UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-17020
Sensar Corporation
(Exact name of registrant as specified in its charter)
Nevada 87-0429944
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 West Broadway, Suite 501, Salt Lake City, Utah 84101
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (801) 350-0587
Securities registered under section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered under section 12(g) of the Act:
Common Stock, Par Value $0.001
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of March 27, 2000, there were 6,545,746 shares of the Issuer's common
stock, par value $0.001, issued and outstanding. The aggregate market value of
the Issuer's voting stock held by nonaffiliates of the Issuer was approximately
$360,000,000, computed at the closing quotation for the Issuer's common stock of
$60 as of March 27, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the
part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) any annual report to security holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes. None.
TABLE OF CONTENTS
<TABLE>
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Item Number and Caption Page
<S> <C> <C>
PART I
1. Business 3
2. Properties 8
3. Legal Proceedings 8
4. Submission of Matters to a Vote of Security Holders 8
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters 9
6. Selected Financial Data 10
7. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
8. Financial Statements and Supplementary Data 14
9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure 14
PART III
10. Directors and Executive Officers of the Registrant 15
11. Executive Compensation 17
12. Security Ownership of Certain Beneficial Owners and Management 22
13. Certain Relationships and Related Transactions 23
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 25
SIGNATURES 27
</TABLE>
PART I
ITEM 1. BUSINESS
FORWARD LOOKING STATEMENTS
This report on Form 10-K contains certain forward looking statements and
information relating to the Company and its proposed merger with Net2Wireless
Corporation. These forward looking statements are not based on historical
facts, but reflect the Company's current expectations concerning future results
and events. Such statements generally describe the objectives, goals, and plans
of the Company and are not intended to be accurate descriptions of the future.
The proposed merger with Net2Wireless Corporation is subject to a number of
conditions, including approval by the shareholders of both the Company and
Net2Wireless Corporation, the Company eliminating any liabilities it may have
other than up to $50,000 in current liabilities, and the satisfaction of a
number of standard closing conditions, that may or may not be met. The
potential products and services of Net2Wireless are still in the development
stage and have not yet been tested in a commercial setting. Consequently, the
proposed business of Net2Wireless has not advanced beyond research and
development. The proposed business and potential products and services of
Net2Wireless are subject to the substantial risks associated with new market
introductions, including the ability of Net2Wireless to successfully develop
commercial products based on its technology, the ability of Net2Wireless to
address technical and manufacturing problems in producing new products,
favorable market acceptance of any products produced, the ability of
Net2Wireless to obtain a price for its products and services sufficient for it
to make a profit, Net2Wireless' ability to enter into favorable strategic
alliances, joint ventures, or other collaborative arrangements with established
industry partners, the success of the marketing efforts of Net2Wireless, the
ability of Net2Wireless to successfully protect its intellectual property to
prevent competitors from benefiting from the technology, the ability of
Net2Wireless to compete with larger, more established entities, and the ability
of Net2Wireless to obtain the necessary financing to successfully complete its
goals. In addition, Net2Wireless proposes to conduct business and develop
products for a market that is only just emerging. There may not be significant
consumer demand for some or all of the proposed products and services of
Net2Wireless Corporation. One or more of the factors listed above, or other
factors or influences that may develop in the future or that may currently seem
inconsequential, may change the actual results of the Company significantly from
those described in the forward looking statements. The Company does not intend
to update these forward looking statements, except as may occur in the regular
course of its periodic reporting obligations.
OVERVIEW
Sensar Corporation (the "Company") was historically engaged in the design,
development, manufacturing, and marketing of analytical scientific
instrumentation. In November 1997, the board of directors, due in part to
missed product deadlines and significant ongoing operating losses, replaced the
existing executive management of the Company. Andrew C. Bebbington was retained
as the new chief executive officer of the Company and undertook an immediate
evaluation of all aspects of the Company's operations, including manufacturing,
research and development, sales and marketing approaches, product options,
personnel and management, contractual arrangements, and overall cost structure.
As a result of recommendations by Mr. Bebbington in December 1997, the board of
directors approved significant restructuring steps and certain changes in the
strategic direction of the Company.
Goals and targets were then established for each of the remaining business
lines for 1998. Executive management continued to monitor each of the
technologies in the Company's portfolio, measure developments against budgeted
goals, and institute cost-cutting measures in order to reduce the substantial
losses being suffered by the Company at that time. Sales of the Company's
products did not meet budgeted expectations and, despite the cost-cutting
measures taken, the Company continued to suffer significant losses, although at
a reduced rate. As a result of these ongoing losses and the continuing decline
in the market price for the Company's common stock, the Company was unable to
attract outside financing on terms acceptable to it and was forced to consider
the sale of a portion of its assets to fund its cash requirements.
During 1998, new management had continued to invest in product development
in the acoustic instrumentation business, while at the same time implementing
cost-cutting measures and imposing operational discipline. As a result, a
significant improvement in the performance of the acoustics business based on
year-to-year comparisons was obtained. This improvement permitted the Company
to identify and negotiate an agreement with a purchaser of the acoustics
business. A definitive agreement concerning this transaction was signed
November 30, 1998 and, following the approval of the stockholders at a special
meeting held March 18, 1999, was completed March 31, 1999. At about the same
time, the Company decided to terminate its development work involving its
supercritical fluid chromatography instruments. This minor line of business was
sold to a group of former employees, none of whom were members of executive
management. Shortly thereafter, in July 1999, the Company completed the sale of
its real property to the purchaser of the acoustic instrumentation business.
The Company used a portion of the proceeds from the sale of its acoustic
instrumentation business to retire the remaining 1998 Series A Preferred Stock
then outstanding. This preferred stock had a floating conversion feature based
on the trading price for the common stock that became disadvantageous to the
common stockholders as the Company's stock price continued to decline. Some of
the remaining proceeds of the sale of the acoustic instrumentation business were
used to attempt the finalization of the Company's Jaguar mass spectrometer
products.
During the end of 1998 and the early part of 1999, the trading price of the
Company's common stock continued to decline to well below the minimum price
required for continued listing on the Nasdaq National Market, which is $1.00 per
share. Consequently, at the March 18, 1999 stockholders meeting, the board of
directors proposed, and received stockholder approval for, a consolidation of
the issued and outstanding stock of the Company.
At the same time, the Company had scheduled a hearing with Nasdaq
concerning an earlier letter that had been sent to the Company indicating
Nasdaq's intent to terminate the listing of the common stock on the Nasdaq
National Market System. While it was hoped that the consolidation of the
outstanding stock would increase the stock price above the $1.00 minimum, the
Company was also temporarily below the $5 million public float requirement and
Nasdaq expressed concern about the Company's ability to continue to meet the net
tangible asset requirement for the Nasdaq National Market System in light of its
limited revenues and history of significant ongoing operating losses. At the
NASD hearing, the Company and the NASD negotiated a resolution pursuant to which
the Company's common stock would be moved from the Nasdaq National Market System
to the Nasdaq SmallCap System and would continue to be listed there provided
that the consolidation resulted in a market price in excess of the $1.00 per
share minimum.
As a result of the array of business and financial issues confronting the
Company, it did not have access to traditional sources of financing necessary to
continue its development of its mass spectrometry and CrossCheck technologies.
Consequently, Mr. Bebbington and the board of directors began to engage in
conversations about his willingness to continue as the chief executive
officer of the Company. The outside members of the board of directors also
indicated their unwillingness to remain on the board in the absence of Mr.
Bebbington's continued participation.
At this time, Howard S. Landa met with Mr. Bebbington and proposed a
wholesale change in management and the board of directors. Mr. Landa was at
that time a senior partner of Kruse, Landa & Maycock, L.L.C., outside legal
counsel to the Company. As a result of this relationship, the Company retained
the services of an independent legal firm and convened a special meeting of the
board of directors to consider Mr. Landa's proposal.
On April 21, 1999, the then current directors of the Company resigned and a
newly elected board of directors was appointed. Concurrently, Mr. Landa was
appointed as the new chief executive officer of the Company and Mr. Bebbington
resigned, although he agreed to continue to provide transitional services as a
consultant to the Company. The new board of directors immediately implemented a
consolidation of the outstanding stock on the basis of one share for each five
shares previously outstanding, arranged for a $1 million equity financing, and
approved the execution of agreements to investigate the potential acquisition of
two start-up internet entities. While these investigations did not lead to an
acquisition, it was the beginning of the Company's aggressive search for an
acquisition that could potentially provide value to the stockholders of the
Company.
Under an agreement put in place while Mr. Bebbington was the chief
executive officer of the Company, the Company had granted distribution rights to
its Jaguar mass spectrometer products to a Japanese firm engaged in the
scientific instrumentation business. The obligation to market the instruments
was subject to the testing and acceptance of those instruments by the
distributor. Delivery of the initial instruments was delayed because of
manufacturing problems, and ultimately the Company agreed to deliver the first
six instruments by June 30, 1999. When the manufacturing team failed to deliver
any instruments acceptable to the distributor by that date, the board of
directors reclassified the Jaguar mass spectrometer operations as assets held
for sale and renewed the Company's efforts to negotiate a transaction with a
potential buyer of this technology. These efforts lead to a sale to a
privately-held corporation engaged in the scientific instrumentation business,
of the Jaguar mass spectrometer technology in August 1999. At the same time,
the Company abandoned the CrossCheck technology that it had held under a license
agreement, and returned this technology to the holder of the patent. The
Company also sold its residual interest in airport noise monitoring software.
The business based on this software had been sold to a third party in 1995.
Subsequent to the new management team assuming operational control in April
1999, the Company actively began searching for an acquisition, focusing in the
high technology, internet arena. The Company reviewed a number of businesses
and business plans during this period. While some of the investigations lead to
letters of intent, and the Company did make two small minority interest
investments in other companies, none of the investigations and negotiations
resulted in the execution of a material agreement until the fall of 1999.
In September 1999, the Company entered into negotiations and signed a
letter of intent to acquire a wireless communications technology that ultimately
led to the execution of an agreement with Net2Wireless Corporation
("Net2Wireless") on December 8, 1999, that was subsequently amended on January
4, 2000, and March 21, 2000 (the "Reorganization Agreement").
NET2WIRELESS CORPORATION
General
Net2Wireless is a privately-held Delaware corporation with a research and
development subsidiary located in Israel. Net2Wireless maintains a website at
www.net2w.com. Net2Wireless is developing technology which is intended to
enable and enhance a wide variety of wireless communication services. The goal
of Net2Wireless is to permit the following services to be provided to cellular
subscribers carrying wireless devices such as palm computers, personal digital
assistants, and cellular phones:
(a) browsing the internet through standard websites and using standard
browsers;
(b) transmission of live video over the 9600 bps wireless link to the
wireless device;
(c) providing instant messaging with full graphics support;
(d) providing messaging services (e-mail, voice mail, fax, etc.); and
(e) providing full graphics applications with network based storage.
Net2Wireless currently has an installation at Partner Communications
Company, Ltd., the third largest cellular carrier in Israel, which is conducting
a beta-site test of the Net2Wireless products. Net2Wireless' products and
services are still in development, and there can be no assurance that
Net2Wireless will be successful in achieving its goals.
Net2Wireless recently completed a private placement for gross proceeds of
approximately $29 million to provide funding for its ongoing research and
development efforts and the expansion of its work force.
PROPOSED MERGER
The Reorganization Agreement provides for the merger of Net2Wireless with
and into the Company in exchange for the issuance of 18,295,060 shares of common
stock and the assumption of options and warrants to acquire 14,766,649 shares of
common stock. Such warrants and options have a weighted average exercise price
of $2.03 per share. In addition, the Company will issue 1,000,000 shares to
certain individuals involved in introducing the two entities.
Under the terms of the Reorganization Agreement, the Company agreed to
advance Net2Wireless up to $2 million prior to the merger to assist it in
meeting its ongoing development and growth expenses. The Company advanced
$500,000 of this amount to Net2Wireless in February 2000. Net2Wireless has
recently completed a private placement of its securities which resulted in gross
proceeds to it of approximately $29 million. The Company does not know if
Net2Wireless will request that the additional $1.5 million be advanced prior to
the merger, but it may do so.
The Reorganization Agreement requires the Company to have a minimum amount
of cash and collectible notes receivable and no liabilities at closing, other
than current accounts payable not to exceed $50,000. In order to meet the
requirement with respect to the elimination of liabilities, the Company has
provided for the termination of its deferred compensation plan and the executive
employment agreement with Mr. Landa, the assumption of the lease to which it is
currently a party, and the indemnification of the Company by Mr. Landa with
respect to pending litigation. See "CERTAIN RELATIONSHIPS AND RELATED
TRNSACTIONS."
Additional shares of common stock may be issued to the Net2Wireless
stockholders in the event that the net cash held by the Company at the closing
of the merger, as defined in the Agreement, plus all amounts collected on the
note receivables held by the Company within 60 days of the due date of such
receivables, is less than $4.45 million. The number of additional shares to be
issued will be determined by dividing any shortfall by $1.86. These contingent
shares will be delivered to former Net2Wireless stockholders within 10 business
days of the final determination of the number of shares. At December 31, 1999,
the Company had $5.0 million of net cash under the definition used in the
Reorganization Agreement, assuming the full collection of all short-term
receivables. At March 27, 2000, the Company had cash of approximately
$4,330,000 and the note receivable from Net2Wireless of $500,000 with current
liabilities of approximately $50,000. In addition, the Company had notes
receivable from other parties of approximately $1,370,000. The Company has not
received any notice that such receivables are subject to any claim or offset,
and currently expects these amounts to be collected in due course.
Consequently, the Company does not anticipate that additional shares will be
issued under these provisions.
On completion of the merger, the current shareholders of Net2Wireless will
hold approximately 65% of the outstanding common stock of the Company and
warrants and options that will permit them to increase their ownership to
approximately 77% of the Company on exercise. In addition the current directors
and officers of the Company will resign and nominees of Net2Wireless will be
appointed in their place. As a result, the current shareholders and management
of Net2Wireless will control the Company subsequent to the merger.
Completion of the merger is subject to the approval of the transaction by
the shareholders of both the Company and Net2Wireless and the satisfaction of
additional standard closing conditions. If the merger is completed, the
corporate domicile of the Company will be moved from Nevada to Delaware and its
name will be changed to "Net2Wireless Corporation."
Employees
The Company currently has two employees, Mr. Landa, the chief executive
officer of the Company, and his assistant.
ITEM 2. PROPERTIES
The Company sold its administrative and manufacturing facilities in Provo,
Utah, to PCB during 1999 in connection with the sale of its acoustics
instrumentation business.
Until recently, the Company leased 1,692 square feet of space at 50 West
Broadway, Suite 501, Salt Lake City, Utah 84101, for monthly lease payments of
$2,256 under the terms of a three-year lease. As of March 1, 2000, this lease
was assumed by Mr. Landa, the chief executive officer of the Company, as
required by the terms of the agreement with Net2Wireless. Mr. Landa has agreed
to permit the Company to continue to use the facilities on a rent-free basis
pending the closing of the proposed merger with Net2Wireless. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."
ITEM 3. LEGAL PROCEEDINGS
On September 28, 1999, an action entitled Edgar Lee, et al. v. Sensar
Corporation was filed in the Fourth Judicial District Court in Utah County,
Utah, Civil No. 990403473. The action was brought by several former employees
of the Company, seeking the payment of a bonus based on the successful
completion of the sale of certain of the Company's assets, technologies, and/or
businesses. The Company does not believe the employees are entitled to such a
bonus, has filed a motion to dismiss a portion of the claims, and intends to
vigorously defend its position. Mr. Landa has agreed to indemnify the Company
against all future costs or liabilities associated with this litigation after
March 1, 2000, under the provisions of the indemnification agreement
contemplated by the Reorganization Agreement. See "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the three months ended December 31, 1999, the Company did not hold a
shareholders' meeting and no matters were submitted to a vote of the security
holders of the Company, through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the Nasdaq SmallCap Market under
the trading symbol "SCII." The following table sets forth high and low closing
sale prices for the Company's common stock as reported on Nasdaq for the periods
indicated. Such quotations do not include retail markups, markdowns,
commissions, or other adjustments. All amounts have been adjusted to give
effect to the 1:5 consolidation of the outstanding common stock of the Company
effective May 3, 1999 and the 2:1 forward split of the outstanding common stock
effective January 17, 2000.
The following table sets forth the approximate range of high and low
closing sale prices for the common stock of the Company during the periods
indicated.
<TABLE>
<CAPTION>
Quarter Ended High Bid Low Bid
- ------------- -------- -------
<S> <C> <C>
March 31, 1998 $ 9.219 $5.781
June 30, 1998 $ 7.969 $4.375
September 30, 1998 $ 5.000 $1.094
December 31, 1998 $ 1.484 $0.625
March 31, 1999 $ 1.094 $0.703
June 30, 1999 $ 3.594 $0.859
September 30, 1999 $ 2.797 $1.500
December 31, 1999 $ 34.250 $2.094
</TABLE>
On March 27, 2000, the last reported sales price for the Company's common
stock as reported by Nasdaq was $60.
On March 27, 2000, the Company had approximately 285 stockholders of
record.
The Company has not paid dividends with respect to its common stock. There
are no restrictions on the declaration or payment of dividends in the articles
of incorporation or bylaws of the Company or in any of its contractual
agreements, other than under the Reorganization Agreement for the period the
merger is pending. However, it is anticipated that any potential earnings of
the Company and, subsequent to the merger, the combined company, will be
retained for working capital and investment in the growth and expansion of
business operations. Consequently, it is not anticipated that the Company,
before or after the proposed merger, will pay dividends in the foreseeable
future.
ITEM 6. SELECTED FINANCIAL DATA
CERTAIN FINANCIAL DATA
The following statement of operations and balance sheet data as of and for
the periods ended December 31, 1999, 1998, and 1997, 1996, and June 30, 1996 and
1995, were derived from the Consolidated Financial Statements of the Company.
In January 1997, the Company changed its fiscal year end from June 30 to
December 31 effective December 31, 1996. The Consolidated Financial Statements
of the Company for the fiscal year ended December 31, 1999, 1998, and 1997, for
the six months ended December 31, 1996, and for the fiscal years ended June 30,
1996 and 1995, have been audited by independent certified public accountants.
The selected financial data below should be read n conjunction with the
Consolidated Financial Statements of the Company and the notes thereto and "ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
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Six Months
Ended Year Ended
Year Ended December 31, December June 30,
----------------------------------------- 31, ------------------------
1999 1998 1997 1996 1996(2) 1995(3)
------------ ----------- ------------ ----------- ----------- ----------
Statement of Operations Data(1):
<S> <C> <C> <C> <C> <C> <C>
Revenues: $ 147,944 $ 137,814 $ 140,870 $ 59,638 $ 12,320 $ 7,302
============ =========== ============ =========== =========== ==========
Income (loss) from
continuing operations $(11,995,158) $(1,221,025) $ (2,324,262) $ (326,242) $ (463,637) $ (510,863)
Income (loss) from
discontinued operations 22,528 (5,702,419) (12,493,549) (1,317,678) (1,242,611) 199,246
Gain on sale of
discontinued operations 3,268,250 - - - - -
------------ ----------- ------------ ----------- ----------- ----------
Net loss $ (8,704,380) $(6,923,444) $(14,817,811) $(1,643,920) $(1,706,248) $ (311,617)
============ =========== ============ =========== =========== ==========
Basic earnings
(loss) per common
shares from
continuing operations $ (2.11) $ (0.51) $ (0.51) $ (0.08) $ (0.16) $ (0.21)
Basic earnings (loss)
per common share from
discontinued operations 0.58 (1.12) (2.71) (0.32) (0.38) 0.08
------------ ----------- ------------ ----------- ----------- ----------
Basic earnings
(loss) per common
share $ (1.53) $ (1.63) $ (3.22) $ (0.40) $ (0.54) $ (0.13)
============ =========== ============ =========== =========== ==========
Weighted average
common shares
outstanding 5,693,514 5,073,463 $ 4,603,080 4,164,328 3,255,489 2,440,397
Balance Sheet Data:
Working capital $ 5,034,089 $ 4,038,840 $ 6,784,305 $15,584,953 $15,737,295 $6,549,131
Total assets $ 5,568,839 $ 4,317,769 $ 7,104,476 $15,716,524 $16,032,158 $6,827,550
Long-term liabilities
and deferred gain $ 5,542,040 $ - $ - $ - $ 45,792 $ 134,354
Stockholders' equity
(deficit) $ (154,959) $ 4,049,572 $ 6,853,003 $15,591,513 $15,661,097 $6,415,511
Cash dividends declared
per common share $ - $ - $ - $ - $ - $ -
</TABLE>
(1) During the year ended December 31, 1999, the Company discontinued the
operations of its analytical instrumentation business. The results of
these operations have been segregated from continuing operations for
all periods presented.
(2) Effective October 27, 1995, the Company acquired Sensar Instruments,
Inc. (formerly Sensar Corporation), in a transaction accounted for as
a purchase.
(3) During the year ended June 30, 1995, the Company discontinued the
operations of its airport noise monitoring business. The results of
these operations have been segregated from continuing operations for
all periods presented.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and related notes contained herein.
OVERVIEW
During the year ended December 31, 1999, the Company completed the sale or
disposition of its various product lines and technologies. The principal
transactions were:
- - The completion of the sale of the assets of the acoustic and vibration
product line to PCB Group, Inc. ("PCB") in March 1999;
- - The sale of the Company's real estate to PCB in July 1999;
- - The sale of the assets associated with the Jaguar mass spectrometer
product line to LECO Corporation in August 1999; and
- - The discontinuance of continued research and development with respect to
the CrossCheck technology in August 1999.
The results of operations and cash flows associated with the foregoing have
been accounted for and segregated as discontinued operations in the accompanying
consolidated financial statements. All periods have been restated to reflect
the treatment of these operations as discontinued.
In conjunction with the disposition of its historical operations, the
Company undertook a search for a suitable business or technology to acquire,
which led to the execution of an agreement with Net2Wireless Corporation on
December 8, 1999. The Company was able to negotiate the agreement with
Net2Wireless in part because of its strong liquidity position resulting from the
previous asset sales. At December 31, 1999, the Company had current assets of
$5,215,847, primarily consisting of cash and short-term notes receivable, and
current liabilities of $181,758. At March 27, 2000, the Company had current
assets of approximately $6,200,000 and current liabilities of approximately
$50,000.
RESULTS OF OPERATIONS
Comparison of Years Ended December 31, 1999 and 1998
Revenues
With the disposition of the assets of its historical operations, the
Company's sole source of revenue from continuing operations was interest income
of $147,944 for 1999 and $137,814 for 1998 earned on temporary cash investments
and notes receivable.
Costs and Expenses
General and administrative expenses associated with continuing operations
increased from $708,890 for the year ended December 31, 1998, to $893,416 for
the year ended December 31, 1999. The increase was principally related to
increases of approximately $99,000 for legal fees and $27,000 in travel costs
associated primarily with the due diligence review of various potential
candidates for business transactions.
During the year ended December 31, 1999, the Company recorded non-cash
compensation related to stock options of $5,885,833. The principal element of
this charge, $5,618,740, relates to stock options to acquire 240,000 shares
granted to management that have a cashless exercise provision. Generally
accepted accounting principles require that compensation be recorded for stock
options with such provisions. The amount of compensation is equal to the change
in the stock price above the exercise price. Additionally, the Company has
recorded non-cash compensation expense during 1999 of $267,093 for the fair
value of stock options granted to certain non-employees to acquire an aggregate
of 270,000 shares of common stock.
During 1999, the Company also recorded a non-cash deferred compensation
expense of $5,342,040 for the accrual of amounts earned under a deferred
compensation plan established in 1999. This plan created an unfunded deferred
compensation pool based on specified percentages of the Company's net income and
increases in market capitalization. As of December 31, 1999, the entire amount
of the deferred compensation pool is attributable to the increase in market
capitalization of the Company. See "EXECUTIVE COMPENSATION: Deferred
Compensation Plan" and Note E to the Consolidated Financial Statements of the
Company for additional information about this plan.
The Company has also recorded a net credit of $31,663 for unusual items
during the year ended December 31, 1999. This credit principally consists of a
recovery of approximately $145,000 on notes receivable from the exercise of
stock options which were previously reserved, net of a termination benefit paid
to the former chief executive officer of $125,000.
Comparison of Years Ended December 31, 1998 and 1997
Revenues
With the disposition of the assets of its historical operations, the
Company's sole source of revenue from continuing operations was interest income
of $137,814 for 1998 and $140,870 for 1997 earned on temporary cash investments
and notes receivable.
Costs and Expenses
General and administrative expenses associated with continuing operations
decreased from $1,081,168 for the year ended December 31, 1997, to $708,890 for
the year ended December 31, 1998. The decrease of $372,278 was principally
related to a reduction of approximately $408,000 for professional services,
consulting, and certain other outside service costs that resulted due to a
change in general corporate objectives from obtaining funding and seeking to
acquire technologies to internal research and development and the operation of
the Company's business.
The Company recorded unusual charges associated with continuing operations
of $649,949 for 1998 compared to $1,383,964 for 1997. In 1998, the unusual
charges were principally composed of (1) an allowance of approximately $165,000
for a receivable from a former chief executive officer of the Company for
withholding taxes paid by the Company on his behalf, the collectibility of which
was then in doubt; and (2) an allowance of $400,000 against certain notes from
former executive officers arising from the exercise of stock options, the
collectibility of which was then uncertain due to the decline in the price of
the Company's stock. In 1997, the unusual items related to the termination
costs for former executive officers of the Company arising out of the
restructuring of the Company in November 1997 and paid to the former officers in
the form of cash and common stock.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had total current assets of $5,215,847,
including cash and cash equivalents of $3,735,115. The Company had total
current liabilities of $181,758 at December 31, 1999, resulting in working
capital of $5,034,089.
The Company's primary source of cash for the year ended December 31, 1999,
was the net cash provided by the sale of discontinued operations of
approximately $5.6 million. The Company's primary uses of cash for the year
ended December 31, 1999, was net cash used in operations of $1,089,815 and
$3,071,437 used to redeem the Company's remaining 1998 Series A Preferred Stock.
Management believes that the current cash balances are more than sufficient
to meet the existing commitments of the Company for the next fiscal year.
YEAR 2000
With the sale or disposal of its historical product lines and associated
assets, the Company currently has no information systems, customers, or
suppliers on which it is dependent. The Company has obtained assurances from
its banking institution that it is Year 2000 compliant. Accordingly, the
Company expects no future costs to be incurred on Year 2000 issues.
INFLATION AND ENVIRONMENTAL REGULATION
The Company's operations have not been, and in the near term are not
expected to be, materially affected by inflation or changing prices.
The Company does not believe that any recently enacted or presently
proposed environmental legislation will have a material adverse effect on its
results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are set forth immediately
following the signature page.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The Company and its current auditors have not disagreed on any items of
accounting treatment or financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is the name and age of each executive officer and director
of the Company, together with all positions and offices of the Company held by
each and the term of office and the period during which each has served:
<TABLE>
<CAPTION>
Director and/or
Name Age Position and Office Held Executive Officer Since
- ------------------ --- ------------------------ -----------------------
<S> <C> <C> <C>
Howard S. Landa 52 CEO and Chairman of the Board April 21, 1999
Brian B. Lewis 52 Director April 21, 1999
Steven P. Strasser 50 Director April 21, 1999
Mickey Hale 52 Director May 5, 1999
</TABLE>
A director's regular term is for a period of three years or until his
successor is duly elected and qualified. The terms of the board are staggered
so that one-third of the board is subject to election at each annual
shareholders' meeting. The current term of Howard S. Landa expires at the 2001
annual meeting; the current terms of Brian B. Lewis, Steven P. Strasser, and
Mickey Hale expire at the 2002 annual meeting. On completion of the proposed
merger with Net2Wireless, the current officers and directors of the Company will
resign in favor of nominees of Net2Wireless.
