OR IF THE OEMS DO NOT ADEQUATELY PROMOTE OUR
PRODUCTS.
We depend upon our OEM customers to market our products and we do not have
significant experience and resources devoted to independent marketing efforts.
Failure of the OEMs' products to achieve market acceptance, the failure of the
OEMs to bundle our products with theirs, or any other event causing a decline
in our sales to the OEMs could seriously harm our business. Even if consumers
buy OEMs' products, their ultimate decision to buy our products depends on OEM
packaging, distribution and sales efforts, which may not be sufficient to
maintain or increase sales of our products. If we cannot achieve or maintain a
sufficient consumer acceptance rate of our products concurrent with their
purchases of OEM products, our future sales to OEM customers will be adversely
affected.
A NEW OR COMPETING DATA TRANSFER SOLUTION THAT ACHIEVES SIGNIFICANT MARKET
SHARE OR RECEIVES SIGNIFICANT SUPPORT FROM FLASH MEMORY CARD OR DIGITAL
APPLIANCE 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,
Personal Computer Memory Card International Association, or 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.
SINCE WE SELL OUR PRODUCTS TO A LIMITED NUMBER OF LARGE CUSTOMERS, WE EXPECT
THAT THOSE CUSTOMERS MAY PRESSURE US TO MAKE PRICE CONCESSIONS, WHICH WOULD
REDUCE OUR FUTURE GROSS MARGINS.
Our reliance on sales to a limited number of large customers may expose 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 Apple, FujiFilm, Hitachi, IBM, Iomega,
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 three manufacturers of our FlashPath products, Toshiba, Apple and IBM
provide technological assistance in the development of our products, and
Olympus and FujiFilm market our products. We expect that these and similar
types of relationships will be critical to our growth because our business
model calls for the continued outsourcing of many key operational functions and
we do not currently have the resources to perform these functions ourselves.
WE MUST OVERCOME GEOGRAPHIC AND CULTURAL DIFFERENCES IN ORDER TO MAINTAIN OUR
STRATEGIC RELATIONSHIPS.
There are inherent difficulties in developing and maintaining
relationships with foreign entities. Language and cultural differences often
impair relationships, and geographical distance, at times, is also an
impediment. We must overcome these difficulties. If any of our current
relationships is impaired, or if we are unable to develop additional strategic
relationships in the future, our product development costs would significantly
increase and our business would be materially and adversely affected.
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OUR SALES AND EXPENSES ARE GEOGRAPHICALLY CONCENTRATED IN JAPAN, AND,
THEREFORE, WE COULD SUFFER FROM EXCHANGE RATE FLUCTUATIONS.
On a pro forma basis after giving effect to the VST acquisition,
approximately 31% of our revenues for 1999 were attributable to sales to
Japanese customers, and we expect that sales to Japanese customers will
continue to account for a significant portion of our total revenues for the
foreseeable future. All of our Japanese sales, as well as the related expenses,
are denominated in yen. Fluctuations in exchange rates between the yen and the
U.S. dollar, particularly with respect to Japanese transactions denominated in
a currency other than the yen, could adversely impact our financial results.
Some transactions and accounts of our Japanese subsidiary are U.S. dollar
denominated. Since the Japanese subsidiary's accounting records are kept in
yen, those U.S. dollar denominated transactions are accounted for in yen at the
time of the transaction. U.S. dollar denominated accounts are remeasured at the
end of the accounting period. This remeasurement results in adjustments to
income. In addition, the balance sheet accounts of our Japanese subsidiary are
translated to the U.S. dollar for financial reporting purposes and resulting
adjustments are made to stockholders equity. The value of the yen may
deteriorate against the dollar, which would impair the value of stockholders'
investment in us. Since a substantial portion of our revenues and receivables
are denominated in yen, the longer our Japanese receivables remain outstanding,
the greater the risk to our stockholders of an impairment of their investment
due to a deterioration of the yen relative to the U.S. dollar. 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
adjustment to equity of approximately $290,000 for 1998. In 1999, we had a
foreign currency gain of approximately $30,000 and a foreign currency
transaction adjustment to equity of approximately $277,000. 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.
OUR SALES ARE GEOGRAPHICALLY CONCENTRATED IN JAPAN, AND, THEREFORE, WE COULD
SUFFER FROM ECONOMIC AND POLITICAL DIFFICULTIES.
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 many of 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. For
example, Yamaichi, Hitachi and Mitsumi are the sole manufacturers of our
FlashPath
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products. We do not have contracts with any of Yamaichi, Hitachi or Mitsumi. If
Yamaichi, Hitachi or Mitsumi terminates production or cannot meet our
production requirements, we may have to rely on other contract manufacturing
sources or identify and qualify new contract manufacturers. The lead time
required to qualify a new manufacturer could range from approximately three to
six months. Despite efforts to do so, we may not be able to identify or qualify
new contract manufacturers in a timely manner and these new manufacturers may
not allocate sufficient capacity to us in order to meet our requirements. Any
significant delay in our ability to obtain adequate quantities of our products
from our current or alternative contract manufacturers would cause our sales to
decline.
TOSHIBA INTRODUCED US TO ONE OF OUR MANUFACTURERS AND WE MAY NOT BE ABLE TO
RETAIN THE SERVICES OF THE MANUFACTURER IF OUR RELATIONSHIP WITH TOSHIBA IS
IMPAIRED.
Yamaichi, one of the manufacturers of our FlashPath products, was
introduced to us by Toshiba, which is one of our major stockholders. If our
relationship with Toshiba is impaired, we may not be able to retain the
services of Yamaichi in manufacturing our products.
OUR DEPENDENCE ON FOREIGN MANUFACTURING AND INTERNATIONAL SALES EXPOSES US TO
DIFFICULTIES OFTEN NOT ENCOUNTERED BY EXCLUSIVELY DOMESTIC COMPANIES.
Many of our products are manufactured overseas and a substantial portion
of our revenues are derived from overseas sales. On a pro forma basis after
given effect to the VST acquisition, approximately 38% of our revenues in 1999
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
PRODUCE FINISHED PRODUCTS WILL BE IMPAIRED IF WE ARE UNABLE TO OBTAIN
SUFFICIENT QUANTITIES OF SOME 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
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function of these integrated circuits is the conversion of digital and analog
data. In addition, Iomega is a sole source supplier of Zip drives, and LSI
Logic is our primary supplier of ASICs for our FireWire products. 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. For example, in 1997 and 1998 we experienced a
nine-month delay in the shipment of our first notebook Zip drives resulting
from delays in deliveries of Zip mechanisms from our sole supplier. We suffered
additional costs as a result of these delays which adversely affected our gross
margin.
OUR CURRENT AND POTENTIAL COMPETITORS HAVE SIGNIFICANTLY GREATER RESOURCES THAN
WE DO, AND INCREASED COMPETITION COULD HARM SALES OF OUR PRODUCTS.
Increased competition is likely to result in price reductions, reduced
operating margins and loss of market share. Many of our current and potential
competitors have significantly greater financial, technical, marketing,
purchasing and other resources than we do. As a result, our competitors may be
able to respond more quickly to new or emerging technologies or standards and
to changes in customer requirements. Our competitors may also be able to devote
greater resources to the development, promotion and sale of products, and may
be able to deliver competitive products at a lower end-user price. Current and
potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products to address the needs of our prospective customers. Therefore, it
is possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share.
OUR BUSINESS MAY SUFFER IF WE ARE UNABLE TO MANAGE OUR GROWTH.
Failure to effectively manage our growth could impair our ability to
execute our business strategy. Our business has grown substantially in recent
periods, with revenues increasing from approximately $15.3 million in 1998 to
approximately $102 million in 1999, on a pro forma basis after giving effect to
the VST acquisitions. 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 105 as of March 31, 2000.
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.
WE MAY NOT BE ABLE TO INTEGRATE THE BUSINESS OF COMPANIES WE ACQUIRE AND
THEREFORE THESE ACQUISITIONS MAY NOT PROVIDE ADDITIONAL VALUE TO OUR
STOCKHOLDERS.
We continually evaluate potential acquisitions of complementary
businesses, products and technologies. We acquired VST Technologies, Inc.,
based in Acton, Massachusetts, in March 2000. We may not realize the desired
benefits of this transaction or of future transactions. In order to
successfully integrate acquired companies we must, among other things:
/bullet/ Continue to attract and retain key management and other personnel;
/bullet/ Integrate the acquired products from both an engineering and sales
and marketing prospective;
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/bullet/ Establish a common corporate culture; and
/bullet/ Integrate geographically distant facilities, systems and
employees.
If our management's attention to day-to-day operations is diverted to
integrating acquired companies or if problems in the integration process arise,
our business could be adversely affected and we could be required to use a
significant portion of our available cash. If an acquisition is made utilizing
our securities, a significant dilution to our stockholders and significant
acquisition related charges to earnings could occur.
Our acquisition of VST was dilutive and we expect that our earnings per
share will remain negative for the foreseeable future as a result of the VST
acquisition. We may incur additional charges in the future resulting from
redundancies in product lines, customer lists and sales channels associated
with these acquisitions. Acquisitions may also cause us to incur or assume
additional liabilities or indebtedness, including liabilities that are unknown
or not fully known to us at the time of the acquisition, which could have an
adverse effect on us. Furthermore, we cannot assure that any products we
acquire in connection with any acquisition will gain acceptance in our markets.
OUR GROWTH PROSPECTS WILL BE REDUCED IF WE CANNOT SUCCESSFULLY MARKET AND SELL
OUR NEW FIREWIRE RAID ARRAY PRODUCT.
We recently introduced a 100 Gigabyte FireWire RAID array. We do not know
whether this product will achieve any significant level of consumer acceptance.
In addition, because this product is more expensive than our other products, we
cannot distribute this product though our normal sales channels. If we are not
be able to develop the marketing and sales infrastructure necessary to
successfully distribute this product, our growth prospects will be reduced.
Finally, our ability to exploit this technology in the future depends on our
continued renewal of an exclusive license of source codes from a third party.
OUR GROWTH PROSPECTS WILL BE REDUCED IF THE SMART CARD MARKET DOES NOT DEVELOP.
Our 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, Iomega, Sony, Toshiba and others require us
to indemnify them for any damages they may suffer if a third party claims that
we are violating their intellectual property rights. While, to date, we have
not received indemnification claims, there may be future claims. Any
indemnification claim may require us to pay substantial damages, which could
negatively impact our financial condition.
OUR PRODUCTS MAY BE RETURNED TO US BY OUR CUSTOMERS IF PROJECTED CONSUMER
DEMAND DOES NOT MATERIALIZE, WHICH WOULD LEAD TO A REDUCTION IN OUR REVENUES.
Lack of consumer demand for our products may result in efforts by OEMs and
our other customers to return products to us. While we are contractually
obligated to accept returned products
16
<PAGE>
only on a limited basis, we may determine that it is in our best interest to
accept returns in order to maintain good relations with our customers. Product
returns reduce our revenues. While we have experienced very limited product
returns to date, returns may increase in the future.
WE COULD BE HELD LIABLE FOR PRODUCT DEFECTS, WHICH COULD REQUIRE US TO PAY
SUBSTANTIAL DAMAGES AND HARM OUR REPUTATION WITH OUR CUSTOMERS.
Complex products such as ours can 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.
ONE OF OUR PRINCIPAL STOCKHOLDERS CAN EXERT SIGNIFICANT INFLUENCE OVER US AND
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 39% of our common stock after the offering. Accordingly, Mr.
Fischer will be able to exert significant influence over 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 STILL 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
17
<PAGE>
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. Although, to date we have
not experienced any material effect on our business or operations as a result
of any Year 2000 Issues, we believe that it is impossible to determine with
certainty that all Year 2000 Issues affecting our business have been identified
and/or corrected. The Year 2000 Issue could adversely impact our business. For
a more complete discussion regarding our efforts to minimize the effects of
these problems, 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.
MANAGEMENT MAY APPLY THE PROCEEDS OF THIS OFFERING TO USES THAT DO NOT INCREASE
OUR OPERATING RESULTS OR MARKET VALUE.
We currently have no specific use planned for the net proceeds from this
offering. As a consequence, our management will have broad discretion to
allocate a large percentage of these proceeds to uses which the stockholders
may not deem desirable, and there can be no assurance that the proceeds can or
will yield a positive return. We may use a portion of these funds for the
acquisition of complementary businesses, products and technologies. See "Use of
Proceeds."
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 HAS BEEN, AND MAY CONTINUE TO BE, VOLATILE, WHICH MIGHT MAKE IT HARD
FOR INVESTORS TO SELL THEIR SHARES AT A PREDICTABLE PRICE, OR AT ALL.
Our common stock has only been trading on a public market since October 6,
1999. The trading price has been, and is likely to continue to be, highly
volatile. The market price of our common stock is likely to 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;
18
<PAGE>
/bullet/ Loss of or decrease in sales to a major customer or failure to
complete significant transactions;
/bullet/ Additions or departures of key personnel;
/bullet/ Future sales of our common stock, including sales which dilute
existing investors;
/bullet/ Stock market price and volume fluctuations attributable to
inconsistent trading volume levels of our stock;
/bullet/ General stock market conditions;
/bullet/ Commencement of or involvement in litigation; and
/bullet/ Announcements by us or our competitors of key innovations or
product introductions.
WE COULD BE SUBJECT TO CLASS ACTION LITIGATION DUE TO STOCK PRICE VOLATILITY,
WHICH, IF IT OCCURS, WILL DISTRACT MANAGEMENT, RESULT IN SUBSTANTIAL COSTS AND
HARM OUR BUSINESS.
In the past, securities class action litigation has often been brought
against companies following periods of volatility in the market price of their
securities. We may be the target of similar litigation in the future.
Securities litigation could result in substantial costs and divert management's
attention and resources, which could cause serious harm to our business.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
After this offering, we will have approximately 19.4 million shares of
common stock outstanding. Of these shares, the 3.45 million shares sold in our
initial public offering are, and the 4.2 million shares 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 March 31, 2000, approximately 13.5 million of
the outstanding shares of common stock were "restricted shares" as that term is
defined in Rule 144. In addition, all our executive officers and directors and
some of our stockholders, including the selling stockholders, who together,
assuming no exercise of the underwriters' over-allotment option, will hold an
aggregate of approximately 10.8 million shares of common stock upon completion
of the offering, have agreed that they 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 90 days after the date of this
prospectus without the prior written consent of Merrill Lynch, Pierce, Fenner &
Smith Incorporated. 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 their shares will be eligible for resale until 91 days after
the date of this prospectus. Merrill Lynch, Pierce, Fenner & Smith Incorporated
may, at its sole discretion, and at any time without notice, release all or any
portion of the securities subject to lock-up agreements.
As of March 31, 2000, options to purchase 2,500,683 shares of our common
stock were outstanding. Should the holders of these options exercise their
options, there will be additional shares eligible for sale. Three of our
principal stockholders and a majority of the former management and
non-management shareholders of VST 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.
19
<PAGE>
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. You can find many of
these statements by looking for words like "will," "should," "believe,"
"expect," "anticipate," "estimate," "intend," "may," "pro forma," "plan" or
similar expressions used in this prospectus. We have based these forward-looking
statements on our current expectations and projections about future events.
These forward-looking statements include, among other things:
/bullet/ Our anticipated growth strategies, including trends in revenues,
costs, gross margins and profitability;
/bullet/ Our intention to develop, market and introduce new products;
/bullet/ Anticipated growth of the personal computer and technology
industries;
/bullet/ Anticipated trends in our businesses, including trends in the
demand for digital appliances and, therefore, demand for our
products;
/bullet/ Expectations of consumer preferences and desires;
/bullet/ Future projections of our financial performance;
/bullet/ Future expenditures for capital projects;
/bullet/ The emergence of certain competing technologies;
/bullet/ Potential uses for and applications of our products;
/bullet/ Our ability to continue to control costs and maintain quality; and
/bullet/ Other forward-looking statements in the document.
The forward-looking statements included in the prospectus are subject to
risks, uncertainties and assumptions about our company. Our results of
operations may differ materially from the forward-looking statements as a
result of, among other things, the risk factors described under "Risk Factors."
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this prospectus might not occur.
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.
20
<PAGE>
On March 5, 1997 SmartDisk Corporation was incorporated. Our initial name
was "Fintos, Inc." which was changed to "SmartDisk Corporation" in September
1997.
In January 1998, we entered into an operating agreement with SDSC and
Fischer International and commenced operations. Under this operating agreement,
we agreed, along with Fischer International, to provide operating services to
SDSC and to market and develop SafeBoot, Smarty and FlashPath on behalf of
SDSC.
In February 1998, Phoenix House Investments, LP (Formerly Phoenix House
Investments, L.L.C.), an investment company controlled by Mr. Fischer, Fischer
International and Toshiba entered into a joint venture agreement which detailed
a plan of capital contribution, corporate governance and business strategies
for us. Although we commenced operations in January 1998, it was under this
strategic arrangement that we received our first significant capital
contributions and became the successor-in-interest to SDSC.
In May 1998, Mr. Fischer contributed his shares of SDSC to Phoenix House
in exchange for ownership interests in Phoenix House. Phoenix House was, for a
short time, the sole owner of SDSC.
Before the significant capital contributions discussed below,
substantially all outstanding shares of our common stock were owned by our
employees or consultants as a result of the exercise of stock options.
The joint venture arrangement became effective in May 1998, with the
following results:
/bullet/ Toshiba purchased 2,487,500 shares of our common stock,
representing approximately 23% of our common stock immediately
after the purchase, in exchange for approximately $10.0 million,
consisting of a cash payment of approximately $5.0 million and the
cancellation of a $5.0 million note which evidenced a prior loan
made by Toshiba to us.
/bullet/ Phoenix House purchased 7,350,000 shares of our common stock,
representing approximately 69% of our common stock immediately
after the purchase, in exchange for all of the outstanding shares
of SDSC.
/bullet/ Fischer International purchased 150,000 shares of our common
stock, representing approximately 1% of our common stock
immediately after the purchase, in exchange for trademarks it
owned relating to SafeBoot, FlashPath and Smarty.
/bullet/ SDSC became our wholly owned subsidiary.
/bullet/ Fischer International, Toshiba, and Phoenix House became our major
stockholders.
In June 1998, SDSC was merged into SmartDisk and the separate corporate
existence of SDSC ended.
In May 1999, Phoenix House and the other stockholders of SDL exchanged all
of their SDL shares for 515,500 shares of our common stock. As a result of the
exchange, SDL became our wholly-owned subsidiary.
In March 2000, we acquired VST Technologies, Inc. in exchange for
approximately $16.4 million in cash, approximately 1.1 million shares of our
common stock and options to purchase approximately 443,000 shares of our common
stock at exercise prices ranging from $0.90 to $4.45. Upon consummation of the
merger, VST's name was changed to SmartDisk Personal Storage Systems
Corporation and it became our wholly owned subsidiary.
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<PAGE>
USE OF PROCEEDS
Assuming an offering price of $29.00 per share, we estimate that our net
proceeds from the sale of the 2,224,561 shares of common stock that we are
offering will be approximately $60.8 million, after deducting estimated offering
expenses of approximately $500,000 and underwriting discounts and commissions
payable by us. We will not receive any of the proceeds from the sale of common
stock by the selling stockholders. We intend to use the net proceeds of this
offering for working capital and other general corporate purposes. 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 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.
PRICE RANGE OF COMMON STOCK
Our common stock has been traded on the Nasdaq National Market under the
symbol "SMDK" since October 6, 1999. The following table sets forth for the
periods indicated the range of high and low closing sales prices per share of
our common stock as reported by the Nasdaq National Market:
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1999
Fourth Quarter (commencing October 6, 1999) ......... $55.19 $23.56
2000
First Quarter ....................................... $65.13 $24.13
Second Quarter (through April 19, 2000) ............. $36.50 $16.38
</TABLE>
On April 19, 2000, the last sale price of our common stock, as reported by
the Nasdaq National Market, was $29.00 per share. As of March 31, 2000, we had
approximately 80 stockholders of record. We believe that the number of
beneficial owners of our common stock is in excess of 1,250.
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. In addition, our line of credit prohibits the payment of cash
dividends.
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<PAGE>
CAPITALIZATION
(IN THOUSANDS, EXCEPT SHARE DATA)
The following table sets forth our capitalization as of December 31, 1999:
/bullet/ On an actual basis;
/bullet/ On a pro forma basis to reflect the acquisition of VST; and
/bullet/ On a pro forma as adjusted basis to reflect the acquisition of VST
and the sale of the 2,224,561 shares of common stock offered by
this prospectus at an assumed offering price of $29.00 per share,
and the application of the net proceeds we will receive from the
offering in the manner described in "Use of Proceeds."
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
-----------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(2)
------------ -------------- ---------------
<S> <C> <C> <C>
Cash, cash equivalents and short-term investments ........... $ 45,720 $ 30,117 $ 90,904
Stockholders' equity:
Common Stock, $0.001 par value; 60,000,000 shares
authorized; 16,072,399 shares issued and 15,991,422 shares
outstanding, actual; 17,142,399 shares issued and
17,061,422 shares outstanding, pro forma; and 19,366,960
shares issued and 19,285,983 shares outstanding, pro forma
as adjusted .............................................. 16 17 19
Capital in excess of par value ............................. 71,247 140,346 201,131
Treasury stock ............................................. (58) (58) (58)
Accumulated other comprehensive income ..................... 712 712 712
Notes receivable from officers/employees ................... (388) (388) (388)
Accumulated deficit ........................................ (21,742) (21,742) (21,742)
--------- --------- ---------
Total stockholders' equity ................................ 49,787 118,887 179,674
--------- --------- ---------
Total capitalization ..................................... $ 49,787 $ 118,887 $ 179,674
========= ========= =========
</TABLE>
- ----------------
(1) Gives effect to the VST acquisition as if it had occurred as of December
31, 1999. See "Unaudited Pro Forma Financial Data."
(2) Gives effect to (i) our sale of 2,224,561 shares of common stock offered
hereby at an assumed public offering price of $29.00 per share (after
deduction of the estimated underwriting discount and offering expenses)
and the receipt and application of the net proceeds and (ii) the VST
acquisition as if each had occurred as of December 31, 1999.
The table does not reflect the issuance of approximately 15,000 shares of
our common stock upon the exercise of options in the first quarter 2000.
The outstanding share information excludes the following:
/bullet/ 1,136,750 shares of common stock issuable on exercise of
outstanding options as of December 31, 1999 with a weighted
average exercise price of $7.19 per share;
/bullet/ 2,329,000 shares of common stock reserved for grant and issuance
under our stock option plans as of December 31, 1999; and
/bullet/ 80,977 shares of common stock held in treasury as of December 31,
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.
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Our consolidated statements of operations data set forth below for the
years ended December 31, 1997, 1998 and 1999 and the consolidated balance sheet
data as of December 31, 1998 and 1999 have been derived from audited
consolidated financial statements which are in this prospectus. Our
consolidated statement of operations data set forth below for the year ended
December 31, 1996 and the consolidated balance sheet data as of December 31,
1996 and 1997 have been derived from audited consolidated financial statements
which are not included in this prospectus. Our selected financial data as of
and for the year ended December 31, 1995, have been derived from unaudited
consolidated financial statements, which are not included in this prospectus.
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,
---------------------------------------------------------------------
1995 1996 1997 1998 1999
------------ ------------ ----------- ------------ ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Product sales ................................ $ 316 $ 500 $ 893 $ 15,038 $37,262
Research and development revenue ............. -- -- -- -- 2,587
Royalties .................................... -- -- -- 285 470
-------- --------- -------- -------- -------
Total revenues ................................ 316 500 893 15,323 40,319
Cost of revenues .............................. 486 367 301 12,600 24,820
-------- --------- -------- -------- -------
Gross profit (loss) ........................... (170) 133 592 2,723 15,499
Operating expenses:
Research and development ..................... 331 720 1,412 2,107 5,869
Sales and marketing .......................... 48 6 12 1,566 1,608
General and administrative ................... 1,728 3,418 3,184 4,531 6,259
Impairment loss .............................. -- 7,807 -- -- --
-------- --------- -------- -------- -------
Total operating expenses ...................... 2,107 11,951 4,608 8,304 13,736
-------- --------- -------- -------- -------
Operating income (loss) ....................... (2,277) (11,818) (4,016) (5,581) 1,763
Gain (loss) on foreign exchange ............... -- -- -- (48) 30
Interest and other income ..................... 38 -- 8 76 586
Interest expense .............................. -- -- (1) (52) (54)
-------- --------- --------- -------- -------
Net income (loss) before income taxes ......... (2,239) (11,818) (4,009) (5,605) 2,325
Income tax expense (benefit) .................. -- (2,348) (45) (102) 1,367
-------- --------- -------- -------- -------
Net income (loss) ............................. $ (2,239) $ (9,470) $ (3,964) $ (5,503) $ 958
======== ========= ======== ======== =======
Weighted average shares used to calculate
earnings (loss) per share amounts:(1)
Basic ........................................ 7,350 7,579 7,739 8,040 10,725
Diluted ...................................... 7,350 7,579 7,739 8,040 13,349
Earnings (loss) per share:
Basic ........................................ $ (0.30) $ (1.25) $ (0.51) $ (0.68) $ 0.09
Diluted ...................................... $ (0.30) $ (1.25) $ (0.51) $ (0.68) $ 0.07
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------
1995 1996 1997 1998 1999
------------ ----------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments ....................................... $ 51 $ 8 $ 330 $ 2,920 $45,720
Working capital (deficit) .......................... (3,579) (2,191) (4,753) 2,869 46,108
Total assets ....................................... 437 250 1,607 11,136 63,444
Long-term debt (including current portion) ......... -- 93 645 648 --
Redeemable common stock ............................ -- -- -- 9,992 --
Total stockholders' equity (deficit) ............... (3,580) (2,017) (4,626) (6,336) 49,787
</TABLE>
- ----------------
(1) Shares used in computing earnings (loss) per share reflect the retroactive
adjustment of outstanding shares related to the mergers of SmartDiskette
Limited and SmartDisk Security Corporation into SmartDisk, as well as the
one-for-four reverse stock split completed in August 1999.
25
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma combined condensed statement of
operations for the year ended December 31, 1999, and the unaudited pro forma
combined condensed balance sheet as of December 31, 1999 give effect to the VST
acquisition as if it had occurred on (i) January 1, 1999 in the case of the
statement of operations and (ii) December 31, 1999 in the case of the balance
sheet. These unaudited pro forma financial statements are based upon the
historical financial information appearing elsewhere in this prospectus.
The VST acquisition will be treated as a purchase business combination for
financial accounting purposes. The total purchase cost of the acquisition will
be allocated to the tangible and intangible assets and liabilities of VST based
upon their respective fair values. The pro forma adjustments are based upon
preliminary estimates and certain assumptions that management believes are
reasonable in the circumstances and are described in the notes accompanying
these unaudited pro forma financial statements. After definitive valuations
have been made, the final allocation of the purchase price could differ from
the preliminary estimates used herein which would result in changes to the pro
forma financial statements. These unaudited pro forma financial statements are
provided for information purposes only and do not purport to represent what our
results of operations or financial position would actually have been had the
transactions in fact occurred at such dates or to project our results of
operations or financial position at or for any future date or period.
These unaudited pro forma financial statements and accompanying notes
should be read in conjunction with "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.
26
<PAGE>
SMARTDISK CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------
SMARTDISK VST PRO FORMA PRO FORMA
CORPORATION(1) TECHNOLOGIES(2) ADJUSTMENTS COMBINED
---------------- ----------------- ------------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and short-term
investments ....................................... $ 45,720 $ 797 $ (16,400)(a) $ 30,117
Restricted cash .................................... 1,050 -- -- 1,050
Accounts receivable ................................ 3,866 11,178 -- 15,044
Notes receivable ................................... 6,302 -- -- 6,302
Inventories, net ................................... 1,475 10,799 -- 12,274
Other current assets ............................... 1,353 166 -- 1,519
Deferred tax asset ................................. -- 1,485 -- 1,485
--------- -------- ---------- ---------
Total current assets ............................... 59,766 24,425 (16,400) 67,791
Property and equipment, net ........................ 2,623 1,288 -- 3,911
Intangible assets, net ............................. 883 -- 79,286 (a) 80,169
Deposits and other assets .......................... 172 -- -- 172
--------- -------- ---------- ---------
Total Assets ....................................... $ 63,444 $ 25,713 $ 62,886 $ 152,043
========= ======== ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................... $ 5,330 $ 9,122 $ -- $ 14,452
Bank line of credit and discounted notes ........... 4,894 4,500 -- 9,394
Other accrued liabilities .......................... 2,015 1,624 2,800 (a) 6,439
Income taxes payable ............................... 1,110 1,448 -- 2,558
Deferred revenue ................................... 308 -- -- 308
--------- -------- ---------- ---------
Total current liabilities .......................... 13,657 16,694 2,800 33,151
Capital lease obligation ........................... -- 5 -- 5
Redeemable convertible preferred stock ............. -- 11,974 (11,974)(a) --
Stockholders' equity (deficit):
Common stock ...................................... 16 1 (1)(a) 17
1 (a)
Capital in excess of par value .................... 71,247 744 (744)(a) 140,346
69,099 (a)
Treasury stock, at cost ........................... (58) -- -- (58)
Accumulated other comprehensive income ............ 712 -- -- 712
Notes receivable from officers/employees .......... (388) -- -- (388)
Accumulated deficit ............................... (21,742) (3,705) 3,705 (a) (21,742)
--------- -------- ---------- ---------
Total stockholders' equity (deficit) ............... 49,787 (2,960) 72,060 118,887
--------- -------- ---------- ---------
Total Liabilities and Stockholders' Equity ......... $ 63,444 $ 25,713 $ 62,886 $ 152,043
========= ======== ========== =========
</TABLE>
- ----------------
(1) Represents the balance sheet for SmartDisk as of December 31, 1999. See
our financial statements and notes beginning on page F-2 of this
prospectus.
(2) Represents the balance sheet for VST, which we acquired on March 6, 2000,
as of December 31, 1999. See VST's financial statements and notes
beginning on page F-26 of this prospectus.
27
<PAGE>
SMARTDISK CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------
SMARTDISK VST PRO FORMA PRO FORMA
CORPORATION(1) TECHNOLOGIES(2) ADJUSTMENTS COMBINED
---------------- ----------------- ----------------- -------------
<S> <C> <C> <C> <C>
REVENUES
Product sales .................................... $37,262 $61,526 $ -- $ 98,788
Research and development revenue ................. 2,587 -- -- 2,587
Royalties ........................................ 470 -- -- 470
------- ------- --------- ---------
Total revenues ................................... 40,319 61,526 -- 101,845
COST OF REVENUES ................................. 24,820 45,774 -- 70,594
------- ------- --------- ---------
GROSS PROFIT ..................................... 15,499 15,752 -- 31,251
OPERATING EXPENSES ...............................
Research and development ......................... 5,869 2,608 -- 8,477
Sales and marketing .............................. 1,608 3,765 -- 5,373
General and administrative ....................... 6,259 2,902 -- 9,161
Amortization of goodwill and other
intangible assets ............................... -- -- 15,857 (b) 15,857
------- ------- --------- ---------
Total operating expenses ......................... 13,736 9,275 15,857 38,868
------- ------- --------- ---------
OPERATING INCOME (LOSS) .......................... 1,763 6,477 (15,857) (7,617)
Interest and other income (expense), net ......... 562 (265) (1,300)(c) (1,003)
------- ------- --------- ---------
Net income (loss) before income taxes ............ 2,325 6,212 (17,157) (8,620)
Income tax expense ............................... 1,367 -- 1,965 (d) 3,332
------- ------- --------- ---------
NET INCOME (LOSS) ................................ $ 958 $ 6,212 $ (19,122) $ (11,952)
======= ======= ========= =========
Earnings (loss) per share--basic ............... $ 0.09 $ (1.01)
Earnings (loss) per share--diluted ............. $ 0.07 $ (1.01)
Weighted average shares used to calculate
earnings (loss) per share amounts
Basic .......................................... 10,725 1,070 (e) 11,795
Diluted ........................................ 13,349 1,070 (e) 11,795
</TABLE>
- ----------------
(1) Represents actual results of operations for SmartDisk for the year ended
December 31, 1999. See our financial statements and notes beginning on
page F-2 of this prospectus.
(2) Represents the actual results of operations for VST, which we acquired on
March 6, 2000, for the year ended December 31, 1999. See VST's financial
statements and notes beginning on page F-26 of this prospectus.
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<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
NOTE 1. UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
The pro forma combined condensed balance sheet gives effect to the
acquisition as if it had occurred on December 31, 1999.
On March 6, 2000, SmartDisk Corporation acquired all the outstanding
shares of VST stock in exchange for approximately 1.07 million shares of
SmartDisk common stock and $16.4 million in cash. In addition, SmartDisk issued
options to purchase a total of approximately 443,000 shares of SmartDisk common
stock in exchange for all issued and outstanding VST options. The following
adjustment has been reflected in the unaudited pro forma combined condensed
balance sheet.
(a) To record cash, common stock and options issued to the shareholders of VST,
and record applicable purchase accounting entries, including the
elimination of VST's common stock, capital in excess of par value and
retained earnings.
Under purchase accounting, the total purchase price will be allocated to
VST's assets and liabilities based on their relative fair values. Allocations
are subject to valuations as of the date of the closing of the acquisition. The
amounts and components of the estimated purchase price along with the
preliminary allocation of the estimated purchase price to net assets purchased
are presented below.
PURCHASE PRICE
<TABLE>
<S> <C>
Cash ................................................ $16,400,000
Common stock ........................................ 1,070
Capital in excess of par ............................ 49,298,930
Value of SmartDisk options issued ................... 19,800,000
Transaction costs ................................... 2,800,000
-----------
Total purchase price ................................ $88,300,000
===========
NET ASSETS ACQUIRED
Book value of net tangible assets of VST ............ $ 9,013,623
Goodwill and other intangible assets of VST ......... 79,286,377
-----------
Net assets acquired ................................. $88,300,000
===========
</TABLE>
NOTE 2. UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
The pro forma combined condensed statement of operations gives effect to
the acquisition as if it had occurred on January 1, 1999.
(b) Adjustment to record the amortization of goodwill and other intangible
assets resulting from the allocation of purchase price. The pro forma
adjustment assumes goodwill and other intangible assets will be amortized
on a straight-line basis over five years. The ultimate categories of
intangible assets and the lives assigned will be based on the results of a
valuation analysis. Historical amortization of goodwill and other
intangible assets for SmartDisk has been included in general and
administrative expenses.
(c) To reflect an increase in interest expense assuming we borrowed the $16.4
million cash paid to VST security holders at our effective borrowing rate
on January 1, 1999 until the date of our IPO at which time we would have
paid down the debt. The resulting decrease in cash proceeds would
correspondingly decrease interest income associated with cash, cash
equivalents and short-term investments.
(d) To reflect income tax expense at a rate of approximately 40% on income
earned by VST less pro forma interest expense.
(e) To reflect the estimated shares to be issued as consideration for the
acquisition.
29
<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. For additional information, see "Related Party Transactions" and note
1 of the notes to our financial statements.
On March 6, 2000, we completed our acquisition of VST Technologies, Inc.
VST designs, develops, manufactures and markets USB-based flash memory readers
and USB and FireWire-based high performance personal storage systems for
Windows and Macintosh platforms. Our acquisition of VST will expand our product
lines to include advanced FireWire and USB technologies and additionally expand
our access to the rapidly growing digital video and digital music markets. In
addition, we expect that the acquisition of VST will position us to participate
in the market for Apple products. VST's product line includes expansion bay
storage devices, such as the Zip 100 drive for Apple, IBM and Fujitsu
notebooks, SuperDisk drives for select Apple and IBM notebooks, USB floppy
drives, portable FireWire hard drives and a dual flash memory card and
rotational media reader, as well as a recently introduced 100 Gigabyte FireWire
RAID array.
We acquired VST for approximately $16.4 million in cash, approximately 1.1
million shares of our common stock and options to acquire approximately 443,000
shares of our common stock with exercise prices ranging from $0.90 to $4.45.
VST, a Delaware corporation whose predecessor was incorporated in 1993, is
located near Boston, Massachusetts. For the year ended December 31, 1999, VST
had gross revenues of approximately $61.5 million, operating income of
approximately $6.5 million and net income of approximately $6.2 million. We will
account for the VST acquisition under the purchase method of accounting. Because
of the significant amount of goodwill which we recognized in respect of the VST
acquisition (approximately $79.3 million), the acquisition was dilutive to our
stockholders and will require us to recognize amortization expenses of
approximately $15.9 million annually for the next five years.
OVERVIEW
We design, develop, manufacture and market digital connectivity products
and personal storage systems that allow consumers to easily access and exchange
digital data. As a result, our products provide consumers with a user friendly
way to transfer, store, manage and share digital photographs, video, music,
voice and data among digital appliances, personal computers and the Internet.
With the growth of digital appliances, such as digital cameras, digital video
camcorders, voice recorders and music players, consumers are increasingly using
the PC as the "multimedia center" of the home or office. These digital
appliances capture digital data on high capacity, reusable flash memory cards
that appeal to consumers because of their small size, versatility and
portability. Our digital connectivity products and personal storage systems are
designed to provide an easy way to transfer, store, manage and share digital
data. Our products are designed to cross PC platforms, support most leading
media types and use high performance PC interfaces, such as USB and FireWire.
Our patented digital
30
<PAGE>
connectivity products, such as our FlashPath products for the Toshiba
SmartMedia card, SanDisk MultiMediaCard and Sony Memory Stick, as well as
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 between PCs and digital appliances. Our latest digital
connectivity product, the Tri-Media Reader, utilizes a USB cable interface to
exchange digital data and is intended to address an expanding installed base of
PCs with USB cable interfaces. Our personal storage systems include high
performance external portable hard disk drives and floppy disk drives for
desktop and notebook PCs utilizing USB and FireWire interfaces with the PC, as
well as expansion bay disk drives for notebooks. Substantially all of our
personal storage systems are compatible with Windows and Macintosh operating
systems.
Our principal digital connectivity products, our FlashPath family of
products, are used primarily to transfer images to PCs from digital cameras. We
develop and market three FlashPath products, one for each of three different
flash memory cards: SanDisk's MultiMediaCard, Sony's Memory Stick and Toshiba's
SmartMedia card. These flash memory cards are used in cameras and video
camcorders made by a number of leading camera manufacturers, including FujiFilm,
JVC, Olympus, Panasonic, Sanyo, Sharp, Sony and Toshiba. During the year ended
December 31, 1999, we sold over one million FlashPaths for the SmartMedia card.
During the fourth quarter of 1999, we completed development of our first
FlashPath product for the Memory Stick and began full-scale production and
shipping to Sony for distribution. In the fourth quarter of 1999, we also
shipped working samples of our FlashPath product for the MultiMediaCard. We
began volume production of FlashPath for the MultiMediaCard in the first quarter
of 2000. In the first quarter of 2000, we also introduced a follow-on FlashPath
product for new models of Sony's Mavica digital still camera. In January 2000,
we introduced a USB Tri-Media Reader which reads and writes to SmartMedia cards,
CompactFlash cards and rotational media, such as a 1.44 Mega-byte floppy disk,
all in a single USB cable-powered device for both Windows and Macintosh systems.
We believe that as consumers embrace the digital lifestyle, the number of
applications for flash memory cards will grow. These flash memory cards are
designed for applications in "smart" cellular phones, digital still cameras and
camcorders, digital audio players, digital voice recorders and video game
devices. In addition to our product development efforts with Sony and SanDisk,
we also have strategic relationships with a number of key electronics industry
participants, including Hitachi, NEC, and Toshiba.
Our personal storage systems enhance the user's ability to store and
manage digital data. Our personal storage systems are compatible with both
Windows and Macintosh operating systems and support very high transfer rates,
up to 400 Megabits per second and 100 Gigabytes of capacity. Since 1992, we
have worked with Apple as an Apple developer. Through this relationship, Apple
has provided us access to selected product road maps which has allowed us to
focus on new opportunities in the development and engineering of many FireWire
and USB systems. Through our strategic relationship with Iomega, we build
Iomega Zip drive products for Apple, IBM and Fujitsu. Iomega designs,
manufactures and markets disk drives that can be purchased as aftermarket
products to be added to PCs and other electronic devices or as a built-in
feature incorporated in PCs. In 1999, we were one of the first companies to
ship FireWire personal storage systems for both Macintosh and Windows operating
systems, as well as FireWire Zip drives. In the first quarter of 2000, we
introduced one of the first 100 Gigabyte portable FireWire RAID arrays.
Our strategic partners actively participate in the development of our
products, provide us with access to leading-edge manufacturing capabilities,
and market and/or distribute our products globally.
RESULTS OF OPERATIONS
SMARTDISK
In 1997, we were primarily a development stage company with limited
revenues. We did not begin to recognize significant revenues from our FlashPath
and Smarty products until mid-1998. During 1999 and 1998, substantially all of
our product revenues were derived from the sale of our FlashPath
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<PAGE>
product that works with SmartMedia flash memory cards. Moreover, most of our
product revenues in 1999 were derived from sales to relatively few OEM
customers. FujiFilm and Olympus collectively accounted for approximately 55% of
our 1999 revenues, down from 70% in 1998, and our top five customers accounted
for approximately 81% of our revenues, down from 93% in 1998. In 1999, on a pro
forma basis after giving effect to the VST acquisition, Olympus, FujiFilm and
Ingram Micro accounted for approximately 11%, 11% and 22% of our revenues and
our top five customers collectively accounted for approximately 58% of our
revenues. 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. 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, which may be tied to seasonal demand for both our
digital connectivity products and our personal storage systems, as well as the
consumer electronic products manufactured and sold by our OEM customers. 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 fiscal year ended December 31, 1999 was our first full year of
profitability and we have been profitable since the third quarter of 1999. Our
net losses in 1998 and 1997 resulted from our significant investment in
research and development and in building sales and marketing and general and
administrative infrastructure. We expect to continue to invest significantly in
research and development related to new digital connectivity products and
personal storage systems, as well as marketing and sales activities to support
those products. No assurance can be given that the introduction or market
acceptance of new products will be successful.
We purchase a substantial portion of 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 85% of our 1999 revenues
were derived from customers located outside the United States, most of which
were denominated in yen. See note 1 of the notes to our financial statements
for additional information with respect to our foreign operations.
While most of the transactions and accounts of our United States and
Japanese operations are dollar or yen denominated, some accounts are
denominated in other currencies. Since the accounting records of our Japanese
operations are kept in yen, any non-yen denominated transactions are accounted
for in yen at the time of the transaction. Upon settlement of such a
transaction, any foreign currency gain or loss results in an adjustment to
income. We could be required to denominate our product sales in currencies
other than yen in the future, which would make the management of currency
fluctuations more difficult and expose us to greater currency risk. Some
accounts of our U.S. and Japanese operations are denominated in currencies
other than the dollar or yen and are remeasured to the dollar or yen at the end
of the accounting period. This remeasurement also results in an adjustment to
income. Additionally, the balance sheet accounts of our Japanese operations are
translated to dollars for financial reporting purposes and resulting
adjustments are made to stockholders' equity. The value of the yen may
strengthen or weaken against the dollar, which would impact the value of
stockholders' investment in our common stock. The strengthening of the yen
against the U.S. dollar in 1999 contributed the most significant portion of the
foreign currency translation gain adjustment. This amount is included in
accumulated other comprehensive income and shown in the equity section of our
balance sheet. We do not currently hedge against foreign currency exposure. The
lack of a hedging program exposes us to foreign currency gains and losses.
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<PAGE>
Our backlog at December 31, 1999 was approximately $5.4 million, compared
to approximately $2.7 million at December 31, 1998. On a pro forma basis after
giving effect to the VST acquisition, our backlog at December 31, 1999 was
approximately $9.1 million. The increase in backlog of approximately $2.7
million resulted primarily from the year-end introduction of the Memory Stick
FlashPath for use with Sony digital appliances and the MultiMediaCard FlashPath
which utilizes SanDisk's latest flash memory card. 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.
COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998
REVENUES. Total product revenues were approximately $37.3 million for the
year ended December 31, 1999 compared to approximately $15.0 million for the
year ended December 31, 1998. This increase was primarily attributable to
higher sales of our FlashPath for SmartMedia product, which we commercially
introduced in mid-1998, and, to a lesser extent, sales of our newest product,
FlashPath for the Sony Memory Stick, which we commercially introduced in the
fourth quarter of 1999. Foreign sales accounted for 85% of our 1999 revenues,
compared to 90% of our 1998 revenues. We expect that the acquisition of VST
will significantly increase our revenues for fiscal year 2000.
Our product revenues from the sale of FlashPath increased from $13.8
million for the year ended December 31, 1998 to $36.4 million for the year
ended December 31, 1999. This increase was partially offset by decreases in the
sale of our Smarty product from $1.3 million for the year ended December 31,
1998 to $836,000 for the year ended December 31, 1999. As a result of the
growth of our FlashPath revenues and the decrease in Smarty sales, Smarty
revenues represented less than 3% of product revenues for the year ended
December 31, 1999 compared to approximately 9% in the year ended December 31,
1998. Our product revenues from the sale of our FlashPath and Smarty products
are recognized at the time of shipment to customers.
Fiscal year 1999 was the first year that we have had revenues from our
research and development efforts. During 1999, we entered into a development
agreement with a customer for the development of new products. Upon acceptance
of the product by the customer in the fourth quarter of 1999, we recognized
approximately $2.6 million in revenue. During the fourth quarter, we entered
into an additional research and development agreement with the same customer,
which is expected to be completed during the first half of 2000. Our research
and development revenue is recognized upon final customer acceptance of our
work performed under the terms of the agreement.
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. As our FlashPath revenues continue to increase, these royalties
represent a smaller portion of our total revenues and have decreased to
approximately 1% of our total revenues for the year ended December 31, 1999.
Our royalty revenues from the sale of our SafeBoot product increased to
$470,000 in the year ended December 31, 1999 as compared to $284,000 in
December 31, 1998.
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 $24.8 million for the year ended
December 31, 1999 compared to approximately $12.6 million for the year ended
December 31, 1998. This increase in costs was due primarily to the increase in
sales of our FlashPath product. With the acquisition of VST, we expect that our
cost of revenues will increase significantly next year as we add infrastructure
to expand our product offerings, particularly for FireWire and USB products, and
support anticipated sales growth.
GROSS PROFIT. Our gross profit for the year ended December 31, 1999
increased to approximately $15.5 million or 38% of total revenue, compared to
approximately $2.7 million or 18% of total revenue
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<PAGE>
for the year ended December 31, 1998. These increases in the gross profit and
gross profit percentage are primarily the result of revenue growth and improved
margins on our FlashPath product. The improved FlashPath product margins
achieved in 1999 are a result of our efforts to reduce our costs per unit. The
improved margins also resulted from a favorable mix associated with higher
shipments to customers other than our largest OEMs which we intend to continue.
Because we expect OEMs to continue to account for a large portion of our sales,
we expect gross margins on our FlashPath products to remain relatively
consistent with the current level. However, our largest OEM customers may seek
price concessions, which could cause a reduction in our gross margins. Another
contributor to our improved gross profit in 1999 was the research and
development revenue earned under the research and development agreement we have
with one of our customers. Without the research and development revenue, our
gross margin would be approximately 35% of total revenue. With the acquisition
of VST in March 2000, we expect the actual amount of our gross profit to
increase next year, however, we anticipate our overall gross margin percentage
will decrease. In 1999, VST had a gross margin of 26% of revenues, and on a pro
forma basis after giving effect to the VST acquisition, our gross margin was
approximately 31%.
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 $5.9 million,
or 15% of revenues, for the year ended December 31, 1999 compared to
approximately $2.1 million, or 14% of revenues, for the year ended December 31,
1998. This increase was the result of hiring additional technical personnel,
including salaries and related payroll expenses, costs incurred in conjunction
with one of our research and development contracts and the outsourcing of
product development.
All of these expenses were incurred to support our development of enhanced
versions of our existing FlashPath and Smarty products, as well as our
development of our new FlashPath products 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
enhancement of our existing FlashPath products and the expansion of the
FlashPath line to support additional flash memory card formats. In addition, we
expect to incur additional costs as we develop other digital connectivity
products to conveniently transfer digital data from competing flash memory cards
to existing, non-PC technologies, such as our recently-announced
FlashTrax/registered trademark/ product, and, other products that support
computer interfaces other than the 3.5 inch floppy disk drive, such as our
recently-introduced USB Tri-Media Reader.
VST had research and development expenses of $2.6 million, or 4% of
revenues, for the year ended December 31, 1999 to support the development of
many of their products. On a pro forma basis after giving effect to the VST
acquisition, our 1999 research and development expenses were approximately $8.5
million, or 9% of revenues. We expect our consolidated research and development
expenses to increase but represent a decreasing percentage of our total product
revenues.
SALES AND MARKETING EXPENSES. Sales and marketing expenses include
salaries, benefits and travel expenses for our sales, 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 by
less than $100,000 to approximately $1.6 million for the year ended December 31,
1999 compared to the year ended December 31, 1998. The change from 1998 to 1999
reflects various additional costs incurred in 1998 in connection with the
introduction of the FlashPath product for SmartMedia, including salaries and
payroll related expenses associated with the opening of our Tokyo, Japan office
in March 1998. In connection with the VST acquisition we added approximately 70
new products to our existing product lines. Therefore, we anticipate that the
sales and marketing efforts related to these new products will significantly
increase our expenses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
include the salaries and related expenses of our executive management, finance,
information systems, human resources,
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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 increased to
approximately $6.3 million in the year ended December 31, 1999 compared to
approximately $4.6 million in 1998. This increase is primarily due to increases
in professional services, legal fees and personnel related costs including
salaries, bonuses and relocation expenses. We also expect that these expenses
will increase significantly in 2000 as a result of the VST acquisition due to
the addition of VST's general and administrative expenses. For the year ended
December 31, 1999, VST had 46 employees and general and administrative expenses
of $2.9 million.
INTEREST AND OTHER INCOME/INTEREST EXPENSE. Interest and other income
includes interest earned on cash balances and gains or losses on foreign
exchange. Interest expense is incurred on the bank line of credit in Japan. The
average outstanding balance on the line of credit in Japan remained consistent
between 1999 and 1998, therefore, interest expense remained consistent between
years. The significant component of interest and other income is interest
earned on the proceeds from our initial public offering in October 1999.
Most of our revenues in 1999, as well as related expenses, were
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 1999 compared to a loss of approximately $48,000 in 1998. See note 1 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
year ended December 31, 1999, we provided for Japanese withholding tax of
approximately $585,000 on royalty income from Japan. We also provided for
Japanese income tax of approximately $780,000 due to income earned in Japan. As
of December 31, 1999 we had a net operating loss carry forward of approximately
$1.5 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 11 of the notes to our financial statements for additional
information. Our effective tax rate in 1999 was 58%. We expect this to improve
as a result of the anticipated implementation of proposed tax planning
measures; however, any such improvements will be offset by the acquisition of
VST.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
REVENUES. Our revenues increased to approximately $15.3 million in 1998
from $893,000 in 1997. This increase was the result of approximately $13.4
million in sales of our FlashPath for SmartMedia product, which was
commercially introduced in mid-1998, and increased sales of Smarty of
approximately $1.0 million. Substantial shipments of these products did not
occur until the first quarter of 1998 for Smarty and the second quarter of 1998
for FlashPath.
COST OF REVENUES. Cost of revenues increased to approximately $12.6
million for the year ended December 31, 1998 from $301,000 in 1997. This
increase in costs was primarily due to the increase in sales of our FlashPath
product since substantial shipment of our FlashPath and Smarty products did not
occur until 1998. The cost of revenues in 1997 was primarily related to our
SafeBoot product.
GROSS PROFIT. Gross profits increased to approximately $2.7 million in
1998 from approximately $592,000 in 1997. This increase resulted primarily from
the market introduction of our FlashPath product in mid-1998. Gross profit as a
percentage of revenues decreased to 18% in 1998 compared to 66% in 1997. This
decrease was the result of lower overall margins from sales of FlashPath to our
major OEM customers at quantity pricing levels. The margins generated in 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 $2.1 million in 1998 from $1.4 million in 1997. The increase was
attributable to the hiring of additional technical personnel to support the
development of our FlashPath and Smarty products.
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SALES AND MARKETING EXPENSES. Sales and marketing expenses increased to
approximately $1.5 million in 1998 from approximately $12,000 in 1997. This
increase was due to the hiring of sales, marketing and product management
personnel to support our FlashPath and Smarty products, and in particular, the
opening of our Tokyo, Japan office in March 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to approximately $4.6 million in 1998 from approximately $3.2 million
in 1997. This increase was attributable to our hiring of additional executives
to support our growth, including executives to staff our Tokyo office, which
opened in March 1998.
VST
Fiscal 1999 represented VST's second consecutive year of substantial
revenue growth and the first year of profitability. Prior to 1999, all of VST's
sales consisted of expansion bay storage devices and peripheral power
management products for notebook computers. Prior to 1998, all of VST's sales
consisted of peripheral products for Macintosh Powerbooks. In 1998, VST
successfully launched its notebook Zip drives, diversifying its products for
Windows-compatible notebooks. VST's first non-Apple sales in 1998 were from
notebook Zip drives sold for IBM ThinkPads, Fujitsu Lifebooks and NEC Versa
notebooks. Revenue growth in 1999 was due to VST's successful entry into the
desktop marketplace for personal storage systems, as VST began shipping
FireWire and USB-based storage devices for Windows and Macintosh desktop
platforms. These new FireWire and USB personal storage systems represented
approximately 44% of 1999 revenues. Customers purchased most of these desktop
peripherals for use with desktops sold by Apple. USB storage devices sold
particularly well, accounting for approximately two thirds of sales of new
personal storage systems. We expect sales of the FireWire family of products to
grow as the number of PCs featuring FireWire ports increases.
Most of VST's products are sold to domestic customers through the retail
distribution channel, consisting of sales to Apple, national and worldwide
distributors, mail order and catalog houses, and established retail chain
stores. Sales to the retail distribution channel accounted for 74% of 1999 sales
and 60% of 1998 sales. VST also sells directly to major OEMs, such as IBM and
Fujitsu. VST's sales to OEMs were 15% of 1999 sales and 24% of 1998 sales.
VST's backlog of orders was approximately $3.7 million at December 31,
1999, compared to approximately $3.0 million in 1998. The increase in the
backlog reflects both the higher sales and increased product offerings at the
end of 1999 compared to 1998. Since most of VST's customers expect product
deliveries shortly after order placement, VST's backlog is usually less than
one month's sales. In addition, VST often builds a backlog of orders for new
products that have been announced but are not yet shipping.
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1999 AND 1998
REVENUES. Revenues for the year ended December 31, 1999 were approximately
$61.5 million, an increase of approximately 150% over approximately $24.6
million for the year ended December 31, 1998. The increase in revenue was
primarily attributable to sales of the new USB-based personal storage systems,
which VST commercially introduced in late 1998, and FireWire-based personal
storage systems, which VST commercially introduced in the first half of 1999,
and an increase in sales of expansion bay hard drives and SuperDisk drives for
use with Apple notebook computers. The increase in sales of expansion bay hard
drives and SuperDisk drives was due in part to the fact that Apple began
shipping their notebook computers without floppy drives in the expansion bays
during 1999, and many Powerbook customers bought VST's SuperDisk drives for the
expansion bays in order to have floppy capability. The remainder of the 1999
sales were Zip drives for Apple, Fujitsu, and IBM notebooks and power
peripherals sold into the Apple market. Foreign sales accounted for 8% of total
1999 sales, compared to 9% of 1998 sales.
Revenues from the sale of USB-based personal storage systems increased to
approximately $19.0 million for the year ended December 31, 1999 from
approximately $100,000 for the year ended
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December 31, 1998. VST began shipping its first FireWire-based personal storage
systems in April 1999, and its product revenues from the sale of these products
were approximately $8.0 million for the year ended December 31, 1999. Revenues
from the sale of Zip drives, primarily for Apple, IBM, Fujitsu and NEC
notebooks, decreased to approximately $20.0 million for the year ended December
31, 1999 from approximately $22.0 million for the year ended December 31, 1998.
Product revenues are recognized at the time of shipment to customers.
COST OF REVENUES. Cost of revenues includes amounts paid to contract
assembly houses for purchases of finished assemblies and amounts paid to
fulfillment houses for product packaging, handling, storage and shipping
services, as well as provisions to product warranty reserves and reserves for
excess and obsolete inventory. Cost of revenues increased to approximately $45.8
million for the year ended December 31, 1999 compared to approximately $19.2
million for the year ended December 31, 1998. This increase in costs was due
primarily to the increase in sales of products. We expect cost of revenues to
increase as we add infrastructure, including tooling, to expand our product
offerings. Cost of revenues in 1998 included significant costs due primarily to
an approximately nine-month delay in the shipment of VST's first notebook Zip
drives resulting from delays in deliveries of Zip mechanisms from VST's
supplier.
GROSS PROFIT. Gross profit margins increased to approximately $15.7
million or 26% of revenues for the year ended December 31, 1999 from
approximately $5.4 million or 22% of revenues for the year ended December 31,
1998. The cost of revenue associated with the delayed shipment of VST's first
notebook Zip drives adversely impacted 1998 gross margin. Overall gross margin
results generally reflect decreasing prices during the life cycle of the
product due to competitive dynamics and aging platforms, counterbalanced by
higher margins for new products and economies of scale.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of salaries and payroll-related expenses for design and development
engineers, as well as prototype supplies and contract or professional services.
Research and development expenses increased by approximately 137% to
approximately $2.6 million, or 4% of revenues, for the year ended December 31,
1999 compared to approximately $1.1 million, or 5% of revenues, for the year
ended December 31, 1998. The increase is primarily attributable to additional
engineering personnel and to prototype costs for new product development.
Research and development expense decreased as a percentage of revenue from 1998
to 1999 is attributable to an increase of approximately 150% in revenue. We
believe that the continued introduction of new personal storage products with an
emphasis on being first-to-market is essential to growth and will require an
increase in the absolute dollars spent on research and development.
SALES AND MARKETING. Sales and marketing expenses include salaries,
benefits and travel expenses for our sales, marketing and product management
personnel in the United States. 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 $3.8 million
for the year ended December 31, 1999 compared to approximately $2.8 million for
the year ended December 31, 1998. The increase is primarily attributable to
increased product advertising and promotion, and the additional sales personnel
and associated expenses required to achieve $61.5 million sales volume in 1999
compared to the $24.6 million sales volume in 1998.
GENERAL AND ADMINISTRATIVE. General and administrative expenses include the
salaries and related expenses of executive management, finance, information
systems, human resources, legal and administrative functions, as well as lease
rental expense, utilities, maintenance expenses, insurance, legal and accounting
professional fees, depreciation and amortization. General and administrative
expenses increased to approximately $2.9 million for the year ended December 31,
1999 compared to approximately $2.2 million for the year ended December 31,
1998. The increase is primarily attributable to additional operating and
clerical personnel, additional compensation related to performance-based bonus
programs, additional executive travel and general increases in most other
administrative expenses.
37
<PAGE>
INTEREST AND OTHER EXPENSE. Interest and other expense includes interest
on the outstanding balance of VST's line of credit and convertible demand notes
and a loan from strategic partners. Interest expense was approximately $261,000
in 1999 compared to approximately $473,000 in 1998. Although the average
outstanding balance on VST's line of credit was higher in 1999 than in 1998,
interest expense in 1998 also included interest on convertible demand notes
that converted to equity in December 1998 and a note payable to a vendor that
was paid in full during December 1998.