There is no family relationship among the current directors and executive
officers. The following sets forth brief biographical information for each
director and executive officer of the Company.
Howard S. Landa, age 52, was appointed as a director and chairman of the
board of the Company on April 21, 1999. Mr. Landa was a founder of Kruse, Landa
& Maycock, L.L.C. in 1978. Mr. Landa spent his professional career specializing
in corporate acquisitions, taxation, the infusion of new capital, and management
advice. Mr. Landa has taken a leave of absence from his former firm in order to
dedicate his full business time to the Company. Mr. Landa received his juris
doctorate from Hastings College of Law, University of California, in 1973 and an
LL.M. in taxation from New York University in 1974.
Brian B. Lewis, age 52, was appointed as a director of the Company on April
21, 1999. Mr. Lewis is an attorney and a founder of the law offices of Brian B.
Lewis. Mr. Lewis has extensive experience in advising start-up, emerging,
financially distressed, and growth companies. Mr. Lewis has previous management
experience serving as interim chief executive officer and general counsel to
Honey Hill Farms, Inc., in 1991-1992 and interim president and general counsel
of Ahead Technology, Inc., in 1989-1991. Mr. Lewis currently serves on the
board of directors of Plato Labs, Inc., Surface Solutions Products Group, Inc.,
and Florentine Restaurant Group, Inc. Mr. Lewis received his bachelor of
science degree in industrial management from San Jose State University in 1969
and his juris doctorate from Hastings College of Law, University of California,
in 1973.
Steven P. Strasser, age 50, was appointed as a director of the Company on
April 21, 1999. Since 1987, Mr. Strasser has been engaged in stock and venture
capital investments on his own behalf. Mr. Strasser served as co-chairman of
Modula Computer from 1980 to 1987. Prior to that time, Mr. Strasser was
involved in investment banking first with Edwards & Handley and then with J.
Franklin Investments. Mr. Strasser received his bachelor of science degree in
economics from the University of Utah in 1970 and a masters of business
administration from Columbia University in 1972.
Mickey Hale, age 52, was appointed as a director of the Company on May 5,
1999. Ms. Hale has been president and chief executive officer of Imperial
Development Corporation and related travel services and real estate entities
since 1990. Ms. Hale was an investment advisor at Shearson Lehman Brothers from
1987-1990 and served in the same capacity at Paine Webber from 1980-1987.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and executive officers, and persons who own more than
10% of a registered class of the Company's equity securities to file with the
Securities and Exchange Commission initial reports of ownership and reports of
changes in ownership of equity securities of the Company. Officers, directors,
and greater than 10% shareholders are required to furnish the Company with
copies of all Section 16(a) forms they file.
Other than the report on Form 4 of Jeffrey Cohen, formerly the chief
operating officer of the Company, for the month of November, 1999, which was
filed in mid-December, 1999, the Company believes that all reports required by
Section 16(a) for transactions in 1999 have been timely filed.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation
awarded to, earned by, or paid to the chief executive officer and the other
executive officer of the Company who received compensation in excess of $100,000
for the periods indicated.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
------------------------------------------
Annual Compensation Awards Payouts
----------------------------------------- -------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Securities
Annual Restricted Underlying All Other
Compen- Stock Options/ LTIP Compen-
Name and Salary Bonus sation(1) Award(s) SARs Payouts sation
Principal Position Year ($) ($) ($) ($) (#) ($) ($)
- ----------------------- ---------- -------- -------- --------- ------------ ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Howard S. Landa, CEO 12/31/99(2) $ 66,585 $ 0 $ 0 $ 0 1,000,000(10) $ 0 $3,908,810(8)
and Chairman of the
Board
Andrew C. Bebbington, 12/31/99(3) $175,631 $ 50,000 $ 2,316 $ 0 750,000(3) $ 0 $ 125,000(9)
Former CEO and 12/31/98 $250,000 $ 100,000 $ 6,569 $ 0 400,000(7) $ 0 $ 53,303(6)
Chairman of the Board 12/31/97(4) $ 31,250 $ 0 $ 575 $ 0 400,000(7) $ 0 $ 0
Jeffrey S. Cohen, 12/31/99 $ 83,060 $ 30,000 $ 6,948 $ 0 40,000 $ 0 $ 70,000(9)
Former Chief $ 29,238(6)
Operating Officer 12/31/98(5) $128,333 $ 45,000 $ 6,001 $ 0 120,000 $ 0 $ 14,577(6)
and Director
</TABLE>
(1) These amounts reflect the benefit to the named executive officers of
amounts paid by the Company for health, disability, and life insurance.
(2) Mr. Landa accepted the positions of chief executive officer and a member
of the board of directors effective April 21, 1999. Mr. Landa was not
previously an employee of the Company. The foregoing table reflects
amounts paid, awarded, or accrued for Mr. Landa from April 21, 1999, to
December 31, 1999.
(3) Mr. Bebbington resigned his position with the Company April 21, 1999.
The amounts shown for 1999 include payments of $98,714 made to Mr.
Bebbington as a consultant subsequent to his resignation and options
to acquire 650,000 shares of common stock granted to Mr. Bebbington
in November 1999.
(4) Mr. Bebbington accepted the positions of chief executive officer and a
member of the board of directors effective November 17, 1997. Mr.
Bebbington was not previously an employee of the Company. The 1997
amounts in the foregoing table reflect amounts paid, awarded, or
accrued for Mr. Bebbington from November 17, 1997, to December 31, 1997.
(5) Mr. Cohen accepted the positions of chief operating officer and a member
of the board of directors effective February 2, 1998. Mr. Cohen was not
previously an employee of the Company. The 1998 amounts in the
foregoing table reflect amounts paid, awarded, or accrued for Mr. Cohen
from February 2, 1998, to December 31, 1998.
(6) These amounts reflect amounts paid by the Company to, or on behalf of,
the named executive officers for relocation costs in conjunction with
their employment by the Company.
(7) In 1997, as part of his employment by the Company, Mr. Bebbington was
granted an option to acquire 400,000 shares of common stock. In March
1998, the option granted in 1997 was terminated in favor of an option
to acquire 400,000 shares of common stock with modified provisions for
vesting and exercise prices.
(8) This amount represents Mr. Landa's share of the deferred compensation
pool accrued for 1999. As described in Note (10) below, Mr. Landa will
forfeit his interest in this plan if the 800,000 options subject to
stockholder approval are approved.
(9) This amount represents severance payments made to these former officers.
(10) Of these options granted, 800,000 are subject to stockholder approval.
If approved by the stockholders, Mr. Landa has agreed to forfeit his
interest in the deferred compensation plan described in Note (8) above.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth information respecting all individual grants
of options made during the last completed fiscal year to the named executive
officers of the Company.
<TABLE>
<CAPTION>
Potential Realized Value
at Assumed Annual
Rates of Stock
Appreciation for
Individual Grants Option Term
- ---------------------------------------------------------------------------------- ----------------------------
(a) (b) (c) (d) (e) (f) (g)
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees During Base Price Expiration
Name Granted (#) Fiscal Year ($/share) Date 5%($) 10%($) 0%
- --------------------- ------------- ----------------- ------------ ----------- ----------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Howard S. Landa 1,000,000 55.9% (1) (1) $ 1,831,188 $ 2,235,000 $1,100,000
Andrew C. Bebbington 750,000 41.9% (3) (3) $ 1,431,961 $ 1,732,969 $1,031,250
Jeffrey S. Cohen 40,000 2.2% (2) (2) $ 35,763 $ 53,100 $ 0
</TABLE>
(1) Options to acquire 200,000 shares of common stock expire April 27, 2002,
and are 50% exercisable at $1.50 per share and 50% exercisable at $2.50
per share. The remaining options to acquire 800,000 shares are
exercisable at $2.00 per share, expire November 16, 2001, and are
subject to shareholder approval.
(2) These options to acquire 40,000 shares of common stock have been
exercised, but originally would have expired April 27, 2002. These
options were 50% exercisable at $1.50 per share and 50% exercisable
at $2.50 per share.
(3) Options to acquire 100,000 and 650,000 shares of common stock were
granted in April and November 1999, respectively, in conjunction
with Mr. Bebbington acting as a consultant to the Company. The
options to acquire 100,000 shares are 50% exercisable at $1.50 per
share (exercised in 1999) and 50% exercisable at $2.50 per share
(expire April 27, 2002). The options to acquire 650,000 shares are
exercisable at $2.00 per share, expire November 16, 2001, and are
subject to shareholder approval.
The following table sets forth the information concerning the options
exercised by the named executive officer during the year ended December 31,
1999, and the value of unexercised options as of December 31, 1999.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
FY End (#) FY End ($)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized ($) Unexercisable Unexercisable
- -------------------- --------------- ------------------ --------------- ---------------
<S> <C> <C> <C> <C>
Howard S. Landa 0 $ 0 200,000/800,000 $5,550,000/$22,200,000
Andrew C. Bebbington 50,000 $ 518,748 50,000/650,000 $1,362,500/$18,037,500
Jeffrey S. Cohen 40,000 $ 68,750 0/0 $0/$0
</TABLE>
EXECUTIVE EMPLOYMENT AGREEMENTS
The Company has an employment contract with Howard S. Landa with an initial
term through December 31, 2002, that provides for monthly compensation of
$8,000. This employment agreement will terminate on completion of the proposed
merger with Net2Wireless. The Company does not have an employment agreement
with any other person.
DEFERRED COMPENSATION PLAN
The Company adopted a deferred compensation plan on June 24, 1999, when the
strategy to identify potential acquisitions was being implemented. Under the
terms of the plan, Mr. Landa has a 30% interest in the compensation pool, the
outside directors were each granted a 3% interest, and consultants to the
Company were granted a 2% interest.
The deferred compensation pool consists of two components: (a) an
increasing percentage of 3% to 7-1/2% of the net income of the Company
subsequent to March 31, 1999, in excess of $2 million, excluding gains on the
sale of the technologies then held by the Company and excluding compensation
charges related to the granting of options, but including 75% of any net
unrealized gain on investments made by the Company in marketable securities
subsequent to March 31, 1999; and (b) an amount equal to 7-1/2% of any increase
in the market capitalization of the Company above $13.4 million that is in
excess of 150% of the increase in the Russell 2000 Index over the same period.
The maximum amount permitted to be included in the compensation pool under these
two components is 25 million and $50 million, respectively. The deferred
compensation pool is fixed at December 31, 2002, or, if sooner, on any change of
control, such as the proposed merger with Net2Wireless. In the event of a
change of control, the deferred compensation pool may not be less than $5
million. The pool is required to be paid in cash unless payment in stock of the
Company has been approved by the shareholders, which has not occurred.
While the Company has not realized income to date sufficient to affect the
compensation pool, the increase in market capitalization of the Company as of
March 27, 2000, giving effect to the proposed merger, would result in a
compensation pool in excess of the $50 million limitation provided by the terms
of the deferred compensation plan. Under the terms of the Reorganization
Agreement with Net2Wireless, the Company is obligated to eliminate the cash
liability associated with the deferred compensation plan as a condition to the
closing of the proposed merger. Each of the holders of interests in the
deferred compensation plan has agreed to relinquish their interest on
stockholder approval of options granted to them by the board of directors. See
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
COMPENSATION OF DIRECTORS
The Company compensates its outside directors for service on the board of
directors by payment of $1,000 for each board meeting attended and reimbursement
of expenses incurred in attending board meetings. The Company does not
separately compensate its board members who are also employees of the Company
for their service on the board. Each of the members of the board received an
option to acquire 200,000 shares of stock at a weighted average exercise price
of $2.00 per share at the time they became a director. In addition, each of the
non-executive directors were awarded an option to acquire 50,000 shares of stock
at an exercise price of $2.00 in November 1999. Each of the three non-executive
directors holds a 3% interest in the Company's deferred compensation plan.
These individuals have agreed to waive their rights in the deferred compensation
plan if the options previously granted to them are approved by the shareholders
of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
The Company does not have a compensation committee. The entire board,
other than the particular individual executive officer involved, participates in
the setting of compensation for senior management.
Report on Executive Compensation
Management compensation is overseen by the board of directors of the
Company, which consists of one member of senior management, Howard S. Landa, and
three outside directors who are not employees of the Company.
Compensation Philosophy. The board of directors recognizes the need to
attract and retain qualified executives with appropriate experience. During
1999, the Company was seeking to sell its existing technologies and identify a
suitable acquisition which had the potential for increasing stockholder value.
The compensation package reflected this challenging environment by establishing
a low base-line salary for the chief executive officer and adopting a deferred
compensation plan with benefits tied to the achievement of pre-determined profit
targets and increases in stockholder value measured by the market capitalization
of the Company.
Chief Executive Compensation. The Company has entered into an employment
contract with Mr. Landa with an initial term through December 31, 2002,
providing for annual compensation of $96,000.
Deferred Compensation Pool and Stock Options. Mr. Landa was granted a 30%
interest in the Company's deferred compensation plan. This plan provides for
compensation based on Company earnings subsequent to March 31, 1999, in excess
of $2 million dollars and increases in the market capitalization of the Company
in excess of 150% of the increase in the Russell 2000 Index.
Options to acquire 1,000,000 shares of common stock have been granted to
Mr. Landa at exercise prices of $1.50 for 100,000 shares, $2.50 for 100,000
shares and $2.00 for 800,000 shares. 800,000 of these options are subject to
shareholder approval. A portion of these options were granted to Mr. Landa in
exchange for his agreement to relinquish his interest in the deferred
compensation pool on stockholder approval of the options.
Review of Performance. Mr. Landa joined the Company with the goal of
seeking a suitable acquisition and increasing stockholder value. The board of
directors believes the compensation of the chief executive officer is fair and
reasonable for both the officer and the shareholders of the Company.
Board of Directors:
Howard S. Landa
Brian B. Lewis
Steven P. Strasser
Mickey Hale
ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth information as to each person owning of record
or who was known by the Company to own beneficially more than 5% of the common
stock of issued and outstanding stock as of March 27, 2000, and information as
to the ownership of the Company's common stock by each of its directors and by
the directors and executive officers as a group. Except as otherwise indicated,
all shares are owned directly, and the persons named in the table have sole
voting and investment power with respect to shares shown as beneficially owned
by them.
<TABLE>
<CAPTION>
Name and Address Nature of Number of
of Beneficial Owners(1) Ownership Shares Owned Percent(2)
- ------------------------------------- --------------- ------------ ----------
<S> <C> <C> <C>
Principal Stockholder
S.A.C. Capital Advisors(3) Common Stock 443,600 6.8%
Directors
Howard S. Landa Common Stock(4) 56,076 0.9%
Options(5) 1,000,000 13.3%
---------
Total 1,056,076 14.0%
Brian B. Lewis Common Stock(6) 9,000 0.1%
Options(7) 250,000 3.7%
---------
Total 259,000 3.8%
Steven P. Strasser Common Stock 12,500 0.2%
Options(7) 250,000 3.7%
---------
Total 262,500 3.9%
Mickey Hale Common Stock 16,700 0.3%
Options(7) 250,000 3.7%
---------
Total 266,700 3.9%
All Executive Officers and Common Stock 94,276 1.4%
Directors as a Group (four persons) Options 1,750,000 21.1%
---------
Total 1,844,276 22.2%
</TABLE>
(1) Except as otherwise indicated, to the best knowledge of the Company, all
stock is owned beneficially and of record by the indicated person, and
each shareholder has sole voting and investment power.
(2) The percentages shown are based on 6,545,746 shares of common stock of
the Company issued and outstanding as of March 27, 2000. The
percentages shown for options assume the exercise of all options held
solely by that individual and a corresponding increase in the issued
and outstanding common stock. The percentage shown for total holdings
assumes the exercise of all options held by the individual and a
corresponding increase in the issued and outstanding common stock.
(3) These shares are held jointly with S.A.C. Capital Associates, LLC, and
Steven A. Cohen.
(4) These shares are held by the spouse and children of Mr. Landa and a
limited liability company in which Mr. Landa is a minority owner. Mr.
Landa denies direct beneficial ownership and control of these shares.
(5) Options to acquire 800,000 shares have been approved by the board of
directors, but are subject to the further approval of the shareholders
of the Company.
(6) These shares are held on behalf of the children of Mr. Lewis.
(7) These options are subject to the further approval of the shareholders of
the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the change of management of the Company in April, 1999,
Andrew C. Bebbington, the former chief executive officer, resigned. Mr.
Bebbington and Jeffrey S. Cohen, the then chief operating officer, agreed to
terminate their former employment agreements in exchange for cash payments and
in the case of Mr. Bebbington, a consulting agreement, and in the case of Mr.
Cohen, a new employment agreement. Under the terms of the consulting agreement,
Mr. Bebbington was retained as the chief consultant of the Company through
December 31, 1999, at a rate of $10,000 per month. Mr. Cohen continued to
provide services as chief operating officer through December 31, 1999, also at a
rate of $10,000 per month, although the Company was reimbursed for one-half of
this cost by PCB because Mr. Cohen also provided transitional services to it.
Mr. Bebbington received an initial cash payment of $125,000 and a bonus at
December 31, 1999, of $50,000. Mr. Cohen received an initial cash payment of
$70,000 and a bonus at December 31, 1999, of $30,000. Mr. Bebbington has
continued as a consultant to the Company subsequent to December 31, 1999.
The current chief executive officer and all members of the board of
directors received options when they were appointed in April and May 1999. Each
of these individuals received additional options in November, 1999. In
addition, each of them is a beneficiary of the deferred compensation plan
adopted by the Company in June, 1999. See "EXECUTIVE COMPENSATION."
The Company has entered into an indemnification agreement with Howard S.
Landa. Under that agreement, Mr. Landa has agreed to indemnify the Company for
any costs arising out of the litigation, Edgar Lee, et al. v. Sensar
Corporation, subsequent to March 1, 2000, including costs of defense and the
payment of any settlement or judgment. Under the terms of the indemnification
agreement, the Company has agreed to transfer to Mr. Landa the assets held by
the Company's subsidiary, Eagle Lake Ventures, Inc., including the right to use
that name. These assets had a book value of $352,992 at December 31, 1999, and
include two minority investments in unrelated companies, with a total combined
cost to the Company of $325,000. In addition, Mr. Landa agreed to assume the
lease for the office space located at 50 West Broadway, Suite 501, Salt Lake
City, Utah. Mr. Landa will receive miscellaneous office furniture and other
fixed assets located at that office. Finally, Mr. Landa has agreed to make any
space that the Company would like to have at the Salt Lake City office available
prior to the merger at no charge and thereafter, for a period of one year
subsequent to the closing of the merger, at a cost of $1.00 per month. This
agreement as approved by the board of directors of the Company but was not
negotiated at arms-length. Because of the contingent nature of the litigation
and the inability of the parties to currently predict the outcome, it is
uncertain what the cost would have been to the Company to obtain similar
benefits from an unrelated third-party.
In addition to the indemnification agreement, Mr. Landa agreed to terminate
the unexpired term of his employment agreement with the Company, to provide 100
hours of transitional services without charge to the Company and to forego his
30% interest in the compensation pool under the terms of a deferred compensation
plan approved by the board of directors of the Company in June, 1999. The 41%
interest granted to Mr. Landa and others had a value of $5,342,040 as of
December 31, 1999, as reflected on the balance sheet of the Company. As of
March 27, 2000, this pool, assuming the completion of the proposed merger with
Net2Wireless, would exceed the $50 million limitation set forth in the plan. On
November 16, 1999, Mr. Landa was granted an option to acquire 800,000 shares of
stock at $2.00 per share. The termination of Mr. Landa's interest in the
deferred compensation plan is contingent upon the approval by the stockholders
of this option.
Each of the directors, other than Mr. Landa, received an option to acquire
50,000 shares of common stock at an exercise price of $2.00 per share on
November 16, 1999. Each of the directors has agreed to forgo their 3% interest
in the deferred compensation plan, subject only to the approval by the
stockholders of these options and the options for 200,000 shares that were
granted at the time that each of these individuals became a member of the board
of directors in April and May, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
FINANCIAL STATEMENTS AND SCHEDULES
The financial statements, including the index to the financial statements,
are included immediately following the signatures to this report.
EXHIBITS
<TABLE>
<CAPTION>
SEC
Exhibit Reference
No. No. Title of Document Location
- ------- --------- ------------------------------------------- --------
<S> <C> <C> <C>
1 (3) Articles of Incorporation, as amended Exhibit to report on
November 3, 1987 Form 10-K for the year
ended June 30, 1988*
2 (3) Certificate of Amendment to the Exhibit to report on
Articles of Incorporation Form 10-K for the year
filed July 3, 1989 ended June 30, 1989*
3 (3) Designation of Rights, Privileges, and Registration Statement
Preferences of 1995 Series Preferred Stock filed on Form SB-2,
Exhibit 3, SEC File
No. 33-59963*
4 (3) Designation of Rights, Privileges, and Exhibit to report on
Preferences of 1998 Series A Preferred Stock Form 8-K dated
February 13, 1998*
5 (3) Bylaws Registration Statement
filed on Form S-18,
Exhibit 5, SEC File
No. 33-3365-D*
6 (10) Agreement by and among Sensar This Filing
Corporation and Net2Wireless, Inc.,
dated December 8, 1999
7 (10) First Amendment to Agreement by and This Filing
between Sensar Corporation and
Net2Wireless, Inc., dated January 4, 2000
8 (10) Second Amendment to Agreement by and This Filing
between Sensar Corporation and
Net2Wireless Corporation (formerly
Net2Wireless, Inc.), dated March 21, 2000
9 (10) Executive Employment Agreement of Exhibit to report on
Howard S. Landa effective Form 10-Q for the
April 22, 1999 quarter ended
June 30, 1999*
10 (10) Deferred Compensation Plan This Filing
Adopted by the Board of Directors
Effective May 1, 1999
11 (10) 1997 Stock Option and Award Plan Exhibit to report on
Form 10-Q for the
quarter ended
March 31, 1997*
12 (10) Asset Purchase Agreement by and among Exhibit "A" to Proxy
PCB Group, Inc., Beehive Acquisition Corp., Statement dated
Larson-Davis Incorporated, and Larson-Davis February 16, 1999*
Laboratories, dated November 30, 1998, and Exhibit to report
as amended February 16, 1999, and on Form 10-K for the
March 31, 1999 year ended
December 31, 1998*
13 (10) Asset Purchase Agreement between Exhibit to report on
Sensar Instruments, Inc., Sensar Form 8-K dated
Corporation, and LECO Corporation, August 19, 1999*
dated August 19, 1999
14 (10) Form of Market Stand Off and Exhibit to report on
Redemption Agreement by and between Form 10-K for the
Larson-Davis Incorporated and Investors year ended
of 1998 Series A Preferred Stock, December 31, 1998*
dated January, 1999
15 (21) Subsidiaries of Larson-Davis Incorporated Exhibit to report on
Form 10-KSB for the
year ended
June 30, 1996*
16 (23) Consent of Grant Thornton LLP This Filing
17 (27) Financial Data Schedule This Filing
</TABLE>
*Incorporated by reference
REPORTS ON FORM 8-K
During the last quarter of the fiscal year ended December 31, 1999, the
Company filed three reports on Form 8-K, dated October 7, 1999, October 12,
1999, and December 14, 1999. Subsequent to December 31, 1999, the Company has
filed three reports on Form 8-K, dated January 4, 2000, January 5, 2000, and
March 16, 2000, respectively.
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Company has caused this report to be
signed on its behalf by the undersigned, hereunto duly authorized.
SENSAR CORPORATION
Dated: March 29, 2000 By /s/ Howard S. Landa
Howard S. Landa, CEO and Chairman of
the Board (Chief Executive Officer and
Principal Financial and Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Company and in the capacities and on the dates indicated:
Dated: March 29, 2000 By /s/ Howard S. Landa
Howard S. Landa, Director
Dated: March 29, 2000 By /s/ Brian B. Lewis
Brian B. Lewis, Director
Dated: March ___, 2000 By
Steven P. Strasser, Director
Dated: March 29, 2000 By /s/ Mickey Hale
Mickey Hale, Director
SENSAR CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Consolidated Financial Statements:
Report of Grant Thornton LLP, Independent Certified Public Accountants
on the December 31, 1999, 1998 and 1997 financial statements F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-3
Consolidated Statements of Operations and Comprehensive Loss
for the Years Ended December 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997 F-7
Notes to Consolidated Financial Statements F-9
Financial Statement Schedules:
All financial statement schedules are omitted because they are not applicable or
because the required information is contained in the Consolidated Financial
Statements or the Notes thereto.
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Sensar Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Sensar
Corporation and Subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations and comprehensive loss, stockholders'
equity (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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sensar Corporation
and Subsidiaries as of December 31, 1999 and 1998, and the consolidated results
of their operations and their consolidated cash flows each of the three years in
the period ended December 31, 1999, in conformity with generally accepted
accounting principles.