INCOME TAXES. Through fiscal 1998, VST had not been profitable since its
inception, and had accumulated a net operating loss carryforward to be used to
offset future taxable income. Although VST reported over $6.0 million of
pre-tax income in 1999, VST did not record any income tax expense due to the
net operating loss carryforward VST had accumulated. However, VST recorded a
current income tax liability of $1.5 million at December 31, 1999, and also
recorded a deferred tax asset of $1.5 million to recognize the estimated future
effects of temporary differences between the carrying value of assets for
financial reporting and tax reporting purposes. VST recognized this deferred
tax asset in 1999 due to the belief that it was more likely than not that VST
would be able to realize this asset.
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1998 AND 1997
REVENUES. Revenues for the year ended December 31, 1998 were approximately
$24.6 million, an increase of approximately 224% over the approximately $7.6
million for the year ended December 31, 1997. The increase in revenue was
primarily attributable to sales of Zip drives for Apple, Fujitsu, and IBM
notebooks, which VST began shipping in small quantities during November 1997.
The remainder of VST's sales in 1997 were non-Zip expansion bay storage devices
and power peripherals sold into the Apple market, primarily through master
distributors, catalog/mail order houses, and retail resellers. In addition,
foreign sales accounted for 9% of total 1998 sales, compared to 22% of 1997
sales, as VST phased-out its line of notebook magneto optical drives sold in
Japan.
Revenues from the sale of USB-based personal storage systems, which VST
introduced in late 1998, were approximately $100,000 for the year ended December
31, 1998. Revenues from the sale of notebook Zip drives increased to
approximately $22.0 million for the year ended December 31, 1998 from
approximately $1.5 million for the year ended December 31, 1997. Revenues from
the sale of non-Zip expansion bay storage devices and power peripherals
decreased to approximately $3.0 million for the year ended December 31, 1998
from approximately $6.0 million for the year ended December 31, 1997.
COST OF REVENUES. Cost of revenues increased to approximately $19.2
million for the year ended December 31, 1998 compared to approximately $6.2
million for the year ended December 31, 1997. The increased costs were due
primarily to an approximately nine-month delay in the shipment of VST's first
notebook Zip drives resulting from delays in deliveries of Zip mechanisms from
VST's supplier.
GROSS PROFIT. Gross profit margins increased to approximately $5.4 million
or 22% of revenues in 1998 from approximately $1.5 million or 19% of revenues in
1997. Cost of revenue associated with the delayed shipment of VST's first
notebook Zip drives adversely impacted 1998 gross margins. Excluding the effect
of these costs, gross profit margins decreased to 26% in 1998 from 27% in 1997.
VST's 1997 sales mix included a greater percentage of higher margin power
products than the lower margins associated with the notebook storage drives that
dominated the 1998 sales mix. Overall gross margin results generally reflect
decreasing prices during the life cycle of the product due to competitive
dynamics and aging platforms, counterbalanced by higher margins for new products
and economies of scale.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased by
approximately 6% to approximately $1.1 million or 5% of revenues for the year
ended December 31, 1998 compared to approximately $1.2 million or 15% of
revenues for the year ended December 31, 1997 due in part to
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<PAGE>
research and development funding from strategic partners in 1998. This decrease
in research and development expense as a percentage of revenue from 1997 to 1998
was attributable to an increase of approximately 224% in revenue.
SALES AND MARKETING. Sales and marketing expenses increased to
approximately $2.8 million for the year ended December 31, 1998 compared to
approximately $2.2 million for the year ended December 31, 1997. The increase
was primarily attributable to the increased infrastructure required to support
VST's approximately $24.6 million sales volume in 1998 compared to supporting an
approximately $7.6 million sales volume in 1997. The increased infrastructure
included additional leased space, additional sales, customer and technical
support personnel, and the increased depreciation from the supporting computer
equipment, office furniture and fixtures.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
to approximately $2.2 million for the year ended December 31, 1998 compared to
approximately $1.4 million for the year ended December 31, 1997. The increase is
primarily attributable to the increased infrastructure required to support VST's
higher sales volume in 1998 compared to 1997.
INTEREST AND OTHER EXPENSE. Interest expense was approximately $457,000 in
1998 compared to approximately $348,000 in 1997. Increase in interest expense
in 1998 was primarily the result of interest on convertible demand notes issued
in September and October 1998 and interest on a loan from strategic partner. A
higher average balance on VST's bank line of credit during 1998 compared to
1997 also contributed to the higher interest expense.
INCOME TAXES. Through fiscal 1997, VST had not achieved profitability and
had accumulated a net operating loss carryforward to be used to offset future
taxable income.
QUARTERLY RESULTS
The following table sets forth unaudited quarterly operating data for each
of the eight quarters ended December 31, 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, the availability of manufacturing capacity necessary
to make our products. In addition, this historical data does not include the
financial performance of VST which we acquired in March 2000. Therefore, we
believe that period-to-period comparisons of our historical results are neither
meaningful nor predictive of our future performance. The quarterly data should
be read together with the financial statements and the notes to those
statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDING
-------------------------------------------------------------------------------------------------
MARCH JUNE SEPTEMBER DECEMBER MARCH JUNE SEPTEMBER DECEMBER
31, 30, 30, 31, 31, 30, 30, 31,
1998 1998 1998 1998 1999 1999 1999 1999
----------- ----------- ----------- ------------ ----------- ----------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues ..................... $ 532 $ 3,440 $ 4,889 $ 6,462 $ 5,507 $ 8,486 $ 11,463 $ 14,863
Gross profit ................. 91 629 1,520 483 836 2,886 4,495 7,282
Gross profit margin .......... 17% 18% 31% 7% 15% 34% 39% 49%
Total operating expenses ..... 1,297 2,205 2,187 2,615 2,831 3,037 3,548 4,320
Operating income (loss) ...... (1,206) (1,576) (667) (2,132) (1,995) (151) 948 2,961
Net income (loss) ............ $ (1,189) $ (1,540) $ (690) $ (2,084) $ (1,967) $ (189) $ 702 $ 2,412
</TABLE>
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
39
<PAGE>
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 both our digital
connectivity products and our personal storage systems, as well as the consumer
electronic products manufactured and sold by our OEM customers. Accordingly, the
cancellation or delay of customer orders, or the loss of a significant customer,
could have a material adverse effect on our business. We may be unable to adjust
spending for our research and development or other activities in a timely manner
to compensate for any unexpected revenue shortfall, and any significant
shortfall in revenue in relation to our expectations would have an immediate
adverse effect on our business, results of operations and financial condition.
Due to the above factors, quarterly revenues and results of operations are
difficult to forecast, and we believe that period-to-period comparisons of our
operating results are neither meaningful nor predictive of future performance.
In one or more future quarters our results of operations may fall below the
expectations of securities analysts and investors. In that event, the trading
price of our common stock would likely be materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1998 1999 % CHANGE
------------ ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash, cash equivalents and short-term investments ......... $ 2,920 $45,720 1,466%
Working capital ........................................... $ 2,869 $46,108 1,507%
Stockholders' equity (deficit) ............................ $ (6,336) $49,787 *
</TABLE>
- ----------------
* not meaningful
During 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. In October 1999, we completed an
initial public offering of our common stock which raised capital in the amount
of $39.14 million.
VST financed its operations and met its capital requirements since its
inception in 1993 primarily through private placements of common and preferred
stock, convertible demand notes from existing investors and loans from
strategic partners, and from working capital lines of credit with commercial
banks.
We maintain a line of credit under which we may borrow up to $5 million.
Any amounts borrowed under this line of credit bear interest at 2% over the
30-day LIBOR rate and are secured by all assets of the Company. This line of
credit expires on December 15, 2000. We have not borrowed against this line of
credit and we have no current plans to borrow any amounts under this line of
credit.
Our Japanese branch has a line of credit with maximum borrowing capacity
of approximately $2.9 million, or 295 million yen. The facility, which has no
fixed term, is secured by a time deposit and accounts receivable. The branch
maintains a time deposit with the bank that has a balance at December 31, 1999
of approximately $1.0 million. We may borrow up to 90% of this amount. The
credit agreement corresponding to the time deposit collateral is renewable
automatically on May 31, 2000. In addition, accounts receivable of up to $2
million, or 200 million yen, of specified trade customers may be used as
additional collateral. The credit agreement corresponding to the accounts
receivable collateral is renewable automatically on January 31, 2001. The
interest rate on borrowings under the credit facility is 1.38% per year. The
outstanding balance under the line of credit was approximately $2 million, or
200 million yen, as of December 31, 1999 compared to approximately $0.9 million
at December 31, 1998.
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The Japanese branch also discounts certain short-term promissory notes
received from trade customers with the bank. Bank borrowings collateralized by
promissory notes totaled approximately $2.9 million, or 302 million yen, at
December 31, 1999 and approximately $1.4 million, or 160 million yen, at
December 31, 1998.
Net cash used in operating activities was approximately $0.2 million for
the year ended December 31, 1999 as compared to approximately $6.0 million and
$4.1 million for the years ended December 31, 1998 and 1997. Net cash used in
operating activities in 1999 was due to increases in accounts and notes
receivable of approximately $6.7 million, prepaid expenses and other current
assets of approximately $0.9 million. These amounts were partially offset by
approximately $1.0 million of net income and increases in accounts payable of
approximately $1.6 million, accrued expenses of approximately $2.4 million and
deferred research and development revenues of approximately $0.3 million. At
December 31, 1999, approximately $6.3 million, or 62%, of our trade
receivables, substantially all of which related to sales to Asian OEMs, were
subject to extended payment term arrangements secured by promissory notes. This
is a normal business practice in Asia, particularly in Japan, and, in these
cases, credit terms generally ranged from 90 to 150 days. The OEMs are required
to pay for the products that they order from us and which we deliver to them
whether or not they ultimately resell the products. Product returns are
contractually required only for defective products and, to date, returns have
been negligible. In addition, our allowance for doubtful accounts at December
31, 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. Since a substantial portion of our revenues and receivables
are denominated in yen, the longer our Japanese receivables remain outstanding,
the greater the risk to our stockholders of an impairment of their investment
due to a deterioration of the yen relative to the U.S. dollar.
Net cash used for VST's operating activities in 1999 was approximately
$1.7 million, compared to $2.8 million during 1998. Cash used for operating
activities in 1998 was primarily for funding receivables growth and its
operating loss. VST also invested in approximately $1.2 million of new property
and equipment during 1999 compared to approximately $0.6 million during 1998.
VST total assets grew from $8.5 million at December 31, 1998 to $25.7 million
at December 31, 1999. VST leveraged the growth in assets primarily through
supplier trade debt and bank debt. VST's trade debt increased by $5.7 million
while the bank debt increased by $3.0 million in 1999.
Net cash used in investing activities was approximately $30.2 million for
1999 compared to $2.1 million in 1998 and $0.3 million in 1997. The most
significant use of cash in 1999 was for the purchase of short-term investments
with a portion of the proceeds from our initial public offering in October
1999. Cash was also used for capital expenditures, primarily the acquisition of
production equipment for the manufacture of our products in Japan.
Net cash provided by financing activities was approximately $46.6 million
in 1999 compared to $10.4 million in 1998 and $4.8 million in 1997. This was
primarily attributable to approximately $43.8 million in proceeds from private
sales and the initial public offering of our common stock, as well as,
approximately $2.6 million in net borrowings under our line of credit with a
Japanese bank.
During 1998 VST raised approximately $4.4 million in cash from the
issuance of convertible demand notes and its Series C preferred stock,
including the conversion of $663,000 of notes payable from 1997. The
approximately $483,000 balance of a loan from a strategic partner was paid in
full during 1998. All outstanding convertible demand notes converted into
shares of Series C preferred stock on December 23, 1998.
On October 6, 1999, we completed our initial public offering. We realized
net proceeds of approximately $39.14 million from the sale of 3,450,000 shares
of our common stock, including 450,000 shares issued upon the exercise of the
underwriters' over allotment option, at an initial public offering
41
<PAGE>
price of $13.00 per share after deducting underwriting discounts and commissions
of approximately $3.14 million and offering expenses of approximately $2.57
million.
The net proceeds from our initial public offering have been invested in
cash, cash equivalents and short-term investments. In early March 2000, in
connection with the acquisition of VST, we paid $19.0 million dollars in
purchase price consideration and other acquisition related costs. We also
funded VST's current operations with approximately $1.5 million following the
acquisition. VST has a line of credit secured by a security interest in
substantially all of its assets, including all of its intellectual property. As
of March 31, 2000, no amounts were outstanding under this line of credit. We
plan to use the net proceeds from this offering and the remaining net proceeds
from our initial public offering for general corporate purposes, including
working capital and capital expenditures, as well as potential acquisitions of
technology and businesses. The use of the proceeds from our initial public
offering does not represent a material change in the use of proceeds described
in our prospectus dated October 5, 1999.
We believe that the net proceeds of this offering, along with our cash and
cash equivalents, short-term investments, credit facility and the remaining net
proceeds of the initial public offering, will be sufficient to meet our working
capital and anticipated capital expenditure needs for at least the next 12
months. We may need to raise additional capital if we expand more rapidly than
initially planned, to develop new or enhanced products and/or services, to
respond to competitive pressures or to acquire complementary products,
businesses or technologies. The capital, if needed, may not be available or may
not be available on terms acceptable to us.
YEAR 2000 ISSUES
The "Year 2000 Issue" refers generally to the problems that some software
may have in determining the correct century of the year. Many existing
electronic systems, including computer systems, use only the last two digits to
refer to a year. Therefore, these systems may recognize a date using "00" as
1900 rather than the year 2000. If not corrected, these electronic systems
could fail or create erroneous results when addressing dates on and after
January 1, 2000.
In 1999, we completed our remediation and testing of hardware and software
systems to assess their Year 2000 readiness. Our costs associated with Year 2000
compliance have been minimal, and, therefore, these costs have not been
accounted for separately. To date, we have not experienced any material adverse
effect on our business or operations as a result of any Year 2000 Issues. In
addition, we have not deferred any material information technology projects or
equipment purchases as a result of our Year 2000 activities. However, we believe
that it is not possible to determine with complete certainty that all Year 2000
Issues affecting us have been identified or corrected. If we, our customers, our
providers of hardware and software or our third-party computer network providers
fail to remedy any Year 2000 Issues, the reasonably likely worst case scenario
would be a disruption in the supply of our products from our subcontractors or
an interruption of our research programs, which could have a material adverse
affect on our business, financial conditions and results of operations.
Presently we are unable to quantitatively estimate the duration and extent of
any such disruption or interruption, or estimate the effect such disruption or
interruption may have on our future revenue. However, we believe that the impact
of any Year 2000 Issue on the supply of our products or on our research programs
will be limited to our ongoing operations. We do not expect that any historical
data will be affected.
MARKET RISK
We do not currently use derivative financial instruments. We currently
place our marketable security investments in high-quality credit instruments,
primarily U.S. Government obligations and corporate obligations with
contractual maturities of less than two years. We do not expect any material
loss from our marketable security investments and, therefore, believe that our
potential interest rate exposure is not material.
42
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition." This bulletin established guidelines for revenue
recognition and is effective for periods beginning after March 15, 2000. We do
not expect that the adoption of the guidelines required by SAB No. 101 to have
a material impact on our financial condition or results of operations.
In June 1998, the Financial Standards Board issued Statement of Financial
Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and hedging activities. SFAS No. 133, as amended by SFAS
No. 137, will be effective for our financial reporting beginning in the first
quarter of fiscal 2001. SFAS No. 133 will require us to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The accounting for gains
and losses from changes in the fair value of a particular derivative will
depend on the intended use of the derivative. We do not expect the adoption of
SFAS No. 133 to have a material impact on our results of operations or
financial position.
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<PAGE>
BUSINESS
OVERVIEW
We design, develop, manufacture and market digital connectivity products
and personal storage systems that allow consumers to easily access and exchange
digital data. As a result, our products are designed to provide consumers with
a user friendly way to transfer, store, manage and share digital photographs,
video, music, voice and data among digital appliances, personal computers and
the Internet. With the growth of digital appliances, such as digital cameras,
digital video camcorders, voice recorders and music players, consumers are
increasingly using the PC as the "multimedia center" of the home or office.
These digital appliances capture digital data on high capacity, reusable flash
memory cards that appeal to consumers because of their small size, versatility
and portability. Our digital connectivity products and personal storage systems
provide an easy way to transfer, store, manage and share digital data. Our
products are designed to cross PC platforms, support most leading media types
and use high performance PC interfaces, such as USB and FireWire. Our patented
digital connectivity products, such as our FlashPath products for the Toshiba
SmartMedia card, SanDisk MultiMediaCard and Sony Memory Stick, as well as
Smarty, are designed to 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 between PCs and digital appliances. Our
latest digital connectivity product, the Tri-Media Reader, utilizes a USB cable
interface to exchange digital data and is intended to address an expanding
installed base of PCs with USB cable interfaces. Our personal storage systems
include high performance external portable hard disk drives and floppy disk
drives for desktop and notebook PCs utilizing USB and FireWire interfaces with
the PC, as well as expansion bay disk drives for notebooks. Substantially all
of our personal storage systems are compatible with Windows and
Macintosh/registered trademark/ operating systems.
Our principal digital connectivity products, our FlashPath family of
products, are used primarily to transfer images to PCs from digital cameras. We
develop and market three FlashPath products, one for each of three different
flash memory cards: SanDisk's MultiMediaCard, Sony's Memory Stick and Toshiba's
SmartMedia card. These flash memory cards are used in cameras and video
camcorders made by a number of leading camera manufacturers, including
FujiFilm, JVC, Olympus, Panasonic, Sanyo, Sharp, Sony, and Toshiba. During the
12-month period ended December 31, 1999, we sold over one million FlashPaths
for the SmartMedia card. During the fourth quarter of 1999, we completed
development of our first FlashPath product for the Memory Stick and began
full-scale production and shipping to Sony for distribution. In the fourth
quarter of 1999, we also shipped working samples of our FlashPath product for
the MultiMediaCard. We began volume production of FlashPath for the
MultiMediaCard in the first quarter of 2000. In the first quarter of 2000, we
also introduced a follow-on FlashPath product for new models of Sony's Mavica
digital still camera. In January 2000, we introduced a USB Tri-Media Reader
which reads and writes to SmartMedia cards, CompactFlash cards and rotational
media, such as a 1.44 Mega-byte floppy disk, all in a single USB cable-powered
device for both Windows and Macintosh systems. We believe that as consumers
embrace the digital lifestyle, the number of applications for flash memory
cards will grow. These flash memory cards are designed for applications in
"smart" cellular phones, digital still cameras and camcorders, digital audio
players, digital voice recorders and video game devices. In addition to our
product development efforts with Sony and SanDisk, we also have strategic
relationships with a number of key electronics industry participants, including
Hitachi, NEC, and Toshiba.
Our personal storage systems enhance the user's ability to store and
manage digital data. Our personal storage systems are compatible with both
Windows and Macintosh operating systems and support very high transfer rates,
up to 400 Megabits per second and 100 Gigabytes of capacity. Since 1992, we
have worked with Apple as an Apple developer. Through this relationship, Apple
has provided us access to selected product road maps which has allowed us to
focus on new opportunities in the development and engineering of many FireWire
and USB systems. Through our strategic relationship with Iomega, we build
Iomega Zip drive products for Apple, IBM and Fujitsu. Iomega designs,
manufactures and markets disk drives that can be purchased as aftermarket
products to be
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added to PCs and other electronic devices or as a built-in feature incorporated
in PCs. In 1999, we were one of the first companies to ship FireWire personal
storage systems for both Macintosh and Windows operating systems, as well as
FireWire Zip drives. In addition, in the first quarter of 2000, we introduced
one of the first 100 Gigabyte portable FireWire RAID array. In recognition of
our technological innovation, in 1999 we received the Pinacor Best of Show
Award and the IBM Technologies Group Achievement Award for our FireWire hard
drive.
Our strategic partners actively participate in the development of our
products, provide us with access to leading-edge manufacturing capabilities,
and market and/or 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 growth of Internet use, has led to widespread
consumer familiarity with the storage, manipulation, transfer and management of
digital data. In addition, the convergence of advanced consumer electronic
products, PCs and the Internet offers consumers the opportunity to personalize,
exchange, store and manage digital data generated from a wide range of sources.
This convergence has precipitated greater demand for connectivity and data
storage and management.
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, often referred to
as digital appliances, include digital still cameras, digital voice recorders,
digital camcorders, digital music players, electronic photo albums, personal
digital assistants and "smart" phones. We believe that approximately 18 million
of these types of digital appliances were shipped in 1999, and we believe that
this number will grow to approximately 78 million by 2002. One of the most
popular digital appliances today is the digital camera. Approximately 5 million
digital cameras were shipped in 1999, and we believe that this number will grow
to approximately 15 million by 2002.
A major challenge created by the digitization of audio and video is the
increasing need for portable mass storage devices for the PC and high
performance interfaces, such as USB and FireWire, to connect these storage
devices to the PC. MP3 and other compression methods, voice recognition
software, video movies, video conferencing, the Internet, digital video cameras
and digital still camera images have all driven the digitization of audio and
video. For example, one hour of digital video requires approximately 14
Gigabytes of memory and one hour of MP3 near-CD quality music requires
approximately 60 Megabytes of memory.
As a result of their high performance capabilities, USB and FireWire
interfaces are quickly beginning to be installed on new desktop and notebook
PCs. For example, most new PCs, including all Apple PCs, feature USB ports. In
addition, FireWire ports have recently started to appear on PCs from Compaq,
Dell, Gateway, Sony and NEC, and all of Apple's Macintosh CPUs except the
entry-level iBook.
USB is a high performance PC interface technology that is replacing low to
medium speed CPU interfaces such as serial ports, which are generally used for
mice, keyboards, floppy disk drives and tablets. FireWire is Apple's trade name
for Institute of Electrical and Electronics Engineering, or IEEE, 1394, a high
speed PC interface that is replacing SCSI and parallel interfaces, which are
generally used for digital appliances, hard disk drives and Zip drives.
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The following table depicts the relationship among digital applications,
storage capacities and transfer technologies.
<TABLE>
<CAPTION>
TRANSFER TECHNOLOGY APPLICATION STORAGE TECHNOLOGY STORAGE CAPACITY
- ----------------------------- ------------------ ------------------------ ------------------
<S> <C> <C> <C>
RAID Array 100 GB High
FireWire; USB 2.0 Video Large Hard Disk Drive 25 GB
SCSI Medium Hard Disk Drive 6 GB
DVD RAM
USB 1.1 Music CD RW 650 MB
LS120 Medium
Electronic Parallel Port ZIP Drive 100 MB
Still Images
Floppy Disk Emulation Data Floppy Disk Drive 1.4 MB
Electronic Books
Voice
Low
</TABLE>
MB denotes Megabyte; and GB denotes Gigabyte. Cable transfer rates are
generally stated in Megabits, while drive capacities and drive transfer rates
are generally stated in Megabytes or Gigabytes.
One of the principal challenges to connectivity between digital appliances
and PCs 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
emerging digital appliances to store digital data. There are currently five
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;
/bullet/ the Sony Memory Stick; and
/bullet/ the SanDisk, Toshiba and Matsushita Secure Digital (SD) Card.
A second major challenge to connectivity between digital appliances and
PCs is the current lack of convenient connection methods. While consumers' use
of digital appliances is becoming increasingly popular, the inherent difficulty
of connecting digital appliances to PCs due to non-conforming interfaces
continues to be a major barrier to widespread acceptance. 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. 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 other consumer digital
appliances is the interface between their appliances and PCs or other digital
appliances.
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There are currently a number of interfaces used to transfer data from
digital appliances to personal computers:
/bullet/ Cable interfaces that connect to serial ports, parallel ports, USB
and FireWire; and
/bullet/ Non-cable interfaces such as infrared interfaces, Personal
Computer Memory Card International Association, or PCMCIA, and
floppy disk drive slots.
We believe that serial port and parallel port interfaces have
disadvantages that make them less desirable for use with consumer-oriented
digital appliances. Those interfaces require the use of cumbersome cables and
limited PC peripheral ports, which are frequently dedicated to connecting the
PC to devices such as printers, scanners, modems and other peripherals. In
addition, direct digital appliance-to-PC connections via serial or parallel
port consume the appliances' battery power and render the appliances unusable
while data is being transferred.
While USB and FireWire solutions utilize direct cable connection, they do
not have the same limitations of serial or parallel port interfaces. In
general, USB and FireWire have the ability to provide a direct source of power
to the digital appliance and therefore do not drain the appliances' batteries.
Moreover, USB and FireWire interfaces allow much faster data transfer rates
than their traditional serial or parallel port alternatives, can accommodate
numerous serial devices and offer hot-plug and plug-n-play connections so that
storage devices can be connected and disconnected without shutting down or
restarting the PC. In addition, while many of the current installed base of
desktop PCs worldwide are not equipped with USB or FireWire ports, most new
computers are shipped with USB or FireWire support. Similarly, some of the
non-cable interfaces 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 SOLUTIONS
We design, develop, manufacture and distribute easy-to-use, portable and
low cost devices that facilitate data exchange, manipulation and storage among
digital appliances, PCs and the Internet. Our products include our FlashPath
flash memory card readers, USB Tri-Media Reader, Smarty smart card readers,
external portable hard disk drives and floppy disk drives for desktop and
notebook PCs, as well as expansion bay disk drives for notebook PCs. Our
products are available for both Windows and Macintosh operating systems,
allowing the OEMs that market our consumer products to reach a large installed
base of potential users. Our current and planned digital connectivity products
and personal storage systems 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 through the familiar and ubiquitous 3.5 inch floppy disk
drive. This widely recognized format reduces consumer intimidation frequently
created by new technologies, facilitating the adoption of our products and
various consumer-oriented digital appliances. A consumer using a digital camera
removes the flash memory card that serves as the camera's 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. While the flash memory card
stores the digital images captured by the digital camera, FlashPath easily
transfers the digital images from the flash memory card to the PC. 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. Our USB Tri-Media Reader reads
and writes to flash memory cards, as well as rotational media such as floppy
disks, allowing consumers to use a single flash memory card reader to transfer
digital data from multiple digital appliances, flash memory cards and/or
rotational media at a rapid transfer rate. Our personal storage systems address
the needs of today's consumers: portability, user friendliness, reliability and
seamless integration with the computer's operating system, or plug-n-play. Our
personal storage systems also offer our proprietary product-specific software
that enhances the user's experience, further differentiating our products from
competitors' offerings.
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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 FlashPath
product is designed to transfer digital data, images and audio from the Toshiba
SmartMedia card, the Sony Memory Stick, and the SanDisk MultiMediaCard to a
standard 3.5 inch floppy disk drive. Our USB Tri-Media Reader also supports the
SanDisk CompactFlash card and the Toshiba SmartMedia card. 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. Our personal storage
systems also support most leading rotational storage media, including hard disk
drives, floppy disk drives, Iomega Zip drives and Imation SuperDisk drives.
They can also store high quality digital still images and video movies and
digital music due to their ability to support very high transfer rates of up to
400 Megabits per second and 100 Gigabytes of capacity.
VERSATILE. Our 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, Windows 2000, NEC Windows and Macintosh operating systems. As a result, the
same FlashPath that is used to transfer images from one digital camera to a
Microsoft-based PC can be used to transfer images from another digital camera
to an Apple computer. Similarly, the same FlashPath that is used to transfer
images may also be used to transfer voice, images 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
increasingly rely 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. Our personal storage systems are
also compatible with both Windows and Macintosh operating systems.
INDEPENDENT POWER SOURCE. Unlike serial and parallel port cables, our
flash memory and smart card reader products do not rely upon a digital
appliance's power source to transfer digital data from a flash memory card to a
PC. For example, our FlashPath and Smarty products run on two replaceable
batteries and our USB Tri-Media Reader uses the PC's power source. Our
USB-based and FireWire-based personal storage systems also utilize the PC's
power source rather than the appliance's power supply. This is important
because digital appliances, such as digital cameras, consume significant
amounts of power and require frequent battery replacement or recharging.
Products that use serial or parallel cable interfaces quickly drain power from
digital appliances, making those competing products less attractive.
BUSINESS STRATEGY
Our strategy is to use our proprietary technologies to:
/bullet/ Establish our connectivity solutions as the industry standard for
the transfer of data among digital appliances, PCs and the
Internet by strengthening our position as a technological and
market leader; and
/bullet/ Bring our personal storage systems quickly to market with industry
leading solutions that emphasize ease of use and portability and
therefore capitalize on the growth of the PC as the "multimedia
center" of the home or office.
Key elements of this business strategy are to:
CAPITALIZE ON TECHNOLOGY EXPERTISE TO EXPAND OUR PRODUCT OFFERINGS. We
have developed extensive expertise, intellectual property and core capabilities
in digital connectivity, personal storage systems and flash memory card and
smart card technologies. We intend to capitalize on our
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technology base, partnerships and patents to design, develop and market a broad
range of digital connectivity and personal storage systems that can operate
across a variety of flash memory products, hardware platforms and software
environments. 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, such as
our recently announced FlashTrax/registered trademark/ product which enables
conventional audio cassette players to play MP3-formatted music downloaded from
the Internet or copied from an existing CD collection to a flash memory card.
EXPAND CUSTOMER AND STRATEGIC INDUSTRY RELATIONSHIPS. We have formed
strategic relationships with a number of leading consumer product OEMs and
other key industry participants, including Apple, FujiFilm, Hitachi, IBM, JVC,
NEC, Olympus, Panasonic, 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/ Many of our OEM customers advertise, promote, package, sell and
distribute our products under some of the world's most recognized
brand names. OEM customers that perform some of or all of these
activities include Apple, FujiFilm, Hitachi, JVC, Olympus,
Polaroid, SanDisk, Sharp, Sony and Toshiba. As a result, we have
access to extraordinary market strength without the need to invest
heavily in our own marketing programs and distribution
infrastructure.
/bullet/ Our product development relationships have provided access to
flash memory card and PC manufacturers early in the design phase
of their product development process. This has allowed 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 have assisted with engineering and design for
manufacturability, which helps ensure that mechanical and
electrical considerations are integrated into a total systems
approach to achieve a high quality and cost-effective product.
MAINTAIN MEDIA, INTERFACE AND PLATFORM NEUTRALITY. We are using our
flexible technology architecture and core capabilities to create connectivity
and personal storage products that enable consumers to use all leading flash
memory cards and rotational media. 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, as well as to support all of the leading
rotational media with our personal storage systems, including hard disk drives,
floppy disk drives, Iomega Zip drives and Imation SuperDisk drives.
PROMOTE BRAND AWARENESS OF OUR PRODUCTS. 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, as well as the SmartDisk name wherever possible. 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. Recently, we formed a strategic relationship
with Tech Data Corporation, a leading global provider of IT products and
logistics services. Under our arrangement, Tech Data will distribute our
FlashPath for SmartMedia to its customers, which we believe is an important
first step toward our goal of enhancing the penetration of our digital
connectivity products throughout retailers worldwide.
EMPHASIZE USER-FRIENDLY PRODUCTS. We are committed to capitalizing on our
patent portfolio of user-friendly digital connectivity products and personal
storage systems that offer seamless integration with the PC's operating system
to enable consumers to conveniently transfer and store images, music,
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voice and other types of digital data among consumer electronic devices, the
Internet and PCs, including portable personal storage systems.
CAPITALIZE ON FIRST-TO-MARKET ADVANTAGES. Our focus is on technologies and
market segments where we can maximize the first-to-market advantages provided
by our technical expertise to provide various connectivity and storage
solutions to the needs presented by the proliferation of digital appliances.
Our products are developed using a building block approach which leverages
previously developed technologies. This ability to modify and extend our
existing base of technologies to yield new product offerings, allows us to
rapidly respond to industry developments, provides first-to-market advantages
and reduces development costs for future products. To augment the
time-to-market advantages provided by our building block approach, we also draw
on the substantial capabilities of an extensive list of development partners
including major OEMs, key component suppliers, manufacturers, and firms that
specialize in rapid prototyping. We have also developed an expertise in compact
packaging techniques and driver integration for our personal storage systems
that also provide first-to-market advantages. We intend to use these
first-to-market advantages to lengthen our product life cycles and increase our
market share. Our internal processes and external relationships are tightly
integrated, and are designed to enable us to rapidly develop products from
design stage to commercial launch. For example, in 1996 we completed the
development of a miniaturized, portable Zip drive for the Macintosh PowerBook
in less than 6 weeks. In 1997, we introduced one of the first miniaturized
SuperDisk and Zip drive products for the IBM ThinkPad series of notebook
computers. In 1998, we were the largest OEM provider of Iomega Zip drives for
notebooks, and shipped product to Fujitsu, Apple Computer and IBM. In 1999, we
remained one of the largest OEM providers of Iomega Zip drives.
Our products have won many industry awards including the following:
Best of Show, MacWorld EXPO 1996 for our Zip drive for PowerBook
Windows Sources Stellar Award, April 1998 for our Zip100
MacAddict Freakin Awesome Award, October 1999 for our FireWire hard
drive
Pinacor Best of Show Award, November 1999 for our FireWire hard drive
Wired for 3D Editors Choice Winner, 1999 for our FireWire hard drive
IBM Technologies Group, 1999 Achievement Award, for our FireWire hard
drive
PRODUCTS
Our products are designed to easily transfer digital data among digital
appliances, PCs and the Internet and to store and manage that digital data.
DIGITAL CONNECTIVITY PRODUCTS
FLASHPATH PRODUCTS. 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 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 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, Windows 2000, NEC Windows and
Macintosh operating systems.
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Our current FlashPath products transfer images from digital cameras using
the SmartMedia, MultiMediaCard, and Memory Stick flash memory cards. A number
of manufacturers use these flash cards in their digital cameras, including
Agfa, FujiFilm, JVC, Olympus, Ricoh, Sanyo, Sharp, Sony and Toshiba. In
addition, we expect that these FlashPath adapters will support other
applications, including digital audio players, "smart" cellular phones,
camcorders and voice recorders. We expect that these new applications 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.
USB-BASED DIGITAL CONNECTIVITY PRODUCTS. Our recently introduced USB
Tri-Media Reader reads and writes to SmartMedia, Compact Flash and 3.5-inch
floppy disks in a single USB cable-powered device. This product is designed to
be extensible to other flash memory cards, such as the SanDisk MultiMediaCard
and the Sony Memory Stick. It is compatible with both Windows and Macintosh
operating systems.
PERSONAL STORAGE SYSTEMS
EXPANSION BAY STORAGE DEVICES. We market floppy disk drives, Iomega Zip
drives, Imation SuperDisk drives and hard drives to OEMs for inclusion in the
expansion bays of IBM, Apple and Fujitsu notebooks. We design, manufacture and
ship Zip drives to IBM for their most recent three models of high performance
ThinkPad notebooks, including the model 600, 600E and 570 lines. In addition,
we also market products for other ThinkPad product lines with an UltraBay under
the "ThinkPad Proven" certification logo. We are a leading supplier of notebook
Zip drive products and we sell both the 100 Megabyte and 250 Megabyte Iomega
FireWire Zip drives. In addition, we provide many personal storage systems for
the expansion bays of the Apple PowerBook line, including the Iomega Zip drive,
the Imation SuperDisk drive, a DVD-ROM drive and a recently introduced CD-R/W.
SuperDisk drives read and write to either a SuperDisk 120 MB removable storage
cartridge or a standard 3.5 inch floppy diskette.
USB-BASED PRODUCTS. We offer USB hard drives and floppy disk drives that
are compatible with both Windows and Macintosh operating systems. They operate
seamlessly with the PC's operating system, offering hot-plug and plug-n-play
connections so that storage devices can be connected and disconnected without
shutting down or restarting the PC. Our portable external USB floppy disk drive
is one of the highest volume products for all Macintosh CPUs in the U.S. and
addresses the need of Macintosh users for floppy capability since Apple no
longer includes floppy disk drives in its PCs. Our USB floppy disk drive is
very compact and light weight, and requires no external power supply. Our line
of 6 and 12 Gigabyte USB ultra-slim hard drives are among the smallest,
lightest (6.5 ounces) most portable products in their class. Our 6, 12, 18 and
25 Gigabyte USB/FireWire combination drive offers both USB and FireWire
interfaces in a single device, while maintaining the ultra-compact footprint,
light weight and plug-n-play ease of use. We believe that this personal storage
system is one of the industry's best for backup and portability for large
volumes of digital data.
FIREWIRE-BASED PRODUCTS. We offer FireWire hard drives, floppy disk drives
and Zip drives. Our line of 4 to 25 Gigabyte ultra-slim FireWire hard drives
provide the fastest data transfer rates of any portable storage device. We
believe that these drives have great appeal to the mobile user of digital video
cameras. We also market a line of full-height FireWire hard drives in various
capacities up to 37 Gigabytes. Our FireWire cardbus card allows users to plug
these devices into notebooks that do not yet have FireWire ports. Substantially
all of these products are compatible with both Windows and Macintosh operating
systems. Our FireWire hard drives combine portability, modularity and FireWire
connectivity to offer high performance, mobile storage solutions. Reflecting
our expertise in the notebook market, our ultra-slim FireWire hard drives are
compact and truly portable with the smallest measuring only 3" x 5.5" x 0.7"
and weighing as little as 6.5 oz. The full-height FireWire drives address the
demand for larger capacities for a variety of digital video, audio and
multimedia applications. Our FireWire hard drives offer not only hot-plug and
plug-n-play functionality, but also transfer speeds of 12 to 25 Megabytes per
second, fast enough for digital video recording and playback. These drives do
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not require an AC power adapter since they are efficient enough to be powered
by the FireWire connection. When our FireWire hard drive is connected to the
computer with a single FireWire cable, the drive interacts with the computer's
operating system, automatically configures itself, and mounts to the desktop.
This allows the user to easily transport our FireWire hard drive in a shirt
pocket from the "home office" to the "work office" with all operating systems,
applications, and document files intact.
Our recently introduced 100 Gigabyte FireWire RAID array offers even
higher storage capacity than standard large hard disk drives. It also offers
transfer speeds of up to 35 Megabytes per second, fast enough to capture and
store live digital video. In the first quarter of 2000, we introduced a line of
250 Megabyte Iomega FireWire Zip drives.
OTHER
Our Smarty product enables 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,
cable connections or hardware installation. 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. 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.
We also offer a line of power management products such as power adapters,
smart-chargers and long-life, lithium-ion batteries for the Macintosh PowerBook
series.
In March of this year, we announced the development of a patented
technology, called FlashTrax, that enables conventional audio cassette players,
particularly those installed in automobiles, to play MP3-formatted music
downloaded from the Internet or copied from an existing CD collection to a
flash memory card. FlashTrax resembles a conventional audio cassette but has a
slot that accepts a removable flash memory card on which digital audio files
are stored. We recently demonstrated the FlashTrax technology in a working
prototype model that uses MultiMediaCard flash memory cards.
TECHNOLOGY
Since our inception, we have focused our research and development efforts
in the area of digital connectivity on designing and developing products that
facilitate the transfer of data from digital appliances using flash memory
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 driver technologies, product design and product
development of USB-based and FireWire-based personal storage systems.
Another element of our business strategy is to enter into strategic
alliances without licensing our technology to OEMs. Our strategic alliances
with Hitachi, NEC, SanDisk, 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.
DIGITAL CONNECTIVITY. Our digital connectivity products are compatible
with a broad range of hardware platforms and software environments. Our floppy
disk drive interface architecture builds
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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 cards 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, while the time for the development of our products for the SanDisk
MultiMediaCard and Sony Memory Stick was shortened to less than 12 months. We
are also utilizing our core technological capabilities to develop products that
conveniently transfer digital data from competing flash memory cards to
existing, non-PC technologies, such as our recently announced FlashTrax product
which enables conventional audio cassette players to play MP3-formatted music
downloaded from the Internet or copied from an existing CD collection to a
flash memory card, as well as products that support computer interfaces other
than the 3.5 inch floppy disk drive, such as our recently introduced USB
Tri-Media Reader which utilizes a USB cable interface to the PC, rather than a
floppy disk drive.
The technology comprised in our digital connectivity 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.
/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.
PERSONAL STORAGE SYSTEMS. Our personal storage systems are compatible with
a broad range of hardware platforms and software environments, as well as with
both Windows and Macintosh operating systems. Our Macintosh-compatible hard
drives also include key features, such as encryption, password protection, boot
capability and partitioning features. We were one of the first manufacturers to
ship with all of these features integrated into our Macintosh-compatible
products. Our FireWire hard drives were also one of the first-to-market in the
Macintosh platform and also the first to be certified by Microsoft for Windows
98SE and 2000.
USB is a high performance PC interface technology that is replacing low to
medium speed CPU interfaces such as serial ports. USB interfaces offer data
transfer speeds of up to 12 Megabits per second, as compared to one or two
Megabits per second for traditional serial ports. USB interfaces are used for
mice, keyboards, floppy disk drives and tablets. FireWire is Apple's trade name
for IEEE 1394, a high speed PC interface that is replacing SCSI and parallel
interfaces. Other manufacturers may adopt the IEEE 1394 standard under their
own trade names, such as Sony's iLink. Sony and Apple are currently licensing
these trade names at no charge. FireWire interfaces offer data transfer speeds
of up to 400 Megabits per second, as compared to 50 Megabits per second for
traditional SCSI and parallel ports. FireWire interfaces are used for digital
appliances, hard disk drives and Zip drives. Both USB and FireWire are
intelligent serial buses that can support new digital appliance hot-plug and
plug-n-play connections so that storage devices can be connected and
disconnected without shutting down or restarting the PC. USB and FireWire can
also accommodate
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multiple devices connected to the PC, up to 127 in the case of USB and 63 in
the case of FireWire, as compared to one or two for serial and parallel
interfaces and seven for SCSI interfaces. Furthermore, USB-based and
FireWire-based personal storage systems may be powered directly from the USB or
FireWire cable, eliminating the need for external power adapters.
We expect IEEE 1394 to become a new standard for connecting high-speed
serial devices to CPUs, replacing the parallel and SCSI interfaces. Speeds in
the 1 Gigabit range are expected in 2001, which makes FireWire conducive even
to internal interfaces such as hard drives. Multiple CPUs can be connected to a
single FireWire device, allowing multiple computers to share the same digital
video camera for the first time. FireWire is also much more user-friendly than
Small Computer System Interface, or SCSI. The device drivers are loaded
automatically and there are no bulky cables, terminators or SCSI ID switches
that must be set. FireWire also employs a memory bus architecture that allows
peripherals to communicate directly with each other, without burdening the
host. Software drivers are loaded automatically, simplifying the user
experience. In addition, we expect next generation technologies, including
high-end Digital Subscriber Line, or DSL, and cable modems, to be supported
with FireWire.
We introduced one of the first personal storage systems utilizing a
FireWire RAID array in January 2000, and volume production is scheduled for the
second quarter of 2000. This FireWire RAID array product is a very compact, high
capacity, high-performance system of proprietary hardware and software in which
four large hard disk drives are arrayed in a series and connected to the PC
through a FireWire cable interface. This array format multiplies the drive's
data capacity to 100 Gigabytes, compared to 32 Gigabytes for standard large hard
disk drives, and the drive's data transfer rate to 35 Megabytes per second,
compared to 12 Megabytes per second for standard large hard disk drives,
enabling it to store and manage live digital video. The FireWire RAID array also
uses battery operation for portability. We believe that our FireWire RAID array
is especially useful in that it is one of the only currently available personal
storage systems that takes full advantage of the very high data transfer speeds
of FireWire cables, which currently reach 400 Megabits, or 40 Megabytes, per
second. We believe that there are significant opportunities in professional and
consumer digital still image, digital video capture and editing and also
potential Internet server-related applications for this future product.
The technology comprised in our FireWire personal storage product
offerings consists of five components:
/bullet/ FIREWIRE-BASED POWER SOURCING. An embedded, integrated and wide
range power supply allows our FireWire drives to run from FireWire
bus power, so no external power supply is required.
/bullet/ DIGITAL BRIDGE ASIC. This device is an ASIC bridge that allows
high performance transmission of digital data from the disk drive
to the FireWire cable. We currently license this technology and
the firmware from LSI Logic.
/bullet/ FIREWIRE DRIVERS. We design and own separate and integrated
drivers for all of our FireWire products. These drivers provide a
high level of integration to the operating system and, we believe,
allow more flexibility and features than those found on
competitive products.
/bullet/ FIREWIRE APPLICATIONS. We offer the first fully integrated
FireWire formatting, utility, benchmarking and updated application
for FireWire products. This application provides performance
improvements, data security and protection.
/bullet/ INTEGRATED RAID FAMILY OF PRODUCTS. Our FireWire storage systems
can be embedded into a RAID array system that we expect to ship in
the second quarter of 2000. This hardware and software solution
allows individual FireWire drives to be used together to achieve
higher data transmission, or striping, and for data protection, or
mirroring.
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DEVELOPMENT EFFORTS. During the remainder of 2000 and in 2001, we expect
that our development efforts will be primarily focused on the following
initiatives:
/bullet/ Expanding our FlashPath product line to support the SD flash
memory card and new operating systems, such as Millenium and
Linux;
/bullet/ Expanding our USB reader product line to support other flash
memory cards;
/bullet/ Introducing new, audio products that will allow flash memory cards
to be used with existing non-PC technologies;
/bullet/ Expanding our USB product line to support the faster USB 2.0
standard;
/bullet/ Expanding our FireWire product line to support the FireWire RAID
array and software;
/bullet/ Further reducing our product costs;
/bullet/ Enhancing product performance; and
/bullet/ Media management software.
MARKETING, CUSTOMERS AND STRATEGIC RELATIONSHIPS
SALES AND MARKETING. We market and sell our products primarily through a
combination of OEMs, distributors and resellers. We sell our current flash
memory products to OEMs, including FujiFilm, JVC, Olympus, Panasonic, Ricoh,
SanDisk, Sanyo, Sharp, Sony, and Toshiba. These OEMs compete in some of the
fastest growing segments of the electronics industry, including digital
cameras, digital audio players and digital camcorders. We sell a portion of our
personal storage systems to OEMs such as IBM, which sells several of our
products under the "Options By IBM" program. In addition, we sell our personal
storage system products to Apple which, in turn, distributes them on a
consignment basis to their customers. Most of these sales are made through the
Apple Web Store, where our products may be configured and ordered along with a
Macintosh CPU.
Often, both the OEM's brand name and our FlashPath trade name 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 marketing of our FlashPath product with FujiFilm's, Olympus' and
Sony's digital cameras illustrates the cooperative relationships we have with
some of our customers. Their marketing campaigns have emphasized 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 more than one million FlashPath for SmartMedia units during
the 12-month period ended December 31, 1999 largely as a result of our
customers' extensive market penetration.
Recently, we formed a strategic relationship with Tech Data Corporation, a
leading global provider of IT products and logistics services, to distribute
some of our flash memory products. Under our arrangement, Tech Data will
distribute our FlashPath for SmartMedia to its customers, which we believe is
an important first step toward our goal of enhancing the penetration of our
digital connectivity products throughout retailers worldwide. We market and
sell most of our personal storage systems through distributors and resellers.
Ingram Micro and Pinacor handle our distribution to the vast majority of our
U.S. resellers. We sell our personal storage systems to the major catalog and
mail order houses with Micro Warehouse as our largest customer of the group. We
also sell directly to end users such as CompUSA, Inc. and Fry's Electronics,
Inc.
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We support the marketing activities of our customers with a dedicated
product manager for each of our principal 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), Hitachi and
Visa-related banks in Latin America. Bank of America, for example, distributes
Smarty to some of its corporate customers for use in making secure electronic
funds transfers. Visa distributes Smarty with its Platinum card in some Latin
American regions for use in authenticating permitted access to restricted areas
on the Visa Platinum website.
In addition to catalogs, we promote our products through print and Web
advertising. Some of the OEMs with whom we have developed or manufactured
products prohibit us from marketing those products outside of their own
marketing programs. Our Web-based sales, though modest, have grown steadily
since we implemented the capability on our site. We have also been featured in
many ads and technical write-ups in the press and magazines.
As of March 31, 2000, we had 17 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% to 4%. Our customers generally place orders for our products
on an as-needed basis, with no long-term commitments. We also sell our personal
storage systems through a manufacturing representative organization.
STRATEGIC RELATIONSHIPS. An important element of our business strategy is
to develop strategic relationships with industry participants 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, PC 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 flash memory products in connection with
the distribution of their consumer electronic products. Similarly, other OEMs
frequently distribute our personal storage systems in connection with the
distribution of their premium 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.
Set forth below are brief descriptions of some of our strategic
relationships:
APPLE COMPUTER. Apple has led the industry in forging transitions to new
interface technologies, such as USB, FireWire and Airport, or IEEE 802.11. Since
1992, we have worked with Apple as an Apple developer. Through this
relationship, Apple has provided us access to selected product road maps, which
has allowed us to focus on new opportunities in the development and engineering
of many FireWire and USB systems. We sell these products to Apple which, in
turn, distributes them on a consignment basis to their customers. Most of these
sales are made through the Apple Web Store, where our products may be configured
and ordered along with a Macintosh CPU. In addition, we provide many personal
storage systems for the expansion bays of Apple's PowerBook line, including the
Iomega Zip drive, the Imation SuperDisk drive, a DVD-ROM drive and a recently
introduced CD-R/W.
IBM. We design, manufacture and ship Zip drives to IBM for their most
recent three models of high performance ThinkPad notebooks, including the model
600, 600E and 570 lines. We build these
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under the IBM logo. In addition, we also market products for other ThinkPad
product lines with an UltraBay under the "ThinkPad Proven" certification logo,
which IBM sells under the "Options By IBM" program. We have also developed
Imation SuperDisk products for certain ThinkPad lines. Separately, IBM's
Storage Division also provides components for many of our notebook, USB and
FireWire products.
IOMEGA CORPORATION. Through a strategic relationship with Iomega, we build
Iomega Zip drive products for Apple, IBM and Fujitsu. Iomega designs,
manufactures and markets disk drives that can be purchased as aftermarket
products to be added to PCs and other electronic devices or as a built-in
feature incorporated in PCs. We are one of Iomega's leading notebook suppliers
of Zip drive solutions, and in the first quarter of 2000, shipped one of the
first FireWire Zip drives in 100 Megabyte and 250 Megabyte capacities. Our
FireWire Zip drives enjoy the same Windows and Macintosh operating system
compatibility, ease of use and plug-n-play performance users expect from all of
our integrated FireWire products. We own portions of the source code required
for the operation of the Zip drive on the Macintosh operating system. Through a
cross-licensing agreement with Iomega, we have the exclusive right to produce
Zip drives for the PowerBook series of Macintosh computers.
SANDISK. We also have a co-development agreement with SanDisk, a leading
developer and marketer of flash memory storage products, including
CompactFlash, MultiMediaCard and the SD Card. Under this arrangement, we
jointly developed a FlashPath product to support the SanDisk MultiMediaCard. We
funded the development costs and are entitled to revenues derived from the sale
of our FlashPath for the MultiMediaCard. We pay SanDisk a royalty based on the
portion of those revenues derived from sales other than to SanDisk. In June
1999, we issued 37,500 shares of our common stock to SanDisk as partial payment
for entering into the co-development agreement.
SONY. Under our co-development agreements with Sony, we have developed
FlashPath products 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 are manufacturing, and Sony is marketing and
distributing, these co-developed products.
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.
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The following table illustrates the nature of some of our strategic
relationships:
TYPE OF STRATEGIC RELATIONSHIP
<TABLE>
<CAPTION>
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>
Apple ................ /check mark/ /check mark/ /check mark/ /check mark/
Atmel ................ /check mark/ /check mark/
Hitachi .............. /check mark/ /check mark/ /check mark/ /check mark/
IBM .................. /check mark/ /check mark/ /check mark/
Iomega Corp. ......... /check mark/ /check mark/ /check mark/
LSI Logic ............ /check mark/ /check mark/ /check mark/
Mitsumi .............. /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/
Y-E Data ............. /check mark/ /check mark/ /check mark/ /check mark/
Yamaichi ............. /check mark/ /check mark/ /check mark/ /check mark/
</TABLE>
RESEARCH AND DEVELOPMENT
Our product design and development activities are conducted in our offices
in Naples, Florida; Atlanta, Georgia; Boston, Massachusetts; and Tokyo, Japan.
Our research and development teams at all locations regularly collaborate and
share data and research protocols in order to maximize innovation and
development.
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 firmware design and ASIC design. Our
engineers and other research and development employees also develop design
specifications based on customer requirements and supervise our quality
assurance activities. This team consists of executive management, line
management, engineers, developers and quality assurance personnel.
BOSTON. Our Boston research and development team designs and develops
FireWire, USB and notebook product lines for Macintosh and Windows-based
systems. This team has primary responsibility for Macintosh software
integration, FireWire ASIC integration and ultra-compact industrial product
design, prototyping and tooling design functions. Extensive use of Computer
Aided Design provides very fast product development cycles, which enabled the
Boston-based operation to provide in excess of forty new products in 1999.
Industrial design, product design, tooling design, mold flow analysis,
electronics design, printed circuit layout, mechanical design and high volume
manufacturing test fixtures are all performed in our Boston design center.
ATLANTA. Our Atlanta team focuses their research and development
activities on product conceptualization relative to audio and video digital
appliance hardware and software. The first audio product under development is
our recently announced FlashTrax product, a flash memory-based adapter that
facilitates the transfer of digital music files from the Internet to the
well-established base of cassette players. Additionally, the team is focused on
a family of products that will allow consumers to conveniently download, play,
and manage a library of digital music files.
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
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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, the Senior Manager of Audio/Video products and four
Toshiba engineers who provide services on a contract basis.
For 1997, 1998, and 1999, our research and development expenditures were
approximately $1.4 million, $2.1 million and $5.9 million ($8.5 million in 1999
on a pro forma basis after giving effect to the VST acquisition).
In addition, 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 Apple, Hitachi, Iomega, LSI Logic, 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
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
particular, we have developed a system of managing the supply chain for our
personal storage systems which is designed to enable us to move quickly from
initial design phase to market introduction in 8-16 weeks. 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 digital connectivity products are currently manufactured in the
Philippines and Japan at facilities operated by Hitachi, Yamaichi and Mitsumi.
We currently outsource all of our personal storage system manufacturing to four
contract manufacturers located in New England, yet we maintain multiple global
sourcing capabilities for PC board fabrication. We design and own substantially
all of our personal storage system tooling. Our personal storage system
products are distributed from one of two fulfillment centers, both of which are
located in Massachusetts. 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.
Accordingly, we intend to seek additional manufacturing capacity and, in
particular, at least two manufacturers for each of our products.
To ensure that our products manufactured by others meet our standards, our
production engineers generally work with our contract manufacturers throughout
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
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manufacturers to improve process control and product design, and conduct
periodic, on-site inspections of our manufacturers. In addition, our production
engineers conduct regular 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 digital connectivity 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 connectivity
product 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, 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.
We face competition from numerous providers of stand-alone FireWire and
USB personal storage devices. These competing products are offered by a number
of companies, including:
/bullet/ In the case of USB devices, iDrive, Imation, La Cie, Newer
Technology and Teac; and
/bullet/ In the case of FireWire devices, ADS Technologies, Evergreen
Technologies, EZQuest, FireStorm, FireWire Direct, La Cie, QPS,
SANCube, Seagate Technologies, Western Digital and Yano.
The market for digital connectivity and storage 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 USB-based and
FireWire-based technology. Future competition may also accelerate as Windows
based PCs migrate towards USB-based and FireWire-based interfaces.
Many of our current and potential competitors have greater financial,
technical, marketing, purchasing and other resources than we do. As a result,
some of 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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We believe that the principal competitive factors affecting the market for
digital connectivity products and personal storage systems include:
/bullet/ Ease of use;
/bullet/ Quality and reliability;
/bullet/ Rate of throughput, or data transfer speed;
/bullet/ Strength of distribution channels;
/bullet/ Price; and
/bullet/ The extent to which our products work with existing and will work
with future digital appliances.
We believe that our products compete successfully on most of these bases.
INTELLECTUAL PROPERTY
We do not intend to license our proprietary digital connectivity
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. We have
granted certain USB and FireWire product manufacturers who are competitors a
limited, non-exclusive license to include our USB and FireWire drivers in
specific products for certain periods. In all cases, these versions of the USB
and FireWire drivers are base level drivers, without the benefit of our
complete feature set, which adds significant value to our products. 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 ten United States patents and 56 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 limit
another party's ability to manufacture and sell competing data transfer
products that use a floppy disk drive or FireWire 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 Germany, Japan or The
Netherlands, and our trademark application for the SmartDisk name is still
pending in
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the United States. Our FlashTrax trademark is registered 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 March 31, 2000, we had 105 full-time employees, including 54
employees (all of whom work in the United States or Japan) engaged in research
and development, 19 engaged in sales and marketing, 12 engaged in operations and
20 engaged in general and 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
1,400 square feet of space in Alpharetta, Georgia for a portion of our research
and development efforts. The lease on our Alpharetta facility expires in
September 2000. We also lease approximately 22,000 square feet in our Acton,
Massachusetts facility under a five-year lease which expires in April of 2002.
We also lease approximately 3,500 square feet of space in Tokyo for our
Japanese operations. This lease expires in April 2002. 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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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
Our executive officers, directors and key employees, and their ages as of
March 31, 2000, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------- ----- --------------------------------------------------------
<S> <C> <C>
Addison M. Fischer ............ 51 Chairman of the Board of Directors
Michael S. Battaglia .......... 55 President, Chief Executive Officer and Director
Vincent Fedele ................ 44 Chief Technology Officer
James M. Giarrusso ............ 49 Senior Vice President and General Manager,
Personal Storage Systems
Douglas R. Kraul .............. 44 Vice President, Audio/Video Products
Michael R. Mattingly .......... 51 Chief Financial Officer
Robert Protheroe .............. 43 Senior Vice President, Research and Development
Daniel E. Reed ................ 32 Vice President, Corporate Development and Legal Affairs
Quresh Sachee ................. 37 Vice President, Sales and Marketing
Yoshiaki Uchida ............... 57 Senior Vice President and General Manager,
Japanese Operations
D. James Bidzos ............... 45 Director
Anthony A. Ibarguen ........... 40 Director
Shigeki Morita ................ 55 Director
Timothy Tomlinson ............. 50 Director
Joseph M. Tucci ............... 52 Director
Hatim Tyabji .................. 55 Director
Other Key Employees:
NAME AGE POSITION
- -------------------------------- -- --------------------------------------------------------
O. Lee Drennan ................ 42 Director of Product Engineering
Kazuhisa Fukatsu .............. 58 Senior Manager, Production Control and Assistant to the
President of SmartDisk International
Kazuhiro Iwata ................ 53 Vice President, Engineering of SmartDisk International
Jon Kaplan .................... 41 Vice President, Software Development
Konosuke Nakamura ............. 52 Vice President, Marketing of SmartDisk International
</TABLE>
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
Technologies, Inc., a network security company. Mr. Fischer also controls
Phoenix House Investments, LP, one of our principal stockholders. 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
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Addison Fischer, our Chairman of the Board of Directors and holder of a
majority interest in Phoenix House Investments, LP, one of our principal
stockholders. During 1998, Mr. Battaglia also served as an officer of 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 and Xcert International, which are
privately-held.
VINCENT FEDELE has served as our Chief Technology Officer since March
2000. Mr. Fedele was the founder of VST, which we acquired on March 6, 2000. He
served as Chairman of the Board of Directors of VST from its inception until
joining us. In addition, from June 1993 until October 1998, he served as
President and Chief Executive Officer of VST. Most recently, Mr. Fedele managed
new business development, strategic marketing and new product development for
VST.