/s/ Grant Thornton LLP
Grant Thornton LLP
Salt Lake City, Utah
January 21, 2000 (except for Notes K and N,
as to which the date is March 23, 2000)
<TABLE>
<CAPTION>
Sensar Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
-------------------------
1999 1998
------------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 3,735,115 $ 694,959
Notes receivable (Note B) 1,455,134 120,000
Other current assets 25,598 609
Net assets of discontinued operations (Note B) - 3,491,469
------------- ----------
Total current assets 5,215,847 4,307,037
OFFICE EQUIPMENT AND FURNISHINGS,
net of accumulated depreciation 27,992 10,732
INVESTMENTS (Note D) 325,000 -
------------- ----------
$ 5,568,839 $4,317,769
============= ==========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
December 31,
-------------------------
1999 1998
------------- ----------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 31,438 $ 125,742
Accrued liabilities 150,320 142,455
------------ ------------
Total current liabilities 181,758 268,197
LONG-TERM LIABILITIES AND DEFERRED GAIN
Deferred compensation (Note E) 5,342,040 -
Deferred gain 200,000 -
------------ ------------
Total liabilities and deferred gain 5,723,798 268,197
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes C, E and K) - -
STOCKHOLDERS' EQUITY (DEFICIT)
(Notes C, G, H, J and N)
Preferred stock, $.001 par value; authorized
10,000,000 shares; issued and outstanding
zero shares at December 31, 1999 and
3,039.95 shares at December 31, 1998 - 3
Common stock, $.001 par value; authorized
290,000,000 shares; issued and outstanding
6,326,038 shares at December 31, 1999 and
5,228,366 shares at December 31, 1998 6,326 5,228
Additional paid-in capital 34,850,817 30,701,333
Accumulated deficit (35,012,102) (26,282,308)
Notes receivable from exercise of options - (374,684)
------------ ------------
Total stockholders' equity (deficit) (154,959) 4,049,572
------------- ------------
$ 5,568,839 $ 4,317,769
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
Sensar Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
Year ended December 31,
------------------------------------------
1999 1998 1997
------------ ----------- -------------
<S> <C> <C> <C>
Revenues
Interest income $ 147,944 $ 137,814 $ 140,870
------------ ----------- ------------
Costs and expenses
General and administrative 893,416 708,890 1,081,168
Compensation expense for stock options (Note J) 5,885,833 - -
Deferred compensation expense (Note E) 5,342,040 - -
Unusual charges (credits), net (Note M) (31,663) 649,949 1,383,964
Interest expense 31,811 - -
Other 21,665 - -
------------ ----------- ------------
12,143,102 1,358,839 2,465,132
------------ ----------- ------------
Loss from continuing operations
before income taxes (11,995,158) (1,221,025) (2,324,262)
Income taxes (Note F) - - -
------------ ----------- ------------
Loss from continuing operations (11,995,158) (1,221,025) (2,324,262)
Gain on sale of discontinued operations (Note B) 3,268,250 - -
Income (loss) from discontinued operations (Note B) 22,528 (5,702,419) (12,493,549)
------------ ----------- ------------
Net loss (8,704,380) (6,923,444) (14,817,811)
Other comprehensive income - foreign
currency translation adjustments - (64,512) (15,848)
------------ ----------- ------------
Comprehensive loss $ (8,704,380) $(6,987,956) $(14,833,659)
============ =========== ============
Loss per common share (Note I)
Continuing operations
Basic and diluted $ (2.11) $ (0.51) $ (0.51)
Discontinued operations
Basic and diluted $ 0.58 $ (1.12) $ (2.71)
Net loss
Basic and diluted $ (1.53) $ (1.63) $ (3.22)
Loss from continuing operations applicable
to common stock $(12,020,572) $(2,567,588) $ (2,339,262)
Weighted average common and
common equivalent shares outstanding
Basic and diluted 5,693,514 5,073,463 4,603,080
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
Sensar Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1999, 1998 and 1997
Preferred stock Common stock Additional
------------------------ ------------------------- paid-in Accumulated
Shares Amount Shares Amount capital deficit
---------- ---------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Balances at
January 1, 1997 200,000 $ 200 4,287,116 $ 4,287 $20,005,806 $ (4,418,780)
Shares issued for services
rendered (Note H) - - 21,940 22 262,137 -
Shares issued upon exercise
of options (Note J) - - 87,052 87 115,538 -
Shares surrendered in payment
of advance (Note H) - - (696) (1) (9,999) -
Shares purchased under
employee stock purchase
plan (Note J) - - 6,163 6 83,995 -
Shares issued upon exercise
of warrants (Note J) - - 345,045 345 4,497,034 -
Shares issued to former
executives (Note J) - - 80,000 80 1,149,920 -
Conversion of preferred
stock (Note G) (200,000) (200) 23,537 24 176 -
Adjustment for translation
of foreign currency - - - - - -
Preferred dividends - - - - - (15,000)
Net loss for the year - - - - - (14,817,811)
---------- ------ ---------- ---------- ---------- -----------
Balances at
December 31, 1997 - - 4,850,157 4,850 26,104,607 (19,251,591)
Shares issued for services
rendered (Note H) - - 19,499 19 148,294 -
Shares issued upon exercise
of options (Note J) - - 110,546 111 726,079 -
Shares purchased under
employee stock purchase
plan (Note J) - - 29,273 29 81,143 -
Shares issued upon exercise
of warrants (Note J) - - 29,634 30 359,794 -
Shares issued in private
placement (Note G) 3,500.00 3 - - 3,281,605 -
Conversion of preferred
stock (Note G) (460.05) - 189,257 189 (189) -
Collection of and allowance
on notes receivable from
exercise of options
(Note J) - - - - - -
Adjustment for translation
of foreign currency - - - - - -
Preferred dividends - - - - - (107,273)
Net loss for the year - - - - - (6,923,444)
---------- ------ ---------- ---------- ---------- -----------
Balances at
December 31, 1998 3,039.95 3 5,228,366 5,228 30,701,333 (26,282,308)
Shares issued upon exercise
of options (Note J) - - 105,880 106 (106) -
Shares issued upon exercise
of warrants (Note J) - - 411,764 412 231,967 -
Conversion of preferred
stock (Note G) (101.20) - 128,032 128 (128) -
Collection of and allowance
on notes receivable from
exercise of options
(Note J) - - - - - -
Shares issued in private
placement (Note H) - - 500,000 500 986,105 -
Redemption of preferred
stock (Note G) (2,938.75) (3) - - (2,938,747) -
Conversion of debenture
(Note H) - - 17,778 18 39,982 -
Settlement of litigation
(Note J) - - (65,782) (66) (86,312) -
Capital contribution for
compensation from
stock option grants
(Note J) - - - - 5,885,833 -
Capital contribution for
beneficial conversion
feature - - - - 30,890 -
Preferred dividends - - - - - (25,414)
Net loss for the year - - - - - (8,704,380)
---------- ------ ---------- ---------- ---------- -----------
Balances at
December 31, 1999 - $ - 6,326,038 $ 6,326 $34,850,817 $(35,012,102)
========== ======= ========== ========== =========== ============
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1999, 1998 and 1997
(Continued)
Notes Accumulated
receivable other
from comprehensive
exercise income
of options (loss) Total
------------- ------------- -------------
<S> <C> <C> <C>
Balances at
January 1, 1997 $ - $ 80,360 $ 15,671,873
Shares issued for services
rendered (Note H) - - 262,159
Shares issued upon exercise
of options (Note J) (69,375) - 46,250
Shares surrendered in
payment of advance (Note H) - - (10,000)
Shares purchased under
employee stock purchase
plan (Note J) - - 84,001
Shares issued upon exercise
of warrants (Note J) - - 4,497,379
Shares issued to former
executives (Note J) - - 1,150,000
Conversion of preferred
stock (Note G) - - -
Adjustment for translation
of foreign currency - (15,848) (15,848)
Preferred dividends - - (15,000)
Net loss for the year - - (14,817,811)
--------- --------- ------------
Balances at
December 31, 1997 (69,375) 64,512 6,853,003
Shares issued for services
rendered (Note H) - - 148,313
Shares issued upon exercise
of options (Note J) (726,190) - -
Shares purchased under
employee stock purchase
plan (Note J) - - 81,172
Shares issued upon exercise
of warrants (Note J) - - 359,824
Shares issued in private
placement (Note G) - - 3,281,608
Conversion of preferred
stock (Note G) - - -
Collection of and allowance
on notes receivable from
exercise of options
(Note J) 420,881 - 420,881
Adjustment for translation
of foreign currency - (64,512) (64,512)
Preferred dividends - - (107,273)
Net loss for the year - - (6,923,444)
--------- --------- ------------
Balances at
December 31, 1998 (374,684) - 4,049,572
Shares issued upon exercise
of options (Note J) - - -
Shares issued upon exercise
of warrants (Note J) - - 232,379
Conversion of preferred
stock (Note G) - - -
Collection of and allowance
on notes receivable from
exercise of options
(Note J) 265,371 - 265,371
Shares issued in private
placement (Note H) - - 986,605
Redemption of preferred
stock (Note G) - - (2,938,750)
Conversion of debenture
(Note H) - - 40,000
Settlement of litigation (Note J) 109,313 - 22,935
Capital contribution for
compensation from
stock option grants
(Note J) - - 5,885,833
Capital contribution for
beneficial conversion
feature - - 30,890
Preferred dividends - - (25,414)
Net loss for the year - - (8,704,380)
--------- --------- ------------
Balances at
December 31, 1999 $ - $ - $ (154,959)
========= ========= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
Sensar Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
-----------------------------------------
1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flows from investing activities
Loss from continuing operations $(11,995,158) $(1,221,025) $(2,324,262)
Adjustments to reconcile loss from continuing
operations to net cash used in continuing operations
Depreciation 6,385 2,475 4,294
Compensation expense for stock options (Note J) 5,885,833 - -
Deferred compensation expense (Note E) 5,342,040 - -
Stock issued in payment of compensation - 46,338 1,188,041
Interest expense from beneficial conversion feature 30,890 - -
Provision for (recovery of) impairment losses (157,239) 621,549 -
Changes in assets and liabilities
Other current assets (24,989) 26,886 (84,218)
Accounts payable (94,304) (35,614) 97,871
Accrued liabilities 112,138 57,201 69,520
------------ ---------- -----------
Net cash used in
continuing operations (894,404) (502,190) (1,048,754)
Net cash used in
discontinued operations (195,411) (2,207,682) (4,073,303)
------------ ---------- -----------
Net cash used in
operating activities (1,089,815) (2,709,872) (5,122,057)
------------ ---------- -----------
Cash flows from investing activities
Purchase of office equipment and furnishings (23,645) (9,022) (200)
Collection of notes receivable 365,411 - -
Issuance of note receivable (35,000) - -
Increase in investments (325,000) - -
------------ ---------- -----------
Net cash used in investing activities of
continuing operations (18,234) (9,022) (200)
Net cash provided by (used in) sale of
discontinued operations and other investing activities of discontinued operations 5,566,491 37,495 (854,011)
------------ ---------- -----------
Net cash provided by (used in)
investing activities 5,548,257 28,473 (854,211)
------------ ---------- -----------
Cash flows from financing activities
Net proceeds from issuance of common
stock and exercise of options and warrants 1,628,984 3,743,485 4,627,630
Redemption of preferred stock (3,071,437) - -
Preferred dividends paid - - (15,000)
Proceeds from issuance of convertible debenture 40,000 - -
------------ ---------- -----------
Net cash provided by (used in) financing
activities of continuing operations (1,402,453) 3,743,485 4,612,630
Net cash used in financing activities of
discontinued operations (15,833) (1,515,088) (104,583)
------------ ---------- -----------
Net cash provided by (used in)
financing activities (1,418,286) 2,228,397 4,508,047
------------ ---------- -----------
Effect of exchange rates on cash - (64,512) (15,848)
Net increase (decrease) in cash and cash equivalents 3,040,156 (517,514) (1,484,069)
------------- ------------ ------------
Cash and cash equivalents at beginning of year 694,959 1,212,473 2,696,542
------------ ---------- -----------
Cash and cash equivalents at end of year $ 3,735,115 $ 694,959 $ 1,212,473
============ ========== ===========
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 29,839 $ 146,510 $ 299,438
Income taxes - - -
Significant noncash investing and financing activities
Acquisition of equipment through long-term obligations $ - $ - $ 326,960
Notes receivable issued in exercise of stock options 726,190 69,375 -
Conversion of debenture into common stock 40,000 - -
</TABLE>
The accompanying notes are an integral part of these financial statements.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows.
1. Business activity and principles of consolidation
Sensar Corporation (formerly Larson-Davis Incorporated) (the Company) was
primarily engaged in the design, development, manufacture, and marketing of
analytical instruments. The Company has sold or otherwise disposed of all
product lines of this business (Note B) and has no current operations. The
accompanying consolidated financial statements of the Company include the
accounts of the Company and its wholly-owned subsidiaries; SECO, Inc. (formerly
Larson-Davis Laboratories Corporation), Sensar Instruments, Inc. (formerly
Sensar Corporation), Eagle Lake Ventures, Inc., and Larson Davis Ltd. (a UK
Corporation). All subsidiaries except Eagle Lake Ventures, Inc. are inactive at
December 31, 1999. All significant intercompany transactions and accounts have
been eliminated in consolidation.
2. Depreciation
Office equipment and furnishings are stated at cost. Depreciation is provided
in amounts sufficient to relate the cost of depreciable assets to operations
over estimated service lives of three to five years. The straight-line method
of depreciation is followed for financial reporting purposes and accelerated
methods are used for income tax purposes.
3. Income taxes
The Company utilizes the liability method of accounting for income taxes. Under
the liability method, deferred tax assets and liabilities are determined based
on 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. An allowance against
deferred tax assets is recorded when it is more likely than not that such tax
benefits will not be realized.
4. Cash and cash equivalents
For purposes of the financial statements, the Company considers all highly
liquid debt instruments with an original maturity of three months or less when
purchased to be cash equivalents.
5. Net loss per common share
The Company follows the provisions of Statement of Financial Accounting
Standards No. 128 "Earnings Per Share" (SFAS No. 128). SFAS No. 128 requires
the presentation of basic and diluted EPS. Basic EPS are calculated by dividing
earnings (loss) available to common shareholders by the weighted average number
of common shares outstanding during each period. Diluted EPS are similarly
calculated, except that the weighted average number of common shares outstanding
includes common shares that may be issued subject to existing rights with
dilutive potential.
6. Concentrations of credit risk
The Company's financial instruments that are exposed to concentration of credit
risk consist primarily of cash equivalents and notes receivable. The Company
maintains its cash and cash equivalents principally at one major financial
institution. Cash equivalents are invested through a daily repurchase agreement
with the financial institution. The agreement provides for the balance of
available funds to be invested in an undivided interest in one or more direct
obligations of, or obligations that are fully guaranteed as to principal and
interest by, the United States Government, or an agency thereof. These
securities are not a deposit and are not insured by the Federal Deposit
Insurance Corporation.
At December 31, 1999, approximately $1 million of the total notes receivable is
owed by one debtor and arose out of the sale of the Jaguar product line.
Although the note is unsecured, the Company reviewed the credit worthiness of
the note holder and believes that the balance is fully collectible.
7. Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported amounts of assets, liabilities, revenues and expenses during the
reporting period. Estimates also affect the disclosure of contingent assets and
liabilities at the date of the financial statements. Actual results could
differ from these estimates.
8. Fair value of financial instruments
The estimated fair value of financial instruments is not presented because, in
management's opinion, the carrying amounts and estimated fair values of
financial instruments in the accompanying consolidated balance sheets are not
materially different.
9. Stock options
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options rather than adopting the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123).
NOTE B - DISCONTINUED OPERATIONS
Historically, the Company developed and marketed various products in one
industry segment, analytical instrumentation. These historical product lines
were sold or otherwise disposed of as follows:
1. During 1998, the Company sold its supercritical fluid chromatography
(SFC) product and abandoned its TOF2000 mass spectrometer product.
2. At March 31, 1999, the Company sold the assets and operations associated
with its acoustics division to PCB Group, Inc. (PCB), except for certain real
estate, which was sold to PCB in July 1999. The Company received gross cash
proceeds of approximately $5.3 million, a note for $500,000, and the assumption
or payoff of approximately $1.7 million of liabilities. The note bears interest
at 7.28 percent and is payable at $22,450 per month with the balance due April
2000.
3. The Jaguar mass spectrometer assets and operations were sold to LECO
Corporation (LECO) in August 1999. The Company received proceeds of
approximately $1.8 million, consisting of cash of approximately $800,000 (net of
certain expenses, payments, and third quarter losses, but without deductions for
losses incurred prior to June 30 or the delivery of two Jaguar units to Brigham
Young University at no charge), and a non-interest bearing note with a carrying
value of $1,000,000 (interest imputed at 6.92 percent). The note is due August
2000 and is not collateralized.
4. The CrossCheck technology was returned to Brigham Young University and
the associated license agreement was terminated during the quarter ended
September 30, 1999.
5. In August 1999, the right to receive royalty payments on the ANOMS
intellectual property was assigned to Lochard Pty Ltd for installment payments
totaling $200,000, plus contingent payments based upon future performance.
The analytical instrumentation operations of the Company have been accounted for
as discontinued operations, and accordingly, these assets and liabilities have
been segregated as "net assets of discontinued operations" in the accompanying
consolidated balance sheets. The results of operations and cash flows
associated with these assets and liabilities are segregated and reported as
discontinued operations in the accompanying consolidated statements of
operations and cash flows. All periods presented have been restated to reflect
the discontinued operations. Information related to the discontinued operations
of the analytical instrumentation business is set forth below:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
1999 1998 1997
------------ ----------- ------------
<S> <C> <C> <C>
Net sales $ 1,763,711 $ 8,729,192 $ 8,313,328
Costs and operating expenses:
Cost of sales (970,730) (5,241,186) (6,074,883)
Research and development (653,605) (2,919,945) (4,860,993)
Selling, general and administrative (833,608) (3,346,298) (4,938,114)
Unusual credits, net 537,258 (2,786,784) (4,553,391)
------------ ------------ ------------
Operating loss (156,974) (5,565,021) (12,114,053)
Other expense, net (70,470) (137,398) (379,496)
Less loss subsequent to measurement
date of June 30, 1999 charged against gain on disposition
249,972 - -
------------ ------------ ------------
Income (loss) from discontinued operations
$ 22,528 $ (5,702,419) $(12,493,549)
============ ============ ============
</TABLE>
Net assets of discontinued operations consist of the following elements at
December 31, 1998 (none at December 31, 1999):
<TABLE>
<CAPTION>
<S> <C>
Trade accounts receivable, net $1,681,755
Inventories 2,046,871
Other current assets 93,160
Property and equipment, net 1,316,516
Assets under capital lease obligations, net 202,026
Intangible assets, net 322,779
Accounts payable (412,379)
Accrued liabilities (779,228)
Long-term debt (682,982)
Capital lease obligations (297,049)
----------
Total $3,491,469
==========
</TABLE>
NOTE C - CHANGE IN EXECUTIVE MANAGEMENT
Effective April 21, 1999, the then current members of the board of directors of
the Company resigned and a new board and chief executive officer were appointed.
The Company entered into an employment agreement with a new chief executive
officer which provides for annual compensation of $96,000. The term of the
employment agreement is through December 31, 2002, but renews automatically such
that there is always one year remaining under the agreement. In the event this
agreement is terminated, other than for cause, the Company is required to pay
the chief executive officer the greater of the amount of salary remaining under
the term of the contract or the salary for a one-year period.
In connection with the appointment of the new chief executive officer, he was
granted an option to acquire 200,000 shares of common stock, half of which is
exercisable at $1.50 per share and the other half at $2.50 per share. The
option is immediately exercisable, expires three years after grant, and has a
cashless exercise provision.
Under the employment agreements of the former chief executive officer and former
chief operating officer, each had the right to terminate his employment
agreement for cause with the sale of the assets of the acoustics division (Note
B) and to receive compensation equal to his base salary remaining under his
employment agreement, which would have been approximately $560,000 in the
aggregate for the two officers. In lieu of this payment the new board of
directors negotiated a termination benefit of $195,000 in the aggregate
(recorded as unusual charges) and consulting/employment arrangements whereby the
former chief executive officer would provide transitional consulting services to
the Company and the former chief operating officer would continue as the chief
operating officer of the Company to supervise the ongoing operations of the
Company in exchange for monthly compensation of $10,000 each and aggregate
options to acquire 140,000 shares of common stock, half of which were
exercisable at $1.50 per share and the other half at $2.50 per share.
NOTE D - INVESTMENTS
The Company invested $150,000 in PayStation.com, Inc. (PayStation) in the form
of $75,000 for a convertible promissory note and $75,000 for 15,000 shares of
convertible preferred stock, representing 2.5 percent of the offering.
PayStation has repaid the promissory note, leaving a balance of $75,000 as the
Company's investment. PayStation is an internet-based company that has the
capability to deliver internet-based financial services to consumers who prefer
to pay bills through the internet. The Company's investment in PayStation is
accounted for under the cost method of accounting.
The Company also participated in the second round funding of Durect Corporation
(Durect), a pioneer in drug therapy treatments, employing subcutaneous delivery
technology and paid $250,000 for preferred stock convertible into approximately
1 percent of Durect. The Company's investment in Durect is accounted for under
the cost method of accounting.
NOTE E - DEFERRED COMPENSATION PLAN
On June 24, 1999, the board adopted a deferred compensation plan to provide
long-term incentive compensation to the members of the board and certain other
consultants or members of management. The plan establishes an unfunded deferred
compensation pool, based on specified percentages of the Company's net income
and increases in its market capitalization. No earnings compensation will be
paid into the pool until the cumulative net income from the operations under the
new board has exceeded $2,000,000 and no amounts will be paid for increases in
market capitalization unless the increase in market capitalization exceeds 150
percent of any increase in the Russell 2000 Index (with appropriate adjustments
for additional capital infusions or acquisitions). The chief executive officer,
received an initial 30 percent ownership in the pool and may grant the other 70
percent to persons other than himself and his family. To date, he has granted a
total of 11 percent to others. On December 31, 2002, amounts due, if any, will
be paid out to the participants. However, in the event of a change of control
of the Company, as defined in the agreement, or in the event the deferred
compensation plan is terminated by the board of directors, a distribution of the
deferred compensation pool will be required. In either of these two events, the
amount of the distribution would be equal to the amount in the deferred
compensation pool or $5 million, whichever is greater. Additionally, in the
event the employment agreement of the chief executive officer is terminated,
other than for cause, he is entitled to his share of the deferred compensation
pool, but not less than $1.5 million. In connection with the planned
acquisition of Net2Wireless discussed in Note N to the financial statements, the
deferred compensation plan would be terminated and the participants in the plan
would abandon their interest in the plan subject only to shareholder approval of
options previously granted to the participants.
Deferred compensation expense is measured based on the changes in factors which
determine the amount of the deferred compensation pool, which to date has solely
been the change in market capitalization of the Company's common stock. For the
year ended December 31, 1999, the Company recognized deferred compensation
expense of $5,342,040 representing the current amount of the deferred
compensation pool multiplied by 41 percent for the interests granted through
December 31, 1999.
NOTE F - INCOME TAXES
The income tax expense (benefit) reconciled to the tax computed at the statutory
federal rate of 34 percent is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Income taxes (benefit) at statutory rate $(2,959,489) $(2,353,971) $(5,038,056)
State income taxes (benefit)
net of federal tax effect (287,245) (228,474) (488,988)
Amortization of acquired technology - 900,420 60,797
Settlement with former directors 33,723 70,427 165,750
Operating losses with no current tax benefit 3,199,056 1,605,535 5,292,150
Other, net 13,955 6,063 8,347
----------- ----------- -----------
Income tax expense $ - $ - $ -
=========== =========== ===========
</TABLE>
Deferred income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Deferred tax assets
Benefit of net operating loss carryforwards $ 8,340,728 $ 7,831,621
Compensation expense for stock options 2,141,656 -
Deferred compensation expense 1,992,581 -
Capitalized software development costs and
amortization of intangible assets 257,383 796,526
Inventory allowances - 376,365
Accrued liabilities 34,664 113,199
Allowance for doubtful accounts 27,043 256,287
Other, net 4,364 4,345
------------- -------------
12,798,419 9,378,343
Less valuation allowance (12,798,310) (9,373,873)
------------- -------------
109 4,470
Deferred tax liabilities
Depreciation of property and equipment (109) (4,470)
------------- -------------
Net deferred tax asset $ - $ -
============= =============
</TABLE>
The Company has sustained net operating losses in each of the periods presented.
There were no deferred tax assets or income tax benefits recorded in the
financial statements for net deductible temporary differences or net operating
loss carryforwards because the likelihood of realization of the related tax
benefits cannot be established. Accordingly, a valuation allowance has been
recorded to reduce the net deferred tax asset to zero and consequently, there is
no income tax provision or benefit for any of the periods presented. The
increase in the valuation allowance was $3,424,437, $1,614,711, and $5,268,566
for the years ended December 31, 1999, 1998, and 1997, respectively.
As of December 31, 1999, the Company had net operating loss carryforwards for
tax reporting purposes of approximately $22,000,000 expiring in various years
through 2014. Utilization of approximately $3,100,000 of the total net
operating loss is dependent on the future profitable operation of Sensar
Instruments, Inc. under the separate return limitation rules and limitations on
the carryforward of net operating losses after a change in ownership. If the
planned acquisition of Net2Wireless discussed in Note N to the financial
statements is consummated, it is expected that the availability of all of the
net operating losses will be substantially restricted because of the change of
control and lack of continuity of business interests.
NOTE G - PREFERRED STOCK
1998 Series A Preferred Stock
In February 1998, the Company completed the private placement of shares of 1998
Series A Preferred Stock (the "Preferred Stock") and warrants to purchase common
stock for gross proceeds of $3,500,000. Of this amount, approximately $549,000
was assigned as the value of the warrants and the balance was assigned as the
value of the Preferred Stock. The Preferred Stock bore an annual dividend of
four percent per annum and had a liquidation preference equal to $1,000 per
share plus all accrued, but unpaid dividends. The Preferred holders voted as a
class with the common stockholders.
The Preferred Stock was convertible at the election of the holders into that
number of shares of common stock calculated by dividing $1,000 plus any accrued
but unpaid dividends, by the lower of (1) $9.00 or (2) 85 percent of the average
closing price of the common stock for the ten trading days preceding the
conversion. During the years ended December 31, 1999 and 1998, holders of
101.20 shares and 460.05 shares of Preferred Stock converted their shares into
128,032 and 189,257 shares of common stock, respectively.
In an attempt to eliminate the potential market disruption of a significant
conversion of the Preferred Stock into common stock, the Company used part of
the proceeds from the sale of the assets of the acoustic division (Note B), to
reacquire and cancel 100 percent of the outstanding shares of Preferred Stock
for approximately $3.07 million, including accrued but unpaid dividends. The
Company agreed to reprice one-half of the associated warrants at $1.25 per share
and to cancel the other half of the warrants.
1995 Series Preferred Stock
During the year ended June 30, 1995, the Company issued 200,000 shares of 1995
Series Preferred Stock in payment of $500,000 of short-term debt. The Preferred
Stock had a liquidation preference equal to $2.50 per share, plus unpaid
dividends. This Preferred Stock paid cumulative dividends at a rate of $0.225
per share per annum, payable monthly. The Preferred Stock was convertible into
common stock at the option of the holder or the option of the Company at the
rate of $7.50 per share divided by an amount equal to the average of the closing
bid prices for the common stock for the twenty consecutive trading days
immediately prior to the date that the holder provided notice of such
conversion. The Preferred Stock was converted, in accordance with the governing
provisions of the designation, into 23,537 shares of common stock effective
April 30, 1997.
NOTE H - COMMON STOCK
At a special meeting of stockholders held on March 18, 1999, a one-for-five
consolidation of the issued and outstanding common stock of the Company was
approved. The board of directors implemented the consolidation of the common
stock effective at the close of business on
April 30, 1999. At the close of business on January 17, 2000, a forward
two-for-one stock split became effective for the issued and outstanding common
stock of the Company. All common share and per common share information
included in the accompanying financial statements has been retroactively
restated to reflect the one-for-five consolidation and the two-for-one forward
stock split.
In May 1999, the Company completed a private placement of 500,000 shares of
common stock at $2.00 per share. The net proceeds to the Company, after
associated expenses, were approximately $987,000. The stock issued was
subsequently registered for resale with the Securities and Exchange Commission.
During 1999, the Company also issued a convertible debenture in the amount of
$40,000, which was converted into 17,778 shares of common stock in December
1999.
During the years ended December 31, 1998 and 1997, the Company issued 19,499
shares and 21,940 shares, respectively, of common stock valued at prices ranging
from $5.75 to $11.58 per share and $8.45 to $33.13 per share, respectively, for
services rendered. During the year ended December 31, 1997, an officer
surrendered 696 shares of common stock in payment of a noninterest-bearing
advance.
NOTE I - EARNINGS (LOSS) PER COMMON SHARE
The following data show the amounts used in computing net loss per common share
from continuing operations, including the effect on net loss for preferred stock
dividends and a beneficial conversion feature associated with preferred stock
and warrants. The following data also show the weighted average number of
shares and rights to acquire shares with dilutive potential. For 1998, loss
from continuing operations applicable to common stock includes a noncash imputed
dividend to the preferred shareholders related to the beneficial conversion
feature on the 1998 Series A Preferred Stock and related warrants (Note G). The
beneficial conversion feature is computed as the difference between the market
value of the common stock into which the Series A Preferred Stock can be
converted and the value assigned to the Series A Preferred Stock in the private
placement. The imputed dividend is a one-time, noncash charge increasing the
net loss per common share.
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Loss from continuing operations $(11,995,158) $ (1,221,025) $ (2,324,262)
Dividends on preferred stock (25,414) (107,273) (15,000)
Imputed dividend from beneficial conversion feature - (1,239,290) -
------------ ------------ ------------
Loss from continuing operations applicable to common stock
$(12,020,572) $ (2,567,588) $ (2,339,262)
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Common shares outstanding during the entire year 5,228,366 4,850,157 4,287,116
Weighted average common shares issued during the year 465,148 223,306 315,964
--------- --------- ---------
Weighted average number of common shares used in basic EPS 5,693,514 5,073,463 4,603,080
Dilutive effect of stock options and warrants - - -
--------- --------- ---------
Weighted average number of common shares and dilutive potential common stock used in diluted EPS 5,693,514 5,073,463 4,603,080
========= ========= =========
</TABLE>
For the years ended December 31, 1999, 1998 and 1997, none of the options and
warrants that were outstanding, as described in Note J, were included in the
computation of diluted EPS because to do so would have been anti-dilutive.
NOTE J - STOCK OPTIONS AND WARRANTS
1. Stock-based compensation plans
During the periods presented in the accompanying financial statements, the
Company had stock options that were granted under four stock option plans: the
1991 Director Stock Option Plan (the 1991 Director Plan); the 1996 Director
Stock Option Plan (the 1996 Director Plan); the 1997 Stock Option and Award Plan
(the 1997 Employee Plan); and the 1987 Stock Option Plan (the 1987 Employee
Plan). The Company has also granted options under executive employment
agreements.
A summary of the status of the options granted under the Company's stock option
plans and employment agreements at December 31, 1999, 1998, and 1997 and changes
during the years then ended is presented in the table below:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------------------
1999 1998 1997
--------------------- ---------------------- -----------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 924,990 $ 10.53 1,014,736 $ 13.55 1,219,936 $ 12.18
--------- ---------- ----------
Granted 560,000 2.05 704,000 9.95 480,800 15.35
Exercised (105,880) 1.61 (110,546) 6.58 (116,000) 6.70
Forfeited (830,178) 9.44 (130,400) 12.88 - -
Canceled (24,000) 7.34 (552,800) 15.55 (570,000) 13.53
-------- -------- ---------
Outstanding at end
of year 524,932 $ 5.17 924,990 $ 10.53 1,014,736 $ 13.55
======== ======== =========
Exercisable at
end of year 515,144 $ 5.03 482,994 $ 10.20 469,742 $ 11.23
======== ======== =========
</TABLE>
The weighted-average fair value of each option grant is $0.89, $2.88 and $7.60
for the years ended December 31, 1999, 1998 and 1997, respectively, and is
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted-average assumptions used for grants during the years
ended December 31, 1999, 1998 and 1997, respectively: risk-free interest rates
of 5.1 percent, 5.5 percent, and 6.0 percent; expected dividend yields of zero
for all periods; expected lives of 2.5, 5.4, and 5.8 years; and expected
volatility of 114 percent, 46 percent, and 42 percent.
A summary of the status of the options outstanding under the Company's stock
option plans and employment agreements at December 31, 1999 is presented below:
<TABLE>
<CAPTION>
Weighted-
average Weighted- Weighted-
remaining average average
Number contractual exercise Number exercise
Range of exercise prices outstanding life (years) price exercisable price
- ------------------------ ----------- ------------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$1.50 - $2.00 120,000 2.40 $ 1.58 120,000 $ 1.58
$2.01 - $3.00 270,000 1.96 2.50 270,000 2.50
$3.01 - $17.50 134,932 2.56 13.71 125,144 13.78
------- -------
$1.50 - $17.50 524,932 2.28 $ 5.17 515,144 $ 5.03
======= =======
</TABLE>
In January 1996, the Company granted options to three executives under newly
executed employment agreements. The agreements granted options to acquire an
aggregate of 330,000 shares of common stock at an exercise price of $10.625 per
share. The options under the employment agreements vested 20 percent on the
grant date and 20 percent for each year of service thereafter, and would have
expired in January 2006. All of the options granted in 1996 were canceled in
1997.
In 1998 and 1997, two former executives exercised options to acquire 110,546
shares and 12,000 shares, respectively, of common stock in exchange for notes
receivable in the aggregate amount of $726,190 and $69,375, respectively. In
1998, the Company established a reserve of $400,000 against these notes due to
the uncertainty of their collection in light of the decline in the price of the
Company's common stock. During 1999, the Company agreed to accept substantially
all of the proceeds from the sale of the common stock held by one of the former
officers of approximately $438,000 in satisfaction of his notes totaling
$726,190. The note for $69,375 was extinguished as part of a settlement of
litigation against the other former officer.
In conjunction with the 1997 employment of a new chief executive officer, the
Company granted options to acquire 400,000 shares of common stock. The options
were granted at $14.375 per share, but were exercisable at the lower of the
grant price or 80 percent of the trading price on the date of exercise (but not
less than $9.00 per share). During 1998, this option was canceled in favor of
an option to purchase 400,000 shares of common stock at prices ranging from
$9.00 to $16.25 per share. During 1998, the Company granted options to acquire
120,000 shares of common stock to a new chief operating officer at prices
ranging from $7.475 to $13.75 per share. All of the foregoing options were
forfeited in April 1999 with the resignation of both officers from the board of
directors (Note C).
A new chief executive officer was appointed in April 1999 (Note C). In
conjunction with his appointment, the chief executive officer was granted an
option to acquire 200,000 shares of common stock, half of which are exercisable
at $1.50 per share and half at $2.50 per share. During April and May, three new
non-executive directors were appointed to the board. On appointment, each
received an option to acquire 200,000 shares of common stock, half of which are
exercisable at $1.50 per share and half at $2.50 per share. Under Nasdaq
corporate governance rules, these options are subject to shareholder approval.
Additionally, options to acquire an aggregate of 360,000 shares of common stock
have been granted principally to nonemployees, at prices ranging from $1.50 to
$2.50 per share. All of these options are immediately exercisable, generally
expire three years after grant, and have a cashless exercise provision.
Generally accepted accounting principles require that compensation be recorded
each period for stock options with cashless exercise provisions granted to
management, equal to the change in the stock price above the exercise price. If
the price of the stock declines during the period, a credit is recorded against
previously recorded compensation expense, but not in excess of the cumulative
compensation recorded since the grant date. During the year ended December 31,
1999, the Company recognized $5,618,740 as a non-cash compensation charge as a
consequence of the cashless exercise provisions of the options granted to
management to acquire an aggregate of 240,000 shares. Additionally, the Company
has recorded non-cash compensation expense during the year ended December 31,
1999, of $267,093 for stock options granted to nonemployees to acquire an
aggregate of 270,000 shares of common stock. The compensation expense was based
on the fair value of options granted using the assumptions discussed earlier in
this Note.
In November 1999, the board of directors approved options to acquire an
aggregate of 1,600,000 shares of common stock for $2.00 per share to the chief
executive officer, to the non-executive members of the board of directors, and
to the Company's chief consultant. These grants are subject to shareholder
approval, which approval will be sought at the next meeting of shareholders. If
these options are approved by the shareholders, the participants in the deferred
compensation plan have agreed to abandon their interests in the deferred
compensation pool and the board of directors has agreed to terminate the
deferred compensation plan. If approved by the shareholders, the Company would
record compensation expense as measured under generally accepted accounting
principles on the date of shareholder approval, less the amount of the deferred
compensation liability terminated at that date.
Under the 1991 Director Plan, the Company granted options to acquire 12,000
shares of common stock annually to each director. Under this plan, the Company
may grant up to an aggregate of 300,000 options. Options granted under this
plan vested immediately and expired five years after the grant. The 1991
Director Plan terminated July 1, 1996.
Under the 1996 Director Plan, the Company reserved 560,000 shares of common
stock to be granted to directors of the Company. In 1996, the Company granted
options to each director to acquire 80,000 shares of common stock (for a total
of 400,000 options) at $17.50 per share. Options under the 1996 Director Plan
vested 25 percent on the grant date and 25 percent for each year of service
thereafter and expire five years after their vesting date. Of the options
granted in 1996, options with respect to 240,000 shares were canceled in 1997.
During 1998, options with respect to an additional 120,000 shares were canceled
or forfeited, leaving options for 40,000 shares outstanding at December 31,
1999. The 1996 Director Plan terminated May 9, 1999.
Under the 1987 Employee Plan, as amended in 1994, the Company could grant
options to acquire up to 300,000 shares of common stock, of which options to
acquire 152,923 shares were exercised and no options are outstanding as of
December 31, 1999. The 1987 Employee Plan terminated November 9, 1997.
The 1997 Employee Plan reserves 300,000 shares of common stock for issuance
pursuant to stock options or stock awards granted, of which options to acquire
151,880 shares have been exercised or are outstanding and 105,554 shares have
been awarded to employees and others as of December 31, 1999. Concurrently with
the granting of certain options in 1998, the Company canceled existing options
previously granted to certain employees to purchase 72,800 shares of common
stock at prices ranging from $11.725 to $26.25 per share. Shares awarded
primarily consist of stock issued to former management in November 1977 in
connection with their termination and were recorded at fair value of $1,150,000
on the date of their termination.
The Company adopted the 1997 Employee Stock Purchase Plan (the Stock Purchase
Plan) effective as of February 1, 1997. The maximum number of shares of common
stock which are available under this plan is 40,000 shares. The Stock Purchase
Plan provided an opportunity to the employees of the Company to purchase shares
of common stock in the Company at 85 percent of fair market value on each
offering date. During the years ended December 31, 1998 and 1997, the employees
of the Company purchased 29,273 and 6,163 shares of common stock for gross
proceeds of $81,172 and $84,001, respectively. The Stock Purchase Plan expired
December 31, 1998.
The Company accounts for options granted to management and to the members of the
board of directors under APB 25 and its related interpretations and the opinions
of the Emerging Issues Task Force. Had compensation cost for these plans been
determined based on the fair value of the options at the grant dates for awards
under these plans consistent with the method prescribed by SFAS 123, the
Company's net loss and loss per common share would have been changed to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1999 1998 1997
------------ ----------- -------------
<S> <C> <C> <C> <C>
Net loss As reported $(8,704,380) $(6,923,444) $(14,817,811)
Pro forma (3,492,019) (7,337,855) (16,118,507)
Net loss per common share As reported $ (1.53) $ (1.63) $ (3.22)
Pro forma (0.62) (1.79) (3.50)
</TABLE>
2. Stock warrants
In 1998, in connection with a private placement of the Preferred Stock, the
Company granted warrants to purchase 280,000 shares of common stock at $11.25
per share. In connection with the redemption of the remaining Preferred Stock
in 1999, the Company canceled one half of the remaining warrants and reduced the
exercise price of the other half to $1.25 per share.
In conjunction with a private placement of common stock in May 1995, the Company
issued warrants to a group of investors to acquire common stock of the Company.
After that time, the Company issued additional warrants to this group as the
previously outstanding warrants were exercised.
In January 1997, the board of directors approved a reduction in the exercise
price, from $15.625 to $13.25 per share, of certain of these warrants related to
686,333 shares of common stock. In consideration of this reduction, the holders
of the warrants agreed to the early exercise of the warrants which were
otherwise permitted to be exercised until November 1, 1998. The holders agreed
to exercise 307,124 shares on or before January 31, 1997, which exercise
occurred and resulted in gross proceeds to the Company of $4,069,393. This
initial issuance was priced at $15.625 per share and resulted in the issuance of
260,441 shares, with 46,683 shares held in reserve, because the reduced pricing
was contingent upon the timely exercise of the warrants related to all 686,333
shares.
The agreement relating to the exercise of the remaining 379,209 warrants was
amended on November 14, 1997. The exercise price remained at $13.25 per share
or an aggregate of $5,024,517 to be paid in ten equal installments commencing
November 15, 1997, and continuing on the day that was five weeks subsequent to
the preceding payment until the full amount was paid. On receipt of each
payment, the Company agreed to issue a certificate representing the stock then
being acquired, calculated at an exercise price of $13.25 per share, and issue a
replacement warrant covering the same number of shares. Additionally, on
receipt of the first payment, the Company agreed to deliver certificates
representing the 46,683 shares held in reserve and to issue replacement warrants
for the 307,124 shares, exercised in January 1997, referred to in the previous
paragraph. Replacement warrants had an exercise price of $21.875 per share and
were exercisable at any time through April 16, 2003. In the event that a
warrant holder failed to make one or more payments when due, that portion of the
outstanding warrants that was then due would thereafter have an exercise price
of $15.625 per share and the holder would not be entitled to a replacement
warrant, if and when the outstanding warrant was exercised. Due to the
declining market price of the Company's common stock, this group only exercised
67,555 warrants after the amendment, and the remaining warrants expired in
November 1998.
In November 1999, the exercise price of 374,680 warrants and 44,900 warrants
with exercise prices of $21.875 and $11.25, respectively, were reduced to $2.00
per share.
A summary of the status of common stock underlying the warrants issued and
changes during the years is presented in the table below:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------------
1999 1998 1997
---------------------- -------------------- --------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 654,680 $17.33 840,067 $17.23 840,067 $15.63
Granted 537,130 1.84 309,634 12.28 345,045 21.88
Exercised (534,330) 1.84 (29,633) 13.25 (345,045) 13.25
Expired - - (465,388) 14.03 - -
Canceled (654,680) 17.33 - - - -
-------- -------- --------
Outstanding at
end of year 2,800 $ 1.25 654,680 $17.33 840,067 $17.23
======== ======== ========
</TABLE>
NOTE K - COMMITMENTS AND CONTINGENCIES
1. Litigation
In September 1999, certain former employees of the Company filed a lawsuit
against the Company seeking damages for non-payment of a bonus arrangement, plus
penalties and attorneys fees. The Company denies that the conditions of the
bonus were met, has filed a motion to dismiss certain claims, and intends to
vigorously defend its position. Management of the Company believes that it has
substantial defenses to the claims and does not believe that the ultimate
outcome of this litigation will have a material impact on the financial position
of the Company. In March 2000, the chief executive officer agreed to indemnify
the Company for all costs and expenses, including any judgments, arising out of
this litigation subsequent to March 1, 2000.
2. Operating lease
The Company leases certain office space under an operating lease for $2,256 per
month. At December 31, 1999 the chief executive officer of the Company is a
guarantor on the lease and in March 2000, he assumed responsibility for payment
of the lease through its expiration in September 2002. Minimum future payments
under this non-cancelable operating lease at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31,
- ------------------------
2000 $27,343
2001 28,436
2002 21,961
Thereafter -
$77,740
</TABLE>
NOTE L - RELATED PARTY TRANSACTION
The Company entered into a consulting arrangement during 1997, with a
corporation owned and controlled by a former director of the Company who
resigned in April 1998. Under the terms of the arrangement, the corporation
agreed to provide the Company with advisory and consulting services concerning
the commercialization of the technology held by Sensar Instruments, Inc., the
identification of markets for such products, the establishment of marketing
contacts, and the development of an operational plan for the development and
marketing of products based on this technology. Under the arrangements the
Company incurred compensation expense of $95,540 in 1997 (none in 1999 or 1998),
plus the reimbursement of third-party expenses incurred on behalf of the
Company.
NOTE M - UNUSUAL CHARGES
The Company has incurred the following unusual charges (credits) during the
years covered by the financial statements:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------
1999 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
Termination benefits paid to former executive
management
$ 125,000 $ - $1,383,964
Write down (recovery) of receivable from former
executive officer and related litigation costs
(12,035) 187,492 -
Write down (recovery) of notes receivable and
accrued interest from former executive
management for exercise of stock options
(144,628) 456,723 -
Other charges - 5,734 -
--------- -------- ----------
$ (31,663) $649,949 $1,383,964
========= ======== ==========
</TABLE>
NOTE N - AGEEMENT WITH NET2WIRELESS
The Company has entered into an agreement with Net2Wireless Corporation, that
gives the Company the right to acquire Net2Wireless in exchange for the issuance
of 18,295,060 shares of the Company's common stock. Net2Wireless acquired the
wireless division of I.T.E.S Ltd., and is a startup company that is focused on
developing wireless internet communications, including multimedia applications.
In the event of a merger, options and other rights to acquire Net2Wireless stock
then outstanding would be converted into rights to acquire 14,766,649 shares of
the Company's common stock. The number of shares to be issued to the
Net2Wireless stockholders will be increased in the event that the cash held by
the Company at closing, plus all amounts collected on the notes receivable held
by the Company, less all cash liabilities is not at least $4.45 million. The
number of additional shares to be issued will be determined by dividing the
short fall, if any, by $1.86. The Company will also issue 1,000,000 shares to
certain individuals involved in identifying Net2Wireless.
As part of this agreement, the Company has agreed to provide Net2Wireless with
short-term financing of up to $2 million, of which $500,000 was advanced in
February 2000. The advance bears interest at 8 percent per annum and is due in
full on or before September 30, 2000. The financing will be used to allow
further recruitment of technical staff for ongoing development work by
Net2Wireless.
As part of the transaction, the Company has agreed to the following:
1. Maintain a minimum of $4.5 million in cash and notes receivable
(including the advance to Net2Wireless discussed above) with only nominal
current liabilities, not to exceed $50,000;
2. Cause to be exercised all options, to acquire stock of the Company held
by current management and directors; and
3. Have no more than 9,000,000 shares outstanding, including shares subject
to options at the time of closing.
In order to eliminate the Company's liabilities other than nominal current
liabilities, the Company will terminate all employment and consulting
agreements, will terminate its deferred compensation plan, and has entered into
an agreement effective March 1, 2000 with the chairman of the board whereby the
chairman has agreed to indemnify the Company with respect to pending litigation
and assume the real property lease to which the Company is a party. Termination
of the deferred compensation plan and the chief executive officer's employment
agreement are contingent on stockholder approval of options previously granted
by the board of directors to management, non-executive directors, and the chief
consultant.
In exchange for the indemnification and the assumption of the lease in March
2000, the Company distributed to the chairman of the board the minority
investment interests held by the Company with a book value of $325,000 at
December 31, 1999,and the office furniture and equipment located at the
Company's Salt Lake City office with a book value of $27,992 at December 31,
1999. The chairman has also agreed to provide 100 hours of transitional
services to the Company to assist new management.
The agreement is subject to the satisfaction of several conditions, including
the approval of the shareholders of the Company and Net2Wireless. The agreement
may be terminated by the mutual consent of the parties, by either party if the
closing has not taken place by December 31, 2000, by either party if there is a
breach by the other party, or by the failure of the Company or Net2Wireless to
receive shareholder approval of the transaction.
It is contemplated that, at closing, the current officers and directors of the
Company will resign and Net2Wireless will appoint new directors and executive
officers of the Company. After the acquisition, the shareholders of
Net2Wireless will own a majority of the common stock of the Company then
outstanding. Accordingly, for financial reporting purposes, the merger will be
treated as a reverse acquisition accounted for as a recapitalization of
Net2Wireless.
AGREEMENT
THIS AGREEMENT (this "Agreement") is entered into this 8th day of December,
1999, by and among SENSAR CORPORATION, a Nevada corporation ("Sensar") and
Net2Wireless, Inc., a Delaware corporation ("Net"), based on the following:
Premises
A. Sensar is a publicly-held corporation with its common stock listed
on the NASDAQ Small Cap Market.
B. Net is an emerging growth company that has the right to acquire
development technology with potential applications in the wireless
communications field.
C. Sensar and Net have discussed the possibility of a business
transaction to the mutual benefit of both parties and have agreed to enter into
the transactions set forth in this Agreement.
Agreement
NOW, THEREFORE, based on the stated premises, which are incorporated herein
by this reference, and for and in consideration of the mutual covenants and
agreements hereinafter set forth and the mutual benefits to the parties to be
derived therefrom, it is hereby agreed as follows:
ARTICLE I
DEFINITIONS
When used herein, the following terms shall have the meanings indicated:
Section 1.01 Code. The Internal Revenue Code of 1986, as amended.
Section 1.02 Exchange Act. The Securities Exchange Act of 1934, as
amended.
Section 1.03 GAAP. United States generally accepted accounting
principles, as in effect on the date of determination, applied on a consistent
basis.
Section 1.04 Net. Net2Wireless, Inc., a corporation organized under
the laws of the state of Delaware and its wholly owned subsidiaries.
Section 1.05 Net Stock. All of the shares of Net issued and
outstanding as of the Closing Date, which are to be exchanged for shares of
Sensar Common Stock pursuant to the terms of this Agreement.
Section 1.06 SEC. The United States Securities and Exchange
Commission.
Section 1.07 Securities Act. The Securities Act of 1933, as amended.
Section 1.08 Sensar. Sensar Corporation, a Nevada corporation.
Section 1.09 Sensar Common Stock. The authorized common stock, par
value $0.001 per share, of Sensar.
ARTICLE II
TRANSACTION
Section 2.01 Loan. On the terms and conditions hereinafter set forth,
Sensar agrees to loan to Net Two Million Dollars ($2,000,000) (the "Funding").
The Funding will be made to Net subsequent to the successful completion of the
following:
(a) The acquisition (the "Asset Acquisition"), directly or
indirectly through wholly-owned subsidiaries of Net, of the following from
I.T.E.S. Ltd., an Israeli corporation ("ITES"):
(i) All intellectual property owned by ITES related to wireless
multi-media streaming;
(ii) Any intellectual property owned by ITES necessary to permit the
development by Net of related wireless applications such as e-mail, messaging,
etc.; and
(iii) The tangible property owned by ITES associated with the
intellectual property transferred to Net.
(b) The delivery of, and acceptance by Sensar, of the Net Schedules
required by Section 5.22, including the audited financial statements of Net, as
required by Section 5.05;
(c) The written agreement by the holders of at least 67% of the Net
Stock outstanding subsequent to the Asset Acquisition to approve the execution
and delivery of this Agreement by Net and to vote in favor of the acquisition of
Net as a wholly-owned subsidiary of Sensar if a Reorganization Notice (as
defined in Section 2.04) is given; and
(d) Net shall enter into an agreement with Partner Communications Ltd.
("Partner"), in form and substance acceptable to Sensar, that provides for the
installation and testing of Net's wireless multi-media streaming platform with
Partner's existing wireless network; and
(e) The execution and delivery of a security agreement in form and
substance acceptable to Sensar granting the security interest set forth in
Section 2.03.
Section 2.02 Note. The obligation of Net with respect to the Funding
and any subsequent amounts advanced to Net by Sensar shall be evidenced by a
promissory note, in a form satisfactory to Sensar. All such amounts shall bear
interest at eight percent (8%) per annum, from the date advanced until paid.
The principal and all accrued but unpaid interest shall be due in full on or
before September 30, 2000.
Section 2.03 Security. The obligations of Net to Sensar shall be
secured by a perfected security interest in all of the assets of Net, including
the shares of its operating subsidiaries.
Section 2.04 Reorganization.
(a) At any time after the commencement by Net of the pilot program
under the agreement with Partner until 30 days following the receipt of written
notice from Net that Net has completed its pilot program under the terms of the
agreement with Partner (the "Completion Date"), but in no event later than
December 31, 2000, Sensar may, by prior written notice (the "Reorganization
Notice") to Net, elect to acquire 100% of the equity interest of Net under the
terms set forth in Section 2.05.
(b) Within 30 days following the Completion Date and prior to
December 31, 2000, Net may deliver a Reorganization Notice to Sensar.
(c) On delivery of such Reorganization Notice, whether by Sensar
or Net, the parties shall be bound to proceed with the reorganization as set
forth below.
Section 2.05 Terms of the Reorganization. If a Reorganization Notice
is delivered, the acquisition of Net shall be accomplished either as an
acquisition of Net as a wholly-owned subsidiary of Sensar or through a merger of
Net with and into Sensar, in accordance with the representations, covenants, and
conditions set forth in this Agreement. All of the issued and outstanding
shares, and rights to acquire shares, of Net shall be cancelled as of the
effective time of the merger and Sensar shall issue an aggregate of 8,000,000
shares of Sensar common stock to the former holders of Net Stock, including the
holders, other than Sensar, of any rights to acquire Net Stock, pro rata, as
each holder's rights may be determined by the board of directors of Net;
provided that in addition to such 8,000,000 shares, options or a plan to issue
options existing as of the Closing to acquire Net Stock will be assumed as
options to acquire a maximum of 5,500,000 shares of Sensar Common Stock. If the
amount received by Sensar with respect to the short term notes receivable
reflected on the financial statements of Sensar as of September 30, 1999 on or
before the date that is 60 days subsequent to the due date of such receivables,
when added to the net cash held by Sensar at the Closing is less than $4.5
million, the number of shares of Sensar stock to be delivered to the former
holders of Net stock shall be increased, in the aggregate, by the number of
shares calculated in accordance with the following formula: [$4.45 million -
(net cash + amount received with respect to the short-term receivables on or
before sixty days subsequent to the due date)] by 4 = number of shares. For
purposes of this calculation "net cash" shall mean the cash held by Sensar as of
the Closing plus the amount due from Net for amounts advanced by Sensar under
the Funding (including accrued interest) less the liabilities of Sensar as of
the Closing, excluding any liability for which Sensar is indemnified by Howard
S. Landa under the provisions of Section 4.08 and to the extent then included,
any deferred gain reflected as a liability on the balance sheet of Sensar.
Section 2.06 Closing of Acquisition. The closing ("Closing") of the
acquisition contemplated by this Agreement shall be on a date and at such time
as the parties may agree ("Closing Date") within the 10-day period subsequent to
the approval of the acquisition by the stockholders of Sensar and Net.
Section 2.07 Closing Events. At the Closing:
(a) The shareholders of Net shall deliver the original
certificates representing all of the issued and outstanding stock and rights to
acquire stock of Net, duly executed, with appropriate signature guarantees, for
cancellation by Net. Sensar shall deliver the original of the certificates
representing 8,000,000 shares of Sensar Common Stock (subject to the adjustments
provided for in this Agreement), registered in the names and denominations set
forth on Schedule 2.10.
(b) The current directors of Sensar shall resign and Andrew
Bebbington and four nominees of Net shall be appointed to the board of directors
of Sensar. All current officers of Sensar shall resign and the new board of
directors shall appoint the officers of Sensar and Net.
(c) Each of the respective parties hereto shall execute,
acknowledge, and deliver (or shall cause to be executed, acknowledged, and
delivered) any and all certificates, financial statements, schedules,
agreements, resolutions, r other instruments required by this Agreement to be
so delivered at or prior to the Closing together with such other items as may be
reasonably requested by the parties hereto and their respective legal counsel in
order to effectuate or evidence the transactions contemplated hereby; and
(d) In addition to the foregoing, each of the parties shall
execute and deliver such additional documents as may reasonably be required in
order to effectuate the acquisition herein contemplated in accordance with the
requirements of the Code and shall treat such acquisition for all tax purposes
consistently with the other parties' treatment thereof and in accordance with
the requirements as a reorganization under Code section 368(a).