JAMES M. GIARRUSSO has served as our Senior Vice President and General
Manager, Personal Storage Systems, since March 2000. Mr. Giarrusso served as
Chief Operating Officer of VST from July 1998 until July 1999 and as Chief
Executive Officer from July 1999 until joining us in March 2000. He also served
as a director of VST from July 1993 to July 1995. For the ten years prior to
joining VST, he served in various senior management positions for Data General
Corporation, a computer storage and server developer and manufacturer, most
recently as Director-Customer Fulfillment.
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 electronic 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, Sales and Marketing, since
May 1998. From 1993 to May 1998, Mr. Sachee was employed by IVI/Checkmate
Electronics, Inc., a designer and
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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 company, in various
product development and marketing management positions, and by Unisys
Corporation.
YOSHIAKI UCHIDA has served as our Senior Vice President and General
Manager, Japanese Operations, since February 2000, and previously 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. Since March 1999,
Mr. Bidzos has served as Vice Chairman of the Board of Directors of RSA
Security, Inc., a network security company, and served as its Executive Vice
President from July 1996 to February 1999. From 1986 to February 1999, 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, which subsequently changed its name to RSA Security, in
July 1996. Mr. Bidzos has served as Chairman of the Board of Directors of
VeriSign, Inc., a publicly-held electronic credentials/digital certificate
company, since its inception in April 1995, 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. Since
December 1999, Mr. Ibarguen has served as a Managing Director, Operations and
President of Professional Services of Internet Capital Group, an Internet
holding company. In addition, from September 1996 through December 1999, he
served in varying capacities at Tech Data Corp., a manufacturer of micro-
computer hardware and software, including President and Chief Operating
Officer. 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. Mr. Ibarguen is also a director of eMerge Interactive,
Inc., a publicly-held provider of an online marketplace for the cattle
industry.
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 Technology Executive, Semiconductor Company, which he has
held since November 1998.
TIMOTHY TOMLINSON has served as a director since our 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.,
which are publicly-held, as well as other, privately-held companies, including
Fischer International where he has served since April 1999.
JOSEPH M. TUCCI has served as a director since August 1999. Since January
2000, Mr. Tucci has served as President and Chief Operating Officer of EMC
Corporation, a publicly-held company that designs and manufactures
storage-related hardware and software products. Prior to joining EMC, Mr. Tucci
served as Deputy Chief Executive Officer of Getronics N.V., a provider of
information and communication technology services, from June 1999 through
December 1999. From August 1990 through June 1999, Mr. Tucci was employed by
Wang Laboratories, Inc., a provider of information technology services and
solutions, initially as Executive Vice President, Operations, and, from January
1993 until June 1999, as President and Chief Executive Officer. Mr. Tucci
served as Chairman of the Board of Directors of Wang Laboratories from October
1993 until June 1999. Getronics acquired Wang in June 1999, and Wang
Laboratories is currently a subsidiary of Getronics. Mr. Tucci is also a
director of Telecom Italia, S.p.A. and Paychex, Inc., a company engaged in
providing computerized payroll accounting services, which are publicly-held.
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
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services. From 1986 until 1998, Mr. Tyabji served as President and Chief
Executive Officer of VeriFone, Inc., a company which designs systems for
automated payment transactions. 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 and Ariba, Inc., which are publicly-held.
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.
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
Directors consist of Michael S. Battaglia, Timothy Tomlinson and Joseph M.
Tucci, with the initial term of office of the Class I Directors expiring at the
annual meeting of stockholders in 2000. Class II Directors consist of Shigeki
Morita and D. James Bidzos, with the initial term of office of Class II
Directors expiring at the annual meeting of stockholders in 2001. Class III
Directors consist of Addison M. Fischer, Anthony A. Ibarguen and Hatim Tyabji,
with the initial term of office of Class III Directors expiring at the annual
meeting of stockholders in 2002.
The board of directors has a compensation committee and an audit
committee.
COMPENSATION COMMITTEE. The compensation committee of the board of
directors reviews and makes recommendations to the board regarding all forms of
compensation provided to our executive officers and directors and our
subsidiaries including stock compensation and loans. In addition, the
compensation committee reviews and makes recommendations on stock compensation
arrangements for all of our employees. The compensation committee also
administers our 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 external audit of SmartDisk,
including, among other things, our internal control structure, 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
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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, received a stock grant of 2,500
shares of our common stock upon completion of our initial public offering in
October 1999.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee of the board of directors consisted in 1999 of
D. James Bidzos, Hatim Tyabji and Joseph M. Tucci. There were no compensation
committee interlocks during our last fiscal year.
EXECUTIVE COMPENSATION
The following table sets forth compensation information for the fiscal
years ended December 31, 1998 and 1999 paid by us for services by our Chief
Executive Officer and our four most highly compensated executive officers who
served in such capacities as of December 31, 1999, collectively referred to
below as the "named executive officers":
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------- -------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
- ----------------------------- ------ ---------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Michael S. Battaglia 1999 $ 275,000 $ 109,500 200,000 --
Chief Executive Officer 1998 100,440(1) 45,000(1) 426,136 --
and President
Quresh Sachee 1999 146,667 69,304 50,000 --
Vice President, 1998 89,306 47,500 50,000 --
Marketing and Sales
Robert L. Protheroe 1999 142,500 25,000 100,000 --
Senior Vice President,
Research and Development
Yoshiaki Uchida 1999 168,800 39,475 50,000 --
Senior Vice President and 1998 25,000 -- 25,000 --
General Manager,
Japanese Operations
Michael R. Mattingly 1999 105,972 14,750 75,000 --
Chief Financial Officer
</TABLE>
- ----------------
(1) In addition, Mr. Battaglia received $100,440 in salary and $60,000 in bonus
from Fischer International for services rendered to Fischer International
in 1998. Commencing January 1, 1999, Mr. Battaglia became our full-time
employee.
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OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options during the
fiscal year ended December 31, 1999 to each of the named executive officers. No
stock appreciation rights were granted to these individuals during that year.
OPTION GRANTS IN 1999
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(1)
---------------------------------------------------------- --------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED FISCAL YEAR ($)(SH)(2) DATE(2) 5%($) 10%($)
- ------------------------------ ------------ -------------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Michael S. Battaglia ......... 87,500 8.5% $4.80 2/11/09 $264,136 $ 669,372
112,500 11.0% 8.00 5/13/09 563,490 1,427,993
Quresh Sachee ................ 6,250 0.6% 4.80 2/11/09 18,867 47,812
43,750 4.3% 8.00 5/13/09 220,113 557,810
Robert L. Protheroe .......... 40,000 3.9% 4.80 3/16/09 120,748 305,999
60,000 5.9% 8.00 5/13/09 301,869 764,996
Yoshiaki Uchida .............. 12,500 1.2% 4.80 2/11/09 37,734 95,625
37,500 3.7% 8.00 5/13/09 188,668 478,123
Michael R. Mattingly ......... 25,000 2.4% 4.80 2/14/09 75,467 191,249
50,000 4.9% 8.00 5/13/09 251,558 637,497
</TABLE>
- ----------------
(1) Potential realizable value is based on the assumption that the common stock
price appreciates at the annual rate shown, compounded annually, from the
date of grant until the end of the option term. The amounts have been
calculated based on the 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) Prior to our initial public offering on October 6, 1999, there was no
public market for our common stock. The exercise price of each of these
options granted prior to that time is equal to the fair market value of
our common stock on the date of grant as determined by our board of
directors.
(3) 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.
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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.
These values have been calculated based on a price of $32.75 per share, which
is equal to the closing price of our common stock on December 31, 1999 as
reported on the Nasdaq National Market. We have never granted stock
appreciation rights. Value realized is calculated by subtracting the aggregate
exercise price paid from the likely value of the shares on completion of this
offering.
AGGREGATE OPTION EXERCISES IN 1999 AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS
SHARES AT DECEMBER 31, 1999(#) AT DECEMBER 31, 1999($)
ACQUIRED VALUE ----------------------------- ----------------------------
ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---------------- ------------ ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Michael S. Battaglia ..... -- -- -- 200,000 -- 5,230,000
Quresh Sachee ............ -- -- 20,000 50,000 575,000 1,257,500
Robert L. Protheroe ...... -- -- -- 100,000 -- 2,603,000
Yoshiaki Uchida .......... -- -- -- 75,000 -- 1,996,250
Michael R. Mattingly ..... -- -- -- 75,000 -- 1,936,250
</TABLE>
EMPLOYMENT AGREEMENTS
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 2000 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 $190,000 and he is
eligible for a bonus of $60,000 for 2000 if we achieve specific revenue and
profitability goals. 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 2000 if we achieve specific revenue and profitability
goals. 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.
VINCENT FEDELE. Mr. Fedele's employment agreement with our subsidiary,
SmartDisk Personal Storage Systems Corporation, has a two year term ending
March 6, 2002. His annual base salary is $200,000 and he is eligible for a
bonus of $60,000 if we achieve specific revenue and profitability goals. If we
elect not to renew his employment agreement upon its expiration, we must pay
Mr. Fedele severance of three months base salary. In addition, if we terminate
him without cause, we must pay him severance of three months' base salary and
his pro rata portion of any bonus compensation to which he is entitled. Mr.
Fedele has agreed not to compete with us for two years after termination of his
employment if we terminate him for cause and for the later of one year
following the termination date or March 6, 2002 if he resigns or we terminate
him without cause.
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<PAGE>
JAMES M. GIARRUSSO. Mr. Giarrusso's employment agreement with our
subsidiary, SmartDisk Personal Storage, has a two year term ending March 6,
2002. His annual base salary is $200,000 and he is eligible for a bonus of
$60,000 if we achieve specific revenue and profitability goals. If we elect not
to renew his employment agreement upon its expiration, we must pay Mr.
Giarrusso severance of three months base salary. In addition, if we terminate
him without cause, we must pay him severance of three months' base salary and
his pro rata portion of any bonus compensation to which he is entitled. Mr.
Giarrusso has agreed not to compete with us for two years after termination of
his employment if we terminate him for cause and for the later of one year
following the termination date or March 6, 2002 if he resigns or we terminate
him without cause.
EMPLOYEE BENEFIT PLANS
1999 INCENTIVE COMPENSATION PLAN. Our board of directors adopted our 1999
Incentive Compensation Plan in July 1999 and our stockholders approved the
adoption of the plan in July 1999. We have reserved 2,500,000 shares of common
stock for issuance under the plan, of which options to purchase 1,532,998
shares were outstanding as of March 31, 2000. There remain 967,002 shares of
common stock available for issuance 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 compensation
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. Prior to January 1,
2000, directors were granted options to purchase an additional 6,000 shares in
January of each year that they served on the board and 500 each year that they
served as a member, and 500 each year that they served as chairman, of a
committee. Pursuant to an amendment to the plan adopted by the board of
directors effective January 1, 2000, directors are granted options to purchase
an additional 7,500 shares in January of each year that they serve on the board
and 2,000 each year that they serve as a member, and 1,000 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.
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On March 24, 2000 the board of directors adopted an amendment to the plan,
subject to the approval of our stockholders at the 2000 Annual Meeting,
scheduled to be held on May 23, 2000. If the amendment is approved by our
stockholders, the amended plan will differ from our current plan as follows:
/bullet/ the number of shares of common stock reserved and available for
delivery in connection with awards under the plan will be
increased to 3,000,000 shares from 2,500,000 shares; and
/bullet/ the number of shares of common stock reserved and available for
delivery in connection with awards under the plan will
automatically increase on the first trading day of each calendar
year, commencing 2001 and continuing through 2005, by an amount
equal to 3.0% of the total number of shares of our common stock
outstanding on the last trading day of the immediately preceding
calendar year.
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, of which 15,411 shares have been issued as
of March 31, 2000. There remain 449,589 shares of common stock available for
issuance under the plan. 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, is implemented through successive twelve-
month offering periods, generally commencing the first of January each year.
The initial offering period commenced on October 6, 1999, the date of the
initial public offering of our common stock, and runs through December 31,
2000. The plan is administered by the compensation committee. Employees become
eligible to participate when they have been employed for more than five (5)
months in a calendar year, working at least 20 hours a week. 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 either the beginning of the offering period or the day that the
employee became eligible under the plan (if after the beginning of such
period), whichever is higher, or the end of each six-month exercise 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 $21,250 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.
1998 EMPLOYEE STOCK OPTION PLAN. Our board of directors adopted a 1998
Employee Stock Option Plan in January 1998, and our stockholders approved the
adoption of the plan in March 1998. Although we terminated this plan in July
1999, options to purchase 814,592 shares were outstanding as of March 31, 2000.
We have reserved shares of common stock for issuance upon the exercise of these
options.
The plan required that 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,
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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.
1998 DIRECTORS AND CONSULTANTS STOCK OPTION PLAN. Our board of directors
adopted a 1998 Directors and Consultants Stock Option Plan in January 1998, and
our stockholders approved the adoption of the plan in March 1998. Although we
terminated this plan in July 1999, options to purchase 142,093 shares were
outstanding as of March 31, 2000. We have reserved shares of common stock for
issuance upon the exercise of these options.
The plan required that 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, 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.
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PRINCIPAL AND SELLING STOCKHOLDERS
The table below sets forth information regarding the beneficial ownership
of our common stock as of March 31, 2000, by the following individuals or
groups:
/bullet/ Each person or entity who is known by us to own beneficially more
than 5.0% of our outstanding stock;
/bullet/ Each of the named executive officers;
/bullet/ Each of our directors;
/bullet/ All directors and executive officers as a group; and
/bullet/ Each of the stockholders selling shares of our common stock in
this offering.
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 17,126,485 shares
of common stock outstanding as of March 31, 2000. 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 March 31, 2000 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.
The number of shares offered does not reflect the possible sale of shares
upon the exercise of the underwriters' over-allotment option. We and some of the
members of our management have granted an option to the underwriters,
exercisable for 30 days after the date of this prospectus, to purchase up to an
aggregate of 630,000 additional shares of our common stock at the public
offering price set forth on the cover page of this prospectus, less the
underwriting discount. The members of management who have granted these options
are Michael S. Battaglia, Douglas R. Kraul, Michael R. Mattingly, Robert
Protheroe, Daniel E. Reed, Quresh Sachee and Yoshiaki Uchida.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO THE OFFERING NUMBER THE OFFERING
----------------------- OF SHARES ----------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------------------------ ----------- --------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
DIRECTORS, NAMED EXECUTIVE OFFICERS
AND 5% STOCKHOLDERS
Phoenix House Investments, LP(1) ......... 7,382,917 43.1% 183,000 7,199,917 37.2
Toshiba Corporation(2) ................... 2,537,500 14.8 500,000 2,037,500 10.5
Michael S. Battaglia(3) .................. 417,886 2.4 -- 417,866 2.2
D. James Bidzos(4) ....................... 29,140 * -- 29,140 *
Vincent Fedele(5) ........................ 262,721 1.5 63,375 199,346 1.0
Addison M. Fischer(6) .................... 7,961,685 46.5 583,000 7,378,685 38.1
James M. Giarrusso(7) .................... 90,710 * 24,000 66,710 *
Anthony A. Ibarguen(8) ................... 8,550 * -- 8,550 *
Douglas R. Kraul(9) ...................... 676 * -- 676 *
Michael R. Mattingly(10) ................. 8,332 * -- 8,332 *
</TABLE>
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<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO THE OFFERING NUMBER THE OFFERING
------------------------ OF SHARES --------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------------------------------ ------------ --------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Shigeki Morita ................................. -- -- -- -- --
Robert Protheroe(11) ........................... 10,756 * -- 10,756 *
Daniel E. Reed(12) ............................. 6,679 * -- 6,679 *
Quresh Sachee(13) .............................. 52,596 * -- 52,596 *
Timothy Tomlinson(14) .......................... 31,074 * -- 31,074 *
Joseph M. Tucci(15) ............................ 7,050 * -- 7,050 *
Hatim Tyabji(16) ............................... 11,550 * -- 11,550 *
Yoshiaki Uchida(17) ............................ 14,620 * -- 14,620 *
All directors and executive officers,
as a group (16 persons)(18) .................. 8,913,665 50.9 670,375 8,243,290 42.6
OTHER SELLING STOCKHOLDERS
Yamaichi Electronics Company, Ltd. ............. 250,000 1.5 50,000 200,000 1.0
Rohm Company, Ltd. ............................. 250,000 1.5 50,000 200,000 1.0
NEC Corporation ................................ 125,000 * 25,000 100,000 *
Add Venture Associates ......................... 12,397 * 12,397 - -
Le Serre ....................................... 1,711 * 1,711 - -
Ascent Venture Partners, L.P. .................. 14,733 * 3,300 11,433 *
Ascent Venture Partners II, L.P. ............... 147,360 * 33,300 114,060 *
Henry Crouse ................................... 7,645 * 3,000 4,645 *
Germanium Power Devices Corp ................... 7,859 * 7,859 - -
Germanium Power Devices Corp. Profit
Sharing Trust Group F ........................ 10,998 * 10,998 - -
Rufus R. Ward .................................. 1,568 * 1,568 - -
Mark S. Ain .................................... 5,913 * 5,913 - -
Lawrence Owen Brown Family Trust ............... 3,763 * 3,763 - -
Anthony P. Morris .............................. 5,418 * 5,418 - -
Green Mountain Capital, L.P. ................... 62,497 * 30,000 32,497 *
Rhovin Engineering Pension Plan ................ 4,702 * 4,702 - -
Allen Greenberg ................................ 680 * 680 - -
Leonard & Dena Oppenheim ....................... 3,906 * 3,906 - -
Richard Scherr ................................. 1,949 * 949 1,000 *
Keystone Venture Partners V, L.P. .............. 277,192 1.6 277,142 - -
Zero Stage Capital V, L.P. ..................... 190,590 1.1 95,000 95,590 *
Massachusetts Technology Development Corp. ..... 55,809 * 55,809 - -
William Thalheimer ............................. 921 * 921 - -
T & B Investors, LLC ........................... 76,770 * 76,770 - -
Alson Partners III ............................. 44,958 * 44,958 - -
Other selling stockholders, as a group ......... 1,564,289 9.1 805,064 759,225 3.9
</TABLE>
- ----------------
* Less than one percent.
(1) The address for Phoenix House is Phoenix House Investments, LP, 101
Convention Center Drive, Suite 850, Las Vegas, Nevada 89109. Phoenix House
is controlled by Addison M. Fischer, the Chairman of our board of
directors.
(2) The address for Toshiba Corporation is 1-1 Shibaura 1-Chome, Minato-ku,
Tokyo 105, Japan.
(3) Includes 6,750 shares subject to options either currently exercisable or
exercisable by Mr. Battaglia within 60 days of March 31, 2000. Does not
reflect the possible sale of shares upon the exercise of the underwriters'
over-allotment option. If the underwriters exercise the option in full,
Mr. Battaglia will sell shares, resulting in him owning
shares ( %) after the closing of the offering.
(4) Includes 360 shares subject to options either currently exercisable or
exercisable by Mr. Bidzos within 60 days of March 31, 2000. Excludes
shares held by Phoenix House, in which Mr. Bidzos owns a 2.5% ownership
interest. Mr. Bidzos disclaims beneficial ownership of the shares held by
Phoenix House.
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(5) Includes 220,947 shares subject to options either currently exercisable or
exercisable by Mr. Fedele within 60 days of March 31, 2000 and 20,887
shares owned by Mr. Fedele's wife and minor children, as to which Mr.
Fedele disclaims beneficial ownership. Of the 63,375 shares offered by Mr.
Fedele, 4,129 are offered on behalf of his wife and minor children.
(6) 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.
(7) Includes 80,200 shares subject to options either currently exercisable or
exercisable by Mr. Giarrusso within 60 days of March 31, 2000 and 5,255
shares owned by Mr. Giarrusso's wife and 5,225 held by Mr. Giarrusso as
custodian for his minor son, as to which 10,510 shares Mr. Giarrusso
disclaims beneficial ownership. Of the 24,000 shares offered by Mr.
Giarrusso; 4,000 are offered on behalf of his wife and son.
(8) Includes 3,550 shares subject to options either currently exercisable or
exercisable by Mr. Ibarguen within 60 days of March 31, 2000.
(9) Does not reflect the possible sale of shares upon the exercise of the
underwriters' over-allotment option. If the underwriters exercise the
option in full, Mr. Kraul will sell shares, resulting in him
owning shares after the closing of the offering.
(10) Includes 7,813 shares subject to options either currently exercisable or
exercisable by Mr. Mattingly within 60 days of March 31, 2000. Does not
reflect the possible sale of shares upon the exercise of the underwriters'
over-allotment option. If the underwriters exercise the option in full,
Mr. Mattingly will sell shares, resulting in him owning
shares after the closing of the offering.
(11) Includes 10,000 shares subject to options either currently exercisable or
exercisable by Mr. Protheroe within 60 days of March 31, 2000. Does not
reflect the possible sale of shares upon the exercise of the underwriters'
over-allotment option. If the underwriters exercise the option in full,
Mr. Protheroe will sell shares, resulting in him owning
shares after the closing of the offering.
(12) Includes 6,250 shares subject to options either currently exercisable or
exercisable by Mr. Reed within 60 days of March 31, 2000. Does not reflect
the possible sale of shares upon the exercise of the underwriters'
over-allotment option. If the underwriters exercise the option in full,
Mr. Reed will sell shares, resulting in him owning
shares after the closing of the offering.
(13) Includes 21,954 shares subject to options either currently exercisable or
exercisable by Mr. Sachee within 60 days of March 31, 2000. Does not
reflect the possible sale of shares upon the exercise of the underwriters'
over-allotment option. If the underwriters exercise the option in full,
Mr. Sachee will sell shares, resulting in him owning
shares after the closing of the offering.
(14) Includes 1,500 shares held by trusts for which Mr. Tomlinson and his wife
are the sole trustees. Mr. Tomlinson disclaims beneficial ownership of
those shares. Also includes 7,417 shares held by an investment fund of
which Mr. Tomlinson is a general partner. Mr. Tomlinson disclaims
beneficial ownership of such shares except to the extent of his pecuniary
interest therein.
(15) Includes 3,550 shares subject to options either currently exercisable or
exercisable by Mr. Tucci within 60 days of March 31, 2000.
(16) Includes 3,550 shares subject to options either currently exercisable or
exercisable by Mr. Tyabji within 60 days of March 31, 2000.
(17) Includes 13,283 shares subject to options either currently exercisable or
exercisable by Mr. Uchida within 60 days of March 31, 2000. Does not
reflect the possible sale of shares upon the exercise of the underwriters'
over-allotment option. If the underwriters exercise the option in full,
Mr. Uchida will sell shares, resulting in him owning
shares after the closing of the offering.
(18) See footnotes (3) through (17) above.
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RELATED PARTY TRANSACTIONS
PRE-FORMATION ADVANCES
Prior to 1997, Addison Fischer and his affiliates, including Fischer
International, advanced SDSC, our predecessor, non-interest bearing loans in
the aggregate amount of approximately $9.6 million in order to fund our
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 our 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 our common stock.
FORMATION TRANSACTIONS
Although we commenced operations in January 1998, we did not receive
significant capital contributions until February of that year. In February
1998, we entered into a joint venture agreement along with Toshiba and Phoenix
House which detailed a plan of capital contribution, corporate governance and
business strategies for us. Pursuant to this agreement, each of Toshiba,
Fischer International and Phoenix House agreed to purchase shares of our common
stock and become our principal stockholders. Before the May 1998 stock
purchases described below substantially, all outstanding shares of our common
stock were owned by employees of, or consultants to, SmartDisk, as a result of
the exercise of stock options.
The joint venture agreement called for Toshiba to make an immediate loan
to us 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 our 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 our common stock,
both Phoenix House and Fischer International acquired shares of our common
stock. Both Phoenix House and Fischer International are controlled by Addison
Fischer, the Chairman of our board of directors. Phoenix House acquired
7,350,000 shares of our common Stock in exchange for all of the outstanding
shares of SDSC. As a result, SDSC became our wholly owned subsidiary and we
became the owner of the exclusive patent licenses owned by SDSC. Fischer
International acquired 150,000 shares of our common stock in return for
trademarks it owned relating to the SafeBoot, FlashPath and Smarty products.
Immediately after their capital contributions, Phoenix House, Toshiba and
Fischer International owned 68.8%, 23.3% and 1.4% of our 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
our common stock. Of the total number of our 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, we 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 our 1996 and 1997
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financial statements, which reflect the revenue of SDSC, are net of the fees
paid to Fischer International and its affiliates. In addition, operating
expenses totaling approximately $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 us for the expenses
related to providing those services. Upon our obtaining control of SDSC in May
1998, this agreement was terminated and replaced with a new operating agreement
between Fischer International and us. Under this new agreement, as amended in
June 1999, we reimburse Fischer International for marketing, accounting and
other similar services. In addition, until recently we have shared office space
with Fischer International. We have reimbursed Fischer International for the
cost of this office space as well as other general and administrative expenses.
Our share of these expenses is based on an internal analysis of the relative
amount of time devoted to our business by employees of Fischer International as
well as the overhead charges attributable to these employees. In 1998 and 1999,
we paid Fischer International approximately $1.5 million and $300,000 under
this arrangement for the reimbursement of expenses under the operating
agreement and for the other shared services.
In May 1998, we entered into license and distribution agreements with
Fischer International. Under these agreements, we granted Fischer International
a non-exclusive license to our SafeBoot product and distribution rights to our
SafeBoot, Smarty and FlashPath products until 2001. Pursuant to this agreement,
Fischer International agreed to pay us 33.3% of the net revenue derived from
the sale of our products on a stand-alone basis and 5% of the net revenue
derived from the sale of our products which are bundled with the products of
third parties. In 1998 and 1999, we received approximately $285,000 and
$470,000 from Fischer International under these agreements in royalties related
to SafeBoot, and no royalties related to Smarty and FlashPath.
TOSHIBA TRANSACTIONS
In May 1998, we entered into a license agreement with Toshiba, which was
contemporaneously becoming one of our principal stockholders. Under this
agreement, Toshiba granted us a non-exclusive license to patents relating to
the interface with Toshiba's SmartMedia cards. We paid a one-half of 1% royalty
on the net sales price of our products that use the Toshiba license through
March 1999. This agreement was amended in September 1998 to expand the field of
use for the non-exclusive license. In April 1999, we again amended the Toshiba
license. In exchange for 50,000 shares of our common stock, Toshiba agreed to
grant us a fully-paid license as of April 1999, at which time we stopped paying
royalties. In 1998 and 1999, we paid approximately $69,000 and $25,600 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, 1998 and 1999, we had aggregate sales to Toshiba or the sales agent of
approximately $495,000, $0 and $815,000.
Also, since September 1998, four engineers from Toshiba have worked for us
on a contract basis. In 1998 and 1999, we paid Toshiba approximately $74,000
and $474,000 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 purchase 426,136 shares of our 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 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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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. The
outstanding principal balance of the loan as of March 31, 2000 is $45,000.
OTHER TRANSACTIONS
On May 28, 1998, we sold 28,750 shares of our common stock at a price of
$4.00 per share to First TZMM Investment Partnership, an entity affiliated with
Tomlinson Zisko Morosoli & Maser LLP. Timothy Tomlinson, one of our directors,
is a partner of Tomlinson Zisko Morosoli & Maser LLP.
On July 1, 1999, as part of a larger round of investments led by SCM
Microsystems, we sold an aggregate of 20,000 shares of common stock to Messrs.
Tomlinson and Bidzos, two of our directors, for $160,000, or $8.00 per share.
Individually, Mr. Tomlinson received 7,500 shares and Mr. Bidzos received
12,500 shares. In addition, First TZMM Investment Partnership acquired 27,500
shares for $220,000.
On January 21, 2000, we granted options to acquire 15,000 shares of common
stock to Mr. Tomlinson with an exercise price of $35.00 per share. Options to
purchase 6,000 shares vested immediately, options to purchase 6,000 shares
vested 12.5% per quarter and options to purchase 3,000 shares vested 2% per
month. On January 31, 2000, we loaned Mr. Tomlinson $209,994 in connection with
his exercise of options to purchase 6,000 shares of our common stock for $35.00
per share. The loan bears interest at the rate of 6.07% per year and the
interest is payable quarterly. The principal balance is due on January 31,
2005.
Timothy Tomlinson, one of our directors, is a partner of Tomlinson Zisko
Morosoli & Maser LLP, which provided legal services to us in 1999. Fees paid in
1999 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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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 March 31, 2000, there were 17,126,485 shares of common stock
outstanding that were held of record by approximately 80 stockholders. There
will be 19,351,046 shares of common stock outstanding, assuming no exercise
after March 31, 2000 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 stockholders, 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 stockholders, 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, LP and Fischer International Systems Corporation, we
entered into an agreement providing registration rights for Toshiba, Phoenix
House and Fischer International. At any time after 90 days following the date
of this prospectus, Toshiba, Phoenix House 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 90 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, Phoenix House and Fischer International may request that we file a
registration statement on Form S-3, covering all or a portion of securities of
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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 our 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, in connection with our acquisition of VST Technologies, Inc.,
we entered into agreements providing registration rights for the management
stockholders and other specified non-management stockholders of VST. At any
time after 90 days following the date of this prospectus, holders of a majority
of our common stock received by the management stockholders or the non-
management stockholders of VST in connection with the acquisition may require
us to file a registration statement under the Securities Act. The management
stockholders may neither require registration in any one filing of more than
25% of the shares received by them in connection with the acquisition nor
require us to file more than four registration statements. Only one request for
registration may be made by the management stockholders in any six month
period. The non-management stockholders may neither require registration in any
one filing of more than 50% of the shares received by them in connection with
the acquisition nor require us to file more than one registration statement.
The registration rights given in connection with the VST acquisition are
subject to our right to delay the filing of a registration statement for no
more than 60 days if our board of directors determines in good faith that a
filing would have a material adverse affect on any proposal or plan of ours to
engage in a material acquisition or disposition of assets or a material merger,
consolidation, tender offer or other similar transaction. We may not delay a
filing more than once in any nine-month period.
In addition, Toshiba, Phoenix House, SCM Microsystems, Inc., Fischer
International and the former management and non-management stockholders of VST
have "piggyback" registration rights. If we propose to register any common
stock under the Securities Act, those stockholders 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, Phoenix House, Fischer International and the
former management and non-management stockholders of VST will pay all
underwriting discounts and selling commissions applicable to the sale of their
securities.
We also agreed to indemnify Toshiba, Phoenix House and Fischer
International and the former management and non-management stockholders of VST
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, Phoenix House and Fischer
International 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
80
<PAGE>
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 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.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have outstanding 19,351,046
shares of common stock based upon shares outstanding as of March 31, 2000,
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
3,450,000 shares sold in our initial public offering are, and the 4,200,000
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. As of March 31,
2000, approximately 13,500,000 of the outstanding shares of common stock are
"restricted securities" as that term is defined in Rule 144. In addition, all
our executive officers and directors and some of our stockholders, including the
selling stockholders, who together, assuming no exercise of the underwriters'
over-allotment option, will hold an aggregate of approximately 10,800,000 shares
of common stock upon the completion of the offering, have agreed that they
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 90 days after the date of this prospectus without the prior written
consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated. 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 their shares will be
eligible for resale until 91 days after the date of this prospectus. Merrill
Lynch, Pierce, Fenner & Smith Incorporated may, at its sole discretion, and at
any time without notice, release all or any portion of the securities subject to
lock-up agreements.
81
<PAGE>
In general, the volume limitations under Rule 144, as currently in effect,
provide that 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 194,000 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.
Toshiba, Phoenix House, Fischer International and the former management
and non-management stockholders of VST are 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.
82
<PAGE>
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Chase Securities Inc.
and U.S. Bancorp Piper Jaffray Inc. are acting as representatives of the
underwriters named below. Subject to the terms and conditions described in a
purchase agreement among us, the selling stockholders and the underwriters, we
and the selling stockholders have agreed to sell to the underwriters, and the
underwriters severally have agreed to purchase from us and the selling
stockholders, the number of shares listed opposite their names below.
<TABLE>
<CAPTION>
NUMBER
OF SHARES
UNDERWRITER ----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated .....................
Chase Securities Inc. ...................
U.S. Bancorp Piper Jaffray Inc. .........
Total ............................ 4,200,000
=========
</TABLE>
The underwriters have agreed to purchase all of the shares sold under the
purchase agreement if any of these shares are purchased. If an underwriter
defaults, the purchase agreement provides that the purchase commitments of the
nondefaulting underwriters may be increased or the purchase agreement may be
terminated.
We and the selling stockholders have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act, or
to contribute to payments the underwriters may be required to make in respect
of those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreement, such as the receipt by the underwriters of
officer's certificates and legal opinions. The underwriters reserve the right
to withdraw, cancel or modify offers to the public and to reject orders in
whole or in part.
COMMISSIONS AND DISCOUNTS
The representatives have advised us and the selling stockholders that the
underwriters propose initially to offer the shares to the public at the
offering price on the cover page of this prospectus and to dealers at that
price less a concession not in excess of $ per share. The underwriters may
allow, and the dealers may reallow, a discount not in excess of $ per share
to other dealers. After the offering, the public offering price, concession and
discount may be changed.
The following table shows the public offering price, underwriting discount
and proceeds before expenses to SmartDisk and the selling stockholders. The
information assumes either no exercise or full exercise by the underwriters of
their over-allotment options.
<TABLE>
<CAPTION>
WITHOUT WITH
PER SHARE OPTION OPTION
----------- --------- -------
<S> <C> <C> <C>
Public offering price ........................... $ $ $
Underwriting discount ........................... $ $ $
Proceeds, before expenses, to SmartDisk ......... $ $ $
Proceeds to the selling stockholders ............ $ $ $
</TABLE>
The expenses of the offering, not including the underwriting discount, are
estimated at $500,000 and are payable by SmartDisk.
OVER-ALLOTMENT OPTION
We and some of the members of our management have granted options to the
underwriters to purchase up to 630,000 additional shares at the public offering
price less the underwriting discount.
83
<PAGE>
The underwriters may exercise these options for 30 days from the date of
this prospectus solely to cover any over-allotments. If the underwriters
exercise these options, each will be obligated, subject to conditions contained
in the purchase agreements, to purchase a number of additional shares
proportionate to that underwriter's initial amount reflected in the above table.
NO SALES OF SIMILAR SECURITIES
We, the selling stockholders and our executive officers and directors have
agreed, with exceptions, not to sell or transfer any common stock for 90 days
after the date of this prospectus without first obtaining the written consent
of Merrill Lynch. Specifically, we and these other individuals have agreed not
to directly or indirectly
/bullet/ offer, pledge, sell or contract to sell any common stock,
/bullet/ sell any option or contract to purchase any common stock,
/bullet/ purchase any option or contract to sell any common stock,
/bullet/ grant any option, right or warrant for the sale of any common
stock,
/bullet/ lend or otherwise dispose of or transfer any common stock,
/bullet/ request or demand that we file a registration statement related to
the common stock, or
/bullet/ enter into any swap or other agreement that transfers, in whole or
in part, the economic consequence of ownership of any common stock
whether any such swap or transaction is to be settled by delivery
of shares or other securities, in cash or otherwise.
This lockup provision applies to common stock and to securities
convertible into or exchangeable or exercisable for or repayable with common
stock. It also applies to common stock owned now or acquired later by the
person executing the agreement or for which the person executing the agreement
later acquires the power of disposition.
QUOTATION ON THE NASDAQ NATIONAL MARKET
The shares are quoted on the Nasdaq National Market under the symbol
"SMDK."
PRICE STABILIZATION AND SHORT POSITIONS
Until the distribution of the shares is completed, SEC rules may limit
underwriters and selling group members from bidding for and purchasing our
common stock. However, the representatives may engage in transactions that
stabilize the price of the common stock, such as bids or purchases to peg, fix
or maintain that price.
If the underwriters create a short position in the common stock in
connection with the offering, i.e., if they sell more shares than are listed on
the cover of this prospectus, the representatives may reduce that short
position by purchasing shares in the open market. The representatives may also
elect to reduce any short position by exercising all or part of the
over-allotment option described above. Purchases of the common stock to
stabilize its price or to reduce a short position may cause the price of the
common stock to be higher than it might be in the absence of such purchases.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the underwriters makes any representation that the
representatives or the lead managers will engage in these transactions or that
these transactions, once commenced, will not be discontinued without notice.
84
<PAGE>
PASSIVE MARKET MAKING
In connection with this offering, underwriters and selling group members
may engage in passive market making transactions in the common stock on the
Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Exchange Act during a period before the commencement of offers or sales of
common stock and extending through the completion of distribution. A passive
market maker must display its bid at a price not in excess of the highest
independent bid of that security. However, if all independent bids are lowered
below the passive market maker's bid, that bid must then be lowered when
specified purchase limits are exceeded.
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,
McLean, Virginia.
EXPERTS
Ernst & Young LLP, independent certified public accountants, have audited
our consolidated financial statements at December 31, 1998 and 1999 and for
each of the three years in the period ended December 31, 1999, as set forth in
their report. We have included our consolidated 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.
The financial statements of VST Technologies, Inc. included in this
prospectus and elsewhere in the registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report, and are included in reliance upon the authority of Arthur Andersen LLP
as experts in giving their report.
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
85
<PAGE>
information statements and other information regarding registrants that file
electronically with the Securities and Exchange Commission. The Securities and
Exchange Commission's website address is www.sec.gov.
We intend 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. We intend to furnish other reports as we may determine or as may
be required by law.
86
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PAGE
----
SMARTDISK CORPORATION
Report of Independent Certified Public Accountants .................................. F-2
Consolidated Balance Sheets of SmartDisk as of December 31, 1998 and 1999 ........... F-3
Consolidated Statements of Operations of SmartDisk for the Years Ended December 31,
1997, 1998 and 1999 ............................................................... F-4
Consolidated Statements of Cash Flows of SmartDisk for the Years Ended December 31,
1997, 1998 and 1999 ............................................................... F-5
Consolidated Statements of Stockholders' Equity (Deficit) of SmartDisk for the Years
Ended December 31, 1997, 1998 and 1999 ............................................ F-6
Notes to Consolidated Financial Statements of SmartDisk ............................. F-7
VST TECHNOLOGIES, INC.
Report of Independent Public Accountants ............................................ F-26
Balance Sheets of VST as of December 31, 1998 and 1999 .............................. F-27
Statements of Operations of VST for the Years Ended December 31, 1997,
1998 and 1999 ..................................................................... F-28
Statements of Redeemable Convertible Preferred Stock and Stockholders' Deficit of VST
for the Years Ended December 31, 1997, 1998 and 1999 .............................. F-29
Statements of Cash Flow of VST for the Years Ended December 31, 1997,
1998 and 1999 ..................................................................... F-30
Notes to Financial Statements of VST ................................................ F-31
</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, 1998 and 1999, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for
each of the three years in the period ended December 31, 1999. Our audits also
included the financial statement schedule listed in the Index at Item 14(a)2.
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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, 1998 and 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ Ernst & Young LLP
Miami, Florida
January 21, 2000, except
for Note 15 as to which
the date is March 6, 2000
F-2
<PAGE>
SMARTDISK CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1998 1999
---------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 2,919,728 $ 19,079,542
Restricted cash ......................................................... 1,050,000 1,050,000
Short-term investments .................................................. -- 26,640,401
Accounts receivable, net of allowance for doubtful accounts of
$33,848 and $139,842 at December 31, 1998 and 1999, respectively 2,195,356 3,865,781
Notes receivable ........................................................ 1,381,886 6,302,439
Inventories, net ........................................................ 1,689,020 1,474,613
Other current assets .................................................... 280,291 1,353,235
------------- -------------
Total current assets .................................................. 9,516,281 59,766,011
Property and equipment, net .............................................. 682,014 2,623,629
Intangible assets, net ................................................... 740,978 882,699
Deposits and other assets ................................................ 196,682 171,855
------------- -------------
TOTAL ASSETS ............................................................. $ 11,135,955 $ 63,444,194
============= =============
LIABILITIES, REDEEMABLE COMMON STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT) .........................................
Current liabilities: .....................................................
Accounts payable ........................................................ $ 3,706,297 $ 5,329,804
Bank line of credit and discounted notes ................................ 2,247,718 4,894,672
Other accrued liabilities ............................................... 693,590 2,014,765
Income taxes payable .................................................... -- 1,110,537
Deferred research and development contract revenue ...................... -- 307,874
------------- -------------
Total current liabilities ............................................. 6,647,605 13,657,652
Deferred income tax liability ............................................ 184,658 --
Stockholder loan ......................................................... 648,147 --
Commitments and contingencies ............................................ -- --
Redeemable common stock: 2,487,500 shares issued and outstanding at
December 31, 1998 ...................................................... 9,991,918 --
Stockholders' equity (deficit): ..........................................
Preferred stock, $.001 par value; 5,000,000 shares authorized;
none issued ........................................................... -- --
Common stock, $.001 par value; 60,000,000 shares authorized;
9,296,723 issued and 9,216,496 outstanding at December 31, 1998;
16,072,399 issued and 15,991,422 outstanding at December 31, 1999 ..... 9,297 16,072
Capital in excess of par value .......................................... 16,351,092 71,246,592
Treasury stock, 80,227 shares at December 31, 1998 and 80,977 shares
at December 31, 1999, at cost ......................................... (57,764) (58,304)
Accumulated other comprehensive income .................................. 478,948 711,954
Notes receivable from officers/employees ................................ (417,334) (387,454)
Accumulated deficit ..................................................... (22,700,612) (21,742,318)
------------- -------------
Total stockholders' equity (deficit) .................................. (6,336,373) 49,786,542
------------- -------------
TOTAL LIABILITIES, REDEEMABLE COMMON STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT) ......................................... $ 11,135,955 $ 63,444,194
============= =============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
SMARTDISK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1997 1998 1999
--------------- --------------- ---------------
<S> <C> <C> <C>
REVENUES
Product sales .......................................... $ 892,530 $ 15,038,281 $ 37,262,464
Research and development revenue ....................... -- -- 2,586,506
Royalties .............................................. -- 284,298 470,479
------------ ------------ ------------
Total revenues ....................................... 892,530 15,322,579 40,319,449
COST OF REVENUES ........................................ 300,678 12,600,330 24,820,064
------------ ------------ ------------
GROSS PROFIT ............................................ 591,852 2,722,249 15,499,385
OPERATING EXPENSES ......................................
Research and development ............................... 1,411,986 2,107,142 5,868,983
Sales and marketing .................................... 11,582 1,565,865 1,608,214
General and administrative ............................. 3,184,552 4,630,736 6,259,161
------------ ------------ ------------
Total operating expenses ............................. 4,608,120 8,303,743 13,736,358
------------ ------------ ------------
OPERATING INCOME (LOSS) ................................. (4,016,268) (5,581,494) 1,763,027
Gain (loss) on foreign exchange ......................... -- (47,678) 29,919
Interest and other income ............................... 8,210 75,770 586,663
Interest expense ........................................ (514) (51,858) (54,471)
------------ ------------ ------------
Net income (loss) before income taxes ................... (4,008,572) (5,605,260) 2,325,138
Income tax expense (benefit) ............................ (44,598) (102,316) 1,366,844
------------ ------------ ------------
NET INCOME (LOSS) ....................................... $ (3,963,974) $ (5,502,944) $ 958,294
============ ============ ============
Earnings (loss) per share--basic ........................ $ (0.51) $ (0.68) $ 0.09
Earnings (loss) per share--diluted ...................... $ (0.51) $ (0.68) $ 0.07
Weighted average shares used to calculate earnings (loss)
per share amounts .....................................
Basic .................................................. 7,738,909 8,040,169 10,724,608
Diluted ................................................ 7,738,909 8,040,169 13,349,376
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
SMARTDISK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1997 1998 1999
----------------- ----------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ......................................................... $ (3,963,974) $ (5,502,944) $ 958,294
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation ............................................................. 227,089 613,777 1,478,184
Amortization ............................................................. 179,346 410,917 551,751
Bad debt expense ......................................................... -- 26,565 93,035
Provision for inventory obsolescence ..................................... -- -- 86,600
Employee stock option expense ............................................ -- -- 76,500
Foreign currency (gain) loss ............................................. -- (31,235) (29,919)
Deferred income tax benefit .............................................. (44,598) (102,316) (388,874)
Changes in assets and liabilities:
(Increase) decrease in assets: ..........................................
Accounts receivable ..................................................... -- (2,221,921) (1,763,460)
Notes receivable ........................................................ -- (1,381,886) (4,920,553)
Inventories ............................................................. 23,529 (1,394,524) 127,807
Other current assets .................................................... (274,894) (240,169) (918,472)
Deposits and other assets ............................................... 20,525 (176,942) 93,517
Increase (decrease) in liabilities: .....................................
Accounts payable ........................................................ (397,416) 3,452,485 1,623,507
Deferred research and development contract revenue ...................... -- -- 307,874
Other accrued liabilities and income taxes payable ...................... 80,588 587,575 2,431,712
------------- ------------- -------------
Net cash used in operating activities ...................................... (4,149,805) (5,960,618) (192,497)
Cash flows from investing activities:
Purchases of property and equipment ....................................... (284,943) (1,019,878) (3,057,057)
Purchases of short-term investments ....................................... -- -- (36,707,793)
Sales and maturities of short-term investments ............................ -- -- 9,995,030
Purchase of intangible assets ............................................. -- -- (404,959)
Increase in restricted cash ............................................... -- (1,050,000) --
------------- ------------- -------------
Net cash used in investing activities ...................................... (284,943) (2,069,878) (30,174,779)
Cash flows from financing activities:
Proceeds from issuance of exchangeable note ............................... -- 5,000,000 --
Net proceeds from line of credit .......................................... -- 2,247,718 2,646,954
Net proceeds (repayment) of stockholder loan .............................. 3,709,527 (3,955,000) --
Net proceeds (repayment) of loan from related parties ..................... 1,045,000 (1,045,000) --
Proceeds from sale of redeemable common stock ............................. -- 4,950,000 --
Net proceeds from issuance of common stock ................................ -- 3,259,967 43,820,485
Proceeds from sale of stock by SDL ........................................ -- -- 65,225
Collections on notes receivable from officers ............................. -- -- 29,880
Purchase of treasury stock ................................................ -- (57,764) (540)
------------- ------------- -------------
Net cash provided by financing activities .................................. 4,754,527 10,399,921 46,562,004
Effect of exchange rate fluctuations on cash ............................... 1,973 220,525 (34,914)
------------- ------------- -------------
Increase in cash and cash equivalents ...................................... 321,752 2,589,950 16,159,814
Cash and cash equivalents at beginning of period ........................... 8,026 329,778 2,919,728
------------- ------------- -------------
Cash and cash equivalents at end of period ................................. $ 329,778 $ 2,919,728 $ 19,079,542
============= ============= =============
Significant non-cash activities:
Acquisition of SDL patents ................................................ $ 693,424 $ 300,000
Conversion of stockholder loan to capital ................................. 654,661 $ 648,147
Exchange of note payable plus accrued interest for redeemable common stock 5,041,918
Notes receivable obtained for stock option exercise ....................... 417,334
Issuance of common stock for licenses and trademarks ...................... 600,000 300,000
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
SMARTDISK CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN COMPREHENSIVE
----------------------- EXCESS OF INCOME
SHARES AMOUNT PAR VALUE (LOSS)
------------ ---------- --------------- -----------------
<S> <C> <C> <C> <C>
Balance at 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 at 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 in
private placement ............. 666,250 666 3,164,334
Common stock issued for
trademarks .................... 150,000 150 (150)
Common stock issued under
stock option plans ............ 699,863 700 511,601
Acquisition of SDL minority
interest ...................... 32,718 33 299,967
Repurchase of common stock ..... --------- ----- ----------
Balance at December 31, 1998 9,296,723 9,297 16,351,092
Comprehensive income:
Net income .................... $ 958,294
Foreign currency translation
adjustments .................. 277,147
Unrealized loss on short-
term investments ............. (44,141)
-------------
Comprehensive income ......... $ 1,191,300
=============
Issuance of common stock in
public offering, net .......... 3,452,500 3,453 39,170,411
Conversion of redeemable
common stock .................. 2,487,500 2,487 9,989,431
Issuance of common stock in
private placements ............ 650,000 650 4,299,350
Issuance of common stock
under stock option plans ...... 47,875 48 251,948
Issuance of common stock
under employee stock
purchase plan ................. 15,411 15 171,110
Issuance of common stock for
license ....................... 37,500 37 299,963
Conversion of stockholder
loan into SDL shares .......... 76,018 76 648,071
Issuance of shares by SDL ...... 8,872 9 65,216
Collection on note receivable
from officer ..................
Repurchase of common stock ..... ---------- ------- ------------
Balance at December 31, 1999 16,072,399 $16,072 $ 71,246,592
========== ======= ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ACCUMULATED NOTES
OTHER RECEIVABLE
COMPREHENSIVE FROM
ACCUMULATED INCOME OFFICERS/ TREASURY
DEFICIT (LOSS) EMPLOYEES STOCK TOTAL
----------------- --------------- ------------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
Balance at 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 at 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 in
private placement ............. 3,165,000
Common stock issued for
trademarks .................... --
Common stock issued under
stock option plans ............ (417,334) 94,967
Acquisition of SDL minority
interest ...................... 300,000
Repurchase of common stock ..... (57,764) (57,764)
------------ ------- --------- --------- -------------
Balance at December 31, 1998 (22,700,612) 478,948 (417,334) (57,764) (6,336,373)
Comprehensive income:
Net income .................... 958,294
Foreign currency translation
adjustments .................. 277,147
Unrealized loss on short-
term investments ............. (44,141)
Comprehensive income ......... 1,191,300
Issuance of common stock in
public offering, net .......... 39,173,864
Conversion of redeemable
common stock .................. 9,991,918
Issuance of common stock in
private placements ............ 4,300,000
Issuance of common stock
under stock option plans ...... 251,996
Issuance of common stock
under employee stock
purchase plan ................. 171,125
Issuance of common stock for
license ....................... 300,000
Conversion of stockholder
loan into SDL shares .......... 648,147
Issuance of shares by SDL ...... 65,225
Collection on note receivable
from officer .................. 29,880 29,880
Repurchase of common stock ..... (540) (540)
------------- --------- ---------- --------- -------------
Balance at December 31, 1999 $ (21,742,318) $ 711,954 $ (387,454) $ (58,304) $ 49,786,542
============= ========= ========== ========= =============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
SMARTDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
SmartDisk Corporation ("SmartDisk" or the "Company") was incorporated in
March 1997, and its predecessor, SmartDisk Security Corporation ("SDSC") was
incorporated on May 18, 1993. SmartDisk designs and develops products that
enable consumers to easily share digital data among advanced consumer
electronic products, PCs and the Internet. 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.
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 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
F-7
<PAGE>
SMARTDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All intercompany transactions and balances
between the companies have been eliminated. The consolidated financial
statements are stated in U.S. dollars and have been prepared in accordance with
accounting principles generally accepted in the United States.
CERTAIN UNCERTAINTIES AND RISKS
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash and cash equivalents,
short-term investments and trade receivables. The Company places its cash and
cash equivalents, and short-term investments with major financial institutions.
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.
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.
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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-8
<PAGE>
SMARTDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
FOREIGN CURRENCY TRANSLATION
Substantially all of the Company's sales are made through a Japanese
branch. 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 intercompany balances with the Japanese branch are denominated in
Yen. Certain cash time deposits and inter-company accounts of the Japanese
branch 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 years ended December 31, 1998 and 1999 totaled
$170,416 and $87,910, respectively.
RECLASSIFICATIONS
Certain amounts in prior years' consolidated financial statements have
been reclassified to conform to the fiscal 1999 presentation.
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, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
All highly liquid investments with an original maturity of three months or
less when purchased are considered to be cash equivalents. All cash equivalents
are carried at cost, which approximates fair value. Cash and cash equivalents
include money market funds, certificates of deposit and U.S. Government Agency
securities.
The Company has cash investment policies that limit investments to
investment grade securities. Investments held by the Company are classified as
"available-for-sale" as defined by SFAS No. 115 and are carried at fair value
based on quoted market prices. Such investments consist of U.S. Government
Agency securities, corporate debt securities and asset backed securities with
original maturities beyond three months and less than twenty-four months.
Realized losses represent the difference between the proceeds received upon
sale of an investment and its amortized cost. The Company's realized losses,
net of tax, during the year ended December 31, 1999 were $45,656. Unrealized
losses, net of tax, as of December 31, 1999 were $44,141. The Company did not
have short-term investments during the years ended December 31, 1998 and 1997.
F-9
<PAGE>
SMARTDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
A detail of the Company's short-term investments as of December 31, 1999
is as follows:
<TABLE>
<CAPTION>
AMORTIZED AGGREGATE UNREALIZED UNREALIZED
COST BASIS FAIR VALUE GAINS LOSSES
-------------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
US government and government
agency securities ................... $15,964,942 $15,920,180 $ -- $ (44,762)
Asset backed securities .............. 5,990,602 5,984,190 -- (6,412)
Corporate bonds and notes ............ 4,757,219 4,736,031 -- (21,188)
----------- ----------- ---- ---------
Total short-term investments ......... $26,712,763 $26,640,401 $ -- $ (72,362)
=========== =========== ==== =========
</TABLE>
The following represents the maturities of the Company's short-term
investments as of December 31, 1999:
<TABLE>
<CAPTION>
AGGREGATE
FAIR VALUE
--------------
<S> <C>
Due in 0-12 months ............ $ 9,996,060
Due in 12-24 months ........... 16,644,341
-----------
Total ......................... $26,640,401
===========
</TABLE>
RESTRICTED CASH
Restricted cash is composed of a time deposit that the Company's Japanese
branch 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.
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 been established, at which time
certain development costs required to attain general production
F-10
<PAGE>
SMARTDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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 Statement of Financial
Accounting Standards (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 when the risk of loss and title transfers to
the customer, which is generally 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.
STOCK BASED COMPENSATION
SFAS No. 123 "Accounting for Stock-Based Compensation" permits the use of
either a fair value based method or the intrinsic value method defined in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") to account for stock-based compensation arrangements. The
Company determines the value of stock-based compensation arrangements under the
provisions of APB 25 and, accordingly, has included the pro forma disclosures
required under SFAS No. 123 in Note 9.
ADVERTISING
Advertising costs are charged to expense as incurred, advertising expenses
for 1997, 1998 and 1999 were $3,785, $214,002 and $147,251, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 established accounting and reporting standards requiring that every
derivative financial instrument be recorded on the balance sheet as either an
asset or liability measured at its current market value. Because SmartDisk
currently holds no derivative instruments and does not engage in hedging
activities, the Company expects that the adoption of SFAS No. 133 will have no
material impact on its financial position, results of operations or cash flows.
The Company will be required to implement SFAS No. 133 for the year ending
December 31, 2001.
F-11
<PAGE>
SMARTDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
COMPREHENSIVE INCOME
Comprehensive income (loss) includes all changes in equity that result
from transactions and other economic events during the period other than
transactions with stockholders. The significant components of other
comprehensive income (expense) for the Company include equity adjustments
resulting from the translation of the balance sheet for the Japanese branch and
the European subsidiary and unrealized gains and losses on short-term
investments. Accumulated other comprehensive income at December 31, 1999,
includes accumulated foreign currency translation adjustments of $756,095
offset by unrealized losses on short-term investments of $44,141, net of tax.
NOTE 2. INVENTORY
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1999
-------------- --------------
<S> <C> <C>
Finished goods ..................... $ 1,687,905 $ 1,561,213
Raw materials ...................... 1,115 --
----------- -----------
Total inventories .................. 1,689,020 1,561,213
Allowance for obsolescence ......... -- (86,600)
----------- -----------
Net inventory ...................... $ 1,689,020 $ 1,474,613
=========== ===========
</TABLE>
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1999
------------ --------------
<S> <C> <C>
Production Equipment .............................. $ 702,779 $ 3,697,941
Furniture and fixtures ............................ 191,576 318,973
Software .......................................... 167,519 370,487
--------- ------------
Property and equipment, at cost ................... 1,061,874 4,387,401
Accumulated depreciation and amortization ......... (379,860) (1,763,772)
--------- ------------
Property and equipment, net ....................... $682,014 $ 2,623,629
========= ============
</TABLE>
NOTE 4. INTANGIBLE ASSETS
The patents and goodwill recorded as of December 31, 1998 relate to
technology held by SDL. These amounts will be fully amortized in the first half
of 2000. During 1999, the Company incurred approximately $400,000 in costs for
the successful defense of the patent on its primary technology and product.
These costs have been capitalized and included in patents. These costs will be
amortized over three years, the expected future life of the patent.
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.
F-12
<PAGE>
SMARTDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 4. INTANGIBLE ASSETS--(CONTINUED)
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.
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1999
------------ --------------
<S> <C> <C>
Patents .......................... $ 998,334 $ 1,389,204
Goodwill ......................... 332,791 326,464
License .......................... -- 300,000
--------- ------------
Total intangibles ................ 1,331,125 2,015,668
Accumulated amortization ......... (590,147) (1,132,969)
--------- ------------
Intangible assets, net ........... $740,978 $ 882,699
========= ============
</TABLE>
NOTE 5. BANK LINE OF CREDIT
The Company's wholly owned Japanese branch has a line of credit with
maximum borrowing capacity of approximately $2.9 million (295 million Yen). The
facility, which has no fixed term, is collateralized by a time deposit and
accounts receivable. The branch maintains a time deposit with the bank that has
a balance at December 31, 1999 of $1,050,000. The Company may borrow up to 90%
of this amount. The credit agreement corresponding to the time deposit
collateral is renewable automatically on May 31, 2000. In addition, accounts
receivable of up to $2 million (200 million Yen) of specified trade customers
may be used as additional collateral. The credit agreement corresponding to the
accounts receivable collateral is renewable automatically on January 31, 2001.
The interest rate on borrowings under the line of credit is 1.38% per year. The
outstanding balance under the line of credit was approximately $0.9 million
(100 million Yen) as of December 31, 1998 and approximately $2 million (200
million Yen) at December 31, 1999.
The Japanese branch also discounts certain short-term promissory notes
received from trade customers with the bank. Bank borrowings collateralized by
promissory notes totaled approximately $1.4 million (160 million Yen) at
December 31, 1998 and approximately $2.9 million (302 million Yen) at December
31, 1999.
The Company maintains a line of credit under which it may borrow up to $5
million. Any amounts borrowed under this line of credit bear interest at 2%
over the 30-day LIBOR rate and would be collateralized by all assets of the
Company. This line of credit expires on December 15, 2000. The Company has not
borrowed against this line of credit and has no current plans to borrow any
amounts under this line of credit.
Interest paid during the years ended December 31, 1998 and 1999 amounted
to $5,017 and $53,842, respectively. The Company made no interest payments in
1997.
F-13
<PAGE>
SMARTDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 6. 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 also leases office space under an operating
lease that expires in September 2000. The Company's Japanese branch leases
office space under a two year operating lease that commenced in April 1998.
This lease has been renewed through 2002 on terms similar to the original lease
agreement. Total rent expense on operating leases for 1997, 1998 and 1999 was
$36,995, $261,399 and $443,645, respectively. Rent expense incurred related to
FISC for these same periods totaled $36,995, $135,290 and $58,578,
respectively.
The table below sets forth minimum payments for the years indicated under
operating leases with remaining terms in excess of one year, at December 31,
1999:
<TABLE>
<S> <C>
2000 ........... $440,141
2001 ........... 446,343
2002 ........... 83,896
</TABLE>
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.
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.