ARTICLE III
PRE-CLOSING COVENANTS
Section 3.01 Affirmative and Negative Covenants of Net.
(a) Net hereby covenants and agrees that, during the term of this
Agreement and prior to the Closing, unless otherwise expressly contemplated by
this Agreement (including, without limitation, the Asset Acquisition) or
consented to in writing by Sensar, Net will:
(ii) operate its business in all material respects in the usual
and ordinary course, consistent with past practice;
(iii) use all reasonable efforts to preserve substantially intact
its business organization, maintain its material rights and franchises, retain
the services of its officers and employees and maintain its relationships with
its material customers and suppliers;
(iv) maintain and keep its material properties and assets in as
good repair and condition as at present, ordinary wear and tear excepted, and
maintain supplies and inventories in quantities consistent with its customary
business practice; and
(v) use all reasonable efforts to keep in full force and effect
insurance and bonds comparable in amount and scope of coverage to that currently
maintained.
(b) Except as expressly contemplated by this Agreement (including,
without limitation, the Asset Acquisition) or otherwise consented to in writing
by Sensar, during the term of this Agreement and prior to the Closing Date, Net
will not do any of the foregoing:
(i) declare or pay any dividend on, or make any other distribution in
respect of, outstanding shares of capital stock;
(ii) (A) redeem, purchase or otherwise acquire any shares of its
capital stock or any securities or obligations convertible into or exchangeable
for any shares of its capital stock, or any options, warrants or conversion or
other rights to acquire any shares of its capital stock or any such securities
or obligations (except in connection with the exercise of outstanding stock
options in accordance with their terms); (B) effect any reorganization or
recapitalization; or (C) split, combine or reclassify any of its capital stock
or issue or authorize or propose the issuance of any other securities in respect
of, in lieu of or in substitution for, shares of its capital stock;
(iii) (A) issue, deliver, award, grant or sell, or authorize or propose
the issuance, delivery, award, grant or sale (including the grant of any
security interests, liens, claims, pledges, limitations in voting rights,
charges or other encumbrances) of, any shares of any class of its capital stock
(including shares held in treasury), any securities convertible into or
exercisable or exchangeable for any such shares, or any rights, warrants or
options to acquire any such shares; (B) amend or otherwise modify the terms of
any such rights, warrants or options the effect of which shall be to make such
terms more favorable to the holders thereof; or (C) take any action to
accelerate the exercisability of stock options or other rights to acquire Net
Stock provided, however, that Net shall be permitted to issue stock options
which will be assumed as options to acquire 5,500,000 shares of Sensar Common
Stock following the Closing;
(iv) acquire or agree to acquire, by merging or consolidating with, by
purchasing any equity interest in or a portion of the assets of, or by any other
manner, any business or any corporation, partnership, association or other
business organization or division thereof, or otherwise acquire or agree to
acquire any assets of any other person (other than pursuant to this Agreement or
for the purchase of assets from suppliers or vendors in the ordinary course of
business and consistent with past practice);
(v) sell, lease, exchange, mortgage, pledge, transfer or otherwise
dispose of, or agree to sell, lease, exchange, mortgage, pledge, transfer or
otherwise dispose of, any assets material to Net or its business;
(vi) initiate, solicit or encourage (including by way of furnishing
information or assistance), or take any other action to facilitate, any
inquiries or the making of any proposal relating to, or that may reasonably be
expected to lead to, any transaction that would be inconsistent with the
transactions contemplated by this Agreement, or enter into discussions or
negotiate with any person or entity in furtherance of such inquiries or to
obtain such a competing transaction, or agree to or endorse any competing
transaction, or authorize or permit any of the officers, directors or employees
of Net or any investment banker, financial advisor, attorney, accountant or
other representative retained by Net to take any such action, and Net shall
promptly notify Sensar of all relevant terms of any such inquiries and proposals
received by Net or by any officer, director, investment banker, financial
advisor, attorney, accountant or other representative relating to any of such
matters and if such inquiry or proposal is in writing, Net shall promptly
deliver or cause to be delivered to Sensar a copy of such inquiry or proposal
provided that, notwithstanding any provision of this Agreement to the contrary,
if Net shall breach the provisions of this Section 3.01(b)(vi), Sensar shall
have the right to convert the $2 million note evidencing the Funding into Net
Stock representing 33% of the equity ownership of Net on a fully diluted basis;
(vii) release any third party from its obligations, or grant any
consent, under any existing standstill provision relating to a competing
transaction or otherwise under any confidentiality or other agreement, or fail
to fully enforce any such agreement;
(viii) adopt or propose to adopt any amendments to its certificate of
incorporation or bylaws, which would alter the terms of its capital stock or
would have an adverse impact on the consummation of the transactions
contemplated by this Agreement;
(ix) (A) change any of its methods of accounting employed in the
preparation of the financial statements described in Section 5.05 below , or (B)
make or rescind any express or deemed election relating to taxes, settle or
compromise any claim, action, suit, litigation, audit or controversy relating to
taxes (except where the amount of such settlement or controversy, individually
or in the aggregate, does not exceed $10,000);
(x) incur any obligations for borrowed money, incur any purchase money
indebtedness, or provide a guarantee, whether or not evidenced by a note, bond,
debenture or similar instrument, except in the ordinary course of business
consistent with past practice and in no event in excess of $100,000 in the
aggregate;
(xi) adopt a plan of complete or partial liquidation, dissolution,
merger, consolidation, restructuring, recapitalization or other material
reorganization of Net;
(xii) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction of any such claims, liabilities or
obligations, (x) reflected on, or reserved against in, or contemplated by, the
financial statements (or the notes thereto) of Net, (y) incurred in the ordinary
course of business consistent with past practice or (z) which are legally
required to be paid, discharged or satisfied;
(xiii) knowingly take, or agree to commit to take, any action that
would make any representation or warranty of Net contained herein inaccurate in
any respect at, or as of any time prior to, the Closing;
(xiv) Net will not engage in any transaction with, or enter into any
agreement, arrangement, or understanding with, directly or indirectly, any of
Net affiliates, including, without limitation, any transactions, agreements,
arrangements or understanding with any affiliate or other person covered under
Item 404 of Regulation S-K promulgated under the Securities Act, other than
pursuant to such agreement, arrangements or understandings existing on the date
of this Agreement or as disclosed in writing to Sensar on the date hereof or
which are contemplated under this Agreement; provided that, Net provides Sensar
with all information concerning any such agreement, arrangement or understanding
that Sensar may reasonably request;
(xv) engage in any futures or options trading or be a party to any
price or currency swaps, hedges, futures or derivative instruments; or
(xvi) agree in writing or otherwise to do any of the foregoing.
Section 3.02 Affirmative Covenants of Sensar. Sensar hereby covenants
and agrees that, during the term of this Agreement and prior to the Closing,
unless otherwise expressly contemplated by this Agreement or consented to in
writing by Net, Sensar will:
(a) timely file all SEC reports that may become due subsequent to the
date of this Agreement. Sensar will provide a draft of any such SEC report to
Net prior to its release in order to solicit Net's comments;
(b) take such steps as are necessary so that at the Closing Sensar has
no liabilities other than current liabilities not yet due, not to exceed $50,000
in the aggregate, and a minimum of an aggregate of $4.5 million in cash and note
receivables due no later than October 1, 2000 (with the maximum principal amount
of such notes not to exceed $3.5 million inclusive of the $2 million note (and
accrued and unpaid interest) evidencing the Funding);
(c) terminate all of its employment and consulting agreements, except
for such agreements as may be terminable at will on thirty (30) days or less
notice, without payment of penalty or any other amount other than the current
amount due for services;
(d) cause to be exercised all options, warrants, or other rights to
acquire stock or securities of Sensar identified in Schedule 3.02(d). When such
options are exercised on a cashless basis in connection with the Closing, the
average of the closing prices for Sensar Common Stock for the 20 trading days
with reported trading volume of at least 50,000 shares preceding the Closing
shall be used to calculate the number of shares to be issued;
(e) use its best efforts to maintain the listing of its common stock on
the NASDAQ Small Cap Market;
(f) maintain and keep its material properties and assets in as good
repair and condition as at present, ordinary wear and tear excepted, and
maintain supplies and inventories in quantities consistent with its customary
business practice; and
(g) use all reasonable efforts to keep in full force and effect
insurance and bonds comparable in amount and scope of coverage to that currently
maintained.
In the course of accomplishing the foregoing, Sensar may make cash
payments, distribute assets, enter into transactions, and issue Sensar Common
Stock so long as it has a minimum of $4.5 million in cash and notes payable no
later than October 1, 2000 (with the maximum principal amount of such notes not
to exceed $3.5 million inclusive of the $2 million note (and accrued and unpaid
interest therein) evidencing the Funding) as of the Closing Date and does not
have in excess of 3,150,000 (plus any additional shares issued subsequent to the
date of this Agreement pursuant to the exercise of the options or warrants
identified in schedule 7.03) shares of Sensar Common Stock issued and
outstanding as of the Closing Date.
Section 3.03 Negative Covenants of Sensar. Except as expressly
contemplated by this Agreement or otherwise consented to in writing by Net (and
in addition to the covenant set forth in the preceding paragraph), during the
term of this Agreement and prior to the Closing Date, Sensar will not do any of
the following:
(a) declare or pay any dividend on, or make any other distribution
in respect of, outstanding shares of capital stock;
(b) redeem, purchase or otherwise acquire any shares of its
capital stock or any securities or obligations convertible into or exchangeable
for any shares of its capital stock, or any options, warrants or conversion or
other rights to acquire any shares of its capital stock or any such securities
or obligations (except in connection with the exercise of outstanding stock
options in accordance with their terms); (2) effect any reorganization or
recapitalization; or (3) split, combine or reclassify any of its capital stock
or issue or authorize or propose the issuance of any other securities in respect
of, in lieu of or in substitution for, shares of its capital stock;
(c) except for the rights identified in schedule 7.03, (1) issue,
deliver, award, grant or sell, or authorize or propose the issuance, delivery,
award, grant or sale (including the grant of any security interests, liens,
claims, pledges, limitations in voting rights, charges or other encumbrances)
of, any shares of any class of its capital stock (including shares held in
treasury), any securities convertible into or exercisable or exchangeable for
any such shares, or any rights, warrants or options to acquire any such shares;
(2) amend or otherwise modify the terms of any such rights, warrants or options
the effect of which shall be to make such terms more favorable to the holders
thereof; or (3) take any action to accelerate the exercisability of stock
options or other rights to acquire Sensar Common Stock;
(d) acquire or agree to acquire, by merging or consolidating with,
by purchasing any equity interest in or a portion of the assets of, or by any
other manner, any business or any corporation, partnership, association or other
business organization or division thereof, or otherwise acquire or agree to
acquire any assets of any other person (other than pursuant to this Agreement or
for the purchase of assets from suppliers or vendors in the ordinary course of
business and consistent with past practice);
(e) sell, lease, exchange, mortgage, pledge, transfer or otherwise
dispose of, or agree to sell, lease, exchange, mortgage, pledge, transfer or
otherwise dispose of, any assets material to Sensar or its business;
(f) initiate, solicit or encourage (including by way of furnishing
information or assistance), or take any other action to facilitate, any
inquiries or the making of any proposal relating to, or that may reasonably be
expected to lead to, any transaction that would be inconsistent with the
transactions contemplated by this Agreement, or enter into discussions or
negotiate with any person or entity in furtherance of such inquiries or to
obtain such a competing transaction, or agree to or endorse any competing
transaction, or authorize or permit any of the officers, directors or employees
of Sensar or any investment banker, financial advisor, attorney, accountant or
other representative retained by Sensar to take any such action, and Sensar
shall promptly notify Net of all relevant terms of any such inquiries and
proposals received by Sensar or by any officer, director, investment banker,
financial advisor, attorney, accountant or other representative relating to any
of such matters and if such inquiry or proposal is in writing, Sensar shall
promptly deliver or cause to be delivered to Net a copy of such inquiry or
proposal;
(g) release any third party from its obligations, or grant any
consent, under any existing standstill provision relating to a competing
transaction or otherwise under any confidentiality or other agreement, or fail
to fully enforce any such agreement;
(h) adopt or propose to adopt any amendments to its certificate of
incorporation or bylaws, which would alter the terms of its capital stock or
would have an adverse impact on the consummation of the transactions
contemplated by this Agreement;
(i) change any of its methods of accounting in effect at December
31, 1998, or (2) make or rescind any express or deemed election relating to
taxes, settle or compromise any claim, action, suit, litigation, audit or
controversy relating to taxes (except where the amount of such settlement or
controversy, individually or in the aggregate, does not exceed $10,000), or
change any of its methods of reporting income or deductions for income tax
purposes from those employed in the preparation of the federal income tax
returns for the taxable year ended December 31, 1998, except in each case, as
may be required by law or GAAP;
(j) incur any obligations for borrowed money, incur any purchase
money indebtedness, or provide a guarantee, whether or not evidenced by a note,
bond, debenture or similar instrument;
(k) adopt a plan of complete or partial liquidation, dissolution,
merger, consolidation, restructuring, recapitalization or other material
reorganization of Sensar;
(l) pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction of any such
claims, liabilities or obligations, (x) reflected on, or reserved against in, or
contemplated by, the financial statements (or the notes thereto) of Sensar, (y)
incurred in the ordinary course of business consistent with past practice or (z)
which are legally required to be paid, discharged or satisfied;
(m) knowingly take, or agree to commit to take, any action that
would make any representation or warranty of Sensar contained herein inaccurate
in any respect at, or as of any time prior to, the Closing;
(n) Sensar will not engage in any transaction with, or enter into
any agreement, arrangement, or understanding with, directly or indirectly, any
of Sensar affiliates, including, without limitation, any transactions,
agreements, arrangements or understanding with any affiliate or other person
covered under Item 404 of Regulation S-K promulgated under the Securities Act,
other than pursuant to such agreement, arrangements or understandings existing
on the date of this Agreement or as disclosed in writing to Net on the date
hereof or which are contemplated under this Agreement; provided that, Sensar
provides Net with all information concerning any such agreement, arrangement or
understanding that Net may reasonably request;
(o) engage in any futures or options trading or be a party to any
price or currency swaps, hedges, futures or derivative instruments; or
(p) agree in writing or otherwise to do any of the foregoing.
Section 3.04 Interim Reports. During the term of this Agreement, each
party shall provide the other with monthly reports. Such reports shall be
delivered by the 15th of the month following the month reported commencing the
month following the Funding and shall contain a copy of the internal financial
statements of such party, certified by the chief financial officer of such party
as true and correct and a fair representation of the financial condition and
results of operation for such party as of and for the periods presented; with
respect to Net, a summary of the development of the technology and future steps
required or intended to be taken by Net with respect to the technology; a
summary and, if requested by the other party, a copy of any material agreement
entered into or proposed to be entered into by the other party; and with respect
to Net, a summary of the current status, and prospective business plan, of Net.
Section 3.05 Access and Information.
(a) Sensar shall, and shall cause its subsidiaries to, afford Net
and its officers, directors, employees, accountants, consultants, legal counsel,
agents and other representatives (collectively, the "Net Representatives")
reasonable access at reasonable times, upon reasonable prior notice, to the
officers, employees, agents, properties, offices and other facilities of Sensar
and its subsidiaries and to the books and records thereof and furnish promptly
to Net and the Net Representatives such information concerning the business,
properties, contracts, records and personnel of Sensar and its subsidiaries
(including, without limitation, financial, operating and other data and
information) as may be reasonably requested, from time to time, by Net or such
Representatives.
(b) Net shall (i) afford to Sensar and its officers, directors,
employees, accountants, consultants, legal counsel, agents and other
representatives (collectively, the "Sensar Representatives") reasonable access
at reasonable times, upon reasonable prior notice, to the officers, employees,
accountants, agents, properties, offices and other facilities of Net and its
subsidiaries and to their respective books and records and (ii) furnish promptly
to Sensar and Sensar Representatives such information concerning the business,
properties, contracts, records and personnel of Net (including, without
limitation, financial, operating and other data and information) as may be
reasonably requested, from time to time, by Sensar or such Representatives.
(c) The information received pursuant to section 3.05(a) and (b)
shall be deemed to be "confidential information" and shall not be disclosed to
any other person or entity, except to the parties' representatives, and shall
not be used for any purpose other than the transactions contemplated by this
Agreement.
Section 3.06 Termination.
(a) This Agreement may be terminated at any time prior to the
Closing Date by the mutual consent of both Sensar and Net through action of
their respective boards of directors. This Agreement may be terminated by
either Sensar or Net in the event that (x) neither Sensar nor Net has delivered
to the other the Reorganization Notice on or before September 30, 2000 or (y)
the Closing shall not have occurred by December 31, 2000 as a result of the
failure of the other party to satisfy the conditions required to be met by such
other party prior to Closing. In the event of termination pursuant to this
subparagraph (a) of section 3.06, no obligation, right, remedy, or liability
shall arise hereunder, other than the obligations of Net to Sensar with respect
to any amounts advanced upon the Funding, and the parties shall bear their own
costs incurred in connection with the preparation and execution of this
Agreement, the preparation and review of financial statements required to be
delivered pursuant hereto, and the negotiation of the transactions contemplated
hereby.
(b) This Agreement may be terminated at any time prior to the
Closing Date by action of Sensar's board of directors if Net shall fail to
comply in any material respect with any of its covenants or agreements contained
in this Agreement, if any of the representations or warranties of Net contained
herein shall be inaccurate in any material respect at or subsequent to the
Funding, or if the stockholders of Net fail to approve the transactions
contemplated by this Agreement including the acquisition of Net. In the event
of termination pursuant to this subparagraph (b) of section 3.06, no obligation,
right, remedy, or liability shall arise hereunder, other than the obligations of
Net to Sensar with respect to amounts advanced upon the Funding, and the parties
shall bear their own costs incurred in connection with the preparation and
execution of this Agreement, the preparation and review of financial statements
required to be delivered pursuant hereto, and the negotiation of the
transactions contemplated hereby.
(c) This Agreement may be terminated at any time prior to the
Closing Date by action of Net's board of directors if Sensar shall fail to
comply in any material respect with any of its covenants or agreements contained
in this Agreement, if any of the representations or warranties of Sensar
contained herein shall be inaccurate in any material respect, or if the
stockholders of Sensar fail to approve this Agreement. In the event of
termination pursuant to this subparagraph (c) of section 3.06, no obligation,
right, remedy, or liability shall arise hereunder, other than the obligations of
Net to Sensar with respect to any amounts advanced upon the Funding, and the
parties shall bear their own costs incurred in connection with the preparation
and execution of this Agreement, the preparation and review of financial
statements required to be delivered pursuant hereto, and the negotiation of the
transactions contemplated hereby.
Section 3.07 Post-Closing Covenants of Sensar and Net. Subsequent to
the Closing of the transactions contemplated by this Agreement, neither Sensar
nor Net shall undertake (or fail to undertake) any action that would result in
the merger failing to qualify as a reorganization within the meaning of section
368(a) of the Code. Sensar and Net shall execute and deliver any and all
documents, instruments, and agreements necessary to effectuate the purposes of
this Agreement. All of the provisions of this section 3.07 shall survive the
Closing and the consummation of the transactions contemplated herein.
ARTICLE IV
ADDITIONAL AGREEMENTS
Section 4.01 Meeting of Sensar Shareholders. Sensar shall, promptly
after the effectiveness of the Proxy Statement/Prospectus provided for in
section 4.03, take all actions necessary in accordance with Nevada Law and its
articles of incorporation and bylaws to convene a meeting of Sensar's
stockholders (the "Sensar Stockholders Meeting") to approve
(a) the acquisition of Net; and
(b) to the extent subject to shareholder approval, the options
granted to current officers, directors, consultants, and advisors of Sensar, all
as disclosed in Schedule 7.03;
and Sensar shall consult with Net in connection therewith. The Board of
Directors of Sensar shall recommend that its stockholders vote in favor of the
foregoing proposals and shall cause such recommendation to be included in the
Proxy Statement/Prospectus (as defined in Section 4.03 below).
Section 4.02 Meeting of Net Shareholders. Net shall, promptly after
the effectiveness of the Proxy Statement/Prospectus provided for in section
4.03, take all actions necessary in accordance with Delaware law and its
articles of incorporation and bylaws to convene a special meeting of Net's
shareholders to approve the acquisition of Net (the "Net Shareholders Meeting"),
and Net shall consult with Sensar in connection therewith. The Net Shareholders
agree to vote all of the shares of Net Stock held by them at the time of the
record date for the Net Shareholders Meeting in favor of the acquisition of Net.
Net shall recommend approval of the acquisition to its shareholders and use its
best efforts to solicit from the other shareholders of Net proxies to approve
and adopt the acquisition.
Section 4.03 S-4 Registration Statement.
(a) As promptly as practicable after delivery of the Acquisition
Notice, Net and Sensar shall prepare and file with the SEC a Form S-4, including
a proxy statement for use in connection with obtaining the approval of the
transactions contemplated by this Agreement by the stockholders of Sensar and
Net and a prospectus for the issuance by Sensar of the Common Stock to the Net
Shareholders (the "Proxy Statement/Prospectus"). Each of Net, Sensar and the
Net Shareholders shall use their best efforts to cause the Form S-4 to be
declared effective by the SEC as promptly as practicable, and shall take any
action required to be taken under any applicable federal or state securities
laws in connection with the issuance of shares of the Sensar Common Stock. Each
of Sensar, Net, and the Net Shareholders shall furnish all information
concerning them as may reasonably be necessary or advisable in connection with
such actions. In addition, Net shall provide disclosure concerning tax
consequences to the stockholders of Net under the tax laws of the State of
Israel, if any. As promptly as practicable after the Form S-4 shall have been
declared effective by the SEC, Sensar shall mail the Proxy Statement/Prospectus
to its stockholders entitled to notice of and to vote at the Sensar Stockholders
Meeting and Net shall mail the Proxy Statement/Prospectus to its shareholders
entitled to vote at the Net Stockholders Meeting. The Proxy
Statement/Prospectus shall include the recommendation of Sensar's and Net's
Board of Directors in favor of the adoption of this Agreement.
(b) The information supplied by Sensar for inclusion in the Form
S-4 shall not, at the time the Proxy Statement/Prospectus is mailed to the
stockholders of Sensar, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein not misleading. If at any time prior to the
Closing Date any event or circumstance relating to Sensar or any of its
affiliates, or its or their respective officers or directors, is discovered by
Sensar that should be set forth in a supplement to the Proxy
Statement/Prospectus, Sensar shall promptly inform Net thereof in writing.
Sensar will indemnify and hold harmless Net, each of its officers, directors,
shareholders and each person who controls Net within the meaning of Section 15
of the Securities Act from and against any and all losses, claims, damages,
expenses, liabilities, or actions to which it may become subject under
applicable law (including the Securities Act and the Exchange Act) and will
reimburse it for any legal or other expenses reasonably incurred by it in
connection with investigating or defending any claims or actions, whether or not
resulting in liability, insofar as such losses, claims, damages, expenses,
liabilities, or actions arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact or the omission of a material fact
required to be stated therein, or necessary in order to make the statements
therein not misleading except insofar as any statement or omission was made in
reliance upon and in conformity with information furnished in writing by Net
expressly for use therein.
(c) The information supplied by Net for inclusion in the Form S-4
shall not, at the time the Proxy Statement/Prospectus is mailed to the
stockholders of Sensar and the Net Shareholders, contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein not misleading. If at any
time prior to the Closing Date any event or circumstance relating to Net or any
of its affiliates, or to their respective officers or directors, is discovered
by Net that should be set forth in a supplement to the Proxy
Statement/Prospectus, Net shall promptly inform Sensar thereof in writing. Net
will indemnify and hold harmless Sensar, each of its officers, directors and
each person who controls Sensar within Section 15 of the Securities Act from and
against any and all losses, claims, damages, expenses, liabilities, or actions
to which it may become subject under applicable law (including the Securities
Act and the Exchange Act) and will reimburse it for any legal or other expenses
reasonably incurred by it in connection with investigating or defending any
claims or actions, whether or not resulting in liability, insofar as such
losses, claims, damages, expenses, liabilities, or actions arise out of or are
based upon any untrue statement or alleged untrue statement of a material fact
or the omission of a material fact required to be stated therein, or necessary
in order to make the statements therein not misleading, but only insofar as any
statement or omission was made in reliance upon and in conformity with
information furnished in writing by Net expressly for use therein.
Section 4.04 S-3 Registration Statement.
(a) Either prior to or concurrently with the filing of the Proxy
Statement/Prospectus Sensar shall file a registration statement on Form S-3
registering the resale of the stock of the individuals and entities set forth on
Schedule 4.04 not currently covered by a registration statement (the "Resale
Registration"); provided that such individuals and entities shall each execute
an agreement satisfactory to Sensar pursuant to which they shall agree not to
publicly sell or dispose of 50% of the registered shares until the expiration of
180 days following the effective date of the registration statement. Such
Resale Registration shall be kept effective by Sensar until all of the shares of
Sensar Common Stock covered thereby have been sold or can otherwise be sold free
of any restriction or limitation. The obligations of this section 4.04 shall be
for the benefit of the selling shareholders identified on schedule 4.04 and
shall survive the consummation of the transactions contemplated by this
Agreement.
(b) The information supplied by Sensar for inclusion in the Form
S-3 shall not, at the time the Resale Registration is filed, becomes effective,
or thereafter, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein not misleading. If at any time while the Resale
Registration is effective, any event or circumstance relating to Sensar or any
of its affiliates is discovered by Sensar that should be set forth in an
amendment to the Resale Registration, Sensar shall promptly prepare and file
such amendment. Sensar will indemnify and hold harmless each person or entity
selling shares pursuant to the Resale Registration, and each of their respective
officers, directors, shareholders and each person who controls such selling
shareholders within the meaning of Section 15 of the Securities Act from and
against any and all losses, claims, damages, expenses, liabilities, or actions
to which it may become subject under applicable law (including the Securities
Act and the Exchange Act) and will reimburse it for any legal or other expenses
reasonably incurred by it in connection with investigating or defending any
claims or actions, whether or not resulting in liability, insofar as such
losses, claims, damages, expenses, liabilities, or actions arise out of or are
based upon any untrue statement or alleged untrue statement of a material fact
or the omission of a material fact required to be stated therein, or necessary
in order to make the statements therein not misleading, except insofar as any
statement or omission was made in reliance upon and in conformity with
information furnished in writing by such selling shareholder expressly for use
therein.
(c) The information supplied by Net for inclusion in the Form S-3
shall not, at the time the Resale Registration is filed, becomes effective, or
thereafter, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading. If at any time while the Resale Registration
is effective, any event or circumstance relating to Net or any of its affiliates
is discovered by Net that should be set forth in a supplement to the Resale
Registration, Net shall promptly inform Sensar thereof in writing. Net will
indemnify and hold harmless Sensar and each of its officers, directors and each
person who controls Sensar within the meaning of Section 15 of the Securities
Act from and against any and all losses, claims, damages, expenses, liabilities,
or actions to which it may become subject under applicable law (including the
Securities Act and the Exchange Act) and will reimburse it for any legal or
other expenses reasonably incurred by it in connection with investigating or
defending any claims or actions, whether or not resulting in liability, insofar
as such losses, claims, damages, expenses, liabilities, or actions arise out of
or are based upon any untrue statement or alleged untrue statement of a material
fact or the omission of a material fact required to be stated therein, or
necessary in order to make the statements therein not misleading, but only
insofar as any statement or omission was made in reliance upon and in conformity
with information furnished in writing by Net expressly for use therein.
Section 4.05 Appropriate Action; Consents; Filings.
(a) Sensar and Net shall each use all reasonable efforts to (i)
take, or cause to be taken, all appropriate action, and do, or cause to be done,
all things necessary, proper or advisable under applicable law or otherwise to
consummate and make effective the transactions contemplated by this Agreement,
(ii) obtain from any governmental entities any consents, licenses, permits,
waivers, approvals, authorizations or orders required to be obtained or made by
Net or Sensar or any of its subsidiaries in connection with the authorization,
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby, (iii) make all necessary filings, and
thereafter make any other required submissions, with respect to this Agreement
required under (A) the Securities Act and the Exchange Act and the rules and
regulations thereunder, and any other applicable federal or state securities
laws, and (B) any other applicable Law.
(b) Net and Sensar agree to cooperate with respect to, and agree
to use all reasonable efforts vigorously to contest and resist, any action,
including legislative, administrative or judicial action, and to have vacated,
lifted, reversed or overturned any decree, judgment, injunction or other order
(whether temporary, preliminary or permanent) (an "Order") of any Governmental
Entity that is in effect and that restricts, prevents or prohibits the
consummation of the transactions contemplated by this Agreement, including,
without limitation, by vigorously pursuing all available avenues of
administrative and judicial appeal and all available legislative action. Each
of Net and Sensar also agree to take any and all actions, including, without
limitation, the disposition of assets or the withdrawal from doing business in
particular jurisdictions, required by regulatory authorities as a condition to
the granting of any approvals required in order to permit the consummation of
the Acquisition or as may be required to avoid, lift, vacate or reverse any
legislative or judicial action which would otherwise cause any condition to
Closing not to be satisfied.
(c) (i) Each of Sensar and Net shall give any notices to third
parties, and use all reasonable efforts to obtain any third party consents (A)
necessary, proper or advisable to consummate the transactions contemplated by
this Agreement, or (B) otherwise required under any contracts, licenses, leases
or other agreements in connection with the consummation of the transactions
contemplated hereby.
(iii) In the event that any party shall fail to obtain any third
party consent described in subsection (c)(i) above, such party shall use all
reasonable efforts, and shall take any such actions reasonably requested by the
other party, to limit the adverse effect upon Net and Sensar and their
respective businesses resulting, or which could reasonably be expected to result
after the Closing Date, from the failure to obtain such consent.
(d) Each of Net and Sensar shall promptly notify the other of (A)
any material change in its current or future business, assets, liabilities,
financial condition or results of operations, (B) any complaints, investigations
or hearings (or communications indicating that the same may be contemplated) of
any Governmental Entities with respect to its business or the transactions
contemplated hereby, (C) the institution or the threat of material litigation or
(D) any event or condition that might reasonably be expected to cause any of its
representations, warranties, covenants or agreements set forth herein not to be
true and correct at the Closing Date. As used in the preceding sentence,
"material litigation" means any case, arbitration or adversary proceeding or
other matter which would have been required to be disclosed on the Sensar
disclosure schedules, if in existence on the date hereof, or in respect of which
the legal fees and other costs might reasonably be expected to exceed $10,000
over the life of the matter.
Section 4.06 Public Announcements. The press release announcing the
execution and delivery of this Agreement shall be a joint press release of Net
and Sensar. In addition, Sensar shall be entitled to make such press releases
and file such information as it deems advisable to comply with its requirements
under United State securities laws. Sensar will provide a draft of any such
press release to Net prior to its release in order to solicit Net's comments.
Section 4.07 NASDAQ. Each party hereto shall use all reasonable
efforts to cause the shares of Sensar Common Stock to be issued to the
shareholders of Net to be approved for listing (subject to official notice of
issuance) on the NASDAQ Small Cap Market or another over-the-counter national
securities exchange prior to the Closing Date.
Section 4.08 Indemnification by Howard S. Landa. Howard S. Landa shall
agree to assume all obligations, including costs of defense, associated with the
litigation brought by former employees on the terms acceptable to Net.
ARTICLE V
REPRESENTATIONS, COVENANTS, AND WARRANTIES OF NET
As an inducement to and to obtain the reliance of Sensar, Net represents
and warrants after giving effect to the Asset Acquisition and thereafter, and
except as set forth on the Net Schedules, as set forth below in this Article V.
As used in this Article V, the term "Net" shall include Net and the Subsidiaries
(as defined in Section 5.04) unless the context otherwise requires.
Section 5.01 Organization. Net is a corporation duly organized,
validly existing, and in good standing under the corporate laws of the state of
Delaware and each subsidiary of Net is duly organized, validly existing, and in
good standing under the laws of its jurisdiction of organization and each has
the corporate power to own all of its properties and assets and to carry on its
business in all material respects as it is now being conducted, and there is no
jurisdiction in which it is not so qualified in which the character and location
of the assets owned by it or the nature of the business transacted by it
requires qualification, except where failure to do so would not have a material
adverse effect on the business or properties of Net. Included in the Net
Schedules (as hereinafter defined) are complete and correct copies of the
certificate of incorporation and bylaws of Net and its subsidiaries as in effect
on the date hereof. The execution and delivery of this Agreement does not, and
the consummation of the transactions contemplated by this Agreement in
accordance with the terms hereof will not, violate any provision of Net's or its
subsidiaries certificate of incorporation or bylaws.
Section 5.02 Approval of Agreement. The board of directors of Net has
authorized the execution and delivery of this Agreement by Net and has approved
the consummation of the transactions contemplated hereby. Included in the Net
Schedules is a signed copy of a consent duly adopted by the board of directors
of Net evidencing such approval. Net has full power, authority, and legal
right, and has taken all action required by law, its certificate of
incorporation, its bylaws, or otherwise, to consummate the transactions
contemplated hereby.
Section 5.03 Capitalization. Net has authorized capital of 3,000
shares of common stock, par value $0.01 per share. All issued and outstanding
Net Stock is held by the individuals and entities set forth on Schedule 5.03 in
the amount set forth opposite their respective names. There are no options,
rights, convertible securities, calls, or commitments to which Net is a party or
to which it is subject requiring the issuance of any additional shares of Net
Stock. All issued and outstanding shares of Net are validly authorized, legally
issued, fully paid, and nonassessable and not issued in violation of the
preemptive or other right of any person.
Section 5.04 No Subsidiary or Predecessor. Net does not own,
beneficially or of record, any equity securities in any other entity other than
the subsidiaries listed on Schedule 5.04 (the "Subsidiaries"). Net owns all of
the outstanding capital stock of each of the Subsidiaries.
Section 5.05 Financial Information.
(a) Included in the Net Schedules are the audited consolidated
financial statements of Net and the Subsidiaries as of the closing of the Asset
Acquisition.
(b) Such financial information has been prepared in accordance
with GAAP, except as disclosed in the Net Schedules. Such financial statements
contain all of the periods and notes that would be required to be included in a
registration statement filed by Net by the provisions of Regulations S-X
promulgated under the Securities Act of 1933, as amended. Net did not have, as
of the date of the most recent balance sheet, except as and to the extent
reflected or reserved against therein, any liabilities or obligations (absolute
or contingent) which should be reflected in a balance sheet prepared in
accordance with GAAP. All assets reflected on the most recent balance sheet
present fairly the assets of Net, as of the date of such balance sheet.
(c) Net has filed all tax returns and reports as required by law.
All such returns and reports are accurate and correct in all material respects.
There are no income taxes currently due to any governmental agency that have not
been paid. Net does not have any liabilities with respect to the payment of any
tax (including any deficiencies, interest, or penalties) accrued for or
applicable to the period ended on the date of the most recent balance sheet
included in the Net Schedules and all such dates and years and periods prior
thereto and for which Net may be liable in its own right or as transferee of the
assets of, or as successor to, any other corporation or other entity, except for
taxes accrued but not yet due and payable. None of the tax returns of Net has
been audited or is currently being audited by any governmental agency. Net has
not made any tax election which would have a material adverse effect on Net, its
financial condition, its business as presently conducted or as proposed to be
conducted, or any of its properties or material assets. There are no
outstanding agreements or waivers extending the statutory period of limitation
applicable to any tax return of Net.
(d) The books and records, financial and otherwise, of Net are in
all material respects complete and correct and have been made and maintained in
accordance with sound business and bookkeeping practices and, in reasonable
detail, accurately and fairly reflect the transactions involving the assets of
Net. Net has maintained a system of internal accounting controls sufficient to
provide reasonable assurances that (i) transactions have been and are executed
in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit the preparation of financial
statements in conformity with GAAP and any other criteria applicable to such
statements and to maintain accountability for assets; (iii) access to assets is
permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals, and appropriate action is taken
with respect to any differences.
(e) Except as set forth in the Net Schedules, the balance sheet
included in the Net Schedules, or in the notes thereto, Net (i) has good and
marketable title to its accounts receivable, and other debts due or recorded in
the records and books of account of Net, free of any security interests or liens
and free of any material defenses, counterclaims, and set-offs, and all of such
accounts receivable, invoices, and debts are actual and bona fide amounts due
Net for the total dollar amount thereof shown on the books of Net and resulted
from the regular course of its business; and (ii) the accounts receivable,
invoices, and debts set forth on the Net balance sheets arose in the ordinary
course of business and are, net of any reserves shown on the balance sheet,
collectible in full in all material respects on the continuation of reasonable
collection efforts by Net or successor personnel and without resorting to
litigation and in any event not later than ninety (90) days after the date
billed.
Section 5.06 Information. The information concerning Net set forth in
this Agreement and in the Net Schedules is complete and accurate in all material
respects and does not contain any untrue statement of a material fact or omit to
state a material fact required to make the statements made, in light of the
circumstances under which they were made, not misleading.
Section 5.07 Options or Warrants. Except as set forth on Schedule 5.07,
there are no existing options, warrants, calls, commitments, or other rights of
any character relating to authorized and unissued Net Stock or other securities
of Net or the Subsidiaries. Other than the convertible obligations incurred in
connection with the Asset Acquisition, all such rights shall be cancelled as of
the effective time of the acquisition in accordance with Section 2.06 above.
Section 5.08 Absence of Certain Changes or Events. Except as set forth
in this Agreement or in the Net Schedules, since the date of the balance sheet
included in the Net Schedules:
(a) There has not been (i) any material adverse change in the
business, operations, assets, or condition of Net, except for changes occurring
as a result of transactions in the normal course of business of Net, or (ii) any
damage, destruction, or loss to Net (whether or not covered by insurance)
materially and adversely affecting the business, operations, assets, or
condition of Net;
(b) Net has not (i) amended its certificate of incorporation and
bylaws; (ii) declared or made, or agreed to declare or make, any payment of
dividends or distributions of any assets of any kind whatsoever to stockholders
or purchased or redeemed, or agreed to purchase or redeem, any of its capital
stock; (iii) waived any rights of value which in the aggregate are extraordinary
or material considering the business of Net; (iv) made any material change in
its method of management, operation, or accounting; (v) entered into any other
material transactions, (vi) made any accrual or arrangement for or payment of
bonuses or special compensation of any kind or any severance or termination pay
to any present or former officer, employee, or shareholder; (vii) increased the
rate of compensation payable or to become payable by it to any of its officers
or directors or any of its employees whose monthly compensation exceeds $5,000;
or (viii) made any increase in any profit sharing, bonus, deferred compensation,
insurance, pension, retirement, or other employee benefit plan, payment, or
arrangement made to, for, or with its officers, directors, or employees;
(c) Net has not (i) granted or agreed to grant any options,
warrants, or other rights to acquire its stocks, bonds, or other corporate
securities; (ii) borrowed or agreed to borrow any funds or incurred, or become
subject to, any material obligation or liability (absolute or contingent) except
liabilities incurred in the ordinary course of business; (iii) paid any material
obligation or liability (absolute or contingent) other than current liabilities
reflected in or shown on the most recent balance sheet included in the Net
Schedules and current liabilities incurred since that date in the ordinary
course of business; (iv) sold or transferred, or agreed to sell or transfer, any
of its assets, properties, or rights (except assets, properties, or rights not
used or useful in its business which, in the aggregate have a value of less than
$10,000 or assets, properties, or rights disposed of in the ordinary course of
business); (v) made or permitted any amendment or termination of any contract,
agreement, or license to which it is a party if such amendment or termination is
material, considering the business of Net; or (vi) issued, delivered, or agreed
to issue or deliver any stock, bonds, or other corporate securities including
debentures (whether authorized and unissued or held as treasury stock); and
(d) Net has not become subject to any law or regulation which
materially and adversely affects, or may in the future materially and adversely
affect, the business, operations, properties, assets, or condition of Net.
Section 5.09 Title to Personal and Real Property.
(a) Except as disclosed in the balance sheet included in the Net
Schedules, Net has good and marketable title to all its properties, inventory,
know-how, interests in properties, and assets, which are reflected in the most
recent balance sheet included in the Net Schedules, or are used in Net's
business, or acquired after that date (except those sold or otherwise disposed
of since such date in the ordinary course of business), free and clear of all
material mortgages, security interests, royalties, liens, pledges, charges, or
encumbrances, except (i) statutory liens or claims for amounts not yet
delinquent; and (ii) such imperfections of title and easements as do not and
will not materially detract from or interfere with the present or proposed use
of the properties subject thereto or affected thereby or otherwise materially
impair present business operations on such properties. All personal property
held by Net is in a state of good maintenance and repair, excepting only
reasonable wear and tear, and is adequate and suitable for the purposes for
which it is presently being used.
(b) Net does not own any real property in fee simple.
(c) Included in the Net Schedules is an accurate and complete list
of all personal property owned by Net or used in its business and having a
purchase price of over $10,000, together with a description of any mortgages,
financing instruments, or other encumbrances to the title to such properties.
Also included in the Net Schedules are copies of all leases for real and
personal property to which Net is a party. Except as disclosed in the Net
Schedules, each such lease is in full force and effect; all rents and additional
fees due to date on each such lease have been paid; in each case, the lessee has
been in peaceable possession since the commencement of the original term of such
lease and is not in default thereunder and no waiver, indulgence, or
postponement of the lessee's obligation thereunder has been granted by the
lessor; and there exists no event of default or event, occurrence, condition, or
act, which, with the giving of notice, the lapse of time, or the happening of
any further event or condition, would become a default under such lease, the
occurrence of which would have a material adverse affect on Net. Net has not
violated any of the terms or conditions under any such lease in any material
respect, and all of the material covenants to be performed by any other party
under any such lease have been fully performed. The property leased by Net is
in a state of good maintenance and repair, except reasonable wear and tear, and
is adequate and suitable for the purposes for which it is presently being used.
Section 5.10 Intellectual Property. Net owns the entire right, title,
and interest to all trade secrets, technology, know-how, tradenames, trademarks,
servicemarks, and other proprietary information owned by, used, or licensed in
connection with the business of, Net, including all copyrights, patents, patent
applications, registrations, and applications with respect thereto, all of which
is described in Section 2.01(a) (collectively the "Intellectual Property").
Such Intellectual Property is not subject to the payment of royalties or any
other obligation to any other person or entity. No employee or former employee
of Net owns, directly or indirectly, any right, title, or interest in or to the
Intellectual Property. Hemi Davidson hereby waives, assigns, and transfers to
Net any and all rights or claims he may have to the Intellectual Property. None
of the Intellectual Property is subject to any material order, decree, judgment,
stipulation, settlement, encumbrance, or attachment. Except as set forth in the
Net Schedules, there are no pending or threatened proceedings, litigation, or
other adverse claims to the Intellectual Property of which Net is aware. To
Net's knowledge, the Intellectual Property does not infringe on the copyright,
patent, trade secret, know-how, or other proprietary right of any other person
or entity and comprises all such rights necessary to permit the operation of the
business of Net as now being conducted and as proposed to be conducted.
Section 5.11 Litigation and Proceedings. Except as set forth in the
Net Schedules, there are no actions, suits, or proceedings pending or, to the
knowledge of Net or its officers and directors, threatened in writing by or
against Net or affecting Net or its properties, at law or in equity, before any
court or other governmental agency or instrumentality, domestic or foreign, or
before any arbitrator of any kind. Net is not in material default with respect
to any judgment, order, writ, injunction, decree, award, rule, or regulation of
any court, arbitrator, or governmental agency or instrumentality.
Section 5.12 Contracts.
(a) Included in the Net Schedules is a description of every
contract, agreement, distributorship, franchise, license, or other agreement,
arrangement, or commitment to which Net is a party or by which its assets or
properties are bound, which calls for the payment by Net of more than $2,000 a
month, or $24,000 in the aggregate;
(b) Except as described in this Agreement or in the Net Schedules,
Net is not a party to or bound by, and the properties of Net are not subject to,
any contract, agreement, other commitment or instrument or any charter or other
corporate restriction or any judgment, order, writ, injunction, decree, or award
which materially and adversely affects, or in the future may (as far as Net can
now reasonably foresee) materially and adversely affect, the business
operations, properties, assets, or financial condition of Net; and
(c) Except as included or described in the Net Schedules or
reflected in the accompanying Net balance sheet, Net is not a party to any oral
or written (i) contract for the employment of any officer, director, or
employee, whose compensation is greater than $5,000 per month, which is not
terminable on thirty (30) days (or less) notice; (ii) profit sharing, bonus,
deferred compensation, stock option, severance pay, pension benefit or
retirement plan; (iii) agreement, contract, or indenture relating to the
borrowing of money in amounts greater than $10,000 in the aggregate; (iv)
guarantee of any obligation for the borrowing of money or otherwise, excluding
endorsements made for collection and other guarantees of obligations, which, in
the aggregate do not exceed $10,000; (v) consulting or other similar contract
with an unexpired term of more than one year or providing for payments in excess
of $10,000 in the aggregate; (vi) collective bargaining agreement; (vii)
agreement with any present or former officer or director of Net whose
compensation was or is greater than $5,000 per month; or (viii) other contract,
agreement, or other commitment, except normal ongoing monthly operating
expenses, involving payments by it in the future of more than $10,000 in the
aggregate per contract.
Section 5.13 Material Contract Defaults. Net is not in default in any
respect under the terms of any outstanding contract, agreement, lease, or other
commitment which is material to the business, operations, properties, assets, or
financial condition of Net, and there is no event of default or other event
which, with notice or lapse of time or both, would constitute a default in any
material respect under any such contract, agreement, lease, or other commitment
in respect of which Net has not taken adequate steps to prevent such a default
from occurring. Net's agreements with Partner remain in full force and effect,
Net is current and in full compliance with its obligations thereunder, and Net
has not received any notice from Partner that it intends to terminate such
agreements or requesting any material change or modification to such agreements.
Section 5.14 Insurance Claims. Except as set forth in the Net
Schedules, during the last three years Net has not received, or informed its
insurance carriers of, any claims for damages, whether or not covered by
insurance, for amounts greater than $10,000. Net is not currently aware of any
pending or unasserted claims.
Section 5.15 No Conflict With Other Instruments. The execution of this
Agreement and the consummation of the transactions contemplated by this
Agreement will not result in the breach of any term or provision of, or
constitute an event of default under, any material indenture, mortgage, deed of
trust, or other material contract, agreement, or instrument to which Net is a
party or to which any of its properties or operations are subject, which would
have a material adverse affect on Net.
Section 5.16 Governmental Authorizations. Net has all licenses,
franchises, permits, and other governmental authorizations that are legally
required to enable it to conduct its business in all material respects as
conducted on the date hereof or as presently contemplated. Net required
approvals, if any, for the export of its technology, necessary to permit it to
conduct its business and provide its proposed services outside of the State of
Israel. No authorization, approval, consent, or order of, or registration,
declaration, or filing with, any court or other governmental body is required in
connection with the execution and delivery by Net of this Agreement and the
consummation by Net of the transactions contemplated hereby.
Section 5.17 Compliance With Laws and Regulations. Net has complied
with all applicable statutes and regulations of any federal, state, or other
governmental entity or agency thereof, except to the extent that noncompliance
would not materially and adversely affect the business, operations, properties,
assets, or financial condition of Net or except to the extent that noncompliance
would not result in the incurrence of any material liability for Net. Included
in the Net Schedules is a copy of each letter of inquiry, review, or
investigation or other writing from or to any governmental authority subsequent
to December 31, 1997, evidencing a violation or possible or alleged violation of
any of the foregoing.
Section 5.18 Insurance. Included in the Net Schedules is a complete
list of all business liability, casualty, automobile, extended coverage, and
other insurance policies which Net maintains respecting its products, services,
business, properties, and employees, showing for each type of coverage the
policy limits, principal exclusions, deductibles, insurer, and other relevant
information. Such policies are in full force and effect and are free from any
right of termination by the insurance carriers. All of the insurable properties
of Net are insured for its benefit in the amount of their full replacement value
(subject to reasonable deductibles) against losses due to fire and other
casualty, with extended coverage, and other risks customarily insured against by
persons operating similar properties in the localities where such properties are
located and under valid and enforceable policies issued by insurers of
recognized responsibility.
Section 5.19 Transactions With Affiliates. Set forth in the Net
Schedules is a list of every contract, agreement, or arrangement between Net and
any person who is or has ever been during the previous three years an officer or
director of Net or person owning of record, or known by Net to own beneficially,
5% or more of the issued and outstanding common stock of Net and which is to be
performed in whole or in part after the date hereof. In all of such
circumstances, the contract, agreement, or arrangement was for a bona fide
business purpose of Net. Except as disclosed in the Net Schedules or otherwise
disclosed herein, no officer or director of Net or 5% shareholder of Net has, or
has had during the preceding three years, any interest, directly or indirectly,
in any material transaction with Net. The Net Schedules also include a
description of any commitment by Net, whether written or oral, to lend any funds
to, borrow any money from, or enter into any other material transaction with,
any such affiliated person.
Section 5.20 Labor Agreements and Actions. Net is not bound by or
subject to (and none of its assets or properties is bound by or subject to) any
written or oral, express or implied, contract, commitment, or arrangement with
any labor union, and no labor union has requested or sought to represent any of
the employees, representatives, or agents of Net. There is no strike or other
labor dispute involving Net pending or threatened, which could have a material
adverse effect on the assets, properties, financial condition, operating
results, or business of Net or (as such business is presently conducted and as
it is proposed to be conducted), and Net is not aware of any labor organization
activity involving its employees. Net is not aware that any officer or key
employee, or that any group of key employees, intends to terminate their
employment with Net, nor does Net have a present intention to terminate the
employment of any of the foregoing. Except as set forth in the Net Schedules,
the employment of each officer and employee of Net is terminable at the will of
Net.
Section 5.21 Pension Obligations. Net does not have any unfunded
pension liability to any person or entity in connection with any retirement,
pension plan, or similar arrangement.
Section 5.22 Net Schedules. Prior to the Funding, Net shall deliver to
Sensar the following schedules, which are collectively referred to as the "Net
Schedules." On delivery, Sensar shall have five days to review the Net
Schedules. If Sensar does not object to the Net Schedules within such period,
they shall be deemed accepted by Sensar. The Net Schedules shall be updated as
of Closing and shall be certified by the chief executive officer of Net as
complete, true, and accurate:
(a) A schedule including copies of the certificate of
incorporation and bylaws of Net in effect as of the date of this Agreement as
referred to in section 5.01;
(b) A schedule containing copies of resolutions adopted by the
board of directors of Net approving this Agreement and the transactions herein
contemplated as referred to in section 5.02;
(c) A schedule listing the shares of Net Stock held by each of the
Net Shareholders;
(d) A schedule including the financial information required by
section 5.05;
(e) A schedule including copies of all income tax returns filed
for Net, as identified in section 5.05;
(f) A schedule listing the accounts receivable and notes and other
obligations receivable of Net as of the date of the balance sheet included in
the Net Schedules or that arose thereafter other than in their ordinary course
of business, indicating the debtor and amount, classifying the accounts to show
in reasonable detail the length of time, if any, overdue, and stating the nature
and amount of any refunds, setoffs, reimbursements, discounts, or other
adjustments, which in the aggregate are greater than $1,000, due to or claimed
by such debtors;
(g) A schedule listing the accounts payable and notes and other
obligations payable of Net as of the date of the balance sheet included in the
Net Schedules or that arose thereafter other than in the ordinary course of the
business of Net, indicating the creditor and amount, classifying the accounts to
show in reasonable detail the length of time, if any, overdue, and stating the
nature and amount of any refunds, setoffs, reimbursements, discounts, or other
adjustments, which in the aggregate are greater than $1,000, payable to Net from
any one such creditor;
(h) A schedule setting forth a description of any material adverse
change in the business, operations, property, inventory, assets, or financial
condition of Net since the balance sheet included in the Net Schedules, required
to be provided pursuant to section 5.08 hereof;
(i) Copies of all agreements or arrangements and all written
statements of practice followed with regard to the payment of compensation,
bonuses, deferred compensation, profit sharing, pension, vacation, retirement,
or other compensation benefits to officers, directors, or employees whose
monthly compensation exceeds $5,000 (and descriptions of any such agreements,
arrangements, or practices which are not in writing), together with a schedule
setting forth the name or identification of each officer, director, or employee
whose monthly compensation exceeds $5,000 and of each former officer or former
employee of Net who is currently being paid or who is entitled to, or may become
entitled to, compensation in amounts greater than $5,000 per month of any of
such compensation benefits and the rate or amounts thereof and showing the
nature of any family relationship of such person to each stockholder owning 5%
or more of the stock of Net;
(j) A schedule containing a description of all personal property
owned by Net or used in its business and having a purchase price of over
$10,000, including a description of every material mortgage, financing
instrument, or encumbrance to which such personal property of Net is subject
(except statutory liens or claims not yet delinquent and except liens, claims,
encumbrances, or equities which do not or in the future will not materially
detract from or interfere with the present or proposed use of the property
subject thereto or affected thereby);
(k) A schedule containing a description of each lease, rental
agreement, or similar instrument, including a description of each oral
arrangement;
(l) A schedule setting forth the litigation and proceedings
referred to in section 5.11;
(m) A schedule listing all material contracts, agreements,
franchises, license agreements, or other commitments to which Net is a party or
by which their properties are bound, as referred to in section 5.12, but
excluding those with affiliates which are described in section 5.19;
(n) A schedule of any insurance claims as referenced in section
5.14;
(o) Copies of all licenses, permits, and other governmental
authorizations (or requests or applications therefor) pursuant to which Net
carries on or proposes to carry on its business (except those which are
immaterial to the present or proposed business of Net), as referred to in
section 5.16;
(p) A schedule describing the matters regarding compliance with
laws and regulations as referred to in section 5.17;
(q) A schedule showing details of all insurance coverage as
referred to in section 5.18;
(r) A schedule containing a description of all material contracts,
leases, agreements, and other instruments between Net and any affiliates, as
referred to in section 5.19;
(s) A schedule showing the name and location of each bank or other
institution in which Net has an account or safe deposit box, and the names of
all persons authorized to draw thereon or to have access thereto;
(t) Copies of all powers of attorney given by Net now in effect or
to be in effect; and
(u) A schedule setting forth any other information, together with
any required copies of documents, required to be disclosed in the Net Schedules
by sections 5.01 through 5.21.