NOTE 7. EARNINGS (LOSS) PER SHARE DATA
Basic earnings (loss) per share is calculated by dividing net income
(loss) by the weighted average number of common shares outstanding during the
period. Diluted earnings per share is calculated by dividing net income by the
weighted average number of common shares outstanding for the period plus the
dilutive effect of the conversion of the outstanding redeemable common stock,
outstanding
F-14
<PAGE>
SMARTDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 7. EARNINGS (LOSS) PER SHARE DATA--(CONTINUED)
shares of non-vested stock and outstanding stock options using the "treasury
stock" method. For the year ended December 31, 1998, the redeemable common
stock, shares of non-vested stock and stock options were excluded from the
calculation of earnings (loss) per share because they were anti-dilutive. They
have been included in the computation of earnings per share for the year ended
December 31, 1999 due to their dilutive effect on earnings per share.
Earnings (loss) per share has been computed reflecting the retroactive
adjustment of outstanding shares related to the mergers of SDL and SDSC into
SmartDisk as well as the one for four reverse stock split that was effected in
August 1999.
The following table sets forth the computation of basic and diluted
earnings (loss) per share:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1997 1998 1999
---------------- ---------------- -------------
<S> <C> <C> <C>
Numerator:
Net income (loss) .................................. $ (3,963,974) $ (5,502,944) $ 958,294
============ ============ ==========
Denominator:
Weighted average shares outstanding ................ 7,738,909 8,040,169 10,724,608
Dilutive effect of conversion of redeemable
common stock ..................................... -- -- 1,901,404
Dilutive effect of stock options ................... -- -- 365,619
Dilutive effect of non-vested common stock ......... -- -- 357,745
------------ ------------ ----------
Diluted shares outstanding ......................... 7,738,909 8,040,169 13,349,376
============ ============ ==========
Basic earnings (loss) per share ..................... $ (0.51) $ (0.68) $ 0.09
Diluted earnings (loss) per share ................... $ (0.51) $ (0.68) $ 0.07
</TABLE>
Subsequent to December 31, 1999, the Company issued approximately
1,080,000 shares of common stock, of which approximately 1,067,000 related to
the acquisition of VST. The Company also granted approximately 934,000 options
to purchase shares of SmartDisk common stock and issued approximately 443,000
options to acquire shares of SmartDisk Corporation common stock in exchange for
outstanding vested options to acquire shares of VST common stock.
NOTE 8. STOCKHOLDERS' EQUITY (DEFICIT)
In connection with an agreement that was finalized in May 1998, Toshiba
Corporation 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 January and July 1999, SmartDisk sold a total of 650,000 shares of its
common stock in private transactions for gross proceeds of $4.30 million.
In August 1999, the Company completed a reverse stock split of one for
four. The consolidated financial statements and footnotes have been
retroactively restated to reflect the reverse stock split in the prior periods,
including all references in the financial statements to number of shares and
per share amounts.
F-15
<PAGE>
SMARTDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 8. STOCKHOLDERS' EQUITY (DEFICIT)--(CONTINUED)
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.
On October 6, 1999, the Company completed its initial public offering
(IPO). The Company realized net proceeds of approximately $39.14 million from
the sale of 3,450,000 shares of common stock (including 450,000 shares issued
upon the exercise of the underwriters' over allotment option) at an initial
public offering price of $13.00 per share after deducting underwriting
discounts and commissions of approximately $3.14 million and offering expenses
of approximately $2.57 million. Upon the successful completion of the Company's
IPO, each of the 2,487,500 outstanding shares of redeemable common stock were
converted into one share of common stock.
NOTE 9. STOCK BASED COMPENSATION
STOCK OPTION PLANS
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS No. 123 requires use
of option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's stock
options equals the market price of the underlying stock on the date of grant,
no compensation expense was recognized during 1998 and 1999.
The Company's 1998 Employee Stock Option Plan 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. Options granted under the plan are fully vested after four years and all
options granted have a ten-year contractual life. This plan was terminated in
July 1999.
The Company's 1998 Directors and Consultants Stock Option Plan 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. Options granted under the plan are fully vested after four years and all
options granted have a ten-year contractual life. This plan was terminated in
July 1999.
The Company has reserved 965,750 shares of common stock for outstanding
options issued under the aforementioned stock option plans.
During 1998 and 1999, the Company granted 880,613 stock options to
employees and directors of SmartDisk with exercise prices ranging from $0.72 to
$8.00, which options were immediately exercisable for cash or in part by cash
(minimum par value for the shares purchased) and the balance by a five-year
full recourse promissory note. Such notes would be secured by the shares
purchased (to be held in escrow with no transfer rights pending full payment)
with interest based on the coupon rate yield of a 52-week U.S. Treasury bill
immediately preceding the execution and issuance of the
F-16
<PAGE>
SMARTDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 9. STOCK BASED COMPENSATION--(CONTINUED)
promissory note, with voting rights for the underlying shares remaining with
the shareholder until default, if any, on the note. Of the 880,613 immediately
exercisable options granted, 743,363 options have been exercised and 67,250
have been cancelled as of December 31, 1999. Of the 743,363 shares of common
stock issued upon exercise, 357,745 remain nonvested and 80,977 have been
repurchased and are shown as treasury stock, at cost, in the equity section of
the balance sheet as of December 31, 1999. The nonvested shares of common stock
will vest in accordance with the provisions of the original option award.
In July 1999, the Company established the 1999 Incentive Compensation Plan
(the 1999 Plan) and reserved 2,500,000 shares of common stock for issuance
thereunder. 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.
As of December 31, 1999, 171,000 options have been granted under the 1999 Plan.
No other form of Award has been granted under the 1999 Plan.
During the year ended December 31, 1999, compensation expense of $76,500
was recognized relating to the accelerated vesting of 21,000 options,
exercisable at $0.72 per share.
A summary of the Company's stock option activity, and related information
for the years ended December 31, follows:
<TABLE>
<CAPTION>
WEIGHTED NUMBER OF WEIGHTED
NUMBER OF AVERAGE OPTIONS AVERAGE
OPTIONS EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------- ---------------- ------------- ---------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1997 ......... -- $ -- -- $ --
Granted with exercise prices equal to
fair market value ..................... 1,041,613 1.29
Granted with exercise prices less than
fair market value ..................... 25,000 4.00
Exercised ............................... (699,863) 0.73
Canceled ................................ (750) 0.72
---------
Outstanding at December 31, 1998 ......... 366,000 2.54 2,250 0.72
Options granted with exercise prices
equal to fair market value ............ 1,024,500 7.77
Exercised ............................... (47,875) 3.67
Canceled ................................ (205,875) 2.66
---------
Outstanding at December 31, 1999 ......... 1,136,750 $ 7.19 44,794 $ 2.73
=========
</TABLE>
F-17
<PAGE>
SMARTDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 9. STOCK BASED COMPENSATION--(CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
--------------------------------------------------- -------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER OF REMAINING AVERAGE OPTIONS AVERAGE
EXERCISE PRICES OPTIONS CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ------------------- ----------- ------------------ ---------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
$0.72-$1.00 58,750 8.1 years $ 0.76 24,689 $0.75
$4.00-$4.80 321,125 9.0 years 4.66 16,385 4.28
$8.00-$13.00 740,375 9.4 years 8.24 3,720 9.00
$30.50-$36.50 16,500 9.9 years 32.00 -- --
------- ------
$0.72-$36.50 1,136,750 9.3 years $ 7.19 44,794 $2.73
========= ======
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
In July 1999, the Company established the 1999 Employee Stock Purchase
Plan, for which 465,000 shares of the Company's common stock have been
reserved. 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. Employees are eligible to participate if they are employed by the Company
for at least 20 hours per week and more than five (5) months in a calendar
year. Entry dates into the plan are the first day of each calendar quarter.
Each participant is granted an option to purchase the Company's common stock on
June 30 and December 31 (the "Purchase Date") of each Offering Period, up to a
maximum of 1,000 shares, through payroll deductions, which may not exceed 15%
of an employee's total compensation. The initial Offering Period commenced on
October 5, 1999 and will end on the last business day of December 2000. 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 of the Offering Period or the
Purchase Date. 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 the
Company. Employee contributions are limited to $21,250 per year. Approximately
90 percent of eligible employees participated in the Plan in 1999. Under the
Plan, the Company sold 15,411 shares of common stock to employees on December
31, 1999.
PRO FORMA INFORMATION FOR STOCK-BASED COMPENSATION
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options and employee stock purchase plan under
the fair value method of that Statement. For the fair value disclosure below,
compensation value is estimated for each option grant using a Black-Scholes
option-pricing model. The following weighted average assumptions were used for
option grants in fiscal 1998 and 1999: risk-free interest rate of 5.25% in 1998
and 5.75% in 1999; expected dividend yield of 0% for 1998 and 1999; volatility
factor of the expected market price of the Company's common stock of zero for
the period in 1999 prior to the Company's IPO and for all of 1998 and 0.80 for
the period in 1999 following the Company's IPO; and an expected life of the
options of 3 years for 1998 and 1999.
F-18
<PAGE>
SMARTDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 9. STOCK BASED COMPENSATION--(CONTINUED)
Shares issued through the 1999 Employee Stock Purchase Plan during 1999 were
valued with a minimum value pricing model using the following assumptions:
risk-free interest rate of 5.75%, expected dividend yield of 0% and a life of
three months.
The weighted average grant date fair value of options granted during the
years ended December 31, 1998 and 1999 with exercise prices equal to market
value was $0.84 and $5.11, respectively. There were no options granted during
the year ended December 31, 1999 with exercise prices less than market value.
The weighted average grant date fair value of options granted during the year
ended December 31, 1998 with exercise prices less than market value was $3.40.
The weighted average grant date fair value of the shares issued through the
1999 Employee Stock Purchase Plan for the year ended December 31, 1999 was
$2.11.
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 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 than 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's stock options.
For purposes of pro forma disclosures, the estimated fair value of options
is amortized to expense over the options' vesting period. The Company's pro
forma information for options issued is as follows:
<TABLE>
<CAPTION>
1998 1999
---------------- ------------
<S> <C> <C>
Net income (loss):
As reported ....................... $ (5,502,944) $ 958,294
Pro forma ......................... $ (5,620,529) $ 754,101
Basic net income (loss) per share:
As reported ....................... $ (0.68) $ 0.09
Pro forma ......................... $ (0.70) $ 0.07
Diluted net income (loss) per share:
As reported ....................... $ (0.68) $ 0.07
Pro forma ......................... $ (0.70) $ 0.06
</TABLE>
The effects of applying SFAS No. 123 on pro forma disclosures of net income
and earnings per share for fiscal 1998 and 1999 are not likely to be
representative of the pro forma effects on net income and earnings per share in
future years because the number of shares to be issued under these plans is not
known and the assumptions used to determine the fair value can vary
significantly.
F-19
<PAGE>
SMARTDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 10. 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's matching contributions are
earned by the employee based on a straight line, five year vesting schedule.
The Company may make additional annual contributions to the plan at the
discretion of the Board of Directors. For the years ended December 31, 1998 and
1999, the Company made matching contributions of $10,747 and $30,596,
respectively.
NOTE 11. INCOME TAXES
The United States and foreign components of income (loss) from continuing
operations before income taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1997 1998 1999
----------------- ---------------- ------------
<S> <C> <C> <C>
United States ......... $ (3,462,924) $ (4,584,045) $ 552,953
Foreign ............... (545,648) (1,021,215) 1,772,185
------------- ------------ ----------
Total ................ $ (4,008,572) $ (5,605,260) $2,325,138
============= ============ ==========
</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 components of
the income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1997 1998 1999
------------- ------------- --------------
<S> <C> <C> <C>
Current:
United States ............................ $ 0 $ 0 $ 60,000
Foreign .................................. 0 0 1,695,718
--------- ---------- ----------
Total Current Expense (Benefit) .......... $ 0 $ 0 $1,755,718
Deferred:
United States ............................ $ 0 $ (25,000) $ (50,000)
Foreign .................................. $ (44,498) (77,316) (338,874)
--------- ---------- ----------
Total Deferred Expense (Benefit) ......... $ (44,498) $ (102,316) $ (388,874)
--------- ---------- ----------
Income Tax Provision (Benefit) ............ $ (44,598) $ (102,316) $1,366,844
========= ========== ==========
</TABLE>
F-20
<PAGE>
SMARTDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 11. INCOME TAXES--(CONTINUED)
The significant components of the Company's deferred income taxes are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1999
-------------- --------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards ...................... $ 2,615,236 $ 1,238,163
Depreciation and amortization ......................... 18,377 104,640
Accrued expenses ...................................... 9,225 134,052
Bad debt & inventory reserves ......................... -- 85,211
Foreign tax & alternative minimum tax credits ......... -- 1,759,548
Other ................................................. -- 347,057
------------ ------------
Deferred tax assets ................................... 2,642,838 3,668,671
Less: valuation allowance ............................ (2,642,838) (3,417,277)
------------ ------------
Net deferred tax assets ................................ -- 251,395
Deferred tax liabilities ...............................
Acquired intangibles .................................. (184,658) (56,453)
------------ ------------
Total net deferred taxes ............................... $ (184,658) $ 194,942
============ ============
</TABLE>
The reconciliation of the U.S. federal statutory income tax rate to the
effective income tax rate is:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1998 1999
------------ ------------ ----------
<S> <C> <C> <C>
Federal income tax benefit .......................... (34.00)% (34.00)% 34.00%
State taxes, net of federal benefit ................. (3.63) (3.63) 3.57
Foreign tax rate differential ....................... 0.63 (0.13) (0.33)
Non-deductible items ................................ -- 1.38 0.56
Goodwill ............................................ 0.37 0.13 1.83
Recognition of net deferred tax assets from change in
SDSC status ........................................ -- (0.17) --
S corporation loss reported by stockholders ......... 32.51 -- --
Change in valuation allowance ....................... 3.02 34.01 19.48
Other ............................................... -- 0.61 (0.32)
------ ------ -----
Total .............................................. (1.10)% (1.80)% 58.79%
====== ====== =====
</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,
F-21
<PAGE>
SMARTDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 11. INCOME TAXES--(CONTINUED)
management has determined that a valuation allowance of approximately $770,000,
$2,643,000 and $3,417,000 at December 31, 1997, 1998 and 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 $774,000 for December 31, 1997, 1998 and
1999, respectively.
At December 31, 1998 and 1999, the Company had United States and foreign
net operating loss carryforwards for tax purposes as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1999
------------------------------- -----------------------------
JURISDICTION AMOUNT EXPIRATION AMOUNT EXPIRATION
- --------------------------- ------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
United States .......... $4,932,000 2018 $1,532,000 2018
United Kingdom ......... 2,343,000 Unlimited 2,005,000 Unlimited
Japan .................. 377,000 2003 -- N/A
</TABLE>
At December 31, 1999, the Company had United States tax credit
carryforwards as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------
TAX CREDIT AMOUNT EXPIRATION
- ------------------------------------------- ------------- -------------
<S> <C> <C>
Foreign tax credit ..................... $1,699,548 2004
Alternative minimum tax credit ......... $ 60,000 Unlimited
</TABLE>
The Company made income tax payments of $145,330 during 1999. No income
tax payments were made in 1998 and 1997.
NOTE 12. 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 DECEMBER 31,
------------------------
1997 1998 1999
------ ------ -----
<S> <C> <C> <C>
Foreign markets:
Asian and Pacific Rim ......... --% 84% 81%
United States ................. 82 10 15
Europe ........................ 18 6 4
</TABLE>
F-22
<PAGE>
SMARTDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 12. SEGMENT INFORMATION--(CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1997 1998 1999
-------- ------ -----
<S> <C> <C> <C>
Significant Customers:
FujiFilm ............ --% 38% 28%
Olympus ............. -- 32 27
FISC ................ 100 14 9
Sony ................ -- -- 10
</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,
-----------------------------
1998 1999
------------- -------------
<S> <C> <C>
Asian and Pacific Rim ......... $1,830,076 $4,359,808
Europe ........................ (46,025) 198,115
</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,
---------------------------
1998 1999
----------- -------------
<S> <C> <C>
Asian and Pacific Rim ......... $281,347 $1,680,321
Europe ........................ 750,821 191,637
</TABLE>
NOTE 13. 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 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 allocation 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 1997 and operating expenses totaling approximately $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
1997, expenses would have approximated the amount reported.
F-23
<PAGE>
SMARTDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 13. RELATED PARTY TRANSACTIONS--(CONTINUED)
As a direct result of this operating arrangement between FISC and
SmartDisk, the Company's stockholder loan from Fischer was increased by
$3,158,817 in 1997 representing funding of SmartDisk operations by Fischer
through FISC. Stockholder loan amounts totaling $654,661 in 1997 were
contributed to capital. In addition, stockholder loan amounts totaling $648,147
at December 31, 1998, 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 bearing amounts advanced to fund the
Company's operations. These amounts were repaid in 1998.
In 1998, 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 and
$25,555 in 1998 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 1999, approximately 34% and 18%, respectively, of the Company's sales were
to related parties. During 1998 and 1999, purchases of products and services of
approximately $14.0 million and $37.5 million, respectively, were made from
related parties.
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 certain 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 years ended December 31, 1998 and 1999 of approximately $1,500,000 and
$300,000, 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 full amount was outstanding as of December 31, 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 several of its employees to
allow for the immediate exercise of stock option grants. Each loan was made
pursuant to a full
F-24
<PAGE>
SMARTDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 13. RELATED PARTY TRANSACTIONS--(CONTINUED)
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. As of December 31, 1999, the principal amount due under these
loans was $387,454.
NOTE 14. RESEARCH AND DEVELOPMENT CONTRACT REVENUES
During 1999, SmartDisk entered into and completed various research and
development contracts with a customer. The contracts entitled the Company to
invoice and receive funds over the development period, some of which were
conditioned upon acceptance of certain deliverables. Through December 31, 1999,
SmartDisk invoiced approximately $2.6 million for development work. All of
these revenues were recognized as income in the fourth quarter of 1999 upon the
customer's final acceptance of the product. Approximately $1.6 million of
contract costs were charged to expense over the life of the development
periods, which ended in 1999. The Company's accounting for these research and
development revenues was based upon final customer acceptance of the product
being a condition of earning revenue under the contract.
SmartDisk also has an ongoing research and development contract, which was
entered into during the fourth quarter of 1999. This contract entitles
SmartDisk to invoice and receive funds over the development period, which is
through March 31, 2000, some of which are conditioned upon the customer's
acceptance of certain deliverables. Through December 31, 1999, SmartDisk has
not invoiced the customer for the development work under this contract and no
revenues were recognized as income. Approximately $500,000 of contract costs
related to this development contract has been charged to expense as of December
31, 1999. The Company's accounting has been based upon final customer
acceptance being a condition of earning revenue under the contract. Total
estimated costs to be incurred under this contract are approximately $1.0
million.
NOTE 15. SUBSEQUENT EVENTS
On February 23, 2000, the Company signed a letter of intent to acquire
substantially all of the intellectual property of a privately held company for
approximately $800,000 and the issuance of approximately 37,000 shares of
SmartDisk common stock. This company, which is based in California, is a
supplier of software for high-performance storage solutions. The transaction
will be accounted for under the purchase method of accounting and is expected
to close in the first half of 2000.
On March 6, 2000, the Company acquired VST Technologies ("VST") for
approximately $16.4 million in cash and the issuance of 1.1 million shares of
SmartDisk common stock valued at approximately $49 million. In addition, the
Company issued approximately 443,000 options, valued at approximately $19.8
million, to acquire shares of SmartDisk Corporation common stock with exercise
prices ranging from $0.90 to $4.45, in exchange for outstanding vested options
to acquire shares of VST common stock. VST, which is based in Massachusetts,
designs, develops, manufactures and markets high performance portable
peripherals for the computer industry. The transaction will be accounted for
under the purchase method of accounting.
F-25
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To VST Technologies, Inc.:
We have audited the accompanying balance sheets of VST Technologies, Inc.
(a Delaware corporation) as of December 31, 1999 and 1998 and the related
statements of operations, redeemable convertible preferred stock and
stockholders' deficit and cash flows for each of the three years in the period
ended December 31, 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of VST Technologies, Inc. as
of December 31, 1999 and 1998 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Boston, Massachusetts
February 29, 2000 (except for the matter
discussed in Note 1, as to which the date
is March 6, 2000)
F-26
<PAGE>
VST TECHNOLOGIES, INC.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
ASSETS --------------- ---------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents .............................................. $ 605,986 $ 796,834
Accounts receivable, net of reserves of approximately $2,385,000 in 1999
and $980,000 in 1998 ................................................. 4,426,241 11,178,440
Inventories ............................................................ 2,645,531 10,799,268
Prepaid expenses ....................................................... 112,102 165,566
Deferred tax asset (Note 4) ............................................ -- 1,485,000
------------ ------------
Total current assets ................................................. 7,789,860 24,425,108
------------ ------------
Property and Equipment, at cost: ........................................
Production equipment ................................................... 1,328,528 2,107,417
Computer equipment and software ........................................ 369,029 618,565
Furniture and fixtures ................................................. 293,155 412,408
Construction in progress ............................................... 9,900 61,538
------------ ------------
2,000,612 3,199,928
Less--Accumulated depreciation ......................................... 1,247,346 1,912,385
------------ ------------
753,266 1,287,543
------------ ------------
$ 8,543,126 $ 25,712,651
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit ......................................................... $ 1,500,000 $ 4,500,000
Current portion of capital lease obligation ............................ - 7,071
Accounts payable ....................................................... 3,452,386 9,121,474
Accrued payroll expenses ............................................... 362,419 698,801
Accrued other expenses ................................................. 463,967 918,443
Income taxes payable (Note 4) .......................................... -- 1,448,150
------------ ------------
Total current liabilities ............................................ 5,778,772 16,693,939
------------ ------------
Capital Lease Obligation, net of current portion ........................ -- 5,089
------------ ------------
Commitments (Note 9)
Redeemable Convertible Preferred Stock:
Series A redeemable convertible preferred stock, $0.01 par value-
Authorized--248,840 shares Issued and outstanding--214,949 shares,
recorded at redemption value ......................................... 3,721,169 3,995,570
Series B redeemable convertible preferred stock, $0.01 par value-
Authorized--243,440 shares Issued and outstanding--135,114 shares,
recorded at redemption value ......................................... 2,812,640 3,034,338
Series C redeemable convertible preferred stock, $0.01 par value-
Authorized--560,092 shares Issued and outstanding--553,744 shares,
recorded at redemption value ......................................... 4,495,295 4,943,828
Stockholders' Deficit:
Common stock, $0.01 par value- Authorized--2,813,708 shares
Issued and outstanding--101,037 shares ............................... 878 1,010
Additional paid-in capital ............................................. 725,496 744,187
Accumulated deficit .................................................... (8,991,124) (3,705,310)
------------ ------------
Total stockholders' deficit .......................................... (8,264,750) (2,960,113)
------------ ------------
$ 8,543,126 $ 25,712,651
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
VST TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
--------------- ---------------- --------------
<S> <C> <C> <C>
Revenues ....................................... $ 7,645,025 $24,605,867 $61,525,751
Cost of Revenues ............................... 6,182,709 19,189,060 45,773,589
----------- ----------- -----------
Gross margin ................................ 1,462,316 5,416,807 15,752,162
----------- ----------- -----------
Operating Expenses: ............................
Selling and marketing ......................... 2,172,582 2,789,188 3,764,981
Research and development ...................... 1,172,534 1,098,601 2,608,001
General and administrative .................... 1,421,604 2,182,687 2,901,823
----------- ----------- -----------
4,766,720 6,070,476 9,274,805
----------- ----------- -----------
Income (loss) from operations ............... (3,304,404) (653,669) 6,477,357
Interest Income ................................ 488 1,263 1,228
Interest Expense ............................... (305,405) (473,231) (261,185)
Other (Expense) Income, net .................... (42,737) 8,062 (5,060)
------------- ------------ -------------
Net income (loss) ........................... (3,652,058) (1,117,575) 6,212,340
Accretion of Dividends on Redeemable Convertible
Preferred Stock .............................. 279,308 487,951 926,526
------------- ------------ -----------
Net income (loss) attributable to
common stockholders ...................... $(3,931,366) $(1,605,526) $ 5,285,814
============= ============ ===========
Net Income (Loss) per Share: ...................
Basic ......................................... $ (44.78) $ (18.29) $ 57.58
============= ============ ===========
Diluted ....................................... $ (44.78) $ (18.29) $ 11.57
============= ============ ===========
Weighted Average Shares Outstanding: ...........
Basic ......................................... 87,799 87,799 91,803
============= ============ ===========
Diluted ....................................... 87,799 87,799 456,825
============= ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-28
<PAGE>
VST TECHNOLOGIES, INC.
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
SERIES A REDEEMABLE SERIES B REDEEMABLE SERIES C REDEEMABLE
------------------------ ------------------------ -----------------------
NUMBER OF REDEMPTION NUMBER OF REDEMPTION NUMER OF REDEMPTION
SHARES VALUE SHARES VALUE SHARES VALUE
----------- ------------ ----------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 137,734 $2,143,393 -- $ -- -- $ --
Conversion of convertible
subordinated debt and
accrued interest to
redeemable convertible
preferred stock ............. 76,246 1,068,384 109,264 2,093,466 -- --
Issuance of Series B
preferred stock, net of
issuance costs of $28,745 -- -- 25,642 471,274 -- --
Accretion of dividends on
redeemable convertible
preferred stock ............. -- 249,047 -- 30,261 -- --
Proceeds from issuance of
warrants .................... -- -- -- -- -- --
Net loss ..................... -- -- -- -- -- --
------- ---------- ------- ---------- -- ----------
Balance, December 31, 1997 .... 213,980 3,460,824 134,906 2,595,001 -- --
Conversion of convertible
subordinated debt and
accrued interest to
redeemable convertible
preferred stock ............. -- -- -- -- 292,633 2,620,329
Issuance of Series C
preferred stock, net of
issuance costs of $54,939 -- -- -- -- 261,111 1,864,999
Accretion of dividends and
original issuance
discount on redeemable
convertible preferred
stock ....................... -- 260,345 -- 217,639 -- 9,967
Net loss ..................... -- -- -- -- -- --
------- ---------- ------- ---------- ------- ----------
Balance, December 31, 1998 .... 213,980 3,721,169 134,906 2,812,640 553,744 4,495,295
Accretion of dividends on
redeemable convertible
preferred stock ............. -- 260,351 -- 217,642 -- 448,533
Exercise of stock options .... -- -- -- -- -- --
Exercise of warrants ......... 969 14,050 208 4,056 -- --
Net income ................... -- -- -- -- -- --
------- ---------- ------- ---------- ------- ----------
Balance, December 31, 1999 .... 214,949 $3,995,570 135,114 $3,034,338 553,744 $4,943,828
======= ========== ======= ========== ======= ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
----------------------- ADDITIONAL STOCKHOLDERS'
NUMBER OF $0.01 PAR PAID-IN ACCUMULATED EQUITY
SHARES VALUE CAPITAL DEFICIT (DEFICIT)
----------- ----------- ------------ ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 87,799 $ 878 $580,957 $ (3,399,293) $ (2,817,458)
Conversion of convertible
subordinated debt and
accrued interest to
redeemable convertible
preferred stock ............. -- -- -- -- --
Issuance of Series B
preferred stock, net of
issuance costs of $28,745 -- -- -- --
Accretion of dividends on
redeemable convertible
preferred stock ............. -- -- -- (279,308) (279,308)
Proceeds from issuance of
warrants .................... -- -- 144,539 -- 144,539
Net loss ..................... -- -- -- (3,652,058) (3,652,058)
------ ------ -------- ------------ ------------
Balance, December 31, 1997 .... 87,799 878 725,496 (7,330,659) (6,604,285)
Conversion of convertible
subordinated debt and
accrued interest to
redeemable convertible
preferred stock ............. -- -- -- -- --
Issuance of Series C
preferred stock, net of
issuance costs of $54,939 -- -- -- (54,939) (54,939)
Accretion of dividends and
original issuance
discount on redeemable
convertible preferred
stock ....................... -- -- -- (487,951) (487,951)
Net loss ..................... -- -- -- (1,117,575) (1,117,575)
------ ------ -------- ------------ ------------
Balance, December 31, 1998 .... 87,799 878 725,496 (8,991,124) (8,264,750)
Accretion of dividends on
redeemable convertible
preferred stock ............. -- -- -- (926,526) (926,526)
Exercise of stock options .... 10,444 104 18,440 -- 18,544
Exercise of warrants ......... 2,794 28 251 -- 279
Net income ................... -- -- -- 6,212,340 6,212,340
------ ------ -------- ------------ ------------
Balance, December 31, 1999 .... 101,037 $1,010 $744,187 $ (3,705,310) $ (2,960,113)
======= ====== ======== ============ ============
</TABLE>
The accompanying notes are an integral part of these
financial statements.
F-29
<PAGE>
VST TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
---------------- ---------------- ---------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) ............................................... $ (3,652,058) $ (1,117,575) $ 6,212,340
Adjustments to reconcile net income (loss) to net cash
used in operating activities-
Depreciation ................................................... 458,846 531,583 665,039
Deferred tax asset ............................................. -- -- (1,485,000)
Amortization of original issue discount ........................ 144,539 -- --
Conversion of accrued interest to redeemable
preferred stock .............................................. 220,218 63,729 --
Changes in assets and liabilities-
Accounts receivable ........................................... (664,010) (3,014,739) (6,752,199)
Inventories ................................................... (407,065) (366,931) (8,153,737)
Prepaid expenses .............................................. 18,141 (2,382) (53,464)
Accounts payable .............................................. 863,433 840,638 5,669,088
Accrued expenses .............................................. 376,224 314,771 790,858
Income taxes payable .......................................... -- -- 1,448,150
------------ ------------ ------------
Net cash used in operating activities ........................ (2,641,732) (2,750,906) (1,658,925)
------------ ------------ ------------
Cash Flows from Investing Activities:
Purchases of property and equipment ............................. (631,083) (604,554) (1,175,696)
Decrease in other assets ........................................ 1,970 5,828 --
------------ ------------ ------------
Net cash used in investing activities ........................ (629,113) (598,726) (1,175,696)
------------ ------------ ------------
Cash Flows from Financing Activities:
Net borrowings under line of credit ............................. 680,560 544,440 3,000,000
Proceeds from issuance of convertible subordinated debt ......... 1,390,461 1,956,600 --
Repayments on capital lease obligation .......................... 500,000 -- (11,460)
Principal repayments on note payable ............................ (16,544) (483,456) --
Net proceeds from the sale of redeemable convertible
preferred stock ............................................... 471,274 1,810,060 --
Proceeds from exercise of stock options ......................... -- -- 18,544
Proceeds from exercise of warrants .............................. -- -- 18,385
Proceeds from issuance of warrants .............................. 144,539 -- --
------------ ------------ ------------
Net cash provided by financing activities .................... 3,170,290 3,827,644 3,025,469
------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents ............. (100,555) 478,012 190,848
Cash and Cash Equivalents, beginning of year ..................... 228,529 127,974 605,986
------------ ------------ ------------
Cash and Cash Equivalents, end of year ........................... $ 127,974 $ 605,986 $ 796,834
============ ============ ============
Supplemental Disclosure of Noncash Financing Transactions:
Accretion of dividends on redeemable convertible
preferred stock ............................................... $ 279,308 $ 487,951 $ 926,526
============ ============ ============
Conversion of convertible subordinated debt and accrued
interest into redeemable convertible preferred stock .......... $ 3,161,850 $ 2,620,329 $ --
============ ============ ============
Equipment acquired under capital lease obligation ............... $ -- $ -- $ 23,620
============ ============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest .......................... $ 57,272 $ 331,019 $ 236,845
============ ============ ============
Cash paid during the year for taxes ............................. $ 2,400 $ 2,400 $ 36,850
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
VST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
VST Technologies, Inc. (the Company) was incorporated in Delaware to
develop, manufacture, distribute, market, sell and service peripheral computer
products for portable and desktop personal computers.
The Company is subject to the risks associated with emerging,
technology-oriented companies. Primary among these risks are competition from
substitute products and the need to successfully develop and market its current
and future products and, if it becomes necessary, to obtain additional
financing to fund operations. Management believes that the Company's current
cash position along with the availability under its line of credit and current
operating plan will be sufficient to fund operations for the next fiscal year.
On March 6, 2000, the Company was acquired by SmartDisk Corporation
(SmartDisk), a publicly held Company, for approximately $16.4 million in cash,
approximately 1.1 million shares of SmartDisk common stock and options to
acquire approximately 443,000 shares of SmartDisk common stock.
The accompanying financial statements reflect the application of the
accounting policies described below.
(A) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
remaining maturity of three months or less to be cash equivalents. At December
31, 1998 and 1999, the Company's cash equivalents consist entirely of money
market funds.
(B) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market and consist of the following at December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
------------- -------------
<S> <C> <C>
Raw materials ............................... $1,344,782 $ 5,033,684
Work-in-process and finished goods .......... 1,300,749 5,765,584
---------- -----------
$2,645,531 $10,799,268
========== ===========
</TABLE>
(C) DEPRECIATION
The Company provides for depreciation by charges to operations using the
straight-line method based on the estimated useful lives of the related assets,
as follows:
<TABLE>
<CAPTION>
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE
- --------------------------------------------- ----------------------
<S> <C>
Production equipment ..................... 18 months
Computer equipment and software .......... 3-5 years
Furniture and fixtures ................... 5 years
</TABLE>
In accordance with Statement of Financial Accounting Standards (SFAS) No.
121, ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS
TO BE DISPOSED OF, the Company
F-31
<PAGE>
VST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
reviews its long-lived assets (which consist primarily of property and
equipment) for impairment as events and circumstances indicate the carrying
amount of an asset may not be recoverable. The Company evaluates the
realizability of its long-lived assets based on profitability and cash flow
expectations for the related asset. Management believes that, as of each of the
balance sheet dates presented, none of the Company's long-lived assets were
impaired.
(D) REVENUE RECOGNITION
The Company recognizes revenue upon product shipment, at which time
ownership of the product is transferred. In addition, the Company also reserves
for anticipated product returns and customer allowances at that time.
(E) RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred.
(F) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(G) FINANCIAL INSTRUMENTS
The estimated fair market value of the Company's financial instruments,
which include cash and cash equivalents, accounts receivable and accounts
payable, approximates the carrying values of those instruments.
(H) CONCENTRATIONS OF CREDIT RISK
SFAS No. 105, DISCLOSURE ABOUT FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT
RISK, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. Financial instruments that subject the Company to significant
concentrations of credit risk primarily consist of cash and cash equivalents
and accounts receivable. The Company maintains its cash and cash equivalents
balances with well capitalized financial institutions. To control accounts
receivable credit risk, the Company performs credit evaluations of its
customers and maintains allowances for potential credit losses. The Company has
not experienced any significant loss on any particular customer during 1998 or
1999.
(I) COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes net income (loss), as well as other
changes in stockholders' equity (deficit) except stockholder investments and
distributions. The Company's comprehensive income (loss) is equal to net income
(loss) for all periods presented.
F-32
<PAGE>
VST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(J) STOCK-BASED COMPENSATION
The Company records stock-based compensation issued to employees using the
intrinsic value method, and stock-based compensation issued to nonemployees
using the fair value method. Stock-based compensation is recognized on options
issued to employees if the option exercise price is less than the market price
of the underlying stock on the date of grant.
(K) NET INCOME (LOSS) PER SHARE
The Company computes net income (loss) per share in accordance with the
provisions of SFAS No. 128, EARNINGS PER SHARE. Under the provisions of SFAS
No. 128, net income (loss) per share is measured at two levels: basic net
income (loss) per share and diluted net income (loss) per share. Basic net
income (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding during the period. Diluted
net income (loss) per is computed by dividing net income (loss) by the weighted
average number of dilutive common shares, options and warrants outstanding
during the period. Diluted weighted average shares reflects the dilutive
effect, if any, of common stock options and warrants based on the treasury
stock method. No common stock equivalents are considered dilutive in periods in
which a loss is reported because all such common equivalent shares are
antidilutive. The number of common stock equivalents that were excluded from
the calculation, as their effect would have been antidilutive, was 175,300,
208,764 and 86,446 in 1997, 1998 and 1999, respectively.
The calculations of basic and diluted weighted average shares outstanding
are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- ---------
<S> <C> <C> <C>
Basic weighted average shares outstanding ............ 87,799 87,799 91,803
Dilutive options and warrants ........................ -- -- 365,022
------ ------ -------
Diluted weighted average shares outstanding .......... 87,799 87,799 456,825
====== ====== =======
</TABLE>
(L) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES. SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS No. 133, as amended by SFAS No. 137, will be effective
for the Company's financial reporting beginning in the first quarter of 2001.
SFAS No. 133 will require the Company to recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The accounting for gains and losses from changes in
the fair value of a particular derivative will depend on the intended use of
the derivative. The Company does not expect the adoption of SFAS No. 133 to
have a material impact on the results of its operations or financial position.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101
"Revenue Recognition." This bulletin, as amended, established guidelines for
revenue recognition and is effective for periods beginning after March 15,
2000. The Company does not expect that the adoption of the guidelines required
by SAB 101 will have a material impact on the financial statements.
F-33
<PAGE>
VST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
(2) LINE OF CREDIT
During 1999, the Company entered into a new line of credit agreement (the
line) with a bank under which the Company may borrow up to $5,000,000 based
upon a borrowing base of 80% of eligible accounts receivable, as defined. The
line expires on June 30, 2000. Borrowings under the line are collateralized by
substantially all of the Company's assets and bear interest at the bank's prime
rate (8.50% at December 31, 1999) plus an incremental rate based on financial
performance. This incremental rate was 0.50% at December 31, 1999. The
agreement requires compliance with several financial covenants, with which the
Company was in compliance at December 31, 1999. As of December 31, 1999, there
was $4,500,000 outstanding under the line.
During 1999, the Company issued a warrant to a bank for the purchase of
6,348 shares of Series C redeemable convertible preferred stock (the Series C
preferred stock) (see Note 5(a)) at an exercise price of $8.10 per share. No
value has been ascribed to these warrants, as they have an immaterial effect on
the financial statements.
(3) CONVERTIBLE SUBORDINATED DEBT
The Company issued convertible demand notes payable (the 1997 notes) in
the amount of $1,535,000 during 1997. At December 31, 1997, $600,000 of these
notes were outstanding. In 1998, the Company issued an additional $2,556,600 of
such notes (the 1998 notes). In conjunction with the issuance of the 1998
notes, the outstanding 1997 notes were canceled and reissued as part of the
1998 notes. The 1998 notes were unsecured and bore interest at 12% per annum.
In connection with the issuance of the 1997 notes, the Company issued an
aggregate of 15,745 warrants, to which the Company allocated $144,539 of the
gross proceeds. The resulting original issuance discount was fully amortized in
1997.
In conjunction with the sale of the Series C preferred stock (see Note
5(a)), all principal plus accrued interest on the 1998 notes was converted into
292,633 shares of Series C preferred stock and the Company issued warrants to
purchase common stock at an exercise price of $0.10 (see Note 6(b)).
(4) INCOME TAXES
The Company provides for income taxes under the liability method in
accordance with SFAS No. 109, ACCOUNTING FOR INCOME TAXES. Under the provisions
of SFAS No. 109, the Company recognizes a current tax liability or asset for
current taxes payable or refundable and a deferred tax liability or asset for
the estimated future effects of temporary differences between the carrying
value of assets and liabilities for financial reporting and tax reporting
purposes to the extent that they are realizable.
F-34
<PAGE>
VST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
(4) INCOME TAXES--(CONTINUED)
The Components of the deferred tax assets are as follows:
<TABLE>
<CAPTION>
1998 1999
--------------- --------------
<S> <C> <C>
Net operating loss carryforwards ............ $ 1,792,000 $ --
Allowance for bad debts ..................... 121,000 193,000
Accrued liabilities ......................... 361,000 1,041,000
Reserve for inventory obsolescence .......... 413,000 383,000
Reserve for stock rotation rights ........... -- (332,000)
Depreciation ................................ 144,000 200,000
------------ ----------
Total net deferred tax assets ............. 2,831,000 1,485,000
Valuation allowance ......................... (2,831,000) --
------------ ----------
$ -- $1,485,000
============ ==========
</TABLE>
During 1999, the Company recorded a deferred tax asset of $1,485,000 in
the accompanying balance sheet, as it was determined that it was more likely
than not that the Company would be able to realize this asset.
At December 31, 1998, the Company recorded a full valuation allowance
against its deferred tax asset due to the uncertainty surrounding the timing of
the realization of these tax benefits. Realization of these tax benefits were
dependent on generating sufficient taxable income.
The reconciliation between the statutory federal income tax rate and the
Company's effective tax rate is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Federal statutory rate ......................... (34)% (34)% 34%
State tax, net of federal tax benefit .......... (6) (6) 6
Change in valuation allowance .................. 40 40 (40)
--- --- ----
0 % 0 % 0 %
==== ==== ======
</TABLE>
(5) REDEEMABLE CONVERTIBLE PREFERRED STOCK
During 1995, the Company issued 137,734 shares of Series A redeemable
convertible preferred stock (Series A preferred stock), $0.01 par value, at an
issuance price of $14.50 per share for net proceeds of approximately
$1,900,000. In 1997, the Company issued 76,246 and 109,264 shares of Series A
preferred stock and Series B redeemable preferred stock (Series B preferred
stock), respectively, pursuant to the conversion of $3,161,850 of convertible
subordinated debt and accrued interest. On May 6, 1997, the Company sold 25,642
shares of Series B preferred stock for net proceeds of $471,000. On December
23, 1998, the Company issued 553,744 shares of Series C preferred stock for net
cash proceeds of $1,810,000 and the conversion of $2,620,329 of convertible
subordinated debt and accrued interest. The rights and privileges of the Series
A, Series B and Series C preferred stock are as follows:
F-35
<PAGE>
VST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
(5) REDEEMABLE CONVERTIBLE PREFERRED STOCK--(CONTINUED)
LIQUIDATION
In the event of liquidation, the Series A, Series B and Series C preferred
stockholders are entitled to $14.50, $19.50 and $8.10 per share plus accrued
and unpaid dividends (compounded at 8%, 8% and 10% of the original purchase
price), respectively, prior to any distribution to common stockholders. The
liquidation rights of the Series C preferred stockholders are senior to those
of both the Series A and Series B preferred stockholders.
VOTING
The preferred stockholders are entitled to voting rights equivalent to the
number of shares of common stock into which each preferred share can be
converted.
CONVERSION
Each class of preferred stock is convertible into common stock at a rate
of one share of common stock for each share of preferred stock, adjustable for
certain dilutive events. Each share of preferred stock will be automatically
converted into shares of common stock upon the closing of a public offering of
the Company's common stock, at a price per share of not less than $24.30 per
share (as adjusted for any stock dividend or stock distribution) and aggregate
gross proceeds of not less than $15,000,000.
RIGHT OF FIRST REFUSAL
The preferred stockholders have certain rights of first refusal that allow
them to participate ratably in any future issuance of stock to maintain their
original ownership percentage. This right terminates upon a public offering, as
defined.
DIVIDENDS
Cumulative dividends on preferred stock are paid out of available
earnings, as defined, if and when declared by the Board of Directors, at a rate
of 8%, 8% and 10% for Series A, Series B and Series C preferred stock,
respectively.
REDEMPTION
The Company may be required, upon an affirmative vote of the holders of at
least 50% of the then outstanding preferred shares, to redeem all of the
preferred stock in three equal installments, with the first installment on or
after December 1, 2003, and the second and third installments on the first and
second anniversary of such date, respectively. The redemption price of the
Series A, Series B and Series C preferred stock is $14.50, 19.50 and $8.10 per
share, respectively, plus an amount equal to an annual compounded rate of 8%,
8% and 10% of the original purchase price, respectively.
F-36
<PAGE>
VST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
(6) STOCKHOLDERS' DEFICIT
(A) COMMON STOCK
The Company has authorized 2,813,708 shares of $0.01 par value common
stock. The Company has reserved 1,827,537 shares of common stock for the
conversion of the preferred stock and the issuance upon exercise of common
stock warrants and stock options.
(B) WARRANTS
The following table summarizes preferred stock warrant activity for the
three-year period ended December 31, 1999:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE WEIGHTED
SHARES PER SHARE(#) AVERAGE PRICE(#)
----------- ---------------- -----------------
<S> <C> <C> <C>
Outstanding, December 31, 1996 ......... 31,712 $14.50-19.50 $16.12
Issued ................................ 23,437 19.50 19.50
------ ------------ ------
Outstanding, December 31, 1997 ......... 55,149 14.50-19.50 17.55
------ ------------ ------
Outstanding, December 31, 1998 ......... 55,149 14.50-19.50 17.55
Issued ................................ 6,348 8.10 8.10
------ ------------ ------
Exercised ............................. (1,177) 14.50-19.50 15.38
------ ------------ ------
Outstanding, December 31, 1999 ......... 60,320 $ 8.10-19.50 $16.75
====== ============ ======
Exercisable, December 31, 1999 ......... 60,320 $ 8.10-19.50 $16.75
====== ============ ======
</TABLE>
The warrants may be exercised at any time after issuance and expire at
various dates through 2007. The warrants are subject to certain antidilution
provisions that allow the holders of these warrants to participate in property
and security dividends issued by the Company to common stockholders and to
participate in any common stock dividends or splits.
In addition to the preferred stock warrants granted above, in 1997, the
Company granted warrants for the purchase of 1,026 shares of common stock at an
exercise price of $19.50 per share and in 1998, the Company granted warrants to
purchase 138,436 shares of common stock, an exercise price of $0.10 per share,
in connection with the conversion of the convertible subordinated debt
described in Note 3 and the issuance of the Series C preferred stock (Note 5).
The warrants may be exercised at anytime after issuance and expire at various
dates through 2008. No value has been ascribed to these warrants, as they have
an immaterial effect on the financial statements.
(C) STOCK OPTION PLAN
Under the 1995 Stock Option Plan as amended (the Plan), the Company may
grant options to purchase up to 536,994 shares of common stock to be granted to
Company directors, officers, employees and consultants. Incentive stock options
may be granted under the Plan at a price not less than 100% of the fair market
value on the date of grant and expire at a maximum of 10 years from the date of
grant. Nonqualified stock options expire on dates determined in each optionee's
agreement, but they may be subject to earlier termination, as provided in the
Plan. The Plan terminates on July 5, 2005.
F-37
<PAGE>
VST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
(6) STOCKHOLDERS' DEFICIT--(CONTINUED)
Information with respect to all stock option activity is as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE WEIGHTED AVERAGE
SHARES PER SHARE OPTIONS PRICE
----------- -------------- -----------------
<S> <C> <C> <C>
Outstanding, December 31, 1996 ......... 81,244 $1.45-1.60 $1.46
Granted ............................... 41,381 1.60-1.95 1.93
Expired ............................... (3,500) 1.45-1.95 1.58
------ ---------- -----
Outstanding, December 31, 1997 ......... 119,125 $1.45-1.95 $1.62
Granted ............................... 49,500 1.95 1.95
Canceled .............................. (15,010) 1.95 1.95
------- ---------- -----
Outstanding, December 31, 1998 ......... 153,615 1.45-1.95 1.69
Granted ............................... 358,464 .81-4.00 .96
Canceled .............................. (8,100) 1.45-2.43 2.34
Exercised ............................. (10,444) 1.45-1.95 1.78
------- ---------- -----
Outstanding, December 31, 1999 ......... 493,535 $ .81-4.00 $1.15
======= ========== =====
Exercisable, December 31, 1999 ......... 396,606 $ .81-1.95 $1.10
======= ========== =====
Exercisable, December 31, 1998 ......... 115,502 $1.45-1.95 $1.64
======= ========== =====
Exercisable, December 31, 1997 ......... 67,652 $1.45-1.95 $1.45
======= ========== =====
</TABLE>
The range of exercise prices for common stock options outstanding and
options exercisable at December 31, 1999 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------------- ------------- ------------- ------------ ------------- ---------
<S> <C> <C> <C> <C> <C>
$0.81 326,264 5.89 $ 0.81 259,443 $0.81
1.45 72,100 4.10 1.45 79,016 1.45
1.60 3,500 6.75 1.60 2,625 1.60
1.95 66,571 8.30 1.95 55,522 1.95
2.43 23,950 9.42 2.43 - 2.43
4.00 1,150 9.63 4.00 - 4.00
- ------------ ------- ---- --------- ------- -----
$.81-4.00 493,535 6.14 $.81-4.00 396,606 $1.10
============ ======= ==== ========= ======= =====
</TABLE>
The Financial Accounting Standards Board issued SFAS No. 123, ACCOUNTING
FOR STOCK-BASED COMPENSATION, which requires the measurement of the fair value
of stock-based compensation to be included in the statement of operations or
disclosed in the notes to the financial statements. The Company has determined
that it will continue to account for stock-based compensation for employees
under Accounting Principles Board Opinion No. 25 and elect the disclosure-only
alternative under
F-38
<PAGE>
VST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
(6) STOCKHOLDERS' DEFICIT--(CONTINUED)
SFAS No. 123 for stock-based compensation awarded in 1998 and 1999 using the
Black-Scholes option pricing model prescribed by SFAS No. 123. The underlying
assumptions used are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1997 1998 1999
--------- --------- --------------
<S> <C> <C> <C>
Risk-free interest rate ........... 6.22% 4.65% 5.10-6.15%
Expected dividend yield ........... -- -- --
Expected lives (in years) ......... 7 7 7
Expected volatility ............... 65% 65% 65%
</TABLE>
During the years ended December 31, 1997, 1998 and 1999, the weighted
average value of option grants was $0.33, $1.25 and $0.30 per share,
respectively. The weighted average remaining contractual life of options
outstanding at December 31, 1997, 1998 and 1999 was 7.40, 7.21 and 6.14 years,
respectively.
The pro forma effect of SFAS No. 123 for the years ended December 31,
1997, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---------------- ---------------- -------------
<S> <C> <C> <C>
Net income (loss) .................... $ (3,652,058) $ (1,117,575) $6,212,340
Pro forma net income (loss) .......... $ (3,654,389) $ (1,196,147) $6,033,058
Pro forma net income (loss) per share-
Basic ............................... $ (41.62) $ (13.62) $ 65.72
Diluted ............................. $ (41.62) $ (13.62) $ 13.21
</TABLE>
(7) SIGNIFICANT CUSTOMERS
Three customers accounted for approximately 50%, 53% and 57% during 1997,
1998 and 1999, respectively, of the Company's revenue. As of December 31, 1998
and 1999, one and two customers, respectively, represented approximately 51%
and 56%, respectively, of the Company's accounts receivable balance.
(8) SIGNIFICANT VENDORS
During 1998 and 1999, the Company relied on another company to supply a
key component for the manufacture of some of the Company's peripheral products.
During 1997, there were no significant vendors.
(9) COMMITMENTS
The Company conducts its operations in leased facilities under an
operating lease agreement. The lease expires in April 2001 and future minimum
lease payments under this agreement are $435,505 for 2000. The Company recorded
approximately $162,010, $210,271 and $222,415 of rent expense in 1997, 1998 and
1999, respectively.
F-39
<PAGE>
VST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
(10) SEGMENT AND GEOGRAPHIC INFORMATION
The Company had adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 requires certain financial and
supplementary information to be disclosed on an annual and interim basis for
each reportable segment of an enterprise. The Company has determined that it
only operates in one segment. Gross revenues by significant geographic region
are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------------------------ ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
North America ............. $6,763,436 78% $23,517,040 91% $58,354,476 92%
Europe .................... 326,780 4 2,097,522 8 3,664,183 6
Asia/Pacific Rim .......... 1,552,278 18 238,016 1 1,472,147 2
---------- -- ----------- -- ----------- --
$8,642,494 100% $25,852,578 100% $63,490,806 100%
========== === =========== === =========== ===
</TABLE>
(11) VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE,
BEGINNING OF CHARGED TO BALANCE,
ALLOWANCE FOR DOUBTFUL ACCOUNTS YEAR EXPENSE WRITE-OFFS END OF YEAR
- --------------------------------- -------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
December 31, 1999 ............ $299,968 $180,000 $ -- $479,968
December 31, 1998 ............ 75,000 267,277 (42,309) 299,968
December 31, 1997 ............ 54,315 64,927 (44,242) 75,000
</TABLE>
<TABLE>
<CAPTION>
BALANCE,
BEGINNING OF CHARGED TO BALANCE,
RESERVE FOR PRICE PROTECTION YEAR EXPENSE WRITE-OFFS END OF YEAR
- ------------------------------ -------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
December 31, 1999 ......... $280,000 $ 520,000 $ (394,869) $405,131
December 31, 1998 ......... 35,000 1,086,317 (841,317) 280,000
December 31, 1997 ......... -- 35,000 -- 35,000
</TABLE>
<TABLE>
<CAPTION>
BALANCE,
BEGINNING OF CHARGED TO BALANCE,
RESERVE FOR STOCK ROTATION YEAR EXPENSE WRITE-OFFS END OF YEAR
- ------------------------------ -------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
December 31, 1999 ......... $400,000 $1,100,000 $ -- $1,500,000
December 31, 1998 ......... 310,000 647,641 (557,641) 400,000
December 31, 1997 ......... 116,414 341,540 (147,954) 310,000
</TABLE>
(12) SUBSEQUENT EVENTS
On February 23, 2000, the Company signed an agreement to acquire
substantially all of the intellectual property of a privately held company and
supplier of software for high-performance storage solutions, for approximately
$400,000 in cash and 41,100 shares of the Company's common stock.
F-40
<PAGE>
[INSIDE BACK COVER]
[GRAPHIC OMITTED]
Simplifying The Digital Lifestyle/trademark/
<PAGE>
================================================================================
4,200,000 SHARES
[GRAPHIC OMITTED]
COMMON STOCK
-----------
PROSPECTUS
-----------
MERRILL LYNCH & CO.
CHASE H&Q
U.S. BANCORP PIPER JAFFRAY
APRIL , 2000
================================================================================
<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 and the selling
Stockholders in connection with the sale of common stock being registered. All
amounts are estimates except the SEC registration fee and the NASD filing fees.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee ......... $ 37,138
NASD filing fee ............................................. 14,568
Nasdaq National Market listing fee .......................... 17,500
Printing expenses ........................................... 125,000
Accounting fees and expenses ................................ 100,000
Legal fees and expenses ..................................... 150,000
Blue Sky fees and expenses .................................. 10,000
Transfer Agent's fees and expenses .......................... 5,000
Miscellaneous ............................................... 40,794
--------
TOTAL ...................................................... $500,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's board of Directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Our bylaws provides for mandatory
indemnification of our directors and officers and permissible indemnification
of employees and other agents to the maximum extent permitted by the Delaware
General Corporation Law. Our certificate of incorporation provides that,
pursuant to Delaware law, our directors shall not be liable for monetary
damages for breach of the directors' fiduciary duty as directors to us and our
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 us 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. In addition, we have entered into Indemnification Agreements with our
officers and directors, the form of which is attached as Exhibit 10.22 hereto
and incorporated herein by reference. The Indemnification Agreements provide
our officers and directors with further indemnification to the maximum extent
permitted by the Delaware General Corporation Law. Reference is made to Section
6(b) of the Purchase Agreement contained in Exhibit 1.1 hereto, indemnifying
our officers and directors against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On January 13, 1999, we sold 250,000 shares of common stock to Hitachi
Software Engineering Co., Ltd. for $1,100,000.
On April 1, 1999, we sold 50,000 shares of common stock to Toshiba
Corporation in exchange for a fully-paid license.
II-1
<PAGE>
On May 26, 1999, we sold 515,500 shares of common stock to the
stockholders of SmartDiskette Limited, an English corporation, in exchange for
all of the outstanding shares of capital stock of SmartDiskette Limited.
On June 30, 1999, we 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, we sold 312,500 shares of common stock to SCM
Microsystems, Inc. for $2,500,000. On that date, we also sold an aggregate of
87,500 shares of common stock to five investors, including two of our
directors, Messrs. Tomlinson and Bidzos, and First TZMM Investment Partnership
for $700,000, or $8.00 per share. First TZMM Investment Partnership is an
entity affiliated with Tomlinson Zisko Morosoli & Maser LLP. Mr. Tomlinson is a
partner of Tomlinson Zisko Morosoli & Maser LLP.
Between January 1, 1998 and March 31, 2000, we issued an aggregate of
753,738 shares of common stock to 20 persons, all of whom were our employees,
directors or consultants. Such shares were issued upon exercise of stock
options with exercise prices ranging from $0.72 to $35.00 per share.
On March 6, 2000, we sold approximately 1,070,000 shares of common stock
to the stockholders of VST Technologies, Inc. as partial consideration for the
exchange of all of the outstanding capital stock of VST.
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 us, to information about us.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
A. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------- -------------------------------------------------------------------------------
<S> <C>
1.1 Form of Purchase Agreement
2.1 Agreement and Plan of Merger among SmartDisk, VST Acquisition Corp., Inc., VST
Technologies, Inc. and certain stockholders of VST Technologies, Inc. (2.0)(2)
3.1 Certificate of Incorporation (3.1)(1)
3.2 Bylaws (3.2)(1)
5.1 Opinion of Greenberg Traurig, P.A.
10.1 1998 Employee Stock Option Plan (10.1)(1)
10.2 1998 Directors and Consultants Stock Option Plan (10.2)(1)
10.3 1999 Incentive Compensation Plan
10.4 1999 Employee Stock Purchase Plan (10.4)(1)
10.5 Employment Agreement with Michael S. Battaglia (10.5)(4)
10.6 Employment Agreement with Robert Protheroe (10.6)(1)
10.7 Employment Agreement with Quresh Sachee (10.7)(4)
10.8 Employment Agreement with Vincent Fedele
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------- -----------------------------------------------------------------------------------------
<S> <C>
10.9 Employment Agreement with James M. Giarrusso
10.10 License Agreement dated May 26, 1998 between Toshiba Corporation and SmartDisk, as
amended (10.8)(1)
10.11 Operating Agreement dated May 28, 1998 between Fischer International System Corporation
and SmartDisk, as amended (10.9)(1)
10.12 License and Distribution Agreement dated May 28, 1998 between SmartDisk and Fischer
International Systems Corporation (10.10)(1)
10.13 Distribution Agreement dated May 28, 1998 between Fischer International Systems
Corporation and SmartDisk (10.11)(1)
10.14 Investors' Rights Agreement dated May 22, 1998 among SmartDisk and each of the investors
a party thereto (10.12)(1)
10.15 Amendment Number One to Investors' Rights Agreement dated July 1999 among SmartDisk
and each of the investors a party thereto (10.13)(3)
10.16 Management Registration Rights Agreement dated March 6, 2000 among SmartDisk and
certain former stockholders of VST Technologies, Inc.
10.17 Non-Management Registration Rights Agreement dated March 6, 2000 among SmartDisk and
certain former stockholders of VST Technologies, Inc.
10.18 Lease Agreement dated October 4, 1993 between Arnold Industrial Park and SmartDisk, by
assignment (10.13)(1)
10.19 Development and License Agreement dated June 30, 1999 between SmartDisk and Sony
Corporation (10.14)(1)+
10.20 Development and License Agreement dated December 1, 1999 between SmartDisk and Sony
Corporation (10.16)(3)
10.21 Cooperative Development Agreement dated June 30, 1999 between SmartDisk and SanDisk
Corporation (10.15)(1)+
10.22 Form of Indemnification Agreement between the Registrant and each of its directors and
executive officers (10.16) (1)
10.23 Joint Venture Agreement dated as of February 24, 1998 by and among Phoenix House
Investments, L.L.C., Toshiba Corporation and SmartDisk Corporation (10.17)(1)
10.24 Amendment No. 2 to License Agreement dated April 1, 1999 between Toshiba Corporation
and SmartDisk (10.20)(4)
21.1 Subsidiaries of SmartDisk
23.1 Consent of Greenberg Traurig, P.A. (included in Exhibit 5.1)
23.2 Consent of Ernst & Young LLP
23.3 Consent of Arthur Andersen LLP
24.1 Power of Attorney (set forth on the signature page of this Registration Statement)
27.1 Financial Data Schedules (SEC use only)
</TABLE>
- ----------------
(1) Incorporated by reference to the exhibit in the preceding parentheses as
filed with SmartDisk's Registration Statement on Form S-1 (Registration
No. 333-82793).
(2) Incorporated by reference to the exhibit in the preceding parentheses as
filed with SmartDisk's Report on Form 8-K (Event of March 6, 1999).
(3) Incorporated by reference to the exhibit in the preceding parentheses as
filed with SmartDisk's Annual Report on Form 10-K for the year ended
December 31, 1999 (File No. 000-27257).
(4) Incorporated by reference to the exhibit in the preceding parentheses as
filed with Amendment No. 1 to SmartDisk's Annual Report on Form 10-K/A for
the year ended December 31, 1999 (File No. 000-27257).
+ Certain information in these exhibits has been omitted pursuant to a
request for confidential treatment filed with the SEC.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS
We hereby undertake 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 ours
pursuant to the Delaware General Corporation Law, our Certificate of
Incorporation or our Bylaws, the Underwriting Agreement, or otherwise, we have
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 us of expenses incurred or
paid by a director, officer, or controlling person of ours 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, we 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 us is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
We hereby undertake 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 us 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, SmartDisk has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Naples, State of
Florida, on this 20th day of April, 2000.
SMARTDISK CORPORATION
By: /s/ Michael S. Battaglia
-------------------------------------
Michael S. Battaglia
President and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Michael
S. Battaglia and Daniel E. Reed or any one of them, as his or her true and
lawful attorneys-in-fact and agents with full power of substitution and
resubstitution for him or her in his or her name, place and stead in any and
all capacities to execute in the name of each such person who is then an
officer or director of SmartDisk any and all amendments (including
post-effective amendments) to this Registration Statement, and any registration
statement relating to the offering hereunder pursuant to Rule 462 under the
Securities Act of 1933, as amended, and to file the same with all exhibits
thereto and other documents in connection therewith with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents and each
of them full power and authority to do and perform each and every act and thing
required or necessary to be done in and about the premises as fully as he or
she might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
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 April 20, 2000
Addison M. Fischer
/s/ Michael S. Battaglia
- ------------------------ President, Chief Executive Officer and April 20, 2000
Michael S. Battaglia Director (Principal Executive Officer)
/s/ Michael R. Mattingly
- ------------------------ Chief Financial Officer (Principal Financial April 20, 2000
Michael R. Mattingly and Accounting Officer)
/s/ D. James Bidzos
- ------------------------ Director April 20, 2000
D. James Bidzos
/s/ Anthony A. Ibarguen
- ------------------------ Director April 20, 2000
Anthony A. Ibarguen
/s/ Shigeki Morita
- ------------------------ Director April 20, 2000
Shigeki Morita
/s/ Timothy Tomlinson
- ------------------------ Director April 20, 2000
Timothy Tomlinson
- ------------------------ Director
Joseph M. Tucci
/s/ Hatim Tyabji
- ------------------------ Director April 20, 2000
Hatim Tyabji
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- -------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Purchase Agreement
5.1 Opinion of Greenberg Traurig, P.A.
10.3 1999 Incentive Compensation Plan
10.8 Employment Agreement with Vincent Fedele
10.9 Employment Agreement with James M. Giarrusso
10.16 Management Registration Rights Agreement dated March 6, 2000 among SmartDisk and
certain former stockholders of VST Technologies, Inc.
10.17 Non-Management Registration Rights Agreement dated March 6, 2000 among SmartDisk and
certain former stockholders of VST Technologies, Inc.
21.1 Subsidiaries of SmartDisk
23.1 Subsidiaries of SmartDisk
23.2 Consent of Ernst & Young LLP
23.3 Consent of Arthur Andersen LLP
</TABLE>
EXHIBIT 1.1
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WSGR Draft April 3, 2000
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SMARTDISK CORPORATION
(a Delaware corporation)
[number of shares] Shares of Common Stock
PURCHASE AGREEMENT
Dated: April __________, 2000
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TABLE OF CONTENTS
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PURCHASE AGREEMENT................................................................................................1
SECTION 1. Representations and Warranties.....................................................4
(a) REPRESENTATIONS AND WARRANTIES BY THE COMPANY......................................4
(i) COMPLIANCE WITH REGISTRATION REQUIREMENTS.................................4
(ii) INDEPENDENT ACCOUNTANTS...................................................5
(iii) FINANCIAL STATEMENTS......................................................5
(iv) NO MATERIAL ADVERSE CHANGE IN BUSINESS....................................6
(v) GOOD STANDING OF THE COMPANY..............................................6
(vi) GOOD STANDING OF SUBSIDIARIES.............................................6
(vii) CAPITALIZATION............................................................7
(viii) AUTHORIZATION OF AGREEMENT................................................7
(ix) AUTHORIZATION AND DESCRIPTION OF SECURITIES...............................7
(x) ABSENCE OF DEFAULTS AND CONFLICTS.........................................8
(xi) ABSENCE OF LABOR DISPUTE..................................................8
(xii) ABSENCE OF PROCEEDINGS....................................................9
(xiii) ACCURACY OF EXHIBITS......................................................9
(xiv) POSSESSION OF INTELLECTUAL PROPERTY.......................................9
(xv) ABSENCE OF FURTHER REQUIREMENTS...........................................9
(xvi) POSSESSION OF LICENSES AND PERMITS.......................................10
(xvii) TITLE TO PROPERTY........................................................10
(xviii) COMPLIANCE WITH CUBA ACT.................................................10
(xix) INVESTMENT COMPANY ACT...................................................11
(xx) ENVIRONMENTAL LAWS.......................................................11
(xxi) REGISTRATION RIGHTS......................................................11
(b) REPRESENTATIONS AND WARRANTIES BY THE SELLING STOCKHOLDERS........................12
(i) ACCURATE DISCLOSURE......................................................12
(ii) AUTHORIZATION OF AGREEMENTS..............................................12
(iii) GOOD AND MARKETABLE TITLE................................................12
(iv) DUE EXECUTION OF POWER OF ATTORNEY AND CUSTODY AGREEMENT.................13
(v) ABSENCE OF MANIPULATION..................................................13
(vi) ABSENCE OF FURTHER REQUIREMENTS..........................................13
(vii) RESTRICTION ON SALE OF SECURITIES........................................14
(viii) CERTIFICATES SUITABLE FOR TRANSFER.......................................14
(ix) NO ASSOCIATION WITH NASD.................................................14
(c) OFFICER'S CERTIFICATES............................................................15
SECTION 2. SALE AND DELIVERY TO UNDERWRITERS; CLOSING........................................15
(a) INITIAL SECURITIES................................................................15
(b) OPTION SECURITIES.................................................................15
(c) PAYMENT...........................................................................16
(d) DENOMINATIONS; REGISTRATION.......................................................17
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SECTION 3. COVENANTS OF THE COMPANY..........................................................18
(a) COMPLIANCE WITH SECURITIES REGULATIONS AND COMMISSION REQUESTS....................18
(b) FILING OF AMENDMENTS..............................................................18
(c) DELIVERY OF REGISTRATION STATEMENTS...............................................19
(d) DELIVERY OF PROSPECTUSES..........................................................19
(e) CONTINUED COMPLIANCE WITH SECURITIES LAWS.........................................19
(f) BLUE SKY QUALIFICATIONS...........................................................19
(g) RULE 158..........................................................................20
(h) USE OF PROCEEDS...................................................................20
(i) LISTING...........................................................................20
(j) RESTRICTION ON SALE OF SECURITIES.................................................20
(k) REPORTING REQUIREMENTS............................................................21
SECTION 4. PAYMENT OF EXPENSES...............................................................22
(a) EXPENSES..........................................................................22
(b) EXPENSES OF THE SELLING STOCKHOLDERS..............................................22
(c) TERMINATION OF AGREEMENT..........................................................23
(d) ALLOCATION OF EXPENSES............................................................23
SECTION 5. CONDITIONS OF UNDERWRITERS' OBLIGATIONS...........................................23
(a) EFFECTIVENESS OF REGISTRATION STATEMENT...........................................23
(b) OPINION OF COUNSEL FOR COMPANY....................................................23
(c) OPINION OF COUNSEL FOR THE SELLING STOCKHOLDERS...................................24
(d) OPINION OF COUNSEL FOR UNDERWRITERS...............................................24
(e) OFFICERS' CERTIFICATE.............................................................25
(f) CERTIFICATE OF SELLING STOCKHOLDERS...............................................25
(g) ACCOUNTANT'S COMFORT LETTER.......................................................25
(h) BRING-DOWN COMFORT LETTER.........................................................26
(i) APPROVAL OF LISTING...............................................................26
(j) NO OBJECTION......................................................................26
(k) LOCK-UP AGREEMENTS................................................................26
(l) CONDITIONS TO PURCHASE OF OPTION SECURITIES.......................................26
(m) ADDITIONAL DOCUMENTS..............................................................27
(n) TERMINATION OF AGREEMENT..........................................................27
SECTION 6. Indemnification...................................................................28
(a) INDEMNIFICATION OF UNDERWRITERS...................................................28
(b) INDEMNIFICATION OF COMPANY, DIRECTORS AND OFFICERS AND SELLING
STOCKHOLDERS......................................................................30
(c) ACTIONS AGAINST PARTIES; NOTIFICATION.............................................31
(d) SETTLEMENT WITHOUT CONSENT IF FAILURE TO REIMBURSE................................32
(e) OTHER AGREEMENTS WITH RESPECT TO INDEMNIFICATION..................................32
SECTION 7. CONTRIBUTION......................................................................32
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SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY....................34
SECTION 9. Termination of Agreement..........................................................34
(a) TERMINATION; GENERAL..............................................................34
(b) LIABILITIES.......................................................................35
SECTION 10. DEFAULT BY ONE OR MORE OF THE UNDERWRITERS........................................35
SECTION 11. DEFAULT BY ONE OR MORE OF THE SELLING STOCKHOLDERS OR THE COMPANY.................36
SECTION 12. NOTICES...........................................................................37
SECTION 13. PARTIES...........................................................................37
SECTION 14. GOVERNING LAW AND TIME............................................................38
SECTION 15. EFFECT OF HEADINGS................................................................38
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SMARTDISK CORPORATION
(a Delaware corporation)
[number of shares] Shares of Common Stock
(Par Value $.001 Per Share)
PURCHASE AGREEMENT
April __________, 2000
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
HAMBRECHT & QUIST LLC
U.S. BANCORP PIPER JAFFRAY INC.
as Representatives of the several Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
SmartDisk Corporation, a Delaware corporation (the "Company"), and the
persons listed in Schedule B hereto (the "Selling Stockholders"), confirm their
respective agreements with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch"), Hambrecht & Quist LLC, U.S. Bancorp Piper
Jaffray Inc. and each of the other Underwriters named in Schedule A hereto
(collectively, the "Underwriters", which term shall also include any underwriter
substituted as hereinafter provided in Section 10 hereof), for whom Merrill
Lynch, Hambrecht & Quist LLC and U.S. Bancorp Piper Jaffray Inc. are acting as
representatives (in such capacity, the "Representatives"), with respect to (i)
the sale by the Company and the Selling Stockholders, acting severally and not
jointly, and the purchase by the Underwriters, acting severally and not jointly,
of the respective numbers of shares of Common Stock, par value $0.001 per share,
of the Company ("Common Stock") set forth in Schedules A and B hereto and (ii)
the grant by the Company and the Selling Stockholders [CONFIRM THAT
OVER-ALLOTMENT SHARES WILL ALSO BE SUPPLIED BY SELLING STOCKHOLDERS] to the
Underwriters, acting severally and not jointly, of the option described in
Section 2(b) hereof to purchase all or any part of [over-allotment shares]
additional shares of Common Stock to cover over-allotments, if any. The
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aforesaid [number of shares] shares of Common Stock (the "Initial Securities")
to be purchased by the Underwriters and all or any part of the [over-allotment
shares] shares of Common Stock subject to the option described in Section 2(b)
hereof (the "Option Securities") are hereinafter called, collectively, the
"Securities".
The Company and the Selling Stockholders understand that the
Underwriters propose to make a public offering of the Securities as soon as the
Representatives deem advisable after this Agreement has been executed and
delivered.
[CONFIRM THAT THERE WILL BE NO DIRECTED SHARES]
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-/bullet/) covering
the registration of the Securities under the Securities Act of 1933, as amended
(the "1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will either
(i) prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of
the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule
434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a
"Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). The
information included in such prospectus or in such Term Sheet, as the case may
be, that was omitted from such registration statement at the time it became
effective but that is deemed to be part of such registration statement at the
time it became effective (a) pursuant to paragraph (b) of Rule 430A is referred
to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is
referred to as "Rule 434 Information." Each prospectus used before such
registration statement became effective, and any prospectus that omitted, as
applicable, the Rule 430A Information or the Rule 434 Information, that was used
after such effectiveness and prior to the execution and delivery of this
Agreement, is herein called a "preliminary prospectus." Such registration
statement, including the exhibits thereto and schedules thereto at the time it
became effective and including the Rule 430A Information and the Rule 434
Information, as applicable, is herein called the "Registration Statement." Any
registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations
is herein referred to as the "Rule 462(b) Registration Statement," and after
such filing the term "Registration Statement" shall include the Rule 462(b)
Registration Statement. The final prospectus in the form first furnished to the
Underwriters for use in connection with the offering of the Securities is herein
called the "Prospectus." If Rule 434 is relied on, the term "Prospectus" shall
refer to the preliminary prospectus dated April [__], 2000 together with the
Term Sheet and all references in this Agreement to the date of the Prospectus
shall mean the date of the Term Sheet. For purposes of this Agreement, all
references to the Registration Statement, any preliminary prospectus, the
Prospectus or any Term Sheet or any amendment or supplement to any of the
foregoing shall be deemed to include the copy filed with the Commission pursuant
to its Electronic Data Gathering, Analysis and Retrieval system ("EDGAR").
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SECTION 1. REPRESENTATIONS AND WARRANTIES.
(a) REPRESENTATIONS AND WARRANTIES BY THE COMPANY. The Company
represents and warrants to each Underwriter as of the date hereof, as of the
Closing Time referred to in Section 2(c) hereof, and as of each Date of Delivery
(if any) referred to in Section 2(b) hereof, and agrees with each Underwriter,
as follows:
(i) COMPLIANCE WITH REGISTRATION REQUIREMENTS. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or, to
the knowledge of the Company, are contemplated by the Commission, and
any request on the part of the Commission for additional information
has been complied with.
At the respective times the Registration Statement, any Rule
462(b) Registration Statement and any post-effective amendments thereto
became effective and at the Closing Time (and, if any Option Securities
are purchased, at the Date of Delivery), the Registration Statement,
the Rule 462(b) Registration Statement and any amendments and
supplements thereto complied and will comply in all material respects
with the requirements of the 1933 Act and the 1933 Act Regulations and
did not and will not contain an 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 the
Prospectus, any preliminary prospectus and any supplement thereto or
prospectus wrapper prepared in connection therewith, at their
respective times of issuance and at the Closing Time, complied and will
comply in all material respects with any applicable laws or regulations
of foreign jurisdictions in which the Prospectus and such preliminary
prospectus, as amended or supplemented, if applicable, are distributed
in connection with the offer and sale of Securities. Neither the
Prospectus nor any amendments or supplements thereto including any
prospectus wrapper, at the time the Prospectus or any such amendment or
supplement was issued and at the Closing Time (and, if any Option
Securities are purchased, at the Date of Delivery), included or will
include an untrue statement of a material fact or omitted or will 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. If Rule 434 is used, the Company will comply with the
requirements of Rule 434 and the Prospectus shall not be "materially
different", as such term is used in Rule 434, from the prospectus
included in the Registration Statement at the time it became effective.
The representations and warranties in this subsection shall not apply
to statements in or omissions from the Registration Statement or
Prospectus made in reliance upon and in conformity with information
furnished to the Company in writing by any Underwriter through Merrill
Lynch expressly for use in the Registration Statement or Prospectus.
Each preliminary prospectus and the prospectus filed as part
of the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to
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Rule 424 under the 1933 Act, complied when so filed in all material
respects with the 1933 Act Regulations and each preliminary prospectus
and the Prospectus delivered to the Underwriters for use in connection
with this offering was identical to the electronically transmitted
copies thereof filed with the Commission pursuant to EDGAR, except to
the extent permitted by Regulation S-T.
(ii) INDEPENDENT ACCOUNTANTS. The accountants who certified
the financial statements and supporting schedules included in the
Registration Statement are independent public accountants as required
by the 1933 Act and the 1933 Act Regulations.
(iii) FINANCIAL STATEMENTS. The financial statements included
in the Registration Statement and the Prospectus, together with the
related schedules and notes, present fairly the financial position of
the Company and its consolidated subsidiaries at the dates indicated
and the statement of operations, stockholders' equity and cash flows of
the Company and its consolidated subsidiaries for the periods
specified; said financial statements have been prepared in conformity
with generally accepted accounting principles ("GAAP") applied on a
consistent basis throughout the periods involved. The supporting
schedules included in the Registration Statement present fairly in
accordance with GAAP the information required to be stated therein. The
selected financial data and the summary financial information included
in the Prospectus present fairly the information shown therein and have
been compiled on a basis consistent with that of the audited financial
statements included in the Registration Statement. The pro forma
financial statements and the related notes thereto included in the
Registration Statement and the Prospectus present fairly the
information shown therein, have been prepared in accordance with the
Commission's rules and guidelines with respect to pro forma financial
statements and have been properly compiled on the bases described
therein, and the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate to give
effect to the transactions and circumstances referred to therein.
(iv) NO MATERIAL ADVERSE CHANGE IN BUSINESS. Since the
respective dates as of which information is given in the Registration
Statement and the Prospectus, except as otherwise stated therein, (A)
there has been no material adverse change in the condition, financial
or otherwise, or in the earnings, business affairs or business
prospects of the Company and its subsidiaries considered as one
enterprise, whether or not arising in the ordinary course of business
(a "Material Adverse Effect"), (B) there have been no transactions
entered into by the Company or any of its subsidiaries, other than
those in the ordinary course of business, which are material with
respect to the Company and its subsidiaries considered as one
enterprise, and (C) there has been no dividend or distribution of any
kind declared, paid or made by the Company on any class of its capital
stock.
(v) GOOD STANDING OF THE COMPANY. The Company has been duly
organized and is validly existing as a corporation in good standing
under the laws of the State of
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Delaware and has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under this
Agreement; and the Company is duly qualified as a foreign corporation
to transact business and is in good standing in each other jurisdiction
in which such qualification is required, whether by reason of the
ownership or leasing of property or the conduct of business, except
where the failure so to qualify or to be in good standing would not
result in a Material Adverse Effect.
(vi) GOOD STANDING OF SUBSIDIARIES. Each "significant
subsidiary" of the Company (as such term is defined in Rule 1-02 of
Regulation S-X) (each a "Subsidiary" and, collectively, the
"Subsidiaries") has been duly organized and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the
failure so to qualify or to be in good standing would not result in a
Material Adverse Effect; except as otherwise disclosed in the
Registration Statement, all of the issued and outstanding capital stock
of each such Subsidiary has been duly authorized and validly issued, is
fully paid and non-assessable and is owned by the Company, directly or
through subsidiaries, free and clear of any security interest,
mortgage, pledge, lien, encumbrance, claim or equity; none of the
outstanding shares of capital stock of any Subsidiary was issued in
violation of the preemptive or similar rights of any securityholder of
such Subsidiary. The only subsidiaries of the Company are the
subsidiaries listed on Exhibit 21.1 to the Registration Statement.
(vii) CAPITALIZATION. The authorized, issued and outstanding
capital stock of the Company is as set forth in the Prospectus in the
column entitled "Actual" under the caption "Capitalization" (except for
subsequent issuances, if any, pursuant to this Agreement, pursuant to
reservations, agreements or employee benefit plans referred to in the
Prospectus or pursuant to the exercise of convertible securities or
options referred to in the Prospectus). The shares of issued and
outstanding capital stock, including the Securities to be purchased by
the Underwriters from the Selling Stockholders, have been duly
authorized and validly issued and are fully paid and non-assessable;
none of the outstanding shares of capital stock, including the
Securities to be purchased by the Underwriters from the Selling
Stockholders, was issued in violation of the preemptive or other
similar rights of any securityholder of the Company.
(viii) AUTHORIZATION OF AGREEMENT. This Agreement has been
duly authorized, executed and delivered by the Company.
(ix) AUTHORIZATION AND DESCRIPTION OF SECURITIES. The
Securities to be purchased by the Underwriters from the Company have
been duly authorized for issuance and sale to the Underwriters pursuant
to this Agreement and, when issued and delivered by the Company
pursuant to this Agreement against payment of the consideration set
5
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forth herein, will be validly issued and fully paid and non-assessable;
the Common Stock conforms to all statements relating thereto contained
in the Prospectus and such description conforms to the rights set forth
in the instruments defining the same; no holder of the Securities will
be subject to personal liability by reason of being such a holder; and
the issuance of the Securities is not subject to the preemptive or
other similar rights of any securityholder of the Company.
(x) ABSENCE OF DEFAULTS AND CONFLICTS. Neither the Company nor
any of its subsidiaries is in violation of its charter or by-laws or in
default in the performance or observance of any obligation, agreement,
covenant or condition contained in any contract, indenture, mortgage,
deed of trust, loan or credit agreement, note, lease or other agreement
or instrument to which the Company or any of its subsidiaries is a
party or by which it or any of them may be bound, or to which any of
the property or assets of the Company or any subsidiary is subject
(collectively, "Agreements and Instruments") except for such defaults
that would not result in a Material Adverse Effect; and the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated herein and in the Registration Statement
(including the issuance and sale of the Securities and the use of the
proceeds from the sale of the Securities as described in the Prospectus
under the caption "Use of Proceeds") and compliance by the Company with
its obligations hereunder have been duly authorized by all necessary
corporate action and do not and will not, whether with or without the
giving of notice or passage of time or both, conflict with or
constitute a breach of, or default or Repayment Event (as defined
below) under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company or any
subsidiary pursuant to, the Agreements and Instruments (except for such
conflicts, breaches or defaults or liens, charges or encumbrances that
would not result in a Material Adverse Effect), nor will such action
result in any violation of the provisions of the charter or by-laws of
the Company or any subsidiary or any applicable law, statute, rule,
regulation, judgment, order, writ or decree of any government,
government instrumentality or court, domestic or foreign, having
jurisdiction over the Company or any subsidiary or any of their assets,
properties or operations. As used herein, a "Repayment Event" means any
event or condition which gives the holder of any note, debenture or
other evidence of indebtedness (or any person acting on such holder's
behalf) the right to require the repurchase, redemption or repayment of
all or a portion of such indebtedness by the Company or any subsidiary.
(xi) ABSENCE OF LABOR DISPUTE. No labor dispute with the
employees of the Company or any subsidiary exists or, to the knowledge
of the Company, is imminent, and the Company is not aware of any
existing or imminent labor disturbance by the employees of any of its
or any subsidiary's principal suppliers, manufacturers, customers or
contractors, which, in either case, may reasonably be expected to
result in a Material Adverse Effect.
(xii) ABSENCE OF PROCEEDINGS. There is no action, suit,
proceeding, inquiry or investigation before or brought by any court or
governmental agency or body, domestic
6
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or foreign, now pending, or, to the knowledge of the Company,
threatened, against or affecting the Company or any subsidiary, which
is required to be disclosed in the Registration Statement (other than
as disclosed therein), or which might reasonably be expected to result
in a Material Adverse Effect, or which might reasonably be expected to
materially and adversely affect the properties or assets thereof or the
consummation of the transactions contemplated in this Agreement or the
performance by the Company of its obligations hereunder; the aggregate
of all pending legal or governmental proceedings to which the Company
or any subsidiary is a party or of which any of their respective
property or assets is the subject which are not described in the
Registration Statement, including ordinary routine litigation
incidental to the business, could not reasonably be expected to result
in a Material Adverse Effect.
(xiii) ACCURACY OF EXHIBITS. There are no contracts or
documents which are required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits thereto which
have not been so described and filed as required.
(xiv) POSSESSION OF INTELLECTUAL PROPERTY. The Company and its
subsidiaries own or possess, or can acquire on reasonable terms,
adequate patents, patent rights, licenses, inventions, copyrights,
know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or
procedures), trademarks, service marks, trade names or other
intellectual property (collectively, "Intellectual Property") necessary
to carry on the business now operated by them, and other than as
described in the Prospectus neither the Company nor any of its
subsidiaries has received any notice or is otherwise aware of any
infringement of or conflict with asserted rights of others with respect
to any Intellectual Property or of any facts or circumstances which
would render any Intellectual Property invalid or inadequate to protect
the interest of the Company or any of its subsidiaries therein, and
which infringement or conflict (if the subject of any unfavorable
decision, ruling or finding) or invalidity or inadequacy, singly or in
the aggregate, would result in a Material Adverse Effect.
(xv) ABSENCE OF FURTHER REQUIREMENTS. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or
agency is necessary or required for the performance by the Company of
its obligations hereunder, in connection with the offering, issuance or
sale of the Securities hereunder or the consummation of the
transactions contemplated by this Agreement, except (i) such as have
been already obtained or as may be required under the 1933 Act or the
1933 Act Regulations or state securities laws and (ii) such as have
been obtained under the laws and regulations of jurisdictions outside
the United States in which the Securities are offered.
(xvi) POSSESSION OF LICENSES AND PERMITS. The Company and its
subsidiaries possess such permits, licenses, approvals, consents and
other authorizations (collectively, "Governmental Licenses") issued by
the appropriate federal, state, local or foreign regulatory agencies or
bodies necessary to conduct the business now operated by them;
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the Company and its subsidiaries are in compliance with the terms and
conditions of all such Governmental Licenses, except where the failure
so to comply would not, singly or in the aggregate, have a Material
Adverse Effect; all of the Governmental Licenses are valid and in full
force and effect, except when the invalidity of such Governmental
Licenses or the failure of such Governmental Licenses to be in full
force and effect would not have a Material Adverse Effect; and neither
the Company nor any of its subsidiaries has received any notice of
proceedings relating to the revocation or modification of any such
Governmental Licenses which, singly or in the aggregate, if the subject
of an unfavorable decision, ruling or finding, would result in a
Material Adverse Effect.
(xvii) TITLE TO PROPERTY. The Company and its subsidiaries
have good and marketable title to all real property owned by the
Company and its subsidiaries and good title to all other properties
owned by them, in each case, free and clear of all mortgages, pledges,
liens, security interests, claims, restrictions or encumbrances of any
kind except such as (a) are described in the Prospectus or (b) do not,
singly or in the aggregate, materially affect the value of such
property and do not interfere with the use made and proposed to be made
of such property by the Company or any of its subsidiaries; and all of
the leases and subleases material to the business of the Company and
its subsidiaries, considered as one enterprise, and under which the
Company or any of its subsidiaries holds properties described in the
Prospectus, are in full force and effect, and neither the Company nor
any subsidiary has any notice of any material claim of any sort that
has been asserted by anyone adverse to the rights of the Company or any
subsidiary under any of the leases or subleases mentioned above, or
affecting or questioning the rights of the Company or such subsidiary
to the continued possession of the leased or subleased premises under
any such lease or sublease.
(xviii) COMPLIANCE WITH CUBA ACT. The Company has complied
with, and is and will be in compliance with, the provisions of that
certain Florida act relating to disclosure of doing business with Cuba,
codified as Section 517.075 of the Florida statutes, and the rules and
regulations thereunder (collectively, the "Cuba Act") or is exempt
therefrom.
(xix) INVESTMENT COMPANY ACT. The Company is not, and upon
the issuance and sale of the Securities as herein contemplated and the
application of the net proceeds therefrom as described in the
Prospectus will not be, an "investment company" or an entity
"controlled" by an "investment company" as such terms are defined in
the Investment Company Act of 1940, as amended (the "1940 Act").
(xx) ENVIRONMENTAL LAWS. Except as described in the
Registration Statement and except as would not, singly or in the
aggregate, result in a Material Adverse Effect, (A) neither the Company
nor any of its subsidiaries is in violation of any federal, state,
local or foreign statute, law, rule, regulation, ordinance, code,
policy or rule of common law or any judicial or administrative
interpretation thereof, including any judicial or administrative order,
consent, decree or judgment, relating to pollution or protection of
human health, the environment (including, without limitation, ambient
air, surface water, groundwater, land surface or subsurface strata) or
wildlife, including, without limitation,
8
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laws and regulations relating to the release or threatened release of
chemicals, pollutants, contaminants, wastes, toxic substances,
hazardous substances, petroleum or petroleum products (collectively,
"Hazardous Materials") or to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of Hazardous
Materials (collectively, "Environmental Laws"), (B) the Company and its
subsidiaries have all permits, authorizations and approvals required
under any applicable Environmental Laws and are each in compliance with
their requirements, (C) there are no pending or threatened
administrative, regulatory or judicial actions, suits, demands, demand
letters, claims, liens, notices of noncompliance or violation,
investigation or proceedings relating to any Environmental Law against
the Company or any of its subsidiaries and (D) there are no events or
circumstances that might reasonably be expected to form the basis of an
order for clean-up or remediation, or an action, suit or proceeding by
any private party or governmental body or agency, against or affecting
the Company or any of its subsidiaries relating to Hazardous Materials
or any Environmental Laws.
(xxi) REGISTRATION RIGHTS. There are no persons with
registration rights or other similar rights to have any securities
registered pursuant to the Registration Statement or otherwise
registered by the Company under the 1933 Act.
(b) REPRESENTATIONS AND WARRANTIES BY THE SELLING STOCKHOLDERS. Each
Selling Stockholder severally represents and warrants to each Underwriter as of
the date hereof, as of the Closing Time, and, if the Selling Stockholder is
selling Option Securities on a Date of Delivery, as of each such Date of
Delivery, and agrees with each Underwriter, as follows:
(i) ACCURATE DISCLOSURE. To the best knowledge of such Selling
Stockholder, the representations and warranties of the Company
contained in Section 1(a) hereof are true and correct; such Selling
Stockholder has reviewed and is familiar with the Registration
Statement and the Prospectus and neither the Prospectus nor any
amendments or supplements thereto including any prospectus wrapper
includes any untrue statement of a material fact or omits 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;
such Selling Stockholder is not prompted to sell the Securities to be
sold by such Selling Stockholder hereunder by any information
concerning the Company or any subsidiary of the Company which is not
set forth in the Prospectus.
(ii) AUTHORIZATION OF AGREEMENTS. Each Selling Stockholder has
the full right, power and authority to enter into this Agreement and a
Power of Attorney and Custody Agreement (the "Power of Attorney and
Custody Agreement") and to sell, transfer and deliver the Securities to
be sold by such Selling Stockholder hereunder. The execution and
delivery of this Agreement and the Power of Attorney and Custody
Agreement and the sale and delivery of the Securities to be sold by
such Selling Stockholder and the consummation of the transactions
contemplated herein and compliance by such Selling Stockholder with its
obligations hereunder have been duly authorized by such Selling
Stockholder and do not and will not, whether with or without the giving
of notice or
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passage of time or both, conflict with or constitute a breach of, or
default under, or result in the creation or imposition of any tax,
lien, charge or encumbrance upon the Securities to be sold by such
Selling Stockholder or any property or assets of such Selling
Stockholder pursuant to any contract, indenture, mortgage, deed of
trust, loan or credit agreement, note, license, lease or other
agreement or instrument to which such Selling Stockholder is a party or
by which such Selling Stockholder may be bound, or to which any of the
property or assets of such Selling Stockholder is subject, nor will
such action result in any violation of the provisions of the charter or
by-laws or other organizational instrument of such Selling Stockholder,
if applicable, or any applicable treaty, law, statute, rule,
regulation, judgment, order, writ or decree of any government,
government instrumentality or court, domestic or foreign, having
jurisdiction over such Selling Stockholder or any of its properties.
(iii) GOOD AND MARKETABLE TITLE. Such Selling Stockholder has
and will at the Closing Time and, if any Option Securities are
purchased, on the Date of Delivery have good and marketable title to
the Securities to be sold by such Selling Stockholder hereunder, free
and clear of any security interest, mortgage, pledge, lien, charge,
claim, equity or encumbrance of any kind, other than pursuant to this
Agreement; and upon delivery of such Securities and payment of the
purchase price therefor as herein contemplated, assuming each such
Underwriter has no notice of any adverse claim, each of the
Underwriters will receive good and marketable title to the Securities
purchased by it from such Selling Stockholder, free and clear of any
security interest, mortgage, pledge, lien, charge, claim, equity or
encumbrance of any kind.
(iv) DUE EXECUTION OF POWER OF ATTORNEY AND CUSTODY AGREEMENT.
Such Selling Stockholder has duly executed and delivered, in the form
heretofore furnished to the Representatives, the Power of Attorney and
Custody Agreement with [AIF for selling stockholders], or any of them,
as attorney(s)-in-fact (the "Attorney(s)-in-Fact") and [custodian], as
custodian (the "Custodian"); the Custodian is authorized to deliver the
Securities to be sold by such Selling Stockholder hereunder and to
accept payment therefor; and each Attorney-in-Fact is authorized to
execute and deliver this Agreement and the certificate referred to in
Section 5(f) or that may be required pursuant to Sections 5(l) and 5(m)
on behalf of such Selling Stockholder, to sell, assign and transfer to
the Underwriters the Securities to be sold by such Selling Stockholder
hereunder, to determine the purchase price to be paid by the
Underwriters to such Selling Stockholder, as provided in Section 2(a)
hereof, to authorize the delivery of the Securities to be sold by such
Selling Stockholder hereunder, to accept payment therefor, and
otherwise to act on behalf of such Selling Stockholder in connection
with this Agreement.
(v) ABSENCE OF MANIPULATION. Such Selling Stockholder has not
taken, and will not take, directly or indirectly, any action which is
designed to or which has constituted or which might reasonably be
expected to cause or result in stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale
of the Securities.
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(vi) ABSENCE OF FURTHER REQUIREMENTS. No filing with, or
consent, approval, authorization, order, registration, qualification or
decree of, any court or governmental authority or agency, domestic or
foreign, is necessary or required for the performance by each Selling
Stockholder of its obligations hereunder or in the Power of Attorney
and Custody Agreement, or in connection with the sale and delivery of
the Securities hereunder or the consummation of the transactions
contemplated by this Agreement, except (i) such as may have previously
been made or obtained or as may be required under the 1933 Act or the
1933 Act Regulations or state securities laws and (ii) such as have
been obtained under the laws and regulations of jurisdictions outside
the United States in which the Securities are offered.
(vii) RESTRICTION ON SALE OF SECURITIES. During a period of 90
days from the date of the Prospectus, such Selling Stockholder will
not, without the prior written consent of Merrill Lynch, (i) offer,
pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any share of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or
file any registration statement under the 1933 Act with respect to any
of the foregoing or (ii) enter into any swap or any other agreement or
any transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of the Common Stock,
whether any such swap or transaction described in clause (i) or (ii)
above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not
apply to the Securities to be sold hereunder.
(viii) CERTIFICATES SUITABLE FOR TRANSFER. Certificates for
all of the Securities to be sold by such Selling Stockholder pursuant
to this Agreement, in suitable form for transfer by delivery or
accompanied by duly executed instruments of transfer or assignment in
blank with signatures guaranteed, have been placed in custody with the
Custodian with irrevocable conditional instructions to deliver such
Securities to the Underwriters pursuant to this Agreement.
(ix) NO ASSOCIATION WITH NASD. Neither such Selling
Stockholder nor any of its affiliates directly, or indirectly through
one or more intermediaries, controls, or is controlled by, or is under
common control with, or has any other association with (within the
meaning of Article I, Section 1(m) of the By-laws of the National
Association of Securities Dealers, Inc.), any member firm of the
National Association of Securities Dealers, Inc.
(c) OFFICER'S CERTIFICATES. Any certificate signed by any officer of
the Company or any of its subsidiaries delivered to the Representatives or to
counsel for the Underwriters shall be deemed a representation and warranty by
the Company to each Underwriter as to the matters covered thereby; and any
certificate signed by or on behalf of the Selling Stockholders as such and
delivered to the Representatives or to counsel for the Underwriters pursuant to
the terms of
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this Agreement shall be deemed a representation and warranty by such Selling
Stockholder to the Underwriters as to the matters covered thereby.
SECTION 2. SALE AND DELIVERY TO UNDERWRITERS; CLOSING.
(a) INITIAL SECURITIES. On the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company and each Selling Stockholders, severally and not jointly,
agree to sell to each Underwriter, severally and not jointly, and each
Underwriter, severally and not jointly, agrees to purchase from the Company and
each Selling Stockholder, at the price per share set forth in Schedule C, that
proportion of the number of Initial Securities set forth in Schedule B opposite
the name of the Company or such Selling Stockholder, as the case may be, which
the number of Initial Securities set forth in Schedule A opposite the name of
such Underwriter, plus any additional number of Initial Securities which such
Underwriter may become obligated to purchase pursuant to the provisions of
Section 10 hereof, bears to the total number of Initial Securities, subject, in
each case, to such adjustments among the Underwriters as the Representatives in
their sole discretion shall make to eliminate any sales or purchases of
fractional securities.
(b) OPTION SECURITIES. In addition, on the basis of the representations
and warranties herein contained and subject to the terms and conditions herein
set forth, the Company and the Selling Stockholders, acting severally and not
jointly, hereby grant an option to the Underwriters, severally and not jointly,
to purchase up to an additional [over-allotment shares] shares of Common Stock,
as set forth in Schedule B, at the price per share set forth in Schedule C, less
an amount per share equal to any dividends or distributions declared by the
Company and payable on the Initial Securities but not payable on the Option
Securities. The option hereby granted will expire 30 days after the date hereof
and may be exercised in whole or in part from time to time only for the purpose
of covering over-allotments which may be made in connection with the offering
and distribution of the Initial Securities upon notice by the Representatives to
the Company and the Selling Stockholders setting forth the number of Option
Securities as to which the several Underwriters are then exercising the option
and the time and date of payment and delivery for such Option Securities. Any
such time and date of delivery (a "Date of Delivery") shall be determined by the
Representatives, but shall not be later than seven full business days after the
exercise of said option, nor in any event prior to the Closing Time, as
hereinafter defined. If the option is exercised as to all or any portion of the
Option Securities, each of the Underwriters, acting severally and not jointly,
will purchase that proportion of the total number of Option Securities then
being purchased which the number of Initial Securities set forth in Schedule A
opposite the name of such Underwriter bears to the total number of Initial
Securities, subject in each case to such adjustments as the Representatives in
their discretion shall make to eliminate any sales or purchases of fractional
shares.
(c) PAYMENT. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of Wilson
Sonsini Goodrich & Rosati, P.C., 7927 Jones Branch Drive, Suite 200, McLean, VA
22102, or at such other place as shall be agreed upon by the Representatives and
the Company and the Selling Stockholders, at 9:00 A.M. (Eastern time) on the
third (fourth, if the pricing occurs after 4:30 P.M. (Eastern time) on any
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<PAGE>
given day) business day after the date hereof (unless postponed in accordance
with the provisions of Section 10), or such other time not later than ten
business days after such date as shall be agreed upon by the Representatives and
the Company and the Selling Stockholders (such time and date of payment and
delivery being herein called "Closing Time").
In addition, in the event that any or all of the Option Securities are
purchased by the Underwriters, payment of the purchase price for, and delivery
of certificates for, such Option Securities shall be made at the above-mentioned
offices, or at such other place as shall be agreed upon by the Representatives
and the Company and the Selling Stockholders, on each Date of Delivery as
specified in the notice from the Representatives to the Company and the Selling
Stockholders.
Payment shall be made to the Company and the Selling Stockholders by
wire transfer of immediately available funds to a bank accounts designated by
the Company and the Custodian pursuant to each Selling Stockholder's Power of
Attorney and Custody Agreement, as the case may be, against delivery to the
Representatives for the respective accounts of the Underwriters of certificates
for the Securities to be purchased by them. It is understood that each
Underwriter has authorized the Representatives, for its account, to accept
delivery of, receipt for, and make payment of the purchase price for, the
Initial Securities and the Option Securities, if any, which it has agreed to
purchase. Merrill Lynch, individually and not as representative of the
Underwriters, may (but shall not be obligated to) make payment of the purchase
price for the Initial Securities or the Option Securities, if any, to be
purchased by any Underwriter whose funds have not been received by the Closing
Time or the relevant Date of Delivery, as the case may be, but such payment
shall not relieve such Underwriter from its obligations hereunder.
(d) DENOMINATIONS; REGISTRATION. Certificates for the Initial
Securities and the Option Securities, if any, shall be in such denominations and
registered in such names as the Representatives may request in writing at least
one full business day before the Closing Time or the relevant Date of Delivery,
as the case may be. The certificates for the Initial Securities and the Option
Securities, if any, will be made available for examination and packaging by the
Representatives in The City of New York not later than 10:00 A.M. (Eastern time)
on the business day prior to the Closing Time or the relevant Date of Delivery,
as the case may be.
SECTION 3. COVENANTS OF THE COMPANY. The Company covenants with each
Underwriter as follows:
(a) COMPLIANCE WITH SECURITIES REGULATIONS AND COMMISSION
REQUESTS. The Company, subject to Section 3(b), will comply with the
requirements of Rule 430A or Rule 434, as applicable, and will notify
the Representatives immediately, and confirm the notice in writing, (i)
when any post-effective amendment to the Registration Statement shall
become effective, or any supplement to the Prospectus or any amended
Prospectus shall have been filed, (ii) of the receipt of any comments
from the Commission, (iii) of any request by the Commission for any
amendment to the Registration Statement or any amendment or supplement
to the Prospectus or for additional information, and (iv) of the
issuance by the Commission of any stop order suspending the
effectiveness of the
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Registration Statement or of any order preventing or suspending the use
of any preliminary prospectus, or of the suspension of the
qualification of the Securities for offering or sale in any
jurisdiction, or of the initiation or threatening of any proceedings
for any of such purposes. The Company will promptly effect the filings
necessary pursuant to Rule 424(b) and will take such steps as it deems
necessary to ascertain promptly whether the form of prospectus
transmitted for filing under Rule 424(b) was received for filing by the
Commission and, in the event that it was not, it will promptly file
such prospectus. The Company will make every reasonable effort to
prevent the issuance of any stop order and, if any stop order is
issued, to obtain the lifting thereof at the earliest possible moment.
(b) FILING OF AMENDMENTS. The Company will give the
Representatives notice of its intention to file or prepare any
amendment to the Registration Statement (including any filing under
Rule 462(b)), any Term Sheet or any amendment, supplement or revision
to either the prospectus included in the Registration Statement at the
time it became effective or to the Prospectus, will furnish the
Representatives with copies of any such documents a reasonable amount
of time prior to such proposed filing or use, as the case may be, and
will not file or use any such document to which the Representatives or
counsel for the Underwriters shall object.
(c) DELIVERY OF REGISTRATION STATEMENTS. The Company has
furnished or will deliver to the Representatives and counsel for the
Underwriters, without charge, signed copies of the Registration
Statement as originally filed and of each amendment thereto (including
exhibits filed therewith or incorporated by reference therein) and
signed copies of all consents and certificates of experts, and will
also deliver to the Representatives, without charge, a conformed copy
of the Registration Statement as originally filed and of each amendment
thereto (without exhibits) for each of the Underwriters. The copies of
the Registration Statement and each amendment thereto furnished to the
Underwriters will be identical to the electronically transmitted copies
thereof filed with the Commission pursuant to EDGAR, except to the
extent permitted by Regulation S-T.
(d) DELIVERY OF PROSPECTUSES. The Company has delivered to
each Underwriter, without charge, as many copies of each preliminary
prospectus as such Underwriter reasonably requested, and the Company
hereby consents to the use of such copies for purposes permitted by the
1933 Act. The Company will furnish to each Underwriter, without charge,
during the period when the Prospectus is required to be delivered under
the 1933 Act or the Securities Exchange Act of 1934 (the "1934 Act"),
such number of copies of the Prospectus (as amended or supplemented) as
such Underwriter may reasonably request. The Prospectus and any
amendments or supplements thereto furnished to the Underwriters will be
identical to the electronically transmitted copies thereof filed with
the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(e) CONTINUED COMPLIANCE WITH SECURITIES LAWS. The Company
will comply with the 1933 Act and the 1933 Act Regulations so as to
permit the completion of the
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distribution of the Securities as contemplated in this Agreement and in
the Prospectus. If at any time when a prospectus is required by the
1933 Act to be delivered in connection with sales of the Securities,
any event shall occur or condition shall exist as a result of which it
is necessary, in the opinion of counsel for the Underwriters or for the
Company, to amend the Registration Statement or amend or supplement the
Prospectus in order that the Prospectus will not include any untrue
statements of a material fact or omit to state a material fact
necessary in order to make the statements therein not misleading in the
light of the circumstances existing at the time it is delivered to a
purchaser, or if it shall be necessary, in the opinion of such counsel,
at any such time to amend the Registration Statement or amend or
supplement the Prospectus in order to comply with the requirements of
the 1933 Act or the 1933 Act Regulations, the Company will promptly
prepare and file with the Commission, subject to Section 3(b), such
amendment or supplement as may be necessary to correct such statement
or omission or to make the Registration Statement or the Prospectus
comply with such requirements, and the Company will furnish to the
Underwriters such number of copies of such amendment or supplement as
the Underwriters may reasonably request.
(f) BLUE SKY QUALIFICATIONS. The Company will use its best
efforts, in cooperation with the Underwriters, to qualify the
Securities for offering and sale under the applicable securities laws
of such states and other jurisdictions (domestic or foreign) as the
Representatives may designate and to maintain such qualifications in
effect for a period of not less than one year from the later of the
effective date of the Registration Statement and any Rule 462(b)
Registration Statement; provided, however, that the Company shall not
be obligated to file any general consent to service of process or to
qualify as a foreign corporation or as a dealer in securities in any
jurisdiction in which it is not so qualified or to subject itself to
taxation in respect of doing business in any jurisdiction in which it
is not otherwise so subject. In each jurisdiction in which the
Securities have been so qualified, the Company will file such
statements and reports as may be required by the laws of such
jurisdiction to continue such qualification in effect for a period of
not less than one year from the effective date of the Registration
Statement and any Rule 462(b) Registration Statement.
(g) RULE 158. The Company will timely file such reports
pursuant to the 1934 Act as are necessary in order to make generally
available to its securityholders as soon as practicable an earnings
statement for the purposes of, and to provide the benefits contemplated
by, the last paragraph of Section 11(a) of the 1933 Act.
(h) USE OF PROCEEDS. The Company will use the net proceeds
received by it from the sale of the Securities in the manner specified
in the Prospectus under "Use of Proceeds".
(i) LISTING. The Company will use its best efforts to effect
the listing of the Securities and maintain the quotation of the
Securities on the Nasdaq National Market and will file with the Nasdaq
National Market all documents and notices required by the
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<PAGE>
Nasdaq National Market of companies that have securities that are
traded in the over-the-counter market and quotations for which are
reported by the Nasdaq National Market.
(j) RESTRICTION ON SALE OF SECURITIES. During a period of 90
days from the date of the Prospectus, the Company will not, without the
prior written consent of Merrill Lynch, (i) directly or indirectly,
offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of any
share of Common Stock or any securities convertible into or exercisable
or exchangeable for Common Stock or file any registration statement
under the 1933 Act with respect to any of the foregoing or (ii) enter
into any swap or any other agreement or any transaction that transfers,
in whole or in part, directly or indirectly, the economic consequence
of ownership of the Common Stock, whether any such swap or transaction
described in clause (i) or (ii) above is to be settled by delivery of
Common Stock or such other securities, in cash or otherwise. The
foregoing sentence shall not apply to (A) the Securities to be sold
hereunder, [(B) any shares of Common Stock issued by the Company upon
the exercise of an option or warrant or the conversion of a security
outstanding on the date hereof and referred to in the Prospectus, (C)
any shares of Common Stock issued or options to purchase Common Stock
granted pursuant to existing employee benefit plans of the Company
referred to in the Prospectus or (D) any shares of Common Stock issued
pursuant to any non-employee director stock plan or dividend
reinvestment plan.]
(k) REPORTING REQUIREMENTS. The Company, during the period
when the Prospectus is required to be delivered under the 1933 Act or
the 1934 Act, will file all documents required to be filed with the
Commission pursuant to the 1934 Act within the time periods required by
the 1934 Act and the rules and regulations of the Commission
thereunder.
SECTION 4. PAYMENT OF EXPENSES.
(a) EXPENSES. The Company and the Selling Stockholders will pay or
cause to be paid all expenses incident to the performance of their obligations
under this Agreement, including (i) the preparation, printing and filing of the
Registration Statement (including financial statements and exhibits) as
originally filed and of each amendment thereto, (ii) the preparation, printing
and delivery to the Underwriters of this Agreement, any Agreement among
Underwriters and such other documents as may be required in connection with the
offering, purchase, sale, issuance or delivery of the Securities, (iii) the
preparation, issuance and delivery of the certificates for the Securities to the
Underwriters, including any stock or other transfer taxes and any stamp or other
duties payable upon the sale, issuance or delivery of the Securities to the
Underwriters, (iv) the fees and disbursements of the Company's counsel,
accountants and other advisors, (v) the qualification of the Securities under
securities laws in accordance with the provisions of Section 3(f) hereof,
including filing fees and the reasonable fees and disbursements of counsel for
the Underwriters in connection therewith and in connection with the preparation
of the Blue Sky Survey and any supplement thereto, (vi) the printing and
delivery to the Underwriters of copies of each preliminary prospectus, any Term
Sheets and of the Prospectus and any
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amendments or supplements thereto, (vii) the preparation, printing and delivery
to the Underwriters of copies of the Blue Sky Survey and any supplement thereto,
(viii) the fees and expenses of any transfer agent or registrar for the
Securities, (ix) the filing fees incident to, and the reasonable fees and
disbursements of counsel to the Underwriters in connection with, the review by
the National Association of Securities Dealers, Inc. (the "NASD") of the terms
of the sale of the Securities and (x) the fees and expenses incurred in
connection with the inclusion of the Securities in the Nasdaq National Market.
(b) EXPENSES OF THE SELLING STOCKHOLDERS. The Selling Stockholders,
jointly and severally, will pay all expenses incident to the performance of
their respective obligations under, and the consummation of the transactions
contemplated by this Agreement, including (i) any stamp duties, capital duties
and stock transfer taxes, if any, payable upon the sale of the Securities to the
Underwriters, and their transfer between the Underwriters pursuant to an
agreement between such Underwriters, and (ii) the fees and disbursements of
their respective their counsel and accountants.
(c) TERMINATION OF AGREEMENT. If this Agreement is terminated by the
Representatives in accordance with the provisions of Section 5, Section 9(a)(i)
or Section 11 hereof, the Company and the Selling Stockholders shall reimburse
the Underwriters for all of their out-of-pocket expenses, including the
reasonable fees and disbursements of counsel for the Underwriters.
(d) ALLOCATION OF EXPENSES. The provisions of this Section shall not
affect any agreement that the Company and the Selling Stockholders may make for
the sharing of such costs and expenses.
SECTION 5. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of
the several Underwriters hereunder are subject to the accuracy of the
representations and warranties of the Company and the Selling Stockholders
contained in Section 1 hereof or in certificates of any officer of the Company
or any subsidiary of the Company or on behalf of any Selling Stockholder
delivered pursuant to the provisions hereof, to the performance by the Company
of its covenants and other obligations hereunder, and to the following further
conditions:
(a) EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration
Statement, including any Rule 462(b) Registration Statement, has become
effective and at Closing Time no stop order suspending the
effectiveness of the Registration Statement shall have been issued
under the 1933 Act or proceedings therefor initiated or threatened by
the Commission, and any request on the part of the Commission for
additional information shall have been complied with to the reasonable
satisfaction of counsel to the Underwriters. A prospectus containing
the Rule 430A Information shall have been filed with the Commission in
accordance with Rule 424(b) (or a post-effective amendment providing
such information shall have been filed and declared effective in
accordance with the requirements of Rule 430A) or, if the Company has
elected to rely upon Rule 434, a Term Sheet shall have been filed with
the Commission in accordance with Rule 424(b).
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(b) OPINION OF COUNSEL FOR COMPANY. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of
Closing Time, of (i) Greenberg Traurig P.A., counsel for the Company,
in the form of Exhibit A-1 attached hereto, (ii) [Tokyo Aoyama Law
Office - Baker & McKenzie] in the form of Exhibit A-2 attached hereto,
(iii) [Graf von Westphalen Fritze and Modest] in the form of Exhibit
A-3 attached hereto, (iv) [Osborne Clarke] in the form of Exhibit A-4
attached hereto and (v) [Nixon Vanderhye P.C.,] patent counsel for the
Company in the form of Exhibit A-5 attached hereto and each of the
foregoing in form and substance satisfactory to counsel for the
Underwriters, together with signed or reproduced copies of such letter
for each of the other Underwriters and to such further effect as
counsel to the Underwriters may reasonably request.
(c) OPINION OF COUNSEL FOR THE SELLING STOCKHOLDERS. At
Closing Time, the Representatives shall have received the favorable
opinion, dated as of Closing Time, of [selling stockholders counsel],
counsel for the Selling Stockholders, in form and substance
satisfactory to counsel for the Underwriters, together with signed or
reproduced copies of such letter for each of the other Underwriters to
the effect set forth in Exhibit B hereto and to such further effect as
counsel to the Underwriters may reasonably request.
(d) OPINION OF COUNSEL FOR UNDERWRITERS. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of
Closing Time, of Wilson Sonsini Goodrich & Rosati, P.C., counsel for
the Underwriters, together with signed or reproduced copies of such
letter for each of the other Underwriters with respect to the matters
set forth in clauses (i), (ii), (v), (vi) (solely as to preemptive or
other similar rights arising by operation of law or under the charter
or by-laws of the Company), (viii) through (x), inclusive, (xii), (xiv)
(solely as to the information in the Prospectus under "Description of
Capital Stock--Common Stock") and the penultimate paragraph of Exhibit
A-1 hereto. In giving such opinion such counsel may rely, as to all
matters governed by the laws of jurisdictions other than the law of the
State of New York and the federal law of the United States and the
General Corporation Law of the State of Delaware, upon the opinions of
counsel satisfactory to the Representatives. Such counsel may also
state that, insofar as such opinion involves factual matters, they have
relied, to the extent they deem proper, upon certificates of officers
of the Company and its subsidiaries and certificates of public
officials.
(e) OFFICERS' CERTIFICATE. At Closing Time, there shall not
have been, since the date hereof or since the respective dates as of
which information is given in the Prospectus, any material adverse
change in the condition, financial or otherwise, or in the earnings,
business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in
the ordinary course of business, and the Representatives shall have
received a certificate of the President or a Vice President of the
Company and of the chief financial or chief accounting officer of the
Company, dated as of Closing Time, to the effect that (i) there has
been no such material adverse change, (ii) the representations and
warranties in Section 1(a) hereof are true and correct with the same
force and effect as though expressly made at and as of Closing
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Time, (iii) the Company has complied with all agreements and satisfied
all conditions on its part to be performed or satisfied at or prior to
Closing Time, and (iv) 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 are contemplated by the
Commission.
(f) CERTIFICATE OF SELLING STOCKHOLDERS. At Closing Time, the
Representatives shall have received a certificate of an
Attorney-in-Fact on behalf of each Selling Stockholder, dated as of
Closing Time, to the effect that (i) the representations and warranties
of each Selling Stockholder contained in Section 1(b) hereof are true
and correct in all respects with the same force and effect as though
expressly made at and as of Closing Time and (ii) each Selling
Stockholder has complied in all material respects with all agreements
and all conditions on its part to be performed under this Agreement at
or prior to Closing Time.
(g) ACCOUNTANT'S COMFORT LETTER. At the time of the execution
of this Agreement, the Representatives shall have received from each of
(i) Ernst & Young LLP and (ii) Arthur Andersen LLP a letter dated such
date, in form and substance satisfactory to the Representatives,
together with signed or reproduced copies of such letter for each of
the other Underwriters containing statements and information of the
type ordinarily included in accountants' "comfort letters" to
underwriters with respect to the financial statements and certain
financial information contained in the Registration Statement and the
Prospectus.
(h) BRING-DOWN COMFORT LETTER. At Closing Time, the
Representatives shall have received from each if (i) Ernst & Young LLP
and (ii) Arthur Andersen LLP a letter, dated as of Closing Time, to the
effect that they reaffirm the statements made in the letter furnished
pursuant to subsection of this Section, except that the specified date
referred to shall be a date not more than three business days prior to
Closing Time.
(i) APPROVAL OF LISTING. At Closing Time, the Securities shall
have been approved for inclusion in the Nasdaq National Market, subject
only to official notice of issuance.
(j) NO OBJECTION. The NASD has confirmed that it has not
raised any objection with respect to the fairness and reasonableness
of the underwriting terms and arrangements.
(k) LOCK-UP AGREEMENTS. At the date of this Agreement, the
Representatives shall have received an agreement substantially in the
form of Exhibit C hereto signed by the persons listed on Schedule D
hereto.
(l) CONDITIONS TO PURCHASE OF OPTION SECURITIES. In the event
that the Underwriters exercise their option provided in Section 2(b)
hereof to purchase all or any portion of the Option Securities, the
representations and warranties of the Company and the Selling
Stockholders contained herein and the statements in any certificates
furnished
19
<PAGE>
by the Company, any subsidiary of the Company and the Selling
Stockholders hereunder shall be true and correct as of each Date of
Delivery and, at the relevant Date of Delivery, the Representatives
shall have received:
(i) OFFICERS' CERTIFICATE. A certificate, dated such Date of
Delivery, of the President or a Vice President of the Company and of
the chief financial or chief accounting officer of the Company
confirming that the certificate delivered at the Closing Time pursuant
to Section 5(e) hereof remains true and correct as of such Date of
Delivery.
(ii) CERTIFICATE OF SELLING STOCKHOLDERS. A certificate, dated
such Date of Delivery, of an Attorney-in-Fact on behalf of each Selling
Stockholder confirming that the certificate delivered at Closing Time
pursuant to Section 5(f) remains true and correct as of such Date of
Delivery.
(iii) OPINION OF COUNSEL FOR COMPANY. The favorable opinion of
(i) Greenberg Traurig P.A., (ii) [Tokyo Aoyama Law Office - Baker &
McKenzie], (iii) [Graf von Westphalen Fritze and Modest], (iv) [Osborne
Clarke] and (v) [Nixon Vanderhye P.C.,] dated such Date of Delivery,
relating to the Option Securities to be purchased on such Date of
Delivery and otherwise to the same effect as the opinions required by
Section 5(b) hereof.
(iv) OPINION OF COUNSEL FOR THE SELLING STOCKHOLDERS. The
favorable opinion of [selling stockholders counsel], counsel for the
Selling Stockholders, in form and substance satisfactory to counsel for
the Underwriters, dated such Date of Delivery, relating to the Option
Securities to be purchased on such Date of Delivery and otherwise to
the same effect as the opinion required by Section 5(c) hereof.
(v) OPINION OF COUNSEL FOR UNDERWRITERS. The favorable opinion
of Wilson Sonsini Goodrich & Rosati, P.C., counsel for the
Underwriters, dated such Date of Delivery, relating to the Option
Securities to be purchased on such Date of Delivery and otherwise to
the same effect as the opinion required by Section 5(d) hereof.