ARTICLE VI
Intentionally deleted
ARTICLE VII
REPRESENTATIONS, COVENANTS, AND WARRANTIES OF SENSAR
As an inducement to, and to obtain the reliance of Net, Sensar represents
and warrants, except as set forth on the Sensar Schedules, as follows:
7.01 Organization. Sensar is a corporation duly organized, validly
existing, and in good standing under the laws of the state of Nevada, and has
the corporate power to own all of its properties and assets and to carry on its
business in all material respects as it is now being conducted, and there is no
jurisdiction in which it is not so qualified in which either the character and
location of the assets owned by it or the nature of the business transacted by
it requires qualification, except where failure to do so would not have a
material adverse effect on the business or properties of Sensar. Included in
the Sensar Schedules (as hereinafter defined) are complete and correct copies of
the articles of incorporation and bylaws of Sensar in effect on the date hereof.
The execution and delivery of this Agreement does not, and the consummation of
the transactions contemplated by this Agreement in accordance with the terms
hereof will not, violate any provision of the articles of incorporation or
bylaws of Sensar. Sensar has full power, authority, and legal right and has
taken all action required by law, its articles of incorporation, bylaws, and
otherwise to consummate the transactions herein contemplated. Effective as of
the Closing, Sensar shall have no subsidiaries.
Section 7.02 Approval of Agreements. The board of directors of Sensar
has authorized the execution and delivery of this Agreement by Sensar and has
approved the consummation of the transactions contemplated hereby. Included in
the Sensar Schedules are copies of resolutions duly adopted by the board of
directors of Sensar evidencing such approval. Prior to Closing, Sensar shall
obtain the approval of the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby by its stockholders.
Subject to such approval, Sensar has full power, authority, and legal right, and
has taken all action required by law, its articles of incorporation, its bylaws,
or otherwise, to execute this Agreement and consummate the transactions
contemplated hereby.
Section 7.03 Capitalization. The authorized capitalization of Sensar
consists of 10,000,000 shares of preferred stock, par value $0.001 per share, of
which no shares are issued and outstanding, and 290,000,000 shares of Sensar
Common Stock, par value $0.001 per share, of which 3,150,000 shares are issued
and outstanding. In addition, Sensar has shares of Sensar Common Stock reserved
for issuance on the exercise of outstanding and committed options and warrants
as set forth in Schedule 7.03. All issued and outstanding shares of Sensar
Common Stock are validly authorized, legally issued, fully paid, and
nonassessable and not issued in violation of the preemptive or other right of
any person. All shares of Sensar Common Stock to be issued pursuant to this
Agreement are validly authorized and will be, when issued, legally issued, fully
paid, and nonassessable and not issued in violation of the preemptive or other
right of any person.
Section 7.04 SEC Reports. Sensar has filed all reports required by the
provisions of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the Securities Act of 1933, as amended (the Securities Act"). In
addition, Sensar shall file a registration statement (the "Registration
Statement"), registering the issuance of the common stock of Sensar in exchange
for the Net Stock held by the Net Shareholders as contemplated by this
Agreement. None of the filings of Sensar contained, when filed, and the
Registration Statement will not contain, when it becomes effective, any untrue
statement of a material fact or omission of a material fact necessary to make
the statements made therein, in light of the circumstances under which they were
made, not misleading.
Section 7.05 Financial Statements.
(a) Included in the reports referred to in section 7.04 are the
audited consolidated balance sheets of Sensar as of December 31, 1998 and 1997,
and the related audited consolidated statements of operations and stockholders'
equity and changes in financial position for the periods then ended, together
with the notes to such statements and the opinion of Grant Thornton LLP,
certified public accountants, with respect to such financial statements. Also
included are the unaudited financial statements for the interim period ended
September 30, 1999. All such financial statements have been prepared in
accordance with generally accepted accounting principles consistently applied
throughout the periods involved and present fairly the financial position of
Sensar as of the dates and for the periods stated herein.
(b) Sensar has filed all tax returns and reports as required by
law. All such returns and reports are accurate and correct in all material
respects. There are no income taxes currently due to any governmental agency
that have not been paid. Sensar does not have any liabilities with respect to
the payment of any tax (including any deficiencies, interest, or penalties)
accrued for or applicable to the period ended on the date of the most recent
balance sheet included in the Sensar Schedules and all such dates and years and
periods prior thereto and for which Sensar may be liable in its own right or as
transferee of the assets of, or as successor to, any other corporation or other
entity, except for taxes accrued but not yet due and payable. None of the tax
returns of Sensar has been audited or is currently being audited by any
governmental agency. Sensar has not made any tax election which would have a
material adverse effect on Sensar, its financial condition, its business as
presently conducted or as proposed to be conducted, or any of its properties or
material assets. There are no outstanding agreements or waivers extending the
statutory period of limitation applicable to any tax return of Sensar.
(c) The books and records, financial and otherwise, of Sensar are
in all material respects complete and correct and have been made and maintained
in accordance with sound business and bookkeeping practices and, in reasonable
detail, accurately and fairly reflect the transactions involving the assets of
Sensar. Sensar has maintained a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions have been and
are executed in accordance with management's general or specific authorization;
(ii) transactions are recorded as necessary to permit the preparation of
financial statements in conformity with GAAP and any other criteria applicable
to such statements and to maintain accountability for assets; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals, and appropriate action is taken
with respect to any differences.
(d) Except as set forth in the Sensar Schedules, the balance sheet
included in the Sensar Schedules, or in the notes thereto, Sensar (i) has good
and marketable title to its accounts receivable, and other debts due or recorded
in the records and books of account of Sensar, free of any security interests or
liens and free of any material defenses, counterclaims, and set-offs, and all of
such accounts receivable, invoices, and debts are actual and bona fide amounts
due Sensar for the total dollar amount thereof shown on the books of Sensar and
resulted from the regular course of its business; and (ii) the accounts
receivable, invoices, and debts set forth on the Sensar balance sheets arose in
the ordinary course of business and are, net of any reserves shown on the
balance sheet, collectible in full in all material respects on the continuation
of reasonable collection efforts by Sensar or successor personnel and without
resorting to litigation and in any event not later than ninety (90) days after
the date billed.
Section 7.06 Information. The information concerning Sensar set forth
in this Agreement and in the Sensar Schedules is complete and accurate in all
material respects and does not contain any untrue statement of a material fact
or omit to state a material fact required to make the statements made, in light
of the circumstances under which they were made, not misleading.
Section 7.07 Options or Warrants. At the Closing Date there will be no
existing options, warrants, convertible securities, calls, commitments, or other
rights of any character relating to authorized and unissued Sensar Common Stock
or other securities of Sensar other than as set forth on schedule 7.03 (a
portion of which shall be exercised pursuant to Section 3.02(d)).
Section 7.08 Absence of Certain Changes or Events. Except as set forth
in this Agreement or in the Sensar Schedules, since the date of the most recent
balance sheet included in the Sensar Schedules:
(a) There has not been (i) any material adverse change in the
business, operations, assets, or condition of Sensar, (ii) any damage,
destruction, or loss to Sensar (whether or not covered by insurance) materially
and adversely affecting the business, operations, assets, or condition of
Sensar; or (iii) any claim or litigation brought against Sensar;
(b) Sensar has not (i) amended its certificate of incorporation
and bylaws; (ii) declared or made, or agreed to declare or make, any payment of
dividends or distributions of any assets of any kind whatsoever to stockholders
or purchased or redeemed, or agreed to purchase or redeem, any of its capital
stock; (iii) waived any rights of value which in the aggregate are extraordinary
or material considering the business of Sensar; (iv) made any material change in
its method of management, operation, or accounting; (v) entered into any other
material transactions; (vi) made any accrual or arrangement for or payment of
bonuses or special compensation of any kind or any severance or termination pay
to any present or former officer, employee, or shareholder; (vii) increased the
rate of compensation payable or to become payable by it to any of its officers
or directors or any of its employees whose monthly compensation exceeds $5,000;
or (viii) made any increase in any profit sharing, bonus, deferred compensation,
insurance, pension, retirement, or other employee benefit plan, payment, or
arrangement made to, for, or with its officers, directors, or employees;
(c) Sensar has not (i) granted or agreed to grant any options,
warrants, or other rights to acquire its stocks, bonds, or other corporate
securities; (ii) borrowed or agreed to borrow any funds or incurred, or become
subject to, any material obligation or liability (absolute or contingent) except
liabilities incurred in the ordinary course of business; (iii) paid any material
obligation or liability (absolute or contingent) other than current liabilities
reflected in or shown on the most recent balance sheet included in the Sensar
Schedules and current liabilities incurred since that date in the ordinary
course of business; (iv) sold or transferred, or agreed to sell or transfer, any
of its assets, properties, or rights (except assets, properties, or rights not
used or useful in its business which, in the aggregate have a value of less than
$10,000 or assets, properties, or rights disposed of in the ordinary course of
business); (v) made or permitted any amendment or termination of any contract,
agreement, or license to which it is a party if such amendment or termination is
material, considering the business of Sensar; or (vi) issued, delivered, or
agreed to issue or deliver any stock, bonds, or other corporate securities
including debentures (whether authorized and unissued or held as treasury
stock); and
(d) Sensar has not become subject to any law or regulation which
materially and adversely affects, or may in the future materially and adversely
affect, the business, operations, properties, assets, or condition of Sensar.
Section 7.09 Title to Personal and Real Property. Sensar does not own
any real property. The only lease to which Sensar is a party will be assumed by
a third party in connection with the Closing.
Section 7.10 No Conflict With Other Instruments. The execution of this
Agreement and the consummation of the transactions contemplated by this
Agreement will not result in the breach of any term or provision of, or
constitute an event of default under, any material indenture, mortgage, deed of
trust, or other material contract, agreement, or instrument to which Sensar is a
party or to which any of its properties or operations are subject which would
have a material adverse affect on Sensar.
Section 7.11 Litigation and Proceedings. Except as set forth in the
Sensar Schedules, there are no actions, suits, or proceedings pending or, to the
knowledge of Sensar or its officers and directors, threatened in writing by or
against Sensar or affecting Sensar or its properties, at law or in equity,
before any court or other governmental agency or instrumentality, domestic or
foreign, or before any arbitrator of any kind. Sensar is not in material
default with respect to any judgment, order, writ, injunction, decree, award,
rule, or regulation of any court, arbitrator, or governmental agency or
instrumentality.
Section 7.12 Contracts.
(a) Included in the Sensar Schedules is a description of every
contract, agreement, distributorship, franchise, license, or other agreement,
arrangement, or commitment to which Sensar is a party or by which its assets or
properties are bound, which calls for the payment by Sensar of more than $2,000
a month, or $24,000 in the aggregate;
(b) Except as described in this Agreement or in the Sensar
Schedules, Sensar is not a party to or bound by, and the properties of Sensar
are not subject to, any contract, agreement, other commitment or instrument or
any charter or other corporate restriction or any judgment, order, writ,
injunction, decree, or award which materially and adversely affects, or in the
future may (as far as Sensar can now reasonably foresee) materially and
adversely affect, the business operations, properties, assets, or financial
condition of Sensar; and
(c) Except as included or described in the Sensar Schedules or
reflected in the accompanying Sensar balance sheet, Sensar is not a party to any
oral or written (i) contract for the employment of any officer, director, or
employee, whose compensation is greater than $5,000 per month, which is not
terminable on thirty (30) days (or less) notice; (ii) profit sharing, bonus,
deferred compensation, stock option, severance pay, pension benefit or
retirement plan; (iii) agreement, contract, or indenture relating to the
borrowing of money in amounts greater than $10,000 in the aggregate; (iv)
guarantee of any obligation for the borrowing of money or otherwise, excluding
endorsements made for collection and other guarantees of obligations, which, in
the aggregate do not exceed $10,000; (v) consulting or other similar contract
with an unexpired term of more than one year or providing for payments in excess
of $10,000 in the aggregate; (vi) collective bargaining agreement; (vii)
agreement with any present or former officer or director of Sensar whose
compensation was or is greater than $5,000 per month; or (viii) other contract,
agreement, or other commitment, except normal ongoing monthly operating
expenses, involving payments by it in the future of more than $10,000 in the
aggregate per contract.
Section 7.13 Material Contract Defaults. Sensar is not in default in
any respect under the terms of any outstanding contract, agreement, lease, or
other commitment which is material to the business, operations, properties,
assets, or financial condition of Sensar, and there is no event of default or
other event which, with notice or lapse of time or both, would constitute a
default in any material respect under any such contract, agreement, lease, or
other commitment in respect of which Sensar has not taken adequate steps to
prevent such a default from occurring.
Section 7.14 Intentionally deleted.
Section 7.15 Governmental Authorizations. Sensar has all licenses,
franchises, permits, and other governmental authorizations that are legally
required to enable it to conduct its business in all material respects as
conducted on the date hereof. Other than as required by state and Federal
securities laws, no authorization, approval, consent, or order of, or
registration, declaration, or filing with, any court or other governmental body
is required in connection with the execution and delivery by Sensar of this
Agreement and the consummation by Sensar of the transactions contemplated
hereby.
Section 7.16 Compliance With Laws and Regulations. Sensar has complied
with all applicable statutes and regulations of any federal, state, or other
governmental entity or agency thereof, except to the extent that noncompliance
would not materially and adversely affect the business, operations, properties,
assets, or financial condition of Sensar or except to the extent that
noncompliance would not result in the incurrence of any material liability for
Sensar. Included in the Sensar Schedules is a copy of each letter of inquiry,
review, or investigation or other writing from or to any governmental authority
subsequent to December 31, 1997, evidencing a violation or possible or alleged
violation of any of the foregoing.
Section 7.17 Transactions With Affiliates. Set forth in the Sensar
Schedules is a description of every contract, agreement, or arrangement between
Sensar and any person who is or has ever been during the previous three years an
officer or director of Sensar or person owning of record, or known by Sensar to
own beneficially, 5% or more of the issued and outstanding common stock of
Sensar and which is to be performed in whole or in part after the date hereof.
In all of such circumstances, the contract, agreement, or arrangement was for a
bona fide business purpose of Sensar. Except as disclosed in Sensar's periodic
reports filed with the SEC, the Sensar Schedules, or otherwise disclosed herein,
no officer or director of Sensar or 5% shareholder of Sensar has, or has had
during the preceding three years, any interest, directly or indirectly, in any
material transaction with Sensar. The Sensar Schedules also include a
description of any commitment by Sensar, whether written or oral, to lend any
funds to, borrow any money from, or enter into any other material transaction
with, any such affiliated person.
Section 7.18 Labor Agreements and Actions. Sensar has two employees,
Jeffery S. Cohen, whose employment terminates December 31, 1999, and Howard S.
Landa, whose employment will terminate at Closing.
Section 7.19 Pension Obligations. Sensar does not have any unfunded
pension liability to any person or entity in connection with any retirement,
pension plan, or similar arrangement.
Section 7.20 Sensar Schedules. Prior to the Funding, Sensar shall
deliver to Net the following schedules, which are collectively referred to as
the "Sensar Schedules." On delivery Net shall have five days to review the
Sensar Schedules. If Net does not object to the Sensar Schedules within such
period, they shall be deemed accepted by Net. The Sensar Schedules shall be
updated as of Closing, and shall be certified by the chief executive officer of
Sensar as complete, true, and accurate.
(a) A schedule including copies of the articles of incorporation
and bylaws of Sensar in effect as of the date of this Agreement, as referred to
in section 7.01;
(b) A schedule containing copies of resolutions adopted by the
board of directors of Sensar approving this Agreement and the transactions
herein contemplated as referred to in section 7.02;
(c) A schedule setting forth all warrants, options and other
rights to acquire Sensar Common Stock to which Sensar is a party or by which it
is bound as referred to in section 7.03;
(d) A schedule containing the annual report of Sensar on form 10-K
for the year ended December 31, 1998;
(e) A schedule containing the quarterly report of Sensar on form
10-Q for the quarter ended March 31, 1999;
(f) A schedule containing the report of Sensar on form 8-K dated
April 21, 1999;
(g) A schedule containing the quarterly report of Sensar on form
10-Q for the quarter ended June 30, 1999;
(h) A schedule containing the report of Sensar on form 8-K dated
August 4, 1999;
(i) A schedule containing the report of Sensar on form 8-K dated
August 19, 1999;
(j) A schedule containing the report of Sensar on form 10-Q for
the period ended September 30, 1999;
(k) A schedule containing the report of Sensar on form 8-K dated
October 7, 1999;
(l) A schedule containing the report of Sensar on form 8-K dated
October 12, 1999;
(m) A schedule setting forth a description of any material change
in the business, operations, assets, or condition of Sensar since September 30,
1999, required to be provided pursuant to section 7.08 hereof;
(n) A schedule setting forth a description of pending litigation
as required by section 7.12;
(o) A schedule of contracts as required by section 7.13;
(p) A schedule of transactions with affiliates; and
(q) A schedule setting forth any other information, together with
any required copies of documents, required to be disclosed in the Sensar
Schedules by sections 7.01 through 7.20.
ARTICLE VIII
CONDITIONS PRECEDENT TO OBLIGATIONS OF SENSAR
The obligations of Sensar under this Agreement are subject to the
satisfaction, at or before the Closing Date, of the following conditions:
Section 8.01 Accuracy of Representations and Satisfaction of Covenants.
The representations and warranties made by Net in this Agreement shall be true
as of the Closing, and Net shall have performed or complied with all material
covenants and conditions required by this Agreement to be performed or complied
with by Net prior to or at the Closing. Sensar shall be furnished with
certificates, signed by the chief executive officer of Net and dated the Closing
Date, to the foregoing effect.
Section 8.02 Net Disclosure Schedules. Sensar shall have received an
update all of the Net Disclosure Schedules and any material change to such
Schedules from the Schedules delivered in connection with the execution of this
Agreement shall be reasonably acceptable, in form and content, to Sensar.
Section 8.03 Stockholder Approval. The proposals submitted to the
stockholders at the Sensar Stockholders' Meeting shall have been approved.
Section 8.04 Net Shareholder Election. Holders of not more than 5% of
the Net Stock shall have exercised their dissenter's rights under Delaware
corporate law.
Section 8.05 Good Standing. Sensar shall have received a certification
that Net is in good standing, dated as of a date within ten (10) days prior to
the Closing Date.
Section 8.06 UCC Certificate. Sensar shall have received a Commercial
Code certificate as of a date within five (5) days of the Closing Date to the
effect that there are no encumbrances of record on the assets of Net, other than
those disclosed in the Net Schedules.
Section 8.07 Regulatory Action. Net shall have not received any notice
of a regulatory action pending or contemplated by any governmental agency
against Net or with respect to its intellectual property.
Section 8.08 Other Items. Sensar shall have received such further
documents, certificates, or instruments relating to the transactions
contemplated hereby as Sensar may reasonably request.
ARTICLE IX
CONDITIONS PRECEDENT TO OBLIGATIONS OF NET
The obligations of Net under this Agreement are subject to the
satisfaction, at or before the Closing Date, of the following conditions:
Section 9.01 Accuracy of Representations and Satisfaction of Covenants.
The representations and warranties made by Sensar in this Agreement shall be
true as of the Closing, and Sensar shall have performed and complied with all
material covenants and conditions required by this Agreement to be performed or
complied with by Sensar prior to or at the Closing. Sensar shall have been
furnished with a certificate, signed by the duly authorized chief executive
officer of Sensar, and dated the Closing Date, to the foregoing effect.
Section 9.02 Sensar Commitments. Sensar shall have a minimum of an
aggregate of $4.5 million in cash and notes receivable due no later than October
1, 2000, with no liabilities except as permitted by this Agreement, and shall
have not more than 3,150,000 (plus any shares issued on the exercise of the
options and warrants identified on schedule 7.03 subsequent to the date of this
Agreement) shares of common stock outstanding prior to the Closing.
Section 9.03 Indemnification. Howard S. Landa shall have indemnified
Sensar as set forth in section 4.08.
Section 9.04 Intentionally omitted.
Section 9.05 Good Standing. Net shall have received a certificate of
good standing from the Secretary of State of Nevada with respect to Sensar,
dated as of a date within ten (10) days prior to the date of this Agreement,
certifying that Sensar is in good standing as a corporation in the state of
Nevada.
Section 9.06 Options and Warrants. The options, warrants and other
rights to acquire stock or securities of Sensar identified in Schedule 3.02(d)
shall have been exercised.
Section 9.07 Financial Statements. Net shall have received the audited
consolidated financial statements of Sensar at, and for the year ended, December
31, 1999 prepared in accordance with GAAP and Regulation S-X. If the Closing
shall occur after March 31, 2000, Net shall have also received the consolidated
financial statements of Sensar at, and for the quarter ended, March 31, 2000,
which financial statements shall be unaudited but reviewed pursuant to SAS 71.
Section 9.08 Other Items. Net shall have received such further
documents, certificates, or instruments relating to the transactions
contemplated hereby as Net may reasonably request.
ARTICLE X
MISCELLANEOUS
Section 10.01 Survival of Representations and Warranties. Except as
otherwise provided, the representations, warranties, covenants, and agreements
of the parties shall not survive the Closing.
Section 10.02 Brokers. Sensar agrees that there were no finders or
brokers involved in bringing the parties together or who were instrumental in
the negotiation, execution, or consummation of this Agreement other than those
entitled to receive the 500,000 shares of common stock, all of whom are set
forth on Schedule 10.02 to be delivered by Sensar prior to the Closing. Sensar
and Net agree to indemnify the other against any claim by any third person for
any commission, brokerage, or finder's fee or other payment with respect to this
Agreement or the transactions contemplated hereby based on any alleged agreement
or understanding between such party and such third person, whether express or
implied, resulting from the actions of such party. The covenants set forth in
this section 10.02 shall survive the Closing and the consummation of the
transactions herein contemplated.
Section 10.03 Tax Treatment. No representation or warranty is being
made or legal opinion given by any party to any other regarding the treatment of
this transaction for federal or state income taxation. All parties intend for
the transaction to be treated as a "tax-free" reorganization under the
provisions of the Code and agree to take all corporate action necessary, to file
all tax returns and reports, and prepare financial statements consistent with
the treatment of the transaction as a reorganization under section 368(a) for
those shareholders resident in the United States. Shareholders not resident in
the United States or otherwise unable to qualify for "tax-free" treatment under
section 368(a) shall be solely responsible for any tax consequences to them
resulting from the consummation of the transactions contemplated hereby.
Although this transaction has been structured in an effort to qualify for
treatment under section 368(a) of the Code, there is no assurance that any part
of this transaction in fact meets the requirements for such qualification. Each
party has relied exclusively on its own legal, accounting, and other tax
advisers regarding the treatment of this transaction for federal and state
income taxes.
Section 10.04 Governing Law. This Agreement shall be governed by,
enforced, and construed under and in accordance with the laws of the United
States of America and, with respect to matters of state law, with the laws of
the state of Utah.
Section 10.05 Notices. Any notices or other communications required or
permitted hereunder shall be in writing and shall be deemed sufficiently given
if personally delivered, if sent by facsimile or telecopy transmission or other
electronic communication confirmed by registered or certified mail, postage
prepaid, or if sent by prepaid overnight courier addressed as follows:
If to Sensar, to: Sensar Corporation
Howard S. Landa
50 West Broadway, Suite 500
Salt Lake City, Utah 84101
Fax: (801) 350-0825
Confirmation: (801) 350-0587
With copies to: Keith L. Pope, Esq.
Kruse, Landa & Maycock, L.L.C.
Eighth Floor, Bank One Tower
50 West Broadway
Salt Lake City, Utah 84101
Fax: (801)359-3954
Confirmation: (801) 531-7090
If to Net: Hemi Davidson
Net2Wireless, Inc.
17 Ben-Gurion Street
Bnei Brak
Tel Aviv 52537
Israel
Fax: 011-9867-579-0127
Confirmation: 011-9867-570-6193
With copies to: Richard H. Gilden, Esq.
Fulbright & Jaworski L.L.P
666 Fifth Avenue
New York, New York 10103
Fax: (212) 752-5958
Confirmation: (212) 318-3021
and
Yaron Sobol
Attorney at Law
66 Rothschild Blvd.
Tel Aviv 65785
ISRAEL
Fax: 011-972-3-566-0480
Confirmation: 011-972-3-566-0595
or such other addresses as shall be furnished in writing by any party in the
manner for giving notices hereunder, and any such notice or communication shall
be deemed to have been given as of the date so delivered or sent by facsimile or
telecopy transmission or other electronic communication, or one day after the
date so sent by overnight courier.
Section 10.06 Attorneys' Fees. In the event that any party institutes
any action or suit to enforce this Agreement or to secure relief from any
default hereunder or breach hereof, the breaching party or parties shall
reimburse the nonbreaching party or parties for all costs, including reasonable
attorneys' fees, incurred in connection therewith and in enforcing or collecting
any judgment rendered therein.
Section 10.07 Costs. Each of the parties shall bear its respective
costs associated with this Agreement and the transactions contemplated hereby,
including legal fees, accounting fees, and other costs and expenses.
Section 10.08 Schedules; Knowledge. Whenever in any section of this
Agreement reference is made to information set forth in the Sensar Schedules or
Net Schedules such reference is to information specifically set forth in such
schedules and clearly referenced to identify the section of this Agreement to
which the information relates. Whenever any representation is made to the
"knowledge" of any party, it shall be deemed to be a representation as to actual
knowledge only.
Section 10.09 Third-Party Beneficiaries. This Agreement is solely
between Sensar and Net and the Net Shareholders, and no director, officer,
stockholder, employee, agent, independent contractor, or any other person or
entity shall be deemed to be a third party beneficiary of this Agreement.
Section 10.10 Entire Agreement. This Agreement, together with the
other agreements entered into between the parties contemporaneously with this
Agreement (this Agreement and such other documents collectively referred to as
the "Transaction Documents"), represent the entire agreement between the parties
relating to the subject matter hereof. All previous agreements between the
parties, whether written or oral, have been merged into the Transaction
Documents. The Transaction Documents fully and completely express the agreement
of the parties relating to the subject matter hereof. There are no other
courses of dealing, understandings, agreements, representations, or warranties,
written or oral, except as set forth in the Transaction Documents.
Section 10.11 Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original and all of which taken
together shall be but a single instrument.
Section 10.12 Amendment or Waiver. Every right and remedy provided
herein shall be cumulative with every other right and remedy, whether conferred
herein, at law, or in equity, and may be enforced concurrently herewith, and no
waiver by any party of the performance of any obligation by the other shall be
construed as a waiver of the same or any other default then, theretofore, or
thereafter occurring or existing. This Agreement shall only be amended by a
writing signed by all parties hereto, with respect to any of the terms contained
herein, and any term or condition of this Agreement may be waived or the time
for performance thereof may be extended by a writing signed by the party or
parties for whose benefit the Provision is intended.
Section 10.13 Severability. If and to the extent that any court of
competent jurisdiction holds any provision, or any part thereof, of this
Agreement to be invalid or unenforceable, such holding shall in no way affect
the validity of the remainder of this Agreement which shall continue in full
force and effect.
Section 10.14 Successors and Assigns. This Agreement may not be
assigned without the prior written consent of both parties.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers, hereunto duly authorized, and the
individuals have caused this Agreement to be executed as of the date first above
written.
Sensar:
SENSAR CORPORATION
By /s/ Howard S. Landa
Howard S. Landa, CEO
Net:
Net2Wireless, Inc.