(vi) BRING-DOWN COMFORT LETTER. A letter from each of (i)
Ernst & Young LLP and (ii) Arthur Andersen LLP, in form and substance
satisfactory to the Representatives and dated such Date of Delivery,
substantially in the same form and substance as the letter furnished to
the Representatives pursuant to Section 5(g) hereof, except that the
"specified date" in the letter furnished pursuant to this paragraph
shall be a date not more than five days prior to such Date of Delivery.
(m) ADDITIONAL DOCUMENTS. At Closing Time and at each Date of
Delivery counsel for the Underwriters shall have been furnished with
such documents and opinions as they may require for the purpose of
enabling them to pass upon the issuance and sale of the Securities as
herein contemplated, or in order to evidence the accuracy of any of the
representations or warranties, or the fulfillment of any of the
conditions, herein contained;
20
<PAGE>
and all proceedings taken by the Company and the Selling Stockholders
in connection with the issuance and sale of the Securities as herein
contemplated shall be satisfactory in form and substance to the
Representatives and counsel for the Underwriters.
(n) TERMINATION OF AGREEMENT. If any condition specified in
this Section shall not have been fulfilled when and as required to be
fulfilled, this Agreement, or, in the case of any condition to the
purchase of Option Securities on a Date of Delivery which is after the
Closing Time, the obligations of the several Underwriters to purchase
the relevant Option Securities, may be terminated by the
Representatives by notice to the Company at any time at or prior to
Closing Time or such Date of Delivery, as the case may be, and such
termination shall be without liability of any party to any other party
except as provided in Section 4 and except that Sections 1, 6, 7 and 8
shall survive any such termination and remain in full force and effect.
SECTION 6. INDEMNIFICATION.
(a) INDEMNIFICATION OF UNDERWRITERS. The Company and the Selling
Stockholders, jointly and severally, agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act to the
extent and in the manner set forth in clauses (i), (ii), (iii) and (iv) below.
In addition, each Selling Stockholder, severally and not jointly, agrees to
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), including the Rule
430A Information and the Rule 434 Information, if applicable, 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 arising out of any untrue statement or alleged untrue
statement of a material fact included 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;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of (A) the violation of
any applicable laws or regulations of foreign jurisdictions where
Securities have been offered and (B) any untrue statement or alleged
untrue statement of a material fact included in the supplement or
prospectus wrapper material distributed in [Canada] in connection with
the sale of the Securities or the omission or alleged omission
therefrom of a material fact necessary to make the statements therein,
when considered in conjunction with the Prospectus or preliminary
prospectus, not misleading;
21
<PAGE>
(iii) against any and all loss, liability, claim, damage
and expense whatsoever, as incurred, to the extent of the aggregate
amount paid in settlement of any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened,
or of any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission or in
connection with any violation of the nature referred to in Section
6(ii)(A) hereof; provided that (subject to Section 6(d) below) any such
settlement is effected with the written consent of the Company and the
Selling Stockholders; and
(iv) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by Merrill
Lynch), reasonably incurred in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any
such alleged untrue statement or omission or in connection with any
violation of the nature referred to in Section 6ERROR! BOOKMARK NOT
DEFINED.(ii)(A) hereof, to the extent that any such expense is not paid
under (i) (ii) or (iii) above;
PROVIDED, HOWEVER, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
Underwriter through Merrill Lynch expressly for use in the Registration
Statement (or any amendment thereto), including the Rule 430A Information and
the Rule 434 Information, if applicable, or any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto).
(b) INDEMNIFICATION OF COMPANY, DIRECTORS AND OFFICERS AND SELLING
STOCKHOLDERS. Each Underwriter severally agrees to indemnify and hold harmless
the Company, its directors, each of its officers who signed the Registration
Statement, and each person, if any, who controls the Company within the meaning
of Section 15 of the 1933 Act or Section 20 of the 1934 Act, and each Selling
Stockholder and each person, if any, who controls any Selling Stockholder within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against
any and all loss, liability, claim, damage and expense described in the
indemnity contained in subsection of this Section, as incurred, but only with
respect to untrue statements or omissions, or alleged untrue statements or
omissions, made in the Registration Statement (or any amendment thereto),
including the Rule 430A Information and the Rule 434 Information, if applicable,
or any preliminary prospectus or the Prospectus (or any amendment or supplement
thereto) in reliance upon and in conformity with written information furnished
to the Company by such Underwriter through Merrill Lynch expressly for use in
the Registration Statement (or any amendment thereto) or such preliminary
prospectus or the Prospectus (or any amendment or supplement thereto).
(c) ACTIONS AGAINST PARTIES; NOTIFICATION. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the
22
<PAGE>
extent it is not materially prejudiced as a result thereof and in any event
shall not relieve it from any liability which it may have otherwise than on
account of this indemnity agreement. In the case of parties indemnified pursuant
to Section 6(a) above, counsel to the indemnified parties shall be selected by
Merrill Lynch, and, in the case of parties indemnified pursuant to Section 6(b)
above, counsel to the indemnified parties shall be selected by the Company. An
indemnifying party may participate at its own expense in the defense of any such
action; provided, however, that counsel to the indemnifying party shall not
(except with the consent of the indemnified party) also be counsel to the
indemnified party. In no event shall the indemnifying parties be liable for fees
and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances No
indemnifying party shall, without the prior written consent of the indemnified
parties, settle or compromise or consent to the entry of any judgment with
respect to any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim whatsoever in
respect of which indemnification or contribution could be sought under this
Section 6 or Section 7 hereof (whether or not the indemnified parties are actual
or potential parties thereto), unless such settlement, compromise or consent (i)
includes an unconditional release of each indemnified party from all liability
arising out of such litigation, investigation, proceeding or claim 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.
(d) SETTLEMENT WITHOUT CONSENT IF FAILURE TO REIMBURSE. If at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6(a)(iii) effected without its written consent if (i) such settlement is
entered into more than 45 days after receipt by such indemnifying party of the
aforesaid request, (ii) such indemnifying party shall have received notice of
the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.
(e) OTHER AGREEMENTS WITH RESPECT TO INDEMNIFICATION. The provisions of
this Section shall not affect any agreement among the Company and the Selling
Stockholders with respect to indemnification.
SECTION 7. CONTRIBUTION. If the indemnification provided for in Section
6 hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company and the
Selling Stockholders on the one hand and the Underwriters on the other hand from
the offering of the Securities pursuant to this Agreement
23
<PAGE>
or (ii) if the allocation provided by clause (i) is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault of the
Company and the Selling Stockholders on the one hand and of the Underwriters on
the other hand in connection with the statements or omissions, or in connection
with any violation of the nature referred to in Section 62)(ii)(A) hereof, which
resulted in such losses, liabilities, claims, damages or expenses, as well as
any other relevant equitable considerations.
The relative benefits received by the Company and the Selling
Stockholders on the one hand and the Underwriters on the other hand in
connection with the offering of the Securities pursuant to this Agreement shall
be deemed to be in the same respective proportions as the total net proceeds
from the offering of the Securities pursuant to this Agreement (before deducting
expenses) received by the Company and the Selling Stockholders and the total
underwriting discount received by the Underwriters, in each case as set forth on
the cover of the Prospectus, or, if Rule 434 is used, the corresponding location
on the Term Sheet bear to the aggregate initial public offering price of the
Securities as set forth on such cover.
The relative fault of the Company and the Selling Stockholders on the
one hand and the Underwriters on the other hand shall be determined by reference
to, among other things, whether any such untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact relates
to information supplied by the Company or the Selling Stockholders or by the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission or any
violation of the nature referred to in Section 6(a)(ii)(A).
The Company, the Selling Stockholders and the Underwriters agree that
it would not be just and equitable if contribution pursuant to this Section 7
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. The aggregate amount of losses, liabilities, claims, damages and expenses
incurred by an indemnified party and referred to above in this Section 7 shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever based upon any such
untrue or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no Underwriter shall
be required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of any such untrue or
alleged untrue statement or omission or alleged omission.
24
<PAGE>
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company or any
Selling Stockholder] within the meaning of Section 15 of the 1933 Act or Section
20 of the 1934 Act shall have the same rights to contribution as the Company or
such Selling Stockholder, as the case may be. The Underwriters' respective
obligations to contribute pursuant to this Section 7 are several in proportion
to the number of Initial Securities set forth opposite their respective names in
Schedule A hereto and not joint.
The provisions of this Section shall not affect any agreement among the
Company and the Selling Stockholders with respect to contribution.
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE
DELIVERY. All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Company or any of its
subsidiaries or the Selling Stockholders submitted pursuant hereto, shall remain
operative and in full force and effect, regardless of any investigation made by
or on behalf of any Underwriter or controlling person, or by or on behalf of the
Company or the Selling Stockholders, and shall survive delivery of the
Securities to the Underwriters.
SECTION 9. TERMINATION OF AGREEMENT.
(a) TERMINATION; GENERAL. The Representatives may terminate this
Agreement, by notice to the Company and the Selling Stockholders, at any time at
or prior to Closing Time (i) if there has been, since the time of execution of
this Agreement or since the respective dates as of which information is given in
the Prospectus, any material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of the
Company and its subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business, or (ii) if there has occurred any
material adverse change in the financial markets in the United States or the
international financial markets, any outbreak of hostilities or escalation
thereof or other calamity or crisis or any change or development involving a
prospective change in national or international political, financial or economic
conditions, in each case the effect of which is such as to make it, in the
judgment of the Representatives, impracticable to market the Securities or to
enforce contracts for the sale of the Securities, or (iii) if trading in any
securities of the Company has been suspended or materially limited by the
Commission or the Nasdaq National Market, or if trading generally on the
American Stock Exchange or the New York Stock Exchange or in the Nasdaq National
Market has been suspended or materially limited, or minimum or maximum prices
for trading have been fixed, or maximum ranges for prices have been required, by
any of said exchanges or by such system or by order of the Commission, the
National Association of Securities Dealers, Inc. or any other governmental
authority, or (iv) if a banking moratorium has been declared by either Federal,
New York [or Florida] authorities.
25
<PAGE>
(b) LIABILITIES. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that Sections
1, 6, 7 and 8 shall survive such termination and remain in full force and
effect.
SECTION 10. DEFAULT BY ONE OR MORE OF THE UNDERWRITERS. If one or more
of the Underwriters shall fail at Closing Time or a Date of Delivery to purchase
the Securities which it or they are obligated to purchase under this Agreement
(the "Defaulted Securities"), the Representatives shall have the right, within
24 hours thereafter, to make arrangements for one or more of the non-defaulting
Underwriters, or any other underwriters, to purchase all, but not less than all,
of the Defaulted Securities in such amounts as may be agreed upon and upon the
terms herein set forth; if, however, the Representatives shall not have
completed such arrangements within such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10%
of the number of Securities to be purchased on such date, each of the
non-defaulting Underwriters shall be obligated, severally and not
jointly, to purchase the full amount thereof in the proportions that
their respective underwriting obligations hereunder bear to the
underwriting obligations of all non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the
number of Securities to be purchased on such date, this Agreement or,
with respect to any Date of Delivery which occurs after the Closing
Time, the obligation of the Underwriters to purchase and of the Company
to sell the Option Securities to be purchased and sold on such Date of
Delivery shall terminate without liability on the part of any
non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination
of this Agreement or, in the case of a Date of Delivery which is after the
Closing Time, which does not result in a termination of the obligation of the
Underwriters to purchase and the Company to sell the relevant Option Securities,
as the case may be, either the (i) Representatives or (ii) the Company and any
Selling Stockholder shall have the right to postpone Closing Time or the
relevant Date of Delivery, as the case may be, for a period not exceeding seven
days in order to effect any required changes in the Registration Statement or
Prospectus or in any other documents or arrangements. As used herein, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 10.
SECTION 11. DEFAULT BY ONE OR MORE OF THE SELLING STOCKHOLDERS OR THE
COMPANY. (a) If a Selling Stockholder shall fail at Closing Time or at a Date of
Delivery to sell and deliver the number of Securities which such Selling
Stockholder or Selling Stockholders are obligated to sell hereunder, and the
remaining Selling Stockholders do not exercise the right hereby granted to
26
<PAGE>
increase, pro rata or otherwise, the number of Securities to be sold by them
hereunder to the total number to be sold by all Selling Stockholders as set
forth in Schedule B hereto, then the Underwriters may, at option of the
Representatives, by notice from the Representatives to the Company and the
non-defaulting Selling Stockholders, either (a) terminate this Agreement without
any liability on the fault of any non-defaulting party except that the
provisions of Sections 1, 4, 6, 7 and 8 shall remain in full force and effect or
(b) elect to purchase the Securities which the non-defaulting Selling
Stockholders and the Company have agreed to sell hereunder. No action taken
pursuant to this Section 11 shall relieve any Selling Stockholder so defaulting
from liability, if any, in respect of such default.
In the event of a default by any Selling Stockholder as referred to in
this Section 11, each of the Representatives, the Company and the non-defaulting
Selling Stockholders shall have the right to postpone Closing Time or Date of
Delivery for a period not exceeding seven days in order to effect any required
change in the Registration Statement or Prospectus or in any other documents or
arrangements.
(b) If the Company shall fail at Closing Time or at the Date of
Delivery to sell the number of Securities that it is obligated to sell
hereunder, then this Agreement shall terminate without any liability on the part
of any nondefaulting party; provided, however, that the provisions of Sections
1, 4, 6, 7 and 8 shall remain in full force and effect. No action taken pursuant
to this Section shall relieve the Company from liability, if any, in respect of
such default.
27
<PAGE>
SECTION 12. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Underwriters shall be directed to the Representatives at North Tower, World
Financial Center, New York, New York 10281-1201 attention of __________; notices
to the Company shall be directed to it at __________, attention of __________;
and notices to the Selling Stockholders shall be directed to __________
attention of __________.
SECTION 13. PARTIES. This Agreement shall each inure to the benefit of
and be binding upon the Underwriters, the Company and the Selling Stockholders
and their respective successors. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any person, firm or
corporation, other than the Underwriters, the Company and the Selling
Stockholders and their respective successors and the controlling persons and
officers and directors referred to in Sections 6 and 7 and their heirs and legal
representatives, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision herein contained. This Agreement and
all conditions and provisions hereof are intended to be for the sole and
exclusive benefit of the Underwriters, the Company and the Selling Stockholders
and their respective successors, and said controlling persons and officers and
directors and their heirs and legal representatives, and for the benefit of no
other person, firm or corporation. No purchaser of Securities from any
Underwriter shall be deemed to be a successor by reason merely of such purchase.
SECTION 14. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED
TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 15. EFFECT OF HEADINGS. The Article and Section headings herein
and the Table of Contents are for convenience only and shall not affect the
construction hereof.
28
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company and the Attorney-in-Fact for
the Selling Stockholders a counterpart hereof, whereupon this instrument, along
with all counterparts, will become a binding agreement among the Underwriters,
the Company and the Selling Stockholders in accordance with its terms.
Very truly yours,
SMARTDISK CORPORATION
By
----------------------------------------
Title:
[AIF for selling stockholders]
By
----------------------------------------
As Attorney-in-Fact acting on behalf of
the Selling Stockholders named in
Schedule B hereto
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
HAMBRECHT & QUIST LLC
U.S. BANCORP PIPER JAFFRAY INC.
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By
-------------------------------------------------
Authorized Signatory
For itself and as representative of the other Underwriters named in Schedule A
hereto.
29
<PAGE>
SCHEDULE A
NAME OF UNDERWRITER NUMBER OF
------------------- INITIAL SECURITIES
------------------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.....................
Hambrecht & Quist LLC..................................
U.S. Bancorp Piper Jaffray Inc.
Total.......................................... [number of shares]
=====================
Sch A - 1
<PAGE>
SCHEDULE B
NUMBER OF INITIAL MAXIMUM NUMBER OF OPTION
SECURITIES TO BE SOLD SECURITIES TO BE SOLD
--------------------- ---------------------
SMARTDISK CORPORATION
[names of selling
stockholders]
Total......................
Sch B - 1
<PAGE>
SCHEDULE C
SMARTDISK CORPORATION
[number of shares] Shares of Common Stock
(Par Value $.001 Per Share)
1. The initial public offering price per share for the
Securities, determined as provided in said Section 2, shall be $__________.
2. The purchase price per share for the Securities to be paid by
the several Underwriters shall be $__________, being an amount equal to the
initial public offering price set forth above less $__________ per share;
provided that the purchase price per share for any Option Securities purchased
upon the exercise of the over-allotment option described in Section 2(b) shall
be reduced by an amount per share equal to any dividends or distributions
declared by the Company and payable on the Initial Securities but not payable on
the Option Securities.
Sch C - 1
<PAGE>
SCHEDULE D
[List of persons and entities
subject to lock-up]
Sch D - 1
<PAGE>
Exhibit A-1
FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO SECTION 5(B)
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware.
(ii) The Company has corporate power and authority to own,
lease and operate its properties and to conduct its business as
described in the Prospectus and to enter into and perform its
obligations under the Purchase Agreement.
(iii) The Company is duly qualified as a foreign
corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason
of the ownership or leasing of property or the conduct of business,
except where the failure so to qualify or to be in good standing would
not result in a Material Adverse Effect.
(iv) The authorized, issued and outstanding capital stock
of the Company is as set forth in the Prospectus in the column entitled
"Actual" under the caption "Capitalization" (except for subsequent
issuances, if any, pursuant to the Purchase Agreement or pursuant to
reservations, agreements or employee benefit plans referred to in the
Prospectus or pursuant to the exercise of convertible securities or
options referred to in the Prospectus); the shares of issued and
outstanding capital stock of the Company, including the Securities to
be purchased by the Underwriters from the Selling Stockholders, have
been duly authorized and validly issued and are fully paid and
non-assessable; and none of the outstanding shares of capital stock of
the Company was issued in violation of the preemptive or other similar
rights of any securityholder of the Company.
(v) The Securities to be purchased by the Underwriters
from the Company have been duly authorized for issuance and sale to the
Underwriters pursuant to the Purchase Agreement and, when issued and
delivered by the Company pursuant to the Purchase Agreement against
payment of the consideration set forth in the Purchase Agreement, will
be validly issued and fully paid and non-assessable and no holder of
the Securities is or will be subject to personal liability by reason of
being such a holder.
(vi) The issuance and sale of the Securities by the
Company and the sale of the Securities by the Selling Stockholders is
not subject to the preemptive or other similar rights of any
securityholder of the Company.
(vii) Each Subsidiary has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
the jurisdiction of its
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incorporation, has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the
failure so to qualify or to be in good standing would not result in a
Material Adverse Effect; except as otherwise disclosed in the
Registration Statement, all of the issued and outstanding capital stock
of each Subsidiary has been duly authorized and validly issued, is
fully paid and non-assessable and, to the best of our knowledge, is
owned by the Company, directly or through subsidiaries, free and clear
of any security interest, mortgage, pledge, lien, encumbrance, claim or
equity; none of the outstanding shares of capital stock of any
Subsidiary was issued in violation of the preemptive or similar rights
of any securityholder of such Subsidiary.
(viii) The Purchase Agreement has been duly authorized,
executed and delivered by the Company.
(ix) The Registration Statement, including any Rule 462(b)
Registration Statement, has been declared effective under the 1933 Act;
any required filing of the Prospectus pursuant to Rule 424(b) has been
made in the manner and within the time period required by Rule 424(b);
and, to the best of our knowledge, no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or
threatened by the Commission.
(x) The Registration Statement, including any Rule 462(b)
Registration Statement, the Rule 430A Information and the Rule 434
Information, as applicable, the Prospectus, and each amendment or
supplement to the Registration Statement and Prospectus, as of their
respective effective or issue dates (other than the financial
statements and supporting schedules included therein or omitted
therefrom, as to which we need express no opinion) complied as to form
in all material respects with the requirements of the 1933 Act and the
1933 Act Regulations.
(xi) If Rule 434 has been relied upon, the Prospectus was
not "materially different," as such term is used in Rule 434, from the
prospectus included in the Registration Statement at the time it became
effective.
(xii) The form of certificate used to evidence the Common
Stock complies in all material respects with all applicable statutory
requirements, with any applicable requirements of the charter and
by-laws of the Company and the requirements of the Nasdaq National
Market.
(xiii) To the best of our knowledge, there is not pending or
threatened any action, suit, proceeding, inquiry or investigation, to
which the Company or any subsidiary is a party, or to which the
property of the Company or any subsidiary is
A-2
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subject, before or brought by any court or governmental agency or body,
domestic or foreign, which might reasonably be expected to result in a
Material Adverse Effect, or which might reasonably be expected to
materially and adversely affect the properties or assets thereof or the
consummation of the transactions contemplated in the Purchase Agreement
or the performance by the Company of its obligations thereunder.
(xiv) The information in the Prospectus under "Description
of Capital Stock - Common Stock", "Capitalization" and "Business" and
in the Registration Statement under Item 14, to the extent that it
constitutes matters of law, summaries of legal matters, the Company's
charter and bylaws or legal proceedings, or legal conclusions, has been
reviewed by us and is correct in all material respects.
(xv) To the best of our knowledge, there are no statutes
or regulations that are required to be described in the Prospectus that
are not described as required.
(xvi) All descriptions in the Registration Statement of
contracts and other documents to which the Company or its subsidiaries
are a party are accurate in all material respects; to the best of our
knowledge, there are no franchises, contracts, indentures, mortgages,
loan agreements, notes, leases or other instruments required to be
described or referred to in the Registration Statement or to be filed
as exhibits thereto other than those described or referred to therein
or filed or incorporated by reference as exhibits thereto, and the
descriptions thereof or references thereto are correct in all material
respects.
(xvii) To the best of our knowledge, neither the Company nor
any subsidiary is in violation of its charter or by-laws and no default
by the Company or any subsidiary exists in the due performance or
observance of any material obligation, agreement, covenant or condition
contained in any contract, indenture, mortgage, loan agreement, note,
lease or other agreement or instrument that is described or referred to
in the Registration Statement or the Prospectus or filed or
incorporated by reference as an exhibit to the Registration Statement.
(xviii) No filing with, or authorization, approval, consent,
license, order, registration, qualification or decree of, any court or
governmental authority or agency, domestic or foreign (other than under
the 1933 Act and the 1933 Act Regulations, which have been obtained, or
as may be required under the securities or blue sky laws of the various
states, as to which we need express no opinion) is necessary or
required in connection with the due authorization, execution and
delivery of the Purchase Agreement or for the offering, issuance, sale
or delivery of the Securities.
(xix) The execution, delivery and performance of the
Purchase Agreement and the consummation of the transactions
contemplated in the Purchase Agreement and in the Registration
Statement (including the issuance and sale of the Securities and the
use of the proceeds from the sale of the Securities as described in the
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<PAGE>
Prospectus under the caption "Use Of Proceeds") and compliance by the
Company with its obligations under the Purchase Agreement do not and
will not, whether with or without the giving of notice or lapse of time
or both, conflict with or constitute a breach of, or default or
Repayment Event (as defined in Section 1(a)(x) of the Purchase
Agreement) under or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company or any
subsidiary pursuant to any contract, indenture, mortgage, deed of
trust, loan or credit agreement, note, lease or any other agreement or
instrument, known to us, to which the Company or any subsidiary is a
party or by which it or any of them may be bound, or to which any of
the property or assets of the Company or any subsidiary is subject
(except for such conflicts, breaches or defaults or liens, charges or
encumbrances that would not have a Material Adverse Effect), nor will
such action result in any violation of the provisions of the charter or
by-laws of the Company or any subsidiary, or any applicable law,
statute, rule, regulation, judgment, order, writ or decree, known to
us, of any government, government instrumentality or court, domestic or
foreign, having jurisdiction over the Company or any subsidiary or any
of their respective properties, assets or operations.
(xx) To the best of our knowledge, there are no persons
with registration rights or other similar rights to have any securities
registered pursuant to the Registration Statement or otherwise
registered by the Company under the 1933 Act.
(xl) The Company is not an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in the 1940
Act.
(xli) The Rights under the Company's Stockholders' Rights Plan to which
holders of the Securities will be entitled have been duly authorized and validly
issued.]
(xxi) Nothing has come to our attention that would lead us to
believe that the Registration Statement or any amendment thereto,
including the Rule 430A Information and Rule 434 Information (if
applicable), (except for financial statements and schedules and other
financial data included therein or omitted therefrom, as to which we]
need make no statement), at the time such Registration Statement or any
such amendment became effective, contained an untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or
that the Prospectus or any amendment or supplement thereto (except for
financial statements and schedules and other financial data included
therein or omitted therefrom, as to which we need make no statement),
at the time the Prospectus was issued, at the time any such amended or
supplemented prospectus was issued or at the Closing Time, included or
includes an untrue statement of a material fact or omitted or omits 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.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of the laws of [Germany, Japan and the United
Kingdom], upon the opinion of [/bullet/], each a special counsel to the Company
[with regard to such jurisdiction] (which opinion shall be dated and furnished
to the Representatives at the Closing Time, shall be
A-4
<PAGE>
satisfactory in form and substance to counsel for the Underwriters and shall
expressly state that the Underwriters may rely on such opinion as if it were
addressed to them), provided that Greenberg Traurig shall state in their opinion
that they believe that they and the Underwriters are justified in relying upon
such opinion, and (B), as to matters of fact (but not as to legal conclusions),
to the extent they deem proper, on certificates of responsible officers of the
Company and public officials. Such opinion shall not state that it is to be
governed or qualified by, or that it is otherwise subject to, any treatise,
written policy or other document relating to legal opinions, including, without
limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991).
A-5
<PAGE>
EXHIBIT A-2
FORM OF OPINION OF [TOKYO AOYAMA LAW OFFICE - BAKER & MCKENZIE]
TO BE DELIVERED PURSUANT TO SECTION 5(B)
April [ ], 2000
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated,
HAMBRECHT & QUIST LLC
U.S. BANCORP PIPER JAFFRAY INC.
as Representatives of the several
Underwriters to be named in the
within-mentioned Purchase Agreement
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
RE: SMARTDISK INTERNATIONAL, INC. JAPAN BRANCH
Ladies and Gentlemen:
You have requested us to provide our opinion with respect to the Japan
branch of SmartDisk International, Inc. (hereinafter "SmartDisk Japan") in
connection with an SEC registration for a public offering of shares of common
stock of SmartDisk Corporation, a Delaware corporation (the "Company").
For the purposes of this opinion, we have examined the following
documents: (i) a certified copy of the commercial registration (TOKIBO TOHON) of
SmartDisk Japan certified by the Chuo Branch of the Legal Affairs Bureau of the
Ministry of Justice of Japan, indicating that SmartDisk Japan is validly
registered in Japan as of April [ ], 2000; (ii) a copy of the final prospectus
dated April [ ], 2000 to be used in connection with the public offering and sale
of the Company's shares (the "Prospectus"); and (iii) a copy of the Purchase
Agreement dated April [ ], 2000 to be entered into by and among you and the
Company. Additionally, for purposes of rendering our opinions in paragraphs 2,
3, 5 and 6 hereof, we have relied exclusively upon the statements of [Mr.
Tsuneichi Kunai, Manager of Finance] for SmartDisk Japan. In rendering our
opinion, we have assumed the accuracy of such representations made by [Mr.
Kunai] on behalf
B-1
<PAGE>
of SmartDisk Japan, and that there are no documents or other information which
we have not been informed of which would materially alter our opinion herein.
In rendering our opinion set forth herein, we have relied exclusively
on our review of the documents and statements described above, and have not
undertaken any independent investigation to determine the existence or absence
of other relevant facts. We have not undertaken the examination of any public
records other than the commercial registration referred to above. Whenever a
statement herein is qualified by "to our current actual knowledge," or similar
phrase, it is intended to indicate that, during the course of our limited
representation of SmartDisk Japan in providing tax advice, primarily at the time
or its registration as a branch in Japan, no information that would give us
current actual knowledge of the inaccuracy of such statement has come to the
attention of those attorneys in this firm who have rendered such limited legal
services. We have relied exclusively on the documents listed herein and the
representations made by [Mr. Kunai] on behalf of SmartDisk Japan, and have not
undertaken any independent investigation to determine the accuracy of such
statement, and any limited inquiry undertaken by us during the preparation of
this opinion letter should not be regarded as such and investigation; no
inference as to our knowledge of any matter bearing on the accuracy of any such
statement should be drawn from the fact of our limited representation of
SmartDisk Japan.
We express no opinion as to any matters which may be or which purport
to be governed by the laws of any jurisdiction other than the country of Japan.
Based on the foregoing documents and such investigations as we have
deemed necessary, and subject to the assumptions, qualifications and exceptions
herein stated, we are of the opinion that:
1. SmartDisk Japan has been duly registered under the laws
of Japan as a branch office of SmartDisk International, Inc.
2. SmartDisk Japan has all necessary power and authority to
own, lease and operate its properties and to conduct its
business as described in the Prospectus.
3. To the best of our current, actual knowledge, SmartDisk
Japan does not own or control, directly or indirectly, any
corporation or other business entity.
4. No consent, approval, authorization or order of or
qualification with any court, government or governmental
agency or body in Japan is necessary in connection with the
consummation by the Company of its public offering of its
shares.
5. To the best of our current, actual knowledge, there are
no legal or governmental proceedings pending or threatened
against SmartDisk Japan.
6. To the best of our current, actual knowledge, the
execution and delivery of the Purchase Agreement and the
consummation of the transactions contemplated in the Purchase
Agreement do not and will not conflict with or result in a
breach
B-2
<PAGE>
of any of the terms or provisions of or constitute a default
under any agreement or instrument of a material nature, of
which we are aware, to which SmartDisk Japan is a party or by
which SmartDisk Japan may be bound.
The opinion set forth in this letter is limited to the maters expressly
set forth herein and no opinion is implied or may be inferred beyond the matters
expressly stated herein. This opinion is being delivered by the undersigned to
and may be relied upon by (i) the addressee hereof and (ii) Greenberg Traurig,
P.A. for the purposes of rendering its opinion to the underwriters in connection
with the public offering and sale of the Company's shares. The opinion expressed
herein is limited to reflect the state of law applicable to the particular facts
herein contained only as of the date hereof, and we express no opinion as to the
consequence or application of any laws of facts existing and applicable after
such dates.
Yours
[Tokyo Aoyama Law Office - Baker & McKenzie]
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EXHIBIT A-3
FORM OF OPINION OF [GRAF VON WESTPHALEN FRITZE AND MODEST]
TO BE DELIVERED PURSUANT TO SECTION 5(B)
April [ ], 2000
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated,
HAMBRECHT & QUIST LLC
U.S. BANCORP PIPER JAFFRAY INC.
as Representatives of the several
Underwriters to be named in the
within-mentioned Purchase Agreement
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Dear Sirs:
PUBLIC OFFERING OF SMARTDISK CORPORATION
LEGAL OPINION IN RELATION TO SMARTDISKETTE GMBH ("THE COMPANY")
SECTION 16. Introduction
(a) This opinion as to German law is addressed to you in connection with
the offering by SmartDisk Corporation ("SMARTDISK") of an aggregate of
[ ] shares ("THE FIRM SHARES") of its Common Stock, par value $0.001
per share ("THE COMMON SHARES") and the granting of a 30-day option to
purchase up to [ ] additional Common Shares ("THE OPTION SHARES") to
cover over-allotments ("THE OFFERING") in accordance with an offering
circular issued by SmartDisk ("THE PROSPECTUS") together with a
purchase agreement ("THE PURCHASE AGREEMENT").
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<PAGE>
(b) Expressions defined in the Prospectus and the Purchase Agreement have
the same respective meanings in this opinion except as amended in this
letter.
SECTION 17. Documents Examined
(a) For the purposes of giving this opinion we have examined:
(a) a marked-up version of the Final Prospectus (excluding all
exhibits referred to therein) dated [ ] April 2000;
(b) a marked-up version of the Purchase Agreement dated [ ]
April 2000;
(c) the GESELLSCHAFTSVERTRAG, (the Company's memorandum and
articles of association) dates 9.12.96 as notarised by Dr.
Bittner Nr 260/1996;
(d) [Confirmations of the appointments of Eisele, Wynkoop and
Battaglia as directors of the Company dated 25.8.92 and
26.4.98];
(e) Notarised agreements relating to the transfer of shares in
the Company, dated
(i) 26.2.91
(ii) 25.8.92
(iii) 20.6.96;
(iv) [others];
(f) a copy of the entry maintained by the Commercial Register at
Idstein, Nr HRB 1574 (HANDELSREGISTERAUSZUG) relating to the
Company dated [ ] April 2000 ("THE SEARCH"); a copy of the
above document is annexed to this letter;
(g) documents relating to the payment of the Company's share
capital;
(h) a Subordination Agreement (RANGRUCKTRITTSERKLARUNG) given by
SmartDiskette Limited dated 26.4.99;
(i) a list of the Company's registered patents provided by Nixon
Vanderheye a copy of the above document is annexed to this
letter a copy of the above document is annexed to this
letter;
(j) a schedule prepared by the Company's patent attorneys Nixon
Vanderheye and Leineweber, detailing the Company's patents
which have a commercial value, a copy of the schedule is
annexed to this letter;
(k) a letter dated April [ ], 2000 from Nixon Vanderheye P.C. a
copy of the above document is annexed to this letter;
B-5
<PAGE>
(l) the director's certificate dated April [ ], 2000 in respect
of the Company and its intellectual property rights, a copy
of the above documents is annexed to this letter.
(b) Except as mentioned above, we have not examined any agreements,
instruments, records or other documents whatsoever relating to the Company
and have not made any other inquiries or investigations concerning the
Company in connection with he giving of this opinion. We are basing the
giving of this opinion solely on the matters referred to in Clause 2.1
(c) In considering the documents listed above we have assumed:
(a) the authenticity if all signatures and seal on them;
(b) the correctness of all facts stated in them;
(c) the authenticity and completeness of all documents submitted
to us as originals and the conformity to original documents
of all copy documents submitted to us and the authenticity
and completeness of the originals from which these copies
were taken;
(d) that all board meetings and stockholders' meetings at which
any resolution was passed are duly convened and held and
that any such resolution was passed by a duly qualified
quorum of directors or, as the case may be, stockholders and
that in relation to such board resolutions, any provisions
contained in the Company's articles of association relating
to the declaration of directors' interests or the power or
interested directors to vote were duly observed and that
none of the resolutions referred to above have been
rescinded or amended in any way;
(e) that the Company is fully solvent and that it has not passed
any voluntary winding up resolution or resolution to appoint
a liquidator and that no petition has been presented to or
order made by any competent court for the winding up of the
Company and that no resolution has been passed nor any
petition presented to or order made by any competent court
in connection with the appointment of an administrator or
other insolvency practitioner in relation to the Company;
(f) that there are no provisions of the laws of any jurisdiction
outside Germany which would render the subject matter of
this opinion illegal or unenforceable; and
(g) that there are no changes between the marked-up version of
the Final Prospectus dated [ ] April 2000 and marked-up
version of the Purchase Agreement dated [ ] April 2000
annexed to this letter and the final versions of the
Prospectus and the Purchase Agreement.
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<PAGE>
SECTION 18. Scope of Opinion
(a) This opinion letter:
(a) is given to you in connection with the Offering only, and may
not be disclosed to or relied upon by any other person (other
than Greenberg Traurig, P.A. as counsel to SmartDisk in
connection with the execution and delivery of the Purchase
Agreement; and other than as may be required by any regulatory
authority for the time being having jurisdiction over you or
your auditors for the time being without the prior written
consent); and
(b) is limited to the matters stated in it and does not extend to
and is not to be read as extending by implication to any other
matter in connection with the Offering.
(b) Our opinion is confined to and given on the basis of German law as
currently applied by the German courts and we have made no investigation of
the laws of any country or jurisdiction other than Germany (and, in
particular, we have not made any investigations of the laws of the State of
Delaware and we don not express or imply any opinion of them). Furthermore,
we express no opinion other than as to matters of fact and our opinion is
to be construed in accordance with and is governed by German law.
SECTION 19. Opinion as to Corporate Matters
Based upon and subject to the foregoing and subject to the reservations and
qualifications set out below and to any matters not disclosed to us, we are
of the opinion that under German law at the date of this letter:
(a) The Company has been duly organised and is validly existing as a
corporation in good standing under the laws of Federal Republic of Germany,
with corporate power and authority to own or lease its properties and
conduct its business as described in the Prospectus (namely the owning and
licensing of patents).
(b) The Company is duly qualified to transact business in all jurisdictions in
which the conduct of its business requires such qualification, or in which
the failure to qualify would have a material adverse effect upon the
condition, financial or otherwise, or the earnings, business, operations or
prospects of the Company.
(c) The outstanding shares of capital stock of the Company (with a nominal
value of DM [ ]) have been duly authorised and validly issued and are fully
paid and nonassessable and are owned by SmartDiskette Limited, and to the
best of our knowledge, are owned free and clear of all liens, encumbrances
and equities and claims. No options, warrants or other rights to purchase,
agreements or other obligations to issue or other right to convert any
obligations into any shares of capital stock or of ownership interests in
the Company are outstanding.
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<PAGE>
(d) To the best of our knowledge, no material legal or governmental proceedings
are pending or threatened against the Company, except as described in the
Prospectus.
(e) The execution and delivery of the Purchase Agreement and the consummation
of the transactions contemplated in the Purchase Agreement do not and will
not conflict with or result in a breach of any of the terms or provisions
of, or constitute a default under, any agreement or instrument, of which we
are aware, to which the Company is a party or by which the Company may be
bound.
SECTION 20. Opinion as to Intellectual Property matters
Based upon and subject to the foregoing and subject to the reservations and
qualifications set out below and to any matters not discussed to us, we are
of the opinion that under German law at the date of this letter:
(a) To the best of our knowledge, except as described in the Prospectus, the
Company has not received any notice of infringement or of conflict with
rights or claims of others with respect to any intellectual property.
Except as described in the Prospectus, nothing has come to our attention
that has led us to believe that any patents of others are infringed by the
processes or practices of the Company, or by the manufacture, use or sale
of the Company's products or any other items made or used according to the
patent applications held by or licensed to the Company.
(b) To the best of our knowledge, except (a) in connection with assertions or
inquired made by patent office examiners in the ordinary course of the
prosecution of patent applications in the Patent Office or (b) as described
in the Prospectus, there is not pending or threatened in writing any
action, suit, proceeding or claim (c) challenging the validity or scope of
the patent applications held by or licensed to the Company or (d) asserting
that any patent is infringed by the processed or practices of the Company,
or by the manufacture, use or sale of the Company's products or any other
items made or used according to the patent applications held by or licensed
to the Company. We as counsel to the Company, having made due inquiry of
the directors and of the Company's patent attorneys Nixon Vanderheye and
Leineweber, do not know of any pending or threatened litigation or any
governmental proceeding, statute or regulation which would affect the
Company's rights to patents applications, or under any instrument or other
document relating hereto.
(c) To the best of our knowledge, having made due enquiry of the directors and
of Nixon Vanderheye and Leineweber, the Company has obtained all material
intellectual property licenses required for the conduct of its business,
such licenses are in full force and effect and the Company is complying
therewith in all material respects.
(d) Except as described in the Prospectus, to the best of our knowledge, after
due inquiry, the Company is not under any obligation to pay third party
royalties or fees of any kind
B-8
<PAGE>
whatsoever with respect to any technology or any related intellectual
properties developed, employed or used in the present conduct of the
Company's affairs.
(e) We believe that the description relating to patents and patent applications
with respect to all patent matters under "Risk Factors - We may fail to
adequately protect our intellectual property and, therefore, lose our
competitive advantage", "Business-Technology", and "Business-Intellectual
Property" in the Prospectus are accurate and fairly present the information
required to be shown, and we do not know of any instrument or other
document relating to patents or patent applications required to be
summarised or described therein or to be filed as an exhibit thereto which
is not so summarised, described or filed.
(f) We do not believe that the statements relating to patents, patent
applications and patent matters under "Risk Factors-We may fail to
adequately protect our intellectual property and, therefore, lose our
competitive advantage", "Business-Technology" and "Business-Intellectual
Property" in (a) the Registration Statement as of its Effective Date, or
any amendment thereto at the time it became effective, contained any untrue
statement of a material fact or omitted to state any material fact required
to be stated therein or necessary in order to make the statements therein
not misleading, or (b) the Prospectus or any supplement or amendment
thereto on the Closing Date, or at the time such Prospectus or any such
supplement or amendment thereto was issued, contains or contained any
untrue statement of a material fact or omits or omitted to state any
material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading.
(g) We express no opinion as to any tax liabilities that may or may not be
incurred by the Company or by SmartDisk in relation to the transfer of the
ownership of any patents form the Company to any other entity.
[Graf von Westphalen Fritze and Modest]
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<PAGE>
EXHIBIT A-4
FORM OF OPINION OF [OSBORNE CLARKE]
TO BE DELIVERED PURSUANT TO SECTION 5(B)
April [ ], 2000
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated,
HAMBRECHT & QUIST LLC
U.S. BANCORP PIPER JAFFRAY INC.
as Representatives of the several
Underwriters to be named in the
within-mentioned Purchase Agreement
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
RE: YOUR REFERENCE: [ ]
Dear Sirs:
PUBLIC OFFERING OF SMARTDISK CORPORATION
LEGAL OPINION IN RELATION TO SMARTDISKETTE LIMITED (THE "COMPANY")
SECTION 21. INTRODUCTION
(a) This opinion as to English law is addressed to you in connection with the
offering by SmartDisk Corporation ("SMARTDISK") of an aggregate of [ ]
shares ("THE FIRM SHARES") of its Common Stock, par value $0.001 per share
("THE COMMON SHARES") and the granting of a 30-day option to purchase up to
additional Common Shares ("THE OPTION SHARES") to cover over-allotments
("THE OFFERING") in accordance with an offering circular to be issued by
SmartDisk ("THE PROSPECTUS"), of which a marked-up version of the Final
Prospectus dated [_] April 2000 (excluding all exhibits referred to
therein) is annexed to this letter, together with an purchase agreement
("THE PURCHASE AGREEMENT") a marked-up version of which, dated [ ] April
2000, is annexed to this letter.
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<PAGE>
(b) Expressions defined in the Prospectus and the Purchase Agreement have the
same respective meanings in this opinion except as amended in this letter.
SECTION 22. DOCUMENTS EXAMINED
(a) For the purposes of giving this opinion we have examined:
(a) a marked-up version of the Final Prospectus (excluding all
exhibits referred to therein) dated April [ ], 2000;
(b) a marked-up version of the Purchase Agreement dated [ ] April
2000;
(c) a copy, certified as true, complete and up to date, of the
Company's memorandum and articles of association;
(d) the director's certificate dated [ ] April 2000 in respect of
the Company, a copy of which is annexed to this letter;
(e) a copy of the printed microfiche of documents maintained by
the Registrar of Companies at the Companies Registration Office
relating to each UK Group Company dated [ ] April 2000 ("THE
SEARCHES");
(f) a good standing certificate of the Company dated [ ] April
2000, a copy of which is annexed to this letter; and
(g) the register of members of the Company maintained pursuant to
the Companies Act 1985.
(b) Expect as mentioned above, we have not examined any agreements,
instruments, records or other documents whatsoever relating to the Company
and have not made any other inquiries or investigations concerning the
Company in connection with the giving of this opinion. We are basing the
giving of this opinion solely on the matters referred to in Clause 2.1.
(c) In considering the documents listed above we have assumed:
(a) the authenticity of all signatures and seals on them;
(b) the correctness of all facts stated in them;
(c) the authenticity and completeness of all documents submitted
to us as original and the conformity to original documents of all copy
documents submitted to us and the authenticity and completeness of the
originals from which these copies were taken;
(d) that all board meetings and stockholders' meeting at which
any resolution was passed were duly convened and held and that any
such resolution was passed by a duly
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<PAGE>
qualified quorum of directors or, as the case may be, stockholder and
that in relation to such board resolutions, any provisions contained
in the Companies Act 1985 or the respective companies' articles of
association relating to the declaration of directors' interest or the
power of interested directors to vote were duly observed and that none
of the resolutions referred to above have been rescinded or amended in
any way;
(e) that the Company is fully solvent and that it has not
passed any voluntary winding up resolution or resolution to appoint a
liquidator and that no petition has been presented to or order made by
any competent court for the winding up of the Company and that no
resolution has been passed nor any petition presented to or order made
by any competent court in connection with the appointment of an
administrator in relation to the Company;
(f) that there are no provisions of the laws of any
jurisdiction outside England which would render the subject matter to
this opinion illegal or unenforceable; and
(g) that there are no changes between the marked-up version of
the Final Prospectus dated [ ] April 2000 and marked-up version of the
Purchase Agreement dated [ ] April 2000 annexed to this letter and the
final versions of the Prospectus and the Purchase Agreement.
SECTION 23. SCOPE OF OPINION
(a) This opinion letter:
(a) is given to you in connection with the Offering only, and
may not be disclosed to or relied upon by any other person (other than
Greenberg Traurig, P.A., as counsel to SmartDisk in connection with the
execution and delivery of the Purchase Agreement; and other than as may
be required by any regulatory authority for the time being having
jurisdiction over you and your auditors for the time being without our
prior written consent); and
(b) is limited to the matters stated in it and does not exceed
to and is not to be read as extending by implication to any other
matter in connection with the Offering.
(b) Our opinion is confined to and given on the basis of English law as
currently applied by the English courts and we have made no investigation
of the laws of any country or jurisdiction other than England (and, in
particular, we have not made any investigation of the laws of the State of
Delaware and we do not express or imply any opinion of them). Furthermore,
we express no opinion other than as to matters of fact and our opinion is
to be construed in accordance with and governed by English law.
SECTION 24. OPINION
B-12
<PAGE>
Based upon and subject to the foregoing and subject to the reservations and
qualifications set out below and to any matters not disclosed to us, we are
of the opinion that under English law at the date of this letter, to the
best of our knowledge and belief:
(a) the Company has been duly incorporated under the laws of
England and Wales, and (i) our search, as of the business day
immediately preceding the date of this opinion letter, of the
microfiche of the file kept by the Registrar of Companies in respect
to the Company and (ii) a certificate of good standing dated the
business day immediately preceding the date of this opinion letter and
issued by the Registrar of Companies in respect of the Company,
indicate that the Company is validly existing and of good standing
under the laws of England and Wales. To the best of our knowledge, the
Company is not in violation of its Memorandum and Articles of
Association.
(b) the Company has the corporate power and authority to own,
lease and operate its properties and conduct its business as described
in the Prospectus;
(c) all of the issued and outstanding share capital of the
Company has been duly authorised and validly issued and such shares
are fully paid and have not been issued in violation of or subject to
any pre-emptive right, right of first refusal or other similar right
and are owned by SmartDisk free and clear of any pledge, lien,
security interest, encumbrance, claim or equitable interest;
(d) there is no legal or governmental proceeding pending to which
the Company is a party or to which any or the properties of the
Company is subject, and no such proceeding has been threatened against
the Company;
(e) no consent, approval, authorisation, order or qualification
with any court, government or governmental agency or body in England
and Wales is required to be obtained by the Company in connection with
the consummation by SmartDisk of the Initial Public Offering provided
that the Company does not itself offer any SmartDisk shares for sale
to the public in England and Wales;
(f) the execution and delivery of the Purchase Agreement and the
consummation of the transactions contemplated in the Purchase
Agreement do not and will not conflict with or result in a breach of
any of the terms or provisions of or constitute a default under any
agreement or instrument of a material nature, of which we are aware,
to which the Company is a party or by which the Company may be bound;
SECTION 25. RESERVATIONS AND QUALIFICATIONS
(a) The opinions expressed in this letter are subject to the following
reservations and qualifications:
(a) In April 1998 three German stockholders sold all their respective
shareholding in the Company to Phoenix House Investments, LLC, a company
incorporated in the U.S. However, the Inland Revenue has not completed the
process of adjudicating as to the
B-13
<PAGE>
amount of stamp duty that is payable on this transaction and so, according
to section 183 of the Companies Act 1985 (as amended) ("THE ACT"), the
registration of the transfer of the shares into the Company's books cannot
be done until this process has been completed;
(b) On 26 May 1999 the stockholders of the Company exchanged all of
their shares for 515,500 shares of SmartDisk's common stock. However, the
Inland Revenue has not completed the process of adjudicating as to the
amount of stamp duty that is payable on this transaction and so, according
to section 183 of the Act, the registration of the transfer of the shares
into the Company's books cannot be done until this process has been
completed.
[Osborne Clarke]
B-14
<PAGE>
EXHIBIT A-5
FORM OF OPINION OF [NIXON VANDERHYE P.C.]
TO BE DELIVERED PURSUANT TO SECTION 5(B)
RE: PUBLIC OFFERING OF SMARTDISK CORPORATION
Ladies and Gentlemen:
We have acted as patent counsel to SmartDisk Corporation, a Delaware
Corporation (together with its subsidiaries, the "Company"), in connection with
the Company's patent application prosecution before the United States Patent and
Trademark Office and in various other patent related matters. The underwriters
named in Schedule A to the Purchase Agreement dated April [ ],1999 are referred
to herein as the "Underwriters".
In our capacity as patent counsel to the Company, we have examined the
issued U.S. patents and pending U.S. patent applications owned by the Company or
its subsidiaries. We have also examined, among other things, the intellectual
property related provisions of the Form S-1 Registration Statement, as amended
to date and as declared effective by the Securities and Exchange Commission (the
"Commission") (the "Registration Statement") pursuant to the Securities Act of
1933, as amended. The final prospectus relating to the Company's public offering
in the form delivered for filing with the Commission pursuant to Rule 424(b)
under the Securities Act of 1933, as amended is referred to herein as the
"Prospectus".
In rendering the opinions set forth below, inasmuch as our
representation of the Company is not a general one, but is limited to specific
undertakings generally involving patent law and related matters, we disclaim any
responsibility or intention to undertake any investigation or render any opinion
with respect to any other matters. In rendering these opinions, we have reviewed
documents, records and matters of law we have deemed necessary for purposes of
rendering this opinion, including certain of our records of our work performed
for the Company. We believe that such review is reasonably likely to disclose
any matters which the Company has referred to us as legal counsel and to which
we, as such legal counsel, have devoted substantive attention on behalf of the
Company in the form of legal consultation or representation. But we do not
represent that such review would necessarily disclose every such matter.
The opinions set forth herein are as of the date of this letter, except
as may be specifically otherwise noted herein, and we disclaim any undertaking
to advise you of changes which thereafter may be brought to our attention. We
also point out that we do not assume any
B-15
<PAGE>
obligation to form a professional conclusion regarding unasserted possible
claims, especially in light of the fact that our engagement by the Company is
limited to patent and related matters, and we have not been engaged by the
Company, nor do we hold ourselves out as engaging in general corporate law or
securities law.
We understand that the Company does not intend that either its request
to us to provide information to you or our response to you, should be construed
in any way to constitute a waiver of the attorney-client privilege or the
attorney-work product doctrine. Except as may be required by your professional
responsibilities to disclose, we understand that you will treat this letter as
having been provided in confidence and that nothing contained herein will be
quoted in whole or part in any publicly disseminated document, nor is it to be
filed with or furnished to any governmental agency or other person without the
prior written consent of this firm.
In light of the foregoing, we are of the opinion that:
1. To our knowledge, except as generally described in the Prospectus, the
Company has not received any notice of infringement or of conflict with rights
or claims of others with respect to any intellectual property. Except as
generally described in the Prospectus, nothing has come to our attention that
has led us to believe that any patents of others are infringed by the processes
or practices of the Company, or by the manufacture, use or sale of the Company's
products.
2. To our knowledge, except (a) in connection with assertions or inquiries
made by Patent Office examiners in the ordinary course of the prosecution of
patent applications in the Patent Office or (b) as may be generally described in
the Prospectus, there is not pending or threatened in writing any action, suit,
proceeding or claim (x) challenging the validity or scope of the patent
applications held by or licensed to the Company or (y) asserting that any patent
is infringed by the processes or practices of the Company, or by the
manufacture, use or sale of the Company's products.
3. We as patent counsel to the Company, except as may be generally
described in the Prospectus do not know of any pending or threatened litigation
or any governmental proceeding, statute or regulation which would affect the
Company's intellectual property rights to patents or patent applications, or
under any instrument or other document relating thereof.
4. To our knowledge, the Company has obtained all material intellectual
property licenses required for the conduct of its business, such intellectual
property licenses are in full force and effect and the Company is complying
therewith in all material respects.
5. Except as generally described in the Prospectus, to our knowledge, the
Company is not under any obligation to pay to any third party royalties or fees
of any kind whatsoever with respect to any technology or any related
intellectual properties developed, employed or used in the present conduct of
the Company's affairs.
B-16
<PAGE>
6. We believe that the descriptions relating to patents and patent
applications with respect to all patent matters under "Risk Factors - We may
fail to adequately protected our intellectual property and, therefore, lose our
competitive advantage" "--We may face competition from Intel if it decides to
utilize its competing patent" and "Infringement claims by third parties could
result in costly litigation and otherwise adversely impact our business,"
"Business-Technology" and "Business-Intellectual Property" in the Prospectus are
accurate and fairly present the information shown, and we do not know of any
instrument or other document relating to patents or patent applications required
to be summarized or described therein or to be filed as an exhibit thereto which
is not so summarized, described or filed.
7. We do not believe that the statements relating to patents, patent
applications and patent matters under "Risk Factors - We may fail to adequately
protected our intellectual property and, therefore, lose our competitive
advantage" "--We may face competition from Intel if it decides to utilize its
competing patent" and "Infringement claims by third parties could result in
costly litigation and otherwise adversely impact our business,"
"Business-Technology" and "Intellectual Property" in the Registration Statement
we reviewed, contained any untrue statement of a material fact or omitted to
state any material fact which was required to be stated therein from a patent
law perspective or necessary in order to make the statements therein not
misleading. Except with respect to the matters expressly covered above by this
opinion letter, we have not independently verified the accuracy, completeness or
fairness of the information contained in the Registration Statement and the
Prospectus.
The opinions expressed herein are based upon and subject to, the
further comments, assumptions, limitations, qualifications and exceptions set
forth below:
1. We are licensed to practice law only in the State of Virginia and
before the U.S. Patent and Trademark Office.
2. This opinion letter is limited to the matters stated herein and no
opinions may be implied or inferred beyond the matters expressly stated herein.
3. The opinions expressed herein are as of the date hereof, and we assume
no obligation to update or supplement such opinions to reflect any facts or
circumstances that may hereafter come to our attention or any changes in law
that may hereafter occur.
4. Although we have acted as counsel to the Company in connection with
other matters, there may exist matters of a legal nature involving the
Company in connection with which we have not been consulted and have
not represented the Company.
5. As used herein, the phrase "to our knowledge," "known to us" or any
similar expression or phrase with respect to our knowledge of matters of fact,
means as to matters of fact that, based on the actual knowledge of individual
attorneys within the firm representing the Company, and after an examination of
those documents referred to herein, no facts have been disclosed to us that have
caused us to conclude that the opinions expressed herein are factually
incorrect.
B-17
<PAGE>
This opinion letter has been issued solely for the benefit of the
Underwriters in connection with the transaction described above and no other
party or entity shall be entitled to rely hereon without the express written
consent of this firm, except for Greenberg Traurig, P.A., subject to all of the
limitations to our opinion set forth above. Without our prior written consent,
this opinion letter may not be quoted in whole or in part or otherwise referred
to in any document or report and may not be furnished to any person or entity;
provided, however, that the Underwriters shall be entitled to utilize this
opinion letter in connection with their defense of any litigation, governmental
investigation or similar proceeding related to the offering contemplated by the
Prospectus.
Very truly yours,
[NIXON & VANDERHYE P.C.]
---------------------------
cc: Daniel Reed
B-18
<PAGE>
EXHIBIT B
FORM OF OPINION OF COUNSEL FOR THE SELLING STOCKHOLDERS
TO BE DELIVERED PURSUANT TO SECTION 5(C)
(i) No filing with, or consent, approval, authorization, license,
order, registration, qualification or decree of, any court or governmental
authority or agency, domestic or foreign, (other than the issuance of the order
of the Commission declaring the Registration Statement effective and such
authorizations, approvals or consents as may be necessary under state securities
laws, as to which [I][we] need express no opinion) is necessary or required to
be obtained by the Selling Stockholders for the performance by each Selling
Stockholder of its obligations under the Purchase Agreement or in the Power of
Attorney and Custody Agreement, or in connection with the offer, sale or
delivery of the Securities.
Each Power of Attorney and Custody Agreement has been duly executed and
delivered by the respective Selling Stockholders named therein and constitutes
the legal, valid and binding agreement of such Selling Stockholder.
The Purchase Agreement has been duly authorized, executed and delivered
by or on behalf of each Selling Stockholder.
Each Attorney-in-Fact has been duly authorized by the Selling
Stockholders to deliver the Securities on behalf of the Selling Stockholders in
accordance with the terms of the Purchase Agreement.
(v) The execution, delivery and performance of the Purchase Agreement
and the Power of Attorney and Custody Agreement and the sale and delivery of the
Securities and the consummation of the transactions contemplated in the Purchase
Agreement and in the Registration Statement and compliance by the Selling
Stockholders with its obligations under the Purchase Agreement have been duly
authorized by all necessary action on the part of the Selling Stockholders and
do not and will not, whether with or without the giving of notice or passage of
time or both, conflict with or constitute a breach of, or default under or
result in the creation or imposition of any tax, lien, charge or encumbrance
upon the Securities or any property or assets of the Selling Stockholders
pursuant to, any contract, indenture, mortgage, deed of trust, loan or credit
agreement, note, license, lease or other instrument or agreement to which any
Selling Stockholder is a party or by which [his/her/it/they] may be bound, or to
which any of the property or assets of the Selling Stockholders may be subject
nor will such action result in any violation of the provisions of the charter or
by-laws of the Selling Stockholders, if applicable, or any law, administrative
regulation, judgment or order of any governmental agency or body or any
administrative or court decree having jurisdiction over such Selling Stockholder
or any of its properties.
To the best of [our][my] knowledge, each Selling Stockholder has valid
and marketable title to the Securities to be sold by such Selling Stockholder
pursuant to the Purchase Agreement,
B-19
<PAGE>
free and clear of any pledge, lien, security interest, charge, claim, equity or
encumbrance of any kind, and has full right, power and authority to sell,
transfer and deliver such Securities pursuant to the Purchase Agreement. By
delivery of a certificate or certificates therefor such Selling Stockholder will
transfer to the Underwriters who have purchased such Securities pursuant to the
Purchase Agreement (without notice of any defect in the title of such Selling
Stockholder and who are otherwise bona fide purchasers for purposes of the
Uniform Commercial Code) valid and marketable title to such Securities, free and
clear of any pledge, lien, security interest, charge, claim, equity or
encumbrance of any kind.
Nothing has come to [our] [my] attention that would lead [us] [me] to
believe that the Registration Statement or any amendment thereto, including the
Rule 430A Information and Rule 434 Information (if applicable), (except for
financial statements and schedules and other financial data included therein or
omitted therefrom, as to which [we] [I] need make no statement), at the time
such Registration Statement or any such amendment became effective, contained an
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not misleading
or that the Prospectus or any amendment or supplement thereto (except for
financial statements and schedules and other financial data included therein or
omitted therefrom, as to which [we] [I] need make no statement), at the time the
Prospectus was issued, at the time any such amended or supplemented prospectus
was issued or at the Closing Time, included or includes an untrue statement of a
material fact or omitted or omits 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.