By /s/ Hemi Davidson
Hemi Davidson, CEO
FIRST AMENDMENT TO
AGREEMENT
THIS FIRST AMENDMENT TO AGREEMENT (this "Amendment") is entered into as of
January 4, 2000, to amend the Agreement dated December 8, 1999, by and between
Sensar Corporation, a Nevada corporation ("Sensar"), and Net2Wireless, Inc., a
Delaware corporation ("Net2Wireless"), based on the following:
Premises
A. Sensar and Net2Wireless are parties to the Agreement (the
"Acquisition Agreement") dated December 8, 1999, pursuant to which Sensar has
agreed to provide funding to Net2Wireless and holds the right to acquire
Net2Wireless. The parties wish to amend the Acquisition Agreement as set forth
herein.
B. This Amendment is entered into in conformance with Section 10.2 of
the Acquisition Agreement which requires that any modification of the
Acquisition Agreement be set forth in writing and signed by all parties.
Agreement
NOW, THEREFORE, based on the foregoing premises and in consideration of the
agreements, representations, warranties, and covenants contained herein, and the
benefits to the parties to be derived therefrom, the parties agree as follows:
1. Defined Meanings. Capitalized terms used in this Amendment and not
defined shall have the meanings given to them in the Acquisition Agreement.
2. Negative Covenants of Sensar. Under the provisions of section
3.03(b) of the Acquisition Agreement, Sensar is prohibited, inter alia, from
adopting any recapitalization or split of its capital stock. Sensar and
Net2Wireless have considered the potential effects of a forward split of
Sensar's stock and consider it in the best interests of both the current
shareholders of Sensar and the Net2Wireless shareholders who will receive Sensar
common stock if either Sensar or Net2Wireless elects to exercise their
respective option under the provisions of section 2.04 of the Acquisition
Agreement to trigger a reorganization between the parties. Consequently, the
parties agree that the following transaction shall not be a violation of
Sensar's obligations under section 3.03 of the Acquisition Agreement:
The implementation by Sensar of a forward split of its issued and
outstanding common stock on the basis of two for one (2:1), so that the holder
of shares of common stock would receive one (1) additional share for each share
of common stock held as of the Record Date (as defined below). The forward
split would be effective for all holders of common stock as of January 12, 2000
(the "Record Date") and would be completed as quickly as reasonably practical
following the filing of the necessary notices. All options, warrants and other
rights to acquire Sensar common stock outstanding on the Record Date would be
adjusted to give effect to the forward split.
3. Terms of the Reorganization. Section 2.05 of the Acquisition
Agreement is hereby amended to give effect to the forward split of the issued
and outstanding Sensar common stock by doubling the share amounts of the Sensar
common stock so that "8,000,000" is replaced with "16,000,000" and "5,500,000"
is replaced with "11,000,000." In addition, the number "4" contained in the
formula calculating the number of additional shares to be issued under certain
circumstances is replaced by the number "2."
4. Affirmative Covenants of Sensar. Section 3.02 of the Acquisition
Agreement is hereby amended to give effect to the forward split by replacing the
share amount of "3,150,000" with the share amount of "6,300,000" where it
appears in that paragraph.
5. Conforming Changes. All other references in the Acquisition
Agreement to the issued and outstanding shares of common stock of Sensar, or the
rights to acquire common stock of Sensar, are hereby amended to give effect to
the forward split by doubling the number of shares referred to and, in the case
of rights to acquire shares, by decreasing the per share exercise or strike
price to one-half of that stated.
6. Ratification of Acquisition Agreement. Except as specifically
provided in Sections 1 through 5 hereof, the parties specifically ratify,
confirm and adopt as binding and enforceable, all of the terms and conditions of
the Acquisition Agreement.
EXECUTED effective the date first above written.
SENSAR CORPORATION
By /s/ Howard S. Landa
Howard S. Landa, CEO
NET2WIRELESS, INC.
By /s/ Hemi Davidson
Hemi Davidson, CEO
SECOND AMENDMENT TO
AGREEMENT
THIS SECOND AMENDMENT TO AGREEMENT (this "Amendment") is entered into as of
March 21, 2000, to amend the Agreement dated December 8, 1999, as previously
amended January 4, 2000, by and between Sensar Corporation, a Nevada corporation
("Sensar"), and Net2Wireless Corporation (formerly "Net2Wireless, Inc."), a
Delaware corporation ("Net2Wireless"), based on the following:
PREMISES
A. Sensar and Net2Wireless are parties to the Agreement (the
"Acquisition Agreement") dated December 8, 1999, as amended January 4, 2000,
pursuant to which Sensar has agreed to provide funding to Net2Wireless and holds
the right to acquire Net2Wireless.
B. Subsequent to the execution of the Acquisition Agreement, certain
opportunities have been available to Net2Wireless. The parties have agreed to
amend the Acquisition Agreement to permit Net2Wireless to take advantage of such
opportunities and wish to set forth such amendments in writing.
C. This Amendment is entered into in conformance with Section 10.2 of
the Acquisition Agreement which requires that any modification of the
Acquisition Agreement be set forth in writing and signed by all parties.
AGREEMENT
NOW, THEREFORE, based on the foregoing premises and in consideration of the
agreements, representations, warranties, and covenants contained herein, and the
benefits to the parties to be derived therefrom, the parties agree as follows:
1. Defined Meanings. Capitalized terms used in this Amendment and not
defined shall have the meanings given to them in the Acquisition Agreement.
2. Agreement With Partner Communications Company, Ltd. Under the
provisions of Section 2.01(d) of the Acquisition Agreement, Net2Wireless was
required to enter into an agreement with Partner Communications Company, Ltd.,
in form and substance acceptable to Sensar. Net2Wireless has met this
obligation by the execution of the Agreement dated March 13, 2000 (the "Partner
Agreement"). The parties agree that the maximum number of 3,020,576 shares
subject to the option granted to Partner for an aggregate exercise price of US
$5,555,556, as such amounts may subsequently be adjusted under the anti-dilution
provisions set forth in the Partner Agreement, is acceptable and that the
obligations under such option shall be assumed by Sensar in the reorganization
under the provisions of Section 2.05 of the Acquisition Agreement.
3. Affirmative and Negative Covenants of Net2Wireless. Under the
provisions of section 3.01 of the Acquisition Agreement, Net2Wireless is
required, inter alia, to operate its business in all material respects in the
usual and ordinary course and to not issue shares of its stock other than as
specifically contemplated by the Acquisition Agreement. The parties agree that
the following transaction shall not be a violation of any of Net2Wireless'
obligations under section 3.01 of the Acquisition Agreement:
The issuance by Net2Wireless of shares of Series A Preferred Stock at a
minimum of $27.93 per share, for an aggregate of up to $50 million in gross
proceeds to Net2Wireless (the "Series A Placement"). The holders of the Series
A Preferred Stock would have the rights and obligations set forth on the Summary
of Principal Terms attached hereto as Exhibit "A." Net2Wireless represents and
warrants that the offer and sale in the placement of these securities is and
will be in full compliance with: (a) an available exemption from the
registration requirements of the Securities Act of 1933, as amended; (b) all
other governing provisions of United States federal securities laws; (c)
applicable state securities laws; and (d) the applicable provisions of the laws
of any other jurisdiction in which offers and sales are made for those
transactions occurring outside of the United States.
4. Terms of the Reorganization. The parties have also agreed to a
stock distribution to all shareholders and option holders of Net2Wireless of
.074074 shares for each share previously outstanding. In order to accommodate
this distribution, Section 2.05 of the Acquisition Agreement, as previously
amended by the terms of the First Amendment dated January 4, 2000, is hereby
amended to increase the aggregate shares of Sensar common stock to be issued to
the holders of Net Stock and rights to acquire Net Stock (other than as set
forth below) from 16,000,000 to 17,185,185. In addition, Sensar shall assume
the obligations under the option held by Partner Communications Company, Ltd.,
and options issued by Net2Wireless to employees, officers, directors, and
consultants, which shall be increased from a maximum of 11,000,000 shares to a
maximum of 11,814,815 shares. Finally, Sensar shall issue shares of Sensar
common stock in addition to those set forth above, equal to the number of shares
sold in the Series A Placement, as such shares may subsequently be adjusted
under the governing terms of that placement.
5. Issued and Outstanding Stock of Sensar. Section 3.02 of the
Acquisition Agreement is hereby amended to require Sensar to have, after the
mandatory conversion of options held by officers, directors, and consultants as
provided in Section 3.02(d) of the Acquisition Agreement, no more than 9,000,000
shares of common stock and/or rights to acquire common stock outstanding at the
time of closing. For each share of Sensar common stock, or right to acquire a
share, outstanding in excess of 9,000,000, Sensar shall increase the number of
shares of Sensar common stock to be issued to the Net2Wireless stockholders in
the reorganization by two shares.
6. Ratification of Acquisition Agreement. Net2Wireless agrees that it
will fully and timely comply with all of the other terms and conditions of the
Acquisition Agreement and will cooperate in good faith with Sensar in the
completion of all transactions contemplated by the Acquisition Agreement.
Except as specifically provided in this Amendment, the parties specifically
ratify, confirm, and adopt as binding and enforceable, all of the terms and
conditions of the Acquisition Agreement.
EXECUTED effective the date first above written.
SENSAR CORPORATION
By /s/ Howard S. Landa
Howard S. Landa, Chairman of the Board
and CEO
NET2WIRELESS CORPORATION
By /s/ Nechemia Davidson
Nechemia Davidson
CEO
SENSAR CORPORATION
DEFERRED COMPENSATION PLAN
Adopted by the Board of Directors
Effective May 1, 1999
I. ESTABLISHMENT AND ADMINISTRATION OF PLAN
1.1 Establishment of Plan. Sensar Corporation, a Nevada corporation
("Sensar"), hereby establishes this SENSAR CORPORATION DEFERRED COMPENSATION
PLAN (the "Plan"), to be effective as of May 1, 1999 (the "Effective Date"), for
the purpose of establishing a pool of deferred compensation amounts (the
"Deferred Compensation Pool") to award certain individuals who contribute
significantly to the success of Sensar and the enhancement of shareholder value
(collectively, "Participants"), such Deferred Compensation Pool to be
distributed to the Participants within one hundred five (105) days after
December 31, 2002, or earlier if there is a Change of Control, as defined
herein, all on the terms and conditions of this Plan. The benefits provided
under this Plan are intended to be in addition to other employee benefit
programs or agreements with the Participants.
1.2 Applicability of ERISA. This Plan is intended to be a "top-hat"
plan. This Plan is an unfunded plan maintained primarily for the purpose of
rewarding individuals who contribute significantly to the success of Sensar and
the enhancement of shareholder value.
1.3 Administration of Plan. This Plan shall be administered by the
Board of Directors of Sensar; provided, however, that the Chairman of the Board
of Directors (the "Chairman") shall have sole authority to nominate Participants
in the Plan, as set forth below. Subject to compliance with applicable
provisions of governing law, the Board of Directors may delegate administration
of the Plan or specific administrative duties with respect to the Plan to such
committees as the Board of Directors deems proper. The Board of Directors or
duly authorized committee administering this Plan at any time is referred to
herein as the "Administrative Entity." The construction, interpretation and
implementation of this Plan by the Administrative Entity shall be final and
binding on all Participants absent a showing of demonstrable error. Neither the
Chairman nor any member of the Administrative Entity shall be liable for any
action taken or not taken under this Plan. Neither the Chairman nor any member
of the Administrative Entity shall be liable for any determination made in good
faith with respect to this Plan.
1.4 Designation of Participants. Participation in this Plan shall be
made available to a select group of individuals, who may or may not be employees
of Sensar. Howard S. Landa, the Chairman, shall be a Participant with a
participating percentage (the "Participating Percentage") in this Plan of thirty
percent (30%). From time to time until the Deferred Compensation Pool is
distributed, the Chairman may nominate other Participants in this Plan, and
shall recommend the Participating Percentage of each Participant; provided that,
Mr. Landa shall not designate a Participant who is a member of his immediate
family. The designation of Participants and the Participating Percentage of
each Participant (other than the Participating Percentage held by Mr. Landa)
shall be subject to review and approval by the Administrative Entity. The
determination as to the eligibility of any individual to participate in this
Plan shall be in the sole and absolute discretion of the Chairman and the
Administrative Entity, which decision shall be conclusive and binding for all
purposes hereunder. The Chairman may reduce his Participating Percentage in
order to allocate it to another Participant, including an immediate family
member. In the event that the Chairman has not designated Participants to the
extent of one hundred percent (100%) of the Deferred Compensation Pool, any
amounts not designated shall be the property of Sensar and Sensar shall have no
obligation to distribute such amounts.
1.5 No Right to Corporate Assets; Nonalienation of Benefits. This Plan
is unfunded and Sensar and all companies controlling, controlled by and under
common control with Sensar ("Affiliates") will not be required to set aside,
segregate, or deposit any funds or assets of any kind to meet the obligations of
Sensar hereunder. Nothing in this Plan will give a Participant or any other
person any equity or other interest in the assets of Sensar or any of its
Affiliates, or create a trust of any kind or a fiduciary relationship of any
kind between Sensar or any of its Affiliates on the one hand and any Participant
or any such other person on the other. To the extent that any person acquires a
right to receive distributions hereunder, such right shall be no greater than
the right of any unsecured general creditor of Sensar and may not be assigned,
sold, anticipated, pledged or otherwise transferred by Participant except by
will or by the laws of descent and distribution, and shall not be subject to any
claims of a Participant, a Participant's spouse, their respective creditors, or
their respective successors or assigns. The foregoing sentence shall not
relieve Sensar of its obligations to pay and distribute the Deferred
Compensation Pool when and to the extent distributable pursuant to this
Agreement.
1.6 Limitation on Rights Created by Plan. Nothing in this Plan will
give a Participant any right to continue as an officer, employee, consultant, or
in any other capacity of or with Sensar, or any of its Affiliates.
1.7 Binding Effect of Plan. This Plan will be binding upon and inure
to the benefit of the Participants individually and will be binding upon and
inure to the benefit of Sensar and its assigns and successors in interest.
1.8 Severability. In the event that any provision of this Plan shall
be declared illegal or invalid for any reason, said illegality or invalidity
shall not affect the remaining provisions of this Plan but shall be fully
severable and this Plan shall be construed and enforced as if said illegal or
invalid provision had never been inserted herein.
1.9 Interpretation. This Plan will be construed, enforced and
administered according to the laws of the state of Utah, except to the extent
superseded by federal laws.
II. DEFERRED COMPENSATION POOL
2.1 Schedule of Deferred Compensation Pool. The Administrative Entity
shall maintain a Schedule of Deferred Compensation Pool (the "Schedule"). The
Schedule shall be maintained on the records of Sensar only to reflect the
amounts to be credited to the Deferred Compensation Pool in accordance with this
Plan and shall be for notational purposes only. Until the date of distribution,
the amount of the Deferred Compensation Pool set forth on the Schedule shall be
entirely the property of Sensar and its Affiliates and shall be available to
Sensar and its Affiliates from time to time for the payment of their debts,
liabilities and commitments generally.
2.2 Deferred Compensation Pool Amounts. Subject to the other
provisions of this Plan, amounts shall be credited to the Deferred Compensation
Pool and set forth on the Schedule in accordance with the terms of this Section.
For purposes hereof, the "Measurement Date" shall be the earlier of December 31,
2002, or the date of effectiveness of a Change of Control requiring distribution
of the Deferred Compensation Pool pursuant to Section 3.2.
(a) Net Income. The Deferred Compensation Pool shall be increased
by a percentage of Sensar's cumulative net income before income taxes between
March 31, 1999, and the Measurement Date, as follows:
Amount of Net Income %
Greater than Less than
$0 $2 million 0%
$2 million $5 million 3%
$5 million $10 million 4%
$10 million $20 million 5%
$20 million 7%
For purposes hereof, net income before income taxes shall be determined on
the same basis used to prepare the financial statements of Sensar, all in
accordance with generally accepted accounting principles, consistently applied;
provided that, such net income shall not include any income recognized on the
sale of the ANOMS, Jaguar, or CrossCheck Technologies nor include any loss,
charge, or reserve for options granted after April 15, 1999, with respect to any
claims or disputes based on matters occurring prior to April 21, 1999, or
established with respect to potential distributions to Participants under the
terms of this Plan.
(b) Unrealized Appreciation of Investments. For purposes of
calculating the amount to be credited to the Deferred Compensation Pool as set
forth in subsection (a), net income before taxes shall be increased by an amount
equal to seventy-five percent (75%) of the net unrealized gain on marketable
securities held by Sensar, valued as of the Measurement Date; provided that,
only securities that are publicly held and traded and quoted on a registered
national securities exchange or the Nasdaq Stock Market shall be included in
such calculation. Net unrealized gain shall mean the increase in the value of
the marketable securities held by Sensar offset by any decreases in such
securities, as measured by the average of the trading price of such securities
for twenty (20) trading days preceding the Measurement Date compared to the
acquisition price of such security, appropriately adjusted for any stock splits,
consolidations, or other recapitalizations. Notwithstanding the foregoing, the
Deferred Compensation Pool shall not be reduced in the event the unrealized
losses on the marketable securities exceed the unrealized gains. In no event
shall the Deferred Compensation Pool be increased by a combined amount greater
than $25,000,000 pursuant to subparagraphs (a) and (b).
(c) Increase in Market Capitalization. The Deferred Compensation
Pool shall be increased by an amount equal to seven and one-half percent (7 %)
of the increase in Sensar's market capitalization between the Effective Date and
the Measurement Date that is in excess, on a percentage basis, of one hundred
fifty percent (150%) of any increase in the Russell 2000 Index for such period.
For purposes of this calculation, the market capitalization of Sensar at the
Effective Date shall be deemed to be $13,392,562 ($5.00 per share). The market
capitalization of Sensar as of the Measurement Date shall be reduced by the
amount, as reflected on the financial statements of Sensar, of paid-in capital
and additional paid-in capital recorded for the issuance of securities of Sensar
for cash or for the acquisition of assets or properties between the Effective
Date and the Measurement Date. Notwithstanding the foregoing, the Deferred
Compensation Pool shall not be increased by an amount greater than $50,000,000
pursuant to this subparagraph (c).
2.3 Interest. Interest will not be credited to the Deferred
Compensation Pool or included on the Schedule.
III. PAYMENTS AND DISTRIBUTIONS
3.1 Distribution of Deferred Compensation Pool on Distribution Date.
Within 105 days following December 31, 2002, or within 45 days following a
Change of Control, as defined in Section 3.2, distributions of the Deferred
Compensation Pool shall be made to Participants according to their allocated
Participating Percentage in the manner set forth in this Article III.
3.2 Distribution of Deferred Compensation Pool on Change of Control.
In the event of a Change of Control, distribution of the Deferred Compensation
Pool shall be made to Participants according to their Participating Percentage;
provided, however, that if the Deferred Compensation Pool is then less than
$5,000,000, it shall be deemed to be increased to $5,000,000 for purposes of
calculating the distributions. For purposes hereof, a Change of Control shall
mean any of the following: (i) the sale, lease, exchange, or other transfer in
one transaction or a series of transactions of all or substantially all of the
assets of Sensar to a single purchaser that is not a wholly owned subsidiary of
Sensar; (ii) the sale, lease, exchange, or other disposition to a single person
or group of persons under common control in one transaction or a series of
related transactions resulting in such person or persons owning, directly or
indirectly, greater than twenty-five percent (25%) of the combined voting power
of Sensar's then outstanding voting securities entitled to vote generally; (iii)
as a result of a merger, consolidation, sale of all or substantially all of the
assets of Sensar, a contested election, or any combination of the foregoing, the
persons who were directors of Sensar immediately prior thereto shall cease to
constitute a majority of the board of directors of Sensar or any successor to
Sensar; (iv) the decision by Sensar to terminate its business and liquidate its
assets; (v) the merger or consolidation of Sensar in a transaction in which the
shareholders of Sensar immediately prior to such merger or consolidation receive
less than fifty percent (50%) of the outstanding voting securities of the new or
continuing corporation; or (vi) any person, entity or group of persons, within
the meaning of Section 3(a)(9) or Section 13(d) of the Securities Exchange Act
of 1934 (the "Exchange Act"), or any comparable successor provisions, shall
become the beneficial owner, within the meaning of Rule 13d-3 of the Exchange
Act, of twenty-five percent (25%) or more of either the outstanding shares of
common stock of Sensar or the combined voting power of Sensar's then outstanding
voting securities entitled to vote generally.
3.3 Method of Distribution. The Deferred Compensation Pool shall be
distributed to each Participant in an amount equal to such Participant's
Participating Percentage multiplied by the Deferred Compensation Pool at the
Measurement Date, all in accordance with the following:
(a) The Deferred Compensation Pool shall be paid to the Participants in
a lump sum cash payment.
(b) Notwithstanding the foregoing, if Sensar has received all necessary
shareholder approval of this Plan required by state or federal securities laws
or the corporate governance rules of the national securities exchange or the
Nasdaq Stock Market on which the common stock of Sensar is then listed and
Sensar has obtained the effectiveness of a registration statement permitting the
immediate sale without restriction by the Participants, Sensar can pay a portion
of the amounts due to Participants as follows:
(i) At the election of the Administrative Entity, up to thirty percent
(30%) of the Deferred Compensation Pool may be paid in common stock of Sensar,
such shares to be valued at the average closing price for Sensar's common stock
on a registered national securities exchange or, if not listed on such exchange,
the Nasdaq Stock Market over the twenty (20) trading day period immediately
preceding the Measurement Date; or
(ii) To the extent that Sensar does not have cash and cash equivalents
available for distribution of the Deferred Compensation Pool in excess of a
reasonable reserve for its working capital needs as determined in good faith by
the Board of Directors, based on the historical needs of Sensar, the amount
necessary to maintain such a reasonable working capital reserve can be paid by
delivery of shares of common stock.
(c) In the event that it delivers common stock to Participants, Sensar
shall use commercially reasonable best efforts to maintain the effectiveness of
the registration statement until the resale of such shares is no longer required
to be registered by reason of Rule 144(h) under the Securities Act.
3.4 Hardship Distributions from Deferred Compensation Accounts. If a
designated Participant is the subject of an Unforeseeable Emergency which would
result in severe financial hardship to such Participant, then, to the extent
such Participant's Participating Percentage has been determined, the
Administrative Entity may, in its sole discretion, cause to be distributed a
portion or all of such Participant's allocable part of the Deferred Compensation
Pool, as set forth on the Schedule at such time. The Administrative Entity must
approve the payment in respect of any distribution. No payment shall be made to
the extent that a hardship may be relieved (i) through reimbursement or
compensation by insurance or otherwise, or (ii) by liquidation of such
Participant's assets, to the extent the liquidation of such assets would not
itself cause severe financial hardship. No payment shall be made in excess of
the amount reasonably required to satisfy the Unforeseeable Emergency,
determined with regard to any Federal or state income tax payable with respect
to any distribution. For purposes of this section, "Unforeseeable Emergency"
means severe financial hardship to a Participant resulting from a sudden illness
or accident of such Participant or of a dependent of such Participant, loss of
such Participant's property due to a casualty, or other similar extraordinary
or unforeseeable circumstance arising as a result of events beyond the control
of such Participant.
3.5 Distribution to Beneficiary. A Participant may designate a
beneficiary to receive the deferred compensation hereunder in the event of the
Participant's death prior to the Distribution Date. In the event a beneficiary
is not designated then rights under this Plan may pass according to the laws of
descent and distribution.
3.6 Termination of Rights. If a Participant is the perpetrator of a
fraud, a theft, or an embezzlement from or with respect to either Sensar or an
Affiliate, the Administrative Entity may suspend, reduce, terminate, or
otherwise alter any participation or payment of the Participant's distribution.
3.7 Receipt and Release for Payments. Any payment to a Participant or
any beneficiary shall, to the extent thereof, be in full satisfaction of any
claim hereunder against Sensar. Sensar may require the Participant or
beneficiary, as a condition precedent to such payment, to execute a receipt and
release thereof in such form as shall be determined by Sensar.
3.8 Withholding. All amounts payable hereunder shall be reduced by any
and all federal, state and local taxes imposed upon the Participant which are
required to be paid or withheld by Sensar. Sensar may withhold any amounts it
deems appropriate with respect to the payment of any distribution pursuant to
this Plan for the purpose of satisfying the obligations of Sensar and its
Affiliates with respect to the payment of any amounts due appropriate
authorities with respect to said distributions.
3.9 Right of Setoff. Sensar shall have the right to setoff against any
distributions made to any Participant pursuant to this Plan any amounts owed to
Sensar or any of its Affiliates by any Participant.
IV. AMENDMENT AND TERMINATION
4.1 Amendment. The Board of Directors of Sensar may, without the
consent of any Participant or any other person, amend the Plan; provided,
however, that no amendment will change the Participating Percentage of any
Participant designated prior to the amendment or negatively affect the rights of
any such Participant under this Plan.
4.2 Termination. The Board of Directors of Sensar may terminate this
Plan at any time in its sole discretion. Upon termination of the Plan, Sensar
shall be required to distribute to the Participants an aggregate amount equal to
the greater of $5,000,000 or the amount reflected on the Schedule setting forth
the Deferred Compensation Pool (treating the date of termination of the Plan as
the Measurement Date).
IN WITNESS WHEREOF, this Sensar Corporation Deferred Compensation Plan has
been executed to take effect on May 1, 1999.
SENSAR CORPORATION
By /s/ Howard S. Landa
Howard S. Landa, Chairman of the Board
CONSENT
We have issued our report dated January 21, 2000, except for Notes K and N for
which the date is March 23, 2000, accompanying the consolidated financial
statements of Sensar Corporation included in the Annual Report of Sensar
Corporation on Form 10-K for the year ended December 31, 1999. We hereby
consent to the incorporation by reference of said report in the Registration
Statements of Sensar Corporation on Forms S-3 (File No. 333-1505, effective
March 22, 1996; File No. 333-6527, effective August 2, 1996; File No.
333-29923, effective October 3, 1997; File No. 333-49989, effective May 29,
1998; and File No. 333-81253, effective June 28, 1999) and on Forms S-8 (File
No. 33-44784, filed December 30, 1991; File No. 33-35751, filed July 5, 1990;
File No. 333-24553, filed April 4, 1997; and File No. 333-38919 filed October
28, 1997).
/s/ Grant Thornton LLP
GRANT THORNTON LLP
Salt Lake City, Utah
January 21, 2000, except for Notes K and N for which
the date is March 23, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999, AND CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,735,115
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,215,847
<PP&E> 36,476
<DEPRECIATION> (8,484)
<TOTAL-ASSETS> 5,568,839
<CURRENT-LIABILITIES> 181,758
<BONDS> 0
<COMMON> 6,326
0
0
<OTHER-SE> (161,285)
<TOTAL-LIABILITY-AND-EQUITY> 5,568,839
<SALES> 0
<TOTAL-REVENUES> 147,944
<CGS> 0
<TOTAL-COSTS> 12,089,626
<OTHER-EXPENSES> 21,665
<LOSS-PROVISION> (31,663)
<INTEREST-EXPENSE> 31,811
<INCOME-PRETAX> (11,995,158)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,995,158)
<DISCONTINUED> 3,290,778
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,704,380)
<EPS-BASIC> (1.53)
<EPS-DILUTED> (1.53)
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