B-20
<PAGE>
EXHIBIT C
April [/bullet/], 2000
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated,
HAMBRECHT & QUIST LLC
U.S. BANCORP PIPER JAFFRAY INC.
as Representatives of the several
Underwriters to be named in the
within-mentioned Purchase Agreement
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Re: PROPOSED PUBLIC OFFERING BY SMARTDISK CORPORATION
Dear Sirs:
The undersigned, a stockholder of SmartDisk Corporation, a Delaware
corporation (the "Company"), understands that Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Hambrecht & Quist
LLC and U.S. Bancorp Piper Jaffray Inc. propose to enter into a Purchase
Agreement (the "Purchase Agreement") with the Company and the Selling
Stockholders providing for the public offering of shares (the "Securities") of
the Company's common stock, par value $.001 per share (the "Common Stock"). In
recognition of the benefit that such an offering will confer upon the
undersigned as a stockholder of the Company, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
undersigned agrees with each underwriter to be named in the Purchase Agreement
that, during a period of 90 days from the date of the Purchase Agreement, the
undersigned will not, without the prior written consent of Merrill Lynch,
directly or indirectly, (i) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant for the sale of, or otherwise dispose of or
transfer any shares of the Company's Common Stock or any securities convertible
into or exchangeable or exercisable for Common Stock, whether now owned or
hereafter acquired by the undersigned or with respect to which the undersigned
has or hereafter acquires the power of disposition, or file any registration
statement under the Securities Act of 1933, as amended, with respect to any of
the foregoing or (ii) enter into any swap or any other agreement or any
transaction that transfers, in whole or in part, directly or indirectly, the
economic consequence of ownership of the Common Stock, whether any such swap or
transaction is to be settled by delivery of Common Stock or other securities, in
cash or otherwise.
C-1
<PAGE>
Very truly yours,
Signature: ______________________
Print Name: _____________________
C-2
<PAGE>
EXHIBIT D
FORM OF OPINION OF COUNSEL FOR THE UNDERWRITERS
TO BE DELIVERED PURSUANT TO SECTION 5(D)
[To be provided]
C-3
<PAGE>
ANNEX A
FORM OF ACCOUNTANTS' COMFORT LETTER PURSUANT TO SECTION 5(g)
We are independent public accountants with respect to the Company within the
meaning of the 1933 Act and the applicable published 1933 Act Regulations
(i) in our opinion, the audited financial statements and the
related financial statement schedules included in the Registration
Statement and the Prospectus comply as to form in all material respects
with the applicable accounting requirements of the 1933 Act and the
published rules and regulations thereunder;
(ii) on the basis of procedures (but not an examination in
accordance with generally accepted auditing standards) consisting of a
reading of the unaudited interim financial statements of the Company
for the three month periods ended March 31, 1998 and March 31, 1999,
the three and six month periods ended June 30, 1998 and June 30, 1999
and the three and nine month periods ended September 30, 1998 and
September 30, 1999, included in the Registration Statement and the
Prospectus (collectively, the "Quarterly Financials") [, a reading of
the unaudited interim financial statements of the Company for the
three-month period ended March 31, 2000, included in the Registration
Statement and the Prospectus (the "Three-month financials")] [, a
reading of the latest available unaudited interim financial statements
of the Company], a reading of the minutes of all meetings of the
stockholders and directors of the Company and its subsidiaries and the
[Compensation] and [__________] Committees of the Company's Board of
Directors [and any subsidiary committees] since [December 31, 1999]
[March 31, 2000], inquiries of certain officials of the Company [and
its subsidiaries] responsible for financial and accounting matters, a
review of interim financial information in accordance with standards
established by the American Institute of Certified Public Accountants
in Statement on Auditing Standards No. 71, Interim Financial
Information ("SAS 71"), with respect to the [description of relevant
periods] and such other inquiries and procedures as may be specified in
such letter, nothing came to our attention that caused us to believe
that:
(A) the Quarterly Financials included in the
Registration Statement and the Prospectus do not comply as
to form in all material respects with the applicable
accounting requirements of the 1933 Act and the 1933 Act
Regulations or any material modifications should be made
to the unaudited [consolidated] financial statements
included in the Registration Statement and the Prospectus
for them to be in conformity with generally accepted
accounting principles;
[(B) the Three-month financials included in the
Registration Statement and the Prospectus do not comply as
to form in all material respects with the applicable
accounting requirements of the 1933 Act and the 1933 Act
Regulations applicable to unaudited interim financial
statements included in
M-1
<PAGE>
registration statements or any material modifications
should be made to the Three-month financials included in
the Registration Statement and the Prospectus for them to
be in conformity with generally accepted accounting
principles;]
(C) at [December 31, 1999][March 31, 2000] and at a
specified date not more than five days prior to the date
of this Agreement, there was any change in the
[___________] of the Company and its subsidiaries or any
decrease in the [__________] of the Company and its
subsidiaries or any increase in the [__________] of the
Company and its subsidiaries, in each case as compared
with amounts shown in the latest balance sheet included in
the Registration Statement, except in each case for
changes, decreases or increases that the Registration
Statement discloses have occurred or may occur; or
(D) [for the period from [December 31, 1999][March
31, 2000] to [March 31, 2000][April [ ], 2000] for the
period from [December 31, 1999][March 31, 2000] to a
specified date not more than five days prior to the date
of this Agreement, there was any decrease in [_________],
[__________] or [___________], in each case as compared
with the comparable period in the preceding year, except
in each case for any decreases that the Registration
Statement discloses have occurred or may occur;
(iii) based upon the procedures set forth in clause
(ii) above and a reading of the [Selected Financial Data]
included in the Registration Statement and a reading of
the financial statements from which such data were
derived, nothing came to our attention that caused us to
believe that the [Selected Financial Data] included in the
Registration Statement do not comply as to form in all
material respects with the disclosure requirements of Item
301 of Regulation S-K of the 1933 Act [, that the amounts
included in the [Selected Financial Data] are not in
agreement with the corresponding amounts in the audited
[consolidated] financial statements for the respective
periods or that the financial statements not included in
the Registration Statement from which certain of such data
were derived are not in conformity with generally accepted
accounting principles];
(iv) we have compared the information in the
Registration Statement under selected captions with the
disclosure requirements of Regulation S-K of the 1933 Act
and on the basis of limited procedures specified herein.
nothing came to our attention that caused us to believe
that this information does not comply as to form in all
material respects with the disclosure requirements of
Items 302, 402 and 503(d), respectively, of Regulation
S-K;
[(vi)] we are unable to and do not express any
opinion on the [Pro Forma Combining Statement of
Operations] (the "Pro Forma Statement") included in
M-2
<PAGE>
the Registration Statement or on the pro forma adjustments
applied to the historical amounts included in the Pro
Forma Statement; however, for purposes of this letter we
have:
(A) read the Pro Forma Statement;
(B) performed [an audit] [a review in accordance
with SAS 71] of the financial statements to which the
pro forma adjustments were applied;
(C) made inquiries of certain officials of the
Company who have responsibility for financial and
accounting matters about the basis for their
determination of the pro forma adjustments and
whether the Pro Forma Statement complies as to form
in all material respects with the applicable
accounting requirements of Rule 11-02 of Regulation
S-X; and
(D) proved the arithmetic accuracy of the
application of the pro forma adjustments to the
historical amounts in the Pro Forma Statement; and
on the basis of such procedures and such other inquiries
and procedures as specified herein, nothing came to our
attention that caused us to believe that the Pro Forma
Statement included in the Registration Statement does not
comply as to form in all material respects with the
applicable requirements of Rule 11-02 of Regulation S-X or
that the pro forma adjustments have not been properly
applied to the historical amounts in the compilation of
those statements; and
(vii) in addition to the procedures referred to in
clause (ii) above, we have performed other procedures, not
constituting an audit, with respect to certain amounts,
percentages, numerical data and financial information
appearing in the Registration Statement, which are
specified herein, and have compared certain of such items
with, and have found such items to be in agreement with,
the accounting and financial records of the Company; and
[(viii) in addition, we [comfort on a financial
forecast that is included in the Registration Statement].
M-3
EXHIBIT 5.1
GREENBERG TRAURIG, P.A.
1221 BRICKELL AVENUE
MIAMI, FLORIDA 33131
TELEPHONE: (305) 579-0500
TELECOPIER: (305) 579-0717
April 20, 2000
SmartDisk Corporation
3506 Mercantile Avenue
Naples, Florida 34104
Re: SMARTDISK CORPORATION
Registration Statement on Form S-1
Ladies and Gentlemen:
We have acted as special counsel to SmartDisk Corporation, a Delaware
corporation (the "Company"), in connection with the preparation and filing of a
Registration Statement on Form S-1 (the "Registration Statement"), filed by the
Company, with the Securities and Exchange Commission (the "Commission") pursuant
to the Securities Act of 1933, as amended (the "Act"), and the rules and
regulations promulgated thereunder (the "Rules"). The Registration Statement
relates to the sale by the Company and certain selling shareholders (the
"Selling Shareholders") of up to 4,600,000 shares (including, 600,000 shares
subject to the over-allotment option) of the Company's Common Stock, par value
$.001 per share (the "Shares").
<PAGE>
SmartDisk Corporation
re. Registration Statement on Form S-1
April 20, 2000
Page 2
In connection therewith, we have examined and relied upon the original
or a copy, certified to our satisfaction, of (i) the Amended and Restated
Articles of Incorporation and the Bylaws of the Company; (ii) actions of the
Board of Directors of the Company authorizing the offering and the issuance of
the Shares and related matters; (iii) the Registration Statement and exhibits
thereto; and (iv) such other documents and instruments as we have deemed
necessary for the expression of opinions contained herein. In making the
foregoing examinations, we have assumed the genuineness of all signatures and
the authenticity of all documents submitted to us as originals, and the
conformity to original documents of all documents submitted to us as certified
or photostatic copies. As to various questions of fact material to this opinion,
we have relied, to the extent we deem reasonably appropriate, upon
representations or certificates of officers or directors of the Company and upon
documents, records and instruments furnished to us by the Company, without
independently checking or verifying the accuracy of such documents, records and
instruments.
Based upon the foregoing examination, we are of the opinion that (i)
the Shares to be sold by the Company pursuant to the Registration Statement have
been duly and validly authorized and, when issued and delivered in accordance
with the Purchase Agreement filed as Exhibit 1.1 to the Registration Statement
will be validly issued, fully paid and nonassessable, and (ii) the Shares to be
sold by the selling shareholders pursuant to the Registration Statement have
been duly and validly authorized and issued and are fully paid and
nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the prospectus forming a part of the Registration Statement. In
giving such consent, we do not admit that we come within the category of persons
whose consent is required by Section 7 of the Act or the rules and regulations
of the Commission thereunder.
Sincerely,
/s/ GREENBERG TRAURIG, P.A.
------------------------------------
GREENBERG TRAURIG, P.A.
EXHIBIT 10.3
SMARTDISK CORPORATION
1999 INCENTIVE COMPENSATION PLAN
(AMENDED AND RESTATED AS OF MARCH 24, 2000)
<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.
2
<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). Three Million (3,000,000) shares, which
is comprised of (A) the Two Million Five Hundred Thousand (2,500,000) shares
reserved under the plan as originally adopted and (B) an additional Five Hundred
Thousand (500,000) shares authorized by the Board on March 24, 2000, subject to
stockholder approval at the 2000 Annual Meeting, 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, plus (iii) an annual increase to be added on the first trading
day of January each year, commencing 2001 and continuing through 2005, equal to
three percent (3%) of the total number of shares of common stock outstanding on
the last trading day in December of the immediately preceding calendar year, as
authorized by the Board on March 24, 2000, subject to stockholder approval at
the 2000 Annual Meeting. 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.
7
<PAGE>
(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 7,500 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), (E) for each committee assignment on
each January 1, an Option to purchase 2,000 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), and (F) for
each committee chairmanship on January 1, an Option to
purchase 1,000 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). 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.
8
<PAGE>
(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,
9
<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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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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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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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.
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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
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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
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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
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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 became effective on the Effective Date, upon adoption by the
Board and approval by the Company's stockholders. The Plan was amended on March
24, 2000 to effect the following changes, which are subject to stockholder
approval at the 2000 Annual Meeting: (i) to increase the number of shares of
Stock reserved and available for delivery in connection with Awards by an
additional Five Hundred Thousand (500,000) shares; and (ii) to implement the
automatic share increase provision in clause (iii) of Section 4(a). 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 10.8
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made and entered into as of
March 6, 2000 by and between SmartDisk Personal Storage Systems Corporation, a
Delaware corporation formerly known as "VST Acquisition, Inc." (the "Company"),
and Vince Fedele (the "Executive").
RECITALS
A. The Board of Directors of the Company (the "Board") desires to
ensure the Executive's employment with the Company and to compensate him
therefor.
B. The Executive's execution and delivery of this Agreement is a
condition to the closing obligations of SmartDisk Corporation, a Delaware
corporation ("SmartDisk"), pursuant to an Agreement and Plan of Merger, dated as
of February 23, 2000, (the "Merger Agreement") among the Company, SmartDisk, VST
Technologies, Inc., a Delaware corporation, and certain "Shareholders" party
thereto.
C. The execution of this Agreement is a material inducement for Company
and SmartDisk to enter into the Merger Agreement.
D. The Board has determined that this Agreement will reinforce and
encourage the Executive's attention and dedication to the Company.
E. The Executive is willing to make his services available to the
Company on the terms and conditions hereinafter set forth.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and mutual covenants
set forth herein, the parties agree as follows:
1. EMPLOYMENT.
1.1 GENERAL. The Company hereby agrees to employ the
Executive, and the Executive hereby agrees to serve the Company on the terms and
conditions set forth herein.
1.2 DUTIES OF EXECUTIVE. During the term of this Agreement,
the Executive shall serve as the Chief Technology Officer of the Company, shall
diligently perform all services as may be assigned to him by or under the
direction of SmartDisk's President and Chief Executive Officer and shall
exercise such power and authority as may from time to time be delegated to him
by the Company's Board of Directors. Without limiting the generality of the
foregoing, Executive shall have general responsibility for all Company product
development, strategic marketing and related communications. The Executive shall
devote substantially all of his business time and attention to the business and
affairs of the Company, render such services to the best of his ability, and use
his best efforts to promote the interests of the Company. By execution below,
SmartDisk also agrees that the Executive is hereby appointed Chief Technology
Officer of SmartDisk.
1.3 PLACE OF PERFORMANCE. In connection with his employment by
the Company hereunder, the Executive shall perform his duties and obligations
hereunder primarily from the Company's offices located in Acton, Massachusetts,
except for required travel on the Company's business.
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2. TERM.
2.1 INITIAL TERM. The initial term of this Agreement, and the
employment of the Executive hereunder, shall be for the two-year period
commencing on the date hereof (the "Initial Term").
2.2 RENEWAL TERMS. The Initial Term of this Agreement, and the
employment of the Executive hereunder shall automatically be renewed for
successive one year periods, unless the Company or the Executive provides
written notice to the other at least 30 days prior to the expiration of the
applicable term. The terms and conditions of any renewal term shall be the same
as those contained herein unless otherwise mutually agreed upon by the Company
and the Executive in a written supplement to this Agreement signed by the
Executive and the Company's President (the "Written Supplement"). In the event
that the Company delivers a notice of non-renewal, the Executive shall be
entitled to the compensation and benefits as if terminated pursuant to Section
5.4 and shall be subject to Section 6.1 as if terminated pursuant to Section
5.4.
3. COMPENSATION.
3.1 BASE SALARY. The Executive shall receive a base salary at
the annual rate of $200,000 (the "Base Salary") during the Initial Term of this
Agreement, with such Base Salary payable in installments consistent with the
Company's normal payroll schedule, subject to applicable withholding and other
taxes. The Base Salary may, by action and in the sole discretion of the Board,
be increased at any time or from time to time. After July 1, 2000, the Board
shall consider the performance of the Executive for a possible merit increase in
the Base Salary; provided that any such increase shall be in the sole discretion
of the Board.
3.2 BONUS COMPENSATION. In addition to the Base Salary, the
Executive shall be entitled to receive bonus compensation (the "Bonus
Compensation") during the Initial Term. The Board shall establish a performance
bonus formula with respect to Bonus Compensation pursuant to which the Executive
will be able to receive a target bonus of $60,000 per annum if the Company
achieves the specified level of financial results.
3.3 STOCK OPTIONS. Contemporaneously herewith, SmartDisk is
granting the Executive a non-qualified stock option to purchase 80,000 shares of
SmartDisk's common stock, the exercise price of which shall be established in
accordance with the SmartDisk option pricing policy in effect on the date
hereof. The option will be granted pursuant to the Company's 1999 Incentive
Compensation Plan (the "Incentive Plan") and be in customary form; provided that
the option will vest (ie, become exercisable) with respect to twenty-five
percent (25%) of the shares issuable upon exercise of such option on the first
anniversary date of this Agreement and thereafter vest as to six and one-quarter
percent (6.25%) of the subject shares on each subsequent quarter. For example,
such option will be exercisable with respect to 37.5% of the subject shares on
the 18-month anniversary of this Agreement. In the event of a "Change in
Control" (as defined in the Incentive Plan), fifty percent of the unvested
shares underlying the option shall vest on the effective date of a Change in
Control.
4. EXPENSE REIMBURSEMENT AND OTHER BENEFITS.
4.1 REIMBURSABLE EXPENSES. During the term of the Executive's
employment hereunder, the Company, upon the submission of proper substantiation
by the Executive, shall reimburse the Executive for all reasonable expenses
actually and necessarily paid or incurred by the Executive in the course of and
pursuant to the business of the Company.
4.2 OTHER BENEFITS. The Executive shall be entitled to
participate in all medical, dental and hospitalization, group life insurance,
and any and all other plans as are presently and hereinafter provided by
SmartDisk to its executives on substantially the same terms as the other
executives and prior
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to December 31, 2000 in accordance with Section 7.5 of the Merger Agreement. The
Executive shall be entitled to vacations in accordance with the Company's
prevailing policy for its executives.
4.3 WORKING FACILITIES. The Company shall furnish the
Executive with an office, secretarial help and such other facilities and
services suitable to his position and adequate for the performance of his duties
hereunder.
4.4 AUTOMOBILE. During the term of Executive's employment
hereunder, the Company shall (x) provide the Executive with a non-accountable
automobile allowance of six hundred fifty dollars ($650.00) per month, which is
intended to compensate Executive for his automobile lease costs, and (y)
reimburse the Executive for all out-of-pocket costs of gasoline, oil, repairs,
maintenance, insurance and other operating costs incurred by Executive by reason
of the use of Executive's automobile for Company business from time to time. The
Company shall also provide Executive with a one-time, non-accountable automobile
allowance of $10,000, which is intended to compensate Executive for his
automobile lease down payment, delivery charges and other acquisition-related
costs.
5. TERMINATION.
5.1 TERMINATION FOR CAUSE. The Company shall at all times have
the right, upon written notice to the Executive, to terminate the Executive's
employment hereunder for "Cause" (as hereinafter defined). For purposes of this
Agreement, the term "Cause" shall mean (i) the failure or refusal of the
Executive to perform the duties or render the services reasonably assigned to
him from time to time by or under direction of the President of the Company
(except during reasonable vacation periods or sick leave), which failure or
refusal is not cured within 15 days of written notice by the Company; (ii) gross
negligence or willful misconduct by the Executive in the performance of his
duties as an employee of the Company, (iii) the conviction of the Executive of a
felony; (iv) the material breach by the Executive of any of the provisions of
Section 6.1, 6.2, 6.3 or 6.4 hereof; (v) the breach by the Executive of his
fiduciary duty or duty of trust to the Company, including the commission by the
Executive of an act of fraud or embezzlement against the Company, (vi) substance
abuse, or (vii) any other material breach by the Executive of any of the
material terms or provisions of this Agreement or any other agreement between
the Company and the Executive related to the Executive's employment, which other
material breach is not cured within ten (10) business days of written notice by
the Company. Upon any termination pursuant to this Section 5.1, the Executive
shall be entitled to receive any salary (other than Bonus Compensation) and
employment benefits which shall have accrued prior to the date of termination,
but shall not be entitled to any bonus or severance payments, salary or
employment benefits relating to periods subsequent to the date of termination,
subject to Executive's rights to continue medical and dental coverage under the
Company's group policy, at Executive's expense, as may be provided by law.
5.2 DISABILITY. The Company shall at all times have the right,
upon written notice to the Executive, to terminate the Executive's employment
hereunder, if the Executive shall, as the result of mental or physical
incapacity, illness or disability, become unable to perform his duties hereunder
for in excess of ninety (90) days in any 12-month period. Upon any termination
pursuant to this Section 5.2, the Company shall pay to the Executive (i) the
balance of Executive's salary and other benefits for the remainder of the month
in which disability occurs, and (ii) a pro rata portion of any Bonus
Compensation to which Executive would be otherwise entitled under Section 3.2
based upon the ratio the number of months employed (calculated through the end
of the then current month) bears to the bonus period of twelve (12) months and
the Company shall have no further liability hereunder (other than for
reimbursement for reasonable business expenses incurred prior to the date of
termination, subject, however to the provisions of Section 4.1).
5.3 DEATH. In the event of the death of the Executive during
the term of his employment hereunder, the Company shall pay to the estate of the
deceased Executive (i) the balance of Executive's salary and other benefits for
the remainder of the month in which death occurs, and (ii) a pro rata portion of
any Bonus Compensation to which Executive would be otherwise entitled under
Section 3.2
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based upon the ratio the number of months employed (calculated through the end
of the then current month) bears to the bonus period of twelve (12) months and
the Company shall have no further liability hereunder (other than for
reimbursement for reasonable business expenses incurred prior to the date of the
Executive's death, subject, however to the provisions of Section 4.1).
5.4 TERMINATION BY THE COMPANY WITHOUT CAUSE. At any time, the
Company shall have the right to terminate this Agreement and Executive's
employment with the Company by providing at least 30 days prior written notice
to the Executive; provided, however, that, the Company shall (i) pay to the
Executive any unpaid Base Salary accrued through the effective date of
termination specified in such notice, (ii) pay Executive's Base Salary in the
manner set forth in Section 3.1 hereof until the date which is three months
following such effective date (the "Severance Date") and (iii) pay a pro rata
portion of any Bonus Compensation to which the Executive would be otherwise
entitled under Section 3.2 based upon the ratio the number of months employed
bears to the bonus period of twelve (12) months. Following the effective date of
such termination, the Company shall continue to pay for or provide to the
Executive such benefits as may have been provided to the Executive in accordance
with Section 4.2 immediately prior to such termination (subject to changes in
the terms of such coverage by the provider as may be applicable to the Company
as a whole) for a period ending on the earliest of (A) the date of the
Executive's employment by a third party on a substantially full-time basis, (B)
the death of the Executive and (C) the Severance Date. Except as expressly
provided herein, the Company shall have no further liability hereunder (other
than for reimbursement for reasonable business expenses incurred prior to the
date of termination, subject, however to the provisions of Section 4.1).
5.5 TERMINATION BY EMPLOYEE. At any time, the Executive may
terminate this Agreement and Executive's employment with the Company by
providing at least 30 days prior written notice to the Company. Upon termination
of this Agreement pursuant to this Section 5.5., the Executive shall be entitled
to receive any salary (other than Bonus Compensation) and employment benefits
which shall have accrued prior to the date of termination, but shall not be
entitled to any bonus or severance payments, salary or employment benefits
relating to periods subsequent to the date of termination, subject to
Executive's rights to continue medical and dental coverage under the Company's
group policy at Executive's expense, as may be provided by law.
6. RESTRICTIVE COVENANTS.
6.1 NON-COMPETITION. While employed by the Company and for a
period of two years following the later of the date his employment is terminated
hereunder or, if applicable, the Severance Date (the "Restricted Period"), the
Executive shall not, directly or indirectly (whether as owner, principal, agent,
shareholder, employee, partner, lender, venturer with or consultant to any
person, firm, partnership, corporation, limited liability company or other
entity), whether or not compensation is received, engage or participate in any
activity for any business or entity which is or plans to engage in the marketing
and sale of any products or services which are under active development or are
marketed or sold by the Company, SmartDisk, and/or their respective subsidiaries
and affiliates during the term of this Agreement anywhere in the United States;
provided, however, that nothing herein shall be deemed to prevent the Executive
from acquiring through market purchases and owning, solely as an investment,
less than three percent in the aggregate of the equity securities of any class
of any issuer whose shares are registered under ss.12(b) or 12(g) of the
Securities Exchange Act of 1934, as amended, and are listed or admitted for
trading on any United States national securities exchange or are quoted on the
National Association of Securities Dealers Automated Quotations System, or any
similar system of automated dissemination of quotations of securities prices in
common use, so long as the Executive is neither involved in the management or
conduct of the business affairs of such issuer nor a member of any "control
group" (within the meaning of the rules and regulations of the United States
Securities and Exchange Commission) of any such issuer. Notwithstanding the
foregoing, in the event that the Executive's employment hereunder is terminated
pursuant to Section 5.4 or Section 5.5, the Restricted Period shall terminate on
the later of (a) one year after the date Executive's employment is terminated or
(b) two years from the date of execution of this Agreement. The Executive
acknowledges and agrees that the covenants provided for in this Section 6.1
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are reasonable and necessary in terms of time, area and line of business to
protect the Company's and SmartDisk's "Trade Secrets" (as hereinafter defined).
The Executive further acknowledges and agrees that such covenants are reasonable
and necessary in terms of time, area and line of business to protect the
Company's and SmartDisk's legitimate business interests, which include their
interests in protecting the Company's and SmartDisk's (i) valuable confidential
business information, (ii) substantial relationships with customers throughout
the United States, and (iii) customer goodwill associated with the ongoing
business of the Company and SmartDisk. The Executive expressly authorizes the
enforcement of the covenants provided for in this Section 6.1 by (A) SmartDisk
and its subsidiaries, (B) SmartDisk's and the Company's permitted assigns, and
(C) any successors to SmartDisk's and the Company's business. To the extent that
the covenant provided for in this Section 6.1 may later be deemed by a court to
be too broad to be enforced with respect to its duration or with respect to any
particular activity or geographic area, the court making such determination
shall have the power to reduce the duration or scope of the provision, and to
add or delete specific words or phrases to or from the provision. The provision
as modified shall then be enforced.
6.2 NONDISCLOSURE. Executive shall not divulge, communicate, use to the
detriment of the Company, SmartDisk or for the benefit of any other person or
persons, or misuse in any way, any "Confidential Information" pertaining to the
Company or SmartDisk. Any confidential information or data now known or
hereafter acquired by the Executive with respect to the Company or SmartDisk
shall be deemed a valuable, special and unique asset of the Company or SmartDisk
that is received by the Executive in confidence and as a fiduciary, and
Executive shall remain a fiduciary to the Company and SmartDisk with respect to
all of such information. For purposes of this Agreement, the following terms
when used in this Agreement have the meanings set forth below:
"CONFIDENTIAL INFORMATION" means confidential data and confidential
information relating to the business of the Company or SmartDisk (which does not
rise to the status of a Trade Secret under applicable law) which is or has been
disclosed to the Executive or of which the Executive became aware as a
consequence of or through his employment with the Company and which has value to
the Company or SmartDisk and is not generally known to the competitors of the
Company or SmartDisk. Confidential Information does not include (a) information
that is or becomes generally available to the public other than as a result of
the Executive's disclosure of such information, (b) information that was within
the Executive's possession prior to it being furnished to the Executive by or on
behalf of SmartDisk or its affiliates, including the Company, provided that the
source of such information was not known to the Executive to be bound by a
confidentiality agreement with or other contractual, legal or fiduciary
obligation of confidentiality to SmartDisk or its affiliates, including the
Company, or any other party with respect to such information, (c) information
that becomes available to the Executive on a non-confidential basis from a
source other than SmartDisk or any of its affiliates, including the Company,
provided that such source is not known to the Executive to be bound by a
confidentiality agreement with or other contractual, legal or fiduciary
obligation of confidentiality to the SmartDisk or its affiliates, including the
Company, or any other party with respect to such information, (d) information
the disclosure of which is required by applicable law or judicial process, or
(e) general technical skills or general experience gained by the Executive
during the Executive's employment with the Company.
"TRADE SECRETS" means information of the Company or SmartDisk
including, but not limited to, technical or nontechnical data, formulas,
patterns, compilations, programs, financial data, financial plans, product or
service plans or lists of actual or potential customers or suppliers which (i)
derives economic value, actual or potential, from not being generally known to,
and not being readily ascertainable by proper means by, other persons who can
obtain economic value from its disclosure or use, and (ii) is the subject of
efforts that are reasonable under the circumstances to maintain its secrecy.
In addition, during the Initial Term and during the periods described
in the last sentence of this Section 6.2, the Executive (a) will receive and
hold all Confidential Information and Trade Secrets (collectively "Company
Information") in trust and in strictest confidence, (b) will take reasonable
steps to protect the Company Information from disclosure and will in no event
take any action causing, or fail to
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take any action reasonably necessary to prevent, any Company Information to lose
its character as Company Information, and (c) except as required by the
Executive's duties in the course of his employment by the Company, will not,
directly or indirectly, use, disseminate or otherwise disclose any Company
Information to any third party without the prior written consent of SmartDisk,
which may be withheld in SmartDisk's absolute discretion. The provisions of this
Section 6.2 shall survive the termination of the Executive's employment (i) for
a period of five years with respect to Confidential Information, and (ii) with
respect to Trade Secrets, for so long as any such information qualifies as a
Trade Secret under applicable law.
6.3 NONSOLICITATION OF EMPLOYEES AND CUSTOMERS. While employed
by the Company and for a period of two years following the later of the date his
employment is terminated hereunder by either the Company or the Executive, or,
if applicable, the Severance Date, the Executive shall not, directly or
indirectly, for himself or for any other person, firm, corporation, partnership,
association or other entity, (i) attempt to employ or enter into any contractual
arrangement with any employee or former employee of the Company or SmartDisk,
unless such employee or former employee has not been employed by the Company or
SmartDisk for a period in excess of three months, and/or (ii) divert or take
away, or attempt to divert or take away, the business or prospects of any of the
actual or targeted prospective customers or clients of the Company or SmartDisk,
nor shall the Executive make known the names and addresses of such customers or
any information relating in any manner to the Company's or SmartDisk's trade or
business relationships with such customers.
6.4 ASSIGNMENT OF INVENTIONS.
(a) ORIGINAL DEVELOPMENT. The Executive represents
and warrants to the Company that all work that the Executive performs
for or on behalf of the Company and its clients, and all work product
that the Executive produces in such capacity, including but not limited
to software, documentation, memoranda, ideas, designs, inventions,
processes, algorithms, etc. ("Work Product"), will not knowingly
infringe upon or violate any patent, copyright, trade secret, or other
property right of any of his former employers or of any other third
party. The Executive will not disclose to the Company, or use in any of
his Work Product, any confidential or proprietary information belonging
to others, unless both the owner thereof and the Company have consented
in writing.
(b) DISCLOSURE. The Executive will promptly disclose
to the Company all Work Product developed by him within the scope of
his employment with the Company or which relates directly to, or
involve the use of, any Company Information, including but not limited
to all software, concepts, ideas and designs, and all documentation,
manuals, letters, pamphlets, drafts, memoranda and other writings or
tangible things of any kind. The Executive will not disclose them to
anyone other than authorized Company personnel.
(c) COPYRIGHT OWNERSHIP. The Executive acknowledges
and agrees that all Work Product which is made by him (solely or
jointly with others) within the scope of his employment and which is
protectable by copyright is being created at the instance of the
Company and is "work made for hire," as that term is defined in the
United States Copyright Act (17 USCA, Section 101).
(d) ASSIGNMENT. The Executive hereby assigns to the
Company all of his other rights, title and interest (including but not
limited to all patent, copyright and trade secret rights) in and to all
Work Products prepared by him, whether patentable or not, made or
conceived in whole or in part by him within the scope of his employment
hereunder, or that relates directly to, or involves the use of Company
Information.
(e) DOCUMENTS. The Executive agrees to execute all
documents reasonably requested by the Company to further evidence the
foregoing assignment and to provide all
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reasonable assistance to the Company (at the Company's expense) in
perfecting or protecting any or all of the Company's rights in his Work
Product.
(f) PRE-EXISTING INVENTIONS NOT ASSIGNED. The
Executive represents that the Executive has indicated on Annex III to
this Agreement all inventions, expression of ideas or other Work
Product related to the Company's or SmartDisk's business and created
prior to his employment by the Company in which the Executive has any
right, title or interest that the Executive does not assign to the
Company. If the Executive does not have any such inventions,
expressions of ideas, or work product to indicate, the Executive will
write "none" on Annex III. The Executive will not assert any rights
under any inventions as having been made or acquired by him prior to
his being employed by the Company, unless such inventions are
identified on Annex I.
6.5 BOOKS AND RECORDS. All books, records, reports, writings, notes,
notebooks, computer programs, sketches, drawings, blueprints, prototypes,
formulas, photographs, negatives, models, equipment, chemicals, reproductions,
proposals, flow sheets, supply contracts, customer lists and other documents
and/or things belonging to the Company or embodying or relating to any
Confidential Information or Trade Secrets, whether prepared by the Executive or
otherwise coming into the Executive's possession shall not be copied,
duplicated, replicated, transformed, modified or removed from the premises of
the Company except pursuant to the business of the Company and shall be returned
immediately to the Company on termination of the Executive's employment
hereunder or on the Company's request at any time.
6.6 NO CONFLICT. The Executive represents to the Company that his
execution and performance of this Agreement does not violate the provisions of
any employment, non-competition, confidentiality or other material agreement to
which he is a party or by which he is bound. The Executive also agrees to
indemnify and hold harmless the Company from any and all damages and other
obligations or liabilities incurred by the Company in connection with any breach
of the foregoing representation.
7. INJUNCTION. It is recognized and hereby acknowledged by the parties
hereto that a breach by the Executive of any of the covenants contained in
Section 6 of this Agreement will cause irreparable harm and damage to SmartDisk
and the Company, the monetary amount of which may be virtually impossible to
ascertain. As a result, the Executive recognizes and hereby acknowledges that
Smart Disk or the Company shall be entitled to seek an injunction from any court
of competent jurisdiction (without posting a bond or other security) enjoining
and restraining any violation of any or all of the covenants contained in
Section 6 of this Agreement by the Executive or any of his affiliates,
associates, partners or agents, either directly or indirectly, and that such
right to injunction shall be cumulative and in addition to whatever other
remedies the Company or the Company may possess.
8. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without regard to conflicts of
laws principles thereof and all questions concerning the validity and
construction hereof shall be determined in accordance with the laws of said
state.
9. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and, upon
its effectiveness, shall supersede all prior agreements, understandings and
arrangements, both oral and written, between the Executive and SmartDisk (or any
of its affiliates, including the Company) with respect to such subject matter.
Except for the obligation to pay all accrued but unpaid salary due the
Executive, all such prior agreements, understandings and arrangements for the
provision of services by the Executive to the Company and the compensation of
the Executive in any form are hereby terminated, and the Executive hereby
releases and forever discharges SmartDisk (as well as the Company and its other
affiliates) from any and all liabilities and obligations of any nature arising
out of or in connection with any and all such prior agreements, understandings
or arrangements. This Agreement may not be modified in any way unless by a
written instrument signed by both the Company and the Executive.
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10. NOTICES. Any notice required or permitted to be given hereunder
shall be deemed given when delivered by hand or when deposited in the United
States mail, by registered or certified mail, return receipt requested, postage
prepaid, (i) if to the Company, c/o SmartDisk Corporation, 3506 Mercantile
Avenue, Naples, Florida 34104, Attention: Daniel E. Reed, Vice President, and
(ii) if to the Executive, to his address as reflected on the payroll records of
the Company, or to such other address as either party hereto may from time to
time give notice of to the other.
11. BENEFITS; BINDING EFFECT. This Agreement shall be for the benefit
of and binding upon the parties hereto and their respective heirs, personal
representative, legal representatives, successors and, where applicable,
assigns, including, without limitation, any successor to the Company, whether by
merger, consolidation, sale of stock, sale of assets or otherwise; provided,
however that the Executive shall not delegate his employment obligations
hereunder, or any portion thereof, to any other person.
12. SEVERABILITY. The invalidity of any one or more of the words,
phrases, sentences, clauses or sections contained in this Agreement shall not
affect the enforceability of the remaining portions of this Agreement or any
part thereof, all of which are inserted conditionally on their being valid in
law, and, in the event that any one or more of the words, phrases, sentences,
clauses or sections contained in this Agreement shall be declared invalid, this
Agreement shall be construed as if such invalid word or words, phrase or
phrases, sentence or sentences, clause or clauses, or section or sections had
not been inserted. If such invalidity is caused by length of time or size of
area, or both, the otherwise invalid provision will be considered to be reduced
to a period or area which would cure such invalidity.
13. WAIVERS. The waiver by either party hereto of a breach or violation
of any term or provision of this Agreement shall not operate nor be construed as
a waiver of any subsequent breach or violation.
14. DAMAGES. Nothing contained herein shall be construed to prevent the
Company or the Executive from seeking and recovering from the other damages
sustained by either or both of them as a result of its or his breach of any term
or provision of this Agreement. In the event that either party hereto brings
suit for the collection of any damages resulting from, or for the injunction of
any action constituting, a breach of any of the terms or provisions of this
Agreement, then the party found to be at fault shall pay all reasonable court
costs and attorneys' fees of the other.
15. SECTION HEADINGS. The section headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
16. NO THIRD PARTY BENEFICIARY. Nothing expressed or implied in this
Agreement is intended, or shall be construed, to confer upon or give any person
other than the Company, the parties hereto and their respective heirs, personal
representatives, legal representatives, successors and assigns, any rights or
remedies under or by reason of this Agreement.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
SMARTDISK PERSONAL STORAGE SYSTEMS
CORPORATION
By: /s/ MICHAEL S. BATTAGLIA
---------------------------------------
Michael S. Battaglia,
President and Chief Executive Officer
/s/ VINCE FEDELE
---------------------------------------
Vince Fedele
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SMARTDISK CORPORATION (AS TO SECTION 1.2)
By: /s/ MICHAEL S. BATTAGLIA
---------------------------
Michael S. Battaglia,
President and Chief Executive Officer
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ANNEX I
PRE-EXISTING INVENTIONS
None
EXHIBIT 10.9
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made and entered into as of
March 6, 2000 by and between SmartDisk Personal Storage Systems Corporation, a
Delaware corporation formerly known as "VST Acquisition, Inc." (the "Company"),
and James M. Giarrusso (the "Executive").
RECITALS
A. The Board of Directors of the Company (the "Board") desires to
ensure the Executive's employment with the Company and to compensate him
therefor.
B. The Executive's execution and delivery of this Agreement is a
condition to the closing obligations of SmartDisk Corporation, a Delaware
corporation ("SmartDisk"), pursuant to an Agreement and Plan of Merger, dated as
of February 23, 2000, (the "Merger Agreement") among the Company, SmartDisk, VST
Technologies, Inc., a Delaware corporation, and certain "Shareholders" party
thereto.
C. The execution of this Agreement is a material inducement for Company
and SmartDisk to enter into the Merger Agreement.
D. The Board has determined that this Agreement will reinforce and
encourage the Executive's attention and dedication to the Company.
E. The Executive is willing to make his services available to the
Company on the terms and conditions hereinafter set forth.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and mutual covenants
set forth herein, the parties agree as follows:
1. EMPLOYMENT.
1.1 GENERAL. The Company hereby agrees to employ the
Executive, and the Executive hereby agrees to serve the Company on the terms and
conditions set forth herein.
1.2 DUTIES OF EXECUTIVE. During the term of this Agreement,
the Executive shall serve as the Senior Vice President and General Manager of
the Company, shall diligently perform all services as may be assigned to him by
or under the direction of the President of the Company and shall exercise such
power and authority as may from time to time be delegated to him by the
Company's Board of Directors. The Executive shall devote substantially all of
his business time and attention to the business and affairs of the Company,
render such services to the best of his ability, and use his best efforts to
promote the interests of the Company.
1.3 PLACE OF PERFORMANCE. In connection with his employment by
the Company hereunder, the Executive shall perform his duties and obligations
hereunder primarily from the Company's offices located in Acton, Massachusetts,
except for required travel on the Company's business.
2. TERM.
2.1 INITIAL TERM. The initial term of this Agreement, and the
employment of the Executive hereunder, shall be for the two-year period
commencing on the date hereof (the "Initial Term").
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2.2 RENEWAL TERMS. The Initial Term of this Agreement, and the
employment of the Executive hereunder shall automatically be renewed for
successive one year periods, unless the Company or the Executive provides
written notice to the other at least 30 days prior to the expiration of the
applicable term. The terms and conditions of any renewal term shall be the same
as those contained herein unless otherwise mutually agreed upon by the Company
and the Executive in a written supplement to this Agreement signed by the
Executive and the Company's President (the "Written Supplement"). In the event
that the Company delivers a notice of non-renewal, the Executive shall be
entitled to the compensation and benefits as if terminated pursuant to Section
5.4 and shall be subject to Section 6.1 as if terminated pursuant to Section
5.4.
3. COMPENSATION.
3.1 BASE SALARY. The Executive shall receive a base salary at
the annual rate of $200,000 (the "Base Salary") during the Initial Term of this
Agreement, with such Base Salary payable in installments consistent with the
Company's normal payroll schedule, subject to applicable withholding and other
taxes. The Base Salary may, by action and in the sole discretion of the Board,
be increased at any time or from time to time. After the first anniversary of
this Agreement, the Board shall consider the performance of the Executive for a
possible merit increase in the Base Salary; provided that any such increase
shall be in the sole discretion of the Board.
3.2 BONUS COMPENSATION. In addition to the Base Salary, the
Executive shall be entitled to receive bonus compensation (the "Bonus
Compensation") during the Initial Term. The Board shall establish a performance
bonus formula with respect to Bonus Compensation pursuant to which the Executive
will be able to receive a target bonus of $60,000 per annum if the Company
achieves the specified level of financial results.
3.3 STOCK OPTIONS. Contemporaneously herewith, SmartDisk is
granting the Executive a non-qualified stock option to purchase 60,000 shares of
SmartDisk's common stock, the exercise price of which shall be established in
accordance with the SmartDisk option pricing policy in effect on the date
hereof. The option will be granted pursuant to the Company's 1999 Incentive
Compensation Plan (the "Incentive Plan") and be in customary form; provided that
the option will vest (ie, become exercisable) with respect to twenty-five
percent (25%) of the shares issuable upon exercise of such option on the first
anniversary date of this Agreement and thereafter vest as to six and one-quarter
percent (6.25%) of the subject shares on each subsequent quarter. For example,
such option will be exercisable with respect to 37.5% of the subject shares on
the 18-month anniversary of this Agreement. In the event of a "Change in
Control" (as defined in the Incentive Plan), fifty percent of the unvested
shares underlying the option shall vest on the effective date of a Change in
Control.
4. EXPENSE REIMBURSEMENT AND OTHER BENEFITS.
4.1 REIMBURSABLE EXPENSES. During the term of the Executive's
employment hereunder, the Company, upon the submission of proper substantiation
by the Executive, shall reimburse the Executive for all reasonable expenses
actually and necessarily paid or incurred by the Executive in the course of and
pursuant to the business of the Company.
4.2 OTHER BENEFITS. The Executive shall be entitled to
participate in all medical, dental and hospitalization, group life insurance,
and any and all other plans as are presently and hereinafter provided by
SmartDisk to its executives on substantially the same terms as the other
executives and prior to December 31, 2000 in accordance with Section 7.5 of the
Merger Agreement. The Executive shall be entitled to vacations in accordance
with the Company's prevailing policy for its executives.
4.3 WORKING FACILITIES. The Company shall furnish the
Executive with an office, secretarial help and such other facilities and
services suitable to his position and adequate for the performance of his duties
hereunder.
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5. TERMINATION.
5.1 TERMINATION FOR CAUSE. The Company shall at all times have
the right, upon written notice to the Executive, to terminate the Executive's
employment hereunder for "Cause" (as hereinafter defined). For purposes of this
Agreement, the term "Cause" shall mean (i) the failure or refusal of the
Executive to perform the duties or render the services reasonably assigned to
him from time to time by or under direction of the President of the Company
(except during reasonable vacation periods or sick leave), which failure or
refusal is not cured within 15 days of written notice by the Company; (ii) gross
negligence or willful misconduct by the Executive in the performance of his
duties as an employee of the Company, (iii) the conviction of the Executive of a
felony; (iv) the material breach by the Executive of any of the provisions of
Section 6.1, 6.2, 6.3 or 6.4 hereof; (v) the breach by the Executive of his
fiduciary duty or duty of trust to the Company, including the commission by the
Executive of an act of fraud or embezzlement against the Company, (vi) substance
abuse, or (vii) any other material breach by the Executive of any of the
material terms or provisions of this Agreement or any other agreement between
the Company and the Executive related to the Executive's employment, which other
material breach is not cured within ten (10) business days of written notice by
the Company. Upon any termination pursuant to this Section 5.1, the Executive
shall be entitled to receive any salary (other than Bonus Compensation) and
employment benefits which shall have accrued prior to the date of termination,
but shall not be entitled to any bonus or severance payments, salary or
employment benefits relating to periods subsequent to the date of termination,
subject to Executive's rights to continue medical and dental coverage under the
Company's group policy, at Executive's expense, as may be provided by law.
5.2 DISABILITY. The Company shall at all times have the right,
upon written notice to the Executive, to terminate the Executive's employment
hereunder, if the Executive shall, as the result of mental or physical
incapacity, illness or disability, become unable to perform his duties hereunder
for in excess of ninety (90) days in any 12-month period. Upon any termination
pursuant to this Section 5.2, the Company shall pay to the Executive (i) the
balance of Executive's salary and other benefits for the remainder of the month
in which disability occurs, and (ii) a pro rata portion of any Bonus
Compensation to which Executive would be otherwise entitled under Section 3.2
based upon the ratio the number of months employed (calculated through the end
of the then current month) bears to the bonus period of twelve (12) months and
the Company shall have no further liability hereunder (other than for
reimbursement for reasonable business expenses incurred prior to the date of
termination, subject, however to the provisions of Section 4.1).
5.3 DEATH. In the event of the death of the Executive during
the term of his employment hereunder, the Company shall pay to the estate of the
deceased Executive (i) the balance of Executive's salary and other benefits for
the remainder of the month in which death occurs, and (ii) a pro rata portion of
any Bonus Compensation to which Executive would be otherwise entitled under
Section 3.2 based upon the ratio the number of months employed (calculated
through the end of the then current month) bears to the bonus period of twelve
(12) months and the Company shall have no further liability hereunder (other
than for reimbursement for reasonable business expenses incurred prior to the
date of the Executive's death, subject, however to the provisions of Section
4.1).
5.4 TERMINATION BY THE COMPANY WITHOUT CAUSE. At any time, the
Company shall have the right to terminate this Agreement and Executive's
employment with the Company by providing at least 30 days prior written notice
to the Executive; provided, however, that, the Company shall (i) pay to the
Executive any unpaid Base Salary accrued through the effective date of
termination specified in such notice, (ii) pay Executive's Base Salary in the
manner set forth in Section 3.1 hereof until the date which is three months
following such effective date (the "Severance Date") and (iii) pay a pro rata
portion of any Bonus Compensation to which the Executive would be otherwise
entitled under Section 3.2 based upon the ratio the number of months employed
bears to the bonus period of twelve (12) months. Following the effective date of
such termination, the Company shall continue to pay for or provide to the
Executive such benefits as may have been provided to the Executive in accordance
with Section 4.2 immediately prior to such termination (subject to changes in
the terms of such coverage by the provider as may be applicable
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to the Company as a whole) for a period ending on the earliest of (A) the date
of the Executive's employment by a third party on a substantially full-time
basis, (B) the death of the Executive and (C) the Severance Date. Except as
expressly provided herein, the Company shall have no further liability hereunder
(other than for reimbursement for reasonable business expenses incurred prior to
the date of termination, subject, however to the provisions of Section 4.1).
5.5 TERMINATION BY EMPLOYEE. At any time, the Executive may
terminate this Agreement and Executive's employment with the Company by
providing at least 30 days prior written notice to the Company. Upon termination
of this Agreement pursuant to this Section 5.5., the Executive shall be entitled
to receive any salary (other than Bonus Compensation) and employment benefits
which shall have accrued prior to the date of termination, but shall not be
entitled to any bonus or severance payments, salary or employment benefits
relating to periods subsequent to the date of termination, subject to
Executive's rights to continue medical and dental coverage under the Company's
group policy at Executive's expense, as may be provided by law.
6. RESTRICTIVE COVENANTS.
6.1 NON-COMPETITION. While employed by the Company and for a
period of two years following the later of the date his employment is terminated
hereunder or, if applicable, the Severance Date (the "Restricted Period"), the
Executive shall not, directly or indirectly (whether as owner, principal, agent,
shareholder, employee, partner, lender, venturer with or consultant to any
person, firm, partnership, corporation, limited liability company or other
entity), whether or not compensation is received, engage or participate in any
activity for any business or entity which is or plans to engage in the marketing
and sale of any products or services which are under active development or are
marketed or sold by the Company, SmartDisk, and/or their respective subsidiaries
and affiliates during the term of this Agreement anywhere in the United States;
provided, however, that nothing herein shall be deemed to prevent the Executive
from acquiring through market purchases and owning, solely as an investment,
less than three percent in the aggregate of the equity securities of any class
of any issuer whose shares are registered under ss.12(b) or 12(g) of the
Securities Exchange Act of 1934, as amended, and are listed or admitted for
trading on any United States national securities exchange or are quoted on the
National Association of Securities Dealers Automated Quotations System, or any
similar system of automated dissemination of quotations of securities prices in
common use, so long as the Executive is neither involved in the management or
conduct of the business affairs of such issuer nor a member of any "control
group" (within the meaning of the rules and regulations of the United States
Securities and Exchange Commission) of any such issuer. Notwithstanding the
foregoing, in the event that the Executive's employment hereunder is terminated
pursuant to Section 5.4 or Section 5.5, the Restricted Period shall terminate on
the later of (a) one year after the date Executive's employment is terminated or
(b) two years from the date of execution of this Agreement. The Executive
acknowledges and agrees that the covenants provided for in this Section 6.1 are
reasonable and necessary in terms of time, area and line of business to protect
the Company's and SmartDisk's "Trade Secrets" (as hereinafter defined). The
Executive further acknowledges and agrees that such covenants are reasonable and
necessary in terms of time, area and line of business to protect the Company's
and SmartDisk's legitimate business interests, which include their interests in
protecting the Company's and SmartDisk's (i) valuable confidential business
information, (ii) substantial relationships with customers throughout the United
States, and (iii) customer goodwill associated with the ongoing business of the
Company and SmartDisk. The Executive expressly authorizes the enforcement of the
covenants provided for in this Section 6.1 by (A) SmartDisk and its
subsidiaries, (B) SmartDisk's and the Company's permitted assigns, and (C) any
successors to SmartDisk's and the Company's business. To the extent that the
covenant provided for in this Section 6.1 may later be deemed by a court to be
too broad to be enforced with respect to its duration or with respect to any
particular activity or geographic area, the court making such determination
shall have the power to reduce the duration or scope of the provision, and to
add or delete specific words or phrases to or from the provision. The provision
as modified shall then be enforced.
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6.2 NONDISCLOSURE. Executive shall not divulge, communicate,
use to the detriment of the Company, SmartDisk or for the benefit of any other
person or persons, or misuse in any way, any "Confidential Information"
pertaining to the Company or SmartDisk. Any confidential information or data now
known or hereafter acquired by the Executive with respect to the Company or
SmartDisk shall be deemed a valuable, special and unique asset of the Company or
SmartDisk that is received by the Executive in confidence and as a fiduciary,
and Executive shall remain a fiduciary to the Company and SmartDisk with respect
to all of such information. For purposes of this Agreement, the following terms
when used in this Agreement have the meanings set forth below:
"CONFIDENTIAL INFORMATION" means confidential data and
confidential information relating to the business of the Company or SmartDisk
(which does not rise to the status of a Trade Secret under applicable law) which
is or has been disclosed to the Executive or of which the Executive became aware
as a consequence of or through his employment with the Company and which has
value to the Company or SmartDisk and is not generally known to the competitors
of the Company or SmartDisk. Confidential Information does not include (a)
information that is or becomes generally available to the public other than as a
result of the Executive's disclosure of such information, (b) information that
was within the Executive's possession prior to it being furnished to the
Executive by or on behalf of SmartDisk or its affiliates, including the Company,
provided that the source of such information was not known to the Executive to
be bound by a confidentiality agreement with or other contractual, legal or
fiduciary obligation of confidentiality to SmartDisk or its affiliates,
including the Company, or any other party with respect to such information, (c)
information that becomes available to the Executive on a non-confidential basis
from a source other than SmartDisk or any of its affiliates, including the
Company, provided that such source is not known to the Executive to be bound by
a confidentiality agreement with or other contractual, legal or fiduciary
obligation of confidentiality to the SmartDisk or its affiliates, including the
Company, or any other party with respect to such information, (d) information
the disclosure of which is required by applicable law or judicial process, or
(e) general technical skills or general experience gained by the Executive
during the Executive's employment with the Company.
"TRADE SECRETS" means information of the Company or
SmartDisk including, but not limited to, technical or nontechnical data,
formulas, patterns, compilations, programs, financial data, financial plans,
product or service plans or lists of actual or potential customers or suppliers
which (i) derives economic value, actual or potential, from not being generally
known to, and not being readily ascertainable by proper means by, other persons
who can obtain economic value from its disclosure or use, and (ii) is the
subject of efforts that are reasonable under the circumstances to maintain its
secrecy.
In addition, during the Initial Term and during the periods described
in the last sentence of this Section 6.2, the Executive (a) will receive and
hold all Confidential Information and Trade Secrets (collectively "Company
Information") in trust and in strictest confidence, (b) will take reasonable
steps to protect the Company Information from disclosure and will in no event
take any action causing, or fail to take any action reasonably necessary to
prevent, any Company Information to lose its character as Company Information,
and (c) except as required by the Executive's duties in the course of his
employment by the Company, will not, directly or indirectly, use, disseminate or
otherwise disclose any Company Information to any third party without the prior
written consent of SmartDisk, which may be withheld in SmartDisk's absolute
discretion. The provisions of this Section 6.2 shall survive the termination of
the Executive's employment (i) for a period of five years with respect to
Confidential Information, and (ii) with respect to Trade Secrets, for so long as
any such information qualifies as a Trade Secret under applicable law.
6.3 NONSOLICITATION OF EMPLOYEES AND CUSTOMERS. While employed
by the Company and for a period of two years following the later of the date his
employment is terminated hereunder by either the Company or the Executive, or,
if applicable, the Severance Date, the Executive shall not, directly or
indirectly, for himself or for any other person, firm, corporation, partnership,
association or other entity, (i) attempt to employ or enter into any contractual
arrangement with any employee or former employee of the Company or SmartDisk,
unless such employee or former employee has not been
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employed by the Company or SmartDisk for a period in excess of three months,
and/or (ii) divert or take away, or attempt to divert or take away, the business
or prospects of any of the actual or targeted prospective customers or clients
of the Company or SmartDisk, nor shall the Executive make known the names and
addresses of such customers or any information relating in any manner to the
Company's or SmartDisk's trade or business relationships with such customers.
6.4 ASSIGNMENT OF INVENTIONS.
(a) ORIGINAL DEVELOPMENT. The Executive represents and
warrants to the Company that all work that the Executive performs for
or on behalf of the Company and its clients, and all work product that
the Executive produces in such capacity, including but not limited to
software, documentation, memoranda, ideas, designs, inventions,
processes, algorithms, etc. ("Work Product"), will not knowingly
infringe upon or violate any patent, copyright, trade secret, or other
property right of any of his former employers or of any other third
party. The Executive will not disclose to the Company, or use in any of
his Work Product, any confidential or proprietary information belonging
to others, unless both the owner thereof and the Company have consented
in writing.
(b) DISCLOSURE. The Executive will promptly disclose to
the Company all Work Product developed by him within the scope of his
employment with the Company or which relates directly to, or involve
the use of, any Company Information, including but not limited to all
software, concepts, ideas and designs, and all documentation, manuals,
letters, pamphlets, drafts, memoranda and other writings or tangible
things of any kind. The Executive will not disclose them to anyone
other than authorized Company personnel.
(c) COPYRIGHT OWNERSHIP. The Executive acknowledges and
agrees that all Work Product which is made by him (solely or jointly
with others) within the scope of his employment and which is
protectable by copyright is being created at the instance of the
Company and is "work made for hire," as that term is defined in the
United States Copyright Act (17 USCA, Section 101).
(d) ASSIGNMENT. The Executive hereby assigns to the
Company all of his other rights, title and interest (including but not
limited to all patent, copyright and trade secret rights) in and to all
Work Products prepared by him, whether patentable or not, made or
conceived in whole or in part by him within the scope of his employment
hereunder, or that relates directly to, or involves the use of Company
Information.
(e) DOCUMENTS. The Executive agrees to execute all
documents reasonably requested by the Company to further evidence the
foregoing assignment and to provide all reasonable assistance to the
Company (at the Company's expense) in perfecting or protecting any or
all of the Company's rights in his Work Product.
(f) PRE-EXISTING INVENTIONS NOT ASSIGNED. The Executive
represents that the Executive has indicated on Annex III to this
Agreement all inventions, expression of ideas or other Work Product
related to the Company's or SmartDisk's business and created prior to
his employment by the Company in which the Executive has any right,
title or interest that the Executive does not assign to the Company. If
the Executive does not have any such inventions, expressions of ideas,
or work product to indicate, the Executive will write "none" on Annex
III. The Executive will not assert any rights under any inventions as
having been made or acquired by him prior to his being employed by the
Company, unless such inventions are identified on Annex I.
6.5 BOOKS AND RECORDS. All books, records, reports, writings,
notes, notebooks, computer programs, sketches, drawings, blueprints, prototypes,
formulas, photographs, negatives, models, equipment, chemicals, reproductions,
proposals, flow sheets, supply contracts, customer lists and
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other documents and/or things belonging to the Company or embodying or relating
to any Confidential Information or Trade Secrets, whether prepared by the
Executive or otherwise coming into the Executive's possession shall not be
copied, duplicated, replicated, transformed, modified or removed from the
premises of the Company except pursuant to the business of the Company and shall
be returned immediately to the Company on termination of the Executive's
employment hereunder or on the Company's request at any time.
6.6 NO CONFLICT. The Executive represents to the Company that
his execution and performance of this Agreement does not violate the provisions
of any employment, non-competition, confidentiality or other material agreement
to which he is a party or by which he is bound. The Executive also agrees to
indemnify and hold harmless the Company from any and all damages and other
obligations or liabilities incurred by the Company in connection with any breach
of the foregoing representation.
7. INJUNCTION. It is recognized and hereby acknowledged by the parties
hereto that a breach by the Executive of any of the covenants contained in
Section 6 of this Agreement will cause irreparable harm and damage to SmartDisk
and the Company, the monetary amount of which may be virtually impossible to
ascertain. As a result, the Executive recognizes and hereby acknowledges that
Smart Disk or the Company shall be entitled to seek an injunction from any court
of competent jurisdiction (without posting a bond or other security) enjoining
and restraining any violation of any or all of the covenants contained in
Section 6 of this Agreement by the Executive or any of his affiliates,
associates, partners or agents, either directly or indirectly, and that such
right to injunction shall be cumulative and in addition to whatever other
remedies the Company or the Company may possess.
8. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without regard to conflicts of
laws principles thereof and all questions concerning the validity and
construction hereof shall be determined in accordance with the laws of said
state.
9. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and, upon
its effectiveness, shall supersede all prior agreements, understandings and
arrangements, both oral and written, between the Executive and SmartDisk (or any
of its affiliates, including the Company) with respect to such subject matter.
Except for the obligation to pay all accrued but unpaid salary due the
Executive, all such prior agreements, understandings and arrangements for the
provision of services by the Executive to the Company and the compensation of
the Executive in any form are hereby terminated, and the Executive hereby
releases and forever discharges SmartDisk (as well as the Company and its other
affiliates) from any and all liabilities and obligations of any nature arising
out of or in connection with any and all such prior agreements, understandings
or arrangements. This Agreement may not be modified in any way unless by a
written instrument signed by both the Company and the Executive.
10. NOTICES. Any notice required or permitted to be given hereunder
shall be deemed given when delivered by hand or when deposited in the United
States mail, by registered or certified mail, return receipt requested, postage
prepaid, (i) if to the Company, c/o SmartDisk Corporation, 3506 Mercantile
Avenue, Naples, Florida 34104, Attention: Daniel E. Reed, Vice President, and
(ii) if to the Executive, to his address as reflected on the payroll records of
the Company, or to such other address as either party hereto may from time to
time give notice of to the other.
11. BENEFITS; BINDING EFFECT. This Agreement shall be for the benefit
of and binding upon the parties hereto and their respective heirs, personal
representative, legal representatives, successors and, where applicable,
assigns, including, without limitation, any successor to the Company, whether by
merger, consolidation, sale of stock, sale of assets or otherwise; provided,
however that the Executive shall not delegate his employment obligations
hereunder, or any portion thereof, to any other person.
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12. SEVERABILITY. The invalidity of any one or more of the words,
phrases, sentences, clauses or sections contained in this Agreement shall not
affect the enforceability of the remaining portions of this Agreement or any
part thereof, all of which are inserted conditionally on their being valid in
law, and, in the event that any one or more of the words, phrases, sentences,
clauses or sections contained in this Agreement shall be declared invalid, this
Agreement shall be construed as if such invalid word or words, phrase or
phrases, sentence or sentences, clause or clauses, or section or sections had
not been inserted. If such invalidity is caused by length of time or size of
area, or both, the otherwise invalid provision will be considered to be reduced
to a period or area which would cure such invalidity.
13. WAIVERS. The waiver by either party hereto of a breach or violation
of any term or provision of this Agreement shall not operate nor be construed as
a waiver of any subsequent breach or violation.
14. DAMAGES. Nothing contained herein shall be construed to prevent the
Company or the Executive from seeking and recovering from the other damages
sustained by either or both of them as a result of its or his breach of any term
or provision of this Agreement. In the event that either party hereto brings
suit for the collection of any damages resulting from, or for the injunction of
any action constituting, a breach of any of the terms or provisions of this
Agreement, then the party found to be at fault shall pay all reasonable court
costs and attorneys' fees of the other.
15. SECTION HEADINGS. The section headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
16. NO THIRD PARTY BENEFICIARY. Nothing expressed or implied in this
Agreement is intended, or shall be construed, to confer upon or give any person
other than the Company, the parties hereto and their respective heirs, personal
representatives, legal representatives, successors and assigns, any rights or
remedies under or by reason of this Agreement.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
SMARTDISK PERSONAL STORAGE SYSTEMS
CORPORATION
By: /s/ MICHAEL S. BATTAGLIA
--------------------------------------
Michael S. Battaglia,
President and Chief Executive Officer
/s/ JAMES M. GIARRUSSO
-----------------------------------------
James M. Giarrusso
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ANNEX I
PRE-EXISTING INVENTIONS
None
EXHIBIT 10.16
MANAGEMENT
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT ("Agreement") is made and entered
into this 6th day of March, 2000, between SmartDisk Corporation, a Delaware
corporation (the "Company") and each of Vincent Fedele, James M. Giarrusso and
Francis P. Reardon (each a "Holder" and collectively, the "Holders").
RECITALS
A. The Company is contemporaneously issuing and delivering to Holders
an aggregate of approximately 1,067,481 shares (the "Restricted Shares") of the
Company's common stock, par value $0.001 per share (the "Common Stock"),
pursuant to that certain Agreement and Plan of Merger, dated as of February 23,
2000 (the "Merger Agreement"), among the Company, VST Acquisition, Inc., a
Delaware corporation and wholly owned subsidiary of the Company, VST
Technologies, Inc., a Delaware corporation, and the "Shareholders" named
therein. Capitalized terms used in this Agreement and which are not defined
herein shall have the same meanings ascribed thereto in the Merger Agreement.
B. As contemplated by the Merger Agreement, the Company has agreed
herein to provide to Holders certain registration rights with respect to the
Restricted Shares.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and covenants set
forth in the Merger Agreement, the parties agree as follows:
1. REGISTRATION RIGHTS.
(a) INCIDENTAL (PIGGYBACK) REGISTRATION. Subject to the
limitations set forth in this Agreement, if the Company at any time within one
(1) year of the date hereof proposes to file on its behalf and/or on behalf of
any of its security holders ("the demanding security holders") a Registration
Statement under the Securities Act of 1933, as amended (the "Securities Act"),
on any form (other than a Registration Statement on Form S-4 or S-8 or any
successor form for securities to be offered in a transaction of the type
referred to in Rule 145 under the Securities Act or to employees of the Company
pursuant to any employee benefit plan, respectively) for the general
registration of securities to be sold for cash with respect to its Common Stock
or any other class of equity security (as defined in Section 3(a)(11) of the
Securities Exchange Act of 1934) of the Company, it will give written notice to
the Holders at least 15 days before the initial filing with the Commission of
such Registration Statement, which notice shall set forth the intended method of
disposition of the securities proposed to be registered by the Company. The
notice shall offer to include in such filing the aggregate number of shares of
Restricted Shares as the Holders may request, subject, however, to the
provisions of this Section 1(a) below.
If the Holders desire to have Restricted Shares registered under this
Section 1, they shall advise the Company in writing within 10 days after the
date of receipt of such offer from the Company, setting forth the amount of such
Restricted Shares for which registration is requested, not to exceed 25% of the
Restricted Securities received by such Holder in the Merger (subject to
adjustment for stock splits, stock dividends and similar reclassifications
affecting the Common Stock). The Company shall thereupon include in such filing
the number of shares of Restricted Shares of each Holder for which registration
is so requested, subject to the following provisions of this paragraph. In the
event that the proposed registration by the Company is, in whole or in part, an
underwritten public offering of securities of the Company, the Company shall not
be required to include any of the Restricted Shares in such underwriting unless
<PAGE>
Holders agree to accept the offering on the same terms and conditions as the
shares of Common Stock, if any, otherwise being sold through the underwriters
under such registration and provided further, that: (i) if the managing
underwriter determines and advises the Company that the inclusion of all
Restricted Shares proposed to be included by the Holders in the underwritten
public offering and other issued and outstanding shares of Common Stock proposed
to be included therein by the persons other than the Holders, the Company and
any holder who has exercised demand registration rights with respect to such
registration (the "Other Shares") would jeopardize the success of the Company's
offering, then (x) the Company shall be required to include in the offering (in
addition to the number of shares to be sold by the Company and any demanding
security holder) only that number of Restricted Shares that the managing
underwriter believes will not jeopardize the success of the Company's offering
and (y) the number of Restricted Shares and Other Shares included in such
underwritten public offering shall be reduced pro rata based upon the number of
shares of Restricted Shares and Other Shares requested by the holders thereof to
be registered in such underwritten public offering subject to the provisions of
that certain Investors' Rights Agreement between the Company and Phoenix House
Investments, LLC, Toshiba Corporation and Fischer International Systems
Corporation (collectively, the "Prior Holders"), requiring that such reduction
in the number of Other Shares included in such offering not reduce the number of
Other Shares owned by the Prior Holders included in the Offering, below 30% of
the total amount of securities included in the offering; and (ii) in each case
all Restricted Shares owned by the Holders which are not included in the
underwritten public offering shall be subject to customary underwriter "lock-up"
arrangements and not sold or otherwise transferred by the Holders for a period,
not to exceed one hundred eighty (180) calendar days, which the managing
underwriter reasonably determines as necessary in order to effect the
underwritten public offering. In the event the Company chooses a registration
form which limits the size of the offering, either in terms of the number of
shares or dollar amount, the Company shall not be required to include in the
offering (in addition to the number of shares to be sold by the Company and any
demanding security holder) Restricted Shares which would exceed such limits and
the number of Restricted Shares and Other Shares included in such underwritten
public offering shall be reduced pro rata based upon the number of shares of
Restricted Shares and Other Shares requested by the holders thereof to be
registered in such underwritten public offering.
(b) REGISTRATION AT THE REQUEST OF HOLDERS.
(i) Subject to the limitations set forth in this
Agreement, the Company agrees that upon receipt by the Company of a Registration
Demand (as hereinafter defined) satisfying the conditions of paragraph (iii) of
this Section 1(b), the Company will (A) give prompt written notice of such
proposed registration to all Holders, who shall have the right (by providing the
Company a written election within ten (10) days of receipt of such notice) to
have their Restricted Shares included in such registration, and (B) file a
registration statement under the Securities Act, with reasonable promptness, and
in any case not later than sixty (60) days after the Company's receipt of the
Registration Demand (thirty (30) days if the Company is then eligible to file a
registration statement on Form S-3) for an offering of such number of Restricted
Shares as to which registration is requested in the Registration Demand. The
Company shall use its best efforts to cause such registration statement to
promptly become effective under the Securities Act. No Registration Demand shall
be effective or impose any obligation upon the Company unless the Registration
Demand shall request the registration of Restricted Shares with an aggregate
offering value of at least $5 million ($1 million if the Company is then
eligible to file a registration statement on Form S-3). The Company shall be
entitled to postpone (upon written notice to the Holders) for up to sixty (60)
days the filing or requested effectiveness of a registration statement in
respect of a Registration Demand (but no more than once in any nine-month
period) if the Company's Board of Directors determines in good faith and in its
reasonable judgment that effecting the registration in respect of such
Registration Demand would have a material adverse affect on any proposal or plan
by the Company to engage in any material acquisition or disposition of assets
(other than in the ordinary course of business) or any material merger,
consolidation, tender offer or other similar transaction.
(ii) The Company shall be entitled to include in any
public offering of Common Stock pursuant to a registration statement filed
pursuant to this Section 1(b), securities of the
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Company entitled generally to vote in the election of directors (or any
securities convertible into or exchangeable for or exercisable for the purchase
of securities so entitled generally to vote in the election of directors) to be
sold by other shareholders of the Company or by the Company for its own account,
except as and to the extent that in the opinion of the managing underwriter (if
any), such inclusion would adversely affect the marketing of the Restricted
Shares to be sold by the Holders in such offering, provided that if the managing
underwriter believes that the inclusion of all shares requested to be included
in the proposed underwritten public offering would adversely affect the
marketing of the Restricted Shares, then the aggregate number of shares to be
offered by the Company and the other shareholders of the Company having similar
registration rights shall be reduced so as to permit the offering of all
Restricted Shares requested by the Holders without such adverse effects.
(iii) A "Registration Demand" shall be a written
notice from the Holders to the Company in accordance with the requirements of
this Agreement which states that the Holders of a majority of the Restricted
Shares desire that the Company effect the registration of Restricted Shares
pursuant to a registration statement under the Securities Act and requesting
that the Company effect registration with respect to a specified number of each
Holder's Restricted Shares within the limits of this Agreement. No more than
four Registration Demands may be made under this Agreement, no more than one
Registration Demand may be made in any six month period and no Registration
Demand may be made after the second anniversary of the Effective Time of the
Merger. The first Registration Demand shall not be made prior to the four month
anniversary of the Effective Time of the Merger, the second Registration Demand
shall not be made prior to the eleventh month anniversary of the Effective Time,
the third Registration Demand shall not be made prior to the seventeenth month
anniversary of the Effective Time, and the fourth Registration Demand shall not
be made prior to the twenty-third month anniversary of the Effective Time. In
addition, no Holder shall at any time request the registration of the sale of
more than 25% of the Restricted Shares (in the case of the first Registration
Demand hereunder, net of any Restricted Shares registered pursuant to Section
1(a) above) received by such Holder pursuant to the Merger. The Company's
obligation to register any Holder's Restricted Shares is further subject to the
requirements of paragraph (c) of this Section 1.
(c) UNDERWRITING DOCUMENTS; OTHER LIMITATIONS.
(i) Notwithstanding any provision of this Agreement
to the contrary, a Holder may not include any Restricted Shares in any
underwritten offering required or contemplated under this Agreement unless the
Holder timely executes and delivers the form of underwriting agreement, custody
agreement, power of attorney and other agreements and instruments reasonably
required by the underwriters of such offering in connection with the preparation
and consummation of such offering.
(ii) Notwithstanding any provision of this Agreement
to the contrary, in no event shall the Company be required to register the sale
of any Restricted Shares held by the Escrow Agent.
2. CERTAIN REGISTRATION PROCEDURES. If the Company is required by the
provisions of Section 1 to use its best efforts to effect the registration of
any Restricted Shares under the Securities Act, the Company will:
(a) prepare and file with the Securities and Exchange
Commission (the "Commission") a registration statement with respect to such
Restricted Shares and such amendments and supplements to such registration
statement and the prospectus used in connection therewith as may be necessary to
keep such registration statement effective until the earliest of (i) the
completion of the distribution of the registered securities, and (ii) the three
(3)-month anniversary of the effective date of the registration statement and to
comply with the provisions of the Securities Act with respect to the sale or
other disposition of all securities covered by such registration statement;
3
<PAGE>
(b) furnish to any selling security holders such number of
copies of a summary prospectus or other prospectus, including a preliminary
prospectus, in conformity with the requirements of the Securities Act, and such
other documents, as such selling security holders may reasonably request;
(c) use its best efforts to register or qualify the securities
covered by such registration statement under such other securities or "blue sky"
laws of such jurisdictions within the United States and Puerto Rico as each
Holder of securities shall reasonably request (provided, however, that the
Company shall not be obligated to qualify as a foreign corporation to do
business under the laws of any jurisdiction in which it is not then qualified or
to file any general consent to service or process or to qualify as a broker or
dealer in securities), and do such other reasonable acts and things as may be
required of it to enable the Holders to consummate the disposition in such
jurisdiction of the securities covered by such registration statement;
(d) take such other actions as are reasonably required in
order to expedite or facilitate the disposition of such Common Stock; and
(e) promptly notify in writing the Holders and each
underwriter (if any) of the happening of any event, during the period of
distribution, as a result of which the registration statement includes an untrue
statement of a material fact or omits to state any material fact required to be
stated therein or necessary to make the statements therein not misleading in
light of the circumstances then existing (in which case, the Company shall
promptly provide the Holders and/or underwriters, as appropriate, with revised
or supplemental prospectuses and if so requested by the Company in writing, the
Holders shall promptly take action to cease making any offers of the Restricted
Shares until receipt and distribution of such revised or supplemental
prospectuses).
3. EXPENSES. All expenses incurred in complying with this Agreement,
including, without limitation, all registration and filing fees (including all
expenses incident to filing with the NASD), printing expenses, fees and
disbursements of counsel for the Company, expenses of any special audits
incident to or required by any such registration and expenses (including
attorneys' fees) of complying with the securities or blue sky laws of any
jurisdictions pursuant to Section 2(c), except to the extent required to be paid
by participating selling security holders by state securities or blue sky laws,
shall be paid by the Company, except that the Company shall not be liable for
any fees, discounts or commissions to any underwriter or any fees or
disbursements of counsel for Holders in respect of the securities sold by
Holders, which amounts shall be paid by the Holders.
4. INDEMNIFICATION. In the event of any registration of any Restricted
Shares under the Securities Act pursuant to this Agreement, the Company shall
indemnify and hold harmless the seller of such shares, each underwriter of such
shares, if any, each such broker or any other person, if any, who controls any
of the foregoing persons, within the meaning of the Securities Act, against any
losses, claims, damages or liabilities, joint or several, to which any of the
foregoing persons may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon an untrue statement of a material fact
contained in any registration statement under which such Restricted Shares were
registered under the Securities Act, any final prospectus contained therein, or
any amendment or supplement thereto, or any document prepared and/or furnished
by the Company incident to the registration or qualification of any Restricted
Shares, or arise out of or are based upon the omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading or, with respect to any final prospectus, necessary to
make the statements therein in light of the circumstances under which they were
made, not misleading, or any violations by the Company of the Securities Act or
state securities or "blue sky" laws applicable to the Company relating to action
or inaction required of the Company in connection with such registration or
qualification under such state securities or blue sky laws; and shall reimburse
such seller, such underwriter, broker or other person acting on behalf of such
seller and each such controlling person for any legal or any other expenses
reasonably incurred by any of them in connection with investigating or defending
any such loss, claim, damage, liability or action; provided, however, that the
Company shall not
4
<PAGE>
be so obligated to indemnify and reimburse any such Holder for any such loss,
claim, damage or liability that arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
said registration statement, said final prospectus or said amendment or
supplement or any document incident to the registration or qualification of any
Restricted Shares in reliance upon and in conformity with information furnished
by such Holder to the Company for use in preparation thereof. Before Restricted
Shares held by the Holders shall be included in any registration pursuant to
this Agreement, the Holders shall have agreed to indemnify and hold harmless (in
the same manner and to the same extent as set forth in this Section 4 for the
indemnification of such prospective seller and underwriter by the Company) the
Company, each director of the Company, each officer of the Company who shall
sign such registration statement and any person who controls the Company within
the meaning of the Securities Act, with respect to any untrue statement or
omission from such registration statement or final prospectus contained therein
or any amendment or supplement thereto, if such untrue statement or omission was
(i) made in reliance upon and in conformity with information furnished to the
Company by any Holder for use in the preparation of such registration statement,
final prospectus or amendment or supplement or (ii) contained in any
registration statement or prospectus which was utilized by any Holder or any
controlling person or affiliate of any Holder either (A) on any date which is in
excess of 90 days after the date of the Prospectus included in the registration
statement, or (B) after the Holders were notified, in accordance with Section
2(e) hereof, that such registration statement contained an untrue statement of a
material fact or omitted to state any material fact. Promptly after receipt by
an indemnified party of notice of the commencement of any action involving a
claim referred to in this Section 4, such indemnified party will, if a claim in
respect thereof is made against any indemnifying party, give written notice to
the latter of such claim and/or the commencement of such action. In case any
such action is brought against an indemnified party, the indemnifying party will
be entitled to participate in and assume the defense thereof, jointly with any
other indemnifying party similarly notified to the extent that it may wish, with
counsel reasonably satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its election to assume the
defense thereof, the indemnifying party shall be responsible for any legal or
other expenses subsequently incurred by the latter in connection with the
defense thereof, provided that if any indemnified party shall have reasonably
concluded that there may be one or more legal defenses available to such
indemnified party which conflict in any material respect with those available to
the indemnifying party, or that such claim or litigation involves or could have
an effect upon matters beyond the scope of the indemnity agreement provided in
this Section 4, such indemnifying party shall reimburse such indemnified party
and shall not have the right to assume the defense of such action on behalf of
such indemnified party and such indemnifying party shall reimburse such
indemnified party and any person controlling such indemnified party for that
portion of the fees and expenses of any counsel retained by the indemnified
party which are reasonably related to the matters covered by the indemnity
agreement provided in this Section 4. The indemnifying party shall not make any
settlement of any claims indemnified against hereunder without the written
consent of the indemnified party or parties, which consent shall not be
unreasonably withheld.
In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in this Section 4 is due
in accordance with its terms but for any reason is held to be unavailable to an
indemnified party in respect to any losses, claims, damages and liabilities
referred to herein, then the indemnifying party shall, in lieu of indemnifying
such indemnified party, contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities to
which such party may be subject in such proportion as is appropriate to reflect
the relative fault of the Company on the one hand and the Holders on the other
in connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative fault of the Company and the Holders shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of material fact related to information supplied by the Company
or the Holders and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Holders agree that it would not be just and equitable if
contribution pursuant to this Section 4 were determined by pro rata allocation
or by any other method of allocation which does not take account of the
equitable considerations referred to above. Notwithstanding the provisions of
this paragraph of Section 4, (a) in no
5
<PAGE>
case shall any one Holder be liable or responsible for any amount in excess of
the net proceeds received by such selling Holder from the offering of Restricted
Shares and (b) the Company shall be liable and responsible for any amount in
excess of such proceeds; provided, however, that 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. Any party entitled to contribution will, promptly
after receipt of notice of commencement of any action, suit or proceeding
against such party in respect to which a claim for contribution may be made
against another party or parties under this Section, notify such party or
parties from whom contribution may be sought, but the omission so to notify such
party or parties from whom contribution may be sought shall not relieve such
party from any other obligation it or they may have thereunder or otherwise
under this Section. No party shall be liable for contribution with respect to
any action, suit, proceeding or claim settled without its prior written consent,
which consent shall not be unreasonably withheld.
5. CERTAIN LIMITATIONS ON REGISTRATION RIGHTS. Notwithstanding the
other provisions of this Agreement, the Company shall not be obligated to
register the Restricted Shares of Holders if, in the opinion of counsel to the
Company, the sale or other disposition of Holders' Restricted Shares may be
effected without registering such Restricted Shares under the Securities Act.
The Company's obligations under Section 1 with respect to each Holder are also
expressly conditioned upon such Holder furnishing to the Company in writing such
information concerning such Holder and such Holder's controlling persons and the
terms of such Holder's proposed offering of Restricted Shares as the Company or
the managing underwriter (if any) shall reasonably request for inclusion in the
applicable registration statement.
6. MISCELLANEOUS.
(a) Notices. Any notice, request, instruction, correspondence
or other document to be given hereunder by any party hereto to another (herein
collectively called "Notice") shall be in writing and delivered personally or
mailed by registered or certified mail, postage prepaid and return receipt
requested, or by telecopier, as follows:
IF TO COMPANY: SmartDisk Corporation
3506 Mercantile Avenue
Naples, Florida 34104
Attention: Daniel E. Reed
Telecopy No. (941) 436-2509
WITH A COPY TO:
Greenberg Traurig, LLP
One East Camelback Road, Suite 1100
Phoenix, Arizona 85012
Attention: Bruce E. Macdonough
Telecopy No. (602) 263-2566
IF TO THE HOLDERS: To the address set opposite each Holder's
name on the signature page attached hereto
WITH COPIES TO:
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
Attention: Stuart M. Falber
Telecopy No. (617) 526-5000
6
<PAGE>
Each of the above addresses for notice purposes may be changed by providing
appropriate notice hereunder. Notice given by personal delivery or registered
mail shall be effective upon actual receipt. Notice given by telecopier shall be
effective upon actual receipt if received during the recipient's normal business
hours, or at the beginning of the recipient's next normal business day after
receipt if not received during the recipient's normal business hours. All
Notices by telecopier shall be confirmed by the sender thereof promptly after
transmission in writing by registered mail or personal delivery. Anything to the
contrary contained herein notwithstanding, notices to any party hereto shall not
be deemed effective with respect to such party until such Notice would, but for
this sentence, be effective both as to such party and as to all other persons to
whom copies are provided above to be given.
(b) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding upon the successors and assigns of the Company. The
rights granted to each Holder pursuant to the terms of this Agreement may be
transferred by such Holder to (i) another Holder, (ii) any affiliate of such
Holder, (iii) any person or entity acquiring at least 50,000 Restricted Shares
(such number being subject to adjustment for any stock dividend, stock split,
subdivision, combination or other recapitalization of the Common Stock of the
Company) or such lesser number as the Board of Directors of the Company may
agree in writing, or (iv) any person or entity acquiring 100% of such Holder's
Restricted Shares if the number of such Restricted Shares is less than the
amount contemplated by the preceding clause (iii); provided, however, that in
each such case (x) the Company is given written notice by the transferee at the
time of such transfer, stating the name and address of the transferee and
identifying the securities with respect to which such rights are being assigned,
and (y) any transferee (other than a Holder) to whom rights hereunder are
transferred shall, as a condition to such transfer, deliver to the Company a
written instrument by which such transferee agrees to be bound by the
obligations imposed upon Holders under this Agreement to the same extent as if
such transferee were a party hereto. Until the Company receives such notice and
written instrument, the transfer shall not be valid and shall not be reflected
on the books and records of the Company. A transferee to whom rights are
transferred pursuant to this subsection (b) may not again transfer such rights
to any other person or entity, other than as provided in this subsection.
(c) GOVERNING LAW. The provisions of this Agreement shall be
governed by and construed in accordance with the laws of the State of Delaware
(excluding any conflict of law rule or principle that would refer to the laws of
another jurisdiction). EACH PARTY HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY
WAIVES, TO THE FULLEST EXTENT IT MAY LEGALLY AND EFFECTIVELY DO SO, TRIAL BY
JURY IN ANY SUIT, ACTION OR PROCEEDING ARISING HEREUNDER.
(d) ENTIRE AGREEMENT; AMENDMENTS; WAIVERS. This Agreement,
together with the Merger Agreement, constitutes the entire agreement between and
among the parties hereto pertaining to the subject matter hereof and supersedes
all prior agreements, understandings, negotiations and discussions, whether oral
or written, of the parties, and there are no warranties, representations or
other agreements between the parties in connection with the subject matter
hereof except as set forth specifically herein or contemplated hereby. No
supplement, modification or waiver of this Agreement shall be binding unless
executed in writing by the Company and the Holders of at least 50% of the
Restricted Shares. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provision hereof (regardless of
whether similar), nor shall any such waiver constitute a continuing waiver
unless otherwise expressly provided.
(e) MULTIPLE COUNTERPARTS. This Agreement may be executed in
one or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
(f) SEVERABILITY. Wherever 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 shall be prohibited by or
invalid under applicable law, such provisions shall be ineffective to the
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extent of such prohibition or invalidity, without invalidating the remainder of
such provision or the remaining provisions of this Agreement.
(g) RULE 144 MATTERS. The Company agrees, during the one-year
period commencing on the first anniversary of the Effective Time, to:
(i) use its best efforts to make and keep current
public information about the Company available, as those terms are understood
and defined in Rule 144;
(ii) use its best efforts to file with the Commission
in a timely manner all reports and other documents required of the Company under
the Securities Act and the Exchange Act; and
(iii) furnish to any holder of Restricted Shares upon
request (i) a written statement by the Company as to its compliance with the
reporting requirements of Rule 144 and of the Securities Act and the Exchange
Act, (ii) a copy of the most recent annual or quarterly report of the Company,
and (ii) such other reports and documents of the Company as such holder may
reasonably request to avail itself of any similar rule or regulation of the
Commission allowing it to sell any such securities without registration.
8
<PAGE>
IN WITNESS WHEREOF, the Company and Holders have executed this
Registration Rights Agreement as of the date first above written.
SMARTDISK CORPORATION:
By: /s/ MICHAEL S. BATTAGLIA
-------------------------------
Name: Michael S. Battaglia
Title: President and Chief
Executive Officer
HOLDERS: ADDRESS:
/s/ VINCENT FEDELE P.O. Box 061
- ---------------------------------- Harvard, Massachusetts 01451
Vincent Fedele
/s/ JAMES M. GIARRUSSO 14 Pheasant Lane
- ---------------------------------- Bedford, Massachusetts 01730
James M. Giarrusso
/s/ FRANCIS P. REARDON 12 Tanglewood Drive
- ---------------------------------- Shrewsbury, Massachusetts 01451
Francis P. Reardon
9
EXHIBIT 10.17
NON-MANAGEMENT
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT ("Agreement") is made and entered
into this 6th day of March, 2000, between SmartDisk Corporation, a Delaware
corporation (the "Company") and the stockholders of the Company that have
executed this Agreement or a counterpart hereof in accordance with Section 6(e)
(each a "Holder" and collectively, the "Holders").
RECITALS
A. The Company is contemporaneously issuing and delivering to Holders
an aggregate of approximately 1,067,481 shares (the "Restricted Shares") of the
Company's common stock, par value $0.001 per share (the "Common Stock"),
pursuant to that certain Agreement and Plan of Merger, dated as of February 23,
2000 (the "Merger Agreement"), among the Company, VST Acquisition, Inc., a
Delaware corporation and wholly owned subsidiary of the Company, VST
Technologies, Inc., a Delaware corporation, and the "Shareholders" named
therein. Capitalized terms used in this Agreement and which are not defined
herein shall have the same meanings ascribed thereto in the Merger Agreement.
B. As contemplated by the Merger Agreement, the Company has agreed
herein to provide to Holders certain registration rights with respect to the
Restricted Shares.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and covenants set
forth in the Merger Agreement, the parties agree as follows:
1. REGISTRATION RIGHTS.
(a) INCIDENTAL (PIGGYBACK) REGISTRATION. Subject to the
limitations set forth in this Agreement, if the Company at any time within one
(1) year of the date hereof proposes to file on its behalf and/or on behalf of
any of its security holders ("the demanding security holders") a Registration
Statement under the Securities Act of 1933, as amended (the "Securities Act"),
on any form (other than a Registration Statement on Form S-4 or S-8 or any
successor form for securities to be offered in a transaction of the type
referred to in Rule 145 under the Securities Act or to employees of the Company
pursuant to any employee benefit plan, respectively) for the general
registration of securities to be sold for cash with respect to its Common Stock
or any other class of equity security (as defined in Section 3(a)(11) of the
Securities Exchange Act of 1934) of the Company, it will give written notice to
the Holders at least 15 days before the initial filing with the Commission of
such Registration Statement, which notice shall set forth the intended method of
disposition of the securities proposed to be registered by the Company. The
notice shall offer to include in such filing the aggregate number of shares of
Restricted Shares as the Holders may request, subject, however, to the
provisions of this Section 1(a) below.
If the Holders desire to have Restricted Shares registered under this
Section 1, they shall advise the Company in writing within 10 days after the
date of receipt of such offer from the Company, setting forth the amount of such
Restricted Shares for which registration is requested. The Company shall
thereupon include in such filing the number of shares of Restricted Shares of
each Holder for which registration is so requested, subject to the following
provisions of this paragraph. In the event that the proposed registration by the
Company is, in whole or in part, an underwritten public offering of securities
of the Company, the Company shall not be required to include any of the
Restricted Shares in such underwriting unless Holders agree to accept the
offering on the same terms and conditions as the shares of Common Stock, if any,
otherwise being sold through the underwriters under such registration and
provided further, that: (i) if the managing underwriter determines and advises
the Company that the inclusion of all Restricted Shares proposed to be included
by the Holders in the underwritten public
<PAGE>
offering and other issued and outstanding shares of Common Stock proposed to be
included therein by the persons other than the Holders, the Company and any
holder who has exercised demand registration rights with respect to such
registration (the "Other Shares") would jeopardize the success of the Company's
offering, then (x) the Company shall be required to include in the offering (in
addition to the number of shares to be sold by the Company and any demanding
security holder) only that number of Restricted Shares that the managing
underwriter believes will not jeopardize the success of the Company's offering
and (y) the number of Restricted Shares and Other Shares included in such
underwritten public offering shall be reduced pro rata based upon the number of
shares of Restricted Shares and Other Shares requested by the holders thereof to
be registered in such underwritten public offering subject to the provisions of
that certain Investors' Rights Agreement between the Company and Phoenix House
Investments, LLC, Toshiba Corporation and Fischer International Systems
Corporation (collectively, the "Prior Holders"), requiring that such reduction
in the number of Other Shares included in such offering not reduce the number of
Other Shares owned by the Prior Holders included in the Offering, below 30% of
the total amount of securities included in the offering; and (ii) in each case
all Restricted Shares owned by the Holders which are not included in the
underwritten public offering shall be subject to customary underwriter "lock-up"
arrangements and not sold or otherwise transferred by the Holders for a period,
not to exceed one hundred eighty (180) calendar days, which the managing
underwriter reasonably determines as necessary in order to effect the
underwritten public offering. In the event the Company chooses a registration
form which limits the size of the offering, either in terms of the number of
shares or dollar amount, the Company shall not be required to include in the
offering (in addition to the number of shares to be sold by the Company and any
demanding security holder) Restricted Shares which would exceed such limits and
the number of Restricted Shares and Other Shares included in such underwritten
public offering shall be reduced pro rata based upon the number of shares of
Restricted Shares and Other Shares requested by the holders thereof to be
registered in such underwritten public offering.
(b) REGISTRATION AT THE REQUEST OF HOLDERS.
(i) Subject to the limitations set forth in this
Agreement, the Company agrees that upon receipt by the Company of a Registration
Demand (as hereinafter defined) satisfying the conditions of paragraph (iii) of
this Section 1(b), the Company will (A) give prompt written notice of such
proposed registration to all Holders, who shall have the right (by providing the
Company a written election within ten (10) days of receipt of such notice) to
have their Restricted Shares included in such registration, and (B) file a
registration statement under the Securities Act, with reasonable promptness, and
in any case not later than sixty (60) days after the Company's receipt of the
Registration Demand for an offering of such number of Restricted Shares as to
which registration is requested in the Registration Demand. The Company shall
use its best efforts to cause such registration statement to promptly become
effective under the Securities Act. No Registration Demand shall be effective or
impose any obligation upon the Company unless the Registration Demand shall
request the registration of Restricted Shares with an aggregate offering value
of at least $5 million. The Company shall be entitled to postpone (upon written
notice to the Holders) for up to sixty (60) days the filing or requested
effectiveness of a registration statement in respect of a Registration Demand
(but no more than once in any nine-month period) if the Company's Board of
Directors determines in good faith and in its reasonable judgment that effecting
the registration in respect of such Registration Demand would have a material
adverse affect on any proposal or plan by the Company to engage in any material
acquisition or disposition of assets (other than in the ordinary course of
business) or any material merger, consolidation, tender offer or other similar
transaction.
(ii) The Company shall be entitled to include in any
public offering of Common Stock pursuant to a registration statement filed
pursuant to this Section 1(b) or pursuant to Section 1(d), securities of the
Company entitled generally to vote in the election of directors (or any
securities convertible into or exchangeable for or exercisable for the purchase
of securities so entitled generally to vote in the election of directors) to be
sold by other shareholders of the Company or by the Company for its own account,
except as and to the extent that in the opinion of the managing underwriter
2
<PAGE>
(if any), such inclusion would adversely affect the marketing of the Restricted
Shares to be sold by the Holders in such offering, provided that if the managing
underwriter believes that the inclusion of all shares requested to be included
in the proposed underwritten public offering would adversely affect the
marketing of the Restricted Shares, then the aggregate number of shares to be
offered by the Company and the other shareholders of the Company having similar
registration rights shall be reduced so as to permit the offering of all
Restricted Shares requested by the Holders without such adverse effects.
(iii) A "REGISTRATION DEMAND" shall be a written
notice from the Holders to the Company in accordance with the requirements of
this Agreement which states that the Holders of a majority of the Restricted
Shares desire that the Company effect the registration of Restricted Shares
pursuant to a registration statement under the Securities Act and requesting
that the Company effect registration with respect to a specified number of each
Holder's Restricted Shares within the limits of this Agreement. No more than one
Registration Demand may be made under this Agreement, and no Registration Demand
may be made after the second anniversary of the Effective Time of the Merger.
The Registration Demand shall not be made prior to the four month anniversary of
the Effective Time of the Merger or after August 12, 2000. No Holder shall at
any time request pursuant to this Section 1(b) the registration of the sale of
more than 50% of the Restricted Shares (net of any Restricted Shares registered
pursuant to Section 1(a) above) received by such Holder pursuant to the Merger.
The Company's obligation to register any Holder's Restricted Shares is further
subject to the requirements of paragraph (c) of this Section 1.
(c) UNDERWRITING DOCUMENTS; OTHER LIMITATIONS.
(i) Notwithstanding any provision of this Agreement
to the contrary, a Holder may not include any Restricted Shares in any
underwritten offering required or contemplated under this Agreement unless the
Holder timely executes and delivers the form of underwriting agreement, custody
agreement, power of attorney and other agreements and instruments reasonably
required by the underwriters of such offering in connection with the preparation
and consummation of such offering.
(ii) Notwithstanding any provision of this Agreement
to the contrary, in no event shall the Company be required to register the sale
of any Restricted Shares held by the Escrow Agent.
(d) FORM S-3 REGISTRATION.
(i) Subject to the limitations set forth in this
Agreement, the Company will file as promptly as possible after it is eligible to
do so (and in no event later than October 16, 2000) a registration statement on
Form S-3 (the "Shelf Registration Statement") covering all of the Restricted
Shares and thereafter shall use its best efforts to cause the Shelf Registration
Statement to be declared effective as soon as practicable following such filing
and to maintain such effectiveness until the one year anniversary of the date
hereof; PROVIDED, HOWEVER, that the Company shall have the right to prohibit the
sale of Restricted Shares pursuant to the Shelf Registration Statement, upon
notice to the Holders (A) if in the opinion of counsel for the Company, the
Company would thereby be required to disclose information not otherwise then
required by law to be publicly disclosed, provided that the Company shall use
its best efforts to minimize the period of time in which it shall prohibit the
sale of any shares of Common Stock pursuant to this clause (A), which shall in
no event exceed 45 days in any one-year period; or (B) during the period
starting with the date 10 days prior to the Company's estimate of the date of
filing of, and ending on a date 90 days after the effective date of, a
registration in which the Holders are entitled to participate in accordance with
Section 1(a) hereof, or such longer post-effective periods as may be reasonably
required by the underwriter or underwriters if such offering is underwritten.
2. CERTAIN REGISTRATION PROCEDURES. If the Company is required by the
provisions of Section 1 to use its best efforts to effect the registration of
any Restricted Shares under the Securities Act, the Company will:
3
<PAGE>
(a) prepare and file with the Securities and Exchange
Commission (the "Commission") a registration statement with respect to such
Restricted Shares and such amendments and supplements to such registration
statement and the prospectus used in connection therewith as may be necessary to
keep such registration statement effective until the earliest of (i) the
completion of the distribution of the registered securities, and (ii) the three
(3)-month anniversary of the effective date of the registration statement (or,
in the case of a registration statement filed on Form S-3, and subject to the
limitations contemplated by Section 1(d) hereof, the one-year anniversary of the
Effective Time) and to comply with the provisions of the Securities Act with
respect to the sale or other disposition of all securities covered by such
registration statement;
(b) furnish to any selling security holders such number of
copies of a summary prospectus or other prospectus, including a preliminary
prospectus, in conformity with the requirements of the Securities Act, and such
other documents, as such selling security holders may reasonably request;
(c) use its best efforts to register or qualify the securities
covered by such registration statement under such other securities or "blue sky"
laws of such jurisdictions within the United States and Puerto Rico as each
Holder of securities shall reasonably request (provided, however, that the
Company shall not be obligated to qualify as a foreign corporation to do
business under the laws of any jurisdiction in which it is not then qualified or
to file any general consent to service or process or to qualify as a broker or
dealer in securities), and do such other reasonable acts and things as may be
required of it to enable the Holders to consummate the disposition in such
jurisdiction of the securities covered by such registration statement;
(d) take such other actions as are reasonably required in
order to expedite or facilitate the disposition of such Common Stock; and
(e) promptly notify in writing the Holders and each
underwriter (if any) of the happening of any event, during the period of
distribution, as a result of which the registration statement includes an untrue
statement of a material fact or omits to state any material fact required to be
stated therein or necessary to make the statements therein not misleading in
light of the circumstances then existing (in which case, the Company shall
promptly provide the Holders and/or underwriters, as appropriate, with revised
or supplemental prospectuses and if so requested by the Company in writing, the
Holders shall promptly take action to cease making any offers of the Restricted
Shares until receipt and distribution of such revised or supplemental
prospectuses).
3. EXPENSES. All expenses incurred in complying with this Agreement,
including, without limitation, all registration and filing fees (including all
expenses incident to filing with the NASD), printing expenses, fees and
disbursements of counsel for the Company, expenses of any special audits
incident to or required by any such registration and expenses (including
attorneys' fees) of complying with the securities or blue sky laws of any
jurisdictions pursuant to Section 2(c), except to the extent required to be paid
by participating selling security holders by state securities or blue sky laws,
shall be paid by the Company, except that the Company shall not be liable for
any fees, discounts or commissions to any underwriter or any fees or
disbursements of counsel for Holders in respect of the securities sold by
Holders, which amounts shall be paid by the Holders.
4. INDEMNIFICATION. In the event of any registration of any Restricted
Shares under the Securities Act pursuant to this Agreement, the Company shall
indemnify and hold harmless the seller of such shares, each underwriter of such
shares, if any, each such broker or any other person, if any, who controls any
of the foregoing persons, within the meaning of the Securities Act, against any
losses, claims, damages or liabilities, joint or several, to which any of the
foregoing persons may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon an untrue statement of a material fact
contained in any registration statement under which such Restricted Shares were
registered under the Securities Act, any final prospectus contained therein, or
any amendment or supplement thereto, or any document prepared and/or furnished
4
<PAGE>
by the Company incident to the registration or qualification of any Restricted
Shares, or arise out of or are based upon the omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading or, with respect to any final prospectus, necessary to
make the statements therein in light of the circumstances under which they were
made, not misleading, or any violations by the Company of the Securities Act or
state securities or "blue sky" laws applicable to the Company relating to action
or inaction required of the Company in connection with such registration or
qualification under such state securities or blue sky laws; and shall reimburse
such seller, such underwriter, broker or other person acting on behalf of such
seller and each such controlling person for any legal or any other expenses
reasonably incurred by any of them in connection with investigating or defending
any such loss, claim, damage, liability or action; provided, however, that the
Company shall not be so obligated to indemnify and reimburse any such Holder for
any such loss, claim, damage or liability that arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in said registration statement, said final prospectus or said amendment or
supplement or any document incident to the registration or qualification of any
Restricted Shares in reliance upon and in conformity with information furnished
by such Holder to the Company for use in preparation thereof. Before Restricted
Shares held by the Holders shall be included in any registration pursuant to
this Agreement, the Holders shall have agreed to indemnify and hold harmless (in
the same manner and to the same extent as set forth in this Section 4 for the
indemnification of such prospective seller and underwriter by the Company) the
Company, each director of the Company, each officer of the Company who shall
sign such registration statement and any person who controls the Company within
the meaning of the Securities Act, with respect to any untrue statement or
omission from such registration statement or final prospectus contained therein
or any amendment or supplement thereto, if such untrue statement or omission was
(i) made in reliance upon and in conformity with information furnished to the
Company by any Holder for use in the preparation of such registration statement,
final prospectus or amendment or supplement or (ii) contained in any
registration statement or prospectus which was utilized by any Holder or any
controlling person or affiliate of any Holder either (A) on any date which is in
excess of 90 days after the date of the Prospectus included in the registration
statement, or (B) after the Holders were notified, in accordance with Section
2(e) hereof, that such registration statement contained an untrue statement of a
material fact or omitted to state any material fact. Promptly after receipt by
an indemnified party of notice of the commencement of any action involving a
claim referred to in this Section 4, such indemnified party will, if a claim in
respect thereof is made against any indemnifying party, give written notice to
the latter of such claim and/or the commencement of such action. In case any
such action is brought against an indemnified party, the indemnifying party will
be entitled to participate in and assume the defense thereof, jointly with any
other indemnifying party similarly notified to the extent that it may wish, with
counsel reasonably satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its election to assume the
defense thereof, the indemnifying party shall be responsible for any legal or
other expenses subsequently incurred by the latter in connection with the
defense thereof, provided that if any indemnified party shall have reasonably
concluded that there may be one or more legal defenses available to such
indemnified party which conflict in any material respect with those available to
the indemnifying party, or that such claim or litigation involves or could have
an effect upon matters beyond the scope of the indemnity agreement provided in
this Section 4, such indemnifying party shall reimburse such indemnified party
and shall not have the right to assume the defense of such action on behalf of
such indemnified party and such indemnifying party shall reimburse such
indemnified party and any person controlling such indemnified party for that
portion of the fees and expenses of any counsel retained by the indemnified
party which are reasonably related to the matters covered by the indemnity
agreement provided in this Section 4. The indemnifying party shall not make any
settlement of any claims indemnified against hereunder without the written
consent of the indemnified party or parties, which consent shall not be
unreasonably withheld.
In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in this Section 4 is due
in accordance with its terms but for any reason is held to be unavailable to an
indemnified party in respect to any losses, claims, damages and liabilities
referred to herein, then the indemnifying party shall, in lieu of indemnifying
such indemnified party, contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities
5
<PAGE>
to which such party may be subject in such proportion as is appropriate to
reflect the relative fault of the Company on the one hand and the Holders on the
other in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative fault of the Company and the Holders shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of material fact related to information supplied by the Company
or the Holders and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Holders agree that it would not be just and equitable if
contribution pursuant to this Section 4 were determined by pro rata allocation
or by any other method of allocation which does not take account of the
equitable considerations referred to above. Notwithstanding the provisions of
this paragraph of Section 4, (a) in no case shall any one Holder be liable or
responsible for any amount in excess of the net proceeds received by such
selling Holder from the offering of Restricted Shares and (b) the Company shall
be liable and responsible for any amount in excess of such proceeds; PROVIDED,
HOWEVER, that 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. Any party entitled to contribution will, promptly after
receipt of notice of commencement of any action, suit or proceeding against such
party in respect to which a claim for contribution may be made against another
party or parties under this Section, notify such party or parties from whom
contribution may be sought, but the omission so to notify such party or parties
from whom contribution may be sought shall not relieve such party from any other
obligation it or they may have thereunder or otherwise under this Section. No
party shall be liable for contribution with respect to any action, suit,
proceeding or claim settled without its prior written consent, which consent
shall not be unreasonably withheld.
5. CERTAIN LIMITATIONS ON REGISTRATION RIGHTS. Notwithstanding the
other provisions of this Agreement, the Company shall not be obligated to
register the Restricted Shares of Holders if, in the opinion of counsel to the
Company, the sale or other disposition of Holders' Restricted Shares may be
effected without registering such Restricted Shares under the Securities Act.
The Company's obligations under Section 1 with respect to each Holder are also
expressly conditioned upon such Holder furnishing to the Company in writing such
information concerning such Holder and such Holder's controlling persons and the
terms of such Holder's proposed offering of Restricted Shares as the Company or
the managing underwriter (if any) shall reasonably request for inclusion in the
applicable registration statement.
6. MISCELLANEOUS.
(a) NOTICES. Any notice, request, instruction, correspondence
or other document to be given hereunder by any party hereto to another (herein
collectively called "NOTICE") shall be in writing and delivered personally or
mailed by registered or certified mail, postage prepaid and return receipt
requested, or by telecopier, as follows:
IF TO THE COMPANY: SmartDisk Corporation
3506 Mercantile Avenue
Naples, Florida 34104
Attention: Daniel E. Reed
Telecopy No. (941) 436-2509
WITH A COPY TO:
Greenberg Traurig, LLP
One East Camelback Road, Suite 1100
Phoenix, Arizona 85012
Attention: Bruce E. Macdonough
Telecopy No. (602) 263-2566
6
<PAGE>
IF TO THE HOLDERS: To the address set opposite each Holder's
name on the signature page attached hereto
WITH COPIES TO:
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
Attention: Stuart M. Falber
Telecopy No. (617) 526-5000
Each of the above addresses for notice purposes may be changed by providing
appropriate notice hereunder. Notice given by personal delivery or registered
mail shall be effective upon actual receipt. Notice given by telecopier shall be
effective upon actual receipt if received during the recipient's normal business
hours, or at the beginning of the recipient's next normal business day after
receipt if not received during the recipient's normal business hours. All
Notices by telecopier shall be confirmed by the sender thereof promptly after
transmission in writing by registered mail or personal delivery. Anything to the
contrary contained herein notwithstanding, notices to any party hereto shall not
be deemed effective with respect to such party until such Notice would, but for
this sentence, be effective both as to such party and as to all other persons to
whom copies are provided above to be given.
(b) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding upon the successors and assigns of the Company. The
rights granted to each Holder pursuant to the terms of this Agreement may be
transferred by such Holder to (i) another Holder, (ii) any affiliate of such
Holder, (iii) any person or entity acquiring at least 50,000 Restricted Shares
(such number being subject to adjustment for any stock dividend, stock split,
subdivision, combination or other recapitalization of the Common Stock of the
Company) or such lesser number as the Board of Directors of the Company may
agree in writing, or (iv) any person or entity acquiring 100% of such Holder's
Restricted Shares if the number of such Restricted Shares is less than the
amount contemplated by the preceding clause (iii); PROVIDED, HOWEVER, that in
each such case (x) the Company is given written notice by the transferee at the
time of such transfer, stating the name and address of the transferee and
identifying the securities with respect to which such rights are being assigned,
and (y) any transferee (other than a Holder) to whom rights hereunder are
transferred shall, as a condition to such transfer, deliver to the Company a
written instrument by which such transferee agrees to be bound by the
obligations imposed upon Holders under this Agreement to the same extent as if
such transferee were a party hereto. Until the Company receives such notice and
written instrument, the transfer shall not be valid and shall not be reflected
on the books and records of the Company. A transferee to whom rights are
transferred pursuant to this subsection (b) may not again transfer such rights
to any other person or entity, other than as provided in this subsection.
(c) GOVERNING LAW. The provisions of this Agreement shall be
governed by and construed in accordance with the laws of the State of Delaware
(excluding any conflict of law rule or principle that would refer to the laws of
another jurisdiction). EACH PARTY HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY
WAIVES, TO THE FULLEST EXTENT IT MAY LEGALLY AND EFFECTIVELY DO SO, TRIAL BY
JURY IN ANY SUIT, ACTION OR PROCEEDING ARISING HEREUNDER.
(d) ENTIRE AGREEMENT; AMENDMENTS; WAIVERS. This Agreement,
together with the Merger Agreement, constitutes the entire agreement between and
among the parties hereto pertaining to the subject matter hereof and supersedes
all prior agreements, understandings, negotiations and discussions, whether oral
or written, of the parties, and there are no warranties, representations or
other agreements between the parties in connection with the subject matter
hereof except as set forth specifically herein or contemplated hereby. No
supplement, modification or waiver of this Agreement shall be binding unless
executed in writing by the Company and the Holders of at least 50% of the
Restricted
7
<PAGE>
Shares. No waiver of any of the provisions of this Agreement shall be deemed or
shall constitute a waiver of any other provision hereof (regardless of whether
similar), nor shall any such waiver constitute a continuing waiver unless
otherwise expressly provided.
(e) MULTIPLE COUNTERPARTS. This Agreement may be executed in
one or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument. In addition, any
former stockholder of [FIRE] who executes a counterpart hereof within 30 days of
date first written above shall be deemed a "Holder" and upon such execution
shall have all of the rights and obligations of a Holder hereunder.
(f) SEVERABILITY. Wherever 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 shall be prohibited by or
invalid under applicable law, such provisions shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.
(g) RULE 144 MATTERS. The Company agrees, during the one-year
period commencing on the first anniversary of the Effective Time, to:
(i) use its best efforts to make and keep current
public information about the Company available, as those terms are understood
and defined in Rule 144;
(ii) use its best efforts to file with the Commission
in a timely manner all reports and other documents required of the Company under
the Securities Act and the Exchange Act; and
(iii) furnish to any holder of Restricted Shares upon
request (i) a written statement by the Company as to its compliance with the
reporting requirements of Rule 144 and of the Securities Act and the Exchange
Act, (ii) a copy of the most recent annual or quarterly report of the Company,
and (ii) such other reports and documents of the Company as such holder may
reasonably request to avail itself of any similar rule or regulation of the
Commission allowing it to sell any such securities without registration.
<PAGE>
IN WITNESS WHEREOF, the Company and Holders have executed this
Registration Rights Agreement as of the date first above written.
SMARTDISK CORPORATION:
By: /s/ MICHAEL S. BATTAGLIA
---------------------------------------------
Name: Michael S. Battaglia
Title: President and Chief Executive Officer
HOLDERS: ADDRESS:
KEYSTONE VENTURE PARTNERS V, L.P. 225 West Washington
Chicago, IL 60606
By: Keystone V Partners, L.P.
By: Keystone V MGT Co.
/s/ John R. Regan
----------------------------------------- 450 Old Oak Court
Print Name: John R. Regan
Managing Director
/s/ ALLYSSA FEDELE P.O. Box 061
- ------------------------------------------------ Harvard, MA 01451
Print Name: Allyssa Fedele
/s/ CHERYL FEDELE P.O. Box 061
- ------------------------------------------------ Harvard, MA 01451
Print Name: Cheryl Fedele
/s/ VINCENT FEDELE P.O. Box 061
- ------------------------------------------------ Harvard, MA 01451
Print Name: Vincent Fedele, as father of
Brent Fedele
/s/ VINCENT FEDELE P.O. Box 061
- ------------------------------------------------ Harvard, MA 01451
Print Name: Vincent Fedele, as father of
Rebecca Fedele
/s/ CATHERINE E. GIARRUSSO 14 Pheasant Lane
- ------------------------------------------------ Bedford, MA 01730
Print Name: Catherine E. Giarrusso
/s/ JAMES M. GIARRUSSO 14 Pheasant Lane
- ------------------------------------------------ Bedford, MA 01730
Print Name: James M. Giarrusso, custodian for
Mathew J. Giarrusso
/s/ HENRY CROUSE 51 Pilgrim Path
- ------------------------------------------------ Carlisle, MA 01741
Print Name: Henry Crouse
/s/ LEONARD AND DENA OPPENHEIM, JOINTLY 138 Diablo View Drive
- ------------------------------------------------ Orlinda, CA 94563
Print Name: Leonard and Dena Oppenheim, Jointly
/s/ MICHAEL G. BALOG 19 Winward Road
- ------------------------------------------------ Tiburon, CA 94920
Print Name: Michael G. Balog
/s/ SHAWNA HUNTER 14 Altamira Avenue
- ------------------------------------------------ Kentfield, CA 94909
Print Name: Shawna Hunter
/s/ ANTHONY P. MORRIS 8 Niles Lane
- ------------------------------------------------ Winchester, MA 01890
Print Name: Anthony P. Morris
/s/ MARK S. AIN 225 Bishops Forest Drive
- ------------------------------------------------ Waltham, MA 02452
Print Name: Mark S. Ain
9
<PAGE>
/s/ RICH DUMLER c/o Lambda Fund
- ------------------------------------------------ 380 Lexington Avenue, 54th Fl.
Print Name: Rich Dumler New York, NY 10168
/s/ ERIC T. JOHNSON
- ------------------------------------------------ P.O. Box 4003
Print Name: Eric T. Johnson Vineyard Haven, MA 02568
LAWRENCE OWEN BROWN FAMILY TRUST
By: /s/ LAWRENCE OWEN BROWN
-------------------------------------------- 19753 Farwell Ave.
Title: Trustee Saratoga, CA 95070
/s/ GORDON G. BELL c/o Bell Computers
- ------------------------------------------------ 450 Old Oak Court
Print Name: Gordon G. Bell Los Altos, CA 94022
/s/ JUSTINE A. JOHNSON 640 Knotty Oak Road
- ------------------------------------------------ Coventry, RI 02816
Print Name: Justine A. Johnson
/s/ JOHN CONSTANTINO 2 Sutton Place South
- ------------------------------------------------ New York, NY 10022
Print Name: John Constantino
/s/ ALLEN GREENBERG c/o Walden Partners Ltd.
- ------------------------------------------------ 150 E. 58th Street
Print Name: Allen Greenberg New York, NY 10155
/s/ JACK C. RICH 77 Pinecroft Road
- ------------------------------------------------ Weston, MA 02943
Print Name: Jack C. Rich
/s/ MARGARET JOHNS
- ------------------------------------------------ 63 Atlantic Avenue #19
Print Name: Margaret Johns Boston, MA 01810
GERMANIUM POWER DEVICES CORP.
By: /s/ WILLIAM M. AVERY
--------------------------------------------- P.O. Box 3065
William M. Avery Andover, MA 01810
GERMANIUM POWER DEVICES CORP.
PROFIT SHARING TRUST GROUP F
By: /s/ WILLIAM M. AVERY
--------------------------------------------- P.O. Box 3065
William M. Avery Andover, MA 01810
Trustee
/s/ RUFUS R. WARD c/o Germanium Power Devices
- ------------------------------------------------ Corp.
Print Name: Rufus R. Ward P.O. Box 3065
Andover, MA 01810
/s/ MICHAEL MARK 284 Summer Avenue
- ------------------------------------------------ Reading, MA 01867
Print Name: Michael Mark
10
<PAGE>
RHOVIN ENGINEERING PENSION PLAN
By: /s/ VINCENT SABELLA 325 Main Street
--------------------------------------------- North Reading, MA 01864
Vincent Sabella
/s/ RICHARD SCHERR 41 Chatham Road
- ------------------------------------------------ Newton, MA 02461
Print Name: Richard Scherr
MASSACHUSETTS TECHNOLOGY DEVELOPMENT
CORPORATION
By: /s/ ROBERT J. CROWLEY 148 State Street
--------------------------------------------- Boston, MA 02109
Robert J. Crowley
Vice President
LE SERRE
By: /s/ FRANK M. POLESTRA 255 State Street
--------------------------------------------- Boston, MA 02109
Frank M. Polestra
Partner
H & D INVESTMENTS II LP
By: /s/ PAUL BROUNTAS Hale & Dorr
--------------------------------------------- 60 State Street
Paul Brountas Boston, MA 02109
ADD VENTURE ASSOCIATES
By: /s/ NOEL G. POSTERNAK 100 Charles River Plaza
--------------------------------------------- Boston, MA 02114
Noel G. Posternak
Partner
ZERO STAGE CAPITAL V, L.P.
By: /s/ PAUL M. KELLEY 101 Main Street, 17th Floor
--------------------------------------------- Cambridge, MA 01242
Paul M. Kelley
General Partner
/s/ MARGARET HOULAHAN 46 Juniper Circle
- ------------------------------------------------ Concord, MA 01472
Print Name: Margaret Houlahan
GREEN MOUNTAIN CAPITAL, L.P.
By: /s/ I.M. SWEATMAN RR1, Box 1503
--------------------------------------------- Waterbury, VT 05676
I.M. Sweatman
General Manager
11
<PAGE>
T & B INVESTORS, LLC
By: /s/ WILLIAM THALHEIMER 25 Constitution Drive
--------------------------------------------- Bedford, MA 03110
William Thalheimer
Managing Partner
/s/ WILLIAM THALHEIMER Imaging Automation
- ------------------------------------------------ 25 Constitution Drive
Print Name: William Thalheimer Bedford, MA 03110
ALSON PARTNERS III
c/o William Thalheimer-Imaging
By: /s/ WILLIAM THALHEIMER Automation
--------------------------------------------- 25 Constitution Drive
William Thalheimer Bedford, MA 03110
Managing Partner
/s/ HENRY APPELBAUM 1630A 30th Street #275
- ------------------------------------------------ Boulder, CO 80301
Print Name: Henry Appelbaum
12
EXHIBIT 21.1
SMARTDISK CORPORATION
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Subsidiary State or Jurisdiction of Incorporation Percentage of Ownership
- ------------------------------- --------------------------------------- ------------------------
<S> <C> <C>
SmartDisk International, Inc. Delaware 100%
SmartDiskette Limited United Kingdom 100%
SmartDiskette GmbH Germany 100%
SmartDisk (Cayman) LTD. Cayman Islands 100%
SmartDisk Personal Storage
Systems Corporation Delaware 100%
VST International Limited Barbados 100%
</TABLE>
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 January 21, 2000, except for Note 15 as to which
the date is March 6, 2000, in the Registration Statement (Form S-1) and related
Prospectus of SmartDisk Corporation for the registration of 4,200,000 shares of
its common stock.
/s/ Ernst & Young LLP
Miami, Florida
April 19, 2000
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
Boston, Massachusetts
April 19, 2000
